<PAGE>
As filed with the Securities and Exchange Commission on March 6, 1996
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
------------------
FSI INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Minnesota 3559 41-1223238
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
322 Lake Hazeltine Drive
Chaska, Minnesota 55318
(612) 448-5440
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------
Joel A. Elftmann
Chairman, President and Chief Executive Officer
FSI International, Inc.
322 Lake Hazeltine Drive
Chaska, Minnesota 55318
(612) 448-5440
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------
IT IS REQUESTED THAT COPIES OF NOTICES AND COMMUNICATIONS FROM THE SECURITIES
AND EXCHANGE COMMISSION BE SENT TO:
Douglas P. Long Michael J. Danaher
Faegre & Benson LLP Wilson Sonsini Goodrich & Rosati
2200 Norwest Center Professional Corporation
90 South Seventh Street 650 Page Mill Road
Minneapolis, Minnesota 55402 Palo Alto, California 94304
(612)336-3000 (415) 493-9300
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE REGISTRATION
STATEMENT AND UPON CONSUMMATION OF THE MERGER DESCRIBED HEREIN.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
============================================================================================
Title of Securities Amount Proposed Maximum Proposed Maximum Amount of
to be to be Offering Price Aggregate Registration
Registered Registered (1) Per Share Offering Price (2) Fee
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock
(no par value) 1,800,000 Shares N.A. $9,367,000 $3,230
============================================================================================
</TABLE>
(1) Based upon the maximum number of shares that may be issued in the
transaction described herein.
(2) Estimated solely for purpose of computing the registration fee, in
accordance with Rule 457(f), based upon the book value, as of December 31,
1995, of all shares of common stock of Semiconductor Systems, Inc. to be
acquired by the registrant in the transaction described herein.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
_______________________________________________________________________________
<PAGE>
FSI INTERNATIONAL, INC.
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN THE PROXY STATEMENT/PROSPECTUS OF INFORMATION REQUIRED IN
THE PROSPECTUS
<TABLE>
<S> <C> <C>
1. Forepart of Registration Statement Facing Page of the Registration Statement;
and Outside Front Cover Page of Cross-Reference Sheet; Outside Front
Prospectus Cover Page of Proxy Statement/Prospectus
2. Inside Front and Outside Back Cover Available Information;
Pages of Prospectus Table of Contents
3. Risk Factors, Ratio of Earnings to Summary; Selected Historical and Pro Forma
Fixed Charges and Other Information Financial Data; Risk Factors;
Introduction - General
4. Terms of the Transaction Summary; Background of the Merger
and Related Matters - Recommendation
of the Semiconductor Systems Board of
Directors; Reasons for the Merger; The
Merger; Comparison of Semiconductor
Systems and FSI Shareholders' Rights
5. Pro Forma Financial Information Selected Historical and Pro Forma
Financial Data; Unaudited Pro
Forma Combined Financial Information
6. Material Contracts with the Company Summary; Background of the Merger and
Being Acquired Related Matters - Background of the
Merger - Interests of Certain Persons in
the Merger - Operations After the Merger
7. Additional Information Required for *
Reoffering by Persons and Parties
Deemed to be Underwriters
8. Interests of Named Experts and Counsel Experts; Legal Opinions
9. Disclosure of Commission Position on *
Indemnification for Securities Act
Liabilities
10. Information with Respect to S-3 *
Registrants
11. Incorporation of Certain Information *
by Reference
12. Information with Respect to S-2 or *
S-3 Registrants
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
13. Incorporation of Certain Information *
by Reference
14. Information with Respect to Summary; Available Information; Selected
Registrants Other Than S-2 or S-3 Historical and Pro Forma Financial Data;
Registrants FSI Business; FSI Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Index to Financial
Statements
15. Information with Respect to S-3 *
Companies
16. Information with Respect to *
S-2 or S-3 Companies
17. Information with Respect to Companies Summary; Selected Historical and Pro
Other Than S-2 or S-3 Companies Forma Financial Data; Semiconductor
Systems Business; Semiconductor Systems
Management's Discussion and Analysis of
Financial Conditions and Results of
Operations; Index to Financial
Statements
18. Information if Proxies, Consents, Available Information; Summary;
or Authorizations Are to Be Solicited Introduction; Background of the Merger
and Related Matters - Interests of
Certain Persons in the Merger; The
Merger - General; The Merger - Expenses
of the Merger; The Merger - Dissenters'
Rights; Security Ownership of Management
of FSI and Certain Beneficial Owners;
Principal Shareholders of Semiconductor
Systems; Information Regarding FSI
Management and Compensation
19. Information if Proxies, Consents, or *
Authorizations Are Not to Be Solicited
or in an Exchange Offer
</TABLE>
__________________
*Item is omitted because answer is negative or item is inapplicable.
ii
<PAGE>
SEMICONDUCTOR SYSTEMS, INC.
47003 MISSION FALLS COURT
FREMONT, CALIFORNIA 94539
_________, 1996
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders of
Semiconductor Systems, Inc. ("Semiconductor Systems") to be held at
Semiconductor Systems' principal executive offices located at 47003 Mission
Falls Court, Fremont, California 94539 on ________, 1996 at 9:00 a.m., Pacific
Standard Time. At the Special Meeting you will be asked to consider and vote
upon the approval of a proposed merger whereby Spectre Acquisition Corp.
("Merger Sub"), a California corporation which is a wholly owned subsidiary of
FSI International, Inc. ("FSI"), will be merged with and into Semiconductor
Systems (the "Merger"), pursuant to the Agreement and Plan of Reorganization
dated as of February 5, 1996, by and among Semiconductor Systems, FSI and Merger
Sub (together with the Merger Agreement attached thereto, the "Merger
Agreement").
As a result of the Merger, Semiconductor Systems will become a wholly owned
subsidiary of FSI and each share of Semiconductor Systems' Common Stock
outstanding immediately prior to the time the Merger becomes effective will
convert into the right to receive a number of shares of FSI Common Stock
determined in accordance with the provisions of the Merger Agreement, as
described in the enclosed Proxy Statement/Prospectus for the Special Meeting.
The enclosed Proxy Statement/Prospectus contains a more complete
description of the terms of the Merger. You are urged to read the Proxy
Statement/Prospectus carefully.
THE BOARD OF DIRECTORS HAS APPROVED THE MERGER AND MERGER AGREEMENT AS
BEING IN THE BEST INTERESTS OF SEMICONDUCTOR SYSTEMS' SHAREHOLDERS AND
RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE THE MERGER. IN MAKING THIS
RECOMMENDATION, THE BOARD OF DIRECTORS HAS CONSIDERED NUMEROUS FACTORS,
INCLUDING THE CONSIDERATION OFFERED BY FSI AND THE STRUCTURE OF THE PROPOSED
MERGER.
In order to ensure that your vote is represented at the Special Meeting,
PLEASE DATE, SIGN, AND PROMPTLY RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. If
you attend the meeting, you may vote in person if you wish, even though you have
previously returned your proxy.
Michael L. Parodi
President and Chief Executive Officer
<PAGE>
SEMICONDUCTOR SYSTEMS, INC.
47003 MISSION FALLS COURT
FREMONT, CALIFORNIA 94539
____________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD
_______________, 1996
To the Shareholders of Semiconductor Systems, Inc.:
A Special Meeting of Shareholders of Semiconductor Systems, Inc.
("Semiconductor Systems") will be held at Semiconductor Systems' principal
executive offices located at 47003 Mission Falls Court, Fremont, California
94539, on _______ __, 1996, at 9:00 a.m., Pacific Standard Time, for the
following purposes (which are more fully described in the accompanying Proxy
Statement/Prospectus).
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Reorganization, dated as of February 5, 1996, by and among
Semiconductor Systems, FSI International, Inc., a Minnesota corporation ("FSI")
and Spectre Acquisition Corp., a California corporation wholly owned by FSI
("Merger Sub") (together with the Merger Agreement attached thereto, the "Merger
Agreement"), and as contemplated thereby the merger of Merger Sub with and into
Semiconductor Systems (the "Merger"). In connection with such Merger, each
outstanding share of common stock, no par value, of Semiconductor Systems
("Semiconductor Systems Common Stock") will be converted into the right to
receive shares of common stock, no par value, of FSI ("FSI Common Stock") based
upon the conversion ratio described in the accompanying Proxy
Statement/Prospectus and in the Merger Agreement, a copy of which is attached
hereto as Annex I; and
2. To transact any other business that may properly come before the
Special Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on _______, 1996, as
the record date for determination of shareholders entitled to notice of and to
vote at the Special Meeting or any adjournments thereof.
Under California law, if the Merger is consummated, a shareholder of
Semiconductor Systems who does not vote in favor of the Merger and who otherwise
follows statutorily prescribed procedures, will be entitled, in lieu of
receiving shares of FSI Common Stock as a result of the Merger, to receive cash
equal to the "fair value" of such shareholder's shares of Semiconductor Systems
Common Stock. See "The Merger -- Dissenters' Rights" and Annex II to the Proxy
Statement/Prospectus.
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. THE AFFIRMATIVE
VOTE OF AT LEAST A MAJORITY OF THE OUTSTANDING SHARES OF SEMICONDUCTOR SYSTEMS
COMMON STOCK IS REQUIRED FOR THE APPROVAL OF THE MERGER. A VOTE IN FAVOR OF THE
MERGER IS BEING RECOMMENDED BY THE BOARD OF DIRECTORS. WHETHER OR NOT YOU PLAN
TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENVELOPE PROVIDED, AS IT IS IMPORTANT THAT YOUR SHARES BE
REPRESENTED. NO POSTAGE IS NEEDED IF MAILED IN THE UNITED STATES.
By Order of the Board of Directors
Michael L. Parodi
President and Chief Executive Officer
_______ __, 1996
<PAGE>
PROXY STATEMENT
OF
SEMICONDUCTOR SYSTEMS, INC.
FOR A SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON _____________, 1996
_______________
PROSPECTUS
OF
FSI INTERNATIONAL, INC.
COMMON STOCK
NO PAR VALUE
_______________
This Proxy Statement/Prospectus is being furnished to the shareholders of
Semiconductor Systems Inc., a California corporation ("Semiconductor Systems"),
in connection with the solicitation of proxies by the Board of Directors of
Semiconductor Systems from holders of outstanding shares of common stock, no par
value, of Semiconductor Systems ("Semiconductor Systems Common Stock"), for use
at the special meeting of shareholders (the "Special Meeting") of Semiconductor
Systems scheduled to be held on ____________, 1996 at Semiconductor Systems'
principal executive offices, 47003 Mission Falls Court, Fremont, California
94539 and at any adjournment thereof.
This Proxy Statement/Prospectus relates to the proposed merger of Spectre
Acquisition Corp., a newly formed, wholly owned subsidiary ( the "Merger Sub")
of FSI International, Inc., a Minnesota corporation ("FSI"), with and into
Semiconductor Systems (the "Merger"). FSI has filed a Registration Statement on
Form S-4 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with the Securities and Exchange Commission (the
"Commission") covering the shares of common stock, no par value, of FSI ("FSI
Common Stock") to be issued in connection with the Merger. This Proxy
Statement/Prospectus also constitutes the Prospectus of FSI with respect to such
shares and is filed as part of the Registration Statement.
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN FACTORS
SEMICONDUCTOR SYSTEMS SHAREHOLDERS SHOULD CONSIDER IN EVALUATING THE MERGER AND
THE ACQUISITION OF THE FSI COMMON STOCK OFFERED HEREBY.
No person has been authorized to give any information or to make any
representation other than as contained herein in connection with the offer of
FSI Common Stock to be issued in connection with the Merger, and if given or
made, such information must not be relied upon as having been authorized. This
Proxy Statement/Prospectus does not constitute an offer to sell or a
solicitation of an offer to purchase such stock in any jurisdiction or to any
person to whom it would be unlawful to make such an offer or solicitation.
Neither the delivery of this Proxy Statement/Prospectus nor any distribution of
such stock shall, under any circumstances, create any implication that there has
been no change in the information set forth herein or in the affairs of either
FSI or Semiconductor Systems since the date hereof.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
_______________
The date of this Proxy Statement/Prospectus is __________, 1996.
<PAGE>
AVAILABLE INFORMATION
FSI is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). In accordance therewith, FSI files
reports, proxy statements, and other information with the Commission.
Reports, proxy statements, and other information concerning FSI can be
inspected and copied at the public reference facilities of the Commission, Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the Commission: New York Regional Office, Seven World Trade
Center, Suite 1300, New York, New York 10048, and Chicago Regional Office, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials can be obtained at prescribed rates by writing to the Commission,
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549.
As permitted by the rules and regulations of the Commission, this Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement and exhibits thereto. Statements made in the Proxy
Statement/Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement and any amendments
thereto, including exhibits filed, are available for inspection and copying at
the Commission's offices as described above. All information herein with respect
to FSI and Merger Sub has been furnished by FSI, and all information herein with
respect to Semiconductor Systems has been furnished by Semiconductor Systems.
FSI(R), Polaris(R), Mercury(R), Excalibur(R), ChemFill(R), ChemBlend(TM),
ChemGen(TM) Stabilized Distribution(TM), Orion(TM), Ice(TM), Zeta(TM),
VP4500(TM), P2000(TM), and P2200M(TM) are trademarks of FSI or its subsidiary
Applied Chemical Solutions, Inc. OrbiTrak(R), is a trademark of Semiconductor
Systems. All other brand names or trademarks appearing in this Proxy
Statement/Prospectus are the property of their respective holders.
-2-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION......................................................2
SUMMARY....................................................................6
General..................................................................6
The Companies............................................................6
The Special Meeting......................................................7
Background of the Merger and Related Matters.............................9
The Merger...............................................................9
Comparison of FSI and Semiconductor Systems Shareholders' Rights........12
Market Prices and Dividend Data.........................................12
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA..........................13
Selected Historical Financial Data......................................14
FSI and Semiconductor Systems Selected Unaudited Pro Forma Data.........16
Comparative Per Share Data..............................................17
RISK FACTORS..............................................................18
Cyclicality of the Semiconductor Device Industry........................18
Fluctuations in Quarterly Operating Results.............................18
Management of Growth....................................................18
Dependence on New Products and Processes................................19
Reliance on Affiliated International Distributors.......................19
International Business..................................................20
Acquisitions............................................................21
Japanese Competition....................................................21
Competition.............................................................21
Dependence on Key Customers.............................................22
Acceptance of Polaris Microlithography Cluster..........................22
Changes in Industry Purchasing Practices; Lengthening Sales Cycle.......22
Dependence on Key Suppliers.............................................23
Dependence on Key Personnel.............................................23
Patents and Other Intellectual Property.................................23
Volatility of Stock Price...............................................23
INTRODUCTION..............................................................24
General.................................................................24
Voting and Proxies......................................................25
BACKGROUND OF THE MERGER AND RELATED MATTERS..............................26
Background of the Merger................................................26
Recommendation of the Board of Semiconductor Systems; Reasons
for the Merger..........................................................28
FSI's Reasons for the Merger............................................28
Interests of Certain Persons in the Merger..............................29
Operations After the Merger.............................................29
THE MERGER................................................................30
General.................................................................30
Merger Consideration....................................................30
No Fractional Shares....................................................31
Effective Time and Time of the Merger...................................31
Exchange of Semiconductor Systems Common Stock..........................31
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Conditions to the Merger; Amendment and Termination.....................32
Representations and Warranties..........................................33
Conduct of Semiconductor Systems' Business Prior to the Merger..........34
Tax Distributions To Semiconductor Systems Shareholders.................35
Effect on Employee Benefit Plans........................................35
Expenses of the Merger..................................................35
Indemnification and Escrow of Merger Consideration......................36
Termination Fees........................................................37
Affiliate Agreements; Voting Agreements.................................37
Governmental and Regulatory Approvals...................................38
Federal Income Tax Consequences.........................................38
Accounting Treatment....................................................39
Dissenters' Rights......................................................39
COMPARISON OF FSI AND SEMICONDUCTOR SYSTEMS SHAREHOLDERS' RIGHTS..........40
FSI Capital Stock.......................................................40
Semiconductor Systems Capital Stock.....................................42
Certain Differences in Rights of Shareholders...........................43
SECURITY OWNERSHIP OF MANAGEMENT OF FSI AND CERTAIN BENEFICIAL OWNERS.....45
FSI BUSINESS..............................................................46
General.................................................................46
Industry Background.....................................................46
Integrated Circuit Fabrication..........................................47
Products................................................................49
Spare Parts and Service.................................................52
Backlog and Seasonality.................................................52
Research and Development................................................52
Marketing, Sales and Support............................................53
Manufacturing and Suppliers.............................................53
Competition.............................................................54
Customers...............................................................55
Patents, Trademarks and Intellectual Property...........................56
Employees...............................................................56
Properties..............................................................56
Legal Proceedings.......................................................57
INFORMATION REGARDING FSI MANAGEMENT AND COMPENSATION.....................58
Executive Officers and Directors........................................58
Compensation of Directors...............................................60
Executive Compensation..................................................60
Stock Option Grants and Exercises in Last Fiscal Year...................62
Change in Control Agreements............................................63
Interest Of FSI Management And Others In Certain Transactions...........64
FSI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.....................................................65
Results of Operations...................................................65
Fiscal Quarters Ended November 25, 1995 and November 26, 1994...........65
Fiscal Years Ended August 1995, 1994 and 1993...........................66
Quarterly Results of Operations.........................................68
Liquidity and Capital Resources.........................................69
PRINCIPAL SHAREHOLDERS OF SEMICONDUCTOR SYSTEMS...........................70
Director and Executive Officer Information..............................71
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
SEMICONDUCTOR SYSTEMS BUSINESS............................................71
Introduction............................................................71
Industry Background.....................................................71
Technology and Products.................................................72
Service and Spare Parts.................................................73
Engineering, Research and Development...................................73
Sales and Marketing.....................................................74
Customers...............................................................74
Manufacturing and Suppliers.............................................74
Backlog.................................................................74
Competition.............................................................74
Patents, Trademarks, Copyrights and Other Intellectual Property.........75
Employees...............................................................75
Facilities..............................................................75
SEMICONDUCTOR SYSTEMS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF PERATIONS........................................75
Results of Operations...................................................76
Years Ended December 31, 1993, 1994 and 1995............................76
Liquidity and Capital Resources.........................................77
EXPERTS...................................................................78
LEGAL OPINIONS............................................................78
INDEX TO FINANCIAL STATEMENTS AND INFORMATION............................F-1
ANNEX I - AGREEMENT AND PLAN OF REORGANIZATION...........................A-1
ANNEX II - SECTION 1300, ET SEQ. OF CALIFORNIA GENERAL CORPORATION LAW...A-62
</TABLE>
-5-
<PAGE>
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement/Prospectus. This summary is not intended to be complete
and is qualified in its entirety by reference to the more detailed information
appearing elsewhere herein. Shareholders are urged to review the entire Proxy
Statement/Prospectus, including the Annexes hereto.
GENERAL
This Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of Spectre Acquisition Corp., a newly formed, wholly owned subsidiary
("Merger Sub") of FSI International, Inc., a Minnesota corporation ("FSI"), with
and into Semiconductor Systems, Inc. ("Semiconductor Systems"). Upon
effectiveness of the Merger, each outstanding share of common stock, no par
value, of Semiconductor Systems ("Semiconductor Systems Common Stock") (other
than shares held by FSI, Merger Sub or any other subsidiary of FSI and shares
held by shareholders who exercise and do not subsequently withdraw or lose
statutory dissenters' rights under Chapter 13 of the California General
Corporation Law) will be converted into the right to receive that number of
shares of common stock, no par value, of FSI ("FSI Common Stock") determined by
dividing 1,800,000 shares (the "FSI Shares") by the sum of: (i) the number of
shares of Semiconductor Systems Common Stock outstanding immediately prior to
the Effective Time plus (ii) the number of shares of Semiconductor Systems
Common Stock issuable upon the exercise or conversion of all stock options,
rights or other securities of Semiconductor Systems outstanding immediately
prior to the Effective Time (the "Exchange Ratio"); provided, however, that the
number of FSI Shares used for purposes of calculating the Exchange Ratio shall
be subject to adjustment if Semiconductor Systems costs and fees associated with
legal, accounting, investment banking and other similar fees and expenses
associated with the transactions contemplated by the Merger (the "Semiconductor
Systems Transaction Costs") exceed $500,000 in the aggregate. In that event, the
number of FSI Shares used for the purposes of calculating the Exchange Ratio
shall be decreased by an amount equal to the quotient determined by dividing (x)
the amount by which the actual amount of Semiconductor Systems Transaction Costs
exceeds $500,000 by (y) the closing sale price of a share of FSI Common Stock on
the date immediately preceding the Closing Date as reported on the National
Association of Securities Dealers, Inc. National Market System ("NMS") or, if no
sale of shares of FSI Common Stock has occurred on that date, on the next
preceding day on which a sale did occur on NMS (the "Closing Price"). Assuming
no adjustment to the aggregate number of shares of FSI Common Stock to be used
in calculating the Exchange Ratio and no further issuances by Semiconductor
Systems of any shares of Semiconductor Systems Common Stock or other
Semiconductor Systems securities, or rights or options to acquire Semiconductor
Systems Common Stock or other securities, each share of Semiconductor Systems
Common Stock would be converted into .2174022 shares of FSI Common Stock
pursuant to the Merger. The Merger Agreement provides that, except for grants of
options to employees in the ordinary course and issuances of Semiconductor
Systems Common Stock pursuant to the exercise of outstanding stock options,
Semiconductor Systems may not issue any shares of Semiconductor Systems Common
Stock, other Semiconductor Systems securities, or rights or options to acquire
Semiconductor Systems Common Stock or other Semiconductor Systems securities
without the consent of FSI.
The Merger will be effected pursuant to an Agreement and Plan of
Reorganization dated as of February 5, 1996 (together with the Merger Agreement
attached thereto, the "Merger Agreement"), among Semiconductor Systems, FSI and
Merger Sub, a copy of which is attached hereto as Annex I. See "The Merger."
THE COMPANIES
FSI International, Inc. FSI International, Inc. designs, manufactures,
markets, and supports microlithography, surface conditioning, and chemical
management equipment used in the fabrication of integrated circuits. FSI's
microlithography product, the Polaris cluster, processes photoresist (light
sensitive material used for patterning) on the surface of silicon wafers as part
of the photolithography phase of the integrated circuit fabrication process.
FSI's surface conditioning products, including the Mercury spray processing
systems and the Excalibur vapor processing systems, remove contaminants and
excess photoresist from wafers during the fabrication process and selectively
remove oxide from the wafer surface. The process steps performed by FSI's
microlithography and surface conditioning products are used repeatedly
throughout the fabrication cycle and constitute an integral part of the
manufacturing process for virtually every integrated circuit produced today.
FSI's chemical management products
-6-
<PAGE>
perform the critical functions of blending or mixing, delivering and controlling
the flow, concentration, and purity of chemicals used by various types of
processing equipment within a fabrication facility.
Advances in electronics technology in recent years have resulted in
increasingly sophisticated integrated circuits which require submicron
geometries and complex manufacturing processes. To meet the demand for these
more complex, high performance devices, integrated circuit manufacturers require
process technologies that are timely, reliable, and readily integrated into high
volume manufacturing environments. Competitive pressures are at the same time
forcing integrated circuit manufacturers to reduce the costs of producing
integrated circuits. FSI believes it responds to these demands by providing
leading technology products that increase yields, integrate with other
suppliers' equipment, and provide significant overall cost advantages.
FSI's strategy is to remain focused as a technological leader in its three
core markets, emphasizing close customer relationships that enhance FSI's
responsiveness to the needs and cost constraints of its markets. FSI intends to
enhance its product offerings in its three core markets by continuing FSI's
commitment to engineering and development and by making strategic acquisitions
of complementary technologies or products. As part of its strategy and to serve
its customers better, FSI continues to expand and enhance its demonstration and
process development facilities and recently completed construction of and the
relocation of FSI's manufacturing operations for its surface conditioning and
microlithography products to a new 100,000 square foot manufacturing facility in
Chaska, Minnesota.
FSI sells products from one or more of its product lines to most major
integrated circuit manufacturers, including AMD, Chartered Semiconductor,
Cypress Semiconductor, LG Semicon, Intel, IBM, Motorola, National Semiconductor,
SGS Thomson, and Texas Instruments. FSI markets its products directly in North
America and primarily through a network of affiliated distributors in Europe,
the Far East, and Japan. Through these affiliated international distributors FSI
can provide timely and efficient worldwide customer service and support.
The principal executive offices of FSI, a Minnesota corporation, are
located at 322 Lake Hazeltine Drive, Chaska, Minnesota 55318 and its telephone
number is (612) 448-5440.
Semiconductors Systems, Inc. Semiconductor Systems, Inc. designs,
develops, manufactures, markets and services technologically advanced equipment
used in the semiconductor, flat panel display, thin film head and multi-chip
module industries. Semiconductor Systems manufactures a line of specialized,
proprietary photolithography processing products which are principally used in
the photoresist stages of the critical layering in the fabrication of
semiconductor devices and other advanced electronic devices. Semiconductor
Systems' product offerings include the OrbiTrak semiconductor processing system,
APEX flat panel display and multi-chip module processing systems, Scorpio thin-
film-head processing system, System-500 high throughput semiconductor processing
system and System-150/System-1A semiconductor processing systems. Semiconductor
Systems also provides spare parts to its installed customer base plus
maintenance service contracts as requested.
The principal executive offices of Semiconductor Systems, a California
corporation, are located at 47003 Mission Falls Court, Fremont, California
94539-7819 and its telephone number is (510) 683-8858.
THE SPECIAL MEETING
Time, Date, Place and Purpose. A special meeting of shareholders of
Semiconductor Systems (the "Special Meeting") will be held on ____________,
1996, at 9:00 a.m., Pacific Standard Time, at the principal executive offices of
Semiconductor Systems located at 47003 Mission Falls Court, Fremont, California
94539. At the Special Meeting, holders of shares of Semiconductor Systems Common
Stock will be asked to consider and vote upon a proposal to approve and adopt
the Merger Agreement and the Merger contemplated thereby. See "Introduction --
General."
Record Date, Quorum, Vote Required. Only holders of record of
Semiconductor Systems Common Stock at the close of business on _________, 1996
will be entitled to notice of and to vote at the Special Meeting. As of such
date, there were 8,000,000 shares of Semiconductor Systems Common Stock
outstanding held by 13 holders of record. Holders of record on the record date
are entitled to one vote per share on any matter which may properly come before
the Special Meeting. The presence, either in person or by proxy, of the holders
of a majority of the then outstanding shares of Semiconductor Systems Common
Stock is necessary to constitute a quorum at the Special Meeting. The
affirmative vote of the holders of a majority of the outstanding shares of
Semiconductor Systems Common Stock is required to approve and adopt the Merger
Agreement and the Merger. See "Introduction -- General" and "Introduction --
Voting and Proxies."
-7-
<PAGE>
FSI, as sole shareholder of Merger Sub, has approved the Merger Agreement.
No vote of FSI's shareholders is required to approve the Merger Agreement. See
"Introduction -- Voting and Proxies."
Certain Voting Information. On ________________, Semiconductor Systems'
directors and executive officers (and their affiliates), as a group,
beneficially owned 4,772,250 shares (or approximately 59.7%) of the outstanding
Semiconductor Systems Common Stock. Michael L. Parodi, Douglas K. Amis, Gerald
E. Masterson and Qui V. Nguyen, who in the aggregate own approximately 72.2% of
the outstanding shares of Semiconductor Systems Common Stock, have agreed with
FSI to vote in favor of the Merger Agreement and the Merger at the Special
Meeting. See "Principal Shareholders of Semiconductor Systems."
Holders of Semiconductor Systems Common Stock who dissent from the approval
and adoption of the Merger Agreement and the Merger and who comply with required
statutory procedures will have certain appraisal rights under California law.
See "The Merger -- Dissenters' Rights."
The Semiconductor Systems shareholders, pursuant to the Shareholders
Agreement dated February 5, 1996 among FSI and all shareholders of Semiconductor
Systems and as provided in the Merger Agreement, have appointed Michael L.
Parodi to act on their behalf as agent and attorney-in-fact of such
shareholders. See "The Merger -- Indemnification and Escrow of Merger
Consideration."
-8-
<PAGE>
BACKGROUND OF THE MERGER AND RELATED MATTERS
Background of the Merger. The proposed Merger is the result of a review by
Semiconductor Systems' Board of Directors of strategic alternatives available to
Semiconductor Systems that would enable it to achieve its projected growth rate,
including consideration of equity and debt financing, financing from a strategic
partner or merger with a more established firm.
After careful evaluation of various alternatives, the Board of Directors of
Semiconductor Systems chose to pursue and to work toward the signing of a
definitive agreement of merger with FSI. Negotiations and due diligence
continued throughout December 1995 and January 1996. On February 4, 1996,
pertinent agreements were completed. On February 4, 1996, the Board of Directors
of Semiconductor Systems unanimously approved the Merger Agreement and the
Merger with FSI, and the Merger Agreement was signed by the authorized
representatives of the parties on February 5, 1996.
Recommendations of Board of Directors. The terms of the Merger are the
result of arm's-length negotiations between representatives of FSI and
Semiconductor Systems.
The Semiconductor Systems Board has unanimously approved the Merger
Agreement and determined to recommend approval of the Merger to the shareholders
of Semiconductor Systems. Semiconductor Systems' Board believes that the
proposed Merger is in the best interests of Semiconductor Systems and its
shareholders and recommends that shareholders of Semiconductor Systems vote for
approval and adoption of the Merger Agreement and the Merger. For a discussion
of the factors considered by the Board in approving the Merger, see "Background
of the Merger and Related Matters--Recommendation of the Board of Semiconductor
Systems: Reasons for the Merger."
Interests of Certain Persons in the Merger. Certain directors and officers
of Semiconductor Systems have interests in the Merger different from the
interests of other Semiconductor Systems shareholders. See "Background of the
Merger--Interests of Certain Persons in the Merger."
THE MERGER
General. Pursuant to the Merger Agreement, Merger Sub will be merged with
and into Semiconductor Systems. As a result of the Merger, each outstanding
share of Semiconductor Systems Common Stock (other than shares held by FSI,
Merger Sub or any other subsidiary of FSI and shares held by shareholders who
exercise and do not subsequently withdraw or lose statutory dissenters' rights)
will be converted into a fraction of a share of FSI Common Stock based upon the
Exchange Ratio set forth in the Merger Agreement and described herein. See "The
Merger -- Merger Consideration."
Effective Time of the Merger. The Effective Time of the Merger will be the
time and on the date at which Articles of Merger are filed with the Secretary of
State of the State of California in accordance with the relevant provisions of
the California Corporations Code (the "Effective Time"). It is presently
contemplated that the Effective Time of the Merger will occur as soon as
practicable after approval of the Merger Agreement and Merger by the
shareholders of Semiconductor Systems, subject to the terms and conditions set
forth in the Merger Agreement. See "The Merger--Effective Date and Time of the
Merger" and "--Conditions to the Merger; Amendment and Termination." The closing
of the Merger will occur on the day of the Effective Time or at such other time
as agreed to by the parties to the Merger Agreement (the "Closing Date"). FSI
and Semiconductor Systems anticipate that the Merger will close _____________,
1996, although there can be no assurance as to whether or when the Merger will
occur. See "The Merger--Terms of the Merger; Amendment and Termination," "--
Conditions to the Merger; Amendment and Termination," and "--Regulatory
Approvals."
Exchange of Semiconductor Systems Stock Certificates. As soon as
practicable after the Effective Time, instructions with regard to the surrender
of Semiconductor Systems stock certificates, together with a letter of
transmittal to be used for this purpose, will be furnished to all Semiconductor
Systems shareholders for use in exchanging their stock certificates for the
shares of FSI Common Stock they will be entitled to receive as a result of the
Merger. Shareholders of Semiconductor Systems should not submit their stock
certificates for exchange until such instructions and letter of transmittal are
received. See "The Merger -- Exchange of Semiconductor Systems Stock
Certificates."
Conditions to the Merger; Termination. In addition to approval by the
shareholders of Semiconductor Systems, the obligations of the parties to
consummate the Merger are subject to the satisfaction or, where permitted,
waiver of
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<PAGE>
certain conditions. It is also a condition to FSI's obligation to consummate the
Merger that not more than 5% of the outstanding shares of Semiconductor Systems
Common Stock shall have exercised, or shall continue to have the right to
exercise, dissenters' rights with respect to the transactions contemplated by
the Merger Agreement.
The Merger Agreement may be terminated at any time prior to the Effective
Time of the Merger whether before or after shareholder approval (i) by mutual
written consent of FSI and Semiconductor Systems, (ii) by either FSI or
Semiconductor Systems if the Merger has not been consummated on or before May
20, 1996, (iii) by either FSI or Semiconductor Systems, provided it is not in
breach, if there has been a material breach of any representation, warranty,
covenant or agreement contained in the Merger Agreement (which has not been
cured) on the part of the other party, (iv) by FSI or Semiconductor Systems if
there shall be a final, non-appealable order of a federal or state court in
effect preventing consummation of the Merger or if there shall be any final
action taken, or any statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Merger by any governmental entity which would
make consummation of the Merger illegal, (v) by FSI if the recommendation by the
Board of Directors of Semiconductor Systems for approval of the Merger or the
Merger Agreement is modified or withdrawn in any way detrimental to FSI or the
Merger and Merger Agreement is not approved by the Semiconductor Systems
shareholders or (vi) by Semiconductor Systems if the Board of Directors of
Semiconductor Systems modifies or withdraws its recommendation to approve the
Merger or Merger Agreement in any way detrimental to FSI and at the time of such
action an acquisition proposal by a third party is outstanding (provided that
Semiconductor System pays FSI the required termination fee). See "The Merger--
Conditions to the Merger; Amendment and Termination" and "--Termination Fees".
Representations, Warranties and Covenants. In the Merger Agreement,
Semiconductor Systems and FSI have made certain representations and warranties
as to their respective organization and existence, certain financial
information, capitalization, corporate authority and approvals relating to the
Merger, and Semiconductor Systems has made certain representations and
warranties with respect to its business operations including its properties,
insurance, employee benefits, environmental compliance, taxes and absence of
previously undisclosed material liabilities. Prior to the Effective Time,
Semiconductor Systems has covenanted and agreed to conduct its business in the
usual, regular and ordinary course in substantially the same manner as
previously conducted. See "The Merger --Representations, Warranties and
Covenants."
Semiconductor Systems Employee Benefit Plans. FSI will take such
reasonable actions as are necessary to allow eligible employees of Semiconductor
Systems to participate in FSI's Employee Stock Purchase Plan and its Defined
Contribution Pension Plan as soon as practicable after the Effective Time of the
Merger. Subject to the eligibility and other participation requirements and
terms contained in FSI's benefit programs and plans, FSI will provide
Semiconductor Systems' employees with full credit for years of past service to
Semiconductor Systems since its incorporation on November 20, 1990. See "The
Merger -- Effect on Employee Benefit Plans."
Substitution of Semiconductor Systems Options. Upon consummation of the
Merger, all options to purchase shares of Semiconductor Systems Common Stock
then outstanding will be converted into options to purchase FSI Common Stock
(the "Substituted Options"). Following the Effective Time, each Substituted
Option will be exercisable for that number of whole shares of FSI Common Stock
determined by multiplying the number of shares of Semiconductor Systems Common
Stock that were subject to such Substituted Option immediately prior to the
Effective Time by the Exchange Ratio, and rounded down to the nearest whole
number. The exercise price per share of Substituted Options shall be equal to
the exercise price per share immediately prior to the Effective Time divided by
the Exchange Ratio and rounded down to the nearest whole cent. The Substituted
Options shall be issued under FSI's existing 1994 Omnibus Stock Plan. See "The
Merger -- Effect on Employee Benefit Plans."
Indemnification and Escrow of Merger Consideration. Pursuant to the
Merger Agreement and the Shareholders Agreement dated February 5, 1996 among the
shareholders of Semiconductor Systems (the "Securityholders") and FSI, the
Securityholders, severally, but not jointly, have agreed to indemnify and hold
FSI and the other Indemnities (as hereinafter defined) harmless from and against
any Adverse Consequences (as hereinafter defined) they may suffer as a result of
(i) any inaccuracy or breach of any representation or warranty of Semiconductor
Systems contained in the Merger Agreement or any failure of Semiconductor
Systems to perform or comply with any covenant contained therein (provided that
the Securityholders shall not have any obligation for the first $150,000 in
Adverse Consequences incurred in the aggregate by the Indemnitees) until no
later than the first anniversary of the Effective Time (the "General Indemnity")
and (ii) any claim, action, dispute or loss arising out of any action taken or
omitted in connection with any transactions involving securities of
Semiconductor Systems (excluding the Merger) which were made between or among
Semiconductor Systems and/or its shareholders and former shareholders during the
12 months prior to the Effective Time involving any shareholder agreement among
Semiconductor Systems and any current or former shareholder of
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<PAGE>
Semiconductor Systems until the expiration of the period during which a claim
may be asserted under any relevant statute of limitations (the "Claims
Indemnity").
As security for the obligations of the Securityholders under the General
Indemnity, 60,000 shares of FSI Common Stock to be issued in the Merger will be
held in escrow with Harris Trust & Savings Bank (or other mutually acceptable
escrow agent) (the "Escrow Agent"). As security for the obligations of the
Securityholders under the Claims Indemnity, 250,000 shares of FSI Common Stock
to be issued in the Merger will be held in escrow with the Escrow Agent. The
escrow fund established with respect to the General Indemnity shall expire on
the first anniversary of the Effective Time and the escrow fund established with
respect to the Claims Indemnity shall expire on August 31, 1997, after which
times, respectively, the escrowed shares not subject to prior claims for
indemnification pursuant to the Merger Agreement shall be released from escrow.
Any indemnity obligations under either the General Indemnity or the Claims
Indemnity shall be allocated among the Securityholders in the same proportion as
the number of escrowed shares contributed by a Securityholder to the escrow
represents of the total of all escrowed shares. See "The Merger--Indemnification
and Escrow of Merger Consideration."
Termination Fees. Under certain specified conditions, the Merger Agreement
provides for the payment by Semiconductor Systems to FSI of $1,000,000 upon
termination of the Merger Agreement. See "The Merger -- Termination Fees."
Affiliate Agreements; Voting Agreements. Messrs. Parodi, Amis, Masterson
and Nguyen, the "affiliates" (as that term is defined for purposes of Rule 145
under the Securities Act) of Semiconductor Systems, have entered into agreements
restricting the sale or disposition of their shares of Semiconductor Systems
Common Stock prior to the Merger and the resale or other disposition of shares
of FSI Common Stock received by them in the Merger so as to comply with the
requirements of the securities laws and pooling of interests accounting. In
addition, these Semiconductor Systems affiliates have each agreed to vote their
shares of Semiconductor Systems Common Stock in favor of the Merger Agreement at
the Special Meeting. Messrs. Parodi, Amis, Masterson and Nguyen own in the
aggregate 5,772,250 shares (or 72.2%) of the outstanding Semiconductor Systems
Common Stock. See "The Merger -- Affiliate Agreements; Voting Agreements."
Accounting Treatment. The Merger is intended to qualify as a pooling of
interests for accounting and financial reporting purposes. See "The Merger --
Accounting Treatment."
Dissenters' Rights. Holders of Semiconductor Systems Common Stock who do
not vote in favor of the Merger may, under certain circumstances and by
following procedures prescribed by the California Corporations Code, exercise
dissenters' rights and receive cash for their shares of Semiconductor Systems
Common Stock. The failure of a dissenting Semiconductor Systems shareholder to
follow the appropriate procedures, may result in the termination or waiver of
such rights. For information regarding dissenters' rights under California law,
see "The Merger -- Dissenters' Rights" and Annex II.
Regulatory Matters. Consummation of the Merger is conditioned upon, among
other things, the receipt of all consents or approvals of government agencies,
the receipt of which is necessary for the consummation of the Merger and the
transactions contemplated thereby. See "The Merger -- Governmental and
Regulatory Approvals."
Expenses of the Merger. Pursuant to the Merger Agreement, each party has
agreed to pay all fees and expenses incurred by the respective party in
connection with the Merger; provided, however, that if the fees and expenses of
Semiconductor Systems exceed $500,000, then the number of FSI Shares used to
determine the Exchange Ratio shall be reduced accordingly and, under certain
conditions, if the Merger Agreement is terminated, Semiconductor Systems will be
required to pay a termination fee to FSI. See "The Merger--Merger
Consideration," "--Expenses of the Merger," and "--Termination Fees."
Tax Distributions to Semiconductor Systems Shareholders. The Merger
Agreement provides that Semiconductor Systems will continue to make
distributions to shareholders for income tax purposes for taxes incurred prior
to the Effective Time. In addition, prior to the Closing, Semiconductor Systems
shall issue to each shareholder of Semiconductor Systems a promissory note for
the same purpose. Shareholders will, however, be required to reimburse
Semiconductor Systems if the actual taxable income of Semiconductor Systems for
1995 is less than amounts previously distributed on account of such taxable
income. See "The Merger--Tax Distributions to Semiconductor Systems
Shareholders."
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<PAGE>
Federal Income Tax Consequences of the Merger. FSI and Semiconductor
Systems intend for the Merger to be treated as a reorganization within the
meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the
"Code"). See "The Merger -- Federal Income Tax Consequences."
COMPARISON OF FSI AND SEMICONDUCTOR SYSTEMS SHAREHOLDERS' RIGHTS
The rights of Semiconductor Systems' shareholders are currently governed by
California law and by Semiconductor Systems' Articles of Incorporation (the
"Semiconductor Systems Articles") and Bylaws (the "Semiconductor Systems
Bylaws"). At the Effective Time of the Merger, Semiconductor Systems
shareholders will become shareholders of FSI, a Minnesota corporation, and their
rights as FSI shareholders will be governed by Minnesota law and by FSI's
Articles of Incorporation and Bylaws. There are various differences between the
rights of Semiconductor Systems shareholders and the rights of FSI shareholders.
See "Comparison of FSI and Semiconductor Systems Shareholders' Rights."
MARKET PRICES AND DIVIDEND DATA
FSI Common Stock is listed on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ") under the symbol "FSII". The
following table sets forth for the periods indicated the high and low sales
prices per share of FSI Common Stock as reported on the Nasdaq National Market
for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1994
First Quarter............................... $6 1/2 $4 5/8
Second Quarter.............................. 6 7/8 4 7/8
Third Quarter............................... 7 7/8 5 1/4
Fourth Quarter.............................. 9 5 3/8
FISCAL 1995
First Quarter............................... 14 1/4 8 5/8
Second Quarter.............................. 18 1/8 12 1/8
Third Quarter............................... 26 5/8 17 3/8
Fourth Quarter.............................. 35 22 3/4
FISCAL 1996
First Quarter............................... 38 1/2 18 1/2
Second Quarter.............................. 24 1/2 12 1/2
Third Quarter (through March 4, 1996)....... 15 12 7/8
</TABLE>
As of December 6, 1995, there were approximately 400 record holders of FSI
Common Stock and an estimated additional 14,000 shareholders who held beneficial
interests in shares of FSI Common Stock registered in nominee names of banks and
brokerage houses.
FSI has never declared or paid cash dividends on its Common Stock. FSI
currently intends to retain all earnings for use in its business and does not
anticipate paying any cash dividends in the foreseeable future.
There is no public trading market for Semiconductor Systems Common Stock.
Semiconductor Systems has been an S corporation since its incorporation in
November 1990. As an S corporation, Semiconductor Systems has regularly paid
dividends sufficient to cover the federal and state taxes incurred by the
shareholders of Semiconductor Systems in connection with their ownership of
Semiconductor Systems Common Stock. In addition, in 1991, 1992 and 1993
Semiconductor Systems paid dividends to its shareholders in excess of amounts
necessary to cover their tax obligations. Pursuant to the Merger Agreement,
certain dividends will be paid on or before the Closing Date to cover the taxes
associated with ownership of Semiconductor Systems Common Stock during 1995 and
the period from January 1, 1996 through the Closing Date. As a result of the
Merger, Semiconductor Systems' status as an S corporation will terminate. See
"The Merger--Tax Distribution to Semiconductor Systems Shareholders."
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<PAGE>
On February 2, 1996, the last full trading day prior to the public
announcement that Semiconductor Systems and FSI had reached a definitive
agreement with respect to the Merger, the reported closing price per share of
FSI Common Stock as reported on the Nasdaq National Market was $15 7/8. On
____________, the last full trading day prior to the date of this Proxy
Statement/Prospectus, the reported closing sales price per share of FSI Common
Stock as reported on the Nasdaq National Market was $_______. Assuming no
adjustment to the aggregate number of shares of FSI Common Stock to be used in
calculating the Exchange Ratio and no further issuances by Semiconductor Systems
of any shares of its capital stock or rights or options to acquire its capital
stock, each share of Semiconductor Systems Common Stock would be converted into
.2174022 shares of FSI Common Stock pursuant to the Merger. Semiconductor
Systems shareholders are urged to obtain current market quotations for FSI
Common Stock.
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The FSI selected historical consolidated financial data presented on the
next page for and as of the five fiscal years ended August 26, 1995 are derived
from the consolidated financial statements of FSI and its subsidiaries, which
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants. Data as of and for the quarters ended November 25, 1995 and
November 26, 1994 have been derived from unaudited consolidated financial
statements of FSI and, in the opinion of FSI's management, includes all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the results of operations for the periods then ended and the
financial position of FSI and its subsidiaries as of such dates. Interim
operating results are not necessarily indicative of the results that may be
achieved for the entire year. The Semiconductor Systems selected historical
financial data presented below for and as of the five years ended December 31,
1995 are derived from the audited financial statements of Semiconductor Systems;
the financial statements for each of the three years in the period ended
December 31, 1995 have been audited by Price Waterhouse LLP, independent
accountants. The selected pro forma financial data of FSI and Semiconductor
Systems are derived from the Unaudited Pro Forma Combined Financial Information
included elsewhere herein. The pro forma information is not necessarily
indicative of the operating results or financial position that would have
occurred if the Merger had been consummated, nor is it necessarily indicative of
future operating results or financial position. The following selected financial
data should be read in conjunction with the separate historical financial
statements of FSI and Semiconductor Systems and notes thereto, and unaudited pro
forma combined financial information, included elsewhere in this Proxy
Statement/Prospectus.
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<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FSI INTERNATIONAL, INC.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
---------------------------------------------------------------- ---------------------------
AUGUST 26, AUGUST 27, AUGUST 28, AUGUST 29, AUGUST 31, NOVEMBER 25, NOVEMBER 26,
1995 1994 1993 1992 1991 1995 1994
----------- ----------- ----------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................ $190,403 $96,437 $78,432 $46,879 $44,957 $ 62,147 $30,184
Cost of goods sold................... 112,002 55,788 49,464 28,109 27,788 35,127 16,263
Gross profit......................... 78,401 40,649 28,968 18,770 17,169 27,020 13,921
Selling, general, and administrative
expenses........................... 33,909 19,552 14,496 11,170 12,299 11,314 6,329
Research and development expenses.... 24,865 15,743 11,760 9,783 8,376 7,532 4,873
Operating income (loss).............. 19,627 5,354 2,712 (2,183) (3,506) 8,174 2,719
Other income (expense), net.......... 2,173 (254) (671) (410) (414) 1,396 121
Income (loss) before income taxes.... 21,800 5,100 2,041 (2,593) (3,920) 9,570 2,840
Income tax expense (benefit)......... 5,926 1,254 360 392 (616) 3,420 790
Income (loss) before minority
interest and equity in earnings
(loss) of affiliates............... 15,874 3,846 1,681 (2,985) (3,304) 6,150 2,050
Minority interest.................... (155) -- -- -- -- (162) --
Equity in earnings (loss) of
affiliates......................... 3,567 1,800 1,277 (373) 40 1,556 1,000
Net income (loss).................... $ 19,286 $ 5,646 $ 2,958 $(3,358) $(3,264) $ 7,544 $ 3,050
Net income (loss) per common share... $ 1.13 $ .43 $ .28 $ (.36) $ (.37) $ .35 $ .21
Weighted average common shares and
common share equivalents........... 17,071 13,222 10,558 9,275 8,715 21,565 14,417
BALANCE SHEET DATA:
Working capital...................... $146,130 $27,778 $13,421 $10,934 $13,355 $143,487 $28,919
Total assets......................... 233,841 69,357 41,369 36,911 27,696 240,160 76,055
Short-term debt...................... 33 149 2,753 4,976 199 22 99
Long-term debt, less current
maturities......................... 47 33 343 866 304 81 22
Stockholders' equity................. 178,210 42,367 21,589 17,713 20,195 185,870 45,634
Dividends............................ -- -- -- -- -- -- --
</TABLE>
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<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEMICONDUCTOR SYSTEMS, INC.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993 1992 1991/1/
-------- ------- ------- ------- ---------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Sales.................................... $31,392 $28,229 $25,673 $24,014 $ 21,967
Cost of sales............................ 19,055 16,123 12,665 11,066 12,209
Gross profit............................. 12,337 12,106 13,008 12,948 9,758
Selling, general, and administrative
expenses............................... 5,963 4,963 3,832 3,210 2,285
Research and development expenses........ 3,592 3,013 2,632 1,965 871
Operating income......................... 2,782 4,130 6,544 7,773 6,602
Other income (expense), net.............. (289) 28 122 85 (171)
Income before income taxes............... 2,493 4,158 6,666 7,858 6,431
Income tax expense....................... 37 37 176 185 144
Net income............................... $ 2,456 $ 4,121 $ 6,490 $ 7,673 $ 6,287
Net income per share..................... $ .30 $ .51 $ .80 $ .93 $ .67
Weighted average common shares and
equivalents............................ 8,072 8,051 8,127 8,225 9,367
BALANCE SHEET DATA:
Working capital.......................... $ 7,665 $ 7,150 $ 5,402 $ 7,245 $ 5,535
Total assets............................. 22,247 14,895 11,361 10,574 9,142
Short-term debt.......................... 5,906 1,187 500 -- 940
Long-term debt, less current maturities.. 383 172 -- -- 1,880
Shareholders' equity..................... 9,367 8,748 6,584 7,825 4,147
Distributions to shareholders............ 1,837 1,957 7,671 3,878 2,110
</TABLE>
________________
/1/ The 1991 Statement of Operations is for the period December 3, 1990 (date
of purchase of the business of Semiconductor Systems by the management of
Semiconductor Systems) to December 31, 1991.
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<PAGE>
FSI AND SEMICONDUCTOR SYSTEMS SELECTED PRO FORMA DATA/(1)(2)/
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
--------------------------------------- -----------------------------
AUGUST 26, AUGUST 27, AUGUST 28, NOVEMBER 25, NOVEMBER 26,
1995 1994 1993 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF
OPERATIONS DATA:
Sales.......................................... $218,460 $124,666 $104,105 $70,343 $37,390
Cost of goods sold............................. 128,653 71,911 62,129 40,543 20,622
Gross profit................................... 89,807 52,755 41,976 29,800 16,768
Selling, general and administrative expenses... 39,999 24,515 18,328 12,753 7,768
Research and development expenses.............. 28,037 18,756 14,392 8,532 5,696
Operating income............................... 21,771 9,484 9,256 8,515 3,304
Other income (expense), net.................... 2,117 (226) (549) 1,242 139
Income before income tax....................... 23,888 9,258 8,707 9,757 3,443
Income tax expense............................. 6,767 2,763 2,886 3,497 1,033
Income before minority interest and equity in
earnings of affiliates...................... 17,121 6,495 5,821 6,260 2,410
Minority interest.............................. (155) -- -- (162) --
Equity in earnings of affiliates............... 3,567 1,800 1,277 1,556 1,000
Net income..................................... $ 20,533 $ 8,295 $ 7,098 $ 7,654 $ 3,410
Net income per common share.................... $ 1.09 $ .55 $ .58 $ .33 $ .21
Weighted average common shares and common
share equivalents........................... 18,825 14,973 12,324 23,323 16,170
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 25,
1995
--------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Working capital................................ $151,786
Total assets................................... 261,216
Short-term debt................................ 5,398
Long-term debt, less current maturities........ 420
Stockholders' equity........................... 195,608
</TABLE>
___________________
/(1)/ Semiconductor Systems' fiscal year ends December 31. In presenting the
pooling of interests combination on a pro forma basis, Semiconductor
Systems' financial statements for the twelve months ended August 26, 1995
were combined with FSI's financial statements for the same period and
Semiconductor Systems' financial statements for the years ended December
31, 1994 and 1993 were combined with FSI's for the years ended August 27,
1994 and August 28, 1993, respectively. The pro forma statements of
operations for the quarters ended November 25, 1995 and November 26, 1994
and the balance sheet as of November 25, 1995 of FSI has been combined
with Semiconductor Systems' statements of operations for the quarters
ended November 26, 1995 and November 27, 1994, respectively, and the
balance sheet as of November 26, 1995. See Unaudited Pro Forma Combined
Information contained elsewhere herein.
/(2)/ Pro forma data includes adjustments for the effect of recognizing income
tax expense for Semiconductor Systems as if it has been a C Corporation
versus an S Corporation. See Note (D) to the Unaudited Pro Forma Combined
Information contained elsewhere herein.
-16-
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of FSI and
Semiconductor Systems and combined per share data on an unaudited pro forma
basis after giving effect to the Merger on a pooling of interests basis assuming
that .2174022 of a share of FSI Common Stock is issued in exchange for each
share of Semiconductor Systems Common Stock in the Merger. This data should be
read in conjunction with the selected historical financial data, the unaudited
pro forma combined financial information and the separate historical financial
statements of FSI and Semiconductor Systems and notes thereto, included
elsewhere in this Proxy Statement/Prospectus. The unaudited pro forma combined
financial data are not necessarily indicative of the operating results that
would have been achieved had the transaction been in effect as of the beginning
of the periods presented and should not be construed as representative of future
operations.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
------------------------------------- -------------------------
AUGUST 26, AUGUST 27, AUGUST 28, NOVEMBER 25, NOVEMBER 26,
1995 1994 1993 1995 1994
----------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Historical--FSI
Net income............... $ 1.13 $ .43 $ .28 $ .35 $ .21
Book value............... $ 8.80 $ -- $ -- $ 9.15 $ --
<CAPTION>
YEAR ENDED DECEMBER 31 QUARTER ENDED
----------------------- -------------------------
AUGUST 27, NOVEMBER 26, NOVEMBER 27,
1995/(1)/ 1994 1993 1995/(1)/ 1994/(1)/
----------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Historical--Semiconductor
Systems
Net income............... $ .26 $ .51 $ .80 $ .02 $ .07
Book value............... $ 1.06 $ -- $ -- $ 1.03 $ --
Historical--Semiconductor
Systems
Pro Forma/(2)/
Net income............... $ .15 $ .33 $ .51 $ .01 $ .04
Book value............... $ 1.14 $ -- $ -- $ 1.21 $ --
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
------------------------------------- -------------------------
AUGUST 26, AUGUST 27, AUGUST 28, NOVEMBER 25, NOVEMBER 26,
1995 1994 1993 1995 1994
----------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Pro Forma Combined--Per
FSI Share/(1)/
Net income............... $ 1.09 $ .55 $ .58 $ .33 $ .21
Book value............... $ 8.52 $ -- $ -- $ 8.87 $ --
Equivalent Pro Forma
Combined-Per
Semiconductor Systems
Share/(1)(3)/
Net income............... $ .24 $ .12 $ .13 $ .07 $ .05
Book value............... $ 1.85 $ -- $ -- $ 1.93 $ --
</TABLE>
_______________________
/(1)/ Semiconductor Systems' fiscal year ends December 31. In presenting the
pooling of interests combination on a pro forma basis, Semiconductor
Systems' financial statements for the year ended August 26, 1995 were
combined with FSI's financial statements for the same period and
Semiconductor Systems' financial statements for the years ended December
31, 1994 and 1993 were combined with FSI's for the years ended August 27,
1994 and August 28, 1993, respectively. The pro forma statements of
operations for the quarters ended November 25, 1995 and November 26, 1994
and the balance sheet as of November 25, 1995 of FSI has been combined
with Semiconductor Systems statements of operations for the quarters
ended November 26, 1995 and November 27, 1994, respectively, and the
balance sheet as of November 26, 1995. See Unaudited Pro Forma Combined
Financial Information contained elsewhere herein.
/(2)/ Historical pro forma Semiconductor Systems per share data represents the
historical per share data of Semiconductor Systems on a pro forma basis
giving effect to the recognition of income tax expense for Semiconductor
Systems as if it has been a C corporation versus an S Corporation. See
Note (D) to the Unaudited Pro Forma Combined Financial Information
contained elsewhere herein.
/(3)/ The Equivalent Pro Forma Combined information represents the pro forma
combined net income and book value multiplied by .2174022, which is the
assumed Exchange Ratio.
-17-
<PAGE>
RISK FACTORS
In addition to the other information in this Proxy Statement/Prospectus,
the following factors should be carefully considered in evaluating the Merger
and FSI and its business before acquiring the shares of FSI Common Stock offered
hereby.
CYCLICALITY OF THE SEMICONDUCTOR DEVICE INDUSTRY
FSI's business depends in large part on the capital equipment expenditures
of semiconductor device manufacturers, which in turn depend on the current and
anticipated demand for integrated circuits and products utilizing integrated
circuits. The semiconductor device industry is cyclical and has historically
experienced periodic downturns, which often have had an adverse effect on
capital equipment expenditures by semiconductor device manufacturers. These
downturns generally have adversely affected the sales, gross profits, and
operating results of semiconductor equipment suppliers, including FSI. There can
be no assurance that FSI's sales, gross profits, and operating results will not
be adversely affected by any future downturns in the semiconductor device
industry. In addition, FSI's recently completed construction of a new
manufacturing facility, its expansion and enhancement of its laboratory
facilities, and its upgrade of its computer systems, as well as the need for
continued investment by FSI in research and development, marketing, and customer
service and support capabilities will limit FSI's ability to reduce expenses
during future downturns in the semiconductor device industry. See "FSI
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 semiconductor device 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 production difficulties could delay shipments. These
factors also could significantly affect annual results of operations. See "FSI
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations."
MANAGEMENT OF GROWTH
FSI is undergoing a period of rapid growth. In addition, with the
acquisition in January, 1995 of a 50% interest in FSI Metron Europe, Ltd. ("FME"
and formerly Vinylglass Limited), a company based in the United Kingdom, and the
acquisition in March, 1995 of Applied Chemical Solutions ("ACS"), a company
based in Hollister, California, FSI has experienced additional growth in the
number of employees, the scope of its operations, and the geographic area of
FSI's operations. This growth has resulted in, and is expected to continue to
create, the need for additional capacity (including facilities and skilled
employees), new and increased responsibilities for management personnel, and
added pressures on FSI's operating and financial systems. FSI's ability to
manage future growth effectively and accomplish its overall goals will depend on
its ability to hire additional management and technical personnel. Competition
for highly skilled technical, managerial and marketing personnel in FSI's
industry is high. Industry growth and the low unemployment rate in the
Minneapolis, Minnesota area, which includes FSI's principal facilities in
Chaska, has increased the competition for such personnel. FSI must also
integrate its new employees into its overall operations, and to continue to
improve its operational, financial, and management systems and controls. In
response to its growth, FSI has recently completed construction of a new
manufacturing facility, authorized the construction and equipping of an
additional 88,000 square feet of laboratory and office space to the new
facility, and is in the process of upgrading its computer systems. If FSI is
unable to manage growth effectively or hire or retain qualified personnel, FSI's
business and results of operations could be materially and adversely affected.
See "FSI Business -- Employees" and "--Properties."
-18-
<PAGE>
As FSI's customers attempt to meet the growing demand for semiconductor
devices by increasing their production capacity, they are setting aggressive
delivery requirements for their suppliers, including FSI. Failure to meet
customer expectations, whether because of capacity constraints or otherwise,
could jeopardize relations with such customers and materially adversely affect
the operations and earnings of FSI.
In light of the significant recent growth in revenues and capacity
constraints that will exist even with the expansion of its manufacturing
facilities and a slower growth rate expected in the semiconductor equipment
industry, FSI does not believe that the rate of revenue growth in fiscal 1995,
on a comparable quarter basis, can be sustained in the future.
DEPENDENCE ON NEW PRODUCTS AND PROCESSES
Semiconductor device manufacturing equipment and processes are subject to
rapid technological change and new product introductions as well as evolving
industry standards. The development of more complex integrated circuits and the
increased overall demand for products utilizing integrated circuits has driven
the need for new facilities, equipment, and processes to produce such devices at
an acceptable cost. As a result of these factors, FSI believes semiconductor
device manufacturers are increasingly relying on equipment manufacturers to
design and develop more efficient equipment, to design and implement improved
processes for the benefit of semiconductor device manufacturers, and to
integrate their equipment with that of other equipment manufacturers. Therefore,
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
expense may result. There can be no assurance that FSI will be able to develop
and introduce new products or enhancements to its existing products and
processes in a manner which satisfies customer needs or achieves market
acceptance. The failure to do so could materially and adversely affect FSI's
business and results of operations. See "FSI Business -- Industry Background"
and "-- Research and Development."
RELIANCE ON AFFILIATED INTERNATIONAL DISTRIBUTORS
The majority of FSI's international sales are made through its affiliated
distributors, Metron Technology B.V. (together with its subsidiaries, "Metron
Technology") in Europe and in the Far East and m.FSI Ltd. in Japan ("m.FSI").
See Note 6 of Notes to Consolidated Financial Statements of FSI. These
affiliated distributors also provide service and support to many of 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
22% and 26% of FSI's total sales in fiscal 1995 and fiscal 1994, respectively,
and the earnings received from FSI's equity ownership interest in such
affiliated distributors accounted for approximately 18% and 32% of FSI's net
income in fiscal 1995 and fiscal 1994, 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
those of other companies serving the semiconductor device industry. Over the
past several years, a majority of the revenues of the affiliated distributors,
in the aggregate, have been attributable to sales of products of other
semiconductor manufacturing equipment and consumables suppliers. Thus, the
financial results of the affiliated distributors and their impact on FSI's
financial results are dependent not only upon the ability of these distributors
to successfully market FSI's products, but also their ability to maintain
relationships with and market the products of other semiconductor manufacturing
equipment and consumables suppliers. Moreover, while sales of FSI's products by
Metron Technology (and of certain other manufacturers for whom they distribute)
are generally in United States dollars, the expenses of Metron Technology are
generally denominated in foreign currencies and, accordingly, Metron
Technology's operating results may be affected by fluctuations in interest and
currency exchange rates. In addition, sales by m.FSI are
-19-
<PAGE>
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 limited instances (totaling less than
20% of the aggregate annual sales of Metron Technology and mYFSI) where a sale
by an affiliated distributor has been both in a foreign currency (usually at the
request of a foreign-domiciled customer) and of a size significant to justify
the costs of engaging in hedging activity, FSI's affiliated distributors have
hedged such transactions by buying forward United States dollars and selling
forward the applicable local currency. If the order that is the subject of a
hedging transaction is subsequently 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, because of
changes in the applicable exchange rates, 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 Technology and m.FSI will continue to distribute, or to
distribute successfully, FSI's products or the products of other semiconductor
manufacturing equipment and consumables suppliers, 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.
Effective July 6, 1995, Metron Technology acquired Transpacific Technology
Corporation ("Transpacific"), a California corporation. Transpacific markets or
distributes the products of certain semiconductor equipment and consumables
manufacturers in portions of the United States and Europe. FSI's day-to-day
involvement in the management of Metron Technology has been reduced following
the acquisition, and the future success of Metron Technology will depend on the
successful integration of the senior management of Transpacific and Metron
Technology, none of whom has prior experience in managing a semiconductor
equipment business of the size and geographic scope of Metron Technology. There
can be no assurance that Metron Technology will be able to successfully
integrate the acquired businesses, product lines and principals of the former
entities comprising Metron Technology. The loss of any principal, as a result of
the acquisition or otherwise, without the creation of new distributor
relationships to take their place, could have an adverse effect on FSI's
financial condition and results of operations. See "Business--Marketing, Sales,
and Support" and "--Customers."
INTERNATIONAL BUSINESS
Approximately 37% and 33% of FSI's sales for fiscal 1995 and fiscal 1994,
respectively, were attributable to sales outside the United States, including
sales through FSI's affiliated international distributors which accounted for
61% and 78%, respectively, of such international sales. See "Reliance on
Affiliated International Distributors" above and Note 15 of the Notes to
Consolidated Financial Statements of FSI. 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. 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 Technology
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 do the laws of the United States. A
growing 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. See "FSI Business -- Marketing,
Sales, and Support" and "-- Competition."
-20-
<PAGE>
ACQUISITIONS
FSI from time to time may acquire complementary businesses, products, or
technologies. On January 31, 1995, FSI and its European affiliated distributor,
Metron Europa (now Metron Technology), each acquired 50% of FME, which is
located in Newhaven, East Sussex, England, and which manufactures, markets, and
services chemical delivery systems and certain other products. In addition,
effective March 8, 1995, FSI acquired ACS, which is located in Hollister,
California, and designs, markets, and services chemical blending and delivery
systems, point of use chemical generation systems, and slurry mixing and
delivery systems used in conjunction with chemical mechanical planarization,
commonly referred to as CMP. There can be no assurance that FSI will be able to
successfully integrate the acquired businesses, products, or technologies of
FME, ACS or others.
JAPANESE COMPETITION
Since 1992, Japanese semiconductor device manufacturers have substantially
reduced their levels of capital spending on new fabrication facilities and
equipment in Japan and elsewhere. This has resulted in reduced sales and
increasing competitive pressures in the Japanese market segment (comprised of
semiconductor device fabrication facilities located in Japan and those located
outside of Japan which are controlled by Japanese companies). As a result,
pricing pressures in both the Japanese market and elsewhere may continue into
the foreseeable future due to Japanese semiconductor equipment manufacturers
offering substantial discounts on their products.
FSI believes that the Japanese companies with which it competes have a
competitive advantage because of their dominance of the Japanese market segment.
Furthermore, Japanese semiconductor device manufacturers have extended their
influence outside Japan by licensing products and process technologies to non-
Japanese semiconductor device manufacturers. Such licenses can result in a
recommendation to use semiconductor equipment manufactured by Japanese
companies. Therefore, FSI may be at a competitive disadvantage with respect to
the Japanese semiconductor equipment suppliers, who have been engaged for some
time in collaborative efforts with Japanese semiconductor device manufacturers.
Certain Japanese semiconductor equipment manufacturers have announced plans to
begin manufacturing operations in the United States, which will enable them to
compete more effectively in the United States market.
The Japanese market segment is important as it represents a substantial
percentage of the world-wide semiconductor device market. To date, FSI has not
yet established itself as a significant participant in the Japanese market
segment with respect to its microlithography cluster or chemical management
system product lines. As part of the strategy to establish its Japanese
presence, FSI formed a joint venture, m.FSI, in August 1991 with Mitsui & Co.,
Ltd. and its wholly owned subsidiary, Chlorine Engineers Corp., Ltd.
(collectively, "Mitsui") and granted m.FSI certain product and technology
licenses and product distribution rights in Japan. There can be no assurance
that FSI will be able to maintain or increase its sales to the Japanese market
segment. See "FSI Business -- Marketing, Sales, and Support" and "--
Competition." FSI does not believe that there are any existing government trade
restrictions that would materially limit FSI's ability to compete in the
Japanese or Korean markets. There can be no assurance, however, that imposition
of such restrictions in the future will not adversely affect FSI's ability to
compete in these markets.
COMPETITION
The semiconductor equipment industry is highly competitive. In each of the
markets it serves, FSI faces intense competition from established competitors,
some of which have substantially greater financial, engineering, research,
development, manufacturing, marketing, service, and support resources, greater
name recognition than FSI, and long-standing customer relationships. In order to
remain competitive, FSI must maintain a high level of investment in research and
development, marketing, and customer service and support as well as control
operating expenses. There can be no assurance that FSI will have sufficient
resources to continue to make such investments or that FSI's products will
continue to be viewed as competitive as a result of technological advances by
competitors or changes in semiconductor processing technology. FSI's competitors
may also increase their efforts to gain and retain market share through
competitive pricing. Such competitive pressures may necessitate significant
price reductions by FSI or result in lost orders which could adversely affect
FSI's results of operations. See "FSI Business -- Marketing, Sales, and Support"
and "--Competition."
