<PAGE> 1
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 29, 1998
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)
MINNESOTA 41-1223238
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
322 LAKE HAZELTINE DRIVE, CHASKA, MINNESOTA 55318
-------------------------------------------------------
(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
1
<PAGE> 2
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price on October 16, 1998, as reported on the
Nasdaq National Market, was approximately $85,249,000. Shares of common stock
held by each officer and director and by each person who owns 10% or more of the
outstanding Common Stock have been excluded from this computation in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for any other purpose.
As of October 16, 1998, the registrant had issued and outstanding 23,054,176
shares of Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended August
29, 1998 (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 26, 1999, (the "Proxy Statement") and to
be filed within 120 days after the Registrant's fiscal year ended August 29,
1998, 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.)
2
<PAGE> 3
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 from these forward looking
statements. 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 1998
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 in this report 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 and multichip modules.
The Company has four segments, Surface Conditioning Division (SCD), Chemical
Management Division (CMD), Microlithography Division (MLD) and Shared Services
(SS).
Due to the similarity of production processes, distribution methods, customer
base and products/services, the reporting of segment information will be
aggregated for Surface Conditioning and Microlithography. (See Note 17 of the
Company's notes to the consolidated financial statements incorporated by
reference and referred to in Item 8 on page 21 of this Report.)
The Surface Conditioning segment sells products, processes and services using
wet, vapor and cryogenic techniques to prepare the surfaces of silicon wafers
for subsequent processing and the Microlithography segment supplies photoresist
processing equipment and services for the semiconductor, thin film head and
multichip module markets.
The Chemical Management segment supplies a wide range of chemical management
systems for microelectronics manufacturers. These systems generate, blend and
deliver chemicals to all points of use in a manufacturing facility.
The Shared Services segment consists of legal, marketing, finance, information
services, human resources and other administrative activities. None of the
Shared Service costs are allocated to the other segments.
In the fall of 1997, FSI established a company in South Korea to provide
chemical management systems' support and turnkey installation services to the
microelectronics manufacturing industry in South Korea. The new company, FSI
Chemical Management Company-Korea, Ltd. ("CMK"), is owned 65% by FSI with the
remaining 35% owned by FSI's affiliated distributor Metron Technology B.V.
("Metron").
3
<PAGE> 4
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 supplier of photoresist
processing equipment and support, and SSI became a wholly-owned subsidiary of
the Company. Principal SSI products include the ORBITRAK(R) 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 Metron each acquired
a 50% interest in FSI Chemical Management Europe, Limited ("CME") located in
Newhaven, England. 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. ACS's 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 equip fabrication facilities by combining manufacturing equipment
produced by several different suppliers, each of which performs specific
functions in the manufacturing process. The multichip module, and thin film head
fabrication processes utilize many of the same basic technological building
blocks as that of the semiconductor manufacturing industry.
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 are demanding higher
performance devices from 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'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. The industry is currently experiencing a
downturn and it is unclear at this point in time as to how long this downturn
may last.
The Company continues to believe 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
4
<PAGE> 5
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.
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
------------------------------------------------------------------------------
AUGUST 29, 1998 AUGUST 30, 1997 AUGUST 31,1996
-------------------------- ------------------------ -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Microlithography
products $ 74,540 34.2% $ 80,994 32.1% $137,975 45.4%
Surface conditioning
products 60,197 27.6% 54,578 21.6% 66,082 21.7%
Chemical management
systems 49,864 22.9% 84,724 33.6% 66,642 21.9%
Spare parts and
service 33,293 15.3% 32,145 12.7% 33,342 11.0%
----------- ---------- ----------- -------- ----------- --------
$217,894 100.0% $252,441 100.0% $304,041 100.0%
=========== ========== =========== ======== =========== ========
</TABLE>
MICROLITHOGRAPHY PRODUCTS. The Company's microlithography products consist 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 process modules and safety walls, creating a
self-contained process environment and is configured to match the throughput
capabilities of the integrated exposure equipment (stepper). The enclosure can
be used to provide a Class 1 clean room environment with independent control of
temperature, humidity and airborne chemical contaminants 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 transport(s) wafers
through the various process modules in a sequence programmed by the operator.
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 production pauses between wafer lots for
resetting the wafer sequence
5
<PAGE> 6
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 Applied Magnetics; ASM
Lithography; International Business Machines Corporation ("IBM"); ITT
Corporation; National Semiconductor, Corp., ("NSC"); SMST Submicron; 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) 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.
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 multichip 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, Hewlett-Packard, International
Rectifier Corp., Motorola, Inc. ("Motorola"), Microchip Technology, Read-Rite
Corporation and Seagate Technology.
6
<PAGE> 7
SURFACE CONDITIONING PRODUCTS. The Company's surface conditioning products
perform cleaning, etching 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 with open chemical batches arranged in a
line 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.
In October 1997, the Company introduced the ZETA(TM) system, a batch spray
processor designed to meet all factory automation requirements for both 200- and
300-mm wafer technology. The ZETA(TM) system includes an eight-chemical flow
system for improved process which allows for a wider range of chemical blend
ratios and also lowers chemical and DI water consumption. The ZETA(TM) system
provides a reliable, automated environment to move wafers to and from the
process chamber. A central robot moves cassettes from station to station and
into the ZETA(TM) system 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 system workcell. The automated and enclosed ZETA(TM) system
helps ensure maximum process tool use, increases throughput, reduces
contamination and minimizes human error.
In 1998, the Company introduced the ANTARES(TM) single wafer platform. The
ANTARES(TM) single wafer platform is capable of integrating such products as the
EXCALIBUR(R) and ARIES(R) systems. The advantages of a single platform for the
Company's customers include common spares, less service training and support and
less engineering support. The ANTARES(TM) single wafer platform has the ability
to mix and match multiple process technologies.
Spray processing system customers include Advanced Micro Devices ("AMD"); Atmel
Corporation; Fujitsu Microelectronics, Inc. ("Fujitsu"); IBM; "IRC"; Lucent
Technology; Macronix International Co., Ltd.; Matsushita Corp.; Motorola; SGS
Thompson Microelectronics, Inc. ("SGS Thompson"); Philips Semiconductors B.V.;
Siliconix, Inc. and TI. The spray processing systems offered by the Company
range in price from $650,000 to $2.0
7
<PAGE> 8
million. The Company also markets certain equipment complementary to its spray
processors, including water heaters, chemical heaters, and booster pumps.
Vapor Processing Systems. The Company's EXCALIBUR(R) vapor processing systems
use anhydrous hydrogen fluoride ("HF") gas in conjunction with water vapor to
perform cleaning steps normally done with liquid chemicals. The EXCALIBUR(R)
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. Up to two
process chambers can be operated with a single electronic controller through the
utilization of multi-tasking software. The advantages of vapor HF 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 leading to
technology enablement. 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.
The Company's EXCALIBUR(R) system customers include AMD; ANAM Industrial Co.
Ltd. ("ANAM"); Fujitsu; Hyundai Electronics Industries Co., Ltd.;
IBM; Matsushita; Motorola; Taiwan Semiconductor Manufacturing Corp.;
and TI. Systems vary in price from approximately $400,000 to $650,000 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 is effective on many types of particle or residue contamination. The
advantage of using 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. An ARIES system varies in price
from $1,200,000 to $1,500,000 depending on the number of process chambers and
related requirements. To date, the Company's only ARIES system customer has been
IBM.
CHEMICAL MANAGEMENT SYSTEMS. The Company's chemical management systems enable
semiconductor manufacturers to blend acids and slurries 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 ten to twenty distinct chemicals and two to four types of
slurry. Each chemical requires its own station operated by a dedicated
programmable logic controller. These dedicated controllers are in turn
integrated
8
<PAGE> 9
by a host industrial computer to monitor and control the entire system.
Normally, one chemical delivery module is required for each chemical; however,
one module can be used to supply that chemical to multiple use points within the
clean room. Each system installation requires a degree of customization based on
the delivery requirements and physical layout of the customer's facility. FSI's
project management expertise allows it to perform multiple installations
simultaneously, which is a significant advantage during periods of growth in the
number of fabrication facilities being constructed, upgraded, or expanded. In
addition, upon the request of a customer, FSI will oversee and coordinate not
only the installation of a chemical delivery system but also the entire chemical
distribution system of the fabrication facility, including point of use
interfaces and primary and secondary containment piping.
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 incorporates vacuum pressure or pump pulsation
dampened technology with full redundancy. The 1500 series utilizes stabilized
distribution, stabilized drum transfer compartmentalization for on-line
maintenance, semiautomatic component purge with DI water and nitrogen and a
standard metal and particle sampling compartment. The CHEMFILL 5000, designed
for facilities requiring high chemical flow features redundant pump/pressure
systems that help increase uptime.
In fiscal 1998, the Company introduced the CHEMFILL 1200 series which
incorporates stabilized distribution in a vacuum pressure or pump pulsation
dampened configuration to provide for all the solvent and aqueous chemistries
required by a fabrication facility. The CHEMFILL 1200 series provides vacuum
pressure technology at a lower cost to the customer and higher purity capability
to support sub 0.18 micron semiconductor manufacturing.
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 slurries which are used in
conjunction with CMP technology. The Company's P2200, P4400 and P6000 systems
mix and deliver slurries for both oxide and metal polishing applications.
Chemical management system customers include ANAM; AMD; Chartered Semiconductor;
Cypress; Hitachi; IBM; Lucent; Matsushita Semiconductor Corporation of America;
Motorola; NSC and Siemens. The Company has installed chemical management systems
in over 150 fabrication plants worldwide. Typical installations vary in price
from $250,000 to $3,500,000. However, a project
9
<PAGE> 10
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 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 1998 and 1997, was approximately $54
million and $112 million, respectively. Approximately 55% and 32% respectively
of FSI's backlog at fiscal 1998 and 1997 year-end was comprised of orders from
three customers. 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 where the equipment is scheduled to be shipped
within twelve months of the order. All orders are subject to cancellation by the
customer and in some cases a limited penalty provision may apply. During fiscal
1997, the semiconductor market experienced volatility in terms of product demand
and product pricing and deteriorating industry conditions. These conditions
continued into fiscal 1998 and have 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. In fiscal
1998 and 1997, purchase orders aggregating approximately $14,498,000 and
$18,861,000, constituting 6.7% and 7.5% 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 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.
10
<PAGE> 11
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 Chaska, Minnesota, occupying
over 2,000 square feet, and another in Allen, Texas, occupying 2,200 square
feet. In fiscal 1998, the Company opened a new research and development
laboratory in one of its Chaska, Minnesota facilities which focuses on high
purity chemical delivery and blending equipment. This laboratory occupies
approximately 2,100 square feet. In fiscal 1997, the Company added a slurry
blending and dispense technology laboratory in Hollister, California, which
occupies 1,250 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 1998, 1997 and 1996 were approximately $42,975,000, $39,713,000,
and $40,998,000, respectively, and represented 19.7%, 15.7% and 13.5% 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
together with product and technical specialists devoted to each of the Company's
product lines. These individuals 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 1998, the sales effort was supported by approximately
170 employees and contractors engaged in customer service and support.
International sales, primarily in Europe and Asia accounted for approximately
41%, 36% and 35% of total sales for fiscal years 1998, 1997 and 1996
respectively. The Company owns a 31.8% 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 31.8% 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.
11
<PAGE> 12
The Company owns a 49% equity interest in m-FSI, Ltd. ("m-FSI"), a Japanese
joint venture company formed in August 1991 with Mitsui & Co., Ltd. and its
wholly-owned subsidiary, Chlorine Engineers Corp., Ltd. (collectively,
"Mitsui"). Mitsui owns a 51% equity interest in m-FSI. In connection with its
formation, the Company and Mitsui granted m-FSI certain product and technology
licenses and product distribution rights.
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 may pay a commission to one of its
affiliated distributors in connection with the sale. When commissions are taken
into account, the international sales to the Company's affiliates are on terms
generally no less favorable to the Company than international sales by the
Company directly to non-affiliates.
MANUFACTURING, RAW MATERIALS AND SUPPLIERS
The Company maintains multiple manufacturing facilities including Chaska,
Minnesota; Allen, Texas and Fremont, California. CME also manufactures, under a
license from the Company, certain CMD products. In addition, CME 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 by the Company's manufacturing
personnel. 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. 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,
CME, 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 its 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
12
<PAGE> 13
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.*
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 product line. As part of the
strategy to establish its Japanese presence, the Company formed a joint venture,
m-FSI in August 1991 with Mitsui and granted m-FSI certain product and
technology licenses and product distribution rights in Japan.
The Company believes that the Japanese equipment companies with which it
competes have a competitive advantage because of their dominance of the Japanese
market segment. Furthermore, Japanese microelectronics manufacturers have
extended their influence outside Japan by licensing products and process
technologies to non-Japanese manufacturers. Such licenses can result in a
recommendation to use equipment manufactured by Japanese companies. Therefore,
the Company may be at a competitive disadvantage with respect to the Japanese
equipment suppliers, who have been engaged for some time in collaborative
efforts with Japanese microelectronics manufacturers. Certain Japanese equipment
manufacturers have begun to establish manufacturing operations in the United
States, which will enable them to compete more effectively in the United States
market.
A portion of the Company's international sales have been to semiconductor device
manufacturers located in Korea. The Korean market is extremely competitive and
the semiconductor device manufacturers located there have been very aggressive
in seeking price concessions from suppliers. The Company recently established a
company in South Korea, CMK, to provide sales support and service to chemical
management systems or projects in Korea. FSI does not believe that there are any
existing government trade restrictions that would materially limit FSI's ability
to compete in the Japanese or Korean markets.
Taiwan, Singapore and more recently, Thailand and Malaysia, have increased their
microelectronics fabrication facility 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.*
13
<PAGE> 14
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"), SCP Global Technologies, 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., a subsidiary
of U.S. Filter Corporation and a number of gas and/or 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 11%, 17% and 11% of the Company's sales in
fiscal 1998, 1997 and 1996, respectively.
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.
Sales to the Company's affiliated international distributors in fiscal 1998,
1997 and 1996, which may include sales of products subsequently resold to the
Company's direct customers, accounted for approximately 37%, 29% and 25%
respectively, of the Company's total sales. In addition, the earnings received
from the Company's equity ownership interest in such affiliated distributors was
approximately $674,000, $3,712,000 and $5,108,000, in fiscal 1998, 1997 and 1996
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.*
Effective March 31, 1998 the Company and Metron entered into a new distribution
agreement. The agreement appoints Metron as the Company's distributor in a
number of European and Asian countries for FSI's CMD, MLD, and SCD products. The
agreement continues until terminated. Either party may terminate the agreement
on or after January 31, 2000 by giving one year prior written notice and upon
the occurrence of certain events at an earlier date upon one year notice. There
is no requirement that Metron purchase a specified amount or percentage of the
Company's products.
The Company entered into licensing and distribuiton agreements with m-FSI when
it was formed in 1991. In general, m-FSI has exclusive distribution rights with
respect to certain of FSI's products in Japan. The licensing agreement allows
m-FSI to manufacture certain of FSI's products. The agreements may be terminated
only upon the occurrence of certain events or conditions. There is no obligation
under the distribution agreement for m-FSI to purchase a specified amount or
percentage of FSI's products.
14
<PAGE> 15
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 that 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.
The POLARIS cluster is offered by the Company under a non-exclusive license from
TI. The Company has 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(R) 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 29, 1998, FSI and its wholly-owned subsidiaries ACS and SSI, and
its joint ventures, CME and CMK, had, in the aggregate, approximately 1,140
employees. As of October 31st that number was approximately 990 and the decrease
is primarily related to a reduction in force in October of 1998. 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 retain and attract 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.
15
<PAGE> 16
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."
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 21 of this report.
OTHER RISK FACTORS
A discussion of certain risk factors is presented in the "Risk Factors Section"
in the "Management's Discussion and Analysis of Financial Condition and Results
of Operations" appearing on pages 15 to 18 of the Company's Annual Report to
Shareholders for the year ended August 29, 1998, which risk factors discussion
is hereby incorporated by reference.
ITEM 2. PROPERTIES
The Company's corporate offices are located in Chaska, a suburb of Minneapolis,
Minnesota. In fiscal 1998, the Company leased approximately 288,000 square feet,
in four buildings. The annual rental cost for these facilities in fiscal 1998
was approximately $1,238,000.
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
manufacturing support operations and a 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 at a cost of $18.6 million to construct and equip. This
facility comprises the Microlithography Division's headquarters and includes
manufacturing, engineering, and a research and development laboratory.
16
<PAGE> 17
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 England (CME
Headquarters).
* a 62,040 square foot research and development laboratory, engineering,
manufacturing, and administrative facility in Fremont, California (SSI
Headquarters).
* a 4,270 square foot sales support and project management facility in Bundang,
Korea (CMK 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.
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. 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 to 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.
17
<PAGE> 18
In October 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. Semiconductor Systems
intends to vigorously defend the lawsuit and the Company currently believes the
trial will commence shortly.
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 29, 1998.
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
- ---- --- --------
Mark A. Ahmann (1) 42 Vice President, Human Resources
Dale A. Courtney (2) 61 Senior Vice President; President,
Surface Conditioning Division
Joel A. Elftmann (3) 58 Chairman and
Chief Executive Officer
Patricia M. Hollister (4) 38 Chief Financial Officer and
18
<PAGE> 19
Corporate Controller
Luke R. Komarek (5) 45 Vice President; General Counsel and
Assistant Secretary
Dale M. Pescatrice (6) 51 Vice President; President, Chemical
Management Division
Benno G. Sand (7) 44 Executive Vice President, Chief
Administrative Officer and Secretary
Benjamin J. Sloan (8) 58 Executive Vice President, Chief
Operating Officer and President,
Microlithography Division
Charles R. Wofford (9) 65 Vice Chairman
(1)Mr. Ahmann has been Vice President of Human Resources since January 1998 and
joined the Company in May 1997 as Staff Vice President, Human Resources. From
1988 to 1997 he worked for Aetna, Inc. in a variety of human resources positions
with the company in corporate and divisional operations, most recently as Vice
President, Human Resources in a project management capacity. Prior to Aetna he
worked for Honeywell, Inc. and Northern States Power Company.
(2)Mr. Courtney has served as Senior Vice President; President, Surface
Conditioning Division of the Company since January 1, 1998 and as Executive Vice
President; President, Surface Conditioning Division from January 1996 to
December 1997. 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 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 January 1998, Mr. Elftmann 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)Ms. Hollister has served as Chief Financial Officer and Corporate Controller
since January 1998. She was Corporate Controller of the Company from March 1995
until January 1998. Prior thereto, Ms. Hollister was employed by KPMG Peat
Marwick LLP in Minneapolis, Minnesota where she served over 12 years on various
audit and consulting engagements, most recently as a Senior Manager.
(5)Mr. Komarek joined FSI in June 1995 as corporate counsel. He was named
General Counsel in October 1996 and made a Staff Vice President in May 1997. In
January 1998 he was elected Vice President and General Counsel. He has served as
Assistant Secretary since 1996. Prior to joining FSI he
19
<PAGE> 20
was at Faegre and Benson, the company's outside law firm for several years and
prior to Faegre he held legal management positions with Northgate Computer
Company and Diversified Energies, Inc. Mr. Komarek is also a director of CMK.
(6)Mr. Pescatrice joined FSI as Vice President; President, Chemical Management
Division in March 1998. In 1997, Mr. Pescatrice was associated with
Co-Development International as a senior consultant where he contributed his
supply chain experience to the Tennessee Valley Authority (TVA), the largest
generator of electric power in the United States. Mr. Pescatrice worked at Texas
Instruments from 1969-1996. From 1994 to 1996, he served as Vice President,
World-Wide Supply Process and was accountable for the global strategy and
execution of procurement and logistics performance to enhance semiconductor
group objectives. From 1985 to 1993, he served as Vice President, Materials
Division within the semiconductor group. Mr. Pescatrice is also a director of
both CMK and CME.
(7)Mr. Sand has served as Executive Vice President and Chief Administrative
Officer since January 1, 1998. He served as Executive Vice President and Chief
Financial Officer of the Company from January 1992 to January 1998. 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.
(8)Dr. Sloan has served as Executive Vice President; Chief Operating Officer and
President, Microlithography Division of the Company since January 1, 1998. From
January 1996 to January 1998 he served as Executive Vice President and
President, Microlithography Division. 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 a semiconductor group of TI and Manager of the Wafer
Fabrication Systems Division of TI's Process Automation Center. Dr. Sloan also
serves as a director of SSI.
(9)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.
20
<PAGE> 21
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 29, 1998 and the number of
shareholders of record is contained in the Company's 1998 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 11 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 12 to 18 is incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Registrant at August 29, 1998 and
August 30, 1997 and for each of the three years in the period ended August 29,
1998 and the Report thereon of the Independent Auditors' on pages 19 to 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 26, 1999 (the "Proxy Statement") and which will be filed with
the Securities and Exchange Commission pursuant to Regulation 14A within 120
days after August 29, 1998.
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 26, 1999, 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.
21
<PAGE> 22
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
included in the Proxy Statement and is incorporated by reference. For
information concerning executive officers, see Item 4A of this Form 10-K Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item, which is included in the Proxy Statement,
is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item, which is included in the Proxy Statement,
is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item, which is included in the Proxy Statement,
is incorporated by reference.
22
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) (1) The following financial statements and documents and the report of the
independent auditors are included in the Annual Report (an Exhibit to this
Report) and are incorporated by reference in Item 8 of this Report:
<TABLE>
<CAPTION>
PAGE NUMBER IN THE
ANNUAL REPORT
-------------------------
<S> <C>
Selected Financial Data for the five years ended August 29, 1998 11
Management's Discussion and Analysis of Financial Condition and Results of
Operations 12-18
Consolidated Statements of Operations - Fiscal Years ended
August 29, 1998, August 30, 1997 and August 31, 1996 20
Consolidated Balance Sheets - August 29, 1998 and August 30, 1997 21
Consolidated Statements of Stockholders' Equity - Fiscal Years ended August
29, 1998, August 30, 1997 and August 31, 1996 22
Consolidated Statements of Cash Flows - Fiscal Years ended
August 29, 1998, August 30, 1997 and August 31, 1996 23
Notes to Consolidated Financial Statements 24-32
Independent Auditors' Report 19
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
PAGE NUMBER
IN THIS REPORT
---------------------
<S> <C>
(a) (2) Financial Statement Schedules
The following Report and financial statement schedule are included in this Part
IV and are found in this Report at the pages indicated.
