<PAGE>
Filed Pursuant to Rule 424(b)(4)
File No. 33-60283
PROSPECTUS
2,750,000 SHARES
[LOGO OF
FSI INTERNATIONAL, FSI INTERNATIONAL, INC.
INC. APPEARS HERE]
COMMON STOCK
------------------
Of the 2,750,000 shares of Common Stock offered hereby, 2,500,000 shares are
being sold by FSI International, Inc. ("FSI" or the "Company") and 250,000
shares are being sold by the Selling Shareholders. See "Principal and Selling
Shareholders." The Company will not receive any proceeds from the sale of
shares by the Selling Shareholders.
On June 28, 1995 the last reported sale price on the Nasdaq National Market
for the Common Stock was $23.00 per share. See "Price Range of Common Stock and
Dividend Policy." The Common Stock is quoted on the Nasdaq National Market
under the symbol "FSII."
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 6.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Discounts and Proceeds to
Price Commissions Proceeds to Selling
to Public (1) Company (2) Shareholders
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................ $22.75 $1.10 $21.65 $21.65
- --------------------------------------------------------------------------------------------
Total (3)........................ $62,562,500 $3,025,000 $54,125,000 $5,412,500
- --------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting estimated expenses payable by the Company of $275,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
412,500 additional shares of Common Stock, on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be $71,946,875, $3,478,750, and
$63,055,625, respectively. See "Underwriting."
------------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation, or
modification of the offer without notice, to delivery to and acceptance by the
Underwriters and to certain further conditions. It is expected that delivery of
the shares will be made at the offices of Lehman Brothers Inc., New York, New
York on or about July 5, 1995.
------------------
NEEDHAM & COMPANY, INC.
LEHMAN BROTHERS
MONTGOMERY SECURITIES
June 28, 1995
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements, and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at certain of the Commission's regional
offices located as follows: 7 World Trade Center, Suite 1300, New York, New
York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can also be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
The Company has filed with the Commission a Registration Statement on Form S-
3 (herein referred to, together with all amendments thereto, as the
"Registration Statement") under the Securities Act with respect to the offering
of the shares made hereby. This Prospectus does not contain all of the
information contained in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other document are summaries which are not necessarily complete and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement herein being
qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended August 27,
1994, as amended on February 16, 1995 (which incorporates by reference certain
portions of the Company's 1994 Annual Report to Shareholders and certain
portions of the Company's definitive Proxy Statement for the Company's 1995
Annual Meeting of Shareholders), the Company's Quarterly Reports on Form 10-Q
for the quarters ended November 26, 1994, February 25, 1995, and May 27, 1995,
the Company's Current Reports on Form 8-K dated January 5, 1995, as amended on
February 16, 1995, and March 22, 1995, and the description of the Company's
Common Stock as set forth in the Company's Form 8-A Registration Statement
dated October 31, 1988 are incorporated into this Prospectus by reference. All
documents filed by the Company pursuant to Sections 13(a), 13(c), 14, or 15(d)
of the Exchange Act after the date of this Prospectus and prior to the
termination of this offering shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus. The Company will provide without charge to each person to
whom this Prospectus is delivered, upon written or oral request of such person,
a copy (without certain exhibits) of any or all documents incorporated by
reference in this Prospectus. Requests for such copies should be directed to
the Executive Vice President and Chief Financial Officer, FSI International,
Inc., 322 Lake Hazeltine Drive, Chaska, Minnesota 55318; telephone number (612)
448-8936.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-
6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
----------------
FSI(R), Polaris(R), Mercury(R), Excalibur(R), ChemFill(R), ChemBlend(TM),
Stabilized Distribution(TM), Orion(TM), VP4500(TM), P2000(TM), and P2200M(TM)
are trademarks of the Company. All other brand names or trademarks appearing in
this Prospectus are the property of their respective holders.
2
<PAGE>
THE ROLE OF FSI'S PRODUCTS IN INTEGRATED
FSI products are used during several critical phases in the fabrication of
semiconductor devices. These operations are repeated numerous times, depending
upon the type and complexity of the semiconductor device and the overall process
employed by the device manufacturer.
[PHOTO OF CHEMFILL 5000 APPEARS HERE]
CHEMICAL MANAGEMENT
ChemFill(R) Systems automatically deliver chemicals needed to the point of use
in the fab, minimizing the amount of handling needed and helping to ensure
purity.
[PHOTO OF MERCURY AND EXCALIBUR SYSTEMS APPEARS HERE]
[PHOTO APPEARS HERE]
WAFER CARRIER ----------- CLEANING
|
|
-----------
ETCH BACK
-----------
|
|
[PHOTO APPEARS HERE]
ASSEMBLY TEST ------------ STRIPPING
[PHOTO OF MERCURY SYSTEM APPEARS HERE]
<PAGE>
CIRCUIT FABRICATION
[PHOTO OF POLARIS CLUSTER
APPEARS HERE]
FSI's MERCURY(R) and POLARIS(R) Clusters
EXCALIBUR(R) Systems consist of one or two
prepare the wafer by cleanroom qualified robots
removing contaminants surrounded by various process
using a sequenced modules which bake and develop
application of chemicals photoresist on the wafer
by spray or vapor surface. Photoresist is
technology. These systems light-sensitive material used to
provide an alternative to project circuit patterns onto
traditional immersion silicon wafers. Polaris represents
technology, principally a processing alternative to
wet bench processing conventional photoresist track
of wafers. or linear systems, which permit
processing of the wafer only
according to a preestablished
arrangement of the equipment.
------------
LAYERING
------- OR ------- PHOTOLITHOGRAPHY
DEPOSITION
------------ / |
/ |
/ \ EXPOSURE |
/ \ (STEPPER) |
|
DIFFUSION CVD |
(FURNACE) |
|
|
|
ION PLASMA |
DIFFUSION IMPLANT ETCH |
\ / \ |
\ / \ |
\ / \|
------------ ---------
- --- DOPING ------- CLEANING ------- ETCHING
------------ ---------
[PHOTO OF EXCALIBUR SYSTEM
APPEARS HERE]
The MERCURY(R) System is Etching leaves an
used to strip photoresist undesirable residue on
from the surface of the the wafer's surface. The
wafer. Photoresist EXCALIBUR(R) Vapor Phase
stripping is required Processor is utilized to
after most etching and remove the residue.
doping steps.
<PAGE>
PROSPECTUS SUMMARY
The following information is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) included or
incorporated by reference in this Prospectus. Unless otherwise indicated, all
information in this Prospectus has been adjusted to reflect the two-for-one
stock split of the Company distributed on June 19, 1995 (the "Stock Split") and
to reflect the acquisition, effective March 8, 1995, of Applied Chemical
Solutions, which acquisition was accounted for using the pooling-of-interests
method of accounting, and assumes no exercise of the Underwriters' over-
allotment option. See "Underwriting." The Company's fiscal year ends on the
last Saturday in August and comprises 52 or 53 weeks. The Company's fiscal
quarters are generally 13 weeks, ending on a Saturday. Unless the context
otherwise indicates, reference to the Company or FSI refers to FSI
International, Inc. and its subsidiaries.
THE COMPANY
FSI International, Inc. designs, manufactures, markets, and supports
microlithography, surface conditioning, and chemical management equipment used
in the fabrication of integrated circuits. The Company's microlithography
product, the Polaris cluster, processes photoresist (light sensitive material
used for patterning) on the surface of silicon wafers as part of the
photolithography phase of the integrated circuit fabrication process. The
Company's surface conditioning products, including the Mercury spray processing
systems and the Excalibur vapor processing systems, remove contaminants and
excess photoresist from wafers during the fabrication process and selectively
remove oxide from the wafer surface. The process steps performed by the
Company's microlithography and surface conditioning products are used
repeatedly throughout the fabrication cycle and constitute an integral part of
the manufacturing process for virtually every integrated circuit produced
today. The Company's chemical management products perform the critical
functions of generating, blending, delivering, and controlling the flow,
concentration, and purity of chemicals used by various types of processing
equipment within a fabrication facility.
Advances in electronics technology in recent years have resulted in
increasingly sophisticated integrated circuits which require submicron
geometries and complex manufacturing processes. To meet the demand for these
more complex, high performance devices, integrated circuit manufacturers
require process technologies that are timely, reliable, and readily integrated
into high volume manufacturing environments. Competitive pressures are at the
same time forcing integrated circuit manufacturers to reduce the costs of
producing integrated circuits. FSI believes it responds to these demands by
providing leading technology products that increase yields, integrate with
other suppliers' equipment, and provide significant overall cost advantages.
The Company's strategy is to remain focused as a technological leader in its
three core markets, emphasizing close customer relationships that enhance the
Company's responsiveness to the needs and cost constraints of its markets. FSI
intends to enhance its product offerings in its three core markets by
continuing the Company's commitment to engineering and development and by
making strategic acquisitions of complementary technologies or products.
Effective March 8, 1995, the Company acquired Applied Chemical Solutions, which
designs, markets, and services chemical blending and delivery systems, point of
use chemical generation systems, and slurry mixing and delivery systems used in
conjunction with chemical mechanical planarization, commonly referred to as
CMP. See "Risk Factors--Acquisitions" and "Recent Developments--Acquisition of
Applied Chemical Solutions." As part of its strategy and to serve its customers
better, the Company continues to expand and enhance its demonstration and
process development facilities, has begun construction of a new 100,000 square
foot manufacturing facility, and is in the process of establishing
manufacturing capability for its chemical management systems in Europe through
the acquisition in January 1995 of a 50% interest in FSI Metron Europe, Ltd.
(formerly Vinylglass Limited), a United Kingdom company.
The Company sells products from one or more of its product lines to most
major integrated circuit manufacturers, including AMD, Ericsson, Fujitsu, LG
Semicon, Hyundai, Intel, IBM, Motorola, SGS
3
<PAGE>
Thomson, and Texas Instruments. The Company markets its products directly in
North America and primarily through a network of affiliated distributors in
Europe, the Far East, and Japan. Through these affiliated international
distributors the Company can provide timely and efficient worldwide customer
service and support. Effective April 3, 1995, certain of these affiliated
distributors entered into a reorganization agreement with Transpacific
Technology Corporation which contemplates that the affiliated distributors and
Transpacific would be consolidated into a global distribution company.
Transpacific markets or distributes products of certain semiconductor equipment
and consumables manufacturers in portions of the United States and Europe. See
"Risk Factors--Reliance on Affiliated International Distributors" and "Recent
Developments--Metron Activities."
The principal executive offices of the Company, a Minnesota corporation, are
located at 322 Lake Hazeltine Drive, Chaska, Minnesota 55318 and its telephone
number is (612) 448-5440.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........ 2,500,000 shares
Common Stock offered by the Selling
Shareholders.............................. 250,000 shares
Common Stock to be outstanding after the
Offering.................................. 19,635,782 shares (1)
Use of proceeds by the Company............. For working capital and general corporate
purposes.
Nasdaq National Market Symbol.............. FSII
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
-------------------------------- ----------------
AUGUST 29, AUGUST 28, AUGUST 27, MAY 28, MAY 27,
1992 1993 1994 1994 1995
---------- ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(2):
Sales........................ $46,879 $78,432 $96,437 $68,210 $126,415
Gross profit................. 18,770 28,968 40,649 28,413 54,255
Operating income (loss)...... (2,183) 2,712 5,354 3,938 12,787
Income (loss) before income
taxes....................... (2,593) 2,041 5,100 3,650 13,818
Equity in earnings (loss) of
affiliates.................. (373) 1,277 1,800 1,160 2,128
Net income (loss)............ (3,358) 2,958 5,646 3,963 12,146
Net income (loss) per common
share (3)................... $ (.36) $ .28 $ .43 $ .31 $ .76
Weighted average common
shares and common
share equivalents (3)....... 9,275 10,558 13,222 12,968 15,916
</TABLE>
<TABLE>
<CAPTION>
MAY 27, 1995
AUGUST 27, -----------------------
1994 ACTUAL AS ADJUSTED(4)
---------- -------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA (2):
Working capital.............................. $27,778 $ 84,378 $138,228
Total assets................................. 68,995 145,930 199,780
Short-term debt.............................. 149 45 45
Long-term debt, less current maturities...... 33 2 2
Stockholders' equity......................... 42,006 106,422 160,272
</TABLE>
4
<PAGE>
- --------
(1) Based upon the number of shares outstanding on May 27, 1995, as adjusted to
reflect the Stock Split. Such number does not include 1,709,424 shares
issuable upon exercise of outstanding options granted by the Company,
198,930 shares reserved for future issuance under the Company's stock
plans, 100,000 shares issuable upon the exercise of outstanding Common
Stock purchase warrants, and 35,000 shares reserved for issuance in
connection with the purchase in June 1994 of certain technology and other
assets, each as adjusted to reflect the Stock Split.
(2) All amounts have been adjusted to reflect the acquisition, effective March
8, 1995, of Applied Chemical Solutions, which acquisition was accounted for
using the pooling-of-interests method of accounting. See "Recent
Developments--Acquisition of Applied Chemical Solutions" and Note 2 of
Notes to Consolidated Financial Statements of FSI.
(3) Share information and per share information have been adjusted to reflect
the Stock Split.
(4) Adjusted to reflect the sale of 2,500,000 shares of Common Stock offered
hereby by the Company at the initial public offering price of $22.75 per
share, and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be carefully considered in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby.
CYCLICALITY OF THE SEMICONDUCTOR DEVICE INDUSTRY
The Company's business depends in large part on the capital equipment
expenditures of semiconductor device manufacturers, which in turn depend on the
current and anticipated demand for integrated circuits and products utilizing
integrated circuits. The semiconductor device industry is cyclical and has
historically experienced periodic downturns, which often have had an adverse
effect on capital equipment expenditures by semiconductor device manufacturers.
These downturns generally have adversely affected the sales, gross profits, and
operating results of semiconductor equipment suppliers, including the Company.
Over the past two to three years, the semiconductor device industry has been
experiencing significant growth, particularly in the United States and Korea.
There can be no assurance that such growth will continue or that the Company's
sales, gross profits, and operating results will not be adversely affected by
future downturns in the semiconductor device industry. In addition, the
Company's construction of a new manufacturing facility, its expansion and
enhancement of its laboratory facilities, and the upgrading of its computer
systems as well as the need for continued investment by the Company in research
and development, marketing, and customer service and support capabilities will
limit the Company's ability to reduce expenses during future downturns in the
semiconductor device industry. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's results for a particular quarter can vary due to a number of
factors and, consequently, the Company may experience significant fluctuations
in its quarterly sales, gross profits, operating results, and net income.
Factors which may influence the Company's operating results in a given quarter
include specific economic conditions in the semiconductor device industry, the
financial results of the Company's affiliates, the timing of the receipt of
orders from major customers, the mix of products sold by the Company,
competitive pricing pressures, the proportion of international sales, product
modifications requested by customers and available production capacity. During
a specific quarter, a significant portion of the Company's revenue may be
derived from the sale of a relatively small number of systems. Accordingly, a
small change in the number of such systems sold in a quarter may cause
significant changes in operating results. Moreover, customers may cancel or
reschedule shipments, and production difficulties could delay shipments. These
factors also could significantly affect annual results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results of Operations."
MANAGEMENT OF GROWTH
The Company is undergoing a period of rapid growth. In addition, with the
acquisition of a 50% interest in FSI Metron Europe, Ltd. ("FME" and formerly
Vinylglass Limited), a company based in the United Kingdom, and the acquisition
of Applied Chemical Solutions ("ACS"), a company based in Hollister,
California, the Company expects additional growth in the number of employees,
the scope of its operations, and the geographic area of the Company's
operations. This growth has resulted in, and is expected to continue to create,
the need for additional capacity (including facilities and skilled employees),
new and increased responsibilities for management personnel, and added
pressures on the Company's operating and financial systems. The Company's
ability to manage future growth effectively and accomplish its overall goals
will depend on its ability to hire additional management and technical
personnel. Competition for highly skilled technical, managerial and marketing
personnel in the Company's industry is high. Industry growth and the low
unemployment rate in the Minneapolis, Minnesota area, which includes the
Company's principal facility in Chaska, has increased the competition for such
personnel. The Company must also integrate its new employees into its overall
operations, and continue to improve its operational, financial, and management
6
<PAGE>
systems and controls. The Company has commenced a number of programs in
response to its growth, including the construction of a new manufacturing
facility, the expansion and enhancement of its Surface Conditioning Division
Demonstration and Development Laboratory, and the upgrading of its computer
systems. If the Company is unable to manage growth effectively or hire or
retain qualified personnel, the Company's business and results of operations
could be materially and adversely affected. See "Acquisitions" above, "Recent
Developments," and "Business--Employees" and "--Properties."
The need to manage the Company's growth successfully is particularly
important in this period of industry-wide expansion. As the Company's customers
attempt to meet the growing demand for semiconductor devices by increasing
their production capacity, they are setting aggressive delivery requirements
for their suppliers, including the Company. Failure to meet customer
expectations, whether because of capacity constraints or otherwise, could
jeopardize relations with such customers and materially adversely affect the
operations and earnings of the Company.
In light of the significant recent growth in revenues and capacity
constraints that will exist even with the planned expansion of its
manufacturing facilities, the Company does not believe that the recent rate of
revenue growth, on a comparable quarter basis, is sustainable.
DEPENDENCE ON NEW PRODUCTS AND PROCESSES
Semiconductor device manufacturing equipment and processes are subject to
rapid technological change and new product introductions as well as evolving
industry standards. The development of more complex integrated circuits and the
increased overall demand for products utilizing integrated circuits has driven
the need for new facilities, equipment, and processes to produce such devices
at an acceptable cost. As a result of these factors, the Company believes
semiconductor device manufacturers are increasingly relying on equipment
manufacturers to design and develop more efficient equipment, to design and
implement improved processes for the benefit of semiconductor device
manufacturers, and to integrate their equipment with that of other equipment
manufacturers. Therefore, the Company believes that its future success will
depend in part upon its ability to continue to enhance its existing products
and their process capabilities, and to design and develop new technologies,
processes, and systems which compete effectively on the basis of price and
performance and which adequately address customer requirements. In addition,
the Company must continue to develop, manufacture, and market new products
which conform to emerging industry standards. As a result, the Company expects
to continue to make significant investments in research and development and to
continue to consider from time to time the strategic acquisition of businesses,
products, or technologies complementary to the Company's business. The success
of the Company in developing, introducing, and selling new and enhanced
equipment depends upon a variety of factors including product selection, timely
and efficient completion of product design and development, timely and
efficient implementation of manufacturing and assembly processes, product
performance in the field, and effective sales and marketing. The Company also
must manage product transitions successfully, as introductions of new products
could adversely affect sales of existing products. If new products have
reliability or quality problems, reduced orders, higher manufacturing costs,
delays in collecting accounts receivable, and additional service and warranty
expense may result. There can be no assurance that the Company will be able to
develop and introduce new products or enhancements to its existing products and
processes in a manner which satisfies customer needs or achieves market
acceptance. The failure to do so could materially and adversely affect the
Company's business and results of operations. See "Business--Industry
Background," "--Company Strategy," and "--Research and Development."
RELIANCE ON AFFILIATED INTERNATIONAL DISTRIBUTORS
The majority of the Company's international sales are made through its
affiliated distributors, Metron Semiconductors Europa B.V. (together with its
subsidiaries, "Metron Europa") in Europe; Metron Semiconductors (Hong Kong)
Limited, Metron Semiconductors Far East Limited, and Metron Semiconductors Asia
Limited and its subsidiary in the Far East (collectively, the "Metron Asia
Group" and, together with Metron Europa, the "Metron Group"); and m.FSI Ltd. in
Japan ("m.FSI"). See Note 6 of Notes to Consolidated Financial Statements of
FSI. These affiliated distributors also provide service and support to many of
the Company's international customers. Thus, a reduction in the sales efforts
or financial
7
<PAGE>
viability of such distributors, or a termination of the Company's investment in
or relationship with such entities, could adversely affect the Company's
international sales, its financial results, and its ability to support its
international customers. Sales to the Company's affiliated distributors
accounted for approximately 26% and 28% of the Company's total sales in fiscal
1994 and the nine months ended May 27, 1995, respectively, and the earnings
received from the Company's equity ownership interest in such affiliated
distributors accounted for approximately 32% and 18% of the Company's net
income in fiscal 1994 and the nine months ended May 27, 1995, respectively. The
earnings or losses of the Company's affiliated distributors can significantly
affect the financial results of the Company. The affiliated distributors
distribute not only the Company's products but also those of other companies
serving the semiconductor device industry. Over the past several years, a
majority of the revenues of the affiliated distributors, in the aggregate, have
been attributable to sales of products of other semiconductor manufacturing
equipment and consumables suppliers. Thus, the financial results of the
affiliated distributors and their impact on the Company's financial results are
dependent not only upon the ability of these distributors to successfully
market FSI's products, but also their ability to maintain relationships with
and market the products of other semiconductor manufacturing equipment and
consumables suppliers. Moreover, while sales of the Company's products by the
Metron Group (and of certain other manufacturers for whom they distribute) are
generally in United States dollars, the expenses of the Metron Group are
generally denominated in foreign currencies and, accordingly, the Metron
Group's operating results may be affected by fluctuations in interest and
currency exchange rates. In addition, sales by m.FSI are denominated in yen
and, accordingly, FSI's equity interest in the earnings of m.FSI are affected
by fluctuations in dollar/yen exchange rates. FSI's affiliated distributors
generally do not engage in hedging transactions in an effort to lessen the
potentially negative effect of foreign currency devaluation in relation to the
United States dollar. However, in those limited instances (totaling less than
20% of the aggregate annual sales of the Metron Group and m.FSI) where a sale
by an affiliated distributor has been both in a foreign currency (usually at
the request of a foreign-domiciled customer) and of a size significant to
justify the costs of engaging in hedging activity, FSI's affiliated
distributors have hedged such transactions by buying forward United States
dollars and selling forward the applicable local currency. If the order that is
the subject of a hedging transaction is subsequently cancelled by the customer,
the affiliated distributor may be required to satisfy its hedging obligations
by buying and/or selling the applicable currencies at market prices that could,
because of changes in the applicable exchange rates, result in losses to the
affiliated distributor. To date, the Company has not experienced any material
adverse effect as a result of the hedging activities of its affiliated
distributors. There can be no assurance that the Metron Group and m.FSI will
continue to distribute, or to distribute successfully, the Company's products
or the products of other semiconductor manufacturing equipment and consumables
suppliers, and in such an event the Company's results of operations and
earnings could be adversely affected. FSI is not aware of any financial
difficulties being experienced by any of its affiliated distributors which
could materially adversely affect FSI's financial condition or results of
operations.