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<PAGE>
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 1995, 1994
and 1993 have accounted for approximately 54%, 46% and 50% respectively, of
FSI's total sales. Direct sales to FSI's top two customers in each of fiscal
1995, 1994 and 1993 accounted for approximately 28%, 30% and 32%, respectively,
of FSI's total sales. FSI's top two customers in fiscal 1995 were International
Business Machines Corporation ("IBM") and Motorola, Inc. ("Motorola") and in
fiscal 1994 were Texas Instruments, Inc. ("TI") and Motorola. In addition,
approximately 38% of FSI's backlog at fiscal 1995 year-end was comprised of
orders from two customers. Sales to FSI's affiliated distributors in fiscal
1995, 1994 and 1993, which may include sales of products subsequently resold to
FSI's top five customers, accounted for approximately 22%, 26% and 25%,
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. See "FSI
Business -- Customers."
ACCEPTANCE OF POLARIS MICROLITHOGRAPHY CLUSTER
FSI introduced the original Polaris microlithography cluster in 1991. In
July 1994, FSI introduced the Polaris 2000 product, an advanced microlithography
cluster with enhanced processing capabilities and increased throughput. Use of
the Polaris cluster represents an alternative to the conventional track approach
employed by semiconductor device manufacturers to process photoresist. To date,
a significant majority of the sales of Polaris clusters has been to three
customers, IBM, TI, and LG Semicon Co., Ltd. ("LG Semicon"), which purchases
FSI's products through its United States affiliate, LG International (America),
Ltd. Future growth in sales by FSI's microlithography division will depend upon
the acceptance of FSI's microlithography cluster technology by a broader group
of customers, including additional international customers. Because of the large
capital commitment involved in the construction and operation of a semiconductor
device manufacturing facility, the decision by a semiconductor device
manufacturer to undertake a large-scale deployment of the Polaris cluster
involves a significant technological and financial commitment to what is
currently an alternative approach. While FSI is actively promoting the
acceptance of this technology, there can be no assurance that FSI will be
successful in obtaining broader acceptance of the Polaris cluster technology.
Failure to achieve broader acceptance could have an adverse effect on FSI's
results of operations and earnings. FSI designs and manufactures the Polaris
cluster under a license from TI which includes an exclusive license to sell such
systems. The loss or material limitation of this license could have an adverse
effect on FSI's results of operations and earnings. See "FSI Business--
Marketing, Sales, and Support" and "--Competition."
CHANGES IN INDUSTRY PURCHASING PRACTICES; LENGTHENING SALES CYCLE
Sales of FSI's systems depend, in significant part, upon the decision of a
prospective customer to increase manufacturing capacity by constructing and
equipping new semiconductor device manufacturing facilities or upgrading current
facilities, both of which typically involve significant capital commitments. FSI
believes that semiconductor device manufacturers are increasingly relying on
equipment suppliers to help them meet the technological challenges and cost
constraints inherent in constructing or expanding semiconductor device
fabrication facilities. Due to these and other factors, FSI's systems typically
have lengthy sales cycles during which FSI may expend substantial funds and
management effort. FSI believes that the length of the sales cycle will increase
as certain of its current and potential customers centralize purchasing
decisions into one decision-making entity, which is expected to intensify the
evaluation process and require additional sales and marketing expenditures by
FSI. FSI believes that, as a result, certain semiconductor device manufacturers
are developing strategic relationships with suppliers and are focusing on a
limited number of suppliers for each item of process equipment in a fabrication
facility. Once a semiconductor device manufacturer has selected a particular
vendor's capital equipment, FSI believes that the manufacturer generally relies
upon that equipment for the specific production line application at that
facility, and in some cases future facilities. Such manufacturers in some cases
will attempt to consolidate their other capital equipment requirements with the
same vendor. Accordingly, FSI's ability to receive orders from potential
customers may depend upon such customers undertaking an evaluation for new
equipment. For many potential customers, such an evaluation may occur
infrequently. There can be no assurance that FSI will prevail in such
evaluations or that it will not lose potential orders to larger semiconductor
equipment suppliers with broader product lines.
-22-
<PAGE>
DEPENDENCE ON KEY SUPPLIERS
Certain of the components and sub-assemblies included in FSI's products are
obtained from a single supplier or a limited group of suppliers. Although FSI
seeks to reduce dependence on sole and limited source suppliers, disruption or
termination of these sources could have an adverse effect on FSI's operations.
FSI believes that alternative sources could be obtained and qualified to supply
these components, if necessary. Nevertheless, prolonged inability to obtain
certain components could have an adverse effect on FSI's operating results and
could result in damage to customer relationships. FSI is not aware of any
financial difficulties being experienced by any of FSI's key suppliers that
could materially adversely affect FSI's financial condition or results of
operations. See "FSI Business-- Manufacturing and Suppliers."
DEPENDENCE ON KEY PERSONNEL
FSI's success depends to a significant extent upon certain senior
management and technical personnel. The loss of the services of one or more of
these key persons could have a material adverse effect on FSI. FSI's future
success will depend in large part upon its ability to attract and retain highly
skilled technical, managerial, and marketing personnel. Competition for such
personnel in FSI's industry is high. FSI's primary facilities are located in
Chaska, Minnesota, near Minneapolis, and in Dallas, Texas. The current
unemployment rate in the Minneapolis area is extremely low and industry growth
has increased competition for highly skilled technical personnel in both Chaska
and Dallas. There can be no assurance that FSI will continue to be successful in
attracting and retaining the personnel it requires to successfully develop new
and enhanced products and to continue to grow and operate profitably. See "FSI
Business -- Employees" and "Management."
PATENTS AND OTHER INTELLECTUAL PROPERTY
FSI's success depends in significant part on its intellectual property.
While FSI attempts to protect its intellectual property through patents,
copyrights, trade secrets, and non-disclosure agreements, it believes that its
success will depend to a greater degree upon innovation, technological
expertise, and the ability to quickly adapt to and deliver new technology. FSI
currently holds numerous United States patents and additional foreign patents in
Japan and several European countries and has several United States patent
applications and foreign patent applications pending. There can be no assurance
that FSI will be able to protect its technology or that competitors will not be
able to develop similar technology independently. No assurance can be given that
the claims allowed on any patents held or acquired by FSI will be sufficiently
broad to protect FSI's technology. In addition, no assurance can be given that
any existing or future patents issued to FSI will not be challenged,
invalidated, or circumvented or that the rights granted thereunder will provide
competitive advantages to FSI. In that event, FSI's results of operations could
be adversely affected. Moreover, FSI may be forced to incur significant costs to
defend its patent rights. In addition, although FSI believes that its products
do not infringe any valid existing proprietary rights of others, there can be no
assurance that third parties will not assert infringement claims in the future.
In October, 1995, Purusar Corporation ("Purusar") brought suit against FSI in
United States District Court, Northern District of California, seeking monetary
damages and injunctive relief based upon FSI's alleged infringement of a patent
held by Purusar. There also may be pending patent applications or issued patents
of which FSI is not aware that FSI may need to license or challenge at
significant expense. There can be no assurance that any such license would be
available on acceptable terms, if at all, or that FSI would prevail in any such
challenge. See "FSI Business -- Polaris License Agreement; Other Intellectual
Property" and "-- Legal Proceedings."
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 device industry specifically, may adversely
affect the market price of FSI Common Stock.
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INTRODUCTION
GENERAL
This Proxy Statement/Prospectus is being furnished to the shareholders of
Semiconductor Systems in connection with the solicitation of proxies by the
Board of Directors of Semiconductor Systems from holders of outstanding shares
of Semiconductor Systems Common Stock, for use at a special meeting of
shareholders (the "Special Meeting") of Semiconductor Systems, to be held on
________, 1996 at 9:00 a.m., Pacific Standard Time, at the principal executive
offices of Semiconductor Systems located at 47003 Mission Falls Court, Fremont,
California 94539 and at any adjournment thereof.
At the Special Meeting, Semiconductor Systems shareholders will be asked to
consider and vote upon a proposal to approve and adopt the Agreement and Plan of
Reorganization dated as of February 5, 1996, among Semiconductor Systems, FSI
International, Inc., a Minnesota corporation ("FSI"), and Spectre Acquisition
Corp., a California corporation and a newly formed and wholly owned subsidiary
of FSI ("Merger Sub") (together with the Merger Agreement attached thereto, the
"Merger Agreement") (attached hereto as Annex I), and the merger provided
therein of Merger Sub with and into Semiconductor Systems (the "Merger").
At the Effective Time of the Merger, the outstanding shares of
Semiconductor Systems (other than shares held by shareholders who exercise and
do not subsequently withdraw or lose statutory dissenters' rights) will be
converted into shares of common stock, no par value, of FSI ("FSI Common
Stock").
Each share of Semiconductor Systems Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares owned by Merger Sub,
FSI, or any direct or indirect wholly owned subsidiary of FSI or of
Semiconductor Systems and any shares held by dissenting shareholders) will be
canceled and extinguished and be converted automatically into the right to
receive FSI Common Stock equal to the quotient determined by dividing 1,800,000
shares (the "FSI Shares") by the sum of: (i) the number of shares of
Semiconductor Systems Common Stock outstanding immediately prior to the
Effective Time plus (ii) the number of shares of Semiconductor Systems Common
Stock issuable upon the exercise or conversion of all stock options, rights or
other securities of the Semiconductor Systems outstanding immediately prior to
the Effective Time (the "Exchange Ratio"); provided, however, that the number of
FSI Shares used for purposes of calculating the Exchange Ratio shall be subject
to adjustment to reflect fully the effect of any stock split, reverse split,
stock dividend (including any dividend or distribution of securities convertible
into FSI Common Stock), reorganization, recapitalization or other like change
with respect to FSI Common Stock occurring after February 5, 1996 and before the
Effective Time of the Merger.
The number of FSI Shares used for purposes of calculating the Exchange
Ratio shall be subject to adjustment if Semiconductor Systems' costs and fees
associated with legal, accounting, investment banking and other similar fees and
expenses associated with the transactions contemplated by the Merger (the
"Semiconductor Systems Transaction Costs") exceed $500,000 in the aggregate. In
such event, the number of FSI Shares used for the purposes of calculating the
Exchange Ratio shall be decreased by that number of shares equal to the quotient
determined by dividing (x) the amount by which the actual amount of
Semiconductor Systems Transaction Costs exceed $500,000 by (y) the closing sale
price of a share of FSI Common Stock on the date immediately preceding the
Closing Date as reported in the National Association of Securities Dealers, Inc.
National Market System ("NMS") or, if no sale of shares of FSI Common Stock has
occurred on that date, on the next preceding date on which a sale did occur, on
the NMS (the "Closing Price"). Prior to Closing, Semiconductor Systems shall
supply FSI with a certificate itemizing in reasonable detail the Semiconductor
Systems Transaction Costs.
The principal executive offices of FSI are located at 322 Lake Hazeltine
Drive, Chaska, Minnesota 55318 and its telephone number is (612) 448-5440. The
principal executive offices of Semiconductor Systems are located at 47003
Mission Falls Court, Fremont, California 94539 and its telephone number is (510)
683-8858.
The Proxy Statement/Prospectus also constitutes the prospectus of FSI with
respect to the shares of FSI Common Stock to be issued in the Merger. The
information in this Proxy Statement/Prospectus with respect to FSI and Merger
Sub has been supplied by FSI, and the information with respect to Semiconductor
Systems has been supplied by Semiconductor Systems.
This Proxy Statement/Prospectus will first be mailed to shareholders of
Semiconductor Systems on or about ________, 1996.
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VOTING AND PROXIES
Only holders of record of Semiconductor Systems Common Stock as of the
close of business on ________, 1996, are entitled to notice of and to vote at
the Special Meeting or at any adjournment thereof. At such date, there were
8,000,000 shares of Semiconductor Systems Common Stock outstanding held by 13
holders of record.
Shareholders of record on the record date are entitled to one vote per
share on any matter which may properly come before the Special Meeting. The
presence, either in person or by proxy, of the holders of a majority of the then
outstanding shares of Semiconductor Systems Common Stock is necessary to
constitute a quorum at the Special Meeting. The affirmative vote of the holders
of at least a majority of the outstanding shares of Semiconductor Systems Common
Stock are required to approve and adopt the Merger Agreement and the Merger.
FSI, as sole shareholder of Merger Sub, has approved the Merger Agreement.
No vote of FSI shareholders is required to approve the Merger Agreement.
Shares of Semiconductor Systems Common Stock represented by properly
executed proxies will, unless such proxies have previously been revoked, be
voted in accordance with the instructions indicated on such proxies. IF NO
INSTRUCTIONS ARE INDICATED ON A DULY EXECUTED PROXY, SUCH SHARES WILL BE VOTED
IN FAVOR OF APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER. Any
shareholder who has given a proxy may revoke it at any time before it is voted
by filing with the Secretary of Semiconductor Systems, at the address of
Semiconductor Systems set forth above, written notice of revocation or a duly
executed proxy bearing a later date (attendance at the Special Meeting will not
in and of itself constitute a revocation of a proxy).
Other than the approval and adoption of the Merger Agreement and the
Merger, Semiconductor Systems does not know of any matters which are to come
before the Special Meeting. Pursuant to the Shareholders Agreement dated
February 5, 1996 and upon the affirmative vote of Semiconductor Systems
shareholders with respect to the Merger Agreement and the Merger, Michael L.
Parodi will be appointed, as agent and attorney-in-fact, to act on behalf of
each of the shareholders who shall be entitled to receive shares of FSI Common
Stock in the Merger. See "The Merger--Indemnification and Escrow of Merger
Consideration" and "Comparison of FSI and Semiconductor Systems Shareholders'
Rights--Semiconductor Systems Capital Stock." Should any other business properly
come before the Special Meeting, the proxy holders will have discretionary
authority to vote the shares of Semiconductor Systems Common Stock represented
thereby on such matters in accordance with their best judgment.
In addition to solicitation by mail, directors, officers and employees of
Semiconductor Systems, who will not be specifically compensated for such
services, may solicit proxies from the shareholders of Semiconductor Systems,
personally or by telephone or telegram or other forms of communication.
Semiconductor Systems will bear its own expenses in connection with the
solicitation of proxies for the Special Meeting.
HOLDERS OF SEMICONDUCTOR SYSTEMS COMMON STOCK ARE REQUESTED TO COMPLETE,
DATE AND SIGN THE SEMICONDUCTOR SYSTEMS PROXY AND RETURN IT PROMPTLY TO
SEMICONDUCTOR SYSTEMS IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE.
SHAREHOLDERS SHOULD NOT SEND THEIR STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
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BACKGROUND OF THE MERGER AND RELATED MATTERS
BACKGROUND OF THE MERGER
The proposed Merger has resulted from a review by the Board of Directors of
Semiconductor Systems of various strategic alternatives available to it. This
review encompassed key market factors as well as evaluation and analysis of
financing alternatives available to Semiconductor Systems to sustain its
projected growth rate.
Semiconductor Systems' executive officers, Michael L. Parodi, President and
Chief Executive Officer, Gerald E. Masterson, Vice President and Chief Financial
Officer, and Douglas K. Amis, Vice President, Administration, considered matters
relative to the Merger in numerous meetings throughout the months of November
and December, 1995 and January 1996. Certain aspects of these deliberations and
related matters are summarized below.
Management has constantly monitored and evaluated trends in the
semiconductor capital equipment business, especially as it related to
requirements placed on Semiconductor Systems by its customer base. Of particular
interest were three key trends among the leading semiconductor device
manufacturers:
1. Reliance on fewer numbers of suppliers, many of which tend to be the
large, well established leaders in the industry. This puts smaller
suppliers such as Semiconductor Systems at a distinct disadvantage,
despite the technological advantages it believes it can offer;
2. Demand for a global support network to maintain semiconductor device
manufacturing facilities throughout the world, especially in the
Pacific Rim and Europe; and
3. Demand on capital equipment suppliers to make significant investments
in research and development, total quality management and clean room
production facilities.
Semiconductor Systems' management believed that, for Semiconductor Systems
to maintain its projected growth rate, it would need to add to its research and
development activities and extend its sales, distribution and field service
activities to the global market as well as meet the requirements of its
customers as listed above. In order to accomplish these goals, management felt
that additional financing would be necessary.
In the spring of 1994, Semiconductor Systems engaged a financial advisor to
assist management in evaluating its financing alternatives. In the spring of
1995, Semiconductor Systems attempted an equity and debt financing which was
canceled in the summer of 1995 when the prospective equity investors objected to
the terms of the debt financing. Thereafter, Semiconductor Systems continued to
explore other forms of financing, including discussions with banks for loans and
discussions with investment bankers regarding the feasibility and timing of a
public offering.
In late September 1995, FSI's Executive Vice President and Chief Financial
Officer, Benno G. Sand, telephoned Mr. Parodi and expressed FSI's interest in
exploring the possibility of a transaction with Semiconductor Systems. Mr. Sand
indicated that he and Joel A. Elftmann, FSI's Chairman, President and Chief
Executive Officer, would be in the area on November 1, 1995 and suggested that
he and Mr. Elftmann could visit Semiconductor Systems in order to meet
Semiconductor Systems' senior management and to tour Semiconductor Systems'
facility.
On October 10, 1995, Semiconductor Systems engaged Hultquist Capital LLC,
an investment banking firm, to evaluate Semiconductor Systems' various financing
alternatives. Upon closing of the Merger, Hultquist Capital, LLC will receive a
fee of approximately 1% of the value at the Closing Date of the FSI Common Stock
to be received by the Semiconductor Systems' shareholders, less advisory fees
already paid. No other financial advisors or investment banking firms will
receive a fee in connection with the Merger.
On November 1, 1995, after signing a mutual non-disclosure agreement, Mr.
Parodi and Mr. Masterson presented an overview of Semiconductor Systems, its
products and its business outlook to Messrs. Elftmann and Sand, followed by a
tour of Semiconductor Systems' facilities. Following further discussions, Mr.
Elftmann invited Semiconductor Systems' senior management to visit FSI's
facilities to continue discussions within the next few weeks.
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Messrs. Parodi, Masterson and Amis met with Mr. Sand and Dr. Benjamin J.
Sloan, FSI's Executive Vice President and President of the Microlithography
Division, on November 16, 1995 at FSI's headquarters in Chaska, Minnesota.
Messrs. Parodi, Masterson and Amis toured FSI's headquarters and new
manufacturing facility and discussed FSI's Microlithography Division
headquartered in Dallas, Texas.
On November 17, 1995, Messrs. Parodi, Masterson and Amis were given an
opportunity to tour FSI's Dallas facility and to gain further understanding of
the Microlithography Division's business infrastructure.
In November 1995, Messrs. Parodi, Masterson and Amis also visited the Texas
facilities of another semiconductor capital equipment supplier with which
Semiconductor Systems was considering a possible merger. Following the tour of
the other semiconductor capital equipment supplier's facilities, discussions
concerning a potential business combination were held with members of both
companies' senior executives.
During the next few weeks the Semiconductor Systems management continued
its discussions regarding Semiconductor Systems' strategic alternatives for
growth. These included consultations with various investment bankers regarding
the possibilities and merits of a public offering, and exploratory discussions
with other companies to determine if there were other possible merger
candidates.
Further discussions with FSI concerning a potential business combination
between Semiconductor Systems and FSI were held later in November and in
December 1995. During these discussions, FSI asked that Semiconductor Systems
consider the possibility of merging into FSI or an FSI subsidiary. Informal
discussions among Semiconductor Systems' senior management indicated a strong
interest to continue to explore a potential combination with FSI should the
terms and conditions of such a combination be favorable.
On November 28 and 29, 1995, the parties entered into more detailed
discussions regarding specific terms of a possible merger. During December 4
through 7, FSI representatives conducted an in-depth due diligence review at
Semiconductor Systems' headquarters.
In early December 1995, Messrs. Parodi, Masterson and Amis had daily
discussions regarding Semiconductor Systems' financing alternatives. In
consultation with Mr. Hultquist, Messrs. Parodi, Masterson and Amis focused on
four alternatives:
1. merging with FSI;
2. merging with another semiconductor capital equipment supplier;
3. continuing Semiconductor Systems' current business plan without
additional capitalization, utilizing only bank revolving credit; and
4. financing Semiconductor Systems' business growth through an equity
offering.
The management of Semiconductor Systems carefully deliberated the merits of
all of the above alternatives. In particular, management considered the tangible
and intangible benefits to the Semiconductor Systems' shareholders of pursuing
the merger with FSI, including the liquidity that would be achieved by the
shareholders in such a transaction, the value of the FSI Common Stock, the
perceived synergy between the cultures of FSI and Semiconductor Systems and the
ability of Semiconductor Systems' employees to continue to vest their options.
Management concluded that the proposed merger with FSI would be more attractive
than those that would be available from other companies, and more likely to
enhance shareholder value than would combinations with other known potential
candidates. After weighing the merits of the merger with FSI against the risks
and costs associated with remaining as an independent company, Semiconductor
Systems chose to pursue a merger with FSI.
On December 22, 1995, Messrs. Sand and Parodi agreed that, although neither
party was obligated to enter into an agreement, both parties would work
diligently toward the signing of a definitive agreement while due diligence
investigations and negotiations continued. Draft agreements and comments were
exchanged by the parties and their counsel from the middle of December 1995
through February 4, 1996. Pricing discussions and negotiations of other key
points continued until February 4, 1996. On February 4, 1996, the pertinent
agreements were completed, including the
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Agreement and Plan of Reorganization and the exhibits thereto, including the
Merger Agreement, and employment agreements for Messrs. Parodi, Masterson, and
Amis in addition to employment agreements with Qui V. Nguyen, Semiconductor
Systems' Director of Manufacturing and Michael R. Biche, Semiconductor Systems'
Director of Product Development. At a meeting of the Semiconductor Systems Board
on February 4, 1996, the Board approved the terms of the Merger.
RECOMMENDATION OF THE BOARD OF SEMICONDUCTOR SYSTEMS; REASONS FOR THE MERGER
The factors considered by the Board in approving the Merger included, among
others, the following:
1. Consolidation is supported by the trend of leading semiconductor
device manufacturers who are reducing the number of suppliers with whom they do
business. FSI is highly respected by Semiconductor Systems' target customer base
and a merger with FSI will enhance Semiconductor Systems' position in the
industry;
2. FSI's global distribution and support channels support semiconductor
manufacturing facilities throughout the world and would provide Semiconductor
Systems with the opportunity to quickly penetrate target markets, especially in
the Pacific Rim and in Europe;
3. The belief that FSI has both the capital and infrastructure to meet
the requirements for continued growth of Semiconductor Systems. Moreover, FSI
supports continued investment in research and development, total quality
management and clean room production facilities;
4. The Merger presents an opportunity for Semiconductor Systems'
shareholders to enhance the liquidity of their investment through their
holdings of publicly traded FSI Common Stock;
5. The tax free nature of the transaction, as opposed to a cash merger or
other taxable transaction;
6. The belief by the Board that the shares of FSI, a more mature company
with a significantly better financial condition and a more diversified product
line, presented the Semiconductor Systems shareholders with greater future
stability and potential for appreciation than Semiconductor Systems shares;
7. The positive impact on the employees of Semiconductor Systems due to
the assessment that FSI culture and values closely match those of Semiconductor
Systems;
8. The ability of Semiconductor Systems' employees to continue to vest
their current Semiconductor Systems option holdings under FSI's employee stock
option plan; and
9. The relative risk of the strategic alternative of remaining as an
independent company, which the Board rejected due to the anticipated cost of
raising required additional capital, or the strategic alternatives of another
business combination or other affiliation, which the Board rejected due to the
lack of candidates as attractive as FSI.
By unanimous vote, the Board approved the Merger Agreement and the Merger,
and authorized Mr. Parodi to sign the Merger Agreement.
THE BOARD OF DIRECTORS OF SEMICONDUCTOR SYSTEMS RECOMMENDS THAT
SHAREHOLDERS OF SEMICONDUCTOR SYSTEMS VOTE FOR APPROVAL OF THE MERGER AGREEMENT
AND THE MERGER.
FSI'S REASONS FOR THE MERGER
By acquiring Semiconductor Systems, FSI believes that it is obtaining
additional photoresist processing technology, enabling FSI to provide customers
with a more complete range of product offerings. Also, the acquisition provides
FSI with technology and products which have applications for thin film head,
flat panel display and multi-chip module photoresist processing applications.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
Messrs. Parodi, Masterson, Amis and Nguyen have each agreed that in their
capacity as holders of Semiconductor Systems Common Stock they will vote their
shares in favor of the Merger Agreement at the Special Meeting.
Messrs. Parodi, Masterson, Amis, Nguyen and Biche have also agreed to enter
into employment agreements upon the consummation of the Merger (collectively the
"Employment Agreements"). Pursuant to his employment agreement with
Semiconductor Systems as the surviving corporation after the merger (the
"Surviving Corporation") and FSI, for a two-year term Mr. Parodi will be
employed by the Surviving Corporation as Vice President and General Manager, and
by FSI as Senior Vice President, Microlithography Division. Pursuant to
employment agreements with the Surviving Corporation, the Surviving Corporation
will initially employ the other above-named individuals for one-year terms in
the following capacities: Mr. Masterson as Vice President, Finance; Mr. Amis as
Vice President, Administration; Mr. Nguyen as Manufacturing Manager; and Mr.
Biche as Engineering Manager. The Employment Agreements will be subject to early
termination in the event of death, disability or termination of employment for
cause. The salaries under the Employment Agreements will be comparable to
current base salaries received by the above-named individuals.
Pursuant to the terms of the Employment Agreements, if the Surviving
Corporation (or, in the case of Mr. Parodi, FSI) terminates their employment for
any reason other than for cause, Messrs. Parodi, Masterson, Amis, Nguyen and
Biche will be entitled to continue to receive their base salaries during the
term of the agreements. In addition, pursuant to a Management Agreement to be
entered into between Mr. Parodi and FSI, Mr. Parodi shall be entitled to certain
compensation, including one year's salary and incentive compensation, upon Mr.
Parodi's termination of employment following certain changes in control of FSI.
The Employment Agreements also provide for participation in FSI's bonus programs
and for certain non-monetary benefits. Pursuant to the Employment Agreements and
in consideration of $10,000 in cash to Messrs. Parodi, Masterson and Amis and
$5,000 to Messrs. Nguyen and Biche, to be paid upon execution thereof, each of
Messrs. Parodi, Masterson, Amis, Nguyen and Biche will agree that during the
term of the Employment Agreements and for six months after termination thereof,
he will not directly or through any other entity, enter into competition with
the products or services currently provided by Semiconductor Systems, or the
products or services that may evolve in the ordinary course of Semiconductor
Systems' business. Messrs. Parodi, Masterson, Amis, Nguyen and Biche also each
will receive incentive stock options to purchase shares of FSI Common Stock
under FSI's 1994 Omnibus Stock Plan. The aggregate number of options for the
five above-named individuals will total 50,000 shares. The exercise price of
such options will be equal to the fair market value of FSI Common Stock on the
date issued and the options will vest over a four-year period.
All Semiconductor Systems employees and consultants as a group (including
Mr. Biche who holds options to purchase 100,000 shares) currently hold options
to purchase 279,583 shares of Semiconductor Systems Common Stock. FSI has agreed
to substitute options to purchase FSI Common Stock for all outstanding
Semiconductor Systems options at the Effective Time. As a result, options to
purchase approximately 60,782 shares of FSI Common Stock are expected to be
issued to all Semiconductor Systems employees and consultants as a group.
OPERATIONS AFTER THE MERGER
After the Merger, the business of Semiconductor Systems will be operated as
a wholly owned subsidiary of FSI. Pursuant to the terms of the Merger Agreement,
until successors are duly elected or appointed in accordance with applicable
law, the directors of Merger Sub at the Effective Time of the Merger shall be
the directors of the Surviving Corporation. The officers of the Surviving
Corporation shall be Benjamin J. Sloan, President and Chief Executive Officer;
Benno G. Sand, Executive Vice President, Chief Financial Officer and Secretary;
Michael L. Parodi, Vice President and General Manager; Douglas K. Amis, Vice
President, Administration; and Gerald E. Masterson, Vice President, Finance, in
each case until their respective successors are duly elected or appointed and
qualified. The future management of the Surviving Corporation will depend on
prevailing circumstances and future events.
The Merger Agreement provides, subject to amendment as provided therein,
that the Articles of Incorporation and the By-Laws of Merger Sub in effect
immediately prior to the Merger shall be the Articles of Incorporation and By-
Laws of the Surviving Corporation.
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THE MERGER
This section of the Proxy Statement/Prospectus describes certain aspects of
the Merger. The following description does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement, which is
attached as Annex I to this Proxy Statement/Prospectus and is incorporated by
reference herein. ALL SHAREHOLDERS OF SEMICONDUCTOR SYSTEMS ARE URGED TO READ
THE MERGER AGREEMENT IN ITS ENTIRETY.
GENERAL
The Merger Agreement provides that, subject to the requisite approval of
the shareholders of Semiconductor Systems, the receipt of all required
regulatory approvals and the satisfaction or, where permitted, waiver of certain
other conditions, Merger Sub will be merged with and into Semiconductor Systems.
As a result of the Merger, the separate corporate existence of Merger Sub will
cease, and Semiconductor Systems will become a wholly owned subsidiary of FSI.
MERGER CONSIDERATION
At the Effective Time of the Merger, each outstanding share of
Semiconductor Systems Common Stock (other than shares held by FSI, Merger Sub or
any other subsidiary of FSI and shares as to which statutory dissenters'
appraisal rights have been exercised and not subsequently forfeited) will be
converted into a number of shares of FSI Common Stock determined by dividing
1,800,000 shares by the sum of: (i) the number of shares of Semiconductor
Systems Common Stock outstanding immediately prior to the Effective Time plus
(ii) the number of shares of Semiconductor Systems Common Stock issuable upon
the exercise or conversion of all stock options, rights or other securities of
Semiconductor Systems outstanding immediately prior to the Effective Time (the
"Exchange Ratio"); provided, however, that the number of FSI Shares used for
purposes of calculating the Exchange Ratio will be subject to adjustment if
Semiconductor Systems' costs and fees associated with legal, accounting,
investment banking and other similar fees and expenses associated with the
transactions contemplated by the Merger (the "Semiconductor Systems Transaction
Costs") exceed $500,000 in the aggregate. In that event, the number of FSI
Shares used for the purposes of calculating the Exchange Ratio shall be
decreased by an amount equal to the quotient determined by dividing (x) the
amount by which the actual amount of Semiconductor Systems Transaction Costs
exceeds $500,000 by (y) the Closing Price.
Assuming no adjustment to the Exchange Ratio due to Semiconductor Systems
expenses exceeding $500,000 and assuming no additional issuances of
Semiconductor Systems capital stock (other than pursuant to the exercise of
outstanding options, warrants or rights) and no additional grants of options or
other rights to acquire Semiconductor Systems capital stock, the Exchange Ratio
would be .2174022. The Merger Agreement provides that, except for grants of
options to employees in the ordinary course and issuances of Semiconductor
Systems Common Stock pursuant to the exercise of outstanding stock options,
Semiconductor Systems may not issue any shares of Semiconductor Systems Common
Stock or rights or options to acquire Semiconductor Systems Common Stock without
the consent of FSI. Based upon the number of outstanding shares of Semiconductor
Systems Common Stock as of the date hereof, an aggregate of approximately
1,739,217 shares of FSI Common Stock will be issued to Semiconductor Systems
shareholders upon consummation of the Merger; based upon the number of shares of
FSI Common Stock outstanding as of December 28, 1995, such shares would
represent approximately 7.9% of the total number of shares of FSI Common Stock
outstanding after the Merger. An additional approximately 60,782 shares of FSI
Common Stock will be issuable upon exercise of FSI stock options substituted for
Semiconductor Systems stock options outstanding at the Effective Time. The
actual number of shares of FSI Common Stock that will be issued in respect of
shares of Semiconductor Systems Common Stock at the closing of the Merger and
the number of shares of FSI Common Stock that will be reserved for issuance
under substituted options to purchase FSI Common Stock issued in the Merger will
depend on the number of shares of Semiconductor Systems Common Stock outstanding
immediately prior to the Effective Time of the Merger and the number of options
to purchase Semiconductor Systems Common Stock outstanding immediately prior to
the Effective Time of the Merger.
The Merger Agreement provides that the Exchange Ratio shall be adjusted to
reflect the effect of any stock split, reverse split, stock dividend,
reorganization, recapitalization or other like change with respect to FSI Common
Stock occurring after the date of the Merger Agreement and prior to the
Effective Time.
Any shares of Semiconductor Systems Common Stock owned by FSI, Merger Sub
or any other subsidiary of FSI at the Effective Time of the Merger will be
canceled in the Merger and no cash or other consideration will be paid in
respect thereof.
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Each share of FSI Common Stock outstanding as of the Effective Time of the
Merger will remain outstanding and unchanged by reason of the Merger. Each share
of common stock of Merger Sub outstanding immediately prior to the Effective
Time of the Merger will automatically be converted into and become one share of
Semiconductor Systems Common Stock and will constitute the only outstanding
capital stock of Semiconductor Systems.
NO FRACTIONAL SHARES
No fractional shares of FSI Common Stock will be issued in the Merger.
Instead, FSI will pay to each holder of Semiconductor Systems Common Stock who
would otherwise be entitled to a fractional share an amount of cash (rounded to
the nearest whole cent) equal to the product of such fraction multiplied by the
Closing Price.
Based upon the number of shares of FSI Common Stock outstanding at December
28, 1995 and based upon the number of shares of FSI Common Stock expected to be
issued to Semiconductor Systems shareholders in the Merger, approximately
22,116,089 shares of FSI Common Stock would be outstanding immediately following
the Effective Time of the Merger.
EFFECTIVE TIME AND TIME OF THE MERGER
The Merger will become effective upon the filing of Articles of Merger with
the Secretary of State of the State of California in accordance with the
relevant provisions of the California Corporations Code (the "Effective Time").
Such filing will be made, however, only upon the satisfaction or, where
permitted, waiver of all of the conditions contained in the Merger Agreement. It
is presently contemplated that the Effective Time of the Merger will occur
___________________, 1996. See "The Merger--Conditions to the Merger; Amendment
and Termination."
EXCHANGE OF SEMICONDUCTOR SYSTEMS COMMON STOCK
In order to receive the shares of FSI Common Stock to which the
shareholders of Semiconductor Systems will be entitled as a result of the
Merger, the shareholders will be required to surrender their stock certificates
after the Effective Time of the Merger, together with a duly completed and
executed letter of transmittal, to Harris Trust and Savings Bank, which will act
as Exchange Agent (the "Exchange Agent") in connection with the Merger. Upon
receipt of such stock certificates and letter of transmittal, the Exchange Agent
will issue to the registered holder or his or her transferee the shares of FSI
Common Stock which such person is entitled to receive as a result of the Merger
(less that number of such shares to be deposited in escrow to secure certain
indemnification obligations of the Semiconductor Systems shareholders, see
"Indemnification and Escrow of Merger Consideration"), together with any cash
such person is entitled to receive in respect of any fractional share of FSI
Common Stock in an amount calculated as described under "No Fractional Shares"
above. Instructions with regard to the surrender of certificates, together with
the letter of transmittal to be used for this purpose, will be mailed to
Semiconductor Systems shareholders as promptly as practicable after the
Effective Time of the Merger. SHAREHOLDERS OF SEMICONDUCTOR SYSTEMS SHOULD NOT
SUBMIT THEIR STOCK CERTIFICATES FOR EXCHANGE UNTIL SUCH INSTRUCTIONS AND LETTER
OF TRANSMITTAL ARE RECEIVED.
If any shares of FSI Common Stock are to be issued to a person other than
the person in whose name the certificate for shares of Semiconductor Systems
Common Stock surrendered in exchange therefor is registered, it shall be a
condition to such issuance that the stock certificate so surrendered shall be
properly endorsed (with such signature guarantees as may be required by the
letter of transmittal) and otherwise in proper form for transfer, and that the
person requesting such issuance shall pay any transfer or other taxes required
by reason of the issuance of such shares of FSI Common Stock to a person other
than the registered holder of Semiconductor Systems stock certificate
surrendered, or establish to the satisfaction of the Exchange Agent that such
tax has been paid or is not applicable.
After the Effective Time, there will be no further transfers on the stock
transfer books of Semiconductor Systems of shares of Semiconductor Systems
Common Stock which were outstanding immediately prior to the Effective Time of
the Merger. If a certificate representing such shares is presented for transfer,
it will be canceled and exchanged for the appropriate number of shares of FSI
Common Stock.
The conversion of Semiconductor Systems Common Stock into the right to
receive shares of FSI Common Stock will occur at the Effective Time without
regard to the date or dates on which certificates for shares of Semiconductor
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Systems Common Stock are physically surrendered. Until a certificate which
formerly represented shares of Semiconductor Systems Common Stock is actually
surrendered for exchange and received by the Exchange Agent, each outstanding
certificate that, prior to the Effective Time, represented shares of
Semiconductor Systems Common Stock (other than shares of Semiconductor Systems
Common Stock held by FSI, Merger Sub or any other subsidiary of FSI and shares
held by shareholders who exercise and do not subsequently withdraw or lose
statutory dissenters' rights) shall be deemed from and after the Effective Time,
for all corporate purposes other than the payment of dividends, to evidence the
ownership of the number of whole shares of FSI Common Stock into which such
shares of Semiconductor Systems Common Stock shall have been so converted. No
dividends or other distributions declared or made after the date of the Merger
Agreement with respect to FSI Common Stock with a record date after the
Effective Time will be paid to the holder of any unsurrendered certificate with
respect to the shares of FSI Common Stock represented thereby until the holder
of record of such certificate shall surrender such certificate. Subject to
applicable law, following surrender of any such certificate, there shall be paid
to the record holder of the certificates representing whole shares of FSI Common
Stock issued in exchange therefor, without interest, at the time of such
surrender, the amount of dividends or other distributions with a record date
after the Effective Time theretofore paid with respect to such whole shares of
FSI Common Stock. None of the Exchange Agent, the Surviving Corporation or any
party hereto shall be liable to a holder of shares of Semiconductor Systems
Common Stock or FSI Common Stock for any amount properly paid to a public
official pursuant to any applicable abandoned property, escheat or similar law.
CONDITIONS TO THE MERGER; AMENDMENT AND TERMINATION
The respective obligations of Semiconductor Systems and FSI to consummate
the Merger are subject to the satisfaction of a number of conditions, including
but not limited to the following: (i) the Merger Agreement shall have been
approved and adopted by the requisite vote of the shareholders of Semiconductor
Systems; (ii) the Registration Statement shall have become effective under the
Securities Act; (iii) no temporary restraining order, preliminary or permanent
injunction or other order shall be issued by any court of competent
jurisdiction; nor shall any proceeding brought by an administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign, seeking any of the foregoing be pending; nor shall there be any action
taken, or any statute, rule, regulation or order enacted, enforced or deemed
applicable to the Merger, which makes the consummation of the Merger illegal;
nor shall there be any other legal or regulatory restraint or prohibition
preventing the consummation of the Merger; (iv) each of Messrs. Parodi,
Masterson, Amis, Nguyen and Biche shall have entered into employment agreements
with Semiconductor Systems; and (v) the waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated and FSI, Semiconductor Systems and Merger Sub shall have timely
obtained from each governmental entity all other approvals, if any, necessary
for consummation of the Merger and the several transactions contemplated hereby.
In addition, the obligations of Semiconductor Systems to consummate the
Merger is further subject to the satisfaction of a number of conditions, unless
waived in writing by Semiconductor Systems, including but not limited to the
following: (i) the truth and accuracy in all material respects of the
representations and warranties of FSI and Merger Sub set forth in the Merger
Agreement and compliance in all material respects by FSI and Merger Sub with all
covenants, obligations and conditions required to be performed and complied with
by them as of the Effective Time; (ii) the receipt by Semiconductor Systems of a
certificate of certain officers of FSI stating the truth and accuracy in all
material respects of the representations and warranties made by FSI and Merger
Sub and their compliance in all material respects with the covenants,
obligations and conditions to be performed by FSI and Merger Sub pursuant to the
Merger Agreement; (iii) the receipt by Semiconductor Systems of a legal opinion
by Faegre & Benson LLP, counsel to FSI; (iv) the receipt by Semiconductor
Systems of a legal opinion by Wilson, Sonsini, Goodrich & Rosati Professional
Corporation, counsel to Semiconductor Systems, regarding the tax-free nature of
the transaction; and (v) the non-occurrence of any material adverse change in
the business, properties, results of operations or financial condition of FSI.
In addition, the obligations of FSI and Merger Sub to consummate the Merger
are further subject to the satisfaction of a number of conditions, unless waived
in writing by FSI, including but not limited to the following: (i) the truth and
accuracy in all material respects of the representations and warranties of
Semiconductor Systems set forth in the Merger Agreement and compliance in all
material respects by Semiconductor Systems with all covenants, obligations and
conditions required to be performed and complied with by them as of the
Effective Time; (ii) the receipt by FSI and Merger Sub of a certificate of
certain officers of Semiconductor Systems stating the truth and accuracy in all
material respects of the representations and warranties made by Semiconductor
Systems and its compliance in all material respects with the covenants,
obligations and conditions to be performed by Semiconductor Systems pursuant to
the Merger
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Agreement; (iii) the receipt by FSI and Merger Sub of evidence of the receipt of
all necessary third party consents for the assignment of certain material
Semiconductor Systems agreements; (iv) no temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal or regulatory restraint provision
challenging FSI's proposed acquisition of Semiconductor Systems, or limiting or
restricting FSI's conduct or operation of the business of Semiconductor Systems
following the Merger, shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other governmental entity domestic or
foreign, seeking any of the foregoing be pending; (v) the receipt by FSI and
Merger Sub of a legal opinion from Wilson, Sonsini, Goodrich, & Rosati
Professional Corporation, legal counsel to Semiconductor Systems; (vi) the
receipt by FSI of an opinion from Faegre & Benson LLP, counsel to FSI, regarding
the tax-free nature of the transaction; (vii) the non-occurrence of any material
adverse change in the business properties, results of operations or financial
condition of Semiconductor Systems; (viii) not more than 5% of the outstanding
shares of Semiconductor Systems Common Stock shall have exercised, or shall
continue to have the right to exercise, dissenters' rights with respect to the
transactions contemplated by the Merger Agreement; (ix) the receipt by FSI and
Merger Sub of an executed affiliate agreement by each of the affiliates of
Semiconductor Systems; (x) the termination of any agreements between
Semiconductor Systems and any of its shareholders that grant certain
registration, voting, right of first refusal or other similar rights to such
shareholders; and (xi) receipt by FSI of a letter from KPMG Peat Marwick LLP,
FSI's independent accountants, reconfirming its belief that the Merger will
qualify as a pooling of interests under generally accepted accounting
principles.
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time (i) by the mutual written consent of Semiconductor
Systems and FSI; (ii) by FSI if: (a) it is not in material breach of its
obligations under the Merger Agreement and there has been a material breach of
any representation, warranty, covenant or agreement contained in the Merger
Agreement on the part of Semiconductor Systems and such breach has not been
cured within ten (10) business days after written notice to Semiconductor
Systems (provided that no cure period shall be required for a breach which by
its nature can not be cured); (b) there shall be any final action taken, or any
statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any governmental entity, which would prohibit FSI's
or Semiconductor Systems' ownership or operation of all or a material portion of
the business of Semiconductor Systems, or compel FSI or Semiconductor Systems to
dispose of or hold separate all or a material portion of the business or assets
of Semiconductor Systems or FSI as a result of the Merger; (c) the
recommendation by the Board of Directors of Semiconductor Systems for the Merger
or the Merger Agreement is modified or withdrawn in any way detrimental to FSI;
or (d) the Merger and the Merger Agreement is not approved by the shareholders
of Semiconductor Systems; (iii) by Semiconductor Systems if: (a) it is not in
material breach of its obligation under the Merger Agreement and there has been
a material breach of any representation, warranty, covenant or agreement
contained in the Merger Agreement on the part of FSI or Merger Sub and such
breach has not been cured within ten (10) business days after written notice to
FSI (provided that no cure period shall be required for a breach which by its
nature can not be cured) or; (b) the recommendation by the Board of Directors of
Semiconductors Systems with respect to the Merger is modified or withdrawn in
any way detrimental to FSI and at the time of such action an Acquisition
Proposal (as defined below) is outstanding (provided that Semiconductor Systems
pays FSI a $1.0 million termination fee (see "Termination Fees")); and (iv) by
FSI or Semiconductor Systems if: (a) the Closing has not occurred by May 20,
1996; (b) there shall be a final non-appealable order of a federal or state
court in effect preventing consummation of the Merger; or (c) there shall be any
final action taken, or any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any governmental
entity which would make consummation of the Merger illegal.
The Merger Agreement may be amended by the parties thereto at any time by
execution of an instrument in writing signed on behalf of each of the parties to
such Merger Agreement.
REPRESENTATIONS AND WARRANTIES
Semiconductor Systems has made numerous representations and warranties in
the Merger Agreement concerning Semiconductor Systems' organization,
authorizations and business; Semiconductor Systems' financial statements;
absence of undisclosed liabilities; guaranties and warranties; absence of
certain changes in Semiconductor Systems' business and assets; accounts
receivable; inventories; tax returns and taxes; real and personal property;
leases; patents, trademarks and trade names; contracts; insurance; officers,
directors and employees; employee benefit plans; labor relations; bank accounts;
transactions with affiliates; litigation and compliance with law; absence of
restrictions and conflicts; brokers, finders and investment bankers; and
accounting treatment.
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FSI has likewise represented and warranted to Semiconductor Systems in the
Merger Agreement as to its organization and authorization; absence of
restrictions and conflicts; capitalization; financial statements; absence of
certain changes; litigation; compliance with laws; accuracy of SEC filings; and
brokers, finders and investment bankers.
CONDUCT OF SEMICONDUCTOR SYSTEMS' BUSINESS PRIOR TO THE MERGER
Under the Merger Agreement, Semiconductor Systems has agreed that until the
Effective Time or the earlier termination of the Merger Agreement pursuant to
the terms thereof, it will, among other things, conduct its operations in the
ordinary course of business in substantially the same manner as conducted prior
to February 5, 1996, will pay its debts and taxes when due, will pay or perform
its other obligations when due and will use all reasonable efforts, consistent
with past practices and policies, to preserve intact its business organizations,
officers, key employees and business relationships. Among other limitations
relating to the conduct of its business, Semiconductor Systems has agreed that
it will not, without FSI's prior written consent or except as expressly
contemplated by the Merger Agreement: (a) amend or accelerate the exercisability
of outstanding stock options or restricted stock or authorize cash payments in
exchange for any options outstanding; (b) enter into any commitment or
transaction (i) which requires performance over a period longer than six months
in duration, or (ii) to purchase fixed assets for an aggregate purchase price in
excess of $150,000 through March 31, 1996 or in excess of $75,000 per month
thereafter; (c) except for certain stated exceptions, grant any severance or
termination pay (i) to any director or officer or (ii) to any other employee
other than payments made pursuant to standard written agreements outstanding on
the date of the Merger Agreement as disclosed therein; (d) transfer to any
person any rights in Semiconductor Systems' patents, trademarks or other
proprietary rights; (e) enter into or amend any agreements pursuant to which any
other party is granted exclusive marketing or other exclusive rights of any type
or scope with respect to any products or technology of Semiconductor Systems;
(f) violate, amend or otherwise modify the terms of any of its material
contracts, other than certain contracts entered into in the ordinary course of
Semiconductor Systems' business and which would not have a material adverse
effect on Semiconductor Systems; (g) commence any litigation, other than (i) for
routine collection matters, (ii) for cases where Semiconductor Systems
determines that failure to commence litigation would materially impair the value
of its business or (iii) for a breach of the Merger Agreement; (h) except for
certain tax-related distributions, declare or pay any dividends on or make other
distributions in respect of any of its capital stock, or split, combine or
reclassify any of its capital stock or issue or authorize the issuance of any
securities in respect of shares of its capital stock, or repurchase any shares
of its capital stock except from former employees, directors and consultants in
accordance with agreements providing for the repurchase of shares in connection
with termination of services to Semiconductor Systems; (i) issue, sell or
purchase any shares of its capital stock or subscriptions, rights, warrants or
options to acquire any such shares or other convertible securities (except for
grants pursuant to Semiconductor Systems' Stock Option Plan made in the ordinary
course of business and after consultation with FSI, repurchases from employees
in connection with agreements providing for the repurchase of shares in
connection with termination of services to Semiconductor Systems and issuances
pursuant to rights held by employees as of February 5, 1996); (j) amend its
Articles of Incorporation or Bylaws; (k) acquire or agree to acquire any
corporation or business or any assets which are material to Semiconductor
Systems; (l) sell, lease, license or otherwise dispose of any material assets
except in the ordinary course of business; (m) incur any indebtedness other than
debt incurred under Semiconductor Systems' existing line of credit and on terms
consistent with past practice or guarantee any indebtedness or issue or sell any
debt securities or guarantee debt securities of others; (n) adopt or amend any
employee benefit plan or enter into any employment contract, or pay any special
bonus or other special remuneration to any director or employee, or increase
wage or salary rates (other than certain approved 1996 salary and rate
increases); (o) revalue any assets except in the ordinary course of business;
(p) pay, discharge or otherwise satisfy in an amount in excess of $100,000 (in
the aggregate) any claim, liability or obligation other than the payment,
discharge or satisfaction in the ordinary course of business of liabilities
reflected or reserved against in Semiconductor Systems' financial statements or
those disclosed in the Merger Agreement; (q) make or change any material tax
election, settle any tax claim or consent to any waiver or extension of any
limitation period applicable to tax claims; (r) take any action which would
interfere with the ability to account for the Merger as a pooling of interests;
(s) waive or release any right or claim of Semiconductor Systems, other than in
the ordinary course of business and in an amount not in excess of $10,000 per
right or claim; (t) enter into any material contract other than ordinary course
of business customer and supply contracts; or (u) take or agree to take any
action relating to the foregoing or any action that would result in any of the
representations and warranties of Semiconductor Systems set forth in the Merger
Agreement becoming untrue or incorrect or prevent Semiconductor Systems from
performing its covenants as set forth therein.
Semiconductor Systems has further agreed that it will not, and will not
permit its officers, directors or other agents to, directly or indirectly
solicit, encourage, initiate or participate in any negotiations with respect to
any offer or
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proposal relating to the acquisition of all or substantially all of
Semiconductor Systems' business, assets or properties or the acquisition of
Semiconductor Systems stock by merger, purchase of assets, tender offer or
otherwise, or otherwise assist, or cooperate with any person to make any such
acquisition, or disclose any information not customarily disclosed to parties
other than its attorneys or financial advisors concerning Semiconductor Systems'
business and properties; provided, however, that Semiconductor Systems may
participate in negotiation, furnish information or assist or cooperate if
Semiconductor Systems' Board of Directors, based upon the advice of
Semiconductor Systems' outside counsel, determines in good faith that failure to
do so would constitute a breach of the Board's fiduciary duty. If Semiconductor
Systems receives any offer or proposal relating to the foregoing or any request
for disclosure or access to information, it is required to immediately inform
FSI as to all material facts relating to the offer or proposal and furnish FSI
all information FSI may reasonably request.
TAX DISTRIBUTIONS TO SEMICONDUCTOR SYSTEMS SHAREHOLDERS
The Merger Agreement provides that Semiconductor Systems shall, consistent
with past practice, distribute to its shareholders, in cash on or before the
Closing Date, an aggregate of (i) 46% of the taxable income of Semiconductor
Systems for its taxable year ended December 31, 1995 (less any amounts
previously distributed (the "Distributed Amount") with respect thereto) plus
(ii) 46% of the estimated taxable income of Semiconductor Systems for the period
commencing January 1, 1996 and ending on the day preceding the Closing Date (the
"1996 Short Period"). In addition, on the day immediately preceding the Closing
Date, Semiconductor Systems shall make an aggregate distribution, in the form of
a promissory note (the "Promissory Note"), to the Semiconductor Systems
shareholders equal to 46% of the actual tax liability of Semiconductor Systems
for the 1996 Short Period, less any previous distributions made to cover taxes
for such period. If the actual taxable income for the 1996 Short Period exceeds
the estimated amount, Semiconductor Systems shall promptly pay any amounts owing
under the Promissory Note. If 46% of the actual taxable income for Semiconductor
Systems' taxable year ended December 31, 1995 is less than the Distributed
Amount, Semiconductor Systems shall, prior to the closing, collect from its
shareholders an amount equal to such difference. As a result of the Merger,
Semiconductor Systems' status as an S Corporation will terminate.
EFFECT ON EMPLOYEE BENEFIT PLANS
FSI will take such reasonable actions as are necessary to allow eligible
employees of Semiconductor Systems to participate in FSI's Employee Stock
Purchase Plan and its Defined Contribution Pension Plan as soon as practicable
after the Effective Time of the Merger. Subject to the eligibility and other
participation requirements and terms contained in FSI's benefit programs and
plans, FSI will provide Semiconductor Systems' employees with full credit for
years of past service to Semiconductor Systems since its incorporation on
November 20, 1990.
As of _______________, 1996, there were options outstanding to purchase
279,583 shares of Semiconductor Systems Common Stock. At the Effective Time,
each outstanding option to purchase Semiconductor Systems Common Stock, whether
vested or unvested, will be converted into an option to purchase FSI Common
Stock (a "Substituted Option"), and will be exercisable, as such shares vest,
for the number of whole shares of FSI Common Stock determined by multiplying the
number of shares purchasable under such option immediately prior to the
Effective Time by the Exchange Ratio, and rounded down to the nearest whole
number. The per share exercise price of the Substituted Options will be equal to
the per share exercise price of such option immediately prior to the Effective
Time of the Merger, divided by the Exchange Ratio and rounded to the nearest
whole cent. The Substituted Options will be granted under FSI's 1994 Omnibus
Stock Plan.
EXPENSES OF THE MERGER
Except as provided below, all fees and expenses incurred in connection with
the Merger and the Merger Agreement shall be the obligation of the respective
party incurring such fees and expenses. However, if the Merger is consummated,
and if the Semiconductor Systems' costs and expenses associated with legal,
accounting, investment banking, and other similar fees and expenses associated
with the transactions contemplated by this Agreement (collectively, the
"Semiconductor Systems Transaction Costs") exceed $500,000, then the number of
shares of FSI used for purposes of calculating the Exchange Ratio pursuant to
the terms of the Merger Agreement will be decreased by that number of shares
equal to the quotient determined by dividing (x) the amount by which the actual
amount of Semiconductor Systems Transaction Costs exceed $500,000 by (y) the
Closing Price. See "Termination Fees."
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INDEMNIFICATION AND ESCROW OF MERGER CONSIDERATION
Pursuant to the Merger Agreement and the Shareholders Agreement dated
February 5, 1996 among the shareholders of Semiconductor Systems (the
"Securityholders") and FSI, the Securityholders have agreed, severally but not
jointly, to indemnify and hold FSI, the Surviving Corporation and their
respective affiliates and successors and assigns, including the directors,
officers, employees, agents, advisors and representatives of each (each an
"Indemnity") harmless from and against any Adverse Consequences (as defined
below) such Indemnity may suffer as a result of (i) any inaccuracy or breach of
any representation or warranty of Semiconductor Systems contained in the Merger
Agreement, or any failure of Semiconductor Systems to perform or comply with any
covenant contained therein (provided that the Securityholders shall not have any
obligation for the first $150,000 in Adverse Consequences incurred in the
aggregate by the Indemnities) until no later than the first anniversary of the
Effective Time (except with respect to claims asserted prior to such time) (the
"General Indemnity") and (ii) any claim, action, dispute or loss arising out of
any action taken or omitted in connection with any transactions involving
securities of Semiconductor Systems (excluding the Merger) which were made
between or among Semiconductor Systems and/or its shareholders and former
shareholders during the 12 months prior to the Effective Time involving any
shareholder agreement among Semiconductor Systems and any current or former
shareholder of Semiconductor Systems until the expiration of the period during
which a claim may be asserted under any relevant statute of limitations (except
with respect to claims asserted prior to such time) (the "Claims Indemnity").
As used in the Merger Agreement and the Shareholders Agreement, "Adverse
Consequences" means all actions, suits, proceedings, hearings, investigations,
charges, complaints, claims, demands, injunctions, judgments, orders, decrees,
rulings, damages, dues, penalties, fines, costs, reasonable amounts paid in
settlement, liabilities, obligations, taxes, liens, losses, expenses and fees,
including court costs and reasonable attorneys' fees and expenses, offset in
each case by any related insurance proceeds actually received by the
Indemnities.
On November 22, 1995, the shareholders of Semiconductor Systems purchased
1,600,000 shares of Semiconductor Systems Common Stock held by a former employee
and director of Semiconductor Systems, Eric Hsu, for approximately $1,800,000.
The purchase was made pursuant to an Employee Stock Purchase and Shareholder
Agreement between Mr. Hsu and Semiconductor Systems. Mr. Hsu contends that the
stock purchase was invalid and he has hired counsel and threatened litigation.
Semiconductor Systems management believes that there is no basis for Mr. Hsu's
contention, and Semiconductor Systems and the Semiconductor Systems shareholders
intend to contest the matter vigorously. This matter will be covered by the
Claims Indemnity, subject to the terms and limitations thereof.
As security for the obligations of the Securityholders under the General
Indemnity, 60,000 shares of FSI Common Stock to be issued in the Merger will be
held in escrow with Harris Trust & Savings Bank (or other mutually acceptable
escrow agent) (the "Escrow Agent"). As security for the obligations of the
Securityholders under the Claims Indemnity, 250,000 shares of FSI Common Stock
to be issued in the Merger will be held in escrow with the Escrow Agent. Each
Securityholder will contribute shares of FSI Common Stock to the escrow funds in
proportion to their ownership of Semiconductor Systems Common Stock. The escrow
fund established with respect to the General Indemnity shall expire on the first
anniversary of the Effective Time and the escrow fund established with respect
to the Claims Indemnity shall expire on August 31, 1997, after which times,
respectively, the escrowed shares that are not subject to prior claims for
indemnification pursuant to the Merger Agreement shall be released from escrow.
Any indemnity obligations under either the General Indemnity or the Claims
Indemnity shall be allocated among the Securityholders in the same proportion as
the number of escrowed shares contributed by a Securityholder to the escrow
represents of the total of all escrowed shares. The Merger Agreement and the
Shareholders Agreement provide that each Securityholder shall have appointed
Michael L. Parodi (the "Securityholder Agent") as agent and attorney in fact for
each Securityholder, to give and receive notices and communications, to sell any
shares held in the escrow funds, to authorize delivery to FSI of the escrowed
shares, cash or other property from the escrow fund in satisfaction of claims
for indemnification by FSI, to object to such deliveries, to agree to negotiate,
enter into settlements and compromises of, and demand dispute resolution and
comply with orders of courts and awards of arbitrators with respect to such
claims by FSI, and to take all actions necessary or appropriate in the judgment
of the Securityholder Agent for the accomplishment of the foregoing. The Merger
Agreement and the Shareholders Agreement further provide that the
Securityholders will jointly and severally indemnify the Securityholder Agent
and hold the Securityholder Agent harmless against any loss, liability or
expense incurred without negligence, bad faith or willful misconduct in
connection with the Securityholder Agent's acceptance or administration of his
duties under the Merger Agreement.
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The escrow funds shall be available to reimburse the Securityholder Agent
for documented out-of-pocket expenses incurred by the Securityholder Agent in
the performance of his duties in the following amounts: (i) up to $25,000 for
expenses related to matters involving the General Indemnity and (ii) up to
$100,000 for expenses related to matters involving the Claims Indemnity.
Any securities issued or distributed in respect of shares held in the
escrow funds will be added to the escrow and become a part thereof. Cash
dividends, if any, on FSI Common Stock will not be added to the escrow funds but
will be distributed to the Securityholders. Each Securityholder shall have
voting rights with respect to the shares owned by such Securityholder which are
held in the escrow funds.
The maximum liability of the Securityholders under the General Indemnity
will be an amount equal to the product of the Closing Price multiplied by 10% of
the total number of shares of FSI Common Stock issued in the Merger and the
maximum liability of the Securityholders under the Claims Indemnity will be an
amount equal to the product of the Closing Price multiplied by 20% of the total
number of shares of FSI Common Stock issued in the Merger. FSI has agreed that
it will look first to the appropriate escrow fund to satisfy any indemnification
obligations the Securityholders may have under the Merger Agreement and the
Shareholders Agreement.
The existence of the indemnification obligations under the Merger Agreement
and the Shareholders Agreement will not limit any other potential remedies of
FSI and the other Indemnities with respect to any knowing and intentional
breaches of the representations, warranties or covenants of Semiconductor
Systems contained therein.
TERMINATION FEES
Semiconductor Systems has agreed to pay FSI a fee of $1,000,000 (the
"Termination Fee") if (i) there has been no material breach by FSI of its
representations, warrants, covenants and agreements under the Merger Agreement
(a "Material Breach"), (ii) FSI elects to terminate the Merger Agreement as a
result of the modification or withdrawal by Semiconductor Systems' Board of
Directors of its recommendation for the Merger Agreement or the Merger in any
way detrimental to FSI and (iii) at the time of such termination an Acquisition
Proposal (as defined below) is outstanding. In addition, Semiconductor Systems
will pay the Termination Fee to FSI if (i) there has been no Material Breach,
(ii) the Merger has not been approved by the Semiconductor Systems shareholders
at the Special Meeting, and (iii) at the time of the Special Meeting, an
Acquisition Proposal is outstanding. Except as provided below, the Termination
Fee shall be due promptly upon request by FSI. If the Acquisition Proposal
contemplates a transaction in which the aggregate value of such transaction is
less than the value of the FSI Common Stock offered under the Merger Agreement,
then such Termination Fee shall only be payable if and at the time Semiconductor
Systems completes a transaction within one year of the termination of the Merger
Agreement with the party that made such Acquisition Proposal.
The term "Acquisition Proposal" means a written offer from a party other
than FSI to acquire Semiconductor Systems in a merger transaction, to acquire
all or substantially all of the assets of Semiconductor Systems or to acquire at
least 50% of the outstanding Semiconductor Systems Common Stock.
AFFILIATE AGREEMENTS; VOTING AGREEMENTS
The shares of FSI Common Stock to be issued in the Merger have been
registered under the Securities Act pursuant to the Registration Statement,
thereby allowing such securities to be traded without restriction by all former
holders of Semiconductor Systems Common Stock not deemed to be "affiliates" (as
such term is defined for purposes of Rule 145 under the Securities Act) of
Semiconductor Systems at the time the transaction is submitted for a vote to
Semiconductor Systems shareholders. The affiliates of Semiconductor Systems are
Messrs. Parodi, Amis, Masterson and Nguyen.
Pursuant to the terms of the Affiliate Agreements, each affiliate of
Semiconductor Systems has agreed not to make any sale of FSI Common Stock
received upon consummation of the Merger in violation of the Securities Act or
the rules and regulations promulgated thereunder. Generally, this will require
that such sales be made in accordance with Rule 145(d) under the Securities Act,
which in turn requires that, for specified periods, such sales be made in
compliance with the volume limitations, manner of sale provisions and current
information requirements of Rule 144 under the Securities Act. The volume
limitations should not pose any material limitations on any Semiconductor
Systems
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shareholder who owns less than one percent of FSI's outstanding Common Stock
after the Merger unless, pursuant to Rule 144, such shareholder's shares are
required to be aggregated with those of another shareholder.
Each affiliate of Semiconductor Systems also has agreed not to sell,
exchange, transfer, pledge, dispose of or offer or agree to do any of the
foregoing or in any other way reduce the risk of his or her ownership of, or
investment in, (i) shares of Semiconductor Systems Common Stock owned by such
affiliate prior to the Effective Time; or (ii) shares of FSI Common Stock or
other rights with respect to FSI Common Stock, until such time as financial
results covering at least 30 days of combined operations of FSI and
Semiconductor Systems after the Effective Time have been published by FSI.
In addition, each affiliate of Semiconductor Systems has agreed to vote at
the Special Meeting all shares of Semiconductor Systems Common Stock held by him
in favor of the Merger Agreement and the Merger.
GOVERNMENTAL AND REGULATORY APPROVALS
Certain acquisition transactions such as the Merger are reviewed by the
Antitrust Division of the Department of Justice (the "Antitrust Division") or
the Federal Trade Commission (the "FTC") to determine whether such transactions
comply with applicable antitrust laws. Under certain provisions of the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the
Merger may not be consummated until certain information has been furnished to
the Antitrust Division and the FTC and certain waiting period requirements under
the HSR Act have been satisfied. Information was filed with the Antitrust
Division and the FTC under the HSR Act by FSI and Semiconductor Systems on
February 22, 1996; the waiting period under the HSR Act expired on March ___,
1996.
FSI and Semiconductor Systems are aware of no other governmental or
regulatory approvals required for consummation of the Merger, other than
compliance with the federal securities laws and applicable securities and "blue
sky" laws of the various states.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal Federal income tax consequences
of the Merger to the shareholders of Semiconductor Systems and to FSI. The
discussion set forth below is based on current provisions of the Code, Treasury
Regulations (proposed, temporary and final) promulgated thereunder, judicial
decisions and administrative rulings. All of the foregoing are subject to change
and any such change may be retroactively applied, which could affect the
validity of this discussion. The Federal income tax discussion set forth below
may not be applicable to certain classes of taxpayers, including foreign persons
and persons who acquired shares of Semiconductor Systems pursuant to the
exercise of employee stock options or rights or otherwise as compensation.
SEMICONDUCTOR SYSTEMS SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO
THE TAX CONSEQUENCES OF THE MERGER SPECIFIC TO THEM, INCLUDING THE APPLICABILITY
AND EFFECT OF STATE, LOCAL AND OTHER TAX LAWS.
FSI and Semiconductor Systems will receive at the Effective Time opinions
of their counsel, Faegre & Benson LLP and Wilson Sonsini Goodrich & Rosati
Professional Corporation, respectively, (the "Tax Opinions") to the effect that
for Federal income tax purposes: (i) the merger of Merger Sub with and into
Semiconductor Systems, in accordance with the terms of the Merger Agreement,
will qualify as a "reorganization" within the meaning of Section 368(a) of the
Code; (ii) no gain or loss will be recognized to the shareholders of
Semiconductor Systems upon the receipt by them of shares of FSI Common Stock in
exchange for their shares of Semiconductor Systems Common Stock pursuant to the
Merger; (iii) the aggregate tax basis of the shares of FSI Common Stock received
by the shareholders of Semiconductor Systems (including any fractional share
interests treated as received) will be the same as the aggregate tax basis of
the shares of Semiconductor Systems Common Stock surrendered in exchange
therefor; and (iv) the holding period of the shares of FSI Common Stock received
by the Semiconductor Systems shareholders (including any fractional share
interests treated as received) in exchange for shares of Semiconductor Systems
Common Stock will include the period during which the shares of Semiconductor
Systems Common Stock surrendered in exchange therefor were held, provided the
shares of Semiconductor Systems Common Stock were held as a capital asset at the
Effective Time.
No ruling has been or will be obtained from the Internal Revenue Service
("IRS") in connection with the Merger. The Tax Opinions neither bind the IRS nor
preclude the IRS from adopting a contrary position. In addition, the Tax
Opinions will be subject to certain assumptions and qualifications and will be
based on the truth and accuracy of certain
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representations made by FSI, Merger Sub, Semiconductor Systems and the
shareholders of Semiconductor Systems, including representations in certificates
to be delivered to counsel by the respective managements of FSI, Merger Sub and
Semiconductor Systems and by certain shareholders of Semiconductor Systems. Of
particular importance will be certain assumptions and representations relating
to the "continuity of interest" requirement.
To satisfy the continuity of interest requirement, Semiconductor Systems
shareholders must not, pursuant to a plan or intent existing at or prior to the
Merger, dispose of or transfer so much of either (i) their Common Stock of
Semiconductor Systems in anticipation of the Merger or (ii) the FSI Common Stock
to be received in the Merger (collectively, "Planned Dispositions"), such that
the Semiconductor Systems shareholders, as a group, would no longer have a
substantial proprietary interest in the Semiconductor Systems business being
conducted by FSI after the Merger. Planned Dispositions include, among other
things, shares disposed of pursuant to the exercise of dissenters' rights.
Semiconductor Systems shareholders will generally be regarded as having retained
a substantial proprietary interest as long as the FSI Common Stock received in
the Merger (after reduction for any Planned Dispositions), in the aggregate,
represents a substantial portion of the entire consideration received by the
stockholders in the Merger. If the continuity of interest requirement were not
satisfied, the Merger would not be treated as a "reorganization" within the
meaning of the Code.
