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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 30, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER
0-17276
FSI INTERNATIONAL, INC.
(Exact Name of Registrant as specified in its charter)
MINNESOTA 41-1223238
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
322 LAKE HAZELTINE DRIVE, CHASKA, MINNESOTA 55318
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(Address of principal executive offices and Zip Code)
Registrant's telephone number including area code: (612) 448-5440
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE ACT
TITLE OF EACH CLASS AND NAME OF EACH EXCHANGE ON WHICH REGISTERED:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price on October 17, 1997, as reported on the
Nasdaq National Market, was approximately $409,137,000. Shares of common
stock held by each officer and director and by each person who owns 5% or more
of the outstanding Common Stock have been excluded from this computation
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in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for any other
purpose.
As of October 17, 1997, the registrant had issued and outstanding 22,614,918
shares of Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
August 30, 1997 (the "Annual Report") are incorporated by reference into Parts
I, II and IV of this Form 10-K Report.
Portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on January 27, 1998, (the "Proxy Statement")
and to be filed within 120 days after the Registrant's fiscal year ended August
30, 1997, are incorporated by reference into Part III of this Form 10-K Report.
(The Compensation Committee Report and the stock performance graph of the
Registrant's Proxy Statement are expressly not incorporated by reference
herein.)
The Index to Exhibits begins on page 26.
PART I
ITEM 1. BUSINESS
CAUTIONARY INFORMATION REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in this Report on Form 10-K constitute
forward looking statements within the meaning of the Private Litigation
Securities Reform Act of 1995. Such forward looking statements are based upon
current expectations and beliefs and involve numerous risks and uncertainties
that could cause actual events or results to differ materially. For a
discussion of factors that could cause actual results to differ materially
from those described in this Form 10-K, see the discussion of risk factors set
forth below in this Report and in the Section of the 1997 Annual Report to
Shareholders entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" incorporated by reference into this Report.
Forward-looking statements herein are indicated by an asterisk(*).
THE COMPANY
FSI International, Inc., a Minnesota corporation organized in 1973 ("FSI" or
the "Company"), designs, develops, manufactures, markets and supports
microlithography, surface conditioning and chemical management equipment used
in the fabrication of microelectronics, such as advanced semiconductor devices,
thin film heads, multi-chip modules and flat panel displays. This is the only
industry segment in which the Company is presently engaged and sales to
semiconductor device companies represent a significant majority of the
Company's total revenues.
In the fall of 1997, FSI International, Inc. established a company in South
Korea to provide chemical management support and turnkey installation services
to the microelectronics manufacturing industry in South Korea. The new
company, FSI Chemical Management Company-Korea, Ltd. ("FSI-CMK"), is owned 65%
by FSI with the remaining 35% owned by FSI's affiliated distributor Metron
Technology B.V.
On April 4, 1996, the Company, through a merger involving a newly-formed and
wholly-owned subsidiary of the Company, acquired all of the outstanding capital
stock of Semiconductor Systems, Inc. ("SSI") a resist processing company, and
SSI became a wholly-owned subsidiary of the Company. Principal SSI resist
processing products include the ORBITRAK(R), the APEX(TM), and the SCORPIO(TM)
Microlithography Clusters. SSI's operations are headquartered in Fremont,
California.
During fiscal 1995, the Company completed two transactions which expanded
its chemical management capabilities. In January 1995, FSI and its affiliated
distributor Metron Technology B.V. (f/k/a Metron Semiconductors Europa B.V.)
each acquired a 50% interest in FSI Metron Europe, Limited ("FME") located in
Newhaven, England. FME manufactures, markets, and services chemical
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distribution systems, and portable clean rooms primarily for use by
semiconductor device manufacturers. On March 8, 1995 the Company, through a
merger involving a newly-formed and wholly-owned subsidiary, acquired all of
the outstanding capital stock of Applied Chemical Solutions ("ACS") and ACS
became a wholly-owned subsidiary of the Company. Principal ACS products
include chemical blending and delivery systems, point of use chemical
generation systems and slurry mixing and delivery systems used in conjunction
with chemical mechanical planarization or polishing, commonly referred to as
CMP. ACS' operations are headquartered in Hollister, California.
The Company markets its products directly in North America and primarily
through a network of affiliated distributors in Europe, Asia Pacific and Japan.
Through these affiliated international distributors the Company can provide
timely and efficient worldwide customer service and support.
INDUSTRY BACKGROUND
The fabrication of semiconductor devices is a complex process involving
several distinct phases repeated numerous times during the fabrication process.
Each production phase requires different processing technology and equipment,
and no one semiconductor equipment supplier currently produces an entire
state-of-the-art fabrication system. Rather, semiconductor device manufacturers
typically construct fabrication facilities by combining manufacturing equipment
produced by several different suppliers, each of which performs specific
functions in the manufacturing process.
The flat panel display, multi-chip module, and thin film head fabrication
processes utilize many of the same basic technological building blocks as does
the semiconductor manufacturing industry, in that certain production equipment
provides the same basic function or applications for a substrate as
semiconductor manufacturing equipment does for a silicon wafer. The flat panel
display and thin film head markets, while not as large as the semiconductor
device market, have over the past few years experienced greater growth than the
semiconductor device market.
Demand for new microelectronics manufacturing equipment is driven
principally by the need for new processes and systems capable of manufacturing
increasingly complex devices. Industries that utilize microelectronics devices
are demanding higher performance devices from equipment manufacturers. Over the
last decade, technological advances have allowed device manufacturers to reduce
the size and substantially increase the functionality of each device.
The Company believes that microelectronics manufacturers are asking
equipment suppliers to take an increasingly active role in meeting the
manufacturer's technology requirements and cost constraints by developing and
supporting the products and processes required to fabricate advanced
microelectronics products.
Concurrent with rapid technological advances in microelectronics,
competitive pressures are forcing manufacturers to reduce production costs.
Because of the significant capital cost of a typical new fabrication facility,
manufacturers have increased their focus on the various cost components of
these facilities. This focus has led manufacturers to increasingly analyze the
costs associated with owning and operating each piece of required operating
equipment, often referred to as the equipment's "cost of ownership." Cost of
ownership measurement has become an increasingly competitive issue among
equipment suppliers. In addition, the Company believes that in an effort to
reduce total manufacturing costs and to reduce potential contaminant exposure
as the substrate is transferred from one process step to another, manufacturers
are increasingly seeking process equipment capable of being integrated with the
process equipment of other suppliers to create a highly automated and
integrated processing system.
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PRODUCTS
The mix of products sold by the Company may vary significantly from year to
year. The following table sets forth, for the periods indicated, the amount of
sales and approximate percentages of the Company's total sales contributed by
the Company's principal products:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
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AUGUST 30, 1997 AUGUST 31, 1996 AUGUST 26, 1995
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Microlithography clusters $ 80,994 32.1% $137,975 45.4% $ 85,486 39.1%
Surface conditioning products 54,578 21.6% 66,082 21.7% 59,898 27.4%
Chemical management systems 84,724 33.6% 66,642 21.9% 45,223 20.7%
Spare parts and service 32,145 12.7% 33,342 11.0% 27,853 12.8%
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$252,441 100.0% $304,041 100.0% $218,460 100.0%
========= ====== ======== ====== ========= ======
</TABLE>
MICROLITHOGRAPHY CLUSTERS. The Company's microlithography products consists
of several versions of the POLARIS(R) Cluster and of several other products
manufactured by the Company's subsidiary SSI.
The Company's POLARIS microlithography clusters perform all of the
photolithography processing steps except exposure. The POLARIS cluster consists
of one or two clean-room qualified robots surrounded by various process
modules. Each module is totally independent and requires no mechanical
interface. The cluster is enclosed by transparent safety walls, creating a
self-contained process environment and is configured to match the throughput
capabilities of the integrated exposure equipment. The enclosure can be
modified to provide a Class 1 clean room environment with independent control
of temperature, humidity and organics from the rest of the fabrication area.
During operation, cassettes of wafers are loaded into the cluster's
input/output module from which the robot or robots transports wafers through
the various process modules in a sequence programmed by the operator allowing
the desired treatment of the wafer surface.
The POLARIS clusters represent a processing alternative to conventional
photoresist track or linear systems which permit processing of the wafer only
according to a pre-established arrangement of the equipment. Wafer routing and
throughput in a POLARIS cluster are not dependent upon module configuration.
The programmable capability allows random wafer routing and continuous
processing of wafers eliminating the need for the queuing of partially
processed wafers sometimes required by traditional track systems. In addition,
by controlling system variables within narrow tolerance levels, the POLARIS
cluster is able to better ensure the repeatability of the various process
steps. As a result, the POLARIS cluster provides system flexibility and
performance advantages over competing track systems. It also provides
significant reliability and serviceability advantages. The highly integrated
and automated cluster approach of the POLARIS cluster eliminates the need for a
number of complex mechanisms which can impact system reliability, such as
exposure system interface modules and wafer transport mechanisms generally
associated with track systems. Recent models include a dual robot system to
provide for higher throughput and to address more complex process flows.
POLARIS process modules can be serviced from outside the cluster without
disrupting other cluster process operations. In addition, should technology
change in any particular process module, that individual module can be replaced
or modified with an upgrade without rendering the entire system obsolete.
Purchasers of multiple POLARIS clusters include SMST Submicron ("SMST"); ITT
Corporation; International Business Machines Corporation ("IBM"), LG Semicon
Co., Ltd. ("LG Semicon"); National Semiconductor, Corp., ("NSC"); Texas
Instruments, Incorporated ("TI"); and Tower Semiconductor Ltd. ("TSL") The
price of the POLARIS cluster ranges from approximately $800,000 to $2,500,000,
depending on wafer size, number of modules, and number of robots required. The
POLARIS cluster technology is licensed by the Company from TI. See "Patents,
Trademarks and Intellectual Property" below.
In April 1996, the Company expanded its resist processing product line,
through the acquisition of SSI, to include the ORBITRAK(R), APEX(TM), and
SCORPIO(TM) Microlithography Clusters. Introduced by SSI in 1993, the ORBITRAK
Microlithography Cluster is designed for use in submicron fabs. The ORBITRAK
cluster features proprietary process modules -- arranged in an "orbit" around
production proven, three axis robots -- that allow wafers to be processed in
virtually any desired sequence. Multiple process chambers, thermal process
modules, and fixed central robots with dual end effectors all contribute to
superior throughput in a very small footprint, thereby reducing its cost of
ownership.
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Introduced by SSI in 1993, the APEX Cluster is designed to meet the needs of
display manufacturers in the flat panel display market. Flat panel displays
are the full color screens on lap top computers, and other electronic
components. Using the design architecture developed for the ORBITRAK Cluster,
the APEX Cluster also integrates the cluster tool processing concept. The APEX
Cluster is designed to handle thin glass substrates up to 500mm x 500mm (20
inches) square.
Introduced by SSI in 1993, the SCORPIO Cluster is a flexible and
cost-effective platform for the photolithography steps involved in the
manufacturing of thin film heads and semiconductor devices. The benefits of
"cluster" processing are also evident in this system. The SCORPIO Cluster
provides thin-film head manufacturers who produce less complex circuits with
some of the same advantages provided by the ORBITRAK and POLARIS Clusters. The
SCORPIO Cluster is also designed for use in manufacturing multi-chip modules
("MCMs"). MCMs are multiple integrated circuits (memory, logic,
microcomponent, etc.) designed onto a single packaging substrate to provide
increased functionality with a smaller component size.
Purchasers of SSI's products include Candescent Technologies
Corporation, Dallas Semiconductors, Inc., Flip Chip Technologies ("Flip Chip"),
Hewlett-Packard, International Rectifier Corp., Motorola, Inc. ("Motorola"),
Microchip Technology, Read-Rite Corporation, Seagate Technology, and Xerox Palo
Alto Research Center ("Xerox").
SURFACE CONDITIONING PRODUCTS. The Company's surface conditioning products
perform cleaning and stripping functions necessary for the fabrication of
semiconductor devices.
Spray Processing Systems. The Company's spray processing systems, which
include the MERCURY(R) and ZETA(TM) Spray Processors, are sophisticated spray
chemistry systems used to clean, etch and strip wafers at various stages in the
semiconductor device fabrication process. These systems use centrifugal spray
technology to process wafers by exposing them to a programmed, sequenced spray
of fresh chemicals inside a closed, nitrogen filled chamber. Cassettes filled
with wafers are loaded into a turntable in the process chamber and the
processing chemicals, de-ionized water, and nitrogen are sequentially
dispensed into the chamber through one or more spray posts mounted in the
chamber. As the turntable rotates, nozzles apply a chemical spray to the
wafers' surface. After chemical application, de-ionized water is sprayed on the
wafer surface and all surfaces of the process chamber to remove chemical
residues. The wafers and chamber are then dried by centrifugal spinning
combined with a flow of nitrogen into the chamber. FSI's spray processing
systems include a microprocessor-based controller to program, control, and
monitor the operating functions of the system in order to ensure precise
control and repeatability of the process.
The Company's spray processing systems provide an alternative to traditional
immersion technology, principally wet-bench processing of wafers. A chemical
wet-bench consists of an exhaust hood laboratory bench with open chemical tanks
in which the wafers are either manually or automatically transferred from one
chemical bath to another. The Company believes that its spray processing
systems provide cost of ownership and many other benefits over wet-bench
chemical processing including protection of the process equipment operator from
hazardous chemicals or fumes, improved cleaning capability, reduced chemical
usage, lower space utilization in the clean room, and greater process
flexibility, including the capability to easily change chemical sequences.
The Company introduced the automated Material Handling System ("MHS") in
June, 1996. The MHS provides a reliable, automated environment to move wafers
to and from the MERCURY process chamber. A central robot moves cassettes from
station to station and into the MERCURY process chamber. After wafers are
processed, it unloads the cassettes from the process chamber, transfers wafers
back into the transport cassettes and returns the cassettes to the input/output
("I/O") ports to be removed from the MHS workcell. The automated and enclosed
MHS helps ensure maximum process tool use, increases throughput, reduces
contamination and minimizes human error. Custom configurations and integration
options are available to meet specific facility requirements. In October 1997,
the Company introduced the ZETA(TM) system, a fully automated spray processor.
The ZETA(TM) system includes an eight-chemical flow system for improved process
which enables a wider range of chemical blend ratios and also lower chemical
and DI water consumption.
MERCURY spray processing system customers include Advanced Micro Devices,
Inc. ("AMD"); Atmel Corporation ("Atmel"); Fujitsu Microelectronics, Inc.
("Fujitsu"); IBM; International Rectifier Corporation ("IRC"); Lucent
Technology ("Lucent"); Matsushita Corp.; ("Matsushita"); Motorola; SGS Thompson
Microelectronics, Inc. ("SGS Thompson"); Siliconix, Inc. ("Siliconix"), TI; and
Winbond Electronics Corp. ("Winbond"). The spray processing systems offered by
the Company range in price from $450,000 to $1.8 million. The Company also
markets certain equipment complementary to its spray processors, including
water heaters, chemical heaters, and booster pumps.
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Vapor Processing Systems. The Company's EXCALIBUR(R) EOS, ISR, and MVP
Vapor Phase Processing Systems use anhydrous hydrogen fluoride ("HF") gas in
conjunction with water vapor to perform cleaning steps normally done with
liquid chemicals. The EXCALIBUR Systems are highly automated, with a
microprocessor-based controller and user-friendly software for sequencing and
control of the reactants. Wafers are processed on an individual basis and
loaded from the wafer carrier into the process chamber by a handler that
minimizes particle contamination. Single-wafer processing permits EXCALIBUR
Systems to be integrated with equipment of other suppliers and provides greater
control over process uniformity. Up to two process chambers can be operated
with a single electronic controller through the utilization of multi-tasking
software. The advantages of vapor phase processing over wet processing include
increased chemical purity (due in part to its ability to mix chemical gases
with water vapor at the point of use), reduced chemical and waste disposal
costs, increased processing capabilities and ease of integration with cluster
tools. An integrated system of this type provides the necessary environmental
and surface control of the wafer between cleaning and various other process
steps, resulting in reduced contamination and improved yield.
Since introduction in 1987, EXCALIBUR systems have gone through a number of
enhancements, including the development from a single gas to a multi-gas
system. These continual enhancements led to the introduction of the EXCALIBUR
MVP (Multi-Vapor Processor) system in July 1993. In addition to HF gas, the
EXCALIBUR MVP system uses hydrogen chloride (HCL) gas for improved metal
removal and ozone gas for trace organic removal, and has the processing
capability to clean the backside of the wafer along with the front side. The
EXCALIBUR MVP system can be used for the critical cleaning steps in the
semiconductor device fabrication process.
The Company's EXCALIBUR System customers include Advanced Micro Devices
("AMD"), Fujitsu, Hyundai Electronics Industries Co., Ltd. ("Hyundai"), IBM,
Matsushita, Motorola, Taiwan Semiconductor Manufacturing Corp. ("TSMC"), and
TI. Systems vary in price from approximately $250,000 to $750,000 depending on
the model, wafer size, number of process chambers, and related electronic
control requirements.
Through a License Agreement with IBM, FSI manufactures, markets, and
services a product using IBM's cryogenic aerosol cleaning technology. In July,
1996, the Company introduced this cryogenic aerosol cleaning technology as the
ARIES(R) CryoKinetic Cleaning System. In the system, ultrapure argon/nitrogen
crystals are formed by rapidly cooling the gaseous mixture. When the frozen gas
crystals collide with particles or residues on the wafer surface, they impart
sufficient CryoKinetic force to dislodge contaminants. Contaminants become
entrained in the gas flow and are carried away from the wafer and removed from
the process chamber. This removal process is facilitated by a unique chamber
design that prevents contaminants from redepositing on the wafer surface once
removed. The process appears to be effective on many types of particle or
residue contamination. The advantage of the cleaning obtained with an ARIES
System over conventional aqueous processes includes the ability of the
cryogenic aerosol to remove particles or particulate without undercutting and
weakening device structures and the removal of difficult residues after
reactive ion etching. An ARIES system varies in price from $500,000 to
$1,500,000 depending on the number of process chambers and related
requirements. To date, the Company's only ARIES System customer is IBM.
CHEMICAL MANAGEMENT SYSTEMS. The Company's chemical management systems
enable semiconductor manufacturers to generate certain acids from gases, blend
acids and solvents to desired concentrations, store the acids and solvents in
bulk tanks outside the device fabrication clean room and to deliver programmed
amounts of chemicals to various types of equipment in the clean room.
Chemical Delivery Systems. The Company offers chemical delivery and slurry
systems utilizing pump, pump and pressure, and vacuum pressure designs. The
Company's chemical delivery systems provide manufacturers with enhanced
chemical purity, inventory control, safety, dispensing accuracy and bulk
purchasing opportunities.
Typically, a chemical delivery system installation involves the delivery,
flow and purity control of 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
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chemical distribution system of the fabrication facility, including point of
use interfaces and primary and secondary containment piping.
The Company offers several models of chemical delivery systems, including
the ChemFill(R) 500 module, which provides all the features of a centralized
delivery system in a compact, economical unit. This model can be used as a
cost-effective solution for small volume chemical users or as a local source of
chemicals in large fabrication facilities. The ChemFill 1000 PLC module (for
"programmable logic control") offers increased automation to its users,
providing enhanced control, flexibility, and functionality. The ChemFill 1500
series of delivery modules incorporate proprietary vacuum pressure technology
to draw chemicals from their storage and transportation containers into the
system and pressure to transfer the chemical back to the container, in a
recirculation mode, or to points of use in a dispense mode. The ChemFill 5000,
designed for facilities requiring high chemical flow features redundant flow
systems that help increase uptime.
Chemical Blending and Mixing Systems. The Company's chemical blending and
mixing systems allow semiconductor device manufacturers to reduce chemical
costs by enabling them to blend a process chemical from concentrate on site to
create the various chemical concentrations required at different points of use
in the clean room. The ChemLitho(TM) line of blending systems provides
accurate photoresist developer blending for the microlithography area. The
ChemPrep(TM) line of blending systems accurately blends HF or Ammonium
hydroxide for specialty cleaning applications.
Chemical Generation Systems. The ChemGen(R) chemical generation systems
allow semiconductor device manufacturers to reduce chemical costs by generating
bulk quantities of specific chemicals by mixing gases with deionized water
located at the facility. These chemicals are then delivered to the various use
points in the fabrication facility.
Slurry Mixing and Delivery Systems. The Company's proprietary vacuum
pressure slurry mixing and delivery systems mix and deliver slurry which is
used in conjunction with CMP technology. The Company's P2200, P4400 and P6000
systems mix and deliver slurry for both oxide and metal polishing applications.
Chemical management system customers include ANAM Industrial Co., Ltd., AMD,
Chartered Semiconductor, Cypress, Hitachi, IBM, Lucent, Matsushita
Semiconductor Corporation of America ("MASCA"), Motorola, NSC, and Siemens.
The Company has installed chemical management systems in over 100 fabrication
plants worldwide. Typical installations vary in price from $250,000 to
$3,500,000. However, a project involving turn-key installation with multiple
chemicals and points of use can cost in excess of $15,000,000.
SPARE PARTS AND SERVICE.
The Company sells spare part kits for a number of its products and
individual spare part components for its equipment. The Company often packages
product improvements to enable customers to update previously purchased
equipment.
The Company employs customer service and process engineers to assist and
train the Company's customers in performing preventive maintenance and service
on FSI equipment and developing process applications for the equipment through
service and application engineers worldwide. The Company offers a variety of
process, service, and maintenance programs that may be purchased for a fee. A
number of customers have purchased maintenance contracts whereby the Company's
service employees work full-time at the customer's facility, and provide
process service and maintenance support for FSI equipment.
BACKLOG AND SEASONALITY
The Company's backlog at the end of fiscal 1997 and 1996, was
approximately $112 million and $113 million, respectively. Backlog consists of
orders for which a customer's purchase order has been received or a customer
purchase order number has been communicated to the Company and is scheduled to
be shipped within twelve months. During fiscal 1997, the semiconductor market
experienced volatility in terms of product demand and product pricing. This
has caused certain semiconductor manufacturers to exercise caution in making
their capital equipment purchase decisions and in certain cases to reschedule
or cancel capital equipment purchases. All orders are subject to cancellation
by the customer and in some cases a limited penalty provision may apply. In
fiscal 1997 and 1996, purchase orders aggregating approximately $18,861,000 and
$16,799,000, constituting 7.5% and 5.5% of sales, respectively, were canceled
and not rescheduled. Because of the timing and relative size of certain orders
received by the Company and possible changes in delivery schedules and
cancellations of orders, the Company's backlog can vary from time to time and
at any
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particular date is not necessarily indicative of actual sales for any
succeeding period. See Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The business of the Company is
not seasonal to any significant extent.
