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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 31, 1996
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER
0-17276
FSI INTERNATIONAL, INC.
(Exact Name of Registrant as specified in its charter)
MINNESOTA 41-1223238
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
322 LAKE HAZELTINE DRIVE, CHASKA, MINNESOTA 55318
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (612) 448-5440
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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The aggregate market value of the common stock, no par value, held by
non-affiliates of the Registrant, based on the closing price of the Common
Stock on October 28, 1996, as reported on the Nasdaq National Market, was
approximately $220,897,040. Shares of common stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded from this computation in that such persons may be deemed to
be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for any other purpose.
As of October 28, 1996, the registrant had issued and outstanding
22,362,056 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on January 22, 1997, (the "Proxy Statement")
and to be filed within 120 days after the Registrant's fiscal year ended August
31, 1996, are incorporated by reference into Part III of this Form 10-K Report.
(The Compensation Committee Report and the stock performance graph of the
Registrant's Proxy Statement are expressly not incorporated by reference
herein.)
Portions of the Annual Report to Shareholders for the fiscal year ended
August 31, 1996 (the "Annual Report") are incorporated by reference into Parts
II and IV of this Form 10-K Report.
There are 102 pages to this Report. The Index to Exhibits begins on page 39.
PART I
ITEM 1. BUSINESS
This Report on Form 10-K contains certain forward-looking statements
regarding future events with respect to the Company. These statements involve
risks and uncertainties and actual events or results may differ materially.
Factors that could cause actual results to differ materially from those
described in this Form 10-K include those set forth below. See "Risk Factors"
in this Form 10-K commencing on page 19. Forward-looking statements are
indicated by an asterisk(*).
THE COMPANY
FSI International, Inc., a Minnesota corporation organized in 1973 ("FSI"
or the "Company"), designs, manufactures, markets and supports
microlithography, surface conditioning and chemical management equipment used
in the fabrication of microelectronics, such as advanced semiconductor
devices, thin film heads, multi-chip modules, and flat panel displays. This is
the only industry segment in which the Company is presently engaged and sales
to semiconductor device companies represent a significant majority of the
Company's total revenues.
The Company's microlithography products, including the POLARIS(R),
ORBITRAK(R), APEX(TM), and SCORPIO(TM) Microlithography Clusters, process
photoresist (light sensitive material used for patterning) on substrates as
part of the photolithography phase used in the fabrication of many
microelectronic components. The Company's surface conditioning products,
including the MERCURY(R) Spray Processing Systems, the EXCALIBUR(R) Vapor
Processing Systems, and the ARIES(TM) CryoKinetic(TM) Cleaning System, remove
contaminants and excess photoresist from
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substrates during the fabrication process and selectively remove oxide from the
substrate 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 a number of microelectronic components produced today. The
Company's chemical management products, including its CHEMFILL(R) Chemical
Delivery Modules, CHEMGEN(R) Chemical Blending Modules, and CHEMLITHO (TM)
Developer Blending Systems 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 microelectronics technology in recent years have resulted in
increasingly sophisticated designs which require submicron geometries and
complex manufacturing processes. To meet the demand for these more complex,
high performance devices, manufacturers require process technologies that are
timely, reliable and readily integrated into high volume manufacturing
environments. Competitive pressures are at the same time forcing manufacturers
to reduce the costs of producing microelectronic components. 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.
The Company markets its products directly in North America and primarily
through a network of affiliated distributors in Europe, Asia and Japan.
Through these affiliated international distributors the Company can provide
timely and efficient worldwide customer service and support.
On April 4, 1996, the Company, through a merger involving a newly-formed
and wholly-owned subsidiary of the Company, acquired all of the outstanding
capital stock of Semiconductor Systems Inc. ("SSI") and SSI became a
wholly-owned subsidiary of the Company. Principal SSI resist processing
products include the ORBITRAK, the APEX, and the SCORPIO Microlithography
Clusters. SSI's operations are headquartered in Fremont, California.
During fiscal 1995, the Company completed two transactions which expanded
its chemical management capabilities. In January 1995, FSI and its affiliated
distributor Metron Technology B.V. (f/k/a Metron Semiconductors Europa B.V.)
each acquired a 50% interest in FSI Metron Europe, Limited ("FME") located in
New Haven, England. FME manufactures, markets, and services chemical
distribution systems, wet benches and portable clean rooms primarily for use by
semiconductor device manufacturers. On March 8, 1995 the Company, through a
merger involving a newly-formed and wholly-owned subsidiary, acquired all of
the outstanding capital stock of Applied Chemical Solutions ("ACS") and ACS
became a wholly-owned subsidiary of the Company. 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's
operations are headquartered in Hollister, California.
RECENT COST CONTROL MEASURES
Due to difficult semiconductor industry conditions, which are expected to
continue at least until the second half of calendar 1997, the Company recently
adopted certain cost control measures
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in an attempt to align spending with expected sales decreases. Fiscal 1996
results include approximately $1.5 million of pre-tax charges in the fourth
quarter associated with eliminating or reducing the scope of certain programs
as part of the Company's cost control measures. Additional cost control
measures, including mandatory furlough days and a reduction in executive
compensation were implemented in September, 1996. As a result of the cost
control measures, and in response to industry conditions, the Company reduced
its workforce by approximately 9%. For the first quarter of fiscal 1997, the
Company will record a pre-tax charge of approximately $300,000 for costs
resulting primarily from severance compensation and outplacement services.*
INDUSTRY BACKGROUND
The fabrication of semiconductor devices is a complex process involving
several distinct phases repeated numerous times during the fabrication process.
Each production phase requires different processing technology and equipment,
and no one semiconductor equipment supplier currently produces an entire
state-of-the-art fabrication system. Rather, semiconductor device manufacturers
typically construct fabrication facilities by combining manufacturing equipment
produced by several different suppliers, each of which performs specific
functions in the manufacturing process.
The flat panel display, multi-chip module, and thin film head fabrication
processes utilize many of the same basic technological building blocks as does
the semiconductor manufacturing industry, in that certain production equipment
provides the same basic function or applications for a substrate as
semiconductor manufacturing equipment does for a silicon wafer. The flat panel
display and thin film head markets, while not as large as the semiconductor
device market, have over the past few years experienced significant growth.
Demand for new semiconductor manufacturing equipment is driven principally
by the need for new processes and systems capable of manufacturing increasingly
complex devices. Industries that utilize semiconductor devices are demanding
higher performance devices from semiconductor manufacturers. Over the last
decade, technological advances have allowed device manufacturers to reduce the
size and substantially increase the functionality of each device. Today, 16
and 64 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 microscopic geometries. With high density logic
integrated circuits and advanced DRAMs that require even smaller geometries now
under development, semiconductor device manufacturers require process
technology advances that are timely, highly reliable, and readily implemented
into high volume manufacturing environments.
Concurrent with rapid technological advances in microelectronics,
competitive pressures are forcing manufacturers to reduce production costs.
Because of the significant capital cost of a typical new fabrication facility,
manufacturers have increased their focus on the various cost components of
these facilities. This focus has led manufacturers to increasingly analyze the
costs associated with owning and operating each piece of required operating
equipment, often referred to as the equipment's "cost of ownership." Cost of
ownership measurement has become an increasingly competitive issue among
equipment suppliers. In addition, the Company believes that in an effort to
reduce total manufacturing costs and to reduce potential contaminant exposure
as the substrate is transferred from one process step to another, manufacturers
are increasingly seeking process equipment capable of being integrated with the
process equipment of other suppliers to create a highly automated and
integrated processing system.
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The Company believes that microelectronics manufacturers are asking
equipment suppliers to take an increasingly active role in meeting the
manufacturer's technology requirements and cost constraints by developing and
supporting the products and processes required to fabricate advanced products.
Certain manufacturers are seeking strategic relationships with equipment
suppliers for specific process steps on existing and new products. As a
result, 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 manufacturers as well as
meet international quality standards, such as ISO 9001 certification.
SEMICONDUCTOR DEVICE FABRICATION
The basic component in the manufacture of semiconductor devices is a thin,
circular crystalline silicon wafer, typically four to eight inches in diameter.
During the fabrication process, several layers of conductive and dielectric
materials are sequentially grown or deposited on the wafer surface through a
series of thermal 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 with separately controlled
temperature and humidity and employing specialized filters designed to reduce
the number of particulates in the air within the facility. Each layer
undergoes a series of processes such as etching, deposition, patterning, and
doping (described below), leaving the desired device pattern. The
wafers are ultimately separated into individual integrated circuits (chips) or
discrete devices which are then packaged, assembled and tested. The typical
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. As device geometries become smaller and more
complex, the reduction of organic, metal, and particle contamination on
the wafer becomes an increasingly critical factor in improving
semiconductor device production yields. Cleaning is generally performed
by exposing the wafer to various chemicals in a liquid state, through
immersion or spraying, or in a vapor state. FSI's surface conditioning
products, including the MERCURY Spray Processors the EXCALIBUR Vapor
Phase Processing Systems and ARIES CryoKinetic Cleaning System, are
designed to perform these cleaning functions throughout the device
fabrication process.
Layering. Following cleaning and 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 and forms the
basic wiring circuit to connect millions of transistors.
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 reduce the natural
topographical unevenness on the wafer surface which can reduce yield and
reliability. Certain of the Company's chemical management systems are
used to mix and deliver the slurry used in this process. The Company's
MERCURY Spray
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Processing Systems are used to remove the polishing grit from the surface
of the wafer after CMP processing.
Photolithography. After the film layer is grown or 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. 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 wafer is heated to catalyze the
exposure component of the photoresist. The image on the film is then
developed, which creates protected and unprotected areas. The developed
photoresist is then baked at a high temperature to remove remaining
solvents, improve adhesion to the wafer surface and harden the
photoresist for subsequent processing. The POLARIS, ORBITRAK and SCORPIO
Microlithography 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. With advanced devices, pattern etching is
performed using a dry chemical process. The Company's MERCURY spray
processing systems have been used to perform blanket etching in wet
chemistry applications. During doping, specific ions are implanted on the
wafer to control and change the electrical properties of the wafer
surface. This is accomplished by using intense, uniform beams of
high-energy ions of a desired dopant, aimed at the silicon wafer surface,
leaving a distribution of dopant. 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 MERCURY spray processing systems are used to perform this
function with wet chemistry applications or as a final clean-up after dry
chemistry applications. The Company's EXCALIBUR Vapor Processing System
is used to remove residual silicon dioxide on conductor surfaces to
improve electrical performance between metal layers. The Company's ARIES
CryoKinetic Cleaning System is used to remove residue left after reactive
ion etching of metal or dielectric films typically post dry oxygen ashing
of photoresist.
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. 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,
including its CHEMFILL Chemical Delivery Modules, CHEMLITHO Developer Blending
Systems, and CHEMGEN Chemical Blending Modules, perform the critical
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functions of generating, blending, delivering and controlling the flow,
concentration and purity of chemicals used by various types of processing
equipment throughout the fabrication processes including cleaning,
planarization, photolithography and stripping.
PRODUCTS
The mix of products sold by the Company may vary significantly from year
to year. The following table sets forth, for the periods indicated, the amount
of sales and approximate percentages of the Company's total sales contributed
by the Company's principal products:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
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AUGUST 31, 1996 AUGUST 26, 1995 AUGUST 27, 1994
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<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Microlithography clusters $137,975 45.4% $ 85,486 39.1% $ 58,737 47.1%
Surface conditioning products 66,082 21.7% 59,898 27.4% 27,915 22.4%
Chemical management systems 66,642 21.9% 45,223 20.7% 17,573 14.1%
Spare parts and service 33,342 11.0% 27,853 12.8% 20,442 16.4%
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$304,041 100.0% $218,460 100.0% $124,667 100.0%
======== ====== ======== ====== ======== ======
</TABLE>
MICROLITHOGRAPHY CLUSTERS. The Company's POLARIS microlithography
clusters perform all of the photolithography processing steps except exposure.
The POLARIS cluster consists of a clean-room qualified robot 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 1 clean room environment, with independent
control of temperature, humidity and organics from the rest of the fabrication
area. During operation, cassettes of wafers are loaded into the cluster's
input/output module from which the robot transports wafers through the various
process modules in a sequence programmed by the operator allowing the desired
treatment of the wafer surface.
The POLARIS clusters represent a processing alternative to conventional
photoresist track or linear systems which permit processing of the wafer only
according to a pre-established arrangement of the equipment. Wafer routing and
throughput in a POLARIS cluster are not dependent upon module configuration.
The programmable capability allows random wafer routing and continuous
processing of wafers eliminating the need for the queuing of partially
processed wafers sometimes 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 cluster approach of the POLARIS cluster eliminates the need for a
number of complex mechanisms which can impact system reliability, such as
exposure system interface modules and wafer transport mechanisms generally
associated with track systems. POLARIS process modules can be serviced from
outside the cluster without disrupting other cluster process operations. In
addition, should technology change in any
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particular process module, that individual module can be replaced with an
upgrade without rendering the entire system obsolete.
In June, 1996, the Company introduced the POLARIS 2200 and 2100 cluster
systems building on the industry-proven POLARIS 2000 cluster series. The
POLARIS 2200 cluster is designed to meet the demands of higher-capacity wafer
steppers. This new cluster supports higher throughput and more complex process
flows through its dual-robot handling system . The handling system consists of
a pair of independent, highly reliable Class 1 robots. The cluster achieves
higher process density through its new high-capacity module that contains up to
seven bake, chill or prime stations in a single vertical stack. The POLARIS
2100 Cluster incorporates the new features of the POLARIS 2200 cluster in a
single robot configuration and was designed to be used in applications that have
lower throughput and less complex process flow requirements.
Purchasers of one or more of the POLARIS clusters include Ericsson
Components AB ("Ericsson"); ITT Corporation; International Business Machines
Corporation ("IBM"), LG Semicon Co., Ltd. ("LG Semicon"); Motorola, Inc.
("Motorola"); National Semiconductor, Corp., ("NSC"); Texas Instruments,
Incorporated ("TI"); and Tower Semiconductor Ltd. ("TSL"). The price of the
POLARIS cluster ranges from approximately $800,000 to $2,500,000, depending on
wafer size, number of modules, and number of robots required. The POLARIS
cluster technology is licensed by the Company from TI. See "Patents, Trademarks
and Intellectual Property" below.
In April 1996, the Company expanded its resist processing product line,
through the acquisition of SSI, to include the ORBITRAK, APEX, and SCORPIO
Microlithography Clusters. Introduced by SSI in 1993, the ORBITRAK
Microlithography Clusters is designed for use in submicron fabs. The ORBITRAK
cluster features proprietary process modules -- arranged in an "orbit" around
production proven, three axis robots -- allow wafers to be processed in
virtually any desired sequence. Multiple process chambers, thermal process
modules, and fixed central robots with dual end effectors all contribute to
superior throughput in a very small footprint, thereby reducing its cost of
ownership.
The optional environmental chamber of the ORBITRAK Cluster provides
improved control of particulates, temperature and humidity. Separate
environmental controls for the coat and develop chambers provide further process
management and control. Ergonomic architecture and bulkhead mountability make
optimal use of expensive clean room floor space while allowing easy access for
preventive maintenance. An optional robotic stepper interface transforms the
ORBITRAK Cluster, in combination with a stepper, into a fully-linked
photolithography cell. This interface provides seamless processing from an
uncoated wafer through coating, exposure and development to a masked wafer ready
for deposition or etch processing.
Introduced by SSI in 1993, the APEX Cluster is designed to meet the needs
of display manufacturers in the flat panel display market. Flat panel displays
are the full color screens on lap top computers, and other electronic
components. Using the design architecture developed for the ORBITRAK Cluster,
the APEX Cluster also integrates the cluster tool processing concept. The APEX
Cluster is designed to handle thin glass substrates up to 500mm x 500mm (20
inches) square.
Introduced by SSI in 1993, the SCORPIO Cluster is a flexible and
cost-effective platform for the photolithography steps involved in the
manufacturing of thin film heads and semiconductor devices. The benefits of
"cluster" processing are also evident in this system. The SCORPIO
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Cluster provides thin-film head manufacturers who produce less complex circuits
with some of the same advantages provided by the ORBITRAK and POLARIS Clusters.
The SCORPIO Cluster is also designed for use in manufacturing multi-chip
modules ("MCMs"). MCMs are multiple integrated circuits (memory, logic,
microcomponent, etc.) designed onto a single packaging substrate to provide
increased functionality with a smaller component size. This market is expected
to grow as system designers strive to put more capabilities into smaller
packages which function at higher speeds.*
Purchasers of the SSI's products include Dallas Semiconductors, Inc., Intel
Corporation ("Intel"), Hewlett-Packard, Motorola, Microchip Technology,
Read-Rite Corporation, and Seagate Technology.
SURFACE CONDITIONING PRODUCTS. The Company's surface conditioning products
perform cleaning and stripping functions necessary for the fabrication of
semiconductor devices.
Spray Processing Systems. The Company's spray processing systems, which
include the MERCURY Spray Processors, are sophisticated spray chemistry systems
used to clean, etch, and strip wafers at various stages in the semiconductor
device fabrication process. These systems use centrifugal spray technology to
process wafers by exposing them to a programmed, sequenced spray of fresh
chemicals inside a closed, nitrogen filled chamber. Cassettes filled with
wafers are loaded into a turntable in the process chamber and the processing
chemicals, de-ionized water, and nitrogen are sequentially dispensed into the
chamber through one or more spray posts mounted in the chamber. As the
turntable rotates, nozzles apply a chemical spray to the wafers' surface. After
chemical application, de-ionized water is sprayed on the wafer surface and all
surfaces of the process chamber to remove chemical residues. The wafers and
chamber are then dried by centrifugal spinning combined with a flow of nitrogen
into the chamber. FSI's spray processing systems include a microprocessor-based
controller to program, control, and monitor the operating functions of the
system in order to ensure precise control and repeatability of the process.
The Company's spray processing systems provide an alternative to
traditional immersion technology, principally wet-bench processing of wafers. A
chemical wet-bench consists of an exhaust hood 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 equipment
operator from hazardous chemicals or fumes, improved cleaning capability,
reduced chemical usage, lower space utilization in the clean room, and greater
process flexibility, including the capability to easily change chemical
sequences.
The Company introduced the automated Material Handling System ("MHS") in
June, 1996. The MHS provides a reliable, automated environment to move wafers
to and from the MERCURY process chamber. A central robot moves cassettes from
station to station and into the MERCURY process chamber. After wafers are
processed, it unloads the cassettes from the process chamber, transfers wafers
back into the transport cassettes and returns the cassettes to the input/output
("I/O") ports to be removed from the MHS workcell. The automated and enclosed
MHS helps ensure maximum process tool use, increases throughput, reduces
contamination and minimizes human error. Custom configurations and integration
options are available to meet specific facility requirements. The MHS sells for
approximately $500,000.
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MERCURY Spray processing system customers include Advanced Micro Devices,
Inc. ("AMD"); Atmel Corporation ("Atmel"); Fujitsu Microelectronics, Inc.
("Fujitsu"); IBM; International Rectifier Corporation ("IRC"); Lucent Technology
("Lucent"); Matsushita Corp.; ("Matsushita"); Motorola; SGS Thompson
Microelectronics, Inc. ("SGS Thompson"); TI; and Winbond Electronics Corp.
("Winbond"). The Company offers several types of spray processing systems, which
range in price from $300,000 to $750,000. 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 EOS, ISR, and MVP Vapor
Phase Processing Systems use anhydrous hydrogen fluoride ("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 two process chambers can
be operated with a single electronic controller through the utilization of
multi-tasking software.
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 ease of 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, EXCALIBUR systems have gone through multiple
enhancements, including the development from a single gas to a multi-gas system.
These continual enhancements led to the introduction of the EXCALIBUR MVP
(Multi-Vapor Processor) system in July 1993. In addition to HF gas, the
EXCALIBUR MVP system uses hydrogen chloride (HC1) gas for improved metal
removal and ozone gas for trace organic removal, and has the processing
capability to clean the backside of the wafer along with the front side. The
EXCALIBUR MVP system can be used for most critical cleaning steps in the
semiconductor device fabrication process. Programs are under development to
integrate the EXCALIBUR MVP system with other process equipment. The process
development of the EXCALIBUR MVP system was funded in part by SEMATECH, an
industry and government consortium.
The Company's EXCALIBUR System customers include AMD, Fujitsu, Hyundai
Electronics Industries Co., Ltd. ("Hyundai"), IBM, Intel, Matsushita, Motorola,
and TI. Systems vary in price from approximately $250,000 to $750,000 depending
on the model, wafer size, number of process chambers, and related electronic
control requirements.
Through a License Agreement with IBM, FSI manufactures, markets, and
services a product using IBM's cryogenic aerosol cleaning technology. In July,
1996, the Company introduced this cryogenic aerosol cleaning technology as the
ARIES CryoKinetic Cleaning System which operates as follows. Ultrapure
argon/nitrogen crystals are formed by rapidly cooling the gaseous mixture. When
the frozen gas crystals collide with particles or residues on the wafer surface,
they impart sufficient CryoKinetic force to dislodge contaminants. Contaminants
become entrained in the gas
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flow and are carried away from the wafer and removed from the process chamber.
This removal process is facilitated by a unique chamber design that prevents
contaminants from redepositing on the wafer surface once removed. The process
appears to be effective on many types of particle or residue contamination.
The ARIES system can be configured with up to three process modules on a
six-sided handler with two vacuum load locks depending upon the customer's
capacity requirements. The system, available with or without the handler, is
designed to SEMI/MESC standards.
The advantage of the cleaning obtained with an ARIES System over
conventional aqueous processes includes the ability of the cryogenic aerosol to
remove particles or particulate without undercutting and weakening device
structures and the removal of difficult residues after reactive ion etching. An
ARIES system varies in price from $500,000 to $1,500,000 depending on the number
of process chambers and related requirements.
Over the past several years, based in part upon funding received from the
National Institute of Standards and Technology, the Company has developed the
ORION system, in which "dry" chemicals in a gaseous environment are charged by
an energy source to remove contaminants from a silicon's wafer surface. A
prototype was shipped to a customer for evaluation in the latter part of fiscal
1996. The Company does not expect to generate any revenue from sales of this
product in fiscal 1997.*
CHEMICAL MANAGEMENT SYSTEMS. The Company's chemical management systems
enable semiconductor 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 to deliver programmed
amounts of chemicals 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 manufacturers with enhanced chemical purity,
inventory control, safety, dispensing accuracy and bulk purchasing
opportunities.
Typically, a chemical delivery system installation involves the delivery,
flow and purity control of five to ten distinct chemicals. Each chemical
requires its own station operated by a dedicated programmable logic 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 that
chemical to multiple use points within the clean room. Each system installation
requires a degree of customization based on the delivery requirements and
physical layout of the customer's facility. FSI's project management expertise
allows it to perform multiple installations simultaneously, which is a
significant advantage during periods of growth in the number of fabrication
facilities being constructed, upgraded, or expanded. In addition, upon the
request of a customer, FSI will oversee and coordinate not only the installation
of a chemical delivery system but also the entire chemical distribution system
of the fabrication facility, including point of use interfaces and primary and
secondary containment piping.
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The Company offers several models of chemical delivery systems, including
the CHEMFILL 500 module, which provides all the features of a centralized
delivery system in a compact, economical unit. This model can be used as a
cost-effective solution for small volume chemical users or as a local source of
chemicals in large fabrication facilities. The CHEMFILL 1000 PLC module (for
"programmable logic control") offers increased automation to its users,
providing enhanced control, flexibility, and functionality. The CHEMFILL 1500
series of delivery modules incorporate proprietary vacuum pressure technology to
draw chemicals from their storage and transportation containers into the system
and pressure to transfer the chemical back to the container, in a recirculation
mode, or to points of use in a dispense mode. The CHEMFILL 5000, designed for
facilities requiring high chemical flow features redundant flow systems that
help increase uptime.
Chemical Blending and Mixing Systems. The Company's chemical blending and
mixing systems allow semiconductor device manufacturers to reduce chemical costs
by enabling them to blend a process chemical from concentrate on site to create
the various chemical concentrations required at different points of use in the
clean room. The CHEMLITHO line of blending systems provides accurate
photoresist developer blending for the microlithography area.
Chemical Generation Systems. The CHEMGEN chemical generation systems allow
semiconductor device manufacturers to reduce chemical costs by generating bulk
quantities of specific chemicals by mixing gases with deionized water located at
the facility. These chemicals are then delivered to the various use points in
the fabrication facility.
Slurry Mixing and Delivery Systems. The Company's slurry mixing and
delivery systems, utilize proprietary vacuum pressure technology, mix and
deliver slurry which is used in conjunction with CMP technology. The Company's
P2200 and P4400 systems mix and deliver slurry for both oxide and metal
polishing applications.
