<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended MAY 31, 1997
-------------------------------------------------
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------- ------------------------
Commission File Number: 0-17276
--------------------------------------------------------
FSI INTERNATIONAL, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MINNESOTA 41-1223238
- ------------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
322 LAKE HAZELTINE DRIVE, CHASKA, MINNESOTA 55318
- ------------------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
612-448-5440
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 Exchange 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.
[X] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date:
COMMON STOCK, NO PAR VALUE - 22,515,895 SHARES OUTSTANDING AS OF JUNE 23, 1997
1
<PAGE> 2
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
<S> <C> <C>
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets
as of May 31, 1997 (Unaudited) and August 31, 1996 3
Consolidated Condensed Statements of Operations
(Unaudited) for the quarters ended May 31, 1997
and May 25, 1996 5
Consolidated Condensed Statements of Operations (Unaudited)
for the nine months ended May 31, 1997 and May 25, 1996 6
Consolidated Condensed Statements of Cash Flows (Unaudited)
for the nine months ended May 31, 1997 and May 25, 1996 7
Notes to Consolidated Condensed Financial Statements (Unaudited) 8
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K. 21
SIGNATURES 24
----------
</TABLE>
2
<PAGE> 3
PART I. Item 1. FINANCIAL INFORMATION
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MAY 31, 1997 AND AUGUST 31, 1996
ASSETS
<TABLE>
<CAPTION>
May 31, August 31,
1997 1996
(Unaudited) (Audited)
------------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 75,746,877 $ 48,804,158
Marketable securities 27,426,953 23,116,484
Trade accounts receivable, net of allowance for
doubtful accounts of $1,979,000 and $1,843,000,
respectively 34,296,548 60,532,701
Trade accounts receivable from affiliates 14,444,440 20,228,673
Inventories 65,428,016 64,075,294
Deferred income tax benefit 9,262,861 8,262,861
Prepaid expenses and other current assets 8,646,997 4,974,079
------------- ------------
Total current assets 235,252,692 229,994,250
------------- ------------
Property, plant and equipment, at cost 100,924,752 68,227,403
Less accumulated depreciation and amortization (29,342,746) (22,632,786)
------------- ------------
71,582,006 45,594,617
------------- ------------
Investment in affiliates 15,035,696 12,765,401
Deposits and other assets 3,137,075 4,395,595
Deferred income tax benefit 533,518 533,518
------------- ------------
$ 325,540,987 $293,283,381
============= ============
</TABLE>
See accompanying notes to consolidated condensed financial statements
3
<PAGE> 4
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MAY 31, 1997 AND AUGUST 31, 1996
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
May 31, August 31,
1997 1996
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 152,700 $ 207,000
Trade accounts payable 21,860,799 30,834,470
Accrued expenses 21,365,208 29,069,279
Customer deposits 4,088,282 3,710,547
Deferred revenue 12,205,042 9,824,693
-------------- ------------
Total current liabilities 59,672,031 73,645,989
-------------- ------------
Long-term debt, less current maturities 42,166,836 290,948
Deferred income taxes 94,073 92,021
Minority interest 1,364,550 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, 22,510,508
and 22,362,056 shares at May 31, 1997
and August 31, 1996, respectively 159,159,823 157,731,828
Retained earnings 63,579,860 60,345,308
Cumulative translation adjustment (496,186) 50,229
-------------- ------------
Total stockholders' equity 222,243,497 218,127,365
-------------- ------------
$ 325,540,987 $293,283,381
============== ============
</TABLE>
See accompanying notes to consolidated condensed financial statements
4
<PAGE> 5
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED MAY 31, 1997 AND MAY 25, 1996
(Unaudited)
<TABLE>
<CAPTION>
May 31, May 25,
1997 1996
------------ ------------
<S> <C> <C>
Sales (including sales to affiliates of
$15,067,000 and $20,565,000, respectively) $ 51,393,863 $ 67,465,704
Cost of goods sold 31,726,229 37,758,600
------------ ------------
Gross profit 19,667,634 29,707,104
Selling, general and administrative expenses 14,391,419 14,813,261
Research and development expenses 10,794,056 10,186,062
------------ ------------
Operating (loss) income (5,517,841) 4,707,781
Interest expense (705,605) (144,657)
Interest income 1,227,237 1,269,116
Other income (expense), net (138,688) (3,792)
------------ ------------
(Loss) income before income taxes (5,134,897) 5,828,448
Income tax (benefit) expense (1,195,822) 828,394
------------ ------------
(Loss) income before minority interest
and equity in earnings of affiliates (3,939,075) 5,000,054
Minority interest 116,364 (7,421)
Equity in earnings of affiliates 1,078,663 763,838
------------ ------------
Net (loss) income ($2,744,048) $ 5,756,471
============ ============
Net (loss) income per common share ($0.12) $ 0.25
Weighted average common shares
and common share equivalents 22,507,019 23,061,313
Pro forma Data: (See Note 6)
Income tax (benefit) expense ($1,195,822) $ 888,394
Net (loss) income ($2,744,048) $ 5,696,471
Net income per common share ($0.12) $ 0.25
</TABLE>
See accompanying notes to consolidated condensed financial statements
5
<PAGE> 6
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE-MONTHS ENDED MAY 31, 1997 AND MAY 25, 1996
(Unaudited)
<TABLE>
<CAPTION>
May 31, May 25,
1997 1996
------------ ------------
<S> <C> <C>
Sales (including sales to affiliates of
$57,885,000 and $52,117,000, respectively) $178,542,233 $213,241,843
Cost of goods sold 110,817,572 120,745,246
------------ ------------
Gross profit 67,724,661 92,496,597
Selling, general and administrative expenses 39,857,305 41,802,433
Research and development expenses 29,389,378 28,190,987
------------ ------------
Operating (loss) income (1,522,022) 22,503,177
Interest expense (936,538) (379,121)
Interest income 3,185,868 3,972,973
Other income (expense), net (343,573) (77,363)
------------ ------------
Income before income taxes 383,735 26,019,666
Income tax (benefit) expense (92,096) 7,878,661
------------ ------------
Income before minority interest
and equity in earnings of affiliates 475,831 18,141,005