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend in large part on
its ability to enhance, in collaboration with its customers, its existing
product lines to meet the changing needs of microelectronics manufacturers.*
The Company believes that the trends in the industry, such as utilization of
smaller circuit geometries, increased use of larger substrates and
manufacturers' increased desire for integral processing equipment will make
highly automated and integral systems, including single substrate processing
systems, more important in the manufacturing of devices.* To assist the
Company in its development efforts, the Company maintains relationships with a
number of industry professionals, including its customers, who help identify
and review industry trends in advanced technology and FSI's development
activities toward meeting the industry's technology needs.
The Company's current research and development programs are focused on the
need for cleaner substrate surfaces due to smaller geometries, increased
process control and flexibility through monitoring and software management
systems, robotics automation in the clean room and integration of the Company's
product offerings with the processing equipment of other suppliers. Each of
these programs involves customer collaboration to ensure proper machine
configuration and process development to meet industry requirements.
The Company maintains state-of-the-art demonstration and process
development laboratories, one at its manufacturing facility in Minnesota,
occupying over 2,000 square feet, and another in Allen, Texas, occupying 2,200
square feet. In fiscal 1997, the Company added a slurry blending and dispense
technology laboratory in Hollister, California, which occupies 1,930 square
feet. The Company's laboratory personnel work directly with customers in
solving process problems, developing new processes, evaluating new pieces of
equipment and designing new equipment.
Expenditures for research and development, which are expensed as incurred,
during fiscal 1997, 1996 and 1995 were approximately $39,713,000, $40,998,000,
and $28,037,000, respectively, and represented 15.7%, 13.5% and 12.8% of sales,
respectively.
The Company expects to continue to make substantial investments in research
and development.* The Company also must manage product transitions
successfully, as introduction of new products could adversely affect sales of
existing products.*
MARKETING, SALES AND SUPPORT
The Company markets its products throughout the world. The Company's
marketing and sales efforts are focused on building long-term relationships
with its customers. These efforts are supported by a team of product marketing
managers, sales personnel, and equipment, process and software engineers that
work closely with individual customers to find solutions to their process
needs.
In North America, the Company markets its products through direct sales
personnel located at its operating facilities or at regional sales offices.
The Company also has several product and technical specialists devoted to each
of the Company's product lines. These product and technical specialists and
the Company's process engineers work with customers to understand the
customer's precise processing requirements and to configure the appropriate FSI
equipment to meet such requirements. In addition, as of the end of fiscal
1997, the sales effort was supported by approximately 175 employees and
contractors engaged in customer service and support.
International sales, primarily in Europe and Asia accounted for
approximately 36%, 35% and 33% of total sales for fiscal years 1997, 1996 and
1995 respectively. The Company owns a 37.5% equity interest in Metron
Technology B.V. ("Metron"), a distributor of the Company's products which has
an extensive distribution organization located in Europe, Israel, India, and
in the Asia Pacific Region. Fluoroware, Inc., a manufacturer of plastic
injection moldings for the microelectronics industry, also owns a 37.5% equity
interest in Metron. In addition to the Company's products, Metron also sells
products and equipment on behalf of several other semiconductor equipment and
consumables manufacturers, including Fluoroware, Inc.
The significant majority of the Company's international sales are made to
its affiliated distributors for resale to end users of the Company's products.
However, in some cases, the Company may also sell directly to an international
customer, in which case the Company will pay a commission to one of its
affiliated distributors in connection with the sale. When commissions are
taken into
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account, the international sales to the Company's affiliates are on terms
generally no less favorable to the Company than international sales by the
Company directly to non-affiliates.
The Company owns a 49% equity interest in m-FSI, Ltd. ("m-FSI"), a Japanese
joint venture company formed in August 1991 with Mitsui & Co., Ltd. and its
wholly-owned subsidiary, Chlorine Engineers Corp., Ltd. (collectively,
"Mitsui"). Mitsui owns a 51% equity interest in m-FSI. In connection with
its information, the Company and Mitsui granted m-FSI certain product and
technology licenses and product distribution rights.
MANUFACTURING, RAW MATERIALS AND SUPPLIERS
The Company maintains multiple manufacturing facilities including Chaska,
Minnesota; Allen, Texas; Hollister, California; and Fremont, California. FME
also manufactures, under a license from the Company certain CMD products. In
addition, FME also provides program management, including the capability to
manage the installation of large chemical generation, blending and dispense
systems.
The Company typically assembles its products and systems from components and
prefabricated parts manufactured and supplied by others, such as process
controllers, robots, integrated circuits, power supplies, stainless steel
pressure vessels, chamber bowls, valves and relays. Certain of the items
manufactured by others are made to the Company's specifications. Typically,
final assembly and systems tests are performed within the Company's
manufacturing facilities. Quality control is maintained through incoming
inspection of components, in-process inspection during equipment assembly, and
final inspection and operation of manufactured equipment prior to shipment by
FSI. FSI has a company-wide quality program in place and received ISO 9001
certification in October 1994. Such certification, however, does not cover the
operations of ACS, FME, FSI-CMK or SSI.
Certain of the components and subassemblies included in the Company's
products are obtained from a single supplier or a limited group of suppliers in
order to ensure overall quality and timeliness of delivery. Although the
Company seeks to reduce dependence on sole and limited source suppliers,
disruption or termination of certain of these sources could have a temporary
adverse effect on the Company's operations. The Company believes that
alternative sources could be obtained and qualified to supply these products,
if necessary. Nevertheless, a prolonged inability to obtain certain components
could have an adverse effect on the Company's operating results, disrupt
scheduled deliveries and result in damage to customer relationships.*
COMPETITION
The global semiconductor industry in which FSI competes is highly
competitive. In each of the markets it serves, the Company faces intense
competition from established competitors, some of which have substantially
greater financial, engineering, research, development, manufacturing, marketing
service and support resources, and greater name recognition than the Company.
In order to remain competitive, the Company will be required to maintain a high
level of investment in research and development, marketing, and customer
service and support as well as control operating expenses.* There can be no
assurance that the Company will have sufficient resources to continue to make
such investments or that the Company's products will continue to be viewed as
competitive as a result of technological advances by competitors or changes in
semiconductor processing technology. The Company's competitors also may
increase their efforts to gain and retain market share through competitive
pricing or strategic alliances.* Such competitive pressures may necessitate
significant price reductions by the Company or result in lost orders which
could adversely affect the Company's results of operations.* If the Company's
competitors enter into strategic alliances with leading semiconductor
manufacturers in the areas of surface conditioning, chemical management, or
microlithography, this could impair the ability of the Company to sell its
products to manufacturers and adversely affect the Company's operating
results.*
Regionally, the Japanese market segment is important as it represents a
substantial percentage of the world-wide semiconductor device market. To date,
the Company has not yet established itself as a significant participant in the
Japanese market segment with respect to its microlithography or chemical
management system product lines. As part of the strategy to establish its
Japanese presence, the Company formed a joint venture, m-FSI in August 1991
with Mitsui and granted m-FSI certain product and technology licenses and
product distribution rights in Japan.
The Company believes that the Japanese equipment companies with which it
competes have a competitive advantage because of their dominance of the
Japanese market segment. Furthermore, Japanese microelectronics manufacturers
have extended their influence outside Japan by licensing products and process
technologies to non-Japanese manufacturers. Such licenses can result in a
<PAGE> 10
recommendation to use equipment manufactured by Japanese companies. Therefore,
the Company may be at a competitive disadvantage with respect to the Japanese
equipment suppliers, who have been engaged for some time in collaborative
efforts with Japanese microelectronics manufacturers. Certain Japanese
equipment manufacturers have begun to establish manufacturing operations in the
United States, which will enable them to compete more effectively in the United
States market.
A portion of the Company's international sales have been to semiconductor
device manufacturers located in Korea. The Korean market is extremely
competitive and the semiconductor device manufacturers located there have been
very aggressive in seeking price concessions from suppliers. FSI does not
believe that there are any existing government trade restrictions that would
materially limit FSI's ability to compete in the Japanese or Korean markets.
The Company recently established a company in South Korea, FSI-CMK, to provide
sales support and service to chemical management systems or projects in Korea.
Taiwan, Singapore and recently, Thailand and Malaysia, have significantly
increased their microelectronics fabrication facility construction activity.
The Company understands that many of these companies have technology alliances
with established Japanese, U.S. or European semiconductor device manufacturing
companies and that a substantial portion of their equipment purchase decisions
will be based upon the recommendations of their alliance partners.
Significant competitive factors in the equipment market include quality,
process repeatability, capability and flexibility, ability to integrate with
other products, and overall cost of ownership, including reliability,
automation, throughput, customer support, and system price. The Company has
experienced significant price competition from certain of its competitors,
primarily those in the microlithography and chemical management systems
markets. Although the Company believes that it has certain technological and
other advantages over its competitors, realizing and maintaining such
advantages will require a continued high level of investment by the Company in
research and development, and marketing and customer service and support as
well as controlling operating expenses.* There can be no assurance that the
Company will continue to compete successfully in the future.*
The Company's competitors differ across its three product lines. The
Company's microlithography clusters compete with products offered by, among
others, Dainippon Screen Manufacturing Co. Ltd. ("DNS"), Fairchild/Convac,
Silicon Valley Group, Inc., and Tokyo Electron Ltd. ("TEL"). The Company
competes with, among others, DNS, Kaijo Denki, Steag, Sugai/Sankyo Engineering,
Semitool, Inc., SubMicron Systems, Inc. ("SubMicron"), Santa Clara Plastics,
and TEL in the area of surface conditioning products. The Company's Chemical
Management Division competes with products, among others, from Systems
Chemistry, Inc., a subsidiary of British Oxygen Company ("BOC"), MEGA Systems,
Inc, International Process Equipment Corp., and a number of chemical supply
companies that also offer competitive products or services.
CUSTOMERS
The Company sells products from one or more of its product lines to most
major microelectronics manufacturers and has an extensive history with several
of the largest integrated circuit manufacturers in the world. It has over 100
active customers worldwide.
IBM accounted for approximately 17%, 11% and 14% of the Company's sales in
fiscal 1997, 1996 and 1995, respectively.
Sales to the Company's affiliated international distributors in fiscal 1997,
1996 and 1995, which may include sales of products subsequently resold to the
Company's direct customers, accounted for approximately 29%, 25% and 20%
respectively, of the Company's total sales. In addition, the earnings received
from the Company's equity ownership interest in such affiliated distributors
accounted for approximately 80%, 18% and 17% of the Company's net income in
fiscal 1997, 1996 and 1995, respectively. The earnings or losses of the
Company's affiliated distributors can affect significantly the financial
results of the Company. There can be no assurance that the affiliated
distributors will continue to distribute the Company's products or do so
successfully, and in such event the Company's results of operations and
earnings could be adversely affected.*
The Company has experienced and expects to continue to experience
fluctuations in its customer mix.* The timing of an order for the Company's
equipment is primarily dependent upon the customer's expansion program,
replacement needs, or requirements to improve productivity and yields.
Consequently, a customer who places significant orders in one year will not
necessarily place significant orders in subsequent years.
<PAGE> 11
PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY
The Company's success is dependent upon a variety of factors including
proprietary technology. Protection of the Company's technology by obtaining
and enforcing patents is becoming increasingly important. Consequently, the
Company has an active program to file patent applications in the United States
and other countries on inventions it may consider significant. In addition to
patent protection, the Company attempts to protect its proprietary information
through non-disclosure agreements with its employees and with third-parties.
The Company has a number of patents in the United States and other countries
and additional applications are pending for new developments on its equipment
and related processes. In addition to patents, the Company also possesses
other proprietary intellectual property, including trademarks, know-how, trade
secrets and copyrights.
There can be no assurance that any of these patents will not be challenged,
invalidated, or circumvented or that any rights granted thereunder will provide
competitive advantages to the Company. In addition, there can be no assurances
that patents will issue for pending applications or the claims allowed in any
future patents will be sufficiently broad to protect the Company's technology.
In addition, the laws of some foreign countries may not permit the protection
of the Company's proprietary rights to the same extent as under the laws of the
United States. Although the Company believes that protection afforded by its
patents, patent applications, and other intellectual property rights has value,
rapidly changing technology makes its future success primarily dependent on the
engineering, marketing, service, and manufacturing skills of its employees.*
In the normal course of business, the company from time to time receives
and makes inquiries with regard to possible patent infringement. In dealing
with such inquiries, it may become necessary or useful for the Company to
obtain or grant licenses or other rights. However, there can be no assurance
that such license rights will be available to the Company on commercially
reasonable terms, or at all. The inability to obtain certain license or other
rights or to obtain such licenses or rights on favorable terms, or the need to
engage in litigation could have a material adverse effect on the Company. In
October, 1995, Purusar Corporation ("Purusar") brought suit against the Company
in the United States District Court, Northern District of California seeking
monetary damages based on the Company's alleged infringement of a patent held
by Purusar. See, "Item 3. Legal Proceedings."
The POLARIS cluster is offered by the Company under a non-exclusive license
from TI. The Company recently converted the license to a fully paid-up,
world-wide license to sell and manufacture the POLARIS cluster. FSI also has
the non-exclusive right to manufacture and sell related TI modules. The license
agreement continues until terminated. It may be terminated by either party upon
a breach by the other party, and the failure to cure, of certain terms of the
agreement.
The ARIES CryoKinetic cleaning tool is offered under license agreements from
IBM. The licenses require certain minimum royalties and system-based
royalties. Royalties are based on the "royalty portion revenues" of licensed
equipment which excludes amounts for freight, taxes, customers duties,
insurance, discounts, and certain equipment not manufactured by FSI.
EMPLOYEES
As of August 30, 1997, FSI and its wholly-owned subsidiaries ACS and SSI,
and its joint ventures, FME and FSI-CMK, had, in the aggregate, approximately
1,360 employees. In the high technology industry, competition for highly
skilled employees is intense. The Company believes that a great part of its
future success depends upon its continued ability to attract and retain
qualified employees.* The Company is not subject to any collective bargaining
agreement, has never been subject to a work stoppage and believes its relations
with its employees is good.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of governmental regulations related to
the discharge or disposal of toxic, volatile or otherwise hazardous chemicals
used in the manufacturing process. The Company believes that it is in
compliance with these regulations and that it has obtained all necessary
environmental permits to conduct its business. These permits generally relate
to the disposal of hazardous wastes. Nevertheless, the failure to comply with
present or future regulations could result in fines being imposed on the
Company, suspension of production or cessation of operations.* Such
regulations could require the Company to acquire significant equipment or take
other actions to comply with environmental regulations at a potentially
significant cost to the Company.* Any failure by the Company to control the
use of, or adequately restrict the discharge or disposal of hazardous
substances could subject the Company to future liabilities.* See also "Item 3
- - Legal Proceedings."
<PAGE> 12
The Company believes that compliance with federal, state and local
provisions which have been enacted or adopted regulating discharges of
materials into the environment, or otherwise relating to the protection of the
environment will not have a material effect upon the capital expenditures,
earnings and competitive position of the Company.*
INTERNATIONAL SALES
The Company's international sales for each of the last three fiscal years is
disclosed in the financial statements incorporated by reference and referred to
in Item 8 on page 17 of this Report.
OTHER RISK FACTORS
In addition to the other information contained herein, the following factors
should be carefully considered in evaluating the Company, its business and
prospects.
The Company's business and stock price is subject to a number of risks.
Some of those risks are described below. A discussion of certain risk factors
also is presented in the "Risk Factors Section" in the "Management Discussion
and Analysis of Financial Condition and Results of Operations" appearing on
pages 17 to 18 of the Company's Annual Report to Shareholders for the year
ended August 30, 1997, which is hereby incorporated by reference.
Fluctuations in Quarterly Operating Results
The Company's operating results have in the past been, and may continue to
be subject to quarterly fluctuations due to a number of factors. FSI may
experience significant fluctuations in its quarterly sales, gross profits,
operating results, and net income. Factors which may influence FSI's operating
results in a given quarter include specific economic conditions in the
microelectronics industry, the financial results of FSI's affiliates, the
timing of the receipt of orders from major customers, the mix of products sold
by FSI, competitive pricing pressures, the proportion of international sales,
product modifications requested by customers, and production ability. During a
specific quarter, a significant portion of the Company's revenue may be derived
from the sale of a relatively small number of systems. Accordingly, a small
change in the number of such systems sold in a quarter may cause significant
changes in operating results. Moreover, customers may cancel or reschedule
shipments, and parts availability could delay shipments. These factors also
could significantly affect annual results of operations.
Success of the Company's Affiliated Distributors
The majority of FSI's international sales are made through its affiliated
distributors, Metron in Europe and the Asia Pacific Region, and m-FSI Ltd. in
Japan. 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 or a loss of a
significant principal, could adversely affect FSI's international sales, its
financial results, or its ability to support its international customers.
The earnings or losses of FSI's affiliated distributors can significantly
affect the financial results of FSI. The affiliated distributors distribute
not only FSI's products but also distribute or represent those of other
companies serving the microelectronics industry. Over the past several years,
a majority of Metron's revenues have been attributable to sales of products of
equipment and consumables suppliers other than FSI. Thus, the financial
results of Metron and their impact on FSI's financial results are dependent not
only upon the ability of Metron to successfully market FSI's products, but also
on their ability to maintain relationships with and market the products of
other equipment and consumables suppliers. While sales of FSI's products by
Metron (and of certain other manufacturers for whom they distribute) are
generally in United States dollars, the expenses of Metron are generally
denominated in foreign currencies and, accordingly, Metron's operating results
may be affected by fluctuations in interest and currency exchange rates. In
addition, sales by m-FSI are denominated in yen and, accordingly, FSI's equity
interest in the earnings of m-FSI are affected by dollar/yen exchange rates.
FSI's affiliated distributors periodically engage in hedging transactions in an
effort to lessen the potentially negative effect of foreign currency
devaluation in relation to the United States dollar. This typically occurs in
those instances where a sale by an affiliated distributor has been both in a
foreign currency (usually at the request of a foreign-domiciled customer) and
of a size to justify the costs of engaging in hedging activity. FSI's
affiliated distributors generally have hedged such transactions by buying
forward United States dollars and selling forward the applicable local
currency. If the order that is the subject of a hedging transaction is
subsequently canceled by the customer, the affiliated distributor may be
required to satisfy its hedging obligations by
<PAGE> 13
buying and/or selling the applicable currencies at market prices that could
result in losses to the affiliated distributor. To date, FSI has not
experienced any material adverse effect as a result of the hedging activities
of its affiliated distributors. There can be no assurance that Metron and m-FSI
will continue to distribute, or to distribute successfully, FSI's products or
the products of other microelectronics and consumables companies, and in such
an event FSI's results of operations and earnings could be adversely affected.
FSI is not aware of any financial difficulties being experienced by any of its
affiliated distributors which could materially adversely affect FSI's financial
condition or results of operations.
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 1997, 1996 and
1995 have accounted for approximately 40%, 41% and 54% respectively, of FSI's
total sales. Direct sales to FSI's top two customers in each of fiscal 1997,
1996, and 1995 accounted for approximately 25%, 23% and 27%, respectively, of
FSI's total sales. In addition, approximately 32% of FSI's backlog at fiscal
1997 year-end was comprised of orders from three customers. FSI currently has
no long-term sales commitments with any of its customers and sales are
generally made pursuant to purchase orders. A reduction, delay, or
cancellation of orders from one or more of its significant customers, or the
loss of one or more of such customers, could have a material adverse effect on
FSI's operating results.
International Business
Approximately 36%, 35% and 33% of FSI's sales for fiscal 1997, 1996 and
fiscal 1995, respectively, were attributable to sales outside the United
States, including sales through FSI's affiliated international distributors
which accounted for 82%, 71% and 60% respectively, of such international sales.
See "Success of the Company's Affiliated Distributors" above. FSI expects that
international sales will continue to represent a significant portion of its
total sales. Sales to customers outside the United States are subject to
risks, including the imposition of governmental controls, the need to comply
with a wide variety of foreign and United States export laws, political and
economic instability, trade restrictions, changes in tariffs and taxes, longer
payment cycles typically associated with international sales, and the greater
difficulty of administering business overseas as well as general economic
conditions. A portion of FSI's international sales have been to semiconductor
device manufacturers located in South Korea. The South Korean market is
extremely competitive and the semiconductor device manufacturers located there
have been very aggressive in seeking price concessions from suppliers.
Although substantially all of FSI's direct international sales are
denominated in United States dollars, both direct sales by FSI and sales
through its affiliated international distributors may be affected by changes in
demand resulting from fluctuations in interest and currency exchange rates.
Moreover, while sales by Metron are also generally denominated in United States
Dollars, their expenses are denominated in foreign currencies and,
consequently, their operating results may be directly affected by changes in
exchange rates. Sales by m-FSI are denominated in yen and, accordingly, FSI's
equity interest in the earnings of m-FSI are affected by fluctuations in
dollar/yen exchange rates. Furthermore, although FSI endeavors to meet
technical standards established by foreign regulatory bodies, there can be no
assurance that FSI will be able to comply with changes in foreign standards in
the future. The inability of FSI to design products to comply with foreign
standards could have a material adverse effect on FSI. In addition, the laws
of certain foreign countries may not protect FSI's intellectual property to the
same extent as the laws of the United States.
Industry consolidation.
There has been a trend toward industry consolidation for several years.
During fiscal 1997, the Company saw this trend continue with the completion of
two large industry mergers. The Company expects this trend toward industry
consolidation to continue as companies attempt to strengthen or hold their
market positions in a rapidly changing industry. The Company believes that the
industry consolidation may result in competitors that are better able to
compete. This could have a material adverse affect on the Company's business
operating results and financial condition.
<PAGE> 14
ITEM 2. PROPERTIES
The Company's corporate offices are located in Chaska, a suburb of
Minneapolis, Minnesota. In fiscal 1997, the Company leased approximately
288,000 square feet, in four buildings. The annual rental cost for these
facilities in fiscal 1997 was approximately $1,090,000.
In November 1995, the Company opened a new 100,000 square foot manufacturing
facility which cost approximately $12.5 million to construct and equip. The
facility contains 40,000 square feet of Class 1,000 and 10,000 clean room
space, which can be upgraded to class 100 as required. The new facility also
contains a manufacturing support operations and customer training center. In
May, 1997, the Company completed construction of an 88,000 square foot addition
to this facility. The cost of constructing and equipping this addition was
$21.5 million. This addition contains the headquarters for the Company's
Surface Conditioning Division and includes research laboratory and engineering
facilities.