A successful IRS challenge to the "reorganization" status of the Merger (as
a result of a failure of the "continuity of interest" requirement or otherwise)
would result in a Semiconductor Systems shareholder recognizing gain or loss
with respect to each share of Common Stock of Semiconductor Systems surrendered
equal to the difference between the shareholder's basis in such share and the
fair market value, as of the Effective Time of the Merger, of the FSI Common
Stock received in exchange therefor. In such event, a shareholder's aggregate
basis in the FSI Common Stock so received would equal its fair market value and
his holding period for such stock would begin the day after the Merger.
With respect to a Semiconductor Systems shareholder who receives cash in
the Merger as a result of the rounding of a fractional share interest in FSI
Common Stock, counsel is of the opinion that such shareholder will be treated as
having received such fractional share interest and then, pursuant to Section
302(a) of the Code, as having received such cash in exchange therefor. Assuming
such treatment, a Semiconductor Systems shareholder would recognize gain or loss
measured by the difference between the cash received and the basis for the
fractional share (determined as stated above).
With respect to a Semiconductor Systems shareholder who dissents from the
Merger and receives cash for the value of such dissenting shareholder's
Semiconductor Systems Common Stock, counsel is of the opinion that such cash
will be treated as having been received as a distribution from Semiconductor
Systems in redemption of such Semiconductor Systems Common Stock, subject to the
provisions and limitations of Section 302 of the Code. If the redemption does
not have the effect of the distribution of a dividend under Section 302 of the
Code (after applying the constructive ownership rules of Section 318 of the
Code), such redemption would be treated as a distribution in full payment in
exchange for such Semiconductor Systems Common Stock, and thus the dissenting
shareholder would recognize gain or loss measured by the difference between the
cash received and the basis for such Semiconductor Systems Common Stock.
ACCOUNTING TREATMENT
FSI intends to account for the Merger as a "pooling of interests" under
generally accepted accounting principles. Under the pooling of interests method,
the recorded assets and liabilities of the companies are carried forward to the
combined corporation at their recorded amounts and the income (loss) of the two
companies constitutes the income (loss) of the combined corporation for the
entire fiscal period in which the combination occurs as well as for prior fiscal
periods.
DISSENTERS' RIGHTS
If the Merger Agreement is approved by the required vote of the
shareholders and the Merger is not subsequently abandoned or terminated, any
shareholder of Semiconductor Systems on the record date fixed for determining
shareholders entitled to vote on the Merger may, by complying with the
provisions of Chapter 13 of the California Corporations Code (the "Corporations
Code"), require Semiconductor Systems to purchase for cash at their fair market
value the shares owned by such holder and which were not voted to approve the
Merger Agreement. The fair market value will be determined as of the date before
the first announcement of the terms of the proposed Merger, excluding any
appreciation or depreciation in consequence of the proposed Merger.
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To require Semiconductor Systems to purchase such holder's shares of
Semiconductor Systems Common Stock, an Semiconductor Systems shareholder (a
"Dissenting Shareholder") must:
(1) Not vote any or all of the shares such shareholder is entitled to vote
to approve the Merger Agreement;
(2) Make written demand upon Semiconductor Systems or the transfer agent
for Semiconductor Systems, within thirty (30) days after the date on
which notice of approval of the Merger Agreement is mailed to such
shareholder, setting forth in such holder's demand the number and
class of shares which such shareholder demands that Semiconductor
Systems purchase and a statement by such shareholder as to what such
shareholder claims the fair market value of such shares to have been
as of the date before the first announcement of the terms of the
Merger, excluding any appreciation or depreciation in consequence of
the Merger; and
(3) Submit to Semiconductor Systems, within thirty (30) days after the
date on which notice of approval of the Merger Agreement is mailed to
such shareholder, at the principal office of Semiconductor Systems,
the certificates representing any shares in regard to which demand for
purchase is being made, for endorsement with a statement that the
shares are dissenting shares.
IF A SHAREHOLDER OF SEMICONDUCTOR SYSTEMS VOTES AGAINST APPROVAL OF THE MERGER
AGREEMENT, SUCH VOTE WILL NOT BE SUFFICIENT TO CONSTITUTE THE DEMAND DESCRIBED
IN CLAUSE (2) ABOVE.
Within ten (10) days after the date of the approval of the Merger
Agreement, Semiconductor Systems will mail to each shareholder not voting to
approve the Merger Agreement, a notice of approval of the Merger Agreement,
together with a statement of the price determined by Semiconductor Systems to
represent the fair market value of dissenting shares, and a brief description of
the procedure to be followed if the shareholder desires to exercise dissenters'
rights under the Corporations Code. The statement of price will constitute an
offer by Semiconductor Systems to purchase at the price stated therein any
dissenting shares, as defined above. If Semiconductor Systems and the Dissenting
Shareholder agree that the shares are dissenting shares and agreed upon the
price of the shares, the Dissenting Shareholder will be entitled to the agreed
price plus interest thereon at the legal rate on judgments from the date of such
agreement. If Semiconductor Systems denies that the shares are dissenting shares
or if Semiconductor Systems and the Dissenting Shareholder fail to agree upon
the fair market value of the shares, then the Dissenting Shareholder, within six
months after the date on which notice of approval of the Merger Agreement is
mailed to such shareholder, but not thereafter, may file a complaint in the
Superior Court of the proper county requiring the Court to determine whether the
shares are dissenting shares, or the fair market value of the dissenting shares,
or both, or may intervene in any pending action for the appraisal of any shares
of Semiconductor Systems stock.
A Dissenting Shareholder may not withdraw such shareholder's demand for
purchase of dissenting shares without Semiconductor System's consent.
THE FOREGOING SUMMARY DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE
PROVISIONS OF CHAPTER 13 OF THE CORPORATIONS CODE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CHAPTER, A COPY OF WHICH IS ATTACHED HERETO AS
ANNEX II. SHAREHOLDERS OF SEMICONDUCTOR SYSTEMS WHO WISH TO EXERCISE THEIR
DISSENTER'S RIGHTS SHOULD CONSULT THEIR LEGAL COUNSEL.
COMPARISON OF FSI AND SEMICONDUCTOR SYSTEMS SHAREHOLDERS' RIGHTS
FSI CAPITAL STOCK
The Articles of Incorporation of FSI authorize the issuance by FSI through
its Board of Directors of 50,000,000 shares of Common Stock, no designated par
value, of which 20,376,872 shares were issued and outstanding as of December 28,
1995, and 10,000,000 shares of Preferred Stock, no designated par value, none of
which have been issued.
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Common Stock. All outstanding shares of FSI Common Stock are, and the
shares of FSI Common Stock offered hereby upon completion of the Merger will be,
fully paid and nonassessable. Upon any liquidation or dissolution of FSI, the
holders of FSI Common Stock share ratably, in proportion to the number of shares
held, in the assets available for distribution after payment of all prior
claims, including all prior claims of the holders of any Preferred Stock then
outstanding.
Holders of FSI Common Stock have no preemptive rights and are entitled to
one vote for each share held on each matter submitted to a vote of shareholders.
Cumulative voting for the election of directors is not permitted. Subject to any
prior rights of any Preferred Stock then outstanding, holders of FSI Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors of FSI out of funds legally available therefor.
Preferred Stock. The Board of Directors has the authority, in most
instances without further shareholder action, to issue from time to time all or
any part of the authorized Preferred Stock, in one or more series. The Board of
Directors is authorized to determine the designation of and number of shares in
each series and to fix the dividend, redemption, liquidation, retirement,
conversion, and voting rights, if any, of such series, and any other rights and
preferences thereof. Any shares of Preferred Stock which may be issued may have
disproportionately high voting rights or class voting rights, may be convertible
into shares of FSI Common Stock and may rank prior to shares of FSI Common Stock
as to payment of dividends and upon liquidation. The Board of Directors could
authorize the issuance of one or more series of the Preferred Stock with voting
rights or other rights and preferences which would impede the success of any
proposed merger, tender offer, proxy contest, or other attempt to gain control
of FSI not approved by the Board of Directors. Although the issuance of
Preferred Stock may have an adverse effect on the rights of holders of FSI
Common Stock, the consent of the holders of FSI Common Stock would not be
required for any such issuance of Preferred Stock.
Amended and Restated Articles of Incorporation. Article IX of the Amended
and Restated Articles of Incorporation of FSI provides for a classified board of
not less than five nor more than eleven directors serving staggered three-year
terms. The number of directors may be increased by the shareholders or the Board
of Directors or decreased by the shareholders; provided, however, that any
change in the number of directors must be approved by the affirmative vote of
not less than 75% of the votes entitled to be cast by the holders of all then
outstanding shares of capital stock of FSI, voting as a single class, unless the
change has been approved by a majority of the entire Board of Directors. A
decrease in the number of directors may not shorten the term of an incumbent
director. Removal of a director from office, with or without cause, requires the
affirmative vote of not less than 75% of the votes entitled to be cast by the
holders of all then outstanding shares of capital stock of FSI, voting as a
single class. Any vacancy on the Board of Directors that results from an
increase in the number of directors may be filled by a majority of the Board of
Directors then in office, and any other vacancy occurring in the Board of
Directors may be filled by a majority of the directors then in office, although
less than a quorum, or by a sole remaining director. Notwithstanding the
foregoing, whenever the holders of any one or more classes of Preferred Stock
issued by FSI has the right, voting separately by class or series, to elect
directors at an annual or special meeting of shareholders, the election, term of
office, filling of vacancies, and other features of such directorships are
governed by or pursuant to the applicable terms of the rights and preferences of
such Preferred Stock established by the Board of Directors and made a part of
the Amended and Restated Articles of Incorporation, and such directors will not
be divided into classes unless expressly provided by such terms. No person
(other than a person nominated by or on behalf of the Board of Directors) will
be eligible for election as a director at any annual or special meeting of
shareholders unless a written request that his or her name be placed in
nomination is received from a shareholder of record by the Secretary of FSI not
less than 60 days prior to the date fixed for the meeting, together with the
written consent of such person to serve as a director.
Article X of the Amended and Restated Articles of Incorporation of FSI
provides that certain transactions ("business combinations") with certain
beneficial owners of 10% or more of the voting capital stock of FSI ("interested
shareholders") require, in addition to any affirmative vote required by law, the
affirmative vote of not less than 75% of the votes entitled to be cast by the
holders of all then outstanding shares of voting capital stock of FSI, voting as
a single class. Business combinations include, without limitation, any merger,
consolidation, or statutory exchange of shares of FSI with an interested
shareholder; any sale, lease, pledge, or other disposition to or from an
interested shareholder or FSI of any assets of FSI or the interested
shareholder, respectively, with a value equal to or greater than 10% of the book
value of the consolidated assets of FSI; the adoption of any plan for the
liquidation or dissolution of FSI proposed by or on behalf of an interested
shareholder; and any transaction that has the effect of increasing the
proportionate share of capital stock of FSI beneficially owned by an interested
shareholder. An affirmative vote by the shareholders is not required to approve
a
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business combination under Article X if the business combination has been
approved by a majority of those directors who were members of the Board of
Directors prior to the time that the interested shareholder involved in the
business combination became an interested shareholder or whose election or
nomination was approved by a majority of such directors ("continuing
directors"). An affirmative vote is also not required if the business
combination meets certain conditions specified in Article X, including, without
limitation, that certain minimum consideration be received in the business
combination by holders of capital stock of FSI, that the interested shareholder
not acquire any additional shares of capital stock of FSI after becoming an
interested shareholder (except as approved by the continuing directors), and
that a proxy or information statement describing the proposed business
combination be mailed to all holders of capital stock of FSI at least 30 days
prior to the consummation of the business combination.
The affirmative vote of the holders of not less than 75% of the votes
entitled to be cast by the holders of all then outstanding shares of capital
stock, voting as a single class, is required to amend or repeal, or adopt any
provisions inconsistent with, Articles IX or X of the Amended and Restated
Articles of Incorporation.
These provisions of the Amended and Restated Articles of Incorporation
could have the effect in certain circumstances of delaying or preventing a
change in control of FSI.
Minnesota Business Corporation Act. Section 302A.673 of the Minnesota
Business Corporation Act restricts certain transactions between FSI and certain
shareholders who become the beneficial holders of 10% or more of FSI's
outstanding voting stock ("statutory interested shareholders") unless a majority
of the disinterested directors of FSI has approved, prior to the date on which
the statutory interested shareholders acquire a 10% interest, either the
business combination transaction suggested by such shareholders or the
acquisition of shares that made such shareholders statutory interested
shareholders. If such prior approval is not obtained, the statute imposes a
four-year prohibition from the statutory interested shareholders' share
acquisition date on mergers, sales of substantial assets, loans, substantial
issuances of stock, and various other transactions involving FSI and the
statutory interested shareholder or its affiliates.
In the event of certain tender offers for stock of FSI, Section 302A.675 of
the Minnesota Business Corporation Act precludes the tender offeror from
acquiring additional shares of stock (including acquisitions pursuant to
mergers, consolidations or statutory share exchanges) within two years following
the completion of such an offer unless the selling shareholders are given the
opportunity to sell the shares on terms that are substantially equivalent to
those contained in the earlier tender offer. Section 302A.675 does not apply if
a committee of the Board of Directors consisting of all of its disinterested
directors (excluding present and former officers of the corporation) approves
the subsequent acquisition before shares are acquired pursuant to the earlier
tender offer.
These statutory provisions could also have the effect in certain
circumstances of delaying or preventing a change in the control of FSI.
Transfer Agent and Registrar. Harris Trust and Savings Bank acts as the
Transfer Agent and Registrar for the Common Stock of FSI.
SEMICONDUCTOR SYSTEMS CAPITAL STOCK
The authorized capital stock of Semiconductor Systems consists of
10,000,000 shares of Common Stock, no par value, of which there are 8,000,000
shares outstanding, held of record on ____________, 1996 by 13 shareholders.
Shareholders of Semiconductor Systems Common Stock have the right to notice
of meetings of the shareholders and the right to vote at such meetings. Each
holder of shares of Semiconductor Systems Common Stock is entitled to one vote
for each share held of record on all matters submitted to a vote of
shareholders, except for the election of directors, for which the shareholders
are entitled to cumulate their votes. All outstanding shares of Common Stock
have been fully paid for and are non-assessable. Upon any liquidation or
dissolution of Semiconductor Systems, the holders of Semiconductor Systems
Common Stock share ratably, in proportion to the number of shares held, in the
assets available for distribution after payment of all prior claims. Holders of
Semiconductor Systems Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors of Semiconductor Systems
out of funds legally available therefor.
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CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
Semiconductor Systems is incorporated in the State of California and FSI is
incorporated in the State of Minnesota. Holders of Semiconductor Systems Common
Stock, whose rights are currently governed by California law as well as by
Semiconductor Systems Articles of Incorporation and Bylaws, will, upon
consummation of the Merger, become holders of FSI Common Stock and their rights
as such will be governed by Minnesota law as well as by the Articles of
Incorporation and Bylaws of FSI. A summary of the material differences between
the rights of holders of FSI Common Stock and those of holders of Semiconductor
Systems Common Stock is set forth below. This summary does not purport to be a
complete description of the differences between the rights of the stockholders
of Semiconductor Systems and FSI.
Classified Board of Directors. As permitted under Minnesota law, FSI has a
classified board composed of three classes of directors, each class elected for
a three year term. See "FSI Capital Stock--Amended and Restated Articles of
Incorporation" above. California law permits a classified board only if a
corporation: (i) has outstanding shares listed on the New York Stock Exchange or
the American Stock Exchange; or (ii) has outstanding securities qualified for
trading as a national market security on the National Association of Securities
Dealers Automated Quotation System and has at least 800 holders of equity
securities (a "Listed Corporation"). Semiconductor Systems does not currently
qualify for a classified board of directors under California law.
Amendments to Articles of Incorporation. The requisite vote under
Minnesota law to amend a corporation's articles of incorporation, in the absence
of provisions in the articles of incorporation to the contrary, is generally
only a majority of the voting power of the shares that are present at the
shareholders' meeting and entitled to vote. FSI's Amended and Restated Articles
of Incorporation do require a higher percentage in certain instances. See "FSI
Capital Stock--Amended and Restated Articles of Incorporation" above.
Generally, California law provides that amendments to articles of incorporation
require the affirmative vote of a majority of the outstanding shares entitled to
vote thereon.
Special Meetings; Written Actions. Under Minnesota law, a special meeting
of shareholders may be called by the chief executive officer, chief financial
officer, two or more directors, such other person as authorized in the articles
or bylaws or a holder or holders of 10% or more of all the outstanding shares
entitled to vote, except that a special meeting for the purpose of considering
whether to directly or indirectly facilitate or effect a business combination
must be called by holders of 25% or more of such outstanding shares. Under
California law, the board of directors, the chairman of the board, the president
or the holders of at least 10% of the outstanding shares of a corporation may
call a special meeting of shareholders. Minnesota law permits action by
corporations without a meeting if all shareholders entitled to vote on the
proposed corporate action consent thereto in writing. Under California law,
actions may be taken without a meeting if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding shares having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted.
Election of Directors; Cumulative Voting. Under California law, unless the
corporation is a Listed Corporation, shareholders entitled to vote at any
election of directors may cumulate their votes and give one candidate a number
of votes equal to the number of directors to be elected multiplied by the number
of votes to which the shareholder's shares are normally entitled, or distribute
the shareholder's votes on the same principal among as many candidates as the
shareholder may see fit. The Semiconductor Systems Bylaws currently provide for
cumulative voting in the election of its directors, provided that the
shareholder gives notice of his or her intent to cumulate votes before the
voting begins. The FSI Amended and Restated Articles of Incorporation do not
permit cumulative voting for directors.
Dissenters Rights. Under Minnesota law, shareholders are entitled to
dissenters' rights of appraisal in the event of (i) any material amendment to
the articles of incorporation adversely affecting shares of the shareholder in
that it (a) alters or abolishes preferential rights relating to the shares, (b)
creates, alters or abolishes redemption rights relating to the shares, (c)
alters or abolishes preemptive rights of the shareholder regarding acquisition
of securities of the corporation of which it owns shares, or (d) excludes or
limits the rights of a shareholder to vote on a matter or to cumulate votes;
(ii) any sale, lease, transfer, or other disposition of all or substantially all
of the property and assets of corporation not made in the usual or regular
course of its business; (iii) any merger, except that the right to obtain
payment does not apply to a shareholder of the surviving corporation of a merger
if the shares of the shareholder are not entitled to be voted on the merger;
(iv) any exchange to which the corporation is a party as the corporation whose
shares will be acquired by the acquiring corporation, if the shares of the
shareholder are entitled to vote on the plan; or (v) any other corporate action
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taken pursuant to a shareholder vote with respect to which the articles of
incorporation, bylaws or a resolution approved by the board provides that
dissenting shareholders may obtain payment for their shares.
Under California law, in connection with certain reorganizations of the
corporation (including certain mergers) for which approval of outstanding shares
is required, dissenting shareholders who follow the procedures prescribed by
California law are entitled to receive payment of the fair market value of their
shares. For a more complete description of such rights, see "The Merger--
Dissenters' Rights" and Annex II.
Dividends, Stock Repurchases. Minnesota law permits a corporation to pay
dividends or repurchase shares if the corporation will be able to pay its debts
in the ordinary course of business after paying the dividend or repurchasing the
shares, regardless of whether the corporation has retained earnings, subject to
certain limitations for the benefit of preference shares, if any.
Under California law, any distributions to shareholders (including
dividends and repurchases of shares) are limited either to retained earnings or
to an amount that would leave the corporation with assets (exclusive of
goodwill, capitalized research and development expenses and deferred charges) in
an amount equal to at least 125% of its liabilities (exclusive of deferred
taxes, deferred income and other deferred credits) and with current assets in an
amount at least equal to its current liabilities (or at least 125% of its
current liabilities if the average pre-tax and pre-interest expenses for the
preceding two fiscal years were less than the average interest expenses for such
years). Such limitations are applied to California corporations on a
consolidated basis. Repurchases of shares in connection with certain rescission
actions or pursuant to employee stock plans or purchase plans are excluded from
the foregoing limitations.
Corporate Takeover Legislation. Both Minnesota and California have enacted
legislation aimed at regulating takeovers of certain corporations and protecting
shareholders of such corporations in connection with certain business
combinations. Certain of these Minnesota statutory provisions are discussed
above under "FSI Capital Stock--Minnesota Business Corporation Act." In
addition, FSI's Articles of Incorporation contain certain anti-takeover
provisions. See "FSI Capital Stock--Amended and Restated Articles of
Incorporation" above.
Under California law, if a tender offer or a written proposal for approval
of a reorganization or for certain sale of assets is made to some or all of a
corporation's shareholders by an interested party (an "Interested Party
Proposal"), an affirmative opinion in writing as to the fairness of the
consideration to the shareholders must be delivered in writing to the
shareholders of that corporation. An "interested party" is a person who is a
party to the transaction and (i) directly or indirectly controls the corporation
that is the subject of the tender offer or proposal, (ii) is, or is directly or
indirectly controlled by, an officer or director of the subject corporation, or
(iii) is an entity in which a material financial interest is held by any
director or executive officer of the subject corporation. This provision does
not apply to an Interested Party Proposal if the corporation that is the subject
thereof does not have shares held of record by 100 or more persons.
If a tender of shares or a vote or written consent is being sought pursuant
to an Interested Party Proposal and a later tender offer or written proposal for
a reorganization or sale of assets is made to the corporation or its
shareholders by any other person (a "Later Proposal") at least 10 days prior to
the date for acceptance of the tendered shares or the vote or notice of
shareholders approval on the Interested Party Proposal, then the shareholders
must be informed of such Later Proposal and given a reasonable opportunity to
withdraw any vote, consent, or proxy previously given before the vote or written
consent on the Interested Party Proposal becomes effective, or a reasonable time
to withdraw any tendered shares before the purchase of shares pursuant to the
Interested Party Proposal.
Furthermore, in connection with any merger transaction, California law
generally requires that, unless all shareholders of the class or series consent,
each share of such class or series must be treated equally with respect to any
distribution of cash, property, rights or securities. California law also
provides generally that if a corporation that is a party to a merger, or its
parent, owns more than 50% but less than 90% of the voting power of the other
corporation that is party to such merger, the nonredeemable shares of common
stock of the controlled corporation may be converted only into nonredeemable
shares of the surviving corporation or a parent party unless all of the
shareholders of the class consent.
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SECURITY OWNERSHIP OF MANAGEMENT OF FSI AND CERTAIN BENEFICIAL OWNERS
The following table lists, as of February 15, 1996, certain information
regarding the beneficial ownership of FSI Common Stock by (i) each director of
FSI, (ii) each executive officer of FSI named in the Summary Compensation Table
under "Information Regarding FSI Management and Compensation" included in this
Proxy Statement/Prospectus ("Named Executives"), (iii) all of such directors,
Named Executives and other executive officers as a group, and (iv) each person
or entity known by FSI to own beneficially more than 5% of the outstanding FSI
Common Stock. Except as otherwise noted below, the listed beneficial owner has
sole voting and investment power with respect to such shares. The following
table does not reflect the effects of the expected issuance of 1,800,000 shares
of FSI Common Stock offered hereby.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------------ ------------------ ------------------
<S> <C> <C>
Directors and Named Executives
Joel A. Elftmann 987,373/1/ 4.83%
James A. Bernards 21,999/2/ *
Neil R. Bonke 11,333/3/ *
Dale A. Courtney 105,762/4/ *
Terrence W. Glarner 5,655/5/ *
Robert E. Lorenzini 23,999/6/ *
William M. Marcy 2,666/7/ *
Peter A. Pope 126,311/8/ *
Benno G. Sand 64,540/9/ *
Benjamin J. Sloan 111,697/10/ *
Charles R. Wofford 13,999/11/ *
All directors and executive officers as
a group (14 persons) 1,595,376/12/ 7.61%
5% Shareholders
Pilgrim Baxter and Associates 1,667,100/13/ 8.12%
Suite 300
4 Glenhardie Corporate Center
1255 Drummers Lane
Wayne, PA 19087
Twentieth Century Investors, Inc. 1,138,900/14/ 5.6%
4500 Main Street
P.O. Box 418210
</TABLE>
___________________________
/1/ Includes 6,667 shares issuable pursuant to currently exercisable options
and options exercisable within 60 days of February 15, 1996.
/2/ Includes 13,999 shares issuable pursuant to currently exercisable options
and options exercisable within 60 days of February 15, 1996.
/3/ Includes 11,333 shares issuable pursuant to currently exercisable options
and options exercisable within 60 days of February 15, 1996.
/4/ Includes 100,468 shares issuable pursuant to currently exercisable options
and options exercisable within 60 days of February 15, 1996.
/5/ Includes 3,999 shares issuable pursuant to currently exercisable options
and options exercisable within 60 days of February 15, 1996.
/6/ Includes 13,999 shares issuable pursuant to currently exercisable options
and options exercisable within 60 days of February 15, 1996.
/7/ Includes 2,666 shares issuable pursuant to currently exercisable options
and options exercisable within 60 days of February 15, 1996.
/8/ Includes 82,134 shares issuable pursuant to currently exercisable options
and options exercisable within 60 days of February 15, 1996.
/9/ Includes 61,802 shares issuable pursuant to currently exercisable options
and options exercisable within 60 days of February 15, 1996.
/10/ Includes 110,799 shares issuable pursuant to currently exercisable options
and options exercisable within 60 days of February 15, 1996.
/11/ Includes 13,999 shares issuable pursuant to currently exercisable options
and options exercisable within 60 days of February 15, 1996.
/12/ Includes 529,601 shares issuable pursuant to currently exercisable options
and options exercisable within 60 days of February 15, 1996.
/13/ The number of shares noted above is based upon information from the
February 9, 1996 13G filing of Pilgrim Baxter & Associates.
/14/ The number of shares noted above is based upon information from the
February 9, 1996 13G filing of Twentieth Century Companies, Inc.
* Represents less than 1% ownership.
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<PAGE>
FSI BUSINESS
GENERAL
FSI International, Inc., a Minnesota corporation organized in 1973,
designs, manufactures, markets and supports microlithography, surface
conditioning and chemical management equipment used in the fabrication of
integrated circuits, which is the only industry segment in which FSI is
presently engaged. FSI's microlithography product, the Polaris cluster,
processes photoresist (light sensitive material used for patterning) on the
surface of silicon wafers as part of the photolithography phase of the
integrated circuit fabrication process. FSI's surface conditioning products,
including the Mercury spray processing systems and the Excalibur vapor
processing systems, remove contaminants and excess photoresist from wafers
during the fabrication process and selectively remove oxide from the wafer
surface. The process steps performed by FSI's microlithography and surface
conditioning products, which are used repeatedly throughout the fabrication
cycle, are an integral part of the manufacturing process for virtually every
integrated circuit produced today. FSI's chemical management products,
including its Chemfill, Chemblend, Chemgen, VP4500, P2000 and P2200M systems,
perform the critical functions of blending, delivering and controlling the flow,
concentration and purity of chemicals used by various types of processing
equipment within a fabrication facility.
Advances in electronics technology in recent years have resulted in
increasingly sophisticated integrated circuits which require submicron
geometries and complex manufacturing processes. To meet the demand for these
more complex, high performance devices, integrated circuit manufacturers require
process technologies that are timely, reliable and readily integrated into high
volume manufacturing environments. Competitive pressures are at the same time
forcing integrated circuit manufacturers to reduce the costs of producing
integrated circuits. FSI believes it responds to these demands by providing
leading technology products that increase yields, integrate with other
suppliers' equipment and provide significant overall cost advantages. FSI's
strategy is to remain focused as a technological leader in its three core
markets, emphasizing close customer relationships that enhance FSI's
responsiveness to the needs and cost constraints of its markets.
FSI markets its products directly in North America and through its
affiliated distributors, Metron Technology B.V. (together with its subsidiaries,
"Metron Technology") in Europe and Asia and m.FSI Ltd. in Japan ("m.FSI").
Through these affiliated international distributors FSI can provide timely and
efficient worldwide customer service and support.
During fiscal 1995, FSI completed two transactions which expanded its
chemical management capabilities. In January 1995, FSI and its affiliated
distributor Metron Technology B.V. each acquired a 50% interest in FSI Metron
Europe, Limited ("FME") located in Newhaven, 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, FSI acquired all of the outstanding capital stock of ACS
and ACS became a wholly owned subsidiary of FSI. 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' operations are
headquartered in Hollister, California.
INDUSTRY BACKGROUND
The fabrication of integrated circuits is a complex process involving
several distinct phases repeated numerous times during the fabrication process.
Each production phase requires different processing technology and equipment,
and no one semiconductor equipment supplier currently produces an entire state-
of-the-art fabrication system. Rather, semiconductor device manufacturers
typically construct fabrication facilities by combining manufacturing equipment
produced by several different suppliers, each of which performs specific
functions in the manufacturing process.
Demand for new semiconductor production equipment is driven principally by
the need for new processes and systems capable of manufacturing increasingly
complex integrated circuits. Industries that utilize integrated circuits are
demanding higher performance devices from semiconductor manufacturers. Over the
last decade, technological advances have allowed integrated circuit
manufacturers to reduce the size and substantially increase the number of
transistors on each integrated circuit device. Today, 16 megabit dynamic random
access memory ("DRAM") integrated circuits are
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<PAGE>
manufactured using more than 200 process steps on six or eight inch diameter
wafers and incorporating geometries of 0.5 micron. With high density logic
devices and 64 megabit DRAMs that require geometries of less than 0.5 micron now
under development, integrated circuit manufacturers require process technology
advances that are timely, highly reliable, and readily implemented into high
volume manufacturing environments.
Concurrent with these technological advances, competitive pressures are
forcing semiconductor manufacturers to reduce integrated circuit manufacturing
costs. Because the capital cost of a large semiconductor fabrication facility
is high, in some cases exceeding $1.0 billion, manufacturers have increased
their focus on the various cost components of a semiconductor manufacturing
facility. This greater emphasis on total device processing cost has led
manufacturers increasingly to analyze the costs associated with owning and
operating each piece of process equipment in the manufacturing line (referred to
as the "cost of ownership"), including capital cost, throughput, yield, up-time,
consumables, start-up time, and other equipment related costs for each process
step. In addition, FSI believes that in an effort to reduce total manufacturing
costs and to reduce potential contaminant exposure as the wafer is transferred
from one process step to another, manufacturers are increasingly seeking process
equipment capable of being integrated with the process equipment of other
suppliers to create a highly automated and integrated processing system.
FSI believes that semiconductor 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 semiconductor designs.
Certain semiconductor manufacturers are seeking strategic relationships with
equipment suppliers for specific process steps on existing and new integrated
circuit designs. As a result, semiconductor equipment companies are being asked
to provide advanced process expertise, superior product performance, reduced
overall cost of ownership, and worldwide customer support to better meet the
needs of integrated circuit manufacturers as well as meet international quality
standards, such as ISO 9001 certification.
INTEGRATED CIRCUIT FABRICATION
The basic component in the manufacture of integrated circuits is a thin,
circular crystalline silicon wafer, typically three to eight inches in diameter.
During the fabrication process, several layers of conductive or dielectric
materials are sequentially grown or deposited on the wafer surface through a
series of thermal and/or chemical processes. These processes are conducted in a
controlled environment, typically a "clean room" which is a manufacturing
facility separated from the outside environment 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 to etch a portion of the layer or change the electrical
characteristics of the layer, leaving the desired integrated circuit pattern.
The wafers are ultimately separated into individual integrated circuits or
discrete components which are then packaged, assembled, and tested. The typical
integrated circuit fabrication process takes between eight and twelve weeks. The
primary stages of this process are discussed below.
Cleaning. The wafer surface must be cleaned and conditioned at the
beginning of the fabrication process and at numerous other times throughout
the process. Cleaning is generally performed by exposing the wafer to
various chemicals in a liquid state, through immersion or spraying, or in a
vapor state. As integrated circuit geometries become smaller and more
complex, the reduction of organic, metal, and particle contamination on the
wafer becomes an increasingly critical factor in improving the yields of
wafer processing. In addition to contamination from particles left over
from the various steps in the fabrication process, such as etching or
stripping, contaminants may also be introduced from the equipment and
chemicals utilized in the manufacturing process. FSI's surface conditioning
products, including the Mercury spray processors, the Excalibur vapor
processing systems and the ICE cryogenic aerosol cleaning systems are
designed to perform these cleaning functions throughout the integrated
circuit 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.
Planarization. Chemical mechanical planarization, commonly referred
to as CMP, has become important in semiconductor device manufacturing,
particularly for advanced devices. The CMP process uses a chemical and
mechanical polishing procedure with a slurry and pad to smooth the surface
of a wafer after each layering step in the metal interconnect process. This
smoothing, or planarization, is necessary to prevent
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<PAGE>
extremes of topography which can reduce yield and reliability of
semiconductor devices. FSI's P2000 and P2200M chemical management systems
are used to mix and deliver the slurry used in this process. FSI's Mercury
spray processing systems are used to remove the polishing grit from the
surface of the wafer after CMP processing.
Photolithography. After the film layer is deposited on the wafer, the
film is primed to promote the adhesion of a light sensitive material called
photoresist. After the photoresist is applied, the wafer is heated in order
to remove solvents from the photoresist. Integrated circuit patterns are
then projected onto the photoresist by exposing it to a light source
through a mask. Chemical changes occur in the portion of the photoresist
exposed to the light source, resulting in a transfer of the image of the
desired circuit into the photoresist on the wafer. After a circuit pattern
has been imprinted, the image on the film is developed, which creates
protected and unprotected areas. The developed photoresist is then baked at
a high temperature to remove remaining solvents, improve adhesion to the
wafer surface and harden the photoresist for subsequent processing. Polaris
clusters perform all photolithography functions except exposure.
Etching or Doping. Upon completion of the photolithography process,
the wafer is either etched or doped. During etching the unprotected areas
of the patterned film are removed with chemicals to leave the desired
circuit pattern. Etching can be accomplished with either a wet chemistry
process using liquid chemicals, or a dry chemistry (typically plasma)
process using chemical gases or vapors. With advanced devices, most pattern
etching is performed using a dry process. FSI's Excalibur vapor processing
system and ICE cryogenic aerosol cleaning system are used to remove
residual silicon dioxide to improve electrical performance and to remove
the residue left by plasma or reactive ion etching. FSI's spray processing
systems have been used to perform blanket etching in limited wet chemistry
applications. During doping, specific ions are implanted on the wafer to
control and change the electrical properties of the wafer surface. Doping
produces the semiconductor activity on the wafer.
Stripping. After etching or doping, the wafer is stripped of
photoresist through either a wet chemistry or a dry chemistry process.
FSI'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.
These operations are repeated numerous times during the fabrication process
depending upon the type and complexity of the semiconductor device and the
overall process employed, and the precise order of the steps utilized varies by
manufacturer. A finished integrated circuit consists of a number of film layers
which together form thousands of extremely small electronic components that
combine to perform the desired electrical functions. Each step in the
fabrication process requires precision and must be rigorously controlled to
attain commercially acceptable yields and cost performance.
Chemical management systems enable semiconductor device manufacturers to
store acids and solvents in bulk tanks outside the device fabrication clean room
and to deliver programmed amounts of chemicals to various types of equipment in
the clean room. FSI's chemical management products, including its Chemfill,
Chemblend, Chemgen, VP4500, P2000 and P2200M systems, perform the critical
functions of generating, blending or mixing, delivering and controlling the
flow, concentration and purity of chemicals used by various types of processing
equipment throughout the fabrication process.
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<PAGE>
PRODUCTS
The mix of products sold by FSI may vary significantly from year to year.
The following table sets forth, for the periods indicated, the amount of sales
and approximate percentages of FSI's total sales contributed by FSI's principal
products:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
-------------------------------------------------- -----------------------------
AUGUST 26, 1995 AUGUST 27, 1994 AUGUST 28, 1993 NOVEMBER 1995 NOVEMBER 1994
--------------- ---------------- --------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Microlithography clusters $61,246 32.2% $32,723 33.9% $20,317 25.9% $24,234 39.0% $4,319 14.3%
Surface conditioning products 59,898 31.5 27,915 29.0 26,194 33.4 18,209 29.3 13,894 46.0
Chemical management systems 45,223 23.7 17,573 18.2 18,629 23.8 13,197 21.2 7,323 24.3
Spare parts and service 24,036 12.6 18,226 18.9 13,292 16.9 6,507 10.5 4,648 15.4
-------- ----- ------- ----- ------- ----- ------- ----- ------- -----
$190,403 100.0% $96,437 100.0% $78,432 100.0% $62,147 100.0% $30,184 100.0%
======== ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
MICROLITHOGRAPHY CLUSTERS. FSI's Polaris microlithography cluster performs
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, providing independent control of
temperature, humidity and organics from the rest of the fabrication area.
Operations within the cluster are primarily controlled by a computer console and
a touch screen on each cluster's console. During operation, cassettes of wafers
are loaded in the cluster's input/output module from which the robot transports
wafers through the various process modules in a sequence programmed by the
operator allowing the desired treatment of the wafer surface.
The Polaris cluster represents 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
particular process module, that individual module can be replaced with an
upgrade without rendering the entire system obsolete.
In July 1994, FSI introduced the Polaris 2000 cluster. This new generation
Polaris cluster system contains several process enhancements including an
advanced bake/chill plate technology and a fluid temperature control system and
new robot for higher throughput of wafers. Simultaneous multiple process flow
capabilities allows the system to operate in tandem with another process tool
which is physically linked to the Polaris system and to simultaneously support
other process equipment which is not linked to the system. FSI began shipping
the Polaris 2000 cluster in January 1995.
Purchasers of the Polaris cluster include Ericsson Components AB
("Ericsson"); ITT Corporation; IBM, LG Semicon Co., Ltd. ("LG Semicon");
Motorola; National Semiconductor, Corp., ("NSC"); TI; and Tower Semiconductor
Ltd. ("TSL"). FSI has an installed base of approximately 140 Polaris clusters,
including approximately 65 Polaris 2000 clusters. The price of the Polaris
cluster ranges from approximately $800,000 to $2,000,000, depending on wafer
size, number of modules, and number of robots required.
The Polaris cluster technology is licensed by FSI from TI. See "Patents,
Trademarks and Intellectual Property" below.
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<PAGE>
SURFACE CONDITIONING PRODUCTS. FSI's surface conditioning products perform
cleaning and stripping functions necessary for the processing of integrated
circuits.
Spray Processing Systems. FSI's spray processing systems, which include
the Mercury system, are sophisticated wet chemistry systems used to clean and
strip wafers at various stages in the integrated circuit fabrication process.
These systems use centrifugal spray technology to process wafers by exposing
them to a programmed, sequenced spray of fresh chemicals inside a closed,
nitrogen filled chamber. Cassettes filled with wafers are loaded into a
turntable in the process chamber and the processing chemicals, de-ionized water,
and nitrogen are sequentially dispensed into the chamber through a spray post
mounted in the chamber. As the turntable rotates, nozzles apply a chemical spray
to the 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 also
can perform certain blanket etch functions in limited wet chemistry
applications. FSI's spray processing systems include a microprocessor-based
controller to program, control, and monitor the operating functions of the
system in order to ensure precise control and repeatability of the process.
FSI'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. FSI believes that its spray processing systems provide
many cost of ownership and other benefits over wet-bench chemical processing
including protection of the process operator from hazardous chemicals or fumes,
improved cleaning capability, reduced chemical usage, lower space utilization in
the clean room, and greater process flexibility, including the capability to
easily change chemical sequences.
Spray processing system customers include Advanced Micro Devices, Inc.
("AMD"); Atmel Corporation ("Atmel"); Cypress Semiconductor Corporation
("Cypress"); Digital Equipment Corporation ("DEC"); Fujitsu Microelectronics,
Inc. ("Fujitsu"); IBM; International Rectifier Corporation ("IRC"); Motorola;
NCS; Phillips Semiconductors ("Phillips"); SGS Thompson Microelectronics, Inc.
("SGS Thompson"); Siemens A.G. ("Siemens"); TI; TSL; and Winbond Electronics
Corp. ("Winbond"). FSI has an installed base of over 2,210 spray processing
systems. FSI offers four types of spray processing systems, which range in price
from $300,000 to $600,000. FSI also markets certain equipment complementary to
its spray processors, including water heaters, chemical heaters, and booster
pumps.
Vapor Processing Systems. FSI's Excalibur vapor processing systems use
anhydrous hydrofluoric ("HF") gas in conjunction with water vapor to perform
cleaning steps normally done with liquid chemicals. The Excalibur systems are
highly automated, with a microprocessor-based controller and user-friendly
software for sequencing and control of the reactants. Wafers are processed on an
individual basis and loaded from the wafer carrier into the process chamber by a
handler that minimizes particle contamination. Single-wafer processing permits
Excalibur systems to be more easily integrated with equipment of other suppliers
and provides greater control over process uniformity. Up to four process
chambers can be operated with a single electronic controller through the
utilization of multi-tasking software.
The advantages of vapor phase processing over wet processing include
increased chemical purity (due in part to its ability to mix chemical gases with
water vapor at the point of use), reduced chemical and waste disposal costs,
increased processing capabilities and improved integration with cluster tools.
An integrated system of this type provides the necessary environmental and
surface control of the wafer between cleaning and various other process steps,
resulting in reduced contamination and improved yield.
Since their 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 latest
version of the system, the Excalibur MVP (Multi-Vapor Processor) system in July
1993. In addition to HF gas, the Excalibur MVP system uses hydrochloric acid gas
for improved metal removal and ozone gas for organic removal, and has the
processing capability to clean the backside of the wafer along with the front.
The Excalibur MVP system can be used for the critical cleaning steps in the
integrated circuit production process. Programs are under development to
integrate the Excalibur MVP system with other process equipment. The process
development of the Excalibur MVP system was partially funded by SEMATECH, an
industry and government consortium.
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FSI's Excalibur customers include AT&T Corp. ("AT&T"), Fujitsu, Hyundai
Electronics Industries Co., Ltd. ("Hyundai"), Intel Corporation ("Intel"),
Siemens, and TI. FSI has installed approximately 170 vapor processing systems,
many of which contain multiple modules. Systems vary in price from approximately
$150,000 to $800,000 depending on the model, wafer size, number of process
chambers, and related electronic control requirements.
In August 1995, FSI announced a License Agreement with IBM which will allow
FSI to manufacture, market, and service products using IBM's cyrogenic aerosol
cleaning technology. This IBM-developed technology uses frozen ice particles
formed by inert gases to dislodge contaminants or residue particles from a
silicon wafer's surface. FSI delivered the first test system to IBM in February
1996 and has another system in its development laboratory which is now being
used for demonstration and further process development. FSI will have a
production tool commercially available during the latter part of 1996.
Over the past several years, based in part upon funding received from the
National Institute of Standards and Technology, FSI 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. FSI expects
to ship a prototype to a customer for evaluation in the latter part of 1996.
CHEMICAL MANAGEMENT SYSTEMS. FSI'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. FSI offers chemical delivery systems utilizing
pump, pump and pressure, and vacuum pressure designs. FSI's chemical delivery
systems provide semiconductor 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.
FSI offers four primary models of chemical delivery systems, including the
Chemfill 500, which provides all the features of a centralized delivery system
in a compact, economical unit. This model can be used as a cost-effective
solution for small volume chemical users or as a local source of chemicals in
large fabrication facilities. The Chemfill 1000 PLC (for "programmable logic
control") offers increased automation to its users, providing enhanced control,
flexibility, and functionality. The VP4500 utilizes proprietary ACS 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, which is also programmable logic controlled, features redundant
flow systems that help increase uptime.
Chemical Blending and Mixing Systems. FSI's Chemblend chemical blending
systems and new developer blending systems allow semiconductor device
manufacturers to reduce chemical costs by enabling them to blend a process
chemical from concentrate on site to create the various chemical concentrations
required at different points of use in the clean room.
Chemical Generation Systems. The Chemgen chemical generation systems allow
semiconductor device manufacturers to reduce chemical costs by generating bulk
quantities of certain chemicals by mixing gases with deionized water located at
the facility. These chemicals are then delivered to the various use points in
the semiconductor device manufacturing facility.
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Slurry Mixing and Delivery Systems. FSI's slurry mixing and delivery
systems, which utilize proprietary vacuum pressure technology, mix and deliver
slurry which is used in conjunction with CMP technology. FSI's P2000 series
systems mix and deliver silicon dioxide slurry, while the P2200M mixes and
delivers tungsten slurry.
Chemical management system customers include AMD, Cypress, DEC, Fujitsu,
Intel, Motorola, NSC, Phillips, SGS Thompson, and Tech Semiconductor Singapore
PTE. LTD. ("Tech Semiconductor"). FSI has installed chemical management systems
in over 80 fabrication plants worldwide. Typical installations vary in price
from $250,000 to $2,500,000. 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. FSI sells spare part kits for a number of its
products and individual spare part components for its equipment, primarily spray
processing system and to a lesser extent chemical management systems. FSI often
packages product improvements to enable customers to update previously purchased
equipment.
FSI employs customer service and process engineers to train FSI's customers
in performing preventive maintenance and service on FSI equipment and developing
process applications for the equipment. FSI generally provides a one to two year
parts and labor warranty depending upon the product. FSI also provides in-house
service and maintenance training and process application training for its
customers' personnel on a fee basis. In addition, FSI 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 FSI's service
employees work full-time at the customer's facility, and provide process service
and maintenance support for FSI equipment.
BACKLOG AND SEASONALITY
FSI's backlog at the end of fiscal 1995 and 1994 was approximately $115
million and $77 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 FSI. Orders are subject to cancellation by the
customer, which may involve a cancellation charge. In fiscal 1995 and 1994,
purchase orders aggregating approximately $1,524,000 and $708,000 , constituting
.8% and .7% of sales during fiscal 1995 and 1994, respectively, were canceled
and not rescheduled. Because of the timing and relative size of certain orders
received by FSI changes in delivery schedules and cancellations of orders, FSI's
backlog can vary from time to time and at any particular date is not necessarily
indicative of actual sales for any succeeding period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
business of FSI is not seasonal to any significant extent.
RESEARCH AND DEVELOPMENT
FSI believes that its future success will depend in large part on its
ability to enhance, in collaboration with its customers, its existing product
lines to meet the changing needs of semiconductor device manufacturers. FSI
believes that the trends in the industry, such as utilization of smaller
integrated circuit geometries, increased use of eight inch and larger wafers,
and manufacturers' increased desire for integral processing equipment will make
highly automated and integral systems, including single wafer processing
systems, more important in the manufacture of integrated circuits. To assist FSI
in its development efforts, FSI maintains relationships with a number of
industry processing some of whom serve on FSI's Technical Advisory Board
("TAB"). Members of the TAB meet periodically with FSI management to identify
and review semiconductor device industry trends in advanced technology and FSI's
development activities toward meeting the industry's technology needs. In
addition, the industry professionals provide FSI with on-going technical
consultation and support.
FSI's current research and development programs are primarily focused on
the need for cleaner wafer surfaces due to smaller geometries, increased process
control and flexibility through monitoring and software management systems,
robotics automation in the clean room and integration of FSI'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.
FSI 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.
FSI also is exploring, with customer collaboration, further process refinements
to its spray processing systems and
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conducting basic research on vacuum-based gas phase (dry) cleaning systems which
may provide increased cleaning capabilities and improved process integration.
FSI's dry cleaning project was funded in part by a $2.0 million research grant
from the National Institute of Standards and Technology over a two-year period
that ended February 28, 1995.
FSI 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 microlithography demonstration and process development laboratory
in Dallas, Texas. FSI's laboratory personnel work directly with customers in
solving process problems, developing new processes, evaluating new pieces of
equipment and designing new equipment.
Expenditures for research and development, which are expensed as incurred,
during fiscal 1995, 1994, and 1993 were approximately $24,865,000, $15,743,000
and $11,760,000, respectively, and represented 13.1%, 16.3% and 15.0% of sales,
respectively. FSI attempts to supplement its research and development efforts
with third party funding from industry consortiums, government sources, and
customers. During fiscal 1995, 1994 and 1993, FSI recognized third party funding
of approximately $546,000, $1.3 million and $1.2 million, respectively, as a
reduction in research and development expenses.
MARKETING, SALES AND SUPPORT
FSI markets its products to integrated circuit manufacturers throughout the
world. In North America, FSI markets its products through direct sales personnel
located in four regional sales offices and through two independent sales
representatives. FSI also has several product and technical specialists devoted
to each of FSI's product lines. These product and technical specialists and
FSI'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 November 25, 1995 the sales effort was
supported by approximately 230 employees engaged in service and marketing
support.
International sales, primarily in Europe, the Far East and Japan, accounted
for approximately 37%, 33% and 34% of total sales for fiscal years 1995, 1994
and 1993 respectively. FSI owns a 38.2% equity interest in Metron Technology, a
distributor of FSI's products which has an extensive distribution organization
located in Europe, including Germany, the United Kingdom, the Netherlands,
France, Sweden, Italy, and Israel, in India, and in the Far East, including
Taiwan, Korea, China, Singapore, and Hong Kong. Fluoroware, Inc., a manufacturer
of plastic injection moldings for the semiconductor device industry, also owns a
38.2% equity interest in Metron Technology. In addition to FSI's products,
Metron Technology also sells products and equipment on behalf of several other
semiconductor equipment and consumables manufacturers, including Fluoroware,
Inc.
The significant majority of FSI's international sales are made to its
affiliated distributors for resale to end users of FSI's products. However, in
some cases, FSI may also sell directly to an international customer, in which
case FSI 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 FSI's affiliates are on terms generally no less favorable
to FSI than international sales by FSI directly to non-affiliates.
FSI owns a 49% equity interest in 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, FSI and Mitsui
granted m.FSI certain product and technology licenses and product distribution
rights. m.FSI distributes certain FSI and Mitsui products in Japan .
MANUFACTURING AND SUPPLIERS
Except with respect to ACS products and certain Polaris cluster modules,
FSI 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 FSI's specifications. All final assembly and
systems tests are performed within FSI's manufacturing facilities. Quality
control is maintained through incoming inspection of components, in-process
inspection during equipment assembly, and final inspection and operation of all
manufactured equipment prior to shipment. 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 or FME. Currently,
ACS products are manufactured
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for FSI by a contract manufacturer in Hollister, California. FSI's manufacturing
engineers routinely monitor production progress and perform source inspections
prior to delivery of finished ACS products to customers. In the third quarter of
fiscal 1996, FSI will relocate the manufacturing of ACS products from the
contract manufacturer to one of its manufacturing facilities in Chaska,
Minnesota.
In fiscal 1995, FSI through its fifty percent (50%) interest in FME,
established a manufacturing capability in Europe for its chemical management
systems division. In addition, FME also provides program management, including
the capability to manage the installation of large chemical generation and
dispense systems throughout a semiconductor device manufacturing facility.
Certain of the components and subassemblies included in FSI'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 FSI 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 FSI's
operations. FSI 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 FSI's
operating results and could result in damage to customer relationships.
COMPETITION
The semiconductor equipment industry is highly competitive. In each of the
markets it serves, FSI 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 FSI, and long standing customer relationships. In order to
remain competitive, FSI 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 FSI will have
sufficient resources to continue to make such investments or that FSI's products
will continue to be viewed as competitive as a result of technological advances
by competitors or changes in semiconductor processing technology. FSI'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 FSI or result in lost orders which could
adversely affect FSI's results of operations.
Since 1992, Japanese semiconductor manufacturers substantially reduced
their levels of capital spending on new fabrication facilities and equipment in
Japan and elsewhere. This has resulted in reduced sales and increasing
competitive pressures in the Japanese market segment (comprised of semiconductor
device fabrication facilities located in Japan and those located outside of
Japan which are controlled by Japanese companies). As a result, pricing
pressures in both the Japanese market and elsewhere may continue into the
foreseeable future due to Japanese semiconductor equipment manufacturers
offering substantial discounts on their products.
FSI believes that the Japanese companies with which it competes have a
competitive advantage because of their dominance of the Japanese market segment.
Furthermore, Japanese semiconductor device manufacturers have extended their
influence outside Japan by licensing products and process technologies to non-
Japanese semiconductor device manufacturers. Such licenses can result in a
recommendation to use semiconductor device equipment manufactured by Japanese
companies. Therefore, FSI may be at a competitive disadvantage with respect to
the Japanese semiconductor equipment suppliers, who have been engaged for some
time in collaborative efforts with Japanese semiconductor device manufacturers.
Certain Japanese semiconductor equipment manufacturers have announced plans to
begin manufacturing operations in the United States, which will enable them to
compete more effectively in the United States market.
The Japanese market segment is important as it represents a substantial
percentage of the world-wide semiconductor device market. To date, FSI has not
yet established itself as a significant participant in the Japanese market
segment with respect to its Polaris cluster or chemical management system
product lines. As part of the strategy to establish its Japanese presence, FSI
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.
A growing 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. 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.
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Significant competitive factors in the semiconductor equipment market
include quality, process repeatability, capability and flexibility, ability to
integrate with other products, and overall cost of ownership, including
reliability, automation, throughput, customer support, and system price. FSI has
experienced significant price competition from certain of its competitors,
primarily those in the microlithography and chemical management systems markets.
Although FSI 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 FSI in research and development, and
marketing and customer service and support as well as controlling operating
expenses. There can be no assurance that FSI will continue to compete
successfully in the future.
FSI's competitors differ across its three product lines. FSI's
microlithography clusters compete with products offered by Dainippon Screen
Manufacturing Co. Ltd. ("DNS"), Silicon Valley Group, Inc. and Tokyo Electron
Ltd. ("TEC"). FSI competes with DNS, TEL, Semitool, Inc., Submicron Systems,
Inc. ("Submicron"), and Santa Clara Plastics in the area of surface conditioning
products. FSI's Chemical Management System competes with products from Systems
Chemistry, Inc., a subsidiary of Submicron, MEGA Systems and Chemicals, Inc. and
a number of chemical supply companies that also offer chemical management
systems.
CUSTOMERS
FSI sells products from one or more of its product lines to most major
integrated circuit manufacturers, including AMD, Chartered Semiconductor,
Cypress Semiconductor, LG Semicon, Intel, IBM, Motorola, National Semiconductor,
SGS Thompson and TI, and has over 100 active customers worldwide.
Although the composition of FSI's customers has changed from year to year,
direct sales to FSI's top five customers in each of fiscal 1995, 1994 and 1993
have accounted for approximately 54%, 46% and 50%, respectively, of FSI's total
sales. Direct sales to FSI's top two customers in each of fiscal 1995, 1994 and
1993 accounted for approximately 28%, 30% and 32%, respectively, of FSI's total
sales. In addition, approximately 38% of FSI's backlog at fiscal 1995 year-end
was comprised of orders from two customers. IBM accounted for approximately 16%
and 6% of FSI's sales in fiscal 1995 and 1994, respectively. Motorola accounted
for approximately 12% and 8% of FSI's sales for fiscal 1995 and 1994,
respectively. LG Semicon accounted for approximately 11% and 5% of FSI's sales
for fiscal 1995 and 1994, respectively.
Sales to FSI's affiliated international distributors in fiscal 1995, 1994
and 1993, which may include sales of products subsequently resold to FSI's
direct customers, accounted for approximately 22%, 26%, and 25%, respectively,
of FSI's total sales. In addition, the earnings received from FSI's equity
ownership interest in such affiliated distributors accounted for approximately
18%, 32%, and 43% of FSI's net income in fiscal 1995, 1994 and 1993,
respectively. The earnings or losses of FSI's affiliated distributors can affect
significantly the financial results of FSI. There can be no assurance that the
affiliated distributors will continue to distribute FSI's products or do so
successfully, and in such event FSI's results of operations and earnings could
be adversely affected.
FSI has experienced and expects to continue to experience fluctuations in
its customer mix. The timing of an order for FSI's equipment is primarily
dependent upon the customer's expansion program, replacement needs, or
requirements to improve integrated circuit fabrication productivity and yields.
Consequently, a customer who places significant orders in one year will not
necessarily place significant orders in subsequent years.
Certain of FSI'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.
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PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY
The Polaris cluster is offered by FSI under a license from TI. Under the
license agreement, FSI has the exclusive right to sell and the non-exclusive
right to manufacture the Polaris cluster, except that TI may manufacture and
distribute the system within TI. FSI also has the non-exclusive right to
manufacture and sell related TI modules. TI may modify FSI's exclusive sales
rights to a non-exclusive license if FSI fails to use reasonable efforts in
marketing the Polaris cluster. The license agreement requires a royalty payment
to TI on the equipment manufactured and sold by FSI pursuant to the license. The
royalty to be paid is based on the "net sales price" of the licensed equipment,
as reflected in the final invoice amount charged by FSI to the customer for such
equipment, excluding amounts for packaging, insurance, freight, service,
maintenance, and value-added tax.
The license agreement continues until terminated. It may be terminated by
either party upon a breach by the other party, and the failure to cure, of
certain terms of the agreement, including payment of royalties when due, refusal
to sell products, and failure to meet quality standards.
FSI 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, FSI 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. FSI attempts to protect its proprietary
information through non-disclosure agreements with its key employees.
EMPLOYEES
As of November 25, 1995, FSI and its wholly owned subsidiary ACS had 868
employees, of whom 286 were engaged in manufacturing, 152 were engaged in
customer service, 261 were engaged in research and development, 78 were engaged
in sales and marketing, and 91 held general and administrative positions. As of
such date, FSI also had over 140 independent contractors working throughout FSI
in various capacities, principally in the areas of manufacturing and
engineering. FME employs approximately 35 employees, the majority of whom are
involved in manufacturing and/or system installation.
FSI 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.
PROPERTIES
FSI's corporate offices are located in Chaska, a suburb of Minneapolis,
Minnesota. In fiscal 1995, FSI leased approximately 176,000 square feet, in five
buildings, at a total rental cost of approximately $1.4 million. Effective
December 1, 1995, the rental cost for these facilities was reduced to
approximately $700,000 as part of a new five year lease on its headquarters
facility, which facility also contains a process research laboratory, and
manufacturing for chemical management system products.
In November 1995, FSI opened a new 100,000 square foot manufacturing
facility which cost approximately $11.5 million to construct. The facility
contains 45,000 square feet of Class 1000 manufacturing 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, and shell space
for the expansion of manufacturing support operations. FSI has recently
authorized the construction and equipping of an additional approximately 88,000
square feet of Class 1 laboratory and office space to this new facility. FSI
expects the cost of constructing and equipping this expansion to total
approximately $25.0 million.
FSI also leases facilities in England and in various locations within the
United States including:
. a 48,000 square foot process research 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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. a 11,767 square foot engineering, manufacturing, and
administrative facilities for the Chemical Management Division
located in Europe (FME Headquarters).
In addition, in August 1995, FSI entered into a five-year lease for
approximately 125,800 square feet of engineering, administrative and warehouse
space near its Chaska headquarters. Approximately 45,000 square feet is being
used and the remaining warehouse space is available for sublease.
LEGAL PROCEEDINGS
FSI generates minor amounts of liquid and solid hazardous waste and uses
licensed haulers and disposal facilities to ship and dispose of such waste. FSI
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, FSI believes that it is at most a "de minimis" PRP. FSI recently elected
to participate in a settlement offer made to all de minimis parties with respect
to one such site.
The risk of being named a PRP is that if any of the other PRP's are unable
to contribute their proportionate share of the liability, if any, associated
with the site, those PRP's that are able could be held financially responsible
for the shortfall. While the ultimate outcome of these matters cannot presently
be determined, FSI 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 FSI
in United States District Court, Northern District of California, seeking
monetary damages and injunctive relief based upon FSI's alleged infringement of
a patent held by Purusar. The lawsuit is in the very initial stages. FSI has
asserted various defenses as well as noninfringement of such patent by FSI's
products. While litigation is subject to inherent uncertainties and no assurance
can be given that FSI 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 FSI infringes such patent, FSI believes
that the Purusar lawsuit will not have a material adverse affect on FSI's
consolidated financial statements.
There has been substantial litigation regarding patent and other
intellectual property rights in semiconductor related industries recently and
further commercialization of FSI's products could provoke claims of infringement
of third-parties. Except for the allegations made by Purusar, FSI is not aware
of any claims of infringement by its products of any patents or proprietary
rights of others. In the future, litigation may be necessary to enforce patents
issued to FSI, to protect trade secrets or know-how owned by FSI or to defend
FSI against claimed infringement of the rights of others and determine the scope
and validity of its proprietary rights. Any such litigation could result in
substantial costs and diversion of effort by FSI, which by itself could have a
material adverse affect on FSI's financial condition and operating results.
Further, adverse determinations in such litigation could result in FSI's loss of
proprietary rights, subject FSI to significant liabilities to third parties,
require FSI to seek licenses from third-parties or prevent FSI from
manufacturing or selling its products, any of which could have a material
adverse effect on FSI's financial condition and results of operations.
Other than the litigation described above or routine litigation incidental
to FSI's business, there is no material litigation to which FSI is a party or of
which any of its property is subject.
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INFORMATION REGARDING FSI MANAGEMENT AND COMPENSATION
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of FSI are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Joel A. Elftmann 56 Chairman of the Board, President, and
Chief Executive Officer
Peter A. Pope 45 Executive Vice President, Marketing and
Account Management
Benno G. Sand 41 Executive Vice President; Chief Financial
Officer, and Secretary
Benjamin J. Sloan 55 Executive Vice President; President,
Microlithography Division
Robert E. Cavins 60 Executive Vice President; President,
Chemical Management Division
Dale A. Courtney 58 Executive Vice President; President,
Surface Conditioning Division
J. Wayne Stewart 45 Executive Vice President, Operations
Timothy D. Krieg 40 Executive Vice President, Quality and
Human Resources
James A. Bernards 49 Director
Neil R. Bonke 53 Director
Terrence W. Glarner 52 Director
Robert E. Lorenzini 59 Director
William M. Marcy 53 Director
Charles R. Wofford 62 Director/Vice Chairman
</TABLE>
Directors of FSI are elected at the annual shareholders' meeting for
staggered three-year terms and serve until their successors are duly elected and
qualified. Executive officers of FSI are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
Mr. Elftmann is a co-founder of FSI and has served as a Director of FSI
since 1973 and as Chairman of the Board since August 1983. From August 1983 to
August 1989, and from May 1991 until the present, Mr. Elftmann has also served
as Chief Executive Officer of FSI. From 1977 to August 1983, and from May 1991
until the present, Mr. Elftmann has served as President of FSI. Prior to 1977,
Mr. Elftmann was Vice President and General Manager of FSI. Mr. Elftmann is also
Chairman of the Supervisory Board of Metron Technology B.V. and is a director of
m.FSI Ltd. He also has been a director of Veeco Instruments, Inc. since May
1994.
Mr. Pope was elected Executive Vice President, Marketing and Account
Management of FSI in January 1992. Mr. Pope served as Senior Vice President and
General Manager, Process Equipment of FSI from November 1989 until January 1992.
Mr. Pope served as Vice President, Sales and Service of FSI from May 1985 to
November 1989. From September 1982 to May 1985, Mr. Pope served as Executive
Sales Manager of FSI. Prior thereto, he was Managing Director of Metron. Mr.
Pope also serves as a director of m.FSI Ltd.
Mr. Sand has served as Executive Vice President and Chief Financial Officer
of FSI since January 1992. Mr. Sand served as Vice President, Finance and Chief
Financial Officer of FSI from October 1990 until January 1992. He served as Vice
President, Finance of FSI from October 1987 until October 1990. From August 1983
to October 1987, Mr. Sand served as Corporate Controller of FSI 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 FSI in November 1989 and
Secretary in November 1990.
Dr. Sloan has served as Executive Vice President of FSI since January 1992
and as President of the Microlithography Division of FSI since January 1996.
Prior thereto, Dr. Sloan was employed by TI in Dallas, Texas where he served
over 24 years in various research and development capacities, most recently as
Vice President of TI's Semiconductor Group and Manager of the Wafer Fabrication
Systems Division of TI's Process Automation Center. Dr. Sloan is Chairman of
FSI's Technical Advisory Board.
Dr. Cavins has served as Senior Vice President, Chemical Management
Division of FSI since March 1994 and as Executive Vice President of FSI and
President of the Chemical Management Division since January 1996. He served as
Vice President, Chemical Management Division from January 1993 until March 1994.
From 1988 to March 1992, Dr. Cavins served as Senior Vice President of
Operations for E.F. Johnson Company. From March 1992 to July 1992, Dr. Cavins
was employed by Itron Corporation in the capacity of Vice President and General
Manger for Enscan Operations,
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the energy management division of Itron Corporation. Prior to joining E.F.
Johnson Company, Dr. Cavins served in management positions in various
electronics and engineering capacities at Honeywell Inc. and Control Data
Corporation (now Ceridian Corporation). Dr. Cavins also serves as a Managing
Director of FME.
Mr. Courtney has served as Executive Vice President of FSI since March 1994
and President, Surface Conditioning Division of FSI since January 1996. He
served as Vice President, Surface Conditioning Division of FSI from November
1992 to March 1994. Mr. Courtney served as Vice President, Engineering of FSI
from August 1991 to November 1992. Mr. Courtney served as Director of
Engineering of FSI from September 1990 to August 1991 and as manager of
Engineering Software Development and Automation of FSI from September 1987 to
September 1990. Prior to joining FSI, Mr. Courtney was President of D A Courtney
& Associates, Dallas, Texas, specializing in the development of software for
automation and real time process control systems. Mr. Courtney is a director of
m.FSI Ltd.
Mr. Stewart has served as Vice President, Operations since February 1994
and Executive Vice President, Operations since January 1996. Prior thereto, Mr.
Stewart was employed by TI in Dallas, Texas where he served over 20 years in
various manufacturing and operations management positions, most recently as
Corporate Computer Integrated Manufacturing Director, responsible for worldwide
manufacturing and materials systems. He also was the Manufacturing Manger of
TI's award winning HARM (High Speed Anti-Radar Missile) program. Mr. Stewart
serves as a Managing Director of FME.
Mr. Krieg has served as Vice President, Quality and Human Resources of FSI
since March 1994 and Executive Vice President, Quality and Human Resources since
January 1996. Mr Krieg also served as Vice President, Quality and Human
Resources from January 1992 until March 1993. Mr. Krieg was Vice President,
Human Resources from March 1993 until March 1994 and also served in that same
capacity from October 1987 until January 1992. From September 1979 to October
1987, he served as Human Resources Manager of the Company. Mr. Krieg was elected
Assistant Secretary of the Company in November 1990.
Mr. Bernards has served as a Director of FSI since July 1981. Since June
1993, Mr. Bernards has been President of Facilitation Inc., which provides
business and financial consulting services. Mr. Bernards was President of the
accounting firm of Stirtz, Bernards & Company from May 1981 to June 1993. Since
1986, Mr. Bernards has been President of Brightstone Capital, Ltd., a venture
capital fund manager. He is also a director of Health Fitness Physical Therapy
Corporation.
Mr. Bonke has served as a Director of FSI since June 1994. Mr. Bonke has
been Chairman of the Board and Chief Executive Officer of Electroglas Inc., a
manufacturer of automatic wafer probing equipment for semiconductor device
manufacturers, since April 1993. He was a Group Vice President of General Signal
and President of General Signal's Semiconductor Equipment Operations from
September 1991 to July 1993. From 1990 to 1991, he was Chief Operating Officer
of Cognex Corporation, a manufacturer of machine vision systems for the
semiconductor and electronics industries, and from 1987 to 1990 was President of
General Signal's Xynetics division, a group of semiconductor equipment
manufacturing companies which included Electroglas Mr. Bonke currently serves on
the Board of SEMI/SEMATECH, the equipment arm of the semiconductor device
industry consortium and is a director of SANMINA Corporation.
Mr. Glarner has served as a Director of FSI since October 1988. Since
February 1993, Mr. Glarner has been President of West Concord Ventures, Inc., a
venture capital company. From 1982 to February 1993, Mr. Glarner was President
of North Star Ventures, Inc. and North Star Ventures II, Inc., venture capital
funds. Mr. Glarner is also a director of Aetrium Incorporated, Cima Labs, Inc.
and Datakey, Inc.