Minority interest (147,743) (285,585)
Equity in earnings of affiliates 2,906,464 4,214,514
------------ ------------
Net income $ 3,234,552 $ 22,069,934
============ ============
Net income per common share $ .14 $ .95
Weighted average common shares
and common share equivalents 22,905,188 23,167,428
Pro forma Data: (See Note 6)
Income tax (benefit) expense $ (92,096) $ 8,184,661
Net income $ 3,234,552 $ 21,763,934
Net income per common share $ .14 $ .94
</TABLE>
See accompanying notes to consolidated condensed financial statements
6
<PAGE> 7
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31, 1997 AND MAY 25, 1996
(Unaudited)
<TABLE>
<CAPTION>
May 31, May 25,
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,234,552 $ 22,069,934
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Minority interest 147,743 285,585
Provision for deferred income taxes 2,052 (1,481,712)
Depreciation and amortization 8,475,486 4,999,937
Equity in earnings of affiliates (2,906,464) (4,214,514)
Loss on disposal of equipment 11,901 -
Changes in operating assets and liabilities:
Trade accounts receivable 32,020,386 (4,962,161)
Inventories (1,352,722) (24,674,956)
Other current assets (3,312,918) 1,489,832
Trade accounts payable (8,973,671) (6,012,348)
Accrued expenses (8,633,791) 4,873,655
Customer deposits 377,735 (468,883)
Deferred revenue 2,380,349 1,630,820
Other 179,503 (67,367)
------------ ------------
Net cash provided by (used in) operating activities 21,650,141 (6,532,178)
------------ ------------
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (34,151,335) (20,128,631)
Purchase of marketable securities (18,685,251) (20,256,227)
Sales of marketable securities 9,317,052 3,488,411
Maturities of marketable securities 5,057,730 13,862,117
Decrease (increase) in deposits and other assets 575,079 (263,903)
------------ ------------
Net cash used in investing activities (37,886,725) (23,298,233)
------------ ------------
FINANCING ACTIVITIES:
Additions to long-term debt 42,000,000 105,265
Principal payments on long-term debt (178,412) (182,321)
Advances on notes payable to bank - 9,906,741
Payment on notes payable to bank - (14,406,741)
Net proceeds from issuance of common stock 1,357,715 225,755
S Corporation distribution payments - (629,100)
------------ ------------
Net cash provided by (used in) financing activities 43,179,303 (4,980,401)
------------ ------------
Increase (decrease) in cash and cash equivalents 26,942,719 (34,810,812)
Cash and cash equivalents at beginning of period 48,804,158 97,010,076
------------ ------------
Cash and cash equivalents at end of period $ 75,746,877 $ 62,199,264
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements
7
<PAGE> 8
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) RECLASSIFICATIONS
Certain fiscal 1996 amounts have been reclassified to conform to the
fiscal 1997 presentation.
(2) CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying consolidated condensed financial statements have been
prepared by the Company without audit and reflect all adjustments
(consisting only of normal and recurring adjustments) which are, in the
opinion of management, necessary to present a fair statement of the
results for the interim periods presented. The statements have been
prepared in accordance with the regulations of the Securities and Exchange
Commission but omit certain information and footnote disclosures necessary
to present the statements in accordance with generally accepted accounting
principles. The results of operations for the interim periods presented
are not necessarily indicative of the results to be expected for the full
fiscal year. These consolidated condensed financial statements should be
read in conjunction with the Consolidated Financial Statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 1996 previously filed with the Securities
and Exchange Commission.
(3) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
May 31, 1997 August 31, 1996
(Unaudited) (Audited)
------------ ---------------
<S> <C> <C>
Finished products $ 9,096,863 $ 10,715,376
Work-in-process 18,314,155 16,329,239
Subassemblies 6,844,286 4,689,549
Raw materials and purchased parts 31,172,712 32,341,130
------------ ---------------
$ 65,428,016 $ 64,075,294
------------ ---------------
</TABLE>
(4) SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
May 31, 1997 May 25, 1996
------------ ---------------
<S> <C> <C>
Schedule of interest and income taxes paid:
Interest $ 159,184 $ 381,821
Income taxes $ 4,959,938 $ 8,397,219
</TABLE>
Capital leases entered into for financing purchases of equipment by
the Company during the first nine months of fiscal 1997 and 1996 were $0
and $241,600, respectively. In addition, the Company realized a tax
benefit from the exercise of stock options of $70,280 and $3,534,000 in the
first nine months of fiscal 1997 and 1996, respectively.
8
<PAGE> 9
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(5) PRIVATE DEBT PLACEMENT
On December 19, 1996, the Company completed a private debt placement for
$30.0 million of 7.15% senior unsecured notes due 2004 and $12.0 million
of 7.27% senior unsecured 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.
(6) PRO FORMA INFORMATION
On April 4, 1996, the Company completed the acquisition of Semiconductor
Systems, Inc. (Semiconductor Systems). The acquisition of
Semiconductor Systems was accounted for as a pooling of
interest. Accordingly, all historical information for FSI
International, Inc. and subsidiaries has been restated to include the
operations of Semiconductor Systems as though the two entities have always
been combined.
Pro forma data shown on the consolidated statements of operations reflect
the impact on income tax expense as if Semiconductor Systems was a C
Corporation versus an S Corporation prior to the acquisition of
Semiconductor Systems on April 4, 1996.
(7) SHAREHOLDER RIGHTS PLAN
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 of one preferred share purchase right (a "Right") for each
outstanding share of common stock, no par value, of the Company. The
dividend was paid on June 10, 1997 to Stockholders of Record on that
date. The Rights will expire on June 10, 2007 unless extended or
earlier redeemed or exchanged by the Company.
Under the Rights Plan, each Right will entitle the registered holder to
purchase one-hundredth of a Series A Junior Participating Preferred
Share ("Preferred Shares"), no par value, of the Company at a price of $90.