In March, 1997 the Company completed construction of a 159,000 square foot
facility in Allen, Texas. This facility comprises the Microlithography
Division's headquarters and includes manufacturing, engineering, and a research
and development laboratory.
The Company also leases facilities in England and in various other locations
within the United States including:
* a 27,390 square foot engineering and administrative facility for the
Chemical Management Division located in Hollister, California (ACS
Headquarters).
* 23,500 square feet of office engineering, manufacturing, and
administrative facilities for the Chemical Management Division located in
Europe (FME Headquarters).
* a 62,040 square foot for research and development laboratory, engineering,
manufacturing, and administrative facility in Fremont, California (SSI
Headquarters).
The Company also leases office space for service or sales and services
offices in the United States. Management believes its existing facilities are
well maintained and in good operating condition.
ITEM 3. LEGAL PROCEEDINGS
The Company generates minor amounts of liquid and solid hazardous waste and
uses licensed haulers and disposal facilities to ship and dispose of such
waste. The Company has received notice from state or federal enforcement
agencies that it is a potentially responsible party ("PRP") in connection with
the investigation of several hazardous waste disposal sites owned and operated
by third parties. In each matter, the Company believes that it is at most a
"de minimis" PRP. The Company has elected to participate in settlement offers
made to all de minimis parties with respect to several of such sites.
The risk of being named a PRP is that if any of the other PRP's are unable
to contribute their proportionate share of the liability, if any, associated
with the site, those PRP that are able could be held financially responsible
for the shortfall. While the ultimate outcome of those matters not yet settled
cannot presently be determined, the Company does not believe that any of these
investigations, either individually or in the aggregate, will have a material
adverse effect on its business, operating results, or financial condition.
In October, 1995, Purusar Corporation ("Purusar") brought suit against the
Company in United States District Court, Northern District of California,
seeking monetary damages based upon the Company's alleged infringement of a
patent held by Purusar. The lawsuit is in the late stages of discovery and the
trial is currently scheduled for March, 1998. The Company has asserted various
defenses including the defenses of invalidity and unenforceability of the
patent that is the subject of the lawsuit, as well as non-infringement of such
patent by the Company. While litigation is subject to inherent uncertainties
and no assurance can be given that the Company will prevail in such litigation
or will obtain a license under such patent on commercially reasonable terms, or
at all, if such patent is found to be valid and it is determined the Company
infringes such patent, the Company believes that the Purusar lawsuit will not
have a material adverse affect on the Company's consolidated financial
statements.
<PAGE> 15
There has been substantial litigation regarding patent and other
intellectual property rights in the microelectronics industry recently and
further commercialization of the Company's products could provoke claims of
infringement by third-parties. Except for the allegations made by Purusar, the
Company is not aware of any infringement by its products of any patents or
proprietary rights of others. In the future, litigation may be necessary to
enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company or to defend the Company against claimed infringement of
the rights of others and determine the scope and validity of the Company's
proprietary rights. Any such litigation could result in substantial costs and
diversion of effort by the Company, which by itself could have a material
adverse impact on the Company's financial condition and operating results.
Further, adverse determinations in such litigation could result in the
Company's loss of proprietary rights, subject the Company to significant
liabilities to third parties, require the Company to seek licenses from
third-parties or prevent the Company from manufacturing or selling one or more
products, any of which could have a material adverse effect on the Company's
financial condition and results of operations.
During the second quarter of fiscal 1996, Eric C. and Angie L. Hsu (the
"plaintiffs") filed a lawsuit in the Superior Court of California, County of
Alameda, Southern Division, against Semiconductors Systems, Inc.
("Semiconductor Systems"), a wholly-owned subsidiary of the Company that was
acquired in April 1996, and the former shareholders of Semiconductor Systems.
In the fall of 1995, pursuant to the Employee Stock Purchase and Shareholder
Agreement dated November 30, 1990 between Mr. Hsu and Semiconductor Systems
(the "Shareholder Agreement") and in connection with Mr. Hsu's termination of
his employment with Semiconductor Systems in August 1995, the former
shareholders of Semiconductor Systems purchased the shares of Semiconductor
Systems common stock then held by Mr. Hsu. The plaintiffs are claiming, among
other things, that such purchase breached the Shareholder Agreement and
violated the California Corporations Code, breached the fiduciary duty owed
plaintiffs by the individual defendants and constituted fraud. The plaintiffs
are seeking, among other things, damages in an amount to be proven at trial,
punitive damages, attorneys' fees and a constructive trust over the shares held
in the escrow mentioned below. Discovery in this case is at a very preliminary
stage. Semiconductor Systems intends to vigorously defend the lawsuit.
The Company, on behalf of Semiconductor Systems, has made a claim with
respect to the lawsuit under the escrow created at the time of the Company's
acquisition of Semiconductor Systems. The escrow was established to secure
certain indemnification obligations of the former shareholders of Semiconductor
Systems. The former shareholders have agreed to hold the Company and
Semiconductor Systems harmless from any claim arising out of any securities
transactions between the shareholders or former shareholders of Semiconductor
Systems and Semiconductor Systems. The escrow consists of an aggregate of
250,000 shares of Company Common Stock paid to the former shareholders of
Semiconductor Systems as consideration in the acquisition.
Other than the litigation described above or routine litigation incidental
to the Company's business, there is no material litigation to which the Company
is a party or of which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter ended August 30, 1997.
<PAGE> 16
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers are elected by the board of directors, generally for
a term of one year, and serve until their successor is elected and qualified.
The following table and discussion contains information regarding the current
executive officers of the Company.
NAME AGE POSITION
---- --- --------
Robert E. Cavins (1) 62 Executive Vice President; President,
Chemical Management Division
Dale A. Courtney (2) 60 Executive Vice President; President,
Surface Conditioning Division
Joel A. Elftmann (3) 57 Chairman of the Board, President and
Chief Executive Officer
Peter A. Pope (4) 47 Executive Vice President, Marketing,
Account Management and Quality
Benno G. Sand (5) 43 Executive Vice President, Chief Financial
Officer and Secretary
Benjamin J. Sloan (6) 57 Executive Vice President; President,
Microlithography Division
J. Wayne Stewart (7) 47 Executive Vice President, Operations
Charles R. Wofford (8) 64 Vice Chairman
(1)Dr. Cavins has served as Executive Vice President; President, Chemical
Management Division of the Company since January 1, 1996. From March 1994
until January 1, 1996, he was Senior Vice President, Chemical Management
Division. He served as Vice President, Chemical Management Division from
January 1993 until March 1994. From March 1992 to July 1992, Dr. Cavins was
employed by Itron Corporation in the capacity of Vice President and General
Manager for Enscan Operations, the energy management division of Itron
Corporation. From 1988 to March 1992, Dr. Cavins served as Senior Vice
President of Operations for E.F. Johnson Company. Prior to joining E.F.
Johnson Company, Dr. Cavins served in management positions in various
electronics and engineering capacities at Honeywell, Inc. and Control Data
Corporation (now Ceridian Corporation). Dr. Cavins also serves as a director
of FME and ACS.
(2)Mr. Courtney has served as Executive Vice President; President, Surface
Conditioning Division of the Company since January 1, 1996. From March 1994
until January 1, 1996 he was Senior Vice President, Surface Conditioning
Division. He served as Vice President, Surface Conditioning Division of the
Company from November 1992 to March 1994. Mr. Courtney served as Vice
President, Engineering of the Company from August 1991 to November 1992. Mr.
Courtney served as Director of Engineering of the Company from September 1990
to August 1991 and as manager of Engineering Software Development and
Automation of the Company from September 1987 to September 1990. Prior to
joining the Company, Mr. Courtney was President of D A Courtney & Associates,
Dallas, Texas, specializing in the development of software for automation and
real time process control systems. Mr. Courtney also is a director of m-FSI,
Ltd.
(3)Mr. Elftmann is a co-founder of the Company and has served as a Director of
the Company since 1973 and as Chairman of the Board since August 1983. From
August 1983 to August 1989, and from May 1991 until the present, Mr. Elftmann
has served as Chief Executive Officer of the Company. From 1977 to August 1983,
and from May 1991 until the present, Mr. Elftmann has served as President of
the Company. Mr. Elftmann is a member of the Supervisory Board of Directors
of Metron Technology B.V., a director of m-FSI, Ltd. and has been a director of
Veeco Instruments, Inc. since May 1994.
(4)Mr. Pope was elected Executive Vice President, Marketing, Account Management
and Quality effective January 1997. He was Executive Vice President, Marketing
and Account Management of the Company from January 1992 to January 1997. Mr.
Pope served as Senior Vice President and General Manager, Process Equipment of
the Company from November 1989 until January 1992. Mr. Pope served as Vice
President, Sales and Service of the Company from May 1985 to November 1989.
From September 1982 to
<PAGE> 17
May 1985, Mr. Pope served as Executive Sales Manager of the Company. Prior
thereto, he was Managing Director of Metron Semiconductors Europa B.V. (n/k/a
Metron Technology B.V.) Mr. Pope also serves as a director of m-FSI, Ltd.
(5)Mr. Sand has served as Executive Vice President and Chief Financial Officer
of the Company since January 1992. Mr. Sand served as Vice President, Finance
and Chief Financial Officer of the Company from October 1990 until January
1992. He served as Vice President, Finance of the Company from October 1987
until October 1990. Mr. Sand was elected Assistant Secretary of the Company in
November 1989 and Secretary in November 1990. Mr. Sand is a director of ACS
and SSI.
(6)Dr. Sloan has served as Executive Vice President; President,
Microlithography Division of the Company since January 1, 1996. From January
1992 to January 1996, he served as Executive Vice President, Microlithography
Division. Prior thereto, Dr. Sloan was employed by Texas Instruments in
Dallas, Texas where he served over 24 years in various research and development
capacities, most recently as Vice President of TI's Semiconductor Group and
Manager of the Wafer Fabrication Systems Division of TI's Process Automation
Center. Dr. Sloan also serves as a director of SSI.
(7)Mr. Stewart has served as Executive Vice President, Operations of the
Company since January 1, 1996. From February 1994 until January 1, 1996, he
was Vice President, Operations. Prior thereto, he was employed by Texas
Instruments in Dallas, Texas where he served over 20 years in various
manufacturing and operations management positions, most recently as Custom
Manufacturing Services Manager from July 1992 to February 1994, and Corporate
CIM Manager from August 1990 to July 1992. Mr. Stewart was also the
Manufacturing Manager of TI's award winning HARM (High Speed Anti-Radar
Missile) program. Mr. Stewart also serves as a director of FME.
(8)Mr. Wofford has served as a Director of the Company since November 1992. On
February 5, 1996 he joined the Company as Vice Chairman. Since April 1994, Mr.
Wofford has been a business and management consultant. From April 1992 to
April 1994, he was Chairman of the Board, Chief Executive Officer, and
President of the FARR Company, a manufacturer of clean room filtration systems
and equipment. Mr. Wofford was President and Chief Executive Officer of the
FARR Company from September 1991 to March 1992, and from July 1991 to August
1991 he was President and Chief Operating Officer. Prior thereto, Mr. Wofford
held a variety of positions with respect to TI's semiconductor operations in
the United States, Europe, Asia, and Latin America, including Senior Vice
President, Semiconductor Group.
<PAGE> 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, no par value, is traded on the Nasdaq Stock
Market under the symbol "FSII." The information concerning the quarterly stock
prices and dividends for the fiscal years ended August 30, 1997 and the number
of shareholders of record is contained in the Company's 1997 Annual Report to
Shareholders ("Annual Report"), at page 32 under the captions "Quarterly Data"
and "Common Stock Prices", which information is incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The summary of selected financial data for each of the last five fiscal
years set forth in the Annual Report in the table on page 13 under the caption
"Five-Year Selected Financial Data" is incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing in the
Company's Annual Report on pages 14 to 32 is incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Registrant at August 30, 1997,
August 31, 1996 and August 26, 1995 and for each of the three years and the
period ended August 30, 1996 and the Report thereon of the Independent Auditors
on pages 19-32 of the Annual Report are incorporated herein by reference.
The Quarterly Data on page 32 of the Annual Report is also incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is incorporated by reference to the
Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to
be held on January 27, 1998 (the "Proxy Statement") and which will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within
120 days after August 30, 1997.
Except for those portions specifically incorporated in this Report by
reference to the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on January 27, 1998, no other portions of the Proxy
Statement are deemed to be filed as part of this Report on Form 10-K. The
Proxy Statement is furnished solely for the information of the Securities and
Exchange Commission.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
included in the Proxy Statement and is incorporated by reference. For
information concerning executive officers, see Item 4A of this Form 10-K
Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item, which is included in the Proxy
Statement, is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item, which is included in the Proxy
Statement, is incorporated by reference.
<PAGE> 19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item, which is included in the Proxy
Statement, is incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The following financial statements and documents and the report of the
independent auditors are included in the Annual Report (an Exhibit to this
Report) and are incorporated by reference in Item 8 of this Report:
PAGE NUMBER IN THE
ANNUAL REPORT
-------------
Selected Financial Data for the five years ended
August 30, 1997 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-46
Consolidated Statements of Operations - Fiscal Years
ended August 30, 1997, August 31, 1996, and 28
August 26, 1995
Consolidated Balance Sheets - August 30, 1997 and
August 31, 1996 29
Consolidated Statements of Stockholders' Equity -
Fiscal Years Ended August 30, 1997, August 31, 1996,
and August 26, 1995 30
Consolidated Statements of Cash Flows - Fiscal Years
ended August 30, 1997, August 31, 1996, and August 26, 31
1995
Notes to Consolidated Financial Statements 32-46
Independent Auditors' Report 26
<PAGE> 20
PAGE NUMBER
IN THIS REPORT
--------------
(a) (2) Financial Statement Schedules
The following Report and financial statement schedule are
included in this Part IV and are found in this Report at
the pages indicated.
Independent Auditors' Report on Schedule 24
Schedule II - Valuation and Qualifying Accounts 25
All other schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or notes thereto.
(a)(3) Exhibits
* An asterisk next to a listed Exhibit indicates it is an executive
compensation plan or arrangement.
2.1 Agreement and Plan of Reorganization dated December 23, 1994 by
and among the Company, ACS Acquisition Corp., Applied Chemical
Solutions, and certain significant shareholders of Applied
Chemical Solutions.(1)
2.2 Share Purchase Agreement dated December 14, 1994 by and among
the Company, Metron Semiconductors Europa B.V., Christopher
Springall, Anthony Springall, Roger Springall, David Springall
and Michael Springall. (2)
2.3 Agreement and Plan of Reorganization by and Among FSI
International, Inc., Spectre Acquisition Corp., and
Semiconductor Systems, Inc. (12)
3.1 Restated Articles of Incorporation of the Company. (3)
3.2 Restated By-Laws. (4)
3.3 Amendment to Restated By-Laws. (5)
4.1 Note Purchase Agreement between FSI International, Inc. and
Metropolitan Life Insurance Company and other certain
purchasers (Schedule A omitted) (14)
4.2 Form of Rights Agreement dated as of May 22, 1997 between FSI
International, Inc. and Harris Trust and Savings Bank, National
Association, as Rights Agent (15)
*10.1 FSI International, Inc. 1997 Omnibus Stock Plan (14)
*10.2 Split Dollar Insurance Agreement and Collateral Assignment
Agreement dated December 28, 1989, between the Company and Joel
A. Elftmann. (Similar agreements between the Company and each of
Robert E. Cavins, Benjamin J. Sloan, Dale A. Courtney, Peter A.
Pope, Benno G. Sand and J. Wayne Stewart have
been omitted, but will be filed upon the request of the
Commission).(6)
10.3 Lease dated June 27, 1985, between the Company and Lake
Hazeltine Properties. (4)
10.4 Lease dated September 1, 1985, between the Company and Elftmann,
Wyers, Blackwood Partnership. (4)
10.5 Lease dated September 1, 1985, between the Company and Elftmann,
Wyers Partnership. (4)
*10.6 1989 Stock Option Plan. (5)
*10.7 Amended and Restated Employees Stock Purchase Plan. (3)
10.8 Shareholders Agreement among FSI International, Inc. and Mitsui
& Co., Ltd. and Chlorine Engineers Corp. Ltd. dated as of August
14, 1991. (6)
10.9 FSI Exclusive Distributorship Agreement dated as of August 14,
1991 between FSI International, Inc. and m-FSI, Ltd. (6)
10.10 FSI Licensing Agreement dated as of August 14, 1991, between FSI
International, Inc. and m-FSI, Ltd. (6)
10.11 License Agreement, dated October 15, 1991, between the Company
and Texas Instruments Incorporated. (7)
10.12 Amendment No. 1, dated April 10, 1992, to the License Agreement,
dated October 15, 1991, between the Company and Texas
Instruments Incorporated.(7)
<PAGE> 21
10.13 Amendment effective October 1, 1993 to the License Agreement,
dated October 15, 1991 between the Company and Texas Instruments
Incorporated (8)
*10.14 Amended and Restated Directors' Nonstatutory Stock Option
Plan. (9)
*10.15 Management Agreement between FSI International, Inc. and
Robert E. Cavins, effective as of March 28, 1994. (9)
*10.16 Management Agreement between FSI International, Inc. and Dale A.
Courtney, effective as of March 28, 1994. (9)
*10.17 Management Agreement between FSI International, Inc. and Joel A.
Elftmann, effective as of March 28, 1994 (9)
*10.19 Management Agreement between FSI International, Inc. and
Peter A. Pope, effective as of March 28, 1994. (9)
*10.20 Management Agreement between FSI International, Inc. and
Benno G. Sand, effective as of March 31, 1994. (9)
*10.21 Management Agreement between FSI International, Inc. and
Benjamin J. Sloan, effective as of March 28, 1994. (9)
*10.22 Management Agreement between FSI International, Inc. and
J. Wayne Stewart, effective as of March 28, 1994. (9)
*10.23 Management Agreement between FSI International, Inc and Charles
Wofford effective as of February 5, 1996. (13)
*10.24 FSI International, Inc. 1994 Omnibus Stock Plan. (13)
*10.25 FSI International, Inc. 1997 Incentive Plan.
10.26 First Amendment to Lease made and entered into October 31, 1995
by and between Lake Hazeltine Properties and FSI International,
Inc. (11)
10.27 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) (11)
10.28 Lease dated August 9, 1995 between Skyline Builders, Inc. and
FSI International, Inc. (11)
10.29 Lease Rider dated August 9, 1995 between Skyline Builders,
Inc. and FSI International, Inc. (11)
10.30 Lease Amendment dated November, 1995 between Roland A.
Stinski and FSI International, Inc. (Exhibits to Amendment
omitted) (11)
11.1 Computation of Per Share Earnings of FSI International, Inc.
13.0 Registrant's 1997 Annual Report to Shareholders (Only those
portions of this document specifically incorporated herein by
reference are deemed to be included in this Exhibit and part of
this Report.).
21.0 Subsidiaries of the Company.
23.0 Consent of KPMG Peat Marwick LLP.
24.0 Powers of Attorney from the Directors of FSI International, Inc.
27.0 Financial Data Schedule
(1) Filed as an Exhibit to the Company's Report on Form 8-K dated January 5,
1995, as amended, File No. 0-17276, and incorporated by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form S-3
dated January 5, 1995, SEC File No. 33-88250 and incorporated by
reference.
(3) Filed as an Exhibit to the Company's Report on Form 10-Q for the quarter
ended February 24, 1990, SEC File No. 0-17276, and incorporated by
reference.
(4) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
SEC File No. 33-25035, and incorporated by reference.
(5) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 26, 1989, SEC File No. 0-17276, and incorporated by
reference.
(6) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 31, 1991, as amended by Form 8 dated January 7, 1992, SEC
File No. 0-17276, and incorporated by reference.
(7) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 29, 1992, File No. 0-17276, and incorporated by
reference.
(8) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 28, 1993, SEC File No. 0-17276, and incorporated by
reference.
(9) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
quarter ended May 28, 1994, SEC File No. 0-17276, and incorporated by
reference.
(10)Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 27, 1994, SEC File No. 0-17276, and incorporated by
reference.
(11)Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 26, 1995, SEC File No. 0-17276 and incorporated by
reference.
<PAGE> 22
(12) Filed as an Exhibit to the Company's Registration Statement on Form S-4
(as amended) dated March 21, 1996, SEC File No. 333-1509 and incorporated
by reference.
(13) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 31, 1996, SEC File No. 0-17276 and incorporated by
reference.
(14) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
quarter ended March 1, 1997, SEC File No. 0-17276, and incorporated by
reference.
(15) Filed as an Exhibit to the Company's Report on Form 8-K, filed by the
Company on June 5, 1997, SEC File No. 0-17276, and incorporated by
reference.
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on June 5, 1997, reporting that on
May 22, 1997 the Company adopted a Shareholder Rights Plan.
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FSI INTERNATIONAL, INC.
By: /s/Joel A. Elftmann
-------------------
Joel A. Elftmann, Chairman,
President and Chief Executive
Officer (Principal Executive Officer)
Dated: November 26, 1997
By: /s/Benno Sand
------------------------------------
Benno Sand, Executive Vice President
and Chief Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, constituting a majority
of the Board of Directors, on behalf of the Registrant and in the capacities
and on the dates indicated.
Joel A. Elftmann, Director )
James A. Bernards, Director )
Neil R. Bonke, Director )
Terrence W. Glarner, Director )
Joanna T. Lau, Director )
Robert E. Lorenzini, Director )
Charles R. Wofford, Director )
By: /s/Benno Sand
--------------------------
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Dated: November 26, 1997
<PAGE> 24
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders FSI International, Inc.
Under the date of October 10, 1997, we reported on the consolidated balance
sheets of FSI International, Inc. and subsidiaries as of August 30, 1997 and
August 31, 1996 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended August 30, 1997, as contained in the 1997 annual report to
stockholders. These consolidated financial statements and our report thereon
are incorporated by reference in the annual report on Form 10-K for the year
1997. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related financial statement
schedule as listed in the accompanying index. The financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick
Minneapolis, Minnesota October 10, 1997
<PAGE> 25
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS FISCAL YEARS ENDED AUGUST 30, 1997, AUGUST
31, 1996 AND AUGUST 26, 1995
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING BALANCE AT
OF YEAR ADDITIONS DELETIONS END OF YEAR
------- --------- --------- -----------
<S> <C> <C> <C> <C>
Fiscal Year Ended August 30,
1997 Allowance for doubtful
accounts (Deducted from
receivable accounts $1,843,000 $284,000 $ -- $2,127,000
========== ======== ==== ==========
Fiscal Year Ended August 31,
1996 Allowance for doubtful
accounts (Deducted from
accounts receivable) $1,234,000 $ 609,000 $ -- $1,843,000
========== ========= ==== ==========
Fiscal Year Ended August 26,
1995 Allowance for doubtful
accounts (Deducted from
accounts receivable) $ 533,500 $ 700,500 $ -- $1,234,000
========== ========= ==== ==========
</TABLE>
<PAGE> 26
EXHIBIT INDEX
10.25 FSI International, Inc. 1997 Incentive Plan
11.1 Computation of Per Share Earnings of FSI
International, Inc.