Independent Auditors' Report on Schedule 28
Schedule II - Valuation and Qualifying Accounts 29
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
</TABLE>
24
<PAGE> 25
<TABLE>
<S><C>
(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 by and Among FSI International, Inc., Spectre Acquisition Corp.,
and Semiconductor Systems, Inc. (1)
3.1 Restated Articles of Incorporation of the Company. (2)
3.2 Restated By-Laws. (3)
3.3 Amendment to Restated By-Laws. (4)
4.1 Note Purchase Agreement between FSI International, Inc. and
Metropolitan Life Insurance Company and other certain
purchasers. (Schedule A omitted) (5)
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 (6)
4.3 Amendment dated March 26, 1998 to Rights Agreement dated May 22, 1997 by and between FSI
International, Inc. and Harris Trust and Saving Bank,, National Association as Rights Agent (7)
*10.1 FSI International, Inc. 1997 Omnibus Stock Plan (5)
*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 Dale A. Courtney,
Patricia M. Hollister, Luke R. Komarek, Benno G. Sand and Benjamin J. Sloan,
have been omitted, but will be filed if requested in writing by the Commission):(6)
10.3 Lease dated June 27, 1985, between the Company and Lake
Hazeltine Properties. (3)
10.4 Lease dated September 1, 1985, between the Company and Elftmann, Wyers, Blackwood
Partnership. (3)
10.5 Lease dated September 1, 1985, between the Company and Elftmann, Wyers Partnership. (3)
*10.6 1989 Stock Option Plan. (4)
*10.7 Amended and Restated Employees Stock Purchase Plan.(filed herewith)
10.8 Shareholders Agreement among FSI International, Inc. and Mitsui & Co., Ltd. and
Chlorine Engineers Corp. Ltd. dated as of August 14, 1991. (8)
10.9 FSI Exclusive Distributorship Agreement dated as of August 14, 1991 between
FSI International, Inc. and m-FSI, Ltd. (8)
10.10 FSI Licensing Agreement dated as of August 14, 1991, between FSI International, Inc.
and m-FSI, Ltd. (8)
10.11 License Agreement, dated October 15, 1991, between the Company and Texas Instruments
Incorporated. (9)
10.12 Amendment No. 1, dated April 10, 1992, to the License Agreement, dated October 15, 1991,
between the Company and Texas Instruments Incorporated. (9)
10.13 Amendment effective October 1, 1993 to the License Agreement,
dated October 15, 1991 between the Company and Texas
Instruments Incorporated (10)
*10.14 Amended and Restated Directors' Nonstatutory Stock Option Plan. (11)
*10.15 Management Agreement between FSI International, Inc. and Joel A. Elftmann, effective as of June 5, 1998
(filed herewith) (Similar agreements between the Company and its executive officers have been omitted but will be
filed if requested in writing by the commission.)
*10.16 FSI International, Inc. 1994 Omnibus Stock Plan. (12)
*10.17 FSI International, Inc. 1998 Incentive Plan. (filed herewith)
10.18 First Amendment to Lease made and entered into October 31, 1995 by and between Lake Hazeltine Properties and FSI
International, Inc. (13)
10.19 Distribution Agreement made and entered into as of March 31, 1998 by and between FSI International, Inc. and
Metron Technology B.V. (Exhibits to Agreement omitted) (filed herewith)
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C> <C>
10.20 Lease dated August 9, 1995 between Skyline Builders, Inc. and FSI International, Inc. (13)
10.21 Lease Rider dated August 9, 1995 between Skyline Builders, Inc. and FSI International, Inc. (13)
10.29 Lease Amendment dated November, 1995 between Roland A. Stinski and FSI International,
Inc. (Exhibits to Amendment omitted) (13)
13.0 Registrant's 1998 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) (filed herewith)
21.0 Subsidiaries of the Company (filed herewith)
23.0 Consent of KPMG Peat Marwick (filed herewith)
24.0 Powers of Attorney from the Directors of FSI International, Inc.
(filed herewith)
27.0 Financial Data Schedule (filed herewith)
</TABLE>
(1) 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.
(2) 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.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
SEC File No. 33-25035, and incorporated by reference.
(4) 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.
(5) 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.
(6) 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.
(7) Filed as an Exhibit to the Company's Report on Form 8-A/A-1, filed by
the Company on April 16, 1998, Sec 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 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-K for the fiscal
year ended August 29, 1992, File No. 0-17276, and incorporated by
reference.
(10)Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 28, 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.
---------------------------
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter ended
August 29, 1998.
26
<PAGE> 27
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,
and Chief Executive Officer
(Principal Executive Officer)
Dated: November 23, 1998
By: /s/Patricia M. Hollister
Patricia M. Hollister, Chief Financial Officer
and Corporate Controller
(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 )
Thomas D. George, Director )
Charles R. Wofford, Director )
By: /s/ Patricia M. Hollister
Patricia M. Hollister, Chief Financial Officer
and Corporate Controller
(Principal Financial and Accounting Officer)
Dated: November 23, 1998
27
<PAGE> 28
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of FSI International, Inc.:
Under the date of October 9, 1998, we reported on the consolidated balance
sheets of FSI International, Inc. and subsidiaries as of August 29, 1998 and
August 30, 1997 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended August 29, 1998, as contained in the 1998 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 1998.
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 LLP
Minneapolis, Minnesota
October 9, 1998
28
<PAGE> 29
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS FOR THE FISCAL YEARS ENDED AUGUST 29, 1998,
AUGUST 30, 1997 AND AUGUST 31, 1996
<TABLE>
<CAPTION>
Balance at
Beginning Balance at
of Year Additions Deletions End of Year
------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C>
Fiscal Year Ended August 29, 1998
Allowance for doubtful accounts
(Deducted from accounts receivable) $2,127,000 $986,000 $ $3,113,000
-
Fiscal Year Ended August 30, 1997
Allowance for doubtful accounts
(Deducted from accounts receivable) $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
-
</TABLE>
29
<PAGE> 1
EXHIBIT 10.7
FSI INTERNATIONAL, INC.
EMPLOYEES STOCK PURCHASE PLAN
(as amended January 1998)
Section 1. Establishment and Purpose
1.1 Establishment. FSI International, Inc., a Minnesota corporation,
(hereinafter called "FSI" or the "Company"), hereby establishes a stock purchase
plan for employees as described herein, which shall be known as the FSI
INTERNATIONAL, INC. EMPLOYEES STOCK PURCHASE PLAN (hereinafter called the
"Plan").
1.2 Purpose. The purpose of this Plan is to permit employees to purchase Stock
from FSI at the price specified in Section 5. The Plan is intended to be an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986, as amended (the "Code"), and shall be interpreted and administered in a
manner consistent with such intent.
Section 2. Definitions
2.1 Definitions. Whenever used hereinafter, the following terms shall have the
meanings set forth below:
(a) "Affiliate" means any corporation, a majority of the voting stock of which
is directly or indirectly owned by FSI and whose participation in the Plan the
Board has expressly approved.
(b) "Base Earnings" means a Participant's regular rate of pay including sick
pay, vacation pay, retro pay, overtime, on-call pay, shift differential and
short-term disability, but excluding incentive, discretionary, or signing
bonuses, commissions, foreign service premiums, relocation, expatriate or auto
allowances, and amounts payable under employee benefit plans.
(c) "Board" means the Board of Directors of FSI.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of at least three persons appointed by the
Board empowered to take actions as stated in this Plan. Each member of the
Committee will remain a member for the duration of the Plan, unless such member
resigns or is removed earlier by majority vote of the Board.
(f) "Eligible Employee" means a person who is an Employee on the day
immediately preceding the first day of a Purchase Period.
(g) "Employee" means any employee (including officers and directors who are
also employees) of FSI or its Affiliates.
<PAGE> 2
(h) "Fair Market Value" of a share of Stock as of any date is the mean between
the high and low prices of a share of Stock on said date as published in the
Wall Street Journal, or, if no such prices are published for said date, on the
last preceding day for which such prices are published, or, if the Company's
Stock is listed on a national securities exchange or traded in the national
market system, the mean between the high and low sale prices for such Stock on
such exchange or market on said date, or, if no sale has been made on such
exchange or market on said date, on the last preceding day on which any such
sale shall have been made.
(i) "Interest" means interest as determined pursuant to Section 5.2.
(j) "Participant" means an Eligible Employee who has elected to participate in
the Plan pursuant to Section 4.1.
(k) "Purchase Period" means a six-month period beginning on January 1 or July 1
of each calendar year.
(l) "Stock" means the common stock, no par value, of FSI.
Section 3. Stock Subject to the Plan
3.1 Number. The total number of shares of Stock available for distribution
under this Plan shall not exceed 1,550,000. These shares may consist, in whole
or in part, of authorized but unissued Stock not reserved for any other purpose.
3.2 Adjustment in Capitalization. In the event of any change in the outstanding
shares of Stock by reason of a Stock dividend or split, combination,
recapitalization, or reclassification, the shares of Stock issuable and the
price payable therefor under this Plan shall be appropriately adjusted by the
Committee, whose determination shall be conclusive, provided, however, that
fractional shares shall be rounded down to the nearest whole share. Except as
provided above, no adjustment shall be made in connection with the issuance by
FSI of any Stock or any warrants, rights, or options to acquire shares of Stock
or of securities convertible into Stock.
Section 4. Participation
4.1 Participation. An Eligible Employee may elect to become a Participant on
the first day of any Purchase Period, provided such Participant was an Eligible
Employee on the day immediately preceding the first day of such Purchase Period.
Any election to participate shall be made in accordance with rules adopted by
the Committee. However, in no event shall an Eligible Employee be granted the
right to purchase Stock under the Plan if after the purchase such Eligible
Employee would own stock of FSI possessing 5% or more of the total combined
voting power or value of all classes of stock of FSI. Also, an Eligible Employee
may not become or remain a Participant at any time when such Eligible Employee
owns stock possessing 5% or more of the total combined voting power or value of
all classes of stock of FSI. For purposes of this subsection, the rules of
Section 424(d) of the Code shall apply in
A-2
<PAGE> 3
determining the stock ownership of an individual, and stock which an employee
may purchase under outstanding options shall be treated as stock owned by the
employee.
Section 5. Purchase of Stock
5.1 Contributions for Purchase of Stock. At the time an Eligible Employee
elects to become a Participant in the Plan, such Eligible Employee shall also
elect the form and manner of contributing funds for the purchase of Stock. A
Participant may elect to contribute funds for the purchase of Stock by directing
his or her employer to withhold any whole percentage less than or equal to 10%
of his or her Base Earnings for the purpose of purchasing Stock from FSI. In no
event shall the aggregate contributions for the purchase of Stock exceed 10% of
a Participant's Base Earnings.
A Participant may modify the rate of withholding from such Participant's Base
Earnings only in accordance with the following:
(a) A Participant may at any time direct reduction of the rate of withholding
to a rate lower than that previously in effect. However, only one such direction
to continue withholding at a rate lower than that previously in effect may be
made in any one Purchase Period.
(b) A Participant may at any time direct discontinuance of withholding. If a
Participant directs discontinuance of withholding, such Participant may direct
resumption of withholding only as of the first day of any subsequent Purchase
Period.
(c) Except as provided in subsection (a) or (b) above, a Participant may direct
modification of the rate of withholding only as of the first day of any Purchase
Period. The modified rate may be any whole percentage less than or equal to 10%
of the Participant's Base Earnings. Unless otherwise elected by the Participant,
the rate of withholding such Participant has elected will remain in effect for
subsequent Purchase Periods.
Any election or direction under this section shall be made in
writing pursuant to rules adopted by the Committee, and shall become effective
at a time specified by the Committee.
5.2 Disposition of Contributions. Amounts withheld pursuant to Section 5.1
shall be held by the employer until the end of the Purchase Period during which
they were withheld, subject to the following:
(a) A Participant who elects pursuant to Section 5.1(b) to discontinue
withholding may at any time withdraw all or any part of the amounts previously
withheld or otherwise contributed. Any such withdrawal shall be paid to the
Participant by his or her employer in cash, with Interest.
(b) During the last calendar month of each Purchase Period, each Participant
shall be permitted to elect to have all or any part of the amounts withheld paid
to such Participant in cash with Interest.
A-3
<PAGE> 4
(c) Any withdrawal under (a) or (b) above shall be deemed to be on a
first-in-first-out basis. Interest shall be applied to the average amount in the
Participant's account at the end of each full calendar month during the
completed portion of the Purchase Period. Prior to the first day of any Purchase
Period, the Committee shall determine the rate of Interest with respect to such
Purchase Period. The Committee shall give such publicity to said Interest rate
as it deems appropriate.
(d) Any portion of the amounts withheld that is not paid to the Participant in
cash shall be automatically applied to purchase Stock under Section 5.3.
(e) Any election or direction under this section shall be made in writing
pursuant to rules adopted by the Committee.
5.3 Purchases of Stock. Amounts withheld from a Participant during a Purchase
Period (except any amounts refunded to such Participant in cash under Section
5.2) shall be used as of the last business day of such Purchase Period to
purchase Stock from FSI for a price equal to the lesser of (a) or (b).
(a) 85% of the Fair Market Value of a share of Stock on the first business day
of the Purchase Period.
(b) 85% of the Fair Market Value of a share of Stock on the last business day
of the Purchase Period.
However, only whole shares shall be purchased under the foregoing provisions,
and any amount remaining that is not sufficient to purchase a whole share shall
be refunded to the Participant, without Interest, promptly after the end of the
Purchase Period.
5.4 Issuance of Stock Certificates. As soon as practicable after the close of
the Purchase Period, FSI shall, without stock issue or transfer taxes to the
Participant, deliver to the Participant a certificate or certificates for the
requisite number of shares of Stock.
5.5 Privileges of a Stockholder. A Participant shall not have stockholder
privileges with respect to any Stock until the date of issuance of a certificate
to such Participant for such Stock.
5.6 Limitation On Stock Purchases. As required by Section 423 of the Code, no
Participant may purchase Stock under this Plan and all other employee stock
purchase plans of the Company and its Affiliates at a rate in excess of $25,000
in Fair Market Value of such Stock (determined at the time the option to
purchase Stock is granted) for each calendar year in which any such option to
purchase Stock granted to such Participant is outstanding at any time.
Notwithstanding the foregoing, the Fair Market Value (determined on the first
day of any Purchase Period) of shares of Stock that may be purchased by a
Participant during such Purchase Period shall not exceed the excess, if any, of
(i) $25,000 over (ii) the Fair Market Value (determined on the first day of the
relevant Purchase Period) of shares of Stock previously acquired by the
Participant in any prior Purchase Period during such calendar year.
A-4
<PAGE> 5
Section 6. Termination of Employment
6.1 Termination of Employment. A Participant whose termination of employment
occurs more than three months prior to the close of a Purchase Period will not
be eligible to purchase any shares of Stock pursuant to this Plan with respect
to such Purchase Period. Any amount withheld from such a Participant during the
Purchase Period in which his or her termination of employment occurs shall be
paid to such Participant in cash with Interest calculated under Section 5.2(c)
promptly after such Participant's termination of employment. Any Participant
whose termination of employment occurs within three months prior to the last day
of a Purchase Period may direct Stock purchases or withdrawals with respect to
that Purchase Period pursuant to Sections 5.2 and 5.3. However, if a
Participant's death occurred at any time during the Purchase Period, any amount
withheld from the Participant during such Purchase Period shall be paid to the
Participant's personal representative in cash with Interest determined under
Section 5.2(c), and no portion thereof shall be applied to purchase Stock.
Section 7. Rights of Employees; Participants
7.1 Employment. Nothing in this Plan shall interfere with or limit in any way
the right of FSI or any of its Affiliates to terminate any Employee's, Eligible
Employee's, or Participant's employment at any time, nor confer upon any such
person any right to continue in the employ of FSI or any of its Affiliates.
7.2 Nontransferability. No right or interest of any Participant in this Plan
shall be assignable or transferable, or subject to any lien, directly or
indirectly, by operation of law, or otherwise, including execution, levy,
garnishment, attachment, pledge, or bankruptcy. Any attempted assignment,
transfer, pledge or other disposition of any rights under the Plan shall be null
and void, and shall automatically terminate all rights of a Participant under
the Plan.
Section 8. Administration
8.1 Administration. The Committee shall be responsible for the administration
of the Plan. The Committee, by majority action thereof, is authorized to
interpret the Plan, to prescribe, amend, and rescind rules and regulations
relating to the plan, to provide for conditions and assurances deemed necessary
or advisable to protect the interests of FSI, and to make all other
determinations necessary or advisable for the administration of the Plan,
but only to the extent not contrary to the express provisions of the Plan.
The determination of the Committee, interpretation or other action made or taken
pursuant to the provisions of the Plan shall be final, and shall be binding and
conclusive for all purposes and upon all persons.
Section 9. Amendment, Modification, and Termination of Plan
9.1 Amendment, Modification, and Termination of the Plan. The Board, upon
recommendation of the Committee, at any time may terminate, and at any time and
from time to time and in any respect, may amend or modify the Plan, provided,
however, that no such action of the Board, without approval of the stockholders
of FSI, may:
A-5
<PAGE> 6
(a) increase the total amount of Stock that may be awarded under the Plan,
except as provided in Section 3.2 of the Plan;
(b) change the class of Employees eligible to participate in the Plan;
(c) withdraw the administration of the Plan from the Committee;
(d) permit any person, while a member of the Committee, to be eligible to
participate in the Plan; or
(e) extend the duration of the Plan.
Section 10. Requirements of Law
10.1 Requirements of Law. The issuance of Stock and the payment of cash pursuant
to this Plan shall be subject to all applicable laws, rules, and regulations,
and shares of Stock shall not be issued nor cash payments made except upon
approval of proper government agencies or stock exchanges as may be required.
10.2 Governing Law. The Plan, and all agreements hereunder, shall be construed
in accordance with and governed by the laws of the State of Minnesota.
Section 11. Effective Date of the Plan
11.1 Effective Date. The Plan, as amended, is effective as of January 1, 1998.
11.2 Duration of the Plan. Unless the Board terminates the Plan earlier, the
Plan shall remain in effect until all Stock subject to it shall be distributed
pursuant to the Plan.
A-6
<PAGE> 1
EXHIBIT 10.15
MANAGEMENT AGREEMENT
AGREEMENT entered into as of June 5, 1998 by and between FSI
International, Inc., a Minnesota corporation (the "Company"), and Joel A.
Elftmann (the "Employee").
WITNESSETH:
WHEREAS, the Employee is a key member of the management of the Company
or a Subsidiary and has devoted and/or is expected to devote substantial skill
and effort to the affairs of the Company or a Subsidiary, and the Board of
Directors of the Company desires to recognize the significant personal
contribution that the Employee has made and/or is expected to make to further
the best interests of the Company and its shareholders; and
WHEREAS, it is desirable and in the best interests of the Company and
its shareholders to obtain or maintain the benefits of the Employee's services
and attention to the affairs of the Company or a Subsidiary; and
WHEREAS, it is desirable and in the best interests of the Company and
its shareholders to provide inducement for the Employee (a) to remain in the
service of the Company or a Subsidiary in the event of any proposed or
anticipated change in control of the Company and (b) to remain in the service of
the Company or a Subsidiary in order to facilitate an orderly transition in the
event of a change in control of the Company; and
WHEREAS, it is desirable and in the best interests of the Company and
its shareholders that the Employee be in a position to make judgments and advise
the Company or a Subsidiary with respect to proposed changes in control of the
Company without regard to the possibility that Employee's employment may be
terminated without compensation in the event of certain changes in control of
the Company; and
WHEREAS, the Employee desires to be protected in the event of certain
changes in control of the Company; and
WHEREAS, for the reasons set forth above, the Company and the Employee
desire to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, the Company and the Employee agree as
follows:
1. Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
A. "Accounting Firm" shall have the meaning set forth in Paragraph
4(B).
<PAGE> 2
B. "Base Annual Salary" shall mean the highest annual rate of the
Employee's base salary with whichever of the Company and one or
more of its Subsidiaries that shall have employed the Employee in
effect at any time during the period commencing as of twelve months
prior to the First Event and ending on the date of termination of
the Employee's employment with the Company and its Subsidiaries
(without reduction for any salary reduction or other deferral
contribution to any employee benefit plan sponsored by the Company
or any Subsidiary).
C. "Board" shall mean the Board of Directors of the Company
D. "Cause" shall mean and be limited to, (i) willful and gross neglect
of duties by the Employee or (ii) an act or acts committed by the
Employee constituting a felony under United States federal or
applicable state law and substantially detrimental to the Company
or any Subsidiary or the reputation of the Company or any
Subsidiary, following a determination to that effect by a
resolution duly adopted by the affirmative vote of not less than
two-thirds of the entire membership of the Board at a meeting
thereof called and held for such purpose (after reasonable notice
is provided to the Employee and the Employee is given an
opportunity to be heard before the Board) finding that in the good
faith opinion of the Board the Employee is guilty of the conduct
described above in (i) or (ii).
E. "Code" shall mean the Internal Revenue Code of 1986, as amended,
and any successor statute thereto.
F. "Commencement Date" shall mean the earliest to occur of an Event
described in clause (J)(i), (ii) or (iii) of this Paragraph 1.
G. "Company" shall mean the Company as defined in the first sentence
of this Agreement and any successor to its business and/or assets
which is required to execute and deliver the agreement provided for
in Paragraph 6(B) or which otherwise becomes bound by operation of
law to all the terms and provisions of this Agreement.