Mr. Lorenzini has served as a Director of FSI since November 1986. Since
January 1993, Mr. Lorenzini has been Chairman of SunPower Corporation, a
manufacturer of opto-electronic devices. Since February 1995, he also served as
a Chairman and Chief Executive Officer of Virtual Golf, Inc., a manufacturer of
sports simulation systems. From October 1988 to January 1993 he served as
President and Chief Executive Officer of SunPower Corporation. From December
1986 to October 1989, Mr. Lorenzini was active in a number of venture capital
investments focused on high technology companies. Mr. Lorenzini is a founder of
Siltec Corporation, a multi-division manufacturer of silicon wafers and
processing Systems equipment for the semiconductor device industry. Mr.
Lorenzini was Chairman of the Board and President of Siltec from 1969 to
December 1986. Mr. Lorenzini is also a director of KLA Instruments Corporation.
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Dr. Marcy has served as a Director of FSI since August 1984, and since
August 1986 has served as a consultant to FSI in the area of software
engineering. Dr. Marcy has served as Associate Dean of Engineering for Research
and Administration at Texas Tech University since March 1995. From September
1987 to March 1995, Dr. Marcy served as Professor of Computer Science and the
Director of Computer Science Programs at Texas Tech University. From June 1983
to August 1987, Dr. Marcy was Professor of Industrial Engineering and the
Director of the Center for Automation and Robotics at Texas Tech University.
Prior to June 1983, Dr. Marcy was Chief Operating Officer of Information
Planning Corporation, a software development and sales company.
Mr. Wofford has served as Vice Chairman of FSI since January 1996, and as a
Director of FSI since November 1992. Since April 1994, Mr. Wofford has been a
business and management consultant. From April 1992 to April 1994, he was
Chairman of the Board, Chief Executive Officer, and President of the FARR
Company, a manufacturer of clean room filtration systems and equipment. Mr.
Wofford was President and Chief Executive Officer of the FARR Company from
September 1991 to March 1992, and from July 1991 to August 1991 he was President
and Chief Operating Officer. From 1958 to 1991, Mr. Wofford held a variety of
positions with respect to TI's semiconductor operations in the United States,
Europe, Asia, and Latin America, including Senior Vice President, Semiconductor
Group.
COMPENSATION OF DIRECTORS
Each non-employee director of FSI (an "Outside Director") receives a
quarterly fee of $1,500 for service on the Board and a fee of $1,000 for
personally attending meetings of the Board of Directors. In addition, each
Outside Director receives a fee of $500 for personal attendance at a meeting of
a Committee on which the Director serves if held other than the day of, the day
preceding or the day following a meeting of the Board or an Annual Meeting of
FSI's Shareholders.
Upon joining the Board of Directors, each Outside Director receives a
single grant of an option to purchase 10,000 shares of FSI Common Stock under
the FSI Directors' Nonstatutory Stock Option Plan (the "Directors' Plan"). The
purchase price of each share subject to an option is the fair market value of a
share of FSI Common Stock at the time the option is granted. The options vest
and become exercisable six months after the date of grant, except that vesting
is accelerated upon death or a change in control of FSI. Generally, initial
options expire ten years from the date of grant, but expiration may occur sooner
in the event of an optionee's death. Each Outside Director serving as an Outside
Director immediately following an Annual Meeting of FSI's Shareholders is
granted an option under the Director's Plan to purchase 4,000 shares of FSI
Common Stock at the fair market value at the time of grant (each an "Annual
Outside Director Option"). Annual Outside Director Options vest and become
exercisable cumulatively on an annual basis as follows: one-third of the total
shall become exercisable one each of the first and second anniversaries of the
date of grant and the remainder become exercisable on the third anniversary of
the date of grant, except that vesting is accelerated upon a change in control
or upon the Outside Director's death.
William M. Marcy, a Director of FSI and Professor of Computer Science and
Director of Computer Science Programs at Texas Tech University, acts as a
consultant to FSI in the area of software engineering, for which he currently
receives $3,000 per month from FSI, and for which he received $36,000 in fiscal
1995. In addition, Texas Tech University performs software and computer
development for FSI under contracts administered by Dr. Marcy, pursuant to which
FSI paid Texas Tech University $148,874 during the 1995 fiscal year and is
scheduled to pay Texas Tech University approximately $79,600 during the 1996
fiscal year.
Charles R. Wofford, a Director of FSI and a business and management
consultant, entered into a consulting contract with FSI effective July 1, 1995
in the area of organizational planning and structure. Pursuant to the consulting
contract, Mr. Wofford is to be compensated on an hourly basis for his services.
Mr. Wofford was not paid any compensation for such services in fiscal 1995. Mr.
Wofford became an executive officer of FSI on February 5, 1996, holding the
position of Vice Chairman.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by FSI to or on behalf of the Chief Executive
Officer and the four other most highly compensated executive officers ("Named
Executives") of FSI as of the fiscal year ended August 26, 1995 for services in
all capacities as well as compensation earned by such person for the previous
two fiscal years (if the person was an executive officer during any part of such
fiscal year):
-60-
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------------------------------------
RESTRICTED
OTHER STOCK SECURITIES LTIP ALL OTHER
NAME AND FISCAL SALARY BONUS ANNUAL AWARD(S) UNDERLYING PAYOUTS COMPENSATION(2)
PRINCIPAL POSITION YEAR ($) ($) COMPENSATION(1) ($) OPTIONS/SARS ($) ($)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joel A. Elftmann, 1995 257,027 132,565 - -0- 20,000 -0- 47,384
Chairman, President and 1994 222,065 88,077 - -0- -0- -0- 52,149
Chief Executive Officer 1993 207,674 17,928 - -0- -0- -0- 47,765
Dale A. Courtney, 1995 142,384 73,497 - -0- 30,000 -0- 22,746
Executive Vice President, 1994 119,769 30,375 - -0- 20,000 -0- 21,304
President, 1993 110,707 15,698 - -0- -0- -0- 11,749
Surface Conditioning
Division
Peter A. Pope, 1995 143,077 73,879 - -0- 30,000 -0- 22,492
Executive Vice President, 1994 126,923 32,250 - -0- 20,000 -0- 21,562
Marketing and Account 1993 123,027 6,372 - -0- -0- -0- 19,484
Management
Benno G. Sand, 1995 152,352 78,522 - -0- 30,000 -0- 22,332
Executive Vice President, 1994 168,960 30,625 - -0- 20,000 -0- 23,182
Chief Financial Officer 1993 113,291 5,868 - -0- -0- -0- 18,996
and Secretary
Dr. Benjamin J. Sloan, 1995 167,681 71,666 - -0- 30,000 -0- 22,746
Executive Vice President, 1994 159,577 39,861 - -0- 20,000 -0- 24,075
President, 1993 154,941 21,970 - -0- -0- -0- 33,117
Microlithography Division
</TABLE>
________________________
(1) Disclosure is not required by applicable Securities and Exchange Commission
rules, as the aggregate amount of perquisites and other personal benefits
did not exceed the lesser of $50,000 or 10% of the total salary and bonus
for any of the executive officers named above.
(2) Compensation reported represents (a) the estimated dollar value of Company
contributions to FSI's defined contribution pension plan based upon such
individual's earnings for the year being reported; (b) the dollar value of
premiums paid by FSI on split-dollar life insurance and in the case of Mr.
Courtney, the amount of term life insurance premiums paid by FSI beginning
in fiscal 1993, and (c) in the case of 1994 and 1995 compensation, FSI's
profit sharing contribution to the 401(k) Plan made in fiscal 1994 for the
1993 Plan (calendar) year and in fiscal 1995 for the 1994 Plan (calendar)
year. The dollar value of each benefit for the fiscal year ended August 26,
1995 is: J. Elftmann, (a) $6,000, (b) $39,638, (c) $1,746; D. Courtney, (a)
$6,000, (b) 15,000; (c) $1,746; P. Pope, (a) $6,000, (b) $14,746, (c)
$1,746; B. Sand, (a) $6,000, (b) $14,586, (c) $1,746; and B. Sloan, (a)
$6,000, (b) $15,000, (c) $1,746.
-61-
<PAGE>
STOCK OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR
The following table sets forth individual grants of stock options made to
the Named Executives during the fiscal year ended August 26, 1995.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE
SECURITIES TOTAL AT
UNDERLYING OPTIONS GRANTED ASSUMED ANNUAL RATES OF
NAME OPTIONS TO EMPLOYEES IN EXERCISE EXPIRATION STOCK PRICE APPRECIATION
GRANTED/(1)/ FISCAL YEAR PRICE OR DATE FOR
BASE PRICE OPTION TERM/(4)/
5% 10%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Elftmann 20,000/(2)/ 5.13% $11.55 10/17/99 $63,821 $141,028
Dale A. Courtney 20,000/(2)/ 5.13% $10.50 10/17/04 $132,068 $334,686
10,000/(3)/ 2.57% $15.969 2/15/05 $100,428 $254,505
Peter A. Pope 20,000/(2)/ 5.13% $10.50 10/17/04 $132,068 $334,686
10,000/(3)/ 2.57% $15.969 2/15/05 $100,428 $254,505
Benno G. Sand 20,000/(2)/ 5.13% $10.50 10/17/04 $132,068 $334,686
10,000/(3)/ 2.57% $15.969 2/15/05 $100,428 $254,505
Dr. Benjamin J. Sloan 20,000/(2)/ 5.13% $10.50 10/17/04 $132,068 $334,686
10,000/(3)/ 2.57% $15.969 2/15/05 $100,428 $254,505
</TABLE>
_______________________
(1) All of these options were granted pursuant to FSI's 1994 Omnibus Stock
Plan.
(2) Approximately one-third of the options granted will vest on each of the
first three anniversaries of the date of grant. All options were granted
at fair market value on the date of grant and have a term of ten years
except that Mr. Elftmann's options were granted at 110% of fair market
value and have a term of five years. Generally all of the options will
become fully exercisable upon approval by FSI's shareholders of a merger,
plan of exchange, sale of substantially all of FSI's assets or plan of
liquidation.
(3) A portion of the options vest each year over a six year period and the
amount which vests each year increases during that period. In addition,
the options vest entirely if certain financial targets are achieved in
fiscal 1996, 1997 or 1998. All options were granted at fair market value
and have a term of ten years. Generally all of the options will become
fully exercisable upon approval by FSI's shareholders of a merger, plan of
exchange, sale of substantially all of FSI's assets or plan of liquidation.
(4) Caution should be used in interpreting the financial significance of these
figures. They are calculated by multiplying the number of options granted
by the difference between a future hypothetical stock price and the option
exercise price and are shown pursuant to rules of the Securities and
Exchange Commission. They assume the value of FSI Common Stock appreciates
5% or 10% each year, compounded annually, for the term of each option.
They are not intended to forecast future appreciation, if any, of such
stock price or to establish a present value of options. Also, if
appreciation does occur at the 5% or 10% per year rate, the amounts shown
would not be realized by the recipients until the end of the option term.
-62-
<PAGE>
The following table shows, as to the Named Executives, information
concerning stock options exercised and the value of options held by such persons
at the end of fiscal 1995 including those listed in the table above.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1995
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES ACQUIRED VALUE REALIZED OPTIONS/SARS AT FISCAL IN-THE-MONEY OPTIONS/SARS AT
--------------- --------------
NAME ON EXERCISE (#) ($)(1) YEAR-END(2) FISCAL YEAR-END ($)(3)
---- --------------- ------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Joel A. Elftmann 44,000 922,900 -0- 46,000 -0- 1,269,600
Dale A. Courtney -0- -0- 86,332 43,334 2,742,502 1,003,245
Peter A. Pope 8,086 82,032 100,666 43,334 3,216,941 1,003,245
Benno G. Sand 50,000 1,122,313 47,666 43,334 1,470,191 1,003,245
Benjamin J. Sloan -0- -0- 96,666 43,334 3,023,316 1,003,245
</TABLE>
_____________________
(1) Represents market value of underlying securities on date of exercise less
the exercise price.
(2) Includes options exercisable within 60 days of fiscal year end.
(3) Represents market value of underlying securities at fiscal year end
($33.875 per share) less the exercise price.
CHANGE IN CONTROL AGREEMENTS
FSI has entered into Management Agreements (the "Agreements") with each of
the Named Executives and certain other executive officers of the Company,
including Charles R. Wofford. The Agreements are operative only upon the
occurrence of certain changes in control of FSI. Absent a change in control, the
Agreements do not require FSI to retain the executive officers or to pay them
any specified level of compensation or benefits.
Each Agreement provides that if, for two years after a change in control,
the executive officer's employment is terminated by FSI other than (i) for
cause, (ii) on account of the death, disability or retirement of the executive,
or (iii) except for the Agreements entered into with Joel A. Elftmann, Benjamin
J. Sloan and Benno G. Sand, voluntarily by the executive (other than voluntary
terminations following events that constitute a "Constructive Involuntary
Termination" (as defined in the Agreements, and including compensation
reductions, demotions, relocations and excessive travel)), the executive is
entitled to receive a lump sum severance payment. The amount of the lump sum
severance payment is equal to one times (or, in the case of Messrs. Elftmann,
Pope, Sand and Sloan, one and one-half times) the individual's highest rate of
compensation during the 12 months immediately preceding the change in control,
and payment of a bonus at the "Plan" level for that Plan Year or a specified
percentage of the lump sum payment if no plan is then in effect. The Agreements
also allow the Named Executive to continue his participation in certain
insurance and other benefit plans of FSI for two years following a change in
control. If a change in control of FSI occurred and resulted in the termination
of a Named Executive, giving rise to payments under these management agreements
as of December 1, 1995, the approximate amounts payable to the Named Executives
would be as follows: Mr. Elftmann $494,100; Mr. Courtney $199,500; Mr. Pope
$274,500; Mr. Sand $292,800; and Dr. Sloan $311,100.
-63-
<PAGE>
INTEREST OF FSI MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
FSI's corporate offices and certain manufacturing facilities, aggregating
approximately 161,500 square feet, are leased from three Minnesota partnerships
comprised of two or more of the following individuals: Joel A. Elftmann,
Chairman of the Board, President, and Chief Executive Officer of FSI; Robert S.
Blackwood, a former director and executive officer of FSI; and Joseph H. Wyers,
a former director and executive officer of FSI. Annual rent for the 1995 fiscal
year under the three leases totalled $1,320,300. The 140,000 square foot main
facility is leased from a partnership in which all three such persons are
partners under a lease expiring in October, 2000 subject to five three-year
renewal options at the election of FSI pursuant to lease amendments recently
entered into by FSI and the partnership. Based upon independent appraisals of
the value of the property and comparable market rentals, FSI, effective November
1, 1995, entered into a new five-year lease at an annual rental rate of $700,000
per year which rate commenced December 1, 1995. FSI also pays all real estate
taxes, insurance and maintenance expenses. If FSI exercises a renewal option
then the rent is adjusted to its fair rental value based upon an independent
real estate appraisal. Commencing October 31, 1999 and annually thereafter
during the term of the lease, FSI has an option to purchase the property for the
greater of $4.0 million or 90% of the fair market value of the property.
Pursuant to the policy described below, the lease amendments were approved by a
majority of the Board of Directors and a majority of the disinterested Directors
of the Board.
FSI has adopted a policy prohibiting the lease of any additional facilities
from entities in which its officers or directors have a material interest.
However, this policy would not prohibit FSI from leasing any further additions
to the above facilities or any extensions of the existing operating leases on
the related facilities, if approved by a majority of the members of its Board of
Directors who have no interest in the ownership of such facility and the terms
of such rentals are based upon independent appraisals of the value of such
property and market rentals for comparable property.
FSI owns 38.2% of the outstanding common stock of Metron Technology a
European distributor of FSI's products. Joel A. Elftmann, Chairman of the Board,
President and Chief Executive Officer of FSI, is also Chairman of the
Supervisory Board of Metron. During fiscal 1995 FSI sold to Metron Technology
all of its 50% ownership interest in each of three corporations that distribute
FSI's products in Asia: Metron Semiconductors (Hong Kong) Ltd.; Metron
Semiconductors Far East Ltd. and Metron Semiconductors Asia Ltd. (collectively,
the "Metron Asia Group"). FSI owns 49% of the outstanding capital stock of
m.FSI, which distributes and acts as a licensee for certain of FSI's products in
Japan. Messrs. Elftmann, Pope and Dale A. Courtney, Executive Vice President and
President, Surface Conditioning Division, of FSI, are all directors of m.FSI.
During the 1995 fiscal year, FSI sold approximately $37,750,000 of its
products to Metron Technology (and its subsidiaries, including approximately
$15,069,000 of sales to the Metron Asia Group) and approximately $4,875,000 of
its products to m.FSI Sales to Metron Technology (and its subsidiaries) and
m.FSI are made by FSI on commercially reasonable terms. In addition, in fiscal
1995 FSI paid Metron Asia Group a commission of $1,112,000 for direct sales by
FSI to customers in Asia.
The Board of Directors of FSI has adopted a policy regarding transactions,
other than sales in the normal course of business, between FSI and any
affiliate, including loans from FSI, requiring that all such transactions be
approved by a majority of the Board and a majority of the disinterested outside
directors and that all such transactions be for a bona fide business purpose and
be entered into on terms at least as favorable to FSI as could be obtained from
unaffiliated independent third parties.
-64-
<PAGE>
FSI MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the percentage of sales represented by
certain consolidated statements of income data for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED QUARTER ENDED
------------------------------------- ----------------------------
AUGUST 26, AUGUST 27, AUGUST 28, NOVEMBER 25, NOVEMBER 26,
1995 1994 1993 1995 1994
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Sales................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...................... 58.8 57.9 63.1 56.5 53.9
----- ----- ----- ----- -----
Gross profit............................ 41.2 42.1 36.9 43.5 46.1
Operating expenses:
Selling, general, and administrative... 17.8 20.3 18.5 18.2 21.0
Research and development............... 13.1 16.3 15.0 12.1 16.1
----- ----- ----- ----- -----
Total operating expenses................ 30.9 36.6 33.5 30.3 37.1
----- ----- ----- ----- -----
Operating income........................ 10.3 5.5 3.4 13.2 9.0
Other income (expense), net............. 1.1 (0.2) (0.8) 2.2 0.4
----- ----- ----- ----- -----
Income before income taxes.............. 11.4 5.3 2.6 15.4 9.4
Income tax expense...................... 3.1 1.3 0.5 5.5 2.6
----- ----- ----- ----- -----
Income before minority interest and
equity in earnings of affiliates....... 8.3 4.0 2.1 9.9 6.8
Minority interest....................... (0.1) 0.0 0.0 (0.3) 0.0
Equity in earnings of affiliates........ 1.9 1.9 1.7 2.5 3.3
----- ----- ----- ----- -----
Net income.............................. 10.1% 5.9% 3.8% 12.1% 10.1%
----- ----- ----- ----- -----
</TABLE>
FISCAL QUARTERS ENDED NOVEMBER 25, 1995 AND NOVEMBER 26, 1994
Sales increased $31.9 million, or 106%, to $62.1 million for the first
quarter of fiscal 1996, compared to $30.2 million for the first quarter of
fiscal 1995. The increase was attributable to increased sales in each of FSI's
product categories (including the products of ACS) due to increased unit sales
as construction of new and the expansion of existing manufacturing facilities by
FSI's semiconductor manufacturing customers continued. Sales in fiscal 1996 also
increased from fiscal 1995 due to FSI's investment in FME. In November, FSI
moved the manufacturing operations for its microlithography and surface
conditioning products to a new 100,000 square-foot manufacturing facility, which
contains 45,000 square feet of Class 1000 clean room space in Chaska, Minnesota.
During the second quarter of fiscal 1996, FSI will move its chemical management
manufacturing operations into the space vacated by the other two divisions and
will be transferring to Chaska, Minnesota, the manufacturing of certain ACS
products now manufactured by a third party in Hollister, California. Increasing
revenues in the second quarter of fiscal 1996, as compared to the first fiscal
quarter, is partially dependent on the successful transfer of manufacturing
operations.
FSI believes its ability to continue to increase sales is dependent upon
increased demand for all three of FSI's product lines, sales growth in
international markets, as well as industry and general economic conditions.
FSI's backlog as of November 25, 1995 was in excess of $100 million. Because of
the timing and relative size of certain orders received by FSI and possible
changes in delivery schedules or cancellations of orders, FSI's backlog can vary
from time to time and at any particular date is not necessarily indicative of
actual sales for any succeeding period.
FSI's gross profit, as a percentage of sales, decreased to 43.5% for the
first quarter of fiscal 1996 from 46.1% for the first quarter of fiscal 1995,
due to an increase in the percentage of international sales, which generally
carry lower gross profit margins. International sales as a percentage of total
sales were 44% and 21%, for the first quarter of fiscal 1996 and 1995,
respectively. The increase in international sales as a percentage of sales is
due primarily to expansion by semiconductor device manufacturers in Asia Pacific
and European markets. The decrease in FSI's gross profit as a percentage of
sales was also attributable to a decrease in the percentage of total sales from
FSI's higher margin products.
FSI'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.
-65-
<PAGE>
Selling, general, and administrative expenses decreased to 18.2% of sales
for the first quarter of fiscal 1996, as compared to 21.0% of sales for the
first quarter of fiscal 1995. The increase of approximately $5 million resulted
primarily from expanded customer support and marketing expenses associated with
FSI's increased order activity and personnel additions made in FSI's divisions
in response to FSI's growth. In addition, there were increased accruals for
management incentive bonuses and employee profit sharing and for the costs
associated with the computer system upgrade. While FSI expects the quarterly
amount of selling, general, and administrative expenses to increase during the
remainder of fiscal 1996, selling, general and administrative expenses as a
percentage of sales may decrease over the same period.
Research and development expenses increased approximately $2.7 million in
the first quarter of fiscal 1996 as compared to the first quarter of fiscal
1995. However, as a percentage of sales, research and development decreased to
12.1% of sales for the first quarter of fiscal 1996, as compared to 16.1% of
sales for the first quarter of fiscal 1995. The dollar increase of approximately
$2.7 million resulted primarily from FSI's continued development efforts on new
and existing products, including the ORION vacuum-based, gas phase (dry)
cleaning system, ICE cryogenic aerosol cleaning system, Zeta automated spray
processing system, chemical management models, and various other engineering
projects. FSI expects the quarterly amount of research and development expenses
to increase during the remainder of fiscal 1996.
Other income (expense), net includes primarily interest income. The
increase of $1.3 million for the first quarter of fiscal 1996 as compared to the
first quarter of fiscal 1995 reflects primarily an increase in interest earned
by FSI on the increased amount of cash and cash equivalents and marketable
securities resulting from the February and June 1995 secondary offerings.
Income tax expense for the first quarter of fiscal 1996 was approximately
$3,420,000, or 35.7%, of pre-tax profit compared to approximately $790,000, or
27.8%, of pre-tax profit for the first quarter of fiscal 1995. The lower tax
rate in 1995 is due to the reinstatement of deferred tax assets in 1995. FSI
anticipates the effective tax rate will range from 34% to 36% in fiscal 1996.
The effective tax rate should be at the lower end of the range if Congress
reinstates the research and development tax credit, which expired in June 1995.
The equity in earnings of affiliates increased by approximately $556,000 to
$1,556,000 in the first quarter of fiscal 1996, compared to $1,000,000 for the
first quarter of fiscal 1995. The increase is due to improved earnings at all
affiliates due to expansion by semiconductor device manufacturers in Europe and
the continued growth taking place in the Asia Pacific market.
FISCAL YEARS ENDED AUGUST 1995, 1994 AND 1993
Sales nearly doubled to $190.4 million for the fiscal year ended August 26,
1995 as compared to $96.4 million for the fiscal year ended August 27, 1994. The
increase in sales 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 FSI's semiconductor manufacturing customers, the
acquisition of ACS and FSI's investment in FME.
Sales for fiscal 1994 increased 23% to $96.4 million from $78.4 million for
fiscal 1993. The increase in sales from fiscal 1993 to fiscal 1994 was
attributable to significant growth in FSI's microlithography cluster business
and increased spare parts and service sales.
International sales were $69.6 million, $31.5 million and $26.6 million
during fiscal 1995, 1994 and 1993, respectively, and represented approximately
37%, 33% and 34% of sales during such periods. Sales increased in Europe, the
Far East and Japan during fiscal 1995. The majority of the increase in
international sales in fiscal 1995 related to significant microlithography
cluster sales in Asia. Sales of FSI's products in Europe, the Far East and Japan
also increased from fiscal 1993 to 1994.
Gross profit as a percentage of sales for fiscal 1995 was 41.2% as compared
to 42.1% for fiscal 1994. The decrease in gross profit percentage is primarily
due to increased international sales in fiscal 1995 which generally carry lower
gross profit margins. In addition, the decrease was also related to an increase
in the percentage of total sales of FSI's lower margin products.
-66-
<PAGE>
FSI's gross profit margin increased in fiscal 1994 to 42.1% from 36.9% in
fiscal 1993. The increase in gross profit percentage between fiscal 1993 and
1994 was attributable primarily to a loss of approximately $800,000 on $5.3
million of sales recognized in fiscal 1993 on a chemical management system
project, due to cost overruns. The increase was also related to an increase in
the percentage of total sales from FSI's higher margin products, and to a lesser
extent to a decrease in the percentage of foreign sales as a percentage of total
sales.
Selling, general and administrative expenses were $33.9 million, $19.6
million and $14.5 million, or 17.8%, 20.3% and 18.5% of sales, during fiscal
1995, 1994 and 1993, respectively. The $14.3 million increase in 1995 is due
primarily to increased costs of approximately $3.3 million related to expanded
customer support, increase in management incentive bonuses and employee profit
sharing of $1.5 million, increased commissions of more than $1.0 million, fees
and expenses associated with the ACS acquisition of $800,000, increased
allowance for bad debts, and costs associated with the computer systems upgrade.
In addition, the overall number of personnel in the selling, general and
administrative area increased more than 60% from the end of fiscal 1994 to the
end of fiscal 1995. The increase in selling, general and administrative expenses
from fiscal 1993 to fiscal 1994 was chiefly due to expanded customer support and
marketing of approximately $2.4 million, and management incentive bonuses and
employee profit sharing of approximately $625,000.
Research and development expenses for fiscal 1995 were $24.9 million, or
13.1% of sales, as compared to $15.7 million, or 16.3% of sales, for fiscal
1994. The increase of $9.2 million resulted primarily from FSI's continued
development efforts on new or existing products, including the Polaris 2000
cluster, the Excalibur MVP system, the ORION vacuum-based, gas phase (dry)
cleaning system, the ICE cryogenic aerosol cleaning system and certain chemical
management products.
Research and development expenses for fiscal 1994 increased $3.9 million to
$15.7 million from $11.8 million for fiscal 1993. The increase in fiscal 1994
was primarily due to realizing a full year of expenses for the Microlithography
division's demonstration and process development laboratory, and continued
development costs for FSI's ORION vacuum-based, gas phase (dry) cleaning system.
During fiscal years 1995, 1994 and 1993, FSI recognized approximately
$546,000, $1.3 million and $1.2 million, respectively, of third party funding as
reductions in research and development expenses.
Other income (expense) was approximately $2.2 million of income, or 1.1% of
sales, for fiscal 1995 as compared to $254,000 of expense, or (0.2)% of sales,
for fiscal 1994. The majority of the change is due to an increase of
approximately $1.7 million in interest income recognized on cash and cash
equivalents, and marketable securities. FSI's cash and cash equivalents, and
marketable securities increased due to the proceeds of the two secondary
offerings completed in February and July 1995.
Other income (expense) was approximately $254,000 of expense, or (0.2)% of
sales, for fiscal 1994 as compared to $671,000 of expense, or (0.8)% of sales,
for fiscal 1993. The decrease in expense in fiscal 1994 is due to decreased
interest expense as a result of eliminating FSI's asset-based credit facility in
March 1994. In addition, FSI's interest income increased approximately $244,000
during fiscal 1994 due to increased investments in cash and cash equivalents
from the proceeds of a secondary offering completed in November 1993.
FSI's income tax expense was approximately $5.9 million, $1.3 million and
$360,000 in fiscal 1995, 1994 and 1993, respectively. This equated to an
effective tax rate of 27.2%, 24.6% and 17.6% in fiscal 1995, 1994 and 1993,
respectively. FSI's effective tax rate was lower than what would be expected
using a 35% "statutory" effective tax rate due to the reinstatement of deferred
tax assets resulting from the generation of taxable income in fiscal 1993, 1994
and 1995.
The equity in earnings of affiliates was $3.6 million, $1.8 million and
$1.3 million for fiscal 1995, 1994 and 1993, respectively. The increase in
fiscal 1995 primarily resulted from the increased earnings of its 40-percent-
owned affiliate, Metron Semiconductors Europa B.V. ("MSE"), and the Metron Asia
Group ("MSA") in which it had a 50% ownership. The increase in fiscal 1994 from
1993 was attributed to the increased earnings of both MSE and MSA. On July 5,
1995, MSE acquired MSA and on July 6, 1995, acquired Transpacific Technology
Corporation, a U.S. distribution company. FSI owns 38% of this newly
consolidated entity.
-67-
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited consolidated quarterly
financial information for the first quarter of fiscal 1996 and for each quarter
in fiscal 1995 and 1994. In the opinion of FSI's management, this information
has been prepared on the same basis as the audited consolidated financial
statements appearing elsewhere in this Proxy Statement/Prospectus and includes
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the unaudited quarterly results set forth herein. FSI's quarterly
results have in the past been subject to fluctuations and, thus, the operating
results for any quarters are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------------
FISCAL 1996 FISCAL 1995 FISCAL 1994
----------- ------------------------------------------- --------------------------------------------
NOVEMBER NOVEMBER FEBRUARY MAY AUGUST NOVEMBER FEBRUARY MAY AUGUST
25, 1995 26, 1994 25, 1995 27, 1995 26, 1995 27, 1993 26, 1994 28, 1994 27, 1994
----------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales........................ $62,147 $30,184 $42,728 $53,503 $63,988 $21,415 $20,707 $ 26,087 $28,228
Cost of goods sold........... 35,127 16,263 24,370 31,527 39,842 12,665 11,463 15,668 15,992
------- ------- ------- ------- ------- ------- ------- --------- -------
Gross profit................. 27,020 13,921 18,358 21,976 24,146 8,750 9,244 10,419 12,236
Operating expenses:
Selling, general, and
administrative............. 11,314 6,329 7,470 10,291 9,819 4,284 4,341 4,851 6,076
Research and development... 7,532 4,873 6,040 6,465 7,487 3,396 3,743 3,860 4,744
------- ------- ------- ------- ------- ------- ------- --------- -------
Total operating expenses..... 18,846 11,202 13,510 16,756 17,306 7,680 8,084 8,711 10,820
------- ------- ------- ------- ------- ------- ------- --------- -------
Operating income............. 8,174 2,719 4,848 5,220 6,840 1,070 1,160 1,708 1,416
Other income (expense), net.. 1,396 121 173 737 1,142 (198) (10) (80) 34
------- ------- ------- ------- ------- ------- ------- --------- -------
Income before income
taxes....................... 9,570 2,840 5,021 5,957 7,982 872 1,150 1,628 1,450
Income tax expense........... 3,420 790 1,254 1,756 2,126 185 300 362 407
------- ------- ------- ------- ------- ------- ------- --------- -------
Income before minority
interest and equity in
earnings of affiliates...... 6,150 2,050 3,767 4,201 5,856 687 850 1,266 1,043
Minority interest............ (162) 0 0 0 (155) 0 0 0 0
Equity in earnings of
affiliates.................. 1,556 1,000 323 805 1,439 414 368 378 640
------- ------- ------- ------- ------- ------- ------- --------- -------
Net income................... $ 7,544 $ 3,050 $ 4,090 $ 5,006 $ 7,140 $ 1,101 $ 1,218 $ 1,644 $ 1,683
======= ======= ======= ======= ======= ======= ======= ========= =======
</TABLE>
The table below sets forth the percentage relationship of certain items to
net sales with regard to FSI's results of operations for each of the quarters
presented above.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------------
FISCAL 1996 FISCAL 1995 FISCAL 1994
----------- ------------------------------------------- --------------------------------------------
NOVEMBER NOVEMBER FEBRUARY MAY AUGUST NOVEMBER FEBRUARY MAY AUGUST
25, 1995 26, 1994 25, 1995 27, 1995 26, 1995 27, 1993 26, 1994 28, 1994 27, 1994
----------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.......... 56.5 53.9 57.0 58.9 62.3 59.1 55.4 60.1 56.7
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit................ 43.5 46.1 43.0 41.1 37.7 40.9 44.6 39.9 43.3
Operating expenses:
Selling, general, and
administrative............ 18.2 21.0 17.5 19.2 15.3 20.0 21.0 18.6 21.5
Research and development.. 12.1 16.1 14.1 12.1 11.7 15.9 18.0 14.8 16.8
----- ----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses.... 30.3 37.1 31.6 31.3 27.0 35.9 39.0 33.4 38.3
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating income............ 13.2 9.0 11.4 9.8 10.7 5.0 5.6 6.5 5.0
Other income (expense), net. 2.2 0.4 0.4 1.3 1.8 (0.9) (0.1) (0.3) 0.1
----- ----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes. 15.4 9.4 11.8 11.1 12.5 4.1 5.5 6.2 5.1
Income tax expense.......... 5.5 2.6 3.0 3.3 3.3 0.9 1.4 1.4 1.4
----- ----- ----- ----- ----- ----- ----- ----- -----
Income before minority
interest equity in
earnings of affiliates..... 9.9 6.8 8.8 7.8 9.2 3.2 4.1 4.8 3.7
Minority interest........... (0.3) 0.0 0.0 0.0 (0.2) 0.0 0.0 0.0 0.0
Equity in earnings of
affiliates................. 2.5 3.3 0.8 1.5 2.2 1.9 1.8 1.5 2.3
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income.................. 12.1% 10.1% 9.6% 9.3% 11.2% 5.1% 5.9% 6.3% 6.0%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
FSI expects it will continue to experience fluctuations in its quarterly
operating results. In the past, these fluctuations have been caused by a variety
of factors including timing and shipment of orders, the sales mix of higher
margin and lower margin products, fluctuations in the percentage of
international sales, and equity in earnings (loss) of affiliates. There can be
no assurance as to the level of sales or profits, if any, in any future period.
See "Risk Factors -- Cyclicality of the Semiconductor Device Industry" and
"-- Fluctuations in Operating Results."
-68-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
FSI's cash and cash equivalents and marketable securities decreased by
approximately $10.6 million to approximately $100.6 million on November 25, 1995
from August 26, 1995. The decrease resulted primarily from the use of cash to
support operations in response to continued growth of FSI and from the
acquisition of property, plant and equipment, including those related to FSI's
new manufacturing facility.
FSI's accounts receivable increased by approximately $6.9 million to $54.7
million as of November 25, 1995, compared to August 26, 1995. The increase
reflects higher international sales levels, which generally have longer payment
terms and also increased sales of chemical management products, which typically
have higher retainages by the customer. FSI inventory increased approximately
$.4 million to $32.3 million at the end of the first quarter of fiscal 1996,
compared to the fiscal year ended August 26, 1995. The increase primarily
resulted from FSI's purchased parts and raw materials inventory being higher at
the end of the first quarter of fiscal 1996 offset by a decrease in finished
goods. As of November 25, 1995, FSI's ratio of current assets to current
liabilities was 3.7 to 1.0 and its working capital was $143.5 million.
FSI had acquisitions of property, plant and equipment in the first quarters
of fiscal 1996 and 1995 of approximately $9,701,000 and $1,713,000,
respectively. Capital additions in the first quarter of fiscal 1996 were
associated primarily with the completion of the new manufacturing facility, the
equipping of 35,000 square feet of leased engineering and administrative space
for the Chemical Management Division, and purchase of computer equipment. FSI
expects to invest approximately $30.0 million in facility and laboratory
expansion programs and computer systems in fiscal 1996, including approximately
$25.0 million to construct and equip an additional 88,000 square feet of
laboratory and office space to its new Chaska, Minnesota facility. See "FSI
Business -- Properties."
FSI does not currently have a credit facility. However, FSI has negotiated
the terms of a new credit facility, which it expects to enter into during fiscal
1996. FSI believes that existing cash and cash equivalents, marketable
securities and internally generated funds will be sufficient to meet FSI's
currently projected working capital and other cash requirements both for the
short-term and through at least the end of fiscal 1996.
FSI believes that success in its industry requires substantial capital in
order to maintain the flexibility to take advantage of opportunities as they may
arise. FSI may, from time to time, as market and business conditions warrant,
invest in or acquire complementary businesses, products or technologies. FSI may
effect additional equity or debt financing to fund such activities. The issuance
of additional equity or debt securities could result in additional dilution to
FSI's shareholders.
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<PAGE>
PRINCIPAL SHAREHOLDERS OF SEMICONDUCTOR SYSTEMS
The following sets forth, as of ____________, 1996, in tabular format,
beneficial owners (by right, by agreement or otherwise, to direct the voting or
disposition of shares) of more than 5% of the outstanding shares of the Common
Stock of Semiconductor Systems and all directors and officers of Semiconductor
Systems as a group. Unless otherwise indicated, such persons have sole voting
and dispositive powers with respect to the shares indicated.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME AND ADDRESS/(1)/ BENEFICIALLY OWNED OUTSTANDING SHARES
- --------------------- ------------------ -------------------
<S> <C> <C>
Michael L. Parodi 1,715,750 21.4%
Douglas K. Amis/(2)/ 1,715,750 21.4%
Gerald E. Masterson/(3)/ 1,340,750 16.8%
Qui V. Nguyen 1,000,000 12.5%
Michael E. Van De Ven 400,000 5.0%
All directors and executive 4,772,250 59.7%
officers as a group
(3 persons)
</TABLE>
_________________________
/(1)/ The address for all individuals listed above is c/o Semiconductor
Systems, Inc. 47003 Mission Falls Court, Fremont, California 94539
/(2)/ Shares held by the Douglas K. Amis Trust.
/(3)/ Shares held by the Gerald E. Masterson and Barbara L. Masterson as Co-
Trustees of the Masterson Living Trust dated March 25, 1992.
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<PAGE>
DIRECTOR AND EXECUTIVE OFFICER INFORMATION
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Michael L. Parodi 47 Chairman of the Board, President and Chief
Executive Officer
Gerald E. Masterson 55 Vice President, Finance, Chief Financial
Officer, Secretary and Director
Douglas K. Amis 47 Vice President, Administration and Director
</TABLE>
SEMICONDUCTOR SYSTEMS BUSINESS
INTRODUCTION
Semiconductor Systems designs, develops, manufactures, markets and services
technologically advanced equipment used in the semiconductor, flat panel
display, thin film head and multi-chip module industries. Semiconductor Systems
manufactures a line of specialized, proprietary processing products which are
principally used in the photolithography stages of the critical layering in the
fabrication of semiconductors and other advanced electronic devices.
Semiconductor Systems' product offerings include the OrbiTrak semiconductor
processing system, APEX flat panel display and multi-chip module processing
systems, Scorpio thin-film-head processing system, System-500 high throughput
semiconductor processing system and System-150/System-1A semiconductor
processing systems. Semiconductor Systems also provides spare parts to its
installed customer base plus maintenance service contracts as requested.
INDUSTRY BACKGROUND
Continuous improvements in semiconductor process and design technologies
have led to the production of smaller, more complex and more reliable devices at
a lower cost per function. As performance has increased and size and cost have
decreased, the demand for semiconductors has expanded beyond the primary market
in computer systems to include applications in telecommunications systems,
automotive products, consumer goods and industrial automation and control
systems. Semiconductor content as a percentage of system cost has also
increased. In addition, the demand for electronic systems has expanded
geographically with the emergence of new markets, particularly in the Pacific
Rim countries. Consequently, semiconductor sales have increased significantly
over the long term and Semiconductor Systems believes that these long-term
trends will continue, driving demand for semiconductor production equipment that
can produce advanced integrated circuits in high volumes at the lowest cost of
ownership.
The rapid development of advanced semiconductor applications requires
semiconductor manufacturers to continually improve their technology and
manufacturing capabilities to remain competitive within the industry. As a
consequence, semiconductor manufacturers demand increasingly sophisticated, cost
effective processing equipment from equipment suppliers.
The flat panel display and thin film head industries 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 manufacturing
markets, while not as large as the semiconductor manufacturing market, are
nonetheless experiencing significant growth rates.
The fabrication of semiconductors, flat panel displays and thin film heads
is a complex process involving several distinct phases repeated numerous times
during the fabrication process. Each production phase requires different
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<PAGE>
processing technology and equipment, and no one equipment supplier currently
produces equipment to address all phases of production. As a result, device
manufacturers construct fabrication facilities by combining manufacturing
equipment produced by several different suppliers, each of which performs
specific functions in the manufacturing process.
Concurrent with rapid technological advances in the semiconductor, flat
panel display and thin film head industries, competitive pressures are forcing
device manufacturers to reduce production costs. Because of the significant
capital cost of a typical new semiconductor fabrication facility, device
manufacturers have increased their focus on the various cost components of these
facilities. This focus has led device 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.
Semiconductor Systems believes that device manufacturers are demanding that
equipment suppliers take an increasingly active role in meeting the device
manufacturers technology requirements and cost constraints by developing and
supporting the products and processes required to fabricate advanced devices.
Equipment companies must provide advanced process expertise, superior product
performance, reduced overall cost of ownership and worldwide customer support to
better meet the needs of device manufacturers as well as to meet formal
international quality standards.
TECHNOLOGY AND PRODUCTS
Semiconductor Systems has expertise in and a unique cluster platform
approach to meeting the photolithography requirements of the semiconductor and
other advanced electronic device manufacturing industries. Semiconductor
Systems' products include:
ORBITRAK
Introduced in 1993, the OrbiTrak semiconductor processing system is
designed for use in advanced eight-inch wafer fabrication processes for
integrated circuits with line widths of 0.35 microns or smaller. Geometries of
0.35 microns are required for 64 megabyte DRAMs and other advanced devices.
OrbiTrak's 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 wands all contribute to superior throughput in a
very small footprint. OrbiTrak features a high module density per square foot,
resulting in a small footprint, thereby reducing its cost of ownership.
Improved device yields are a result of OrbiTrak's process and software
control algorithms within the system. The optional class 0.1 environmental
chamber provides control of particulates, temperature and humidity. Separate
environmental controls for the coat and develop chambers provide further process
management and control, a necessity for deep-UV processing requirements.
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 OrbiTrak, 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.
APEX FLAT PANEL DISPLAY PROCESSING SYSTEM
Introduced in 1993, APEX was designed to meet the needs of display
manufacturers in the flat panel display ("FPD") market. Flat panel displays are
the full color screens seen in lap top computers, aircraft cockpits and consumer
electronics. Using the design architecture developed for the OrbiTrak system,
the APEX system also integrates the cluster tool processing concept. The APEX
system is designed to handle thin glass substrate up to 500mm x 500mm (20
inches) square. This capability insures that the APEX system can be used to
manufacture today's FPD products as well as next generation products.
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<PAGE>
SCORPIO PROCESSING SYSTEM
Introduced in 1993, Scorpio is designed to provide an OrbiTrak-like
platform for the photolithography steps involved in the manufacturing of thin
film heads. The benefits of "cluster" processing are also resident in this
system, which is ideally suited for the thin film head marketplace. The Scorpio
system provides thin-film head fabricators with some of the same advantages
provided to semiconductor fabricators by the OrbiTrak system.
Scorpio is also designed for use in manufacturing multi-chip modules
("MCM"). MCMs are multiple integrated circuits 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 with lower propagation delays. MCMs with
substrate sizes larger than standard silicon wafers are anticipated, in which
case the APEX system could also be used for this application.
SYSTEM 500
Introduced in 1991, the System 500 processing system is designed for use in
high volume fabrication processes for semiconductors requiring contamination
control and photoresist processing down to line widths as narrow as 0.5 microns.
The System 500 incorporates such automation features as two develop chambers,
multiple cassettes, automatic loading, state-of-the-art software and
communications capabilities, certain process control improvements, and a robotic
interface to provide for a fully-linked photolithography cell. The System 500
is typically purchased for high-volume, large die area, advanced logic
manufacturing. System 500 can process wafers up to six inches in diameter.
SYSTEM 150
Introduced in 1986, the System 150 is capable of processing semiconductor
wafers with diameters of three to six inches and supporting the needs of
photoresist processing down to 0.5 micron line widths. The System 150 has
excellent software and process control capabilities, as well as providing the
interface to provide for a fully-linked photolithography cell. In the United
States, the System 150 is typically purchased for expansion of current capacity
or for upgrading capability from the System 1A. The System 150 is also well-
suited for emerging country applications.
SYSTEM 1A
The System 1A, introduced in 1983, is Semiconductor Systems' initial
integrated photoresist processing system. With over 100 systems still in wafer
manufacturing today, the System 1A is capable of processing wafers from two to
six inches in diameter and supports the needs of photoresist processing down to
1.0 micron line widths. The System 1A is typically purchased for expansion of
current, older generation fabrication capacity or for equipment replacement
needs. The System 1A is also well-suited for emerging country applications.
OTHER PRODUCTS
Semiconductor Systems provides system remanufacturing and retrofits
tailored to customer specific requirements for OEM, direct and second party
purchased systems. Semiconductor Systems has also developed a line of high
pressure scrubbers and cleaners sold in the same markets that Semiconductor
Systems sells its photoresist processing systems.
SERVICE AND SPARE PARTS
Semiconductor Systems offers service agreements for preventive maintenance
or requested maintenance on site, in addition to replacement and consumable
parts for all systems it sells.
ENGINEERING, RESEARCH AND DEVELOPMENT
Semiconductor Systems seeks to continuously improve its core products based
on customer input. Approximately 45% of Semiconductor Systems' employees are
dedicated to product and development engineering, and field engineering support.
Research and development expenses were $3,013,000 and $3,592,000 for the years
1994 and 1995, respectively.
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<PAGE>
SALES AND MARKETING
Semiconductor Systems' marketing efforts focus on understanding customer
requirements and determining which approach to address a customer requirement.
A tactical sales/marketing organization manages the day-to-day activities with
the customer base as well as marketing communications activities.
Semiconductor Systems' United States sales activities consist primarily of
direct sales through Semiconductor Systems employees or independent sales
representatives. Semiconductor Systems maintains a sales office in Fremont,
California and has sales personnel located in Dallas, Texas and Downingtown,
Pennsylvania. Installation, training of customer service personnel and warranty
service are provided by Semiconductor Systems field service engineers.
In Korea, Taiwan, China, Singapore, Malaysia, Thailand, Indonesia,
Philippines, Europe and Israel, Semiconductor Systems utilizes independent sales
representatives. Training of the independent sales representatives' service
personnel is provided by Semiconductor Systems. In Japan, Semiconductor Systems
has entered into a licensing and distribution agreement with two Japanese
companies to manufacture and distribute the OrbiTrak system in Japan.
CUSTOMERS
Semiconductor Systems offers its products for sale in the United States,
Europe, Israel, the Pacific Rim countries and in Japan. Sales to Intel
Corporation represented 32% and 64% of Semiconductor Systems' sales in 1995 and
1994 respectively. Of Semiconductor Systems' customers, Intel, Hewlett-Packard,
Motorola and Microchip Technology each accounted for more than 10% of revenue in
1995 and only Intel accounted for more than 10% of revenue in 1994.
MANUFACTURING AND SUPPLIERS
Semiconductor Systems typically assembles its products and sub-systems from
components and prefabricated parts manufactured and supplied by others, such as
process controllers, robots, pumps, motors, valves, integrated circuits, power
supplies, pressure valves, chamber bowls and relays. Certain of the materials
are manufactured by others to Semiconductor Systems' specifications. In order
to maintain a high level of quality for customized components, Semiconductor
Systems provides detailed engineering drawings and specifications to all these
suppliers. Quality control is maintained through incoming inspection of
components, in-process inspection during equipment assembly and final inspection
and operation of all manufactured systems prior to shipment.
Certain of the components and subassemblies included in Semiconductor
Systems' products are obtained from a single supplier in order to ensure overall
quality and timeliness of delivery. Although Semiconductor Systems seeks to
reduce dependence on sole and limited source suppliers and Semiconductor Systems
has not experienced significant production delays due to unavailability or delay
in procurement of component parts or raw materials to date, disruption or
termination of certain of these sources could have a temporary adverse effect on
Semiconductor Systems' 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 Semiconductor Systems' operating results and could result in
damage to customer relations.
BACKLOG
At January 28, 1996, Semiconductor Systems' backlog was approximately
$11,254,000, compared with approximately $12,000,000 at the same time last year.
Backlog consists of products ordered for which a customer purchase order has
been received and has been scheduled for delivery within twelve months. Orders
are subject to cancellation or rescheduling, sometimes with a cancellation
charge.
COMPETITION
The semiconductor, flat panel display, thin-film head and MCM equipment
industries are all highly competitive. Semiconductor Systems' principal
competitors in all geographical regions of the world are Tokyo Electron, Dai
Nippon Screen, Silicon Valley Group, and FSI. To date, Semiconductor Systems
has not experienced any barriers to competition as a result of government trade
restrictions in any of the markets it has pursued. There can be no assurance,
however, that imposition of such restrictions in the future will not adversely
affect Semiconductor Systems' ability to compete in these
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<PAGE>
markets. Most of Semiconductor Systems' competitors have greater financial,
manufacturing and service organizations as well as longer standing customer
relations than those of Semiconductor Systems. There can be no assurance that
the levels of competition in Semiconductor Systems' particular product market
will not intensify or that Semiconductor Systems' technological advantages may
not be reduced or lost as a result of technological advances by competitors or
changes in semiconductor, FPD, thin-film head or MCM processing technology.
PATENTS, TRADEMARKS, COPYRIGHTS AND OTHER INTELLECTUAL PROPERTY
Semiconductor Systems believes that the success of its business depends on
a combination of technical competence and marketing abilities rather than on
its patents, trademarks and copyrights. Nevertheless, Semiconductor Systems has
a policy of seeking patents when appropriate for inventions relating to new
products and improvements. Semiconductor Systems owns 5 patents and has 8
patents pending in the United States, and has 18 patent applications pending
elsewhere in the world. Semiconductor Systems has one registered trademark in
the United States and one pending trademark registration in Japan.
Semiconductor Systems also relies upon trade secret protection for its
confidential and proprietary information, and it routinely enters into
confidentiality agreements with its suppliers. There can be no assurance,
however, that others will not independently obtain information regarding
techniques of Semiconductor Systems or otherwise gain access to Semiconductor
Systems' trade secrets, or that Semiconductor Systems can meaningfully protect
its trade secrets.
EMPLOYEES
As of January 28, 1996, Semiconductor Systems employed 169 persons
including 39 in engineering, research and development, 15 in sales and
marketing, 34 in field service and support, 68 in manufacturing and support and
13 in executive, finance and administrative activities. Many of Semiconductor
Systems' employees are highly skilled, and Semiconductor Systems' success will
depend in part upon its continued ability to attract, retain and motivate
highly-skilled employees. Semiconductor Systems has never had a work stoppage
or strike and no employees are represented by a labor union or covered by
collective bargaining agreements. Semiconductor Systems considers its employee
relations to be good.
FACILITIES
Semiconductor Systems' headquarters for all its operations are located in
Fremont, California totaling approximately 62,000 square feet. These facilities
are occupied under a lease expiring on June 30, 1996. Semiconductor Systems
expects to enter into a lease amendment extending the term of the lease through
June 30, 2001 in the near future. Semiconductor Systems, as are all
manufacturing companies, is subject to various federal, state and local
environmental statutory requirements. Semiconductor Systems believes that it is
in material compliance with existing applicable environmental laws and
regulations.
SEMICONDUCTOR SYSTEMS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Founded in 1982, Semiconductor Systems was acquired in 1983 by General
Signal Corporation. In 1990, General Signal announced its intention to exit the
semiconductor equipment industry and put its industry related divisions on the
market for sale. In late 1990, Semiconductor Systems' senior management
purchased certain assets of Semiconductor Systems and immediately began to
refocus the business around a much improved customer satisfaction culture, and
the development of a broader product portfolio to attempt to expand its customer
base.
Semiconductor Systems' operating results are affected by several factors
including competitive pressures on pricing, critical mass as to the level of
manufacturing and engineering capabilities, and the scheduling of orders by its
customers. Additional factors, in the case of OrbiTrak, APEX and Scorpio
processing systems, include customer reluctance to rely on new products and the
relative lack of an installed base of these products. Semiconductor Systems'
cost of sales includes the cost of raw material components and supplies
purchased or fabricated, direct labor personnel and associated costs, associated
facilities costs, direct and indirect costs associated with manufacturing
supervision and sustaining engineering, as well as costs associated with
procurement, scheduling, testing, quality assurance and equipment installation
and warranty functions performed by Semiconductor Systems.
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<PAGE>
Semiconductor Systems' future will depend in part on its ability to
engineer, design, integrate and install products for several customers at the
same time. Semiconductor Systems' ability to retain and attract additional
management and technical personnel will also affect future results.
RESULTS OF OPERATIONS
The following tables set forth for the years indicated certain financial
data in dollar amounts ($ expressed in thousands) and as a percentage of
revenues:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Sales.................................. $25,673 $28,229 $31,392
Cost of goods sold..................... 12,665 16,123 19,055
------- ------- -------
Gross profit........................... 13,008 12,106 12,337
Selling, general & administrative...... 3,832 4,963 5,963
Research and development............... 2,632 3,013 3,592
------- ------- -------
Operating income....................... 6,544 4,130 2,782
Other income (expense), net............ 122 28 (289)
------- ------- -------
Income before income taxes............. 6,666 4,158 2,493
Income tax expense..................... (176) (37) (37)
------- ------- -------
Net income............................. $ 6,490 $ 4,121 $ 2,456
======= ======= =======
<CAPTION>
As a Percentage of Sales
----------------------------
Sales.................................. 100.0% 100.0% 100.0%
Cost of goods sold..................... 49.3 57.1 60.7
----- ----- -----
Gross profit........................... 50.7 42.9 39.3
Selling, general & administrative...... 14.9 17.6 19.0
Research and development............... 10.3 10.7 11.4
----- ----- -----
Operating income....................... 25.5 14.6 8.9
Other income (expense), net............ 0.5 0.1 (1.0)
----- ----- -----
Income before income taxes............. 26.0 14.7 7.9
Income tax expense..................... (0.7) (0.1) (0.1)
----- ----- -----
Net income............................. 25.3% 14.6% 7.8%
===== ===== =====
</TABLE>
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
SALES. Sales increased 10.0% to $28.2 million in 1994 and 11.2% to $31.4
million in 1995. The increase in sales from 1993 to 1994 reflects the net
increase resulting from a reduction of dependence on sales to Intel Corporation
from 77% of Semiconductor Systems' total revenue in 1993 to 64% of total revenue
in 1994, and increased sales to other customers from $5.9 million in 1993 to
$10.3 million in 1994. Sales of spare parts and service averaged $4.0 million
during these periods. The increase in sales from 1994 to 1995 reflects the net
increase from a further reduction of dependence on sales to Intel Corporation
from 64% of total Semiconductor Systems revenue in 1994 to 32% of total revenue
in 1995, and increased sales to other customers from $10.3 million in 1994 to
$21.5 million in 1995. Sales of spare parts increased slightly but a reduction
in service revenue decreased total spare parts and service revenue to $3.4
million during 1995.
Semiconductor Systems' international sales were $0.6 million, $0.8 million
and $1.7 million in 1993, 1994 and 1995, respectively, and represented
approximately 2%, 3% and 5% of sales during such periods. Of the $1.7 million
of 1995 international sales, $1.4 million was to the Japanese company with whom
Semiconductor Systems has a license agreement.
GROSS PROFIT. Semiconductor Systems' gross profit as a percentage of sales
decreased from 50.7% in 1993 to 42.9% in 1994 and to 39.3% in 1995. The
decrease in gross profit percentage between 1993 and 1994 was primarily due to
the product mix changing away from a mature product with higher margins being
sold to a well established customer,
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<PAGE>
to the newer products being sold to newer customers who, reluctant to change to
a somewhat unproven processing system, typically demanded deep price concessions
prior to releasing purchase orders. In addition to these price pressures, higher
costs associated with early stage manufacturing resulted in the decreased gross
margins. The decrease in gross profit percentage from 42.9% in 1994 to 39.3% in
1995 resulted partially from the factors discussed above and partially from the
slightly negative gross margin associated with the $1.4 million sales to the
Japanese company with whom Semiconductor Systems has a license agreement.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $3.8 million, $5.0 million and $6.0 million, or 14.9%, 17.6% and
19.0% of sales in 1993, 1994 and 1995, respectively. The increase, mostly sales
related, from 1993 to 1994 was due primarily to an increase in the headcount of
the direct sales and marketing organization required to more adequately address
the increased product portfolio and expansion of the customer base, plus
commission costs associated with independent sales representatives successfully
obtaining customer purchase orders for Semiconductor Systems products.
Independent sales representatives are paid a higher commission rate on revenue
generated than are Semiconductor Systems' direct sales personnel. The increase
from 1994 to 1995 was due to the addition of direct regional sales personnel,
additional commissions to both the independent sales representatives and to
Semiconductor Systems direct sales personnel, and the establishment of a product
applications laboratory. 1995 costs associated with the applications lab were
approximately $0.8 million. Semiconductor Systems expects that selling, general
and administrative expenses will likely increase in absolute dollars in 1996,
as Semiconductor Systems continues to expand its direct sales and marketing
organization.
RESEARCH AND DEVELOPMENT. Research and development expenses were $2.6
million, $3.0 million and $3.6 million, or 10.3%, 10.7% and 11.4% of sales in
1993, 1994 and 1995, respectively. The increase from 1993 to 1994 was primarily
due to increased OrbiTrak development during the year it was introduced to the
semiconductor marketplace. The increase from 1994 to 1995 was due to a
combination of increased OrbiTrak development during its initial year of
shipments to customers plus development of additional features for the APEX flat
panel display system. Semiconductor Systems expects that research and
development expenses will increase in absolute dollars in 1996, as Semiconductor
Systems continues to devote substantial resources to new product development.
OTHER INCOME (EXPENSE), NET. The balance of other income (expense), net
reflects the swing from net interest earned on a positive cash balance in 1993
and 1994 to interest expense on cash borrowings in 1995.
INCOME TAX EXPENSE. As an S corporation, Semiconductor Systems pays no
corporate level income taxes, other than a net 1.5% to 2.5% tax to various
states on S corporation pre-tax earnings. Net income of S corporations flows to
individual shareholders on a pro-rata basis of shares owned and is to be
included on each shareholder's individual tax return each taxable year. Income
tax expense indicated here reflects only the corporate level taxes assessed to
Semiconductor Systems.
LIQUIDITY AND CAPITAL RESOURCES
Semiconductor Systems has satisfied its liquidity and capital resource
requirements through a combination of internal cash flow and short-term
borrowings. Semiconductor Systems' working capital increased from $5,402,000 at
December 31, 1993 to $7,150,000 at December 31, 1994 and increased further to
$7,665,000 at December 31, 1995.
Semiconductor Systems' operating activities provided cash of $5,712,000 and
$2,499,000 in 1993 and 1994, respectively. Cash provided by operating
activities in 1993 and 1994 primarily resulted from net income partially offset
by changes in working capital needs, most notably inventory and accounts
receivable. Cash used by operating activities in 1995 of $2,070,000 was
primarily caused by increases in inventory and accounts receivable, partially
offset by net income and the increase in accounts payable.
Semiconductor Systems' capital expenditures totaled $762,000, $663,000 and
$616,000 in 1993, 1994 and 1995, respectively. Semiconductor Systems also
acquired $200,000 and $456,000 of equipment via capital leases in 1994 and 1995,
respectively. Semiconductor Systems purchased $2,278,000 of short-term
investments in 1993 which have been sold to fund operations and equipment
acquisitions in 1993, 1994 and 1995.
Semiconductor Systems has made distributions of $7,671,000, $1,957,000 and
$1,837,000 in 1993, 1994 and 1995, respectively, principally for the S
corporation shareholders' tax requirements. At December 31, 1995
-77-
<PAGE>
Semiconductor Systems had $2,784,000 in cash and cash equivalents and had drawn
$5.7 million against a $7.0 million bank short-term facility, which bears
interest at the bank's reference rate (8.5% at December 31, 1995) plus 0.25% and
is secured by substantially all of Semiconductor Systems' assets. At December
31, 1995, Semiconductor Systems was not in compliance with certain covenants of
its line of credit agreement, all of which have been waived by the bank.
Further, Semiconductor Systems has received a letter from its bank indicating
its intent to renew the line of credit agreement through May 1997. Semiconductor
Systems believes that with the short-term credit agreement and available cash it
will have sufficient resources to meet its capital requirements to sustain
operations for at least the next twelve months.
EXPERTS
The consolidated financial statements and financial statement schedule of
FSI as of August 26, 1995 and August 27, 1994 and for each of the fiscal years
in the three-year period ended August 26, 1995, included in the Registration
Statement of which this Proxy Statement/Prospectus is a part have been audited
by KPMG Peat Marwick LLP, independent certified public accountants, as indicated
in their reports accompanying such consolidated financial statements and
financial statement schedule, and are included herein in reliance upon such
reports given upon the authority of said firm as experts in accounting and
auditing.
The financial statements of Semiconductor Systems as of December 31, 1995
and 1994 and for each of the three years in the period ended December 31, 1995
included in this Proxy Statement/Prospectus have been so included in reliance on
the reports of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
LEGAL OPINIONS
The validity of the shares of FSI Common Stock to be issued in the Merger
will be passed upon for FSI by Faegre & Benson LLP, Minneapolis, Minnesota.
Certain legal matters will be passed upon for Semiconductor Systems by Wilson,
Sonsini, Goodrich & Rosati, Professional Corporation, Palo Alto, California.
-78-
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF FSI INTERNATIONAL, INC. AND SUBSIDIARIES
Independent Auditors' Report....................................................................... F-2
Consolidated Statements of Operations for the fiscal years ended August 26, 1995, August 27, 1994
and August 28, 1993............................................................................. F-3
Consolidated Balance Sheets as of August 26, 1995 and August 27, 1994.............................. F-4
Consolidated Statements of Stockholders' Equity for the fiscal years ended August 26, 1995,
August 27, 1994 and August 28, 1993............................................................. F-5
Consolidated Statements of Cash Flows for the fiscal years ended August 26, 1995, August 27, 1994
and August 28, 1993............................................................................. F-6
Notes to Consolidated Financial Statements......................................................... F-7
Consolidated Statements of Operations (unaudited) for the Quarters ended November 25, 1995
and November 26, 1994........................................................................... F-17
Consolidated Condensed Balance Sheets as of November 25, 1995 (unaudited) and August 26, 1995...... F-18
Consolidated Condensed Statements of Cash Flows (unaudited) for the Quarters Ended
November 25, 1995 and November 26, 1994......................................................... F-20
Notes to Consolidated Condensed Financial Statements (unaudited)................................... F-21
FINANCIAL STATEMENTS OF SEMICONDUCTOR SYSTEMS, INC.
Report of Independent Accountants.................................................................. F-22
Balance Sheets as of December 31, 1994 and 1995.................................................... F-23
Statements of Operations for the years ended December 31, 1993, 1994 and 1995...................... F-24
Statements of Shareholders' Equity for the fiscal years ended December 31, 1993, 1994 and 1995..... F-25
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995...................... F-26
Notes to Financial Statements...................................................................... F-27
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF FSI INTERNATIONAL, INC. AND
SEMICONDUCTOR SYSTEMS, INC.
Description of the Unaudited Pro Forma Combined Financial Information.............................. F-33
Unaudited Pro Forma Combined Statements of Operations for the quarters ended November 25, 1995
and November 26, 1994 and for the fiscal years ended August 26, 1995, August 27, 1994 and
August 28, 1993................................................................................. F-34
Combined Balance Sheet as of November 25, 1995..................................................... F-39
Notes to Unaudited Pro Forma Combined Financial Information........................................ F-40
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
FSI International, Inc.:
We have audited the accompanying consolidated balance sheets of FSI
International, Inc. and subsidiaries as of August 26, 1995 and August 27, 1994,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the fiscal years in the three-year period ended August
26, 1995. 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 26, 1995 and August 27, 1994,
and the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended August 26, 1995, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 13, 1995
F-2
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
------------------------------------------
Fiscal years ended August 26, 1995, August 27, 1994 and August 28, 1993 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales (including sales to affiliates of $42,625,000
$24,699,000 and $19,603,000, respectively) $190,403,364 $96,437,653 $78,432,284
Cost of goods sold 112,002,351 55,788,375 49,464,226
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 78,401,013 40,649,278 28,968,058
Selling, general and administrative expenses 33,908,913 19,552,376 14,496,165
Research and development expenses 24,864,705 15,742,894 11,760,306
- ---------------------------------------------------------------------------------------------------------------------
Operating income 19,627,395 5,354,008 2,711,587
Interest expense (27,745) (417,521) (556,984)
Interest income 2,067,619 318,211 74,308
Other income (expense), net 133,079 (154,314) (188,217)
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 21,800,348 5,100,384 2,040,694
Income tax expense 5,926,000 1,254,000 360,000
- ---------------------------------------------------------------------------------------------------------------------
Income before minority interest and equity
in earnings of affiliates 15,874,348 3,846,384 1,680,694
Minority interest (155,562) -- --
Equity in earnings of affiliates 3,566,900 1,799,750 1,277,261
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 19,285,686 $ 5,646,134 $ 2,957,955
=====================================================================================================================
Net income per common share $ 1.13 $ .43 $ .28
- ---------------------------------------------------------------------------------------------------------------------
Weighted average common shares and
common share equivalents 17,070,549 13,222,408 10,557,646
=====================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
FSI INTERNATIONAL
F-3
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 26, 1995 August 27, 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 97,143,176 $10,724,729
Marketable securities 14,059,682 _
Trade accounts receivable, less
allowance for doubtful accounts
of $1,225,000 and $525,000,
respectively 34,709,769 16,234,940
Trade accounts receivable from
affiliates 13,069,739 5,378,164
Inventories 31,859,135 16,452,665
Deferred income tax benefit 5,828,018 1,832,000
Prepaid expenses and other current
assets 4,362,652 4,112,238
- -------------------------------------------------------------------------------
Total current assets 201,032,171 54,734,736
- -------------------------------------------------------------------------------
Property, plant and equipment, net 19,352,519 5,143,244
Investment in affiliates 8,813,370 4,856,091
Deposits and other assets 4,048,242 4,622,798
Deferred income tax benefit--long-term 595,085 -
- -------------------------------------------------------------------------------
$233,841,387 $69,356,869
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 33,228 $ 148,834
Trade accounts payable 25,279,750 10,968,855
Accrued expense 21,252,755 8,948,086
Customer deposits 2,614,874 3,685,948
Deferred revenue 5,722,030 3,204,892
- -------------------------------------------------------------------------------
Total current liabilities 54,902,637 26,956,615
- -------------------------------------------------------------------------------
Long-term debt, less current mturities 46,711 33,228
Minority interest 681,558 -
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, 20,260,612 and 13,166,073
shares, respectively 144,379,884 28,719,418
Retained earnings 32,571,902 13,286,216
Cumulative translation adjustment 1,258,695 361,392
- -------------------------------------------------------------------------------
Total stockholders' equity 178,210,481 42,367,026
- -------------------------------------------------------------------------------
Commitments (notes 3, 5, 6, 17 and 20) $233,841,387 $69,356,869
===============================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
FSI INTERNATIONAL
F-4
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------ Cumulative
Fiscal years ended August 26, 1995, Number of Retained Translation
August 27, 1994 and August 28, 1993 Shares Amount Earnings Adjustment Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, August 29, 1992 9,533,602 $ 12,562,704 $ 4,682,127 $ 467,922 $ 17,712,753
Stock issuance 504,793 830,685 -- -- 830,685
Recision of shares (352,223) (171) -- -- (171)
Tax benefit from stock options exercised -- 156,711 -- -- 156,711
Change in cumulative translation adjustment -- -- -- (69,313) (69,313)
Net income -- -- 2,957,955 -- 2,957,955
- ---------------------------------------------------------------------------------------------------------------------
Balance, August 28, 1993 9,686,172 13,549,929 7,640,082 398,609 21,588,620
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)
Net income -- -- 5,646,134 -- 5,646,134
- ---------------------------------------------------------------------------------------------------------------------
Balance, August 27, 1994 13,166,073 28,719,418 13,286,216 361,392 42,367,026
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
Net income -- -- 19,285,686 -- 19,285,686
- ---------------------------------------------------------------------------------------------------------------------
Balance, August 26, 1995 20,260,612 $144,379,884 $32,571,902 $1,258,695 $178,210,481
=====================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
FSI INTERNATIONAL
F-5
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------
Fiscal years ended August 26, 1995, August 27, 1994 and August 28, 1993 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 19,285,686 $ 5,646,134 $ 2,957,955
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest 155,562 -- --
Depreciation and amortization 3,141,701 2,647,441 2,783,157
Provision for deferred income taxes (4,591,103) (696,000) (1,136,000)
Stock issued for services 65,643 141,376 --
Equity in earnings of affiliates (3,566,900) (1,799,750) (1,277,261)
Gain on sale of equipment (8,000) (19,254) --
Changes in operating assets and liabilities:
Trade accounts receivable (24,698,519) (7,298,164) (880,363)
Inventories (15,319,190) (3,332,475) 265,257
Prepaid expenses and other current assets (250,414) (2,234,324) 321,460
Trade accounts payable 13,019,625 3,285,564 999,624
Accrued expenses 13,043,417 2,840,603 2,667,696
Customer deposits (1,071,074) 2,901,801 (799,627)
Deferred revenue 2,517,138 1,589,371 488,763
Other 13,854 -- --
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,737,426 3,672,323 6,390,661
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Investment in FME, net of cash received (850,333) -- --
Acquisition of property, plant and equipment (16,525,386) (2,716,891) (2,455,266)
Proceeds from note receivable from affiliate 500,000 -- --
Purchase of marketable securities (15,560,502) -- --
Sales of marketable securities 1,500,820 -- --
Decrease (increase) in deposits and other assets 927,097 (4,151,350) 3,717
Proceeds from sale of equipment 8,000 19,254 --
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (30,000,304) (6,848,987) (2,451,549)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Restricted cash -- 1,370,891 (539,295)
Principal payments on long-term debt (166,220) (924,365) (594,051)
Cash overdraft -- -- (652,714)
Notes payable to bank, net -- (1,989,497) (2,269,149)
Net proceeds from issuance of common stock 114,847,545 14,662,703 830,514
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 114,681,325 13,119,732 (3,224,695)
- -------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 86,418,447 9,943,068 714,417
Cash and cash equivalents at beginning of year 10,724,729 781,661 67,244
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 97,143,176 $10,724,729 $ 781,661
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
FSI INTERNATIONAL
F-6
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended August 26, 1995, August 27, 1994 and August 28, 1993
- -------------------------------------------------------
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), and
Applied Chemical Solutions, Inc. (collectively, the "Company"). The 1995
consolidated financial statements also include the accounts of FSI Metron
Europe, Limited (FME), a joint venture owned equally by the Company and Metron
Semiconductors Europa B.V., an affiliate of the Company. This joint venture
interest was acquired as of January 31, 1995. All significant intercompany
balances and transactions have been eliminated in consolidation.