Chemical management system customers include AMD, Chartered Semi, Cypress,
Hitachi, Intel, Lucent, Motorola, NSC, SGS Thompson, and Siemens. The Company
has installed chemical management systems in over 100 fabrication plants
worldwide. Typical installations vary in price from $250,000 to $3,500,000.
However, a project involving turn-key installation with multiple chemicals and
points of use can cost in excess of $10,000,000.
SPARE PARTS AND SERVICE.
The Company sells spare part kits for a number of its products and
individual spare part components for its equipment. The Company often packages
product improvements to enable customers to update previously purchased
equipment.
The Company employs customer service and process engineers to assist and
train the Company's customers in performing preventive maintenance and service
on FSI equipment and developing process applications for the equipment. The
Company generally provides a one to two year 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.
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BACKLOG AND SEASONALITY
The Company's backlog at the end of fiscal 1996 and 1995 was approximately
$113 million and $127 million, 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 is scheduled to be shipped
within twelve months. The semiconductor market is presently experiencing
volatility in terms of product demand and product pricing. This has caused
certain semiconductor manufacturers to exercise caution in making their capital
equipment purchase decisions and in certain cases to reschedule or cancel
capital equipment purchases. Orders are subject to cancellation by the
customer, with a limited penalty. In fiscal 1996 and 1995, purchase orders
aggregating approximately $16,799,000 and $1,524,000, constituting 5.5% and 0.7%
of sales, respectively, were canceled and not rescheduled. Because of the
timing and relative size of certain orders received by the Company and possible
changes in delivery schedules and cancellations of orders, the Company's backlog
can vary from time to time and at any particular date is not necessarily
indicative of actual sales for any succeeding period. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The business of the Company is not seasonal to any significant
extent.
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend in large part on
its ability to enhance, in collaboration with its customers, its existing
product lines to meet the changing needs of microelectronics manufacturers.* The
Company believes that the trends in the industry, such as utilization of smaller
circuit geometries, increased use of larger substrates and manufacturers'
increased desire for integral processing equipment will make highly automated
and integral systems, including single substrate processing systems, more
important in the manufacturing of devices.* To assist the Company in its
development efforts, the Company maintains relationships with a number of
industry professionals, including its customers, who help identify and review
industry trends in advanced technology and FSI's development activities toward
meeting the industry's technology needs.
The Company's current research and development programs are focused on the
need for cleaner substrate surfaces due to smaller geometries, increased process
control and flexibility through monitoring and software management systems,
robotics automation in the clean room and integration of the Company's product
offerings with the processing equipment of other suppliers. Each of these
programs involves customer collaboration to ensure proper machine configuration
and process development to meet the industry's requirements.
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 research on vapor phase and cryogenic aerosol cleaning systems which
may provide increased cleaning capabilities and improved process integration in
FSI's related products.
The Company maintains a demonstration and process development laboratory at
its headquarters in Minnesota, occupying over 2,500 square feet, and a 2,000
square foot Class 1
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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. The Company is currently adding to its
manufacturing facility in Chaska and constructing a new facility in Allen,
Texas, each of which will contain a state of the art demonstration and process
development laboratory. Moreover, the Company is equipping a slurry blending
and dispense technology laboratory in Hollister, California.
Expenditures for research and development, which are expensed as incurred,
during fiscal 1996, 1995, and 1994 were approximately $40,998,000, $28,037,000
and $18,756,000, respectively, and represented 13.5%, 12.8% and 15.0% of sales,
respectively.
MARKETING, SALES AND SUPPORT
The Company markets its products throughout the world. The Company's
marketing and sales efforts are focused on building long-term relationships with
its customers. These efforts are supported by a team of product marketing
managers, sales personnel, and equipment, process and software engineers that
works closely with individual customers to find solutions to their process
needs.
In North America, the Company markets its products through direct sales
personnel located in regional sales offices. 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, as of fiscal year end the sales effort was supported
by approximately 240 employees and contractors engaged in customer service and
support.
International sales, primarily in Europe and Asia accounted for
approximately 35%, 33% and 26% of total sales for fiscal years 1996, 1995 and
1994 respectively. The Company owns a 37.5% equity interest in Metron
Technology B.V. ("Metron"), a distributor of the Company's products which has an
extensive distribution organization located in Europe, Israel, India, and in
the Asia Pacific Region. Fluoroware, Inc., a manufacturer of plastic injection
moldings for the microelectronics industry, also owns a 37.5% equity interest in
Metron. In addition to the Company's products, Metron also sells products and
equipment on behalf of several other semiconductor equipment and consumables
manufacturers, including Fluoroware, Inc.
The significant majority of the Company's international sales are made to
its affiliated distributors for resale to end users of the Company's products.
However, in some cases, the Company may also sell directly to an international
customer, in which case the Company will pay a commission to one of its
affiliated distributors in connection with the sale. When commissions are taken
into account, the international sales to the Company's affiliates are on terms
generally no less favorable to the Company than international sales by the
Company directly to non-affiliates.
The Company owns a 49% equity interest in m-FSI, Ltd. ("m-FSI"), a Japanese
joint venture company formed in August 1991 with Mitsui & Co., Ltd. and its
wholly-owned subsidiary, Chlorine Engineers Corp., Ltd. (collectively,
"Mitsui"). Mitsui owns a 51% equity interest in m-FSI. In connection with its
formation, the Company and Mitsui granted m-FSI certain product and technology
licenses and product distribution rights.
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MANUFACTURING AND SUPPLIERS
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. Generally,
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 manufactured equipment prior to shipment by
FSI. 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, FME or SSI.
In fiscal 1995, the Company through its fifty (50%) percent interest in
FME, established a manufacturing capability in Europe for its chemical
management division. In addition, FME also provides program management,
including the capability to manage the installation of large chemical
generation, blending and dispense systems.
Certain of the components and subassemblies included in the Company's
products are obtained from a single supplier or a limited group of suppliers in
order to ensure overall quality and timeliness of delivery. Although the
Company seeks to reduce dependence on sole and limited source suppliers,
disruption or termination of certain of these sources could have a temporary
adverse effect on the Company's operations. The Company believes that
alternative sources could be obtained and qualified to supply these products, if
necessary. Nevertheless, a prolonged inability to obtain certain components
could have an adverse effect on the Company's operating results and could result
in damage to customer relationships.*
COMPETITION
The industry in which FSI competes is highly competitive. In each of the
markets it serves, the Company faces intense competition from established
competitors, some of which have substantially greater financial, engineering,
research, development, manufacturing, marketing service and support resources,
and greater name recognition than the Company. In order to remain competitive,
the Company will be required to maintain a high level of investment in research
and development, marketing, and customer service and support as well as control
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 also may 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.*
Beginning in early calendar 1996, the semiconductor industry has seen a
weakening due to a decline in DRAM prices compounded by overcapacity due to the
large number of facility expansions in 1995. Industry analysts forecast a
decline in the market for calendar 1997 with growth again in 1998.*
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Because of this declining market, pricing pressures are expected
worldwide.* The Asia and European regions are expected to have the largest
decrease in capital expenditures in calendar 1997 while capital expenditures by
companies in the United States also are expected to decline.* Although
regional capital expenditure patterns may result in localized pricing pressures,
the international nature of the semiconductor industry is expected to result in
worldwide price pressures.*
Regionally, 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 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.
The Company believes that the Japanese equipment companies with which it
competes have a competitive advantage because of their dominance of the Japanese
market segment. Furthermore, Japanese microelectronics manufacturers have
extended their influence outside Japan by licensing products and process
technologies to non-Japanese manufacturers. Such licenses can result in a
recommendation to use equipment manufactured by Japanese companies. Therefore,
the Company may be at a competitive disadvantage with respect to the Japanese
equipment suppliers, who have been engaged for some time in collaborative
efforts with Japanese microelectronics manufacturers. Certain Japanese
equipment manufacturers have begun to establish manufacturing operations in the
United States, which will enable them to compete more effectively in the United
States market.
A portion of the Company's international sales have been to semiconductor
device manufacturers located in Korea. The Korean market is extremely
competitive and the semiconductor device manufacturers located there have been
very aggressive in seeking price concessions from suppliers. FSI does not
believe that there are any existing government trade restrictions that would
materially limit FSI's ability to compete in the Japanese or Korean markets.
Taiwan, Singapore and recently, Thailand and Malaysia, have significantly
increased their microelectronics fabrication facility construction activity. The
Company understands that many of these companies have technology alliances with
established Japanese, U.S. or European semiconductor device manufacturing
companies and that a substantial portion of their equipment purchase decisions
will be based upon the recommendations of their alliance partners.
Significant competitive factors in the equipment market include quality,
process repeatability, capability and flexibility, ability to integrate with
other products, and overall cost of ownership, including reliability,
automation, throughput, customer support, and system price. The Company has
experienced significant price competition from certain of its competitors,
primarily those in the microlithography and chemical management systems markets.
Although the Company believes that it has certain technological and other
advantages over its competitors, realizing and maintaining such advantages will
require a continued high level of investment by the Company in research and
development, and marketing and customer service and support as well as
controlling operating expenses. There can be no assurance that the Company will
continue to compete successfully in the future.
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The Company's competitors differ across its three product lines. The
Company's microlithography clusters compete with products offered by Dainippon
Screen Manufacturing Co. Ltd. ("DNS"), Silicon Valley Group, Inc. and Tokyo
Electron Ltd. ("TEL"),. The Company competes with DNS, TEL, Steag, Semitool,
Inc., SubMicron Systems, Inc. ("SubMicron"), and Santa Clara Plastics in the
area of surface conditioning products. The Company's Chemical Management
Division competes with products from Systems Chemistry, Inc., a subsidiary of
SubMicron, MEGA Systems, Inc. and a number of chemical supply companies that
also offer chemical management systems.
CUSTOMERS
The Company sells products from one or more of its product lines to most
major microelectronics manufacturers and has an extensive history with several
of the largest integrated circuit manufacturers in the world. It has over 100
active customers worldwide.
Although the composition of the Company's customers has changed from year
to year, direct sales to the Company's top five customers in each of fiscal
1996, 1995 and 1994 have accounted for approximately 41%, 54% and 52%,
respectively, of the Company's total sales. Direct sales to the Company's top
two customers in each of fiscal 1996, 1995 and 1994 accounted for approximately
23%, 27% and 34% respectively, of the Company's total sales. In addition,
approximately 31% of the Company's backlog at fiscal 1996 year-end was comprised
of orders from two customers. IBM accounted for approximately 11% and 14% of
the Company's sales in fiscal 1996 and 1995, respectively. Texas Instruments
accounted for approximately 12% and 6% of the Company's sales for fiscal 1996
and 1995, respectively.
Sales to the Company's affiliated international distributors in fiscal
1996, 1995 and 1994, which may include sales of products subsequently resold to
the Company's direct customers, accounted for approximately 25%, 20%, and 20%,
respectively, of the Company's total sales. In addition, the earnings received
from the Company's equity ownership interest in such affiliated distributors
accounted for approximately 18%, 17%, and 18% of the Company's net income in
fiscal 1996, 1995 and 1994, respectively. The earnings or losses of the
Company's affiliated distributors can affect significantly the financial results
of the Company. There can be no assurance that the affiliated distributors will
continue to distribute the Company's products or do so successfully, and in such
event the Company's results of operations and earnings could be adversely
affected.
The Company has experienced and expects to continue to experience
fluctuations in its customer mix. The timing of an order for the Company's
equipment is primarily dependent upon the customer's expansion program,
replacement needs, or requirements to improve productivity and yields.
Consequently, a customer who places significant orders in one year will not
necessarily place significant orders in subsequent years.
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.
PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY
The POLARIS cluster is offered by the Company under a non-exclusive license
from TI. The Company recently converted the license to a fully paid-up,
world-wide license to sell and
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manufacture the POLARIS cluster. FSI also has the non-exclusive right to
manufacture and sell related TI modules. The license agreement continues until
terminated. It may be terminated by either party upon a breach by the other
party, and the failure to cure, of certain terms of the agreement.
The ARIES CryoKinetic cleaning tool is offered under license agreements
from IBM. The licenses require certain minimum royalties and system-based
royalties. Royalty's are based on the "royalty portion revenues" of licensed
equipment which excludes amounts for freight, taxes, customers duties,
insurance, discounts, and certain equipment not manufactured by FSI.
The Company has a policy of seeking patents on inventions governing new
products and processes developed as part of its ongoing research, engineering
and manufacturing activities.
The Company holds numerous United States patents and additional patents in
Japan and several European countries, and has several United States 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. In addition to patent protection,
the Company attempts to protect its proprietary information through
non-disclosure agreements with its employees.
EMPLOYEES
As of August 31, 1996, FSI and its wholly-owned subsidiaries ACS and SSI,
and its joint venture, FME, had 1,412 employees and contractors of whom 473 were
engaged in manufacturing, 238 were engaged in customer service, 408 were engaged
in research and development, 99 were engaged in sales and marketing, and 194
held general and administrative positions. In the first quarter of fiscal
1997, the Company implemented a reduction in force which reduced the total
number of employees and contractors by approximately 9% (See "Recent Cost
Cutting Measures" above).
The Company is not subject to any collective bargaining agreement, has
never been subject to a work stoppage and believes its relations with its
employees is good.
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ENVIRONMENTAL MATTERS
The Company is subject to a variety of governmental regulations related to
the discharge or disposal of toxic, volatile or otherwise hazardous chemicals
used in the manufacturing process. The Company believes that it is in
compliance with these regulations and that it has obtained all necessary
environmental permits to conduct its business. These permits generally relate
to the disposal of hazardous wastes. Nevertheless, the failure to comply with
present or future regulations could result in fines being imposed on the
Company, suspension of production or cessation of operations. Such regulations
could require the Company to acquire significant equipment or to incur
substantial other expenses to comply with environmental regulations. Any
failure by the Company to control the use of, or adequately restrict the
discharge or disposal of hazardous substances could subject the Company to
future liabilities. See also Item 3 - "Legal Proceedings."
The Company believes that compliance with federal, state and local
provisions which have been enacted or adopted regulating discharges of materials
into the environment, or otherwise relating to the protection of the environment
will not have a material effect upon the capital expenditures, earnings and
competitive position of the Company.
INTERNATIONAL SALES
The Company's international sales for each of the last three fiscal years
is disclosed in the financial statements incorporated by reference and referred
to in Item 8 on pages 29-30 of this Report.
RISK FACTORS
In addition to the other information contained herein, the following
factors should be carefully considered in evaluating the Company, its business,
and prospects.
Current Slowdown and Volatility in the Semiconductor Device Industry
The Company's business depends upon the capital equipment expenditures of
microelectronics manufacturers, which in turn depend on the current and
anticipated market demand for semiconductor devices, thin film heads, multi-chip
modules, and flat panel displays. The semiconductor device industry has been
cyclical in nature and historically experienced periodic downturns. The
semiconductor device industry is presently experiencing a slowdown in terms of
product demand and volatility in terms of product pricing. During 1995 many of
the semiconductor device manufacturers announced plans to expand existing or
build new semiconductor device manufacturing facilities. In early 1996, the
average selling price of memory chips and certain other semiconductor devices
significantly decreased. This has resulted in semiconductor device
manufacturers announcing delays in their expansion plans. This slowdown and
volatility has caused the semiconductor industry to reduce its demand for
semiconductor processing equipment and, in some instances, to delay capital
equipment decisions. In some cases this has resulted in order cancellations or
delays of orders and delays of delivery dates for the Company's products. No
assurance can be given that the Company's revenues and operating results will
not be adversely affected during this and possible future downturns in the
semiconductor industry. In addition, the need for continued investments in
research and development, substantial capital equipment requirements and
extensive ongoing worldwide customer service and support capability will limit
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the Company's ability to reduce expenses. Accordingly, there is no assurance
that the Company will be able to remain profitable in the future.
Fluctuations in Quarterly Operating Results
FSI's results for a particular quarter can vary due to a number of factors
and, consequently, FSI may experience significant fluctuations in its quarterly
sales, gross profits, operating results, and net income. Factors which may
influence FSI's operating results in a given quarter include specific economic
conditions in the microelectronics industry, the financial results of FSI's
affiliates, the timing of the receipt of orders from major customers, the mix of
products sold by FSI, competitive pricing pressures, the proportion of
international sales, product modifications requested by customers, and
production ability. During a specific quarter, a significant portion of FSI'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 parts availability could delay shipments. These
factors also could significantly affect annual results of operations.
Dependence on New Products and Processes
Microelectronics 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 devices and the increased overall
demand for products utilizing microelectronics has driven the need for new
facilities, equipment, and processes to produce such devices at an acceptable
cost. As a result of these factors, FSI believes microelectronics manufacturers
are increasingly relying on equipment manufacturers to design and develop more
efficient equipment, to design and implement improved processes for their
benefit , and to integrate their equipment with that of other equipment
manufacturers. Therefore, FSI 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, FSI must continue
to develop, manufacture, and market new products which conform to emerging
industry standards. As a result, FSI 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 FSI's business.
The success of FSI 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. FSI 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 expenses may result.
There can be no assurance that FSI will be able to develop processes in a manner
which satisfies customer needs or achieves market acceptance. The failure to do
so could materially and adversely affect FSI's business and results of
operations.
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Reliance on Affiliated International Distributors
The majority of FSI's international sales are made through its affiliated
distributors, Metron in Europe and the Asia Pacific Region, and m-FSI Ltd. in
Japan ("m-FSI"). These affiliated distributors also provide service and
support to many of FSI's international customers. Thus, a reduction in the
sales efforts or financial viability of such distributors, or a termination of
FSI's investment in or relationship with such entities, could adversely affect
FSI's international sales, its financial results, and its ability to support
its international customers. Sales to FSI's affiliated distributors accounted
for approximately 25% and 20% of FSI's total sales in fiscal 1996 and 1995,
respectively, and the earnings received m-FSI's equity ownership interest in
such affiliated distributors accounted for approximately 18% and 17% of FSI's
net income in fiscal 1996 and 1995, respectively.
The earnings or losses of FSI's affiliated distributors can
significantly affect the financial results of FSI. The affiliated distributors
distribute not only FSI's products but also distribute or represent those of
other companies serving the microelectronics industry. Over the past several
years, a majority of Metron's revenues have been attributable to sales of
products of equipment and consumables suppliers other than FSI. Thus, the
financial results of Metron and their impact on FSI's financial results are
dependent not only upon the ability of Metron to successfully market FSI's
products, but also on their ability to maintain relationships with and market
the products of other equipment and consumables suppliers. Moreover, while
sales of FSI's products by Metron (and of certain other manufacturers for whom
they distribute) are generally in United States dollars, the expenses of Metron
are generally denominated in foreign currencies and, accordingly, Metron'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
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 instances 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 to justify the costs of engaging in hedging activity,
FSI's affiliated distributors generally 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 canceled 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 result in losses to the
affiliated distributor. To date, FSI has not experienced any material adverse
effect as a result of the hedging activities of its affiliated distributors.
There can be no assurance that Metron and m-FSI will continue to distribute, or
to distribute successfully, FSI's products or the products of other
microelectronics and consumables companies, and in such an event FSI'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.
New Facilities Construction
The Company is adding manufacturing capacity during fiscal 1997. This
additional manufacturing capacity will have a negative impact on gross profit
margins if the Company's anticipated revenue levels are not met. The potential
impact of idle manufacturing capacity on gross margins could have an adverse
impact on the Company's future financial results.
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Successful Integration of Semiconductor Systems
The Company's acquisition of Semiconductor Systems requires the integration
of the personnel, products and operations of Semiconductor Systems. If this
integration is not successful, there may be an adverse impact on the Company's
1997 business and financial operations and the long-term growth of the Company.
Competitive Industry
The industry in which the Company competes is highly competitive. The
Company expects its competitors to continue to improve the design and
performance of their current products and processes and to introduce new
products and processes with improved price and performance characteristics. If
the Company's competitors enter into strategic relationships with leading
microelectronics manufacturers covering products similar to those sold by the
Company, its ability to sell its products to those manufacturers could be
adversely affected. No assurance can be given that the Company will continue to
compete successfully in the United States or worldwide. See also "Competition"
above.
Dependence on Key Customers
Although the composition of FSI's largest customers has changed from year
to year, direct sales to FSI's top five customers in each of fiscal 1996, 1995
and 1994 have accounted for approximately 41%, 54% and 52% respectively, of
FSI's total sales. Direct sales to FSI's top two customers in each of fiscal
1996, 1995, and 1994 accounted for approximately 23%, 27% and 34%, respectively,
of FSI's total sales. FSI's top two customers in fiscal 1996 were TI and IBM
and in fiscal 1995 were IBM and Intel. In addition, approximately 31% of FSI's
backlog at fiscal 1996 year-end was comprised of orders from two customers.
Sales to FSI's affiliated distributors in fiscal 1996, 1995, and 1994, which may
include sales of products subsequently resold to FSI's top five customers,
accounted for approximately 25%, 20% and 20%, respectively, of FSI's total
sales. FSI 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 FSI's operating results.
International Business
Approximately 35%, 33% and 26% of FSI's sales for fiscal 1996, 1995 and
fiscal 1994, respectively, were attributable to sales outside the United States,
including sales through FSI's affiliated international distributors which
accounted for 71%, 60%, and 75%, respectively, of such international sales. See
"Reliance on Affiliated International Distributors" above. FSI 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.
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<PAGE> 23
Although substantially all of FSI's direct international sales are
denominated in United States dollars, both direct sales by FSI 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 Metron are also generally denominated in United States Dollars,
their expenses are denominated in foreign currencies and, consequently, their
operating results may be directly 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 fluctuations in dollar/yen exchange rates.
Furthermore, although FSI endeavors to meet technical standards established by
foreign regulatory bodies, there can be no assurance that FSI will be able to
comply with changes in foreign standards in the future. The inability of FSI to
design products to comply with foreign standards could have a material adverse
effect on FSI. In addition, the laws of certain foreign countries may not
protect FSI's intellectual property to the same extent as the laws of the United
States. A portion of FSI'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.
Volatility of Stock Price
FSI 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 FSI, announcements by FSI, 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 industry specifically, may
adversely affect the market price of FSI Common Stock.
Dependence on Key Suppliers
Certain of the components and subassemblies included in the Company's
products are obtained from a single supplier or a limited group of suppliers.
The Company believes that alternative sources could be obtained and qualified to
supply these products. Nevertheless, 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.
Successful Implementation of New Business System
The Company is in the process of defining and testing a new Company-wide
integrated business system for implementation during fiscal 1997. If the
implementation of the new system is not successful, there may be an adverse
impact on the Company's business and results of operations.
Environmental Regulations
The Company is subject to a variety of governmental regulations related to
the discharge or disposal of toxic, volatile, or otherwise hazardous chemicals
used in the manufacturing process and in its research and development programs.
The Company believes that it is in compliance with these regulations and that it
has obtained all necessary environmental permits to conduct its
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<PAGE> 24
business, which permits generally relate to the disposal of hazardous wastes.
Nevertheless, the failure to comply with present or future regulations could
result in fines being imposed on the Company, suspension of production or
cessation of operations. Such regulations could require the Company to acquire
significant equipment or to incur substantial other expenses to comply with
environmental regulations. Any failure by the Company to control the use of, or
adequately restrict the discharge or disposal of hazardous substances could
subject the Company to future liabilities.
Intellectual Property Matters
From time to time, allegations are made that the Company is in violation of
certain patents. In such cases, the Company's policy is to investigate the
allegations and to defend against the claims or negotiate licenses where
considered appropriate. However, no assurance can be given that it will be able
to obtain necessary licenses on commercially reasonable terms, or at all, or
that any litigation resulting from such claims could not have a material adverse
effect on the Company's business and financial condition.
ITEM 2. PROPERTIES
The Company's corporate offices are located in Chaska, a suburb of
Minneapolis, Minnesota. In fiscal 1996, the Company leased approximately
288,000 square feet, in four buildings. The annual rental cost for these
facilities in fiscal 1996 was $1,367,000. Effective December 1, 1995, the
Company entered into a new five year lease on its 140,000 square foot
headquarters facility, which facility also contains a process research
laboratory, and manufacturing for chemical management system products.
In November 1995, the Company opened a new 100,000 square foot
manufacturing facility which cost approximately $12.5 million to construct and
equip. The facility contains 45,000 square feet of Class 1,000 and 10,000 clean
room space, which can be upgraded to class 100 as required. The new facility
also contains a manufacturing support operations and customer training center.
In February, 1996, the Company began construction of an 88,000 square foot
facility addition. It is anticipated the addition will be completed in the
spring of 1997. It will be headquarters for the Company's Surface Conditioning
Division and will include laboratory and engineering facilities.
In March, 1996 the Company began construction of a 150,000 square foot
facility in Allen, Texas. When completed in early 1997, the facility will
comprise the Microlithography Division's headquarters and include
manufacturing, engineering, and a research and development laboratory.