13.0 Registrant's 1997 Annual Report to Shareholders
(not deemed "filed" as part of this Form 10-K
except for those portions that are expressly
incorporated by reference)
21.0 Subsidiaries of the Company
23.0 Consent of KPMG Peat Marwick LLP
24.0 Powers of Attorney from the Directors of FSI
International, Inc.
27.0 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.25
FSI
1997 INCENTIVE PLAN
1. PURPOSE
The purpose of the FSI 1997 Incentive Plan is to attract, motivate and
retain employees who play significant roles in the attainment of annual
corporate and divisional performance targets.
2. DESCRIPTION
The Plan provides for cash awards if FSI and/or its operating divisions
meet or exceed preestablished Performance Targets.
3. DEFINITIONS
When used in the Plan these words and phrases shall have these meanings:
"Annual Base Earnings": a Eligible Employee's base salary or wages
during the Company's 1997 fiscal year, exclusive of incentive, sales or
discretionary bonuses, sales commissions or any other form of cash
compensation and without regard to any deductions for taxes, or pretax
deductions under the Company's benefit plans. The determination of
Annual Base Earnings rests solely with the Company and its determination
shall be final, binding and conclusive.
"Award": a cash award granted under the Plan.
"Board": the Board of Directors of FSI or the Compensation
Committee ("Compensation Committee") of the Board of Directors.
"Committee": a committee consisting of FSI's Vice Chairman,
Executive Vice President and Chief Financial Officer, and Executive Vice
President, Quality and Human Resources.
"Company": FSI International, Inc., its subsidiaries and their
successors or assigns.
"Covered Position": a position with the Company which is eligible
for participation in the Plan.
-1-
<PAGE> 2
"Division": one or more of FSI's operating divisions, Chemical
Management (which includes Applied Chemical Solution's results but
excludes FME's results and FME eliminations), Microlithography (which
includes Semiconductor Systems, Inc.'s results) and Surface Conditioning.
"FSI": FSI International, Inc. and its successors or assigns.
"Goal": the level of financial performance established for the 1997
fiscal year by the Committee or the Compensation Committee for the
Company and each Division that meets the respective Company or Division's
financial objectives for the 1997 fiscal year.
"Eligible Employee": a person who during the 1997 fiscal year was a
regular full-time salaried employee of the Company and who, in the
opinion of the Committee, is in a Covered Position.
"Maximum": the level of financial performance established by the
Committee or the Compensation Committee that is 120% of the Goal for the
Company or the respective Division.
"Performance Targets": the Threshold, Goal and Maximum financial
performance targets established by the Committee or the Compensation
Committee for the Company and each Division.
"Plan": this 1997 Incentive Plan.
"Threshold": the level of financial performance established by the
Committee or the Compensation Committee that is 85% of Goal for the
Company or the respective Division.
4. PLAN ADMINISTRATION
The Plan shall be administered by the Committee. The Committee shall
have all necessary powers to administer and interpret the Plan, such
powers to include adopting rules and regulations and determining
eligibility for participation or Awards, and the amount of any Award. The
Committee's interpretations of the Plan, the determination of any Awards,
and all actions taken and determinations made by the Committee pursuant
to the powers vested in it, shall be final, conclusive and binding on all
parties.
-2-
<PAGE> 3
5. PLAN YEAR
The Plan Year is the Company's 1997 fiscal year and the effective date of
the Plan will be the first day of the 1997 fiscal year.
6. PARTICIPATION
Eligible Employees in the Plan shall be selected by the Committee or the
Board from among the Company's employees based upon such criteria as the
Committee may from time to time determine and is based upon whether the
individual is in a Covered Position. Except for Eligible Employees who
are subject to a non-compete pursuant to a Management Agreement with the
Company, participation in the Plan is conditioned upon the employee's
having entered into a non-compete, invention assignment and
non-disclosure agreement, or an invention assignment and non-disclosure
agreement with the Company, or its subsidiaries. Prior to or soon
after the beginning of the Plan Year, Eligible Employees will be notified
of their eligibility for participation in the Plan. ELIGIBILITY IN ANY
ONE YEAR DOES NOT AUTOMATICALLY QUALIFY AN ELIGIBLE EMPLOYEE FOR FUTURE
YEARS' PLANS.
Employees first hired or promoted into a Covered Position after the
commencement of the Plan Year are eligible for participation in the Plan
on a pro rata basis. An individual who transfers from one Covered
Position to another within the same Division or CCC shall be entitled to
a pro rated Award based upon the Covered Positions held during the Plan
Year. As to each such Covered Position, the pro-ration shall be based
upon the Award the individual would have received had he or she been in
that Covered Position the entire year times a fraction the numerator of
which is the number of days during the Plan Year the individual served in
such position and the denominator of which is 365.
Eligible Employees in this Plan shall not be eligible to participate in
any other Company incentive or sales commission plan unless authorized in
writing by the Committee or the Compensation Committee.
In order to be eligible for an Award under the Plan, an Eligible Employee
must be actively employed in a Covered Position on the last day of the
Plan Year.
If as of the end of the Plan Year an Eligible Employee is on a
Performance Improvement Plan ("PIP") due to job performance issues (e.g.,
a performance review rating of less than 70), then such individual shall
not receive an Award or Awards to which he or she would otherwise be
entitled to under the Plan, unless each of the following criteria are
met:
- The Company determines the individual has satisfactorily completed
the PIP within 90 days following the commencement of the PIP; and
-3-
<PAGE> 4
- The Employee is employed in a Covered Position as of the date the
PIP is satisfactorily completed.
7. GRANTING OF AWARDS
(A) For each of the Company and the Divisions, there is a Threshold,
Goal and Maximum financial objective. The Performance Targets are
comprised of specified annual levels of one or more performance criteria
that the Committee or Compensation Committee may deem appropriate,
including, but not limited to, such matters as: earnings per share, net
income, operating income, operating income as a percent of net sales,
return on assets, return on investment or the like. In determining
whether such Performance Targets have been achieved, the Committee may
disregard or offset the effect of any special charges or gains or the
cumulative effect of a change in accounting in determining the attainment
of one or more Performance Targets.
(B) The Committee or the Compensation Committee, in consultation
with the appropriate members of the Company's management, shall determine
the percentage of Annual Base Earnings that each Eligible Employee shall
be entitled to receive if Threshold, Goal or Maximum Performance Targets
are achieved and if certain levels between Goal and Maximum, i.e., 105%,
110% and 115% of Goal are achieved. Eligible Employees shall be
classified in one of several tiers according to their Covered Position.
These tier groups percentage of Annual Base Earnings upon which the
Eligible Employee's total potential Award is based. The Tier Levels and
the applicable percentages shall be established by the Committee or the
Compensation Committee. Each Eligible Employee will be notified as to
their potential Award. The master list of all Eligible Employees will be
kept by the Committee or its designee. Eligible Employees who perform
services primarily on behalf of a Division are eligible for Awards based
upon the achievement of Performance Targets by the Company and by their
Division. In such cases, the Company's Performance Target is weighted
40% and the Division's Performance Target is weighted 60%.
(C) After the completion of the Plan Year, the Committee and/or the
Compensation Committee shall determine the level of achievement as
compared to the preestablished Performance Targets. If Threshold for the
Company or the applicable Division has not been achieved, there shall be
no Awards pursuant to the Plan to the Eligible Employees covered thereby
with respect to those Performance Targets unless determined otherwise by
the Board. Financial performance in excess of Maximum will not result in
any additional payments pursuant to the terms of the Plan.
(D) The Committee and/or the Board shall have complete discretion
with respect to the determination of the attainment of the Performance
Targets, the Eligible
-4-
<PAGE> 5
Employees to whom Awards shall be granted and the determination of
eligibility. In the event of an acquisition or other significant events,
the Committee may make appropriate adjustments to the Company's and/or
the Division's Performance Targets.
8. PAYMENT OF AWARDS
Awards shall be made only after consultation with the Board or its
Compensation Committee. Awards under the Plan shall be paid in cash
generally within 75 days following the end of the Plan Year. The Plan
shall at all times be entirely unfunded. No provision shall at any time
be made with respect to segregating assets of the Company for payment of
any distributions hereunder. No PARTICIPANT or any other person shall
have any interest in any particular assets of the Company by reason of
the right to receive an Award.
9. TERMINATION OF EMPLOYMENT
All potential awards under this Plan are forfeited if an employee's
employment with the Company is terminated either voluntarily or
involuntarily prior to the end of the Plan Year except due to death,
disability or retirement.
10. FORFEITURES.
If an Eligible Employee received an Award, FSI, by action of the
Committee, will have the right and option (the "Repayment Right') to
require the Employee or his or her legal representative to repay the
Award if the Eligible Employee during the Plan Year or within twelve
months thereafter (the "Applicable Period") (i) has engaged in
competition with the Company that the Committee concludes is detrimental
to the Company, (ii) has made an unauthorized disclosure of material
nonpublic or confidential information of the Company during the
Applicable Period, (iii) has committed a material violation of any
applicable business plans, policies or practices of the Company during
the Applicable Period, or (iv) has engaged in conduct reflecting
dishonesty or disloyalty to the Company during the Applicable Period.
In addition, the Committee, may terminate the Eligible Employee's
participation in the Plan if it determines that the Eligible Employee has
engaged or intends to engage in the activities described in (i)-(iv)
above.
The decision to exercise the Repayment Right will be based solely on the
judgment of the Committee, in its sole and complete discretion, given the
facts and circumstances of each particular case.
Such Repayment Right may be exercised by the Committee within 90 days
after the Committee's discovery of an occurrence that entitles it to
exercise its Repayment Right (but in no event later than 90 days after
the end of the Applicable Period). Such
-5-
<PAGE> 6
Repayment Right will be deemed to be exercised upon the Company's mailing
written notice of such exercise, postage prepaid, addressed to the
Eligible Employee at the Eligible Employee's most recent home address as
shown on the personnel records of the Company.
Receipt of an Award by an Eligible Employee constitutes an agreement on
the Eligible Employee's behalf and on behalf of the Eligible Employee's
legal representative or permitted assigns, as the case may be, to deliver
to the Company, on the date specified in such notice, which date will not
be less than 10 nor more than 30 days after such notice, a certified or
cashier's check for the amount of the Award for which the Repayment Right
has been exercised.
11. DEATH, DISABILITY OR RETIREMENT OF A ELIGIBLE EMPLOYEE
In the event that a Eligible Employee dies, becomes permanently disabled
or retires during the Plan Year, a prorated Award may be made. The
prorated Award, if any, will be made based on the number of months
actively employed during the Plan Year and such other criteria as the
Committee shall determine.
12. EMPLOYMENT
Participation in this Plan does not confer or infer that an Eligible
Employee has any right to continued employment with the Company. There
is no employment agreement or right associated with participation in this
Plan, nor does participation in this Plan restrict the Company's ability
to terminate the employment of an Eligible Employee at any time for any
reason.
13. GOVERNMENT AND OTHER REGULATIONS
The obligation of the Company to make payments or distributions under the
Plan shall be subject to all applicable laws, rules and regulations, and
to such approvals by governmental agencies as may be required.
14. TAX WITHHOLDING
The Company shall have the right to deduct from all Awards any federal,
state, local or foreign taxes as required by law to be withheld with
respect to such cash payments. Tax withholding from the Award will be
based on applicable withholding rates, unless the Participant submits a
written request to have withholding at a different rate and such is
permitted by law. All tax liabilities will remain the responsibility of
the Eligible Employee.
-6-
<PAGE> 7
15. BENEFICIARIES
Any payment due to a deceased Eligible Employee shall be made to the
Eligible Employee's surviving spouse. If a Eligible Employee does not
have a surviving spouse, payment shall be made to the Eligible Employee's
legal representative.
16. NON-TRANSFERABILITY
No Award payable under the Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance
or charge prior to actual receipt thereof by the payee; and any attempt
to so anticipate, alienate, sell, transfer, assign, pledge, encumber or
charge prior to such receipt shall be void except, in the event of an
Eligible Employee's death, to the Eligible Employee's surviving spouse or
in the absence of a surviving spouse by will or the laws of descent and
distribution. The Company shall not be liable in any manner for or
subject to the debts, contracts, liabilities, engagements or torts of any
person entitled to any distribution under the Plan.
17. INDEMNIFICATION
The members of the Board, its Compensation Committee and the Committee
shall be defended, indemnified and held harmless by FSI against and from
any loss, cost, liability or expense that may be imposed upon or
reasonably incurred by them in connection with or resulting from any
claim, action, suit or proceeding to which they may be a party or in
which they may be involved by reason of any action or failure to act
under the Plan and against and from any and all amounts paid by them in
satisfaction of judgment in any such action, suit or proceeding against
them. They shall give FSI an opportunity, at its own expense, to handle
and defend the same before they undertake to handle and defend it on
their own behalf. The foregoing right of indemnification and defense
shall not be exclusive of any other rights of indemnification to which
they may be entitled under FSI's Articles of Incorporation or Bylaws, as
a matter of law, or otherwise, or any power that the FSI may have to
indemnify them or hold them harmless.
18. RELIANCE ON REPORTS
The Board, its Compensation Committee and the Committee shall be fully
justified in relying or acting in good faith upon any report made by the
independent public accountants of the Company and upon any other
information furnished in connection with the Plan by any person or
persons other than themselves. In no event shall they be liable for any
determination made or other action taken or any omission to act in
reliance upon any such report or information or for any action taken,
including the furnishing of information, or failure to act, if in good
faith.
-7-
<PAGE> 8
19. RELATIONSHIP TO OTHER BENEFITS
No payment under the Plan shall be taken into account in determining any
benefits under any pension, retirement, profit sharing, group insurance
or other benefit plan of the Company unless specifically so provided
under such plan.
20. TITLES AND HEADINGS
The titles and headings of the section in the Plan are for convenience of
reference only and in the event of any conflict, the text of the Plan,
rather than such titles or headings, shall control.
21. AMENDMENTS AND TERMINATION
The Board may at any time terminate the Plan, and the Board or the Plan's
Committee may, at any time, or from time to time, amend or suspend and,
if suspended, reinstate, the Plan in whole or in part.
22. RESERVATION OF RIGHTS AND GOVERNING LAW
The Company reserves the right to implement new and different Incentive
Plans each fiscal year. This Plan shall be interpreted and enforced in
accordance with the laws of the State of Minnesota, without giving effect
to conflict of law principles.
23. SEVERABILITY
If one or more provisions of this Plan, shall for any reason be
determined to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality, or unenforceability shall not affect any other
provision (or portions of the provisions) of this Plan and the invalid,
illegal, or unenforceable provision shall be deemed replaced by a
provision that is valid, legal, and enforceable and that comes closest to
expressing the intention of the Company.
-8-
<PAGE> 1
Exhibit 11.1
FSI INTERNATIONAL, INC.
COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
---------------------------------------------------------------------
AUGUST 26, 1995 AUGUST 31, 1996 AUGUST 30, 1997
---------------------------------------------------------------------
<S> <C> <C> <C>
PRIMARY:
AVERAGES SHARES OUTSTANDING 17,437,865 22,176,642 22,465,928
NET EFFECT OF DILUTIVE STOCK
OPTIONS AND WARRANTS -- BASED ON
THE TREASURY STOCK METHOD 1,288,266 962,332 618,745
------------ ------------ ------------
TOTAL 18,726,131 23,138,974 23,084,673
============ ============ ============
NET INCOME $ 21,357,686 $ 28,548,406 $ 4,639,975
============ ============ ============
PRIMARY PER SHARE AMOUNTS $1.14 $1.23 $0.20
============ ============ ============
FULLY DILUTED:
AVERAGE SHARES OUTSTANDING 17,437,866 22,176,641 22,465,928
NET EFFECT OF DILUTIVE STOCK
OPTIONS AND WARRANTS -- BASED ON
THE TREASURY STOCK METHOD 1,387,614 882,839 686,646
------------ ------------ ------------
TOTAL 18,825,480 23,059,480 23,152,574
============ ============ ============
NET INCOME $ 21,357,686 $ 28,548,406 $ 4,639,975
============ ============ ============
FULLY DILUTED PER SHARE AMOUNTS $ 1.13 $ 1.24 $ 0.20
============ ============ ============
</TABLE>
Page 1
<PAGE> 1
COMPANY DESCRIPTION
================================================================================
FSI International, Inc. (Nasdaq: FSII) is a leading global supplier of
automated processing equipment used to manufacture microelectronics, including
semiconductor devices, thin film heads, and multichip modules. The Company
develops, manufactures and markets products that are used in the technology
areas of microlithography, chemical management and surface conditioning. The
Company's products provide broad customer solutions at the key process steps
for microelectronics manufacturing. In addition to its engineering, laboratory
and manufacturing facilities at its corporate headquarters in Chaska, Minn.,
FSI maintains primary facilities in Allen, Texas, Fremont and Hollister,
Calif., and Newhaven, England. The Company supports its expanding customer base
by maintaining sales, service and support centers throughout North America, and
through its affiliates in Europe, Japan and the Asia-Pacific region.
The information in this annual report contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and is subject to the Safe Harbor provisions created by that statute.
Such statements are subject to certain risks and uncertainties, including those
discussed on pages 17 and 18 of this annual report, that could cause actual
results to differ materially from those projected. Readers are cautioned not to
place undue reliance on these forward-looking statements, as actual results
could differ. Forward-looking statements are indicated by an asterisk (*).
TABLE OF CONTENTS
================================================================================
Company Description
Financial Highlights(1)
Letter to Shareholders(2)
Performance Review(5)
Five-Year Selected Data(13)
Management's Discussion and Analysis(14)
Independent Auditors' Letter(19)
Management's Letter(19)
Consolidated Financial Statements(20)
Notes to Consolidated Statement of Operations(24)
Quarterly Data(32)
Common Stock Prices(32)
Glossary(33)
Corporate and Stockholder Information(33)
<PAGE> 2
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(In thousands, except per-share data) 1997 1996 1995
================================================================================
<S> <C> <C> <C>
Sales $252,441 $304,041 $218,460
Research and development expenses 39,713 40,998 28,037
Net income 4,640 28,548 21,358
Net income per common share $ 0.20 $ 1.23 $ 1.13
- --------------------------------------------------------------------------------
Pro Forma Data (1)
Net income $ 4,640 $ 28,242 $ 20,533
Net income per common share $ 0.20 $ 1.22 $ 1.09
- --------------------------------------------------------------------------------
Cash, cash equivalents and marketable securities $ 89,209 $ 71,921 $112,833
Working capital 170,878 156,348 153,263
Property, plant and equipment, net 76,665 45,595 20,126
Total assets 331,152 293,283 251,567
Total debt 42,256 498 4,892
Stockholders' equity 224,340 218,127 186,667
Book value per share $ 9.93 $ 9.75 $ 8.48
Number of shares outstanding 22,583 22,362 22,000
================================================================================
</TABLE>
(1) Pro forma information reflects adjustments made to net income to record
additional tax expense for Semiconductor Systems, Inc., as if it had been a C
Corporation versus an S Corporation prior to its acquisition by the Company
on April 4, 1996. The acquisition was accounted for using the
pooling-of-interests method of accounting. See Note 3 of Notes to
Consolidated Financial Statements.
<PAGE> 3
TO OUR SHAREHOLDERS
Fiscal 1997 was a challenging year for FSI International due to an industry
slowdown that began in 1996. But we used this time wisely to invest in our
future.
As a result of the slowdown, FSI reached its low point in fiscal 1997
sales during the third quarter, followed by an improvement in the fourth
quarter. While this down cycle in purchasing semiconductor fabrication
equipment put pressure on our financial performance, our investments in
infrastructure, technology and globalization provide us with significant
leverage for an improved fiscal 1998.*
FINANCIAL RESULTS
- --------------------------------------------------------------------------------
During fiscal 1997, sales declined 17 percent to $252.4 million from
$304.0 million in fiscal 1996. Net income was $4.6 million, or $0.20 per share,
compared to $28.5 million, or $1.23 per share, in 1996.
For the year, equity in earnings from our affiliates was $3.7 million,
versus $5.1 million a year ago. The decrease is primarily due to the impact
that the semiconductor industry slowdown had on our affiliated distributor,
Metron Technology B.V. On Aug. 30, our fiscal year end, we had a strong backlog
of approximately $112 million.
FINANCIAL STRENGTH
- --------------------------------------------------------------------------------
We ended fiscal 1997 in a strong financial position, with over $89.2
million in cash, cash equivalents and marketable securities; a current ratio of
nearly 3.73 to 1; and a book value of approximately $9.93 per share.
This is important to our customer base because it tells them we are able
to make the investments required to support them globally and can invest in the
next generation of technology.* Overall, we were able to manage the company
through the industry slowdown while maintaining a strong financial position.
As another indicator of our financial strength, FSI completed a private
debt placement in December 1996 for $42 million. The proceeds from the
placement allowed us a good deal of flexibility and were used to acquire
equipment for our demonstration, product and process development laboratories,
for other capital expenditures and for general corporate purposes. In the
future, a portion of the proceeds may be used for strategic acquisitions of
complementary businesses, products or technologies.*
<PAGE> 4
CAPITAL/DEVELOPMENT EXPENDITURES
- --------------------------------------------------------------------------------
Capital expenditures were $42.9 million in fiscal 1997, compared with $33.1
million in 1996. Although we have been investing heavily in our manufacturing,
engineering and laboratory facilities as well as our enterprise systems, these
capital expenditures are expected to decrease to approximately $10 to $15
million in fiscal year 1998, reflecting the completion of several major
projects.*
While these investments did have an impact on gross profit margins and
operating expenses, they were critical for FSI to be able to participate in
future industry growth. As a result, we have the physical facilities in place
to support sales in excess of $600 million, more than double our sales from
1997, without further significant capital investments.*
During the past year, FSI completed two facility expansions. In March, we
moved into our new 150,000-sq.-ft. Allen, Texas, engineering, manufacturing and
laboratory facility for the Microlithography Division. In June, we moved into
an 88,000-sq.-ft. engineering and laboratory facility in Chaska, Minn. This
expansion consolidated the Surface Conditioning Division's operations into one
facility. We also opened a new state-of-the-art test laboratory in Hollister,
Calif., to test the handling characteristics of slurry in FSI's slurry blending
and distribution products.