H. "Constructive Involuntary Termination" shall mean a termination of
employment with the Company and its Subsidiaries by the Employee at
any time from the date of the First Event until the end of the
Transition Period, if after the First Event and at or prior to the
time of such termination:
-2-
<PAGE> 3
(i) the Employee is assigned duties materially inconsistent with
the Employee's authorities, duties, responsibilities and
status (including office, title and reporting requirements)
as an employee of the Company, there is a reduction or
alteration in the nature or status of the Employee's title,
authorities, duties, assignments or responsibilities as
compared with the Employee's title, authorities, duties,
assignments and responsibilities immediately prior to the
First Event, other than a termination for Cause or on account
of Disability;
(ii) the Company or any Subsidiary shall have failed to continue
in effect the Employee's base salary at an equivalent or
greater level, as compared to immediately prior to the First
Event other than a termination for Cause or on account of
Disability or shall have failed to pay the Employee any
amounts due thereunder;
(iii) there is a material reduction in the Employee's level of
participation in any of the Company's short- and/or long-term
incentive compensation plans, or employee benefit or
retirement plans, policies, practices, arrangements,
perquisites or fringe benefits in which the Employee
participates from the levels in place immediately prior to
the First Event, other than a Termination for Cause on
account of Disability; provided, however, that reductions in
the levels of participation in any such plans, policies,
practices, arrangements, perquisites or fringe benefits shall
not be deemed to be a Constructive Involuntary Termination if
the Employee's reduced level of participation in each such
program remains substantially consistent with the average
level of participation of other executives who have positions
commensurate with the Employee's position;
(iv) the Company shall have failed to obtain assumption of this
Agreement by any successor as contemplated by Paragraph 6(B)
hereof;
(v) The Company or any Subsidiary shall fail to reimburse the
Employee for reasonable business expenses and such failure
shall have continued for at least seven days after notice in
accordance with Paragraph 8 hereof of such failure is given
by the Employee to the Company or the Subsidiary, as the case
may be;
-3-
<PAGE> 4
(vi) the Company or any Subsidiary shall require the Employee
to relocate to any place other than a location within
twenty-five miles of the location at which the Employee
performed substantially all of his duties immediately
prior to the First Event or, if the Employee performed
such duties at the Company's or a Subsidiary's principal
executive offices, the Company or such Subsidiary shall
relocate its principal executive offices to any location
other than a location within twenty-five miles of the
location of the principal executive offices of the
Company or the Subsidiary, as the case may be,
immediately prior to the First Event; or
(vii) the Company or a Subsidiary shall require that the
Employee travel on Company business to a substantially
greater extent than required immediately prior to the
First Event.
I. "Disability" shall mean the Employee's absence from his duties
with the Company and its Subsidiaries on a full time basis for
180 consecutive business days, as a result of the Employee's
incapacity due to physical or mental illness, unless within 30
days after written notice pursuant to Paragraph 8 is given
following such absence, the Employee shall have returned to the
full time performance of his duties.
J. "Event" shall mean the occurrence of any one or more of the
following:
(i) less than a majority of the Board shall consist of members of
the Incumbent Board;
(ii) 30% or more of the then Outstanding Company Common Stock or the
combined voting power of the then Outstanding Company Voting
Securities of the Company is acquired or beneficially owned (as
defined in Exchange Act Rule 13d-3) by any person or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act), provided, however, that the following
acquisitions and beneficial ownership shall not constitute
Events pursuant to this clause (ii):
(a) any acquisition or beneficial ownership by the
Company or a Subsidiary of the Company,
(b) any acquisition or beneficial ownership by any employee
benefit plan (or related trust) sponsored or maintained
by the Company or one or more of its Subsidiaries,
-4-
<PAGE> 5
(c) any acquisition or beneficial ownership by the
Employee or any group that includes the Employee, or
(d) any acquisition or beneficial ownership by any
corporation (including without limitation an acquisition
of the nature described in clause (J)(iii) of this
Paragraph 1) with respect to which, immediately
following such acquisition, more than 70% of,
respectively, the then outstanding shares of common
stock of such corporation and the combined voting power
of the then outstanding voting securities of such
corporation entitled to vote generally in the election
of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the persons
who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and the Outstanding
Company Voting Securities immediately prior to such
acquisition in substantially the same proportions as
their ownership, immediately prior to such acquisition,
of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities, as the case may
be;
(iii) The shareholders of the Company approve a definitive agreement
or plan to
(a) merge, consolidate or reorganize the Company (other than
(1) a merger or consolidation with a Subsidiary of the
Company or (2) a merger, consolidation or reorganization
in which all or substantially all of the persons who
were the beneficial owners, respectively, of the
Outstanding Company Common Stock and the Outstanding
Voting Company Securities immediately prior to such
merger, consolidation or reorganization beneficially
own, directly or indirectly, immediately after the
merger, consolidation or reorganization, more than 70%
of, respectively, the then outstanding shares of common
stock and the combined voting power of the then
outstanding voting securities of such corporation
entitled to vote generally in the election of directors,
as the case may be, of the corporation resulting from
the merger, consolidation or reorganization or its
parent corporation, in substantially the same
proportions as their ownership immediately prior to such
merger, consolidation or reorganization of the
Outstanding Company Common Stock and the Outstanding
Company Voting Securities, as the case may be);
-5-
<PAGE> 6
(b) exchange, pursuant to a statutory exchange, Outstanding
Company Common Stock or Outstanding Company Voting
Securities held by shareholders of the Company
immediately prior to the exchange for cash, securities
or other property, unless all or substantially all of
the persons who were the beneficial owners,
respectively, of the Outstanding Company Common Stock
and the Outstanding Company Voting Securities
immediately prior to such statutory exchange
beneficially own, directly or indirectly, immediately
after the statutory exchange, more than 70% of,
respectively, the then outstanding shares of common
stock and the combined voting power of the then
outstanding voting securities of the parent corporation
of the Company entitled to vote generally in the
election of directors, in substantially the same
proportions as their ownership, immediately prior to the
statutory exchange, of the Outstanding Company Common
Stock and the Outstanding Company Voting Securities, as
the case may be; or
(c) (x) completely liquidate or dissolve the Company or (y)
sell or otherwise dispose of all or substantially all of
the assets of the Company (in one or a series of
transactions), other than to a corporation with respect
to which, immediately following such sale or other
disposition, more than 70% of, respectively, the then
outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote
generally in the election of directors is then
beneficially owned, directly or indirectly, by all or
substantially all of the persons who were the beneficial
owners, respectively, of the Outstanding Company Common
Stock and the Outstanding Company Voting Securities
immediately prior to such sale or other disposition in
substantially the same proportions as their ownership,
immediately prior to such sale or other disposition, of
the Outstanding Company Common Stock and the Outstanding
Company Voting Securities, as the case may be.
unless at least 30% of the common stock (or the combined voting power
of the voting securities entitled to vote generally in the election of
directors or voting equity interests) of the surviving corporation or
its parent corporation or of any corporation (or other entity)
acquiring all or substantially all of the assets of the Company (in the
case of a merger, consolidation, reorganization or disposition of
assets) or the Company or its parent corporation (in the case of a
statutory exchange) is, immediately following the merger,
consolidation, reorganization,
-6-
<PAGE> 7
statutory exchange or disposition of assets, beneficially owned,
directly or indirectly, by the Employee or a group of individuals
and/or entities, including the Employee, acting in concert, or
(iv) (a) the Company enters into a letter of intent, an agreement
in principle or a definitive agreement relating to an
Event described in clause (i), (ii) or (iii) above which
ultimately results in such an Event described in clause
(i), (ii) or (iii) hereof,
(b) a tender or exchange offer or proxy contest is commenced
which ultimately results in an Event described in clause
(i), (ii) or (iii) hereof, or
(c) there shall be an involuntary termination of the
employment with the Company and its Subsidiaries of the
Employee or any of the events which constitute a
Constructive Involuntary Termination of employment of
the Employee has occurred, and the Employee reasonably
demonstrates that such event (x) was requested by a
party other than the Board that has previously taken
other steps reasonably calculated to result in an Event
described in clause (i), (ii) or (iii) above and which
ultimately results in an Event described in clause (i),
(ii) or (iii) hereof or (y) otherwise arose in
connection with or in anticipation of an Event described
in clause (i), (ii) or (iii) above that ultimately
occurs.
K. "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
L. "First Event" shall mean the first Event to occur.
M. "Excise Tax" shall have the meaning set forth in Paragraph 4.
N. "Gross-up Payment" shall have the meaning set forth in
Paragraph 4 and "Payment," as used in Paragraph 4, shall have
the meaning set forth in Paragraph 4.
O. "Incumbent Board" shall mean individuals who were either
members of the Board as of the date of this Agreement or whose
election or nomination for election by the Company's
shareholders was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board but
excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or
threatened election contest which
-7-
<PAGE> 8
was (or, if threatened, would have been) subject to Rule 14a-11
of the Exchange Act.
P. "Outstanding Company Common Stock" shall mean the then
outstanding shares of common stock of the Company.
Q. "Outstanding Company Voting Securities" shall mean the then
outstanding securities of the Company entitled to vote
generally in the election of the Board.
R. "person" shall mean an individual, partnership, corporation,
limited liability company, estate, trust or other entity.
S. "Subsidiary" shall mean a corporation, a majority of the
outstanding voting power of the outstanding securities entitled
to vote generally in an election of directors of such
corporation is beneficially owned directly or indirectly by the
Company.
T. "Term" shall have the meaning set forth in Paragraph 14 hereof.
U. "Transition Period" shall mean the two-year period commencing
on the Commencement Date and ending on the second anniversary
of the Commencement Date.
V. "Underpayment" shall have the meaning set forth in Paragraph 4.
2. Employment. The Employee shall remain in the employ of the
Company or a Subsidiary for the Term of this Agreement, and during the Term the
Employee shall have such title, duties, responsibilities, assignments and
authority, and receive such remuneration and fringe benefits, as the Board or
its committees or the board of directors or a committee of the Subsidiary shall
from time to time provide for the Employee; provided, however, that either the
Employee or the Company or a Subsidiary may terminate the employment of the
Employee at any time prior to the expiration of the Term, with or without Cause
and for any reason whatever, subject to the right of the Employee to receive any
payment and other benefits that may be due pursuant to the terms and conditions
of Paragraph 3 of this Agreement (subject to Paragraph 5 of this Agreement) or,
except as provided in Paragraph 3(B), the terms of any other written employment
agreement relating to the employment of Employee by the Company or any
Subsidiary.
3. Rights to Payments Following An Event. If any Event shall occur
during the Term of this Agreement, then the Employee shall be entitled to
receive from the Company cash payments and other benefits on the following basis
(unless the Employee's employment by the
-8-
<PAGE> 9
Company and its Subsidiaries is terminated voluntarily or involuntarily prior to
the First Event, in which case the Employee shall be entitled to no payment or
benefits under this Paragraph 3):
(A) If at the time of, or at any time after, the occurrence of the
First Event and prior to the end of the Transition Period, the
employment of the Employee with the Company and its Subsidiaries
is voluntarily or involuntarily terminated for any reason (unless
such termination is a voluntary termination by the Employee other
than a Constructive Involuntary Termination, is on account of the
death or Disability of the Employee, or is a termination by the
Company or a Subsidiary for Cause), the Employee (or the
Employee's legal representative, as the case may be) shall be
entitled to receive from the Company,
(i) (a) in the event of an involuntary termination, at least 30
days prior written notice of termination and compensation
at the Employee's regular rate of compensation for the
30-day period following receipt of notice of termination of
employment without regard to whether Employee is required
to perform services during such period and (b) a lump sum
cash payment in an amount equal to (x) two times the Base
Annual Salary, plus (y) in lieu of any incentive cash bonus
for any fiscal year or fiscal period of the Company or any
Subsidiary that shall not have ended prior to the
termination of employment of the Employee or has not
commenced as of the date of termination of employment of
the Employee, a lump sum cash payment in an amount equal to
80% of Base Annual Salary;
(ii) in lieu of any further right to participate in any health,
dental, disability or life insurance plan or program in
which the Employee would otherwise be entitled to
participate (except, (a) to the extent required by law or
(b) with respect to life insurance coverage, for any
coverage pursuant to a split dollar insurance agreement
between the Employee and the Company, which split dollar
insurance agreement contains separate provisions applicable
upon termination of employment), a lump sum cash payment of
$18,000;
(iii) in lieu of any other perquisites, including without
limitation fees for professional outplacement services,
secretarial support, office space or car leases, a lump sum
cash payment of $35,000; and
(iv) in lieu of any retirement contributions by the Company or
any Subsidiary under the FSI Pension Plan for the year in
which such termination occurs and for any future years, a
lump sum cash
-9-
<PAGE> 10
payment equal to 8% of the Employee's Base Annual Salary
unless such amount exceeds the cap on Certified Earnings
(as defined in the FSI Pension Plan) contained in the FSI
Pension Plan, in which case the cap amount will be used.
(B) The payments provided for in this Paragraph 3 shall be in
addition to any salary or other remuneration otherwise payable to
the Employee on account of employment by the Company or one or
more of its Subsidiaries (including any amounts received prior to
such termination of employment for personal services rendered
after the occurrence of the First Event) but shall be reduced by
any severance pay which the Employee receives from the Company or
its Subsidiaries under any other policy or agreement of the
Company or its Subsidiaries in the event of involuntary
termination of the Employee's employment.
(C) The Company also shall reimburse the Employee for all previously
unreimbursed reasonable business expenses incurred by the
Employee on or prior to such termination. In addition, the
Company shall promptly pay to the Employee, as incurred, all
reasonable legal fees and expenses incurred by the Employee as a
result of such termination, including, but not limited to, all
such fees and expenses, if any, incurred in contesting or
disputing any such termination or in seeking to obtain or enforce
any right or benefit provided by this Agreement; provided,
however, that the Company may recover such legal fees and
expenses of the Employee if it is finally judicially determined
in such proceeding that the Employee pursued such claim or claims
in bad faith (but in no event shall the Employee be responsible
for any legal fees and expenses of the Company).
(D) The Company's obligation to make the payments provided for in
this Agreement and otherwise to perform its obligations hereunder
shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company or any
Subsidiary may have against the Employee or others.
(E) The Employee shall not be required to mitigate the amount of any
payment or other benefit provided for in Paragraph 3 by seeking
other employment or otherwise, nor shall the amount of any
payment or other benefit provided for in Paragraph 3 be reduced
by any compensation earned by the Employee as the result of
employment by another employer after termination, or otherwise.
-10-
<PAGE> 11
(F) The obligations of the Company under this Paragraph 3 shall survive
the termination of this Agreement and shall be paid in full within
ten business days after the Employee's termination of employment
with the Company and its Subsidiaries.
4. Certain Additional Payment by the Company.
(A) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that Paragraph 5 does not apply and
that any payment or distribution by the Company or any Subsidiary
to or for the benefit of the Employee (whether paid or payable or
distributed or distributable pursuant to the terms of this
Agreement, any stock option, restricted stock agreement or
otherwise, but determined without regard to any additional payments
required under this Paragraph 4) (a "Payment") would be subject to
the excise tax imposed by Section 4999 of the Code or any interest
or penalties are incurred by the Employee with respect to such
excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise
Tax"), then the Employee shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment
by the Employee of all taxes (including any interest or penalties
imposed with respect to such taxes), including, without limitation,
any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Employee retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon the Payment.
(B) Subject to the provisions of Paragraph 4(C), all determinations
required to be made under this Paragraph 4, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up
Payment and the assumptions to be utilized in arriving at such
determination, shall be made by KPMG Peat Marwick LLP ("KPMG") or
such other nationally recognized certified public accounting firm
as may be designated by the Employee and reasonably acceptable to
the Company if KPMG is unable to render such services (the
"Accounting Firm"), which Accounting Firm shall provide detailed
supporting calculations both to the Company and the Employee within
15 business days of the receipt by the Accounting Firm of notice
from the Employee that there has been a Payment, or such earlier
time as is requested by the Company. In the event that the
Accounting Firm is serving as accountant or auditor for the person
effecting the Event, the Employee shall appoint another nationally
recognized accounting firm reasonably acceptable to the Company to
make the determinations required hereunder (which accounting firm
shall then be referred to as the
-11-
<PAGE> 12
Accounting Firm hereunder). All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any Gross-Up Payment,
as determined pursuant to this Paragraph 4, shall be paid by the
Company to the Employee within ten business days of the receipt of
the Accounting Firm's determination. If the Accounting Firm
determines that no Excise Tax is payable by the Employee, it shall
furnish the Employee with a written opinion that failure to report
the Excise Tax on the Employee's applicable federal income tax
return would not result in the imposition of the negligence or
similar penalty. Any determination by the Accounting Firm shall be
binding upon the Company and the Employee. As result of the
uncertainty in the application of Section 4999 of the Code at the
time of the initial determination by the Accounting Firm hereunder,
it is possible that Gross-Up Payments which will not have been made
by the Company should have been made ("Underpayment"), consistent
with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Paragraph 4(C)
and the Employee thereafter is required to make a payment of an
Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment together
with all penalties and interest related thereto shall be promptly
paid by the Company to or for the benefit of the Employee.
(C) The Employee shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such notification
shall be given as soon as practicable but no later than ten
business days after the Employee is informed in writing of such
claim (provided that any delay in so informing the Company within
such ten business day period shall not affect the obligations of
the Company under this Paragraph 4 except to the extent that such
delay materially and adversely affects the Company) and shall
apprise the Company of the nature of such claim and the date on
which such claim is required to be paid. The Employee shall not pay
such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies the Employee
in writing prior to the expiration of such period that it desires
to contest such claim, the Employee shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to
time,
-12-
<PAGE> 13
including, without limitation, accepting legal representation
with respect to such claim by an attorney reasonably selected
by the Company,
(iii) cooperate with the Company in good faith in order to
effectively contest such claim, and
(iv) permit the Company to participate in any proceedings relating
to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and
hold the Employee harmless, on an after-tax basis, for any Excise
Tax or income tax (including interest and penalties with respect
thereto) imposed as a result of such representation and payment of
costs and expenses including reasonable attorneys' fees. Without
limitation on the foregoing provisions of this Paragraph 4(C), the
Company shall control all proceedings taken in connection with such
contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with
the taxing authority in respect of such claim and may, at its sole
option, either direct the Employee to pay the tax claimed and sue
for a refund or contest the claim in any permissible manner, and
the Employee agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company
shall determine; provided, however, that if the Company directs the
Employee to pay such claim and sue for a refund, the Company shall
advance the amount of such payment to the Employee, on an
interest-free basis, and shall indemnify and hold the Employee
harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the
taxable year of the Employee with respect to which such contested
amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Employee shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
-13-
<PAGE> 14
(D) If, after the receipt by the Employee of an amount advanced by the
Company pursuant to Paragraph 4(C), the Employee becomes entitled
to receive any refund with respect to such claim, the Employee
shall (subject to the Company's complying with the requirements of
Paragraph 4(C)) promptly pay to the Company the amount of such
refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Employee of
an amount advanced by the Company pursuant to Paragraph 4(C), a
determination is made that the Employee shall not be entitled to
any refund with respect to such claim and the Company does not
notify the Employee in writing of its intent to contest such denial
of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset,
to the extent thereof, the amount of Gross-Up Payment required to
be paid.
5. Possible Payment Reduction. Notwithstanding any provision to the
contrary contained herein except the last sentence of this Paragraph 5, if the
lump sum cash payments due and the other benefits to which the Employee shall
become entitled under Paragraph 3 hereof, either alone or together with other
payments in the nature of compensation to the Employee which are contingent on a
change in the ownership or effective control of the Company or in the ownership
of a substantial portion of the assets of the Company or otherwise, would equal
or exceed, by less than $25,000, three times the Employee's "base amount" as
defined in Section 280G of the Code or any successor provision thereto, then in
such case such lump sum payment and/or such other benefits and payments shall be
reduced to the largest aggregate amount as will result in no portion thereof
being subject to the excise tax imposed under Section 4999 of the Code (or any
successor provision thereto) or being non-deductible to the Company for federal
income tax purposes pursuant to Section 280G of the Code (or any successor
provision thereto). The Employee in good faith shall determine the amount of any
reduction to be made pursuant to this Paragraph 5 and shall select from among
the foregoing benefits and payments those which shall be reduced. No
modification of, or successor provision to, Section 280G or Section 4999
subsequent to the date of this Agreement shall, however, reduce the benefits to
which the Employee would be entitled under this Agreement in the absence of this
Section 5 to a greater extent than they would have been reduced if Section 280G
and Section 4999 had not been modified or superseded subsequent to the date of
this Agreement, notwithstanding anything to the contrary provided in the first
sentence of this Paragraph 5.
6. Successors and Assigns.
(A) This Agreement shall be binding upon and inure to the benefit of
the successors, legal representatives and assigns of the parties
hereto; provided, however, that the Employee shall not have any right
to assign, pledge or otherwise dispose of or
-14-
<PAGE> 15
transfer any interest in this Agreement or any payments
hereunder, whether directly or indirectly or in whole or in part,
without the written consent of the Company.
(B) The Company will require any successor (whether direct or indirect,
by purchase of a majority of the Outstanding Company Voting
Securities or all or substantially all of the assets of the
Company, or by merger, consolidation, reorganization or otherwise),
by agreement in form and substance satisfactory to the Employee, to
assume expressly and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. Failure of the
Company to obtain such agreement prior to the effectiveness of any
such succession (other than in the case of a merger or
consolidation) shall be a breach of this Agreement and shall
entitle the Employee to compensation from the Company in the same
amount and on the same terms as the Employee would be entitled
hereunder if the Employee terminated his employment on account of a
Constructive Involuntary Termination, except that for purposes of
implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the date of termination.
7. Governing Law. This Agreement shall be construed in
accordance with the laws of the State of Minnesota without regard to conflict
of laws principles.
8. Notices. All notices, requests and demands given to or made
pursuant hereto shall be in writing and shall be delivered or mailed to any such
party at its address which:
(A) In the case of the Company shall be:
FSI International, Inc.
322 Lake Hazeltine Drive
Chaska, Minnesota 55318
Attention: Chief Executive Officer
(B) In the case of the Employee shall be:
Joel A. Elftmann
FSI International, Inc.