Effective April 3, 1995, Metron Europa entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement") with Transpacific Technology
Corporation ("Transpacific"), a California corporation, providing for the
merger of Transpacific with and into Metron Technology, Inc., a newly formed
California corporation and wholly owned subsidiary of Metron Europa, and the
acquisition by Metron Europa of all of the outstanding share capital of the
companies comprising the Metron Asia Group (the "Reorganization"). Transpacific
markets or distributes the products of certain semiconductor equipment and
consumables manufacturers in portions of the United States and Europe. FSI's
day-to-day involvement in the management of the Metron Group will be reduced
following the Reorganization, and the future success of Metron Europa will
depend on the successful integration of the senior management of Transpacific
and the Metron Group, none of whom has prior experience in managing a
semiconductor equipment business of the size and geographic scope that the
combined entities will have. Upon conclusion of the Reorganization, the equity
interest of FSI in the newly combined Metron Europa will be approximately 38%,
compared to its current 40% and 50% equity interests in Metron Europa and the
Metron Asia Group, respectively. Consummation of the Reorganization is subject
to various conditions, including approval by Transpacific's shareholders;
receipt of all required regulatory approvals; and the absence of any material
adverse change in
8
<PAGE>
the business, properties, results of operations or financial condition of
Metron Europa, the Metron Asia Group or Transpacific. There can be no assurance
that Metron Europa will be able to successfully complete the Reorganization or
successfully integrate the acquired businesses, product lines and principals of
Transpacific and the Metron Asia Group. There also can be no assurance that the
business strategy of the Metron Group and Transpacific to develop a global
distribution, sales and service entity will be well received by either
customers, principals, or employees.
No assurance can be given that the existing relationships of Transpacific or
the Metron Group with the semiconductor manufacturing equipment and consumables
manufacturers whose products they market or distribute (their respective
"principals") will not be impaired following the Reorganization. Certain
product lines of principals represented by Metron Europa, the Metron Asia
Group, and Transpacific prior to the Reorganization are competitive. As a
consequence, certain principals of Transpacific have terminated Transpacific as
a distributor or representative or have advised Transpacific of their intention
to terminate it as a distributor or representative, and Transpacific, Metron
Europa and/or the Metron Asia Group also have modified their existing
distribution arrangements with certain principals to restrict the ability of
the combined entity following the Reorganization to represent competing product
lines in the same territory. It is possible that certain principals of
Transpacific, Metron Europa, or the Metron Asia Group will become dissatisfied
because of potential conflicts notwithstanding the Metron Group's or
Transpacific's agreement to such geographic limitations, and such principals
may nevertheless decide to terminate their relationships with one or more
entities within the combined company. The loss of any such principals, without
the creation of new distributor relationships to take their place, could have
an adverse effect on FSI's financial condition and results of operations. See
"Recent Developments--Metron Activities" and "Business--Marketing, Sales, and
Support" and "--Customers."
INTERNATIONAL BUSINESS
Approximately 33% and 30% of the Company's sales for fiscal 1994 and the
first nine months of fiscal 1995, respectively, were attributable to sales
outside the United States, including sales through the Company's affiliated
international distributors which accounted for 78% and 95%, respectively, of
such sales. See "Reliance on Affiliated International Distributors" above and
Note 16 of the Notes to Consolidated Financial Statements of FSI. The Company
expects that international sales will continue to represent a significant
portion of its total sales. Sales to customers outside the United States are
subject to risks, including the imposition of governmental controls, the need
to comply with a wide variety of foreign and United States export laws,
political and economic instability, trade restrictions, changes in tariffs and
taxes, longer payment cycles typically associated with international sales, and
the greater difficulty of administering business overseas as well as general
economic conditions. Although substantially all of the Company's direct
international sales are denominated in United States dollars, both direct sales
by the Company and sales through its affiliated international distributors may
be affected by changes in demand resulting from fluctuations in interest and
currency exchange rates. Moreover, while sales by the Metron Group are also
generally denominated in United States dollars, their expenses are denominated
in foreign currencies and, consequently, their operating results may be
affected by changes in exchange rates. Sales by m.FSI are denominated in yen
and, accordingly, FSI's equity interest in the earnings of m.FSI are affected
by fluctuation in dollar/yen exchange rates. Furthermore, although the Company
endeavors to meet technical standards established by foreign regulatory bodies,
there can be no assurance that the Company will be able to comply with changes
in foreign standards in the future. The inability of the Company to design
products to comply with foreign standards could have a material adverse effect
on the Company. In addition, the laws of certain foreign countries may not
protect the Company's intellectual property to the same extent as do the laws
of the United States. A growing 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. See "Business--Marketing, Sales, and Support" and "--Competition."
9
<PAGE>
ACQUISITIONS
The Company from time to time may acquire complementary businesses, products,
or technologies. On January 31, 1995, the Company and its European affiliated
distributor, Metron Europa, each acquired 50% of FME, which is located in
Newhaven, East Sussex, England, and manufactures, markets, and services
chemical delivery systems and certain other products. In addition, effective
March 8, 1995, the Company acquired ACS, which is located in Hollister,
California, and designs, markets, and services chemical blending and delivery
systems, point of use chemical generation systems, and slurry mixing and
delivery systems used in conjunction with chemical mechanical planarization,
commonly referred to as CMP. There can be no assurance that the Company will be
able to successfully complete other acquisitions or successfully integrate the
acquired businesses, products, or technologies of FME, ACS or others. See
"Recent Developments."
JAPANESE COMPETITION
Since 1992, Japanese semiconductor device manufacturers have substantially
reduced their levels of capital spending on new fabrication facilities and
equipment in Japan and elsewhere. This has resulted in reduced sales and
increasing competitive pressures in the Japanese market segment (comprised of
semiconductor device fabrication facilities located in Japan and those located
outside of Japan which are controlled by Japanese companies). As a result,
pricing pressures in both the Japanese market and elsewhere may continue into
the foreseeable future due to Japanese semiconductor equipment manufacturers
offering substantial discounts on their products.
The Company believes that the Japanese companies with which it competes have
a competitive advantage because of their dominance of the Japanese market
segment. Furthermore, Japanese semiconductor device manufacturers have extended
their influence outside Japan by licensing products and process technologies to
non-Japanese semiconductor device manufacturers. Such licenses can result in a
recommendation to use semiconductor equipment manufactured by Japanese
companies. Therefore, the Company may be at a competitive disadvantage with
respect to the Japanese semiconductor equipment suppliers, who have been
engaged for some time in collaborative efforts with Japanese semiconductor
device manufacturers. Certain Japanese semiconductor equipment manufacturers
have announced plans to begin manufacturing operations in the United States,
which will enable them to compete more effectively in the United States market.
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 cluster or chemical
management system product lines. As part of the strategy to establish its
Japanese presence, the Company formed a joint venture, m.FSI, in August 1991
with Mitsui & Co., Ltd. and its wholly-owned subsidiary, Chlorine Engineers
Corp., Ltd. (collectively, "Mitsui") and granted m.FSI certain product and
technology licenses and product distribution rights in Japan. There can be no
assurance that the Company will be able to maintain or
increase its sales to the Japanese market segment. See "Business--Marketing,
Sales, and Support" and "--Competition." 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. There can be no
assurance, however, that imposition of such restrictions in the future will not
adversely affect FSI's ability to compete in these markets.
COMPETITION
The semiconductor equipment industry 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, greater name recognition than the Company, and long-standing
customer relationships. In order to remain competitive, the Company must
maintain a high level of investment in research and development, marketing, and
customer service and support as well as control operating expenses. There can
be no assurance that the Company will have sufficient resources to continue to
make such investments or that the Company's products will continue to be viewed
as competitive as a result of technological advances by competitors or changes
in
10
<PAGE>
semiconductor processing technology. The Company's competitors may also
increase their efforts to gain and retain market share through competitive
pricing. Such competitive pressures may necessitate significant price
reductions by the Company or result in lost orders which could adversely affect
the Company's results of operations. See "Business--Marketing, Sales, and
Support" and "--Competition."
DEPENDENCE ON KEY CUSTOMERS
Although the composition of the Company's largest customers has changed from
year to year, direct sales to the Company's top five customers in each of
fiscal 1992, 1993, and 1994 have accounted for approximately 45%, 50%, and 46%,
respectively, of the Company's total sales. Direct sales to the Company's top
two customers in each of fiscal 1992, 1993, and 1994 accounted for
approximately 34%, 32%, and 30%, respectively, of the Company's total sales.
FSI's top two customers in fiscal 1994 were Texas Instruments, Inc. ("TI") and
Motorola, Inc. ("Motorola"). In addition, approximately 37% of the Company's
backlog at fiscal 1994 year-end was comprised of orders from three customers.
Sales to the Company's affiliated distributors in fiscal 1992, 1993, and 1994,
which may include sales of products subsequently resold to the Company's top
five customers, accounted for approximately 33%, 25%, and 26%, respectively, of
the Company's total sales. The Company currently has no long-term purchase
commitments with any of its customers and sales are generally made pursuant to
purchase orders. A reduction, delay, or cancellation of orders from one or more
of its significant customers, or the loss of one or more of such customers,
could have a material adverse effect on the Company's operating results. See
"Business--Customers."
ACCEPTANCE OF POLARIS MICROLITHOGRAPHY CLUSTER
The Company introduced the original Polaris microlithography cluster in 1991.
In July 1994, the Company introduced the Polaris 2000 product, an advanced
microlithography cluster with enhanced processing capabilities and increased
throughput. Use of the Polaris cluster represents an alternative to the
conventional track approach employed by semiconductor device manufacturers to
process photoresist. To date, a significant majority of the sales of Polaris
clusters has been to three customers, International Business Machines
Corporation ("IBM"), TI, and LG Semicon Co., Ltd. ("LG Semicon", which
purchases the Company's products through its United States affiliate, LG
International (America), Ltd.). Future growth in sales by the Company's
microlithography division will depend upon the acceptance of the Company's
microlithography cluster technology by a broader group of customers, including
additional international customers. Because of the large capital commitment
involved in the construction and operation of a semiconductor device
manufacturing facility, the decision by a semiconductor device manufacturer to
undertake a large-scale deployment of the Polaris cluster involves a
significant technological and financial commitment to what is currently an
alternative approach. While the Company is actively promoting the acceptance of
this technology, there can be no assurance that the Company will be successful
in obtaining broader acceptance of the Polaris cluster technology. Failure to
achieve broader acceptance could have an adverse effect on the Company's
results of operations and earnings. The Company designs and manufactures the
Polaris cluster under a license from TI which includes an exclusive license to
sell such systems. The loss or material limitation of this license could have
an adverse effect on the Company's results of operations and earnings. See
"Business--Products--Microlithography Clusters" and "--Polaris License
Agreement; Other Intellectual Property."
CHANGES IN INDUSTRY PURCHASING PRACTICES; LENGTHENING SALES CYCLE
Sales of the Company's systems depend, in significant part, upon the decision
of a prospective customer to increase manufacturing capacity by constructing
and equipping new semiconductor device manufacturing facilities or upgrading
current facilities, both of which typically involve significant capital
commitments. The Company believes that semiconductor device manufacturers are
increasingly relying on equipment suppliers to help them meet the technological
challenges and cost constraints inherent in constructing or expanding
semiconductor device fabrication facilities. Due to these and other factors,
the Company's systems typically have lengthy sales cycles during which the
Company may expend substantial funds and management effort. The Company
believes that the length of the sales cycle will increase as certain of its
current and potential customers centralize purchasing decisions into one
decision-making entity, which is expected to intensify the evaluation process
and require additional sales and marketing expenditures by the Company. The
Company
11
<PAGE>
believes that, as a result, certain semiconductor device manufacturers are
developing strategic relationships with suppliers and are focusing on a limited
number of suppliers for each item of process equipment in a fabrication
facility. Once a semiconductor device manufacturer has selected a particular
vendor's capital equipment, the Company believes that the manufacturer
generally relies upon that equipment for the specific production line
application at that facility, and in some cases future facilities. Such
manufacturers in some cases will attempt to consolidate their other capital
equipment requirements with the same vendor. Accordingly, the Company's ability
to receive orders from potential customers may depend upon such customers
undertaking an evaluation for new equipment. For many potential customers, such
an evaluation may occur infrequently. There can be no assurance that the
Company will prevail in such evaluations or that it will not lose potential
orders to larger semiconductor equipment suppliers with broader product lines.
See "Business--Company Strategy."
DEPENDENCE ON KEY SUPPLIERS
Certain of the components and sub-assemblies included in the Company's
products are obtained from a single supplier or a limited group of suppliers.
Although the Company seeks to reduce dependence on sole and limited source
suppliers, disruption or termination of these sources could have an adverse
effect on the Company's operations. The Company believes that alternative
sources could be obtained and qualified to supply these components, if
necessary. Nevertheless, prolonged inability to obtain certain components could
have an adverse effect on the Company's operating results and could result in
damage to customer relationships. FSI is not aware of any financial
difficulties being experienced by any of FSI's key suppliers that could
materially adversely affect FSI's financial condition or results of operations.
See "Business--Manufacturing and Suppliers."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon certain senior
management and technical personnel. The loss of the services of one or more of
these key persons could have a material adverse effect on the Company. The
Company's future success will depend in large part upon its ability to attract
and retain highly skilled technical, managerial, and marketing personnel.
Competition for such personnel in the Company's industry is high. The Company's
two primary facilities are located in Chaska, Minnesota, near Minneapolis, and
Dallas, Texas. The current unemployment rate in the Minneapolis area is
extremely low and industry growth has increased competition for highly skilled
technical personnel in both Chaska and Dallas. There can be no assurance that
the Company will continue to be successful in attracting and retaining the
personnel it requires to successfully develop new and enhanced products and to
continue to grow and operate profitably. See "Business--Employees" and
"Management."
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company's success depends in significant part on its intellectual
property. While the Company attempts to protect its intellectual property
through patents, copyrights, trade secrets, and non-disclosure agreements, it
believes that its success will depend to a greater degree upon innovation,
technological expertise, and the ability to quickly adapt to and deliver new
technology. The Company currently holds numerous United States patents and
additional foreign patents in Japan and several European countries and has
several United States patent applications and foreign patent applications
pending. There can be no assurance that the Company will be able to protect its
technology or that competitors will not be able to develop similar technology
independently. No assurance can be given that the claims allowed on any patents
held or acquired by the Company will be sufficiently broad to protect the
Company's technology. In addition, no assurance can be given that any existing
or future patents issued to the Company will not be challenged, invalidated, or
circumvented or that the rights granted thereunder will provide competitive
advantages to the Company. In that event, the Company's results of operations
could be adversely affected. Moreover, the Company may be forced to incur
significant costs to defend its patent rights. In addition, although the
Company believes that its products do not infringe any valid existing
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims in the future. There also may be pending
12
<PAGE>
patent applications or issued patents of which the Company is not aware that
the Company may need to license or challenge at significant expense. There can
be no assurance that any such license would be available on acceptable terms,
if at all, or that the Company would prevail in any such challenge. See
"Business--Polaris License Agreement; Other Intellectual Property."
VOLATILITY OF STOCK PRICE
The Company's Common Stock has experienced in the past, and could experience
in the future, substantial price volatility as a result of a number of factors,
including quarter to quarter variations in the actual or anticipated financial
results of the Company, announcements by the Company, its competitors or its
customers, government regulations, and developments in the industry. In
addition, the stock market has experienced extreme price and volume
fluctuations which have affected the market price of many technology companies
in particular and which have at times been unrelated to the operating
performance of the specific companies whose stock is traded. Broad market
fluctuations, as well as economic conditions generally and in the semiconductor
device industry specifically, may adversely affect the market price of the
Company's Common Stock. See "Price Range of Common Stock and Dividend Policy."
RECENT DEVELOPMENTS
ACQUISITION OF APPLIED CHEMICAL SOLUTIONS
On March 8, 1995, the Company acquired all the outstanding capital stock of
Applied Chemical Solutions (the "ACS Acquisition") and ACS became a wholly
owned subsidiary of the Company. Principal ACS products include chemical
blending and delivery systems, point of use chemical generation systems, and
slurry mixing and delivery systems used in conjunction with chemical mechanical
planarization, commonly referred to as CMP. ACS' delivery system products
utilize vacuum pressure technology, whereas FSI's products utilize primarily
pump and pressure technology. See "Business--Products--Chemical Management
Systems." Currently, ACS products are manufactured by a third party contractor
located near ACS's operations in Hollister, California. By acquiring ACS, the
Company believes that it has obtained an additional dispense technology along
with expertise in mixing and dispensing slurry, which will enable the Company
to provide customers with a more complete range of chemical management product
offerings, including products addressing the CMP market.
In connection with the ACS Acquisition, the Company issued 1,061,472 shares
of its Common Stock to the former holders of ACS common stock and issued
options to purchase up to 214,758 shares of its Common Stock in substitution of
previously outstanding options to acquire shares of ACS common stock. The ACS
Acquisition was accounted for using the pooling-of-interests method of
accounting. Accordingly, the Company's financial statements have been restated
for all periods prior to the acquisition to include ACS. See Note 2 of Notes to
Consolidated Financial Statements of FSI. Additional information concerning ACS
is included in certain Company documents incorporated herein by reference,
including the Current Report on Form 8-K dated March 22, 1995.
CONSTRUCTION OF NEW MANUFACTURING FACILITY
FSI has commenced construction of a new 100,000 square foot manufacturing
facility in Chaska, Minnesota near its current headquarters. This new facility
will add Class 1000 clean room manufacturing, facilities for training and
manufacturing engineering, and space for a new process development and
demonstration laboratory for the Company's Surface Conditioning Division. The
facility is designed to manufacture all three of FSI's product lines with a
more efficient material flow in a Class 1000 clean room environment. The cost
of purchasing the land for and of constructing and equipping the new facility
is expected to total $11.5 million. The planned November 1995 move to the new
facility will allow expansion of the current facility in the areas of
engineering, administration, customer support, and development laboratories.
FSI believes that its existing facilities will be sufficient to meet projected
production levels through November 1995, when its new facility is expected to
become operational. See "Business--Properties."
13
<PAGE>
METRON ACTIVITIES
FSI Metron Europe, Ltd. On January 31, 1995, FSI and Metron Europa each
acquired 50% of the outstanding share capital of FME for an aggregate purchase
price of approximately $2.4 million. FME manufactures, markets, and services
chemical distribution systems, manual wet benches, and portable clean rooms
primarily for use by semiconductor device manufacturers. For the fiscal year
ended July 31, 1994, FME's sales were approximately $3.5 million. FME and FSI
are in the process of finalizing an agreement that would permit FSI to
manufacture FME's products and permit FME to manufacture certain of FSI's
chemical management and delivery products. In addition, it is expected that
Metron Europa will distribute in its sales territory those FSI chemical
management products FME manufactures or purchases from FSI as well as FME's
products. While the Company does not believe that the FME acquisition will
significantly affect either FSI's or Metron Europa's financial results in the
near future, the acquisition does provide FSI with a European base for
manufacturing chemical management systems.
Metron Group Consolidation. In an effort to create an integrated, world-wide
distribution organization, Metron Europa has entered into agreements with the
Metron Asia Group and Transpacific Technology Corporation providing for the
consolidation of such companies (the "Reorganization"). Transpacific markets or
distributes the products of certain semiconductor equipment and consumable
manufacturers in portions of the United States and Europe. In connection with
and as a result of the Reorganization, the Metron Asia Group companies and
Transpacific will become wholly owned subsidiaries of Metron Europa, the
president and chief executive officer of Transpacific will become the chief
executive officer of Metron Europa, and FSI's 40% and 50% ownership interest in
Metron Europa and the Metron Asia Group, respectively, will be reduced to 38%
of the combined entity. The ownership of Metron Europa following the
Reorganization will be as follows:
<TABLE>
<CAPTION>
PERCENTAGE
SHAREHOLDER OWNERSHIP
----------- ----------
<S> <C>
FSI International, Inc......................................... 38.2%
Fluoroware, Inc................................................ 38.2%
Current Metron Europa Management............................... 14.6%
Transpacific Shareholders...................................... 9.0%
</TABLE>
As part of the Reorganization and in addition to the receipt of shares of
Metron Europa, Transpacific shareholders will receive cash totalling $500,000
and promissory notes totalling $1.3 million, payable in semiannual installments
through December 31, 1997. FSI and Fluoroware each will guarantee one-half of
any amount which becomes due under the notes and for which Metron Europa has
failed to satisfy.