As part of our ongoing technology focus, our goal is to invest at least 13
to 15 percent of our annual revenues in research and development.* In 1997, we
invested 16 percent of revenue to further position our process solutions, our
equipment productivity and the next generation of equipment. In fiscal year
1998, we will invest in 0.25/0.18-micron process technology and 300-millimeter
compatible products.*
MANAGEMENT/EMPLOYEE TEAM
- --------------------------------------------------------------------------------
We have well over a hundred years of semiconductor experience on our
eight-member executive management team. It is this knowledge that enabled us to
weather a downward cycle in our industry and effectively manage our costs. This
team provided FSI with stability as we implemented a cost-containment program
early in the fiscal year.
Along with our employees, our management team works closely with FSI's
customers to show our commitment to this industry. Through every employee's
dedication to customer success, FSI strives to be the global provider of valued
products and services on the frontier of technology. Our employees are an
integral component of our success. We also realize there is no alternative to
customer satisfaction. We have to take care of our customers and we have to
solve problems for them.
One of our management goals for 1997 was to implement business systems
that focused on operational efficiency and productivity improvements. With that
objective in mind, we converted to a new computer business system in January,
overhauling FSI's information systems and information technology architecture.
This new system will help us meet our customers' expectations.*
<PAGE> 5
ORGANIZATIONAL FOCUS
- --------------------------------------------------------------------------------
FSI is a worldwide leader in three distinct wafer manufacturing
technologies--photoresist processing, surface conditioning and chemical
management. Each of these technologies represents a different division of FSI.
During 1997, the Microlithography Division experienced the most
significant impact from the industry slowdown. However, we have significant
leverage in this business and continue to believe that this division is in the
strongest position ever to participate in the semiconductor equipment industry
growth.*
Our Surface Conditioning Division achieved several strategic goals in
fiscal 1997. The division shipped FSI's first 300-millimeter wafer processing
tool to the International 300 Millimeter Initiative (I300I) consortium. The
division also implemented its new state-of-the-art process laboratory. This
Class 1 laboratory allows process development, customer demonstrations and
product testing in an environment that mirrors integrated circuit fabs. The
laboratory also illustrates FSI's commitment to provide thoroughly developed,
value-added solutions for customers.
Our Chemical Management Division was the shining star at FSI in fiscal
1997. The division had record sales, and once again gained market share. The
acquisitions we made in 1995 strengthened our market leadership position in
chemical management systems. We have also been building relationships in global
markets, including establishing a subsidiary in Korea.
Internationally, we continue to build on the success we have had in Europe
and Japan and are stepping up our global expansion efforts in the Asia-Pacific
region.* Our affiliate organizations, Metron Technology B.V. and m-FSI Ltd.,
provide us with a significant presence in these markets.
INDUSTRY OUTLOOK
- --------------------------------------------------------------------------------
With an industry expansion underway, we expect improving conditions during
fiscal 1998 for all three of our business sectors.* Our semiconductor customers
have renewed their focus on ensuring that technology and capacity are in place
for the next major transition--the move to 0.25- and 0.18-micron line widths.
Additionally, leading integrated circuit manufacturers are incorporating
300-millimeter wafer migration plans into their technology and manufacturing
road maps.
The equipment market, which saw the ripple effect of the downturn in the
semiconductor business, is also improving. While technology-related spending
continued throughout this recent downturn, capacity-related purchases were
subdued. As we move into 1998, analysts anticipate continued technology
purchases and an increase in capacity buys.*
For example, in 1997, the available market for semiconductor wafer
equipment is estimated at $19.6 billion. By 2002, according to industry
sources, it is estimated to be over $45 billion, a compound annual growth rate
of 18.1 percent.*
<PAGE> 6
STRATEGIC DIRECTION
- --------------------------------------------------------------------------------
FSI International has a three-part strategy designed to increase its revenues
and market share. First is to develop new products and processes using internal
expertise. Second is to license or acquire technology where we see a
competitive advantage in our three areas of concentration--microlithography,
surface conditioning and chemical management. Third is to examine possible
joint ventures or acquisitions of complementary technologies.
In addition, an important component of our strategic plan is to provide
high-quality products. The Class 1000 and Class 10,000 cleanroom manufacturing
environments in our facilities, as well as our Class 1 and Class 1000
engineering and development laboratories, ensure that FSI has the capabilities
in place to meet customers' increasingly stringent requirements.*
OUTLOOK
Our vision is to be the leading provider of valued products and services to our
customers in each of the three markets we serve. In this, our 25th year of
business, we will focus on the following strategic initiatives:
> Globalization--Continue to expand our presence and improve our service and
process support capabilities in our worldwide markets.*
> Divisionalization--Continue to improve on quality and operational
efficiencies by proceeding with our plans to have each division operate more
autonomously.*
> Technology--Continue our investment in research and development programs with
a focus on 0.25/0.18-micron process technology and products capable of
processing 300-millimeter wafers.*
> People--Continue to provide our employees with the tools and training
necessary to reach higher levels of customer satisfaction.*
> Profitability--Continue to focus on improving our gross profit margins and
managing assets.*
<PAGE> 7
We have spent the past year investing in our future because we are committed to
generating long-term growth. We know there is tremendous opportunity in this
industry.* We have positioned FSI to respond quickly to the next expansion with
innovative technology and cost-effective solutions that create new
possibilities.*
Many thanks to our employees for their contribution to our progress in
1997. We are also sincerely grateful to our customers for their continuing
support of FSI products. In addition, we thank our shareholders for their
confidence in FSI International.
Sincerely,
/s/ J A Elftmann
Joel A. Elftmann
Chairman, President and Chief Executive Officer
November 14, 1997
<PAGE> 8
FSI supplies sophisticated, automated process equipment and chemical management
systems to many of the world's leading microelectronics manufacturers. We are a
worldwide leader in three distinct wafer manufacturing
technologies--photoresist processing, surface conditioning and chemical
management. > Our business depends primarily upon the capital equipment
expenditures of microelectronics manufacturers, which in turn depend on current
and anticipated market demand for semiconductor devices and products utilizing
semiconductor devices.
<PAGE> 9
CREATING NEW
POSSIBILITIES
- --------------------------------------------------------------------------------
It is an industry that is expected to double in size from 1997 to 2001,
according to industry analysts.* > For the past two years, we have been
investing in our future. We are prepared to respond to our customers' needs and
the market opportunities we anticipate as the market recovers.* We have the
people, tools and facilities for developing, testing, producing and supporting
our products and customers.* Combined with our world-class laboratory and
manufacturing facilities, FSI is well-positioned to create new possibilities.*
<PAGE> 10
INDUSTRY EXPECTATIONS
- --------------------------------------------------------------------------------
In today's marketplace, our customers are under tremendous pressure to deliver
increasingly complex, high-quality, lower-cost products. To help meet these
challenges, we focus on technological innovation by aggressively funding
research and development programs, and expanding our global support and service
organizations.
FSI's products provide broad customer solutions at key process steps for
microelectronics manufacturing. We know that delivering products on time and to
exact specifications is an absolute requirement.
Over the long term, FSI is moving toward self-contained business units,
allowing its three divisions to quickly respond to specific customer needs.
Each division is expanding and improving its support capabilities.
Another key element to delivering high-value solutions is lowering the
cost of ownership of FSI products, which, in turn, helps our customers be
cost-competitive. As part of this effort, we opened new demonstration and
product development laboratories in fiscal 1997.
For example, in our Chemical Management Division, a new testing laboratory
enables FSI customers to get vital data on slurry handling characteristics
prior to installing their slurry blending and delivery modules. Opened in the
summer of 1997, this equipment test laboratory is the first laboratory of its
kind available to customers and slurry suppliers.
In the last few years, we've seen pressure in the industry to form
alliances and agreements between companies throughout the supply chain. The
reason? Microelectronics companies want focused account management, which will
solve problems faster with lower overhead costs. In response, we have formed
strategic alliances to leverage knowledge from customers, joint venture
partners, industry consortiums, universities and government laboratories.
<PAGE> 11
GLOBALIZATION
- --------------------------------------------------------------------------------
FSI's future growth will depend on our ability to provide a one-on-one
relationship with customers worldwide. Our international partners, Metron
Technology and m-FSI, distribute, service and support FSI's products in Europe
and Asia. In fiscal 1997, international sales represented 36 percent of FSI's
business.
FSI became a global player shortly after it was formed in 1973. In 1975,
FSI was one of the founders of Metron Semiconductor Europa, an independent
marketing and support organization selling wafer processing equipment and
materials in Europe. This organization acquired Transpacific Technology Corp.
in August 1995 to form Metron Technology B.V. It is the world's largest
semiconductor equipment and materials distribution company outside Japan,
selling FSI products in Europe and Asia-Pacific.
In 1991, FSI formed a joint venture with Mitsui and Co., Japan's oldest
trading company, and its wholly owned subsidiary, Chlorine Engineering Corp.
This partnership, which is named m-FSI Ltd. has its own engineering,
development, sales and marketing and customer service for supporting our
customers in Japan.
Globalization continues to be one of our strategic goals. Over the last
year we have made significant progress in this effort. For example, we
completed a $10 million project at Anam in Korea, and received orders for
chemical management products and services from other Korean semiconductor
manufacturers, who are expanding in Europe and the United States. This expanded
our position as a key supplier of chemical management systems in the
Asia-Pacific region, which is expected to be one of the largest consumers of
microelectronics in the 21st century.* We also continued to grow our presence
in Europe and the United States.
<PAGE> 12
MICROLITHOGRAPHY
- --------------------------------------------------------------------------------
The FSI Microlithography Division supplies photoresist processing equipment and
services for the semiconductor, thin film head and multichip module markets. We
plan to grow sales for semiconductor applications in fiscal 1998 from our
approximately 8 percent market share in calendar 1996.*
Since we introduced it in 1991, the POLARIS Microlithography Cluster,
which applies and develops photosensitive materials on the silicon wafer
surface, has gained increasing acceptance. The POLARIS product line is showing
just how reliable, flexible and productive resist processing equipment can be.
The POLARIS 2100/2200 product line offers high throughput, a reduced
footprint and advanced process capabilities. One or two robotic handlers move
silicon wafers from station to station where prime, coat, bake, chill and
develop processes are performed.
In fiscal 1998, we expect to introduce the POLARIS 2500 cluster, which has
an even lower cost per wafer and higher throughput per square foot, increasing
productivity and efficiency with one central robot.* We believe we will have an
excellent opportunity with the 2500 model to enhance our competitiveness.*
Our POLARIS 3000 program is a parallel program to the 2500 and will allow
the processing of 300-millimeter wafers with no increase in footprint.
In April 1996, FSI acquired Semiconductor Systems, Inc. (SSI), which
expanded the Division's product offerings to include the OrbiTrak and SCORPIO
Microlithography Clusters. One of the benefits of this acquisition was a record
order level for SSI in fiscal 1997.
The OrbiTrak and SCORPIO systems are developed at the Division's Fremont,
Calif., operation. The OrbiTrak platform has gained broad acceptance with thin
film head manufacturers. OrbiTrak is SSI's state-of-the-art robotic wafer
processing system, featuring sub-0.50-micron lithography capabilities. We are
the market leader in the thin film head U.S. market.
In fiscal 1997, the Microlithography Division doubled its manufacturing
capacity to position the Company for growth.* In addition, we invested heavily
in service personnel and training because we view customer support as strategic
for growth. Our affiliates, m-FSI and Metron Technology, have formed
microlithography groups to focus on these products.
Our new 150,000-sq.-ft. Microlithography Division laboratory, engineering
and manufacturing facilities in Allen, Texas, came on line in March 1997. This
facility has been acknowledged by both industry leaders and customers as
world-class. We expect to transfer all POLARIS cluster manufacturing to this
facility by March 1998.*
<PAGE> 13
SURFACE CONDITIONING
- --------------------------------------------------------------------------------
The Surface Conditioning Division produces automated surface conditioning
equipment to prepare silicon wafers for production of integrated circuits,
using wet, vapor and dry gas techniques. This is a $1.4 billion market that is
expected to continue to grow.* FSI has been at the forefront of wafer cleaning
technology for 24 years.
During the recent industry slowdown, we had the opportunity to better
position the Surface Conditioning Division's products. During fiscal 1997, we
refined our 300-millimeter product road maps in order to optimize our research
and development investments. In the future, the Division will focus on a
greater standardization of control systems and handling platforms on the
division's products.*
Although we made no new product introductions in surface conditioning in
fiscal 1997, we introduced new applications for the single-wafer EXCALIBUR
Vapor Phase Processor and the MERCURY Spray Processing System.
During the year, the Division successfully developed and introduced a new
selective oxide etch process for the EXCALIBUR system, which uses chemical
vapors to perform critical cleaning and specialty etching applications. This
new process has already resulted in orders and sales. For example, we are
receiving orders from 64-megabyte DRAM device manufacturers and believe this
process technology will begin to reach its full potential when 256-megabyte
production starts.*
Another major product for the division is the ARIES CryoKinetic Cleaning
System, which uses frozen argon/nitrogen crystals to remove particulates and
etch residue contamination from silicon wafers. An ARIES system has been
installed in a production environment and the results have been very positive
for defect reduction. The ARIES system provides new process applications,
helping customers solve difficult processing challenges.
The MERCURY Spray Processing System uses a controlled chemical spray to
perform submicron cleaning, etching and photoresist stripping applications. New
applications include post chemical-mechanical polishing clean, metals
etch/strip and post etch sidewall polymer removal. Adding these and other
applications should increase the number of systems per fab that a customer
could order.*
In July 1996, we introduced a material handling system for loading and
unloading our MERCURY systems, and delivered our first systems during the last
half of the 1997 fiscal year. We expect an increase in orders and sales of the
MERCURY MHS system in fiscal 1998.*
In addition, the Division moved into its 88,000-sq.-ft. engineering and
Class 1 laboratory facility, which allowed the Division to consolidate onto a
single site. It means our Surface Conditioning Division can be even more
responsive to customers in meeting their requirements for technology
development and process support.
<PAGE> 14
CHEMICAL MANAGEMENT
- --------------------------------------------------------------------------------
The Chemical Management Division provides a wide range of chemical management
systems to the microelectronics markets. These systems generate, blend and
dispense chemicals to all points of use in a manufacturing facility. We also
provide control systems and support services for total chemical management.
While the industry slowdown caused the semiconductor equipment industry to
be down about 10 to 15 percent in fiscal year 1997, Chemical Management
Division sales increased 27 percent. We had the necessary technology in our
core products; we targeted a growing Asian market; and we captured additional
market share in Europe.
In fiscal 1996, we introduced our newest and what we think is the most
advanced chemical distribution model in the industry--the ChemFill 1500
systems. These systems were accepted by many in the industry, enabling us to
expand our leadership position.
The Division's P4400 Slurry Blending and Distribution System and ChemFill
1500 Chemical Delivery Modules saw one of the fastest manufacturing ramp-ups in
company history. The P4400 system uses FSI's patented pressure-vacuum transfer
technology. We shipped more than 150 units of these products in 1997.
In July 1997 at SEMICON(R) West, the largest U.S. trade show of the
semiconductor equipment industry, we introduced a follow-up product, the P6000
Slurry Blending and Distribution System. This system processes higher volumes
and provides better filtration and more mixing capabilities than the P4400
system. We have already received our first orders.
The Division has been very successful with its product strategy, and we
expect several new chemical management products will come to market in fiscal
1998.* As the largest supplier in this industry segment, we believe our
Chemical Management Division will again gain market share in fiscal 1998.*
Currently, we are the only supplier that is successfully managing a number of
large turnkey installations, at the same time, on different continents.
The Division's Hollister, Calif., operation has given the division a
leadership role in the development of slurry blending and distribution
technology for the chemical-mechanical polishing (CMP) process. FSI uses a
vacuum-pressure technology for this application and is the only company
offering this patented technology, which has now been integrated into new
equipment for other applications.
<PAGE> 15
Before we acquired the vacuum technology, no single company could offer three
technologies for moving liquids in semiconductor fabs--pumped, pump pressure
and vacuum pressure. We can now offer a customer a variety of equipment that is
able to provide the best method of delivery for each chemical.
Our increasing market share in Asia, combined with our share in the United
States and Europe, has positioned the Chemical Management Division as the world
leader. To maintain this position, our goal is to continue to develop products
that meet future industry requirements.
We are also aggressively marketing internationally in conjunction with
Metron Technology and m-FSI. In 1997, we established our European facility as a
second site for manufacturing the Chemfill Model 1500 module, making us the
only major company in our industry with a manufacturing facility in Europe.
In Japan, with our longstanding m-FSI partnership, we have been able to
establish a good position in slurry blending and delivery. We also put a lot of
effort into structuring and establishing a presence in Korea.
The Chemical Management Division has developed a global network of
companies, with each one serving its own region while relying on a central bank
of technology, service and installation skills. By doing this we control the
product offerings globally and the project management and delivery of services
regionally.
In 1997, we added product development and manufacturing to our Hollister
operation to position us for continued leadership in the technology of slurry
blending and distribution. We recently began working on a new research and
development laboratory at our facility in Chaska, which will be used to develop
additional gas-to-chemical generation and blending products.*
<PAGE> 16
FIVE-YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per-share data and number of employees) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations
Sales $252,441 $304,041 $218,460 $124,667 $104,105
Gross profit 94,313 129,802 89,807 52,755 41,976
Selling, general and administrative expenses 56,491 58,742 39,999 24,515 18,328
Research and development expenses 39,713 40,998 28,037 18,756 14,392
Operating (loss) income (1,891) 30,062 21,771 9,484 9,256
Equity in earnings of affiliates 3,712 5,108 3,567 1,800 1,277
Net income 4,640 28,548 21,358 9,767 9,448
Net income per common share $ 0.20 $ 1.23 $ 1.13 $ 0.65 $ 0.77
Weighted average common shares and common share equivalents 23,085 23,139 18,825 14,973 12,324
Pro Forma Data (1)
Net income $ 4,640 $ 28,242 $ 20,533 $ 8,295 $ 7,098
Net income per common share $ 0.20 $ 1.22 $ 1.09 $ 0.55 $ 0.58
Balance Sheet
Cash, cash equivalents & marketable securities $ 89,209 $ 71,921 $112,833 $13,558 $ 4,552
Working capital 170,878 156,348 153,263 34,928 18,823
Receivables, net 64,254 80,761 53,344 26,268 17,510
Inventories 61,990 64,075 40,577 21,936 17,475
Total current assets 233,472 229,994 217,251 67,859 42,909
Total assets 331,152 293,283 251,567 84,252 52,729
Total debt 42,256 498 4,892 1,541 3,596
Stockholders' equity $224,340 $218,127 $186,667 $51,115 $28,173
Dividends - - - - -
General Data and Ratios
Current ratio 3.73 3.12 3.40 2.06 1.78
Number of employees 1,357 1,412 1,130 744 597
Book value per common share $ 9.93 $ 9.75 $ 8.48 $ 3.43 $ 2.47
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Pro forma information reflects adjustments made to net income to record
additional tax expense for Semiconductor Systems, Inc., as if it had been a C
Corporation versus an S Corporation prior to its acquisition by the Company on
April 4, 1996. The acquisition was accounted for using the
pooling-of-interests method of accounting. See Note 3 of Notes to Consolidated
Financial Statements.
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The information in this discussion, except for the historical information
contained herein, includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and is
subject to the safe harbor created by that statute. Such forward-looking
statements are marked with an asterisk (*). Such statements are subject to
risks and uncertainties, including those described below under Risk Factors.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak to matters only as of the date hereof, as actual
results could differ materially. The Company assumes no obligation to
publicly release the results of any revision or updates to these
forward-looking statements to reflect future events or unanticipated
occurrences.
During fiscal 1997, the microelectronics industry experienced volatility
in product demand and pricing, which caused semiconductor manufacturers to
exercise caution in making capital equipment purchasing decisions. Certain
semiconductor manufacturers announced delays in expansion of current
facilities and/or the construction, facilitation or equipping of new
manufacturing facilities. As a result, the Company experienced some
cancellations and delays of orders and delays in shipping of orders.
In the first quarter of fiscal 1997, due to the difficult industry
conditions, the Company adopted certain cost containment measures in an
attempt to align spending more closely with expected sales decreases. Cost
control measures, including mandatory furlough days, a temporary reduction in
executive compensation, and a 9% reduction in the work force were implemented
in September 1996. The Company recorded a pretax charge of approximately
$300,000 in the first quarter of fiscal 1997 relating to the reduction in the
work force.
The following table sets forth, for the fiscal years indicated, certain
income and expense items as a percent of total sales:
<TABLE>
<CAPTION>
Percent of Sales
Fiscal Years Ended 1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of goods sold 62.6 57.3 58.9
Gross profit 37.4 42.7 41.1
Selling, general and administrative 22.4 19.3 18.3
Research and development 15.7 13.5 12.8
Operating (loss) income (0.7) 9.9 10.0
Other income, net 0.9 1.3 0.9
Income before income taxes 0.2 11.2 10.9
Income tax (benefit) expense (0.2) 3.4 2.7
Minority interest (0.1) (0.1) -
Equity in earnings of affiliates 1.5 1.7 1.6
Net income 1.8 9.4 9.8
- -----------------------------------------------------------------
</TABLE>
Sales: Sales decreased to $252.4 million for the fiscal year ended August 30,
1997, as compared to $304.0 million for the fiscal year ended August 31,
1996. The decrease in sales occurred in the Surface Conditioning and
Microlithography Divisions. The decrease in
<PAGE> 18
sales was largely due to a decreased demand for equipment as a result of
industry conditions. Sales increased to $304.0 million for the fiscal year ended
August 31, 1996, as compared to $218.5 million for the fiscal year ended August
26, 1995. The increase in sales in fiscal 1996 as compared to fiscal 1995
occurred in all product lines and was generally attributable to increased unit
sales and to a lesser extent to increases in the average selling price resulting
from additional features added to standard product configurations. The increase
in unit sales was largely due to an increased demand for equipment resulting
from the construction of new and the expansion of existing semiconductor
manufacturing facilities by our customers. Total sales for fiscal 1998 are
expected to return to the level of fiscal 1996 of above $300 million.*
International sales were $89.7 million, $107.9 million, and $71.6
million during fiscal 1997, 1996 and 1995, respectively, and represented
approximately 36%, 35% and 33% of sales during these periods. The percent
increase in international sales in fiscal 1997 was due to increased sales in
Europe. The increase in international sales in fiscal 1996 as compared to
fiscal 1995 reflected increases in both Europe and Asia. See Note 14 to the
Company's consolidated financial statements for additional information
regarding the Company's international sales.