The Company's fiscal year ends on the last Saturday in August and is comprised
of 52 or 53 weeks.
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 the responsibility of engineering and design work, as
well as installation, is recognized upon successful completion of the projects'
phases and milestones. Losses on such projects are recognized in the period in
which it is determined that it is probable that a loss might be incurred.
CASH AND CASH EQUIVALENTS. All highly liquid investments purchased with an
original maturity of three months or less are considered to be cash equivalents.
MARKETABLE SECURITIES. In fiscal 1995, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under the 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 and as a separate component of stockholders' equity until realized.
At August 26, 1995, cash equivalents and marketable securities consisted
mainly of investment grade commercial paper and U.S. Government Agency discount
notes and are considered by management to be available for sale. The substantial
majority of these investments are classified as cash equivalents. The remaining
investments are classified as marketable securities, most of which mature in
fiscal 1996. Because amortized cost approximates market, no adjustment has been
made to stockholders' equity as a result of changes in the market value of these
securities.
INVENTORIES. Inventories are valued at the lower of cost, determined by the
first-in, first-out method, or estimated net realizable value.
PROPERTY, PLANT AND EQUIPMENT. Leasehold improvements are carried at cost and
amortized over a three to 15 year period or the term of the underlying lease,
whichever is shorter. Equipment is carried at cost and depreciated on a
straight-line or declining-balance method over their estimated economic lives.
Principal economic lives for equipment are one to seven years. When assets are
retired or disposed of, the cost and accumulated depreciation thereon is removed
from
FSI INTERNATIONAL
F-7
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. As of August 26, 1995, the Company's investment in
affiliated companies consists of a 40 percent interest in Metron Semiconductors
Europa B.V., a 50 percent interest in Metron Semiconductors (Hong Kong) Limited,
Metron Semiconductors Far East Limited and Metron Semiconductors Asia Limited
(collectively, Metron Asia Group), and a 49 percent interest in m.FSI Ltd., a
Japanese joint venture. Each investment is accounted for by the equity method
utilizing a three-month lag due to the affiliates' May and June year-ends.
Summary financial information for Metron Semiconductors Europa B.V., Metron Asia
Group and m.FSI Ltd. are included in note 6.
CAPITALIZED PRODUCT SOFTWARE COSTS. The Company capitalizes computer software
production costs once technological feasibility has been established for the
product. The capitalized costs are generally amortized over periods of two to
four years. The Company had unamortized capitalized software costs of
approximately $0 and $225,000 at August 26, 1995 and August 27, 1994,
respectively. The Company amortized approximately $225,000, $225,000 and
$432,000 in fiscal years 1995, 1994 and 1993, respectively.
INCOME TAXES. Deferred income taxes are provided in amounts sufficient to give
effect to temporary differences between financial and tax reporting.
PRODUCT WARRANTY. The Company, in general, warrants new equipment manufactured
by the Company to the original purchaser to be free from defects in material and
workmanship for up to two years, depending upon the product. Provisions are made
for the estimated costs of maintaining product warranties at the time the
product is sold.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of foreign subsidiaries
and investees are translated into U.S. dollar at current exchange rates.
Operating results of 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.
RECLASSIFICATIONS. Certain fiscal 1994 and 1993 amounts have been reclassified
to conform to the fiscal 1995 presentation.
- --------------------------------------------------------------------------------
/ \
/ Note 2 Acquisition of Applied Chemical Solutions \
/ \
- --------------------------------------------------------------------------------
On March 8, 1995, the Company completed its merger with Applied Chemical
Solutions ("ACS"). The Company issued 1,061,472 shares of common stock in
connection with the merger. This transaction was accounted for as a pooling of
interests; therefore, all prior financial statements have been restated to
reflect the merger. Prior to the merger, ACS prepared its financial statements
on a July 31 fiscal year-end. ACS's fiscal year has been changed to the last
Saturday in August to conform to the Company's year-end. The Company's restated
financial statements for fiscal years 1994 and 1993 include ACS amounts for the
fiscal years ended August 27, 1994 and August 28, 1993, respectively.
FSI INTERNATIONAL
F-8
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Sales and net income (loss) included in the Company's consolidated statements
of operations are as follows:
-----------------------------------------------------
Fiscal years ended August 26, 1995 August 27, 1994 August 28, 1993
- --------------------------------------------------------------------------------
Sales:
ACS $ 11,064,550 $ 2,390,082 $ 1,480,245
FSI and other
subsidiaries 179,338,814 94,047,571 76,952,039
- --------------------------------------------------------------------------------
$190,403,364 $96,437,653 $78,432,284
================================================================================
Net income (loss):
ACS $ 875,734 $ (869,617) $ (231,281)
FSI and other
subsidiaries 18,409,952 6,515,751 3,189,236
- --------------------------------------------------------------------------------
$ 19,285,686 $ 5,646,134 $ 2,957,955
================================================================================
In connection with the merger, approximately $800,000 of merger costs and
expenses were incurred and have been charged to selling, general and
administrative expenses in fiscal 1995. The charge includes professional fees
and other direct transaction costs associated with the merger.
- -------------------------------------------------
| NOTE 3 | Related Party Transactions and |
| | Other Lease Commitments |
- -------------------------------------------------
The Company is obligated under operating lease agreements for equipment and
manufacturing and office facilities. Certain of the lease agreements are with
partnerships of which a partner is an officer and director of the Company.
The lease for the Company's manufacturing facilities is a lease with such a
partnership (Lake Hazeltine Properties). The agreement provides for base monthly
rentals of approximately $58,333, plus payment of executory costs such as
property taxes, maintenance and insurance.
In addition, the agreement provides for an annual adjustment of the monthly
rental based upon the percentage increase in the Consumer Price Index (CPI) for
all urban customers; however, such increase shall not exceed 5 percent per year
and is adjusted every three years to the fair market rental.
Future minimum lease payments for all leases with non-cancellable lease terms
in excess of one year at August 26, 1995 are as follows:
-------------------------------------
Related
Fiscal years ending August Party Leases Other Leases
- -------------------------------------------------------------------------------
1996 $ 847,958 $1,002,789
1997 790,000 757,258
1998 700,000 575,965
1999 700,000 502,684
2000 700,000 485,354
Thereafter 116,667 36,752
- -------------------------------------------------------------------------------
Total minimum lease payments $3,854,625 $3,360,802
===============================================================================
Rental expense for all operating leases consisted of the following:
-----------------------------------------------------
Fiscal years ended August 26, 1995 August 27, 1994 August 28, 1993
- --------------------------------------------------------------------------------
Rent expense for
related party leases $1,320,300 $1,289,800 $1,261,300
Rent expense for other
operating leases 909,400 763,600 889,800
- --------------------------------------------------------------------------------
$2,229,700 $2,053,400 $2,151,100
================================================================================
On June 1, 1991, the Company received a Demand Note Payable with interest at
approximately 0.75 percent 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. As of August 26, 1995, the Company is a
guarantor of approximately $400,000 of Metron Semiconductors Asia Ltd.'s debt.
FSI INTERNATIONAL
F-9
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------
| NOTE 4 | Inventories |
- -------------------------------------------------
Inventories are summarized as follows:
-----------------------------------------
August 26, 1995 August 27, 1994
- --------------------------------------------------------------------------------
Finished products $ 7,048,392 $ 1,675,041
Work in process 6,448,693 5,965,322
Subassemblies 3,387,324 2,195,364
Raw materials and purchased parts 14,974,726 6,616,938
- --------------------------------------------------------------------------------
$31,859,135 $16,452,665
================================================================================
- -------------------------------------------------
| NOTE 5 | Property, Plant and Equipment |
- -------------------------------------------------
The components of property, plant and equipment are as follows:
-----------------------------------------
August 26, 1995 August 27, 1994
- --------------------------------------------------------------------------------
Leasehold improvements $ 3,387,698 $ 2,195,030
Office furniture and equipment 11,015,452 7,027,347
Manufacturing equipment 4,175,259 2,903,051
Lab equipment 5,205,462 4,955,367
Tooling 573,159 535,277
Vehicles 196,669 --
Capital-in-progress 10,170,725 --
- --------------------------------------------------------------------------------
34,724,424 17,616,072
Less accumulated depreciation
and amortization (15,371,905) (12,472,828)
- --------------------------------------------------------------------------------
$ 19,352,519 $ 5,143,244
================================================================================
The Company is in the process of completing a new manufacturing facility in
Chaska, Minnesota. Capital-in-progress costs relating to the building of
approximately $5,553,000 were incurred through August 26, 1995. During fiscal
1996, the Company anticipates approximately $5,950,000 will be incurred to
complete the facility. In addition, the Company has commitments for
approximately $1,400,000 for furniture and equipment related to this facility.
The majority of remaining capital-in-progress amounts relate to investments in
our information technology systems.
- -------------------------------------------------
| NOTE 6 | Investments in Affiliates |
- -------------------------------------------------
A summary of assets, liabilities and results of operations for Metron
Semiconductors Europa B.V., the Metron Asia Group and m.FSI Ltd., accounted
for on the equity method, is as follows (dollars in thousands):
Metron Semiconductors Europa B.V.:
-----------------------------------------------------
May 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Current assets $38,409 $31,637 $23,932
Noncurrent assets, net 5,038 2,952 3,029
Current liabilities 26,852 23,799 19,521
Noncurrent liabilities 81 539 762
Minority interest -- 1,020 621
Total stockholders' equity 16,514 9,231 6,057
- --------------------------------------------------------------------------------
-----------------------------------------------------
Fiscal years ended May 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Sales $101,968 $84,097 $63,226
Net income before minority
interest 4,465 3,947 2,430
Minority interest (115) (413) (266)
Net income 4,350 3,534 2,164
- --------------------------------------------------------------------------------
FSI INTERNATIONAL
F-10
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Metron Asia Group:
------------------------------------------------------
May 31, 1995 June 30, 1994 June 30, 1993
- --------------------------------------------------------------------------------
Current Assets $14,270 $7,360 $4,760
Noncurrent assets, net 628 197 290
Current liabilities 11,257 7,214 5,631
Noncurrent liabilities 87 -- --
Total stockholders'
(deficit) equity 3,554 343 (581)
- --------------------------------------------------------------------------------
Eleven
months ended Fiscal years ended
------------------------------------------------------
May 31, 1995 June 30, 1994 June 30, 1993
- --------------------------------------------------------------------------------
Sales $34,655 $17,964 $14,262
Net income 3,357 913 616
- --------------------------------------------------------------------------------
Metron Asia Group changed its fiscal year-end to May from June in fiscal 1995.
m.FSI Ltd:
------------------------------------------------------
June 30, 1995 1994 1993
- --------------------------------------------------------------------------------
Current Assets $6,430 $5,748 $4,494
Noncurrent assets, net 2,532 1,646 2,046
Current liabilities 4,989 4,613 5,669
Noncurrent liabilities 50 19 9
Total stockholders'
equity 3,923 2,762 862
- --------------------------------------------------------------------------------
------------------------------------------------------
Fiscal years ended June 30, 1995 1994 1993
- --------------------------------------------------------------------------------
Sales $9,641 $10,027 $4,487
Net income (loss) 581 1,737 (928)
- --------------------------------------------------------------------------------
The Company sold approximately $42,625,000, $24,699,000 and $19,603,000 of
its products to Metron Semiconductors Europa B.V., Metron Asia Group and m.FSI
Ltd. in fiscal 1995, 1994 and 1993, respectively. In addition, the Company paid
the Metron Asia Group a commission for direct sales to Asian customers of
$1,112,000, $459,000 and $432,000 in fiscal years 1995, 1994 and 1993,
respectively. At August 26, 1995 and August 27, 1994, trade accounts receivable
from affiliates was approximately $13,070,000 and $5,378,000, respectively.
On July 6, 1995, subsequent to the affiliates' fiscal year-ends, the
consolidation Metron Semiconductors Europa B.V., the Metron Asia Group and a
U.S. company named Transpacific Technology Corporation (TCC) was completed. The
Company owns 38.2 percent of this newly consolidated entity. As part of this
transaction, the Company is a guarantor of affiliate debt to former TTC
shareholders of approximately $489,000.
- ------------------------------------------
| NOTE 7 | Deposits and Other Assets |
- ------------------------------------------
Included in deposits and other assets are net investments in sales type leases
and equipment under operating leases. The components of net investment in sales
type leases are as follows:
--------------------------------------------
Fiscal years ended August 26, 1995 August 27, 1994
- --------------------------------------------------------------------------------
Minimum lease payments receivable $892,800 $1,488,000
Less:
Unearned revenue 50,872 135,016
- --------------------------------------------------------------------------------
Total net investments in sales
type leases $841,928 $1,352,984
================================================================================
Future minimum lease payments to be received are as follows:
--------------------------
Fiscal year Amount
- --------------------------------------------------------------------------------
1996 $595,200
1997 297,600
- --------------------------------------------------------------------------------
Total future minimum lease payments to be received $892,800
================================================================================
FSI INTERNATIONAL
F-11
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Components of investments in equipment under operating leases are as follows:
--------------------------------------------
Fiscal years ended August 26, 1995 August 27, 1994
- --------------------------------------------------------------------------------
Equipment under operating leases $1,997,312 $1,997,312
Less accumulated depreciation 713,325 142,665
- --------------------------------------------------------------------------------
Equipment under operating leases, net $1,283,987 $1,854,647
================================================================================
The following is a schedule of future minimum lease payments under operating
leases:
--------------------------
Fiscal year Amount
- --------------------------------------------------------------------------------
1996 $ 839,000
1997 839,000
1998 211,100
- --------------------------------------------------------------------------------
$1,889,100
================================================================================
- ------------------------------------------
| NOTE 8 | Accrued Expenses |
- ------------------------------------------
Accrued expenses are summarized as follows:
--------------------------------------------
Fiscal years ended August 26, 1995 August 27, 1994
- --------------------------------------------------------------------------------
Commissions $ 1,385,205 $1,057,738
Commissions due to affiliates 1,602,530 56,127
Income taxes 4,201,245 501,781
Salaries and bonuses 4,984,319 2,989,010
Pension and profit sharing 1,298,115 449,600
Estimated product warranty 5,030,947 2,742,671
Product sales incentive commission 744,927 64,334
Other 2,005,467 1,086,825
- --------------------------------------------------------------------------------
$21,252,755 $8,948,086
================================================================================
- ------------------------------------------
| NOTE 9 | Long-Term Debt |
- ------------------------------------------
Long-term debt is summarized as follows:
--------------------------------------------
Fiscal years ended August 26, 1995 August 27, 1994
- --------------------------------------------------------------------------------
Installment loans due in monthly
installments of $10,899 in
principal and interest at 10%
through February 1995--secured
by stock $ -- $ 20,009
Installment loans on capital leases;
interest rates ranging from 9% to
14.25% through August 1996--secured
by underlying equipment 33,228 162,053
Other 46,711 --
- --------------------------------------------------------------------------------
79,939 182,062
Less current maturities 33,228 148,834
- --------------------------------------------------------------------------------
$46,711 $ 33,228
================================================================================
Maturities of long-term debt in fiscal 1997 and 1998, are $43,503 and $3,208,
respectively.
- ------------------------------------------
| NOTE 10 | Technology Purchase |
- ------------------------------------------
During fiscal 1994, the Company purchased technology and related assets from a
third party. The total purchase price consisted of $90,000 cash and 35,000
shares of the Company's common stock with a fair value of approximately
$205,600. As of fiscal year-end, the 35,000 shares of common stock were reserved
for issuance on June 16, 1996.
FSI INTERNATIONAL
F-12
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- ----------------------------------
| NOTE 11 | Income Taxes |
- ----------------------------------
The provision for income taxes is summarized as follows:
---------------------------------------------------
Fiscal years ended 1995 1994 1993
- --------------------------------------------------------------------------------
Current:
Federal $ 9,561,000 $1,627,000 $ 1,416,000
Foreign 204,000 -- --
State 752,000 323,000 80,000
- --------------------------------------------------------------------------------
10,517,000 1,950,000 1,496,000
- --------------------------------------------------------------------------------
Deferred:
Federal (4,084,000) (696,000) (1,136,000)
State (507,000) -- --
- --------------------------------------------------------------------------------
(4,591,000) (696,000) (1,136,000)
- --------------------------------------------------------------------------------
$ 5,926,000 $1,254,000 $ 360,000
================================================================================
In fiscal 1995, 1994 and 1993, there was a tax benefit of $747,278, $365,410
and $156,711, respectively, credited to stockholders' equity associated with
the exercise of stock options.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at August 26,
1995 and August 27, 1994 are as follows:
---------------------------------------------------
Fiscal years ended August 26, 1995 August 27, 1994
- --------------------------------------------------------------------------------
Deferred tax assets:
Inventory $3,522,000 $ 2,187,800
Revenue recognition 1,034,000 179,000
Accounts receivable 466,000 185,000
Property, plant and equipment 365,000 294,000
Accruals 915,000 594,500
Tax credit carryovers -- 484,300
Net operating loss carryover -- 466,500
Other, net 357,000 (115,300)
- --------------------------------------------------------------------------------
Total gross deferred tax assets 6,659,000 4,275,800
Valuation allowance -- (1,996,800)
- --------------------------------------------------------------------------------
Net deferred tax assets 6,659,000 2,279,000
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Accruals 236,000 201,000
Undistributed subsidiary income -- 150,000
Other, net -- 96,000
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 236,000 447,000
- --------------------------------------------------------------------------------
Net deferred tax assets $6,423,000 $ 1,832,000
================================================================================
FSI INTERNATIONAL
F-13
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The effective tax rate differs from the statutory federal income tax rate as
follows:
----------------------------------------
Fiscal years ended 1995 1994 1993
- --------------------------------------------------------------------------------
Expected federal income tax expense 35.0% 34.0% 34.0%
State income taxes, net of federal
benefit 2.7 2.3 (7.2)
Research activities credit (1.0) (8.4) (13.2)
Valuation allowance (9.2) (0.8) (3.3)
Foreign sales corporation (2.6) (4.3) (10.3)
Undistributed earnings of subsidiary -- -- 5.1
Other items, net 2.3 1.8 12.5
- --------------------------------------------------------------------------------
27.2% 24.6% 17.6%
================================================================================
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 $6,423,000 as
of August 26, 1995 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 ASC in fiscal year 1995.
- ----------------------------------------------------
| NOTE 12 | Pensions and Profit Sharing Plans |
- ----------------------------------------------------
The Company has a defined contribution pension plan for employees, Total pension
cost for fiscal 1995, 1994 and 1993 was $857,826, $630,657 and $500,243,
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.
The Company also has an Employee 401(k) Retirement Plan, which allows for a
discretionary profit sharing contribution on a calendar year basis, covering
eligible employees. Contributions under the plan are determined by means of a
formula or at the discretion of the Board of Directors. Contributions accrued in
fiscal years 1995, 1994 and 1993 were $290,000, $200,000 and $150,000,
respectively.
- ----------------------------------------------------
| NOTE 13 | Stock Options and Warrants |
- ----------------------------------------------------
The Company's Directors Nonstatutory Stock Option Plan (the "Directors Plan")
allows for the granting of options to nonemployee directors. The option price
and terms of the options are determined by the Directors Plan, and the 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's Stock Option Plans (the "Option Plans") authorize grants of
options to purchase shares of the Company's common stock to officers and
employees. Under the Option Plans, options become exercisable as determined by
the Option Committee. The option prices are fixed by the Option Committee, and
may not be less than the fair market value of the stock at the time the option
is granted. Options expire 10 years after the date granted or on a prior date
as fixed by the Option Committee.
The Company adopted a 1994 Omnibus Stock Plan (the "Plan") during fiscal year
1994. The Plan, which was approved by the Company's shareholders, authorizes
stock based awards ("Awards") to purchase up to 1,000,000 shares of the
Company's common stock. Under the Plan, the Plan Committee has the power to
make Awards, to determine when and to whom Awards will be granted, the form of
each Award, the amount of each Award, and any other terms or conditions of
each Award consistent with the Plan.
FSI INTERNATIONAL
F-14
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The activity under all plans is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Number of Shares
-----------------------------------------
Available
Activity description For Grant Outstanding Price Range
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
August 29, 1992 269,998 1,642,826 $ .94- 3.03
Granted (257,558) 257,558 1.87- 6.21
Exercised -- (326,564) .94- 2.75
Cancelled 44,330 (44,330) .94- 2.75
- -----------------------------------------------------------------------------------
August 28, 1993 56,770 1,529,490 .94- 6.21
1994 Omnibus Stock
Option Plan 1,000,000 -- --
Granted (354,164) 354,164 6.00- 7.13
Exercised -- (216,864) .94- 3.03
Cancelled (195,828) (51,162) 1.75- 7.13
- -----------------------------------------------------------------------------------
August 27, 1994 506,778 1,615,628 .94- 7.13
Directors Non-
statutory Plan 100,000 -- --
Granted (433,848) 433,848 8.70-26.00
Exercised -- (519,381) .94- 7.13
Cancelled 10,694 (17,694) 2.75- 7.13
- -----------------------------------------------------------------------------------
August 26, 1995 183,624 1,512,401 .94-26.00
===================================================================================
Number of shares
exercisable at
August 26, 1995 833,038 $ .94-7.125
======= ============
</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.
In August 1995, the Board of Directors, subject to the approval of the
shareholders at the 1996 annual shareholders meeting, amended the 1994 Omnibus
Stock Plan to increase the aggregate number of shares that may be purchased
under the plan by an additional 500,000 shares.
- -------------------------------------------------------------------------------
/ \
/ Note 14 Employee Stock Purchase Plan \
/ \
- -------------------------------------------------------------------------------
The Company adopted an employee stock purchase plan (the "Plan") effective
January 1, 1989. The Plan enables employees to contribute up to 6 percent of
their wages toward the purchase of the Company's common stock at 85 percent of
the lower of market value at the beginning of the calendar year or the end of
the calendar year. At August 26, 1995, 322,278 shares were reserved for future
employee purchases of stock under the Plan. On December 31, 1994, 1993 and 1992,
139,582 shares were issued at $4.78 per share, 153,436 shares were issued at
$3.16 per share and 171,222 shares were issued at $1.70 per share, respectively,
under the Plan.
In August 1995, the Board of Directors, subject to the approval of the
shareholders at the 1996 annual shareholders meeting, amended the Plan to
increase the number of shares that may be purchased under the Plan by 200,000
shares.
- -------------------------------------------------------------------------------
/ \
/ Note 15 Additional Sales Information \
/ \
- --------------------------------------------------------------------------------
International sales for the fiscal years ended 1995, 1994 and 1993 were
approximately 37 percent, 33 percent and 34 percent, respectively, of total
sales. (Included in these percentages and the table below are sales to
affiliates. See note 6.) International sales by geographic area, consisting
principally of export sales, are summarized as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------
Fiscal years ended 1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Asia $42,363,000 $16,015,000 $15,021,000
Europe 27,092,000 14,854,000 11,457,000
Other 149,000 626,000 113,000
- ------------------------------------------------------------------------------------------------
$69,604,000 $31,495,000 $26,591,000
================================================================================================
</TABLE>
The following summarizes significant customers comprising 10 percent or more
of the Company's direct customer sales, which includes sales through affiliates
to end users:
FSI INTERNATIONAL
F-15
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
-----------------------------------------
1995 1994 1993
- --------------------------------------------------------------
<S> <C> <C> <C>
Customer A 16% -- 23%
Customer B -- 21% --
Customer C 12% -- --
Customer D 11% -- --
- --------------------------------------------------------------
"--" = less than 10%
</TABLE>
- --------------------------------------------------------------------------------
/ \
/ Note 16 Research and Development Agreements \
/ \
- --------------------------------------------------------------------------------
The Company has received research and development funding commitments from third
party organizations. Such funds are not anticipated to cover all costs of the
research and development projects involved. The funds received are recorded as
reductions to research and development expenses. The Company recognized
approximately $546,200, $1,342,100 and $1,202,700 of third party funding in
fiscal years 1995, 1994 and 1993, respectively.
- --------------------------------------------------------------------------------
/ \
/ Note 17 License Agreement \
/ \
- --------------------------------------------------------------------------------
A product is offered by the Company under a license agreement. Under the license
agreement, the Company has the exclusive right to sell and the non-exclusive
right to manufacture the product, except that the licensor may manufacture and
distribute the product for its own use. The Company also has the non-exclusive
right to manufacture and sell related modules. The licensor may modify the
Company's exclusive sales rights to a non-exclusive license if the Company fails
to use reasonable efforts in marketing the product. The license agreement
requires a royalty payment to the licensor on the equipment manufactured and
sold by the Company pursuant to the license. When certain aggregate sales
amounts are achieved under the license agreement, the Company has the option of
reducing the royalty amount or converting the license to a fully paid,
non-exclusive license. The license agreement continues until terminated. It may
be terminated by either party upon a breach by the other party, and the failure
to cure, of certain terms of the agreement, including payment of royalties when
due, refusal to sell products, and failure to meet quality standards.
- --------------------------------------------------------------------------------
/ \
/ Note 18 Supplementary Cash Flow Information \
/ \
- --------------------------------------------------------------------------------
The Company's non-cash investing and financing activities in fiscal 1993
included $117,195 for the purchase of equipment under capital leases. The
Company paid interest in fiscal 1995, 1994 and 1993 of $31,119, $442,688 and
$586,827, respectively. Income taxes paid in fiscal years 1995, 1994 and 1993
were $5,916,126, $1,751,000 and $595,691, respectively. In addition, the Company
realized, in fiscal years 1995, 1994 and 1993, a tax benefit from the exercise
of stock options in the amount of $747,278, $365,410 and $156,711,
respectively.
- --------------------------------------------------------------------------------
/ \
/ Note 19 Common Stock \
/ \
- --------------------------------------------------------------------------------
On June 1, 1995, the Board of Directors declared a two-for-one common stock
split to stockholders of record as of June 13, 1995. All share information and
per share information have been restated to reflect this stock split.
- --------------------------------------------------------------------------------
/ \
/ Note 20 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 26,
1995, the Company believes it is not involved in any material litigation.
FSI INTERNATIONAL
F-16
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED NOVEMBER 25, 1995 AND NOVEMBER 26, 1994
(Unaudited)
<TABLE>
<CAPTION>
November 25, November 26,
1995 1994
------------- -------------
<S> <C> <C>
Sales (including sales to affiliates of
$13,130,000 and $6,339,000,
respectively) $62,147,725 $30,184,769
Cost of sales 35,127,368 16,263,325
----------- -----------
Gross profit 27,020,357 13,921,444
Selling, general and administrative
expenses 11,313,801 6,329,025
Research and development expenses 7,532,908 4,873,260
----------- -----------
Operating income 8,173,648 2,719,159
Interest expense ( 9,115) (5,605)
Interest income 1,422,072 130,229
Other income (expense), net (16,652) (3,559)
----------- -----------
Income before income taxes 9,569,953 2,840,224
Income tax expense 3,420,065 790,195
----------- -----------
Income before minority interest
and equity in earnings of
affiliates 6,149,888 2,050,029
Minority interest (161,830) ---
Equity in earnings of affiliates 1,556,099 1,000,400
----------- -----------
Net income 7,544,157 3,050,429
=========== ===========
Net income per common share $0.35 $0.21
Weighted average common shares
and common share equivalents 21,564,917 14,417,099
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-17
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
NOVEMBER 25, 1995 AND AUGUST 26, 1995
ASSETS
<TABLE>
<CAPTION>
November 25, August 26,
1995 1995
(Unaudited) (Audited)
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 62,500,518 $ 97,143,176
Marketable securities 38,088,650 14,059,682
Trade accounts receivable, net of
allowance for doubtful accounts
of $1,375,000 and $1,225,000,
respectively 39,412,294 34,709,769
Trade accounts receivable from
affiliates 15,254,708 13,069,739
Inventories 32,285,603 31,859,135
Deferred income tax benefit 5,828,018 5,828,018
Other current assets 3,512,409 4,362,652
------------ ------------
Total current assets 196,882,200 201,032,171
------------ ------------
Property, plant and equipment, at cost 44,285,322 34,724,424
Less accumulated depreciation and
amortization (16,127,758) (15,371,905)
------------ ------------
28,157,564 19,352,519
------------ ------------
Investment in affiliates 10,369,469 8,813,370
Deposits and other assets 4,155,950 4,048,242
Deferred income tax benefit - long-term 594,887 595,085
------------ ------------
$240,160,070 $233,841,387
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-18
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
NOVEMBER 25, 1995 AND AUGUST 26, 1995
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
November 25, August 26,
1995 1995
(Unaudited) (Audited)
-------------- --------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 22,421 $ 33,228
Trade accounts payable 21,633,908 25,279,750
Accrued expenses 23,683,075 21,252,755
Customer deposits 2,506,870 2,614,874
Deferred revenue 5,548,674 5,722,030
------------ ------------
Total current liabilities 53,394,948 54,902,637
------------ ------------
Long-term debt, less current maturities 62,948 46,711
Other long-term liabilities 18,359 0
Minority interest 813,827 681,558
Stockholders' Equity:
Preferred stock, no par value; --- ---
10,000,000 shares
authorized, none issued and
outstanding
Common stock, no par value; 144,524,794 144,379,884
50,000,000 shares
authorized, issued and
outstanding; 20,315,936
and 20,260,612 shares at
November 25, 1995
and August 26, 1995, respectively
Retained earnings 40,116,059 32,571,902
Cumulative translation adjustment 1,229,135 1,258,695
------------ ------------
Total stockholders' equity 185,869,988 178,210,481
------------ ------------
$240,160,070 $233,841,387
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-19
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED NOVEMBER 25, 1995 AND NOVEMBER 26, 1994
(Unaudited)
<TABLE>
<CAPTION>
November 25, November 26,
1995 1994
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 7,544,157 $ 3,050,429
Adjustments to reconcile net income
to net cash
used in operating activities:
Minority interest 161,830 ---
Provision for deferred income
taxes 3,945 ---
Depreciation and amortization 956,071 603,707
Equity in earnings of affiliates (1,556,099) (1,000,400)
Stock issued for services --- 41,587
Changes in operating assets and
liabilities:
Trade accounts receivable (6,887,494) (5,427,155)
Inventories (426,468) (1,371,992)
Prepaid expenses and other
current assets 864,657 (1,204,381)
Trade accounts payable (3,645,842) 1,247,415
Accrued expenses 2,430,319 930,778
Customer deposits (108,003) (98,777)
Deferred revenue (173,356) 1,412,339
Other (59,120) ---
------------ -----------
Net cash used in operating activities (895,403) (1,816,450)
------------ -----------
INVESTING ACTIVITIES:
Acquisition of property, plant and
equipment (9,701,334) (1,713,044)
Purchase of marketable securities (34,634,401) ---
Sales of marketable securities 5,710,297 ---
Maturities of marketable securities 4,895,136 ---
Increase in deposits and other assets (167,293) (5,919)
------------ -----------
Net cash used in investing
activities (33,897,595) (1,718,963)
------------ -----------
FINANCING ACTIVITIES:
Additions (principal payments on)
long-term debt 16,237 (61,112)
Notes payable to bank (10,807) ---
Net proceeds from issuance of
common stock 144,910 175,367
------------ -----------
Net cash provided by financing
activities 150,340 114,255
------------ -----------
Decrease in cash and cash equivalents (34,642,658) (3,421,158)
Cash and cash equivalents at beginning
of period 97,143,176 10,724,729
------------ -----------
Cash and cash equivalents at end of
period 62,500,518 7,303,571
============ ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-20
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) RECLASSIFICATIONS
Certain 1995 amounts have been reclassified to conform to the 1996
presentation.
(2) CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying consolidated condensed financial statements have been
prepared by the Company without audit and reflect all adjustments
(consisting only of normal and recurring adjustments) which are, in the
opinion of management, necessary to present a fair statement of the results
for the interim periods presented. The statements have been prepared in
accordance with the regulations of the Securities and Exchange Commission
but omit certain information and footnote disclosures necessary to present
the statements in accordance with generally accepted accounting principles.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full fiscal
year. These consolidated condensed financial statements should be read in
conjunction with the Consolidated Financial Statements and footnotes
thereto included in the Company's Annual 10-K Report for the fiscal year
ended August 26, 1995 previously filed with the Securities and Exchange
Commission.
(3) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
November 25, August 26,
1995 1995
Unaudited (Audited)
------------ ------------
<S> <C> <C>
Finished products $ 4,820,516 $ 7,048,392
Work-in-process 6,844,662 6,448,693
Subassemblies 2,768,643 3,387,324
Raw materials and purchased parts 17,851,782 14,974,726
----------- -----------
$32,285,603 $31,859,135
=========== ===========
</TABLE>
(4) SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Quarters Ended
--------------------------
November 25, November 26,
1995 1994
------------ ------------
Schedule of interest and income
taxes paid:
<S> <C> <C>
Interest $ 11,815 $ 10,890
Income Taxes 1,807,774 394,340
</TABLE>
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Semiconductor Systems, Inc.
In our opinion, the accompanying balance sheets and the related
statements of operations, of shareholders' equity and of cash flows present
fairly, in all material respects, the financial position of Semiconductor
Systems, Inc. at December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
San Jose, California
February 23, 1996
F-22
<PAGE>
SEMICONDUCTOR SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1994 1995
------------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $1,069,000 $2,183,000
Short-term investments.................................. 1,764,000 601,000
Accounts receivable, net of allowance for
doubtful accounts of $9,000 and $23,000................. 4,655,000 6,461,000
Inventory............................................... 5,484,000 10,805,000
Prepaid expenses and other current assets............... 153,000 112,000
----------------- ----------------
Total current assets............................... 13,125,000 20,162,000
----------------- ----------------
Property and equipment, net.................................. 1,527,000 1,946,000
Other assets................................................. 243,000 139,000
----------------- ----------------
Total assets....................................... $14,895,000 $22,247,000
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit.......................................... $ 1,100,000 $ 5,700,000
Accounts payable........................................ 1,742,000 3,892,000
Accrued expenses and other liabilities.................. 2,904,000 2,573,000
Income taxes payable.................................... 142,000 126,000
Current portion of capital lease obligations............ 87,000 206,000
----------------- ----------------
Total current liabilities.......................... 5,975,000 12,497,000
----------------- ----------------
Long-term portion of capital lease obligations............... 172,000 383,000
----------------- ----------------
Shareholders' equity:
Common Stock, no par value; 10,000,000
shares authorized, 8,000,000 shares issued
and outstanding.................................... 8,000 8,000
Retained earnings....................................... 8,740,000 9,359,000
----------------- ----------------
Total shareholders' equity......................... 8,748,000 9,367,000
----------------- ----------------
Total liabilities and shareholders' equity......... $14,895,000 $22,247,000
================= ================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-23
<PAGE>
SEMICONDUCTOR SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1993 1994 1995
------------------- ----------------- -----------------
<S> <C> <C> <C>
Sales........................................ $25,673,000 $28,229,000 $31,392,000
Cost of sales................................ 12,665,000 16,123,000 19,055,000
------------------- ----------------- -----------------
Gross profit................................. 13,008,000 12,106,000 12,337,000
------------------- ----------------- -----------------
Operating expenses:
Selling, general and administrative..... 3,832,000 4,963,000 5,963,000
Research and development................ 2,632,000 3,013,000 3,592,000
------------------- ----------------- -----------------
Total operating expenses...... 6,464,000 7,976,000 9,555,000
------------------- ----------------- -----------------
Operating income............................. 6,544,000 4,130,000 2,782,000
Interest expense............................. (21,000) (53,000) (350,000)
Interest income.............................. 143,000 81,000 61,000
------------------- ----------------- -----------------
Income before income taxes................... 6,666,000 4,158,000 2,493,000
Provision for income taxes................... (176,000) (37,000) (37,000)
------------------- ----------------- -----------------
Net income................................... $ 6,490,000 $ 4,121,000 $ 2,456,000
=================== ================= =================
Net income per share......................... $0.80 $0.51 $0.30
=================== ================= =================
Weighted average common shares and
equivalents....................... 8,127,000 8,051,000 8,072,000
=================== ================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
SEMICONDUCTOR SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
-----------------------------
Retained
Shares Amount Earnings Totals
------------- ------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992.............. 8,200,000 $8,000 $ 7,817,000 $ 7,825,000
Net income................................ - - 6,490,000 6,490,000
Repurchase of stock....................... (200,000) - (60,000) (60,000)
Distributions to shareholders............. - - (7,671,000) (7,671,000)
------------- ------------- ---------------- ------------------
Balance at December 31, 1993.............. 8,000,000 8,000 6,576,000 6,584,000
Net income................................ - - 4,121,000 4,121,000
Distributions to shareholders............. - - (1,957,000) (1,957,000)
------------- ------------- ---------------- ------------------
Balance at December 31, 1994.............. 8,000,000 8,000 8,740,000 8,748,000
Net income................................ - - 2,456,000 2,456,000
Distributions to shareholders............. - - (1,837,000) (1,837,000)
------------- ------------- ---------------- ------------------
Balance at December 31, 1995.............. 8,000,000 $8,000 $ 9,359,000 $ 9,367,000
============= ============= ================ ==================
</TABLE>
The accompanying notes are an integeral part of these financial statements
F-25
<PAGE>
SEMICONDUCTOR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------
1993 1994 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $6,490,000 $4,121,000 $2,456,000
Adjustments:
Depreciation and amortization....................... 188,000 437,000 653,000
Changes in assets and liabilities:
Accounts receivable.............................. (371,000) (1,460,000) (1,806,000)
Inventory........................................ (1,971,000) (1,129,000) (5,321,000)
Prepaid expenses and other
current assets................................... (124,000) 77,000 41,000
Accounts payable................................. 912,000 (294,000) 2,150,000
Accrued expenses and other
liabilities...................................... 573,000 868,000 (331,000)
Income taxes payable............................. 43,000 41,000 (16,000)
Other assets..................................... (28,000) (162,000) 104,000
---------------- ----------------- -----------------
Net cash provided by (used in)
operating activities............................. 5,712,000 2,499,000 (2,070,000)
---------------- ----------------- -----------------
Cash flows provided by (used in) investing activities:
Capital expenditures................................... (762,000) (663,000) (616,000)
Sales of short-term investments........................ 850,000 673,000 1,163,000
Purchases of short-term investments.................... (2,278,000) (159,000) -
---------------- ----------------- -----------------
Net cash provided by (used in)
investing activities............................. (2,190,000) (149,000) 547,000
---------------- ----------------- -----------------
Cash flows provided by (used in) financing activities:
Distributions to shareholders.......................... (7,671,000) (1,957,000) (1,837,000)
Proceeds from borrowings............................... 500,000 600,000 4,600,000
Repurchase of common stock............................. (60,000) - -
Payments under capital lease
obligations............................................ - (45,000) (126,000)
---------------- ----------------- ----------------
Net cash provided by (used in)
financing activities............................. (7,231,000) (1,402,000) 2,637,000
---------------- ----------------- ----------------
Net increase (decrease) in cash and cash equivalents...... (3,709,000) 948,000 1,114,000
Cash and cash equivalents at beginning
of year................................................... 3,830,000 121,000 1,069,000
---------------- ----------------- ----------------
Cash and cash equivalents at end of year.................. $121,000 $1,069,000 $2,183,000
================ ================= ================
Supplemental cash flow information:
Interest paid during the year.......................... $18,000 $61,000 $288,000
Acquisition of equipment under capital.................
leases................................................. - $200,000 $456,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
SEMICONDUCTOR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION:
Semiconductor Systems, Inc. (the "Company") designs, manufactures, sells
and services high-quality, specialized photolithography/wafer track processing
equipment for sub-micron integrated circuit, flat panel display and thin-film
head fabrication. The Company was incorporated in the state of California in
November 1990. The financial statements of the Company are subject to estimates
made by management.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash equivalents and short-term investments
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Short-term investments consist primarily of tax-exempt municipal bonds.
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). In accordance with SFAS 115, 1993 financial statements
have not been restated to reflect the change in accounting and there was no
cumulative effect as a result of adopting SFAS 115.
SFAS 115 requires investment securities to be classified as either held to
maturity, trading, or available for sale. Management determines the appropriate
classification of its investments at the time of purchase. The Company's short-
term investments portfolio as of December 31, 1994 and 1995 are classified as
available for sale. Under SFAS 115, investments classified as available for sale
are recorded at fair value and any temporary difference between an investment's
cost and its fair value is recorded as a separate component of shareholders'
equity. Gross unrealized holding gains and losses and gross realized gains and
losses were not significant as of or for each of the three years in the period
ended December 31, 1995. The Company's short-term investments mature in 1996.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
on the first-in, first-out basis. The Company obtains certain components from
single, or a limited number of sources. A significant interruption in the
delivery of such items could have material adverse effect on the Company's
financial condition and results of operations.
F-27
<PAGE>
SEMICONDUCTOR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
accelerated methods based on the estimated useful life of the respective assets,
generally three to seven years. Leasehold improvements are amortized on the
straight-line method over the estimated useful lives of the improvements or the
lease term, whichever is shorter.
Revenue recognition
Revenue is recognized upon shipment provided there are no unusual
acceptance, return or other terms. The Company provides for the estimated costs
of fulfilling its installation and warranty obligations at the time the related
revenue is recorded. Service and maintenance contract revenues are initially
recorded as unearned service contract revenue, which is included in other
accrued expenses, and recognized as income on a straight-line basis over the
service period of the related contract.
Research and development costs
Research and development costs are charged to expense as incurred.
Recently issued accounting standards
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The adoption of SFAS 121 is not expected to have any effect on the
Company's financial statements.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." The Company's adoption of SFAS 123 in 1996 is not expected to
have a material effect on the Company's financial position or results of
operations, as the Company intends to continue to measure the compensation cost
of stock option and purchase plans using the intrinsic value-based method.
Income taxes
The Company qualifies for and has elected S corporation status for federal
and state income tax purposes which requires that the income and/or losses of
the Company be included proportionately in the income tax returns of the
shareholders. Accordingly, no provision for income taxes has been made, except
for the California income tax on S corporations.
Net income per share
Net income per share is computed using the weighted average number of
common and common equivalent shares ("weighted average shares") outstanding
during the period plus dilutive common stock equivalents consisting of stock
options outstanding (using the treasury stock method).
Significant customers
<TABLE>
<CAPTION>
Percentage of
Accounts
Receivable
Year Ended December 31, at December 31,
------------------------------------------------------- -----------------
1993 1994 1995 1995
--------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Customers comprising 10% or more of
the Company's net sales for the years
indicated:
A ................................ 77% 64% 32% 12%
B ................................ -- -- 13% 20%
C ................................ -- 10% 12% --
D ................................ -- -- 12% 27%
</TABLE>
F-28
<PAGE>
SEMICONDUCTOR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents,
short-term investments and trade accounts receivable. The Company's customers
are semiconductor manufacturers throughout the world. The Company performs
ongoing credit evaluations of its customers' financial condition and, generally
requires no collateral from its customers. The Company maintains a nominal
allowance for uncollectible accounts receivable based upon expected
collectibility of all accounts receivable and write-offs of accounts receivable
were insignificant in each of the three years in the period ended December 31,
1995.
NOTE 3 - BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1994 1995
---------------- ----------------
<S> <C> <C>
Inventory:
Raw materials...................................................... $1,715,000 $ 4,188,000
Work-in-process.................................................... 3,769,000 6,298,000
Finished goods..................................................... - 319,000
---------------- ----------------
$5,484,000 $10,805,000
================ ================
Property and equipment:
Machinery and equipment............................................ $1,426,000 $ 1,894,000
Furniture and fixtures............................................. 129,000 231,000
Leasehold improvements............................................. 227,000 545,000
Computer hardware and software..................................... 664,000 848,000
---------------- ----------------
2,446,000 3,518,000
Less: accumulated depreciation and amortization.................... (919,000) (1,572,000)
---------------- ----------------
$1,527,000 $ 1,946,000
================ ================
Property and equipment acquired under capital leases included above:
Machinery and equipment............................................ $ 112,000 $ 355,000
Furniture and fixtures............................................. 61,000 123,000
Computer hardware and software..................................... 157,000 308,000
---------------- ----------------
330,000 786,000
Less: accumulated amortization.................................... (123,000) (236,000)
---------------- ----------------
$ 207,000 $ 550,000
================ ================
Accrued expenses and other liabilities:
Accrued payroll and employee benefits.............................. $ 650,000 $ 646,000
Accrued commissions................................................ 556,000 801,000
Accrued warranty and installation.................................. 741,000 799,000
Customer deposits.................................................. 485,000 90,000
Other.............................................................. 472,000 237,000
---------------- ----------------
$2,904,000 $ 2,573,000
================ ================
</TABLE>
F-29
<PAGE>
SEMICONDUCTOR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 4 - LINE OF CREDIT:
The Company has a line of credit agreement (the "Agreement") with a bank
which expires May 1, 1996. The Agreement provides the Company with up to
$7,000,000 of available credit. Amounts outstanding under the credit agreement
bear interest at the bank's reference rate (8.5% at December 31, 1995) plus
0.25% and are secured by substantially all of the Company's assets. At December
31, 1995, $5,700,000 was outstanding under the Agreement. The Agreement requires
that the Company comply with certain financial covenants, maintenance of certain
financial ratios and restrictions on the distributions to shareholders as
defined in the Agreement. At December 31, 1995, the Company was in default of
certain of these covenants but has received a waiver of default.
NOTE 5 - EMPLOYEE BENEFIT PLANS:
401(k) plan
The Company has a 401(k) plan for all eligible employees. Participants may
make contributions to the plan in accordance with the provisions of the plan.
Company contributions vest based upon the participant's length of employment.
Forfeitures are allocated to the remaining participants. The Company did not
make any contributions to the plan during the years ended December 31, 1993,
1994 and 1995.
Profit sharing bonus plan
The Company has a profit sharing bonus plan for eligible nonshareholder
employees. Under the terms of the plan, the Company may distribute, at the
discretion of management, a portion of its profits not to exceed 15% of the
Company's annual income before income taxes. Profit sharing bonus expense was
approximately $419,000, $235,000 and $131,000 for the years ended December 31,
1993, 1994 and 1995, respectively.
NOTE 6 - SHAREHOLDERS' EQUITY:
All of the Company's shareholders are also employees of the Company. The
Company has the right to repurchase shares of the Company's outstanding common
stock upon the occurrence of certain events such as resignation or other
termination, death or disability of a shareholder/employee as more fully
described in the Employee Stock Purchase and Shareholder Agreement (the
"Agreement"). In the event that the Company does not elect to repurchase all or
part of a terminated employee's shares, the remaining shareholders can elect to
repurchase all or part of such shareholder's shares. The price at which the
Company may repurchase the shares is based on undistributed profit divided by
the total number of outstanding shares. Pursuant to the Agreement, the Company
repurchased 200,000 shares in 1993 for an aggregate purchase price of
approximately $60,000. In August 1995, a 20% shareholder of the Company
resigned. Upon resignation, the Company did not elect to purchase the
shareholder's shares. Pursuant to the Agreement, the remaining shareholders
elected to purchase the 1,600,000 shares for an aggregate purchase price of
approximately $1,800,000.
The Company's 1993 Stock Option Plan (the "Plan") provides for the issuance
of nontransferable incentive stock options to employees of the Company and
nonstatutory stock options and stock purchase rights to employees and
consultants of the Company. A total of 1,000,000 shares of common stock have
been reserved for issuance under the Plan.
Incentive stock options granted under the Plan will be at prices of not
less than 100% of the fair value of the common stock as determined by the Board
of Directors at the time of grant, except that stock options granted to
F-30
<PAGE>
SEMICONDUCTOR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
any employee who owns stock representing more than 10% of total voting power
must have an exercise price of not less than 110% of fair value. The term of the
options granted under the plan are to be no more than ten years; except for an
optionee who owns stock representing more than 10% of the voting power of all
classes of stock of the Company. For these options, the term is a maximum of
five years from the date of grant.
In October 1993, options to purchase 200,000 shares of the Company's common
stock were granted to employees at a per share exercise price of $1.25. Options
to purchase 129,166 shares under this grant are currently vested and the
remaining outstanding options become vested in October 1999, subject to certain
provisions which could accelerate the vesting. Options granted in 1994 and 1995
vest 25% per year commencing on the first anniversary of the grant date. None of
the options are exercisable, however, until they are vested and either (1) the
Company becomes a "C" corporation under current tax law, (2) the Company merges
with or into another corporation or sells substantially all of its assets, (3)
the Company undertakes an offering of shares of common stock registered on a
Form S-1 filed with the Securities and Exchange Commission, or (4) six years
after date of grant.
The following table summarizes activities under the Plan:
<TABLE>
<CAPTION>
Options
Available for Options Exercise
Grant Outstanding Price
------------------ ----------------- ------------------
<S> <C> <C> <C>
Balance at December 31, 1992.............. -- -- $ --
Shares authorized......................... 1,000,000 -- --
Options granted........................... (200,000) 200,000 1.25
------------------ ----------------- ------------------
Balance at December 31, 1993.............. 800,000 200,000 1.25
Options granted........................... (47,500) 47,500 1.50 - 1.75
------------------ ----------------- ------------------
Balance at December 31, 1994.............. 752,500 247,500 1.25 - 1.75
Options granted........................... (37,000) 37,000 2.00
Options canceled......................... 4,917 (4,917) 1.50 - 1.75
------------------ ----------------- ------------------
Balance at December 31, 1995.............. 720,417 279,583 $1.25 - 2.00
================== ================= ==================
</TABLE>
At December 31, 1995, 148,079 options were vested under the Plan.
NOTE 7 - LICENSE AGREEMENT:
On December 13, 1994, the Company entered into an agreement to license the
technology for one of its products to a Japanese corporation (the "Licensee").
The license agreement permits the Licensee to design and manufacture the product
for sale to a specified distributor for resale only in Japan or to the Company
for resale outside Japan. In exchange for the license, the Licensee will pay a
royalty to the Company on each system sold to any customer, including the
Company; no systems have been sold to date. The agreement expires on December
31, 2002.
The agreement requires the Company to provide technical support and system
engineering services to the Licensee. SSI shall pay 20% of such costs per year
during the term of the license agreement. However, the Licensee is required to
reimburse the Company for any costs in excess of $100,000 per year during the
term of the license agreement.
F-31
<PAGE>
SEMICONDUCTOR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 8 - COMMITMENTS:
The Company leases its primary facilities under a three-year operating
lease that expires on June 30, 1996 and certain equipment for terms of 3 to 5
years.
Minimum future lease payments under noncancelable leases as of December 31,
1995 were as follows:
<TABLE>
<CAPTION>
Years Capital Leases Operating Leases
- ----- ------------------------ ---------------------
<S> <C> <C>
1996............................................. $ 247,000 $ 383,000
1997............................................. 217,000 417,000
1998............................................. 114,000 417,000
1999............................................. 65,000 436,000
2000............................................. 45,000 454,000
2001 and thereafter.............................. -- 227,000
------------------------ --------------------
Total minimum lease payments..................... 688,000 $ 2,334,000
====================
Less amount representing interest................ (99,000)
Present value of minimum lease payments.......... 589,000
Less current portion............................. (206,000)
----------------------
Long-term lease obligation....................... $ 383,000
======================
</TABLE>
Rent expense totaled approximately $347,000, $361,000 and $379,0 00 for the
years ended December 31, 1993, 1994 and 1995, respectively.
NOTE 9 - SUBSEQUENT EVENTS:
On February 5, 1996, the Company entered into an Agreement and Plan of
Reorganization under which, subject to shareholder approval and certain other
conditions, FSI International, Inc. ("FSI") will acquire all of the outstanding
common stock and options of the Company for previously unissued shares of FSI's
only class of voting common stock in an exchange ratio of approximately .2174022
shares of FSI for each share of the Company.
In November 1995, the shareholders of the Company purchased 1,600,000
shares of the Company's common stock held by a 20% shareholder (the "Former
Shareholder") of the Company for an aggregate purchase price of approximately
$1,800,000. The purchase was made pursuant to an Employee Stock Purchase and
Shareholder Agreement between the Former Shareholder and the Company. See Note 6
above. In February 1996, this Former Shareholder asserted that the stock
purchase was invalid and he has hired counsel and threatened litigation. The
Company's management believes that there is no basis for the Former
Shareholder's contention, and the Company and the Company's shareholders intend
to contest the matter vigorously. Under the terms of the Agreement and Plan of
Reorganization, the cost of potential litigation with the Former Shareholder
would first be borne by the Company's shareholders, subject to the limitations
set forth in the Agreement and Plan of Reorganization.
F-32
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
AS OF NOVEMBER 25, 1995 AND FOR THE QUARTERS ENDED NOVEMBER 25, 1995
AND NOVEMBER 26, 1994 AND FOR THE FISCAL YEARS IN THE THREE-YEAR PERIOD
ENDED AUGUST 26, 1995
FSI International, Inc. (FSI) and Semiconductor Systems, Inc. (Semiconductor
Systems)
The following unaudited pro forma combined financial information presents the
pro forma effect of the proposed acquisition of Semiconductor Systems by FSI on
FSI's historical financial position and results of operations using the pooling-
of-interests method of accounting. Semiconductor Systems' fiscal year ends
December 31. In presenting the pooling-of-interests combination on a pro forma
basis, Semiconductor Systems' financial statements for the twelve months ended
August 26, 1995 were combined with FSI's financial statements for the same
period and Semiconductor Systems' financial statements for the years ended
December 31, 1994 and 1993 were combined with FSI's for the years ended August
27, 1994 and August 28, 1993, respectively. Semiconductor Systems' unaudited
results for the four months ended December 31, 1994 included sales of $3,759,000
and net income of $380,000. An adjustment would be made to stockholders' equity
in the combined historical financial statements to eliminate the effect of
including Semiconductor Systems' net income 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. The pro forma statements of operations for the
quarters ended November 25, 1995 and November 26, 1994 and the balance sheet as
of November 25, 1995 of FSI have been combined with Semiconductor Systems'
statements of operations for the quarters ended November 26, 1995 and November
27, 1994, respectively, and the balance sheet as of November 26, 1995. The pro
forma combined financial information should be read in conjunction with the
historical financial information of FSI and Semiconductor Systems appearing
elsewhere in the Prospectus. The pro forma combined financial information has
been prepared and included as required by the rules and regulations of the
Securities and Exchange Commission and does not purport to be indicative of the
results that actually would have been obtained if the acquisition had been
effected on the dates indicated or of the results which may be obtained in the
future.
F-33
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
AND SEMICONDUCTOR SYSTEMS, INC.
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Historical
------------------------------
FSI Semiconductor
International Systems, Pro Forma
Inc. Inc. Combined
Quarter Ended Quarter Ended Quarter Ended
November 25, November 26, Pro Forma November 25,
1995 1995 Adjustments 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $62,147,725 $8,196,000 $70,343,725
Cost of goods sold 35,127,368 5,416,000 40,543,368
- -----------------------------------------------------------------------------------------------------------------
Gross profit 27,020,357 2,780,000 29,800,357
Selling, general and
administrative expenses 11,313,801 1,440,000 12,753,801
Research and development expenses 7,532,908 999,000 8,531,908
- -----------------------------------------------------------------------------------------------------------------
Operating income 8,173,648 341,000 8,514,648
Interest expense (9,115) (114,000) (123,115)
Interest income 1,422,072 7,000 1,429,072
Other income (expense), net (16,652) (47,000) (63,652)
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 9,569,953 187,000 9,756,953
Income tax expense 3,420,065 6,000 $71,000(d) 3,497,065
- -----------------------------------------------------------------------------------------------------------------
Income before minority
interest and equity
earnings of affiliates 6,149,888 181,000 (71,000)(d) 6,259,888
Minority interest (161,830) 0 (161,830)
Equity in earnings of affiliates 1,556,099 0 1,556,099
- -----------------------------------------------------------------------------------------------------------------
Net income $7,544,157 $181,000 $(71,000)(d) $7,654,157
- -----------------------------------------------------------------------------------------------------------------
Net income per common share $.35 $.02 $.33 (a)
- -----------------------------------------------------------------------------------------------------------------
Weighted average common shares and (8,084,771)(a)
common share equivalents 21,564,917 8,084,771 1,757,635(a) 23,322,552
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
F-34
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
AND SEMICONDUCTOR SYSTEMS, INC.
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Historical
-------------------------------
FSI Semiconductor
International Systems, Pro Forma
Inc. Inc. Combined
Quarter Ended Quarter Ended Quarter Ended
November 26, November 27, Pro Forma November 26,
1994 1994 Adjustments 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $30,184,769 $7,206,000 $37,390,769
Cost of goods sold 16,263,325 4,359,000 20,622,325
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit 13,921,444 2,847,000 16,768,444
Selling, general and administrative expenses 6,329,025 1,439,000 7,768,025
Research and development expenses 4,873,260 823,000 5,696,260
- ------------------------------------------------------------------------------------------------------------------------------
Operating income 2,719,159 585,000 3,304,159
Interest expense (5,605) (5,000) (10,605)
Interest income 130,229 23,000 153,229
Other income (expense), net (3,559) 0 (3,559)
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,840,224 603,000 3,443,224
Income tax expense 790,195 3,000 $240,000(d) 1,033,195
- ------------------------------------------------------------------------------------------------------------------------------
Income before minority
interest and equity
in earnings of affiliates 2,050,029 600,000 (240,000)(d) 2,410,029
Minority interest 0 0 0
Equity in earnings of affiliates 1,000,400 0 1,000,400
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,050,429 $600,000 (240,000)(d) $ 3,410,429
- ------------------------------------------------------------------------------------------------------------------------------
Net income per common share $.21 $.07 $.21(a)
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares and (8,062,643)(a)
common share equivalents 14,417,099 8,062,643 1,752,825(a) 16,169,924
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-35
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
AND SEMICONDUCTOR SYSTEMS, INC.
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Historical
------------------------------
FSI Semiconductor
International Systems, Pro Forma
Inc. Inc. Combined
Year ended Year ended Year ended
August 26, August 27, Pro Forma August 26,
1995 1995 Adjustments 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $190,403,364 $28,057,000 $218,460,364
Cost of goods sold 112,002,351 16,651,000 128,653,351
- --------------------------------------------------------------------------------------------------------------------
Gross profit 78,401,013 11,406,000 89,807,013
Selling, general and administrative expenses 33,908,913 6,090,000 39,998,913
Research and development expenses 24,864,705 3,172,000 28,036,705
- --------------------------------------------------------------------------------------------------------------------
Operating income 19,627,395 2,144,000 21,771,395
Interest expense (27,745) (136,000) (163,745)
Interest income 2,067,619 80,000 2,147,619
Other income (expense), net 133,079 0 133,079
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 21,800,348 2,088,000 23,888,348
Income tax expense 5,926,000 16,000 $825,000(d) 6,767,000
- --------------------------------------------------------------------------------------------------------------------
Income before minority
interest and equity in
earnings of affiliates 15,874,348 2,072,000 (825,000)(d) 17,121,348
Minority interest (155,562) 0 (155,562)
Equity in earnings of affiliates 3,566,900 0 3,566,900
- --------------------------------------------------------------------------------------------------------------------
Net income $19,285,686 $2,072,000 $(825,000)(d) $20,532,686
- --------------------------------------------------------------------------------------------------------------------
Net income per common share $1.13 $.26 $1.09(a)
- --------------------------------------------------------------------------------------------------------------------
Weighted average common shares and (8,072,332)(a)
common share equivalents 17,070,549 8,072,332 1,754,931(a) 18,825,480
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
F-36
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
AND SEMICONDUCTOR SYSTEMS, INC.
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Historical
-------------------------------
FSI Semiconductor
International Systems, Pro Forma
Inc. Inc. Combined
Year ended Year ended Year ended
August 27, December 31, Pro Forma August 27,
1994 1994 Adjustments 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $96,437,653 $28,229,000 $124,666,653
Cost of goods sold 55,788,375 16,123,000 71,911,375
- ------------------------------------------------------------------------------------------------------------------
Gross profit 40,649,278 12,106,000 52,755,278
Selling, general and administrative expenses 19,552,376 4,963,000 24,515,376
Research and development expenses 15,742,894 3,013,000 18,755,894
- ------------------------------------------------------------------------------------------------------------------
Operating income 5,354,008 4,130,000 9,484,008
Interest expense (417,521) (53,000) (470,521)
Interest income 318,211 81,000 399,211
Other income (expense), net (154,314) 0 (154,314)
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,100,384 4,158,000 9,258,384
Income tax expense 1,254,000 37,000 $1,472,000(d) 2,763,000
- ------------------------------------------------------------------------------------------------------------------
Income before minority
interest and equity in
earnings of affiliates 3,846,384 4,121,000 (1,472,000)(d) 6,495,384
Minority interest 0 0 0
Equity in earnings of affiliates 1,799,750 0 1,799,750
- ------------------------------------------------------------------------------------------------------------------
Net income $ 5,646,134 $ 4,121,000 $(1,472,000)(d) $8,295,134
- ------------------------------------------------------------------------------------------------------------------
Net income per common share $ .43 $.51 $.55(a)
- ------------------------------------------------------------------------------------------------------------------
Weighted average common shares and (8,050,848)(a)
common share equivalents 13,222,408 8,050,848 1,750,260(a) 14,972,668
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
F-37
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
AND SEMICONDUCTOR SYSTEMS, INC.
UNAUDITED PRO FORMA
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Historical
-------------------------------
FSI Semiconductor
International Systems, Pro Forma
Inc. Inc. Combined
Year ended Year ended Year ended
August 28, December 31, Pro Forma August 28,
1993 1993 Adjustments 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $78,432,284 $25,673,000 $104,105,284
Cost of goods sold 49,464,226 12,665,000 62,129,226
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 28,968,058 13,008,000 41,976,058
Selling, general and administrative expenses 14,496,165 3,832,000 18,328,165
Research and development expenses 11,760,306 2,632,000 14,392,306
- ---------------------------------------------------------------------------------------------------------------------
Operating income 2,711,587 6,544,000 9,255,587
Interest expense (556,984) (21,000) (577,984)
Interest income 74,308 143,000 217,308
Other income (expense), net (188,217) 0 (188,217)
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,040,694 6,666,000 8,706,694
Income tax expense 360,000 176,000 $2,350,000(d) 2,886,000
- ---------------------------------------------------------------------------------------------------------------------
Income before minority
interest and equity in
earnings of affiliates 1,680,694 6,490,000 (2,350,000)(d) 5,820,694
Minority interest 0 0 0
Equity in earnings of affiliates 1,277,261 0 1,277,261
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 2,957,955 $ 6,490,000 $(2,350,000)(d) $7,097,955
- ---------------------------------------------------------------------------------------------------------------------
Net income per common share $.28 $.80 $.58(a)
- ---------------------------------------------------------------------------------------------------------------------
Weighted average common shares and (8,127,123)(a)
common share equivalents 10,557,646 8,127,123 1,766,843(a) 12,324,489
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
F-38
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
AND SEMICONDUCTOR SYSTEMS, INC.
UNAUDITED PRO FORMA
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
Historical
----------------------------------
FSI Semiconductor
International Systems, Pro Forma
Inc. Inc. Combined
November 25, November 26, Pro Forma November 25,
Assets 1995 1995 Adjustments 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $62,500,518 $ 427,000 $62,927,518
Marketable securities 38,088,650 0 38,088,650
Trade accounts receivable, net 39,412,294 5,780,000 45,192,294
Trade accounts receivable from
affiliates 15,254,708 0 15,254,708
Inventories 32,285,603 11,085,000 43,370,603
Deferred income tax benefit 5,828,018 0 $1,500,000(c) 7,328,018
Other current assets 3,512,409 486,000 3,998,409
- -------------------------------------------------------------------------------------------------------------------
Total current assets 196,882,200 17,778,000 1,500,000 216,160,200
- -------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 28,157,564 1,094,000 29,251,564
Investment in affiliates 10,369,469 0 10,369,469
Deposits and other assets 4,155,950 684,000 4,839,950
Deferred income tax benefit--long-term 594,887 0 594,887
----------- ----------- ---------- -----------
$240,160,070 $19,556,000 $1,500,000 $261,216,070
===================================================================================================================
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------------------------------------------
Current liabilities:
Line of credit $ 0 $5,200,000 $5,200,000
Current maturities of
long-term debt 22,421 176,000 198,421
Trade accounts payable 21,633,908 3,036,000 24,669,908
Accrued expenses 23,683,075 2,567,000 26,250,075
Customer deposits 2,506,870 0 2,506,870
Deferred revenue 5,548,674 0 5,548,674
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 53,394,948 10,979,000 64,373,948
- -------------------------------------------------------------------------------------------------------------------
Long-term debt, less
current maturities 62,948 339,000 401,948
Other long-term liabilities 18,359 0 18,359
Minority interest 813,827 0 813,827
Stockholders' equity:
Preferred stock 0 0 0 0
Common stock 144,524,794 8,000 $8,230,000(b) 154,262,794
1,500,000(c)
Retained earnings 40,116,059 8,230,000 (8,230,000(b) 40,116,059
Cumulative translation adjustment 1,229,135 0 1,229,135
- --------------------------------------------------------------------------------------------------------------------
Total stockholders'
equity $185,869,988 $8,238,000 $1,500,000 $195,607,988
- --------------------------------------------------------------------------------------------------------------------
$240,160,070 $19,556,000 $1,500,000 $261,216,070
====================================================================================================================
</TABLE>
F-39
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Unaudited Pro Forma Combined Financial Information
The following pro forma items are reflected in the accompanying unaudited pro
forma combined balance sheet and statements of operations.
(a) Pro forma net income per common and common equivalent share was
computed by dividing pro forma net income by the pro forma combined
weighted average number of common and common equivalent shares
outstanding. The pro forma adjustment for combined weighted average
number of common and common equivalent shares was based upon the
weighted average number of common and common equivalent shares of
Semiconductor Systems multiplied by the exchange ratio.