The Rights will become exercisable only if a person or group acquires
beneficial ownership of 15 percent 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 percent or more of the
Company's common stock.
9
<PAGE> 10
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2.
RESULTS OF OPERATIONS
THIRD QUARTER AND FIRST NINE MONTHS OF FISCAL 1997 COMPARED WITH THE THIRD
QUARTER AND FIRST NINE MONTHS OF FISCAL 1996
The information in this discussion, except for the historical information
contained herein, contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and is subject
to the safe harbor created by that statute. Such statements are subject to
various risks and uncertainties, including those described below under "Risk
Factors". In addition, readers are also directed to the Risk Factors
discussion found in the Company's Report on Form 10-K for the year ended August
31, 1996 and the Company's Report on Form 10-Q for the quarters ended November
30, 1996 and March 1, 1997. Readers also are cautioned not to place undue
reliance on these forward-looking statements as actual results could differ
materially. The Company assumes no obligation to publicly release any
revisions or updates to these forward-looking statements to reflect future
events or unanticipated occurrences. Such forward-looking statements are
marked with an asterisk (*).
In the first half of fiscal 1996, the microelectronics industry, primarily
semiconductor device manufacturers, began a slowdown in growth. As a result,
certain of the Company's customers delayed orders and/or canceled expansion
plans. Due to the difficult industry conditions, which are expected to last at
least until the second half of calendar 1997, the Company adopted certain cost
control measures in first quarter of fiscal 1997 in an attempt to more closely
align spending 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 force.
SALES:
<TABLE>
<CAPTION>
Third Quarters Ended Nine Months Ended
--------------------------------- -----------------------------------
May 31, May 25, May 31, May 25,
1997 Change 1996 1997 Change 1996
--------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales $51,393,863 (23.8%) $67,465,704 $178,542,233 (16.3%) $213,241,843
</TABLE>
Sales decreased to $51.4 million for the third quarter ended May 31, 1997 as
compared to $67.5 million for the third quarter of fiscal 1996. Sales for the
nine months ended May 31, 1997 decreased $34.7 million to $178.5 million as
compared to $213.2 million for the first nine months of fiscal 1996. The
decrease in sales occurred in the Surface Conditioning and Microlithography
product lines for both periods. The decrease in unit sales is largely due to a
decreased demand for equipment resulting from the delays or cancellations of
construction of new and the expansion of existing semiconductor manufacturing
facilities by our customers. Sales levels are expected to increase in the
fourth quarter of fiscal 1997 as compared to the third quarter of fiscal 1997.*
Foreign sales were $19.0 million and $21.8 million for the third quarter of
fiscal 1997 and 1996, respectively, and represented approximately 37.0% and
32.3% of sales during these periods. Foreign sales were $67.2 million and $70.9
million for the first nine months of fiscal 1997 and 1996, respectively, and
represented 37.6% and 33.3% of sales during these periods. Foreign sales were
approximately 35% of total sales for fiscal 1996. The increase in foreign
sales in the third quarter of fiscal 1997 as compared to the third quarter of
fiscal 1996 occurred in the Asia-Pacific Region. The increase in foreign
sales for the first nine months of fiscal 1997 as compared to the first nine
months of fiscal 1996 occurred in the European Region.
10
<PAGE> 11
The microelectronics industry has been experiencing volatility in product
demand and pricing, which has caused semiconductor device manufacturers to
exercise caution in making capital equipment purchasing decisions. Certain
semiconductor device manufacturers announced their intent to delay expansion of
current facilities and/or the construction, facilitization or equipping of new
manufacturing facilities. The Company has experienced some cancellations and
delays of orders and delays in shipping of orders. Based upon current industry
trends, the Company is expecting a sales decline of approximately 15% to 20% in
fiscal 1997 as compared to fiscal 1996 sales of $304 million.* Further order
cancellations or delays by customers are possible and could have a further
adverse effect on the Company's financial results for fiscal 1997.*
If industry conditions continue to improve at the modest rate forecasted by
analysts, the Company expects fiscal 1998 sales to increase to the fiscal 1996
level.* Sales could grow beyond this level if the Company can broaden its
customer base for the Microlithography cluster products.*
GROSS PROFIT:
<TABLE>
<CAPTION>
Third Quarters Ended Nine Months Ended
---------------------------------- ---------------------------------
May 31, May 25, May 31, May 25,
1997 Change 1996 1997 Change 1996
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross Profit $19,667,634 (33.8%) $29,707,104 $67,724,661 (26.8%) $92,496,597
As a % of sales 38.3% 44.0% 37.9% 43.4%
</TABLE>
Gross profit as a percentage of sales for the third quarter of fiscal 1997 was
38.3% as compared to approximately 44.0% for third quarter of fiscal 1996.
Gross profit as a percentage of sales for the first nine months of fiscal 1997
was 37.9% as compared to approximately 43.4% for the first nine months of
fiscal 1996. The decrease in gross profit margin for the third quarter of
fiscal 1997 as compared to the third quarter of fiscal 1996 was primarily due
to product sales mix and to lower utilization of manufacturing capacity. The
decrease in gross margins for the first nine months of fiscal 1997 as compared
to the first nine months of fiscal 1996 was primarily due to product sales mix,
pricing pressures, product warranty costs and lower utilization of
manufacturing capacity. The decrease related to product mix is due to an
increase in the percentage of total sales of the Company's lower margin
products.
The Company's gross profit margin fluctuates as a result of a number of
factors, including the mix of products sold, the proportion of foreign sales,
competitive pricing pressures and the utilization of manufacturing capacity.