Under the Reorganization Agreement, Metron Europa has agreed to establish a
stock option plan for its directors and key employees. Approximately 18% of the
total number of Metron shares outstanding immediately following the
Reorganization would be reserved for issuance under the plan. The new chief
executive officer of Metron Europa will obtain the right to acquire options for
the purchase of approximately one-third of the total number of such reserved
Metron shares, at a per share price equal to the book value, with adjustments,
of a Metron share on the date of grant.
In addition, the holders of substantially all of the shares of Metron Europa
following the Merger will enter into certain shareholder agreements with
respect to their Metron shares. Such agreements would, among other things,
provide for rights of first refusal in favor of Metron Europa, FSI, and
Fluoroware, and grant the parties certain registration, preemptive, and co-sale
rights. These agreements also will grant the former Transpacific shareholders
the right to put their Metron shares to Metron Europa under certain
circumstances, including termination of employment, death and Metron Europa's
failure to obtain certain prescribed financing objectives within five years
following the closing of the Reorganization. In each case, the price to be paid
for the purchased shares will be based upon a formula based on adjusted book
value or a multiple of book value.
14
<PAGE>
Consummation of the Reorganization is subject to various conditions. No
assurance can be given as to whether or not such conditions will be satisfied
or waived by the party or parties permitted to do so. If the conditions to the
Reorganization remain unsatisfied and the Reorganization has not been
consummated on or before July 6, 1995, the Reorganization Agreement may be
terminated by either Transpacific or Metron Europa. The obligations of
Transpacific and Metron Europa to consummate the Reorganization are subject to,
among other things: approval by the Transpacific shareholders; receipt of all
required regulatory approvals; and the absence of any material adverse change
in the business, properties, results of operations or financial condition of
either party.
If the Reorganization is completed, FSI's day to day involvement in the
management and supervision of the Metron Group would be reduced and the future
success of the combined entity would depend on the successful integration of
the senior management of Transpacific and the Metron Group as well as
acceptance and support of the new combined operations by customers and
suppliers. See "Risk Factors--Reliance on Affiliated International
Distributors" and "Business--Marketing, Sales, and Support."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be approximately $53,850,000 ($62,781,000 if the
Underwriters' over-allotment option is exercised in full), after deducting
underwriting discounts and estimated offering expenses payable by the Company.
The Company will not receive any proceeds from the sale of shares by the
Selling Shareholders. See "Principal and Selling Shareholders."
The net proceeds will be used for working capital and general corporate
purposes. The Company is undertaking the offering in part because it believes
that the availability of adequate financial resources is a substantial
competitive factor in its industry. The Company may use a portion of the net
proceeds to acquire equipment for its demonstration and product development
laboratories and for future facilities expansion. In addition, a portion of the
net proceeds may also be used for strategic acquisitions of businesses,
products, or technologies complementary to the Company's business. The Company
does not have any signed contracts, letters of intent, or agreements in
principle to make any such material acquisition. Pending such uses, the net
proceeds of the offering will be invested in short-term, interest-bearing
investment grade securities.
PRICE RANGE OF COMMON STOCK
AND DIVIDEND POLICY
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "FSII." The following table sets forth, for the periods indicated, the
high and low sale prices for the Common Stock as reported on the Nasdaq
National Market (after giving effect to the Stock Split).
<TABLE>
<CAPTION>
HIGH LOW
------ --------
<S> <C> <C>
FISCAL 1993
First Quarter............................................. 3 7/8 2 1/4
Second Quarter............................................ 4 1/2 3 7/16
Third Quarter............................................. 4 1/4 2 7/8
Fourth Quarter............................................ 5 1/2 3 15/16
FISCAL 1994
First Quarter............................................. 6 1/2 4 5/8
Second Quarter............................................ 6 7/8 4 7/8
Third Quarter............................................. 7 7/8 5 1/4
Fourth Quarter............................................ 9 5 3/8
FISCAL 1995
First Quarter............................................. 14 1/4 8 5/8
Second Quarter............................................ 18 1/8 12 1/8
Third Quarter............................................. 26 5/8 17 3/8
Fourth Quarter (through June 28, 1995).................... 26 3/4 22 3/4
</TABLE>
15
<PAGE>
On June 28, 1995, the last reported sale price for the Common Stock as
reported by the Nasdaq National Market was $23.00 per share. As of June 28,
1995, there were approximately 350 record holders of the Common Stock and an
estimated additional 3,300 shareholders who held beneficial interests in shares
of Common Stock registered in nominee names of banks and brokerage houses.
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain all earnings for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of May
27, 1995 (reflecting the Stock Split) and as adjusted to reflect the sale of
Common Stock offered hereby (after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company) and the
anticipated application of the net proceeds therefrom:
<TABLE>
<CAPTION>
MAY 27, 1995
--------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Long-term debt, less current maturities............. $ 2 $ 2
-------- --------
Stockholders' equity:
Preferred Stock, no par value; 10,000,000 shares
authorized; none issued and outstanding.......... -- --
Common Stock, no par value; 50,000,000 shares
authorized; 17,135,782 shares issued and
outstanding; 19,635,782 shares as adjusted(1).... 80,990 134,840
Retained earnings................................. 25,432 25,432
-------- --------
Total stockholders' equity...................... 106,422 160,272
-------- --------
Total capitalization.......................... $106,424 $160,274
======== ========
</TABLE>
- --------
(1) Shares issued and outstanding and as adjusted do not include 1,709,424
shares issuable upon exercise of outstanding options granted by the
Company, 198,930 shares reserved for future issuance under the Company's
stock plans, 100,000 shares issuable upon the exercise of outstanding
Common Stock purchase warrants, and 35,000 shares reserved for issuance in
connection with the purchase in June 1994 of certain technology and other
assets.
16
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The selected consolidated financial data presented below for and as of the
five fiscal years ended August 27, 1994 are derived from the Consolidated
Financial Statements of the Company and its subsidiaries, which have been
audited by KPMG Peat Marwick LLP, independent certified public accountants.
Data as of and for the nine months ended May 28, 1994 and May 27, 1995 have
been derived from unaudited consolidated financial statements of the Company
and, in the opinion of the Company's management, includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the results of operations for the periods then ended and the financial position
of the Company as of such dates. Interim operating results are not necessarily
indicative of the results that may be achieved for the entire year. The
following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the separate Consolidated Financial Statements of the
Company incorporated by reference or included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
------------------------------------------------------ -----------------
AUGUST 25, AUGUST 31, AUGUST 29, AUGUST 28, AUGUST 27, MAY 28, MAY 27,
1990 1991 1992 1993 1994 1994 1995
---------- ---------- ---------- ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1):
Sales................... $54,306 $44,957 $46,879 $78,432 $96,437 $68,210 $126,415
Cost of goods sold...... 34,865 27,788 28,109 49,464 55,788 39,797 72,160
Gross profit............ 19,441 17,169 18,770 28,968 40,649 28,413 54,255
Selling, general, and
administrative
expenses............... 13,376 12,299 11,170 14,496 19,552 13,476 24,090
Research and development
expenses............... 9,010 8,376 9,783 11,760 15,743 10,999 17,378
Operating income (loss). (2,945) (3,506) (2,183) 2,712 5,354 3,938 12,787
Other income (expense),
net.................... (242) (414) (410) (671) (254) (288) 1,031
Income (loss) before
income taxes........... (3,187) (3,920) (2,593) 2,041 5,100 3,650 13,818
Income tax expense
(benefit).............. (1,246) (616) 392 360 1,254 847 3,800
Income (loss) before
equity in earnings
(loss) of affiliates... (1,941) (3,304) (2,985) 1,681 3,846 2,803 10,018
Equity in earnings
(loss) of affiliates... 192 40 (373) 1,277 1,800 1,160 2,128
Net income (loss)....... $(1,749) $(3,264) $(3,358) $ 2,958 $ 5,646 $ 3,963 $ 12,146
Net income (loss) per
common share(2)........ $ (.22) $ (.37) $ (.36) $ .28 $ .43 $ .31 $ .76
Weighted average common
shares and common share
equivalents(2)......... 8,024 8,715 9,275 10,558 13,222 12,968 15,916
BALANCE SHEET DATA(1):
Working capital......... $16,501 $13,355 $10,934 $13,421 $27,778 $28,696 $ 84,378
Total assets............ 34,293 27,288 36,443 40,970 68,995 60,597 145,930
Short-term debt......... 3,034 199 4,976 2,753 149 211 45
Long-term debt, less
current maturities..... 367 304 866 343 33 47 2
Stockholders' equity.... 22,615 19,787 17,245 21,190 42,006 40,000 106,422
Dividends............... -- -- -- -- -- -- --
</TABLE>
- --------
(1) All amounts have been adjusted to reflect the acquisition, effective March
8, 1995, of Applied Chemical Solutions, which acquisition was accounted for
using the pooling-of-interests method of accounting. See "'Recent
Developments--Acquisition of Applied Chemical Solutions" and Note 2 of
Notes to Consolidated Financial Statements of FSI.
(2) Share information and per share information have been adjusted to reflect
the Stock Split.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
FSI designs, manufactures, markets, and supports equipment used by
semiconductor device manufacturers to produce integrated circuits. The
Company's business is dependent in large part on the capital expenditures of
semiconductor device manufacturers. The semiconductor device industry has
historically been cyclical. Since the end of the downturn which occurred
worldwide from 1990 through 1992, the industry has been experiencing rapid
growth, particularly in the United States and Korea.
The Company implemented certain actions during the 1990-1992 downturn in an
effort to mitigate the effects of the cyclicality of the industry, including
focusing on its three core product lines, consolidating operations, and
expanding into the Japanese market by establishing a joint venture distributor.
Also, during this period the Company began manufacturing and marketing the
Polaris microlithography cluster, under license from TI, for the processing of
photoresist, after terminating its relationship as a manufacturer and
distributor of a conventional track system of a third party. Sales of the
Polaris cluster have grown to $32.7 million, or approximately 34% of sales, in
fiscal 1994 and $38.7 million, or approximately 31% of sales, in the first nine
months of fiscal 1995. The Company's three core product lines generate
substantially different gross profit margins; therefore, results in any period
will be affected by the mix of product sales that occur in such period.
Due to the international nature of the semiconductor device industry, it is
important for the Company to provide sales, service, and support worldwide. The
Company provides these services primarily through affiliated distributors
located in Europe, the Far East, and Japan. These distributors also sell and
support the products of other companies serving the semiconductor device
manufacturing industry. Because of the Company's equity ownership interest in
these distributors, their financial results can have a significant impact on
the Company's financial results. In fiscal 1994 and for the first nine months
of fiscal 1995, equity in earnings of affiliates of $1.8 million and $2.1
million represented approximately 32% and 18% of net income, respectively. See
"Risk Factors--Relationship with Affiliated Distributors," "Recent
Developments--Metron Activities," and Note 6 of Notes to Consolidated Financial
Statements of FSI.
The semiconductor device industry is subject to rapid technological changes.
The Company's future results will depend to a considerable extent on its
ability to continue to develop and deliver new products and product
enhancements to its customers. Therefore, the Company maintains an active
research and development program and may consider from time to time strategic
acquisitions of complementary businesses, products, or technologies.
On March 8, 1995, the Company acquired Applied Chemical Solutions. The ACS
Acquisition was accounted for using the pooling-of-interests method of
accounting. The Company's purpose in acquiring ACS was to obtain products and
technology that would complement FSI's existing chemical management technology
and thereby enable it to provide customers with a more complete range of
chemical management product offerings. In addition, the ACS Acquisition
expanded FSI's geographic presence into the California market, which is the
location of several large semiconductor device manufacturers. The Company
believes that through the ACS Acquisition it has acquired technology at a price
which compares favorably with the cost of independently developing comparable
technology. Although the Company expects to realize the benefits of certain
efficiencies from the combination of FSI and ACS operations, the realization of
such benefits, if any, were not a primary purpose of the ACS Acquisition and
any such effects, whether beneficial or detrimental, are not expected to be
material. See "Recent Developments--Acquisition of Applied Chemical Solutions."
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage of sales represented by certain
consolidated statements of income data for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
-------------------------------- -------------------
AUGUST 29, AUGUST 28, AUGUST 27, MAY 28, MAY 27,
1992 1993 1994 1994 1995
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 60.0 63.1 57.9 58.3 57.1
----- ----- ----- -------- --------
Gross profit............ 40.0 36.9 42.1 41.7 42.9
Operating expenses:
Selling, general, and
administrative......... 23.8 18.5 20.3 19.8 19.1
Research and
development............ 20.9 15.0 16.3 16.1 13.7
----- ----- ----- -------- --------
Total operating
expenses............... 44.7 33.5 36.6 35.9 32.8
----- ----- ----- -------- --------
Operating income (loss). (4.7) 3.4 5.5 5.8 10.1
Other income (expense),
net.................... (0.9) (0.8) (0.2) (0.4) 0.8
----- ----- ----- -------- --------
Income (loss) before
income taxes........... (5.6) 2.6 5.3 5.4 10.9
Income tax expense...... 0.8 0.5 1.3 1.3 3.0
----- ----- ----- -------- --------
Income (loss) before
equity in earnings
(loss) of affiliates... (6.4) 2.1 4.0 4.1 7.9
Equity in earnings
(loss) of affiliates... (0.8) 1.7 1.9 1.7 1.7
----- ----- ----- -------- --------
Net income (loss)....... (7.2)% 3.8% 5.9% 5.8% 9.6%
----- ----- ----- -------- --------
</TABLE>
FISCAL NINE MONTHS ENDED MAY 28, 1994 AND MAY 27, 1995
Sales. Sales increased from the nine months ended May 28, 1994 by $58.2
million, or approximately 85%, to $126.4 million for the nine months ended May
27, 1995. The increase in sales occurred in all product lines and was generally
attributable to increased unit sales and to a lesser extent to increases in the
average selling price of FSI's products resulting from additional features
added.
Gross profit. Gross profit as a percentage of sales for the nine months ended
May 28, 1994 was 41.7% as compared to approximately 42.9% for the nine months
ended May 27, 1995. The increase in gross profit as a percentage of sales for
this period was primarily due to increased margins in the microlithography and
surface conditioning product lines offset in part by decreased margins in the
chemical management product lines. The Company's gross profit margin may
fluctuate as a result of a number of factors, including the mix of products
sold, the proportion of international sales, and competitive pricing pressures.
Selling, General, and Administrative. Selling, general, and administrative
expenses were 19.8% of sales for the nine months ended May 28, 1994, as
compared to 19.1% of sales for the nine months ended May 27, 1995. The increase
of approximately $10.6 million is due primarily to increased costs related to
expanded customer support of approximately $2.0 million, increase in management
incentive bonuses and employee profit sharing of $1.4 million, increased
commissions related to higher sales volume of approximately $1.5 million, fees
and expenses associated with the ACS Acquisition of $800,000, increased
allowance for bad debts, and costs associated with the computer systems
upgrade. The Company expects the amount of selling, general, and administrative
expenses to increase during the remainder of fiscal 1995.
Research and Development. Research and development expenses for the first
nine months of fiscal 1994 were approximately 16.1% of sales, or $11.0 million,
as compared to 13.7% of sales, or $17.4 million, for the first nine months of
fiscal 1995. The increase of approximately $6.4 million resulted primarily from
the Company's continued development efforts on new and existing products,
including the Polaris 2000 cluster,
19
<PAGE>
the Excalibur MVP system, the Orion vacuum-based gas phase (dry) cleaning
system, and certain chemical management systems. Certain of the Company's
research and development projects are partially funded through arrangements
with third parties. For the first nine months of fiscal 1994 and 1995, the
Company recognized approximately $925,000 and $546,000, respectively, from
third parties as a reduction in research and development expenses. The Company
expects the amount of research and development expenses to increase, and does
not expect any funding for research and development from third parties, during
the remainder of fiscal 1995.
Other Income (Expense), Net. Other income (expense) was an expense of
$288,000 for the first nine months of fiscal 1994 as compared to income of $1.0
million for the first nine months of fiscal 1995, which was primarily due to an
increase in interest earned by the Company on short-term investments. Interest
earned for the first nine months of fiscal 1994 approximated $216,000 as
compared to $994,000 for the first nine months of fiscal 1995.
Income Tax Expense. For the first nine months of fiscal 1994, the Company
recorded an income tax expense of $847,000, or 23.2% of pretax profit, as
compared to $3.8 million, or 27.5%, for the first nine months of fiscal 1995.
Income tax expense for the first nine months of fiscal 1995 was approximately
$1.2 million lower than what would be expected using a 36% "statutory"
effective tax rate, reflecting the Company's ability to utilize current and
prior year tax credits associated with its research and development expenses
and its foreign sales corporation as well as its ability under FAS 109 to
reinstate a portion of its deferred taxes, which were previously limited by FAS
109.
Equity in Earnings of Affiliates. For the first nine months of fiscal 1994,
equity in earnings of affiliates was approximately $1.2 million, as compared to
$2.1 million for the first nine months of fiscal 1995. The increase in earnings
for the first nine months of fiscal 1995 is attributed to increased earnings of
the Metron Group, which resulted from recent expansions by several
semiconductor device manufacturers located in Europe and continued growth
taking place in the Asia-Pacific market.
FISCAL YEARS ENDED AUGUST 1992, 1993, AND 1994
Sales. Sales grew 67.3% to $78.4 million in fiscal 1993, and 23.0% to $96.4
million in fiscal 1994. The increase in sales from fiscal 1992 to fiscal 1993
was attributable to significantly increased unit sales in each of the Company's
three product categories and to a lesser extent to increases in the average
selling price of FSI's products resulting from additional features offered.
Sales of spare parts and service averaged approximately $14.8 million during
these periods. The increase in sales from fiscal 1993 to fiscal 1994 was
attributable to significant growth in the Company's microlithography cluster
business and increased spare parts and service sales. Sales for the Polaris
cluster grew from $20.3 million in fiscal 1993 to $32.7 million in fiscal 1994,
or approximately 61%, and spare parts and service sales grew from $13.3 million
to $18.2 million, or approximately 37%. See "Business--Products."
The Company's international sales were $16.0 million, $26.6 million, and
$31.5 million, during fiscal 1992, 1993, and 1994, respectively, and
represented approximately 34%, 34%, and 33% of sales during such periods. Sales
of the Company's products in each of Europe, the Far East, and Japan increased
from 1993 to 1994. See "Business--Marketing, Sales, and Support."
Gross Profit. The Company's gross profit as a percentage of sales decreased
from 40.0% in fiscal 1992 to 36.9% in fiscal 1993 and increased to 42.1% in
fiscal 1994. The decrease in gross profit percentage between fiscal 1992 and
fiscal 1993 was attributable to an increase in the percentage of total sales
from chemical management systems, the Company's lowest margin product line.
Also, during fiscal 1993, the Company recorded a loss of approximately $800,000
on $5.3 million of sales recognized on a chemical management system project,
due to cost overruns. The increase in gross profit percentage between fiscal
1993 and 1994
20
<PAGE>
was attributable primarily to the project cost overrun that occurred in fiscal
1993 and an increase in the percentage of total sales from the Company's higher
margin products, and to a lesser extent to a decrease in the percentage of
foreign sales as a percentage of total sales.
Selling, General, and Administrative. Selling, general, and administrative
expenses were $11.2 million, $14.5 million and $19.6 million, or 23.8%, 18.5%
and 20.3%, of sales during fiscal 1992, 1993, and 1994, respectively. While
selling, general, and administrative expenses increased approximately 30% in
1993 over 1992, these expenses decreased from 23.8% to 18.5%, as a percentage
of sales, due to the economies of scale realized as sales grew over 67%. The
increase in selling, general, and administrative expenses from 1993 to 1994 was
chiefly due to expanded customer support and marketing (approximately $2.4
million of such increase) and management incentive bonuses and employee profit
sharing (approximately $625,000 of such increase).
Research and Development. Research and development expenses were $9.8
million, $11.8 million, and $15.7 million, or 20.9%, 15.0%, and 16.3%, of sales
during fiscal 1992, 1993, and 1994, respectively. The increase from fiscal 1992
to fiscal 1993 was primarily due to the addition in fiscal 1993 of the
Microlithography Division Demonstration and Process Development Laboratory in
Dallas, Texas. In addition, the Company brought to market enhanced versions of
its Excalibur and ChemFill products. The increase from fiscal 1993 to fiscal
1994 was primarily due to realizing a full year of expenses for the
Microlithography Division Demonstration and Process Development Laboratory, and
continued development costs for its Orion dry-gas cleaning system. In addition,
the Company introduced the new Polaris 2000 cluster, the Excalibur MVP (Multi-
Vapor Processing) system, chemical blending systems, and the ChemFill Models
5000 and 500 chemical delivery systems. During fiscal years 1993 and 1994, the
Company recognized approximately $1.2 million and $1.3 million, respectively,
of third party funding as reductions in research and development expenses.