The Company also leases facilities in England and in various locations
within the United States including:
* a 48,000 square foot process research and development laboratory,
engineering and administrative facilities for the
Microlithography Division located in Dallas, Texas.
* a 17,180 square foot engineering and administrative facility for
the Chemical Management Division located in Hollister, California
(ACS Headquarters).
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<PAGE> 25
* 23,500 square feet of engineering, manufacturing, and
administrative facilities for the Chemical Management Division
located in Europe (FME Headquarters).
* a 62,040 square foot for research and development laboratory,
engineering, manufacturing, and administrative facility in
Fremont, California (SSI Headquarters).
* a 126,008 square foot engineering, administrative and warehouse
space near its Chaska headquarters. (Approximately 55,000 square
feet is being used and the remaining warehouse space is available
for sublease.)
ITEM 3. LEGAL PROCEEDINGS
The Company generates minor amounts of liquid and solid hazardous waste and
uses licensed haulers and disposal facilities to ship and dispose of such waste.
The Company has received notice from state or federal enforcement agencies that
it is a potentially responsible party ("PRP") in connection with the
investigation of four hazardous waste disposal sites owned and operated by third
parties. In each matter, the Company believes that it is at most a "de minimis"
PRP. The Company has elected to participate in settlement offers made to all de
minimis parties with respect to several such sites.
The risk of being named a PRP is that if any of the other PRP's are unable
to contribute their proportionate share of the liability, if any, associated
with the site, those PRP that are able could be held financially responsible for
the shortfall. While the ultimate outcome of those matters not yet settled
cannot presently be determined, the Company does not believe that any of these
investigations, either individually or in the aggregate, will have a material
adverse effect on its business, operating results, or financial condition.
In October, 1995, Purusar Corporation ("Purusar") brought suit against the
Company in United States District Court, Northern District of California,
seeking monetary damages and injunctive relief based upon the Company's alleged
infringement of a patent held by Purusar. The lawsuit is in the early discovery
stage. The Company has asserted various defenses as well as noninfringement of
such patent by the Company's products. While litigation is subject to inherent
uncertainties and no assurance can be given that the Company will prevail in
such litigation or will obtain a license under such patent on commercially
reasonable terms or at all if such patent is found to be valid and it is
determined the Company infringes such patent, the Company believes that the
Purusar lawsuit will not have a material adverse affect on the Company's
consolidated financial statements.
There has been substantial litigation regarding patent and other
intellectual property rights in the microelectronics industry recently and
further commercialization of the Company's products could provoke claims of
infringement by third-parties. Except for the allegations made by Purusar, the
Company is not aware of any infringement by its products of any patents or
proprietary rights of others. In the future, litigation may be necessary to
enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company or to defend the Company against claimed infringement of
the rights of others and determine the scope and validity of the Company's
proprietary rights. Any such litigation could result in substantial costs and
diversion of effort by the
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<PAGE> 26
Company, which by itself could have a material adverse affect on the Company's
financial condition and operating results. Further, adverse determinations in
such litigation could result in the Company's loss of proprietary rights,
subject the Company to significant liabilities to third parties, require the
Company to seek licenses from third-parties or prevent the Company from
manufacturing or selling one or more products, any of which could have a
material adverse effect on the Company's financial condition and results of
operations.
Other than the litigation described above or routine litigation incidental
to the Company's business, there is no material litigation to which the Company
is a party or of which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
-----------------------------------------------
There were no matters submitted to a vote of shareholders during the fourth
quarter ended August 31, 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
---------------------------------
The executive officers are elected by the board of directors, generally
for a term of one year, and serve until their successor is elected and
qualified. The following table and discussion contains information regarding
the current executive officers of the Company.
NAME AGE POSITION
---- --- --------
Joel A. Elftmann 56 Chairman of the Board, President, and
Chief Executive Officer
Peter A. Pope 46 Executive Vice President, Marketing and
Account Management
Benno G. Sand 42 Executive Vice President, Chief Financial
Officer, and Secretary
Benjamin J. Sloan 56 Executive Vice President; President,
Microlithography Division
Robert E. Cavins 61 Executive Vice President; President,
Chemical Management Division
Dale A. Courtney 59 Executive Vice President; President,
Surface Conditioning Division
J. Wayne Stewart 46 Executive Vice President, Operations
Timothy D. Krieg 41 Executive Vice President, Quality and
Human Resources
Charles R. Wofford 63 Vice Chairman
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<PAGE> 27
Mr. Elftmann is a co-founder of the Company and has served as a Director of the
Company since 1973 and as Chairman of the Board since August 1983. From August
1983 to August 1989, and from May 1991 until the present, Mr. Elftmann has
served as Chief Executive Officer of the Company. From 1977 to August 1983,
and from May 1991 until 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 a member of the Supervisory Board
of Directors of Metron Technology 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. (n/k/a Metron Technology
B.V.) Mr. Pope also serves as a director of m-FSI, Ltd.
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 is a director of ACS and SSI.
Dr. Sloan has served as Executive Vice President; President, Microlithography
Division of the Company since January 1, 1996. From January 1992 to January
1996, he served as Executive Vice President, Microlithography Division. Prior
thereto, Dr. Sloan was employed by Texas Instruments in Dallas, Texas where he
served over 24 years in various research and development capacities, most
recently as Vice President of TI's Semiconductor Group and Manager of the Wafer
Fabrication Systems Division of TI's Process Automation Center. Dr. Sloan also
serves as a director of SSI.
Dr. Cavins has served as Executive Vice President; President, Chemical
Management Division of the Company since January 1, 1996. From March 1994
until January 1, 1996, he was Senior Vice President, Chemical Management
Division. He served as Vice President, Chemical Management Division from
January 1993 until March 1994. 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. From 1988 to March 1992, Dr. Cavins served as Senior Vice
President of Operations for E.F. Johnson Company. 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 and ACS.
Mr. Courtney has served as Executive Vice President; President, Surface
Conditioning Division of the Company since January 1, 1996. From March 1994
until January 1, 1996 he was Senior Vice
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<PAGE> 28
President, Surface Conditioning Division. He served as Vice President, Surface
Conditioning Division of the Company from November 1992 to March 1994. Mr.
Courtney served as Vice President, Engineering of the Company from August 1991
to November 1992. Mr. Courtney served as Director of Engineering of the
Company from September 1990 to August 1991 and as manager of Engineering
Software Development and Automation of the Company from September 1987 to
September 1990. Prior to joining the Company, Mr. Courtney was President of D
A Courtney & Associates, Dallas, Texas, specializing in the development of
software for automation and real time process control systems. Mr. Courtney
also is a director of m-FSI, Ltd.
Mr. Stewart has served as Executive Vice President, Operations of the Company
since January 1, 1996. From February 1994 until January 1, 1996, he was Vice
President, Operations. Prior thereto, he was employed by Texas Instruments in
Dallas, Texas where he served over 20 years in various manufacturing and
operations management positions, most recently as Custom Manufacturing Services
Manager from July 1992 to February 1994, and Corporate CIM Manager from August
1990 to July 1992. 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 Executive Vice President, Quality and Human Resources
of the Company since January 1, 1996. From March 1994 until January 1, 1996,
he served as Vice President, Quality and Human Resources and he 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. Wofford has served as a Director of the Company since November 1992. On
February 5, 1996 he joined the Company as Vice Chairman. Since April 1994, Mr.
Wofford has been a business and management consultant. From April 1992 to
April 1994, he was Chairman of the Board, Chief Executive Officer, and
President of the FARR Company, a manufacturer of clean room filtration systems
and equipment. Mr. Wofford was President and Chief Executive Officer of the
FARR Company from September 1991 to March 1992, and from July 1991 to August
1991 he was President and Chief Operating Officer. 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.
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<PAGE> 29
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, no par value, is traded on the Nasdaq National
Market under the symbol "FSII." The information concerning the quarterly stock
prices and dividends for the fiscal years ended August 31, 1996 and August 26,
1995 and the number of shareholders of record is contained in the Company's
1996 Annual Report to Shareholders ("Annual Report"), at page 32 under the
captions "Quarterly Data" and "Common Stock Prices", which information is
incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The summary of selected financial data for each of the last five fiscal
years set forth in the Annual Report in the table on page 12 under the caption
"Five-Year Selected Financial Data" is incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing in the
Company's Annual Report on pages 13 to 32 is incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and supplementary data of
the Company and its subsidiaries for the periods indicated and the Independent
Auditors' Report listed below which are included in the Annual Report at the
pages indicated, are incorporated by reference.
<TABLE>
<CAPTION>
PAGE NUMBER IN
CONSOLIDATED FINANCIAL STATEMENTS: ANNUAL REPORT
--------------
<S> <C>
Consolidated Statements of Operations - Fiscal Years Ended 20
August 31, 1996, August 26, 1995 and August 27, 1994.
Consolidated Balance Sheets - August 31, 1996 and 21
August 26, 1995.
Consolidated Statements of Stockholders' Equity - 22
Fiscal Years Ended August 31, 1996, August 26, 1995,
and August 27, 1994.
Consolidated Statements of Cash Flows - Fiscal Years Ended 23
August 31, 1996, August 26, 1995 and August 27, 1994.
</TABLE>
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<PAGE> 30
PAGE NUMBER IN
ANNUAL REPORT
--------------
Notes to Consolidated Financial Statements. 24-32
Independent Auditors' Report 19
Supplementary Data: Quarterly Operating Results 32
and Market Data
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is incorporated by reference to
the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on January 22, 1997 (the "Proxy Statement") and which will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within
120 days after August 31, 1996.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item
is included in the Proxy Statement and is incorporated by reference. For
information concerning executive officers, see Item 4A of this Form 10-K
Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item, which is included in the Proxy
Statement, is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item, which is included in the Proxy
Statement, is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item, which is included in the Proxy
Statement, is incorporated by reference.
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<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The following financial statements and documents and the
report of the independent auditors are included in the Annual Report
(an Exhibit to this Report) and are incorporated by reference in Item
8 of this Report:
<TABLE>
<CAPTION>
PAGE NUMBER IN
ANNUAL REPORT
--------------
<S> <C>
Selected Financial Data for the five years ended
August 31, 1996 12
Management's Discussion and Analysis of Financial Condition 13-32
and Results of Operations
Consolidated Statements of Operations - Fiscal Years ended 20
August 31, 1996, August 26, 1995, and August 27, 1994
Consolidated Balance Sheets - August 31, 1996 and
August 26, 1995 21
Consolidated Statements of Stockholders' Equity -
Fiscal Years Ended August 31, 1996, August 26, 1995,
and August 27, 1994 22
Consolidated Statements of Cash Flows - Fiscal Years
ended August 31, 1996, August 26, 1995, and August 27, 1994 23
Notes to Consolidated Financial Statements 24-32
Independent Auditors' Report 19
</TABLE>
<TABLE>
<CAPTION>
PAGE NUMBER
IN THIS REPORT
--------------
<S> <C>
(a) (2) Financial Statement Schedules
The following Report and financial statement schedule are
included in this Part IV and are found in this Report at
the pages indicated.
Independent Auditors' Report on Schedule 37
Schedule II - Valuation and Qualifying Accounts 38
All other schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or notes thereto.
</TABLE>
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<PAGE> 32
(a)(3) Exhibits
* An asterisk next to a listed Exhibit indicates it is an executive
compensation plan or arrangement.
2.1 Agreement and Plan of Reorganization dated December 23, 1994 by
and among the Company, ACS Acquisition Corp., Applied Chemical
Solutions, and certain significant shareholders of Applied
Chemical Solutions.(1)
2.2 Share Purchase Agreement dated December 14, 1994 by and among the
Company, Metron Semiconductors Europa B.V., Christopher
Springall, Anthony Springall, Roger Springall, David Springall
and Michael Springall. (2)
2.3 Agreement and Plan of Reorganization by and Among FSI
International, Inc., Spectre Acquisition Corp., and Semiconductor
Systems, Inc. (14)
3.1 Restated Articles of Incorporation of the Company. (3)
3.2 Restated By-Laws. (4)
3.3 Amendment to Restated By-Laws. (5)
4.1 FSI Corporation Stock Purchase Agreement dated March 20, 1981.(4)
4.2 Stock Purchase Agreement dated September 15, 1982. (4)
4.3 Common Stock and Common Stock Purchase Warrants Agreement dated
October 15, 1985. (4)
4.4 Second Amendment, dated as of January 9, 1989, to Common Stock
and Common Stock Warrants Purchase Agreement dated as of October
15, 1985. (5)
4.5 Registration and Preemptive Rights Agreement dated October 15,
1985.(4)
*10.1 1983 Incentive Stock Option Plan. (4)
*10.2 1982 Nonqualified Stock Option Plan. (4)
*10.3 Split Dollar Insurance Agreement and Collateral Assignment
Agreement dated December 28, 1989, between the Company and Joel
A. Elftmann. (Similar agreements between the Company and each of
Robert E. Cavins, Benjamin J. Sloan, Dale A. Courtney, Peter A.
Pope, Benno G. Sand, J. Wayne Stewart and Timothy D. Krieg have
been omitted, but will be filed upon the request of the
Commission).(4)
10.4 Lease dated June 27, 1985, between the Company and Lake Hazeltine
Properties. (7)
10.5 Lease dated September 1, 1985, between the Company and Elftmann,
Wyers, Blackwood Partnership. (7)
10.6 Lease dated September 1, 1985, between the Company and Elftmann,
Wyers Partnership. (7)
*10.7 1989 Stock Option Plan. (5)
*10.8 Amended and Restated Employees Stock Purchase Plan. (3)
10.9 Omitted
10.10 Shareholders Agreement among FSI International, Inc. and Mitsui
& Co., Ltd. and Chlorine Engineers Corp. Ltd. dated as of August
14, 1991. (8)
10.11 FSI Exclusive Distributorship Agreement dated as of August 14,
1991 between FSI International, Inc. and m-FSI, Ltd. (8)
10.12 FSI Licensing Agreement dated as of August 14, 1991, between FSI
International, Inc. and m-FSI, Ltd. (8)
10.13 License Agreement, dated October 15, 1991, between the Company
and Texas Instruments Incorporated. (9)
10.14 Amendment No. 1, dated April 10, 1992, to the License Agreement,
dated October 15, 1991, between the Company and Texas Instruments
Incorporated. (9)
10.15 Amendment effective October 1, 1993 to the License Agreement,
dated October 15,
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<PAGE> 33
<TABLE>
<S><C>
1991 between the Company and Texas Instruments Incorporated. (10)
*10.16 Amended and Restated Directors' Nonstatutory Stock Option Plan. (11)
*10.17 Management Agreement between FSI International, Inc. and Robert E. Cavins,
effective as of March 28, 1994. (11)
*10.18 Management Agreement between FSI International, Inc. and Dale A. Courtney,
effective as of March 28, 1994. (11)
*10.19 Management Agreement between FSI International, Inc. and Joel A. Elftmann,
effective as of March 28, 1994. (11)
*10.20 Management Agreement between FSI International, Inc. and Timothy D. Krieg,
effective as of March 28, 1994. (11)
*10.21 Management Agreement between FSI International, Inc. and Peter A. Pope,
effective as of March 28, 1994. (11)
*10.22 Management Agreement between FSI International, Inc. and Benno G. Sand,
effective as of March 31, 1994. (11)
*10.23 Management Agreement between FSI International, Inc. and Benjamin J. Sloan,
effective as of March 28, 1994. (11)
*10.24 Management Agreement between FSI International, Inc. and J. Wayne Stewart,
effective as of March 28, 1994. (11)
*10.25 Management Agreement between FSI International, Inc and Charles Wofford
effective as of February 5, 1996.
*10.26 FSI International, Inc. 1994 Omnibus Stock Plan. (12)
*10.27 FSI International, Inc. 1996 Incentive Plan (13)
10.28 First Amendment to Lease made and entered into October 31, 1995 by and between
Lake Hazeltine Properties and FSI International, Inc. (13)
10.29 Distribution Agreement made and entered into as of July 6, 1995 by and between
FSI International, Inc. and Metron Semiconductors Europa B.V. (Exhibits to
Agreement omitted) (13)
10.30 Lease dated August 9, 1995 between Skyline Builders, Inc. and FSI International,
Inc. (13)
10.31 Lease Rider dated August 9, 1995 between Skyline Builders, Inc. and FSI
International, Inc. (13)
10.32 Lease Amendment dated November, 1995 between Roland A. Stinski and FSI
International, Inc. (Exhibits to Amendment omitted) (13)
11.1 Computation of Per Share Earnings of FSI International, Inc.
13.0 Registrant's 1996 Annual Report to Shareholders (Only those portions of this
document specifically incorporated herein by reference are deemed to be included
in this Exhibit and part of this Report.).
21.0 Subsidiaries of the Company.
23.0 Consent of KPMG Peat Marwick LLP.
24.0 Powers of Attorney from the Directors of FSI International, Inc.
27.0 Financial Data Schedule
</TABLE>
(1) Filed as an Exhibit to the Company's Report on Form 8-K dated January 5,
1995, as amended, File No. 0-17276, and incorporated by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form S-3
dated January 5, 1995, SEC File No. 33-88250 and incorporated by
reference.
(3) Filed as an Exhibit to the Company's Report on Form 10-Q for the quarter
ended
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<PAGE> 34
February 24, 1990, SEC File No. 0-17276, and incorporated by reference.
(4) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
SEC File No. 33-25035, and incorporated by reference.
(5) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 26, 1989, SEC File No. 0-17276, and incorporated by
reference.
(6) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 25, 1990, as amended by Form 8 dated December 20, 1990,
and by Form 8 dated February 5, 1991, SEC File No. 0-17276, and
incorporated by reference. Similar agreements between the Company and
each of Robert E. Cavins, J. Wayne Stewart, Benjamin J. Sloan, Dale A.
Courtney, Peter A. Pope, Benno G. Sand and Timothy D. Krieg have been
omitted, but will be filed upon the request of the Commission.
(7) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
SEC File No. 33-25035, and incorporated by reference.
(8) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 31, 1991, as amended by Form 8 dated January 7, 1992,
SEC File No. 0-17276, and incorporated by reference.
(9) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
quarter ended February 29, 1992, File No. 0-17276, and incorporated by
reference.
(10) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 27, 1993, SEC File No. 0-17276, and incorporated by
reference.
(11) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
quarter ended May 28, 1994, SEC File No. 0-17276, and incorporated by
reference.
(12) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 27, 1994, SEC File No. 0-17276, and incorporated by
reference.
(13) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 26, 1995, SEC File No. 0-17276 and incorporated by
reference.
(14) Filed as an Exhibit to the Company's Registration Statement on Form S-4
(as amended) dated March 21, 1996, SEC File No. 333-1509 and incorporated
by reference.
-34-
<PAGE> 35
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter ending
August 31, 1996.
PROXY STATEMENT
Except for those portions specifically incorporated in this
Report by reference to the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held on January 22, 1997, no other
portions of the Proxy Statement are deemed to be filed as part of this
Report on Form 10-K. The Proxy Statement is furnished solely for the
information of the Securities and Exchange Commission.
-35-
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FSI INTERNATIONAL, INC.
By: /s/Joel A. Elftmann
------------------------
Joel A. Elftmann, Chairman, President
and Chief Executive Officer (Principal
Executive Officer)
Dated: November 25, 1996
By: /s/Benno Sand
------------------
Benno Sand, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, constituting a majority
of the Board of Directors, on behalf of the Registrant and in the capacities
and on the dates indicated.
Joel A. Elftmann, Director )
James A. Bernards, Director )
Neil R. Bonke, Director )
Terrence W. Glarner, Director )
Joanna T. Lau, Director )
Robert E. Lorenzini, Director ) By: /s/Benno Sand
William M. Marcy, Director ) ------------------
Charles R. Wofford, Director ) Benno Sand, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Dated: November 25, 1996
-36-
<PAGE> 37
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
FSI International, Inc.
Under the date of October 11, 1996, we reported on the consolidated balance
sheets of FSI International, Inc. and subsidiaries as of August 31, 1996 and
August 26, 1995 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended August 31, 1996, as contained in the 1996 annual report to
stockholders. These consolidated financial statements and our report thereon
are incorporated by reference in the annual report on Form 10-K for the year
1996. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related financial statement
schedule as listed in the accompanying index. The financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick
Minneapolis, Minnesota
October 11, 1996
-37-
<PAGE> 38
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED AUGUST 31, 1996, AUGUST 26, 1995 AND AUGUST 27, 1994
<TABLE>
<CAPTION>
Balance at
Beginning Balance at
of Year Additions Deletions End of Year
---------- --------- --------- -----------
<S> <C> <C> <C> <C>
Fiscal Year Ended August 31, 1996
Allowance for doubtful
accounts (Deducted from
accounts receivable) $1,234,000 $609,000 $ -- $1,843,000
========== ======== ===== ==========
Fiscal Year Ended August 26, 1995
Allowance for doubtful
accounts (Deducted from
accounts receivable) $ 533,500 $700,500 $ -- $1,234,000
========== ======== ===== ==========
Fiscal Year Ended August 27, 1994
Allowance for doubtful
accounts (Deducted from
accounts receivable) $ 353,900 $179,600 $ -- $ 533,500
========== ======== ===== ==========
</TABLE>
-38-
<PAGE> 39
EXHIBIT INDEX
PAGE(S)
10.25 Management Agreement between FSI International, Inc.
and Charles R. Wofford dated as of February 5, 1996 40-52
11.1 Computation of Per Share Earnings of FSI 53
International, Inc.
13.0 Registrant's 1996 Annual Report to Shareholders (not 54-91
deemed "filed" as part of this Form 10-K except for those
portions that are expressly incorporated by reference)
21.0 Subsidiaries of the Company 92
23.0 Consent of KPMG Peat Marwick LLP 93
24.0 Powers of Attorney from the Directors of FSI International, Inc. 94-101
27.0 Financial Data Schedule 102
-39-
<PAGE> 1
Exhibit 10.25
MANAGEMENT AGREEMENT
(INVOLUNTARY AND CONSTRUCTIVE DISCHARGE FORM)
AGREEMENT entered into as of February 5, 1996 by and between FSI
International, Inc., a Minnesota corporation (the "Company"), and Charles
Wofford (the "Employee").
WITNESSETH:
WHEREAS, the Employee is a key member of the management of the Company and
has devoted and/or is expected to devote substantial skill and effort to the
affairs of the Company, and the Board of Directors of the Company desires to
recognize the significant personal contribution that the Employee has made
and/or is expected to make to further the best interests of the Company and its
stockholders; and
WHEREAS, it is desirable and in the best interests of the Company and its
stockholders to obtain or maintain the benefits of the Employee's services and
attention to the affairs of the Company; and
WHEREAS, it is desirable and in the best interests of the Company and its
stockholders to provide inducement for the Employee (A) to remain in the
service of the Company in the event of any proposed or anticipated change in
control of the Company and (B) to remain in the service of the Company in order
to facilitate an orderly transition in the event of a change in control of the
Company; and
WHEREAS, it is desirable and in the best interests of the Company and its
stockholders that the Employee be in a position to make judgments and advise
the Company with respect to proposed changes in control of the Company without
regard to the possibility that Employee's employment may be terminated without
compensation in the event of certain changes in control of the Company; and
WHEREAS, the Employee desires to be protected in the event of certain
changes in control of the Company; and
WHEREAS, for the reasons set forth above, the Company and the Employee
desire to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, the Company and the Employee agree as follows:
1. Employment. The Employee shall remain in the employ of the Company for
the term of this Agreement as defined in Paragraph 14 (the "Term"), and during
the Term the Employee shall have such title, duties, responsibilities and
authority, and receive such
<PAGE> 2
remuneration and fringe benefits, as the Board of Directors of the Company
or its Committees shall from time to time provide for the Employee; provided,
however, that either the Employee or the Company may terminate the employment
of the Employee at any time prior to the expiration of the Term, with or
without Cause and for any reason whatever, subject to the right of the Employee
to receive any payment and other benefits that may be due pursuant to the terms
and conditions of Paragraph 3 of this Agreement or, except as provided in
Paragraph 3(B) or Paragraph 4, the terms of any other written employment
agreement relating to the employment of Employee by the Company.
2. Occurrence of an Event. For purposes of this Agreement, an
"Event" shall be deemed to have occurred if:
(A) a majority of the directors of the Company shall be persons
other than persons
(i) for whose election proxies shall have been solicited by
the Board of Directors of the Company or
(ii) who are then serving as directors appointed by the Board
of Directors to fill vacancies on the Board of Directors
caused by death or resignation (but not by removal) or to
fill newly-created directorships, but excluding, for this
purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened
election contest which was (or, if threatened, would have
been) subject to Rule 14a-11 of the Securities Exchange
Act of 1934, as amended, (the "Exchange Act") or any
successor rule thereto.