322 Lake Hazeltine Drive
Chaska, Minnesota 55318
Either party may, by notice hereunder, designate a changed address. Any notice,
if mailed properly addressed, postage prepaid, registered or certified mail,
shall be deemed to have been given on the registered date or that date stamped
on the certified mail receipt.
-15-
<PAGE> 16
9. Severability; Severance. In the event that any portion of this
Agreement is held to be invalid or unenforceable for any reason, it is hereby
agreed that such invalidity or unenforceability shall not affect the other
portions of this Agreement and that the remaining covenants, terms and
conditions or portions hereof shall remain in full force and effect, and any
court of competent jurisdiction may so modify the objectionable provision as to
make it valid, reasonable and enforceable.
10. Employment Tax Withholding. The Company may withhold from any
compensation or benefits payable under this Agreement all federal, state, city
or other income and employment taxes that are required to be withheld pursuant
to any law or governmental regulation or ruling.
11. Non-Disposition of Payments. Employee may not encumber or
dispose of any payment under this Agreement, which payments and the rights to
such payments are expressly declared nonassignable or nontransferable, except as
otherwise specifically provided in this Agreement.
12. Titles. The titles and headings preceding the text of the
Paragraphs of this Agreement have been inserted solely for convenience of
reference and do not constitute a part of this Agreement or affect its meaning,
interpretation or effect.
13. Waiver. No provision hereof may be altered, amended, modified
or waived in any way whatsoever, except by written agreement executed by both
the Company and the Employee. The failure of either party to insist in any one
or more instances upon performance of any terms or conditions of this Agreement
will not be construed as a waiver of future performance of any such term,
covenant, or condition and the obligations of either party with respect to such
term, covenant or condition will continue in full force and effect.
14. Term. This Agreement shall commence on the date of this
Agreement and shall terminate, and the Term of this Agreement shall end, on the
later of (A) December 31, 2000, provided that such period shall be automatically
extended for one year and from year to year thereafter until notice of
termination is given by the Employer or the Employee to the other party hereto
at least 90 days prior to December 31, 2000 or the one-year extension period
then in effect, as the case may be, or (B) if the Commencement Date occurs on or
prior to December 31, 2000 (or prior to the end of the extension year then in
effect as provided for in clause (A) hereof), the second anniversary of the
Commencement Date.
15. Termination of Employment with the Company and its
Subsidiaries. References in this Agreement to "termination of employment with
the Company and its Subsidiaries" or words of similar import mean that the
employment of the Employee with whichever of the Company and one or more of the
Subsidiaries that shall have employed the Employee immediately prior to the
termination shall have been terminated.
-16-
<PAGE> 17
16. Superseded Agreement. This Agreement supersedes in all
respects the Management Agreement between the Employee and the Company dated as
March 28, 1994, (the "Superseded Change in Control Agreement"), which Superseded
Change in Control Agreement is hereby terminated and shall be of no further
force.
17. Indemnification. All rights to indemnification, expense
advancement and exculpation existing in favor of the Employee at the time of the
occurrence of the First Event as provided in the Articles of Incorporation or
Bylaws of the Company or any Subsidiaries or by law shall continue until the end
of the Transition Period.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
FSI International, Inc.
By /s/ Benno Sand
_______________________________
/s/ J.A. Elftmann Its CAO
_________________________ _______________________________
Joel A. Elftmann
-17-
<PAGE> 1
EXHIBIT 10.17
FSI
1998 ANNUAL INCENTIVE PLAN
1. PURPOSE
The purpose of the FSI 1998 Annual 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 pre-established Performance Targets, and also for awards
based on an individual's performance so long as the Company and/or the
Division's financial performance meets or exceeds a pre-established
Performance Target.
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 1998 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 Chief
Administrative Officer, Vice President, Human Resources, and Chief
Operating Officer.
"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; typically within Salary Band
Levels 80, 90, 100, or 110.
"Division": one or more of FSI's operating divisions, Chemical
Management (which includes Applied Chemical Solution's results but
excludes FSI CME results and FSI CME eliminations), Microlithography
(which includes Semiconductor Systems, Inc.'s results) and Surface
Conditioning.
"FSI": FSI International, Inc. and its successors or assigns.
1
<PAGE> 2
"Goal": the level of financial performance established for the
1998 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 1998 fiscal year.
"Eligible Employee": a person who during the 1998 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 1998 Annual Incentive Plan.
"Threshold": the level of financial performance established by
the Committee or the Compensation Committee that is 80% 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.
5. PLAN YEAR
The Plan Year is the Company's 1998 fiscal year and the effective date
of the Plan will be the first day of the 1998 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.
2
<PAGE> 3
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 7.0 (Level III)), 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
- 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
Threshold and Goal (85%, 90%, 95%) or between Goal and Maximum, (i.e.,
105%, 110% and 115% of Goal) are achieved. Eligible Employees shall be
classified in one of four Bands. For each Band, a specified percentage
of Annual Base Earnings shall form the basis upon which the Eligible
Employee's total potential Award is based. The Bands and the applicable
percentages of Annual Base Earnings upon which an Award is based
depending upon performance shall be established
3
<PAGE> 4
by the Committee or the Compensation Committee and may be weighted in
order to incentivise maximum performance. Each Eligible Employee will
be notified as to their potential Award. The master list of all
Eligible Employees will be kept by the Human Resources Department.
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.
(C) Each Eligible Employee shall also, in consultation with
his or her manager, establish individual performance goals for the Plan
year ("MBO's"). Such individual may be entitled to an Award based upon
the achievement of the MBO's and also if the Company's financial
performance or the Company's and the applicable Division's weighted
financial performance meets or exceeds Threshold Performance Targets.
(D) After the completion of the Plan Year, the Committee
and/or the Compensation Committee shall determine the level of
achievement as compared to the pre-established 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.
(E) 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 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
4
<PAGE> 5
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
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.
5
<PAGE> 6
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.
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.
6
<PAGE> 7
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.
Monday, March 23, 1998
7
<PAGE> 1
EXHIBIT 10.19
FSI/METRON
DISTRIBUTION AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Article 1: General Conditions ......................................................................2
Section 1.1 Appointment and Acceptance......................................................2
Section 1.2 Distributor Not Agent ..........................................................2
Section 1-3 Product Registration ...........................................................2
Section 1.4 Term ...........................................................................3
Section 1.5 Customer Sales .................................................................3
Article 2: Responsibilities and Obligations of Distributor .........................................3
Section 2.1 Best Efforts ...................................................................3
Section 2.2 Terms of Sale ..................................................................3
Section 2.3 Spare Parts Inventory...........................................................3
Section 2.4 No Sub-Distribution ............................................................4
Section 2.5 Distribution Functions..........................................................4
Section 2.6 Globalization ..................................................................4
Section 2.7 Applications/Process Support ...................................................4
Section 2.8 Sales and Marketing Personnel...................................................4
Section 2.9 Service Personnel...............................................................5
Section 2.10 Consideration..................................................................5
Section 2.11 Business Plan..................................................................5
Section 2.12 Periodic Performance Reviews...................................................6
Section 2.13 Financial Data.................................................................6
Section 2.14 Books and Records..............................................................6
Section 2.15 Export Sales...................................................................6
Section 2.16 Competition ............................................ ......................6
Section 2.17 Indemnification................................................................7
Section 2.18 Limitation of Product Warranty: Warranty.......................................7
Section 2.19 Insurance......................................................................7
Section 2.20 Escalation Policy..............................................................7
Section 2.21 Installation Obligations.......................................................7
Section 2.22 New Product Introduction Installation Obligations..............................8
Section 2.23 Metrics .......................................................................8
Article 3: Obligation to Maintain Integrity of Company Trademarks,
Service Marks and Brand Names ...........................................................8
Section 3.1 Ownership of Trademarks, Patents, and Copyrights ...............................8
Section 3.2 Prominence of Trademarks........................................................8
Section 3.3 Compliance with Laws............................................................9
Section 3.4 Notification of Violations......................................................9
Section 3.3 Notification of Violations......................................................9
Section 3.6 Assistance In the Protection of the Trademarks,
Patents and Copyrights ..................................................................9
Section 3.7 Limitation on Distributor Rights................................................9
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Section 3.8 License Agreements .........................................................9
Article 4: Responsibilities and Obligations of Company..........................................10
Section 4.1 Consideration of Orders.....................................................10
Section 4.2 Sale by Company.............................................................10
Section 4.3 Shipment of Products........................................................10
Section 4.4 Approval of Business Plan ..................................................10
Section 4.5 Technical and Sales Assistance..............................................11
Section 4.6 Stock Obsolescence..........................................................11
Section 4.7 New Product Introduction....................................................12
Section 4.8 Newly Acquired Products.....................................................12
Section 4.9 New Product Installation ...................................................12
Section 4.10 Product Performance........................................................12
Section 5: Terms and Termination................................................................12
Section 5.1 Termination: Renewal........................................................12
Section 5.2 Orders......................................................................13
Section 5.3 Default: Failure to Cure....................................................13
Section 5.4 Default: Insolvency.........................................................14
Section 5.5 Waiver: Repurchase of Inventory.............................................14
Section 5.6 Terms Applying after Termination ...........................................14
Article 6: Miscellaneous........................................................................14
Section 6.1 Confidential Data and Information...........................................14
Section 6.2 Financial Condition.........................................................15
Section 6.3 Affiliates of Company ......................................................15
Section 6.4 Maintenance of Records......................................................15
Section 6.5 Irreparable Harm............................................................15
Section 6.6 Compliance With Governmental Regulations....................................15
Section 6.7 Force Majeure...............................................................15
Section 6.8 Non-Assignability...........................................................16
Section 6.9 Notice......................................................................16
Section 6.10 Construction of Agreement..................................................16
Section 6.11 Compliance with Laws and Regulations.......................................16
Section 6.12 Execution..................................................................17
Section 6.13 Alternative Dispute Resolution ............................................17
Section 6.14 Governing Law..............................................................18
Section 6.15 Waiver of Breach...........................................................18
Section 6.16 Benefit....................................................................18
Section 6.17 No Other Agreements........................................................18
Section 6.18 Amendments.................................................................18
Section 6.19 Severability...............................................................18
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 6.20 Solicitation of Employees...............................................18
Section 6.21 Competing Principal.....................................................18
Section 6.22 Resale of Equipment.....................................................18
Section 6.23 Signatures..............................................................18
</TABLE>
iii
<PAGE> 5
FSI/METRON DISTRIBUTION AGREEMENT
THIS AGREEMENT is made and entered into this 31st day of March, 1998,
by and between FSI INTERNATIONAL, INC., organized and existing under the laws of
the State of Minnesota, United States of America ("Company"), and METRON
TECHNOLOGY B.V., organized and existing under the laws of The Netherlands,
("Distributor").
WHEREAS, Company designs, manufactures and sells products for use in
the microelectronics industry and wishes to expand its market for the Products
(defined below) in the geographic territory (defined below) set forth herein;
WHEREAS, Distributor distributes and sells products in the
microelectronics industry and desires to serve as Company's distributor of the
Products upon the terms and conditions set forth herein; and
WHEREAS, Distributor and Company have over the past several months
negotiated and developed a formal outline describing their respective roles and
responsibilities, which is attached as Exhibit D.
WHEREAS, the Company and Distributor desire to enter into a new
Distribution Agreement to reflect the terms and provisions of Exhibit D.
NOW, THEREFORE, Company and Distributor hereby agree as follows:
1. GENERAL CONDITIONS
1.1 APPOINTMENT AND ACCEPTANCE. Subject to terms and conditions
contained in this Agreement, Company hereby hires and appoints, and Distributor
hereby undertakes and accepts, an appointment as the Distributor of those
Company products described in Exhibit A, Part I and spare parts related thereto
(described below) ("Spare Parts") (collectively "Products") for the geographic
territory described or defined in Exhibit B, Part I ("Territory") for the period
commencing on the date set forth above (the "Effective Date") for the term set
forth in Section 1.4 hereof. Distributor agrees to sell Products to all
customers within the Territory ("Customers"), except for those customers
Products or geographic areas specifically excluded in Exhibit B, Part II.
1.2 DISTRIBUTOR NOT AGENT. Distributor is not an agent, servant,
employee, co-partner, or joint venture of or for Company for any purpose
whatsoever. Distributor shall not have any right or authority to assume or
create any obligation or responsibility, expressed or implied, on behalf of or
in the name of Company, or to bind Company in any manner or way whatsoever.
Distributor shall perform its duties and obligations under this Agreement as an
independent contractor.
1.3 PRODUCT REGISTRATION. If required by local law, registration of
Products shall be in the name of the Company whenever possible. Within thirty
(30) days of the date of this Agreement, any registration documents required
under local law shall be provided to Company by Distributor. A copy of
registration documents are to be provided to the Company within ten (10) days of
receiving registration by
2
<PAGE> 6
Distributor if the registration is granted after the effective date of this
Agreement. If this Agreement is terminated, then said registrations belong
solely to Company and Distributor shall execute any assignments, modifications
or changes necessary to immediately transfer such registration(s) to Company.
1.4 TERM. This Agreement shall take effect as of the Effective Date
and shall continue until January 31, 2000 (the "Initial Term"), unless sooner
terminated as provided in Article 5.
1.5 CUSTOMER SALES. Distributor will follow its discount escalation
policy in its negotiations with its customers and will provide Company with a
current copy of same. Except to the extent expressly prohibited by applicable
law, Distributor shall not discount prices to global customers; (i.e., those
with multi-geographic locations or influence including existing or future joint
ventures) below Company's U.S. list (exclusive of any applicable Company
discounts to such customers) without Company's prior knowledge and consent. Upon
request, Distributor shall inform FSI of the discounts provided to its customers
and of complete sales proposals to potential customers. Sales proposals to
potential customers will be consistent with the divisional or product format
approved by the Company.
2. RESPONSIBILITIES AND OBLIGATIONS OF DISTRIBUTOR
2.1 BEST EFFORTS. Distributor shall exercise its best efforts to sell
Products in the Territory to the reasonable satisfaction of Company, and in
connection therewith, Distributor shall carry out its responsibilities and
obligations set forth in this Article 2.
2.2 TERMS OF SALE. Distributor shall purchase Products in accordance
with Company's current prices, terms, and conditions of sale as established by
Company as of the date of sale and as set forth in Exhibit A, Parts I, II, and
III. No terms proposed by Distributor in a Purchase order or otherwise that are
different from or in addition to the terms of this Agreement shall apply to any
purchase hereunder unless expressly agreed to in writing by an authorized
representative of the Company. Company may, in its absolute discretion, change
the prices, terms and conditions of sale, other than Distributor discounts or
commissions, upon sixty (60) days prior written notice to Distributor; provided,
however, that Company will hold prices on firm quotes for products (but not
Spare Parts) issued in writing by Distributor to a Customer prior to the notice
of the price increase where the delivery date is within 180 days of the
effective date of such price increase so long as said Customer accepts that
delivery date and issues an order consistent with Product lead times.
Notwithstanding anything contained in this Section, prices are subject to change
immediately and without notice for correction of errors or Product structure
changes. Distributor shall make payment in full within sixty (60) days of
shipment.
2.3 SPARE PARTS INVENTORY. Distributor shall maintain a level of
Spare Parts inventory necessary to enable Distributor to carry out its
distribution responsibilities and obligations under this Agreement. The level of
such inventory shall be as set forth in Distributor's Initial and Periodic
Business Plans as approved by Company as set forth in Section 2.11 below. Upon
reasonable advance notice, Distributor shall permit Company's representatives to
enter its premises during normal business hours and at regular intervals to
verify the inventory level of Products and to examine parts from which a credit
or warranty claim is or had been made.
3
<PAGE> 7
Notwithstanding the provisions of Exhibit E, for two years
following a new product's introduction to which this Agreement applies any spare
parts purchase during the first twelve months following the new product
introduction may be returned by Distributor within the two-year anniversary of
the product's introduction for a credit at Distributor's original cost. Any
spare parts for such new product obsoleted during this period will be covered by
the Company's general spare parts policy.
2.4 NO SUB-DISTRIBUTION. Distributor shall not appoint
sub-distributors in the Territory to carry out its responsibilities and
obligations under this Agreement.
2.5 DISTRIBUTION FUNCTIONS. Except for those Products, Territories,
or Customers listed in Exhibit B, Part II and notwithstanding any other
provisions contained herein, Distributor shall perform directly all ordering,
handling, stocking, selling, shipping, installation, and all warranty,
application, and engineering support necessary to distribute Products
effectively throughout the Territory, shall adequately maintain agreed upon
levels of Spare Parts inventory in good and marketable condition. Unless
otherwise agreed in writing by Company, Distributor will not distribute directly
or indirectly in the Territory any products, control systems or systems which
are similar to or competitive with the Products or their applications; provided,
however, that Distributor may, with the written permission of Company,
manufacture items integral to Company's equipment, control systems, or systems.
Exhibit C Part I sets forth Distributor's general responsibilities with respect
to Product sales and service hereunder, which responsibilities may be revised
from time to time to include new products.
2.6 GLOBALIZATION. Although Distributor's sales responsibility is
limited to the Territory, Distributor and Company recognize that customers
within the Territory may have facilities or business relationships outside the
Territory. Distributor agrees to actively support the Company's globalization
efforts including sales to Distributor's customers outside of the Territory.
Distributor acknowledges that support of this globalization effort is part of
its obligations under this Agreement and that it will not be entitled to any
additional compensation for sales to its customers outside of the Territory
unless such sale has been identified as a "strategic account" as part of the
Company's globalization efforts and then only to the extent such globalization
plan provides for compensation.
2.7 APPLICATIONS/PROCESS SUPPORT. In addition to its responsibilities
above, Distributor shall provide applications/process support in the Territory
by:
Providing trained field applications personnel in Asia and
Europe to troubleshoot and define customer processes and supply reports and data
to Company with respect to such endeavors;
Participating and facilitating user conferences with Customers
and Company;
Providing ongoing support directly or in cooperation with
Company to Customers in the areas of applications development, system acceptance
and qualification, troubleshooting, data collection and process refinement.
2.8 SALES AND MARKETING PERSONNEL. Distributor shall engage and
maintain, at its sole expense, fully qualified and technically knowledgeable
sales and marketing personnel to promote the sale and service of Products in the
Territory as set forth in Distributor's Business Plan. Distributor's sales and
4
<PAGE> 8
marketing personnel shall actually participate with Company in developing
product and marketing plans, in user groups and in Company programs relating to
the marketing, sale and promotion of the Products. Distributor shall also
participate in trade shows and exhibitions to promote the sale of Products in
the Territory. Distributor shall organize, at its expense, Product training
seminars as may be reasonably necessary to promote effectively the sale of
Products in the Territory. Distributor's use of non-qualified personnel to sell,
market, or represent the Company in any way is prohibited
2.9 SERVICE PERSONNEL. Distributor's Service Personnel must have
relevant technical background or experience. They must also meet any minimum
standards set by FSI prior to training for certification on FSI's Products. The
Distributor also will train its Service Personnel and supply them with the
proper tools and Distributor shall only permit level 3 certified service
personnel to service and maintain Products. Distributor also agrees to supply
its Service Personnel with and train them regarding safety equipment.
Distributor also agrees to maintain adequate service levels and to provide
retraining and recertification of its personnel and the Company will provide
assistance in establishing such levels. The Company may provide Distributor with
guidelines as to the qualifications, certifications, and abilities of
Distributor's service personnel.. In the event that Company is required to
provide installation support to Distributor due to the non-certification of
Distributor's personnel, Distributor shall reimburse Company at Company's then
current hourly labor rate for each hour of service (plus travel expenses) for
such services.
2.10 CONSIDERATION. The grant of distribution rights is the sole
consideration provided by Company to Distributor for activities undertaken by
Distributor pursuant to this Agreement. Distributor is not entitled to any
compensation from Company for such activities, unless Company so agrees in
writing. All travel and selling expenses associated with sale and service of
Products shall be the sole responsibility of Distributor.
2.11 BUSINESS PLAN. Within ninety (90) days of the execution of
this Agreement, Distributor shall submit to Company an initial business plan
(the "Initial Business Plan") for its review and comment per Section 4.4. After
submission of the Initial Business Plan, Distributor shall update and submit
periodically (but no less than annually) to Company a written business plan (the
"Business Plan"), which shall set forth information including, but not limited
to, the number and addresses of locations within the Territory where Distributor
intends to maintain inventory, a projected level of annual sales of Products
which Distributor intends to achieve within the Territory and Distributor's
marketing strategies for the Product. Such sales projections shall set forth
estimated US dollar sales and volume of each Product by Territory. After receipt
of the Initial Business Plan, Company shall provide to Distributor the form and
content of such Business Plan at least ninety (90) days prior to the start of
Company's next fiscal year.
In addition, if requested to do so by Company, Distributor shall
provide or cause to be provided:
2.11.1 Distributor's current price lists for the sale of
Products to its customers in the Territory.
2.11.2 Distributor's merchandising plans and programs
developed and utilized with copies of any promotional
written materials that contain the Company name or
logo.
5
<PAGE> 9
2.11.3 Distributor's actual and planned sales volumes,
itemized by Product and customer.
2.11.4 Any other information reasonably related to the
selling and marketing of Products in the Territory.
2.11.5 Such information as the Company may reasonably
request to satisfy itself that Distributor is
addressing internal hardware and software systems
issue related to Year 2000 compliance to insure there
is no interruption of its business.
2.12 PERIODIC PERFORMANCE REVIEWS. During the term of this Agreement,
Distributor shall provide Company with performance reviews at a mutually agreed
upon frequency (e.g. quarterly, four month intervals). Such written performance
reviews shall include, but not be limited to, the identification of Products
sold by the quantities and the selling prices or costs thereof, the names and
locations of customers to whom such Products were sold in the Territory, the
current and near term goals of Distributor, quarterly metric reports, warranty
claims, pricing, leads, customer surveys, Product performance,cycle-time/
problem resolution, installations, post-installation status reports,
and any other information that Company may from time to time reasonably deem
appropriate.
2.13. FINANCIAL DATA. Distributor shall promptly provide quarterly
financial information reflecting Distributor's current financial condition and
operating results to Company's Chief Financial Officer. Company shall keep such
information confidential.