The Company does expect gross profit margins to increase as a percentage of
sales in the fourth quarter of fiscal 1997 as compared to third quarter of
fiscal 1997 as the product sales mix changes to higher margin products.*
However, the Company expects overall gross margins in fiscal 1997 to be below
fiscal 1996 levels due to lower sales resulting from the industry slow-down,
lower utilization of manufacturing capacity resulting from the lower sales
level and the cost of the start-up of the Company's new manufacturing facility
in Allen, Texas, lower margins on new product introductions (primarily due to
the high original equipment manufacturer content of such products), and
increased pricing pressure from competitors.*
11
<PAGE> 12
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
<TABLE>
<CAPTION>
Third Quarters Ended Nine Months Ended
---------------------------------------- -------------------------------------------------
May 31, May 25, May 31, May 25,
1997 Change 1996 1997 Change 1996
---------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SG&A $14,391,419 (2.8%) $14,813,261 $39,857,305 (4.7%) $41,802,433
As a % of sales 28.0% 22.0% 22.3% 19.6%
</TABLE>
Selling, general and administrative expenses were $14.4 million and $14.8
million or 28.0% and 22.0% of sales during the third quarter of fiscal 1997 and
1996, respectively. For the first nine months of fiscal 1997 and 1996, SG&A
expenses were $39.9 million and $41.8 million or 22.3% and 19.6% of sales,
respectively. The decrease in the amount of SG&A expenses in the third
quarter of fiscal 1997 as compared to the third quarter of fiscal 1996 was
mainly due to reduced incentive compensation as a result of lower operating
profit. The decrease in the amount of SG&A expenses in the first nine months of
fiscal 1997 as compared to the first nine months of fiscal 1996 was due to
savings relating to the cost controls implemented early in fiscal 1997 and also
due to reduced commission and incentive compensation expense as a result of
lower sales and operating profit. Certain reductions of SG&A expense were
offset by i) increased costs for information systems as our new business
systems were implemented in January 1997, ii) customer services costs as the
Company continued investment in its global customer support organization and
iii) overall infrastructure costs associated with the new facilities. The
Company expects that SG&A expenses will increase in the fourth quarter of
fiscal 1997 on a dollar to dollar basis as compared to the third quarter of
fiscal 1997 due to continued investments in customer support, computer systems
implementation, and an expanded sales, marketing and support focus in the
Asia-Pacific Region.*
RESEARCH AND DEVELOPMENT EXPENSES:
<TABLE>
<CAPTION>
Third Quarters Ended Nine Months Ended
---------------------------------- ------------------------------------
May 31, May 25, May 31, May 25,
1997 Change 1996 1997 Change 1996
---------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
R&D Expense $10,794,056 6.0% $10,186,062 $29,389,378 4.3% $28,190,987
As a % of sales 21.0% 15.1% 16.5% 13.2%
</TABLE>
Research and development expenses for the third quarter of fiscal 1997 were
$10.8 million, or 21.0% of sales, as compared to $10.2 million, or 15.1% of
sales, for the third quarter of fiscal 1996. For the first nine months of
fiscal 1997, research and development expenses were 16.5% of sales or $29.4
million as compared to 13.2% or $28.2 million for the first nine months of
fiscal 1996. R&D dollars have increased as the Company continues its product
and process development efforts on new and existing products, including the
ZETA(TM) automated batch surface conditioning system, the POLARIS(R) 2500
cluster and 300mm program and certain new chemical management products. The
successful introduction of new products and processes is important to the
long-term growth of the Company.* R&D expense is expected to increase in the
fourth quarter of fiscal 1997 on a dollar-to-dollar basis as compared to the
third quarter of fiscal 1997 as the Company continues to invest in next
generation products and process applications, including our 300mm initiatives.*
The amount of the increase will be dependent upon the availability of and our
ability to hire engineers.* Overall, the Company's goal is to invest
approximately 13% to 15% of sales in research and development programs
annually.* The Company expects to exceed the high end of this range during
fiscal 1997 as it continues to invest in new product and process development
programs.*
12
<PAGE> 13
OTHER INCOME (EXPENSE), NET:
<TABLE>
<CAPTION>
Third Quarters Ended Nine Months Ended
------------------------------------------ -----------------------------------------------
May 31, May 25, May 31, May 25,
1997 Change 1996 1997 Change 1996
------------------------------------------ -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Other Income,
(Expense), Net $382,944 (65.8%) $1,120,667 $1,905,757 (45.8%) $3,516,489
As a % of sales 0.7% 1.7% 1.1% 1.6%
</TABLE>
Other income (expense), net was approximately $383,000 and $1.9 million,
respectively, of income for the third quarter and first nine months of fiscal
1997 as compared to $1.1 million and $3.5 million, respectively, of income for
the third quarter and first nine months of fiscal 1996. The majority of the
change for the third quarter comparison was due to increased interest expense
due to the completion of a $42 million private debt placement in December of
1996. The decrease in other income (expense) for the first nine months of
fiscal 1997 as compared to the first nine months of fiscal 1996 was due to
increased interest expense and also due to lower average interest rates as a
result of higher investments in tax-exempt securities for the first nine months
of fiscal 1997 as compared to the first nine months of fiscal 1996.
INCOME TAX (BENEFIT) EXPENSE:
Income tax (benefit) expense for the third quarter and the first nine months of
fiscal 1997 was approximately ($1.2) million and ($92,000) tax benefit,
respectively, compared to approximately $828,000 and $7.9 million of tax
expense, respectively, for third quarter and first nine months of fiscal 1996.
The tax rate for fiscal 1996 was 30% . We expect a 24% tax benefit in fiscal
1997.* The tax rate for fiscal 1997 was reduced to a 24% tax benefit due to
expected lower earnings and the related impact on these expected earnings for
certain tax differences such as R&D credit and tax exempt interest.*
EQUITY IN EARNINGS OF AFFILIATES:
<TABLE>
<CAPTION>
Third Quarters Ended Nine Months Ended
----------------------------------------------- ---------------------------------------------
May 31, May 25, May 31, May 25,
1997 Change 1996 1997 Change 1996
----------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity in
Earnings of
Affiliates $ 1,078,663 41.2% $763,838 $2,906,464 (31.0%) $4,214,514
As a % of sales 2.1% 1.1% 1.6% 2.0%
</TABLE>
The equity in earnings of affiliates was $1.1 million for the third quarter of
fiscal 1997, compared to $764,000 for the third quarter of fiscal 1996. For
the first nine months of fiscal 1997, equity in earnings of affiliates was $2.9
million compared to $4.2 million for the first nine months of fiscal 1996. The
increase for the third quarter of fiscal 1997 as compared to the third quarter
of fiscal 1996 is due to improved performance of m-FSI, the Company's affiliated
distributor in Japan. The decrease for the first nine months of fiscal 1997 as
compared to the first nine months of fiscal 1996 is due to lower earnings of
the Company's other affiliated distributor, Metron Technology B.V., which is
due to current industry conditions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and marketable securities approximated
$103.2 million as of May 31, 1997, an increase of $31.3 million from the end of
fiscal year 1996. The increase in cash and cash equivalents and
13
<PAGE> 14
marketable securities is a result of cash flow from operations of approximately
$21.7 million, and the proceeds from the private debt placement of $42 million
offset by the continued funding of facilities expansions.