The Company ended the fiscal year with a backlog of $112 million as
compared to $113 million at the end of fiscal 1996. Backlog consists of
orders with delivery dates within the next 12 months for which a customer
purchase order has been received or a customer purchase order number has been
communicated to the Company. Because of the timing and relative size of
orders, and the possibility of cancellations or customer delays, backlog is
not necessarily indicative of sales for future periods.
Gross Profit: Gross profit as a percentage of sales for fiscal 1997 was 37.4%
as compared to approximately 42.7% for fiscal 1996. The decrease in gross
profit margin for fiscal 1997 as compared to fiscal 1996 was generally due to
product mix, lower utilization of and increase in manufacturing capacity, and
increased warranty and obsolescence costs. Gross profit as a percentage of
sales for fiscal 1996 was 42.7% compared to 41.1% for fiscal 1995. The
increase in gross profit percentage in fiscal 1996 was generally due to
product mix, along with improved margins in the Chemical Management Division.
The Company's gross profit margin may fluctuate as a result of a number
of factors, including the mix of products sold, the proportion of
international sales, competitive pricing pressures and utilization of
manufacturing capacity.
The Company expects gross profit margins to improve in fiscal 1998
because of an expected change in the product sales mix to higher-margin
products and as the Company begins absorbing the excess manufacturing
capacity.* However, future sales are expected to include more subsystems
supplied by other equipment manufacturers which carry lower margins.*
<PAGE> 19
Selling, General and Administrative Expenses: Selling, general and
administrative expenses (SG&A) were $56.5 million, $58.7 million, and $40.0
million or 22.4%, 19.3% and 18.3% of sales during fiscal 1997, 1996 and 1995,
respectively. The dollar amount decrease in the amount of SG&A for fiscal
1997 was due to savings related to the cost controls implemented early in
fiscal 1997 and due to reduced commission and incentive compensation expense
as a result of lower sales and operating profit. These savings in 1997 were
offset by increased information systems expenses due to the new business
system and also increased infrastructure costs. The increases in the amount
of SG&A expenses in fiscal 1996 as compared to fiscal 1995 were due primarily
to higher costs related to expanded customer support, increases in management
incentive bonuses, employee profit-sharing and higher commissions due to
increased sales levels, increased allowance for bad debts, and costs
associated with the new business system. Increased marketing costs related to
the introduction of new products also contributed to the higher SG&A expenses
in fiscal 1996 as compared to fiscal 1995.
The Company expects the amount of SG&A expenses to increase in fiscal
1998 as compared to fiscal 1997 but decrease as a percentage of sales.* The
Company will continue investing in worldwide sales and support capability,
continue expanding the Company's business system applications and begin
preparation for the year 2000 software change requirements.*
Research and Development Expense: Research and development expenses for
fiscal 1997 were $39.7 million, or 15.7% of sales, as compared to $41.0
million, or 13.5% of sales, for fiscal 1996, and $28.0 million, or 12.8% of
sales, for fiscal 1995. In fiscal 1997, the Company continued development
efforts on new and existing products, including the ARIES(TM) CryoKinetic
Cleaning System, ZETA(TM) Surface Conditioning System, new POLARIS(R) cluster
models, OrbiTrak(R) enhancements and certain new chemical management
products. The successful introduction of new products is important to the
long-term growth of the Company. The Company expects the amount of research
and development expenses to increase in fiscal 1998 as compared to fiscal
1997 but decrease as a percentage of sales.* The Company's goal is to invest
approximately 13% to 15% of sales annually on new product and process
development programs.*
During fiscal years 1997, 1996 and 1995, the Company recognized
approximately $277,000, $0 and $546,000, respectively, of third-party funding
as reductions in research and development expenses.
Other Income (Expense): Other income (expense) was approximately $2.5 million
of income, or 0.9% of sales, for fiscal 1997 as compared to $4.1 million of
income, or 1.3% of sales, for fiscal 1996. The majority of the change was due
to an increase of approximately $1.3 million in interest expense as a result
of the Company's $42.0 million private debt placement completed in December
1996. Other income (expense) was approximately $4.1 million of income, or
1.3% of sales, for fiscal 1996 as compared to $2.1 million of expense, or
0.9% of sales, for fiscal 1995. The majority of the change from fiscal 1995
to 1996 was due to an increase in interest income of approximately $2.5
million recognized on cash, cash equivalents and marketable securities.
<PAGE> 20
Income Tax (Benefit) Expense: The income tax benefit for fiscal 1997 was
approximately $0.7 million compared to an income tax expense of approximately
$10.3 million in fiscal 1996. The 1997 income tax benefit is due to lower
pretax profits reduced by research and development tax credits and tax
savings from tax-exempt interest earnings. The Company's income tax expense
for fiscal 1996 was approximately $10.3 million compared to approximately
$5.9 million for fiscal 1995. Included in tax expense in fiscal 1996 was a
tax benefit of approximately $1.5 million for net deferred tax assets related
to existing temporary differences of Semiconductor Systems recorded at the
time of its conversion from an S corporation to a C corporation upon closing
of the acquisition.
The Company expects the effective tax rate for fiscal 1998 to be between
30% and 33% on expected higher pretax profits.*
Equity in Earnings of Affiliates: Equity in earnings of affiliates was $3.7
million, $5.1 million and $3.6 million for fiscal 1997, 1996 and 1995,
respectively. The decrease in fiscal 1997 as compared to fiscal 1996 is due
to lower earnings at Metron Technology B.V. offset by improved earnings from
m-FSI Ltd. The lower earnings at Metron Technology B.V. for fiscal 1997 is
due to lower profit margins on equipment sales and overall increased selling,
general and administrative expenses. The increase in fiscal 1996 compared to
fiscal 1995 primarily resulted from the improved earnings of both affiliates
(Metron Technology B.V. and m-FSI Ltd.) due to strong growth in the
Asia-Pacific market.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
The Company's cash and cash equivalents and marketable securities were
approximately $89.2 million as of August 30, 1997, an increase of $17.3
million from the end of fiscal 1996. The increase in cash and cash
equivalents and marketable securities resulted primarily from the cash
provided from operations and proceeds from the private debt placement offset
by acquisitions of property, plant and equipment.
The Company's accounts receivable decreased by approximately 20% or
$16.5 million from the end of fiscal 1996. The decrease in accounts
receivable was mainly due to the 17% decrease in sales in fiscal 1997 as
compared to fiscal 1996.
The Company's inventory decreased approximately $2.1 million to $62.0
million at the end of fiscal 1997, as compared to $64.1 million at the end of
fiscal 1996. This was mainly due to decreases in finished products and raw
materials and purchased parts, offset by increases in work in process and
subassemblies. As of August 30, 1997, the Company's current ratio was 3.73 to
1.0 and working capital was $170.9 million.
The Company had acquisitions of property, plant and equipment of $42.9
million, $33.1 million and $16.9 million in fiscal 1997, 1996 and 1995,
respectively. The increase in acquisitions reflects the investments in
facilities expansion and the new business system. The Company expects fiscal
1998 capital expenditures to decrease to approximately $10.0 to $15.0
million.*
The Company completed the construction and equipping of a new
88,000-sq.-ft. laboratory and engineering facility for the Surface
Conditioning Division in Chaska, Minn. in fiscal 1997. The Company moved its
Surface Conditioning Division into the new facility in June 1997. The
laboratory facility is equipped with certain new advanced surface
conditioning products.
The Company also completed the building and equipping of a
150,000-sq.-ft. engineering, manufacturing and laboratory facility in Allen,
Texas, which expanded the manufacturing and development capabilities of the
Company's Microlithography Division. The new facility was completed and
occupied in March 1997.
<PAGE> 21
The Company completed a private debt placement on December 19, 1996, for
approximately $30.0 million of 7.15% unsecured senior notes due 2004 and
$12.0 million of 7.27% unsecured senior notes due 2006. The proceeds from the
private debt placement have been and will be used to acquire additional
equipment for the Company's demonstration and product and process development
laboratories, for other capital expenditures and for general corporate
purposes. In the future, a portion of the proceeds may be used for the
strategic acquisition of complementary businesses, products or technologies.*
The Company believes that with existing cash, cash equivalents, marketable
securities, internally generated funds and proceeds from the private debt
placement, there will be sufficient funds to meet the Company's currently
projected working capital and other cash requirements through at least fiscal
1998.*
The Company believes that success in its industry requires substantial
capital to maintain the flexibility to take advantage of opportunities as
they may arise. The Company may, from time to time, as market and business
conditions warrant, invest in or acquire complementary businesses, products,
or technologies.* The Company may effect additional equity or debt financing
to fund such activities.* The sale of additional equity or debt securities
could result in additional dilution to the Company's shareholders.
New Accounting Pronouncements: In February 1997, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, which
simplifies the standards for computing earnings per share previously found in
Accounting Principles Board Opinion (APB) No. 15. SFAS No. 128 replaces the
presentation of primary earnings per share with a presentation of basic
earnings per share, which excludes dilution. SFAS No. 128 also requires dual
presentation of basic and diluted earnings per share on the face of the
income statement for all entities with complex capital structures, and
requires a reconciliation. Diluted earnings per share is computed similarly
to fully diluted earnings per share pursuant to APB No. 15. SFAS No. 128 must
be adopted for financial statements issued for periods ending after December
15, 1997, including interim periods; earlier application is not permitted.
SFAS No. 128 requires restatement of all prior-period earnings-per-share data
presented. The Company plans to adopt SFAS No. 128 during the second quarter
of fiscal 1998 and anticipates that it will not have a material impact on the
Company's financial statement disclosures.*
<PAGE> 22
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structures, which will be adopted by the Company in
the first quarter of fiscal 1998. SFAS No. 129 requires companies to disclose
certain information about their capital structure. The Company does not
anticipate that SFAS No. 129 will have a material impact on its financial
statement disclosures.*
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains, and
losses) in a full set of general-purpose financial statements. The Company
will adopt SFAS No. 130 in its fiscal year 1999.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information, which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on
the management approach to segment reporting, establishes requirements to
report selected segment information quarterly and to report entity-wide
disclosures about products and services, major customers, and the material
countries in which the entity holds assets and reports revenue. Management
has not yet evaluated the effects of this change on its reporting of segment
information. The Company will adopt SFAS No. 131 in fiscal year 1999.
RISK FACTORS
- --------------------------------------------------------------------------------
Due to the nature of business and the industry in which the Company operates,
the following risk factors should be considered in addition to others
described above.
Cyclicality and Volatility in the Microelectronics Industry: The Company's
business depends upon the capital equipment expenditures of microelectronics
manufacturers, which in turn depend on the current and anticipated market
demand for semiconductor devices and products utilizing semiconductor
devices. The microelectronics industry has been cyclical in nature and has
experienced periodic downturns. Certain semiconductor device manufacturers
have experienced slowdowns in terms of product demand and volatility in terms
of product pricing. Industry slowdowns and volatility have caused the
semiconductor device manufacturers to reduce their demand for semiconductor
processing equipment and, in some instances, to delay capital equipment
decisions. In some cases this has resulted in order cancellations or delays
of orders and delays of delivery dates for the Company's products. No
assurance can be given that the Company's sales and operating results will
not be adversely affected during downturns in the semiconductor industry.
<PAGE> 23
In addition, the need for continued investments in research and development,
substantial capital equipment requirements and extensive ongoing worldwide
customer service and support capability will limit the Company's ability to
reduce expenses. Accordingly, there is no assurance that the Company will be
able to remain profitable in the future.
Risk of Delays in Introducing New Products and the Market's Acceptance of
Such Products: Microelectronics manufacturing equipment and processes are
subject to rapid technological change and new product introductions, as well
as evolving industry standards. The Company believes microelectronics
manufacturers are increasingly relying on equipment manufacturers to design
and develop more efficient equipment, to design and implement improved
processes for the benefit of microelectronics manufacturers and to integrate
their equipment with that of other equipment manufacturers. The Company must
continue to develop, manufacture and market new products that conform to
evolving industry standards and that require a significant commitment of
resources and capital. The success of the Company in developing, introducing
and selling new and enhanced equipment depends upon a variety of factors
including product selection, timely and efficient completion of product
design and development, timely and efficient implementation of manufacturing
and assembly processes, product performance in the field, and effective sales
and marketing. The Company must also manage product transitions successfully,
as introductions of new products could adversely affect the sales of existing
products. The Company's failure to develop and successfully introduce new
products or enhancements to its existing products and processes or achieve
market acceptance of the new products or enhancements could adversely affect
the Company's business and results of operations.
New Facilities and Related Infrastructure Costs: The Company added
manufacturing capacity with new facilities during fiscal 1997. This
additional manufacturing capacity will have a negative impact on gross profit
margins if the Company's anticipated revenue levels are not met. These
additional facilities and related infrastructure costs will also increase the
overall operating expenses of the Company. The potential impact of idle
manufacturing capacity on gross margins and related infrastructure costs
could also have an adverse impact on the Company's future financial results.
<PAGE> 24
Volatility of Stock Price: The Company's common stock has experienced in the
past, and could experience in the future, substantial price volatility as a
result of a number of factors, including quarter-to-quarter variations in the
actual or anticipated financial results of the Company, announcements by the
Company, its competitors or customers, government regulations and
developments in the industry. In addition, the stock market has experienced
extreme price and volume fluctuations, which have affected the market price
of many technology companies in particular and which have at times been
unrelated to the operating performance of the specific companies whose stock
is traded. Broad market fluctuations, as well as economic conditions
generally and in the microelectronics industry specifically, may adversely
affect the market price of the Company's common stock.
Success of Company's Affiliated Distributors: The majority of the Company's
international sales are made through its affiliated distributors, Metron
Technology B.V. and m-FSI Ltd. These affiliated distributors also provide
service and support to many of the Company's international customers. The
affiliated distributors also sell other principals' products. A reduction in
the sales efforts or financial viability of such distributors or a loss of a
significant principal by a distributor could affect the Company's results of
operations.
Litigation: The Company is currently involved in litigation regarding a
patent and could become involved in additional litigation in the future.
There can be no assurance about the outcome of current or any future
litigation or patent infringement inquiries, or whether they will adversely
impact the Company's business or results of operations.
Implementation of New Business System: The Company is in the
post-implementation phase of a new Company-wide integrated business system.
If the new system is not successful, there may be an adverse impact on the
Company's business and results of operations.
Highly Competitive Industry: The microelectronics processing equipment
industry is highly competitive. The Company faces substantial competition
throughout the world. The Company believes that to remain competitive, it
will require significant financial resources to offer a broad range of
products, to maintain customer service and support centers worldwide, and to
invest in product and process research and development. There can be no
assurance that financial resources with favorable terms would be available
when required. The Company believes that the microelectronics
<PAGE> 25
industry is becoming increasingly dominated by large manufacturers that have
the resources to support customers on a worldwide basis. Certain of the
Company's competitors have substantially greater financial, marketing, and
customer service and support capabilities than the Company. There is the
possibility of large equipment companies entering the market areas in which
the Company competes. In addition, there are smaller emerging
microelectronics equipment companies that provide innovative technology. The
Company expects its competitors to continue to improve the design and
performance of their current products and processes and to introduce new
products and processes with improved price and performance characteristics.
No assurance can be given that the Company will continue to compete
successfully in the United States or elsewhere.
Dependence on Key Personnel: The Company's success depends to a significant
extent upon certain management and technical personnel. The loss of the
services of several or more of these key persons could have an adverse effect
on the Company's operations. Competition for such personnel in the Company's
industry in all geographic locations is high. There can be no assurance that
the Company will continue to be successful in attracting and retaining the
personnel it requires to continue to grow and operate profitably.
Volatility of Global Markets: The Company and its affiliates operate in a
global market. Global operations are subject to risks, including political
and economic instability, general economic conditions, imposition of
government controls, fluctuations of exchange rates, the need to comply with
a wide variety of foreign and United States export laws, trade restrictions
and the greater difficulty of administering business overseas. Although
substantially all of the Company's direct international sales are denominated
in United States dollars, both direct sales by the Company and sales through
its affiliated international distributors may be affected by these factors
and thus may adversely affect the operations and financial results of the
Company.
<PAGE> 26
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 30, 1997 and August 31,
1996, 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 30, 1997. 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 30, 1997 and August 31,
1996, and the results of their operations and their cash flows for each of
the fiscal years in the three-year period ended August 30, 1997, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 10, 1997
<PAGE> 27
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
The Company's management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and other financial
information presented in this report. The accompanying consolidated financial
statements have been prepared in conformity with generally accepted
accounting principles and reflect the effects of certain estimates and
judgments made by management.
Management relies upon established accounting procedures and related
systems of internal control for meeting its responsibilities to maintain
reliable financial records. These systems are designed to provide reasonable
assurance that assets are safeguarded and that transactions are properly
recorded and executed in accordance with management's intentions. Management
believes that the established system provides an acceptable balance between
the benefits and associated costs of internal controls.
As part of their audit of the consolidated financial statements, KPMG
Peat Marwick LLP, the independent auditors, consider the internal control
structure of the Company to gain a basic understanding of the accounting
system in order to design an effective and efficient audit approach; however,
it is not intended to provide assurance on the system of internal control.
Management recognizes the role of constructive recommendations from the
auditors as part of the auditing process and responds to each suggestion.
The Audit Committee of the Board of Directors, which consists of two
outside and one inside director, meets periodically with management and the
independent accountants to review accounting, reporting, auditing and
internal control matters. The committee has direct and private access to the
external auditors.
<TABLE>
<S> <C>
/s/ Joel A. Elftmann /s/ Benno Sand
Joel A. Elftmann Benno Sand
Chairman, President Executive Vice President
and Chief Executive Officer and Chief Financial Officer
</TABLE>
<PAGE> 28
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended August 30, 1997 August 31, 1996 August 26, 1995
============================================================================================================
<S> <C> <C> <C>
Sales (including sales to affiliates of $73,626,000,
$76,437,000 and $42,625,000, respectively) $ 252,441,241 $ 304,040,806 $ 218,460,364
Cost of goods sold 158,128,519 174,238,449 128,653,351
- ------------------------------------------------------------------------------------------------------------
Gross profit 94,312,722 129,802,357 89,807,013
Selling, general and administrative expenses 56,490,877 58,742,058 39,998,913
Research and development expenses 39,712,736 40,997,860 28,036,705
- ------------------------------------------------------------------------------------------------------------
Operating (loss) income (1,890,891) 30,062,439 21,771,395
Interest expense (1,748,555) (464,583) (163,745)
Interest income 4,218,432 4,662,888 2,147,619
Other (expense) income, net (11,731) (73,220) 133,079
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 567,255 34,187,524 23,888,348
Income tax (benefit) expense (675,649) 10,250,000 5,942,000
- ------------------------------------------------------------------------------------------------------------
Income before minority interest and
equity in earnings of affiliates 1,242,904 23,937,524 17,946,348
Minority interest (314,380) (497,560) (155,562)
Equity in earnings of affiliates 3,711,451 5,108,442 3,566,900
- ------------------------------------------------------------------------------------------------------------
Net income $ 4,639,975 $ 28,548,406 $ 21,357,686
============================================================================================================
Net income per common share $ 0.20 $ 1.23 $ 1.13
Weighted average common shares and
common share equivalents 23,084,673 23,138,974 18,825,480
Pro forma information (Note 3):
Income tax (benefit) expense $ (675,649) $ 10,556,000 $ 6,767,000
Net income $ 4,639,975 $ 28,242,406 $ 20,532,686
Net income per common share $ 0.20 $ 1.22 $ 1.09
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 29
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 30, 1997 August 31, 1996
=============================================================================================================
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 79,186,746 $ 48,804,158
Marketable securities 10,022,596 23,116,484
Trade accounts receivable, less allowance for doubtful
accounts of $2,127,000 and $1,843,000, respectively 54,161,499 60,532,701
Trade accounts receivable from affiliates 10,092,769 20,228,673
Inventories 61,990,473 64,075,294
Deferred income tax benefit 11,835,439 8,262,861
Prepaid expenses and other current assets 6,182,794 4,974,079
- -------------------------------------------------------------------------------------------------------------
Total current assets 233,472,316 229,994,250
- -------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 76,665,073 45,594,617
Investment in affiliates 15,975,834 12,765,401
Deposits and other assets 3,937,844 4,395,595
Deferred income tax benefit 1,101,334 533,518
- -------------------------------------------------------------------------------------------------------------
$ 331,152,401 $293,283,381
=============================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 118,200 $ 207,000
Trade accounts payable 24,349,713 30,834,470
Accrued expenses 26,398,976 29,069,279
Customer deposits 2,816,617 3,710,547
Deferred revenue 8,910,824 9,824,693
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 62,594,330 73,645,989
- -------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 42,137,894 290,948
Deferred income taxes 3,340 92,021
Minority interest 2,077,208 1,127,058
Stockholders' equity:
Preferred stock, no par value; 9,700,000 shares
authorized; none issued and outstanding - -
Series A Junior Participating Preferred Stock, no par value;
300,000 shares authorized; none issued and outstanding - -
Common stock, no par value; 50,000,000 shares authorized;
issued and outstanding, 22,583,174 and 22,362,056 shares, respectively 159,706,639 157,731,828
Retained earnings 64,985,283 60,345,308
Cumulative translation adjustment (352,293) 50,229
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 224,339,629 218,127,365
- -------------------------------------------------------------------------------------------------------------
$ 331,152,401 $293,283,381
=============================================================================================================
</TABLE>
Commitments (Notes 4, 6, 9 and 18)
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 30
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Cumulative
Number of Retained Translation
Shares Amount Earnings Adjustment Total
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance, August 27, 1994 14,905,279 $ 28,727,418 $22,026,016 $ 361,392 $ 51,114,826
Stock issuance 7,094,539 114,913,188 - - 114,913,188
Tax benefit from stock options exercised - 747,278 - - 747,278
Change in cumulative translation adjustment - - - 897,303 897,303
S Corporation distributions to Semiconductor
Systems' shareholders - - (1,879,600) - (1,879,600)
Net income - - 21,357,686 - 21,357,686
Adjustment to eliminate the effect of including
Semiconductor Systems net income and S
Corporation distributions for the four months ended
December 31, 1994, in both fiscal 1995 and 1994. - - (484,100) - (484,100)
- -------------------------------------------------------------------------------------------------------------------------
Balance, August 26, 1995 21,999,818 144,387,884 41,020,002 1,258,695 186,666,581
Stock issuance 362,238 1,817,747 - - 1,817,747
Tax benefit from stock options exercised - 2,932,197 - - 2,932,197
Reclassification of undistributed
S Corporation earnings to common stock - 8,594,000 (8,594,000) - -
S Corporation distributions to Semiconductor
Systems' shareholders - - (629,100) - (629,100)
Change in cumulative translation adjustment - - - (1,208,466) (1,208,466)
Net income - - 28,548,406 - 28,548,406
- -------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1996 22,362,056 157,731,828 60,345,308 50,229 218,127,365
Stock issuance 221,118 1,710,417 - - 1,710,417
Tax benefit from stock options exercised - 264,394 - - 264,394
Change in cumulative translation adjustment - - - (402,522) (402,522)
Net income - - 4,639,975 - 4,639,975
- -------------------------------------------------------------------------------------------------------------------------
Balance, August 30, 1997 22,583,174 $159,706,639 $64,985,283 $(352,293) $224,339,629
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 31
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended August 30, 1997 August 31, 1996 August 26, 1995
===========================================================================================================
<S> <C> <C> <C>
Operating Activities
Net income $ 4,639,975 $ 28,548,406 $ 21,357,686
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Minority interest 314,380 497,560 155,562
Depreciation and amortization 12,285,993 8,209,407 3,741,901
Provision for deferred income taxes (3,229,075) (2,281,255) (4,591,103)
Stock issued for services - - 65,643
Equity in earnings of affiliates (3,711,451) (5,108,442) (3,566,900)
Loss (gain) on sale of equipment 76,960 - (8,000)
Changes in operating assets and liabilities:
Trade accounts receivable 16,507,106 (27,417,666) (27,682,119)
Inventories 2,084,821 (23,497,859) (19,294,290)
Prepaid expenses and other current assets (848,716) (306,027) (346,314)
Trade accounts payable (6,484,757) 3,822,320 13,485,625
Accrued expenses (3,405,909) 8,229,246 13,942,917
Customer deposits (893,930) 1,095,673 (1,071,074)
Deferred revenue (913,869) 4,102,663 2,517,138
Other 196,984 (104,115) 13,854
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 16,618,512 (4,210,089) (1,279,474)
Investing Activities
Investment in joint ventures, net of cash received 537,282 - (850,333)
Acquisition of property, plant and equipment (42,880,233) (33,111,987) (16,899,586)
Proceeds from note receivable from affiliate - - 500,000
Purchase of marketable securities (14,331,765) (32,679,361) (14,219,782)
Sale of marketable securities 23,059,364 7,028,937 -
Maturities of marketable securities 4,366,289 18,357,222 -
(Increase) decrease in deposits and other assets (116,552) 61,939 887,797
Proceeds from sale of equipment - - 8,000
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (29,365,615) (40,343,250) (30,573,904)
Financing Activities
Debt financing costs (338,872) - -
Proceeds from issuance of long-term debt 42,000,000 105,265 279,400
Principal payments on long-term debt (241,854) (240,866) (262,720)
Payments on notes payable to bank - (14,461,656) (3,350,000)
Advances on notes payable to bank - 9,961,656 7,850,000
S Corporation distribution payments - (629,100) (1,879,600)
Net proceeds from issuance of common stock 1,710,417 1,612,122 114,847,545
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 43,129,691 (3,652,579) 117,484,625
- -----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 30,382,588 (48,205,918) 85,631,247
Cash flows for Semiconductor Systems for the
four months ended December 31, 1994 - - (415,100)
Cash and cash equivalents at beginning of year 48,804,158 97,010,076 11,793,929
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $79,186,746 $ 48,804,158 $ 97,010,076
===========================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended August 30, 1997, August 31, 1996, and August 26, 1995
NOTE 1
- --------------------------------------------------------------------------------
Summary of Significant Accounting Principles
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of FSI International, Inc., and its wholly
owned subsidiaries, FSI International, Ltd., a foreign sales corporation
(FSC), Applied Chemical Solutions, Inc. and Semiconductor Systems, Inc. The
consolidated financial statements also include the accounts of FSI Metron
Europe, Limited (FME), and FSI Chemical Management Company Korea, Ltd.