2.14 BOOKS AND RECORDS. Distributor shall keep accurate records and
accounts of all transactions covered by this Agreement, such as sales by
account, purchase orders, correspondence, Product sales, and tracking of
samples, and shall permit examination by Company or its representatives, at any
time during normal business hours, of such accounts and transactions with
customers. Company's right to examine such accounts and transactions shall cease
one year after the termination of this Agreement. Any requests for review made
after termination will be limited to a specific issue which Company is
investigating. Distributor shall keep, by Product and customer location, records
of all systems installed including records relating to meantime between failure,
service records, revision levels installed, maintenance records, spare parts
records, warranty service, installation drawing, hookups, and acceptance
criteria and shall provide copies of same to Company upon its request. In
addition, Distributor shall keep records regarding the training and
qualification of its Service Personnel, and related items.
2.15 EXPORT SALES. Without Company's written consent, Distributor
shall not sell Products to customers within the Territory if Distributor knows
or reasonably could determine that such Products are intended for sale or use
outside the Territory. If Distributor acquires knowledge of the opportunity for
such sale, Distributor shall inform Company of such opportunity, including the
identity of the prospective customer, and provide support consistent with
Company's globalization strategy.
2.16 COMPETITION. Distributor shall promptly report unfair competitive
acts by others and shall take such steps as are reasonably necessary to protect
the Company's goodwill and reputation throughout the Territory; provided,
however, that Distributor shall not have any authority to bring or defend any
legal action in the name of the Company or its affiliates without the Company's
prior written consent. In
6
<PAGE> 10
addition, if the offerings of FSI products include OEM modules (i.e, an MHS
System) Metron shall not purchase such modules other than through FSI without
FSI's express written consent.
2.17 INDEMNIFICATION. Distributor shall indemnify, defend, and hold
harmless the Company and its officers, directors, agents, employees,
shareholders, legal representatives, successors and assigns, and each of them,
from loss, liability, costs, damages, or expenses from any and all claims,
actions and suits, whether groundless or otherwise, and from and against any and
all liabilities, judgments, losses, damages, costs, charges, attorney's fees,
and other expenses of every nature and character by reason of Distributor's
actions, inactions, performance, or business hereunder or that of its agents,
employees, subcontractors or others acting on its behalf. Distributor further
agrees that the provisions contained in this section shall survive the
termination or expiration of this Agreement and shall be liberally construed in
favor of Company.
2.18 LIMITATION OF PRODUCT WARRANTY: WARRANTY. COMPANY MAKES NO
REPRESENTATIONS OR WARRANTIES, EXPRESSED OR IMPLIED (INCLUDING THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR PARTICULAR PURPOSE) EXCEPT THOSE
SET FORTH IN COMPANY'S THEN CURRENT PUBLISHED WARRANTY POLICIES AND PROCEDURES
APPLICABLE TO A PARTICULAR PRODUCT. Distributor hereby accepts Company's then
current published warranty with respect to a Product and with respect to
applications of a Product, and agrees that such warranty shall be extended by
the Distributor to Customers in the Territory. Distributor is responsible for
any modifications to Company's standard warranty agreed to by Distributor and
shall also provide written notice of any such modifications to Company.
Distributor also agrees to provide support for and to implement Company's
upgrade and corrective action programs. Company reserves the right to change the
terms and conditions of the referenced warranty at its sole option upon 30 days
written notice to Distributor and any and all such changes in and to the
referenced warranty shall become effective upon expiration of the notice period.
The parties hereto acknowledge and agree that Company's liability with respect
to any Product shall be limited solely to Company's referenced warranty, as may
be changed or modified from time to time by Company, in its sole discretion.
2.19 INSURANCE. During the term of this Agreement and for a period of
two years thereafter, Distributor agrees to maintain polices of insurance of the
nature and amounts specified below:
- General commercial liability insurance of at least $2.0 Million.
- Property damage insurance of at least $2.0 Million.
- Other statutory insurance provisions required by the applicable
laws of the Territory.
2.20. ESCALATION POLICY. If Distributor is not meeting its performance
objectives, Company and Distributor will mutually develop and document a
performance improvement plan which may include adjustments in the compensation
arrangements provided for in this Agreement. Further, the parties agree to
follow mutually agreed upon escalation policies to promote the proper and
effective resolution of any issues among them or with customers.
2.21 INSTALLATION OBLIGATIONS. Distributor is primarily responsible
for installation, commissioning, start up and acceptance, except as provided in
Section 4.9 with respect to the first two
7
<PAGE> 11
installations of a new product in each of Asia and Europe. Generally,
Distributor's installation/service personnel are expected to be certified prior
to the third installation of each Product in Asia and in Europe. If certified
personnel are not available, the Company and Distributor agree that at the time
of the acceptance of such order a determination will be made whether Company
will perform the installation and reduce the discount to Distributor or if
Company will bill Distributor on an hourly basis for support and service
provided by Company. Distributor may use subcontractors to assist on an
installation so long as they are insured, bonded and certified to service that
FSI Product. Distributor accepts full responsibility and liability for such
subcontractors' work.
2.22 NEW PRODUCT INTRODUCTION INSTALLATION OBLIGATIONS. With
respect to a new product to which this Agreement applies, Distributor will:
- develop an internal plan to insure it can
support the product;
- commit sales parts personnel to
participate in product introduction
programs and develop strategic and
tactical sales and market plans;
- provide qualified sales and service personnel
to be trained and/or certified with respect to
the product; and
- assist in the development and implementation
of Company's marketing and strategic plans
2.23 METRICS. Distributor and Company shall agree upon
Distributor's performance metrics during the term of this Agreement, which will
include not only the Business Plan and Quarterly Plans referred to above, but
also (i) price attainment and lead attainment goals and incentives; (ii)
customer satisfaction surveys (similar to Company's own survey); (iii) service
and installation metrics in a form acceptable to Company; (iv) tool performance;
and (v) cycle time problem resolution. Failure to achieve satisfactory metrics
will result in mutually agreed upon escalation policies which may impact the
compensation arrangements under this Agreement.
3. OBLIGATION TO MAINTAIN INTEGRITY OF COMPANY TRADEMARKS, SERVICE MARKS AND
BRAND NAMES
3.1 OWNERSHIP OF TRADEMARKS, PATENTS, AND COPYRIGHTS. Distributor
acknowledges Company's exclusive right, title, and interest in and to any and
all trademarks and trade names, whether or not registered, (hereinafter, such
trademarks and trade names shall be collectively referred to as "Trademarks"),
patents ("Patents"), copyrights ("Copyrights") and trade secrets or know-how
which Company may have at any time created, adopted, used, registered, or been
issued in the United States of America or in any other location, and Distributor
agrees that it shall not do, or cause to be done, any acts or things contesting
or in any way impairing or tending to impair any portion of Company's right,
title, and interest in and to the Trademarks, Patents, Copyrights, trade secrets
and know-how.
3.2 PROMINENCE OF TRADEMARKS. In advertising, promotions or in any
other manner so as to identify Products, Distributor shall clearly indicate
Company's ownership of the Trademarks, Patents, and Copyrights. Distributor
further agrees that before distributing or publishing any sales literature,
promotional or descriptive materials, Company shall have the right, upon
request, to inspect, edit and
8
<PAGE> 12
approve of such materials and the Distributor shall provide Company with an
opportunity to inspect, edit and approve such materials as a matter of routine.
3.3 COMPLIANCE WITH LAWS. When referring to the Trademarks, Patents,
and Copyrights, Distributor shall comply with any and all applicable laws and
regulations within the Territory or the United States.
3.4 NOTIFICATION OF VIOLATIONS. Distributor shall promptly notify
Company, in writing, of any and all infringements, imitations, illegal use or
misuse of the Trademarks, Patents, and/or Copyrights which shall come to the
Distributor's attention. Distributor further agrees that it shall take action in
connection with infringement of the Trademarks, Patents, and/or Copyrights,
and/or trade secrets and otherwise attempt to prevent the infringement,
imitation, illegal use or misuse of the Trademarks, Patents, and/or Copyrights
only with Company's prior written consent.
3.5 NOTIFICATION OF VIOLATIONS. Distributor agrees, except to the
extent prohibited by applicable law, to render to Company any and all assistance
reasonably requested of it by Company in connection with the protection and/or
registration of Trademarks, Patents, and/or Copyrights, and to make promptly
available to Company Distributor's personnel files and any other files or
records, or any other information it possesses, or to which it has access, which
may be of use to Company in connection with this Article 3, except to the extent
prohibited by applicable law.
3.6 ASSISTANCE IN THE PROTECTION OF THE TRADEMARKS, PATENTS, AND
COPYRIGHTS. Distributor agrees that at no time during the term of this
Agreement, nor at any time after this Agreement's expiration or termination,
shall Distributor adopt, register, or use in any manner whatsoever or permit the
adoption, registration, or use without Company's prior written consent, any
word, symbol, or combination thereof, which in any way imitates, resembles, or
is similar to any Trademarks of Company, nor shall Distributor in any manner
whatsoever infringe the rights of Company in any Patent or Copyright.
3.7 LIMITATION ON DISTRIBUTOR RIGHTS. By executing this Agreement,
Distributor hereby agrees to grant and does grant to Company an exclusive
worldwide royalty-free license to make, have made, offer for sale, use, sell,
import, duplicate, create derivative works, distribute, perform and to display
all improvements, modifications or inventions (whether patentable or not) that
Distributor has made in the past or makes to any Product or any process
implemented or capable of being implemented on a Company Product during the
period of this Agreement and for two years thereafter. Said license agreement
shall be in a form reasonably acceptable to Company, in its sole discretion.
With respect to all such inventions, during the term of this Agreement, Metron
agrees to prosecute and be responsible for the costs associated with prosecuting
such inventions. If following termination of this Agreement, Metron intends to
abandon prosecution of any inventions or the maintenance of a patent related to
the Products of the Company or processes related thereto, it shall provide the
Company with at least 60 days advance notice and the right to prosecute or
continue maintenance of such patent at Company's cost.
3.8 LICENSE AGREEMENT. By executing this Agreement, Distributor
hereby agrees to grant and does grant to Company an exclusive worldwide
royalty-free license to make, have made, offer for sale, use, sell, import,
duplicate, create derivative works, distribute, perform and to display all
improvements, modifications or inventions (whether patentable or not) that
Distributor has made in the past or makes to
9
<PAGE> 13
any Product or any process implemented or capable of being implemented on a
Company Product during the period of this Agreement and for two years
thereafter. Said license agreement shall be in a form reasonably acceptable to
Company, in its sole discretion. With respect to all such inventions during the
term of this Agreement, Metron agrees to prosecute and be responsible for the
costs associated with prosecuting such inventions. If following termination of
this Agreement, Metron intends to abandon prosecution of any inventions or the
maintenance of a patent related to the Products of the Company or processes
related thereto, it shall provide the Company with at least 60 days advance
notice and the right to prosecute or continue maintenance of such patent at
Company's cost.
4. RESPONSIBILITIES AND OBLIGATIONS OF COMPANY
4.1 CONSIDERATION OF ORDERS. Company shall give reasonable
consideration to Distributor's orders for Products and shall make shipments of
accepted orders promptly in accordance with Company's production schedule and
subject to Product manufacturing lead times. If not rejected within seven (7)
business days, all orders for Products shall be considered accepted. After
acceptance, order cancellations by Distributor are subject to Company's
cancellation policy provided however, the parties recognize that there are
circumstances where it would be inequitable to impose such charges.
4.2 SALE BY COMPANY. Company shall, subject to commercial
availability, offer for sale to Distributor those Products listed on Exhibit A
for resale to Customers within the Territory. Company will not knowingly sell
Products to customers within the Territory except as included within Company's
responsibility pursuant to Exhibit B. Notwithstanding the preceding sentence, if
Company reasonably determines that additional sales are desirable for the full
development of the Products in the Territory, and Distributor has demonstrated
that it is unable to develop fully the market for Products to Customers in the
Territory, then Company may, without notice and without Distributor's consent,
sell Product in the Territory so long as Company does not change the
compensation structure of Distributor. Company further reserves the right, on a
product by product basis, to sell or, in the Company's sole discretion, to
establish a local presence through a joint venture, strategic alliance or
otherwise for any one or more of Company's Divisions or Products, provided,
however, that Company will obtain the consent of Distributor if such change
modifies Distributor's compensation structure. If the Distributor does not
consent within thirty (30) days of notice thereof, then Company will give
Distributor twelve (12) months notice of its intent to enter the market and
change the compensation structure. The prices and terms fixed by Company for
sales to Distributor hereunder are special prices and terms applicable only to
the Company Products intended for ultimate resale in the Territory for which
Distributor is responsible and in which Distributor is to employ all its
marketing efforts.
4.3 SHIPMENT OF PRODUCTS. Unless otherwise determined by Company,
Products shall be sold f.o.b. Company's warehouse/distribution center and title
and risk of loss shall pass to Distributor at the f.o.b. point.
4.4 APPROVAL OF BUSINESS PLAN. Company shall notify Distributor in
writing within thirty (30) days of receipt whether or not Distributor's Business
Plan is acceptable and, if unacceptable, the portions thereof which require
revision. Distributor shall have thirty (30) days to revise its Business Plan to
the reasonable satisfaction of Company. Distributor's failure to revise its
Business Plan to the reasonable satisfaction of Company shall constitute a
substantive breach of this Agreement.
10
<PAGE> 14
4.5 TECHNICAL AND SALES ASSISTANCE. Company will assist
Distributor in promoting sales of Products within the Territory by:
4.5.1 Providing periodic technical and sales training seminars
and programs relating to the sales and service of Products, in the United States
for the training and certification of Distributor's personnel, and the relevant
certification criteria for such personnel;
4.5.2 Providing technical service and support, including the
establishment of procedures for the installation, design and certified training
process and the tools required for installation;
4.5.3 Providing technical service and promotional literature
including any documentation and drawings of maintenance procedures and tool
configurations;
4.5.4 Making joint sales calls and conducting Product seminars
in support of Distributor's sales efforts in the Territory;
4.5.5 Providing the necessary personnel, guidance and support
for the initial installation of a new Product in the Territory;
4.5.6 Providing new Product introduction service obligations;
4.5.7 Providing telephone support during normal business hours;
4.5.8 Making Company Service Personnel available for assistance
at its prevailing hourly rates, plus travel expenses;
4.5.9 Providing Distributor with guidelines for staffing levels
and the job descriptions and qualifications of such individuals;
4.5.10 Providing copies to Distributor of process, technical,
service and safety bulletins;
4.5.11 Assisting Distributor in developing its Initial and
Business Plans; and
4.5.12 Providing any other assistance that Company may deem
appropriate to promote Product sales in the Territory.
Each party shall be responsible for the expenses (including the cost of
transportation, meals and lodging) incurred by its own employees with respect to
subparagraphs 4.5.1, 4.5.2, 4.5.4, and 4.5.5 above. In addition to this Section
4.5, Exhibit C, Part II sets forth in general Company's overall responsibilities
with respect to Product sales and service hereunder.
4.6 STOCK OBSOLESCENCE. Commencing on or before June 30, 1998,
Company shall issue quarterly Spare Parts obsolescence reports ("Quarterly
Obsolescence Report") which shall list by part
11
<PAGE> 15
number the obsolescence status/category and estimate the effective date for the
Spare Parts status change. Categories of obsolescence are as follows:
"Obsolete Immediately" means the part is obsoleted
immediately for safety reasons; or
"Obsolete Over Time" means the part may be used or
returned over the specified time period, typically not exceeding six (6) months.
For purposes of sub-sections 4.6.1 and 4.6.2 above, Company's order
administration will provide instructions for return of the obsolete parts. No
restocking fee will apply in the case of Subsection 4.6.1 or in the case of
Subsection 4.6.2 when the obsolete Spare Part is returned within the time
specified in the Quarterly Obsolescence Report or twelve (12) months from the
date of original sale to the Distributor, whichever is later.
4.7 NEW PRODUCT INTRODUCTION. Company, in consultation with
Distributor, will develop comprehensive product introduction programs addressing
the issues of: (i) documentation of procedures, processes, marketing and product
specifications; (ii) installation, support and criteria; (iii) training,
certification and transition responsibility; (iv) strategic location of
demonstration units and trade show demonstrations; (v) process and process
support requirements of Distributor; (vi) identification of strategic accounts;
(vii) beta site support criteria; (viii) Spare Parts issues; and (ix)
recommended Spare Parts and return goods policy.
4.8 NEWLY ACQUIRED PRODUCTS. If Company, acquires or otherwise merges
with an existing Company with a direct sales presence in Distributor's
territory, the Company retains the right to operate those sales and services
offices and to use them to support the acquired Company's Products in those
areas notwithstanding any other provision of this Agreement.
4.9 NEW PRODUCT INSTALLATION. For the first two installations of a
new product in each of Asia and Europe, FSI will provide service personnel to
assist with support and direction with Distributor's support, generally until
product acceptance.
4.10 PRODUCT PERFORMANCE. Company is responsible for designing and
delivering Products capable of achieving published specifications. Company and
Distributor will follow an escalation policy to address any performance issues
relating to the Product's specifications. If the escalation policy fails to
resolve the issue, upon mutual agreement, such failure may result in additional
charges to Company.
5. TERMS AND TERMINATION
5.1 TERMINATION: RENEWAL. This Agreement shall take effect as of the
Effective Date and continue until terminated. The Company or Distributor may
terminate this Agreement on or after January 31, 2000 by giving one (1) year
prior written notice. Neither party shall be entitled to any compensation,
indemnity, damages, or other payment in the event of termination in accordance
herewith. Each party hereby waives the application of any law providing for such
payment or restricting termination as provided herein. Notwithstanding the above
provisions of this Section 5.1, if at any time during the initial or any
12
<PAGE> 16
subsequent term of this Agreement Distributor completes an Initial Public
Offering (as defined below), and provided that Company continues to hold at
least 20% of the Common Stock of Metron outstanding immediately prior to such
Initial Public Offering and FSI has not prior to the closing of the Initial
Public Offering provided Distributor with a termination notice, then this
Agreement shall continue for a term of two (2) years from the date of the
closing of the Initial Public Offering (the "IPO term"). Either party may
terminate this Agreement effective at any time on or after the expiration of
such IPO term by providing at least 12 months prior written notice (which notice
may be given during or after the IPO term). Furthermore, if after the date
hereof the Distribution Agreement between Distributor and Fluoroware, Inc. is
amended to deal in any manner with the term and/or termination of such
Distribution Agreement in connection with a public offering by Metron or fails
to deal with such event (the "Fluoroware Amendment"), and if such terms
contained in the Fluoroware Amendment regarding the term and termination are
more favorable to Fluoroware with respect thereto than are the preceding two
sentences to Company, then this Agreement shall be amended so as to include the
terms of the Fluoroware Amendment regarding the term and termination and the
parties hereto agree to take all action necessary to affect such amendment.
The term "Initial Public Offering" shall mean the first public
offering of shares of Distributor Common Stock in the United States registered
under the Securities Act of 1933, as amended, in which Distributor receives at
least $20,000,000 in aggregate net proceeds from the sale of such stock and
which is closed by June 30, 2000.
Notwithstanding anything contained above in this Section 5.1,
this Agreement may be terminated at any time by either party with one (1) year
notice to the other party upon the happening of any of the following events: (i)
sale of all or substantially all of the Company or Distributor; (ii) an
acquisition involving more than 50% of the assets of Company or Distributor
other than the "Initial Public Offering" of Distributor; (iii) a merger or
consolidation involving Distributor or Company in which 40% or more of the new
entity is owned by persons other than the respective shareholders of Company or
Distributor (as the case may be) immediately preceding the effective date of the
merger; or (iv) the sale of a Division of Company, in which case the termination
shall be limited to the Division sold or the Products related to such sale.
5.2 ORDERS. Orders for Products accepted by Company as of the date of
termination of this Agreement which have not been delivered as of such date
shall be processed under the terms of this Agreement, subject to Distributor's
ability to provide adequate assurance of payment to Company for such Products.
Upon termination, if requested by Company, Distributor shall assemble and
deliver to Company all records pertaining to past, current, and pending orders
for Products. Termination of this Agreement shall not affect accrued rights of
Company which by their nature are intended to survive termination. In all
events, such terminated Distributor shall work towards a transition plan to
address customer support, warranty, and spare parts.
5.3 DEFAULT: FAILURE TO CURE. This Agreement also may be terminated
by Company with one hundred eighty (180) days written notice if Distributor
defaults in performance of any of its obligations under Article I, Sections 1.1
or 1.2, Articles 2, 3 or Article 6, Sections 6.1, 6.2, 6.4, 6.6 or 6.8 of this
Agreement if Distributor was first given 180 days' prior written notice of the
default, an opportunity to cure such default and informed at the time of the
notice of default that failure to cure could result in termination.
13
<PAGE> 17
5.4 DEFAULT: INSOLVENCY. If Distributor shall be the subject of any
judicial or non-judicial bankruptcy or insolvency proceeding, or becomes
insolvent, or if a receiver, liquidator or administrator of the Distributor's
property or any part thereof is appointed by a court of competent authority, or
if Distributor shall make an assignment for the benefit of creditors, Company
may terminate this Agreement by giving written notice to the Distributor, its
legal representative or assigns, as the case may be. Any termination, whether
for default or otherwise, shall not relieve Distributor from liability for
amounts owed to Company.
5.5 WAIVER: REPURCHASE OF INVENTORY. Distributor hereby waives any
right or claim to damages or compensation resulting from Company's decision not
to extend this Agreement. If this Agreement is terminated or expires, Company
may, at its option, repurchase inventory from Distributor in accordance with the
Company's Spare Parts Policy. Notwithstanding the provisions of Attachment E, if
Company has given notice of a termination other than for breach of the Agreement
by Distributor, it shall repurchase those spare parts in Distributor's
inventory, which were purchased within two years of the termination, at
Distributor's cost and will purchase at its depreciated value any demonstration
equipment of Products from Distributor. In addition, FSI shall become
responsible for service, warranty and other obligations of Distributor with
respect to Company's Products following the effective date of the termination
and Distributor agrees to sign its obligations to Company subject to mutual
agreement by the parties as to an appropriate amount of compensation to be paid
to Company to assume Distributor's obligations with its customers for Company
Products. Company reserves the right to reasonably reject any Spare Part which
is not in the condition as originally delivered to Distributor or which does not
meet Company's current design standards.