(b) Adjustment to transfer the undistributed earnings of Semiconductor
Systems to common stock from retained earnings. Semiconductor Systems
is an S Corporation and under a pooling of interests business
combination, the combined enterprise should report the undistributed
earnings of the S Corporation as additional capital.
(c) Adjustment to recognize the effect of recording net deferred tax
assets related to existing temporary differences of Semiconductor
Systems as if it had been a C Corporation versus an S Corporation. The
net deferred tax assets and corresponding tax benefit will be recorded
in the historical financial statements upon Semiconductor Systems'
election to change from an S Corporation to a C Corporation (closing
date of merger).
(d) Adjustment to recognize the effect of the income tax expense for
Semiconductor Systems as if it had been a C Corporation versus an S
Corporation.
In connection with the merger, approximately $800,000 of merger costs and
expenses may be incurred and would be charged to expense in the period the
merger is closed. The merger expenses will consist of legal, accounting and
investment banking fees. These expenses have not been included in the Pro Forma
Combined Financial Information.
F-40
<PAGE>
ANNEX I
-------
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
FSI INTERNATIONAL, INC.,
SPECTRE ACQUISITION CORP.,
AND
SEMICONDUCTOR SYSTEMS, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I THE MERGER................................................................... 1
1.1 The Merger..................................................................... 1
1.2 Effective Time................................................................. 1
1.3 Effect of the Merger........................................................... 2
1.4 Articles of Incorporation; Bylaws.............................................. 2
1.5 Directors and Officers......................................................... 2
1.6 Effect on Capital Stock........................................................ 2
(a) Conversion of Company Common Stock......................................... 2
(b) Cancellation of Parent-Owned Stock......................................... 3
(c) Stock Options.............................................................. 3
(d) Capital Stock of Merger Sub................................................ 3
(e) Adjustments to Exchange Ratio.............................................. 3
(f) Fractional Shares.......................................................... 3
1.7 Company Dissenting Shares...................................................... 3
1.8 Surrender of Certificates...................................................... 4
(a) Exchange Agent............................................................. 4
(b) Parent to Provide Common Stock............................................. 4
(c) Exchange Procedures........................................................ 4
(d) Distributions With Respect to Unexchanged Shares........................... 4
(e) Transfers of Ownership..................................................... 5
(f) No Liability............................................................... 5
1.9 No Further Ownership Rights in Company Common Stock............................ 5
1.10 Deposit of Parent Common Stock into Escrow..................................... 5
1.11 Lost, Stolen or Destroyed Certificates......................................... 5
1.12 Tax and Accounting Consequences................................................ 5
1.13 Taking of Necessary Action; Further Action..................................... 6
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................... 6
2.1 Organization of the Company.................................................... 6
2.2 Company Capital Structure...................................................... 6
2.3 Subsidiaries................................................................... 7
2.4 Authority...................................................................... 7
2.5 Company Financial Statements................................................... 7
2.6 Inventory...................................................................... 7
2.7 No Undisclosed Liabilities..................................................... 8
2.8 No Changes..................................................................... 8
2.9 Taxes.......................................................................... 9
(a) Definition of Taxes........................................................ 9
(b) Tax Returns and Audits..................................................... 10
2.10 Restrictions on Business Activities............................................ 11
2.11 Title to Properties; Absence of Liens and Encumbrances; Condition of Equipment. 11
2.12 Intellectual Property.......................................................... 12
2.13 Product Warranties and Claims.................................................. 13
2.14 Agreements, Contracts and Commitments.......................................... 13
2.15 Interested Party Transactions.................................................. 15
2.16 Governmental Authorization..................................................... 15
2.17 Litigation..................................................................... 15
2.18 Accounts Receivable............................................................ 15
2.19 Bank Accounts; Guaranties; Powers of Attorney.................................. 15
2.20 Customers...................................................................... 16
2.21 Suppliers...................................................................... 16
2.22 Minute Books................................................................... 16
2.23 Environmental Matters.......................................................... 16
(a) Hazardous Material......................................................... 16
(a) Hazardous Material............................................................. 16
(c) Hazardous Materials Activities................................................. 16
(d) Underground Storage Tanks...................................................... 17
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(e) Permits........................................................................ 17
(f) Environmental Liabilities...................................................... 17
2.24 Brokers' and Finders' Fees..................................................... 17
2.25 Labor Matters.................................................................. 17
2.26 Employee Benefit Plans......................................................... 18
2.27 Insurance...................................................................... 19
2.28 Compliance With Laws........................................................... 19
2.29 Third Party Consents........................................................... 19
2.30 Registration Statements; Proxy Statement/Prospectus............................ 19
2.31 Complete Copies of Materials................................................... 20
2.32 Pooling of Interests; Reorganization........................................... 20
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB.................... 20
3.1 Organization, Standing and Power............................................... 20
3.2 Capital Structure.............................................................. 20
3.3 Authority...................................................................... 21
3.4 SEC Reports and Financial Statements........................................... 21
3.5 No Material Adverse Change..................................................... 22
3.6 Litigation..................................................................... 22
3.7 Broker's and Finders' Fees..................................................... 22
3.8 Registration Statement; Proxy Statement/Prospectus............................. 22
3.9 Pooling of Interests; Reorganization........................................... 23
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME......................................... 23
4.1 Conduct of Business of the Company............................................. 23
4.2 No Solicitation................................................................ 25
ARTICLE V ADDITIONAL AGREEMENTS........................................................ 26
5.1 Registration Statement; Proxy Statement/Prospectus............................. 26
5.2 Meeting of the Company's Shareholders.......................................... 26
5.3 Access to Information.......................................................... 26
5.4 Confidentiality................................................................ 27
5.5 Expenses....................................................................... 27
5.6 Public Disclosure.............................................................. 27
5.7 Pooling Accounting............................................................. 27
5.8 Consents....................................................................... 27
5.9 FIRPTA......................................................................... 27
5.10 Legal Requirements............................................................. 28
5.11 Blue Sky Laws.................................................................. 28
5.12 Best Efforts and Further Assurances............................................ 28
5.13 Certain Benefit Plans.......................................................... 28
5.14 Tax-Free Reorganization........................................................ 28
5.15 Stock Options.................................................................. 28
5.16 [Intentionally Omitted]........................................................ 29
5.17 State Takeover Laws............................................................ 29
5.18 Affiliate Agreements........................................................... 29
5.19 Notification of Certain Matters................................................ 29
5.20 Antitrust Notification......................................................... 30
5.21 Comfort Letters................................................................ 30
5.22 Tax Distributions.............................................................. 30
ARTICLE VI CONDITIONS TO THE MERGER.................................................... 31
6.1 Conditions to Obligations of the Parties to Effect the Merger.................. 31
(a) Shareholder Approval....................................................... 31
(b) Registration Statement Effective........................................... 31
(c) No Injunctions or Restraints; Illegality................................... 31
(d) Employment, Non-Competition................................................ 31
(e) Approvals.................................................................. 31
6.2 Additional Conditions to Obligations of the Company............................ 31
(a) Representations, Warranties and Covenants.................................. 31
(b) Certificate of Parent...................................................... 32
(c) Legal Opinions............................................................. 32
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
(d) Tax Opinion................................................................ 32
(e) No Material Adverse Changes................................................ 32
6.3 Additional Conditions to the Obligations of Parent and Merger Sub.............. 32
(a) Representations, Warranties and Covenants.................................. 32
(b) Certificate of the Company................................................. 32
(c) Third Party Consents....................................................... 33
(d) Injunctions or Restraints on Conduct of Business........................... 33
(e) Legal Opinion.............................................................. 33
(f) Tax Opinion................................................................ 33
(g) No Material Adverse Changes................................................ 33
(h) Dissenters................................................................. 33
(i) Affiliate Agreements....................................................... 33
(j) Termination of Shareholder Agreements...................................... 33
(k) Accounting................................................................. 33
ARTICLE VII INDEMNIFICATION AND ESCROW OBLIGATIONS..................................... 34
7.1 Survival of Representations and Warranties..................................... 34
7.2 Agreement to Indemnify......................................................... 34
7.3 Expiration of Indemnification.................................................. 34
7.4 Escrow Fund.................................................................... 35
7.5 Closing........................................................................ 35
7.6 Protection of Escrow Fund...................................................... 36
7.7 Distributions; Voting.......................................................... 36
7.8 Claims Upon Escrow Fund........................................................ 36
7.9 Objections to Claims........................................................... 37
7.10 Resolution of Conflicts........................................................ 37
7.11 Distribution Upon Termination of Escrow Period................................. 38
7.12 Agent of the Securityholders; Power of Attorney................................ 38
7.13 Actions of the Securityholder Agent............................................ 39
7.14 Third-Party Claims............................................................. 40
7.15 Escrow Agent's Duties.......................................................... 41
7.16 No Joint Liability; Maximum Liability.......................................... 41
7.17 Remedies....................................................................... 41
7.18 Sale of Escrow Shares.......................................................... 41
7.19 Shareholder Agent Expenses; Access to Records.................................. 42
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER......................................... 42
8.1 Termination.................................................................... 42
8.2 Effect of Termination.......................................................... 43
8.3 Termination Fees and Expenses.................................................. 43
8.4 Amendment...................................................................... 44
8.5 Extension; Waiver.............................................................. 44
ARTICLE IX GENERAL PROVISIONS.......................................................... 44
9.1 Survival of Agreements at Effective Time....................................... 44
9.2 Notices........................................................................ 44
9.3 Interpretation................................................................. 45
9.4 Counterparts................................................................... 45
9.5 Entire Agreement............................................................... 45
9.6 Severability................................................................... 45
9.7 Other Remedies................................................................. 46
9.8 Knowledge Attribution.......................................................... 46
9.9 Specific Performance........................................................... 46
9.10 Governing Law.................................................................. 46
9.11 Rules of Construction.......................................................... 46
</TABLE>
EXHIBIT LIST
- ------------
Exhibit A - Merger Agreement
Exhibit B - Affiliate Agreement
Exhibit C - Form of Employment Agreement
iii
<PAGE>
Exhibit D - Opinion of Faegre & Benson Professional Limited Liability
Partnership
Exhibit E - Tax Opinion of Wilson, Sonsini, Goodrich & Rosati
Exhibit F - Opinion of Wilson, Sonsini, Goodrich & Rosati
Exhibit G - Tax Opinion of Faegre & Benson Professional Limited Liability
Partnership
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of February 5, 1996 by and among FSI International, Inc., a
Minnesota corporation ("Parent"), Spectre Acquisition Corp., a California
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and
Semiconductor Systems, Inc., a California corporation (the "Company").
RECITALS
A. The Board of Directors of each of the Company, Parent and Merger Sub
believe it is in the best interests of each company and their respective
shareholders that the Company and Merger Sub combine into a single company
through the statutory merger of Merger Sub with and into the Company (the
"Merger") and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, the outstanding shares of
Common Stock of the Company, no par value ("Company Common Stock"), shall be
converted into shares of Common Stock of Parent, no par value ("Parent Common
Stock"), at the rate determined herein.
C. The Company, Parent and Merger Sub desire to make certain representations
and warranties and other agreements in connection with the Merger.
D. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code").
E. In consideration of a mutual desire to effect the Merger and the mutual
benefit to be derived therefrom, Parent and the shareholders of the Company have
entered into a "Shareholders Agreement" executed and delivered simultaneously
herewith whereby the shareholders of the Company have, among other things,
agreed to and confirmed the indemnification obligations contained in Article VII
of this Agreement.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement, the Merger
Agreement attached hereto as Exhibit A (the "Merger Agreement") and the
applicable provisions of the California Corporations Code ("California Law"),
Merger Sub shall be merged with and into the Company, the separate corporate
existence of Merger Sub shall cease and the Company shall continue as the
surviving corporation. The Company as the surviving corporation after the
Merger is hereinafter sometimes referred to as the "Surviving Corporation."
1.2 Effective Time. On February 26, 1996 or as promptly thereafter as
practicable after the satisfaction or waiver of the conditions set forth in
Article VI, the parties hereto shall cause the Merger to be consummated by
filing the Merger Agreement with the Secretary of State of the State of
California, in
<PAGE>
accordance with the relevant provisions of California Law (the
time of the filing of the Merger Agreement with the Secretary of State of the
State of California being the "Effective Time"). The closing of the transaction
contemplated hereby (the "Closing") shall take place at the offices of Faegre &
Benson Professional Limited Liability Partnership, 2200 Norwest Center, 90 South
Seventh Street, Minneapolis, Minnesota, at 9:00 a.m. on the day of the Effective
Time or at such other time, date and location as the parties hereto agree (the
"Closing Date").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Merger Agreement and the applicable
provisions of California Law. Without limiting the generality of the foregoing,
and subject thereto, at the Effective Time all the property, rights, privileges,
powers and franchises of the Company and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
1.4 Articles of Incorporation; Bylaws.
(a) Unless otherwise determined by Parent prior to the Effective Time,
at the Effective Time the Articles of Incorporation of Merger Sub, as in effect
immediately prior to the Effective Time, shall be the Articles of Incorporation
of the Surviving Corporation until thereafter amended as provided by law and
such Articles of Incorporation; provided, however, that Article I of the
Articles of Incorporation of the Surviving Corporation shall be amended to read
as follows: "The name of the corporation is Semiconductor Systems, Inc."
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 Directors and Officers. The directors of Merger Sub shall be the
initial directors of the Surviving Corporation, until their respective
successors are duly elected or appointed and qualified. The officers of the
Company shall be Benjamin J. Sloan, President and Chief Executive Officer; Benno
G. Sand, Executive Vice President, Chief Financial Officer and Secretary;
Michael L. Parodi, Vice President and General Manager; Douglas K. Amis, Vice
President, Administration; and Gerald E. Masterson, Vice President, Finance, in
each case until their respective successors are duly elected or appointed and
qualified.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of Merger Sub, the Company or the holders of
any of the following securities:
(a) Conversion of Company Common Stock. Each share of Company Common
Stock issued and outstanding immediately prior to the Effective Time (other than
any shares of Company Common Stock to be canceled pursuant to Section 1.6(b) and
any Dissenting Shares (as defined and to the extent provided in Section 1.7(a))
will be canceled and extinguished and be converted automatically into the right
to receive that number of shares of Parent Common Stock equal to the quotient
determined by dividing 1,800,000 shares (the "Parent Shares") by the sum of: (i)
the number of shares of Company Common Stock outstanding immediately prior to
the Effective Time plus (ii) the number of shares of Company Common Stock
issuable upon the exercise or conversion of all stock options, rights or other
securities of the Company outstanding immediately prior to the Effective Time
(the "Exchange Ratio"); provided that the number of Parent Shares used for
purposes of calculating the Exchange Ratio pursuant to
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this Section 1.6(a) shall be subject to adjustment pursuant to Section 1.6(e)
and Section 5.5 of this Agreement.
(b) Cancellation of Parent-Owned Stock. Each share of Company Common
Stock owned by Merger Sub, Parent or any direct or indirect wholly owned
subsidiary of Parent or of the Company immediately prior to the Effective Time
shall be canceled and extinguished without any conversion thereof.
(c) Stock Options. At the Effective Time, all options to purchase
Company Common Stock then outstanding under the Company's 1993 Stock Option Plan
(the "Company Stock Plan") shall be converted into options to acquire shares of
Parent Common Stock in accordance with Section 5.15.
(d) Capital Stock of Merger Sub. Each share of the capital stock of
Merger Sub issued and outstanding immediately prior to the Effective Time shall
automatically be converted into and become one share of common stock of the
Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted
to reflect fully the effect of any stock split, reverse split, stock dividend
(including any dividend or distribution of securities convertible into Parent
Common Stock), reorganization, recapitalization or other like change with
respect to Parent Common Stock occurring after the date hereof and prior to the
Effective Time.
(f) Fractional Shares. No fraction of a share of Parent Common Stock
will be issued, but in lieu thereof each holder of shares of Company Common
Stock who would otherwise be entitled to a fraction of a share of Parent Common
Stock (after aggregating all fractional shares of Parent Common Stock to be
received by such holder) shall receive from Parent an amount of cash (rounded to
the nearest whole cent) equal to the product of such fraction multiplied by the
closing sale price of a share of Parent Common Stock on the date immediately
preceding the Closing Date or, if no sale of shares of Parent Common Stock shall
have occurred on that date, on the next preceding day on which a sale occurred
of shares of Parent Common Stock on the National Association of Securities
Dealers, Inc. National Market System (the "Closing Price").
1.7 Company Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, any
shares of Company Common Stock held by a holder who has exercised dissenters'
rights for such shares in accordance with California Law and who, as of the
Effective Time, has not effectively withdrawn or lost such dissenters' rights
("Dissenting Shares"), shall not be converted into or represent a right to
receive Parent Common Stock pursuant to Section 1.6, but the holder thereof
shall only be entitled to such rights as are granted by California Law.
(b) Notwithstanding the provisions of subsection (a), if any holder of
Dissenting Shares shall effectively withdraw or lose (through failure to perfect
or otherwise) his or her dissenters' rights, then, as of the later of the
Effective Time or the occurrence of such event, such holder's shares shall
automatically be converted into and represent only the right to receive Parent
Common Stock and payment for fractional shares as provided in Section 1.6,
without interest thereon, upon surrender of the certificate representing such
shares.
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(c) The Company shall give Parent (i) prompt notice of any written
demand received by the Company to require the Company to purchase shares of the
Company's Common Stock pursuant to the applicable provisions of California Law
and (ii) the opportunity to participate in all negotiations and proceedings with
respect to such demands. The Company shall not, except with the prior written
consent of Parent, voluntarily make any payment with respect to any such demands
or offer to settle or settle any such demands.
1.8 Surrender of Certificates.
(a) Exchange Agent. Harris Trust and Savings Bank shall act as exchange
agent (the "Exchange Agent") in the Merger.
(b) Parent to Provide Common Stock. Promptly after the Effective Time,
Parent shall make available to the Exchange Agent for exchange in accordance
with this Article I, through such reasonable procedures as Parent may adopt, the
shares of Parent Common Stock issuable pursuant to Section 1.6 in exchange for
outstanding shares of Company Common Stock.
(c) Exchange Procedures. Promptly after the Effective Time, Parent
shall cause to be mailed to each holder of record of a certificate or
certificates (the "Certificates") which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock whose shares were
converted into the right to receive shares of Parent Common Stock pursuant to
Section 1.6, (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as Parent may reasonably specify) and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Parent Common Stock. Upon
surrender of a Certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by Parent, together with such letter
of transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of Parent Common Stock and payment in lieu of fractional shares which
such holder has the right to receive pursuant to Section 1.6, and the
Certificate so surrendered shall forthwith be canceled. Until so surrendered,
each outstanding Certificate that, prior to the Effective Time, represented
shares of Company Common Stock (other than Dissenting Shares) will be deemed
from and after the Effective Time, for all corporate purposes, other than the
payment of dividends, to evidence the ownership of the number of whole shares of
Parent Common Stock into which such shares of Company Common Stock shall have
been so converted and the right to receive an amount in cash in lieu of the
issuance of any fractional shares in accordance with Section 1.6.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the date of this Agreement with
respect to Parent Common Stock with a record date after the Effective Time will
be paid to the holder of any unsurrendered Certificate with respect to the
shares of Parent Common Stock represented thereby until the holder of record of
such Certificate shall surrender such Certificate. Subject to applicable law,
following surrender of any such Certificate, there shall be paid to the record
holder of the certificates representing whole shares of Parent Common Stock
issued in exchange therefor, without interest, at the time of such surrender,
the amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Parent
Common Stock.
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(e) Transfers of Ownership. If any certificate for shares of Parent
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered be properly endorsed and
otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Parent or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
Certificate surrendered, or established to the satisfaction of Parent or any
agent designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
Section 1.8, none of the Exchange Agent, the Surviving Corporation or any party
hereto shall be liable to a holder of shares of Company Common Stock or Parent
Common Stock for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
1.9 No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms hereof (including any cash paid in
respect thereof) shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Common Stock, and there shall be no
further registration of transfers on the records of the Surviving Corporation of
shares of Company Common Stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Article I.
1.10 Deposit of Parent Common Stock into Escrow. On the Closing Date and
notwithstanding any of the provisions in this Section 1.10 or elsewhere in this
Agreement, and without any act of any shareholder of the Company, a portion of
the shares of the Parent Common Stock to be issued in exchange for the Company
Common Stock pursuant to Section 1.6(a) shall be deposited into an escrow to be
established pursuant to Article VII, and the remaining shares of Parent Common
Stock shall be available for issuance as provided in Section 1.8(c). The escrow
shall consist of two escrow accounts, (i) one consisting of an aggregate of
60,000 shares of Parent Common Stock and (ii) the other consisting of an
aggregate of 250,000 shares of Parent Common Stock.
1.11 Lost, Stolen or Destroyed Certificates. In the event any Certificates
evidencing shares of Company Common Stock shall have been lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed Certificates, upon the making of an affidavit of that fact by the
holder thereof, such shares of Parent Common Stock and cash for fractional
shares, if any, as may be required pursuant to Section 1.6; provided, however,
that Parent may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Certificates to
deliver a bond in such sum as it may reasonably direct as indemnity against any
claim that may be made against the Surviving Corporation, Parent or the Exchange
Agent with respect to the certificates alleged to have been lost, stolen or
destroyed.
1.12 Tax and Accounting Consequences. It is intended by the parties hereto
that the Merger shall (a) constitute a reorganization within the meaning of
Section 368 of the Code and (b) qualify for accounting treatment as a pooling of
interests.
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1.13 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Merger Sub, the officers and directors of the
Company and Merger Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action, so long as such action is consistent with this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as disclosed in a document referring specifically to the
representations and warranties in this Agreement that identifies by section
number the section to which such disclosure relates and is supplied by the
Company to Parent (the "Company Disclosure Schedules") and dated as of the date
hereof, the Company represents and warrants to Parent and Merger Sub as follows:
2.1 Organization of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. The Company has the corporate power to own its property and to
carry on its business as now being conducted and as proposed to be conducted by
the Company. The Company is duly qualified to do business and in good standing
as a foreign corporation in each jurisdiction in which the failure to be so
qualified would have a material adverse effect on the business, assets
(including intangible assets), financial condition or results of operations of
the Company. The Company has delivered a true and correct copy of its Articles
of Incorporation and Bylaws, each as amended to date, to counsel for Parent.
2.2 Company Capital Structure. As of the date hereof, the authorized
capital stock of the Company consists of 10,000,000 shares of Common Stock, no
par value, of which there are 8,000,000 shares issued and outstanding held by
the persons, with the addresses and in the amounts, set forth on Schedule
2.2(a). At the time of the Closing, Schedule 2.2(a) shall have been
appropriately adjusted to reflect option exercises and stock repurchases since
the date hereof. All outstanding shares of Company Common Stock are duly
authorized, validly issued, fully paid and non-assessable and not subject to
preemptive rights created by statute, the Articles of Incorporation or Bylaws of
the Company or any agreement to which the Company is a party or by which it is
bound. As of the date hereof, the Company has reserved 1,000,000 shares of
Common Stock for issuance to employees and consultants pursuant to the Company
Stock Plan, of which no shares have been exercised, and 279,583 shares are
subject to outstanding, unexercised options. Schedule 2.2(b) sets forth for
each outstanding option the name of the holder of such option, the address of
such holder, the number of shares subject to such option, the exercise price of
such option, the vesting schedule of such option, whether or not such option
qualifies as an incentive stock option and, if the exercisability of such option
will be accelerated in any way by the transactions contemplated by this
Agreement or for any other reason, an indication of the extent of such
acceleration. Such list also describes any repricing of options which has taken
place since the Company's incorporation. There are no other options, warrants,
calls, rights, commitments or agreements of any character to which the Company
is a party or by which it is bound obligating the Company to issue, deliver,
sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased
or redeemed, any shares of capital stock of the Company or obligating the
Company to grant, extend, accelerate the vesting of, change the price of, or
otherwise amend or enter into any such option, warrant, call, right, commitment
or agreement.
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2.3 Subsidiaries. The Company does not have and has never had any
subsidiaries or affiliated companies and does not otherwise own and has never
otherwise owned any shares of stock or any interest in, or control, directly or
indirectly, any other corporation, partnership, association, joint venture or
business entity.
2.4 Authority. The Company has all requisite corporate power and authority
to enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company, subject only to the approval of the
Merger by the Company's shareholders as contemplated by Section 5.2. This
Agreement has been duly executed and delivered by the Company and constitutes
the valid and binding obligation of the Company. The execution and delivery of
this Agreement by the Company does not, and the consummation of the transactions
contemplated hereby will not, conflict with, or result in any violation of, or
default under (with or without notice or lapse of time, or both), or give rise
to a right of termination, cancellation or acceleration of any obligation or
loss of any benefit under (i) any provision of the Articles of Incorporation, as
amended, or Bylaws of the Company or (ii) any mortgage, indenture, lease,
contract or other agreement or instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Company or its properties or assets. No consent, approval,
order or authorization of, or registration, declaration or filing with, any
court, administrative agency or commission or other governmental authority or
instrumentality ("Governmental Entity"), is required by or with respect to the
Company in connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby, except for (i) the filing
of the Merger Agreement with the Secretary of States of the States of California
and Minnesota, (ii) filings in connection, or in compliance, with the provisions
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), and (iii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state securities laws and the laws of any foreign country.
2.5 Company Financial Statements. Schedule 2.5 sets forth the Company's
audited financial statements for the fiscal years ended December 31, 1992, 1993
and 1994 and the Company's unaudited financial statements for the fiscal year
ended December 31, 1995 (collectively, the "Company Financial Statements"). The
Company Financial Statements are complete and correct in all material respects
and have been prepared in accordance with generally accepted accounting
principles applied on a basis consistent throughout the periods indicated and
consistent with each other (except that the unaudited financial statements for
the fiscal year ended December 31, 1995 do not contain the footnotes necessary
to be in accordance with generally accepted accounting principles). The Company
Financial Statements present fairly the financial condition and operating
results of the Company as of the dates and during the periods indicated therein.
The unaudited balance sheet of the Company as of December 31, 1995 is
hereinafter referred to as the "Company Balance Sheet."
2.6 Inventory. All inventories reflected on the Company Balance Sheet and
all inventories that have been acquired or produced since the date of the
Company Balance Sheet are stated in accordance with generally accepted
accounting principles at the lower of cost or market using the FIFO method. All
raw materials, finished goods, parts and work-in-progress inventories are of a
quality and quantity usable by the Company in the ordinary course of its
business, except for obsolete items, all of which have been written down on the
Company's books of account to net realizable value or have been provided for by
adequate reserves. All finished goods inventories reflected on the Company
Balance Sheet and all such inventories held on the date hereof and on the
Effective Date are or are reasonably expected to be saleable in the
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ordinary course of the Company's business, net of reserves. All inventories of
the Company as of the date hereof are located at the Company's headquarters in
Fremont, California.
2.7 No Undisclosed Liabilities. Except as set forth in Schedule 2.7, the
Company does not have any liabilities, either accrued or contingent (whether or
not required to be reflected in financial statements in accordance with
generally accepted accounting principles), and whether due or to become due,
which individually or in the aggregate, (i) have not been reflected in the
Company Balance Sheet, (ii) have not been specifically described in this
Agreement or (iii) are not normal or recurring liabilities incurred since
December 31, 1995 in the ordinary course of business consistent with past
practices; provided, however, that no representation or warranty is made under
this Section 2.7 with respect to any of those matters covered under Section
2.12.
2.8 No Changes.
(a) Except as set forth in Schedule 2.8(a), since the date of the
Company Balance Sheet there has not been, occurred or arisen any:
(i) destruction or loss of any material assets of the Company
(whether or not covered by insurance); or
(ii) the commencement or notice or threat of commencement of any
governmental proceeding against or investigation of the Company or its affairs
which could, upon ultimate resolution, have a material adverse effect upon the
assets, business, properties, prospects, results of operations or financial
condition of the Company.
(b) Except as set forth in Schedule 2.8(b), since the date of the
Company Balance Sheet through the date of this Agreement the Company has not:
(i) entered into any transaction except in the ordinary course of
business as conducted on the date of the Company Balance Sheet;
(ii) amended or changed the Articles of Incorporation or Bylaws of
the Company;
(iii) made capital expenditures exceeding $25,000 individually or
$100,000 in the aggregate;
(iv) changed its accounting methods or practices (including any
change in depreciation or amortization policies or rates);
(v) revaluated any of its assets;
(vi) declared, set aside, or paid a dividend or other distribution
with respect to the shares of the Company, or any direct or indirect redemption,
purchase or other acquisition by the Company of any of its shares of capital
stock;
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(vii) increased the salary or other compensation payable or to
become payable by the Company to any of its officers, directors or employees, or
the declaration, payment, or commitment or obligation of any kind for the
payment, by the Company, of a bonus or other additional salary or compensation
to any such person;
(viii) acquired, sold or transferred any asset of the Company other
than in the ordinary course of business and consistent with past practices;
(ix) made a loan to any person or entity, or guaranty by the Company
of any loan, other than advances to employees for travel and business expenses
in the ordinary course of business and consistent with past practices;
(x) amended or terminated any contract, agreement or license of the
type referred to in Section 2.14(a)-(p) to which the Company is a party;
(xi) waived or released any right or claim of the Company, including
any write-off or other compromise of any account receivable of the Company;
(xii) issued or sold any of its shares of capital stock or any other
of its securities except for issuance or sales as a result of exercises of stock
options granted under the Company Stock Plan;
(xiii) experienced any labor trouble or received a claim of or
committed a wrongful discharge or other unlawful labor practice or action;
(xiv) experienced the termination by a third party or received
notice from a third party of the termination of any contract, agreement or
license of the type referred to in Section 2.14(a)-(q) to which the Company is a
party;
(xv) experienced a loss of services of any Company personnel that is
material to the conduct of the business of the Company; or
(xvi) entered into any negotiations or otherwise agreed to do any of
the things described in the preceding clauses (i) through (xv) (other than
negotiations with Parent and its representatives regarding the transactions
contemplated by this Agreement).
2.9 Taxes.
(a) Definition of Taxes. For the purposes of this Agreement, a "Tax" or,
collectively, "Taxes," means any and all federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities, including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with respect
to such amounts and any obligations under any agreements or arrangements with
any other person with respect to such amounts and including any liability for
taxes of a predecessor entity.
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(b) Tax Returns and Audits. Except as set forth in Schedule 2.9:
(i) The Company has accurately prepared and timely filed all
required federal, state, local and foreign returns, estimates, information
statements and reports ("Returns") relating to any and all Taxes concerning or
attributable to the Company or its operations and such Returns are true and
correct and have been completed in accordance with applicable law.
(ii) The Company as of the Effective Time: (A) will have paid all
Taxes it is required to pay as of such time and (B) will have withheld with
respect to its employees, shareholders or others all federal and state income
taxes, FICA, FUTA and other Taxes required to be withheld.
(iii) There is no Tax deficiency outstanding, or assessed against
the Company, the Company has not received any written notice of a proposed
assessment of taxes, nor has the Company executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of any
Tax which is still in effect.
(iv) No audit or other examination of any Return of the Company is
presently in progress, nor has the Company been notified of any request for such
an audit or other examination.
(v) Except for those which have been accrued or reserved against on
the Company Balance Sheet and those incurred in the ordinary course of business
since December 31, 1995, the Company does not and will not in the future have
any liabilities for unpaid Taxes, whether asserted or unasserted, contingent or
otherwise, for or with respect to all periods prior to and including the Closing
Date.
(vi) The Company has made available to Parent or its legal counsel
for inspection copies of all federal and state income and all domestic state
sales and use Returns for Taxes for all periods since the date of the Company's
incorporation.
(vii) None of the Company's assets are treated as "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
(viii) There is no contract, agreement, plan or arrangement,
excluding the provisions of this Agreement, covering any employee or former
employee of the Company that, individually or collectively, could give rise to
the payment of any amount that would not be deductible pursuant to Section 280G
or 162 of the Code.
(ix) The Company has not filed any consent agreement under Section
341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any
disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the
Code) owned by the Company.
(x) The Company is not now, or has it ever been, a party to a tax
sharing or allocation agreement.
(xi) The Company is not, and has not been at any time, a "United
States real property holding corporation" within the meaning of Section
897(c)(2) of the Code.
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(xii) The Company has not granted any power of attorney with respect
to any matter relating to Taxes which is currently in force.
(xiii) The Company is not required to include in income any
adjustment pursuant to Section 481(a) of the Code by reason of a voluntary
change in accounting method initiated by the Company nor, to the knowledge of
the Company, has the IRS proposed any such adjustment or change in accounting
method.
(xiv) All transactions that could give rise to an understatement of
federal income tax within the meaning of Section 6662 of the Code have been
disclosed in accordance with Section 6662 of the Code; no indebtedness of the
Company is "corporate acquisition indebtedness" within the meaning of Section
279(b) of the Code.
(xv) The Company is, and at all times since inception has been,
qualified as a corporation for which a valid election to be taxed under the
provisions of Subchapter S ("Subchapter S"), Chapter 1, Subtitle A of the Code
has been filed and is in effect under Subchapter S. In addition, the Company is,
and since inception has been, qualified to be taxed as an S corporation in every
state in which it is obligated to file a Return and that recognizes elections to
be taxed as an S corporation.
2.10 Restrictions on Business Activities. There is no agreement, judgment,
injunction, order or decree binding upon the Company which has or could
reasonably be expected to have the effect of prohibiting or impairing any
business practice of the Company.
2.11 Title to Properties; Absence of Liens and Encumbrances; Condition of
Equipment.
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(a) Schedule 2.11(a) sets forth a true and complete list of all real
property owned or leased by the Company, and, in the case of leased real
property, the name of the lessor, the date of the lease and each amendment
thereto and the aggregate annual rental or other fee payable under any such
lease. All such leases are in good standing, valid and effective in accordance
with their respective terms, and there is not, under any such leases, any
existing material default or event of default (or event which with notice or
lapse of time, or both, would constitute a default and in respect of which the
Company has not taken adequate steps to prevent such default from occurring).
(b) Except as set forth in Schedule 2.11(b), the Company has good and
valid title to, or, in the case of leased properties and assets, valid leasehold
interests in, all of its tangible properties and assets, real, personal and
mixed, used in its business, free and clear of any Liens, except as reflected in
the Company Financial Statements.
(c) Schedule 2.11(c) lists all equipment owned, with either an original
purchase price or current book value of $25,000 or more, and leased by the
Company, reflecting the location of such items and whether they are owned or
leased. The equipment owned or leased by the Company, taken as a whole, is (i)
adequate for the conduct of the business of the Company consistent with its past
practice, (ii) suitable for the uses to which it is currently employed, (iii) in
good operating condition subject to normal wear and tear, (iv) reasonably
maintained, and (v) not unreasonably dangerous or in need of renewal or
replacement, except for renewal or replacement in the ordinary course of
business.
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2.12 Intellectual Property. The Company owns, or is licensed or otherwise
possesses legally enforceable rights to use all patents, trademarks, trade
names, service marks, copyrights, and any applications therefor, mask works,
schematics, technology, know-how, computer software programs or applications (in
both source code and object code form), and tangible or intangible proprietary
information or material that are used by the Company. Schedule 2.12(a) lists
all patents, registered trademarks and service marks, registered and
unregistered copyrights in computer software, trade names and any applications
therefor, which relate to or are a part of the Company's products or services
(the "Company Intellectual Property Rights"), and specifies the jurisdictions in
which each such Company Intellectual Property Right has been issued or
registered or in which an application for such issuance and registration has
been filed, including the respective registration or application numbers and the
names of all registered owners. Schedule 2.12(b) includes and specifically
identifies all third party patents, trademarks or copyrights (including
software) (the "Third Party Intellectual Property Rights") which to the
Company's knowledge are incorporated in, are, or form a part of, any Company
product. Schedule 2.12(b) lists (i) any requests the Company has received to
make any application or registration for patent, copyright, trademark or
servicemark protection of Company or Third Party Intellectual Property Rights,
including the identity of the requestor and the item requested to be so applied
for or registered, and the jurisdiction for which such request has been made;
(ii) all licenses, sublicenses and other agreements as to which the Company is a
party and pursuant to which any person is authorized to use any Company
Intellectual Property Right or any trade secret of the Company; and (iii) all
licenses, sublicenses and other agreements as to which the Company is a party
and pursuant to which the Company is authorized to use any Third Party
Intellectual Property Rights, or other trade secret of a third party in or as
any product, and includes the identity of all parties thereto, a description of
the nature and subject matter thereof, the applicable royalty and the term
thereof.
The Company is not, nor will it be as a result of the execution and delivery
of this Agreement or the performance of its obligations hereunder, in violation
of any license, sublicense or agreement described on Schedule 2.12(b). No
claims with respect to the Company Intellectual Property Rights, any trade
secret of the Company, or Third Party Intellectual Property Rights to the extent
arising out of any use, reproduction or distribution of such Third Party
Intellectual Rights by or through the Company, have been asserted or, to the
knowledge of the Company, are threatened by any person, nor does the Company
know of any grounds for any bona fide claims (i) to the effect that the
manufacture, sale, licensing or use of any product as now used, sold or licensed
or proposed for use, sale or license by the Company infringes on any copyright,
patent, trademark, service mark or trade secret; (ii) against the use by the
Company of any trademarks, trade names, trade secrets, copyrights, patents,
technology, know-how or computer software programs and applications used in the
Company's business as currently conducted or as proposed to be conducted by the
Company; (iii) challenging the ownership, validity or effectiveness of any of
the Company Intellectual Property Rights or other trade secret of the Company;
or (iv) challenging the Company's license or legally enforceable right to use of
the Third Party Intellectual Property Rights.
All registered trademarks, service marks and copyrights held by the Company
are valid and subsisting. To the Company's knowledge, there is no unauthorized
use, disclosure, infringement or misappropriation of any of the Company
Intellectual Property Rights, any trade secret of the Company, or any Third
Party Intellectual Property Right to the extent licensed by or through the
Company, by any third party, including any employee or former employee of the
Company. The Company (i) has not been sued or charged in writing as a defendant
in any claim, suit, action or proceeding which involves a claim of infringement
of any patents, trademarks, service marks, copyrights or violation of trade
secret or other proprietary right of any third party; (ii) has no knowledge of
any basis for any such charge or claim; and
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(iii) has no knowledge of any infringement liability with respect to, or
infringement or violation by, the Company of any patent, trademark, service
mark, copyright, trade secret or other proprietary right of another.
No Company Intellectual Property Right, trade secret material to the Company
or, to the Company's knowledge, Third Party Intellectual Property Right is
subject to any outstanding order, judgment, decree, stipulation or agreement
restricting in any manner the licensing thereof by the Company. The Company has
not entered into any agreement to indemnify any other person against any charge
of infringement of any Company Intellectual Property Right, any trade secret of
the Company, or any Third Party Intellectual Property Right.
2.13 Product Warranties and Claims. All products heretofore sold by the
Company during the two years preceding the date hereof and all services provided
by the Company during such period have been in conformity with all applicable
contractual commitments and all express and implied warranties, and the Company
does not have any liability for replacement or repair of such products or other
damages in connection therewith, subject only to the reserve for product
warranty claims set forth in the Company Balance Sheet and to ordinary course
customer servicing (consistent with industry practices). To the Company's
knowledge, the accrual for warranty related expenses as of December 31, 1995
adequately reflects, and at the Effective Date will adequately reflect, an
amount required for satisfaction of warranty claims due in respect of goods sold
or services provided by the Company prior to such date. Such provision has been
established in accordance with generally accepted accounting principles. Except
for the matters set forth in Schedule 2.13, the Company has not received any
complaint to the effect that (i) goods sold or services supplied by the Company
failed to meet the quality standards or warranty obligations applicable to the
agreements, contracts or purchase orders under which such products or services
were supplied or (ii) the Company failed to meet its obligation to service any
products sold or serviced by the Company.
2.14 Agreements, Contracts and Commitments. As of the date of this
Agreement, except for Employee Plans (as defined in Section 2.26), as
contemplated by this Agreement or as set forth on Schedule 2.14(a), the Company
does not have and is not a party to the following agreements (or group of
related agreements) (whether written or oral):
(a) any collective bargaining agreement;
(b) any agreements that contain any unpaid severance liabilities or
obligations;
(c) any bonus, deferred compensation, incentive compensation, pension,
profit-sharing or retirement plans, or any other employee benefit plans or
arrangements;
(d) any employment or consulting agreement, contract or commitment with
an employee or individual consultant or salesperson or consulting or sales
agreement, contract or commitment with a firm or other organization not
terminable by the Company on 30 days' notice without liability except to the
extent of applicable local law and/or general principles of wrongful termination
law may limit the Company's ability to terminate such employees;
(e) agreement or plan, including, without limitation, any stock option
plan, stock appreciation right plan or stock purchase plan, any of the benefits
of which will be increased, or the vested
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benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the value of any of the benefits
of which will be calculated on the basis of any of the transactions contemplated
by this Agreement;
(f) any fidelity or surety bond or completion bond;
(g) any lease of personal property having a value individually in excess
of $50,000;
(h) any agreement of indemnification or guaranty;
(i) any agreement, contract or commitment containing any covenant
limiting the freedom of the Company to engage in any line of business or compete
with any person;
(j) any agreement, contract or commitment relating to capital
expenditures and involving future obligations in excess of $50,000;
(k) any agreement, contract or commitment relating to the disposition or
acquisition of assets not in the ordinary course of business or any ownership
interest in any corporation, partnership, joint venture or other business
enterprise;
(l) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing of money
or extension of credit, including guaranties referred to in clause (h) hereof;
(m) any purchase order or contract for the purchase of raw materials or
acquisition of assets involving $100,000 or more;
(n) any construction contracts;
(o) any distribution, joint marketing or development agreement;
(p) any purchase order for the sale of Company products (other than for
spare parts) involving $100,000 or more (identified by invoice number, dollar
amount and scheduled shipment date); or
(q) any other agreement, contract or commitment which involves $50,000
or more and is not cancelable without penalty within thirty (30) days.
Schedule 2.14(a) contains a description of any of the above that constitute
oral agreements. Except for such breaches or alleged breaches noted in Schedule
2.14(b), the Company has not breached, or received any claim or threat that it
has breached, any of the terms or conditions of (i) any agreement, contract or
commitment set forth in any of the Schedules to this Agreement or (ii) any other
material agreement, contract or commitment in such a manner as would permit any
other party to cancel or terminate the same or would permit any other party to
seek damages from the Company. Each agreement, contract or commitment set forth
in any of the Schedules to this Agreement is in full force and effect and,
except as otherwise disclosed, is not subject to any default thereunder of which
the Company is aware by any party obligated to the Company pursuant thereto.
Except as set forth in Schedule 2.29, the Company has obtained, or will obtain
prior to the Effective Time, all necessary consents, waivers and approvals as
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are required in connection with the Merger under any of the Company's
agreements, contracts, licenses or leases.
2.15 Interested Party Transactions. Except as set forth on Schedule 2.15,
no officer, director or shareholder of the Company who owns at least 5% of the
outstanding Company Common Stock (nor any ancestor, sibling, descendant or
spouse of any of such persons, or any trust, partnership or corporation in which
any of such persons has or has had an interest), has or has had, directly or
indirectly, (i) an interest in any entity which furnished or sold, or furnishes
or sells, services or products that the Company furnishes or sells, or proposes
to furnish or sell, or (ii) any interest in any entity that purchases from or
sells or furnishes to, the Company, any goods or services or (iii) a beneficial
interest in any contract or agreement set forth in Schedule 2.14(a); provided,
that ownership of no more than one percent (1%) of the outstanding voting stock
of a publicly traded corporation shall not be deemed an "interest in any entity"
for purposes of this Section 2.15.
2.16 Governmental Authorization. Schedule 2.16 sets forth an accurate
list of each federal, state, county, local or foreign governmental consent,
license, permit, grant, or other authorization issued to the Company by a
Governmental Entity (i) pursuant to which the Company currently operates or
holds any interest in any of its properties or (ii) which is required for the
operation of its business or the holding of any such interest (herein
collectively called "Company Authorizations"), which Company Authorizations are
in full force and effect and constitute all Company Authorizations required to
permit the Company to operate or conduct its business or hold any interest in
its properties.
2.17 Litigation. Except as disclosed on Schedule 2.17, there is no
action, suit or legal, administrative, arbitration or other proceeding pending,
filed, initiated or threatened by or against the Company, its properties or any
of its officers or directors, nor, to the knowledge of the Company, is there any
basis therefor. To the best knowledge of the Company, there is no investigation
pending or threatened against the Company, its properties or any of its officers
or directors (nor is there any basis therefor) before any Governmental Entity.
No Governmental Entity has at any time challenged or questioned the legal right
of the Company to manufacture, offer or sell any of its products in the present
manner or style thereof.
2.18 Accounts Receivable. All accounts receivable of the Company arose in
the ordinary course of business at the aggregate amounts thereof, are
collectible except to the extent of reserves shown on the Company Balance Sheet
(and, for accounts arising after December 31, 1995, to an extent consistent with
past reserve practices) and are carried at values determined in accordance with
generally accepted accounting principles consistently applied on a reasonable
basis. None of the accounts receivable of the Company is subject to any claim
of offset, recoupment, setoff or counter-claim and, to the knowledge of the
Company, there are no facts or circumstances (whether asserted or unasserted)
that would give rise to any such claim. No accounts receivable are contingent
upon the performance by the Company of any obligation or contract. No person
has any Lien on any of such accounts receivable and no agreement for deduction
or discount has been made with respect to any of such receivables.
2.19 Bank Accounts; Guaranties; Powers of Attorney. Schedule 2.19
identifies (i) the name of each bank, financial or other institution in which
the Company has an account or safe deposit box or in which any assets of the
Company are deposited, including with the names of all persons authorized to
draw thereon or to have access thereto, (ii) all guaranties, endorsements or
indemnifications by the Company of any person, firm or corporation and (iii) the
names of all persons holding powers of attorney for the Company.
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2.20 Customers. Schedule 2.20 identifies each of the Company's customers
which accounted for at least five percent of total sales for each of the fiscal
years ended December 31, 1993, 1994 and 1995, and sets forth the total dollar
volume of goods and services purchased from the Company by such customers during
each period (each customer named on Schedule 2.20, a "Significant Customer").
The Company has not been notified, and has no knowledge, following the
consummation of the transactions contemplated by this Agreement, that any
customer that was a Significant Customer in 1995 would not do business with the
Company, would do significantly less business with the Company or would continue
to do business with the Company only under certain terms and conditions which
are materially different from those currently prevailing.
2.21 Suppliers. Schedule 2.21 identifies each of the Company's suppliers
which accounted for at least five percent of total goods and services purchased
by the Company for each of the fiscal years ended December 31, 1993, 1994 and
1995, and sets forth the total dollar volume of goods and services purchased by
the Company from such suppliers during each period (each supplier named on
Schedule 2.21, a "Significant Supplier"). The Company has not been notified,
and has no knowledge of any information that could reasonably lead one to
believe, following the consummation of the transactions contemplated by this
Agreement, that any Significant Supplier would not do business with the Company
on substantially the same terms and conditions, including credit, payment and
allocation terms, as it currently does business with the Company.
2.22 Minute Books. The minute books of the Company made available to
counsel for Parent contain complete and accurate minutes of all meetings or
actions by written consent of directors and shareholders of the Company since
the time of incorporation of the Company, and reflect all transactions referred
to in such minutes accurately.
2.23 Environmental Matters.
(a) Hazardous Material by Company. No amount of any substance that has
been designated by any Governmental Entity or by applicable state law to be
radioactive, toxic or hazardous, including, without limitation, PCBs, asbestos,
petroleum, urea-formaldehyde and all substances listed as hazardous substances
pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, or defined as a hazardous waste pursuant to
the United States Resource Conservation and Recovery Act of 1976, as amended,
and the regulations promulgated pursuant to said laws (a "Hazardous Material"),
is present, as a result of the actions of the Company, in, on or under any
property, including the land and the improvements, ground water and surface
water thereof, that the Company has at any time owned, operated, occupied or
leased in such form or quantities as to create any liability or obligation for
either the Company or Parent.
(b) Hazardous Material by Others. To the knowledge of the Company,
except as set forth on Schedule 2.23 no amount of any Hazardous Material is
present, as a result of the actions of any third party or otherwise, in, on or
under any property, including the land and the improvements, ground water and
surface water thereof, that the Company has at any time owned, operated,
occupied or leased in such form or quantities as to create any liability or
obligation for either the Company or Parent.
(c) Hazardous Materials Activities. At no time prior to the Closing has
the Company transported, stored, used, manufactured, disposed of, released or
exposed its employees or others to
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Hazardous Materials in violation of any applicable law, nor has the Company
disposed of, transported, sold, or manufactured any product containing a
Hazardous Material (collectively "Hazardous Materials Activities") in violation
of any rule, regulation, treaty or stature promulgated by any Governmental
Entity to prohibit, regulate or control Hazardous Materials or any Hazardous
Material Activity.
(d) Underground Storage Tanks. To the knowledge of the Company, except
as set forth on Schedule 2.23, there are not now, nor have there ever been in
the past, any underground storage tanks on or under any property that the
Company currently owns, operates, occupies or leases.
(e) Permits. Except as set forth on Schedule 2.23, the Company currently
holds all environmental approvals, permits, licenses, clearances and consents
(the "Environmental Permits") required to conduct the business of the Company
under any federal, state, local or other governmental statute, law, ordinance or
regulation regulating or dealing with the protection of human health or the
environment, and all such Environmental Permits are in full force and effect. A
list of all Environmental Permits is set forth on Schedule 2.23. True and
complete copies of all Environmental Permits have been delivered to Parent by
the Company.
(f) Environmental Liabilities. Except as set forth on Schedule 2.23, no
action, proceeding, revocation proceeding, amendment procedure, writ, injunction
or claim is pending or threatened concerning or relating to the Company, any
Environmental Permit or any Hazardous Materials Activity of the Company. The
Company is not aware of any fact or circumstance which could involve the Company
in any environmental litigation or impose upon the Company any environmental
liability.
2.24 Brokers' and Finders' Fees. Except as disclosed on Schedule 2.24, the
Company has not incurred, nor will it incur, directly or indirectly, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with this Agreement or any transaction contemplated
hereby.
2.25 Labor Matters. Schedule 2.25 lists all current officers and director
level employees of the Company (and their respective titles). The Company is in
compliance with all currently applicable laws and regulations respecting
employment, discrimination in employment, terms and conditions of employment,
wages, hours and occupational safety and health and employment practices, and is
not engaged in any unfair labor practice. The Company has not received any
notice from any Governmental Entity, and there has not been asserted before any
Governmental Entity, any claim, action or proceeding to which the Company is a
party or involving the Company, and, to the knowledge of the Company, there is
neither pending nor threatened any investigation or hearing concerning the
Company, arising out of or based upon any such laws, regulations or practices.
There are no pending claims against the Company under any workers compensation
plan or policy or for short term or long term disability. The Company has fully
complied with all applicable provisions of COBRA and has no obligations with
respect to any former employees or qualified beneficiaries thereunder. The
Company has not given to or received from any current employee of the Company
notice of termination of employment. There is no collective bargaining unit
representing any of the Company's employees. No petition has been filed and is
pending with the National Labor Relations Board by any labor organization or any
group of employees for an election or certification regarding the representation
of any group of employees by a labor organization, nor to the knowledge of the
Company is there at present any solicitation or campaign by any labor
organization or employee for the representation of the Company's employees by a
labor organization.
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2.26 Employee Benefit Plans.
(a) Schedule 2.26(a) lists all employee benefit plans (as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) and all bonus, stock option, stock purchase, incentive, deferred
compensation, supplemental retirement, severance and other similar employee
benefit plans, programs or arrangements, and any current or former employment or
executive compensation or severance agreements, written or otherwise, for the
benefit of, or relating to, any current or former employee of the Company or any
trade or business (whether or not incorporated) which is a member or which is
under common control with the Company (an "ERISA Affiliate") within the meaning
of Section 414 of the Code, or any subsidiary of the Company under which the
Company or an ERISA Affiliate has or could have any obligations or liability
(together, the "Employee Plans").
(b) Except as disclosed on Schedule 2.26(b) (i) none of the Employee
Plans promises or provides retiree medical or other retiree welfare benefits to
any person except as required by applicable law, including but not limited to
COBRA; (ii) all Employee Plans are in compliance with the requirements
prescribed by any and all applicable statutes (including ERISA and the Code),
orders, or governmental rules and regulations currently in effect with respect
thereto (including all applicable requirements for notification to participants
or beneficiaries or the Department of Labor, Internal Revenue Service (the
"IRS") or Secretary of the Treasury), and the Company has performed all
obligations required to be performed by it under, are not in default under or
violation of, and has no knowledge of any default or violation by any other
party to, any of the Employee Plans; (iii) none of the Employee Plans are
intended to qualify under Section 401(a) of the Code; and (iv) no Employee Plan
is or within the prior six (6) years has been subject to, and the Company has
not incurred, and does not expect to incur, any liability under, Title IV of
ERISA or Section 412 of the Code.
(c) None of the following now exists or has existed within the six-year
period ending on the date hereof with respect to any Employee Plan: (i) any act
or omission by the Company constituting a violation of Section 402, 403, 404 or
405 of ERISA; (ii) any act or omission by the Company which constitutes a
violation of Sections 406 and 407 of ERISA and is not exempted by Section 408 of
ERISA or which constitutes a violation of Section 4975(c) of the Code and is not
exempted by Section 4975(d) of the Code; (iii) any act or omission by the
Company constituting a violation of Section 503, 510 or 511 of ERISA; or (iv)
any act or omission by the Company which could give rise to liability under
Section 502 of ERISA.
(d) Each Employee Plan has been maintained in substantial compliance
with its terms, and all contributions, premiums or other payments due from the
Company to (or under) any such Employee Plan have been fully paid or are
adequately provided for on the Company Balance Sheet. All accruals thereon
(including, where appropriate, proportional accruals for partial periods) have
been made in accordance with generally accepted accounting principles
consistently applied on a reasonable basis. There has been no amendment, written
interpretation or announcement (whether or not written) by the Company with
respect to, or change in employee participation or coverage under, any Employee
Plan that would increase the expense of maintaining such plans or arrangements,
individually or in the aggregate, above the level of expense incurred with
respect thereto for the most recently-ended fiscal year.
(e) The Company has made available to Parent complete, accurate and
current copies of all Employee Plans and all amendments, documents,
correspondence and filings relating thereto, including
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but not limited to any statements, filings, reports or returns filed with any
Governmental Entity with respect to the Employee Plans.
2.27 Insurance. Schedule 2.27 sets forth an accurate list of all insurance
policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company. There
is no claim by the Company pending under any of such policies or bonds as to
which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds. All premiums due and payable under all such policies
and bonds have been paid and the Company is otherwise in full compliance with
the terms of such policies and bonds (or other policies and bonds providing
substantially similar insurance coverage). To the Company's knowledge, such
policies of insurance and bonds are of the type and in amounts customarily
carried by persons conducting businesses similar to those of the Company. The
Company has no knowledge of any threatened termination of, or premium increase
with respect to, any of such policies.
2.28 Compliance With Laws. The Company has complied in all material
respects with, is not in material violation of, and has not received any notices
of violation with respect to, any federal, state or local statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business.
2.29 Third Party Consents. Except as set forth on Schedule 2.29, no consent
or approval is needed from any third party in order to effect the Merger, this
Agreement or any of the transactions contemplated hereby.
2.30 Registration Statements; Proxy Statement/Prospectus. The information
concerning the Company supplied by the Company for inclusion in the Registration
Statement (as defined in Section 3.8) shall not at the time the Registration
Statement is declared effective by the Securities and Exchange Commission (the
"SEC") contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The information concerning the Company supplied by the Company
for inclusion in the proxy statement/prospectus to be sent to the shareholders
of the Company in connection with the meeting of the Company's shareholders to
consider the Merger (the "Company Shareholders' Meeting") (such proxy
statement/prospectus as amended or supplemented is referred to herein as the
"Proxy Statement,") shall not, on the date the Proxy Statement is first mailed
to the Company's shareholders, at the time of the Company Shareholders' Meeting
and at the Effective Time, contain any statement which, at such time and in
light of the circumstances under which it shall be made, is false or misleading
with respect to any material fact, or omit to state any material fact necessary
in order to make the statements made therein not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Company
Shareholders' Meeting which has become false or misleading. If at any time
prior to the Effective Time any event relating to the Company or any of its
affiliates, officers or directors should be discovered by the Company which
should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, the Company shall promptly inform Parent and
Merger Sub. Notwithstanding the foregoing, the Company makes no representation
or warranty with respect to any information concerning Parent or Merger Sub
supplied by Parent or Merger Sub which is contained in any of the foregoing
documents.
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2.31 Complete Copies of Materials. All documents received at the request of
Parent or its counsel in connection with their legal and accounting review of
the Company are true and complete copies thereof.
2.32 Pooling of Interests; Reorganization. To the knowledge of the Company
after due investigation, the Company has not (i) taken any action or failed to
take any action which action or failure would jeopardize treatment of the Merger
as a pooling of interests for accounting purposes or (ii) taken any action or
failed to take any action which action or failure would jeopardize the
qualification of the Merger as a reorganization within the meaning of Section
368(a) of the Code.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF PARENT AND MERGER SUB
Except as disclosed in a document referring specifically to the
representations and warranties in this Agreement that identifies by section
number the section to which such disclosure relates and is supplied by Parent to
the Company (the "Parent Disclosure Schedules") and dated as of the date hereof,
the Parent and Merger Sub represent and warrant to the Company as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Minnesota. Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of California. Each of Parent and
Merger Sub has the corporate power to own its properties and to carry on its
business as now being conducted and is duly qualified to do business and is in
good standing in each jurisdiction in which the failure to be so qualified would
have a material adverse effect on the business, assets (including intangible
assets), financial condition or results of operations of Parent and its
subsidiaries, taken as a whole. Parent has delivered a true and correct copy of
the Articles of Incorporation and Bylaws of each of Parent and Merger Sub, as
amended to date, to counsel for the Company.
3.2 Capital Structure.
(a) The authorized stock of Parent consists of 50,000,000 shares of
Common Stock, no par value, of which 20,376,872 shares were issued and
outstanding as of December 28, 1995, and 10,000,000 shares of undesignated
Preferred Stock, no par value, of which no shares are issued or outstanding as
of the date hereof. The authorized capital stock of Merger Sub consists of 1,000
shares of Common Stock, no par value, 1,000 shares of which, as of the date
hereof, are issued and outstanding and are held by Parent. All such shares have
been duly authorized, and all such issued and outstanding shares have been
validly issued, are fully paid and nonassessable. Parent has also reserved (i)
2,700,000 shares of Common Stock for issuance to employees and consultants
pursuant to Parent's employee stock option and stock purchase plans, and (ii)
200,000 shares of Common Stock for issuance to directors under Parent's
Directors' Nonstatutory Stock Option Plan and (iii) 35,000 shares of Parent
Common Stock that may be issued in connection with Parent's purchase of certain
technology in 1994. Parent has also reserved 100,000 shares of Parent Common
Stock for issuance to Aspect, Inc. upon exercise of a warrant to purchase
100,000 shares of Parent Common Stock held by such entity. There are no other
options, warrants, calls, rights, commitments or agreements of any character to
which Parent is a party or by which it is bound obligating Parent to issue,
deliver, sell, repurchase or redeem, or cause to be issued, delivered,
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sold, repurchased or redeemed, any shares of the capital stock of Parent or
obligating Parent to grant, extend or enter into any such option, warrant, call,
right, commitment or agreement.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger, when issued in accordance with this Agreement, the Merger Agreement, and
the applicable provisions of California Law will be duly authorized, validly
issued, fully paid, and nonassessable.
3.3 Authority. Parent and Merger Sub have all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Parent and Merger Sub. This
Agreement has been duly executed and delivered by Parent and Merger Sub and
constitutes the valid and binding obligations of Parent and Merger Sub. The
execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of a benefit under (i) any provision of the Articles of
Incorporation or Bylaws of Parent or Merger Sub or (ii) any mortgage, indenture,
lease, contract or other agreement or instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Parent or its properties or assets. No consent, approval, order
or authorization of, or registration, declaration or filing with, any
Governmental Entity is required by or with respect to Parent and Merger Sub in
connection with the execution and delivery of this Agreement by Parent and
Merger Sub or the consummation by Parent and Merger Sub of the transactions
contemplated hereby, except for (i) the filing of the Merger Agreement with the
Secretary of State of the State of California, (ii) filings in connection, or in
compliance, with the provisions of the HSR Act, (iii) the filing of the
Registration Statement (as defined in Section 3.8) and Proxy Statement with the
SEC, the filing of a Form 8-K and Form 10-C with the SEC after the Closing Date,
and any filings as may be required under applicable state securities laws and
the laws of any foreign country.
3.4 SEC Reports and Financial Statements. Each form, report, schedule,
registration statement and definitive proxy statement filed by Parent with the
SEC since August 27, 1994 (as such documents have since the time of their filing
been amended, the "Parent SEC Reports"), which include all the documents (other
than preliminary material) that Parent was required to file with the SEC since
such date, as of their respective dates, complied in all material respects with
the requirements of the Securities Act of 1933, as amended (the "Securities
Act") or the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
as the case may be, and the rules and regulations of the SEC thereunder
applicable to such Parent SEC Reports. True and correct copies of the Parent
SEC Reports (excluding the exhibits and schedules thereto) have been furnished
to the Company. None of the Parent SEC Reports at the time filed contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, except for such
statements, if any, as have been modified by subsequent filings prior to the
date hereof. The financial statements of Parent included in such reports comply
as to form in all material respects with applicable accounting requirements and
with the published rules and regulations of the SEC with respect thereto, have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto or, in the case of the unaudited statements, as
permitted by Form 10-Q of the SEC) and fairly present (subject in the case of
the unaudited statements, to normal, recurring audit adjustments) the
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consolidated financial position of Parent and its subsidiaries as at the date
thereof and the consolidated results of their operations and cash flows for the
period then ended.
3.5 No Material Adverse Change. Since the date of the balance sheet
included in the Parent's most recently filed report on Form 10-Q or Form 10-K,
Parent has conducted its business in the ordinary course and there has not
occurred: (a) any material adverse change in the financial condition,
liabilities, assets or business of Parent and its subsidiaries, taken as a
whole; (b) any amendments or changes in the Articles of Incorporation or Bylaws
of Parent; (c) any damage to, destruction or loss of any assets of the Parent
(whether or not covered by insurance) that materially and adversely affects the
financial condition or business of Parent and its subsidiaries, taken as a
whole; (d) any sale of a material amount of property of Parent, except in the
ordinary course of business or (e) any adverse change of a character that would
be required to be disclosed in the next Form 10-Q or Form 10-K required to be
filed by Parent.
3.6 Litigation. There is no action, suit, proceeding, claim, arbitration or
investigation pending, or as to which Parent has received any notice of
assertion nor, to Parent's knowledge, is there a reasonable basis to expect such
notice of assertion, against Parent which in any manner challenges or seeks to
prevent, enjoin, alter or materially delay any of the transactions contemplated
by this Agreement. Except as disclosed in the Parent SEC Reports, there is no
suit, action or proceeding pending, or, to the knowledge of Parent, threatened
against Parent, which is reasonably likely to have a material adverse effect on
Parent and its subsidiaries, taken as a whole.
3.7 Broker's and Finders' Fees. Parent has not incurred, and will not
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement,
the Merger or any transaction contemplated hereby.
3.8 Registration Statement; Proxy Statement/Prospectus. Subject to the
accuracy of the representations of the Company made in Section 2.30, the
registration statement (the "Registration Statement") on Form S-4 (or such other
or successor form as shall be appropriate) pursuant to which the shares of
Parent Common Stock to be issued in the Merger will be registered with the SEC
shall not, at the time the Registration Statement (including any amendments or
supplements thereto) is declared effective by the SEC, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements included therein, in light of the circumstances
under which they were made, not misleading. The information concerning Parent
and Merger Sub supplied by Parent for inclusion in the Proxy Statement shall
not, on the date the Proxy Statement is first mailed to the Company's
shareholders, at the time of the Company Shareholders' Meeting and at the
Effective Time, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with respect
to any material fact, or omit to state any material fact necessary in order to
make the statements therein not false or misleading; or omit to state any
material fact necessary to correct any statement in any earlier communication
with respect to the solicitation of proxies for the Company Shareholders'
Meeting which has become false or misleading. If at any time prior to the
Effective Time any event relating to Parent, Merger Sub or any of their
respective affiliates, officers or directors should be discovered by Parent or
Merger Sub which should be set forth in an amendment to the Registration
Statement or a supplement to the Proxy Statement, Parent or Merger Sub will
promptly inform the Company. Notwithstanding the foregoing, Parent and Merger
Sub make no representation or warranty with respect to any information
concerning the Company supplied by the Company which is contained in any of the
foregoing documents.
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3.9 Pooling of Interests; Reorganization. To the knowledge of Parent after
due investigation, Parent has not (i) taken any action or failed to take any
action which action or failure would jeopardize the treatment of the Merger as a
pooling of interests for accounting purposes or (ii) taken any action or failed
to take any action which action or failure would jeopardize the qualification of
the Merger as a reorganization within the meaning of Section 368(a) of the Code.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Company agrees (except to the extent that
Parent shall otherwise consent in writing), to carry on its business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay its debts and Taxes when due subject (i) to good
faith disputes over such debts or Taxes and (ii) in the case of Taxes, to
Parent's consent to the filing of Returns if applicable, to pay or perform other
obligations when due, and, to the extent consistent with such business, use all
reasonable efforts consistent with past practices and policies to preserve
intact the Company's present business organizations, keep available the services
of its present officers and key employees and preserve their relationships with
customers, suppliers, distributors, licensors, licensees, and others having
business dealings with the Company. The Company shall promptly notify Parent of
any event or occurrence not in the ordinary course of business of the Company,
and of any event which could have a material adverse effect on the business,
assets (including intangible assets), financial condition or results of
operations of the Company. Except as expressly contemplated by this Agreement
or as described in the Company Disclosure Schedules, the Company shall not
without the prior written consent of Parent:
(a) Accelerate, amend or change the period of exercisability of options
or restricted stock granted under the Company Stock Plan or authorize cash
payments in exchange for any options granted under any of such Plans;
(b) Enter into any commitment or transaction (i) which requires
performance over a period longer than six months in duration except transactions
in the ordinary course of business, or (ii) to purchase fixed assets for an
aggregate purchase price in excess of $150,000 through March 31, 1996, or in
excess of $75,000 per month thereafter;
(c) Grant any severance or termination pay to (i) any director, or
officer or (ii) to any other employee in excess of an amount equaling one
month's pay to such individual (provided, however, that severance or termination
pay shall not be granted by the Company without Parent's written approval to
more than five such employees), except payments made pursuant to standard
written agreements outstanding on the date hereof and as disclosed on Company
Schedule 2.14(a).
(d) Transfer, sell or license to any person or entity any rights to or
interest in the Company Intellectual Property Rights, except in compliance with
existing agreements (which agreements are listed in Schedule 2.14(a)) or in the
ordinary course of business in connection with product sales;
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(e) Enter into extend or enlarge the rights of the other party under any
agreements pursuant to which any other party is granted exclusive marketing or
other exclusive rights of any type or scope with respect to any products or
technology of the Company;
(f) Violate any of the contracts set forth in the Company Schedules or
amend or otherwise modify the terms of any such contracts other than customer
contracts or contracts for the purchase of supplies and services and the sale of
product and services entered into the ordinary course of business and which
amendment or modification would not have a material adverse effect on the
operations or business of the Company;
(g) Commence a lawsuit other than (i) for the routine collection of
bills, (ii) in such cases where the Company in good faith determines that
failure to commence suit could reasonably result in the material impairment of a
valuable aspect of the Company's business, provided that the Company consults
with Parent prior to the filing of such a suit, or (iii) for a breach of this
Agreement;
(h) Except as provided in Section 5.22, declare or pay any dividends on
or make any other distributions (whether in cash, stock or property) in respect
of any of its capital stock, or split, combine or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect of,
in lieu of or in substitution for shares of capital stock of the Company, or
repurchase or otherwise acquire, directly or indirectly, any shares of the
Company's Common Stock except from former employees, directors and consultants
in accordance with agreements providing for the repurchase of shares in
connection with any termination of service to the Company.