The Company's accounts receivable of $48.7 million at May 31, 1997 reflects a
decrease of 39.6%, or $32 million, from $80.8 million at the end of fiscal
1996. The decrease in accounts receivable is due to decreased sales for the
first nine months of fiscal 1997 as compared to the same period for fiscal
1996. In addition, sales for the fourth quarter of fiscal 1996 was a record
high of $90.8 million as compared to $51.4 for the third quarter of fiscal
1997.
The Company's inventory increased approximately $1.3 million to $65.4 million
at May 31, 1997 compared to $64.1 million at the end of fiscal 1996. This was
primarily due to a customer's request to delay shipment of a $6.0 million order
during the third quarter of fiscal 1997. As a result, there were increased
levels of work-in-process inventory. As of May 31, 1997, the Company's current
ratio of current assets to current liabilities was 3.9 to 1.0 and working
capital was $175.6 million.
The Company had acquisitions of property, plant and equipment of approximately
$34.2 million and $20.1 million for the first nine months of fiscal 1997 and
fiscal 1996, respectively. The acquisitions reflect the continuing investments
in facilities expansions and computer equipment. It is anticipated the Company
will invest $45 to $50 million in fiscal 1997 on the facilities expansion
projects and the conversion to a Company-wide integrated business system.*
In June, 1997, the Company completed the construction and equipping of a new
88,000 square-foot laboratory and engineering facility, at a cost of
approximately $27.0 million, for the Surface Conditioning Division in Chaska,
Minn. The laboratory facility will be equipped with certain advanced surface
conditioning products, some of which were introduced in late fiscal 1996 or are
expected to be introduced in fiscal 1997.*
In March 1997, the Company completed the building and equipping of a 150,000
square-foot engineering, manufacturing and laboratory facility in Allen, Texas,
for the purpose of expanding the manufacturing and development capabilities of
the Company's Microlithography Division. The new facility cost approximately
$21.0 million.
The Company completed a private debt placement on December 19, 1996 for $30.0
million of 7.15% senior unsecured notes due 2004 and $12.0 million of 7.27%
senior unsecured notes due 2006. The proceeds from the private debt placement
will be used to acquire equipment for the Company's demonstration and product
and process development laboratories, other capital expenditures and general
corporate purposes. The Company believes that with existing cash, cash
equivalents, marketable securities and internally generated funds, 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 fund such activities with additional equity or
debt financings.* The sale of additional equity or debt securities could
result in additional dilution to the Company's shareholders.*
RISK FACTORS
Due to the nature of the business and industry in which the Company operates,
the following risk factors should be considered in addition to others described
above.
14
<PAGE> 15
CURRENT SLOWDOWN 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 microelectronic industry has been cyclical in
nature and historically experienced periodic downturns. The semiconductor
device manufacturers are presently experiencing a slowdown in terms of product
demand and volatility in terms of product pricing. During 1995 many of the
semiconductor device manufacturers announced plans to expand existing or build
new semiconductor device manufacturing facilities. In early 1996, the average
selling price of memory chips and certain other semiconductor devices
significantly decreased. This has resulted in semiconductor device
manufacturers announcing delays in their expansion plans. This slowdown and
volatility has caused the semiconductor 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 this and possible
future downturns in the semiconductor industry. In addition, the need for
continued investments in research and development, substantial capital
equipment requirements and extensive ongoing worldwide customer service and
support capability will limit the Company's ability to reduce expenses.
Accordingly, there is no assurance that the Company will be able to remain
profitable in the future.
RISK OF DELAYS IN INTRODUCING NEW PRODUCTS AND THE MARKET'S ACCEPTANCE OF SUCH
PRODUCTS:
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 which conform to evolving industry
standards. The success of the Company in developing, introducing and selling
new and enhanced equipment depends upon a variety of factors including product
selection, timely and efficient completion of product design and development,
timely and efficient implementation of manufacturing and assembly processes,
product performance in the field, and effective sales and marketing. The
Company must also manage product transitions successfully, as introductions of
new products could adversely affect the sales of existing products. The
Company's failure to develop and successfully introduce new products or
enhancements to its existing products and processes or achieve market
acceptance of the new products or enhancements could adversely affect the
Company's business and results of operations.
NEW FACILITIES 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.
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
15
<PAGE> 16
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.
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 equipment industry is highly competitive. The Company
faces substantial competition throughout the world. The Company believes that
to remain competitive, it will require significant financial resources to offer
a broad range of products, to maintain customer service and support centers
worldwide, and to invest in product and process research and development. The
Company believes that the microelectronics industry is becoming increasingly
dominated by large manufacturers who have the resources to support customers on
a worldwide basis. Certain of the Company's competitors have substantially
greater financial, marketing, and customer service and support capabilities
than the Company. 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.
16
<PAGE> 17
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGE IN SECURITIES
On May 22, 1997, the Board of Directors of FSI International,
Inc. (the "Company"), declared a dividend of one preferred share purchase right
(a "Right") for each outstanding Common Share (the "Common Shares"), no par
value, of the Company. The dividend is payable on June 10, 1997 (the "Record
Date") to shareholders of record on that date.