(FSI-CMK), joint ventures in which Metron Technology B.V. (Metron
Technology), an affiliate of the Company, owns 50 percent and 35 percent,
respectively. All significant intercompany balances and transactions have
been eliminated in the consolidation.
The Company's fiscal year ends on the last Saturday in August and is
comprised of 52 or 53 weeks. Fiscal 1997 and 1995 consist of 52-week periods
and fiscal 1996 consists of a 53-week period.
Revenue Recognition: Revenue related to the majority of the Company's
products is recognized upon shipment, except for newly introduced products
and for initial customer installments, which are recognized upon the
successful completion of an evaluation period. Revenue on chemical management
systems, for which the Company has certain responsibility for facilities
engineering and design work, as well as installation, is recognized upon
successful completion of the projects' phases and milestones. Losses on such
projects are recognized in the period in which it is determined that it is
probable that a loss might be incurred and the amount of loss can be
reasonably estimated.
Cash and Cash Equivalents: All highly liquid investments purchased with an
original effective maturity of three months or less are considered to be cash
equivalents.
Marketable Securities: In accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities, 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 that the Company intends to, and has the ability to, hold until
maturity. All other securities not included in trading or held-to-maturity
are classified as available-for-sale. Trading and available-for-sale
securities are recorded at fair market value. Held-to-maturity securities are
recorded at cost, adjusted for the amortization or accretion of premiums or
discounts. Unrealized holding gains and losses for trading securities are
included in earnings. Available-for-sale securities' unrealized holding gains
and losses are excluded from earnings and reported as a net amount in a
separate component of stockholders' equity until realized (See Note 2).
Inventories: Inventories are valued at the lower of cost, determined by the
first-in, first-out method, or net realizable value.
<PAGE> 33
Property, Plant and Equipment: Building and related costs are carried at cost
and depreciated on a straight-line basis over a 30-year period. Leasehold
improvements are carried at cost and amortized over a 3- to 15-year period or
the term of the underlying lease, whichever is shorter. Equipment is carried
at cost and depreciated on a straight-line or declining-
balance method over its estimated economic life. Principal economic lives for
equipment are 1 to 7 years. Software developed for internal use is amortized
over 3 years. When assets are retired or disposed of, the cost and
accumulated depreciation thereon is removed from the accounts and gains or
losses are included in other income (expense). Maintenance and repairs are
expensed as incurred; significant renewals and betterments are capitalized.
Patents and License Fees: Patents and license fees are capitalized and
amortized over their estimated economic or legal lives, whichever is shorter,
ranging up to 5 years.
Investment in Affiliates: The Company's investment in affiliated companies
consists of a 37.5% interest in Metron Technology and a 49.0% interest in
m-FSI Ltd. Each investment is accounted for by the equity method utilizing a
three-month or two-month lag due to the affiliates' May or June year-ends,
respectively. Summary financial information for these affiliates is included
in Note 7.
Income Taxes: Deferred income taxes are provided in amounts sufficient to
give effect to temporary differences between financial and tax reporting. The
Company accounts for tax credits as reductions of income tax expense in the
year in which such credits are allowable for tax purposes.
Product Warranty: The Company, in general, warrants new equipment
manufactured by the Company to the original purchaser to be free from defects
in material and workmanship for one to two years, depending upon the product
or customer agreement. Provision is made for the estimated cost of
maintaining product warranties at the time the product is sold.
Foreign Currency Translation: Assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at current exchange rates.
Operating results for subsidiaries and investees are translated into U.S.
dollars using the average rates of exchange prevailing during the year.
Unrealized gains or losses resulting from translating subsidiaries and
investees are included in the cumulative translation adjustment account in
stockholders' equity.
Net Income Per Common Share: Net income per common share is computed based on
the weighted average number of common shares and common share equivalents
outstanding during the year. All stock options and stock warrants are
reflected in the computation of common share equivalents. For all periods
presented, fully diluted and primary net income per common share are
approximately the same.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that could affect the reported amounts of assets
and liabilities at the date of the financial
<PAGE> 34
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications: Certain 1996 and 1995 amounts have been reclassified to
conform to the 1997 presentation.
NOTE 2
- --------------------------------------------------------------------------------
Concentration of Risk and Financial Instruments
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents,
marketable securities, and trade accounts receivable.
The Company's customers consist of microelectronics manufacturers
located throughout the world. The Company performs ongoing credit evaluations
of its customers' financial condition and generally requires no collateral
from them. The Company maintains an allowance for uncollectible accounts
receivable based upon expected collectibility of all accounts receivable.
The Company invests in a variety of financial instruments such as
municipal bonds, commercial paper and money market fund shares. The Company,
by policy, limits the amount of credit exposure with any one financial or
commercial issuer.
The Company's financial instruments reflected on the balance sheet,
including cash and cash equivalents, marketable securities, accounts
receivables, notes payable, accounts payable and accrued expenses,
approximate fair value due to their short maturities.
As of August 30, 1997, and August 31, 1996, all marketable securities
are classified as available-for-sale.
Information about the contractual maturities of marketable securities at
August 30, 1997, is as follows:
<TABLE>
<CAPTION>
Due After
Due in One Year
One Year Through
or Less Two Years
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial paper,
certificates of deposit
and corporate bonds $8,971,102 $1,051,494
</TABLE>
At August 30, 1997, $70,945,123 of investments in debt securities
purchased with an original effective maturity date of less than three months
are included in cash and cash equivalents on the balance sheet.
Gross unrealized holding gains and losses and gross realized gains and
losses on sales of marketable securities were not significant as of and for
the years ended August 30, 1997, and August 31, 1996. The Company manages its
cash equivalents and short-term investments as a single portfolio of highly
marketable securities, all of which are intended to be available to meet the
Company's current cash requirements.
<PAGE> 35
NOTE 3
- --------------------------------------------------------------------------------
Acquisitions
On April 4, 1996, the Company completed the acquisition of Semiconductor
Systems, Inc. (Semiconductor Systems). In connection with the acquisition,
the Company issued approximately 1,739,200 shares of its common stock. In
addition, the Company issued options for approximately 60,800 shares of the
Company's common stock in substitution of previously outstanding options to
acquire shares of Semiconductor Systems' common stock.
This transaction was accounted for as a pooling of interests; therefore,
all financial statements presented have been restated to reflect the
acquisition. Semiconductor Systems prepared its financial statements on a
December 31 calendar year-end prior to the acquisition. In recording the
pooling-of-interests combination, Semiconductor Systems' financial statements
for the twelve months ended August 31, 1996, and August 26, 1995, were
combined with FSI's financial statements for the same periods and
Semiconductor Systems' financial statements for the year ended December 31,
1994, were combined with FSI's for the year ended August 27, 1994.
Semiconductor Systems' unaudited results for the four months ended December
31, 1994, included sales of $10,500,000 and net income of $1,020,000. An
adjustment was made to stockholders' equity in the combined historical
financial statements to eliminate the effect of including Semiconductor
Systems' net income and S Corporation distributions for the four months ended
December 31, 1994, in the statements of operation for the fiscal years ended
August 26, 1995, and August 27, 1994.
The Company recorded a net deferred tax asset and tax benefit of
approximately $1,500,000 for temporary differences of Semiconductor Systems.
The tax benefit is a result of Semiconductor Systems' conversion from an S
Corporation to a C Corporation upon closing of the acquisition.
The Company, upon completion of the acquisition, also reclassified the
undistributed earnings of Semiconductor Systems of approximately $8,600,000
to common stock from retained earnings as a result of Semiconductor Systems'
conversion from an S Corporation to a C Corporation upon closing of the
acquisition.
In connection with the acquisition of Semiconductor Systems,
approximately $800,000 of acquisition costs and expenses were incurred and
were charged to selling, general and administrative expenses in fiscal 1996.
The charge includes professional fees and other direct transaction costs
associated with the acquisition.
Pro forma data shown on consolidated statements of operations reflects
the impact on income tax expense as if Semiconductor Systems was a C
Corporation versus an S Corporation prior to the acquisition.
On March 8, 1995, the Company completed its acquisition of Applied
Chemical Solutions (ACS). The Company issued 1,061,472 shares of common stock
in connection with the acquisition. This transaction was accounted for as a
pooling of interests; therefore, all prior financial statements have been
restated to reflect the acquisition. There were approximately $800,000 of
acquisition costs and expenses charged to selling, general and administrative
expenses in fiscal 1995 related to the ACS acquisition.
<PAGE> 36
NOTE 4
- --------------------------------------------------------------------------------
Related-Party Transactions and Other Lease Commitments
The Company has operating lease agreements for equipment and for
manufacturing and office facilities. Certain of the lease agreements are with
partnerships of which a partner is an officer, director and shareholder of
the Company.
The lease for the Company's manufacturing headquarters is a lease with
such a partnership (Lake Hazeltine Properties). The agreement provides for a
base monthly rental of $58,333, plus payment of executory costs such a
property taxes, maintenance and insurance.
Future minimum lease payments for all leases with noncancellable lease
terms in excess of one year at August 30, 1997, are as follows:
<TABLE>
<CAPTION>
Related
Party Other
Leases Leases Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fiscal Year Ending August:
1998 $797,200 $1,597,113 $2,394,313
1999 797,200 1,484,433 2,281,633
2000 797,200 1,090,701 1,887,901
2001 105,840 719,405 825,245
2002 105,840 78,273 184,113
Thereafter 0 20,823 20,823
- ----------------------------------------------------------------------------------------------------------
Total minimum
lease payments $2,603,280 $4,990,748 $7,594,028
- ----------------------------------------------------------------------------------------------------------
Rental expense for all operating leases consisted of the following:
Fiscal Year Ended 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Rent expense for
related-party leases $ 792,400 $ 927,400 $1,320,300
Rent expense for other
operating leases 2,025,900 2,027,000 1,280,400
- ----------------------------------------------------------------------------------------------------------
$2,818,300 $2,954,400 $2,600,700
- ----------------------------------------------------------------------------------------------------------
NOTE 5
- ----------------------------------------------------------------------------------------------------------
Inventories
Inventories are summarized as follows:
1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Finished products $ 7,539,031 $10,715,376
Work in process 18,341,911 16,329,239
Subassemblies 9,545,857 4,689,549
Raw materials and purchased parts 26,563,674 32,341,130
- ----------------------------------------------------------------------------------------------------------
$61,990,473 $64,075,294
- ----------------------------------------------------------------------------------------------------------
NOTE 6
- ----------------------------------------------------------------------------------------------------------
Property, Plant and Equipment
</TABLE>
<PAGE> 37
The components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Land $ 1,992,029 $ 1,992,029
Building and leasehold improvements 52,186,798 17,045,409
Office furniture and equipment 31,096,055 23,254,805
Manufacturing equipment 5,605,442 5,609,480
Lab equipment 11,983,673 7,970,971
Tooling 393,782 376,657
Vehicles 139,107 193,605
Construction in progress 2,152,845 11,784,447
- -----------------------------------------------------------------------
105,549,731 68,227,403
Less accumulated depreciation
and amortization (28,884,658) (22,632,786)
- -----------------------------------------------------------------------
$76,665,073 $45,594,617
- -----------------------------------------------------------------------
</TABLE>
Interest is capitalized in connection with the construction of major
facilities. The capitalized interest is recorded as part of the asset to
which it relates and is amortized over the asset's estimated useful life. In
fiscal 1997 approximately $580,000 of interest was capitalized. No interest
was capitalized in 1996 or 1995.
The Company's joint venture, FME, is in the process of completing a new
facility in the United Kingdom. Construction-in-progress costs for this
facility of approximately $500,000 were incurred through August 30, 1997. FME
has commitments of approximately $305,000 of additional costs to complete
this facility. In addition, FME has commitments of approximately $170,000 for
equipment related to this facility.
NOTE 7
- --------------------------------------------------------------------------------
Investments in Affiliates
On July 5, 1995, the merger of the Company's affiliates, Metron
Semiconductors Europa B.V. and the Metron Asia Group was completed with
Metron Semiconductors Europa B.V. surviving as the parent company. The Metron
Asia Group was previously owned by the majority shareholders of Metron
Semiconductors Europa B.V. Accordingly, the transaction has been treated as a
reorganization of entities under common control. All prior Metron
Semiconductors Europa B.V. financial statements were restated to reflect this
merger. On July 6, 1995, Metron Semiconductors Europa B.V. acquired
Transpacific Technology Corporation, a U.S. company. This transaction was
accounted for using purchase accounting. The newly consolidated entity changed
its name to Metron Technology B.V. (Metron Technology). The Company's
ownership in Metron Technology is 37.5%.
A summary of assets, liabilities and results of operations for Metron
Technology and m-FSI Ltd. accounted for on the equity method is as follows
(dollars in thousands):
Metron Technology
May 31, 1997 1996 1995
- --------------------------------------------------------------------------------
[S] [C] [C] [C]
Current assets $77,211 $89,594 $50,677
<PAGE> 38
<TABLE>
<S> <C> <C> <C>
Noncurrent assets 14,382 13,501 5,633
Current liabilities 54,934 70,471 36,085
Noncurrent liabilities 2,371 2,243 815
Total stockholders' equity 34,288 30,381 19,410
Fiscal Year Ended May 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Sales $255,283 $233,302 $134,533
Net income before
minority interest 4,614 9,658 7,656
Minority interest - - (116)
Net income 4,614 9,658 7,540
m-FSI Ltd.
June 30, 1997 1996 1995
- --------------------------------------------------------------------------------
Current assets $18,639 $15,609 $6,430
Noncurrent assets 3,126 1,780 2,532
Current liabilities 13,660 12,438 4,989
Noncurrent liabilities 217 132 50
Total stockholders' equity 7,888 4,819 3,923
Fiscal Year Ended June 30, 1997 1996 1995
- --------------------------------------------------------------------------------
Sales $30,207 $22,567 $9,641
Net income 3,215 1,931 581
</TABLE>
Metron Technology operates mainly in Europe, AsiaPacific and the United
States. m-FSI Ltd. operates in Japan.
The Company sold approximately $73,626,000, $76,437,000 and $42,625,000
of its products in the aggregate to Metron Technology and m-FSI Ltd. in
fiscal 1997, 1996 and 1995, respectively. In addition, the Company paid
Metron Technology a commission for direct sales to Asia-Pacific customers of
$1,774,000, $2,963,000 and $1,112,000 for fiscal years 1997, 1996 and 1995,
respectively. At August 30, 1997, and August 31, 1996, trade accounts
receivable from affiliates were approximately $10,093,000 and $20,229,000,
respectively.
NOTE 8
- --------------------------------------------------------------------------------
Accrued Expenses
Accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Commissions $ 1,206,077 $ 765,797
Commissions due to affiliates 582,100 1,220,891
Income taxes 1,276,587 2,836,846
Salaries and bonus 4,857,761 6,400,225
Pension and profit sharing 1,397,293 1,705,220
Product warranty 10,795,916 8,681,635
Other 6,283,242 7,458,665
- --------------------------------------------------------------------------------
$26,398,976 $29,069,279
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 39
NOTE 9
- --------------------------------------------------------------------------------
Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Unsecured senior notes;
interest rates ranging
from 7.15% to 7.27%
through December 2006 $42,000,000 $ -
Capital leases on equipment;
interest rates ranging from
8.83% to 12.68% through
September 2000 secured by
underlying equipment 249,700 459,000
Other 6,394 38,948
- --------------------------------------------------------------------------------
42,256,094 497,948
Less current maturities (118,200) (207,000)
- --------------------------------------------------------------------------------
$42,137,894 $290,948
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 40
Future payments of long-term debt are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
- --------------------------------------------------------------------------------
<S> <C>
1998 $ 118,200
1999 73,585
2000 6,059,813
2001 7,718,782
2002 7,714,286
Thereafter 20,571,428
- --------------------------------------------------------------------------------
$42,256,094
- --------------------------------------------------------------------------------
</TABLE>
On December 19, 1996, the Company completed a private debt placement for
$30.0 million of 7.15% unsecured senior notes due 2004 and $12.0 million of
7.27% unsecured senior notes due 2006. The notes are subject to certain
affirmative and negative covenants, including financial ratio tests such as
an indebtedness ratio and a tangible net worth test.
NOTE 10
- --------------------------------------------------------------------------------
Income Taxes
The provision for income tax (benefit) expense is summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 2,763,000 $11,997,000 $ 9,561,000
Foreign 333,000 419,000 204,000
State 459,000 1,781,000 768,000
- --------------------------------------------------------------------------------
3,555,000 14,197,000 10,533,000
- --------------------------------------------------------------------------------
Deferred
Federal (3,750,000) (3,694,000) (4,084,000)
Foreign 32,000 26,000 -
State (512,000) (279,000) (507,000)
- --------------------------------------------------------------------------------
(4,230,000) (3,947,000) (4,591,000)
- --------------------------------------------------------------------------------
$ (675,000) $10,250,000 $ 5,942,000
- --------------------------------------------------------------------------------
</TABLE>
In fiscal 1997, 1996 and 1995, there was a tax benefit of $264,394,
$2,932,197 and $747,278, respectively, credited to stockholders' equity
associated with the exercise of stock options.
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at August
30, 1997, and August 31, 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets
Inventory $3,318,000 $1,895,000
Deferred revenue 1,209,000 1,203,000
Accounts receivable 808,000 671,000
Property, plant and equipment 1,220,000 662,000
</TABLE>
<PAGE> 41
<TABLE>
<CAPTION>
<S> <C> <C>
Accruals 5,557,000 4,337,000
Other, net 854,000 422,000
- --------------------------------------------------------------------------------
Total gross deferred tax assets 12,966,000 9,190,000
- --------------------------------------------------------------------------------
Other, net 32,000 486,000
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 32,000 486,000
- --------------------------------------------------------------------------------
Net deferred tax assets $12,934,000 $ 8,704,000
- --------------------------------------------------------------------------------
</TABLE>
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 $12,934,000 as of August 30,
1997, through the availability of taxable income in the carryback period and
of future earnings.