(B) 30% or more of the then outstanding common or voting stock of
the Company is acquired or beneficially owned (as defined in
Exchange Act Rule 13d-3) by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act), provided, however, that the following
acquisitions and beneficial ownership shall not constitute
Events pursuant to this Paragraph 2(B):
(i) any acquisition or beneficial ownership by the Company or
a subsidiary of the Company (if a majority of the
outstanding voting power of the outstanding shares
entitled to vote generally in an election of directors of
the subsidiary are beneficially owned directly or
indirectly by the Company ("Subsidiary")), or
-2-
<PAGE> 3
(ii) any acquisition or beneficial ownership by any employee
benefit plan (or related trust) sponsored or maintained
by the Company or one or more of its Subsidiaries,
(iii) any acquisition or beneficial ownership by the Employee
or any group that includes the Employee, or
(iv) any acquisition or beneficial ownership by a parent
corporation or its wholly-owned subsidiaries, as long as
they shall remain wholly-owned subsidiaries, of 100% of
the outstanding common stock and voting stock of the
Company as a result of a merger or statutory share
exchange which complies with Paragraph 2(C)(i)(2) or the
exception in Paragraph 2(C)(ii) hereof in all respects.
(C) the shareholders of the Company approve a definitive agreement
or plan to
(i) merge or consolidate the Company with or into another
corporation (other than (1) a merger or consolidation
with a Subsidiary of the Company or (2) a merger in which
(a) the Company is the surviving corporation,
(b) no outstanding voting stock of the Company (other
than fractional shares) held by shareholders
immediately prior to the merger is converted into
cash, securities, or other property (except (I)
voting stock of a parent corporation owning
directly, or indirectly through wholly-owned
subsidiaries, both beneficially and of record 100%
of the voting stock of the Company immediately
after the merger or (II) cash upon the exercise by
holders of voting stock of the Company of statutory
dissenters' rights),
(c) the persons who were the beneficial owners,
respectively, of the outstanding common stock and
outstanding voting stock of the Company immediately
prior to such merger beneficially own, directly or
indirectly, immediately after the merger, more than
70% of, respectively, the then outstanding common
stock and the then outstanding voting stock of the
surviving corporation or its parent corporation,
and
(d) if voting stock of the parent corporation is
exchanged for voting stock of the Company in the
merger, all holders of
-3-
<PAGE> 4
any class or series of voting stock of the Company
immediately prior to the merger have the right to
receive substantially the same per share
consideration in exchange for their voting stock
of the Company as all other holders of such class
or series),
(ii) exchange, pursuant to a statutory exchange of shares of
voting stock of the Company held by shareholders of the
Company immediately prior to the exchange, shares of one
or more classes or series of voting stock of the Company
for cash, securities or other property, except for (a)
voting stock of a parent corporation of the Company
owning directly, or indirectly through wholly-owned
subsidiaries, both beneficially and of record 100% of
the voting stock of the Company immediately after the
statutory share exchange if (I) the persons who were the
beneficial owners, respectively, of the outstanding
common stock and outstanding voting stock of the Company
immediately prior to such statutory share exchange own,
directly or indirectly, immediately after the statutory
share exchange more than 70% of, respectively, the then
outstanding common stock and the then outstanding voting
stock of such parent corporation, and (II) all holders
of any class or series of voting stock of the Company
immediately prior to the statutory share exchange have
the right to receive substantially the same per share
consideration in exchange for their voting stock of the
Company as all other holders of such class or series or
(b) cash with respect to fractional shares of voting
stock of the Company or payable as a result of the
exercise by holders of voting stock of the Company of
statutory dissenters' rights,
(iii) sell or otherwise dispose of all or substantially all
of the assets of the Company (in one transaction or a
series of transactions), or
(iv) liquidate or dissolve the Company,
unless a majority of the voting stock (or the voting equity
interest) of the surviving corporation or its parent
corporation or of any corporation (or other entity) acquiring
all or substantially all of the assets of the Company (in the
case of a merger, consolidation or disposition of assets) or
the Company or its parent corporation (in the case of a
statutory share exchange) is, immediately following the
merger, consolidation, statutory share exchange or disposition
of assets, beneficially owned by the
-4-
<PAGE> 5
Employee or a group of persons, including the Employee,
acting in concert, or
(D)(i) the Company enters into an agreement in principle or a
definitive agreement relating to an Event described in
clause (A), (B) or (C) above which ultimately results
in such an Event described in clause (A), (B) or (C)
hereof,
(ii) a tender or exchange offer or proxy contest is
commenced which ultimately results in an
Event described in clause (A) or (B) hereof, or
(iii) there shall be an involuntary termination of the
employment of Employee or any of the events which
constitute a Constructive Involuntary Termination of
employment of Employee occur, and Employee reasonably
demonstrates that such event (x) was requested by a
third party that has previously taken other steps
reasonably calculated to result in an Event described
in clause (A), (B) or (C) above and which ultimately
results in an Event described in clause (A), (B) or (C)
hereof or (y) otherwise arose in connection with or in
anticipation of an Event described in clause (A), (B)
or (C) above that ultimately occurs.
3. Rights to Payments Following An Event. If any Event shall
occur during the Term of this Agreement, then the Employee shall be entitled
to receive from the Company or its successor (which term as used herein shall
include any person acquiring all or substantially all of the assets of the
Company) a cash payment and other benefits on the following basis (unless the
Employee's employment by the Company is terminated voluntarily or involuntarily
prior to the occurrence of the earliest Event to occur (the "First Event"), in
which case the Employee shall be entitled to no payment or benefits under this
Paragraph 3):
(A) If at the time of, or at any time after, the
occurrence of the First Event and prior to the end of the
Transition Period, the employment of the Employee with the
Company is voluntarily or involuntarily terminated for any
reason
(unless such termination is a voluntary termination by the
Employee other than a Constructive Involuntary Termination,
is on account of the death or Disability of the Employee, or
is a termination by the Company for Cause), the Employee (or
the Employee's legal representative, as the case may be),
subject to the limitations set forth in Paragraph 4,
-5-
<PAGE> 6
(i) shall be entitled to receive from the Company or its
successor, upon such termination of employment with the
Company or its successor, (a) in the event of an
involuntary termination, at least 30 days prior written
notice of termination and compensation at the Employee's
regular rate of compensation for the 30-day period
following receipt of notice of termination of employment
without regard to whether Employee is required to perform
services during such period and (b) a lump sum cash
payment in an amount equal to (x) one times the highest
annual rate of the Employee's base salary (without
reduction for any salary reduction or other deferral
contribution to any employee benefit plan sponsored by
the Company) in effect at any time during the period
commencing as of twelve months prior to the First Event
and up to the date of termination, plus (y) the amount of
bonus that is payable in accordance with the terms of any
bonus plan or plans from time to time in effect at the
"Plan" level (100% of the relevant financial goal
(divisional and/or corporate) for the year to which the
bonus relates) or, in the absence of any such plan, a
bonus equal to 35% of the compensation payable pursuant
to clause (x) above, in a lump sum at the time of such
termination of employment; and
(ii) shall be entitled until the end of the Transition Period
to participate in any health, disability and life
insurance plan or program in which the Employee was
entitled to participate immediately prior to the First
Event as if he or she were an employee of the Company
until the end of the Transition Period (except, (a) with
respect to health, disability, or life insurance
coverage, for those portions remaining until the end of
the Transition Period that duplicate health, disability
or life insurance coverage that is in place for the
Employee under any other policy provided at the expense
of another employer of Employee and (b) with respect to
life insurance coverage, for any coverage pursuant to a
split dollar insurance agreement between the Employee and
Company, which split dollar insurance agreement contains
separate provisions applicable upon termination of
employment); provided however, that in the event that the
Employee's participation in any such health, disability
or life insurance plan or program is barred, the Company,
at its sole cost and expense, shall arrange to provide
the Employee with benefits substantially similar to those
which the Employee is entitled to receive under such plan
or program; and
-6-
<PAGE> 7
(iii) shall be entitled to professional outplacement services
by a third party retained by the Company and reasonably
acceptable to the Employee and to secretarial support
and office space for up to twelve months after
termination of employment at a location, designated by
the Company and reasonably acceptable to the Employee,
within 35 miles of the location where the Employee was
employed immediately prior to the First Event, at a cost
to the Company or the successor to the Company which in
the aggregate shall not exceed $15,000.
(B) The payments provided for in this Paragraph 3 shall be in
addition to any salary or other remuneration otherwise payable
to the Employee on account of employment by the Company or one
or more of its subsidiaries or its successor (including any
amounts received prior to such termination of employment for
personal services rendered after the occurrence of the First
Event) but shall be reduced by any severance pay which the
Employee receives from the Company, its subsidiaries or its
successor under any other policy or agreement of the Company in
the event of involuntary termination of Employee's employment.
(C) The Company also shall pay to the Employee all legal fees and
expenses incurred by the Employee as a result of such
termination, including, but not limited to, all such fees and
expenses, if any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any right or
benefit provided by this Agreement
(D) In the event that at any time from the date of the First Event
until the end of the Transition Period,
(i) the Employee does not have substantially equivalent or
greater title, duties, responsibilities and authority as
compared with the Employee's status immediately prior to
the First Event, other than for Cause or on account of
Disability;
(ii) the Company shall have failed to continue in effect at
the equivalent or greater level, the Employee's base
salary and other remuneration and fringe benefits in
which Employee participates immediately prior to the
Change in Control other than for Cause or on account of
Disability or shall have failed to pay Employee any
amounts due thereunder;
-7-
<PAGE> 8
(iii) the Company shall have failed to continue to provide
Employee with benefits substantially similar to those
enjoyed by Employee under any of the Company's life,
medical, health, dental, accident, or disability
insurance plans in which Employee was participating at
the time of the Change in Control, or has taken any
action that would, directly or indirectly, materially
reduce any of such benefits or deprive Employee of any
material fringe benefit enjoyed by Employee at the time
of the Change in Control, or the failure by the Company
to provide Employee with the number of paid vacation days
to which Employee is entitled on the basis of years of
service with the Company's normal vacation policy in
effect at the time of the Change in Control, other than
for Cause or on account of Disability;
(iv) the Company shall have failed to obtain assumption of
this Agreement by any successor as contemplated by
Paragraph 6(B) hereof,
(v) the Company shall require the Employee to relocate to any
place other than a location within twenty-five miles of
the location at which the Employee performed his duties
immediately prior to the First Event or, if the Employee
performed such duties at the Company's principal
executive offices, the Company shall relocate its
principal executive offices to any location other than a
location within twenty-five miles of the location of the
principal executive offices immediately prior to the
First Event, or
(vi) the Company shall require that the Employee travel on
Company business to a substantially greater extent than
required immediately prior to the First Event,
a termination of employment with the Company by the Employee
thereafter shall constitute a Constructive Involuntary Termination.
(E) The Company's and any successor's obligation to make the
payments provided for in this Agreement and otherwise to
perform its obligations hereunder shall not be affected by any
set-off, counterclaim, recoupment, defense or other claim,
right or action which the Company or its successor may have
against the Employee or others.
(F) The Employee shall not be required to mitigate the amount of
any payment or other benefit provided for in Paragraph 3 by
seeking other employment
-8-
<PAGE> 9
or otherwise, nor (except as specifically provided in
Paragraph 3(A)(ii)) shall the amount of any payment or other
benefit provided for in Paragraph 3 be reduced by any
compensation earned by the Employee as the result of
employment by another employer after termination, or otherwise.
(G) The obligations of the Company under this
Paragraph 3 shall survive the termination of this Agreement.
4. Internal Revenue Code Section 280G Limitation. Notwithstanding
any provision to the contrary contained herein except the last sentence of this
Paragraph 4, if the lump sum cash payment due and the other benefits to which
the Employee shall become entitled under Paragraph 3(A) hereof, either alone or
together with other payments in the nature of compensation to the Employee
which are contingent on a change in the ownership or effective control of the
Company or in the ownership of a substantial portion of the assets of the
Company or otherwise, would constitute a "parachute payment" as defined in
Section 280G of the Internal Revenue Code of 1986 (the "Code") or any successor
provision thereto, such lump sum payment and/or such other benefits and
payments shall be reduced (but not below zero) to the largest aggregate amount
as will result in no portion thereof being subject to the excise tax imposed
under Section 4999 of the Code (or any successor provision thereto) or being
non-deductible to the Company for Federal Income Tax purposes pursuant to
Section 280G of the Code (or any successor provision thereto). The Employee in
good faith shall determine the amount of any reduction to be made pursuant to
this Paragraph 4 and shall select from among the foregoing benefits and
payments those which shall be reduced. No modification of, or successor
provision to, Section 280G or Section 4999 subsequent to the date of this
Agreement shall, however, reduce the benefits to which the Employee would be
entitled under this Agreement in the absence of this Section 4 to a greater
extent than they would have been reduced if Section 280G and Section 4999 had
not been modified or superseded subsequent to the date of this Agreement,
notwithstanding anything to the contrary provided in the first sentence of this
Paragraph 4.
5. Definition of Certain Terms.
(A) As used herein, the term "person" shall mean an
individual, partnership, corporation, estate, trust or other
entity.
(B) As used herein, the term "Cause" shall mean, and
be limited to, (i) willful and gross neglect of duties by the
Employee or (ii) an act or acts committed by the Employee
constituting a felony and substantially detrimental to the
Company or its reputation.
(C) As used herein, the term "Disability" shall mean
the Employee's absence from his duties with the Company on a
full time basis for 180 consecutive business days, as a result
of the Employee's incapacity due to physical or
-9-
<PAGE> 10
mental illness, unless within 30 days after written notice
pursuant to Paragraph 1 hereof is given following such absence,
the Employee shall have returned to the full time performance
of his duties.
(D) As used herein, the term "voting stock" shall mean all
outstanding shares of capital stock entitled to vote generally
in the election of directors, considered for purposes of this
Agreement as one class, and all references to percentages of
the voting stock shall be deemed to be references to
percentages of the total voting power of the voting stock.
(E) As used herein, the term "Transition Period" shall mean the
two-year period commencing on the date of the earliest to occur
of an Event described in clause (A), (B) or (C) of Paragraph 2
hereof (the "Commencement Date") and ending on the second
anniversary of the Commencement Date.
6. Successors and Assigns.
(A) This Agreement shall be binding upon and inure to the benefit
of the successors, legal representatives and assigns of the
parties hereto; provided, however, that the Employee shall not
have any right to assign, pledge or otherwise dispose of or
transfer any interest in this Agreement or any payments
hereunder, whether directly or indirectly or in whole or in
part, without the written consent of the Company or its
successor.
(B) The Company will require any successor (whether direct or
indirect, by purchase of a majority of the outstanding voting
stock of the Company or all or substantially all of the assets
of the Company, or by merger, consolidation or otherwise), by
agreement in form and substance satisfactory to the Employee,
to assume expressly and agree to perform this Agreement in the
same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the
effectiveness of any such succession (other than in the case of
a merger or consolidation) shall be a breach of this Agreement
and shall entitle the Employee to compensation from the Company
in the same amount and on the same terms as the Employee would
be entitled hereunder if the Employee terminated his employment
on account of a Constructive Involuntary Termination, except
that for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the
date of termination. As used in this Agreement, "Company"
shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which is
required to execute and deliver the agreement
-10-
<PAGE> 11
provided for in this Paragraph 6(B) or which otherwise becomes
bound by all the terms and provisions of this Agreement by
operation of law.
7. Governing Law. This Agreement shall be construed in
accordance with the laws of the State of Minnesota.
8. Notices. All notices, requests and demands given to or made
pursuant hereto shall be in writing and shall be delivered or mailed to any
such party at its address which:
(A) In the case of the Company shall be:
FSI International, Inc.
322 Lake Hazeltine Drive
Chaska, Minnesota 55318
Attention: Chief Executive Officer
(B) In the case of the Employee shall be:
Charles Wofford
___________________________
___________________________
___________________________
Either party may, by notice hereunder, designate a changed address. Any
notice, if mailed properly addressed, postage prepaid, registered or certified
mail, shall be deemed to have been given on the registered date or that date
stamped on the certified mail receipt.
9. Severability; Severance. In the event that any portion of this
Agreement is held to be invalid or unenforceable for any reason, it is hereby
agreed that such invalidity or unenforceability shall not affect the other
portions of this Agreement and that the remaining covenants, terms and
conditions or portions hereof shall remain in full force and effect, and any
court of competent jurisdiction may so modify the objectionable provision as to
make it valid, reasonable and enforceable. In the event that any benefits to
the Employee provided in this Agreement are held to be unavailable to the
Employee as a matter of law, the Employee shall be entitled to severance
benefits from the Employer, in the event of an involuntary termination or
Constructive Involuntary Termination of employment of the Employee (other than
a termination on account of the death or Disability of the Employee or a
termination for Cause) during the term of this Agreement occurring at the time
of or following the occurrence of an Event, at least as favorable to the
Employee (when taken together with the benefits under this Agreement that are
actually received by the Employee) as the most advantageous benefits made
available by the Employer to employees of comparable position and seniority to
the Employee during the two-year period prior to the First Event.
-11-
<PAGE> 12
10. Employment Tax Withholding. The Company may withhold from any
compensation or benefits payable under this Agreement all federal, state, city
or other income and employment taxes that are required to be withheld pursuant
to any law or governmental regulation or ruling.
11. Assignment. Employee may not encumber or dispose of any
payment under this Agreement, which payments and the rights to such payments are
expressly declared nonassignable or nontransferable, except as otherwise
specifically provided in this Agreement.
12. Titles. The titles and headings preceding the text of the
paragraphs of this Agreement have been inserted solely for convenience of
reference and do not constitute a part of this Agreement or affect its meaning,
interpretation or effect.
13. Waiver. The failure of either party to insist in any one or
more instances upon performance of any terms or conditions of this Agreement
will not be construed as a waiver of future performance of any such term,
covenant, or condition and the obligations of either party with respect
to such term, covenant or condition will continue in full force and effect.
14. Term. This Agreement shall commence on the date of this
Agreement and shall terminate, and the Term of this Agreement shall end, on the
later of (A) December 31, 1996, provided that such period shall be
automatically extended for one year and from year to year thereafter until
notice of termination is given by the Employer or the Employee to the
other party hereto at least 90 days prior to December 31, 1996 or the one-year
extension period then in effect, as the case may be, or (B) if the Commencement
Date occurs prior to December 31, 1996 (or prior to the end of the extension
year then in effect as provided for in clause (A) hereof), the second
anniversary of the Commencement Date.
15. Entire Agreement. This Agreement contains the entire
understanding of the Company and Employee regarding compensation to be paid by
the Company to Employee in the event of a change-in-control involving the
Company and supercedes all prior agreements and understandings, written or
oral, between Employee and Company regarding such compensation including the
Management Agreement between Employee and Company dated as of January 25, 1993.
No provision hereof may be altered, amended, modified or waived in any way
whatsoever, except by written agreement executed by both the Company and
Employee.
-12-
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
FSI International, Inc.
By: /s/ Timothy D. Krieg
--------------------------------
/s/ Charles Wofford Its: Executive Vice President Quality
------------------------------ --------------------------------
Charles Wofford and Human Resources
-13-
<PAGE> 1
EXHIBIT 11.1
FSI INTERNATIONAL, INC.
COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
FISCAL YEAR ENDED:
------------------------------------------------------
AUGUST 27, 1994 AUGUST 26, 1995 AUGUST 31, 1996
------------------------------------------------------
<S> <C> <C> <C>
PRIMARY:
AVERAGES SHARES OUTSTANDING 14,034,444 17,437,865 22,176,642
NET EFFECT OF DILUTIVE STOCK OPTIONS AND
WARRANTS--BASED ON THE TREASURY STOCK METHOD 938,224 1,288,266 962,332
----------- ----------- -----------
TOTAL 14,972,668 18,726,131 23,138,974
=========== =========== ===========
NET INCOME $9,767,134 $21,357,686 $28,548,406
========== =========== ===========
PRIMARY PER SHARE AMOUNTS $ 0.65 $ 1.14 $ 1.23
========== =========== ===========
FULLY DILUTED:
AVERAGE SHARES OUTSTANDING 14,042,032 17,437,866 22,176,641
NET EFFECT OF DILUTIVE STOCK OPTIONS AND 1,001,106 1,387,614 882,839
WARRANTS-BASED ON THE TREASURY STOCK METHOD ---------- ----------- -----------
TOTAL 15,043,138 18,825,480 23,059,480
========== =========== ===========
NET INCOME $9,767,134 $21,357,686 $28,548,406
========== =========== ===========
FULLY DILUTED PER SHARE AMOUNTS $ 0.65 $ 1.13 $ 1.24
========== =========== ===========
</TABLE>
<PAGE> 1
1996 ANNUAL REPORT
[PHOTO MONTAGE]
FSI INTERNATIONAL INVESTING IN THE FUTURE
<PAGE> 2
HIGHLIGHTS
- -- Sales for fiscal 1996 increased 39 percent to $304.0 million and net
income rose 34 percent to $28.5 million as compared to fiscal 1995.
- -- FSI acquired Semiconductor Systems, Inc. (SSI), gaining entry into the
flat panel display market and expanding its presence in the thin film head
microlithography market.
- -- FSI announced plans to build an engineering, manufacturing and laboratory
facility in Allen, Texas, for its Microlithography Division.
- -- The Company opened a new 100,000-square-foot manufacturing facility in
Chaska, Minn., in November 1995. Four months later, the company announced plans
to add an 88,000-square-foot engineering and laboratory facility on this site,
allowing FSI to consolidate the Surface Conditioning Division's operations
into one facility.
- -- The Company won quality recognition awards from Texas Instruments and
Lucent Technologies.
- -- The Company announced several new products, including the POLARIS(R) 2100
and 2200 Clusters, the MERCURY(R) Material Handling System (MHS), the ARIES(TM)
CryoKinetic(TM) Aerosol Cleaning System and the ChemFill(R) 1500 Series of
Chemical Delivery Modules.
COMPANY DESCRIPTION
FSI International, Inc. (Nasdaq: FSII) is a leading global supplier of
automated processing equipment used to manufacture microelectronics, including
semiconductor devices, thin film heads, flat panel displays and multi-chip
modules. The Company develops, manufactures and markets products which are used
in the technology areas of microlithography, chemical management and surface
conditioning. The Company's products provide broad customer solutions at the
key process steps for micorelectronics manufacturing. In addition to its
engineering, laboratory and manufacturing facilities at its corporate
headquarters in Chaska, Minn., FSI maintains primary facilities in Dallas,
Texas, Fremont and Hollister, Calif. and New Haven, England. The Company
supports its expanding customer base by maintaining sales, service and support
centers through-out North America, and through its affiliates in Europe, Japan
and the Asia-Pacific region.
The information in this annual report contains forward looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and is subject to the Safe Harbor provisions created by that statute.
Such statements are subject to certain risks and uncertainties, including those
discussed on pages 17 and 18 of this annual report that could cause actual
results to differ materially from those projected, particularly those sections
entitled "Current Slowdown and Volatility in the Semiconductor Industry,"
"Risks of Delays in Introducing New Products and the Market's Acceptance of
such Products" and "Highly Competitive Industry." Readers are cautioned not to
place undue reliance on these forward-looking statements, as actual results
could differ. Forward-looking statements are indicated by an asterisk (*).
<PAGE> 3
INTEGRATED CIRCUIT MANUFACTURING PROCESS
FSI's products are used for various process steps in the manufacturing of
semiconductor devices (chips). A silicon wafer can go through these steps
anywhere between 15 to 30 times depending on the number of layers and
complexity of the integrated circuits.
Chemical Management
Silicon Wafers
Cleaning
Layering or Deposition
Oxidation
CVD
Microlithography
Etching
Cleaning
Doping
Implant
Diffusion
Photoresist
Stripping
Testing Assembly
[DIAGRAM]
<TABLE>
<CAPTION>
DESCRIPTION MAJOR PRODUCTS PERCENTAGE OF SALES*
<S> <C> <C> <C>
FSI Surface Conditioning products use - MERCURY MP Surface 22%
wet, vapor and cryogenic techniques to Conditioning System
prepare the surfaces of silicon wafers - MERCURY Material [PIE CHART]
for subsequent processing. The Handling System
Division's MERCURY(R) system uses a - EXCALIBUR ISR Vapor
controlled chemical spray to perform Phase Processor
[GRAPHIC] submicron cleaning, etching and - EXCALIBUR MVP Vapor
Surface Conditioning photoresist stripping applications. Its Phase Processor
EXCALIBUR(R) processors use chemical - ARIES CryoKinetic(TM) Cleaning Systems
vapors to perform critical cleaning and
specialty etching applications. The new
ARIES(TM) system uses frozen
argon/nitrogen crystals to remove
particulates and etch residue
contamination from silicon wafers. The
Division has design and manufacturing
facilities in Chaska, Minn.