5.6 TERMS APPLYING AFTER TERMINATION. If this Agreement is terminated
or expires, the terms of this Agreement shall continue to apply to the Products
then owned, possessed or controlled by Distributor. Termination of this
Agreement will not release either party from any obligation accrued prior to the
effective date of termination.
6. MISCELLANEOUS
6.1 CONFIDENTIAL DATA AND INFORMATION. Distributor shall neither use
nor disclose to any third parties any confidential information concerning the
business, affairs, or Products of Company which Distributor may acquire during
the course of its activities under this Agreement (or any prior agreements
between Company and Distributor), provided, however, Distributor may make such
disclosures to prospective or actual customers subject to a confidentiality
agreement. As used herein confidential information of Company shall include but
not be limited to any confidential or proprietary information or compilation of
information acquired by or disclosed to Distributor which relates to the
business, products, markets or research or planning activities of FSI, whether
or not expressly designated by FSI as "Confidential" or "Proprietary". FSI
Confidential Information also includes inventions made, strategies, forecasts,
research and development plans of FSI, FSI customer lists, supplier lists, and
information about FSI's computer systems and networks. Distributor shall take
any and all necessary precautions to prevent unauthorized disclosures including,
but not limited to, Confidentiality Agreements, Non-Compete Agreements and/or
Invention Assignment Agreements with its employees in the form attached hereto
as Exhibit F. The Confidentiality Agreement must be signed by Distributor.
Fully-executed copies shall be
14
<PAGE> 18
filed with the Company. To the extent practical, Distributor will follow
Company's confidentiality guidelines, once finalized, and the parties agree to
protect the confidential information of third parties that is exchanged between
them in writing, using a reasonable of care, but in no event less than the same
degree of care it uses to protect its own confidential information.
6.2 FINANCIAL CONDITION. If Distributor defaults in any financial
obligation hereunder, or if its financial condition is inadequate in Company's
opinion to justify extension of credit of further shipments of Products, then
Company may cancel any outstanding order for Products or delay any shipment of
Products to Distributor, unless adequate assurance of payment is provided.
Company may require execution of a security agreement or an irrevocable letter
of credit by Distributor at any time as a condition of sale of Products to
Distributor hereunder.
6.3 AFFILIATES OF COMPANY. Company reserves the right, upon written
notice to Distributor to assign to any company affiliated with Company (herein
called "Company Affiliate") responsibility for filling orders for Company
Products from Distributor. Distributor agrees to place orders with such Company
affiliate, and make payment as above in accordance with such notice. Sales made
by such Company affiliate pursuant to this Section shall be deemed to be sales
of Company Products made to Distributor hereunder.
6.4 MAINTENANCE OF RECORDS. Distributor shall keep accurate accounts
and records of all transactions covered by this Agreement, and shall permit
Company or its agents at any time during normal business hours to examine such
accounts and records. Company's right to examine such accounts and records shall
cease one year after the termination of this Agreement.
6.5 IRREPARABLE HARM. Any breach by Distributor under Sections 2.5 or
2.16, Article 3 or Sections 6.1, 6.21 or 6.22 hereof shall be deemed to have
caused irreparable injury to Company which is not compensable by an adequate
remedy at law. In such event, Company shall be entitled, in addition to any
other remedy permitted by law, to injunctive relief in respect of such breach,
plus an award of all costs and actual attorney's fees, incurred in enforcing the
same.
6.6 COMPLIANCE WITH GOVERNMENTAL REGULATIONS. In the event any law or
regulation is enacted in a country listed in Exhibit B, Part I attached hereto,
which commercially frustrates Company's purpose in entering into this Agreement
or its ability to perform hereunder, Company shall have the right, in its sole
discretion, upon 60 days notice, notwithstanding any other provisions of this
Agreement, to immediately terminate this Agreement as to the affected Territory
or to modify unilaterally that portion of the Agreement which has been so
affected.
6.7 FORCE MAJEURE. Each party shall be excused from its obligation to
order or deliver Products under this Agreement in the event of national
emergency, war, acts of God, prohibitive government regulations or other causes
beyond the reasonable control of such party if such event renders performance of
this Agreement impossible. If the event renders performance impossible for a
period exceeding sixty (60) days, either party may terminate this Agreement
effective immediately by giving the other party written notice of its intention
to do so and Distributor shall immediately pay all sums owed to Company.
15
<PAGE> 19
6.8 NON-ASSIGNABILITY. This Agreement may not be assigned by
Distributor, nor may any duty of obligation hereunder be delegated to any party
without the prior written consent of Company. Any permitted assignee shall enter
into a new distributorship agreement with Company upon request.
6.9 NOTICE. All notices required to be given hereunder shall be
deemed to have been effectively given only when delivered personally to an
officer of the applicable party, or when first sent by facsimile transmission
and confirmed by registered mail, addressed to the applicable party at its
address set forth below, or at such other address as such party may hereafter
designate as the appropriate address for the receipt of such notice:
To the Company at: FSI International, Inc. With a copy to:
Attention: Benno Sand Luke R. Komarek
322 Lake Hazeltine Drive General Counsel
Chaska, Minnesota 55318 322 Lake Hazeltine Drive
U.S.A. Chaska, MN 55318
U.S.A.
To the Distributor at: Metron Technology B.V. With a copy to:
Attention: Edward Segal Metron Technology Ltd.
1350 Old Bayshore Highway, Attn: Chris Levett-Prinsep
Suite 360 6 & 7 Grafton Way
Burlingame, California 94010 Bassingstoke, Hampshire
U.S.A. England RG226HY
6.10 CONSTRUCTION OF AGREEMENT. This instrument and the attached
Exhibits constitutes the entire Agreement of the parties with respect to the
subject matter thereof and shall be construed in accordance with the laws of the
State of Minnesota without regard to choice of law doctrine. The United Nations
Convention on Contracts for the International Sale of Goods will not be
applicable to this Agreement or the transactions contemplated hereunder. For
purposes of resolving any issue pertaining to conflict of laws, this Agreement
shall be deemed to be fully and solely executed, performed, and observed in the
State of Minnesota. The parties consent to personal jurisdiction in the State of
Minnesota and to accept service of process with respect to any action or
proceeding brought in any court as provided in the following sentence.
Distributor and Company agree that any action brought by either party shall be
filed only in the United States District Court for the District of Minnesota.
6.11 COMPLIANCE WITH LAWS AND REGULATIONS. Distributor shall comply
with all applicable laws and regulations during the course of performance of
this Agreement and in related activities. Should registration of this Agreement
with governmental authorities be required under the local laws of the Territory,
Distributor shall comply with such registration requirements and provide proof
of such compliance to Company. Distributor shall not, directly or indirectly,
engage in any acts which would constitute a violation of United States laws and
regulations, including but not limited to laws and regulations governing exports
of products or technology, the Foreign Corrupt Practices Act and the
Anti-Boycott Act.
16
<PAGE> 20
6.12 EXECUTION. This Agreement shall be executed in duplicate but
shall not be binding upon Company until a copy, signed by the Distributor, is
and executed by Company.
6.13 ALTERNATIVE DISPUTE RESOLUTION. The parties shall first attempt
to resolve any dispute arising out of or relating to this Agreement in
accordance with the procedures specified below.
6.13.1 The parties shall attempt in good
faith to resolve any dispute arising out of or relating to this
Agreement promptly by negotiation between executives who have
authority to settle the controversy and who are at a higher level
of management than the persons with direct responsibilities for
administration of this contract. Any party may give the other
party written notice of any dispute not resolved in the normal
course of business. Within fifteen (15) days after delivery of
the notice, the receiving party shall submit to the other a
written response. The notice and the response shall include (i) a
statement of such party's position and a summary of arguments
supporting that position, and (ii) the name and title of the
executive who will represent that party and of any other person
who will accompany the executive. Within thirty (30) days after
delivery of the disputing party's notice, the executives of both
parties shall meet at a mutually acceptable time and place, and
thereafter as often as they reasonably deem necessary, to attempt
to resolve the dispute. All reasonable requests for information
made by one party to the other will be honored.
6.13.2 If the matter has not been resolved
within sixty (60) days of the disputing party's notice, or if the
parties fail to meet within thirty (30) days of such notice,
either party may initiate mediation of the controversy or claim
as provided below in Section 6.13.3.
6.13.3 If the dispute has not been resolved
by negotiation as provided above, the parties shall endeavor to
settle the dispute by mediation through JAMS/Endispute under its
then current Rules. The neutral third party mediator will be
selected from the JAMS/Endispute Panels of Neutrals, with the
assistance of JAMS/Endispute, unless the parties agree otherwise.
6.13.4 All negotiations pursuant to this
clause are confidential and shall be treated as compromise and
settlement negotiations for purposes of the Federal Rules of
Evidence and state rules of evidence.
6.13.5 If the parties fail to resolve the
dispute through mediation within 45 days of the request for
mediation, then either party may pursue its remedies in Federal
District Court of Minnesota.
6.13.6 Notwithstanding the above provisions
of this Section 6.13, the parties shall not be required to
attempt to negotiate or mediate the dispute if it relates to a
breach of the provisions of Sections 2.5, 2.16, 2.17, 2.18, 5.1,
5.3, 6.1, 6.21, 6.22 and Article 3 or to Distributor's financial
obligations.
17
<PAGE> 21
6.14 GOVERNING LANGUAGE. The governing language of this Agreement
shall be English.
6.15 WAIVER OF BREACH. The failure of either party to require the
performance of any term of this Agreement or the waiver by either party of the
breach of any term of this Agreement shall not prevent a subsequent enforcement
of such term, nor be deemed a waiver of any subsequent breach.
6.16 BENEFIT. This Agreement shall be binding upon the legal
representatives, successors, and assigns of Company and of Distributor.
6.17 NO OTHER AGREEMENTS. Except as expressly contemplated in this
Agreement, there are no other agreements, oral or written, between the parties
effecting this Agreement or relating in any way to the selling or servicing of
Products. This Agreement supersedes all previous negotiations and agreements
between the parties.
6.18 AMENDMENTS. No change or addition to any portion of this
Agreement shall be valid or binding upon either party unless mutually agreed to
in writing.
6.19 SEVERABILITY. If any provision of this Agreement is determined to
be invalid or unenforceable, the provision shall be deemed to be severable from
the remainder of this Agreement and shall not cause the invalidity of the
remainder of this Agreement.
6.20 SOLICITATION OF EMPLOYEES. Company and Distributor agree that
during the term of the Agreement and for a period of six months thereafter it,
nor its successor company, will not directly or indirectly solicit the other
party's employees or alternatively will agree upon an appropriate amount of
compensation for each individual solicited and hired by it.
6.21 COMPETING PRINCIPAL. If an existing principal of Distributor
becomes a competitor of the Company, Distributor must choose within sixty (60)
days thereafter which principal's competing product it intends to present and
shall terminate its representation of the other principal for product in the
geographic area where it has been or is authorized to represent both products as
soon as possible but no later than six months from the date of its election.
Further, to reduce the likelihood of such conflicts, Distributor will provide a
quarterly report to Company of principals of whom it is negotiating and the
Company must indicate whether or not it objects to proposed principal and, if
so, the basis for its objection shall be provided to Distributor.
6.22 RESALE OF EQUIPMENT. Distributor agrees not to resell or
refurbish Company Equipment without Company's written consent.
6.23 SIGNATURES. This Agreement may be executed in counterparts and
facsimile signatures shall be considered originals.
18
<PAGE> 22
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
Metron Technology, B.V. FSI International, Inc.
/s/ Ed Segal /s/ Joel Elftmann
By: ____________________ By: ___________________
Ed Segal Joel Elftmann
Its: Managing Director Its: Chairman and Chief
Executive Officer
/s/ Chris Levett-Prinsep
By: ______________________________
Chris Levett-Prinsep
Its: Managing Director
19
<PAGE> 1
EXHIBIT 13.0
FSI International
1998 ANNUAL REPORT
25 YEARS OF INNOVATION AND CHALLENGE
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 15 through 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
Financial Highlights 1
Letter to Shareholders 2
Operations Review 5
Selected Financial Data 11
Management's Discussion and Analysis 12
Independent Auditors' report 19
Statement of Management's Responsibility 19
Consolidated Financial Statements 20
Notes to Consolidated Financial Statements 24
Quarterly Data 32
Corporate and Stockholder Information 33
<TABLE>
<CAPTION>
Financial Highlights
(in thousands, except per share 1998 1997 1996
data)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 217,894 $ 252,441 $ 304,041
Research and development expenses 42,975 39,713 40,998
Net (loss) income (21,952) 4,640 28,548
Net (loss) income per
</TABLE>
<PAGE> 2
common share
Basic ($ 0.96) $ 0.21 $ 1.29
Diluted ($ 0.96) $ 0.20 $ 1.23
Cash, cash equivalents and $ 88,879 $ 89,209 $ 71,921
marketable securities
Working capital 156,044 170,878 156,348
Property, plant and equipment 68,788 76,665 45,595
Total debt 42,130 42,256 498
Total assets 310,458 331,152 293,283
Stockholders' equity 204,376 224,340 218,127
Book value per share $ 8.87 $ 9.93 $ 9.75
Number of shares outstanding 23,035 22,583 22,362
During fiscal 1998, there were $14.5 million of pre-tax charges including $2.0
million relating to organizational changes and the settlement of a patent
infringement lawsuit and $12.5 relating to severance and outplacement costs,
increased inventory reserves, facilities consolidation costs and other charges.
To Our Shareholders
FSI International did not have a good year in fiscal 1998, reflecting industry
conditions. What started out as a promising year ended in disappointment. In
this letter, I will do my best to explain to you what happened, why our revenues
were down and why we reported a loss for the year.
First of all, there is a worldwide decline in the semiconductor industry. It
began in 1996, showed modest improvement in early 1997, but then worsened and
continued to decline during 1998. As a result, customers canceled or delayed
anticipated capital equipment purchases. This situation was compounded by the
Asia-Pacific economic and currency crisis.
During the year we took steps--which we will detail later in this letter--to
keep FSI healthy in this challenging environment. We continue to monitor
industry conditions to determine if any additional steps are needed. Despite
these difficult measures, we remain very positive about FSI. After 25 years in
the business, we are well aware of the dramatic economic and technological
cycles that are typical of the semiconductor industry.
Let me assure you that FSI has excellent products, technology and people in
place. We are proud to report that for the fourth time, VLSI Research ranked FSI
one of the 10 best semiconductor capital equipment suppliers in the world. To
serve our customers, we will continue to invest in vital research and
development and other strategically important programs.* Above all, we are well
positioned to respond when the industry recovers.
<PAGE> 3
Financial Results
During fiscal 1998, sales declined 14 percent to $218 million from $252 million
in fiscal 1997. The net loss was $22 million, or $.96 per share (diluted)
compared to a net income of $4.6 million or $.20 per share (diluted) in fiscal
1997.
The steps we took in the fourth quarter to lower our operating costs resulted in
$12.5 million in pretax charges. However, we ended the year in a strong
financial position with $88.9 million in cash, cash equivalents and marketable
securities, a current ratio of 3.5 to 1, and a book value of approximately $8.87
per share. We also began fiscal 1999 with approximately $54 million in backlog.
Management/Employees
In January 1998, The President's Office was established with a primary focus on
day-to-day operations. This change now allows me to focus more time and energy
on customer and industry issues and opportunities. We now have in place three
autonomous divisions with a dedicated primary facility for each. We believe that
by having engineering, laboratory, manufacturing, sales, marketing and service
within each division we will see an increase in the quality of products and
services and improve our operational efficiency.*
The President's Office includes Ben Sloan, Ph.D., as Chief Operating Officer;
and Benno Sand as Chief Administrative Officer. Ben is also continuing to serve
as President of the Microlithography Division. Benno, who was previously Chief
Financial Officer, now has responsibility for all the Company's shared service
organizations, including Finance.
Also in January 1998, Patricia (Pat) Hollister was appointed Chief Financial
Officer and Corporate Controller. She has been with FSI as Corporate Controller
since 1995. In addition, shortly after the retirement of Bob Cavins, Ph.D., Dale
Pescatrice was hired and appointed President of the Chemical Management
Division. Then, in midyear, Ajit Rode joined the Company as Vice President and
General Manager for the Microlithography Division's Fremont, Calif. operation.
These managers bring a wealth of knowledge and experience to our Company.
We are also pleased to announce the election of Thomas (Tommy) George, Ph.D., to
our Board of Directors. Tommy is retired from Motorola where he served as
President and General Manager of the Semiconductor Products Group.
Unfortunately, the deterioration in industry conditions during the year required
us to make some changes that affected our work force. After three quarters in
fiscal 1998, we reported a $4.7 million loss and expected continued losses in
the fourth quarter. As a result, through two steps in July and October, we were
forced to reduce our work force to 950 employees, or approximately 29 percent.
We are sincerely saddened by these actions. It hits us hard when we are forced
to release employees. Although no one likes these cost reduction measures, they
are well understood and a necessary step for the Company to maintain cash and
position itself to return to profitability.
<PAGE> 4
After taking such actions, it is always difficult to ask remaining employees to
recommit their talents and energy and convince them there is a future for the
industry. However, we have historically had a dedicated and committed work force
focused upon reaching higher levels of efficiency and customer satisfaction and
we do not expect this to change.*
Organizational Focus
With our divisionalization initiative complete, we continue to improve on
quality and operational efficiencies within each division--Surface Conditioning,
Microlithography and Chemical Management. Our goal is to leverage the best
practices in each division, while our challenge is to show the benefit of this
organizational structure.*
To support this business model, we selected SAP as our enterprise resource
planning (ERP) system. We decided to replace our existing systems with a single
ERP system that can provide managers with better real time information which is
required for decision making. When the implementation is completed in late 1999,
the new system should allow FSI to operate as an integrated enterprise and
perform functions that existing systems cannot.*
As we move forward into the next fiscal year, we intend to focus on delivering
our process technology on fewer platforms.* And, to bridge the gap between
200-mm and 300-mm in the marketplace, we have developed a two-prong strategy:
FSI is providing process capabilities and support for current 200-mm wafer
fabrication, while at the same time, bridging to the next-generation equipment
compatible with 300-mm/sub 0.18-micron technologies.*
Industry Outlook
The demand for PC's historically has had
a significant impact upon semiconductor industry growth. Analysts predict that
PC unit volume growth will continue in 1999 driven by expanding internet usage,
in-home networks, attractive PC pricing and Year 2000 upgrade requirements.
However, the industry worldwide continues to be affected by production
overcapacity. In fact, chip manufacturers are producing more chips on each wafer
by shrinking the die size. Currently, manufacturers are able to increase
production without buying a significant amount of new equipment or moving to the
next generation 300-mm wafer size, resulting in a delay of 300-mm production and
the need to purchase equipment.
Although shrinking feature sizes have allowed device manufacturers to extend the
life and increase the production of existing fabs, at some point they will need
to build new fabs to produce next generation devices. We believe that customers
will start to recognize this in calendar 1999.*
Also, within the past few years, there has been a significant shift in strategy
in the industry. More and more integrated circuit manufacturers are using
foundries to handle their overcapacity orders instead of expanding existing or
constructing new facilities. While we are not certain what this shift will mean
in the long term, we are paying attention to it. The positive aspect of this
shift is that foundry production calls for very flexible processing capability.
We believe FSI products provide an advantage in this area.
<PAGE> 5
Overall, the semiconductor industry is expected to begin growing again sometime
in late calendar 1999.* But it will depend on the global economy as to when it
will truly start to come back.
Strategic Direction
In an effort to strengthen FSI's overall competitiveness and value to customers,
we are focused upon the following business and shared services objectives:
resist processing, surface conditioning, chemical management, back-end-of-line
(BEOL), business systems, worldwide presence and human resources.
We are supporting these objectives by
providing funding for certain underlying strategies. These strategies include
continuing to fund resist processing on silicon wafers and thin film head
manufacturing, as well as nickel iron plating for thin film head manufacturing
utilizing our proven cluster platform. The surface conditioning objective is
supported by two primary strategies: expand the breadth of process applications
on existing and new products, and strengthen our worldwide service and support
capabilities.
The Chemical Management Division will continue to focus resources on slurry
blending and delivery technology used in chemical mechanical polishing (CMP) and
high purity chemical blending and delivery technology for other bulk chemicals
used in a customer's fab. Also, we are funding a few strategies in support of
our BEOL objective with a primary goal of leveraging existing platform and
process technology for use with emerging BEOL device manufacturing technology.*
In support of our business system objective, we have allocated resources to
upgrade our business systems to SAP, as previously discussed, and to ensure that
all internally developed hardware and software is Year 2000 compliant. In an
effort to accomplish our worldwide presence objective, we are working closely
with our affiliates, Metron Technology and m-FSI, to improve our customer
satisfaction by strengthening our worldwide support capabilities. Also, in
support of our human resources objective, we have a strategy to align our reward
and performance systems in support of progress made toward accomplishing key
objectives and strategies.
In closing, I want to express my gratitude to our employees and affiliates for
their loyalty, and to our customers and shareholders for their continued
support. I believe that if we execute well, we will be able to leverage our
world-class laboratory and manufacturing facilities when industry conditions
improve.* We are ready for the challenges that face us in the coming year.
Sincerely,
Joel A. Elftmann
Chairman and Chief Executive Officer
November 13, 1998
Operations Review
25 Years of Innovation and Challenge
<PAGE> 6
Twenty-five years ago in Chaska, Minnesota, FSI International was launched with
the introduction of the semiconductor industry's first centrifugal spin rinser
dryer for silicon wafers.
Since that time, FSI has become an innovative supplier of automated processing
equipment used to manufacture microelectronics, including semiconductor devices,
thin film heads and multichip modules. Today the company specializes in three
distinct wafer manufacturing technologies--surface conditioning, photoresist
processing (microlithography) and chemical management--each one representing a
different division of FSI.