Other Income (Expense), Net. The net balance in other income (expense), net
the past few years has been primarily a result of interest expense related to
the Company's borrowings. In fiscal 1994, the Company recognized approximately
$140,000 of expenses associated with early termination of its revolving credit
facility.
Income Tax Expense. The Company's income tax expense was $392,000, $360,000,
and $1.3 million in fiscal 1992, 1993, and 1994, respectively. This equated to
an effective tax rate of 15.1%, 17.6%, and 24.6% in fiscal 1992, 1993, and
1994, respectively. The Company's effective tax rate differs from the expected
tax rate of 34% due to the required reduction in deferred tax assets that could
be recorded under FAS 96 "Accounting for Income Taxes" in fiscal 1992 and the
reinstatement of deferred tax assets resulting from the generation of taxable
income in fiscal 1993 and 1994.
Equity in Earnings (Loss) of Affiliates. The equity in earnings (loss) of
affiliates reflects a loss of approximately $373,000 in fiscal 1992, and
earnings of approximately $1.3 million and $1.8 million in fiscal 1993 and
fiscal 1994, respectively. The loss in fiscal 1992 resulted primarily from the
start-up costs associated with the Company's Japanese joint venture and to a
lesser extent from the general downturn in the worldwide semiconductor device
industry. The increases in fiscal 1993 and fiscal 1994 are attributed to
increased earnings of the Metron Group, the Company's European and Far East
affiliated distributors.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited consolidated quarterly
financial information for each quarter in fiscal 1994 and the first three
quarters of fiscal 1995. In the opinion of the Company's management, this
information has been prepared on the same basis as the audited consolidated
financial statements incorporated by reference or appearing elsewhere in this
Prospectus and includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the unaudited quarterly results set
forth
21
<PAGE>
herein. The Company's quarterly results have in the past been subject to
fluctuations and, thus, the operating results for any quarters are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------
FISCAL 1994 FISCAL 1995
--------------------------------------------- ---------------------------------
NOVEMBER 27, FEBRUARY 26, MAY 28, AUGUST 27, NOVEMBER 26, FEBRUARY 25, MAY 27,
1993 1994 1994 1994 1994 1995 1995
------------ ------------ ------- ---------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales................... $21,415 $20,707 $26,087 $28,228 $30,184 $42,728 $53,503
Cost of goods sold...... 12,665 11,463 15,668 15,992 16,263 24,370 31,527
------- ------- ------- ------- ------- ------- -------
Gross profit............ 8,750 9,244 10,419 12,236 13,921 18,358 21,976
Operating expenses:
Selling, general, and
administrative....... 4,284 4,341 4,851 6,076 6,329 7,470 10,291
Research and
development.......... 3,396 3,743 3,860 4,744 4,873 6,040 6,465
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 7,680 8,084 8,711 10,820 11,202 13,510 16,756
------- ------- ------- ------- ------- ------- -------
Operating income........ 1,070 1,160 1,708 1,416 2,719 4,848 5,220
Other income (expense),
net.................... (198) (10) (80) 34 121 173 737
------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 872 1,150 1,628 1,450 2,840 5,021 5,957
Income tax expense...... 185 300 362 407 790 1,254 1,756
------- ------- ------- ------- ------- ------- -------
Income before equity in
earnings of affiliates. 687 850 1,266 1,043 2,050 3,767 4,201
Equity in earnings of
affiliates............. 414 368 378 640 1,000 323 805
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 1,101 $ 1,218 $ 1,644 $ 1,683 $ 3,050 $ 4,090 $ 5,006
======= ======= ======= ======= ======= ======= =======
</TABLE>
The table below sets forth the percentage relationship of certain items to
net sales with regard to the Company's results of operations for each of the
quarters in fiscal 1994 and the first three quarters of fiscal 1995.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
FISCAL 1994 FISCAL 1995
-------------------------------------------- ---------------------------------
NOVEMBER 27, FEBRUARY 26, MAY 28, AUGUST 27, NOVEMBER 26, FEBRUARY 25, MAY 27,
1993 1994 1994 1994 1994 1995 1995
------------ ------------ ------- ---------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 59.1 55.4 60.1 56.7 53.9 57.0 58.9
----- ----- ----- ----- ----- ----- -----
Gross profit............ 40.9 44.6 39.9 43.3 46.1 43.0 41.1
Operating expenses:
Selling, general, and
administrative....... 20.0 21.0 18.6 21.5 21.0 17.5 19.2
Research and
development.......... 15.9 18.0 14.8 16.8 16.1 14.1 12.1
----- ----- ----- ----- ----- ----- -----
Total operating
expenses............... 35.9 39.0 33.4 38.3 37.1 31.6 31.3
----- ----- ----- ----- ----- ----- -----
Operating income........ 5.0 5.6 6.5 5.0 9.0 11.4 9.8
Other income (expense),
net.................... (.9) (.1) (.3) .1 .4 .4 1.3
----- ----- ----- ----- ----- ----- -----
Income before income
taxes.................. 4.1 5.5 6.2 5.1 9.4 11.8 11.1
Income tax expense...... .9 1.4 1.4 1.4 2.6 3.0 3.3
----- ----- ----- ----- ----- ----- -----
Income before equity in
earnings of affiliates. 3.2 4.1 4.8 3.7 6.8 8.8 7.8
Equity in earnings of
affiliates............. 1.9 1.8 1.5 2.3 3.3 .8 1.5
----- ----- ----- ----- ----- ----- -----
Net income.............. 5.1% 5.9% 6.3% 6.0% 10.1% 9.6% 9.3%
===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company expects it will continue to experience fluctuations in its
quarterly operating results. In the past, these fluctuations have been caused
by a variety of factors including timing and shipment of orders, the sales mix
of higher margin and lower margin products, fluctuations in the percentage of
international sales,
22
<PAGE>
available production capacity, and equity in earnings (loss) of affiliates.
There can be no assurance as to the level of sales or profits, if any, in any
future period. See "Risk Factors--Cyclicality of the Semiconductor Device
Industry" and "--Fluctuations in Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were approximately $39.0 million as
of May 27, 1995, an increase of $28.2 million from the end of fiscal 1994. The
increase in cash and cash equivalents reflects the net proceeds of
approximately $50.0 million from a secondary stock offering completed by the
Company during February 1995.
The Company's accounts receivable as of May 27, 1995 increased by
approximately 136.3%, or $29.5 million, from the end of fiscal 1994. This
increase is due to increased sales levels in all product lines. The Company's
inventory increased approximately $8.5 million from the end of fiscal 1994 to
May 27, 1995. The majority of the increase was due to increased levels of raw
materials and finished goods relating to the increased sales and order
activity. As of May 27, 1995, the Company's ratio of current assets to current
liabilities was 3.1 to 1.0 and working capital was $84.4 million.
The Company had acquisitions of buildings, leasehold improvements, and
equipment of $7.2 million for the first nine months of fiscal 1995 as compared
to $1.6 million for the first nine months of fiscal 1994. The increase reflects
investments in computer equipment and the facilities expansion. The Company
expects to increase its investment in its manufacturing facilities, Surface
Conditioning Division Demonstration and Development Laboratory, and computer
systems in fiscal 1995 and 1996. FSI recently commenced construction of a
100,000 square foot manufacturing facility in Chaska, Minnesota. The costs of
purchasing the land for and of constructing and equipping the new facility is
expected to total $11.5 million and the cost of upgrading the computer systems
is expected to total $7.0 million over fiscal years 1995 and 1996.
On January 31, 1995, the Company purchased for approximately $1.2 million a
50% equity interest in FME. On March 8, 1995, the Company completed the
acquisition of ACS, which was accounted for as a pooling of interests. In
connection with the ACS Acquisition, the Company issued 1,061,472 shares of its
Common Stock to the former holders of ACS common stock and issued options to
purchase up to 214,758 shares of its Common Stock in substitution of previously
outstanding options to acquire shares of ACS common stock. These acquisitions
are intended to enhance and broaden the Company's chemical management product
offerings and establish a manufacturing capability for the Company's chemical
management systems in Europe.
The Company does not currently have a credit facility. However, the Company
has negotiated the terms of a new credit facility, which it expects to enter
into by the end of fiscal 1995. The Company believes that the proceeds from the
sale of the Common Stock offered hereby by the Company, together with existing
cash, cash equivalents, and internally generated funds will be sufficient to
meet the Company's currently projected working capital and other cash
requirements both for the short-term and through at least the end of fiscal
1996.
The Company believes that success in its industry requires substantial
capital in order to maintain the flexibility to take advantage of opportunities
as they may arise. The Company may, from time to time, as market and business
conditions warrant, invest in or acquire complementary businesses, products, or
technologies. The Company may effect additional equity or debt financings to
fund such activities. The sale of additional equity or debt securities could
result in additional dilution to the Company's shareholders.
23
<PAGE>
BUSINESS
GENERAL
FSI designs, manufactures, markets, and supports microlithography, surface
conditioning, and chemical management equipment used in the fabrication of
integrated circuits. The Company's microlithography product, the Polaris
cluster, processes photoresist (light sensitive material used for patterning)
on the surface of silicon wafers as part of the photolithography phase of the
integrated circuit fabrication process. The Company's surface conditioning
products, including the Mercury spray processing systems and the Excalibur
vapor processing systems, remove contaminants and excess photoresist from
wafers during the fabrication process and selectively remove oxide from the
wafer surface. The process steps performed by the Company's microlithography
and surface conditioning products, which are used repeatedly throughout the
fabrication cycle, are an integral part of the manufacturing process for
virtually every integrated circuit produced today. The Company's chemical
management products perform the critical functions of blending, delivering and
controlling the flow, concentration, and purity of chemicals used by various
types of processing equipment within a fabrication facility.
INDUSTRY BACKGROUND
The fabrication of integrated circuits 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
construct fabrication facilities by combining manufacturing equipment produced
by several different suppliers, each of which performs specific functions in
the manufacturing process.
Demand for semiconductor device manufacturing equipment is driven principally
by the need for new processes and systems capable of manufacturing increasingly
complex integrated circuits and by the overall demand for products utilizing
integrated circuits. Industries that utilize integrated circuits are demanding
higher performance products from semiconductor device manufacturers. Over the
last decade, technological advances have allowed integrated circuit
manufacturers to reduce the size and substantially increase the number of
transistors on each integrated circuit device. Today, 16 megabit dynamic random
access memory ("DRAM") integrated circuits are manufactured using more than 200
process steps on six or eight inch diameter wafers and incorporating geometries
of 0.5 micron. With high density logic devices and 64 megabit DRAMs that
require geometries of less than 0.5 micron now under development, integrated
circuit manufacturers require process technology advances that are timely,
highly reliable, and readily implemented into high volume manufacturing
environments.
Concurrent with these technological advances, competitive pressures are
forcing semiconductor device manufacturers to reduce integrated circuit
manufacturing costs. Because the capital cost of a large semiconductor
fabrication facility is high, in some cases exceeding $1 billion, manufacturers
have increased their focus on the various cost components of a semiconductor
device manufacturing facility. This greater emphasis on total device processing
cost has led manufacturers increasingly to analyze the costs associated with
owning and operating each piece of process equipment in the manufacturing line
(referred to as the "overall cost of ownership"), including capital cost,
throughput, yield, reliability, consumables, start-up time, and other equipment
related costs for each process step. In addition, the Company believes that in
an effort to reduce total manufacturing costs and to reduce potential
contaminant exposure as the wafer 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. Semiconductor device
manufacturers also must continue to address the environmental costs, primarily
those related to the control and disposal of chemical waste and emissions,
associated with operating a fabrication facility.
The Company believes that semiconductor device manufacturers are asking
equipment suppliers to take an increasingly active role in meeting the
manufacturers' technology requirements and cost constraints by developing and
supporting the products and processes required to fabricate advanced
semiconductor device designs. Certain semiconductor device manufacturers are
seeking strategic relationships with equipment
24
<PAGE>
suppliers for specific process steps on existing and new integrated circuit
designs. As a result, semiconductor equipment companies are being asked to
provide advanced process expertise, superior product performance, reduced
overall cost of ownership, and worldwide customer support to better meet the
needs of integrated circuit manufacturers, as well as meet international
quality standards, such as ISO 9001 certification.
COMPANY STRATEGY
FSI seeks to be a leading provider of advanced integrated circuit processing
solutions throughout the world, offering products that increase yields,
integrate with the equipment of other suppliers, and reduce customers overall
cost of ownership. Key elements of the FSI strategy include the following:
Focus on Core Markets. FSI expects to continue to focus on the
microlithography, surface conditioning, and chemical management markets.
The Company believes it has established itself as a technological leader in
these markets and currently provides integrated circuit manufacturers with
high-quality products that have significant overall cost of ownership
advantages. The Company's Polaris cluster and Excalibur vapor and Mercury
spray processing systems were each among the 20 products chosen as winners
of Semiconductor International Magazine's Best Product Awards for 1994. The
Company believes that its technological capabilities, when combined with
the strength of its international distribution and support system, provide
the Company with the opportunity to increase its worldwide market share in
each of its three core markets.
Enhance and Broaden Product Offerings. The Company intends to continue to
enhance and broaden its product offerings in each of the core markets it
serves through internally developed products and from time to time through
strategic alliances and acquisitions. The Company recently acquired ACS and
FME, enabling FSI to augment its chemical management product offerings. In
fiscal 1994, FSI introduced new products in each of its principal product
lines, including the Polaris 2000 cluster, and also has a number of new
products and enhancements to existing products currently under development.
The Company anticipates that it will continue to make significant
investments in engineering, research, and development.
Provide Process Solutions for Customers. FSI believes that continued
leadership in its core markets will require products that contribute to
providing process solutions for its customers. To accomplish this goal, the
Company seeks to foster close customer relationships, which enhance the
Company's understanding of, and facilitate its responsiveness to, the
complex processing needs and cost constraints of integrated circuit
manufacturers. Through its knowledgeable and responsive sales and technical
support staff, the Company works closely with its customers to provide
advanced processing solutions that integrate into the customers' specific
manufacturing environments. The Company is working on joint development
programs with a number of its customers, including the joint exploration of
further enhancements to the Company's spray processing and vapor phase
processing systems. To better serve and understand the needs of its
customers, the Company also continues to expand and upgrade its own
demonstration and process development facilities.
Emphasize Worldwide Service and Support. The Company believes that
integrated circuit manufacturers are seeking equipment suppliers like FSI
which provide service and support worldwide. FSI and its affiliates
continue to add to their technical and service capabilities. FSI has added
53 engineers and 44 additional support personnel over the last 9 months.
The Company believes that with its internal resources and those of its
affiliated distributors in Europe, the Far East, and Japan the Company will
continue to provide timely and efficient customer service and support
worldwide.
Improve Quality and Operational Efficiencies. FSI believes that its
ability to continue to improve quality and obtain operational efficiencies
provides it with a number of benefits, including reduced product costs,
improved product quality and reliability, and decreased manufacturing time.
The Company is implementing a number of programs to further increase the
quality and efficiency of its operations, including achieving ISO 9001
certification in October 1994, developing a new Class 1000 manufacturing
facility, investing in upgraded computer systems designed to improve the
quality of information available to Company management and to allow
integration of the Company's design and manufacturing systems, and
providing advanced training opportunities to its employees.
25
<PAGE>
INTEGRATED CIRCUIT FABRICATION
The basic component in the manufacture of integrated circuits is a thin,
circular crystalline wafer, typically three to eight inches in diameter and
composed of silicon. During the fabrication process, several layers of
conductive or dielectric materials are sequentially grown or deposited on the
wafer surface through a series of thermal and/or chemical processes. These
processes are conducted in a controlled environment, typically a "clean room"
which is a manufacturing facility separated from the outside environment and
employing specialized filters designed to reduce the number of particulates in
the air within the facility. Each layer undergoes a series of processes to etch
a portion of the layer or change the electrical characteristics of the layer,
leaving the desired integrated circuit pattern. The wafers are ultimately
separated into individual integrated circuits or discrete components which are
then packaged, assembled, and tested. The typical integrated circuit
fabrication process takes between eight and twelve weeks. The primary stages of
this process are discussed below.
Cleaning. The wafer surface must be cleaned and conditioned at the
beginning of the fabrication process and at numerous other times throughout
the process. Cleaning is generally performed by exposing the wafer to
various chemicals in a liquid state, through spraying or immersion, or in a
vapor state. As integrated circuit geometries become smaller and more
complex, the reduction of organic, metal, and particle contamination on the
wafer becomes an increasingly critical factor in improving the yields of
wafer processing. In addition to contamination from particles left over
from the various steps in the fabrication process, such as etching or
stripping, contaminants may also be introduced from the equipment and
chemicals utilized in the manufacturing process. FSI's surface conditioning
products, including the Mercury spray processing and the Excalibur vapor
processing systems, are designed to perform these cleaning functions
throughout the integrated circuit fabrication process.
Layering. Following cleaning and wafer surface conditioning, a thin film
of either conductive or dielectric material is grown or deposited on the
wafer surface. Depending upon its particular electrical properties, each
layer functions as an insulator, semiconductor, or conductor.
Planarization. Recently, a new process step called chemical mechanical
planarization, commonly referred to as CMP, has become important in
semiconductor device manufacturing, particularly for advanced devices. The
CMP process uses a chemical and mechanical polishing procedure with a
slurry and pad to smooth the surface of a wafer after each layering step in
the metal interconnect process. This smoothing, or planarization, is
necessary to prevent extremes of topography which can reduce yield and
reliability of semiconductor devices. The Company's Mercury spray
processing systems are used to remove the polishing grit from the surface
of the wafer after CMP processing.
Photolithography. After the film layer is deposited on the wafer, the
film is primed to promote the adhesion of a light sensitive material called
photoresist. After the photoresist is applied, the wafer is heated in order
to remove solvents from the photoresist. Integrated circuit patterns are
then projected onto the photoresist by exposing it to a light source
through a mask. Chemical changes occur in the portion of the photoresist
exposed to the light source, resulting in a transfer of the image of the
desired circuit into the photoresist on the wafer. After a circuit pattern
has been imprinted, the image on the film is developed, which creates
protected and unprotected areas. The developed photoresist is then baked at
a high temperature to remove residual moisture and remaining solvents,
harden the photoresist for subsequent etching, and improve adhesion to the
wafer surface. Polaris clusters perform all photolithography functions
except exposure.
Etching or Doping. Upon completion of the photolithography process, the
wafer is either etched or doped. During etching the unprotected areas of
the patterned film are removed with chemicals to leave the desired circuit
pattern. Etching can be accomplished with either a wet chemistry process,
using liquid chemicals, or a dry chemistry (typically plasma) process,
using chemical gases or vapors. With advanced devices, most pattern etching
is performed using a dry process. The Company's Excalibur vapor processing
system is used to remove residual silicon dioxide to improve electrical
performance and to remove the residue left by plasma or reactive ion
etching. The Company's spray processing systems have
26
<PAGE>
been used to perform blanket etching in limited wet chemistry applications.
During doping, specific ions are implanted on the wafer to control and
change the electrical properties of the wafer surface. Doping produces the
semiconductor activity on the wafer.
Stripping. After etching or doping, the wafer is stripped of photoresist
through either a wet chemistry or a dry chemistry process. The Company's
spray processing systems are used to perform this function with wet
chemistry applications or as a final clean-up after dry chemistry
applications.
These operations are repeated numerous times during the fabrication process
depending upon the type and complexity of the semiconductor device and the
overall process employed, and the precise order of the steps utilized varies by
manufacturer. A finished integrated circuit consists of a number of film layers
which together form thousands of extremely small electronic components that
combine to perform the desired electrical functions. Each step in the
fabrication process requires precision and must be rigorously controlled to
attain commercially acceptable yields and cost performance.
Chemical management systems enable semiconductor device manufacturers to
store 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. The Company's chemical management products perform
the critical functions of blending, delivering and controlling the flow,
concentration and purity of chemicals used by various types of processing
equipment utilized throughout the semiconductor device manufacturing process.
PRODUCTS
The mix of products sold by the Company may vary significantly from year to
year. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." 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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
------------------------------------------- -----------------------------
AUGUST 29, AUGUST 28, AUGUST 27,
1992 1993 1994 MAY 28, 1994 MAY 27, 1995
------------- ------------- ------------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Microlithography
clusters............... $12,044 25.7% $20,317 25.9% $32,723 33.9% $22,870 33.5% $ 38,689 30.6%
Surface conditioning
products............... 18,752 40.0 26,194 33.4 27,915 29.0 19,459 28.5 42,785 33.9
Chemical management
systems................ 3,145 6.7 18,629 23.8 17,573 18.2 12,862 18.9 28,731 22.7
Spare parts and service. 12,938 27.6 13,292 16.9 18,226 18.9 13,019 19.1 16,210 12.8
------- ----- ------- ----- ------- ----- ------- ----- -------- -----
$46,879 100.0% $78,432 100.0% $96,437 100.0% $68,210 100.0% $126,415 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======== =====
</TABLE>
MICROLITHOGRAPHY CLUSTERS. The Company's Polaris microlithography cluster
performs all of the photolithography processing steps except exposure. Polaris
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 transparent safety walls, creating a
self-contained process environment, and is configured to match the throughput
capabilities of the integrated exposure equipment. The enclosure can be
modified to provide a Class 10 or Class 1 clean room environment, providing
independent control of temperature, humidity, and organics from the rest of the
fabrication area. Operations within the cluster are initiated from a computer
console and a touchscreen on each cluster's console provides the primary
operator interface. During operation, cassettes of wafers are loaded in the
cluster's input/output module from which the robot transports wafers through
the various process modules in a sequence programmed by the operator allowing
the desired treatment of the wafer surface.