Each Right entitles the registered holder to purchase from the
Company one one-hundredth of a Series A Junior Participating Preferred Share,
no par value (the "Preferred Shares") of the Company at a price of $90 per one
one-hundredth of a Preferred Share (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement"), dated as of May 22, 1997, between the
Company and Harris Trust and Savings Bank, as Rights Agent (the "Rights
Agent").
Initially, the Rights will attach to all certificates
representing Common Shares then outstanding and no separate Right Certificates
will be distributed. The Rights will separate from the Common Shares and a
Distribution Date for the Rights will occur upon the earlier of:
(i) the close of business on the fifteenth day
following a public announcement that a person or group of affiliated or
associated persons has become an "Acquiring Person" (i.e., has become, subject
to certain exceptions, the beneficial owner of 15% or more of the outstanding
Common Shares), or
(ii) the close of business on the fifteenth day
following the commencement or public announcement of a tender offer or exchange
offer the consummation of which would result in a person or group of affiliated
or associated persons becoming, subject to certain exceptions, the beneficial
owner of 15% or more of the outstanding Common Shares (or such later date as
may be determined by the Board of Directors of the Company prior to a person or
group of affiliated or associated persons becoming an Acquiring Person).
Until the Distribution Date,
(i) the Rights will be evidenced by the Common
Share certificates and will be transferred with and only with the Common
Shares,
(ii) new Common Share certificates issued after
the Record Date upon transfer or new issuance of the Common Shares will contain
a notation incorporating the Rights Agreement by reference, and
(iii) the surrender for transfer of any Common
Share certificate, even without such notation or a copy of this Summary of
Rights attached thereto, will also constitute the transfer of the Rights
associated with the Common Shares represented by such certificate.
As promptly as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the Common Shares as of the close of business on the
Distribution Date and such separate Right Certificates alone will evidence the
Rights.
The Rights are not exercisable until the Distribution Date.
The Rights will expire on June 10, 2007, unless extended or earlier redeemed or
exchanged by the Company as described below.
The Purchase Price payable, and the number of Preferred Shares
or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution:
(i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Preferred Shares,
(ii) upon the grant to holders of the Preferred
Shares of certain rights, options or warrants to subscribe for or purchase
Preferred Shares or convertible securities at less than the then current market
price of the Preferred Shares, or
(iii) upon the distribution to holders of the
Preferred Shares of evidences of indebtedness or assets (excluding regular
periodic cash dividends or dividends payable in Preferred Shares) or of
subscription rights or warrants (other than those described in clause (ii)
hereof).
The number of Preferred Shares issuable upon the exercise of a Right is also
subject to adjustment in the event of a dividend on Common Shares payable in
Common Shares, or a subdivision, combination or consolidation of the Common
Shares.
With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments require an adjustment of at least
1% in the Purchase Price. No fractional Preferred Shares will be issued (other
than fractional shares which are integral multiples of one one-hundredth
(subject to adjustment) of a Preferred Share, which may, at the election of the
Company, be evidenced by depositary receipts) if in lieu thereof a payment in
cash is made based on the closing price (pro-rated for the fraction) of the
Preferred Shares on the last trading date prior to the date of exercise.
In the event that any person or group of affiliated or
associated persons becomes an Acquiring Person (unless such person first
becomes an Acquiring Person pursuant to a tender offer or exchange offer for
all outstanding Common Shares at a price and on terms determined by the Board
of Directors of the Company (prior to any change in control of the Board of
Directors) to be fair to the shareholders and otherwise in the best interests
of the Company and its shareholders and which the Board of Directors recommends
to the shareholders), proper provision shall be made so that each holder of a
Right, other than Rights that are or were beneficially owned by the Acquiring
Person (which will thereafter be void), will thereafter have the right to
receive upon exercise thereof at the then current exercise price of the Right
that number of Common Shares having a market value of two times the exercise
price of the Right, subject to certain possible adjustments.
In the event that, after the Distribution Date or within 15
days prior thereto, the Company is acquired in certain mergers or other
business combination transactions (other than a transaction for at least the
same per-share consideration with a person who acquired Common Shares through a
tender offer or exchange offer for all outstanding Common Shares approved by
the Board of Directors in accordance with the preceding paragraph or any wholly
owned subsidiary of any such person) or 50% or more of the assets or earning
power of the Company and its subsidiaries (taken as a whole) are sold after the
Distribution Date or within 15 days prior thereto in one or a series of related
transactions, each holder of a Right (other than Rights which have become void
under the terms of the Rights Agreement) will thereafter have the right to
receive, upon exercise thereof at the then current exercise price of the Right,
that number of common shares of the acquiring company (or, in certain cases,
one of its affiliates) having a market value of two times the exercise price of
the Right.
In certain events specified in the Rights Agreement, the
Company is permitted to temporarily suspend the exercisability of the Rights.
At any time after a person or group of affiliated or
associated persons becomes an Acquiring Person (subject to certain exceptions)
and prior to the acquisition by a person or group of affiliated or associated
persons of 50% or more of the outstanding Common Shares, the Board of Directors
of the Company may exchange all or part of the Rights (other than Rights which
have become void under the terms of the Rights Agreement) for Common Shares or
equivalent securities at an exchange ratio per Right equal to the result
obtained by dividing the exercise price of a Right by the current per share
market price of the Common Shares, subject to adjustment.
At any time prior to the close of business on the twentieth
day after a public announcement that a person or group of affiliated or
associated persons has become an Acquiring Person, the Board of Directors of
the Company may redeem the Rights in whole, but not in part, at a price of
$.001 per Right, subject to adjustment (the "Redemption Price"), payable in
cash; provided, however, that such redemption may occur after any person
becomes an Acquiring Person only if there has not been a change in control of
the Board of Directors of the Company. The period of time during which the
Rights may be redeemed may be extended by the Board of Directors of the Company
if no such change of control has occurred or if no person has become an
Acquiring Person. The redemption of the Rights may be made effective at such
time, on such basis and with such conditions as the Board of Directors in its
sole discretion may establish. The Board of Directors and the Company shall
not have any liability to any person as a result of the redemption or exchange
of the Rights pursuant to the provisions of the Rights Agreement. The Rights
are not exercisable for Common Shares or Preferred Shares, and the Distribution
Date shall not occur, until the Company's right to redeem the Rights shall have
expired.