(i) Issue, deliver or sell or authorize or propose the issuance,
delivery or sale of, or purchase or propose the purchase of, any shares of its
capital stock or securities convertible into, or subscriptions, rights, warrants
or options to acquire, or other agreements or commitments of any character
obligating it to issue any such shares or other convertible securities, other
than grants of stock options to employees pursuant to the Company's 1993 Stock
Plan made in the ordinary course of business and after consultation with Parent
and the repurchase of shares of Company Common Stock from former employees,
directors and consultants in accordance with agreements providing for the
repurchase of shares in connection with any termination of service to the
Company and the issuance of shares of Company Common Stock pursuant to the
exercise of Company stock options therefor outstanding as of the date of this
Agreement;
(j) Cause or permit any amendments to its Articles of Incorporation or
Bylaws;
(k) Acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to the business of
the Company;
(l) Sell, lease, license or otherwise dispose of any of its properties
or assets, except in the ordinary course of business;
(m) Incur any indebtedness for borrowed money other than debt incurred
under the Company's existing line of credit and in amounts and on terms
consistent with past practice, or guarantee
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any such indebtedness or issue or sell any debt securities of the Company or
guarantee any debt securities of others;
(n) Adopt or amend any employee benefit or stock purchase or option
plan, or enter into any employment contract, pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
of its employees, except for annual wage increases for employees that do not, in
the aggregate, exceed five percent of 1995 base compensation for all such
employees and, individually, do not exceed five percent of 1995 base
compensation in the case of any officer;
(o) Revalue any of its assets, including without limitation writing down
the value of inventory or writing off notes or accounts receivable other than in
the ordinary course of business, or change any accounting methods or practices;
(p) Pay, discharge or satisfy in an amount in excess of $100,000 (in the
aggregate) any claim, liability or obligation (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge or
satisfaction in the ordinary course of business of liabilities reflected or
reserved against in the Company Financial Statements (or the notes thereto) or
listed on Schedule 4.1(p);
(q) Make or change any election in respect of Taxes, adopt or change any
accounting method in respect of Taxes, file any Return or any amendment to a
Return (other than in the ordinary course of business), enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(r) Take any action which would interfere with Parent's ability to
account for the Merger as a pooling of interests;
(s) Waive or release any right or claim of the Company, including any
write-off or other compromise of any account receivable of the Company, other
than in the ordinary course of business and in an amount not in excess of
$10,000 per amount or right or claim;
(t) Enter into any contract, agreement or license of the type referred
to in Section 2.14(a)-(p) other than customer contracts or contracts for the
purchase of supplies and services and the sale of products and services entered
into in the ordinary course of business; or
(u) Take, or agree to take, any of the actions described in Sections
4.1(a) through (t) above, or any action which would make any of the
representations or warranties of the Company contained in this Agreement
materially untrue or incorrect or prevent the Company from performing or cause
the Company not to perform its covenants hereunder.
4.2 No Solicitation. Prior to the Effective Time, the Company will not (nor
will the Company permit any of the Company's officers, directors, agents,
representatives or affiliates to), directly or indirectly, take any of the
following actions with any party other than Parent and its designees:
(a) solicit, encourage, initiate or, except actions which the Company's
Board of Directors determines in good faith, based upon the advice of outside
legal counsel, are required pursuant to its fiduciary duties under applicable
law, participate in any negotiations or discussions with respect to, any
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offer or proposal to acquire all or substantially all of the Company's business,
assets or properties or to purchase or acquire capital stock of the Company
whether by merger, purchase of assets, tender offer or otherwise (an
"Acquisition");
(b) except actions which the Company's Board of Directors determines in
good faith, based upon the advice of outside legal counsel, are required
pursuant to its fiduciary duties under applicable law, disclose any information
not customarily disclosed to any person other than its attorneys or financial
advisors concerning the Company's business and properties or afford to any
person or entity access to its properties, books or records; or
(c) except actions which the Company's Board of Directors determines in
good faith, based upon the advice of outside legal counsel, are required
pursuant to its fiduciary duties under applicable law, assist or cooperate with
any person to make any proposal to consummate a transaction of the type referred
to in clause (a) above.
In the event the Company shall receive any such written offer or proposal,
directly or indirectly, of the type referred to in clause (a) or (c) above, or
any request for disclosure or access pursuant to clause (b) above, the Company
shall immediately inform Parent in writing as to all material facts relating to
any such offer or proposal (including the identity of the party making such
offer or proposal and the specific terms thereof) and will cooperate with Parent
by furnishing any information it may reasonably request.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Registration Statement; Proxy Statement/Prospectus. As promptly as
practicable after the execution of this Agreement, the Company and Parent shall
prepare, and the Parent shall file with the SEC, a Registration Statement on
Form S-4 with respect to the Merger and the Parent Common Stock constituting the
merger consideration, which shall include necessary proxy materials relating to
the approval of the Merger and the transactions contemplated hereby by the
shareholders of the Company. The Registration Statement on Form S-4 shall
comply in form with applicable SEC requirements and Parent shall use all
reasonable efforts to cause the Registration Statement to become effective as
soon thereafter as practicable. The Proxy Statement shall include the
recommendation of the Board of Directors of the Company in favor of the Merger
which shall not be changed unless the Board of Directors of the Company, upon
written advice of its outside legal counsel following receipt of a written
proposal or offer for an Acquisition, shall determine that to include such
recommendation or not withdraw such recommendation if previously included would
constitute a breach of the Board's fiduciary duty under applicable law.
5.2 Meeting of the Company's Shareholders. The Company shall promptly after
the date hereof take all action necessary in accordance with California Law and
its Articles of Incorporation and Bylaws to convene the Company Shareholders'
Meeting as soon as practicable. The Company shall not postpone or adjourn
(other than for the absence of a quorum) the Company Shareholders' Meeting
without the consent of Parent. Subject to Section 5.1, the Company shall use
its best efforts to solicit from shareholders of the Company proxies in favor of
the Merger and shall take all other action necessary or advisable to secure the
vote or consent of shareholders required by California Law to effect the Merger.
5.3 Access to Information. The Company shall afford Parent and its
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the
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Effective Time to (a) all of the Company's properties, books, contracts,
commitments and records, and (b) all other information concerning the business,
properties and personnel of the Company as Parent may reasonably request. The
Company agrees to provide to Parent and its accountants, counsel and other
representatives copies of internal financial statements promptly upon request.
Parent shall provide the Company with copies of such information about Parent as
the Company may reasonably request and shall provide the Company with reasonable
access to its executive officers in this connection. No information or knowledge
obtained in any investigation pursuant to this Section 5.3 shall affect or be
deemed to modify any representation or warranty contained herein or the
conditions to the obligations of the parties to consummate the Merger.
5.4 Confidentiality. The parties acknowledge that Parent and Company have
previously executed a Confidentiality Agreement dated November 1, 1995 (the
"Confidentiality Agreement"), which shall continue in full force and effect in
accordance with its terms.
5.5 Expenses. Except as hereinafter provided, all fees and expenses
incurred in connection with the Merger and this Agreement shall be the
obligation of the respective party incurring such fees and expenses. Provided,
however, that if the Merger is consummated, and if the Company's costs and
expenses associated with legal, accounting, investment banking, and other
similar fees and expenses associated with the transactions contemplated by this
Agreement (collectively, the "Company Transaction Costs"), exceeds $500,000,
then the number of shares of Parent Common Stock used for purposes of
calculating the Exchange Ratio pursuant to Section 1.6(a) shall be decreased by
that number of shares equal to the quotient determined by dividing (x) the
amount by which the actual amount of the Company Transaction Costs exceed
$500,000 by (y) the Closing Price. Prior to the Closing, the Company shall
supply Parent with a certificate itemizing, in reasonable detail, the Company
Transaction Costs.
5.6 Public Disclosure. Unless otherwise required by law, prior to the
Effective Time no disclosure (whether or not in response to an inquiry)
regarding the terms of this Agreement and the transactions contemplated hereby
shall be made by any party hereto unless approved by Parent and the Company
prior to release, provided that, such approval shall not be unnecessarily
withheld, and subject, in the case of Parent, to Parent's obligation to comply
with applicable securities laws.
5.7 Pooling Accounting. During the period from the date of this Agreement
through the Effective Time, unless the other parties hereto shall otherwise
agree in writing, none of Parent, Merger Sub or the Company shall knowingly take
or fail to take any action which action or failure would jeopardize the
treatment of the Merger as a pooling of interests for accounting purposes.
5.8 Consents. Each of Parent and the Company shall promptly apply for or
otherwise seek, and use its best efforts to obtain, all consents and approvals
required to be obtained by it for the consummation of the Merger, and the
Company shall use its best efforts to obtain all necessary consents, waivers and
approvals under any of the Company's material agreements, contracts, licenses or
leases in connection with the Merger for the assignment thereof or otherwise.
All such necessary consents are set forth on Company Schedule 2.29.
5.9 FIRPTA. The Company shall deliver to the Internal Revenue Service a
notice that the Company Common Stock is not a "U.S. Real Property Interest" as
defined in and in accordance with the requirements of Treasury Regulation
Section 1.897-2(h)(2).
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5.10 Legal Requirements. Each of Parent, Merger Sub and the Company will
take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on them with respect to the consummation of
the transactions contemplated by this Agreement and will promptly cooperate with
and furnish information to any party hereto necessary in connection with any
such requirements imposed upon such other party in connection with the
consummation of the transactions contemplated by this Agreement and will take
all reasonable actions necessary to obtain (and will cooperate with the other
parties hereto in obtaining) any consent, approval order or authorization of, or
any registration, declaration or filing with, any Governmental Entity or other
person, required to be obtained or made in connection with the taking of any
action contemplated by this Agreement.
5.11 Blue Sky Laws. Parent shall take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the Parent Common Stock pursuant hereto. The
Company shall use its best efforts to assist Parent as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable in connection with the issuance of Parent Common Stock pursuant
hereto.
5.12 Best Efforts and Further Assurances. Each of the parties to this
Agreement shall each use its best efforts to effectuate the transactions
contemplated hereby and to fulfill and cause to be fulfilled the conditions to
closing under this Agreement. Each party hereto, at the reasonable request of
another party hereto, shall execute and deliver such other instruments and do
and perform such other acts and things as may be necessary or desirable for
effecting completely the consummation of this Agreement and the transactions
contemplated hereby.
5.13 Certain Benefit Plans. Subject to compliance with pooling of interests
accounting treatment of the Merger, Parent shall take such reasonable actions as
are necessary to allow eligible employees of the Company to participate in
Parent's Employee Stock Purchase Plan and Defined Contribution Pension Plan as
soon as practicable after the Effective Time. Subject to the eligibility and
other participation requirements and terms contained in Parent's benefit
programs and plans, Parent shall provide the Company's employees with full
credit for years of past service to the Company since incorporation on November
20, 1990.
5.14 Tax-Free Reorganization. During the period from the date of this
Agreement through the Effective Time, unless the other parties hereto shall
otherwise agree in writing, none of Parent, Merger Sub or the Company shall
knowingly take or fail to take any action which action or failure would
jeopardize qualification of the Merger as a reorganization within the meaning of
Section 368(a) of the Code.
5.15 Stock Options.
(a) Each option to purchase shares of Company Common Stock which is
outstanding at the Effective Time (a "Company Option") shall, by virtue of the
Merger and without any action on the part of the holder thereof, be substituted
by Parent with an option under Parent's existing 1994 Omnibus Stock Plan (a
"Parent Option"). The Parent Option shall entitle the holder to purchase from
Parent that number of whole shares of Parent Common Stock equal to the product
of the number of shares of Company Common Stock that were subject to such
Company Option immediately prior to the Effective Time multiplied by the
Exchange Ratio, rounded down to the nearest whole number of shares of Parent
Common Stock, and the per share exercise price for the shares of Parent Common
Stock issuable upon exercises of such substituted Parent Option will be equal to
the quotient determined by dividing the exercise price per
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share of the Company Common Stock at which such Company Option was exercisable
immediately prior to the Effective Time by the Exchange Ratio, rounded down to
the nearest whole cent.
(b) As promptly as practical after the Effective Time, Parent shall
issue to each holder of a Company Option a written instrument evidencing the
substitution by Parent of such Company Option.
(c) It is the intention of the parties that the Parent Options
substituted by Parent for Company Options in accordance with clause (a) above
qualify following the Effective Time as incentive stock options as defined in
Section 422 of the Code to the extent the Company Options qualified as incentive
stock options prior to the Effective Time; provided, however, that Parent is
relying solely upon the Company's representations as to whether or not the
Company Options qualify as incentive stock options and Parent shall not be
responsible to the optionee or any other person if such determination is alleged
or proves to be incorrect.
5.16 [Intentionally Omitted]
5.17 State Takeover Laws. If any state takeover law shall become applicable
to the transactions contemplated hereby, Parent and the Company and their
respective Boards of Directors shall use their reasonable best efforts to grant
such approvals and to take such other actions as are necessary so that the
transactions contemplated hereby may be consummated as promptly as practicable
on the terms contemplated hereby and shall otherwise act to eliminate the
effects of any such statute or regulation on the transactions contemplated
hereby.
5.18 Affiliate Agreements. Schedule 5.18 sets forth those persons who are,
in the Company's reasonable judgment, 'affiliates" of the Company within the
meaning of Rule 145 (each such person who is an "affiliate" of the Company
within the meaning of Rule 145 is referred to as an "Affiliate") promulgated
under the Securities Act ("Rule 145"). The Company shall provide Parent such
information and documents as Parent shall reasonably request for purposes of
reviewing such list. The Company shall use its best efforts to deliver or cause
to be delivered to Parent, concurrently with the execution of this Agreement
(and in each case prior to the Effective Time) from each of the Affiliates of
the Company, an executed Affiliate Agreement in the form attached hereto as
Exhibit B. Parent and Merger Sub shall be entitled to place appropriate legends
on the certificates evidencing any Parent Common Stock to be received by such
Affiliates pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for Parent Common Stock,
consistent with the terms of such Affiliate Agreements.
5.19 Notification of Certain Matters. Parent shall give prompt notice to
the Company, and the Company shall give prompt notice to Parent, of (i) the
occurrence, or non-occurrence, of any event the occurrence, or non-occurrence of
which would be likely to cause (A) any representation or warranty contained in
this Agreement to be untrue or inaccurate in any material respect or (B) any
covenant, condition or agreement contained in this Agreement not be complied
with or satisfied; and (ii) any failure of Parent or the Company, as the case
may be, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder; provided, however, that the delivery
of any notice pursuant to this Section 5.19 shall not limit or otherwise affect
the remedies available hereunder to the party receiving such notice.
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5.20 Antitrust Notification. Each of the Company and Parent shall use its
best efforts to file with the United States Federal Trace Commission and the
United States Department of Justice the notification and report form required
for the transactions contemplated hereby within five days of the date hereof and
shall promptly file any supplemental or additional information which may
reasonably be requested in connection therewith pursuant to the HSR Act and
shall comply in all material respects with the requirements of the HSR Act.
5.21 Comfort Letters.
(a) The Company shall use its reasonable best efforts to cause to be
delivered to Parent "comfort" letters of Price Waterhouse L.L.P., the Company's
independent public accountants, dated the date on which the Registration
Statement shall become effective and as of the date of the Shareholder Meeting,
and addressed to Parent and the Company, in form and substance reasonably
satisfactory to Parent and as is reasonably customary in scope and substance for
letters delivered by independent public accountants in connection with
transactions such as those contemplated by this Agreement.
(b) Parent shall use its reasonable best efforts to cause to be
delivered to the Company "comfort" letters of KPMG Peat Marwick LLP, Parent's
independent public accountants, dated the date on which the Registration
Statement shall become effective and as of the date of the Shareholder Meeting,
and addressed to the Company and Parent, in form and substance reasonably
satisfactory to Parent and as is reasonably customary in scope and substance for
letters delivered by independent public accountants in connection with
transactions such as those contemplated by this Agreement.
5.22 Tax Distributions. The Company shall, consistent with business
practices regarding the extent of income tax related distributions made to
shareholders with respect to their ownership of Company Common Stock in prior
taxable years, distribute, in cash on or before the Closing, an aggregate amount
equal to the sum of (i) 46% of the taxable income of the Company for its taxable
year ended December 31, 1995 (less any amounts previously distributed to the
shareholders prior to the Closing in respect of their 1995 income tax liability,
which the parties hereto agree is $1,084,800 (the "Distributed Amount") as of
the date hereof) plus (ii) 46% of the estimated taxable income of the Company
for the period commencing January 1, 1996 and ending on the day preceding the
Closing Date (the "1996 Short Period"); the parties, acting in good faith, shall
agree to such estimate at or prior to the Closing. In addition, on the day
immediately preceding the Closing Date, the Company shall make a distribution in
the form of a promissory note (in a form to be agreed to by the parties) (the
"Promissory Note") equal to 46% of the actual tax liability of the Company for
the 1996 Short Period less any previous distributions to cover taxes for such
period. Subsequent to the Closing, the taxable income of the Company for the
1996 Short Period shall be determined in accordance with the terms of the
Shareholders Agreement. If the actual taxable income for such 1996 Short Period
exceeds the estimated amount, the Company shall promptly pay any amounts owing
under the Promissory Note. If 46% of the actual taxable income for the
Company's taxable year ended December 31, 1995 is less than the Distributed
Amount, the Company shall, prior to the closing, collect from the shareholders
(in proportion to their ownership of Company Common Stock for such year) an
amount equal to such difference.
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ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of the Parties to Effect the Merger. The
respective obligations of each party hereto to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Shareholder Approval. This Agreement and the Merger shall have been
approved and adopted by the requisite vote of the shareholders of the Company.
(b) Registration Statement Effective. The SEC shall have declared the
Registration Statement effective in accordance with the provisions of the
Securities Act. No stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued and no proceeding for that
purpose, and no similar proceeding in respect of the Proxy Statement, shall have
been initiated or threatened by the SEC; and all requests for additional
information on the part of the SEC shall have been complied with to the
reasonable satisfaction of the parties hereto. All necessary state securities
authorizations shall have been received.
(c) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order shall be issued by any
court of competent jurisdiction; nor shall any proceeding brought by an
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, seeking any of the foregoing be pending;
nor shall there be any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the Merger, which makes the
consummation of the Merger illegal; nor shall there be any other legal or
regulatory restraint or prohibition preventing the consummation of the Merger.
(d) Employment, Non-Competition. Subject to compliance with pooling of
interests accounting treatment of the Merger, the Surviving Corporation and each
of Michael L. Parodi, Gerald E. Masterson, Douglas K. Amis, Qui Nguyen and
Michael R. Biche shall have entered into their respective employment agreements,
the form of which is attached hereto as Exhibit C.
(e) Approvals. (i) The waiting period (and any extension thereof)
applicable to the consummation of the Merger under the HSR shall have expired or
been terminated and (ii) Parent, the Company and Merger Sub shall have timely
obtained from each Governmental Entity all approvals, if any, necessary for
consummation of the Merger and the several transactions contemplated hereby.
6.2 Additional Conditions to Obligations of the Company. The obligations of
the Company to consummate and effect the Merger and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by the Company:
(a) Representations, Warranties and Covenants. Except as set forth in
the Parent Disclosure Schedules, the representations and warranties of Parent
and Merger Sub in this Agreement shall be true and correct in all material
respects on and as of the Effective Time as though such representations and
warranties were made on and as of such time, except that any representation or
warranty that by its terms was made with reference to a specific date was true
and correct in all material respects as of such
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date, and Parent and Merger Sub shall have performed and complied in all
material respects with all covenants, obligations and conditions of this
Agreement required to be performed and complied with by it as of the Effective
Time.
(b) Certificate of Parent. The Company shall have been provided with a
certificate executed on behalf of Parent by its President and its Chief
Financial Officer to the effect that, as of the Effective Time:
(i) except as set forth in the Parent Disclosure Schedules, all
representations and warranties made by Parent and Merger Sub under this
Agreement are true and complete in all material respects; and
(ii) all covenants, obligations and conditions of this Agreement to
be performed by Parent and Merger Sub on or before such date have been so
performed in all material respects.
(c) Legal Opinions. The Company shall have received a legal opinion from
Faegre & Benson Professional Limited Liability Partnership, counsel to Parent,
substantially in the form of Exhibit D hereto.
(d) Tax Opinion. The Company shall have received an opinion from Wilson,
Sonsini, Goodrich & Rosati, counsel to the Company, substantially in the form of
Exhibit E hereto. In rendering such opinion counsel shall be entitled to rely
on, and Parent and the Company shall make, reasonable representations related to
the tax-free nature of the Merger.
(e) No Material Adverse Changes. There shall not have occurred any
material adverse change in the business, properties, results of operations or
financial condition of Parent.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate and effect the Merger and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Parent:
(a) Representations, Warranties and Covenants. Except as set forth in
the Company Disclosure Schedules, the representations and warranties of the
Company in this Agreement and of the shareholders in the Shareholders Agreement
shall be true and correct in all material respects on and as of the Effective
Time as though such representations and warranties were made on and as of such
time, except that any representation or warranty that by its terms was made with
reference to a specific date was true and correct in all material respects as of
such date, and the Company shall have performed and complied in all material
respects with all covenants, obligations and conditions of this Agreement
required to be performed and complied with by it as of the Effective Time.
(b) Certificate of the Company. Parent shall have been provided with a
certificate executed on behalf of the Company by its President and Chief
Financial Officer to the effect that, as of the Effective Time:
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(i) except as set forth in the Company Disclosure Schedules, all
representations and warranties made by the Company under this Agreement shall be
true and correct in all material respects on and as of the Effective Time as
though such representations and warranties were made as of such time; and
(ii) all covenants, obligations and conditions of this Agreement to
be performed by the Company on or before such date have been so performed in all
material respects.
(c) Third Party Consents. Parent shall have been furnished with evidence
satisfactory to it of the consent or approval of those persons whose consent or
approval shall be required to effectuate the Merger or in order to assign the
agreements listed in Schedule 2.29.
(d) Injunctions or Restraints on Conduct of Business. No temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal or regulatory restraint
provision challenging Parent's proposed acquisition of the Company, or limiting
or restricting Parent's conduct or operation of the business of the Company,
following the Merger shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other Governmental Entity, domestic or
foreign, seeking any of the foregoing be pending.
(e) Legal Opinion. Parent shall have received a legal opinion from
Wilson, Sonsini, Goodrich & Rosati, counsel to the Company, in substantially the
form of Exhibit F and such other opinions as Parent may reasonably request.
(f) Tax Opinion. Parent shall have received an opinion from Faegre &
Benson Professional Limited Liability Partnership, counsel to the Parent,
substantially in the form of Exhibit G hereto. In rendering such opinion,
counsel shall be entitled to rely on, and Parent and the Company shall make,
reasonable representations related to the tax-free nature of the Merger.
(g) No Material Adverse Changes. There shall not have occurred any
material adverse change in the business, properties, results of operations or
financial condition of the Company.
(h) Dissenters. Holders of not more than 5% of the outstanding shares of
Company Common Stock shall have exercised, or shall continue to have the right
to exercise, dissenters' rights with respect to the transactions contemplated by
this Agreement.
(i) Affiliate Agreements. Parent shall have received from each of the
Affiliates of the Company an executed Affiliate Agreement.
(j) Termination of Shareholder Agreements. All agreements between the
Company and any of its shareholders that grant certain registration, voting,
right of first refusal or other similar rights to such shareholders, and where
such rights would otherwise survive the Merger, shall have been terminated.
(k) Accounting. Parent shall have received a letter from KPMG Peat
Marwick L.L.P., in form and substance reasonably satisfactory to Parent,
reconfirming, as of the Effective Time, its belief provided as of the date
hereof that, based on such procedures as were deemed relevant
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(including the receipt of appropriate pooling letters from Price Waterhouse LLP
concerning the Company), the Merger will qualify as a pooling of interests under
generally accepted accounting principles.
ARTICLE VII
INDEMNIFICATION AND ESCROW OBLIGATIONS
7.1 Survival of Representations and Warranties. For purposes of this
Agreement, all representations and warranties in this Agreement or in any
instrument delivered pursuant to this Agreement by the Company, Parent or Merger
Sub (each as modified by the Company Disclosure Schedules or the Parent
Disclosure Schedules, as the case may be) shall survive the Merger and continue
until the date of the first audit report of Parent consolidated financial
statements containing combined operations is issued for those items reasonably
expected to be discovered in the audit process and until the first anniversary
date of the Effective Time for all other items.
7.2 Agreement to Indemnify. Upon execution of this Agreement by the
Securityholder Agent (as defined in Section 7.12), each shareholder of the
Company who shall be entitled to receive shares of Parent Common Stock in the
Merger pursuant to the terms of this Agreement (each a "Securityholder" and
collectively the "Securityholders") severally, but not jointly, hereby agrees to
indemnify and hold Parent, the Surviving Corporation and their respective
Affiliates and successors and assigns, including the directors, officers,
employees, agents, advisors and representatives of each of them (each of whom
may be an "Indemnitee" pursuant to this Section 7.2) harmless from and against
any Adverse Consequences (as hereinafter defined) such Indemnitee may suffer
resulting from, arising out of, relating to, in the nature of or caused by (i)
any inaccuracy or breach of a representation or warranty of the Company
contained in Article II herein (as modified by the Company Disclosure Schedules)
or in any instrument delivered pursuant to this Agreement by the Company, or any
failure by the Company to perform or comply with any covenant contained herein,
provided that the Securityholders shall not have any obligation under this
Section 7.2(i) for the first $150,000 in Adverse Consequences incurred in the
aggregate by the Indemnitees (the "Basket Amount") (the "General Indemnity");
and (ii) any claim, action, dispute or loss arising out of any action taken or
omitted in connection with any transactions involving securities of the Company
(excluding the Merger) which were made between or among the Company and/or its
shareholders and former shareholders during the 12 months prior to the Effective
Date involving any shareholder agreement among the Company and any current or
former shareholder of the Company (the "Claims Indemnity").
For purposes of this Article VII, "Adverse Consequences" means all
actions, suits, proceedings, hearings, investigations, charges, complaints,
claims, demands, injunctions, judgments, orders, decrees, rulings, damages,
dues, penalties, fines, costs, reasonable amounts paid in settlement,
liabilities, obligations, taxes, liens, losses, expenses and fees, including
court costs and reasonable attorneys' fees and expenses, offset in each case by
any related insurance proceeds actually received by the Indemnitees.
7.3 Expiration of Indemnification. The indemnification obligations of the
Securityholders under the General Indemnity shall terminate at 5:00 p.m.,
Fremont, California time, on the first anniversary date of the Effective Time,
but shall not terminate as to any Adverse Consequence (or a potential claim by
an appropriate party) asserted in good faith prior to such date (provided that
written notice of such claim or potential claim is provided pursuant to Section
7.8 within five days after the date of the first audit report of Parent's
consolidated financial statements containing combined operations of Parent and
the Company is issued for those reasonably expected to be discovered in the
audit process or within five days after the first
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anniversary date for all other claims or potential claims). The indemnification
obligations of the Securityholders under the Claims Indemnity shall continue in
full force and effect until expiration of the period during which a claim may be
asserted under any relevant statute of limitations, but shall not terminate as
to any Adverse Consequences (or a potential claim by an appropriate party)
asserted in good faith prior to such date (provided that written notice of such
claim or potential claim is provided pursuant to Section 7.8 within five days
after the expiration of such period).
7.4 Escrow Fund.
(a) As security for the General Indemnity provided for in Section 7.2(i)
hereof and by virtue of this Agreement and the Merger Agreement, the
Securityholders will be deemed to have received and deposited with the Escrow
Agent (as defined below) 60,000 of the shares of Parent Common Stock issued to
them in the Merger (plus any additional shares as may be issued upon any stock
split, stock dividend or other similar distribution effected by Parent after the
Closing) (the "General Escrow Shares"), without any act of any Securityholder
(the "General Escrow Account"). As security for the Claims Indemnity provided
for in Section 7.2(ii) hereof and by virtue of this Agreement and the Merger
Agreement, the Securityholders will be deemed to have received and deposited
with the Escrow Agent 250,000 of the shares of Parent Common Stock to be issued
to them in the Merger (plus any additional shares as may be issued upon any
stock split, stock dividend or other similar distribution effected by Parent
after the Closing) (the "Claims Escrow Shares"; and together with the General
Escrow Shares, the "Escrow Shares"), without any act of any Securityholder (the
"Claims Escrow Account"). Each Securityholder will contribute shares to the
General Escrow Account and the Claims Escrow Account on a pro rata basis equal
to the total of the Escrow Shares multiplied by a fraction the numerator of
which is the number of shares of Parent Common Stock such Securityholder is
entitled to receive in the Merger pursuant to Section 1.6(a) (excluding
therefrom shares of Parent Common Stock otherwise issuable in respect of
Dissenting Shares) and the denominator of which is the total number of shares of
Parent Common Stock all Securityholders are entitled to receive in the Merger
pursuant to Section 1.6(a) (excluding therefrom shares of Parent Common Stock
otherwise issuable in respect of Dissenting Shares). Such shares will be
registered in the name of Escro II & Co., and will be deposited with Harris
Trust and Savings Bank (or other mutually acceptable institution) as Escrow
Agent (the "Escrow Agent"), such deposits to constitute two separate escrow
funds (the "General Escrow Fund" containing the General Escrow Shares and the
"Claims Escrow Fund" containing the Claims Escrow Shares) to be governed by the
terms set forth herein and at Parent's sole cost and expense, except as may
otherwise be provided in this Agreement.
(b) Upon compliance with and subject to the terms hereof, any Indemnitee
shall be entitled to indemnity from the General Escrow Fund for all Adverse
Consequences incurred by such Indemnitee and indemnifiable under the General
Indemnity. Upon compliance with and subject to the terms hereof, any Indemnitee
shall be entitled to indemnity from the Claims Escrow Fund for all Adverse
Consequences incurred by Indemnitee and indemnifiable under the Claims
Indemnity. Each such indemnity will be allocated among the Securityholders in
the same proportion as the number of Escrow Shares contributed by the
Securityholder to the escrow represents of the total of all Escrow Shares. Such
indemnity shall result in a forfeiture of Escrow Shares as set forth in this
Article VII.
7.5 Closing. The General Escrow Fund shall remain in existence during the
period of time (the "General Escrow Period") between the effectiveness of the
Merger and 5:00 p.m., West Coast time, on the first anniversary of the Effective
Time, subject to the 30-day objection period provided in Section 7.9 and subject
to the provisions of Section 7.10. The Claims Escrow Fund shall remain in
existence until and
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including August 31, 1997 (the "Claims Escrow Period"), subject to the 30-day
objection period provided in Section 7.9 and subject to the provisions of
Section 7.10.
7.6 Protection of Escrow Fund. The Escrow Agent shall hold and safeguard
the Escrow Fund during the Escrow Period, shall treat such Escrow Fund as a
trust fund in accordance with the terms of this Agreement and not as the
property of Parent and shall hold and dispose of the Escrow Fund only in
accordance with the terms hereof.
7.7 Distributions; Voting.
(a) Any shares of Parent Common Stock or other equity securities issued
or distributed by Parent (including shares issued upon a stock split) ("New
Shares") in respect of Parent Common Stock in the Escrow Fund which have not
been released from the Escrow Fund pursuant to Section 7.11 shall be added to
the Escrow Fund and become a part thereof. New Shares issued in respect of
shares of Parent Common Stock which have been released from the Escrow Fund
shall not be added to the Escrow Fund but shall be distributed to the
recordholders thereof. Cash dividends on Parent Common Stock shall not be added
to the Escrow Fund but shall be distributed to the recordholders thereof.
(b) Each Securityholder shall have voting rights with respect to the
shares of Parent Common Stock contributed to the Escrow Fund by such
Securityholder (and on any voting securities added to the Escrow Fund in respect
of such shares of Parent Common Stock).
7.8 Claims Upon Escrow Fund.
(a) General Escrow Fund. Parent may make a claim upon the General Escrow
Fund by a written certificate signed by an officer of the Parent (an "Officer's
Certificate") promptly after discovery of Adverse Consequences in excess of the
Basket Amount:
(i) stating that the Indemnitees, in the aggregate, have paid or
properly accrued or reasonably anticipate that they will have to pay or accrue
Adverse Consequences in excess of the Basket Amount and that Parent and/or the
other Indemnitees are therefore entitled to indemnity pursuant to Section 7.2(i)
of this Agreement, and
(ii) specifying in reasonable detail the individual items of Adverse
Consequences which comprise the Basket Amount (in the case of the first such
certificate) and one or more additional Adverse Consequences in excess of the
Basket Amount, the date each such item was paid or properly accrued, or the
basis for such anticipated liability, and the nature of the misrepresentation,
breach of warranty or covenant to which such item is related; the Escrow Agent
shall, subject to the provisions of Section 7.10 hereof, deliver to Parent out
of the General Escrow Fund, as promptly as practicable, cash or shares of Parent
Common Stock held in the General Escrow Fund in an amount equal to the amount of
such Adverse Consequences which exceed the Basket Amount (provided, however,
that with respect to Adverse Consequences the Indemnitees reasonably anticipate
they will have to pay or accrue, such amounts shall not be delivered to Parent
by the Escrow Agent until such time as such Adverse Consequences must actually
be paid or accrued).
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(b) Claims Escrow Fund. Parent may make a claim upon the Claims Escrow
Fund by a written certificate signed by an officer of Parent (an "Officer's
Certificate") promptly after discovery of Adverse Consequences:
(i) stating the Parent and/or the other Indemnitees are entitled to
indemnity pursuant to Section 7.2(ii) of this Agreement; and
(ii) specifying in reasonable detail the individual items of Adverse
Consequences which comprise the claims under the Claims Indemnity and the date
each such item was paid or properly accrued, or the basis for such anticipated
liability; the Escrow Agent shall, subject to Section 7.10 hereof, deliver to
Parent out of the Claims Escrow Fund, as promptly as practicable, cash or shares
of Parent Common Stock held in the Claims Escrow Fund in an amount equal to such
Adverse Consequences (provided, however, that with respect to Adverse
Consequences the Indemnities reasonably anticipate they will have to pay or
accrue, such amounts shall not be delivered to Parent by Escrow Agent until such
time as such Adverse Consequences must actually be paid or accrued).
(c) For the purposes of determining the number of shares of Parent
Common Stock to be delivered to Parent out of either Escrow Fund as indemnity
pursuant to Section 7.8(a) or for determining the amount of cash to be retained
in the Escrow Funds after a sale of Escrow Shares pursuant to Section 7.18, the
shares of Parent Common Stock shall be valued at a price equal to the Closing
Price (as adjusted from time to time in the event of any stock dividends, stock
splits, recapitalizations, reorganizations or other like changes with respect to
Parent Common Stock).
(d) In making any deliveries to Parent pursuant to subsection (a) or (b)
above, the Escrow Agent shall first distribute any cash available in the
applicable Escrow Fund before distributing any shares of Parent Common Stock.
7.9 Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Securityholder Agent and for a period of thirty (30) days after
such delivery, the Escrow Agent shall make no delivery of shares of Parent
Common Stock pursuant to Section 7.8 hereof unless the Escrow Agent shall have
received written authorization from the Securityholder Agent to make such
delivery. After the expiration of such thirty (30) day period, the Escrow Agent
shall make delivery of the shares of Parent Common Stock in either Escrow Fund
in accordance with Section 7.8 hereof, provided that no such payment, delivery
or reduction may be made if the Securityholder Agent shall object in a written
statement to the claim made in the Officer's Certificate and such statement
shall have been delivered to the Escrow Agent prior to the expiration of such
thirty (30) day period.
7.10 Resolution of Conflicts.
(a) In case the Securityholder Agent shall so object in writing to any
indemnity in respect of any claim or claims made in any Officer's Certificate,
the Securityholder Agent and Parent shall attempt in good faith to agree upon
the rights of the respective parties with respect to each of such claims. If
the Securityholder Agent and Parent should so agree, a memorandum setting forth
such agreement shall be prepared and signed by each of Parent and the
Securityholder Agent and shall be furnished to the Escrow Agent. The Escrow
Agent shall be entitled to rely on any such memorandum and distribute shares of
Parent Common Stock from the appropriate Escrow Fund in accordance with the
terms thereof.
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(b) If no such agreement can be reached after good faith negotiation,
either Parent or the Securityholder Agent may demand arbitration of the matter
unless the amount of the damage or loss is at issue in pending litigation with a
third party, in which event arbitration shall not be commenced until such amount
is ascertained or both parties agree to arbitration; and, in either such event,
the matter shall be settled by arbitration conducted by a single, mutually
agreed upon arbitrator. If the parties fail to agree upon an arbitrator within
10 days after arbitration is demanded, the arbitrator shall be chosen in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association. The decision of the arbitrator so selected as to the validity and
amount of any claim in such Officer's Certificate shall be binding and
conclusive upon the parties to this Agreement and notwithstanding anything in
Section 7.9 hereof, the Escrow Agent shall be entitled to act in accordance with
such decision and make or withhold delivery of shares of Parent Common Stock out
of the Escrow Fund in accordance therewith.
(c) Judgment upon any award rendered by the arbitrators may be entered
in any court having jurisdiction. Any such arbitration shall be held in
California under the rules then in effect of the American Arbitration
Association. For purposes of this Section 7.10, in any arbitration hereunder in
which any claim or the amount thereof stated in the Officer's Certificate is at
issue, Parent shall be deemed to be the "Non-Prevailing Party" in the event that
the arbitrator awards Parent less than one-half of the disputed amount;
otherwise, the Securityholders shall be deemed to be the Non-Prevailing Party.
The Non-Prevailing Party to an arbitration shall pay its own expenses, the fees
of the arbitrator, the administrative fee of the American Arbitration
Association, and a percentage of the expenses, including without limitation
attorneys' fees and costs, incurred by the other party to the arbitration, such
percentage to be determined as follows. If the Securityholders are the Non-
Prevailing Party, Parent (or other Indemnitee) shall be entitled to recover that
percentage of its expenses equal to the result of dividing the amount recovered
by Parent by the amount claimed by Parent. If the Securityholders are the Non-
Prevailing Party, the Parent shall be entitled to recover such percentage of its
expenses from the Escrow Fund. If Parent is the Non-Prevailing Party, the
Securityholders shall be entitled to recover that percentage of their expenses
equal to the result of dividing (i) an amount equal to the difference between
the amounts claimed and the amount recovered, by (ii) the amounts claimed.
7.11 Distribution Upon Termination of Escrow Period. Promptly following
termination of the applicable Escrow Period, the Escrow Agent shall deliver to
the Securityholders all of the cash and Parent Common Stock in the General
Escrow Fund or the Claims Escrow Fund, as appropriate, in excess of any amount
of such Parent Common Stock sufficient, in the reasonable judgment of Parent,
and subject to the objection of the Securityholder Agent and the subsequent
dispute resolution of the matter as provided in Section 7.10, to satisfy any
unsatisfied claims specified in any Officer's Certificate previously delivered
to the Escrow Agent with respect to facts or circumstances existing on or prior
to the termination of the applicable Escrow Period. As soon as all such claims
have been resolved, the Escrow Agent shall deliver to Securityholders all cash
and Parent Common Stock remaining in the Escrow Fund to the extent such items
are not required to satisfy such claims. Deliveries of cash and Parent Common
Stock to the Securityholders pursuant to this Section 7.11 shall be made in
proportion to their original contribution to the Escrow Fund.
7.12 Agent of the Securityholders; Power of Attorney.
(a) The shareholders of the Company, by their approval of this Agreement
and the Merger Agreement at the Company Shareholders' Meeting, shall have
approved the indemnification and
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escrow terms set forth in this Article VII including the deposit of the Escrow
Shares of Parent Common Stock by the Securityholders into escrow as set forth in
Section 7.4, and approved the selection and authorization of Michael L. Parodi
as the representative of the Securityholders (the "Securityholder Agent") with
respect to the escrow provisions set forth in this Article VII. The obligations
of the Securityholders with respect to the indemnity and escrow provisions of
this Article VII shall become effective as to each Securityholder upon such
execution of this Agreement on their behalf by the Securityholder Agent
following the Company Shareholder's Meeting. In addition, by virtue of the
approval of this Agreement and the Merger Agreement by the shareholders of the
Company at the Company's Shareholders' Meeting, the Securityholder Agent shall
be constituted and appointed as agent and attorney-in-fact for each
Securityholder for and on behalf of each such Securityholder, to give and
receive notices and communications, to authorize delivery to Parent of Parent
Common Stock, cash or other property from the Escrow Funds in satisfaction of
claims by Parent, to object to such deliveries, to agree to, negotiate, enter
into settlements and compromises of, and demand dispute resolution pursuant to
Section 7.10 and comply with orders of courts and awards of arbitrators with
respect to such claims, and to take all actions necessary or appropriate in the
judgment of the Securityholder Agent for the accomplishment of the foregoing.
Such agency of the Securityholder Agent may be changed by the Securityholders
from time to time upon not less than thirty (30) days prior written notice to
Parent and the Escrow Agent; provided that such Securityholder Agent may not be
removed unless holders of a majority in interest of the Escrow Shares agree to
such removal and to the identity of the substituted Securityholder Agent. No
bond shall be required of any Securityholder Agent, and no Securityholder Agent
shall receive compensation for his or her services. Notices or communications to
or from each Securityholder Agent shall constitute notice to or from each of the
Securityholders.
(b) The Securityholder Agent shall not be responsible for any act done
or omitted thereunder as Securityholder Agent while acting in good faith and in
the exercise of reasonable judgment. The Securityholders shall jointly and
severally indemnify the Securityholder Agent and hold the Securityholder Agent
harmless against any loss, liability or expense incurred without negligence, bad
faith or willful misconduct on the part of the Securityholder Agent and arising
out of or in connection with the acceptance or administration of the
Securityholder Agent's duties hereunder, including the reasonable fees and
expenses of any legal counsel or other professional retained by the
Securityholder Agent.
(c) Each Securityholder hereby agrees to pay all costs and expenses,
including those of any legal counsel or other professional retained by the
Securityholder Agent, in connection with the acceptance or administration of the
Securityholder Agent's duties hereunder.
7.13 Actions of the Securityholder Agent. A decision, act, consent or
instruction of the Securityholder Agent shall constitute a decision of all the
Securityholders, and shall be final, binding and conclusive upon each of the
Securityholders, and the Escrow Agent and Parent may rely upon any decision,
act, consent or instruction of the Securityholder Agent as being the decision,
act, consent or instruction of each and all of the Securityholders. The Escrow
Agent and Parent are hereby relieved from any liability to any person for any
acts done by them in accordance with such decision, act, consent or instruction
of the Securityholder Agent.
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7.14 Third-Party Claims.
(a) If any third party shall notify any Indemnitee (the "Indemnified
Party") with respect to any matter (a "Third Party Claim") which may give rise
to a claim for indemnification against the Securityholders under this Article
VII, then the Indemnified Party shall promptly notify the Securityholder Agent
thereof in writing; provided, however, that no delay on the part of the
Indemnified Party in notifying Securityholder Agent shall relieve the
Securityholders from any obligation hereunder unless (and then solely to the
extent) the Securityholders are prejudiced by such delay.
(b) In connection with any claim under the General Indemnity, the
Securityholders will have the right to defend the Indemnified Party against the
Third Party Claim with counsel of their choice satisfactory to the Indemnified
Party so long as (A) the Securityholder Agent notifies the Indemnified Party in
writing within fifteen (15) days after the Indemnified Party has given notice of
the Third Party Claim that the Securityholders will indemnify the Indemnified
Party from and against the entirety (subject, in each case, to the Basket Amount
in Section 7.2 above) of any Adverse Consequences the Indemnified Party may
suffer resulting from, arising out of, relating to, in the nature of, or caused
by the Third Party Claim, (B) the Securityholders provide the Indemnified Party
with evidence acceptable to the Indemnified Party that the Securityholders will
have the financial resources (including the General Escrow Fund) to defend
against the Third Party Claim and fulfill its indemnification obligations
hereunder, (C) the Third Party Claim involves only money damages and does not
seek an injunction or other equitable relief, (D) settlement of, or an adverse
judgment with respect to, the Third Party Claim is not, in the good faith
judgment of the Indemnified Party, likely to establish a precedential custom or
practice adverse to the continuing business interests of the Indemnified Party,
and (E) the Securityholder conducts the defense of the Third Party Claim
actively and diligently and keep the Indemnified Party reasonably informed of
its status. In connection with any claim under the Claims Indemnity, the
Securityholders will have the right to defend the Indemnified Party against the
Third Party Claim with counsel of their choice satisfactory to the Indemnified
Party so long as (X) the Securityholders notify the Indemnified Party in writing
within fifteen (15) days after the Indemnified Party has given notice of the
Claim that the Securityholders will indemnify the Indemnified Party from and
against the entirety of any Adverse Consequences the Indemnified Party may
suffer resulting from, arising out of, relating to, in the nature of, or caused
by the Claim, and (Y) the Securityholders conduct the defense of the Claim
actively and diligently and keep the Indemnified Party reasonably informed of
its status.
(c) So long as the Securityholders are conducting the defense of the
Third Party Claim in accordance with Section 7.14(b) above, (A) the Indemnified
Party may retain separate co-counsel at its sole cost and expense and
participate in the defense of the Third Party Claim, (B) the Indemnified Party
will not consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of the
Securityholder Agent (which consent is not to be withheld or delayed
unreasonably), and (C) the Securityholders will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party Claim
without the prior written consent of the Indemnified Party (which consent is not
to be withheld or delayed unreasonably).
(d) In the event any of the conditions in Section 7.14(b) above is or
becomes unsatisfied, however, (A) the Indemnified Party may defend against, and
consent to the entry of any judgment or enter into any settlement with respect
to, the Third Party Claim in any manner it reasonably may deem appropriate
(provided the Securityholder Agent consents to such settlement, which consent
shall not be withheld or delayed reasonably), (B) if the Securityholders have
accepted or shall pursuant to the terms of
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this Agreement be deemed to have accepted indemnification responsibility for
such Third Party Claim, the Securityholders will reimburse the Indemnified Party
promptly and periodically for the costs of defending against the Third Party
Claim (including reasonable attorneys' fees and expenses) and (C) the
Securityholders will remain responsible for any Adverse Consequences the
Indemnified Party may suffer resulting from, arising out of, relating to, in the
nature of, or caused by the Third Party Claim to the fullest extent provided in
this Article VII.
7.15 Escrow Agent's Duties.
(a) The Escrow Agent shall be obligated only for the performance of such
duties as are specifically set forth herein, and as set forth in any additional
written escrow instructions which the Escrow Agent may receive after the date of
this Agreement which are signed by an officer of Parent and the Securityholder
Agent, and may rely and shall be protected in relying or refraining from acting
on any instrument reasonably believed to be genuine and to have been signed or
presented by the proper party or parties. The Escrow Agent shall not be liable
for any act done or omitted hereunder as Escrow Agent while acting in good faith
and in the exercise of reasonable judgment, and any act done or omitted pursuant
to the advice of counsel shall be conclusive evidence of such good faith.
(b) The Escrow Agent shall not be liable in any respect on account of
the identity, authority or rights of the parties executing or delivering or
purporting to execute or deliver this Agreement or any documents or papers
deposited or called for hereunder.
(c) The Escrow Agent shall not be liable for the expiration of any
rights under any statute of limitations with respect to this Agreement or any
documents deposited with the Escrow Agent.
7.16 No Joint Liability; Maximum Liability. The liability of the
Securityholders under this Article VII shall be several and not joint, and
liability for any indemnification to which an Indemnitee may be entitled under
this Article VII shall be apportioned among the Securityholders in the
proportion of their original contributions to the Escrow Fund. Except as set
forth in Section 7.17, Parent agrees that (i) the maximum liability of the
Securityholders under the General Indemnity shall be an amount equal to the
product of the Closing Price multiplied by 10% of the total number of shares of
Parent Common Stock to be issued in the Merger pursuant to Section 1.6(a) of
this Agreement, and (ii) the maximum liability of the Securityholders under the
Claims Indemnity shall be an amount equal to the product of the Closing Price
multiplied by 20% of the total number of shares of Parent Common Stock to be
issued in the Merger pursuant to Section 1.6(a) of this Agreement. Parent
further agrees that it will be required to look first to the appropriate Escrow
Fund to satisfy any indemnification obligations the Securityholders may have
under this Agreement.
7.17 Remedies. The existence of this Article VII and of the rights and
restrictions set forth herein do not limit any other potential remedies of
Parent and the other Indemnitees with respect to any knowing and intentional
breaches of the representations and warranties or covenants of the Company
contained in this Agreement.
7.18 Sale of Escrow Shares. Prior to the disbursement of all Escrow Shares,
the Securityholder Agent may from time to time instruct the Escrow Agent to
cause the sale of all or any portion of such Escrow Shares. The instructions
from the Securityholder Agent shall be in writing and shall specify the number
of General Escrow Shares and/or Claims Escrow Shares to be sold, the manner of
such sale and
41
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other relevant terms. A copy of such instructions shall also be delivered to
Parent. The Escrow Agent shall effect the sale of the Escrow Shares in
accordance with such instructions. All cash proceeds received upon the sale and
transfer of any Escrow Shares pursuant to this Section 7.18 shall be deposited
by the Escrow Agent and retained in the appropriate Escrow Fund. Such cash sale
proceeds shall be treated as part of the appropriate Escrow Fund and shall be
subject to all of the applicable provisions of this Article VII relating to the
Escrow Shares.
7.19 Shareholder Agent Expenses; Access to Records. The Escrow Fund shall
be available to reimburse the Securityholder Agent for documented out-of-pocket
expenses incurred by the Agent in the performance of his duties hereunder in the
following amounts: (i) up to $25,000 for expenses related to matters involving
the General Escrow Fund and (ii) up to $100,000 for expenses related to matters
involving the Claims Escrow Fund. Parent and the Company shall provide the
Securityholder Agent and his representatives access to the records of the
Company pertaining to the subject matter of any claims for indemnification
hereunder, including any Third Party Claims.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. This Agreement may be terminated and the Merger abandoned
at any time prior to the Effective Time:
(a) by mutual written consent of the Company and Parent;
(b) by Parent if: (i) it is not in material breach of its obligations
under this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company and such breach has not been cured within ten business days after
written notice to the Company (provided that, no cure period shall be required
for a breach which by its nature cannot be cured); or (ii) there shall be any
final action taken, or any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any Governmental
Entity, which would prohibit Parent's or the Company's ownership or operation of
all or a material portion of the business of the Company, or compel Parent or
the Company to dispose of or hold separate all or a material portion of the
business or assets of the Company or Parent as a result of the Merger.
(c) by the Company if it is not in material breach of its obligations
under this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of
Parent or Merger Sub and such breach has not been cured within ten business days
after written notice to Parent (provided that, no cure period shall be required
for a breach which by its nature cannot be cured);
(d) by any party hereto if: (i) the Closing has not occurred by May 20,
1996 (unless such circumstance is the result of a breach of the terms hereof in
any material respect by the party exercising the termination right); (ii) there
shall be a final non-appealable order of a federal or state court in effect
preventing consummation of the Merger; or (iii) there shall be any final action
taken, or any statute, rule, regulation or order enacted, promulgated or issued
or deemed applicable to the Merger by any Governmental Entity which would make
consummation of the Merger illegal;
42
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(e) by Parent if the recommendation by the Board of Directors of the
Company for the Merger or this Agreement is modified or withdrawn in any way
detrimental to Parent;
(f) by Parent if the Merger and this Agreement shall have been submitted
to a vote of the shareholders of the Company and shall not have been approved by
the requisite vote; or
(g) by the Company if (i) the recommendation by the Board of Directors
of the Company with respect to the Merger is modified or withdrawn in any way
detrimental to Parent and (ii) at the time of such action, an Acquisition
Proposal (as defined in Section 8.3) is outstanding; provided, however, that a
termination of this Agreement pursuant to this Section 8.1(g) shall not be
effective unless and until the Company pays Parent the sum of $1.0 million as
contemplated by Section 8.3 below.
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
8.2 Effect of Termination. In the event of termination of this Agreement as
provided in Section 8.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Merger Sub or the
Company or their respective officers, directors, shareholders or affiliates,
except to the extent that such termination results from the breach by a party
hereto of any of its representations, warranties or covenants set forth in this
Agreement; provided that, the provisions of Sections 5.4, 5.5 and 8.3 and this
Section 8.2 shall remain in full force and effect and survive any termination of
this Agreement.
8.3 Termination Fees and Expenses.
(a) If (i) there has been no material breach by Parent of the
representations, warranties and covenant of Parent under this Agreement (a
"Material Breach"), (ii) this Agreement is terminated pursuant to Section
8.1(e), and (iii) at the time of such termination an Acquisition Proposal (as
defined below) is outstanding, then the Company will promptly thereafter, but in
no event later than three business days after receiving a written request by
Parent therefor or as otherwise provided in 8.3(c), pay to Parent an amount
equal to $1.0 million;
(b) If (i) there has been no Material Breach by Parent, (ii) the Merger
is not approved by the shareholders of the Company and this Agreement has been
terminated pursuant to Section 8.1(f), and (iii) at the time of the meeting of
the Company's shareholders contemplated by Section 5.2, an Acquisition Proposal
is outstanding, then the Company will promptly thereafter, but in no event later
than three business days after receiving a written request by Parent therefor or
as otherwise provided in 8.3(c), pay to Parent an amount equal to $1.0 million;
(c) As used herein, the term "Acquisition Proposal" shall mean a written
offer from a party other than Parent or its affiliates to acquire the Company
in a merger transaction, to acquire all or substantially all of the assets of
the Company, or to acquire at least 50% of the outstanding Company Common Stock.
If the Acquisition Proposal contemplates a transaction in which the aggregate
value of the consideration to be received by the Company and/or its shareholders
in such transaction is less than the value of the Parent Common Stock offered
hereby, then the fee provided under Sections 8.3(a) or 8.3(b) shall only be
payable if the Company shall complete a transaction of the type described in
this Section 8.3(c) within one year after the termination of this Agreement with
the party that made such
43
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Acquisition Proposal; and such fee shall be payable promptly after the closing
of such transaction, but in no event later than three business days after
receiving a written request by Parent therefor.
8.4 Amendment. This Agreement may be amended by the parties hereto at any
time by execution of an instrument in writing signed on behalf of each of the
parties hereto.
8.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE IX
GENERAL PROVISIONS
9.1 Survival of Agreements at Effective Time. The agreements contained in
this Agreement shall terminate at the Effective Time, except that the agreements
set forth in Sections 1.13, 5.4, 5.5, 5.6, 5.12, 5.14 and 5.22 and in Articles
VII and IX of this Agreement shall survive the Effective Time indefinitely.
9.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to Parent or Merger Sub, to:
FSI International, Inc.
322 Lake Hazeltine Drive
Chaska, Minnesota 55318
Attention: Benno G. Sand, Chief Financial Officer
Telecopy No.: (612) 448-2825
with a copy to:
Faegre & Benson Professional Limited Liability Partnership
2200 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Attention: Douglas P. Long, Esq.
Telecopy No.: (612) 336-3026
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(b) if to the Company, to
Semiconductor Systems, Inc.
47003 Mission Falls Court
Fremont, California 94539
Attention: Michael L. Parodi, Jr.
President and Chief Executive Officer
Telecopy No.: (510) 656-3226
with a copy to:
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attention: Michael J. Danaher, Esq.
Telecopy No.: (415) 493-6811
9.3 Interpretation. When a reference is made in this Agreement to Schedule
or Exhibits, such reference shall be to an Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.5 Entire Agreement. This Agreement and the documents and instruments and
other agreements among the parties hereto, including the Company Schedules, the
Parent Schedules, the Company Disclosure Schedule and the Parent Disclosure
Schedule (a) constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and understandings,
both written and oral among the parties with respect to the subject matter
hereof, except for the Confidentiality Agreement and the SSI Stockholders
Agreement, which shall continue in full force and effect until the Closing and
shall survive any termination of this Agreement; (b) are not intended to confer
upon any other person any rights or remedies hereunder; and (c) shall not be
assigned by operation of law or otherwise except as otherwise specifically
provided.
9.6 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
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9.7 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
9.8 Knowledge Attribution. For purposes of this Agreement, (i) except as
hereinafter stated in this Section 9.8, references to "knowledge of the
Company," "the Company's knowledge" or similar knowledge references with respect
to the Company shall refer to the actual knowledge of Michael L. Parodi, Gerald
E. Masterson, Douglas K. Amis, Michael R. Biche or Qui Nguyen, and (ii)
references to "knowledge of Parent," the Parent's knowledge" or similar
knowledge references with respect to Parent shall refer to the actual knowledge
of Joel A. Elftmann, Benno G. Sand, Benjamin J. Sloan and Patricia M. Hollister.
For purposes of Section 2.12 of this Agreement, references therein to "knowledge
of the Company," "the Company's knowledge" or similar knowledge references with
respect to the Company shall refer to the actual knowledge of any management or
supervisory level employee of the Company.
9.9 Specific Performance. Each of the Company and Parent acknowledges and
agrees that the other party would be damaged irreparably if any of the
provisions of this Agreement are not performed in accordance with their specific
terms or otherwise are breached. Accordingly, each of the parties hereto agrees
that the other party shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement and to enforce specifically this Agreement
and the terms and provisions hereof in any action instituted in any court of the
United States or any state thereof having jurisdiction over the parties and the
matter, in addition to any other remedy to which they may be entitled, at law or
in equity.
9.10 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof.
9.11 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in any agreement or other document will
be construed against the party drafting such agreement or document.
[THIS PORTION WAS LEFT INTENTIONALLY BLANK.]
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IN WITNESS WHEREOF, Parent, Merger Sub, the Company and the Escrow Agent (as
to matters set forth in Article VII only) have caused this Agreement to be
signed by themselves or their duly authorized respective officers and to become
effective, all as of the date first written above.
SEMICONDUCTOR SYSTEMS, INC. FSI INTERNATIONAL, INC.
By: /s/Michael L. Parodi, Jr. By: /s/Benno G. Sand
---------------------------- ----------------------------
Michael L. Parodi, Jr., Benno G. Sand,
President and Chief Executive Executive Vice President
Officer and Chief Financial Officer
ESCROW AGENT SPECTRE ACQUISITION CORP.
By: /s/Bruce R. Hartney By: /s/Benno G. Sand
---------------------------- ----------------------------
Benno G. Sand,
Executive Vice President
IN WITNESS WHEREOF, the Securityholder Agent (as to Article VII only) has
caused this Agreement to be signed as of the date set forth below, and upon such
signing, Article VII of this Agreement shall become effective as to each
Securityholder as of the date set forth above.
SECURITYHOLDER AGENT
- ------------------------------
(Print Name)
- ------------------------------
(Signature)
Address:
----------------------
----------------------
----------------------
----------------------
Telephone No.:
----------------
Telecopy No.:
----------------
Date:
-------------------------
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EXHIBIT A
MERGER AGREEMENT
This Merger Agreement, is made and entered into as of ___________, 1996,
("Merger Agreement"), between Semiconductor Systems, Inc., a California
corporation (the "Company" or the "Surviving Corporation"), and Spectre
Acquisition Corp., a California corporation ("Merger Sub"; the Company and
Merger Sub being hereinafter collectively referred to as the "Constituent
Corporations").
INTENDING TO BE LEGALLY BOUND, and in consideration of the premises and
mutual covenants and agreements contained herein, the Constituent Corporations
hereby agree as follows:
ARTICLE I
THE MERGER
1.1 Merger of the Company With and Into Merger Sub.
(a) Agreement to Acquire the Company. Subject to the terms of this
Merger Agreement and an Agreement and Plan of Reorganization dated as of
February 5, 1996 (as amended, the "Reorganization Agreement"), among FSI
International, Inc., a Minnesota corporation and the owner of all the
outstanding shares of stock of Merger Sub ("Parent"), the Company and Merger
Sub, the Company shall be acquired by Parent through a merger (the "Merger") of
Merger Sub with and into the Company.
(b) Effective Time of the Merger. The Merger shall become effective
upon the filing of Articles of Merger with the Secretary of State of the State
of California. The date of such filing is hereinafter referred to as the
"Effective Time."
(c) Surviving Corporation. At the Effective Time Merger Sub shall be
merged into the Company and the separate corporate existence of Merger Sub shall
thereupon cease. The Company shall be the surviving corporation in the Merger
and shall succeed, without other transfer, to all the rights and property of
each Constituent Corporation and shall be subject to all the debts and
liabilities of each Constituent Corporation in the same manner as if the
Surviving Corporation had itself incurred them.
1.2 Effect of the Merger; Additional Actions.
(a) Effects. The Merger shall have the effects set forth in Section
1107 of the California General Corporation Law.
(b) Additional Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or
<PAGE>
any other actions or things are necessary or desirable (i) to vest, perfect or
confirm of record or otherwise in the surviving Corporation its rights, title or
interest in, to or under any of the rights, properties or assets of either
Constituent Corporation acquired or to be acquired by the Surviving Corporation
as a result of, or in connection with, the Merger or (ii) to otherwise carry out
the purposes of this Merger Agreement, each Constituent Corporation and its
officers and directors shall be deemed to have granted to the Surviving
Corporation an irrevocable power of attorney to execute and deliver all such
deeds, bills of sale, assignments and assurances and to take and do all such
other actions and things as may be necessary or desirable to vest, perfect or
confirm any and all right, title and interest in, to and under such rights,
properties or assets in the Surviving Corporation and otherwise to carry out the
purposes of this Merger Agreement; and the officers and directors of the
Surviving Corporation are fully authorized in the name of each Constituent
Corporation or otherwise to take any and all such actions.
ARTICLE II
THE CONSTITUENT CORPORATIONS
2.1 Organization of the Company.
(a) Incorporation. The Company was incorporated under the laws of the
State of California on November 20, 1990.
(b) Authorized Stock. The Company is authorized to issue an aggregate
of 10,000,000 shares of Common Stock, no par value (the "Company Common Stock").
(c) Outstanding Stock. At the close of business on
______________________, 1996, 8,000,000 shares of Company Common Stock were
outstanding, and no shares of capital stock of the Company were held by the
Company in its treasury. At the close of business on _____________, 1996,
1,000,000 shares of Company Common Stock were reserved for issuance under
Company Stock Plans, of which no shares had been exercised and 279,583 shares
were subject to outstanding options.
2.2 Organization of Merger Sub.
(a) Incorporation. Merger Sub was incorporated under the laws of the
State of California on ________________________________, 1996.
(b) Authorized Stock. Merger Sub is authorized to issue an aggregate
of 1,000 shares of Common Stock, without par value ("Sub Stock").
(c) Outstanding Stock. On the date hereof, an aggregate of 1,000
shares of Sub Stock are outstanding and held by Parent.
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ARTICLE III
ARTICLES OF INCORPORATION, BYLAWS AND
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
3.1 Articles of Incorporation of Surviving Corporation.
(a) Amendment of Merger Sub's Articles of Incorporation at Effective
Time. At the Effective Time, Article I of the Articles of Incorporation of
Merger Sub shall be amended in its entirety to read as follows:
"The name of this corporation is Semiconductor Systems, Inc."
(b) Articles of Incorporation of Surviving Corporation. The Articles
of Incorporation of Merger Sub in effect immediately prior to the Effective
Time, as amended as provided in clause (a) above, shall be the Articles of
Incorporation of the Surviving Corporation unless and until amended as provided
by law and such Articles of Incorporation.
3.2 Bylaws of Surviving Corporation. The Bylaws of Merger Sub in effect
immediately prior to the Effective Time shall be the Bylaws of the Surviving
Corporation unless and until amended or repealed as provided by applicable law,
the Articles of Incorporation of the Surviving Corporation and such Bylaws.
3.3 Directors and Officers of Surviving Corporation. The directors of
Merger Sub shall be the initial directors of the Surviving Corporation, to hold
office in accordance with the Articles of Incorporation and Bylaws of the
Surviving Corporation. The officers of the Company shall be Benjamin J. Sloan,
President and Chief Executive Officer; Benno G. Sand, Executive Vice President,
Chief Financial Officer and Secretary; Michael L. Parodi, Vice President and
General Manager; Douglas K. Amis, Vice President, Administration; and Gerald E.
Masterson, Vice President, Finance, in each case until their respective
successors are duly elected or appointed and qualified.
ARTICLE IV
STOCK
4.1 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of Merger Sub, the Company or the
holders of any of the following securities:
(a) Conversion of Company Capital Stock. Each share of Company Common
Stock, issued and outstanding immediately prior to the Effective Time (other
than any shares of Company Common Stock to be canceled pursuant to Section
4.1(b) and any Dissenting Shares (as defined and to the extent provided in
Section 4.2(a)) will be canceled and extinguished and be
-3-
<PAGE>
converted automatically into the right to receive that number of shares of
Parent Common Stock, equal to the quotient determined by dividing 1,800,000
shares (the "Parent Shares") by the sum of: (i) the number of shares of Company
Common Stock outstanding immediately prior to the Effective Time plus (ii) the
number of shares of Company Common Stock issuable upon the exercise or
conversion of all stock options, rights or other securities of the Company
outstanding immediately prior to the Effective Time (the "Exchange Ratio");
provided that the number of Parent Shares used for purposes of calculating the
Exchange Ratio pursuant to this Section 4.1(a) shall be subject to adjustment
pursuant to Section 1.6(a) and Section 5.5 of the Reorganization Agreement and
provided further, that a portion of such shares shall be deposited into two
Escrow Funds pursuant to Section 4.5 hereof and Article VII of the
Reorganization Agreement.
(b) Cancellation of Parent-Owned Stock. Each share of Company Common
Stock owned by Merger Sub, Parent or any direct or indirect wholly owned
subsidiary of Parent or of the Company immediately prior to the Effective Time
shall be canceled and extinguished without any conversion thereof.
(c) Stock Options. At the Effective Time, each option to purchase
shares of Company Common Stock then outstanding under the Company's 1993 Stock
Plan shall, by virtue of the Merger and without any action on the part of the
holder thereof, be substituted by Parent with an option under Parent's existing
1994 Omnibus Stock Plan (a "Parent Option"). The Parent Option shall entitle
the holder to purchase from Parent that number of whole shares of Parent Common
Stock equal to the product of the number of shares of Company Common Stock that
were subject to such Company Option immediately prior to the Effective
multiplied by the Exchange Ratio, rounded to the nearest whole number of shares
of Parent Common Stock, and the per share exercise price for the shares of
Parent Common Stock issuable upon exercise of such substituted Parent Option
will be equal to the quotient determined by dividing the exercise price per
share of the Company Common Stock at which such Company Option was exercisable
immediately prior to the Effective Time by the Exchange Ratio, rounded down to
the nearest whole cent.
(d) Capital Stock of Merger Sub. Each share of Common Stock, no par
value, of Merger Sub issued and outstanding immediately prior to the Effective
Time shall be converted into and exchanged for one validly issued, fully paid
and nonassessable share of Common Stock, no par value, of the Surviving
Corporation. Each stock certificate of Merger Sub evidencing ownership of any
such shares shall continue to evidence ownership of such shares of capital stock
of the Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
Parent Common Stock or Company Capital Stock), reorganization, recapitalization
or other like change with respect to Parent Common Stock or Company Capital
Stock occurring after the date hereof and prior to the Effective Time.
(f) Fractional Shares. No fraction of a share of Parent Common Stock
will be issued, but in lieu thereof each holder of shares of Company Common
Stock who would
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otherwise be entitled to a fraction of a share of Parent Common Stock (after
aggregating all fractional shares of Parent Common Stock to be received by such
holder) shall receive from Parent an amount of cash (rounded to the nearest
whole cent) equal to the product of such fraction multiplied by $____________.
4.2 Company Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary,
any shares of Company Common Stock held by a holder who has exercised
dissenters' rights for such shares in accordance with California Law and who, as
of the Effective Time, has not effectively withdrawn or lost such dissenters'
rights ("Dissenting Shares"), shall not be converted into or represent a right
to receive Parent Common Stock pursuant to Section 4.1, but the holder thereof
shall only be entitled to such rights as are granted by California Law.
(b) Notwithstanding the provisions of subsection (a), if any holder of
Dissenting Shares shall effectively withdraw or lose (through failure to perfect
or otherwise) his or her dissenters' rights, then, as of the later of the
Effective Time or the occurrence of such event, such holder's shares shall
automatically be converted into and represent only the right to receive Parent
Common Stock and payment for fractional shares as provided in Section 4.1,
without interest thereon, upon surrender of the certificate representing such
shares.
(c) The Company shall give Parent (i) prompt notice of any written
demand received by the Company to require the Company to purchase shares of the
Company's Common Stock pursuant to the applicable provisions of California law
and (ii) the opportunity to participate in all negotiations and proceedings with
respect to such demands. The Company shall not, except with the prior written
consent of Parent, voluntarily make any payment with respect to any such demands
or offer to settle or settle any such demands.