27
<PAGE>
[PASTE UP ART OF POLARIS 2000]
POLARIS(R) 2000 CLUSTER
The Polaris cluster represents a processing alternative to conventional
photoresist track or linear systems, which permit processing of the wafer only
according to a preestablished arrangement of the equipment. Wafer routing and
throughput in a Polaris cluster are not dependent upon module configuration.
The programmable capability of the robot allows random wafer routing,
permitting continuous processing of wafers and eliminating the need for the
queuing of partially processed wafers required by traditional track systems. In
addition, by controlling system variables within tight 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 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. 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 with an upgrade without rendering the entire system
obsolete.
In July 1994, the Company introduced the Polaris 2000 cluster. This new
generation Polaris cluster contains several process enhancements including an
advanced bake/chill plate technology and a fluid temperature control system. It
also achieves a higher throughput of wafers. Simultaneous multiple process flow
capabilities allow the system to operate in tandem with another process tool
which is physically linked to the Polaris system and also to simultaneously
support other process equipment which are not linked to the system. The Company
began shipping the Polaris 2000 cluster in January 1995.
28
<PAGE>
Purchasers of the Polaris cluster include Ericsson Components AB
("Ericsson"), IBM, LG Semicon, Motorola, National Semiconductor, Inc. ("NSC"),
TI, and Tower Semiconductor Ltd. ("Tower"). The Company has an installed base
of approximately 100 Polaris clusters, including approximately 25 Polaris 2000
clusters. The price of a typical Polaris cluster ranges from approximately
$800,000 to $1,600,000, depending on wafer size, number of modules, and number
of robots required.
The Polaris cluster technology is licensed by the Company from TI. See
"Polaris License Agreement; Other Intellectual Property" below.
SURFACE CONDITIONING PRODUCTS. The Company's surface conditioning products
perform cleaning and stripping functions necessary for the processing of
integrated circuits.
Spray Processing Systems. The Company's spray processing systems, which
include the Mercury system, are sophisticated wet chemistry systems used to
clean and strip wafers at various stages in the integrated circuit 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 a spray
post mounted in the chamber. As the turntable rotates, nozzles apply a chemical
spray to the wafer 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. The Company's spray
processing systems also can perform certain blanket etch functions in limited
wet chemistry applications. 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 laboratory bench with open chemical tanks
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 many cost of ownership and other benefits over wet-bench
chemical processing including protection of the process 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.
Spray processing system customers include Advanced Micro Devices, Inc.
("AMD"), Atmel Corporation ("Atmel"), Cypress Semiconductor Corporation
("Cypress"), Digital Equipment Corporation ("DEC"), Fujitsu Microelectronics,
Inc. ("Fujitsu"), IBM, International Rectifier Corporation ("IRC"), Motorola,
NSC, SGS Thomson Microelectronics, Inc. ("SGS Thomson"), Siemens A.G.
("Siemens"), TI, Tower, United Microelectronics Corporation ("UMC"), and
Winbond Electronics Corp. ("Winbond"). The Company has an installed base of
over 2,125 spray processing systems. The Company offers four types of spray
processing systems, which range in price from $300,000 to $600,000. 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 vapor processing systems
use anhydrous hydrofluoric ("HF") gas in conjunction with water vapor to
perform cleaning steps normally done with liquid chemicals. The Excalibur
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. Single-
wafer processing permits Excalibur systems to be more easily integrated with
equipment of other suppliers and provides greater control over process
uniformity. Up to four process chambers can be operated with a single
electronic controller through the utilization of multi-tasking software.
29
<PAGE>
The advantages of vapor phase 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 and improved integration with cluster
tools. 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.
Since introduction in 1987, the Company's Excalibur systems have gone through
multiple enhancements, including the development from a single gas to a
multigas system. These continual enhancements led to the introduction of the
latest version of the system, the Excalibur MVP (Multi-Vapor Processing), in
July 1993. In addition to HF gas, the Excalibur MVP system uses hydrochloric
acid gas for improved metal removal and ozone gas for organic removal, and has
the processing capability to clean the backside of the wafer along with the
front. The Excalibur MVP can be used for the critical cleaning steps in the
integrated circuit production process. Programs are under development to
integrate the Excalibur MVP system with other layering process equipment. The
process development of the Excalibur MVP was funded in part by SEMATECH, an
industry and government consortium.
The Company's Excalibur customers include AT&T Corp. ("AT&T"), Fujitsu,
Hyundai Electronics Industries Co., Ltd. ("Hyundai"), Intel Corporation
("Intel"), Siemens, and TI. The Company has installed approximately 150 vapor
processing systems, many of which contain multiple modules. Systems vary in
price from approximately $150,000 to $800,000 depending on the model, wafer
size, number of process chambers, and related electronic control requirements.
CHEMICAL MANAGEMENT SYSTEMS. The Company's chemical management systems enable
semiconductor device manufacturers to generate certain acids from gases, blend
acids and solvents to desired concentrations, store the acids and solvents in
bulk tanks outside the device fabrication clean room, and deliver programmed
amounts of the acids and solvents to various types of equipment in the clean
room.
Chemical Delivery Systems. The Company offers chemical delivery systems
utilizing pump, pump and pressure, and vacuum pressure designs. The Company's
chemical delivery systems provide semiconductor device manufacturers with
enhanced chemical purity, inventory control, safety, dispensing accuracy, and
bulk chemical purchasing opportunities.
Typically, a chemical delivery system installation involves the delivery,
flow, and purity control of 5 to 10 distinct chemicals. Each chemical requires
its own station operated by a dedicated microprocessor-based controller. These
dedicated controllers are in turn integrated 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 a
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, at the
request of a customer, FSI will over-see and coordinate not only the
installation of the chemical delivery system, but also the entire chemical
distribution system of the fabrication facility, including point-of-use
interface and primary and secondary containment piping.
The Company offers four primary models of chemical delivery systems,
including the ChemFill 500, 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 (for
"programmable logic control") offers increased automation to its users,
providing enhanced control, flexibility, and functionality. The VP4500 utilizes
the proprietary ACS vacuum pressure technology to draw chemicals from their
storage and transportation containers into the system and pressure to transfer
the chemicals back to the container, in a recirculation mode, or to points of
use in a dispense mode. The ChemFill 5000, which is also programmable logic
controlled, features redundant flow systems that help increase uptime.
30
<PAGE>
Chemical Blending and Mixing Systems. The Company's ChemBlend 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.
Chemical Generation Systems. The ChemGen chemical generation systems allow
semiconductor device manufacturers to reduce chemical costs by generating bulk
quantities of certain chemicals by mixing gases with deionized water located at
the facility. These chemicals are then delivered to the various use points in
the semiconductor device manufacturing facility.
Slurry Mixing and Delivery Systems. The Company's slurry mixing and delivery
systems, which utilize proprietary vacuum pressure technology, mix and deliver
slurry which is used in conjunction with chemical mechanical planarization, or
CMP, technology. The Company's P2000 series systems mix and deliver silicon
dioxide slurry, while the P2200M mixes and delivers tungsten slurry.
Chemical management systems customers include AMD, Cypress, DEC, Fujitsu,
Hyundai, Intel, Motorola, NSC, Philips, SGS Thomson, and Tech Semiconductor
Singapore PTE.LTD. The Company has installed chemical management systems in
over 35 fabrication plants worldwide. Typical installations vary in price from
$250,000 to $2,500,000, and certain installations can cost in excess of
$6,000,000.
SPARE PARTS AND SERVICE. The Company sells spare part kits for a number of
its products and individual spare part components for its equipment, primarily
spray processing and to a lesser extent chemical management systems. 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. The
Company generally provides a one to two years parts and labor warranty
depending upon the product. The Company also provides in-house service and
maintenance training and process application training for its customers'
personnel on a fee basis. In addition, the Company offers a variety of process,
service, and maintenance programs that may be purchased for a fee. A number of
customers have purchased maintenance contracts whereby the Company's service
employees work full-time at the customer's facility and provide process service
and maintenance support for FSI equipment.
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 semiconductor device manufacturers. The
Company believes that the trends in the industry, such as utilization of
smaller integrated circuit geometries, increased use of eight inch and larger
wafers, and manufacturers' increased desire for integratable processing
equipment, will make highly automated and integratable systems, including
single wafer processing systems, more important in the manufacturing of
integrated circuits. To assist the Company in its development efforts, the
Company maintains a Technical Advisory Board consisting of industry
professionals. This board meets periodically with FSI management to identify
and review semiconductor device industry trends in advanced technology and
FSI's development activities toward meeting the industry's technology needs. In
addition, individual members of the Technical Advisory Board provide the
Company with on-going technical consultation and support.
The Company's current research and development programs are primarily focused
on the need for cleaner wafer 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 the industry's requirements.
31
<PAGE>
The Company is actively engaged in a number of development and process
enhancement programs regarding the Polaris cluster. Such programs include
testing Polaris clusters with new types of photoresist and new processes
utilizing such resist. The Company also is exploring, with customer
collaboration, further process refinements to its spray processing systems and
conducting basic research on its Orion vacuum-based gas phase (dry) cleaning
systems which may provide increased cleaning capabilities and improved process
integration. The Company's dry cleaning project was funded in part by a $2.0
million research grant from the National Institute of Standards and Technology
over a two-year period that ended February 28, 1995.
The Company maintains an extensive demonstration and process development
laboratory at its headquarters in Minnesota, occupying over 2,500 square feet,
and a 2,000 square foot Class 1 microlithography demonstration and process
development laboratory in Dallas, Texas. 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 1992, 1993, and 1994 and the first nine months of fiscal 1995
were approximately $9,783,000, $11,760,000, $15,743,000, and $17,378,000,
respectively, and represented 20.9%, 15.0%, 16.3%, and 13.7% of sales,
respectively. The Company attempts to supplement its research and development
efforts with third party funding from industry consortiums, government sources,
and customers. During fiscal 1993 and 1994, the Company received commitments
from third parties to fund approximately $1.2 million and $1.3 million,
respectively, of research and development. There was no third party funding
received in fiscal 1992. FSI does not have any product royalty obligations or
other financial commitments to any of the third parties that have provided
grant money to FSI as a result of FSI developing new products or technologies
with the aid of such grant money. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
MARKETING, SALES, AND SUPPORT
The Company markets its products to integrated circuit manufacturers
throughout the world. In North America, the Company markets its products
through direct sales personnel located in five regional sales offices and
through two independent sales representatives. The Company also has several
product and technical specialists devoted to each of the Company's product
lines. These product and technical specialists 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, the sales effort is supported by 188 employees
engaged in sales, service, and marketing support.
International sales, primarily in Europe, Japan, and the Far East, accounted
for approximately 34%, 34%, 33%, and 30% of total sales for fiscal years 1992,
1993, and 1994, and the first nine months of fiscal 1995, respectively. For a
breakdown of total international sales by geographic area, see Note 16 of the
Notes to Consolidated Financial Statements of FSI. The Company owns an
approximately 40% equity interest in Metron Europa, a distributor of the
Company's products which has an extensive distribution organization with
offices in Germany, the United Kingdom, the Netherlands, France, Sweden, Italy,
Israel, and India. The Company owns a 50% equity interest in the three
companies comprising the Metron Asia Group, distributors of the Company's
products in Taiwan, Korea, China, Singapore, and Hong Kong. Fluoroware, Inc., a
manufacturer of plastic injection moldings for the semiconductor device
industry, also owns an approximately 40% and 50% equity interest in Metron
Europa and the Metron Asia Group, respectively. In addition to the Company's
products, the Metron Group also sells products and equipment on behalf of
several other semiconductor equipment and consumables manufacturers, including
Fluoroware, Inc. The significant majority of the Company's international sales
are made to its affiliated distributors for resale to the 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 will pay a commission
to one of its affiliated distributors in connection with the sale. When
commissions are taken into account, international sales to the Company's
affiliates are on terms no less favorable to the Company than international
sales by the Company directly to non-affiliates.
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<PAGE>
See Note 6 of Notes to Consolidated Financial Statements of FSI. Metron Europa
and the Metron Asia Group have entered into an agreement to consolidate with
Transpacific, which markets or distributes the products of certain
semiconductor equipment and consumables manufacturers in portions of the United
States and Europe. If the consolidation occurs, the Company's equity ownership
interest in Metron Europa will be approximately 38%. If consummated, no
assurance can be given that the existing relationships of Transpacific or the
Metron Group with the semiconductor manufacturing equipment and consumables
manufacturers whose products they market or distribute will not be impaired by
the consolidation. Transpacific has received notice that certain of these
existing relationships will be terminated due to the marketing or distribution
by both Transpacific and the Metron Group of similar products manufactured by
competing companies. See "Risk Factors--Reliance on Affiliated International
Distributors" and "Recent Developments--Metron Activities."
The Company owns a 49% equity interest in m.FSI, a Japanese joint venture
company formed in August 1991 with Mitsui, which owns the remaining 51% equity
interest. In connection with its formation, the Company and Mitsui granted
m.FSI certain product and technology licenses and product distribution rights.
m.FSI distributes certain m.FSI and Mitsui products in Japan.
CUSTOMERS
The Company sells products from one or more of its product lines to most
major integrated circuit manufacturers and has over 100 active customers
worldwide. The following table lists the top twenty current customers of the
Company (based upon sales during the last three fiscal years) and the Company's
product lines from which each such customer has made purchases:
<TABLE>
<CAPTION>
MICROLITHOGRAPHY SURFACE CHEMICAL
CLUSTERS CONDITIONING MANAGEMENT
---------------- ------------ ----------
<S> <C> <C> <C>
AMD.............................. X X
AT&T............................. X X
Atmel............................ X
Cypress.......................... X X
DEC.............................. X X
Ericsson......................... X X
Fujitsu.......................... X X
LG Semicon....................... X X
Hyundai.......................... X
Intel............................ X X
IBM.............................. X X
IRC.............................. X
Motorola......................... X X X
NSC.............................. X X X
SGS Thomson...................... X X
Siemens.......................... X
TI............................... X X X
Tower............................ X X
UMC.............................. X
Winbond.......................... X
</TABLE>
Although the composition of the Company's largest customers has changed from
year to year, direct sales to the Company's top five customers in each of
fiscal 1992, 1993, and 1994 have accounted for approximately 45%, 50%, and 46%,
respectively, of the Company's total sales. Direct sales to the Company's top
two customers in each of fiscal 1992, 1993, and 1994 accounted for
approximately 34%, 32%, and 30%, respectively, of the Company's total sales. In
addition, approximately 29% of the Company's backlog at fiscal 1994 year-end
was comprised of orders from two customers. Sales to the Company's affiliated
international distributors in fiscal 1992, 1993, and 1994, which may include
sales of products subsequently resold to the Company's direct customers,
accounted for approximately 33%, 25%, and 26%, respectively, of the Company's
sales. TI accounted for approximately 21% of the Company's sales in fiscal
1994. IBM accounted for approximately 28% and 23% of the Company's sales in
fiscal 1992 and 1993, respectively.
33
<PAGE>
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 customers expansion program,
replacement needs, or requirements to improve integrated circuit fabrication
productivity and yields. Consequently, a customer who places significant orders
in one year will not necessarily place significant orders in subsequent years.
Certain of the Company's present products require an export license from the
United States Department of Commerce prior to their sale outside the United
States, while other FSI products can be freely exported under a general export
license.
BACKLOG
The Company's backlog at the end of fiscal 1994 and the end of the third
quarter of fiscal 1995 was approximately $77,000,000 and $98,000,000,
respectively. Backlog consists of orders for which a customer purchase order
has been received or a customer purchase order number has been communicated to
the Company and for which shipment dates within the next twelve months have
been assigned. Orders are subject to cancellation by the customer, generally
with a cancellation charge. In fiscal 1993 and 1994, purchase orders
aggregating approximately $1,617,000 and $708,000, constituting 2.1%, and 0.7%
of sales during such fiscal years, 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 "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MANUFACTURING AND SUPPLIERS
Except with respect to ACS products, 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. All final assembly and systems tests are performed within the
Company's manufacturing facilities. Quality control is maintained through
incoming inspection of components, in-process inspection during equipment
assembly, and final inspection and operation of all manufactured equipment
prior to shipment. Currently, ACS products are manufactured for the Company by
contract manufacturers. Company manufacturing engineers routinely monitor
production progress and perform source inspections prior to delivery of
finished ACS products to customers. 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).
Certain of the components and sub-assemblies included in the Company's
products are obtained from a single supplier or a limited group of suppliers.
Although the Company seeks to reduce dependence on sole and limited source
suppliers, disruption or termination of these sources could have an adverse
effect on the Company's operations. The Company believes that alternative
sources could be obtained and qualified to supply these components, if
necessary. However, a prolonged inability to obtain certain components could
have an adverse effect on the Company's operating results and could result in
damage to customer relationships.
COMPETITION
The semiconductor equipment industry 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, greater name recognition than the Company, and long-standing
customer relationships. In order to remain competitive, the Company must
maintain a high level of investment in research and development, marketing,
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<PAGE>
and customer service and support as well as control operating expenses. There
can be no assurance that the Company will have sufficient resources to continue
to make such investments or that the Company's products will continue to be
viewed as competitive as a result of technological advances by competitors or
changes in semiconductor processing technology. The Company's competitors may
also increase their efforts to gain and retain market share through competitive
pricing. Such competitive pressures may necessitate significant price
reductions by the Company or result in lost orders which could adversely affect
the Company's results of operations.
Since 1992, Japanese semiconductor device manufacturers have substantially
reduced their levels of capital spending on new fabrication facilities and
equipment in Japan and elsewhere. This has resulted in reduced sales and
increasing competitive pressures in the Japanese market segment (comprised of
semiconductor device fabrication facilities located in Japan and those located
outside of Japan which are controlled by Japanese companies). As a result,
pricing pressures in both the Japanese market and elsewhere may continue into
the foreseeable future due to Japanese semiconductor equipment manufacturers
offering substantial discounts on their products.
The Company believes that the Japanese companies with which it competes have
a competitive advantage because of their dominance of the Japanese market
segment. Furthermore, Japanese semiconductor device manufacturers have extended
their influence outside Japan by licensing products and process technologies to
non-Japanese semiconductor device manufacturers. Such licenses can result in a
recommendation to use semiconductor device equipment manufactured by Japanese
companies. Therefore, the Company may be at a competitive disadvantage with
respect to the Japanese semiconductor equipment suppliers, who have been
engaged for some time in collaborative efforts with Japanese semiconductor
device manufacturers. Certain Japanese semiconductor equipment manufacturers
have announced plans to begin manufacturing operations in the United States,
which will enable them to compete more effectively in the United States market.
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 Polaris cluster or chemical management
system product lines. 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. There can be no assurance that the Company will
be able to maintain or increase its sales to the Japanese market segment. A
growing 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. 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.
There can be no assurance, however, that imposition of such restrictions in the
future will not adversely affect FSI's ability to compete in these markets.
Significant competitive factors in the semiconductor 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.
The Company's competitors differ across its three product lines. The
Company's microlithography clusters compete with products offered by Dainippon
Screen Manufacturing Co. Ltd. ("DNS"), Tokyo
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<PAGE>
Electron Ltd. ("TEL"), and Silicon Valley Group. The Company competes with DNS,
TEL and also Semitool Inc., Submicron Systems Inc. ("Submicron"), and Santa
Clara Plastics in the area of surface conditioning products. The Company's
chemical management systems compete with products from Systems Chemistry
Incorporated, a subsidiary of Submicron, and a number of chemical supply
companies that also offer chemical management systems.
POLARIS LICENSE AGREEMENT; OTHER INTELLECTUAL PROPERTY
The Polaris cluster is offered by the Company under a license from TI. Under
the license agreement, FSI has the exclusive right to sell and the non-
exclusive right to manufacture the Polaris cluster, except that TI may
manufacture and distribute such system within TI. FSI also has the non-
exclusive right to manufacture and sell related TI modules. TI may modify FSI's
exclusive sales rights to a non-exclusive license if FSI fails to use
reasonable efforts in marketing the Polaris cluster. The license agreement
requires a royalty payment to TI on the equipment manufactured and sold by the
Company pursuant to the license. The royalty to be paid is based on the "net
sales price" of the licensed equipment, as reflected in the final invoice
amount charged by the Company to the customer for such equipment, excluding
amounts for packaging, insurance, freight, service, maintenance, and value-
added tax. When certain aggregate sales amounts are achieved under the license
agreement, FSI has the option of reducing the royalty amount or converting the
license to a fully-paid, non-exclusive license. Based upon current backlog and
expectations regarding future sales, the Company expects such aggregate sales
amounts under the license agreement to be reached in fiscal 1996.