The terms of the Rights may be amended by the Board of
Directors of the Company, subject to certain limitations after the Distribution
Date, without the consent of the holders of the Rights, including an amendment
prior to the date a person or group of affiliated or associated persons becomes
an Acquiring Person to lower the 15% threshold for exercisability of the Rights
to not less than the greater of (i) the sum of .001% and the largest percentage
of the outstanding Common Shares then known by the Company to be beneficially
owned by any person or group of affiliated or associated persons (subject to
certain exceptions) or (ii) 10%.
Until a Right is exercised, the holder thereof, as such, will
have no rights as a shareholder of the Company, including, without limitation,
the right to vote or to receive dividends.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
17
<PAGE> 18
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a)(3) Exhibits
* An asterisk next to a listed Exhibit indicates it is an executive
compensation plan or arrangement
2.1 Agreement and Plan of Reorganization dated December 23, 1994 by
and among the Company, ACS Acquisition Corp., Applied Chemical
Solutions, and certain significant shareholders of Applied
Chemical Solutions. (1)
2.2 Share Purchase Agreement dated December 14, 1994 by and among
the Company, Metron Semiconductors Europa B.V., Christopher
Springall, Anthony Springall, Roger Springall, David Springall
and Michael Springall. (2)
2.3 Agreement and Plan of Reorganization by and among FSI
International, Inc., Spectre Acquisition Corp. and Semiconductor
Systems, Inc. (14)
3.1 Restated Articles of Incorporation of the Company. (3)
3.2 Restated By-Laws. (4)
3.3 Amendment to Restated By-Laws. (5)
4.1 FSI Corporation Stock Purchase Agreement dated March 20, 1981.
(4)
4.2 Stock Purchase Agreement dated September 15, 1982. (4)
4.3 Common Stock and Common Stock Purchase Warrants Agreement dated
October 15, 1985. (4)
4.4 Second Amendment, dated as of January 9, 1989, to Common Stock
and Common Stock Warrants Purchase Agreement dated as of
October 15, 1985. (5)
4.5 Registration and Preemptive Rights Agreement dated October 15,
1985. (4)
4.6 Note Purchase Agreement between FSI International, Inc. and
Metropolitan Life Insurance Company and other certain
purchasers. (Schedule A omitted) (16)
4.7 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 (17)
*10.1 1983 Incentive Stock Option Plan. (4)
*10.2 1982 Nonqualified Stock Option Plan. (4)
*10.3 Split Dollar Insurance Agreement and Collateral Assignment
Agreement dated December 28, 1989, between the Company and Joel
A. Elftmann. (Similar agreements between the Company and each
of Robert E. Cavins, Benjamin J. Sloan, Dale A. Courtney, Peter
A. Pope, Benno G. Sand, J. Wayne Stewart and Timothy D. Krieg
have been omitted, but will be filed upon the request of the
Commission). (4)
10.4 Lease dated June 27, 1985, between the Company and Lake
Hazeltine Properties. (7)
10.5 Lease dated September 1, 1985, between the Company and Elftmann,
Wyers, Blackwood Partnership. (7)
10.6 Lease dated September 1, 1985, between the Company and Elftmann,
Wyers Partnership. (7)
*10.7 1989 Stock Option Plan. (5)
*10.8 Amended and Restated Employees Stock Purchase Plan. (3)
10.9 Omitted
10.10 Shareholders Agreement among FSI International, Inc. and Mitsui
& Co., Ltd. and Chlorine Engineers Corp. Ltd. dated as of
August 14, 1991. (8)
10.11 FSI Exclusive Distributorship Agreement dated as of August 14,
1991 between FSI International, Inc. and moFSI, Ltd. (8)
10.12 FSI Licensing Agreement dated as of August 14, 1991, between FSI
International, Inc. and moFSI, Ltd. (8)
10.13 License Agreement, dated October 15, 1991, between the Company
and Texas Instruments Incorporated. (9)
21
<PAGE> 19
10.14 Amendment No. 1, dated April 10, 1992, to the License Agreement,
dated October 15, 1991, between the Company and Texas
Instruments Incorporated. (9)
10.15 Amendment effective October 1, 1993 to the License Agreement,
dated October 15, 1991 between the Company and Texas Instruments
Incorporated. (10)
*10.16 Amended and Restated Directors' Nonstatutory Stock Option Plan.
(11)
*10.17 Management Agreement between FSI International, Inc. and Robert
E. Cavins, effective as of March 28, 1994. (11)
*10.18 Management Agreement between FSI International, Inc. and Dale A.
Courtney, effective as of March 28, 1994. (11)
*10.19 Management Agreement between FSI International, Inc. and Joel A.
Elftmann, effective as of March 28, 1994. (11)
*10.20 Management Agreement between FSI International, Inc. and Timothy
D. Krieg, effective as of March 28, 1994. (11)
*10.21 Management Agreement between FSI International, Inc. and Peter
A. Pope, effective as of March 28, 1994. (11)
*10.22 Management Agreement between FSI International, Inc. and Benno
G. Sand, effective as of March 31, 1994. (11)
*10.23 Management Agreement between FSI International, Inc. and
Benjamin J. Sloan, effective as of March 28, 1994. (11)
*10.24 Management Agreement between FSI International, Inc. and J.
Wayne Stewart, effective as of March 28, 1994. (11)
*10.25 Management Agreement between FSI International, Inc. and Charles
R. Wofford effective as of February 5, 1996. (15)
*10.26 FSI International, Inc. 1994 Omnibus Stock Plan. (12)
*10.27 FSI International, Inc. 1997 Incentive Plan
10.28 First Amendment to Lease made and entered into October 31, 1995
by and between Lake Hazeltine Properties and FSI International,
Inc. (13)
10.29 Distribution Agreement made and entered into as of July 6, 1995
by and between FSI International, Inc. and Metron Semiconductors
Europa B.V. (Exhibits to Agreement omitted) (13)
10.30 Lease dated August 9, 1995 between Skyline Builders, Inc. and
FSI International, Inc. (13)
10.31 Lease Rider dated August 9, 1995 between Skyline Builders, Inc.
and FSI International, Inc. (13)
10.32 Lease Amendment dated November 15, 1995 between Roland A.
Stinski and FSI International, Inc. (Exhibits to Amendment
omitted) (13)
10.33 FSI International, Inc. 1997 Omnibus Stock Plan (16)
11.1 Computation of Per Share Earnings 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, SEC 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.