The effective income tax (benefit) expense differs from the expected
statutory federal income tax as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected federal
income tax expense $199,000 $11,966,000 $ 8,361,000
State income (benefit)
expense, net of
federal benefit (52,000) 991,000 645,000
Research activities credit (580,000) (171,000) (239,000)
Tax-exempt interest income (489,000) (490,000) -
Valuation allowance - - (2,198,000)
Foreign sales corporation (18,000) (685,000) (621,000)
S Corporation net income - (263,000) (549,000)
Establishment of
S Corporation
deferred tax asset - (1,500,000) -
Other items, net 265,000 402,000 543,000
- --------------------------------------------------------------------------------
$(675,000) $10,250,000 $ 5,942,000
- --------------------------------------------------------------------------------
</TABLE>
The Company utilized approximately $259,000 and $1,300,000 of net
operating loss carryforwards from ACS in fiscal years 1996 and 1995,
respectively.
<PAGE> 42
At August 30, 1997, there were approximately $12,988,000 of accumulated
undistributed earnings of subsidiaries outside the United States that are
considered to be reinvested indefinitely, subject to cash flow requirements.
It is not practicable to estimate the deferred tax liability related to such
undistributed earnings. If such earnings were remitted to the Company,
applicable U.S. federal income and foreign withholding taxes would be
substantially offset by available foreign tax credits.
NOTE 11
- --------------------------------------------------------------------------------
Pension and Profit-Sharing Plans
The Company has a defined-contribution pension plan covering substantially
all employees. Total pension cost for fiscal 1997, 1996 and 1995 was
$1,818,376, $1,408,086 and $857,826, 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 $39,800. Total pension cost for fiscal 1997, 1996 and 1995 for
FME was approximately $66,500, $74,500 and $38,500, respectively.
The Company also has Employee 401(k) Retirement Plans, which allow for
discretionary profit-sharing contributions, covering eligible employees.
Contributions under the plans are determined by a formula or at the
discretion of the Board of Directors. Contributions accrued for in
fiscal years 1997, 1996 and 1995 were $0, $250,000 and $290,000,
respectively.
NOTE 12
- --------------------------------------------------------------------------------
Stock Options and Warrants
In addition to other stock-based plans, the Company has a 1997 Omnibus Stock
Plan (the Plan). The Plan, which was approved by the Company's shareholders,
authorizes stockbased 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.
<PAGE> 43
The activity under stock option plans of the Company is as follows:
<TABLE>
<CAPTION>
Number of Shares Weighted
Available Average
for Exercise Price
Activity Description Grant Outstanding Per Share
- -------------------------------------------------------------------------
<S> <C> <C> <C>
August 27, 1994 455,563 1,666,843 $ 3.32
Directors' Nonstatutory Plan 100,000 - -
Granted (459,544) 459,544 14.48
Exercised - (519,381) 2.49
Canceled 10,694 (17,694) 6.57
- -------------------------------------------------------------------------
August 26, 1995 106,713 1,589,312 6.64
Additional shares authorized
for 1994 Omnibus Stock
Option Plan 500,000 - -
Granted (422,161) 422,161 16.85
Exercised - (227,300) 2.10
Canceled 62,880 (64,547) 15.28
- --------------------------------------------------------------------------------
August 31, 1996 247,432 1,719,626 9.43
Additional shares authorized
for 1997 Omnibus Stock
Option Plan 1,000,000 - -
Granted (1,019,817) 1,019,817 12.02
Exercised - (129,360) 4.78
Canceled 208,385 (511,291) 17.83
- --------------------------------------------------------------------------------
August 30, 1997 436,000 2,098,792 $ 9.01
Number of shares exercisable
at August 30, 1997 981,453 $ 5.51
- --------------------------------------------------------------------------------
</TABLE>
The weighted-average fair value of options granted during 1997 and 1996
was $6.66 and $6.99, respectively.
At August 30, 1997, the range of exercise prices and the
weighted-average remaining contractual life of outstanding options was $0.94
to $20.50, and 7.3 years, respectively. At August 30, 1997, and August 31,
1996, currently exercisable options of common stock aggregated 981,453 shares
and 873,388 shares, respectively, and the weighted-average exercise price of
those options was $5.51 and $4.64, respectively.
On September 25, 1996, the Board of Directors approved the repricing of
all unexercised options with an exercise price greater than $11.625; the new
exercise price of such options is $11.625. In addition, the vesting periods
of the unvested portion of the repriced options were delayed by one year.
There were approximately 452,000 options with exercise prices of $12.25 to
$29.00 canceled and reissued under the terms described above.
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 29,
2003.
On May 22, 1997, the Company adopted a Shareholder Rights Plan (the
Rights Plan). Pursuant to the Rights Plan, Rights were distributed as a
dividend at the rate of one preferred share purchase right (a Right) for each
outstanding share of common stock of
<PAGE> 44
the Company. The Rights expire on June 10, 2007, unless extended or earlier
redeemed or exchanged by the Company.
Under the Rights Plan, each Right entitles the registered holder to
purchase one-hundredth of a Series A Junior Participating Preferred Share, no
par value (Preferred Shares), of the Company at a price of $90. The Rights
will become exercisable only if a person or group acquires beneficial
ownership of 15% or more of the Company's common stock or commences a tender
offer or exchange offer upon consummation of which such person or group would
beneficially own 15% or more of the Company's common stock.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation. The Company has adopted the disclosure-only
provisions of SFAS No. 123 but applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its plans. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. The Company recognized no
compensation expense in 1997 or 1996 under APB No. 25.
If the Company had elected to recognize compensation cost for the stock
option plan and employee stock purchase plan based on the fair value at the
grant dates for awards under those plans, consistent with the method
prescribed by SFAS No. 123, net income and net income per common share would
have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands, except per-share amounts) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net Income
As reported $4,640 $28,548
Pro forma $2,159 $27,233
Net Income Per Common Share
As reported $0.20 $1.23
Pro forma $0.09 $1.18
</TABLE>
NOTE: The pro forma effect on net income for 1997 and 1996 is not
representative of the pro forma effect on net income in future years because
it does not take into consideration pro forma compensation expense related to
grants made prior to 1996.
The fair value of stock options used to compute pro forma net income and
net income per common share disclosures is the estimated present value at the
grant date using a Black-Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
Options ESPP
1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0% 0.0%
Expected stock price volatility 59.0% 59.0% 66.0% 66.0%
Risk-free interest rate 6.3% 5.5% 5.8% 5.1%
Expected life (years) 3.8 3.8 1.0 1.0
</TABLE>
<PAGE> 45
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, the Black-Scholes model requires the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees.
NOTE 13
- -------------------------------------------------------------------------------
Employee Stock Purchase Plan
The Company has an employee stock purchase plan (the Plan) that enables
employees to contribute up to 6% of their wages toward the purchase of the
Company's common stock at 85% of the lower of market value at the beginning
of the calendar year or the end of the calendar year. On December 31, 1996,
1995 and 1994, 91,765 shares were issued at $12.22 per share, 99,927 shares
were issued at $11.37 per share and 139,582 shares were issued at $4.78 per
share, respectively, under the Plan.
At August 30, 1997, there were 330,586 shares reserved for future
employee purchases of stock under the Plan.
NOTE 14
- --------------------------------------------------------------------------------
Additional Sales Information
International sales for the fiscal years 1997, 1996 and 1995 were
approximately 36%, 35% and 33%, respectively, of total sales. (Included in
these percentages and the table below are sales to affiliates. See Note 7.)
International sales by geographic area, consisting principally of export
sales, are summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Asia $37,058,000 $54,018,500 $43,081,300
Europe 52,192,800 51,862,200 28,324,900
Other 447,300 2,007,500 148,700
- --------------------------------------------------------------------------------
$89,698,100 $107,888,200 $71,554,900
- --------------------------------------------------------------------------------
</TABLE>
The following summarizes significant customers comprising 10% or more of
the Company's customer sales, which include sales through affiliates to end
users:
<TABLE>
<CAPTION>
Fiscal Year Ended 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer A - - 13%
Customer B - 12% -
Customer C 17% 11% 14%
Customer D - - 12%
Customer E - - 10%
</TABLE>
- - Sales to respective customer are less than 10% during the fiscal year.
<PAGE> 46
NOTE 15
- --------------------------------------------------------------------------------
Research and Development Agreements
The Company has received research and development funding commitments from
third-party organizations. Such funds are not anticipated to cover all costs
of the research and development projects involved. The funds received are
recorded as reductions of research and development expenses. The Company
recognized approximately $276,500, $0, and $546,200 of third-party funding in
fiscal years 1997, 1996 and 1995, respectively.
NOTE 16
- --------------------------------------------------------------------------------
License Agreements
The Company, in the ordinary course of business, enters into various
licensing agreements related to technologies. These agreements generally
provide for technology transfers between the Company and the licensors in
exchange for minimum royalty payments and/or a fixed royalty to the
licensors. These agreements can generally be terminated by the Company with
appropriate notice to the licensors.
NOTE 17
- --------------------------------------------------------------------------------
Supplementary Cash Flow Information
The Company paid interest, net of amounts capitalized, in fiscal 1997, 1996,
and 1995 of $1,124,884, $467,283 and $171,219, respectively. Income taxes
paid in fiscal years 1997, 1996, and 1995 were $4,818,723, $11,424,910 and
$5,957,026, respectively. Capital leases entered into for financing purchases
of equipment during fiscal 1997, 1996 and 1995 were $0, $241,610 and $0,
respectively. In addition, the Company realized, in fiscal years 1997, 1996
and 1995, a tax benefit from the exercise of stock options in the amount of
$264,394, $2,932,197 and $747,278, respectively.
NOTE 18
- --------------------------------------------------------------------------------
Contingencies
In the normal course of business, the Company from time to time may become
involved in litigation. Such litigation could ultimately result in a
liability to the Company. As of August 30, 1997, the Company believes it is
not involved in any litigation that will have a material financial impact on
the Company.
<TABLE>
<CAPTION>
First Second Third Fourth
(In thousands, except per-share data) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
1997 (unaudited)
<S> <C> <C> <C> <C>
Sales $66,991 $60,157 $51,394 $73,899
Gross profit 26,765 21,292 19,668 26,588
Operating (loss) income 3,868 128 (5,518) (369)
Net (loss) income 4,041 1,938 (2,744) 1,405
Net (loss) income
per common share $0.18 $0.08 $(0.12) $0.06
1996 (unaudited)
Sales $70,344 $75,432 $67,466 $90,799
Gross profit 29,800 32,989 29,707 37,306
Operating income 8,515 9,281 4,708 7,558
Net income 7,725 8,588 5,756 6,479
Net income
per common share $0.33 $0.37 $0.25 $0.28
</TABLE>
The Company's fiscal quarters are generally 13 weeks, ending on a Saturday.
The fiscal year ends on the last Saturday in August and comprises 52 or 53
weeks.
The Company's common stock is traded on The Nasdaq Stock Market under the
symbol FSII. The following table sets forth the highest and lowest sale
prices, as reported by The Nasdaq Stock Market, for the periods indicated.
<TABLE>
<CAPTION>
QUARTERLY DATA COMMON STOCK PRICES
1997 1996
Fiscal Quarter High Low High Low
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First $15 3/8 $10 $38 1/2 $18 1/2
Second 18 1/4 12 1/2 24 1/4 12 1/2
Third 15 1/4 10 7/8 16 10 3/4
Fourth 20 3/16 13 3/4 14 5/8 9 5/8
</TABLE>
There were approximately 782 stockholder accounts of record on November 7,
1997, and an estimated 14,000 stockholders who held Company stock in street
name.
The Company has never declared or paid cash dividends on its common stock.
The Company currently intends to retain all earnings for use in its business,
and does not anticipate paying dividends in the foreseeable future.
<PAGE> 47
CORPORATE AND STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
Board of Directors
James A. Bernards
President
Facilitation, Incorporated
(Strategic planning, directorships, organizational development)
Neil R. Bonke
Chairman
Electroglas, Inc. (retired)
(Automatic wafer probing
equipment manufacturer)
Joel A. Elftmann
FSI Chairman, President
and Chief Executive Officer
Terrence W. Glarner
President
West Concord Ventures, Inc.
(Venture capital)
Joanna T. Lau
President
Lau Technologies
(Electronics manufacturer)
Robert E. Lorenzini
Chairman
SunPower Corporation
(Solar energy power
generation systems)
Charles R. Wofford
FSI Vice Chairman
Corporate Officers
Joel A. Elftmann
Chairman, President
and Chief Executive Officer
Co-founded FSI in 1973
Dr. Robert E. Cavins
Executive Vice President, President Chemical Management Division
Joined FSI in 1993
Dale A. Courtney
Executive Vice President, President Surface Conditioning Division
Joined FSI in 1987
Peter A. Pope
Executive Vice President, Marketing, Account Management and Quality
Joined FSI in 1982
Benno G. Sand
Executive Vice President, Chief Financial Officer and Secretary
Joined FSI in 1982
Dr. Benjamin J. Sloan
Executive Vice President, President Microlithography Division
Joined FSI in 1992
J. Wayne Stewart
Executive Vice President, Operations
Joined FSI in 1994
Charles R. Wofford
Vice Chairman
Joined FSI in 1996
<PAGE> 48
Corporate Headquarters
322 Lake Hazeltine Drive
Chaska, Minnesota
55318-1096
Phone: 612/448-5440
Fax: 612/448-2825
Common Stock
The common stock of FSI International is traded on The
Nasdaq Stock Market under
the symbol FSII.
Registrar and Transfer Agent
Harris Trust & Savings Bank,
Shareholder Services Division
311 West Monroe Street
Chicago, Illinois 60606
312/461-2549
Stockholder Inquiries
Investors seeking financial publications or wishing to be placed on the
Company's mailing list of investors may call: 612/361-7973
Financial statements and information about FSI International are also available
electronically via the World Wide Web at: http://www.fsi-intl.com
General stockholder and investor questions may be directed to:
Heide Erickson
Manager, Investor Relations
FSI International, Inc.
322 Lake Hazeltine Drive
Chaska, Minnesota
55318-1096
612/361-7648
Form 10-K
The Annual Report on Form 10-K filed with the Securities and Exchange
Commission is available to stockholders on request by contacting
the Investor Relations Department
at the address above.
Annual Meeting
All stockholders and other interested parties are invited to attend the
Company's annual meeting, scheduled for January 27, 1998, at 3:30 p.m. at the
Lutheran Brotherhood Building, 625 Fourth Avenue South, Minneapolis, Minnesota.
Independent Auditors
KPMG Peat Marwick LLP
Minneapolis, Minnesota
General Counsel
Luke R. Komarek
FSI International, Inc.
We were profoundly saddened by the death of William F. Mitchell, a board member
of FSI International from 1978 to 1991. Mr. Mitchell was an exceptional leader,
who remained - even after his tenure on FSI's board - a mentor and inspiration
for FSI management. FSI is proud to announce that it has named its boardroom in
Mr. Mitchell's honor to memorialize this extraordinary man.
GLOSSARY
- --------------------------------------------------------------------------------
> CAGR: Compound Annual Growth Rate.
> Class 1: A classification for a super-clean environment of a manufacturing
facility or laboratory, designating the number and size of particles per cubic
foot of air. The lower the rating, the cleaner the facility.
> Cluster: A modular cluster of process equipment stations within a
manufacturing facility that form an enclosed work cell. The FSI POLARIS(R)
Cluster consists of independent modules or building blocks that can be
configured in many combinations.
<PAGE> 49
> CMP (chemical-mechanical planarization or polishing): A process that removes
unwanted material from the wafer surface by using a chemical "slurry"
containing abrasives along with mechanical equipment that applies pressure on a
rotating platen to polish the surface.
> Fab: Manufacturing facility where integrated circuits are produced.
> Integrated circuit (IC): A tiny complex of electronic components and their
connections produced on a slice of material, such as silicon. Commonly referred
to as a chip.
> Semiconductor: A material, such as silicon (symbol: Si), used in
manufacturing integrated circuits (IC), that has properties of both an
insulator and a conductor.
> Slurry: The chemical mixture used in the chemical mechanical planarization or
polishing (CMP) process. The chemical contains minute particles, often silicon
or alumina, that aid in polishing.
> Thin film head: The device that reads from and writes information to a hard
disk of a computer.
> Wafer: A thin, round slice of semiconductor material, such as silicon, on
which integrated circuits are manufactured and then cut into chips.
<PAGE> 1
EXHIBIT 21.0
SUBSIDIARIES*
JURISDICTION OF
NAME INCORPORATION
---- ----------------
Applied Chemical Solutions, Inc. Minnesota
FSI International, Ltd. Guam
FSI Metron Europe Limited England
Semiconductor Systems, Inc. California
FSI Chemical Management Company - Korea Ltd. Korea
__________
* FSI International, Inc. also owns interests in Metron Technology B.V.(37.5%)
and m-FSI, Ltd.(49%).
<PAGE> 1
EXHIBIT 23.0
Independent Auditors' Consent
The Board of Directors and Stockholders FSI International, Inc.:
We consent to incorporation by reference in the registration statements (No.'s
33-29494, 33-39919, 33-33649, 33-33647, 33-39920, 33-42893, 33-77852, 33-77854,
33-60903, 333-30675, 333-19677, 333-19673, and 333-01509) on Form S-8 of FSI
International, Inc. of our reports dated October 10, 1997 relating to the
consolidated balance sheets of FSI International, Inc. and subsidiaries as of
August 30, 1997 and August 31, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows and related schedule for each
of the fiscal years in the three-year period ended August 30, 1997, which
reports appear in or are incorporated by reference in the August 30, 1997
annual report on Form 10-K of FSI International, Inc.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 26, 1997
<PAGE> 1
EXHIBIT 24.0
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned director of FSI
International, Inc. hereby appoint Joel A. Elftmann and Benno G. Sand, and
each of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in name, place, and stead
of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, the Annual
Report on Form 10-K for the fiscal year ended August 30, 1997 of FSI
International, Inc. and any and all amendments and exhibits thereto, with full
power and authority to do and perform any and all acts and things whatsoever
requisite and necessary or desirable, as fully and effectually in all respects
as I could do if personally present.
IN WITNESS WHEREOF, I have hereunto set my hand this 24th day of October,
1997.
/s/ James A. Bernards
---------------------
James A. Bernards
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned director of FSI
International, Inc. hereby appoint Joel A. Elftmann and Benno G. Sand, and
each of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in name, place, and stead
of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, the Annual
Report on Form 10-K for the fiscal year ended August 30, 1997 of FSI
International, Inc. and any and all amendments and exhibits thereto, with full
power and authority to do and perform any and all acts and things whatsoever
requisite and necessary or desirable, as fully and effectually in all respects
as I could do if personally present.
IN WITNESS WHEREOF, I have hereunto set my hand this 29th day of October,
1997.
/s/ Neil R. Bonke
-----------------
Neil R. Bonke
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned director of FSI
International, Inc. hereby appoint Joel A. Elftmann and Benno G. Sand, and
each of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in name, place, and stead
of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, the Annual
Report on Form 10-K for the fiscal year ended August 30, 1997 of FSI
International, Inc. and any and all amendments and exhibits thereto, with full
power and authority to do and perform any and all acts and things whatsoever
requisite and necessary or desirable, as fully and effectually in all respects
as I could do if personally present.
IN WITNESS WHEREOF, I have hereunto set my hand this 26th day of October,
1997.
/s/ Joel A. Elftmann
--------------------
Joel A. Elftmann
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned director of FSI
International, Inc. hereby appoint Joel A. Elftmann and Benno G. Sand, and
each of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in name, place, and stead
of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, the Annual
Report on Form 10-K for the fiscal year ended August 30, 1997 of FSI
International, Inc. and any and all amendments and exhibits thereto, with full
power and authority to do and perform any and all acts and things whatsoever
requisite and necessary or desirable, as fully and effectually in all respects
as I could do if personally present.
IN WITNESS WHEREOF, I have hereunto set my hand this 22nd day of October,
1997.
/s/ Terrence W. Glarner
-----------------------
Terrence W. Glarner
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned director of FSI
International, Inc. hereby appoint Joel A. Elftmann and Benno G. Sand, and
each of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in name, place, and stead
of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, the Annual
Report on Form 10-K for the fiscal year ended August 30, 1997 of FSI
International, Inc. and any and all amendments and exhibits thereto, with full
power and authority to do and perform any and all acts and things whatsoever
requisite and necessary or desirable, as fully and effectually in all respects
as I could do if personally present.
IN WITNESS WHEREOF, I have hereunto set my hand this 24th day of October,
1997.
/s/ Robert E. Lorenzini
-----------------------
Robert E. Lorenzini
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned director of FSI
International, Inc. hereby appoint Joel A. Elftmann and Benno G. Sand, and
each of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in name, place, and stead
of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, the Annual
Report on Form 10-K for the fiscal year ended August 30, 1997 of FSI
International, Inc. and any and all amendments and exhibits thereto, with full
power and authority to do and perform any and all acts and things whatsoever
requisite and necessary or desirable, as fully and effectually in all respects
as I could do if personally present.
IN WITNESS WHEREOF, I have hereunto set my hand this 31st day of October,
1997.
/s/ Joanna T. Lau
-----------------
Joanna T. Lau
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned director of FSI
International, Inc. hereby appoint Joel A. Elftmann and Benno G. Sand, and
each of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in name, place, and stead
of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, the Annual
Report on Form 10-K for the fiscal year ended August 30, 1997 of FSI
International, Inc. and any and all amendments and exhibits thereto, with full
power and authority to do and perform any and all acts and things whatsoever
requisite and necessary or desirable, as fully and effectually in all respects
as I could do if personally present.
IN WITNESS WHEREOF, I have hereunto set my hand this 23rd day of October,
1997.
/s/ Charles R. Wofford
----------------------
Charles R. Wofford
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-30-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-30-1997
<CASH> 79,186,746
<SECURITIES> 10,022,596
<RECEIVABLES> 66,381,268
<ALLOWANCES> 2,127,000
<INVENTORY> 61,990,473
<CURRENT-ASSETS> 233,472,316
<PP&E> 105,549,731
<DEPRECIATION> 28,884,658
<TOTAL-ASSETS> 331,152,401
<CURRENT-LIABILITIES> 62,594,330
<BONDS> 42,000,000
0
0
<COMMON> 159,706,639
<OTHER-SE> 64,632,990
<TOTAL-LIABILITY-AND-EQUITY> 331,152,401
<SALES> 252,441,241
<TOTAL-REVENUES> 252,441,241
<CGS> 158,128,519
<TOTAL-COSTS> 158,128,519
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 284,000
<INTEREST-EXPENSE> 1,748,555
<INCOME-PRETAX> 567,255
<INCOME-TAX> (675,649)
<INCOME-CONTINUING> 4,639,975
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,639,975
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