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, including payment of royalties when due,
refusal to sell products, and failure to meet quality standards.
The Company holds numerous United States patents and additional patents in
Japan and several European countries and has several United States patent
applications and foreign patent applications pending. However, the Company
believes that patents and trademarks are of less significance in its industry
than such factors as innovative skills, technical expertise, and the ability to
quickly adapt to and deliver new technology to the marketplace. The Company
attempts to protect its proprietary information through non-disclosure
agreements with its key employees. See "Risk Factors--Patents and Other
Intellectual Property."
EMPLOYEES
As of May 27, 1995, the Company had 726 employees, of whom 231 were engaged
in manufacturing, 127 were engaged in customer service, 235 were engaged in
research and development, 61 were engaged in sales and marketing, and 72 held
general and administrative positions. As of such date, the Company also had
over 100 independent contractors working throughout the Company in various
capacities, principally in the areas of manufacturing and engineering. The
Company expects to add approximately 75 new employees and independent
contractors in total by the end of fiscal 1995, primarily in the areas of
manufacturing, engineering, and service.
The Company is not subject to any collective bargaining agreement, has never
been subject to a work stoppage and believes its relations with employees are
good.
REGULATORY 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 four hazardous waste disposal sites owned and operated by
third parties where waste generated by FSI has been located. In each matter,
the Company believes that it is at most a "de minimis" PRP. A risk of being
named a PRP is that if any of the other PRPs are unable to contribute their
36
<PAGE>
proportionate share of the liability, if any, associated with the site, those
PRPs that are able could be held financially responsible for the shortfall.
While the ultimate outcome of these matters cannot presently be determined, the
Company does not believe such investigations, either individually or in the
aggregate, will have a material adverse effect on its business, operating
results, or financial condition.
PROPERTIES
The Company's corporate offices, process research laboratory, and
manufacturing facilities are located in Chaska, a suburb of Minneapolis,
Minnesota, in three buildings aggregating approximately 161,600 square feet at
a total rental cost of $1,301,000 in fiscal 1995. The Company also leases
engineering and research and development facilities and sales and service
offices in various locations within the United States, including a 30,000
square foot microlithography research and development facility located in
Dallas, Texas and a 8,500 square foot chemical management facility located in
Hollister, California (the corporate headquarters for ACS).
FSI recently commenced construction of a new 100,000 square foot
manufacturing facility in Chaska. The new facilities will allow expansion of
the current facility in the areas of engineering, administration, and
development. The Company is currently seeking to lease approximately 30,000 to
50,000 square feet of administrative and warehouse space in Chaska, which will
allow the Company to maintain efficient operations until the new facility is
completed. See "Recent Developments--Construction of New Manufacturing
Facility."
The construction of the facility will be subject to risks generally
associated with real estate development, including potential delays caused by,
among other things, the timing of the receipt of required permits,
unavailability and shortages of required materials, and weather-related delays
and unforeseen construction costs. There can be no assurance that the facility
will be completed as currently scheduled or that costs will not be in excess of
those currently expected.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Joel A. Elftmann 55 Chairman of the Board, President, and Chief Executive Officer
Peter A. Pope 44 Executive Vice President, Marketing and Account Management
Benno G. Sand 41 Executive Vice President, Chief Financial Officer, and Secretary
Benjamin J. Sloan 55 Executive Vice President, Microlithography Division
Robert E. Cavins 59 Senior Vice President, Chemical Management Division
Dale A. Courtney 57 Senior Vice President, Surface Conditioning Division
J. Wayne Stewart 44 Vice President, Operations
Timothy D. Krieg 39 Vice President, Quality and Human Resources, and Assistant Secretary
James A. Bernards 48 Director
Neil R. Bonke 53 Director
Terrence W. Glarner 52 Director
Robert E. Lorenzini 58 Director
William M. Marcy 53 Director
Charles R. Wofford 62 Director
</TABLE>
Directors of the Company are elected at the annual shareholder's meeting for
staggered three-year terms and serve until their successors are duly elected
and qualified. See "Description of Capital Stock--Amended and Restated Articles
of Incorporation." Executive officers of the Company are elected annually by
the Board of Directors and serve until their successors are duly elected and
qualified.
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 also served as Chief Executive Officer of the Company. From 1977 to August
1983, and from May 1991 until the present, Mr. Elftmann has 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 Board of Metron
Semiconductors Europa B.V. and is a director of m.FSI Ltd. He has also been a
director of Veeco Instruments, Inc. since May 1994.
Mr. Pope was elected Executive Vice President, Marketing and Account
Management of the Company in January 1992. Mr. Pope served as Senior Vice
President and General Manager, Process Equipment of the Company from November
1989 until January 1992. Mr. Pope served as Vice President, Sales and Service
of the Company from May 1985 to November 1989. From September 1982 to May 1985,
Mr. Pope served as Executive Sales Manager of the Company. Prior thereto, he
was Managing Director of Metron Semiconductors Europa B.V. Mr. Pope also serves
as a director of m.FSI Ltd. and the corporations that comprise the Metron Asia
Group.
Mr. Sand has served as Executive Vice President and Chief Financial Officer
of the Company since January 1992. 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. From August 1983 to October 1987, Mr. Sand served as
Corporate Controller of the Company and from November 1982 to August 1983 as
its Financial Accounting Manager. Prior thereto he was employed by the
accounting firm of KMG Main Hurdman as an auditor and consultant. Mr. Sand was
elected Assistant Secretary of the Company in November 1989 and Secretary in
November 1990. Mr. Sand also serves as a director of Metron Semiconductors
Europa B.V.
Dr. Sloan has served as Executive Vice President, Microlithography Division
of the Company since January 1992. Prior thereto, Dr. Sloan was employed by TI
in Dallas, Texas where he served over 24 years in various research and
development capacities, most recently as Vice President of TI's Semiconductor
Group and Manager of the Wafer Fabrication Systems Division of TI's Process
Automation Center. Dr. Sloan is Chairman of the Company's Technical Advisory
Board.
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<PAGE>
Dr. Cavins has served as Senior Vice President, Chemical Management Division
of the Company since March 1994. He served as Vice President, Chemical
Management Division from January 1993 until March 1994. From 1988 to March
1992, Dr. Cavins served as Senior Vice President of Operations for E.F. Johnson
Company. From March 1992 to July 1992, Dr. Cavins was employed by Itron
Corporation in the capacity of Vice President and General Manager for Enscan
Operations, the energy management division of Itron Corporation. Prior to
joining E.F. Johnson Company, Dr. Cavins served in management positions in
various electronics and engineering capacities at Honeywell Inc. and Control
Data Corporation (now Ceridian Corporation). Dr. Cavins also serves as a
director of FME.
Mr. Courtney has served as Senior Vice President, Surface Conditioning
Division of the Company since March 1994. 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.
Mr. Stewart has served as Vice President, Operations since February 1994.
Prior thereto, he was employed by TI in Dallas, Texas where he served over 20
years in various manufacturing and operations management positions, most
recently as Corporate Computer Integrated Manufacturing Director, responsible
for worldwide manufacturing and materials systems. Mr. Stewart was also the
Manufacturing Manager of TI's award winning HARM (High Speed Anti-Radar
Missile) program. Mr. Stewart also serves as a director of FME.
Mr. Krieg has served as Vice President, Quality and Human Resources of the
Company since March 1994 and also served in that capacity from January 1992
until March 1993. Mr. Krieg served as Vice President, Human Resources from
March 1993 until March 1994 and also from October 1987 until January 1992. From
September 1979 to October 1987, he served as Human Resources Manager of the
Company. Mr. Krieg was elected Assistant Secretary of the Company in November
1990.
Mr. Bernards has served as a Director of the Company since July 1981. Since
June 1993, Mr. Bernards has been President of Facilitation Inc., which provides
business and financial consulting services. Mr. Bernards was President of the
accounting firm of Stirtz, Bernards & Company from May 1981 to June 1993. Since
1986, Mr. Bernards has been President of Brightstone Capital, Ltd., a venture
capital fund manager. He is also a director of Health Fitness Physical Therapy
Corporation and Visionics Corporation.
Mr. Bonke has served as a Director of the Company since June 1994. Mr. Bonke
has been Chairman of the Board and Chief Executive Officer of Electroglas,
Inc., a manufacturer of automatic wafer probing equipment for semiconductor
device manufacturers, since April 1993. He was a Group Vice President of
General Signal Corporation and President of General Signal Corporation's
Semiconductor Equipment Operations from September 1991 to July 1993. From 1990
to 1991, he was Chief Operating Officer of Cognex Corporation, a manufacturer
of machine vision systems for the semiconductor and electronics industries, and
from 1987 to 1990 he was President of General Signal Corporation's Xynetics
division, a group of semiconductor equipment manufacturing companies which
included Electroglas, Inc. Mr. Bonke currently serves on the Board of Directors
of SEMI/SEMATECH, the equipment arm of the semiconductor device industry
consortium.
Mr. Glarner has served as a Director of the Company since October 1988. Since
February 1993, Mr. Glarner has been President of West Concord Ventures, Inc., a
venture capital company. From 1982 to February 1993, Mr. Glarner was President
of North Star Ventures, Inc. and North Star Ventures II, Inc. Mr. Glarner is
also a director of Aetrium Incorporated, Cima Labs, Inc., and Datakey, Inc.
Mr. Lorenzini has served as a Director of the Company since November 1986.
Since January 1993, Mr. Lorenzini has been Chairman of SunPower Corporation, a
manufacturer of opto-electronic devices. Since July 1993, he also served as a
Principal in Dalton Partners, a business management company. From October 1988
to January 1993, he served as President and Chief Executive Officer of SunPower
Corporation. From December 1986 to October 1989, Mr. Lorenzini was active in a
number of venture capital investments focused
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<PAGE>
on high technology companies. Mr. Lorenzini is a founder of Siltec Corporation,
a manufacturer of silicon wafers and processing equipment for the semiconductor
device industry. Mr. Lorenzini was Chairman of the Board and President of
Siltec Corporation from 1969 to December 1986. Mr. Lorenzini is also a director
of KLA Instruments Corporation.
Dr. Marcy has served as a Director of the Company since August 1984 and since
August 1986 has served as a consultant to the Company in the area of software
engineering. Dr. Marcy has served as Associate Dean of Engineering for Research
and Administration at Texas Tech University since March 1995. From September
1987 to March 1995, Dr. Marcy served as Professor of Computer Science and the
Director of Computer Science Programs at Texas Tech University. From June 1983
to August 1987, Dr. Marcy was Professor of Industrial Engineering and the
Director of the Center for Automation and Robotics at Texas Tech University.
Prior to June 1983, Dr. Marcy was Chief Operating Officer of Information
Planning Corporation, a software development and sales company.
Mr. Wofford has served as a Director of the Company since November 1992.
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 TI's
semiconductor operations in the United States, Europe, Asia, and Latin America,
including Senior Vice President, Semiconductor Group.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of June 1, 1995 (reflecting the Stock
Split) and as adjusted to reflect the sale of shares offered hereby, certain
information regarding beneficial ownership of the Company's Common Stock by:
(i) each person known by the Company to own beneficially 5% or more of the
Company's outstanding shares of Common Stock; (ii) each director of the
Company; (iii) all directors and executive officers of the Company as a group;
and (iv) Mr. Elftmann and the other Selling Shareholders listed below.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1)(2) NUMBER OF OFFERING(1)(3)
----------------- SHARES -----------------
DIRECTORS NUMBER PERCENT OFFERED NUMBER PERCENT
- --------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Joel A. Elftmann................ 1,205,706 7.0% 175,000 1,030,706 5.2%
322 Lake Hazeltine Drive
Chaska, Minnesota 55318
James A. Bernards............... 19,334 * -- 19,334 *
Neil R. Bonke................... 10,000 * -- 10,000 *
Terrence W. Glarner............. 12,990 * -- 12,990 *
Robert E. Lorenzini............. 21,334 * -- 21,334 *
William M. Marcy................ 11,334 * -- 11,334 *
Charles R. Wofford.............. 11,334 * -- 11,334 *
<CAPTION>
OTHER SELLING SHAREHOLDERS
- --------------------------
<S> <C> <C> <C> <C> <C>
Benno G. Sand................... 108,628 * 40,000 68,628 *
Robert E. Cavins................ 48,242 * 20,000 28,242 *
Timothy D. Krieg................ 72,340 * 15,000 57,340 *
All directors and executive
officers as a group
(14 persons)................... 1,839,708 10.4 250,000 1,589,708 7.9
</TABLE>
- --------
* Represents beneficial ownership of less than one percent of the outstanding
Common Stock.
(1) Except as otherwise indicated in the footnotes to this table, the listed
beneficial owner has sole voting and investment power with respect to such
shares.
(2) Includes shares purchasable within 60 days after June 1, 1995 pursuant to
the exercise of options covering 44,000 shares for Mr. Elftmann, 11,332
shares for each of Messrs. Bernards, Glarner, Lorenzini, Marcy, and
Wofford, 10,000 shares for Mr. Bonke, 96,666 shares for Mr. Sand, 46,666
shares for Dr. Cavins, 65,666 shares for Mr. Krieg, and 617,664 shares for
all directors and executive officers as a group.
(3) Assumes the Underwriters do not exercise their option to purchase up to
412,500 additional shares of Common Stock from the Company to cover over-
allotments.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Amended and Restated Articles of Incorporation of the Company authorize
the issuance by the Company through its Board of Directors of 50,000,000 shares
of Common Stock, no designated par value, of which 17,135,782 shares were
issued and outstanding as of May 27, 1995, and 10,000,000 shares of Preferred
Stock, no designated par value, none of which have been issued.
COMMON STOCK
All outstanding shares of the Company's Common Stock are, and the shares of
the Company's Common Stock offered hereby upon completion of this offering will
be, fully paid and nonassessable. Upon any liquidation or dissolution of the
Company, the holders of Common Stock share ratably, in proportion to the number
of shares held, in the assets available for distribution after payment of all
prior claims, including all prior claims of the holders of any Preferred Stock
then outstanding.
Holders of Common Stock have no preemptive rights and are entitled to one
vote for each share held on each matter submitted to a vote of shareholders.
Cumulative voting for the election of directors is not permitted. Subject to
any prior rights of any Preferred Stock then outstanding, holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors of the Company out of funds legally available therefor.
PREFERRED STOCK
The Board of Directors has the authority, in most instances without further
shareholder action, to issue from time to time all or any part of the
authorized Preferred Stock, in one or more series. The Board of Directors is
authorized to determine the designation of and number of shares in each series
and to fix the dividend, redemption, liquidation, retirement, conversion, and
voting rights, if any, of such series, and any other rights and preferences
thereof. Any shares of Preferred Stock which may be issued may have
disproportionately high voting rights or class voting rights, may be
convertible into shares of Common Stock and may rank prior to shares of Common
Stock as to payment of dividends and upon liquidation. The Board of Directors
could authorize the issuance of one or more series of the Preferred Stock with
voting rights or other rights and preferences which would impede the success of
any proposed merger, tender offer, proxy contest, or other attempt to gain
control of the Company not approved by the Board of Directors. Although the
issuance of Preferred Stock may have an adverse effect on the rights of holders
of Common Stock, the consent of the holders of Common Stock would not be
required for any such issuance of Preferred Stock.
AMENDED AND RESTATED ARTICLES OF INCORPORATION
Article IX of the Amended and Restated Articles of Incorporation of the
Company provides for a classified board of not less than five nor more than
eleven directors serving staggered three-year terms. The number of directors
may be increased by the shareholders or the Board of Directors or decreased by
the shareholders; provided, however, that any change in the number of directors
must be approved by the affirmative vote of not less than 75% of the votes
entitled to be cast by the holders of all then outstanding shares of capital
stock of the Company, voting as a single class, unless the change has been
approved by a majority of the entire Board of Directors. A decrease in the
number of directors may not shorten the term of an incumbent director. Removal
of a director from office, with or without cause, requires the affirmative vote
of not less than 75% of the votes entitled to be cast by the holders of all
then outstanding shares of capital stock of the Company, voting as a single
class. Any vacancy on the Board of Directors that results from an increase in
the number of directors may be filled by a majority of the Board of Directors
then in office, and any other vacancy occurring in the Board of Directors may
be filled by a majority of the directors then in office, although less than a
quorum, or by a sole remaining director. Notwithstanding the foregoing,
whenever the holders of any one or more classes of Preferred Stock issued by
the Company has the right, voting
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<PAGE>
separately by class or series, to elect directors at an annual or special
meeting of shareholders, the election, term of office, filling of vacancies,
and other features of such directorships are governed by or pursuant to the
applicable terms of the rights and preferences of such Preferred Stock
established by the Board of Directors and made a part of the Amended and
Restated Articles of Incorporation, and such directors will not be divided into
classes unless expressly provided by such terms. No person (other than a person
nominated by or on behalf of the Board of Directors) will be eligible for
election as a director at any annual or special meeting of shareholders unless
a written request that his or her name be placed in nomination is received from
a shareholder of record by the Secretary of the Company not less than 60 days
prior to the date fixed for the meeting, together with the written consent of
such person to serve as a director.
Article X of the Amended and Restated Articles of Incorporation of the
Company provides that certain transactions ("business combinations") with
certain beneficial owners of 10% or more of the voting capital stock of the
Company ("interested shareholders") require, in addition to any affirmative
vote required by law, the affirmative vote of not less than 75% of the votes
entitled to be cast by the holders of all then outstanding shares of voting
capital stock of the Company, voting as a single class. Business combinations
include, without limitation, any merger, consolidation, or statutory exchange
of shares of the Company with an interested shareholder; any sale, lease,
pledge, or other disposition to or from an interested shareholder or the
Company of any assets of the Company or the interested shareholder,
respectively, with a value equal to or greater than 10% of the book value of
the consolidated assets of the Company; the adoption of any plan for the
liquidation or dissolution of the Company proposed by or on behalf of an
interested shareholder; and any transaction that has the effect of increasing
the proportionate share of capital stock of the Company beneficially owned by
an interested shareholder. An affirmative vote by the shareholders is not
required to approve a business combination under Article X if the business
combination has been approved by a majority of those directors who were members
of the Board of Directors prior to the time that the interested shareholder
involved in the business combination became an interested shareholder or whose
election or nomination was approved by a majority of such directors
("continuing directors"). An affirmative vote is also not required if the
business combination meets certain conditions specified in Article X,
including, without limitation, that certain minimum consideration be received
in the business combination by holders of capital stock of the Company, that
the interested shareholder not acquire any additional shares of capital stock
of the Company after becoming an interested shareholder (except as approved by
the continuing directors), and that a proxy or information statement describing
the proposed business combination be mailed to all holders of capital stock of
the Company at least 30 days prior to the consummation of the business
combination.
The affirmative vote of the holders of not less than 75% of the votes
entitled to be cast by the holders of all then outstanding shares of capital
stock, voting as a single class, is required to amend or repeal, or adopt any
provisions inconsistent with, Articles IX or X of the Amended and Restated
Articles of Incorporation.
These provisions of the Amended and Restated Articles of Incorporation could
have the effect in certain circumstances of delaying or preventing a change in
control of the Company.
MINNESOTA BUSINESS CORPORATION ACT
Section 302A.673 of the Minnesota Business Corporation Act restricts certain
transactions between the Company and certain shareholders who become the
beneficial holders of 10% or more of the Company's outstanding voting stock
("statutory interested shareholders") unless a majority of the disinterested
directors of the Company has approved, prior to the date on which the statutory
interested shareholders acquire a 10% interest, either the business combination
transaction suggested by such shareholders or the acquisition of shares that
made such shareholders statutory interested shareholders. If such prior
approval is not obtained, the statute imposes a four-year prohibition from the
statutory interested shareholders' share acquisition date on mergers, sales of
substantial assets, loans, substantial issuances of stock, and various other
transactions involving the Company and the statutory interested shareholder or
its affiliates.
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In the event of certain tender offers for stock of the Company, Section
302A.675 of the Minnesota Business Corporation Act precludes the tender offeror
from acquiring additional shares of stock (including acquisitions pursuant to
mergers, consolidations or statutory share exchanges) within two years
following the completion of such an offer unless the selling shareholders are
given the opportunity to sell the shares on terms that are substantially
equivalent to those contained in the earlier tender offer. Section 302A.675
does not apply if a committee of the Board of Directors consisting of all of
its disinterested directors (excluding present and former officers of the
corporation) approves the subsequent acquisition before shares are acquired
pursuant to the earlier tender offer.
These statutory provisions could also have the effect in certain
circumstances of delaying or preventing a change in the control of the Company.
TRANSFER AGENT AND REGISTRAR
Harris Trust and Savings Bank acts as the Transfer Agent and Registrar for
the Common Stock of the Company.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, Needham & Company, Inc., Lehman Brothers Inc., and
Montgomery Securities (the "Underwriters"), have severally agreed to purchase
from the Company and the Selling Shareholders, and the Company and the Selling
Shareholders have agreed to sell to each Underwriter, the aggregate number of
shares of Common Stock set forth opposite their respective names in the table
below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Needham & Company, Inc.......................................... 916,500
Lehman Brothers Inc............................................. 917,000
Montgomery Securities........................................... 916,500
---------
Total....................................................... 2,750,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to pay for and accept delivery of the shares of Common Stock are subject to
certain conditions precedent, and that the Underwriters are committed to
purchase and pay for all shares if any shares are purchased.