22
<PAGE> 20
(5) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 26, 1989, SEC File No. 0-17276, and incorporated by
reference.
(6) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 25, 1990, as amended by Form 8 dated December 20, 1990,
and by Form 8 dated February 5, 1991, SEC File No. 0-17276, and
incorporated by reference. Similar agreements between the Company and
each of Robert E. Cavins, J. Wayne Stewart, Benjamin J. Sloan, Dale A.
Courtney, Peter A. Pope, Benno G. Sand and Timothy D. Krieg have been
omitted, but will be filed upon the request of the Commission.
(7) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
SEC File No. 33-25035, and incorporated by reference.
(8) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 31, 1991, as amended by Form 8 dated January 7, 1992,
SEC File No. 0-17276, and incorporated by reference.
(9) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
quarter ended February 29, 1992, 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, 1993, SEC File No. 0-17276, and incorporated by
reference.
(11) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
quarter ended May 28, 1994, SEC File No. 0-17276, and incorporated by
reference.
(12) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 27, 1994, SEC File No. 0-17276, and incorporated by
reference.
(13) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 26, 1995, SEC File No. 0-17276, and incorporated by
reference.
(14) Filed as an Exhibit to the Company's Registration Statement on Form S-4
(as amended) dated March 21, 1996, SEC File No. 333-01509, and
incorporated by reference.
(15) 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.
(16) 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.
(17) 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 Form 8-K on June 5, 1997, reporting that on May 22,
1997, the Company adopted a Shareholder Rights Plan.
23
<PAGE> 21
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURES
- ----------
Pursuant to the requirements 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.
. . . . . . . . . . . .
[Registrant]
DATE: July 14, 1997
By: /s/Benno Sand
----------------------------
Benno Sand
Executive Vice President and
Chief Financial Officer
on behalf of the
Registrant and as
Principal Financial Officer
24
<PAGE> 1
EXHIBIT 10.27
FSI
1997 INCENTIVE PLAN
1. PURPOSE
The purposes 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.
"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
<PAGE> 2
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 Employees to whom Awards shall be granted and the
determination of eligibility. In
-4-
<PAGE> 5
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 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
-5-
<PAGE> 6
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.
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.
-6-
<PAGE> 7
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.
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.
-7-
<PAGE> 8
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.
(Final 1/97)
-8-
<PAGE> 1
EXHIBIT 11.1
FSI INTERNATIONAL, INC.
COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
QUARTER ENDED: NINE MONTHS ENDED:
-------------------------------- -------------------------------
MAY 31, 1997 MAY 25, 1996 MAY 31, 1997 MAY 25, 1996
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
PRIMARY:
AVERAGE SHARES OUTSTANDING 22,507,019 22,179,731 22,444,057 22,116,311
NET EFFECT OF DILUTIVE STOCK OPTIONS AND
WARRANTS - BASED ON THE TREASURY STOCK METHOD 0 881,582 461,131 1,051,117
----------- ------------ ----------- ------------
TOTAL 22,507,019 23,061,313 22,905,188 23,167,428
=========== ============ =========== ============
NET (LOSS) INCOME ($2,744,048) $5,756,471 $3,234,552 $22,069,934
=========== ============ =========== ============
PRIMARY PER SHARE AMOUNTS ($0.12) $0.25 $0.14 $0.95
=========== ============ =========== ============
FULLY DILUTED:
AVERAGE SHARES OUTSTANDING 22,507,019 22,179,731 22,444,057 22,116,311
NET EFFECT OF DILUTIVE STOCK OPTIONS AND
WARRANTS - BASED ON THE TREASURY STOCK METHOD 0 867,038 490,607 963,636
----------- ------------ ----------- ------------
TOTAL 22,507,019 23,046,769 22,934,664 23,079,947
=========== ============ =========== ============
NET (LOSS) INCOME ($2,744,048) $5,756,471 $3,234,552 $22,069,934
=========== ============ =========== ============
FULLY DILUTED PER SHARE AMOUNTS ($0.12) $0.25 $0.14 $0.96
=========== ============ =========== ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> AUG-30-1997 AUG-30-1997
<PERIOD-START> MAR-02-1997 SEP-01-1996
<PERIOD-END> MAY-31-1997 MAY-31-1997
<CASH> 75746877 75746877
<SECURITIES> 27426953 27426953
<RECEIVABLES> 50719988 50719988
<ALLOWANCES> 1979000 1979000
<INVENTORY> 65428016 65428016
<CURRENT-ASSETS> 235252692 235252692
<PP&E> 100924752 100924752
<DEPRECIATION> 29342746 29342746
<TOTAL-ASSETS> 325540987 325540987
<CURRENT-LIABILITIES> 59672031 59672031
<BONDS> 42000000 42000000
0 0
0 0
<COMMON> 159159823 159159823
<OTHER-SE> 63083674 63083674
<TOTAL-LIABILITY-AND-EQUITY> 325540987 325540987
<SALES> 51393863 178542233
<TOTAL-REVENUES> 51393863 178542233
<CGS> 31726229 110817572
<TOTAL-COSTS> 31726229 110817572
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 46000 136000
<INTEREST-EXPENSE> 705605 936538
<INCOME-PRETAX> (5134897) 383735
<INCOME-TAX> (1195822) (92096)
<INCOME-CONTINUING> (2744048) 3234552
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2744048) 3234552
<EPS-PRIMARY> (0.12) 0.14
<EPS-DILUTED> (0.12) 0.14
</TABLE>