An international company since its earliest days, FSI is involved in one of the
world's most dynamic and challenging industries. It is an industry with
technology that evolves at a rapid pace, customers who span the globe, and
process requirements that change with each successive device generation.
Our business depends 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. Although the
semiconductor industry has seemingly had vast potential, it has also been
volatile and cyclical.
Over the years, FSI has emphasized long-term, strategic technology roadmaps to
deliver leading-edge products. We also know our customers remain under
tremendous pressure to deliver increasingly complex, higher quality, lower-cost
products.
Although the industry is currently in a downturn, we believe a new wave of
growth is inevitable.* At some point, manufacturers will upgrade their
technology and new production capacity will come on stream.* As it has for the
past 25 years, FSI International is prepared to respond to the needs of its
customers today, tomorrow and well into the next millennium.*
Surface Conditioning
Since it began, FSI has been at the forefront of wafer cleaning technology. Over
the years, the Company has expanded its surface conditioning technologies to
include wet, vapor, cryokinetic and dry-vacuum processes.
Today, the Surface Conditioning Division's products include the MERCURY Surface
Conditioning Systems, which perform submicron cleaning, etching and photoresist
stripping applications; EXCALIBUR Vapor Phase Processors, which perform
specialty etching and cleaning applications; and the ARIES CryoKinetic Surface
Conditioning System, which uses frozen argon/nitrogen crystals to remove
particulate contamination from semiconductor wafers.
In addition, the division has developed the ZETA Surface Conditioning System,
which is a spray batch processor designed to meet all factory automation
requirements for both 200- and 300-mm wafer technology. The ZETA system has a
broad range of applications to meet the needs of 0.18 micron and smaller process
technologies. In addition, we are currently undergoing a SEMATECH I300I 300-mm
Phase 3 process qualification with the ZETA system and anticipate shipment to
customer sites in 1999.*
<PAGE> 7
While this was a difficult year for the semiconductor industry, the Surface
Conditioning Division can report a number of accomplishments. For example, we
shipped our 300th EXCALIBUR vapor phase system. In fact, in a down market, we
had our best year for EXCALIBUR systems--revenues in 1998 increased compared to
1997--and have continued to receive orders from the United States, Europe and
the Asia-Pacific region. The EXCALIBUR system has a broad customer base and the
capability to do certain processing steps better than any other available
technology. We have maintained a leadership position with this product, and it
is the cornerstone for developing advanced cleaning technologies.
With our ARIES product, all sales had been to one major device manufacturer.
Recently, however, we demonstrated yield improvements for another key customer
which showed an opportunity for a very quick return on investment for them. In
addition, the ARIES system can provide back-end-of-line (BEOL) process
applications for advanced logic devices.
Our goal for the Surface Conditioning Division is to be the leading supplier of
total cleaning solutions. We are supporting this goal through a combination of
internal product and process development and acquisition of critical technology
to provide a complete product portfolio to meet our customers' needs. To offer
this complete portfolio, we know we need a combination of processing
technologies and equipment configurations.
We also know our systems need to handle all wafer sizes through 300-mm with
capabilities from manual to robotic loading. The tools must also accommodate
open cassette, SMIF (standard machine interface), or fully automated 300-mm
FOUPs (front opening unified pods). To offer 300-mm solutions, we are not just
modifying a 200-mm tool. In fact, we have new 300-mm designs based upon our
current underlying tool technology and application knowledge.
To make our product development and on-going support more cost effective, the
division has embarked on a strategy of platform consolidation. Our plan is to
reduce the number of overall control and handling systems. For example, our new
ANTARES(TM) single wafer platform is capable of integrating such products as the
EXCALIBUR and ARIES systems. We will merge these systems and controls to a
common handling and control system.* The advantages for customers will include
common spares, less service training and support, less engineering support and
the ability to mix and match multiple process technologies. We will accept
orders for this new platform in early 1999 for shipment later in the year.*
To help our customers lower the overall cost of ownership, we have introduced a
device termed "low flow pickup." This gives our spray processing equipment the
ability to operate with diluted chemicals, thereby reducing overall chemical
cost. We have also been successful in demonstrating that we can completely
eliminate the sulfuric acid and hydrogen peroxide mixture by using low cost
ozonated water for certain stripping applications. We have patents pending in
this area. This technology is extendable to BEOL processing and is compatible
with advanced copper interconnect device manufacturing technology now being
adopted by certain customers.
Overall, the Surface Conditioning Division is well positioned for the future. We
are building on our momentum with innovative products and technologies as well
as dedicated people.
<PAGE> 8
27.6% Percentage of Sales
Major Products
- - MERCURY(R) Surface Conditioning Systems with optional Material Handling System
(MHS)
- - EXCALIBUR(R) Vapor Processing Systems
- - ARIES(R) CryoKinetic Surface Conditioning System
- - ZETA(TM) Surface Conditioning System
- - Process and Service Support
The move to copper as an interconnect metal is an attractive substitute for
standard aluminum primarily because of its lower resistivity.
Microlithography
In 1990, FSI licensed technology from Texas Instruments to create a workcell
that became the POLARIS Microlithography Cluster, an innovative product line
introduced in 1991. In 1996, FSI acquired Semiconductor Systems, Inc. (SSI)--the
division's Fremont, Calif. operation. With this acquisition, the division became
the U.S. and European market leader in providing resist processing technology
for manufacturing of thin film heads.
Today, the Microlithography Division supplies photoresist processing equipment
and services for the semiconductor, thin film head and multichip module markets
from its design and manufacturing facilities in Allen, Texas, and Fremont.
Unmatched in the industry for its productivity and flexibility, the POLARIS
Microlithography Clusters apply and develop photosensitive materials on the
silicon wafer surface. The foundation of the POLARIS system is its productivity
and process capabilities. With linewidths shrinking, the most important process
parameter relative to photoresist equipment is thermal control. This has been an
area where FSI has demonstrated it can outperform its competitors.
Last February, FSI introduced its fourth-generation of the POLARIS system, the
2500 Microlithography Cluster. The POLARIS 2500 system features stacked spinners
for depositing photosensitive materials and applying a developer solution after
exposure. It also has 12 bake, prime and chill stations in a single module,
resulting in the smallest footprint of any system in the industry and more
efficient use of fab space. The POLARIS 2500 system is a 0.18-micron platform
with process extendability to smaller features, allowing customers to leverage
its capabilities for next generation devices. The features and characteristics
of this evolutionary product have been very well received.
We have also been field testing the POLARIS 3000 system, which will allow
processing of 300-mm wafers with no real change in platform or control systems.
To develop the 3000, we used 200-mm proven platform technology, making the tool
more affordable with reduced risk to the customer. Although acceptance of 300-mm
technology has been delayed by customers, the division has stayed on its
development schedule and is ready for the move to 300-mm.
<PAGE> 9
In an effort to ensure that our tools are performing well and that service is
timely, the division completed a performance improvement program during the past
year. In addition, we transferred all POLARIS cluster manufacturing from our
location in Chaska to our new 150,000-sq.-ft. world-class facility in Allen in
order to have all engineering, manufacturing and research capabilities in one
location. This move has improved both communication and efficiencies.
In recognition of the Microlithography Division's "excellent quality, first
class performance, outstanding cooperation and responsiveness," the division
received the Vendor of the Year award from SMST (Sub Micron Semiconductor
Technology), a joint venture between IBM and Philips Semiconductors in Germany.
The award was based on the division's and our affiliate's--Metron
Technology--support for 12 POLARIS Microlithography Clusters located at SMST's
facility in Boeblingen.
As part of FSI's strategy to license technology, the division--working with a
key customer--licensed certain nickel iron plating technology, which is used for
manufacturing thin film heads. As a result, we are now providing multiple thin
film head process applications on a proven cluster platform. We have already
received repeat orders for the product, which is now available to other
customers.
At the division's Fremont operation, where we manufacture the OrbiTrak and
SCORPIO systems, we have focused our efforts toward targeted customers with
specific application requirements. By focusing on our core business, we have
improved product performance and increased customer satisfaction.
During 1998, the Microlithography Division maintained its market share even
though marketplace conditions have been weak. With our POLARIS program, the
support of our affiliates, our consolidation in Allen, and a narrowing of our
application focus at Fremont, we are doing the things necessary to position
ourselves for when industry conditions improve.
34.2% Percentage of Sales
Major Products
- - POLARIS(R) Microlithography Clusters
- - ORBITRAK(R) Microlithography Clusters
- - SCORPIO(TM) Microlithography Clusters
- - Parts and Service Support
The movement to larger wafer sizes is driven by devices increasing in size and
the push for more chips per wafer. Since the 70s, wafer sizes have grown from
less than 100-mm to the present day 200-mm, with 300-mm wafers on the horizon.
Chemical Management
In 1985, FSI was one of the first suppliers in the microelectronics industry to
provide automated chemical delivery systems, replacing manual bottle fill of
chemicals to process tools in fabs. Then, in
<PAGE> 10
1995, FSI acquired Applied Chemical Solutions, which gave the Company a leading
role in the development of slurry blending and delivery technology for the
chemical mechanical polishing (CMP) process.
Today, FSI's Chemical Management Division supplies a wide range of blending and
delivery products and total systems support. In fact, approximately 1,700 of our
chemical management modules blend and deliver chemicals and slurries used in
semiconductor manufacturing process tools worldwide. The division conducts its
operations primarily through its facilities in Chaska; Hollister, Calif.;
Newhaven, England; and Bundang-Ku, Korea.
While this has been a challenging year for the Chemical Management Division
given the weakness in industry conditions, there were some notable highlights.
For example, we were awarded a substantial contract for customized chemical and
slurry delivery equipment in a new silicon wafer manufacturing facility in
Singapore. We also introduced the Model 1200 Series Chemical Delivery Model.
This system provides leading edge vacuum pressure technology at lower cost to
our customers and a high purity capability to support sub-0.18-micron device
manufacturing processes.
During the year, we also fine-tuned our infrastructure and division facilities.
We opened a new research and development laboratory in our Chaska facility,
which focuses on high purity chemical delivery and blending equipment. The
ultimate goal is to verify design and performance characteristics prior to
customer delivery of equipment.
We maintain a similar laboratory at our Hollister operation. The goals of this
laboratory are to qualify slurry chemistries for both semiconductor
manufacturers and slurry chemistry suppliers, and to evaluate CMP processes and
complimentary equipment.
During the year, we conducted an extensive study comparing our proprietary
vacuum pressure technology against the most commonly used alternative method.
The results of this study demonstrated that our technology is superior in
maintaining crucial slurry consistency or "health" parameters.
In October 1998, the division's P4400 Slurry Blending and Distribution System
was recognized by Semiconductor International as one of the "1998 Editors'
Choice Best Products." This product uses vacuum pressure technology, which
preserves slurry health by preventing particle accumulation that can cause
scratches on the silicon wafer during the CMP process.
In summary, we are seeing the benefits from our investment in state-of-the-art
laboratory facilities for this division. In fiscal 1999, the Chemical Management
Division will continue to focus on new products and technologies, which add
value and provide innovative solutions to customer needs.
22.9% Percentage of Sales
Major Products
- - ChemFill(R) Chemical Delivery Modules
- - ChemLitho(TM) Developer Blending Modules
- - ChemPrep(TM) Chemical Blending Modules
<PAGE> 11
- - Slurry Blending and Distribution Systems
- - Project Management, Installation and Support
The transition in features sizes from > 5.0 micron to less than 0.18 micron has
increased chip speeds and decreased power usage while allowing for a greater
number of chips per wafer.
Five-Year Selected Financial Data
<TABLE>
<CAPTION>
(In thousands, except per-share data 1998 1997 1996 1995 1994
and number of employees)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations
Sales $ 217,894 $ 252,441 $ 304,041 $ 218,460 $ 124,667
Gross profit 68,239 94,313 129,802 89,807 52,755
Selling, general and administrative 63,693 56,491 58,742 39,999 24,515
expenses
Research and development expenses 42,975 39,713 40,998 28,037 18,756
Operating (loss) income (38,429) (1,891) 30,062 21,771 9,484
Equity in earnings of affiliates 674 3,712 5,108 3,567 1,800
Net (loss) income (21,952) 4,640 28,548 21,358 9,767
Basic net (loss) income per common ($ 0.96) $ 0.21 $ 1.29 $ 1.23 $ 0.70
share
Weighted average common shares 22,801 22,466 22,177 17,422 14,023
Diluted net (loss) income per common ($ 0.96) $ 0.20 $ 1.23 $ 1.13 $ 0.65
share
Weighted average common shares and 22,801 22,374 23,207 18,867 15,077
common share equivalents
Pro Forma Data (1)
Net income $ 28,242 $ 20,533 $ 8,295
Diluted net income per common share $ 1.22 $ 1.09 $ 0.55
Balance Sheet
Cash, cash equivalents & marketable $ 88,879 $ 89,209 $ 71,921 $ 112,833 $ 13,558
securities
Working capital 156,044 170,878 156,348 153,263 34,928
Receivables, net 46,463 64,254 80,761 53,344 26,268
Inventories 50,152 61,990 64,075 40,577 21,936
Total current assets 218,045 233,472 229,994 217,251 67,859
Total assets 310,458 331,152 293,283 251,567 84,252
Total debt 42,130 42,256 498 4,892 1,541
Stockholders' equity $ 204,376 $ 224,340 $ 218,127 $ 186,667 $ 51,115
</TABLE>
<PAGE> 12
<TABLE>
<S> <C> <C> <C> <C> <C>
Dividends -- -- -- -- --
General Data and Ratios
Capital expenditures $ 7,766 $ 42,880 $ 33,112 $ 16,900 $ 3,537
Depreciation and amortization $ 15,888 $ 12,286 $ 8,209 $ 3,742 $ 3,085
Current ratio 3.52 3.73 3.12 3.40 2.06
Number of employees 1,142 1,357 1,412 1,130 744
Book value per common share $ 8.87 $ 9.93 $ 9.75 $ 8.48 $ 3.43
</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 4 of Notes to Consolidated Financial Statements.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
The information in this report, 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. Actual results may be materially different from these
forward-looking statements. Factors that could cause actual results to differ
include overall economic and financial conditions in our industry; general
economic conditions; the demand and price for semiconductors; the level of new
orders and order delays or cancellations; competitive pricing pressures; the
timing and success of current and future product and process development
programs; the success of the company's affiliated distributors; and the timing
and extent of any industry upturn or downturn. In addition, readers are also
directed to the Risk Factors discussion found below under "Risk Factors."
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 (*).
Industry conditions continue to be dominated by uncertainty and a sense that the
recovery is further out in the future than previously expected. Semiconductor
device manufacturers continue to reduce or delay their capital spending most
significantly in Korea and Japan; however, customers in other regions of the
world have also lowered their spending levels. Weak DRAM prices, driven by
excess capacity, have caused a number of customers to close or mothball
fabrication facilities.
As a result of current industry conditions, the Company is managing its business
to reflect expected lower revenues as compared to fiscal 1998.* The Company has
implemented cost reduction measures including involuntary reductions in force,
facilities consolidations, scheduled plant shutdowns and the delay or
cancellation of certain programs.
<PAGE> 13
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 1998 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of goods sold 68.7 62.6 57.3
Gross profit 31.3 37.4 42.7
Selling, general and administrative 29.2 22.4 19.3
Research and development 19.7 15.7 13.5
Operating (loss) income (17.6) (0.7) 9.9
Other income, net 0.6 0.9 1.3
Income (loss) before income taxes (17.0) 0.2 11.2
Income tax (benefit) expense (6.4) (0.2) 3.4
Minority interest 0.2 (0.1) (0.1)
Equity in earnings of affiliates 0.3 1.5 1.7
Net (loss) income (10.1) 1.8 9.4
</TABLE>
Sales:
Sales decreased to $218 million for the fiscal year ended August 29, 1998 as
compared to $252 million for the fiscal year ended August 30, 1997. The decrease
in sales occurred in the Chemical Management and Microlithography product lines
offset by increases in the Surface Conditioning product lines. The overall
decrease in sales is a result of limited capital expenditures by the Company's
customers due to the current condition of the semiconductor industry and the
uncertainty caused by the Asian currency crisis and overall global economics.
Sales decreased to $252 million for the fiscal year ended August 30, 1997 as
compared to $304 million for the fiscal year ended August 31, 1996. The decrease
in sales occurred in the Surface Conditioning and Microlithography product
lines. The decrease in sales was largely due to a decreased demand for equipment
as a result of industry conditions.
International sales were $89.8 million, $89.7 million and $107.9 million during
fiscal 1998, 1997 and 1996, respectively, and represented approximately 41%, 36%
and 35% of sales during these periods. The percent increase in international
sales in fiscal 1998 was primarily due to increased sales in Europe. See Note 16
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 approximately $54 million as
compared to $112 million at the end of fiscal 1997. 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 in writing 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.
The continued weakness in DRAM prices, driven by excess capacity, combined with
the financing difficulties and economic turbulence in Asia is causing the
Company's customers to be cautious about
<PAGE> 14
capital spending. Given the uncertainty in the industry, the Company could
continue to see delays or cancellation of orders in the future.* With the
significantly lower fiscal 1999 beginning backlog and the uncertain industry
conditions, the Company has limited visibility into fiscal 1999. The Company
believes that the sales level for the first quarter of fiscal 1999 will be flat
as compared to the fourth quarter of fiscal 1998 and that fiscal 1999 sales will
be below the fiscal 1998 sales level.* At the current anticipated sales level
for fiscal 1999, the Company expects a net loss for the year.*
Gross Profit:
Gross profit as a percentage of sales for fiscal 1998 was 31.3% as compared to
approximately 37.4% for fiscal 1997. The decrease in gross margins for fiscal
1998 as compared to fiscal 1997 was due to several factors including increased
inventory write-offs, excess manufacturing capacity due to lower sales levels
and product sales mix. Gross profit as a percentage of sales for fiscal 1997 was
37.4% as compared to 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 an increase in manufacturing capacity, and increased
warranty and obsolescence costs.
Gross profit margin for the fourth quarter of fiscal 1998 was significantly
reduced due to approximately $9.1 million of additional inventory reserves and
severance and outplacement costs associated with a reduction in force.
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 remain under pressure in fiscal 1999
because of excess capacity and the continued pricing pressure for Chemical
Management and Microlithography products.* It is anticipated that gross margins
as a percent of sales will be below 40% in fiscal 1999.*
Selling, General and Administrative Expenses:
Selling, general and administrative expenses (SG&A) were $63.7 million, $56.5
million and $58.7 million or 29.2%, 22.4% and 19.3% of sales during fiscal 1998,
1997 and 1996, respectively. The dollar and percentage increase in fiscal 1998
as compared to fiscal 1997 is mainly due to one-time charges of approximately
$5.0 million related to organizational changes announced in December 1997, the
settlement of a patent infringement lawsuit, severance costs and outplacement
fees related to a reduction in force and increased allowance for doubtful
accounts. In addition, the increase in the amount of SG&A expenses in fiscal
1998 was also due to costs associated with information systems, Year 2000
programs and overall infrastructure costs. The dollar amount decrease in the
amount of SG&A for fiscal 1997 as compared to fiscal 1996 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 Company expects the dollar amount of SG&A expenses to decrease in fiscal
1999 as compared to fiscal 1998.* However, the Company will continue investing
in worldwide sales and support capability,
<PAGE> 15
continue expanding the Company's business system applications and complete the
Year 2000 hardware and software change requirements.*
Research and Development Expense:
Research and development expenses for fiscal 1998 were $43.0 million, or 19.7%
of sales, as compared to $39.7 million, or 15.7% of sales, for fiscal 1997 and
$41.0 million, or 13.5% of sales, for fiscal 1996. In fiscal 1998, the Company
continued development efforts on new and existing products, including the
ARIES(TM) cryokinetic cleaning system, ZETA(TM) surface conditioning system,
ANTARES(TM) platform, new POLARIS(R) cluster models, ORBITRAK(R) enhancements
and certain new chemical management products.
In general the Company's goal is to invest approximately 13% to 15% of sales
annually on new product and process development programs. The Company expects
the amount of research and development expenses to decrease in fiscal 1999 as
compared to fiscal 1998.*
During fiscal years 1998, 1997 and 1996, the Company recognized approximately
$1,919,000, $277,000, and $0, respectively, of third party funding as reductions
in research and development expenses.
Other Income (Expense) NET:
Other income (expense) net was approximately $1.4 million of income, or 0.6% of
sales, for fiscal 1998 as compared to $2.5 million of income, or 0.9% of sales,
for fiscal 1997 and $4.1 million of income, or 1.3% sales for fiscal 1996. The
majority of the change was due to an increase of interest expense in both fiscal
1998 and 1997 as a result of the Company's $42.0 million private debt placement
completed in December 1996.
Income Tax (Benefit) Expense:
The income tax benefit for fiscal 1998 was approximately $14.0 million compared
to an income tax benefit of approximately $0.7 million in fiscal 1997. The
increase is due to larger operating losses resulting from lower revenues. 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.
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.
At August 29, 1998, the Company has recorded net deferred tax assets of
approximately $17.9 million. Based on an assessment of the Company's taxable
earnings' history and prospective future taxable income, as well as tax planning
strategies available to management which includes the sale or disposal of assets
to produce current taxable income, management has determined it to be more
likely than not that its net deferred tax asset will be realized in future
periods. The Company may be required to provide a valuation allowance for this
asset in the future if it does not generate sufficient taxable income as
planned.
<PAGE> 16
Equity in Earnings of Affiliates:
Equity in earnings of affiliates was approximately $674,000, $3.7 million and
$5.1 million for fiscal 1998, 1997 and 1996, respectively. The decrease in
fiscal 1998 as compared to fiscal 1997 is due to lower earnings at both
affiliates, Metron Technology B.V. and m-FSI Ltd., due to current industry
conditions. 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 as compared to
fiscal 1996 is due to lower profit margins on equipment sales and overall
increased selling, general and administrative expenses.
Liquidity and Capital Resources:
The Company's cash and cash equivalents and marketable securities were
approximately $88.9 million as of August 29, 1998, a decrease of $300,000 from
the end of fiscal 1997. The decrease in cash and cash equivalents and marketable
securities resulted primarily from the cash provided from operations offset by
acquisitions of property, plant and equipment.