The Company and the Selling Shareholders have been advised that the
Underwriters propose initially to offer the shares of Common Stock to the
public at the offering price set forth on the cover page of this Prospectus and
to certain dealers (who may include the Underwriters) at such price less a
concession not in excess of $.66 per share. The Underwriters may allow, and
such dealers may reallow, a concession to certain other dealers (who may
include the Underwriters) not in excess of $.10 per share. After the initial
offering to the public, the offering price and other selling terms may be
changed by the Underwriters.
The Company has granted an option to the Underwriters, exercisable during the
30-day period after the date of this Prospectus, to purchase up to a maximum of
412,500 shares of Common Stock at the public offering price per share, less the
underwriting discounts and commissions, set forth on the cover page of this
Prospectus. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of the Common Stock offered hereby.
To the extent the Underwriters exercise such option, each of the Underwriters
will be committed, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number of shares of Common
Stock to be purchased by such Underwriter as shown in the above table bears to
the total shown.
In the Underwriting Agreement, the Company and the Selling Shareholders have
agreed to indemnify the Underwriters against certain liabilities that may be
incurred in connection with this offering, including liabilities under the
Securities Act, or to contribute payments that the Underwriters may be required
to make in respect thereof.
The Company, the Selling Shareholders, and the other directors and executive
officers of the Company have agreed that, without the prior consent of Lehman
Brothers Inc., they will not directly or indirectly offer to sell, sell, or
otherwise dispose of shares of Common Stock or any securities convertible or
exchangeable therefor, for a period of 90 days following the date of this
Prospectus, subject to certain limited exceptions. Consent to earlier sale of
such shares may be granted by Lehman Brothers Inc. at its discretion.
From time to time, Needham & Company, Inc. has provided, and may continue to
provide, investment banking services to the Company. Needham & Company, Inc.
acted as financial adviser to the Company in connection with FSI's acquisition
of ACS and received a fee of approximately $125,000. The Underwriters also
served as the underwriters for the Company's public offering in February 1995.
In connection with this offering, certain Underwriters and selling group
members (if any) who are qualifying registered market makers on the Nasdaq
National Market may engage in passive market making
44
<PAGE>
transactions in the Common Stock of the Company on the Nasdaq National Market
in accordance with Rule 10b-6A under the Exchange Act, during the two business
day period before commencement of offers or sales of the Common Stock. The
passive market making transactions must comply with applicable volume and price
limits and be identified as such. In general, a passive market maker may
display its bid at a price not in excess of the highest independent bid for the
security; if all independent bids are lowered below the passive market makers'
bid, however, such bid must then be lowered when certain purchase limits are
exceeded.
LEGAL MATTERS
The validity of the shares of Common Stock offered by this Prospectus is
being passed upon for the Company by Faegre & Benson Professional Limited
Liability Partnership ("Faegre & Benson"), Minneapolis, Minnesota and certain
legal matters are being passed upon for the Underwriters by Dorsey & Whitney
P.L.L.P, Minneapolis, Minnesota. A member of Faegre & Benson owns 6,000 shares
of Common Stock of the Company.
EXPERTS
The consolidated financial statements of the Company as of August 28, 1993
and August 27, 1994 and for each of the fiscal years in the three-year period
ended August 27, 1994 included in the Registration Statement of which this
Prospectus is a part have been audited by KPMG Peat Marwick LLP, independent
certified public accountants, as indicated in their report accompanying such
consolidated financial statements, and are included herein in reliance upon
such report given upon the authority of said firm as experts in accounting and
auditing.
The financial statements of Applied Chemical Solutions as of July 31, 1993
and 1994 and for each of the fiscal years in the two-year period ended July 31,
1994 incorporated by reference in the Registration Statement of which this
Prospectus is a part have been audited by KPMG Peat Marwick LLP, independent
public accountants, as indicated in their report accompanying such financial
statements, and are incorporated by reference herein in reliance upon such
report given upon the authority of said firm as experts in accounting and
auditing. The Report of KPMG Peat Marwick LLP for Applied Chemical Solutions
covering the July 31, 1993 and 1994 financial statements contains an
explanatory paragraph that states that the Company's recurring losses from
operations and net capital deficiency raise substantial doubt about the
entity's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of that
uncertainty.
The consolidated financial statements of Metron Semiconductors Europa B.V. as
of May 31, 1993 and 1994 and for each of the fiscal years in the three year
period ended May 31, 1994 incorporated by reference in the Registration
Statement of which this Prospectus is a part have been audited by KPMG
Accountants N.V., independent public accountants, as indicated in their report
accompanying such consolidated financial statements, and are incorporated
herein in reliance upon such report given upon the authority of said firm as
experts in accounting and auditing.
45
<PAGE>
FSI INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF FSI INTERNATIONAL, INC. AND
SUBSIDIARIES
Independent Auditors' Report............................................. F-2
Consolidated Statements of Operations for the fiscal years ended August
29, 1992, August 28, 1993 and August 27, 1994 and for the nine months
ended May 28, 1994 and May 27, 1995 (unaudited)......................... F-3
Consolidated Balance Sheets as of August 28, 1993 and August 27, 1994 and
May 27, 1995 (unaudited)................................................ F-4
Consolidated Statements of Cash Flows for the fiscal years ended August
29, 1992, August 28, 1993 and August 27, 1994 and for the nine months
ended May 28, 1994 and May 27, 1995 (unaudited)......................... F-5
Consolidated Statements of Stockholders' Equity for the fiscal years
ended August 29, 1992, August 28, 1993 and August 27, 1994 and for the
nine months ended May 27, 1995 (unaudited).............................. F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
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 28, 1993 and August 27, 1994,
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
27, 1994. 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 generally accepted auditing
standards. 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 at August 28, 1993 and August 27, 1994,
and the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended August 27, 1994, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 17, 1994, except as to
the pooling of interests with
ACS (Note 2) and the common
stock split (Note 20), which
are as of June 15, 1995
F-2
<PAGE>
FSI INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS
------------------------------------- -------------------------
AUGUST 29, AUGUST 28, AUGUST 27, MAY 28, MAY 27,
1992 1993 1994 1994 1995
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales (including sales
to affiliates of
$15,264,000,
$19,603,000,
$24,699,000,
$17,701,000 and
$35,638,000,
respectively).......... $46,878,835 $78,432,284 $96,437,653 $68,209,757 $126,414,960
Cost of goods sold...... 28,108,592 49,464,226 55,788,375 39,796,743 72,159,943
----------- ----------- ----------- ----------- ------------
Gross profit.......... 18,770,243 28,968,058 40,649,278 28,413,014 54,255,017
Selling, general and
administrative
expenses............... 11,170,164 14,496,165 19,552,376 13,476,242 24,089,985
Research and development
expenses............... 9,782,979 11,760,306 15,742,894 10,998,898 17,378,245
----------- ----------- ----------- ----------- ------------
Operating income
(loss)............... (2,182,900) 2,711,587 5,354,008 3,937,874 12,786,787
Interest expense........ (464,589) (556,984) (417,521) (402,828) (21,895)
Other income (expense),
net.................... 54,139 (113,909) 163,897 115,492 1,053,197
----------- ----------- ----------- ----------- ------------
Income (loss) before
income taxes......... (2,593,350) 2,040,694 5,100,384 3,650,538 13,818,089
Income tax expense...... 392,000 360,000 1,254,000 847,000 3,799,847
----------- ----------- ----------- ----------- ------------
Income (loss) before
equity in earnings
(loss) of affiliates. (2,985,350) 1,680,694 3,846,384 2,803,538 10,018,242
Equity in earnings
(loss) of affiliates... (372,779) 1,277,261 1,799,750 1,159,900 2,127,402
----------- ----------- ----------- ----------- ------------
Net income (loss)..... $(3,358,129) $ 2,957,955 $ 5,646,134 $ 3,963,438 $ 12,145,644
=========== =========== =========== =========== ============
Net income (loss) per
common share......... $ (.36) $ .28 $ .43 $ .31 $ .76
=========== =========== =========== =========== ============
Weighted average common
shares and common share
equivalents............ 9,274,750 10,557,646 13,222,408 12,968,498 15,916,174
=========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
FSI INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 28, AUGUST 27, MAY 27,
1993 1994 1995
----------- ----------- ------------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............... $ 781,661 $10,724,729 $ 38,951,747
Restricted cash......................... 1,370,891 -- --
Trade accounts receivable, less
allowance for doubtful accounts of
$350,000, $525,000 and $1,025,000,
respectively........................... 10,465,012 16,234,940 43,518,142
Trade accounts receivable from
affiliates............................. 3,849,928 5,378,164 7,555,529
Inventories............................. 13,120,190 16,452,665 24,986,505
Deferred income tax benefit............. 1,264,000 1,832,000 2,070,222
Prepaid expenses and other current
assets................................. 1,877,914 4,112,238 6,802,219
----------- ----------- ------------
Total current assets.................. 32,729,596 54,734,736 123,884,364
----------- ----------- ------------
Leasehold improvements and equipment, net. 4,386,190 5,143,244 10,509,680
Investment in affiliates.................. 2,694,949 4,494,699 6,622,101
Deposits and other assets................. 1,159,052 4,622,798 4,914,047
----------- ----------- ------------
$40,969,787 $68,995,477 145,930,192
=========== =========== ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Notes payable to bank................... $ 1,989,497 $ -- --
Current maturities of long-term debt.... 763,365 148,834 45,273
Trade accounts payable.................. 7,683,291 10,968,855 15,604,723
Accrued expenses........................ 6,472,893 8,948,086 13,759,646
Customer deposits....................... 784,147 3,685,948 3,936,387
Deferred revenue........................ 1,615,521 3,204,892 6,160,688
----------- ----------- ------------
Total current liabilities............. 19,308,714 26,956,615 39,506,717
----------- ----------- ------------
Long-term debt, less current maturities... 343,062 33,228 1,933
Deferred income taxes..................... 128,000 -- --
Stockholders' equity:
Preferred stock, no par value;
10,000,000 shares authorized; none
issued and outstanding................. -- -- --
Common stock, no par value; 50,000,000
shares authorized; issued and
outstanding, 9,686,172, 13,166,073, and
17,135,782 shares, respectively........ 13,549,929 28,719,418 80,989,682
Retained earnings....................... 7,640,082 13,286,216 25,431,860
----------- ----------- ------------
Total stockholders' equity............ 21,190,011 42,005,634 106,421,542
Commitments (notes 3 and 18)..............
----------- ----------- ------------
$40,969,787 $68,995,477 $145,930,192
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
FSI INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS
------------------------------------- ------------------------
AUGUST 29, AUGUST 28, AUGUST 27, MAY 28, MAY 27,
1992 1993 1994 1994 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income (loss)..... $(3,358,129) $ 2,957,955 $ 5,646,134 $ 3,963,438 $12,145,644
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization........ 1,934,946 2,783,157 2,647,441 2,019,553 2,106,263
Stock issued for
services............ -- -- 141,376 105,418 65,643
Provision for
deferred income
taxes............... 268,000 (1,136,000) (696,000) -- (238,222)
Equity in (earnings)
loss of affiliates.. 372,779 (1,277,261) (1,799,750) (1,159,900) (2,127,402)
Gain on sale of
equipment........... -- -- (19,254) (19,254) (8,000)
Changes in operating
assets and
liabilities:
Accounts
receivable........ (4,338,926) (880,363) (7,298,164) (7,777,934) (29,460,567)
Inventories........ (5,640,935) 265,257 (3,332,475) (3,587,631) (8,533,840)
Prepaid expenses
and other current
assets............ 803,893 321,460 (2,234,324) (676,799) (2,689,981)
Trade accounts
payable........... 3,550,088 999,624 3,285,564 1,728,063 4,635,868
Accrued expenses... 486,626 2,667,696 2,840,603 635,093 5,545,437
Customer deposits.. 1,500,575 (799,627) 2,901,801 940,238 250,439
Deferred revenue... 866,781 488,763 1,589,371 717,030 2,955,796
Other current
liabilities....... (45,718) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) operating
activities.......... (3,600,020) 6,390,661 3,672,323 (3,112,685) (15,352,922)
----------- ----------- ----------- ----------- -----------
Investing Activities
Acquisition of
leasehold
improvements and
equipment............ (1,064,877) (2,455,266) (2,716,891) (1,646,592) (7,165,688)
Increase in deposits
and other assets..... (1,259,631) 3,717 (4,151,350) (2,452,077) (598,260)
Proceeds from sale of
equipment............ -- -- 19,254 19,254 8,000
Investment in
affiliates........... (50,000) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities.......... (2,374,508) (2,451,549) (6,848,987) (4,079,415) (7,755,948)
----------- ----------- ----------- ----------- -----------
Financing Activities
Restricted cash....... (831,596) (539,295) 1,370,891 1,370,891 --
Cash overdraft........ 652,714 (652,714) -- -- --
Principal payments on
long-term debt....... (307,004) (594,051) (924,365) (848,018) (134,856)
Notes payable to bank,
net.................. 4,258,646 (2,269,149) (1,989,497) (1,989,497) --
Net proceeds from
issuance of common
stock................ 816,077 830,514 14,662,703 14,375,562 51,470,744
Additions to long-term
debt obligations..... 1,012,000 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities.......... 5,600,837 (3,224,695) 13,119,732 12,908,938 51,335,888
----------- ----------- ----------- ----------- -----------
Increase (decrease) in
cash and cash
equivalents............ (373,691) 714,417 9,943,068 5,716,838 28,227,018
Cash and cash
equivalents at
beginning of period.... 440,935 67,244 781,661 781,661 10,724,729
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $ 67,244 $ 781,661 $10,724,729 $ 6,498,499 $38,951,747
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
FSI INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED AUGUST 29, 1992, AUGUST 28, 1993 AND AUGUST 27, 1994
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
NUMBER OF RETAINED
SHARES AMOUNT EARNINGS TOTAL
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, August 31, 1991... 8,740,222 $11,746,627 $ 8,040,256 $ 19,786,883
Stock issuance............. 793,380 816,077 -- 816,077
Net loss................... -- -- (3,358,129) (3,358,129)
---------- ----------- ----------- ------------
Balance, August 29, 1992... 9,533,602 12,562,704 4,682,127 17,244,831
Stock issuance............. 504,793 830,685 -- 830,685
Rescission of shares....... (352,223) (171) -- (171)
Tax benefit from stock
options exercised......... -- 156,711 -- 156,711
Net income................. -- -- 2,957,955 2,957,955
---------- ----------- ----------- ------------
Balance, August 28, 1993... 9,686,172 13,549,929 7,640,082 21,190,011
Stock issuance............. 3,479,901 14,804,079 -- 14,804,079
Tax benefit from stock
options exercised......... -- 365,410 -- 365,410
Net income................. -- -- 5,646,134 5,646,134
---------- ----------- ----------- ------------
Balance, August 27, 1994... 13,166,073 28,719,418 13,286,216 42,005,634
Stock issuance (unaudited). 3,969,709 51,536,387 -- 51,536,387
Tax benefit from stock
options exercised......... -- 733,877 -- 733,877
Net income (unaudited)..... -- -- 12,145,644 12,145,644
---------- ----------- ----------- ------------
Balance, May 27, 1995
(unaudited)............... 17,135,782 $80,989,682 $25,431,860 $106,421,542
========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
FSI INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED AUGUST 29, 1992,
AUGUST 28, 1993, AND AUGUST 27, 1994
(INFORMATION AS OF MAY 27, 1995 AND FOR THE
NINE-MONTHS ENDED MAY 28, 1994 AND MAY 27, 1995 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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) and Applied Chemical Solutions, Inc.
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Interim Financial Statements (unaudited)
The consolidated condensed financial statements at May 27, 1995 and for the
nine months ended May 28, 1994 and May 27, 1995 are unaudited. In the opinion
of management of the Company, such unaudited financial statements include all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the information set forth therein.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Results for the interim periods are not
necessarily indicative of the results for an entire year.
Revenue Recognition
Revenue related to the majority of the Company's products is recognized upon
shipment, except for newly introduced products and for initial customer
installations, which are recognized upon the successful completion of an
evaluation period. Revenue on chemical management systems for which the Company
has the responsibility of engineering and design work, as well as installation,
is recognized upon successful completion of the projects' phases and
milestones. Losses on such projects are recognized in the period in which it is
determined that it is probable that a loss might be incurred.
Cash and Cash Equivalents
All highly liquid investments purchased with an original maturity of three
months of less are considered to be cash equivalents and are stated at the
lower of cost or market.
Inventories
Inventories are valued at the lower of cost, determined by the first-in,
first-out method, or net realizable value.
Leasehold Improvements and Equipment
Leasehold improvements are carried at cost and amortized over a 3 to 15 year
period or the term of the underlying lease, whichever is shorter. Equipment is
carried at cost and depreciated on a straight-line or declining-balance method
over their estimated economic lives. Principal economic lives for equipment are
1 to 7 years. 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 betterments are capitalized.
F-7
<PAGE>
FSI INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Patents and License Fees
Patents and license fees are capitalized and amortized over their estimated
economic or legal lives, whichever is shorter, ranging up to 5 years.
Investment in Affiliates
The Company's investment in affiliated companies consists of a 40% interest
in Metron Semiconductors Europa B.V., a 50% interest in Metron Semiconductors
(Hong Kong) Limited, Metron Semiconductors Far East Limited and Metron
Semiconductors Asia Limited (collectively, Metron Asia Group), and a 49%
interest in m.FSI Ltd. Each investment is accounted for by the equity method.
Summary financial information for Metron Semiconductors Europa B.V., Metron
Asia Group and m.FSI Ltd. are included in note 6.
Capitalized Software Costs
The Company capitalizes computer software production costs once technological
feasibility has been established for the product. The capitalized costs are
amortized generally over periods of two to four years. The Company had
unamortized capitalized software costs of approximately $450,000 and $225,000
at August 28, 1993 and August 27, 1994, respectively. The Company amortized
approximately $40,000, $432,000, and $225,000 in fiscal years 1992, 1993 and
1994, respectively.
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.
Effective August 30, 1992, the Company adopted the asset and liability method
for computing its deferred taxes as specified by FAS 109 "Accounting for Income
Taxes." Under the asset and liability method, deferred taxes are based on the
difference between the financial statement and tax basis of assets and
liabilities and the enacted tax rates that will be in effect when these
differences reverse. There was no material impact on the consolidated financial
statements resulting from the adoption of FAS 109. See note 11 for additional
information related to the Company's implementation of FAS 109.
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 up to two years, depending upon the product. Provision is made for the
estimated cost of maintaining product warranties at the time the product is
sold.
Foreign Currency Transactions
The Company enters into forward exchange contracts to reduce the impact of
foreign currency fluctuations on certain sales transactions. Gains and losses
from forward exchange contracts are included in the determination of net income
(loss) in the period in which the revenue from the sale is recognized.
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed based on the weighted average
number of common shares and common share equivalents outstanding during the
year. For purposes of fiscal 1993 and 1994 and
F-8
<PAGE>
FSI INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
for the nine months ended May 28, 1994 and May 27, 1995, all stock options and
stock warrants are reflected in the computation of common share equivalents.
For purposes of fiscal 1992, this computation does not include stock options
and stock warrants as the effect would be antidilutive. For all periods
presented, fully diluted and primary net income (loss) per common share are the
same.
Reclassifications
Certain 1992 and 1993 amounts have been reclassified to conform to the 1994
presentation.
(2) ACQUISITION OF APPLIED CHEMICAL SOLUTIONS
On March 8, 1995, the Company completed its merger with Applied Chemical
Solutions ("ACS"). The Company issued 1,061,472 shares of common stock in
connection with the merger. This transaction was accounted for as a pooling of
interests; therefore, all financial statements have been restated to reflect
the merger. ACS prepared its financial statements using a July 31 fiscal year
end. ACS's fiscal year end has been changed to the last Saturday in August to
conform to the Company's year end. The Company's restated financial statements
for fiscal years 1992, 1993 and 1994 and its interim financial statements
include ACS amounts as of and for the fiscal years ended August 29, 1992,
August 28, 1993 and August 27, 1994, respectively, and as of May 27, 1995 and
for the nine months ended May 28, 1994 and May 27, 1995, respectively.
Sales and net income (loss) included in the Company's consolidated statements
of operations are as follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
------------------------------------- -------------------------
AUGUST 29, AUGUST 28, AUGUST 27, MAY 28,
1992 1993 1994 1994 MAY 27, 1995
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales
ACS................... $ 0 $ 1,480,245 $ 2,390,082 $ 786,064 $ 6,371,686
FSI................... 46,878,835 76,952,039 94,047,571 67,423,693 120,043,274
----------- ----------- ----------- ----------- ------------
$46,878,835 $78,432,284 $96,437,653 $68,209,757 $126,414,960
=========== =========== =========== =========== ============
Net income (loss):
ACS................... $(2,962,167) $ (231,281) $ (869,617) $ (584,052) $ 151,552
FSI................... (395,962) 3,189,236 6,515,751 4,547,490 11,994,092
----------- ----------- ----------- ----------- ------------
$(3,358,129) $ 2,957,955 $ 5,646,134 $ 3,963,438 $ 12,145,644
=========== =========== =========== =========== ============
</TABLE>
In connection with the merger, approximately $800,000 of merger costs and
expenses were incurred and have been charged to selling, general and
administrative expenses in the Company's third quarter of 1995. The charge
includes professional fees and other direct transaction costs associated with
the merger.