The FSI Microlithography Division - POLARIS(R) 45%
supplies photoresist processing Microlithography Cluster
equipment and services that meet the - OrbiTrak(R) [PIE CHART]
needs of the semiconductor, flat panel Microlithography Cluster
display, thin film head and multi-chip - SCORPIO(TM)
module markets. FSI's tools apply and Microlithography Cluster
develop photosensitive materials used - APEX(TM) FPD
[GRAPHIC] in the definition of submicron patterns Microlithography Cluster
Microlithography required in these markets. In April
1996, FSI acquired Semiconductor
Systems, Inc. (SSI) which expanded the
divisions microlithography solutions to
address the needs beyond the
semiconductor market. The Division has
design and manufacturing facilities in
Dallas, Texas, Chaska, Minn. and
Fremont, Calif.
The Chemical Management Division - ChemFill(R) Chemical 22%
provides a wide range of chemical Delivery Modules
management systems to the IC and - Model 100 Chemical [PIE CHART]
related markets. These systems Blending System
generate, blend and dispense - ChemLitho(TM) Developer
chemicals to all points of use in a Blending Systems
manufacturing facility and include - Slurry Dilution and
[GRAPHIC] controls and support products to Distribution Systems
Chemical Management provide total chemical management. The
Division's subsidiary, Applied Chemical
Solutions (ACS), maintains a leadership
role in the development of slurry
blending and delivery technology for
the chemical mechanical planarization
process (CMP). The Division has design
and manufacturing facilities in Chaska,
Minn., Hollister, Calif. and New Haven,
England.
</TABLE>
* Approximately 11 percent of sales consist of parts and services
INDUSTRY TERMS
CLASS 1: A classification for a super-clean environment of a manufacturing
facility or laboratory, designatingthe number and size of particles per cubic
foot of air. The lower the rating, the cleaner is the facility.
CLUSTER: A modular cluster of process equipment stations within a manufacturing
facility that form an enclosed work cell. The FSI International POLARIS(R)
Cluster consists of independent modules or building blocks that can be
configured in many combinations.
CMP (CHEMICAL MECHANICAL PLANARIZATION): A process that removes unwanted
material from the wafer surface by using a chemical "slurry" containing
abrasives along with mechanical equipment that applies pressure on a rotating
platen to polish the surface.
CONTAMINANTS: Unwanted material that adversely affects the physical or
electrical characteristics of a semiconductor wafer, resulting in product or
process failure.
ETCHING: The process of removing material from a silicon surface to form the
microscopic "valleys" and "ridges" that make up a circuit.
FLAT PANEL DISPLAYS: Computer or electronic display screens that are very thin
and therefore require less space, such as those used in laptop computers.
INTEGRATED CIRCUIT (IC): A tiny complex of electronic components and their
connections produced on a slice of material, such as silicon--commonly referred
to as a chip.
SEMICONDUCTOR: A material, such as silicon (symbol: Si), used in manufacturing
integrated circuits (IC) which has properties of both an insulator and a
conductor.
SLURRY: The chemical mixture used in the chemical mechanical planarization
(CMP) PROCESS: The chemical contains minute particles, often silicon or
alumina, that aid in polishing.
THIN FILM HEAD: The device that reads to and writes information from a hard
disk of a computer.
WAFER: A thin, round slice of semiconductor material, such as silicon, on which
integrated circuits are manufactured and then cut into chips.
<PAGE> 4
FINANCIAL HIGHLIGHTS(1)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Fiscal Years Ended August 1996 1995 1994
- ---------------------------------------------------------------------------------------
(In thousands except per share Data)
<S> <C> <C> <C>
Sales $304,041 $218,460 $124,667
Research and development expenses 40,998 28,037 18,756
Net income 28,548 21,358 9,767
Net income per common share $ 1.23 $ 1.13 $ 0.65
- ---------------------------------------------------------------------------------------
Pro forma data (2)
Net income $ 28,242 $ 20,533 $ 8,295
Net income per common share $ 1.22 $ 1.09 $ 0.55
- ---------------------------------------------------------------------------------------
Cash, cash equivalents and marketable securities 71,921 112,833 13,558
Working capital 156,348 153,263 34,928
Total assets 293,283 251,567 84,252
Stockholders' equity 218,127 186,667 51,115
Book value per share $ 9.75 $ 8.48 $ 3.43
Number of shares outstanding 22,362 22,000 14,905
</TABLE>
(1) All amounts have been adjusted to reflect the acquisition, effective April
4, 1996 of Semiconductor Systems, Inc. The acquisition was accounted for using
the pooling-of-interests method of accounting. See Note 3 of Notes to
Consolidated Financial Statements.
(2) Pro forma information reflects adjustments made to net income, to record
additional tax expense for Semiconductor Systems, Inc. as if it would have been
a C Corporation versus an S Corporation prior to the merger.
SALES (in millions) NET INCOME (in millions)
[BAR CHARTS]
$71 $104 $125 $218 $304 $4.3 $9.4 $9.8 $21.4 $28.5
1992 1993 1994 1995 1996 1992 1993 1994 1995 1996
WORKING CAPITAL (in millions) BOOK VALUE PER SHARE
[BAR CHARTS]
$17 $19 $35 $153 $156 $2.26 $2.47 $3.43 $8.48 $9.75
1992 1993 1994 1995 1996 1992 1993 1994 1995 1996
1 FSI International
<PAGE> 5
JOEL A. ELFTMANN
(new cleanroom manufacturing
facility in Chaska, Minn.)
TO OUR SHAREHOLDERS AND EMPLOYEES
Fiscal 1996 was another year of very good growth for FSI. We took advantage of
favorable industry conditions by making gains in existing markets, entering new
markets and translating these successes into solid financial performance. With
our sights set on the long-term prospects of the industry, we also made sound
investments for our continued growth and, as a result, are well positioned for
a challenging fiscal 1997.*
During fiscal 1996, sales grew 39 percent to $304.0 million from $218.5 million
in fiscal 1995. Net income was $28.5 million, or $1.23 per share, up 34 percent
over $21.4 million, or $1.13 per share, in 1995. For the year, equity in
earnings from our affiliates increased 43 percent to $5.1 million, versus $3.6
million a year ago. We ended the year with a backlog of $113 million.
Our industry is currently experiencing a slowdown, which we expect to
last at least through the middle of calendar 1997.* Some customers are more
cautious, and we have seen softening in our order rates and delays or
cancellations of some orders.
In response, like other semiconductor equipment companies, we have made
tough adjustments. We announced certain cost control measures in September
1996, including furlough days, lower executive compensation and a reduction in
our work force. We will also delay moving into our new 88,000-square-foot
laboratory and engineering facility in Chaska, Minn., until mid-1997. Letting
employees and contractors go was painful, but necessary, since employment
levels had to be adjusted to better align costs with expected sales.
FOCUS ON LONG-TERM GROWTH
Despite the near-term outlook, longer-term forecasts for the industry remain
very positive. Industry analysts continue to estimate that semiconductor
revenue will grow to nearly $300 billion by the year 2000.* Analysts also
predict that
WORLDWIDE SEMICONDUCTOR REVENUE (in billions)
BAR CHART
$65.2 $85.5 $110.6 $151.3 $137.0 $154.6 $188.9 $234.9 $290.2
1992A 1993A 1994A 1995A 1996E 1997E 1998E 1999E 2000E
Dataquest October 1996 Forecast
2 FSI International
<PAGE> 6
[PHOTO-MAN FROM WAIST UP]
the market in which we compete, the semiconductor fabrication equipment
industry, will grow to over $36 billion by the year 2000, from $19 billion in
calendar 1995.*
These growth estimates reflect how semiconductors are a pervasive part
of modern life. Demand continues to grow as thousands of engineers design
integrated circuits into more and more mechanical or electrical devices. There
is also tremendous untapped market potential in certain geographical regions as
more countries adopt these new technologies.*
We see the short-term slowdown of the industry as an opportunity to
prepare our company for the next expansion period. We intend to manage
operations conservatively in the near term with a goal to maintain
profitability in fiscal 1997, while investing aggressively for the long term.*
Our focus in fiscal 1997 will be to achieve high customer satisfaction,
continue new product and process development programs, expedite successful new
product introductions, strengthen our international presence, manage costs and
implement new business systems focused on operational efficiency and
productivity improvements.*
This annual report reflects on our recent successes and our legacy of
investment for long-term growth. Even in difficult times, we have invested in
our technology, our infrastructure and our global presence. With this strategy,
FSI has grown sales from $71 million in fiscal 1992 to $304 million in 1996.
In fiscal 1997, we will continue to build on the solid foundation we have
laid through ongoing investment in technology, infrastructure and customer
support.*
TECHNOLOGY
Technology leadership has always been a cornerstone of FSI's success. We
continue to improve our existing products and broaden their applications, while
developing new products and researching promising technologies.
During the past few years, FSI made strategic investments in technology
through acquisitions, licensing and internal product development. These efforts
have opened new opportunities within our primary markets as well as within new
markets, and provide us with the opportunity to exceed the industry growth rate
for semiconductor fabrication equipment.*
With the acquisition of Semiconductor Systems, Inc. (SSI), our
Microlithography Division is better equipped to address the needs of
manufacturers in the disk drive and flat panel display markets. Our new
ARIES(TM) system takes FSI's Surface Conditioning Division into new process
applications, helping our customers solve difficult processing challenges.
INFRASTRUCTURE
We learned during the growth of the past few years that we also need the
capacity to develop and deliver products quickly in response to customer
demand. As a result, fiscal 1996 was a key year for investing in our
infrastructure, as fiscal 1997 will be. We define infrastructure as the people,
tools and facilities for developing, testing, producing and supporting our
products and customers.
To keep us on the leading edge, we invest heavily in employee training
and advanced hardware and software tools, including systems for product design,
development and testing.
During fiscal 1996, we also made significant investments in new
facilities. In November 1995, we opened our new manufacturing facility in
Chaska, Minn. and, during the year, began construction of additional facilities
in Minnesota and Texas.
<PAGE> 7
CUSTOMER SUPPORT
FSI's focus is always on improving customer satisfaction.
In addition to continually improving our processes, we strive to be more
responsive to our customers. One way we're accomplishing this is through
dedicated service and support organizations for our three core businesses.
Another way is by helping our suppliers to understand our customer. FSI's
Annual Supplier Day is structured to allow our suppliers to get to know our
customers and their needs.
We are progressing on our journey to give our core businesses the
autonomy and accountability they need to grow their division and satisfy their
customer needs. That includes physically consolidating the people and resources
of each core business to further improve customer service and support, reduce
product development cycle time and achieve productivity gains.
GLOBALIZATION
Our continued success and future growth will depend on our ability to support
our customers worldwide.* In fiscal 1996, international sales grew 51 percent
and represented 35 percent of FSI's business. Our goal of having a worldwide
presence with local service and support was enhanced significantly when we,
along with our affiliate Metron Technology B.V. (Metron) acquired FSI Metron
Europe, Limited (FME). FME's strong position in Europe gave us immediate
manufacturing, installation, service and support capabilities which resulted in
FSI's Chemical Management Division gaining share in this important market.
We are continually building FSI's global presence through our
international partners, Metron and m-FSI, Ltd. (m-FSI). These affiliate
organizations distribute, service and support FSI's products in Europe and
Asia. Working with partners like Metron and m-FSI provides our three divisions
with the worldwide infrastructure to meet ever-changing demands.
LOOKING AHEAD
In summary, fiscal 1996 was a sound growth year that put us in a strong
position to manage through the current industry slowdown.* FSI has never been
in a better financial position to participate fully in the future growth of the
semiconductor equipment industry and to gain market share.* FSI's long-term
outlook is very promising and we have a track record for wisely managing our
business.*
During fiscal 1997, we intend to:
- -- Keep customer satisfaction as paramount;
- -- Enhance and broaden our product offerings using a three-prong strategy of
developing new products and applications, and acquiring or licensing
strategic technologies;
- -- Successfully market the new products we introduced in fiscal 1996 and the
new products scheduled for release in fiscal 1997;
- -- Strengthen our worldwide presence, especially in Asia;
- -- Efficiently transition into our new facilities;
- -- Implement new business systems focused on operational efficiency and
productivity improvements; and
- -- Manage our costs.*
Thanks to the investments we've made, we have the employees, the
products, the distribution channel and the loyal customer base we need to
succeed over the long term.* We believe the industry's future prospects support
our growth goals to more than double sales of fiscal 1996 by the year 2000 and
provide a good return to our shareholders.*
Sincerely,
/s/Joel A. Elftmann
Joel A. Elftmann
Chairman, President and Chief Executive Officer
November 15, 1996
4 FSI International
<PAGE> 8
PERFORMANCE REVIEW
Investing for Future Growth
FSI has a long, proven track record of investing in the future. Just
as in the early 1990s, the last cycle of semiconductor fabrication equipment
slowdown, our approach is to carefully invest with a vision of the long-term
prospects for the industry. We continue to hire top technical talent, invest in
research and development, improve the quality and performance of our products
and concentrate on three technology areas. With that same vision, FSI has
become one of the leading manufacturers of equipment for the semiconductor
industry. For example, in 1991 we licensed the POLARIS Cluster technology that
launched FSI into the microlithography arena. In fiscal 1996, our
Microlithography Division contributed 45 percent of sales. Investments in our
other technology areas have also yielded leadership positions. Our Chemical
Management Division is the largest supplier in its market. And the Surface
Conditioning Division is the leading producer of wafer cleaning equipment using
spray processing technology. This annual report looks at FSI from an
historical perspective, highlighting investments that made the company what it
is today and current investments that are creating the FSI for tomorrow.
<PAGE> 9
INVESTING IN TECHNOLOGY
The POLARIS(R) Cluster technology is just one example of FSI investing in its
future.
To continue gaining market share, we must broaden our product offerings
and bring new process application solutions to our customers.* We do this
through internal product and process development, and licensing or acquiring
strategic technology.
<TABLE>
<CAPTION>
- -----------------------------------------------
RESEARCH AND DEVELOPMENT EXPENSES (in millions)
- -----------------------------------------------
<S> <C>
1992 $ 11.7
1993 $ 14.4
1994 $ 18.8
1995 $ 28.0
1996 $ 41.0
- -----------------------------------------------
</TABLE>
INTERNAL DEVELOPMENT Our highly trained employees continually look for new
applications and improvements of our current technologies.
Our customers provide key feedback and suggestions in this process.
Our new MERCURY(R) Material Handling System (MHS) is an example of a
product designed to meet customer specifications. The MHS module, introduced in
July 1996, automates handling of silicon wafers during the cleaning process to
increase productivity, all within a Class 1 cleanroom environment.
LICENSING NEW TECHNOLOGY The POLARIS Cluster technology was licensed from Texas
Instruments in 1991. Similarly, in 1996 FSI licensed a promising new technology
from another leading customer--IBM. The cryogenic aerosol cleaning technology is
the genesis of our new ARIES(TM) CryoKinetic(TM) cleaning product line. The
ARIES system uses frozen argon/nitrogen particles to remove contaminants and
residue from the surface of a silicon wafer. This new technology is promising
for two key reasons.*
[PHOTO]
A HISTORY OF INVESTING IN THE FUTURE
LICENSING TECHNOLOGY
FSI licensed ARIES cryogenic aerosol cleaning technology from IBM in
August 1995. This technology gives FSI a leading-edge, environmentally friendly
solution for particle and residue removal from silicon wafers. Licensing
technologies gives FSI a quick start in new markets. In 1991, FSI started what
is now its largest division by licensing POLARIS microlithography cluster
technology from Texas Instruments.
DEVELOPING TECHNOLOGY
FSI invests heavily in developing next-generation technologies and
takes an active leadership role in the semiconductor equipment industry. For
example, in 1992, FSI was awarded a $2 million NIST grant for the development
of dry gas-phase cleaning technology.
6
<PAGE> 10
First, it reduces the need for water and certain solvents used in some
processes. It also reduces the need for chemical disposal, which is often more
costly than the chemical itself. The ARIES system is an economical solution
that is safer for our customers and the environment.
Second, it opens new market opportunities for FSI. Cryogenic cleaning
technology has been proven to reduce wafer defects. Moreover, this technology
allows the ARIES system to clean integrated circuits with smaller features,
making it an attractive solution for new applications.
ACQUIRING TECHNOLOGY Acquisitions present another method of broadening
our product offerings. We saw such an opportunity in 1994, when FSI began
looking for ways to accelerate the growth of the Chemical Management Division.
In fiscal 1995, we acquired Applied Chemical Solutions (ACS), a move that
significantly expanded our solution set by adding chemical generation and
proprietary vacuum pressure dispense technology. It also expanded FSI's
participation in the chemical mechanical planarization (CMP) market through
its slurry blending and delivery products. CMP is a fast-growing segment in the
semiconductor fabrication equipment industry.
In fiscal 1996, we took a similar step for the Microlithography
Division when FSI acquired Semiconductor Systems, Inc. (SSI). This gave us
immediate entry into new microlithography markets--flat panel display and
multi-chip modules.
The flat panel display market is expected to continue to grow as the
technology expands beyond laptop computers and becomes standard for desktop
computers and televisions.* SSI's APEX(TM) system is used by companies
participating in the emerging U.S. flat panel display industry. Our thin film
head products are used by manufacturers of magnetic heads for high-performance
computer disk drives, as well as companies making sensors
[PHOTO]
In addition to developing next generation products, FSI continually
enhances existing products. Automated features for the MERCURY surface
conditioning system, new blend and dispense technologies for the ChemFill
product line and higher process throughput in the POLARIS 2100 and 2200
clusters are just a few examples of FSI listening and responding to customer
needs.
ACQUIRING TECHNOLOGY
Through acquisitions, FSI has added depth to its product offerings and
branched into new markets. In March 1995, FSI acquired Applied Chemical
Solutions, positioning the company to participate in the fast-growing chemical
mechanical planarization (CMP) market.
In April 1996, the acquisition of Semiconductor Systems, Inc. gave FSI
a more complete offering for multi-chip module, thin film head and flat panel
display markets.
7 FSI INTERNATIONAL
<PAGE> 11
such as those used in pressure measurement and automobile airbag
activation systems. We are well positioned with thin film head manufacturers in
the United States. The SSI OrbiTrak(R) and SCORPIO(TM) products also enhance
our semiconductor fabrication equipment market position by expanding our
microlithography cluster offerings.
INVESTING IN INFRASTRUCTURE
To meet current customer demand and prepare for the future, FSI strengthened
its infrastructure--our employee and operations resources, to develop and
deliver product.
PEOPLE The cornerstone of our infrastructure is people. FSI has always
invested in its people, in terms of training and providing employees with the
tools necessary to compete in today's marketplace.
The semiconductor equipment industry requires highly trained
specialists. Because of the knowledge-based nature of this industry, we view
our employees as FSI's most important asset. We have created a culture in which
employees are encouraged to make suggestions and provide feedback. To measure
employee satisfaction, we conduct an annual survey, which provides quantitative
benchmarks for continuous improvement.
SYSTEMS We are also investing heavily in systems--design workstations,
computers, networks and other automation tools that will make us more
productive--as part of our Project Enterprise initiative.* The scope of Project
Enterprise is very broad and includes reporting systems that help us carefully
manage programs and expenses across the organization. It also includes advanced
computer-aided design, telecommunications and other tools to improve
communication and reduce our product development cycle.
[PHOTO]
INFRASTRUCTURE
FSI has structured its organization and continuously develops the
infrastructure to stay customer-focused and to have the capacity to grow.
The opening of the Microlithography Division's applications lab in Dallas in
1992 and the investment in new engineering design tools in 1993 proved vital to
FSI's success.
The division has outgrown its current facility and we are building an
engineering, manufacturing and laboratory facility in Allen, Texas to expand
our current capabilities.
In 1993, we initiated Project Enterprise, our strategic effort to
develop integrated, company-wide systems to increase productivity and give FSI
a competitive advantage.
8 FSI INTERNATIONAL
<PAGE> 12
FACILITIES Fundamental to FSI's infrastructure are our laboratory and
manufacturing facilities. The microlithography laboratory in Dallas, which
opened in 1993, was critical to the acceptance of the POLARIS cluster
technology. The laboratory allowed customers to test system capabilities for
their specific applications.It is essential that these laboratories remain on
the leading edge. They are used by FSI's engineers to improve existing process
applications and develop new ones. Our customers also use these laboratories to
evaluate applications for FSI products in a controlled environment. We have
outgrown the laboratory in Dallas and are including a Class 1 laboratory
cleanroom within the new engineering and manufacturing facility in Allen,
Texas. This will allow the Microlithography Division to demonstrate the
productivity improvement and process capabilities of existing products and
those under development. Our goal is to assemble the majority of the
microlithography products at the same site where they are developed.
In 1995, FSI opened a new manufacturing facility in Chaska, Minn.
Currently, we are expanding this facility. The addition will include an 8,000
sq. ft. Class 1 process development, and demonstration laboratory and
engineering and subsystem test facilities. Our goal is to consolidate all
Surface Conditioning operations into the expanded Chaska facility by mid-1997.
It is critical for us to increase our manufacturing capabilities now in light
of our growth goals.*
INVESTING IN CUSTOMER SUPPORT
Customer support is a partnership between FSI, our customers and our affiliates
in the international markets. Our goal is to be intimately involved with each
customer in helping them improve their manufacturing processes. This is
reflected in our approach to working with our own suppliers, whom we invite to
participate in FSI quality
[Photo]
We opened a 100,000-square-foot manufacturing facility for surface conditioning
and microlithography products in Minnesota in 1995. This facility is being
expanded to allow all Surface Conditioning operations to be located at one site
by mid-1997.
CUSTOMER SUPPORT
FSI works closely with our customers to ensure their satisfaction. We regularly
receive the recognition of our customers and the industry for product and
support excellence. Since 1991, we have received many awards, including awards
from Motorola, IBM, Texas Instruments, Lucent Technologies, SGS Thomson,
SEMATECH, VLSI Research, Semiconductor International and Solid State Technology
magazines.
9 FSI INTERNATIONAL
<PAGE> 13
training. Extending this training to our key suppliers gives them added insight
to our industry, our products and services, and our approach to doing business.
By working closer with our suppliers, we can be a better supplier.
Because customer satisfaction is a moving target, FSI continually
monitors it. We use a post-installation and customer satisfaction surveys to
measure our performance.
Another indicator of our customer satisfaction is the industry and
customer recognition we've earned over the years. FSI has won awards from VLSI
Research given to the top-ranked equipment suppliers based on customer
rankings.
We also received direct recognition from customers in 1996. For the
sixth time, Texas Instruments honored FSI with its Supplier Excellence Award,
which is presented "to an elite group of suppliers representing less than one
half of one percent of TI suppliers."
During the year, FSI also received a Supplier Excellence Award for its
performance in 1995 from the Microelectronics Group of Lucent Technologies
(formerly part of AT&T).
INVESTING IN GLOBAL EXPANSION
Our customers have worldwide operations. This requires FSI to have a
global presence with local service and support.
We made a significant commitment to becoming a global company in 1991
when FSI announced a joint venture with Mitsui, Ltd. and its wholly owned
subsidiary, Chlorine Engineers Corp., Ltd. in Japan--named m.FSI. FSI has
steadily increased its international presence through its affiliations with
m.FSI in Japan and Metron in Europe and Asia/Pacific.
Events like last year's European MERCURY Spray Processor Application
Technology Forum conducted by the Surface Conditioning Division have helped
connect
[PHOTO]
As another measure of our dedication to being a quality supplier, FSI
received ISO 9001 registration in 1994. We continually strive to improve our
quality processes to meet the ever-changing needs of our customers around the
globe.
Global Expansion
FSI had its origin nearly 25 years ago. Since then we have grown to be
a global supplier, largely through the development of strong international
distribution partnerships.
In 1991, FSI announced a joint venture with Mitsui, Ltd, in Japan-named
m-FSI.
Since then, FSI has dramatically expanded its international presence
through our affiliations with m-FSI and Metron Technology, B.V.
10 FSI INTERNATIONAL
<PAGE> 14
<TABLE>
<CAPTION>
- -------------------------------------------
INTERNATIONAL SALES (in millions)
- -------------------------------------------
<S> <C>
1992 $ 18
1993 $ 33
1994 $ 33
1995 $ 72
1996 $108
- -------------------------------------------
</TABLE>
FSI technologists with users across Europe. Our European sales growth of 83
percent in fiscal 1996 testifies to our success in this market.
FSI continually works toward strengthening our international marketing,
sales, service and support channels. In fiscal 1997, we will focus on expanding
our presence in Asia. We will build on the success we had with surface
conditioning products, particularly in Japan. In fiscal 1996, the Chemical
Management Division had some early successes with its first sale in Japan. In
fiscal 1997 the division intends to establish a joint venture in Korea focused
on supporting the needs of this fast-growing market.