4.3 Surrender of Certificates.
(a) Exchange Agent. Harris Trust and Savings Bank shall act as
exchange agent (the "Exchange Agent") in the Merger.
(b) Parent to Provide Common Stock. Promptly after the Effective
Time, Parent shall make available to the Exchange Agent for exchange in
accordance with this Article I, through such reasonable procedures as Parent may
adopt, the shares of Parent Common Stock issuable pursuant to Section 4.1 in
exchange for outstanding shares of Company Common Stock.
(c) Exchange Procedures. Promptly after the Effective Time, the
Surviving Corporation shall cause to be mailed to each holder of record of a
certificate or certificates (the "Certificates") which immediately prior to the
Effective Time represented outstanding shares of Company Common Stock whose
shares were converted into the right to receive shares of Parent Common Stock
pursuant to Section 4.1, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent and shall be
in such form and have such other provisions as
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Parent may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of Parent Common Stock. Upon surrender of a Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by Parent,
together with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, the holder of such Certificate shall
be entitled to receive in exchange therefor a certificate representing the
number of whole shares of Parent Common Stock and payment in lieu of fractional
shares which such holder has the right to receive pursuant to Section 4.1, and
the Certificate so surrendered shall forthwith be canceled. Until so
surrendered, each outstanding certificate that, prior to the Effective Time,
represented shares of Company Common Stock will be deemed from and after the
Effective Time, for all corporate purposes, other than the payment of dividends,
to evidence the ownership of the number of whole shares of Parent Common Stock
into which such shares of Company Common Stock shall have been so converted and
the right to receive an amount in cash in lieu of the issuance of any fractional
shares in accordance with Section 4.1.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the date of this Agreement with
respect to Parent Common Stock with a record date after the Effective Time will
be paid to the holder of any unsurrendered Certificate with respect to the
shares of Parent Common Stock represented thereby until the holder of record of
such Certificate shall surrender such Certificate. Subject to applicable law,
following surrender of any such Certificate, there shall be paid to the record
holder of the certificates representing whole shares of Parent Common Stock
issued in exchange therefor, without interest, at the time of such surrender,
the amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Parent
Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent
Common Stock is to be issued in a name other than that in which the certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the certificate so surrendered be properly endorsed and
otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Parent or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
certificate surrendered, or established to the satisfaction of Parent or any
agent designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
Section 4.3, none of the Exchange Agent, the Surviving Corporation or any party
hereto shall be liable to a holder of shares of Parent Common Stock for any
amount properly paid to a public official pursuant to any applicable abandoned
property, escheat or similar law.
4.4 No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms hereof (including any cash paid in
respect thereof) shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Common
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<PAGE>
Stock, and there shall be no further registration of transfers on the records of
the Surviving Corporation of shares of Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Agreement.
4.5 Deposit of Parent Common Stock into Escrow. On the Closing Date, an
aggregate of 310,000 of the shares of Parent Common Stock to be issued in
exchange for the Company Common Stock pursuant to Section 4.1(a) (the "Escrow
Shares") shall be deposited into two escrow accounts pursuant to the terms of
Article VII of the Reorganization Agreement, without any act of any shareholder
of the Company, and the remaining shares of Parent Common Stock shall be
available for issuance as provided in Section 4.3(c). The Escrow Shares will be
deposited with Harris Trust and Savings Bank as escrow agent, such deposit to
constitute an escrow fund (the "Escrow Fund"). Parent shall be entitled to
indemnity from the Escrow Fund for any Adverse Consequences (as defined below)
Parent, the Surviving Corporation and their respective affiliates and successors
and assigns, including the directors, officers, employees, agents, advisors and
representatives of each of them, may suffer resulting from, arising out of,
relating to, in the nature of or caused by (i) any inaccuracy or breach of a
representation or warranty of the Company contained in Article II of the
Reorganization Agreement or in any instrument delivered pursuant to the
Reorganization Agreement by the Company, or any failure by the Company to
perform or comply with any covenant contained in the Reorganization Agreement
(provided the aggregate amount of such Adverse Consequences is in excess of
$150,000 ("General Indemnity") or (ii) any claim, action, dispute or loss
arising out of any actions taken or omitted in connection with any transactions
involving securities of the Company (excluding the Merger) which were made
between or among the Company and/or its shareholders and former shareholders
during the 12 months prior to the Effective Date involving any shareholder
agreement among the Company and any current or former shareholder of the Company
("Claims Indemnity"). Any liability for any indemnification to which Parent may
be entitled under Article VII of the Reorganization Agreement shall be
apportioned among the shareholders of the Company on a pro rata basis. The
Escrow Fund as it relates to the General Indemnity shall remain in existence
during the period of time between the Effective Time and 5:00 p.m. West Coast
time, on the first anniversary of the Effective Time, subject to the 30-day
objection period provided in Section 7.9 of the Reorganization Agreement and
subject to the provisions of Section 7.10 of the Reorganization Agreement. The
Escrow Fund as it relates to the Claims Indemnity shall remain in existence
until and including August 31, 1997, subject to the 30-day objection period
provided in Section 7.9 of the Reorganization Agreement and subject to the
provisions of Section 7.10 of the Reorganization Agreement.
"Adverse Consequences" means all, actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, reasonable
amounts paid in settlement, liabilities, obligations, taxes, liens, losses,
expenses and fees, including court costs and reasonable attorneys' fees and
expenses, offset in each case by any related insurance proceeds actually
received by the Indemnitees.
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ARTICLE V
TERMINATION
5.1 Termination by Mutual Agreement. Notwithstanding the approval of this
Merger Agreement by the shareholders of the Company and Merger Sub, this Merger
Agreement may be terminated at any time prior to the Effective Time by mutual
agreement of the Board of Directors of the Company and Merger Sub.
5.2 Termination of Agreement and Plan of Reorganization. Notwithstanding
the approval of this Merger Agreement by the shareholders of the Company and
Merger Sub, this Merger Agreement shall terminate forthwith in the event that
the Reorganization Agreement shall be terminated as therein provided.
5.3 Effects of Termination. In the event of the termination of this
Merger Agreement, this Merger Agreement shall forthwith become void and there
shall be no liability on the part of either the Company or Merger Sub or their
respective officers or directors, except as otherwise provided in the
Reorganization Agreement.
ARTICLE VI
GENERAL PROVISIONS
6.1 Amendment. This Merger Agreement may be amended by the parties hereto
any time before or after approval hereof by the shareholders of the Company or
Merger Sub but, after such approval no amendment shall be made which by law
requires the further approval of such shareholders without obtaining such
approval. This Merger Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
6.2 Counterparts. This Merger Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one agreement.
6.3 Governing Law. This Merger Agreement shall be governed by and
construed in accordance with the laws of the State of California, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law thereof.
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IN WITNESS WHEREOF, the parties have duly executed this Merger Agreement as
of the date first written above.
SEMICONDUCTOR SYSTEMS, INC.
By:
------------------------------------------
Michael L. Parodi, Chief Executive Officer
and President
SPECTRE ACQUISITION CORP.
By:
------------------------------------------
Benno G. Sand, Executive Vice President
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ANNEX II
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CHAPTER 13
DISSENTERS' RIGHTS
RIGHT TO REQUIRE PURCHASE--"DISSENTING SHARES" AND "DISSENTING SHAREHOLDER"
DEFINED. (S) 1300.
DEMAND FOR PURCHASE. (S) 1301.
ENDORSEMENT OF SHARES. (S) 1302.
AGREED PRICE--TIME FOR PAYMENT. (S) 1303.
DISSENTER'S ACTION TO ENFORCE PAYMENT. (S) 1304.
APPRAISERS' REPORT--PAYMENT--COSTS. (S) 1305.
DISSENTING SHAREHOLDER'S STATUS AS CREDITOR. (S) 1306.
DIVIDENDS PAID AS CREDIT AGAINST PAYMENT. (S) 1307.
CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS. (S) 1308.
TERMINATION OF DISSENTING SHAREHOLDER STATUS. (S) 1309.
SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION. (S) 1310.
EXEMPT SHARES. (S) 1311.
ATTACKING VALIDITY OF REORGANIZATION OR MERGER. (S) 1312.
(S) 1300. RIGHT TO REQUIRE PURCHASE--"DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-
form merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or (B)
listed on the list of OTC margin stocks issued by the Board of Governors of the
Federal Reserve System, and the notice of meeting of shareholders to act upon
the reorganization summarizes this section and Sections 1301, 1302, 1303 and
1304; provided, however, that this provision does not apply to any shares with
respect to which there exists any restriction on transfer imposed by the
corporation or by any law or regulation; and provided, further, that this
provision does not apply to any class of shares described in subparagraph (A) or
(B) if demands for payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger;
<PAGE>
provided, however, that subparagraph (A) rather than subparagraph (B) of this
paragraph applies in any case where the approval required by Section 1201 is
sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance with Section
1301.
(4) Which the dissenting shareholder has submitted for endorsement,
in accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the record
holder of dissenting shares and includes a transferee of record. LEG.H. 1975 ch.
682, 1976 ch. 641, effective January 1, 1977, 1982 ch. 36, effective February
17, 1982, 1990 ch. 1018, 1993 ch. 543.
1993 NOTE: Nothing in this act shall be construed to modify or alter the
prohibition contained in Sections 15503 and 15616 of the Corporations Code or
Section 1648 of the Insurance Code, or modify or alter any similar prohibition
relating to the operation of a business in limited partnership form. Stats.
1993 ch. 543 (S) 24.
Nothing in this act shall be construed to modify or impair any rights of
limited partners under the Thompson-Killea Limited Partners Protection Act of
1992 (Chapter 1183 of the Statutes of 1992). Stats. 1993 ch. 543 (S)25.
(S) 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
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(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price. LEG.H.
1975 ch. 682, 1976 ch. 641, effective January 1, 1977, 1980 chs. 501, 1155.
(S) 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares. LEG.H. 1975 ch. 682, effective
January 1, 1977, 1986 ch. 766.
(S) 1303. AGREED PRICE--TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement. LEG.H. 1975 ch. 682, effective January
1, 1977, 1980 ch. 501, 1986 ch. 766.
(S) 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(c) If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(d) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
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<PAGE>
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares. LEG.H. 1975 ch.
682, effective January 1, 1977.
(S) 1305. APPRAISERS' REPORT--PAYMENT--COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301). LEG.H. 1975 ch. 682, 1976 ch. 641, effective January 1, 1977, 1977 ch.
235, 1986 ch. 766.
(S) 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5. LEG.H. 1975 ch. 682, effective
January 1, 1977.
(S) 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by
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<PAGE>
the corporation shall be credited against the total amount to be paid by the
corporation therefor. LEG.H. 1975 ch. 682, effective January 1, 1977.
(S) 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto. LEG.H. 1975 ch. 682, effective January 1, 1977.
(S) 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
LEG.H. 1975 ch. 682, effective January 1, 1977.
(S) 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Section 1304 and 1305 shall be suspended until final determination of such
litigation. LEG.H. 1975 ch. 682, effective January 1, 1977.
(S) 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger. LEG.H. 1975
ch. 682, effective January 1, 1977, 1988 ch. 919.
(S) 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the
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reorganization or short-form merger, or to have the reorganization or short-form
merger set aside or rescinded, except in an action to test whether the number of
shares required to authorize or approve the reorganization have been legally
voted in favor thereof; but any holder of shares of a class whose terms and
provisions specifically set forth the amount to be paid in respect to them in
the event of a reorganization or short-form merger is entitled to payment in
accordance with those terms and provisions or, if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1202, is
entitled to payment in accordance with the terms and provisions of the approved
reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled. LEG.H. 1975 ch. 682, 1976 ch.
641, effective January 1, 1977, 1988 ch. 919.
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PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. Indemnification of Directors and Officers
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Section 4.01 of FSI's Restated By-Laws provides that FSI shall indemnify
its directors and officers to the full extent required or permitted by Minnesota
Statutes or by other provisions of law. Section 302A.521 of the Minnesota
Business Corporation Act provides in substance that, unless prohibited or
limited by its articles of incorporation or bylaws, a corporation must indemnify
an officer or director who is made or threatened to be made a party to a
proceeding by reason of his official capacity against judgments, penalties,
fines, settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding, if
certain criteria are met. These criteria, all of which must be met by the person
seeking indemnification, are (a) that such person has not been indemnified by
another organization for the same judgments, penalties, fines, settlements, and
expenses; (b) that such person acted in good faith; (c) that no improper
personal benefit was obtained by such person and certain statutory conflicts of
interest provisions have been satisfied, if applicable; (d) that, in the case of
a criminal proceeding, such person had no reasonable cause to believe that the
conduct was unlawful; and (e) that such person acted in a manner he reasonably
believed was in the best interests of the corporation or, in certain limited
circumstances, not opposed to the best interests of the corporation. The
determination as to eligibility for indemnification is made by the members of
the corporation's board of directors or a committee of the board who are at the
time not parties to the proceeding under consideration, by special legal
counsel, by the shareholders who are not parties to the proceeding, or by a
court.
Article VIII of FSI's Amended and Restated Articles of Incorporation
provides that no director shall be personally liable to FSI or its shareholders
for monetary damages for breach of fiduciary duty as a director, except (i) for
any breach of the director's duty of loyalty to FSI or its shareholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) for dividends, stock repurchases, and other
distributions made in violation of Minnesota law or for violations of the
Minnesota securities laws, (iv) for any transaction from which the director
derived an improper personal benefit, or (v) for any act or omission occurring
prior to the effective date of the provision limiting such liability in FSI's
Articles of Incorporation. This Article does not affect the availability of
equitable remedies, such as an action to enjoin or rescind a transaction
involving a breach of fiduciary duty, although, as a practical matter, equitable
relief may not be available. This Article also does not limit liability of the
directors for violations of, or relieve them from the necessity of complying
with, the federal securities laws.
ITEM 21. Exhibits and Financial Statement Schedules
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(a) Exhibits
2.1 Agreement and Plan of Reorganization dated February 5, 1996
by and among FSI International, Inc., Spectre Acquisition
Corp. and Semiconductor Systems, Inc. (included as Annex I
in the Proxy Statement/Prospectus) (exhibits and schedules
omitted, but will be filed at request of the Commission)
2.2 Shareholders Agreement dated February 5, 1996 by and among
FSI International, Inc. and the Shareholders of
Semiconductor Systems, Inc.
2.3 Agreement and Plan of Reorganization dated December 23, 1994
by and among FSI, ACS Acquisition Corp., Applied Chemical
Solutions and certain significant shareholders of Applied
Chemical Solutions. (1)
2.4 Share Purchase Agreement dated December 14, 1994 by and
among FSI, Metron Semiconductors Europa B.V. , Christopher
Springall, Anthony Springall, Roger Springall, David
Springall and Michael Springall. (2)
3.1 Restated Articles of Incorporation of FSI. (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)
*5.1 Opinion of Faegre & Benson LLP.
*8.1 Form of Opinion of Faegre & Benson LLP regarding certain tax
matters.
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*8.2 Form of Opinion of Wilson Sonsini Goodrich & Rosati
Professional Corporation regarding certain tax matters.
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 FSI and Joel A.
Elftmann. (Similar agreements between FSI and each of Robert
E. Cavins, 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). (4)
10.4 Lease dated June 27, 1985, between FSI and Lake Hazeltine
Properties. (7)
10.5 Lease dated September 1, 1985, between FSI and Elftmann,
Wyers, Blackwood Partnership. (7)
10.6 Lease dated September 1, 1985, between FSI and Elftmann,
Wyers Partnership. (7)
10.7 1989 Stock Option Plan. (5)
10.8 Amended and Restated Employees Stock Purchase Plan. (3)
10.9 Directors Nonstatutory Stock Option Plan. (3)
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 FSI and
Texas Instruments Incorporated. (9)
10.14 Amendment No. 1, dated April 10, 1992, to the License
Agreement, dated October 15, 1991, between FSI and Texas
Instruments Incorporated. (9)
10.15 Amendment effective October 1, 1993 to the License
Agreement, dated October 15, 1991 between FSI 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 FSI International, Inc. 1994 Omnibus Stock Plan. (12)
10.26 FSI International, Inc. 1995 Incentive Plan. (13)
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 15, 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.
(14)
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of KPMG Accountants N.V.
23.3 Consent of Price Waterhouse LLP.
II-2
<PAGE>
23.4 Consent of Faegre and Benson LLP (included in Exhibits 5.1
and 8.1).
23.5 Consent of Wilson Sonsini Goodrich & Rosati Professional
Corporation (included in Exhibit 8.2).
24.1 Powers of Attorney (included as part of signature page).
_____________
* To be filed by amendment
(1) Filed as an Exhibit to FSI'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 FSI'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 FSI's Report on Form 10-Q for the quarter ended
February 24, 1990, SEC File No. 0-17276, and incorporated by reference.
(4) Filed as an Exhibit to FSI's Registration Statement on Form S-1, SEC File
No. 33-25035, and incorporated by reference.
(5) Filed as an Exhibit to FSI'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 FSI'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 FSI 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 FSI's Registration Statement on Form S-1, SEC File
No. 33-25035, and incorporated by reference.
(8) Filed as an Exhibit to FSI'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 FSI's Report on Form 10-Q for the fiscal year ended
February 29, 1992, File No. 0-17276, and incorporated by reference.
(10) Filed as an Exhibit to FSI'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 FSI'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 FSI'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 FSI'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 Exhibits to FSI's Report on Form 10-K for the fiscal year ended
August 26, 1995 and FSI's Report on Form 10-Q for the fiscal quarter ended
November 25, 1995, SEC File No. 0-17276.
(b) Financial Statement Schedules
FSI International, Inc.
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required
information is shown in the applicable financial statements or notes thereto.
Metron Semiconductors Europa B.V. 31 May 1995 and 31 May 1994 Consolidated
Financial Statements.
ITEM 22. Undertakings
- -------
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period, in which offers or sales are
being made, a posteffective amendment to this registration statement (i)
to include any prospectus required by section 10(a)(3) of the Securities
Act of 1933, (ii) to reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the
most recent posteffective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement, and (iii) to
II-3
<PAGE>
include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such posteffective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a posteffective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(b) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(c) The registrant undertakes that every prospectus: (i) that is
filed pursuant to paragraph (b) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(e) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by means
of a posteffective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis, State of
Minnesota, on March 6 , 1996.
---
FSI INTERNATIONAL, INC.
By /s/ Benno G. Sand
------------------------------------------
Benno G. Sand, Executive Vice President,
Chief Financial Officer and Secretary
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Joel A. Elftmann, Benno G. Sand and J. Wayne Stewart, and each of them (with
full power to act alone), such person's true and lawful attorney-in-fact and
agent with full power of substitution and resubstitution for such person and in
such person's name, place and stead, in any and all capacities, to sign the
Registration Statement on Form S-4 of FSI International, Inc. and any or all
amendments (including post-effective amendments) to the Registration Statement,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as such person
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, and each of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on March 6 , 1996.
---
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
/s/ Joel A. Elftmann Chairman, President, Chief Executive Officer, and
--------------------------- Director (Principal Executive Officer)
Joel A. Elftmann
/s/ Benno G. Sand Executive Vice President, Chief Financial Officer,
--------------------------- and Secretary (Principal Financial and Accounting
Benno G. Sand Officer)
/s/ James A. Bernards Director
---------------------------
James A. Bernards
/s/ Neil R. Bonke Director
---------------------------
Neil R. Bonke
/s/ Terrence W. Glarner Director
---------------------------
Terrence W. Glarner
/s/ Robert E. Lorenzini Director
---------------------------
Robert E. Lorenzini
/s/ William M. Marcy Director
---------------------------
William M. Marcy
/s/ Charles R. Wofford Director
---------------------------
Charles R. Wofford
</TABLE>
<PAGE>
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED AUGUST 26, 1995, AUGUST 27, 1994 AND AUGUST 28. 1993
<TABLE>
<CAPTION>
Balance at
Beginning Balance at
of Year Additions Deletions End of Year
------- --------- --------- -----------
<S> <C>
Fiscal Year Ended August 26, 1995
Allowance for doubtful
accounts (Deducted form
accounts receivable) $525,000 $700,000 $ -0- $1,225,000
======== ======== ======== ==========
Fiscal YeAr Ended August 27, 1994
Allowance for doubtful
accounts (Doubtful from
accounts receivable) $350,000 $175,000 $$ -0- $525,000
======= ======= ======== =======
Fiscal Year Ended August 28, 1993
Allowance for doubtful
accounts (Deducted from
accounts receivable) $300,000 $52,400 $(2,400) $350,000
======= ====== ======= =======
</TABLE>
<PAGE>
METRON SEMICONDUCTORS EUROPA B.V., ALMERE
Financial Statements
for the years ended
31 May 1995, 1994 and 1993
<PAGE>
TABLE OF CONTENTS
page
Consolidated Statements of Operations 2
Consolidated Balance Sheets 3
Consolidated Statements of Cash Flows 4
Consolidated Statements of Shareholders' Equity 5
Notes to the Consolidated Financial Statements 6
page 1
<PAGE>
METRON SEMICONDUCTORS EUROPA B.V., ALMERE
Consolidated Statements of Operations
for the years ended 31 May 1995, 1994 and 1993
<TABLE>
<CAPTION>
=============================================================================================
(in Dutch Guilders) Notes 1994/5 1993/4 1992/3
- ---------------------------------------- ----- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Sales 2 173,097,282 160,479,094 111,877,931
Cost of Sales (123,205,862) (115,196,670) (77,335,028)
-------------- -------------- -------------
Gross Profit 49,891,420 45,282,424 34,542,903
Selling, General and Administrative
Expenses (35,445,230) (33,345,370) (27,671,913)
-------------- -------------- -------------
Operating Profit 14,446,190 11,937,054 6,870,990
Interest Expense (411,672) (673,861) (858,951)
Foreign Currency Exchange Differences (1,736,876) 5,076 47,761
Other Income, net 404,798 358,213 211,022
-------------- -------------- -------------
Income before Income Taxes 12,702,440 11,626,482 6,270,822
Income Tax Expense 3 (5,286,363) (4,137,323) (2,011,228)
-------------- -------------- -------------
Income after Income Taxes 7,416,077 7,489,159 4,259,594
Equity in Earnings of Associated Company 164,600 - -
Minority Interests in Net Earnings (195,973) (783,847) (466,055)
-------------- -------------- -------------
Net Income 7,384,704 6,705,312 3,793,539
============== ============== =============
Net Income per Share NLG3.70 NLG3.44 NLG1.93
-------------- -------------- -------------
Weighted Average Shares 1,994,655 1,948,000 1,962,000
-------------- -------------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 2
<PAGE>
METRON SEMICONDUCTORS EUROPA B.V., ALMERE
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
============================================================================
(in Dutch Guilders) Notes 31 May 1995 31 May 1994
- -------------------------------------- ----- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents 4 13,258,686 8,805,082
Trade Accounts Receivable, less
Allowance for Doubtful Accounts
of NLG 1,687,009 in 1994 and
NLG 869,401 in 1993 33,291,994 36,978,551
Accounts Receivable from Associated
Company 400,600 -
Inventories 1 8,411,874 10,049,421
Income Taxes Receivable 740,962 -
Prepaid Expenses and Other Current
Assets 3,084,519 2,874,892
----------- -----------
Total Current Assets 59,188,635 58,707,946
----------- -----------
Property, Plant and Equipment 5 5,586,248 5,418,786
Investment in Associated Company 6 2,177,239 -
---------- ----------
66,952,122 64,126,732
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank Overdrafts 4 4,483,020 2,255,820
Current Maturities of Long-Term Debt 7 348,604 669,161
Accounts Payable 14,563,651 16,455,999
Accounts Payable to Related Companies 8 8,791,471 11,439,365
Income Taxes Payable 3,010,036 3,155,824
Accrued Liabilities 9 6,624,709 6,825,864
Other Current Liabilities 3,556,911 3,914,185
---------- ----------
Total Current Liabilities 41,378,402 44,716,218
---------- ----------
Long-Term Debt, less Current Maturities 7 115,966 450,999
Deferred Taxation 8,659 19,839
Shareholders' Equity:
Shares of NLG 0.10 par value;
10,000,000 Shares
authorised, issued and outstanding,
2,127,171 Shares of NLG 0.10 par value
at 31 May 1995 and 950 Shares NLG
25.00 par value at 31 May 1994 10 212,717 23,750
Additional Paid in Capital 1,411,613 -
Shares held in Treasury
12,500 Shares at 31 May 1994 - (623,660)
Translation Adjustment (2,237,252) (1,188,822)
Retained Earnings 26,062,017 18,843,563
---------- ----------
Total Shareholders' Equity 25,449,095 17,054,831
---------- ----------
Minority Interests in Subsidiaries - 1,884,845
Commitments and Contingencies 12 & 13
--------- ----------
66,952,122 64,126,732
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3
<PAGE>
METRON SEMICONDUCTORS EUROPA B.V., ALMERE
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended 31 May 1995, 1994 and 1993
<TABLE>
<CAPTION>
=================================================================================
(in Dutch Guilders) 1994/5 1993/4 1992/3
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Operating Activities
Net Income 7,384,704 6,705,312 3,793,539
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation 892,708 960,864 891,811
Minority Interests in Net Earnings 195,973 783,847 281,840
Equity in Earnings of Associated Company (164,600) - -
Changes in Operating Assets and
Liabilities:
Accounts Receivable 3,686,557 (7,395,901) (6,747,468)
Accounts Receivable from Associated
Company (400,600) - -
Inventories 1,637,547 (4,093,519) (281,249)
Refundable Income Tax Benefit (740,962) - 460,348
Prepaid Expenses and Other Current
Assets (209,627) 135,453 (1,147,879)
Accounts Payable (1,892,348) 4,627,059 308,640
Accounts Payable to Related Companies (2,647,894) 3,921,800 1,741,004
Income Taxes Payable (145,788) 1,007,183 1,606,254
Accrued Liabilities (201,155) 2,034,233 1,582,324
Other Current Liabilities (357,274) 1,412,414 1,314,679
Deferred Taxation (11,180) 19,839 -
---------- ---------- ----------
Net cash provided by operations 7,026,061 10,118,584 3,803,843
---------- ---------- ----------
Investing Activities
Acquisition of Equipment (1,292,203) (1,376,423) (1,150,250)
Proceeds from Sale of Equipment 63,316 221,127 104,245
Investment in Associated Company (2,084,347) - -
Acquisition of Minority Interests in
Subsidiaries (2,057,990) - -
---------- ---------- ----------
Net cash used in investing activities (5,371,224) (1,155,296) (1,046,005)
---------- ---------- ----------
Financing Activities
Principal payments on Long-Term Debt (655,590) (715,873) (573,121)
Additions to Long-Term Debt - 169,206 960,688
Issue of new Shares and Shares held in
Treasury 2,057,990 - -
Purchase of Shares held in Treasury - (378,310) (49,227)
Net increase (decrease) in Bank
Overdrafts 2,227,200 (3,736,612) 46,234
--------- --------- ----------
Net cash provided by (used in)
financing activities 3,629,600 (4,661,589) 384,574
--------- --------- ----------
Effect of exchange rate changes on Cash (830,833) (87,306) (294,265)
--------- --------- ---------
Net increase (decrease) in Cash 4,453,604 4,214,393 2,848,147
Cash and Cash Equivalents at beginning
of the year 8,805,082 4,590,689 1,742,542
--------- --------- ----------
Cash and Cash Equivalents at end of year 13,258,686 8,805,082 4,590,689
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4
<PAGE>
METRON SEMICONDUCTORS EUROPA B.V., ALMERE
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended 31 May 1995, 1994 and 1993
<TABLE>
<CAPTION>
==========================================================================================================================
Shares Addl. Paid Held in Translation Retained
---------------------
(in Dutch Guilders) Number Amount in capital Treasury Adjustment Earnings Total
- ------------------- ----------- ------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance 31 May 1992 983 24,575 (196,948) (633,330) 8,344,712 7,539,009
Net Income - - - - 3,793,539 3,793,539
Translation Difference - - - (464,562) - (464,562)
Shares Repurchased (4) (100) (49,127) - - (49,227)
----------- ------- -------- ---------- ---------- ----------
Balance 31 May 1993 979 24,475 (246,075) (1,097,892) 12,138,251 10,818,759
Net Income - - - - 6,705,312 6,705,312
Translation Difference - - - (90,930) - (90,930)
Shares Repurchased (29) (725) (377,585) - - (378,310)
----------- ------- -------- ---------- ---------- ----------
Balance 31 May 1994 950 23,750 (623,660) (1,188,822) 18,843,563 17,054,831
Shares issued as a result of the
change in nominal value 236,550 - - - - -
Shares issued as a result of the
capitalisation of reserves 1,662,500 166,250 - - (166,250) -
Shares issued in exchange for
minority interests in subsidiaries 227,171 22,717 1,411,613 623,660 - - 2,057,990
Net Income - - - - 7,384,704 7,384,704
Translation Difference - - - (1,048,430) - (1,048,430)
----------- ------- --------- -------- ---------- ---------- ----------
Balance 31 May 1995 2,127,171 212,717 1,411,613 - (2,237,252) 26,062,017 25,449,095
=========== ======= ========= ======== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5
<PAGE>
METRON SEMICONDUCTORS EUROPA B.V., ALMERE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the years ended 31 May 1995, 1994 and 1993
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the financial statements of all
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
The balance sheets of the subsidiaries are translated into Dutch Guilders (NLG)
at the rates of exchange ruling at the balance sheet date, whereas the profit
and loss accounts are translated at average rates. The resulting translation
adjustment is charged or credited to Shareholders' Equity in the accompanying
balance sheet.
The 50% investment in an associated company is accounted for using the equity
method.
Revenue Recognition
Revenue is recognised on delivery of goods or the provision of services to the
customers.
Inventories
Inventories consist primarily of purchased products and are stated at the lower
of cost (first-in, first-out basis) or net realisable value. Suitable allowance
has been made for slow moving and obsolete items.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less depreciation. Depreciation
is primarily determined by the straight-line method based on the estimated
useful lives as follows:
<TABLE>
<CAPTION>
<S> <C>
- - buildings and improvements: 10 to 50 years;
- - machinery and equipment: 3 to 17 years;
- - motor vehicles: 3 to 7 years.
</TABLE>
Land is not depreciated. When assets are retired or disposed of, the cost and
accumulated depreciation thereon is removed from the accounts and any gains or
losses included in the income statement. Repair and maintenance expenses are
capitalised only if they extend the useful life of the related asset.
Income Taxes
Deferred income taxes are provided to reflect the tax effect of temporary
differences between financial reporting and taxable income, where applicable.
Deferred income taxes have not been provided for undistributed earnings of
subsidiaries, as it is the intention of management to finance the development of
the companies through retention of earnings.
Product Warranty
Generally, the company warrants products sold to customers to be free from
defects in material and workmanship for up to one year. Provision is made for
the estimated cost of fulfilling these warranties at the time of sale.
Page 6
<PAGE>
METRON SEMICONDUCTORS EUROPA B.V., ALMERE
Foreign Currency Transactions
Assets and liabilities denominated in foreign currencies are translated at
exchange rates ruling at the balance sheet date. Transactions in foreign
currencies are translated at exchange rates approximating those at the
transaction date. The resulting gains and losses are included in the profit and
loss account.
Exposure to exchange movement risks is minimised by matching the maturities of
foreign currency assets and liabilities, mainly accounts receivable and accounts
payable. Periodically, hedging transactions are entered into by the Company or
its subsidiaries to hedge differences existing between foreign currency assets
and liabilities.
Net Income Per Share
Net income per share is computed based on the weighted average number of shares
outstanding during the year. Comparative amounts have been adjusted to reflect
the reduction in nominal value and the issue of new shares through the
conversion of reserves. There are no dilutive share equivalents.
2 ADDITIONAL SALES INFORMATION AND CONCENTRATION OF CREDIT RISK
The Company operates in the semiconductor manufacturing sector. Approximately
13% in 1994/5, 26% in 1993/4 and 23% in 1992/3 of net sales for the years then
ended were made to one, two and two customers, respectively, which individually
represented more than 10% of net sales.
Sales by geographic area are summarised as follows:
<TABLE>
<CAPTION>
=======================================================
(in Dutch Guilders '000) 1994/5 1993/4 1992/3
- ------------------------------------- -------- --------
<S> <C> <C> <C>
Europe 166,700 154,170 109,856
Africa and the Middle East 6,397 6,309 2,022
------- ------- -------
173,097 160,479 111,878
======= ======= =======
</TABLE>
It is impractical to determine net income and identifiable assets by region, as
the sales are made by companies in Europe.
A large portion of the Company's sales are made to a number of major publicly
owned corporations. There is a concentration of credit risk in accounts
receivable from these customers. The credit risk associated with non-payment
from these customers is affected by conditions or occurrences within their
industries. However, accounts receivable from these customers were substantially
current at 31 May 1995. The Company believes that there is no significant credit
risk with respect to these receivables.
Page 7
<PAGE>
METRON SEMICONDUCTORS EUROPA B.V., ALMERE
3. INCOME TAXES
Income before income taxes is as follows:
===========================================================================
(in Dutch Guilders) 1994/5 1993/4 1992/3
- --------------------------------------------------- ---------- ---------
The Netherlands 1,401,313 1,338,411 484,970
Foreign 11,301,127 10,288,071 5,785,852
---------- ---------- ---------
12,702,440 11,626,482 6,270,822
========== ========== =========
Income tax expense is as follows:
===========================================================================
(in Dutch Guilders) 1994/5 1993/4 1992/3
- ---------------------------------------------------------------------------
Current
The Netherlands 457,278 347,541 -
Foreign 4,838,888 3,769,581 2,011,228
Deferred
Foreign (9,803) 20,201 -
--------- --------- ---------
5,286,363 4,137,323 2,011,228
========= ========= =========
The expected tax rate is dependent on the amount of the profit in each of the
individual companies and the rates of tax in the countries in which the
companies operate. The rate will vary from year to year. The effective tax rate
differs from the expected tax rate as follows:
==================================================================
1994/5 1993/4 1992/3
- ------------------------------------------------------------------
Expected income tax rate based on 40.6 % 42.8 % 40.9 %
statutory tax rates
Use of prior year tax losses brought
forward - (1.3)% (2.9)%
Tax credit arising from dividends from (0.9)% (7.2)% (9.6)%
a subsidiary
Loss benefit limitation on tax losses 0.4 % - % 1.7 %
carried forward
Other, mainly permanent differences 1.2 % 0.8 % 2.0 %
------ ------ ------
Effective income tax rate 41.3 % 35.1 % 32.1 %
====== ====== ======
Tax losses carried forward amounted to NLG 1,409,000 (31 May 1994: NLG
1,380,000), with no expiry date. A full valuation allowance has been provided
against the related deferred tax asset, as there does not appear to be a chance
of realisation in the near future. The deferred tax liability relates to
differences between depreciation rates used for the financial statements and
those for tax purposes.
Page 8
<PAGE>
METRON SEMICONDUCTORS EUROPA B.V., ALMERE
4 CASH AND BANK OVERDRAFTS
Cash and cash equivalents represents cash on hand and at banks and time deposits
maturing within three months of the end of the year.
The Company and its subsidiaries have overdraft facilities in various currencies
with a number of banks. Interest is charged at current market rates for amounts
used under these facilities. The facilities are secured by charges over most of
the assets of the Company and its subsidiaries. The amount of the facilities and
their usage are as follows:
========================================================
(in Dutch Guilders) 31 May 1995 31 May 1994
- ------------------------------------------- -----------
Total facilities available 13,337,114 10,452,070
Usage 4,483,020 2,255,820
5 PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are shown as follows:
==================================================================
(in Dutch Guilders) 31 May 1995 31 May 1994
- ----------------------------------------------------- -----------
Land 1,166,445 1,168,449
Buildings and Leasehold Improvements 4,279,289 4,033,382
Machinery, Equipment and Motor Vehicles 6,336,463 5,900,703
---------- ----------
11,782,197 11,102,534
Less: Accumulated Depreciation 6,195,949 5,683,748
---------- ----------
5,586,248 5,418,786
========== ==========
Included in Machinery, Equipment and Motor Vehicles are assets under capital
leases with a net book value of NLG 334,693 (1994: NLG 487,541).
6 INVESTMENT IN ASSOCIATE
On 31 January, the Company acquired 50% of FSI Metron Europe Ltd. (formerly
Vinylglass Ltd.), England, a manufacturer of chemical distribution systems and
wet benches, to increase its presence in the European chemical distribution
market. FSI International, Inc., a related party, acquired the other 50% at the
same time. FSI Metron Europe Ltd. is accounted for using the equity method. Its
financial year end was altered to 31 May. Its assets, liabilities and results of
operations are summarised as follows:
Page 9
<PAGE>
METRON SEMICONDUCTORS EUROPA B.V., ALMERE
<TABLE>
<CAPTION>
=============================================================
(in thousands of Dutch Guilders) 31 May 1995 31 July 1994
- ----------------------------------------------- ------------
<S> <C> <C>
Current Assets 4,129 2,129
Non-current assets 775 833
Current Liabilities 2,716 1,661
Non-current Liabilities 72 132
Shareholders' Equity 2,116 1,169
1994/5 1993/4
----------- ------------
10 Months
Sales 7,849 6,214
Net Income 1,110 74
</TABLE>
The cost of the investment was NLG 2,084,347, including goodwill of NLG
1,204,285. The goodwill element is being written off over a period of 5 years,
being the Company's assessment of the useful life of the goodwill.
In the period 1 February to 31 May 1995, the Group sold approximately NLG
1,087,000 of its products to its associate and purchased approximately NLG
174,000 products from its associate.
7 LONG-TERM DEBT
Long-term debt is summarised as follows:
<TABLE>
<CAPTION>
==================================================================
(in Dutch Guilders) 31 May 1995 31 May 1994
- ----------------------------------------------------- -----------
<S> <C> <C>
DEM loan repayable in six-monthly
instalments of DEM 131,250 up to March
1995; interest 6.75% p.a.; secured by
a mortgage on the land and buildings
in Germany; - 294,394
Instalment loans: interest at various
rates between 9.75% and 16%; repayable
by May 1996; secured by charges on
certain assets. 201,778 426,756
GBP instalment loans on capital leases;
interest at various rates between
10.2% and 17.6%; repayable by April
1998 207,166 305,731
NIS loan and instalment loans on
capital lease; interest rates between
17% and 21%; repayable by September
1998. 55,626 93,279
----------- -----------
464,570 1,120,160
Less: current maturities 348,604 669,161
----------- -----------
115,966 450,999
=========== ===========
</TABLE>
The debt is repayable as follows: 1995/6 NLG 348,604; 1996/7 NLG 70,591; 1997/8
NLG 45,259; 1998/9 NLG 116
Page 10
<PAGE>
METRON SEMICONDUCTORS EUROPA B.V., ALMERE
8 Related Parties
Two of the company's shareholders each own between 20% and 50% of the
outstanding shares. The Company purchases goods from these shareholders and
their subsidiaries for resale in the normal course of business. The terms and
conditions of these purchases are similar to those with non-related vendors.
9 Accrued Liabilities
Included in accrued liabilities is NLG 2,690,000 (1993/4: NLG 3,110,000) for
amounts due under various profit sharing schemes.
10 Share Capital
During the year, the following changes occurred in the share capital:
i The authorised capital of the company was increased from 1,000 shares of
NLG 25.00 to 10,000,000 shares of NLG 0.10.
ii The issued share capital was changed from 1,000 shares of NLG 25.00 to
250,000 shares of NLG 0.10.
iii 1,662,500 new shares of NLG 0.10 were issued to existing shareholders
through capitalising reserves.
iv 214,671 new shares plus the 12,500 shares held in treasury were issued in
exchange for the minority shareholdings in two subsidiary companies.
Also, the company and entered into an agreement with its two minority
shareholders that under certain circumstances (e.g. termination of employment,
death) they or their estates may require the company to purchase their share
holdings at a price to be calculated based on asset value and with restrictions
as to the number of shares that can be purchased and the amount that may be paid
for all such purchases in any one year.
Circumstances which could lead to the Company being required to acquire its own
shares under this agreement did not occur during the year. Subsequent to the
year-end, this agreement was terminated as part of the agreement to acquire the
Asian and American companies (see Note 15).
Page 11
<PAGE>
METRON SEMICONDUCTORS EUROPA B.V., ALMERE
11 PENSION PLANS
Most employees are covered by defined contribution plans, which are funded with
insurance companies. Annual costs for such plans amounted to NLG 548,686 in
1994/5 NLG 446,844 in 1993/4 and NLG 300,281 in 1992/3.
There are defined benefit plans for a small number of employees. The components
of the cost of these plans were:
<TABLE>
<CAPTION>
=============================================================================
(in Dutch Guilders) 1994/5 1993/4 1992/3
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost 59,622 37,009 87,273
Interest Cost 58,508 38,529 30,926
Amortisation 11,684 11,701 11,730
------- ------- -------
Pension Cost 129,814 87,239 129,929
======= ======= =======
The funding status of the plans was
=============================================================================
(in Dutch Guilders) 31 May 1995 31 May 1994
- --------------------------------------------------------------- -----------
Accumulated benefit obligation
Actuarial present value of vested benefits 719,403 612,052
Additional benefits based on projected future
salary increases 223,693 224,300
------- -------
Projected benefit obligation 943,096 836,352
======= =======
Plan assets less than projected benefit obligation 943,096 836,352
======= =======
Accrued liability at year end 836,121 707,794
Unrecognised transition amount, net of 116,647 128,558
amortisation
Unrecognised net gain (9,672) -
------- -------
943,096 836,352
======= =======
The assumptions used in determining the
above amounts were:
=============================================================================
1994/5 1993/4 1992/3
- ------------------------------------------------- --------- ---------
Discount rate 7.0% 6.0% 6.0%
Compensation increase 3.5% 3.5% 3.5%
</TABLE>
Page 12
<PAGE>
METRON SEMICONDUCTORS EUROPA B.V., ALMERE
12 COMMITMENTS
The Company and its subsidiaries have commitments arising from lease and rental
contracts amounting to annual expenses of:
<TABLE>
<CAPTION>
============================================================
(in Dutch Guilders) Capital Operating
- ------------------------------------------------- ---------
<S> <C> <C>
Year ending 31 May 1996 128,394 1,439,308
1997 28,327 1,025,677
1998 10,649 574,293
1999 - 377,203
2000 - 304,722
Thereafter - 2,400,074
--------- ---------
167,370 6,121,277
========= =========
</TABLE>
The Company and its subsidiaries have given guarantees mainly to banks with a
maximum commitment of NLG 1,758,688.
Rental expense for all operating leases was NLG 1,596,693 in 1994/5, NLG
1,335,620 in 1993/4 and NLG 1,339,891 in 1992/3.
The amount of the capital lease commitment excluding the interest element and
including the buy back price is NLG 251,754.
13 CONTINGENCIES
The Company and its subsidiaries are involved in various disputes arising from
the normal course of business. These disputes are for minor amounts and are not
material to the consolidated financial statements, either individually or in
total.
14 SUPPLEMENTARY CASH FLOW INFORMATION
The Company paid interest in 1994/5, 1993/4 and 1992/3 of NLG 418,474, NLG
684,127 and NLG 796,000, respectively. Net income taxes paid in 1994/5 and
1993/4 were NLG 5,112,062 and NLG 2,930,060, respectively, and net income taxes
received in 1992/3 were NLG 78,000. The non-cash investing and financing
activities in 1994/5, 1993/4 and 1992/3 included NLG 31,000, NLG 95,000 and NLG
375,000, respectively, for the purchase of cars under capital leases and NLG
2,057,990 in 1994/5 for the acquisition of the minority interests in subsidiary
companies.
15 DISCLOSURE CONCERNING FINANCIAL INSTRUMENTS
The Company has no significant off-balance sheet financial instruments at 31 May
1995 and 1994.
The carrying-value of accounts receivable and accounts payable approximate fair
values due to their short-term maturities. The carrying value of long-term debt
does not significantly differ from its estimated fair value.
Page 13
<PAGE>
METRON SEMICONDUCTORS EUROPA B.V., ALMERE
16 Subsequent Events
Following a strategic review of the effects of the globalisation of the business
of our customers on the Group, the Company and its major shareholders decided to
position the Group as the leading world-wide distributor of products to the
semiconductor manufacturing industry outside Japan. Subsequent to the year under
review, the following significant transactions were completed to reach this
objective:
i In June, the Company acquired the entire share capital of three companies
trading in Asia (the Metron Asia Group), excluding Japan, from its two major
shareholders in exchange for 531,792 new shares in the Company.
ii In July, the Company acquired the entire share capital of Transpacific
Technology Corporation, a leading American distribution and sales
representation group with subsidiary companies in Europe, in exchange for
262,974 new shares in the Company, $500,000 cash and $1,300,000 promissory
notes.
17 New Accounting Standards
In March 1995, the US Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (FAS) No. 121, Accounting for the Impairment of
Long-Lived Assets to be Disposed Of. This statement establishes accounting
standards relating to the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and for
long-lived assets and certain intangibles to be disposed of. The Company is
first required to comply with the requirements of FAS No. 121 in its
Consolidated Financial Statements for fiscal 1997. However, the company does not
believe that implementation of FAS No. 121 will have a material impact on its
financial statements.
Page 14
<PAGE>
[KPMG LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Metron Semiconductors Europa B.V.
Almere, The Netherlands
We have audited the accompanying consolidated balance sheets of Metron
Semiconductors Europa B.V. and its subsidiaries as of 31 May 1995 and 1994 and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the years ended 31 May 1995, 1994 and 1993 . The consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatements. 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 Metron
Semiconductors Europa B.V. and its subsidiaries as of 31 May 1995 and 1994 and
the results of their operations and their cash flows for each of the years ended
31 May 1995, 1994 and 1993 in conformity with accounting principles generally
accepted in the United States of America.
Amstelveen, The Netherlands, 20 July 1995.
/s/ KPMG Accountants
Signature for identification purposes: X
---
Ref.: drs. H.C.M. van Damme / C.J. Swaan
[KPMG LETTERHEAD]
<PAGE>
Exhibit Index
Exhibits
2.1 Agreement and Plan of Reorganization dated February 5, 1996
by and among FSI International, Inc., Spectre Acquisition
Corp. and Semiconductor Systems, Inc. (included as Annex I
in the Proxy Statement/Prospectus) (exhibits and schedules
omitted, but will be filed at request of the Commission)
2.2 Shareholders Agreement dated February 5, 1996 by and among
FSI International, Inc. and the Shareholders of
Semiconductor Systems, Inc.
2.3 Agreement and Plan of Reorganization dated December 23, 1994
by and among FSI, ACS Acquisition Corp., Applied Chemical
Solutions and certain significant shareholders of Applied
Chemical Solutions. (1)
2.4 Share Purchase Agreement dated December 14, 1994 by and
among FSI, Metron Semiconductors Europa B.V., Christopher
Springall, Anthony Springall, Roger Springall, David
Springall and Michael Springall. (2)
3.1 Restated Articles of Incorporation of FSI. (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)
*5.1 Opinion of Faegre & Benson LLP.
*8.1 Form of Opinion of Faegre & Benson LLP regarding certain tax
matters.
<PAGE>
*8.2 Form of Opinion of Wilson Sonsini Goodrich & Rosati
Professional Corporation regarding certain tax matters.
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 FSI and Joel A.
Elftmann. (Similar agreements between FSI and each of Robert
E. Cavins, 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). (4)
10.4 Lease dated June 27, 1985, between FSI and Lake Hazeltine
Properties. (7)
10.5 Lease dated September 1, 1985, between FSI and Elftmann,
Wyers, Blackwood Partnership. (7)
10.6 Lease dated September 1, 1985, between FSI and Elftmann,
Wyers Partnership. (7)
10.7 1989 Stock Option Plan. (5)
10.8 Amended and Restated Employees Stock Purchase Plan. (3)
10.9 Directors Nonstatutory Stock Option Plan. (3)
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 FSI and
Texas Instruments Incorporated. (9)
10.14 Amendment No. 1, dated April 10, 1992, to the License
Agreement, dated October 15, 1991, between FSI and Texas
Instruments Incorporated. (9)
10.15 Amendment effective October 1, 1993 to the License
Agreement, dated October 15, 1991 between FSI 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 FSI International, Inc. 1994 Omnibus Stock Plan. (12)
10.26 FSI International, Inc. 1995 Incentive Plan. (13)
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 15, 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.
(14)
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of KPMG Accountants N.V.
23.3 Consent of Price Waterhouse LLP.
<PAGE>
23.4 Consent of Faegre and Benson LLP (included in Exhibits 5.1
and 8.1).
23.5 Consent of Wilson Sonsini Goodrich & Rosati Professional
Corporation (included in Exhibit 8.2).
24.1 Powers of Attorney (included as part of signature page).
_____________
* To be filed by amendment
(1) Filed as an Exhibit to FSI'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 FSI'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 FSI's Report on Form 10-Q for the quarter ended
February 24, 1990, SEC File No. 0-17276, and incorporated by reference.
(4) Filed as an Exhibit to FSI's Registration Statement on Form S-1, SEC File
No. 33-25035, and incorporated by reference.
(5) Filed as an Exhibit to FSI'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 FSI'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 FSI 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 FSI's Registration Statement on Form S-1, SEC File
No. 33-25035, and incorporated by reference.
(8) Filed as an Exhibit to FSI'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 FSI's Report on Form 10-Q for the fiscal year ended
February 29, 1992, File No. 0-17276, and incorporated by reference.
(10) Filed as an Exhibit to FSI'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 FSI'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 FSI'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 FSI'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 Exhibits to FSI's Report on Form 10-K for the fiscal year ended
August 26, 1995 and FSI's Report on Form 10-Q for the fiscal quarter ended
November 25, 1995, SEC File No. 0-17276.
<PAGE>
Exhibit 2.2
SHAREHOLDERS AGREEMENT
This Shareholders Agreement is made and entered into as of the 5th day
of February, 1996 among FSI International, Inc., a Minnesota corporation
("FSI"), and the shareholders of Semiconductor Systems, Inc., a California
corporation ("SSI"), listed in the Annex to this Agreement (the "Shareholders").
FSI and the Shareholders are referred to collectively herein as the "Parties."
FSI, Spectre Acquisition Corp., a California corporation and wholly
owned subsidiary of FSI ("Spectre"), and SSI are entering into an Agreement and
Plan of Reorganization concurrently herewith (the "Reorganization Agreement").
Certain terms used herein without definition shall have the meanings ascribed
thereto in the Reorganization Agreement.
The Reorganization Agreement contemplates a transaction in which
Spectre will merge with and into SSI, whereby the outstanding shares of Common
Stock of SSI will be converted into shares of Common Stock of FSI.
FSI and SSI make certain representations, warranties and covenants in
the Reorganization Agreement which will survive the Closing for purposes of
potential indemnification. The Shareholders wish to provide for post-Closing
indemnification to FSI against breaches of these representations, warranties and
covenants and to make certain other covenants among themselves.
Now, therefore, in consideration of the premises and the mutual
promises herein made, FSI and the Shareholders agree as follows.
1. Definitions.
-----------
Capitalized terms used in this Shareholders Agreement and not
otherwise defined herein shall have the same meanings as used in the
Reorganization Agreement. In addition:
"Affiliate" means, with respect to any specified Person, any other
Person that directly or indirectly through one or more intermediaries, controls,
is controlled by, or is under common control with the Person specified. For the
purpose of this definition, "control" means the ability to direct or cause the
direction of the management or affairs of a Person, whether through the direct
or indirect ownership of voting interests, by contract or otherwise.
"Annex" has the meaning set forth in Section 2 below.
"Party" has the meaning set forth in the preface above.
"Reorganization Agreement" has the meaning set forth in the preface
above.
"Requisite Shareholders" means the Shareholders holding a majority in
interest of the total number of shares of SSI Common Stock that all of the
Shareholders hold in the aggregate as set forth in the Annex.
"Tax" or "Taxes" means any and all federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities, including taxes based upon or measured by gross receipts, income,
profit, sales, use and occupation, and value added, ad valorem, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with respect
to such amounts and any obligations under any arrangements or
<PAGE>
agreements with any other person with respect to such amounts and including any
liability for taxes of a predecessor entity.
"Transfer Taxes" means all Taxes, other than Taxes measured by net
income, incurred or imposed by reason of the sale, assignment, transfer of title
or conveyance of (i) the assets and liabilities of SSI as a result of the Merger
or (ii) the Common Stock of SSI, regardless upon whom such Taxes are levied or
imposed by law, including without limitation sales, excise, use, stamp,
documentary, filing, recording, permit, license, authorization, intangible and
similar Taxes.
2. Representations and Warranties of the Shareholders. Each of the
Shareholders severally represents and warrants to FSI that the statements
contained in this Section 2 are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Section 2) with respect to himself, except as set
forth in the Annex attached hereto (the "Annex").
(a) Authorization. The Shareholder has full power and authority to
execute and deliver this Agreement and to perform his obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
Shareholder, enforceable in accordance with its terms and conditions.
(b) Noncontravention. Neither the execution and the delivery of this
Agreement by the Shareholder, nor the performance by the Shareholder of his
obligations hereunder, will (i) violate any constitution, statute, regulation,
rule, injunction, judgment, order, decree, ruling, charge, or other restriction
of the government, governmental agency, or court to which the Shareholder is
subject or (ii) conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to which
the Shareholder is a party or by which he is bound or to which any of his assets
is subject.
(c) SSI Shares. The Shareholder holds of record the number of shares
of Common Stock of SSI set forth next to his name on the Annex.
3. Agreement and Joinder. Each Shareholder hereby agrees to
indemnify the Indemnitees to the extent and pursuant to and in accordance with
the terms and provisions set forth in the Article VII of the Reorganization
Agreement, as if each Shareholder were a party to such Reorganization Agreement.
In addition, each Shareholder hereby confirms the appointment of Michael L.
Parodi as the Securityholder Agent of the Shareholders, all as provided in
Article VII of the Reorganization Agreement. The authority given to the
Securityholders Agent under the Reorganization Agreement is granted and
conferred in consideration of and subject to the interests of the other
Shareholders and shall be irrevocable and shall not be terminated by the
Shareholder or by any other event (including without limitation the death or
incapacity of the Shareholder), whether by operation of law or otherwise, except
as provided in Section 7.12 of the Reorganization Agreement.
4. Post-Closing Covenants. The Parties agree as follows with respect
to the period following the Closing.
(a) General. In case at any time after the Closing any further action
is necessary to carry out the purposes of the Reorganization Agreement, each of
the Parties will take such further action (including the execution and delivery
of such further instruments and documents) as any other Party reasonably may
request, all at the sole cost and expense of the requesting Party (unless the
requesting Party is entitled to
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indemnification therefor under the Reorganization Agreement). The Shareholders
acknowledge and agree that from and after the Closing FSI will be entitled to
possession of all documents, books, records (including tax records), agreements,
and financial data of any sort relating to SSI .
(b) Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under the Reorganization Agreement or (ii) any
fact, situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving SSI , each of the other Parties will cooperate
with the contesting or defending Party and such Party's counsel in the contest
or defense and provide such testimony and access to such Party's books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Section 4 below).
5. Tax Agreements and Obligations
------------------------------
(a) Tax Liabilities. The Shareholders shall be responsible and liable
for 50% of any and all Transfer Taxes.
(b) Tax Records. On the Closing Date, SSI shall retain all of its Tax
records in its possession. Within 10 days after the Closing Date, the
Shareholders shall deliver to the Surviving Corporation or FSI all of the Tax
records of SSI and records relating to the business of SSI that are in the
Shareholders' and their Affiliates possession. The Shareholders may retain a
copy of such Tax records. The Shareholders, the Surviving Corporation, FSI and
their Affiliates shall make available to each other for inspection and copying
during normal business hours, in connection with and with respect to matters
that are relevant to the preparation of Tax returns, Tax audits and Tax
litigation, all Tax records in their possession relating to SSI and its
activities, assets, and business. The Shareholders, the Surviving Corporation,
FSI and their Affiliates shall preserve and keep such Tax records in their
possession until the expiration of any applicable statutes of limitation or
extensions thereof and as otherwise required by law, but in any event for a
period not less than seven complete tax years after the Closing Date.
Notwithstanding the foregoing, any of such parties may dispose of such records
if 90 days advance written notice of intent to dispose is given to the other
parties beforehand. Such notice shall be delivered in accordance with the notice
provisions set forth in this Agreement and shall include a list of the records
to be disposed of describing each file, book or other record accumulation being
disposed in reasonable detail. Each notified party shall have the opportunity,
at its cost and expense, to copy or remove, within such ninety day period, all
or any part of such Tax records. For the purposes of this Section 5(b), Tax
records include, without limitation, journal vouchers, cash vouchers, general
ledgers, material contracts, and authorizations for expenditures.
(c) Tax Assistance and Cooperation. For a period of seven years from
and after the Closing Date, FSI, the Surviving Corporation and the Shareholders
shall (i) cooperate (and cause their respective Affiliates to cooperate) with
each other and with each other's respective agents, including accounting firms
and legal counsel, in connection with the preparation or audit of any Tax return
or report, amended return or report, claim for refund and any tax claim or
litigation in respect of SSI that include whole or partial taxable periods,
activities, operations or events prior to the Effective Date, which cooperation
shall include, but not be limited to, preserving and making available to the
other all information, records, and documents in their possession or control
relating to liabilities for Taxes associated with the operation of SSI prior to
the Effective Date, and (ii) make available to the other as reasonably requested
and available, personnel responsible for preparing, maintaining and interpreting
information, records and documents in connection
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with Taxes as well as related litigation. Any information provided or obtained
under this Section 5(c) shall be kept confidential, except as may be otherwise
necessary in connection with the filing of returns or reports, refund claims,
audits, tax claims and litigation. The Surviving Corporation and the
Shareholders shall provide the other with prompt notice in writing of any
pending or threatened tax audits, assessments or proceedings that they become
aware of related to the business or operations of SSI for whole or partial
periods prior to the Closing Date; provided that in any event such notice shall
not be given more than 10 business days after such party learns of such pending
or threatened tax audit, assessment or proceeding. Such notice shall contain
factual information (to the extent known) describing the asserted tax liability
in reasonable detail and shall be accompanied by copies of any notice or other
document received from or with any tax authority in respect of any such matters.
The Shareholders shall not compromise any audit issue affecting SSI or its
business for whole or partial periods from and after the Effective Date without
advising the Surviving Corporation and FSI in writing of the issues, risks and
proposed compromise. Where such compromise will affect any Taxes for which the
Surviving Corporation or FSI is liable and the Shareholders have received notice
from the Surviving Corporation or FSI concerning such effect, then,
notwithstanding the foregoing provisions of this Section 5(c) to the contrary,
the Shareholders will not compromise such issue without the Surviving
Corporation's or FSI's written consent, as the case may be, which consent will
not be unreasonably withheld. The Surviving Corporation and FSI shall not
compromise any audit issue affecting the Shareholders for whole or partial
periods from and after the Effective Date without advising the Securityholder
Agent in writing of the issues, risks and proposed compromise. Where such
compromise will affect any Taxes for which the Shareholders are liable, then,
notwithstanding the foregoing provisions of this Section 5(c) to the contrary,
neither the Surviving Corporation nor FSI will compromise such issue without the
Securityholder Agent's written consent, which consent will not be unreasonably
withheld. Reasonable out-of-pocket expenses with respect to such contests shall
be borne by Shareholders and the Surviving Corporation or FSI in proportion to
their responsibility for such Taxes. The noncontrolling party shall be afforded
a reasonable opportunity to participate in such proceedings at its own expense.
(d) Tax Returns. The Shareholders shall prepare and file, or cause to
be prepared and filed, when due (i) all Tax returns and reports related to SSI
and the direct or indirect ownership of SSI which were required to have been
filed or furnished before the Effective Date, (ii) returns and reports for
Transfer Taxes which were required to have been filed or furnished on or before
the Effective Date, and (iii) returns the Shareholders must file by law. FSI
shall timely prepare and file, or cause to be prepared and filed, when due all
other Tax returns and reports that are related to SSI and the direct or indirect
ownership of SSI, including all income and franchise Tax returns and reports of
SSI which are required to be filed after the Closing with respect to tax periods
ending before the Effective Date. Returns and reports prepared and filed by the
Surviving Corporation or FSI for pre-Effective Date periods shall be prepared
consistently with past tax accounting practices used with respect to SSI's
returns and reports, including elections, accounting methodologies and asset
write-off periods, and to the extent any return or report items are not covered
by such past practices, in accordance with practices selected by the Surviving
Corporation or FSI. The Surviving Corporation or FSI shall provide the
Securityholder Agent with a copy of any income Tax returns and reports (and
supporting schedules) of SSI prepared by them for pre-Effective Date periods, in
the form proposed to be filed by the Surviving Corporation or FSI, at least 15
days in advance of the due date for income Tax returns (taking into account any
extension of time to file). The Securityholder Agent shall have the right to
approve such returns or reports prior to their filing (provided such approval
shall not be unreasonably withheld). The Securityholder Agent and the Surviving
Corporation or FSI shall attempt in good faith to resolve any issues arising out
of the review of such returns or reports. If, within a reasonable period of
time prior to the due date for filing any such return (taking into account any
extension of time to file), the Securityholder Agent has not so approved such
return for filing, then the Surviving Corporation and FSI shall promptly, and,
no later than 10 days prior to the due date for filing such return,
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<PAGE>
appoint an independent public accounting firm, reasonably acceptable to both
parties, to resolve the specific issues preventing approval by the
Securityholder Agent. The appointed accounting firm shall resolve such issues in
accordance with this Section 5(d) no later than five days prior to the due date
for filing such return. The determination of the appointed accounting firm shall
be final and binding on all of the parties, and such return shall be filed based
upon such resolution. The fees and expenses of such accounting firm in resolving
any such dispute shall be borne equally by FSI and the Shareholders.
6. Termination of Shareholder Arrangements. Each of the Shareholders
hereby agrees to terminate, effective as of the Closing Date, any and all
agreements between SSI and such Shareholder that contain any registration,
voting, rights of first refusal or other similar rights and where such rights
would otherwise survive the Merger.
7. Termination. This Agreement shall terminate if and only if the
Reorganization Agreement is terminated prior to the Closing in accordance with
and pursuant to the terms thereof.
8. Miscellaneous.
(a) Exclusivity. None of the Shareholders will (i) solicit, initiate,
or encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities, or any
substantial portion of the assets, of SSI (including any acquisition structured
as a merger, consolidation, or share exchange) or (ii) except for actions by
such individuals in their capacities as officers of SSI and where the failure to
take such actions would, based upon the advice of outside legal counsel, be a
breach of fiduciary duty under applicable law, participate in any discussions or
negotiations regarding, furnish any information with respect to, assist or
participate in, or facilitate in any other manner any effort or attempt by any
Person to do or seek any of the foregoing. None of the Shareholders will vote
their shares of SSI Common Stock in favor of any such acquisition structured as
a merger, consolidation, or share exchange.
(b) No Third Party Beneficiaries. Except as herein provided
(including pursuant to Article VII of the Reorganization Agreement), this
Agreement shall not confer any rights or remedies upon any Person other than the
Parties and their respective successors and permitted assigns.
(c) Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement among the Parties and
supersedes any prior understandings, agreements, or representations by or among
the Parties, written or oral, to the extent they related in any way to the
subject matter hereof.
(d) Succession and Assignment. This Agreement shall be binding upon
and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any such Party's rights, interests, or obligations hereunder with the prior
written approval of FSI and the Requisite Shareholders; provided, however, that
FSI may assign any or all of its rights and interests hereunder to one or more
of its Affiliates.
(e) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(f) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
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<PAGE>
(g) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
<TABLE>
<S> <C>
If to the Shareholders: Copy to:
Michael L. Parodi, Jr., Securityholder Agent Wilson, Sonsini, Goodrich & Rosati
47003 Mission Falls Court 650 Page Mill Road
Freemont, California 94539 Palo Alto, California 94304
Attention: Michael J. Danaher, Esq.
If to FSI International, Inc.: Copy to:
FSI International, Inc. Faegre & Benson PLLP
322 Lake Hazeltine Drive 2200 Norwest Center
Chaska, Minnesota 55318 90 South Seventh Street
Attention: Chief Financial Officer Minneapolis, Minnesota 55402
Attention: Douglas P. Long, Esq.
</TABLE>
Any Party may send any notice, request, demand, claim or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
party may change the address which notices, requests, demands, claims and other
communications hereunder are to be delivered by giving the other Parties notice
in the manner herein set forth.
(h) Governing Law. This Agreement shall be governed by and construed
in accordance with the domestic laws of the State of Minnesota without giving
effect to any choice or conflict of law provision or rule (whether of the State
of Minnesota or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Minnesota.
(i) Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by FSI
and either the Securityholder Agent or the Requisite Shareholders. No waiver by
any Party of any default, misrepresentation, or breach of warranty or covenant
hereunder, whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
(j) Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(k) Expenses. Each of the Parties will bear his or its own costs and
expenses (including legal fees and expenses) incurred in connection with this
Agreement and the transactions contemplated hereby (except as otherwise provided
herein).
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<PAGE>
(l) Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local,
or foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
(m) Incorporation of Annex. The Annex is incorporated herein by
reference and made a part hereof.
[THIS PORTION WAS LEFT INTENTIONALLY BLANK.]
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
FSI INTERNATIONAL, INC.
By: /s/ BENNO G. SAND
------------------------------------------
Title: Executive Vice President and
--------------------------------------
Chief Financial Officer
-------------------------------------
SHAREHOLDERS
/s/ QUI VAN NGUYEN
----------------------------------------------
(signature)
Qui Van Nguyen
----------------------------------------------
(print)
/s/ MICHAEL E. VAN DE VEN
----------------------------------------------
(signature)
Michael E. Van De Ven
----------------------------------------------
(print)
/s/ RONALD E. LINDQUIST
----------------------------------------------
(signature)
Ronald E. Lindquist
----------------------------------------------
(print)
/s/ JOHN STEPHENS
----------------------------------------------
(signature)
John Stephens
----------------------------------------------
(print)
/s/ MICHAEL L. PARODI
----------------------------------------------
(signature)
Michael L. Parodi
----------------------------------------------
(print)
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<PAGE>
/s/ LOUIE C. FREDRIKSZ
----------------------------------------------
(signature)
Louie C. Fredriksz
-----------------------------------------------
(print)
/s/ RICHARD K. FEY
-----------------------------------------------
(signature)
Richard K. Fey
-----------------------------------------------
(print)
/s/ DOUGLAS K. AMIS
-----------------------------------------------
(signature)
Douglas K. Amis
-----------------------------------------------
(print)
/s/ ROBERT E. MILLER
-----------------------------------------------
(signature)
Robert E. Miller
-----------------------------------------------
(print)
/s/ STEVE G. CRUICKSHANK
-----------------------------------------------
(signature)
Steve G. Cruickshank
-----------------------------------------------
(print)
/s/ RICHARD T. BENVENTANO
-----------------------------------------------
(signature)
Richard T. Benventano
-----------------------------------------------
(print)
/s/ MELVILLE H. MADDEN
-----------------------------------------------
(signature)
Melville H. Madden
-----------------------------------------------
(print)
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<PAGE>
/s/ GERALD E. MASTERSON
----------------------------------------------
(signature)
Gerald E. Masterson
----------------------------------------------
(print)
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<PAGE>
EXHIBIT 23.1
Independent Auditors' Report on Schedule and Consent
The Board of Directors and Shareholders
FSI International, Inc:
The audits referred to in our report dated October 13, 1995, included the
related financial statement schedule for each of the years in the three-year
period ended August 26, 1995 included in the registration statement. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this 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.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 5, 1996
<PAGE>
Exhibit 23.2
Independent Auditors' Consent
The Board of Directors and Shareholders
FSI International, Inc.
We consent to the use of our reports in relation to Metron Semiconductors
Europa B.V. as of May 31, 1995 included herein.
KPMG Accountants NV
Amsterdam, THE NETHERLANDS
March 5, 1996
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of FSI International, Inc. of our report
dated February 23, 1996 relating to the financial statements of Semiconductor
Systems, Inc., which appears in such Prospectus. We also consent to the
references to us under the headings "Experts" and "Selected Financial Data" in
such Prospectus. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such "Selected Financial Data."
PRICE WATERHOUSE LLP
San Jose, California
March 1, 1996