(3) RELATED PARTY TRANSACTIONS AND OTHER LEASE COMMITMENTS
The Company is obligated under 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 a major shareholder
of the Company.
The lease for the Company's manufacturing facilities is a lease with such a
partnership (Lake Hazeltine Properties). The agreement provides for base
monthly rentals of $100,917, plus payment of executory costs such as property
taxes, maintenance and insurance.
F-9
<PAGE>
FSI INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition, the agreement provides for an annual adjustment of the monthly
rental based upon the percentage increase in the Consumer Price Index (CPI) for
all urban customers; however, such increase shall not exceed 5% per year and is
adjusted every five years to the fair market rental. The Company has guaranteed
$1,000,000 of the underlying obligations of the partnership for these
facilities which total approximately $2,362,000, maturing in monthly
installments of $76,457 through October 1995, at which time the balance of
$1,604,245 is due.
Future minimum lease payments for all leases with noncancellable lease terms
in excess of one year at August 27, 1994 are as follows:
<TABLE>
<CAPTION>
RELATED
PARTY OTHER
LEASE LEASES
---------- ----------
<S> <C> <C>
Fiscal Year Ending August:
1995............................................. $1,301,000 $ 654,795
1996............................................. 291,833 483,239
1997............................................. 90,000 224,502
1998............................................. -- 65,082
1999............................................. -- 15,054
---------- ----------
Total minimum lease payments................... $1,682,833 $1,442,672
========== ==========
</TABLE>
Rental expense for all operating leases consisted of the following:
<TABLE>
<CAPTION>
1992 1993 1994
---------- ---------- ----------
<S> <C> <C> <C>
Rent expense for related party leases... $1,219,700 $1,261,300 $1,289,800
Rent expense for other operating leases. 771,200 889,800 763,600
---------- ---------- ----------
$1,990,900 $2,151,100 $2,053,400
========== ========== ==========
</TABLE>
On June 1, 1991, the Company received a Demand Note Payable from Metron
Semiconductors Asia Ltd. At August 28, 1993 and August 27, 1994, there was
$500,000 outstanding against the note. The note bears interest at a rate
approximately 0.75% over prime.
(4) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
AUGUST 28, AUGUST 27, MAY 27,
1993 1994 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Finished products..................... $ 1,572,445 $ 1,675,041 $ 4,213,258
Work in process....................... 3,873,906 5,965,322 6,433,900
Subassemblies......................... 2,288,322 2,195,364 2,767,924
Raw materials and purchased parts..... 5,385,517 6,616,938 11,571,423
----------- ----------- -----------
$13,120,190 $16,452,665 $24,986,505
=========== =========== ===========
</TABLE>
F-10
<PAGE>
FSI INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LEASEHOLD IMPROVEMENTS AND EQUIPMENT
The components of leasehold improvements and equipment are as follows:
<TABLE>
<CAPTION>
1993 1994
---------- ----------
<S> <C> <C>
Leasehold improvements.............................. $1,999,570 $2,195,030
Office furniture and equipment...................... 5,492,776 7,027,347
Manufacturing equipment............................. 3,252,291 2,903,051
Lab equipment....................................... 5,043,670 4,955,367
Tooling............................................. 475,769 535,277
---------- ----------
16,264,076 17,616,072
Less accumulated depreciation and amortization...... 11,877,886 12,472,828
---------- ----------
$4,386,190 $5,143,244
========== ==========
</TABLE>
Included in equipment are assets under capital leases with a net book value
of $517,000 and $360,000 in 1993 and 1994, respectively.
(6) INVESTMENTS IN AFFILIATES
A summary of assets, liabilities and results of operations for Metron
Semiconductors Europa B.V., the Metron Asia Group and m.FSI Ltd. accounted for
on the equity method is as follows (dollars in thousands):
Metron Semiconductors Europa B.V.:
<TABLE>
<CAPTION>
MAY 31,
-----------------------
1992 1993 1994
------- ------- -------
<S> <C> <C> <C>
Current assets................................... $17,917 $23,932 $31,637
Noncurrent assets, net........................... 2,894 3,029 2,952
Current liabilities.............................. 15,811 19,521 23,799
Noncurrent liabilities........................... 390 762 539
Minority interest................................ 456 621 1,020
Total stockholders' equity....................... 4,154 6,057 9,231
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY
31,
-------------------------
1992 1993 1994
------- ------- -------
<S> <C> <C> <C>
Sales.......................................... $45,119 $63,226 $84,097
Net income before minority interest............ 69 2,430 3,947
Minority interest.............................. (17) (266) (413)
Net income..................................... 52 2,164 3,534
</TABLE>
Metron Asia Group:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1992 1993 1994
------- ------- -------
<S> <C> <C> <C>
Current assets................................. $ 3,235 $ 4,760 $ 7,360
Noncurrent assets, net......................... 117 290 197
Current liabilities............................ 4,200 5,631 7,214
Noncurrent liabilities......................... 4 -- --
Total stockholders' (deficit) equity........... (852) (581) 343
<CAPTION>
FISCAL YEARS ENDED JUNE
30,
-------------------------
1992 1993 1994
------- ------- -------
<S> <C> <C> <C>
Sales.......................................... $10,566 $14,262 $17,964
Net income (loss).............................. (50) 616 913
</TABLE>
F-11
<PAGE>
FSI INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
m.FSI Ltd.:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1992 1993 1994
------ ------ -------
<S> <C> <C> <C>
Current assets................................... $2,106 $4,494 $ 5,748
Noncurrent assets, net........................... 2,246 2,046 1,646
Current liabilities.............................. 2,735 5,669 4,613
Noncurrent liabilities........................... -- 9 19
Total stockholders' equity....................... 1,617 862 2,762
<CAPTION>
FISCAL YEARS ENDED
JUNE 30,
-----------------------
1992 1993 1994
------ ------ -------
<S> <C> <C> <C>
Sales............................................ $1,894 $4,487 $10,027
Net income (loss)................................ (1,883) (928) 1,737
</TABLE>
The Company sold approximately $15,264,000, $19,603,000 and $24,699,000 of
its products to Metron Semiconductors Europa B.V., Metron Asia Group, and m.FSI
Ltd. in fiscal 1992, 1993, and 1994, respectively. In addition, in fiscal years
1993 and 1994, the Company paid the Metron Asia Group a commission for direct
sales to Asian customers of $432,000 and $458,900, respectively. At August 28,
1993 and August 27, 1994, trade accounts receivable from affiliates was
approximately $3,850,000 and $5,378,000, respectively.
(7) DEPOSITS AND OTHER ASSETS
Included in deposits and other assets are net investments in sales type
leases and equipment under operating leases. The components of net investment
in sales type leases are as follows:
<TABLE>
<CAPTION>
1993 1994
---- ----------
<S> <C> <C>
Minimum lease payments receivable........................ $-- $1,488,000
Less:
Unearned revenue....................................... -- 135,016
---- ----------
Total net investments
in sales type leases................................ $-- $1,352,984
==== ==========
</TABLE>
Future minimum lease payments to be received are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ----------
<S> <C>
1995........................................................... $ 595,200
1996........................................................... 595,200
1997........................................................... 297,600
----------
Total future minimum lease payments to be received........... $1,488,000
==========
</TABLE>
Components of investments in equipment under operating leases are as follows:
<TABLE>
<CAPTION>
1993 1994
---- ----------
<S> <C> <C>
Equipment under operating leases......................... $-- $1,997,312
Less accumulated depreciation............................ -- 142,665
---- ----------
Equipment under operating leases, net.................. $-- $1,854,647
==== ==========
</TABLE>
F-12
<PAGE>
FSI INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a schedule of future minimum lease payments under operating
leases:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ----------
<S> <C>
1995........................................................... $ 839,000
1996........................................................... 839,000
1997........................................................... 839,000
1998........................................................... 211,100
----------
$2,728,100
==========
</TABLE>
(8) NOTES PAYABLE TO BANK
Notes payable to bank are summarized as follows:
<TABLE>
<CAPTION>
1993 1994
---------- ----
<S> <C> <C>
Demand note payable....................................... $1,989,497 $--
========== ====
</TABLE>
On March 16, 1994, the Company repaid all outstanding loans under a $7.0
million Accounts Financing Agreement entered into on February 28, 1992 with
Congress Financial Corporation ("Congress") thus satisfying all obligations
owing to Congress and terminated the credit facility. In addition, the Company
had a $3.0 million credit agreement with First Bank National Association
("First Bank") entered into on December 22, 1992. The First Bank credit
facility terminated on December 22, 1993. At December 22, 1993, the Company had
no borrowings outstanding under this credit agreement. The Company elected not
to renew this credit agreement with First Bank.
(9) ACCRUED EXPENSES
Accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
1993 1994
---------- ----------
<S> <C> <C>
Commissions........................................ $ 403,552 $1,113,865
Income taxes....................................... 668,291 501,781
Salaries........................................... 1,692,738 2,989,010
Pension and profit sharing......................... 493,147 449,600
Estimated product warranty......................... 2,135,297 2,742,671
Product sales incentive commission................. 109,159 64,334
Other.............................................. 970,709 1,086,825
---------- ----------
$6,472,893 $8,948,086
========== ==========
</TABLE>
F-13
<PAGE>
FSI INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1993 1994
--------- --------
<S> <C> <C>
Installment loan due in monthly installments of $27,000 in
principal and interest at prime plus 3% through March 1995
secured by fixed assets................................... $ 485,000 $ --
Installment loan due in monthly installments of $8,604 in
principal and interest at 10% through October 1994--
secured by stock.......................................... 105,595 8,533
Installment loan due in monthly installments of $2,295 in
principal and interest at 10% through February 1995--
secured by stock.......................................... 39,020 11,476
Installment loans on capital leases; interest rates ranging
from 9% to 14.25% through August 1996--secured by
underlying equipment...................................... 346,812 162,053
Other...................................................... 130,000 --
--------- --------
1,106,427 182,062
Less current maturities.................................... 763,365 148,834
--------- --------
$343,062 $ 33,228
========= ========
</TABLE>
Maturities of long-term debt in fiscal 1995 is $148,834 and in fiscal 1996 is
$33,228.
(11) TECHNOLOGY PURCHASE
During fiscal 1994, the Company purchased technology and related assets from
a third party. The total purchase price consisted of $90,000 cash and 35,000
shares of the Company's common stock with a fair value of approximately
$205,600. As of fiscal year-end, the 35,000 shares of common stock were
reserved for issuance on June 16, 1996.
(12) INCOME TAXES
As discussed in note 1, the Company adopted FAS 109 "Accounting for Income
Taxes" effective August 30, 1992. There was no effect on previously stated net
income due to the adoption of FAS 109.
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
1992 1993 1994
-------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal............................... $(41,600) $1,416,000 $1,627,000
State................................. 8,600 80,000 323,000
-------- ---------- ----------
(33,000) 1,496,000 1,950,000
-------- ---------- ----------
Deferred:
Federal............................... 425,000 (1,136,000) (696,000)
State................................. -- -- --
-------- ---------- ----------
425,000 (1,136,000) (696,000)
-------- ---------- ----------
$392,000 $ 360,000 $1,254,000
======== ========== ==========
</TABLE>
In fiscal 1993 and 1994, there was a tax benefit of $156,711 and $365,410,
respectively, credited to stockholders' equity associated with the exercise of
stock options.
F-14
<PAGE>
FSI INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at August 28,
1993 and August 27, 1994 are as follows:
<TABLE>
<CAPTION>
1993 1994
---------- ----------
<S> <C> <C>
Deferred tax assets:
Estimated product warranty cost................. $ 763,000 $ 976,000
Product obsolescence............................ 562,000 844,000
Inventory capitalization........................ 370,000 341,000
Deferred service contract revenue............... 347,000 179,000
Allowance for doubtful accounts................. 129,000 185,000
Patent and license amortization................. 178,000 265,000
R&D credit carryover............................ 479,000 359,000
AMT credit carryover............................ 154,000 91,000
Foreign tax credit carryover.................... 57,000 --
Other, net...................................... 274,000 470,000
---------- ----------
Total gross deferred tax assets............... 3,313,000 3,710,000
Valuation allowance........................... (1,722,000) (1,460,000)
---------- ----------
Net deferred tax assets..................... 1,591,000 2,250,000
---------- ----------
Deferred tax liabilities:
Accelerated depreciation........................ $ 89,000 (29,000)
Software development............................ 166,000 83,000
Undistributed subsidiary income................. 150,000 150,000
Other, net...................................... 50,000 214,000
---------- ----------
Total gross deferred tax liabilities.......... 455,000 418,000
---------- ----------
Net deferred tax assets..................... $1,136,000 $1,832,000
========== ==========
</TABLE>
The effective tax rate differs from the statutory federal income tax rate as
follows:
<TABLE>
<CAPTION>
1992 1993 1994
----- ----- ----
<S> <C> <C> <C>
Expected federal income tax expense (benefit)........ (34.0)% 34.0% 34.0%
State income taxes, net of federal benefit........... 0.3 (7.2) 2.3
Research activities credit........................... (6.1) (13.2) (8.4)
Loss benefit limitation.............................. 49.2 -- --
Foreign taxes paid................................... 4.2 -- --
Valuation allowance.................................. (2.7) (3.3) (.8)
Undistributed earnings of subsidiary................. -- 5.1 --
Other items, net..................................... 4.2 2.2 (2.5)
----- ----- ----
15.1% 17.6% 24.6%
===== ===== ====
</TABLE>
At August 27, 1994, the Company has federal income tax credit carryforwards
for the alternative minimum tax of $91,000. The Company also has state credit
carryovers of $359,000.
(13) PENSION AND PROFIT SHARING PLANS
The Company has a defined contribution pension plan covering substantially
all employees. Total pension cost for fiscal 1992, 1993 and 1994 was $257,816,
$500,243, $630,657, respectively. There is no past service liability.
F-15
<PAGE>
FSI INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company also has an Employee 401(k) Retirement Plan, which allows for a
discretionary profit sharing contribution, covering eligible employees.
Contributions under the plan are determined by means of a formula or at the
discretion of the Board of Directors. There was no contribution accrued in
fiscal 1992. Contributions accrued for in fiscal years 1993 and 1994 were
$150,000 and $200,000, respectively.
(14) STOCK OPTIONS AND WARRANTS
The Company's Stock Option Plans (the "Option Plans") authorize grants of
options to purchase shares of the Company's common stock to officers, directors
and employees. Under the Option Plans, options become exercisable at a date
determined by the Option Committee. The option prices are fixed by the Option
Committee, and may not be less than the fair market value of the stock at the
time the option is granted. Options expire 10 years after the date granted or
on a prior date as fixed by the Option Committee.
The Company adopted a 1994 Omnibus Stock Plan (the Plan) during fiscal year
1994. The Plan, which was approved by the Company's shareholders, authorizes
stock based awards ("Awards") to purchase up to 1,000,000 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.
The Company's Directors Nonstatutory Stock Option Plan (the "Directors Plan")
allows for the granting of options to nonemployee directors. The option price
and terms of the options are determined by the Directors Plan, and the exercise
price of the option may not be less than the fair market value of the stock at
the time the option is granted.
The activity under all plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------------
AVAILABLE
ACTIVITY DESCRIPTION FOR GRANT OUTSTANDING PRICE RANGE
-------------------- --------- ----------- --------------
<S> <C> <C> <C>
August 31, 1991.......................... 872,938 1,398,672 $ .94 -$ 3.63
Granted................................ (822,000) 822,000 2.00 - 2.75
Exercised.............................. -- (182,200) .94 - 1.86
Cancelled.............................. 219,060 (395,646) .94 - 3.63
--------- ---------
August 29, 1992.......................... 269,998 1,642,826 .94 - 3.03
Granted................................ (257,558) 257,558 1.87 - 6.21
Exercised.............................. -- (326,564) .94 - 2.75
Cancelled.............................. 44,330 (44,330) .94 - 2.75
--------- ---------
August 28, 1993.......................... 56,770 1,529,490 .94 - 6.21
Additional shares authorized........... 1,000,000 -- --
Granted................................ (354,164) 354,164 6.00 - 7.13
Exercised.............................. -- (216,864) .94 - 3.03
Cancelled.............................. (195,828) (51,162) 1.75 - 7.13
--------- ---------
August 27, 1994........................ 506,778 1,615,628 .94 - 7.13
========= =========
Number of shares exercisable at August
27, 1994................................ 972,076 $ .94 -$ 4.44
=========
</TABLE>
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 to an unrelated company
providing consulting services. The warrant expires on February 28, 2003.
F-16
<PAGE>
FSI INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an employee stock purchase plan (the "Plan") effective
January 1, 1989. The Plan enables employees to contribute up to 6 percent of
their wages toward the purchase of the Company's common stock at 85 percent of
the lower of market value at the beginning of the calendar year or the end of
the calendar year. At August 27, 1994, 461,860 shares are reserved for future
employee purchases of stock under the Plan. On December 31, 1991, 1992 and
1993, 141,232 shares were issued at $1.01 per share, 171,222 shares were issued
at $1.70 per share and 153,436 shares were issued at $3.16 per share,
respectively, under the Plan.
(16) ADDITIONAL SALES INFORMATION
International sales for the years ended 1992, 1993 and 1994 were
approximately 34%, 34% and 33%, respectively, of total sales. (Included in
these percentages and the table below are sales to affiliates. See note 5.)
International sales by geographic area, consisting principally of export sales,
are summarized as follows:
<TABLE>
<CAPTION>
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Asia.................................. $ 8,104,000 $15,021,000 $16,015,000
Europe................................ 7,454,000 11,457,000 14,854,000
Other................................. 431,000 113,000 626,000
----------- ----------- -----------
$15,989,000 $26,591,000 $31,495,000
=========== =========== ===========
</TABLE>
The following summarizes significant customers comprising 10% or more of the
Company's direct customer sales:
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Customer A................................................ 28% 23% --
Customer B................................................ -- -- 21%
</TABLE>
(17) 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 to research and development expenses. There was no third party
funding received in fiscal year 1992. The Company recognized approximately
$1,202,700 and $1,342,100 of third party funding in fiscal year 1993 and 1994,
respectively.
(18) LICENSE AGREEMENT
A product is offered by the Company under a license agreement. Under the
license agreement, the Company has the exclusive right to sell and the non-
exclusive right to manufacture the product, except that the licensor may
manufacture and distribute the product for its own use. The Company also has
the non-exclusive right to manufacture and sell related modules. The licensor
may modify the Company's exclusive sales rights to a non-exclusive license if
the Company fails to use reasonable efforts in marketing the product. The
license agreement requires a royalty payment to the licensor on the equipment
manufactured and sold by the Company pursuant to the license. When certain
aggregate sales amounts are achieved under the license agreement, the Company
has the option of reducing the royalty amount or converting the license to a
fully-paid, non-exclusive license. 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, including
payment of royalties when due, refusal to sell products, and failure to meet
quality standards.
F-17
<PAGE>
FSI INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(19) SUPPLEMENTARY CASH FLOW INFORMATION
The Company's non-cash investing and financing activities in fiscal 1992,
1993, and 1994 included $374,493, $117,195 and $0, respectively, for the
purchase of equipment under capital leases. The Company paid interest in fiscal
1992, 1993, and 1994 of $451,878, $586,827, and $442,688, respectively. Income
taxes, net of refunds received were $778,892 in fiscal year 1992, and income
taxes paid in fiscal years 1993 and 1994 were $595,691 and $1,751,000,
respectively. In addition, the Company realized, in fiscal years 1993 and 1994,
a tax benefit from the exercise of stock options in the amount of $156,711 and
$365,410, respectively.
(20) COMMON STOCK
On June 1, 1995, the Board of Directors declared a 2-for-1 Common Stock split
to stockholders of record as of June 13, 1995. All share information and per
share information have been restated to reflect this stock split.
F-18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson, or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus in
connection with the offer made in this Prospectus. If given or made, such
information or representation must not be relied upon as having been authorized
by the Company, the Selling Shareholder or any Underwriter. This Prospectus
does not constitute an offer of any securities other than the registered
securities to which it relates or an offer to sell, or a solicitation of an
offer to buy, to any person in any jurisdiction where such offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
the information contained herein is correct as of any time subsequent to the
date hereof.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain
Documents by Reference................................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Recent Developments....................................................... 13
Use of Proceeds........................................................... 15
Price Range of Common Stock and
Dividend Policy.......................................................... 15
Capitalization............................................................ 16
Selected Financial Data................................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 24
Management................................................................ 38
Principal and Selling Shareholders........................................ 40
Description of Capital Stock.............................................. 41
Underwriting.............................................................. 44
Legal Matters............................................................. 45
Experts................................................................... 45
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,750,000 SHARES
[LOGO OF
FSI INTERNATIONAL, FSI INTERNATIONAL, INC.
INC. APPEARS HERE]
COMMON STOCK
-----------------
PROSPECTUS
June 28, 1995
-----------------
NEEDHAM & COMPANY, INC.
LEHMAN BROTHERS
MONTGOMERY SECURITIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