FOCUSED ON THE FUTURE
While our past successes have taught us valuable lessons, we look to the
future. FSI is a much different company than just five years ago, or even one
year ago. Today we have a much broader product offering, a competitive
operations infrastructure to help us bring current products to market and
develop new ones, and the global reach we need to compete on a worldwide scale.
Given the current industry conditions, fiscal 1997 will be a challenging year.*
However, our focus is on implementing our long-term strategies so that FSI can
achieve our growth goals.*
<TABLE>
<CAPTION>
- -------------------------------------------
SEMICONDUCTOR FABRICATION EQUIPMENT SALES
(in billions)
- -------------------------------------------
<S> <C>
1992A $ 5.1
1993A $ 6.9
1994A $10.8
1995A $19.1
1996E $22.3
1997E $18.8
1998E $19.9
1999E $25.4
2000E $36.2
- -------------------------------------------
</TABLE>
Dataquest July 1996 Forecast
[PHOTO]
The merger of Metron SemiConductors Europa B.V. and Transpacific technology
Corp. (n/k/a Metron Technology) in mid-1995, created the world's largest
semiconductor equipment distributor outside Japan. Today, International sales
represent more than one third of FSI's revenues.
Financial Strength
FSI is a technology company that prides itself on being a well-capitalized,
fiscally conservative company. A series of stock offerings over the years have
raised capital position, FSI is well situated for challenging market
conditions in 1997.*
11 FSI INTERNATIONAL
<PAGE> 15
A HISTORY OF INVESTING IN THE FUTURE
LICENSING TECHNOLOGY
FSI licensed ARIES cryogenic aerosol cleaning technology from IBM in
August 1995. This technology gives FSI a leading-edge, environmentally friendly
solution for particle and residue removal from silicon wafers. Licensing
technologies gives FSI a quick start in new markets. In 1991, FSI started what
is now its largest division by licensing POLARIS microlithography cluster
technology from Texas Instruments.
DEVELOPING TECHNOLOGY
FSI invests heavily in developing next-generation technologies and
takes an active leadership role in the semiconductor equipment industry. For
example, in 1992, FSI was awarded a $2 million NIST grant for the development
of dry gas-phase cleaning technology.In addition to developing next generation
products, FSI continually enhances existing products. Automated features for
the MERCURY surface conditioning system, new blend and dispense technologies
for the ChemFill product line and higher process throughput in the POLARIS
2100 and 2200 clusters are just a few examples of FSI listening and responding
to customer needs.
ACQUIRING TECHNOLOGY
Through acquisitions, FSI has added depth to its product offerings and
branched into new markets. In March 1995, FSI acquired Applied Chemical
Solutions, positioning the company to participate in the fast-growing chemical
mechanical planarization (CMP) market.
In April 1996, the acquisition of Semiconductor Systems, Inc. gave FSI
a more complete offering for multi-chip module, thin film head and flat panel
display markets.
INFRASTRUCTURE
FSI has structured its organization and continuously develops the
infrastructure to stay customer-focused and to have the capacity to grow.
The opening of the Microlithography Division's applications lab in Dallas in
1992 and the investment in new engineering design tools in 1993 proved vital to
FSI's success.
The division has outgrown its current facility and we are building an
engineering, manufacturing and laboratory facility in Allen, Texas to expand
our current capabilities.
In 1993, we initiated Project Enterprise, our strategic effort to
develop integrated, company-wide systems to increase productivity and give FSI
a competitive advantage.We opened a 100,000-square-foot manufacturing facility
for surface conditioning and microlithography products in Minnesota in 1995.
This facility is being expanded to allow all Surface Conditioning operations to
be located at one site by mid-1997.
CUSTOMER SUPPORT
FSI works closely with our customers to ensure their satisfaction. We regularly
receive the recognition of our customers and the industry for product and
support excellence. Since 1991, we have received many awards, including awards
from Motorola, IBM, Texas Instruments, Lucent Technologies, SGS Thomson,
SEMATECH, VLSI Research, Semiconductor International and Solid State Technology
magazines.
As another measure of our dedication to being a quality supplier, FSI
received ISO 9001 registration in 1994. We continually strive to improve our
quality processes to meet the ever-changing needs of our customers around the
globe.
<PAGE> 16
FIVE-YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal years ended August 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
(In thousands except per share data)
Operations(1)
Sales $304,041 $218,460 $124,667 $104,105 $70,892
Gross profit 129,802 89,807 52,755 41,976 31,718
Selling, general and administrative expenses 58,742 39,999 24,515 18,328 14,380
Research and development expenses 40,998 28,037 18,756 14,392 11,748
Operating income 30,062 21,771 9,484 9,256 5,590
Net income 28,548 21,358 9,767 9,448 4,315
Net income per common share 1.23 1.13 0.65 0.77 0.40
Weighted average common shares
and common share equivalents 23,139 18,825 14,973 12,324 10,888
Pro forma data(2)
Net income $ 28,242 $ 20,533 $ 8,295 $ 7,098 $ 1,592
Net income per common share 1.22 1.09 0.55 0.58 0.15
Balance Sheet(1)
Cash and cash equivalents, and marketable securities $ 71,921 $112,833 $ 13,558 4,552 $ 4,076
Working capital 156,348 153,263 34,928 18,823 17,426
Total assets 293,283 251,567 84,252 52,729 47,485
Total debt 498 4,892 1,541 3,596 5,965
Stockholders' equity 218,127 186,667 51,115 28,173 25,538
</TABLE>
(1) All amounts have been adjusted to reflect the acquisition, effective April
4, 1996, of Semiconductor Systems, Inc. The acquisition was accounted
for using the pooling-of-interests method of accounting. See Note 3 of Notes to
Consolidated Financial Statements.
(2) Pro forma information reflects adjustments made to net income to record
additional tax expense for Semiconductor Systems, Inc. as if it would have been
a C Corporation versus an S Corporation prior to the merger.
<TABLE>
<CAPTION>
- --------------------------------
SALES (in millions)
- --------------------------------
<S> <C> <C> <C> <C>
$71 $104 $125 $218 $304
1992 1993 1994 1995 1996
- --------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------
OPERATING INCOME (percent of sales)
- ------------------------------------
<S> <C> <C> <C> <C>
7.9% 8.9% 7.6% 10.0% 9.9%
1992 1993 1994 1995 1996
- ------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------
EQUITY IN EARNINGS (LOSS) OF AFFILIATES
(in millions)
- ---------------------------------------
<S> <C> <C> <C> <C>
$(0.4) $1.3 $1.8 $3.6 $5.1
1992 1993 1994 1995 1996
- ---------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------
NET INCOME (in millions)
- ---------------------------------------
<S> <C> <C> <C> <C>
$4.3 $9.4 $9.8 $21.4 $28.5
1992 1993 1994 1995 1996
- ---------------------------------------
</TABLE>
12 FSI INTERNATIONAL
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
& RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The information in this discussion, except for the historical information
contained herein, contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and is subject
to the safe harbor created by that statute. Such statements are subject to
risks and uncertainties, several of which are discussed below. Readers are
cautioned not to place undue reliance on these forward-looking statements as
actual results could differ materially. The Company assumes no obligation to
publicly release the results of any revision or updates to these
forward-looking statements to reflect future events or unanticipated
occurrences. Such statements are marked with an asterik (*).
In the first half of fiscal 1996, the semiconductor industry began a
slowdown in growth. As a result, certain of the Company's customers have
delayed orders and/or cancelled expansion plans. Due to difficult industry
conditions, which are expected to last at least until the second half of
calendar 1997, the Company adopted certain cost control measures in an attempt
to align spending with expected sales decreases. Fiscal 1996 results include
approximately $1.5 million of pre-tax charges in the fourth quarter associated
with eliminating or reducing the scope of certain programs as part of the
Company's cost control measures. Additional cost control measures, including
mandatory furlough days, a reduction in executive compensation, and a 9%
reduction in the work force were implemented in September 1996. The Company
expects to take a pretax charge of approximately $300,000 in the first quarter
of fiscal 1997 relating to the reduction in force.*
The Company completed the acquisition of Semiconductor Systems, Inc.
(Semiconductor Systems) on April 4, 1996. The acquisition expanded the
Company's microlithography product line. The acquisition of Semiconductor
Systems was accounted for as a pooling of interests. Accordingly, all
historical financial information for FSI International, Inc. and subsidiaries
has been restated to include the operations of Semiconductor Systems as though
the two entities have always been combined.
The following table sets forth, for the fiscal years indicated, certain
income and expense items as a percent of total sales.
PERCENT OF SALES
<TABLE>
<CAPTION>
Fiscal Years Ended August 1996 1995 1994
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of goods sold 57.3 58.9 57.7
Gross profit 42.7 41.1 42.3
Selling, general and
administrative 19.3 18.3 19.7
Research and development 13.5 12.8 15.0
Operating income 9.9 10.0 7.6
Other income (expense), net 1.3 0.9 (0.2)
Income before income taxes 11.2 10.9 7.4
Income tax expense 3.4 2.7 1.0
Minority interest (0.1) - -
Equity in earnings of affiliates 1.7 1.6 1.4
Net income 9.4% 9.8% 7.8%
</TABLE>
SALES: Sales increased to $304.0 million for the fiscal year ended August 31,
1996 as compared to $218.5 million for the fiscal year ended August 26, 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 resulting from additional features added to standard
product configurations. The increase in unit sales is largely due to an
increased demand for equipment resulting from the construction of new and the
expansion of existing semiconductor manufacturing facilities by our customers.
Sales for fiscal 1995 of $218.5 million increased 75% from $124.7 million for
fiscal 1994. The increase in sales from fiscal 1994 to fiscal 1995 also
occurred in all product lines due to increased unit sales driven primarily by
the construction of new and the expansion of existing manufacturing facilities
by our semiconductor manufacturing customers, the acquisition of Applied
Chemical Solutions (ACS) in March 1995 and our investment in FSI Metron Europe
(FME) in January 1995.
International sales were $107.9 million, $71.6 million, and $32.9
million during fiscal 1996, 1995 and 1994, respectively, and represented
approximately 35%, 33% and 26% of sales during these periods. The majority of
the increase in international sales in 1996 related to expansions by our
customers in Europe and Asia. Sales of the Company's products in both Europe
and Asia also increased from 1994 to 1995.
13 FSI INTERNATIONAL
<PAGE> 18
The majority of the increase in international sales in fiscal 1995 related to a
significant increase in microlithography cluster sales in Asia. See Note 14 to
the Company's consolidated financial statements for additional information
regarding the Company's international sales.
- -----------------------------------------
INTERNATIONAL SALES (in millions)
- -----------------------------------------
1994 $ 33
1995 $ 72
1996 $108
- -----------------------------------------
In recent months, the semiconductor industry has been experiencing
volatility in product demand and pricing, which have caused semiconductor
manufacturers to exercise caution in making capital equipment purchasing
decisions. Certain semiconductor manufacturers have announced their intent to
delay expansion of current facilities and/or the construction, facilitization
or equipping of new manufacturing facilities. The Company has experienced some
cancellations and delays of orders and delays in shipping of orders. Based upon
current industry trends, the Company is expecting a sales decline of
approximately 8% to 12% in fiscal 1997 as compared to fiscal 1996.* Further
order cancellations or delays by customers are possible and could have a
further adverse effect on the Company's financial results for fiscal 1997.*
The Company ended the fiscal year with a backlog of $113 million as
compared to $127 million at the end of fiscal 1995. Orders for products of the
Company's Microlithography and Chemical Management core businesses represented
approximately 50% and 30%, respectively, of fiscal 1996 year-end backlog.
Backlog consists of orders with delivery dates within the next twelve months
for which a customer purchase order has been received or a customer purchase
order number has been communicated to the Company. Because of the timing and
relative size of orders and the possibility of cancellations or customer
delays, backlog is not necessarily indicative of sales for future periods.
GROSS PROFIT: Gross profit as a percentage of sales for fiscal 1996 was 42.7%
as compared to approximately 41.1% for fiscal 1995. The increase in gross
profit margin was generally due to product mix, along with improved margins in
the Chemical Management Division. Gross profit as a percentage of sales for
fiscal 1995 was 41.1% as compared to 42.3% for fiscal 1994. The decrease in
gross profit percentage was generally due to increased international sales
which generally carry lower gross profit margins. In addition, the decrease was
also related to an increase in the percentage of total sales of the Company's
lower margin products.
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. The Company made a final payment to
the licensor and now has a fully paid up, nonexclusive, worldwide license for
its Polaris(R) product. This should improve the Company's gross profit margin on
this product.* However, the Company expects overall gross margins to decrease
in fiscal 1997 due to the industry slow-down, expected lower sales levels,
start-up of the Company's new manufacturing facility in Allen, Texas, lower
margins on new product introductions (primarily due to the high original
equipment manufacturer content of such products), and increased pricing
pressure from competitors.*
- ---------------------------------------
GROSS PROFITS (in millions)
- ---------------------------------------
1994 $ 53
1995 $ 90
1996 $130
- ---------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses were $58.7 million, $40.0 million and $24.5 million or 19.3%, 18.3%
and 19.7% of sales during fiscal 1996, 1995 and 1994, respectively. The
increases in the amount of SG&A expenses in 1996 and 1995 were due primarily to
higher costs related to expanded customer support, increases in management
incentive bonuses,
14 FSI INTERNATIONAL
<PAGE> 19
employee profit sharing and higher commissions due to increased sales levels,
increased allowance for bad debts, and costs associated with the computer
systems upgrade. Increased marketing costs related to the introduction of new
products also contributed to the higher SG&A expenses in fiscal 1996. In
addition, the overall number of personnel in SG&A increased more than 60% from
the end of fiscal 1994 to the end of fiscal 1995. The Company expects that SG&A
expenses will increase as a percent of sales in fiscal 1997 due to continued
investments in customer service support, computer systems upgrade, and expanded
sales, marketing and support focus in Japan and Asia.*
<TABLE>
<CAPTION>
- -----------------------------------------
SG&A EXPENSE (percent of sales)
- -----------------------------------------
<S> <C>
1994 19.7
1995 18.3
1996 19.3
- -----------------------------------------
</TABLE>
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses for fiscal
1996 were $41.0 million, or 13.5% of sales, as compared to $28.0 million, or
12.8% of sales, for fiscal 1995 and $18.8 million, or 15.0% of sales, for fiscal
1994. The increases in the amount of R&D expenses resulted primarily from the
Company's continued development efforts on new and existing products, including
the ARIES(TM) CryoKinetic(TM) cleaning system, ZETA(TM) automated surface
conditioning system, the ORION(R) vacuum-based gas phase (dry) cleaning system,
new Polaris(R) 2100 and 2200 cluster models, the EXCALIBUR(R) MVP system,
OrbiTrak(R) system enhancements and certain new chemical management products.
The successful introduction of new products is important to the long-term growth
of the Company. The Company's goal is to invest approximately 13% to 15% of
sales in research and development programs. The Company expects to be at the
high end of this range during fiscal 1997 as it continues to invest in new
product and process development programs.*
During fiscal years 1996, 1995 and 1994, the Company recognized
approximately $0, $546,000 and $1.3 million, respectively, of third-party
funding as reductions in research and development expenses. Sponsored research
and development funding in fiscal 1997 is expected to be minimal.
<TABLE>
<CAPTION>
- --------------------------------------------
R&D EXPENSE (percent of sales)
- --------------------------------------------
<S> <C>
1994 15.0
1995 12.8
1996 13.5
- --------------------------------------------
</TABLE>
OTHER INCOME (EXPENSE): Other income (expense) was approximately $4.1 million
of income, or 1.3% of sales, for fiscal 1996 as compared to $2.1 million of
income, or 0.9% of sales, for fiscal 1995. The majority of the change was due
to an increase of approximately $2.5 million in interest income recognized on
cash and cash equivalents, and marketable securities. Other income (expense)
was approximately $2.1 million of income, or 0.9% of sales, for fiscal 1995 as
compared to $226,000 of expense, or 0.2% of sales, for fiscal 1994. The
majority of the change was due to an increase in interest income of
approximately $1.7 million recognized on cash and cash equivalents and
marketable securities. The Company's average cash and cash equivalents, and
marketable securities balances increased due to the proceeds of two secondary
offerings completed in February and July 1995.
INCOME TAX EXPENSE: Income tax expense for fiscal 1996 was approximately $10.3
million or 30.0% of pretax profit compared to approximately $5.9 million or
24.9% of pretax profit for fiscal 1995. Included in tax expense in fiscal 1996
is a tax benefit of approximately $1.5 million for net deferred tax assets
relating to existing temporary differences of Semiconductor Systems recorded at
the time of its conversion from an S corporation to a C corporation upon
closing of the acquisition. The Company's income tax expense for fiscal 1995
was approximately $5.9 million or 24.9% of pretax profit compared to
approximately $1.3 million or 13.9%
15 FSI INTERNATIONAL
<PAGE> 20
for fiscal 1994. The lower tax rate in 1994 is due to the reinstatement of
deferred tax assets resulting from the generation of taxable income in fiscal
1994. The Company anticipates its effective tax rate will range from 30% to 32%
in fiscal 1997.*
EQUITY IN EARNINGS OF AFFILIATES: The equity in earnings of affiliates was $5.1
million, $3.6 million and $1.8 million for fiscal 1996, 1995 and 1994,
respectively. The increase in fiscal 1996 is due to improved earnings at both
affiliates (Metron Technology B.V. and m-FSI Ltd.), due to expansion by
semiconductor device manufacturers in Europe and Japan and the strong growth
taking place in the Asia/Pacific market. The increase in 1995 primarily
resulted from the increased earnings from Metron Technology B.V. (Metron).
<TABLE>
<CAPTION>
- ------------------------------------------------------
EQUITY IN EARNINGS OF AFFILIATES (in millions)
- ------------------------------------------------------
<S> <C>
1994 $1.8
1995 $3.6
1996 $5.1
- ------------------------------------------------------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents, and marketable securities were
approximately $71.9 million as of August 31, 1996, a decrease of $40.9 million
from the end of fiscal 1995. The decrease in cash and cash equivalents and
marketable securities resulted primarily from the use of cash to support
operations in response to growth, to fund facilities expansion and to pay off
the Semiconductor Systems' debt of approximately $4.5 million.
<TABLE>
<CAPTION>
- ------------------------------------------------------
CASH AND CASH EQUIVALENTS, AND
MARKETABLE SECURITIES (in millions)
- ------------------------------------------------------
<S> <C>
1994 $ 14
1995 $113
1996 $ 72
- ------------------------------------------------------
</TABLE>
The Company's accounts receivable increased by approximately 51.4% or
$27.4 million, from the end of fiscal 1995. The increase in accounts receivable
was mainly due to increased sales of chemical management products, which
typically have higher retainages by the customer and generally take longer to
collect. In addition, payment of retainages on other products continue to be
delayed by customers.
The Company's inventory increased approximately $23.5 million to $64.1 million
at the end of fiscal 1996, as compared to $40.6 million at the end of fiscal
1995. This was mainly due to increased levels of raw materials and purchased
parts required for higher sales order activity and new product introduction
programs. In addition, there were customer-requested delays in shipping certain
equipment orders which are currently planned to ship in the first quarter of
fiscal 1997. As of August 31, 1996, the Company's current ratio of current
assets to current liabilities was 3.1 to 1.0 and working capital was $156.3
million.
<TABLE>
<CAPTION>
- --------------------------------------
TOTAL ASSETS (in millions)
- --------------------------------------
<S> <C>
1994 $ 84
1995 $252
1996 $293
- --------------------------------------
</TABLE>
The Company had acquisitions of property, plant and equipment of $33.1
and $16.9 million in fiscal 1996 and fiscal 1995, respectively. The increase in
acquisitions reflects the investments in computer equipment and facilities
expansion.
The Company is in the process of constructing and equipping a new
88,000-square-foot laboratory and engineering facility at a cost of
approximately $27.0 million, for the Surface Conditioning Division in Chaska,
Minn. The Company expects to move the Surface Conditioning Division into the
new facility in the middle of calendar 1997. The laboratory facility will be
equipped with certain new advanced surface conditioning products which were
introduced in late fiscal 1996 or are expected to be introduced in fiscal 1997.
16 FSI INTERNATIONAL
<PAGE> 21
The Company is also in the process of building and equipping a
150,000-square-foot engineering, manufacturing and laboratory facility in
Allen, Texas, to expand the manufacturing and development capabilities of the
Company's Microlithography Division. The new facility is expected to be
completed by the end of the first quarter of calendar 1997.
The Company had previously negotiated the terms of a credit facility
with a third-party lender but has decided not to enter into this facility at
this time. The Company is examining other short-term and long-term debt
financing alternatives. The Company believes that existing cash, cash
equivalents, marketable securities and internally generated funds will be
sufficient to meet the Company's currently projected working capital and other
cash requirements through at least the end of fiscal 1997.*
The Company believes that success in its industry requires substantial
capital 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 fund such activities with additional equity or
debt financings. The sale of additional equity or debt securities could result
in additional dilution to the Company's shareholders.
In October 1995, the Financial Accounting Standards Board released
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). The Company accounts for its stock option plans and
its employee stock purchase plan in accordance with the provisions of the
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" (APB 25). FAS 123 provides an alternative to APB 25 and is effective
for fiscal years beginning after December 15, 1995. The Company expects to
continue to account for its employee stock plans in accordance with the
provisions of APB 25. Accordingly, FAS 123 is not expected to have a material
impact on the Company's financial position or results of operations. Effective
with the issuance of the Company's fiscal year 1997 financial statements, the
Company will disclose proforma net income and net income per share amounts as
if FAS 123 were applied.
RISK FACTORS
Due to the nature of business and the industry in which the Company
operates, the following risk factors should be considered in addition to others
described above.
CURRENT SLOWDOWN AND VOLATILITY IN THE SEMICONDUCTOR INDUSTRY: The Company's
business depends upon the capital equipment expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market
demand for integrated circuits and products utilizing integrated circuits. The
semiconductor industry has been cyclical in nature and historically experienced
periodic downturns. The semiconductor industry is presently experiencing a
slowdown in terms of product demand and volatility in terms of product pricing.
During 1995 many of the semiconductor device manufacturers announced plans to
expand existing or build new semiconductor device manufacturing facilities. In
early 1996, the average selling price of memory chips and certain other
semiconductor devices significantly decreased. This has resulted in
semiconductor device manufacturers announcing delays in their expansion plans.
This slowdown and volatility has caused the semiconductor industry to reduce
its demand for semiconductor processing equipment and, in some instances, to
delay capital equipment decisions. In some cases this has resulted in order
cancellations or delays of orders and delays of delivery dates for the
Company's products. No assurance can be given that the Company's sales and
operating results will not be adversely affected during this and possible
future downturns in the semiconductor industry. In addition, the need for
continued investments in research and development, substantial capital
equipment requirements and extensive ongoing worldwide customer service and
support capability will limit the Company's ability to reduce expenses.
Accordingly, there is no assurance that the Company will be able to remain
profitable in the future.
RISK OF DELAYS IN INTRODUCING NEW PRODUCTS AND THE MARKET'S ACCEPTANCE OF SUCH
PRODUCTS: Semiconductor device manufacturing equipment and processes are
subject to rapid technological change and new product introductions, as well as
17 FSI INTERNATIONAL
<PAGE> 22
evolving industry standards. 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. The Company must continue
to develop, manufacture and market new products which conform to evolving
industry standards. 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 must also manage product transitions successfully, as introductions
of new products could adversely affect the sales of existing products. The
Company's failure to develop and successfully introduce new products or
enhancements to its existing products and processes or achieve market
acceptance of the new products or enhancements could adversely affect the
Company's business and results of operations.
NEW FACILITIES CONSTRUCTION: The Company is adding manufacturing
capacity during fiscal 1997. This additional manufacturing capacity will have a
negative impact on gross profit margins if the Company's anticipated revenue
levels are not met. The potential impact of idle manufacturing capacity on
gross margins could have an adverse impact on the Company's future financial
results.
SUCCESSFUL INTEGRATION OF SEMICONDUCTOR SYSTEMS: The Company's
acquisition of Semiconductor Systems requires the integration of its personnel,
products and operations. If this integration is not successful, there may be an
adverse impact on the Company's 1997 business and financial operations and the
long-term growth of the Company.
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 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.
SUCCESSFUL IMPLEMENTATION OF NEW BUSINESS SYSTEM: The Company is in the
process of defining and testing a new Company-wide integrated business system
for implementation during fiscal 1997. If the implementation of the new system
is not successful, there may be an adverse impact on the Company's business and
results of operations.
HIGHLY COMPETITIVE INDUSTRY: The semiconductor processing equipment industry is
highly competitive. The Company faces substantial competition throughout the
world. The Company believes that to remain competitive, it will require
significant financial resources to offer a broad range of products, to maintain
customer service and support centers worldwide, and to invest in product and
process research and development. The Company believes that the semiconductor
equipment industry is becoming increasingly dominated by large manufacturers who
have the resources to support customers on a worldwide basis. Certain of the
Company's competitors have substantially greater financial, marketing, and
customer service and support capabilities than the Company. In addition, there
are smaller emerging semiconductor equipment companies that provide innovative
technology. The Company expects its competitors to continue to improve the
design and performance of their current products and processes and to introduce
new products and processes with improved price and performance characteristics.
No assurance can be given that the Company will continue to compete
successfully in the United States or elsewhere.
18 FSI INTERNATIONAL
<PAGE> 23
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 31, 1996 and August 26, 1995,
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
31, 1996. 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 as of August 31, 1996 and August 26, 1995,
and the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended August 31, 1996, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 11, 1996
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
The Company's management is responsible for the preparation, integrity
and objectivity of the consolidated financial statements and other financial
information presented in this report. The accompanying consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles and reflect the effects of certain estimates and judgments made by
management.
Management relies upon established accounting procedures and related
systems of internal control for meeting its responsibilities to maintain
reliable financial records. These systems are designed to provide reasonable
assurance that assets are safeguarded and that transactions are properly
recorded and executed in accordance with management's intentions. Management
believes that the established system provides an acceptable balance between the
benefits and associated costs of internal controls.
As part of their audit of the consolidated financial statements, KPMG
Peat Marwick LLP, the independent auditors, consider the internal control
structure of the Company to gain a basic understanding of the accounting system
in order to design an effective and efficient audit approach; however, it is
not intended to provide assurance on the system of internal control. Management
recognizes the role of constructive recommendations from the auditors as part
of the auditing process and responds to each suggestion.
The Audit Committee of the Board of Directors, which consists of two
outside and one inside director, meets periodically with management and the
independent accountants to review accounting, reporting, auditing and internal
control matters. The committee has direct and private access to the external
auditors.
/s/ Joel A. Elftmann /s/ Benno Sand
Joel A. Elftmann Benno Sand
Chairman, President Executive Vice President
and Chief Executive Officer and Chief Financial Officer
19 FSI INTERNATIONAL
<PAGE> 24
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
YEARS ENDED AUGUST 31 AUGUST 26 AUGUST 27
- ---------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Sales (including sales to affiliates of
$76,437,000, $42,625,000
and $24,699,000, respectively) $304,040,806 $218,460,364 $124,666,653
Cost of goods sold 174,238,449 128,653,351 71,911,375
------------ ------------ ------------
Gross profit 129,802,357 89,807,013 52,755,278
Selling, general and administrative
expenses 58,742,058 39,998,913 24,515,376
Research and development expenses 40,997,860 28,036,705 18,755,894
------------ ------------ ------------
Operating income 30,062,439 21,771,395 9,484,008
Interest expense (464,583) (163,745) (470,521)
Interest income 4,662,888 2,147,619 399,211
Other income (expense), net (73,220) 133,079 (154,314)
------------ ------------ ------------
Income before income taxes 34,187,524 23,888,348 9,258,384
Income tax expense 10,250,000 5,942,000 1,291,000
------------ ------------ ------------
Income before minority interest and equity
in earnings of affiliates 23,937,524 17,946,348 7,967,384
Minority interest (497,560) (155,562) -
Equity in earnings of affiliates 5,108,442 3,566,900 1,799,750
------------ ------------ ------------
Net income $ 28,548,406 $ 21,357,686 $ 9,767,134
------------ ------------ ------------
Net income per common share $ 1.23 $ 1.13 $ 0.65
Weighted average common shares and common
share equivalents 23,138,974 18,825,480 14,972,668
PRO FORMA INFORMATION: (Note 3)
Income tax expense $ 10,556,000 $ 6,767,000 $ 2,763,000
Net income $ 28,242,406 $ 20,532,686 $ 8,295,134
Net income per common share $1.22 $ 1.09 $ 0.55
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20 FSI INTERNATIONAL
<PAGE> 25
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
AUGUST 31 AUGUST 26
- -------------------------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 48,804,158 $ 97,010,076
Marketable securities 23,116,484 15,823,282
Trade accounts receivable, less allowance for doubtful accounts
of $1,843,000 and $1,234,000, respectively 60,532,701 40,273,969
Trade accounts receivable from affiliates 20,228,673 13,069,739
Inventories 64,075,294 40,577,435
Deferred income tax benefit 8,262,861 5,828,018
Prepaid expenses and other current assets 4,974,079 4,668,052
------------ ------------
Total current assets 229,994,250 217,250,571
------------ ------------
Property, plant and equipment, net 45,594,617 20,126,119
Investment in affiliates 12,765,401 8,813,370
Deposits and other assets 4,395,595 4,781,842
Deferred income tax benefit 533,518 595,085
------------ ------------
$293,283,381 $251,566,987
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to bank $ - $ 4,500,000
Current maturities of long-term debt 207,000 160,928
Trade accounts payable 30,834,470 27,012,150
Accrued expenses 29,069,279 23,977,855
Customer deposits 3,710,547 2,614,874
Deferred revenue 9,824,693 5,722,030
------------ ------------
Total current liabilities 73,645,989 63,987,837
------------ ------------
Long-term debt, less current maturities 290,948 231,011
Minority interest 1,127,058 681,558
Deferred income taxes 92,021 -
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, 22,362,056 and 21,999,818 shares, respectively 157,731,828 144,387,884
Retained earnings 60,345,308 41,020,002
Cumulative translation adjustment 50,229 1,258,695
------------ ------------
Total stockholders' equity 218,127,365 186,666,581
------------ ------------
Commitments (Notes 4, 6, 7 and 18) $293,283,381 $251,566,987
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21 FSI INTERNATIONAL
<PAGE> 26
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------
CUMULATIVE
YEARS ENDED AUGUST 31, 1996, AUGUST 26, 1995 NUMBER OF RETAINED TRANSLATION
AND AUGUST 27, 1994 SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, AUGUST 28, 1993 11,425,378 $ 13,557,929 $14,216,082 $ 398,609 $ 28,172,620
Stock issuance 3,479,901 14,804,079 - - 14,804,079
Tax benefit from stock options exercised - 365,410 - - 365,410
Change in cumulative translation adjustment - - - (37,217) (37,217)
S Corporation distributions to
Semiconductor Systems' shareholders - - (1,957,200) - (1,957,200)
Net income - 9,767,134 - 9,767,134
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, AUGUST 27, 1994 14,905,279 28,727,418 22,026,016 361,392 51,114,826
Stock issuance 7,094,539 114,913,188 - - 114,913,188
Tax benefit from stock options exercised - 747,278 - - 747,278
Change in cumulative translation adjustment - - - 897,303 897,303
S Corporation distributions to
Semiconductor Systems' shareholders - - (1,879,600) - (1,879,600)
Net income - - 21,357,686 - 21,357,686
Adjustment to eliminate the effect of including
Semiconductor Systems' net income and
S Corporation distributions for the four months
ended December 31, 1994 in both fiscal
1995 and 1994 - - (484,100) - (484,100)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, AUGUST 26, 1995 21,999,818 144,387,884 41,020,002 1,258,695 186,666,581
Stock issuance 362,238 1,817,747 - - 1,817,747
Tax benefit from stock options exercised - 2,932,197 - - 2,932,197
Reclassification of undistributed S Corporation
earnings to common stock - 8,594,000 (8,594,000) - -
S Corporation distributions to
Semiconductor Systems' shareholders - - (629,100) - (629,100)
Change in cumulative translation adjustment - - - (1,208,466) (1,208,466)
Net income - - 28,548,406 - 28,548,406
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, AUGUST 31, 1996 22,362,056 $157,731,828 $60,345,308 $50,229 $218,127,365
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22 FSI INTERNATIONAL
<PAGE> 27
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
YEARS ENDED AUGUST 31 AUGUST 26 AUGUST 27
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 28,548,406 $ 21,357,686 $ 9,767,134
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Minority interest 497,560 155,562 -
Depreciation and amortization 8,209,407 3,741,901 3,084,841
Provision for deferred income taxes (2,281,255) (4,591,103) (696,000)
Stock issued for services - 65,643 141,376
Equity in earnings of affiliates (5,108,442) (3,566,900) (1,799,750)
Gain on sale of equipment - (8,000) (19,254)
Changes in operating assets and liabilities:
Trade accounts receivable (27,417,666) (27,682,119) (8,758,164)
Inventories (23,497,859) (19,294,290) (4,461,475)
Prepaid expenses and other current assets (306,027) (346,314) (2,157,324)
Trade accounts payable 3,822,320 13,485,625 2,991,564
Accrued expenses 8,229,246 13,942,917 3,749,203
Customer deposits 1,095,673 (1,071,074) 2,901,801
Deferred revenue 4,102,663 2,517,138 1,589,371
Other (104,115) 13,854 8,000
------------ ------------ -----------
Net cash (used in) provided by operating activities (4,210,089) (1,279,474) 6,341,323
INVESTING ACTIVITIES
Investment in FME joint venture, net of cash received - (850,333) -
Acquisition of property, plant and equipment (33,111,987) (16,899,586) (3,536,591)
Proceeds from note receivable from affiliate - 500,000 -
Purchase of marketable securities (32,679,361) (14,219,782) (159,000)
Sales of marketable securities 7,028,937 - 673,000
Maturities of marketable securities 18,357,222 - -
Decrease (increase) in deposits and other assets 61,939 887,797 (4,321,350)
Proceeds from sale of equipment - 8,000 19,254
------------ ------------ -----------
Net cash used in investing activities (40,343,250) (30,573,904) (7,324,687)
FINANCING ACTIVITIES
Restricted cash - - 1,370,891
Principal payments on long-term debt (240,866) (262,720) (968,865)
Increase in long-term debt 105,265 279,400 156,600
Payments on notes payable to bank (14,461,656) (3,350,000) (4,589,497)
Advances on notes payable to bank 9,961,656 7,850,000 3,200,000
S Corporation distribution payments (629,100) (1,879,600) (1,957,200)
Net proceeds from issuance of common stock 1,612,122 114,847,545 14,662,703
------------ ------------ -----------
Net cash (used in) provided by financing activities (3,652,579) 117,484,625 11,874,632
------------ ------------ -----------
(Decrease) increase in cash and cash equivalents (48,205,918) 85,631,247 10,891,268
Cash flows for Semiconductor Systems for the
four months ended December 31, 1994 - (415,100) -
Cash and cash equivalents at beginning of year 97,010,076 11,793,929 902,661
------------ ------------ -----------
Cash and cash equivalents at end of year $ 48,804,158 $ 97,010,076 $11,793,929
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23 FSI INTERNATIONAL
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended August 31, 1996, August 26, 1995 and August 27, 1994
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
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),
Applied Chemical Solutions, Inc. and Semiconductor Systems, Inc. (collectively,
the "Company"). The 1996 and 1995 consolidated financial statements also
include the accounts of FSI Metron Europe, Limited (FME), a joint venture owned
equally by the Company and Metron Technology B.V., an affiliate of the Company.
All significant intercompany balances and transactions have been eliminated in
the consolidation.
The Company's fiscal year ends on the last Saturday in August and is
comprised of 52 or 53 weeks. Fiscal 1996 consists of a 53-week period and
fiscal 1995 and 1994 consist of 52-week periods.
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 installments, which are recognized upon the successful
completion of an evaluation period. Revenue on chemical management systems for
which the Company has certain responsibility for facilities 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 effective maturity of three months or less are considered to be cash
equivalents.
MARKETABLE SECURITIES. In fiscal 1995, the Company adopted the Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under provisions of this statement,
the Company classifies its marketable debt and equity securities in one of
three categories: trading, available-for-sale or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling them in
the near-term. Held-to-maturity securities are those which the Company intends
to, and has the ability to hold until maturity. All other securities not
included in trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair market value.
Held-to-maturity securities are recorded at cost, adjusted for the amortization
or accretion of premiums or discounts. Unrealized holding gains and losses for
trading securities are included in earnings. Available-for-sale securities'
unrealized holding gains and losses are excluded from earnings and reported as
a net amount in a separate component of stockholders' equity until realized.
INVENTORIES. Inventories are valued at the lower of cost, determined by the
first-in, first-out method, or net realizable value.
PROPERTY, PLANT AND EQUIPMENT. Building and related costs are carried at cost
and depreciated on a straight-line basis over a 30-year period. Leasehold
improvements are carried at cost and amortized over a 3 to 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 its
estimated economic life. Principal economic lives for equipment are one to
seven years. Software developed for internal use is amortized over three 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.
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 five years.
INVESTMENT IN AFFILIATES. The Company's investment in affiliated companies
consists of a 37.5% interest in Metron Technology B.V., and a 49.0% interest in
m.FSI Ltd. Each investment is accounted for by the equity method utilizing a
three-month or two-month lag due to the affiliates' May and June year-ends.
Summary financial information for these affiliates are included in Note 7.
24 FSI INTERNATIONAL
<PAGE> 29
INCOME TAXES. Deferred income taxes are provided in amounts sufficient to give
effect to temporary differences between financial and tax reporting. The
Company accounts for tax credits as reductions of income tax expense in the
year in which such credits are allowable for tax purposes.
PRODUCT WARRANTY. The Company, in general, warrants new equipment manufactured
by the Company to the original purchaser to be free from defects in material
and workmanship for one to two years, depending upon the product. Provision is
made for the estimated cost of maintaining product warranties at the time the
product is sold.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at current exchange rates.
Operating results for subsidiaries and investees are translated into U.S.
dollars using the average rates of exchange prevailing during the year.
Unrealized gains or losses resulting from translating subsidiaries and
investees are included in the cumulative translation adjustment account in
stockholders' equity.
NET INCOME PER COMMON SHARE. Net income per common share is computed based on
the weighted average number of common shares and common share equivalents
outstanding during the year. All stock options and stock warrants are reflected
in the computation of common share equivalents. For all periods presented,
fully diluted and primary net income per common share are approximately the
same.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that could affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
RECLASSIFICATIONS. Certain 1995 and 1994 amounts have been reclassified to
conform to the 1996 presentation.
NOTE 2: CONCENTRATION OF RISK AND FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents,
marketable securities and trade accounts receivable.
The Company's customers consist of semiconductor manufacturers located
throughout the world. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from them.
The Company maintains an allowance for uncollectible accounts receivable based
upon expected collectibility of all accounts receivable.
The Company invests in a variety of financial instruments such as
municipal bonds, commercial paper and money market fund shares. The Company, by
policy, limits the amount of credit exposure with any one financial or
commercial issuer.
The Company's financial instruments amount reflected on the balance
sheet, including cash and cash equivalents, marketable securities, accounts
receivables, notes payable, accounts payable and accrued expenses, approximate
fair value due to their short maturities.
As of August 31, 1996 and August 26, 1995, all marketable securities
are classified as available-for-sale.
Information about the contractual maturities of marketable securities
at August 31, 1996 is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Due in One Due After One Year
Year or Less Through Two Years
- ------------------------------------------------------------------------------
<S> <C> <C>
Obligations of States and
Political Subdivisions $18,084,384 $5,032,100
</TABLE>
At August 31, 1996, $38,685,057 of investments in debt securities
purchased with an original effective maturity date of less than three months
are included in cash and cash equivalents on the balance sheet.
Gross unrealized holding gains and losses and gross realized gains and
losses on sales of marketable securities were not significant as of or for the
years ended August 31, 1996 and August 26, 1995. The Company manages its cash
equivalents and short-term investments as a single portfolio of highly
marketable securities, all of which are intended to be available to meet the
Company's current cash requirements.
25 FSI INTERNATIONAL
<PAGE> 30
NOTE 3: ACQUISITIONS
On April 4, 1996, the Company completed the acquisition of Semiconductor
Systems, Inc. (Semiconductor Systems). In connection with the acquisition, the
Company issued approximately 1,739,200 shares of its common stock. In addition,
the Company issued options of approximately 60,800 shares of the Company's
common stock in substitution of previously outstanding options to acquire
shares of Semiconductor Systems' common stock.
This transaction was accounted for as a pooling of interests; therefore,
all financial statements presented have been restated to reflect the
acquisition. Semiconductor Systems prepared its financial statements on a
December 31 calendar year-end prior to the acquisition. In recording the
pooling-of-interests combination, Semiconductor Systems' financial statements
for the 12 months ended August 31, 1996 and August 26, 1995 were combined with
FSI's financial statements for the same periods and Semiconductor Systems'
financial statements for the years ended December 31, 1994 were combined with
FSI's for the year ended August 27, 1994. Semiconductor Systems' unaudited
results for the four months ended December 31, 1994 included sales of
$10,500,000 and net income of $1,020,000. An adjustment was made to
stockholders' equity in the combined historical financial statements to
eliminate the effect of including Semiconductor Systems' net income and S
Corporation distributions for the four months ended December 31, 1994 in the
statements of operations for both fiscal years ended August 26, 1995 and August
27, 1994.
Sales and net income (loss) included in the Company's consolidated
statements of operations are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Fiscal Year Ended August 31 August 26 August 27
- -----------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Sales:
Semiconductor
Systems $ 29,952,300 $ 28,057,000 $ 28,229,000
FSI and other
subsidiaries 274,088,506 190,403,364 96,437,653
------------ ------------ ------------
$304,040,806 $218,460,364 $124,666,653
------------ ------------ ------------
Net income (loss):
Semiconductor
Systems $ (265,500) $ 2,072,000 $ 4,121,000
FSI and other
subsidiaries 28,813,906 19,285,686 5,646,134
------------ ------------ ------------
$ 28,548,406 $ 21,357,686 $ 9,767,134
============ ============ ============
</TABLE>
The Company recorded a net deferred tax asset and tax benefit of
approximately $1,500,000 for temporary differences of Semiconductor Systems. The
tax benefit is a result of Semiconductor Systems' conversion from an S
Corporation to a C Corporation upon closing of the acquisition.
The Company, upon completion of the acquisition, also reclassified the
undistributed earnings of Semiconductor Systems of approximately $8,600,000 to
common stock from retained earnings as a result of Semiconductor Systems'
conversion from an S Corporation to a C Corporation upon closing of the
acquisition.
In connection with the acquisition with Semiconductor Systems,
approximately $800,000 of acquisition costs and expenses were incurred and
have been charged to selling, general and administrative expenses in fiscal
1996. The charge includes professional fees and other direct transaction costs
associated with the acquisition.
Pro forma data shown on consolidated statements of operations reflect
the impact on income tax expense as if Semiconductor Systems was a C
Corporation versus an S Corporation prior to the acquisition.
On March 8, 1995, the Company completed its acquisition of Applied
Chemical Solutions (ACS). The Company issued 1,061,472 shares of common stock in
connection with the acquisition. In addition, the Company issued 214,800 of
options in substitution of previously outstanding options to acquire shares of
ACS common stock. This transaction was accounted for as a pooling of interests;
therefore, all prior financial statements have been restated to reflect the
acquisition. There were approximately $800,000 of acquisition costs and expenses
charged to selling, general and administrative expenses in fiscal 1995 related
to the ACS acquisition.
NOTE 4: RELATED PARTY TRANSACTIONS AND OTHER LEASE COMMITMENTS
The Company has operating lease agreements for equipment and manufacturing and
office facilities. Certain of the lease agreements are with partnerships of
which a partner is an officer, director and shareholder of the Company.
26 FSI INTERNATIONAL
<PAGE> 31
The lease for the Company's headquarters is a lease with such a
partnership (Lake Hazeltine Properties). The agreement provides for a base
monthly rental of $58,333, plus payment of executory costs such as property
taxes, maintenance and insurance.
Future minimum lease payments for all leases with noncancellable lease
terms in excess of one year at August 31, 1996 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
RELATED OTHER
FISCAL YEAR ENDED AUGUST PARTY LEASES LEASES
- ------------------------------------------------------------------
<S> <C> <C>
1997 $ 792,400 $1,726,300
1998 700,000 1,391,100
1999 700,000 1,357,100
2000 700,000 1,335,100
Thereafter - 519,000
---------- ----------
Total minimum lease payments $2,892,400 $6,328,600
========== ==========
- ------------------------------------------------------------------
</TABLE>
Rental expense for all operating leases consisted of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
FISCAL YEAR ENDED AUGUST 31 AUGUST 26 AUGUST 27
1996 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C>
Rent expense for related
party leases $ 927,400 $1,320,300 $1,289,800
Rent expense for other
operating leases 2,027,000 1,280,400 1,125,500
---------- ---------- ----------
$2,954,400 $2,600,700 $2,415,300
========== ========== ==========
</TABLE>
On June 1, 1991, the Company received a Demand Note Payable with
interest at approximately 0.75% over prime from Metron Semiconductors Asia Ltd.
At August 27, 1994, there was $500,000 outstanding against the note. The note
was paid in full in fiscal 1995.
NOTE 5: INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
AUGUST 31 AUGUST 26
1996 1995
- -----------------------------------------------------------
<S> <C> <C>
Finished products $10,715,376 $ 7,935,392
Work in process 16,329,239 12,571,693
Subassemblies 4,689,549 3,717,924
Raw materials and purchased parts 32,341,130 16,352,426
----------- -----------
$64,075,294 $40,577,435
=========== ===========
</TABLE>
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
AUGUST 31 AUGUST 26
- -----------------------------------------------------------------
1996 1995
<S> <C> <C>
Land $ 1,992,029 $ 0
Building and leasehold improvements 17,045,409 3,654,398
Office furniture and equipment 23,254,805 11,977,552
Manufacturing equipment 5,609,480 4,302,359
Lab equipment 7,970,971 5,464,162
Tooling 376,657 573,159
Vehicles 193,605 196,669
Construction in progress 11,784,447 10,170,725
------------ ------------
68,227,403 36,339,024
Less accumulated depreciation and
amortization (22,632,786) (16,212,905)
------------ ------------
$ 45,594,617 $ 20,126,119
============ ============
</TABLE>
The Company is in the process of building a new laboratory facility in
Chaska, Minnesota and a new manufacturing and engineering facility in Allen,
Texas. Construction-in-progress costs for these facilities of approximately
$10,663,000 were incurred through August 31, 1996. During 1997, the Company
anticipates approximately $25,755,000 of costs will be incurred to complete the
facilities. In addition, the Company has commitments for approximately
$11,835,000 for furniture and equipment related to these facilities.
NOTE 7: INVESTMENTS IN AFFILIATES
On July 5, 1995, the merger of the Company's affiliates, Metron Semiconductors
Europa B.V. and the Metron Asia Group was completed with Metron Semiconductors
Europa B.V. surviving as the parent company. This merger was accounted for as
an "as if pooling of interests." Accordingly, all prior Metron Semiconductors
Europa B.V. financial statements were restated to reflect this merger. On July
6, 1995, Metron Semiconductors Europa B.V. acquired a U.S. Company named
Transpacific Technology Corporation. This transaction was accounted for using
purchase accounting. The newly consolidated entity changed its name to Metron
Technology B.V. (Metron). The Company's ownership in Metron is 37.5%.
27 FSI INTERNATIONAL
<PAGE> 32
A summary of assets, liabilities and results of operations for Metron
and m-FSI Ltd. (m-FSI) accounted for on the equity method is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
METRON TECHNOLOGY B.V.:
- --------------------------------------------------------
MAY 31 1996 1995 1994
- --------------------------------------------------------
<S> <C> <C> <C>
Current assets $90,153 $50,677 $37,195
Noncurrent assets, net 12,942 5,633 3,143
Current liabilities 70,471 36,085 29,147
Noncurrent liabilities 2,243 815 1,726
Total stockholders' equity 30,381 19,410 9,465
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------
FISCAL YEARS ENDED MAY 31 1996 1995 1994
- --------------------------------------------------------
<S> <C> <C> <C>
Sales $233,302 $134,533 $100,490
Net income before
minority interest 9,658 7,656 4,847
Minority interest - (116) (414)
Net income 9,658 7,540 4,433
</TABLE>
<TABLE>
<CAPTION>
m-FSI LTD:
- --------------------------------------------------------
JUNE 30 1996 1995 1994
- --------------------------------------------------------
<S> <C> <C> <C>
Current assets $15,609 $6,430 $5,748
Noncurrent assets, net 1,780 2,532 1,646
Current liabilities 12,438 4,989 4,613
Noncurrent liabilities 132 50 19
Total stockholders' equity 4,819 3,923 2,762
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------
FISCAL YEARS ENDED JUNE 30 1996 1995 1994
- --------------------------------------------------------
<S> <C> <C> <C>
Sales $22,567 $9,641 $10,027
Net income 1,931 581 1,737
</TABLE>
Metron operates mainly in Europe, Asia/Pacific and the United States.
m-FSI operates in Japan.
The Company sold approximately $76,437,000, $42,625,000 and $24,699,000
of its products in the aggregate to Metron and m-FSI in fiscal 1996, 1995 and
1994, respectively. In addition, the Company paid Metron a commission for
direct sales to Asia/Pacific customers of $2,963,000, $1,112,000 and $459,000
for fiscal years 1996, 1995 and 1994, respectively. At August 31, 1996 and
August 26, 1995, trade accounts receivable from affiliates was approximately
$20,229,000 and $13,070,000, respectively.
In connection with the purchase of Transpacific Technology Corporation
by Metron Semiconductors Europa B.V., the Company and another Metron
shareholder guaranteed $745,000 of notes payable to certain shareholders of
Transpacific Technology Corporation.
NOTE 8: ACCRUED EXPENSES
Accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
AUGUST 31 AUGUST 26
1996 1995
- --------------------------------------------------------------------
<S> <C> <C>
Commissions $ 765,797 $ 2,263,405
Commissions due to affiliates 1,220,891 1,602,530
Income taxes 2,836,846 4,318,945
Salaries and bonus 6,400,225 5,574,919
Pension and profit sharing 1,705,220 1,313,115
Estimated product warranty 8,681,635 5,892,347
Product sales incentive commission 752,648 744,927
Other 6,706,017 2,267,667
----------- -----------
$29,069,279 $23,977,855
=========== ===========
</TABLE>
NOTE 9: DEBT
As of August 26, 1995, the Company had a line of credit of $5,000,000 with a
balance of $4,500,000 outstanding at an interest rate of 9%. The line of credit
was paid off and terminated in fiscal 1996.
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
AUGUST 31 AUGUST 26
1996 1995
- --------------------------------------------------------------------
<S> <C> <C>
Capital leases on equipment; interest rates
ranging from 8.83% to 12.68% through
September 2000 secured by underlying
equipment $ 459,000 $ 345,228
Other 38,948 46,711
--------- ---------
497,948 391,939
Less current maturities (207,000) (160,928)
--------- ---------
$ 290,948 $ 231,011
========= =========
</TABLE>
Future payments of long-term debt are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------
FISCAL YEAR ENDING
- ------------------------------------------
<S> <C>
1997 $207,000
1998 170,504
1999 65,846
2000 54,598
</TABLE>
28 FSI INTERNATIONAL
<PAGE> 33
NOTE 10: INCOME TAXES
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
FISCAL YEAR ENDED AUGUST 31 AUGUST 26 AUGUST 27
1996 1995 1994
- ------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $10,331,000 $ 9,561,000 $1,627,000
Foreign 419,000 204,000 -
State 1,781,000 768,000 360,000
----------- ----------- ----------
12,531,000 10,533,000 1,987,000
Deferred:
Federal (2,028,000) (4,084,000) (696,000)
Foreign 26,000 - -
State (279,000) (507,000) -
----------- ----------- ----------
(2,281,000) (4,591,000) (696,000)
----------- ----------- ----------
$10,250,000 $ 5,942,000 $1,291,000
=========== =========== ==========
</TABLE>
In fiscal 1996, 1995 and 1994, there was a tax benefit of $2,932,197,
$747,278 and $365,410, respectively, credited to stockholders' equity
associated with the exercise of stock options.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at August 31,
1996 and August 26, 1995 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
AUGUST 31, AUGUST 26,
- ------------------------------------------------------------------------
1996 1995
<S> <C> <C>
Deferred tax assets:
Inventory $1,895,000 $3,522,000
Deferred revenue 1,203,000 1,034,000
Accounts receivable 671,000 466,000
Property, plant and equipment 662,000 365,000
Accruals 4,337,000 915,000
Other, net 422,000 357,000
---------- ----------
Total gross deferred tax assets 9,190,000 6,659,000
Deferred tax liabilities:
Accruals 177,000 236,000
Property, plant and equipment 66,000 -
Other, net 243,000 -
---------- ----------
Total gross deferred tax liabilities 486,000 236,000
---------- ----------
Net deferred tax assets $8,704,000 $6,423,000
========== ==========
</TABLE>
The effective tax rate differs from the statutory federal income tax
rate as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
FISCAL YEAR ENDED AUGUST 31 AUGUST 26 AUGUST 27
- ----------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Expected federal income
tax expense 35.0% 35.0% 34.0%
State income taxes, net of
federal benefit 2.9 2.7 2.3
Research activities credit (0.5) (1.0) (8.4)
Tax-exempt interest income (1.4) - -
Valuation allowance - (9.2) (0.8)
Foreign sales corporation (2.0) (2.6) (4.3)
S Corporation net income (0.8) (2.3) (10.7)
Establishment of S Corporation
deferred tax asset (4.4) - -
Other items, net 1.2 2.3 1.8
---- ---- ----
30.0% 24.9% 13.9%
==== ==== ====
</TABLE>
The Company reduced its valuation allowance from $1,996,800 as of August 27,
1994 to $0 as of August 26, 1995. Based on the Company's taxable income over
the last three fiscal years, management believes it is more likely than not
that the Company will realize the benefit of the net deferred tax asset of
$8,704,358 as of August 31, 1996 through the availability of taxable income in
the carryback period and future earnings.
The Company utilized approximately $1,300,000 of net operating loss
carryforwards from ACS in fiscal year 1995.
At August 31, 1996, there were approximately $10,727,000 of accumulated
undistributed earnings of subsidiaries outside the United States that are
considered to be reinvested indefinitely, subject to cash flow requirements. It
is not practicable to estimate the deferred tax liability related to such
undistributed earnings. If such earnings were remitted to the Company,
applicable U.S. Federal income and foreign withholding taxes would be
substantially offset by available foreign tax credits.
29 FSI INTERNATIONAL
<PAGE> 34
NOTE 11: PENSION AND PROFIT SHARING PLANS
The Company has a defined contribution pension plan covering substantially all
employees. Total pension cost for fiscal 1996, 1995 and 1994 was $1,408,086,
$857,826 and $630,657, respectively. There is no past service liability.
The Company's joint venture, FME, has a fully insured pension plan for
its present directors and employees with a minimum annual contribution of
approximately $33,000. Total pension cost for fiscal 1996 and 1995 for FME was
approximately $74,500 and $38,500, respectively.
The Company also has an Employee 401(k) Retirement Plan, which allows
for a discretionary profit sharing contribution, covering eligible employees.
Contributions under the plans are determined by means of a formula or at the
discretion of the Board of Directors. Contributions accrued for in fiscal years
1996, 1995 and 1994 were $250,000, $290,000 and $200,000, respectively.
NOTE 12: STOCK OPTIONS AND WARRANTS
The Company's Directors Nonstatutory Stock Option Plan (the "Directors
Plan") provides for the automatic granting of options to nonemployee directors.
The option price and terms of the options are determined by the Directors Plan,
and the per share 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 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. In January 1996, the Company's shareholders
authorized an additional 500,000 shares of the Company's common stock for this
Plan. 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 activity under all plans is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Number of Shares
----------------------------------
Activity Description Available for Grant Outstanding Price Range
- --------------------------------------------------------------------------
<S> <C> <C> <C>
August 28, 1993 13,290 1,572,970 $ .94-6.21
1994 Omnibus
Stock Option Plan 1,000,000 - -
Granted (361,899) 361,899 6.00-7.13
Exercised - (216,864) .94-3.03
Canceled (195,828) (51,162) 1.75-7.13
- --------------------------------------------------------------------------
August 27, 1994 455,563 1,666,843 .94-7.13
Directors Nonstatutory
Plan 100,000 - -
Granted (459,544) 459,544 8.05-29.00
Exercised - (519,381) .94-7.13
Canceled 10,694 (17,694) 2.75-7.13
- --------------------------------------------------------------------------
August 26, 1995 106,713 1,589,312 .94-29.00
Additional shares
authorized for 1994
Omnibus Stock Option
Plan 500,000 - -
Granted (422,161) 422,161 12.25-26.00
Exercised - (227,300) .94-18.00
Canceled 62,880 (64,547) 1.87-20.50
- --------------------------------------------------------------------------
August 31, 1996 247,432 1,719,626 .94-29.00
==========================================================================
Number of shares
exercisable at
August 31, 1996 873,388 $ .94-29.00
===================================== ==============
</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.
NOTE 13: 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% of their
wages toward the purchase of the Company's common stock at 85% of the lower of
market value at the beginning of the calendar year or the end of the calendar
year. On December 31, 1995, 1994 and 1993, shares in the amount of 99,927 were
issued at $11.37 per share, 139,582 shares were issued at $4.78 per share, and
153,436 shares were issued at $3.16 per share, respectively, under the Plan.
30 FSI INTERNATIONAL
<PAGE> 35
In January 1996 the Company's shareholders amended the Plan to increase
the number of shares that may be purchased under the Plan by 200,000 shares. At
August 31, 1996, 422,351 shares were reserved for future employee purchases of
stock under the Plan.
NOTE 14: ADDITIONAL SALES INFORMATION
International sales for the fiscal years 1996, 1995 and 1994 were
approximately 35%, 33% and 26%, respectively, of total sales. (Included in
these percentages and the table below are sales to affiliates. See note 7.)
International sales by geographic area, consisting principally of export sales,
are summarized as follows:
<TABLE>
- -------------------------------------------------------------
Fiscal Year Ended August 31 August 26 August 27
- -------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Asia $ 54,018,500 $43,081,300 $15,989,800
Europe 51,862,200 28,324,900 16,280,200
Other 2,007,500 148,700 626,000
------------ ----------- -----------
$107,888,200 $71,554,900 $32,896,000
============ =========== ===========
</TABLE>
The following summarizes significant customers comprising 10% or more of the
Company's customer sales, which includes sales through affiliates to end users:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Fiscal Year Ended August 31 August 26 August 27
1996 1995 1994
- ---------------------------------------------------------
<S> <C> <C> <C>
Customer A - 13% 17%
Customer B 12% - 17%
Customer C 11% 14% -
Customer D - 12% -
Customer E - 10% -
- ---------------------------------------------------------
</TABLE>
NOTE 15: RESEARCH AND DEVELOPMENT AGREEMENTS
The Company has received research and development funding commitments from
third party organizations. Such funds are not anticipated to cover all costs of
the research and development projects involved. The funds received are recorded
as reductions of research and development expenses. The Company recognized
approximately $0, $546,200 and $1,342,100 of third party funding in fiscal
years 1996, 1995 and 1994, respectively.
NOTE 16: LICENSE AGREEMENTS
A certain product is offered by the Company under a license agreement. Under
the license agreement, the Company has the right to sell and to manufacture the
product, and the licensor may also manufacture and distribute the product for
its own use. The Company also has the right to manufacture and sell related
modules. The license agreement required a royalty payment to the licensor on
the equipment manufactured and sold by the Company pursuant to the license.
When certain aggregate sales amounts were achieved under the license agreement,
the Company had the option of reducing the royalty amount or converting the
license to a fully paid, nonexclusive license. The Company has reached the
aggregate sales amount and has converted the license to a fully paid
nonexclusive license.
The Company, in the ordinary course of business, enters into various
other licensing agreements related to technologies. These agreements generally
provide for technology transfers between the Company and the licensors in
exchange for minimum royalty payments and/or a fixed royalty to the licensors.
These agreements can generally be terminated by the Company with appropriate
notice to the licensors.
NOTE 17: SUPPLEMENTARY CASH FLOW INFORMATION
The Company paid interest in fiscal 1996, 1995 and 1994
of $467,283, $171,219 and $497,788, respectively. Income taxes paid in fiscal
years 1996, 1995 and 1994 were $11,424,910, $5,957,026 and $1,790,020,
respectively. Capital leases entered into for financing purchases of equipment
during fiscal 1996, 1995 and 1994 were $241,610, $0 and $43,300, respectively.
In addition, the Company realized, in fiscal years 1996, 1995 and 1994, a tax
benefit from the exercise of stock options in the amount of $2,932,197,
$747,278 and $365,410, respectively.
31 FSI INTERNATIONAL
<PAGE> 36
NOTE 18: CONTINGENCIES
In the normal course of business, the Company from time to time becomes
involved in litigation which may ultimately result in a liability to the
Company. It is the opinion of management that facts known at the present time
do not indicate that there is a probability that any such litigation would have
a material effect on the Company's operations or its financial position. As of
August 31, 1996, the Company believes it is not involved in any material
litigation.
NOTE 19: COST CONTAINMENT
The Company has analyzed potential cost containment measures in response to
industry conditions. As a result, fiscal 1996 results include approximately
$1.5 million of pretax charges associated with eliminating or reducing the
scope of certain programs as the Company implemented cost control measures.
NOTE 20: SUBSEQUENT EVENTS (Unaudited)
Options. On September 25, 1996, the Board of Directors approved the repricing
of all unexercised options with an exercise price greater than $11.625; the new
exercise price of such options is $11.625. In addition, the vesting periods of
the unvested portion of the repriced options will be delayed by one year. As a
result of this repricing, it is estimated that up to approximately 567,000
options with exercise prices of $12.25 to $29.00 may be cancelled and reissued
under the terms described above.
Additional Cost Containment Measures. Additional cost control measures,
including mandatory furlough days, a reduction in executive compensation, and a
9% reduction in the work force were implemented in September 1996. The Company
expects to take a pretax charge of approximately $300,000 in
the first quarter of fiscal 1997 relating to the reduction in force.
QUARTERLY DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
(IN THOUSANDS, FIRST SECOND THIRD FOURTH
EXCEPT PER SHARE) QUARTER QUARTER QUARTER QUARTER
- -----------------------------------------------------------------------
1996 (unaudited)
<S> <C> <C> <C> <C>
Sales $70,344 $75,432 $67,466 $90,799
Gross profit 29,800 32,989 29,707 37,306
Operating income 8,515 9,281 4,708 7,558
Net income 7,725 8,588 5,756 6,479
Net income per
common share $ 0.33 $ 0.37 $ 0.25 $ 0.28
- -----------------------------------------------------------------------
1995 (unaudited)
Sales $37,391 $48,963 $60,008 $72,098
Gross profit 16,768 21,132 24,657 27,250
Operating income 3,304 5,341 5,741 7,385
Net income 3,650 4,603 5,488 7,617
Net income per
common share $ 0.23 $ 0.28 $ 0.27 $ 0.35
</TABLE>
The Company's fiscal quarters are generally 13 weeks, ending on a Saturday.
The fiscal year ends on the last Saturday in August and comprises of 52 or 53
weeks.
COMMON STOCK PRICES
The Company's common stock is traded on the NASDAQ National Market System under
the symbol FSII. The following table sets forth the highest and lowest stock
prices, as reported by the NASDAQ - NMS for fiscal 1996 and 1995.
<TABLE>
<CAPTION>
- ----------------------------------------------------
Fiscal Quarter 1996 1995
- ----------------------------------------------------
High Low High Low
<S> <C> <C> <C> <C>
First 38 1/2 18 1/2 14 1/4 8 5/8
Second 24 1/4 12 1/2 18 1/8 12 1/8
Third 16 10 3/4 26 5/8 17 3/8
Fourth 14 5/8 9 5/8 35 22 3/4
</TABLE>
There were approximately 805 stockholder accounts of record on November
8, 1996, approximately 50 of which are "street name" accounts that the company
estimates to represent approximately 19,000 stockholders.
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 dividends in the foreseeable future.
32 FSI INTERNATIONAL
<PAGE> 37
CORPORATE AND STOCKHOLDER INFORMATION
Board of Directors
James A. Bernards
President
Facilitation, Incorporated
(Strategic planning,
directorships, organizational development)
Neil R. Bonke
Chairman and Chief
Executive Officer
Electroglas, Inc.
(Automatic wafer probing equipment manufacturer)
Joel A. Elftmann
FSI Chairman, President
and Chief Executive Officer
Terrence W. Glarner
President
West Concord Ventures, Inc.
(Venture capital)
Joanna T. Lau
President
Lau Technologies
(Electronics manufacturer)
Robert E. Lorenzini
Chairman
SunPower Corporation
(Solar energy power
generation systems)
Dr. William M. Marcy
Associate Dean of
Engineering for Research and Administration
Texas Tech University
Charles R. Wofford
FSI Vice Chairman
Corporate Officers
Joel A. Elftmann
Chairman, President
and Chief Executive Officer
Co-founded FSI in 1973
<PAGE> 38
Dr. Robert E. Cavins
Executive Vice President,
President Chemical
Management Division
Joined FSI in 1993
Dale A. Courtney
Executive Vice President,
President Surface
Conditioning Division
Joined FSI in 1987
Timothy D. Krieg
Executive Vice President,
Quality and Human Resources
Joined FSI in 1979
Peter A. Pope
Executive Vice President,
Marketing and Account Management
Joined FSI in 1982
Benno G. Sand
Executive Vice President,
Chief Financial Officer
and Secretary
Joined FSI in 1982
Dr. Benjamin J. Sloan
Executive Vice President,
President Microlithography Division
Joined FSI in 1992
J. Wayne Stewart
Executive Vice President, Operations
Joined FSI in 1994
Charles R. Wofford
Vice Chairman
Joined FSI in 1996
Corporate Headquarters
322 Lake Hazeltine Drive
Chaska, Minnesota
55318-1096
612/448-5440
Common Stock
The common stock of FSI International is traded on the Nasdaq National Market
under the symbol FSII.
Registrar and
Transfer Agent
Harris Trust & Savings
Bank, Shareholder
Services Division
311 West Monroe Street
Chicago, Illinois 60606
312/461-2549
<PAGE> 39
Stockholder Inquiries
Investors seeking financial publications or wishing to be placed on the
Company's mailing list of investors may call: (612) 361-7973
Financial statements and information about FSI International are also available
electronically via the World-Wide-Web at:
http://www.fsi-intl.com
General stockholder and investor questions may be directed to:
Heide Erickson
Manager, Investor Relations
FSI International, Inc.
322 Lake Hazeltine Drive
Chaska, Minnesota
55318-1096
(612) 361-7648
Form 10-K
The Annual Report on Form 10-K filed with the Securities and Exchange
Commission is available to stockholders on request by contacting the Investor
Relations Department at
the address below.
Annual Meeting
All stockholders and other interested parties are invited to attend the
Company's annual meeting, scheduled for January 22, 1997, at 3:30 p.m. at the
Lutheran Brotherhood Building, 625 Fourth Avenue South, Minneapolis, Minnesota.
Independent Auditors
KPMG Peat Marwick LLP
Minneapolis, Minnesota
General Counsel
Luke R. Komarek
FSI International, Inc.
<PAGE> 1
EXHIBIT 21.0
SUBSIDIARIES*
JURISDICTION OF
NAME INCORPORATION
- ---- ----------------
Applied Chemical Solutions, Inc. Minnesota
FSI International, Ltd. Guam
FSI Metron Europe Limited England
Semiconductor Systems, Inc. California
- -------------------
* FSI International, Inc. also owns interests in Metron Technology B.V.(37.5%)
and m-FSI, Ltd.(49%).
<PAGE> 1
EXHIBIT 23.0
Independent Auditors' Consent
The Board of Directors and Stockholders
FSI International, Inc.:
We consent to incorporation by reference in the registration statements (No.'s
33-29494, 33-39919, 33-33649, 33-33647, 33-39920, 33-42893, 33-77852, 33-77854,
and 33-60903) on Form S-8 of FSI International, Inc. of our reports dated
October 11, 1996 relating to the consolidated balance sheets of FSI
International, Inc. and subsidiaries as of August 31, 1996 and August 26, 1995,
and the related consolidated statements of operations, stockholders' equity and
cash flows and related schedule for each of the fiscal years in the three-year
period ended August 31, 1996, which reports appear in or are incorporated by
reference in the August 31, 1996 annual report on Form 10-K of FSI
International, Inc.
/s/ KPMG Peat Marwick
Minneapolis, Minnesota
November 25, 1996
<PAGE> 1
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned director of FSI
International, Inc. hereby appoint Joel A. Elftmann and Benno G. Sand, and each
of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in name, place, and stead
of the undersigned, to sign and file with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended, the Annual Report on Form
10-K for the fiscal year ended August 31, 1996 of FSI International, Inc. and
any and all amendments and exhibits thereto, with full power and authority to do
and perform any and all acts and things whatsoever requisite and necessary or
desirable, as fully and effectually in all respects as I could do if personally
present.
IN WITNESS WHEREOF, I have hereunto set my hand this 18th day of October,
1996.
/s/ James A. Bernards
------------------------
James A. Bernards
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned director of FSI
International, Inc. hereby appoint Joel A. Elftmann and Benno G. Sand, and each
of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in name, place, and stead
of the undersigned, to sign and file with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended, the Annual Report on Form
10-K for the fiscal year ended August 31, 1996 of FSI International, Inc. and
any and all amendments and exhibits thereto, with full power and authority to do
and perform any and all acts and things whatsoever requisite and necessary or
desirable, as fully and effectually in all respects as I could do if personally
present.
IN WITNESS WHEREOF, I have hereunto set my hand this 21st day of October,
1996.
/s/ Neil R. Bonke
-----------------------------
Neil R. Bonke
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned director of FSI
International, Inc. hereby appoint Joel A. Elftmann and Benno G. Sand, and each
of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in name, place, and stead
of the undersigned, to sign and file with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended, the Annual Report on Form
10-K for the fiscal year ended August 31, 1996 of FSI International, Inc. and
any and all amendments and exhibits thereto, with full power and authority to do
and perform any and all acts and things whatsoever requisite and necessary or
desirable, as fully and effectually in all respects as I could do if personally
present.
IN WITNESS WHEREOF, I have hereunto set my hand this 20th day of October,
1996.
/s/ Joel A. Elftmann
--------------------------
Joel A. Elftmann
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned director of FSI
International, Inc. hereby appoint Joel A. Elftmann and Benno G. Sand, and each
of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in name, place, and stead
of the undersigned, to sign and file with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended, the Annual Report on Form
10-K for the fiscal year ended August 31, 1996 of FSI International, Inc. and
any and all amendments and exhibits thereto, with full power and authority to do
and perform any and all acts and things whatsoever requisite and necessary or
desirable, as fully and effectually in all respects as I could do if personally
present.
IN WITNESS WHEREOF, I have hereunto set my hand this 21st day of October,
1996.
/s/ Terrence W. Glarner
----------------------------
Terrence W. Glarner
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned director of FSI
International, Inc. hereby appoint Joel A. Elftmann and Benno G. Sand, and each
of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in name, place, and stead
of the undersigned, to sign and file with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended, the Annual Report on Form
10-K for the fiscal year ended August 31, 1996 of FSI International, Inc. and
any and all amendments and exhibits thereto, with full power and authority to do
and perform any and all acts and things whatsoever requisite and necessary or
desirable, as fully and effectually in all respects as I could do if personally
present.
IN WITNESS WHEREOF, I have hereunto set my hand this 24th day of October,
1996.
/s/ Robert E. Lorenzini
------------------------------
Robert E. Lorenzini
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned director of FSI
International, Inc. hereby appoint Joel A. Elftmann and Benno G. Sand, and each
of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in name, place, and stead
of the undersigned, to sign and file with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended, the Annual Report on Form
10-K for the fiscal year ended August 31, 1996 of FSI International, Inc. and
any and all amendments and exhibits thereto, with full power and authority to do
and perform any and all acts and things whatsoever requisite and necessary or
desirable, as fully and effectually in all respects as I could do if personally
present.
IN WITNESS WHEREOF, I have hereunto set my hand this 20th day of October,
1996.
/s/ William M. Marcy
----------------------------
William M. Marcy
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned director of FSI
International, Inc. hereby appoint Joel A. Elftmann and Benno G. Sand, and each
of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in name, place, and stead
of the undersigned, to sign and file with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended, the Annual Report on Form
10-K for the fiscal year ended August 31, 1996 of FSI International, Inc. and
any and all amendments and exhibits thereto, with full power and authority to do
and perform any and all acts and things whatsoever requisite and necessary or
desirable, as fully and effectually in all respects as I could do if personally
present.
IN WITNESS WHEREOF, I have hereunto set my hand this 15th day of October,
1996.
/s/ Charles R. Wofford
-----------------------------
Charles R. Wofford
<PAGE> 8
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned director of FSI
International, Inc. hereby appoint Joel A. Elftmann and Benno G. Sand, and each
of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in name, place, and stead
of the undersigned, to sign and file with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended, the Annual Report on Form
10-K for the fiscal year ended August 31, 1996 of FSI International, Inc. and
any and all amendments and exhibits thereto, with full power and authority to do
and perform any and all acts and things whatsoever requisite and necessary or
desirable, as fully and effectually in all respects as I could do if personally
present.
IN WITNESS WHEREOF, I have hereunto set my hand this 23rd day of October,
1996.
/s/ Joanna T. Lau
------------------------
Joanna T. Lau
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
All financial statements have been restated to reflect the merger with
Semiconductor Systems, Inc. on April 4, 1996. The merger was accounted for as a
pooling of interest.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
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