The Company's accounts receivable decreased by approximately 27.7% or $17.8
million from the end of fiscal 1997. The decrease in accounts receivable was
mainly due to the 13.7% decrease in sales in fiscal 1998 as compared to fiscal
1997 and increased collection efforts by the divisions and the sales group.
The Company's inventory decreased approximately $11.8 million to $50.2 million
at the end of fiscal 1998, as compared to $62.0 million at the end of fiscal
1997. This was mainly due to decreases in finished goods and work-in-process and
a net increase in the inventory reserves of $812,000. As of August 29, 1998, the
Company's current ratio was 3.5 to 1.0 and working capital was $156.0 million.
The Company had acquisitions of property, plant and equipment of $7.8 million,
$42.9 million and $33.1 million in fiscal 1998, 1997 and 1996, respectively. The
Company expects capital expenditures to be less than $10 million in fiscal
1999.*
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 1999.*
The Company believes that success in its industry requires substantial capital
in order to maintain the flexibility to take advantage of opportunities as they
arise. The Company may, from time to time, as market and business conditions
warrant, consider divestitures, investments or acquisitions of 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 SFAS No. 129, "Disclosure of Information about
Capital Structures," which was 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 disclosure requirements of SFAS No. 129 did
not have an impact on the Company's financial statement disclosures.
<PAGE> 17
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 February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which requires companies to
disclose certain information about pensions and other postretirement benefits.
SFAS No. 132 must be adopted for financial statements issued for fiscal years
beginning after December 15, 1997. The Company will adopt SFAS No. 132 in fiscal
1999.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which establishes appropriate accounting
for derivative instruments and hedging activities. SFAS No. 133 must be adopted
for financial statements issued for fiscal years beginning after June 15, 1999.
It is anticipated that the Company will adopt SFAS No. 133 in fiscal 2000.
In March 1998, the FASB issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which establishes the
appropriate accounting for all costs related to software developed or obtained
for internal use. The Company adopted SOP 98-1 in fiscal 1998. The
implementation of SOP 98-1 will result in additional costs being capitalized for
software developed or obtained for internal use.
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. The industry is currently experiencing a downturn and it is
unclear at this point in time as to how long this downturn may last. 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 delay of delivery dates for the Company's
products. No assurance can be given that the Company's sales and operating
results will not continue to be adversely affected during the current slowdown
or will not be adversely affected by future slowdowns 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.
Risk of Delays in Introducing New Products and the Market's Acceptance of Such
Products:
<PAGE> 18
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. 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 is having a negative impact on gross
profit margins due to lower revenue levels. These additional facilities and
related infrastructure costs have also increased the overall operating expenses
of the Company. The potential impact of idle manufacturing capacity on gross
margins and related infrastructure costs will have an adverse impact on the
Company's future financial results until the Company is able to increase its
utilization rates.
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.
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. The Company may
experience significant fluctuations in its quarterly sales, gross profits,
operating results and net income. Factors which may influence the Company's
operating results in a given quarter include specific economic conditions in the
microelectronics industry, the financial results of the Company's affiliates,
the timing of the receipt of orders from major customers, the mix of products
sold by the Company, competitive pricing pressures, the proportion of
international sales, product modifications requested by customers, utilization
of manufacturing capacity 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,
<PAGE> 19
a small change in the numbers 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 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.
The earnings or losses of the Company's affiliated distributors can
significantly affect the financial results of the Company. The affiliated
distributors distribute not only the Company's products but also 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 consumable suppliers other than FSI. Thus,
the financial results of Metron and their impact on the Company's financial
results are dependent not only upon the ability of Metron to successfully market
the Company's products, but also on their ability to maintain relationships with
and market the products of other equipment and consumables suppliers. While
sales of the Company's products by Metron (and of certain other manufacturers
for whom they distribute) are generally in U.S. 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, the Company's equity interest in the earnings of m-FSI are affected
by dollar/yen exchange rates.
The Company'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 U.S. 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. The Company's
affiliated distributors generally have hedged such transactions by buying
forward U.S. dollars and selling forward the applicable local currency. If the
order that is the subject of a hedging transaction is subsequently canceled by
the customer, the affiliated distributor may be required to satisfy its hedging
obligations by buying and/or selling the applicable currencies at market prices
that could result in losses to the affiliated distributor. To date, the Company
has not experienced any material adverse effect as a result of the hedging
activities of its affiliated distributors. There can be no assurance that Metron
or m-FSI will continue to distribute, or to distribute successfully, the
Company's products or the products of other microelectronics and consumables
companies, and in such an event the Company's results of operations and earnings
could be adversely affected. The Company is not aware of any financial
difficulties being experienced by any of its affiliated distributors that could
materially adversely affect the Company's financial condition or results of
operations.
International Business:
Approximately 41%, 36% and 35% of the Company's sales for fiscal 1998, 1997 and
fiscal 1996, respectively, were attributable to sales outside the United States,
including sales through the Company's
<PAGE> 20
affiliated international distributors which accounted for 89%, 82% and 71%,
respectively, of such international sales. See "Success of the Company's
Affiliated Distributors" above. The Company expects that international sales
will continue to represent a significant portion of its total sales. Sales to
customers outside the United States are subject to risks, including the
imposition of governmental controls, the need to comply with a wide variety of
foreign and U.S. 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. The Japan and
Asia-Pacific markets have been extremely competitive and the semiconductor
device manufacturers located there have been very aggressive in seeking price
concessions from suppliers.
Although substantially all the Company's direct international sales are
denominated in U.S. dollars, both direct sales by the Company and sales through
its affiliated international distributors may be affected by changes in demand
resulting from fluctuations in interest and currency exchange rates. Moreover,
while sales by Metron are also generally denominated in U.S. 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, the Company's equity interest
in the earnings of m-FSI are affected by fluctuations in dollar/yen exchange
rates. Furthermore, although the Company endeavors to meet technical standards
established by foreign regulatory bodies, there can be no assurance that the
Company will be able to comply with changes in foreign standards in the future.
The inability of the Company to design products to comply with foreign standards
could have a material adverse effect on the Company. In addition, the laws of
certain foreign countries may not protect the Company's intellectual property to
the same extent as the laws of the United States.
Litigation:
The Company recently settled a patent infringement lawsuit. The Company could in
the future become involved in additional litigation or be the subject of patent
infringement inquiries. There can be no assurance about the outcome of any
future litigation or patent infringement inquiries and whether they will
adversely impact the Company's business or results of operations.
In the normal course of business, the Company from time to time becomes involved
in litigation that may ultimately result in a liability to the Company. It is
the opinion of management that facts known at the present time do not indicate
that there is a probability that any such litigation would have a material
effect on the Company's operations or its financial position. As of August 29,
1998, the Company believes it is not involved in any litigation that will have a
material impact on the Company.
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. 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
<PAGE> 21
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 Customers:
Although the composition of the Company's largest customers has changed from
year to year, direct sales to the Company's top five customers in each of fiscal
1998, 1997 and 1996 have accounted for approximately 40%, 40% and 41%,
respectively, of the Company's total sales. Direct sales to the Company's top
two customers in each of fiscal 1998, 1997, and 1996 accounted for approximately
20%, 25% and 23%, respectively, of the Company's total sales. The Company
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
the Company's operating results.
Industry Consolidation:
There has been a trend toward industry consolidation for several years. During
fiscal 1998 and 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.
Future Acquisitions:
A portion of the Company's historical growth has been from acquisitions. In the
future the Company may pursue acquisitions of additional product lines,
technologies or businesses. Future acquisitions by the Company may result in
potentially dilutive issuance of equity securities, incurrence of debt and
amortization expenses related to goodwill and other intangible assets, which
could materially adversely affect the Company's financial conditions and results
of operations. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies and products of
the acquired company, the diversion of management's attention from other
business concerns, risks of entering markets in which the Company has no or
limited direct prior experience, and the potential loss of key employees of the
acquired company. In the event that an acquisition does occur, there can be no
assurance to the effect thereof on the Company's business, financial conditions
or operating results.
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 U.S. export laws, trade
restrictions and the greater difficulty of administering business overseas.
Although substantially all the Company's direct international sales are
denominated in U.S. 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> 22
Dependence on Key Personnel:
The Company's success depends to a significant extent upon 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.
Intellectual Property Rights:
Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, it believes that
its financial performance will depend more upon the innovation, technological
expertise and marketing abilities of its employees than upon such protection.
There can be no assurance that any of the Company's pending patent applications
will be issued or that foreign intellectual property laws will protect the
Company's intellectual property rights. There also can be no assurance that any
patent issued to the Company will not be challenged, invalidated or circumvented
or that the rights granted thereunder will provide competitive advantages to the
Company. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate the Company's products or, if
patents are issued to the Company, design around the patents issued to the
Company.
As is typical in the semiconductor industry, the Company occasionally receives
notices from third parties alleging infringement claims. Although there are
currently no pending lawsuits against the Company regarding any possible
infringement claims, there can be no assurance that infringement claims by third
parties or claims for indemnification resulting from infringement claims will
not be asserted or that such assertions, if proven to have merit, will not
materially adversely affect the Company's business, financial condition and
results of operations. If any such claims are asserted against the Company, the
Company may seek to obtain a license under the third party's intellectual
property rights if available on reasonable terms or at all. The Company could
decide, in the alternative, to resort to litigation to challenge such claims or
enforce its proprietary rights. Such challenges could be extremely expensive and
time consuming and could materially adversely affect the Company's business,
financial condition and results of operations.
Year 2000:
The Company is addressing the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The "Year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way. The Company is aware of the computing difficulties
that the millennium issue presents for the Year 2000.
The Company has identified teams to address the information technology (IT)
systems used for internal purposes at the Company and to also address its non-IT
systems. Each of the Company's divisions have also identified teams to address
the potential software and hardware issues associated with the division's
individual product lines.
It is anticipated that all reprogramming efforts for internally used IT systems
will be complete by March 31, 1999, allowing adequate time for testing.* The
non-IT systems generally require third-party
<PAGE> 23
assurances as to compliance. To date, confirmations have not been received from
all the Company's vendors indicating that plans are being developed to address
processing of transactions in the Year 2000. Non-IT systems often contain
embedded technology that cannot be repaired and must be replaced. Availability
of resources, unexpected delays as well as coding issues may impact the
Company's ability to complete the reprogramming by March 31, 1999, or of our
vendors' ability to become Year 2000 compliant.* There can be no assurance that
the Company will not experience serious unanticipated negative consequences
and/or material costs caused by undetected errors or defects in the technology
used in its internal operating systems, which are composed predominantly of
third party software and hardware technology or by the inability of vendors to
correct their Year 2000 issues.
The divisions have completed the analysis of each of their product lines to
determine if hardware and software are Year 2000 compliant. The majority of the
Company's current standard product lines are believed to be Year 2000 compliant.
It is the goal of each division to be Year 2000 compliant by December 31, 1998.*
There can be no assurance that the Company's current products do not contain
undetected errors or defects associated with Year 2000 date functions that may
result in material costs to the Company, including repair and replacement costs
and costs incurred in litigation due to any such defects. Many commentators have
stated that a significant amount of litigation will arise out of Year 2000
compliance issues. Because of the unprecedented nature of such litigation, and
the Company's current lack of knowledge as to whether its products are Year 2000
compliant, there can be no assurance that the Company will not be materially
adversely affected by claims related to Year 2000 compliance.
The Company incurred approximately $400,000 to address the Year 2000 problem
during fiscal 1998 and expects to incur approximately $450,000 in fiscal 1999.*
The Company is in the process of establishing a contingency plan if the
Company's IT and non-IT systems are not Year 2000 compliant. It is anticipated
that the contingency plan will be completed by March 1999.*
Market Risks:
The Company is exposed to certain market risks based on outstanding debt
obligations of $42 million as of August 29, 1998. As discussed in note 11 of the
consolidated financial statements, the fixed interest rates range from 7.15% to
7.27% and have maturity dates through December 2006. The Company does not have
investments in derivative financial instruments.
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 29, 1998 and August 30, 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the fiscal years in the three-year period ended
<PAGE> 24
August 29, 1998. 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 29, 1998 and August 30, 1997, and the results
of their operations and their cash flows for each of the fiscal years in the
three-year period ended August 29, 1998, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 9, 1998
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 its 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.
<PAGE> 25
The Audit Committee of the Board of Directors, which consists of three outside
directors, 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.
Joel A. Elftmann
Chairman and Chief Executive Officer
Pat Hollister
Chief Financial Officer and Corporate Controller
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended August 29, 1998 August 30, 1997 August 31, 1996
- ----------- --------------- --------------- ---------------
<S> <C> <C> <C>
Sales (including sales to affiliates of $217,894,406 $252,441,241 $304,040,806
$79,757,000, $73,626,000, and $76,437,000,
respectively)
Cost of goods sold 149,655,006 158,128,519 174,238,449
Gross profit 68,239,400 94,312,722 129,802,357
Selling, general and administrative 63,693,305 56,490,877 58,742,058
expenses
Research and development expenses 42,974,920 39,712,736 40,997,860
Operating (loss) income (38,428,825) (1,890,891) 30,062,439
Interest expense (3,195,435) (1,748,555) (464,583)
Interest income 4,869,662 4,218,432 4,662,888
Other expense, net (250,742) (11,731) (73,220)
Income (loss) before income taxes (37,005,340) 567,255 34,187,524
Income tax (benefit) expense (14,000,000) (675,649) 10,250,000
Income (loss) before minority interest and (23,005,340) 1,242,904 23,937,524
equity in earnings of affiliates
Minority interest 378,975 (314,380) (497,560)
Equity in earnings of affiliates 674,274 3,711,451 5,108,442
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net (loss) income ($21,952,091) $ 4,639,975 $ 28,548,406
Net (loss) income per common share Basic ($0.96) $ 0.21 $ 1.29
Net (loss) income per common share Diluted ($0.96) $ 0.20 $ 1.23
Weighted average common shares 22,801,415 22,465,928 22,176,641
Weighted average common shares and common 22,801,415 23,373,596 23,207,450
share equivalents
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
August 29, 1998 August 30, 1997
--------------- ---------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 75,384,024 $ 79,186,746
Marketable securities 13,495,411 10,022,596
Trade accounts receivable, less allowance for 33,818,525 54,161,499
doubtful accounts of $3,113,000 and $2,127,000,
respectively
Trade accounts receivable from affiliates 12,644,219 10,092,769
Inventories 50,152,429 61,990,473
Deferred income tax benefit 13,499,119 11,835,439
Refundable income taxes 10,637,318 --
Prepaid expenses and other current assets 8,414,318 6,182,794
Total current assets 218,045,363 233,472,316
Property, plant and equipment, net 68,787,793 76,665,073
Investment in affiliates 15,408,400 15,975,834
Deposits and other assets 3,832,467 3,937,844
Deferred income tax benefit 4,383,558 1,101,334
$310,457,581 $331,152,401
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt 65,418 118,200
Trade accounts payable 18,999,777 24,349,713
Accrued expenses 25,226,720 26,398,976
Customer deposits 4,969,645 2,816,617
Deferred revenue 12,739,504 8,910,824
</TABLE>
<PAGE> 27
<TABLE>
<CAPTION>
<S> <C> <C>
Total current liabilities 62,001,064 62,594,330
Long-term debt, less current maturities 42,064,496 42,137,894
Deferred income taxes 24,016 3,340
Minority interest 1,991,738 2,077,208
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, 23,034,562 and
22,583,174 shares, respectively 163,307,107 159,706,639
Retained earnings 43,033,192 64,985,283
Cumulative translation adjustment (1,964,032) (352,293)
Total stockholders' equity 204,376,267 224,339,629
$310,457,581 $331,152,401
</TABLE>
Commitments (Notes 6, 9, 11, 19 and 21)
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common
Stock
Number of Amount Retained Cumulative Total
Shares Earnings Translation
Adjustment
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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
Stock issuance 451,388 3,365,772 -- -- 3,365,772
Tax benefit from stock options
exercised -- 234,696 -- -- 234,696
Change in cumulative translation
adjustment -- -- -- (1,611,739) (1,611,739)
Net income -- -- (21,952,091) -- (21,952,091)
Balance, August 29, 1998 23,034,562 $163,307,107 $43,033,192 ($1,964,032) $204,376,267
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended August 29, 1998 August 30, 1997 August 31, 1996
- ----------- --------------- --------------- ---------------
<S> <C> <C> <C>
Operating Activities
Net (loss) income ($21,952,091) $ 4,639,975 $ 28,548,406
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Minority interest (378,975) 314,380 497,560
Depreciation and amortization 15,887,848 12,285,993 8,209,407
Provision for deferred income taxes (4,925,228) (3,229,075) (2,281,255)
Provision for allowance for doubtful accounts 986,000 284,000 609,000
Provision for inventory reserves 811,915 3,160,502 1,687,778
Equity in earnings of affiliates (674,274) (3,711,451) (5,108,442)
Loss on disposal of equipment 470,679 76,960 --
Changes in operating assets and liabilities:
Trade accounts receivable 16,805,524 16,223,106 (28,026,666)
Inventories 11,026,129 (1,075,681) (25,185,637)
</TABLE>
<PAGE> 29
<TABLE>
<S> <C> <C> <C>
Prepaid expenses and other current assets (12,868,842) (848,716) (306,027)
Trade accounts payable (5,349,936) (6,484,757) 3,822,320
Accrued expenses (937,560) (3,405,909) 8,229,246
Customer deposits 2,153,028 (893,930) 1,095,673
Deferred revenue 3,828,680 (913,869) 4,102,663
Other (576,861) 196,984 (104,115)
Net cash provided by (used in) operating activities 4,306,036 16,618,512 (4,210,089)
Investing Activities
Investment in joint ventures, net of cash received -- 537,282 --
Acquisition of property, plant and equipment (7,765,672) (42,880,233) (33,111,987)
Purchase of marketable securities (13,306,196) (14,331,765) (32,679,361)
Sale of marketable securities -- 23,059,364 7,028,937
Maturities of marketable securities 9,833,381 4,366,289 18,357,222
(Increase) decrease in deposits and other assets (610,198) (116,552) 61,939
Net cash used in investing activities (11,848,685) (29,365,615) (40,343,250)
Financing Activities
Minority interest's investment in CME 500,335 -- --
Debt financing costs -- (338,872) --
Proceeds from issuance of long-term debt -- 42,000,000 105,265
Principal payments on long-term debt (126,180) (241,854) (240,866)
Payments on notes payable to bank -- -- (14,461,656)
Advances on notes payable to bank -- -- 9,961,656
S Corporation distribution payments -- -- (629,100)
Net proceeds from issuance of common stock 3,365,772 1,710,417 1,612,122
Net cash provided by (used in) financing activities 3,739,927 43,129,691 (3,652,579)
Increase (decrease) in cash and cash equivalents (3,802,722) 30,382,588 (48,205,918)
Cash and cash equivalents at beginning of year 79,186,746 48,804,158 97,010,076
Cash and cash equivalents at end of year $ 75,384,024 $ 79,186,746 $ 48,804,158
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Notes to Consolidated Financial Statements
Fiscal Years Ended August 29, 1998, August 30, 1997 and August 31, 1996
<PAGE> 30
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 Chemical Management Europe, Limited (CME), and FSI Chemical
Management Company Korea, Limited (CMK), joint ventures in which Metron
Technology B.V. (Metron Technology), an affiliate of the Company, owns 50% and
35%, respectively. CME and CMK have May 31 fiscal year ends and are consolidated
utilizing a three-month lag. 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 1998 and 1997 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 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
The Company classifies its marketable debt securities as available-for-sale and
carries these securities at fair market value. 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 3).
Inventories
Inventories are valued at the lower of cost, determined by the first-in,
first-out method, or net realizable value.
Property, Plant and Equipment
Building and related costs are carried at cost and depreciated on a
straight-line basis over a 30 year period. Leasehold improvements are carried at
cost and amortized over a 3 to 15 year period or the term of the underlying
lease, whichever is shorter. Equipment is carried at cost and depreciated on a
straight-line 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
<PAGE> 31
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 improvements 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 and two-month lag due
to the affiliates' May and June year ends, respectively. Summary financial
information for these affiliates is included in Note 9.
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
The Company adopted SFAS No. 128, "Earnings per Share" during fiscal 1998. Basic
earnings per share is computed by dividing net income by weighted average number
of shares of common stock outstanding during the year. Diluted earnings per
common share is computed using the treasury stock method to compute the weighted
average common stock outstanding assuming the conversion of dilutive common
stock equivalents. As a result, the Company's reported earnings per share for
prior periods were restated. There was no material impact on reported earnings
per share data when compared to basic and diluted earnings per share calculated
under the provisions of SFAS No. 128 for fiscal 1997 and 1996.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
<PAGE> 32
Employee Stock Plans
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," the Company may
elect to continue to apply the provisions of Accounting Principles Board's
Opinion No. 25 (ABP 25), "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock option and stock purchase
plans or adopt the fair value method of accounting prescribed by SFAS 123. The
Company has elected to continue to account for its stock plans using APB 25, and
therefore is not required to recognize compensation expense in connection with
these plans. Companies that continue to use APB 25 are required to present in
the notes to the consolidated financial statements the pro forma effects on
reported net income and earnings per share as if compensation expense had been
recognized based on the fair value of options granted (see Note 14).
Reclassifications
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
Note 2
Realignment of the Company
During the fourth quarter of fiscal 1998, the Company announced the realignment
of its business due to current industry conditions. The Company recorded
realignment charges of approximately $12,500,000 consisting of $1,200,000 for a
reduction in its workforce, $1,600,000 for consolidation of facilities,
$8,800,000 for additional inventory reserves and $900,000 for allowance for
doubtful accounts. The reduction in workforce resulted in approximately 200
positions being eliminated.
These charges are reflected in the statement of operations consisting of
$9,100,000 of cost of goods sold expenses, $3,000,000 of selling, general and
administrative expenses and $400,000 of research and development expenses.
The Company anticipates future cash outlays related to the realignment charges
will be $1,600,000 primarily related to the consolidation of facilities.
Note 3
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.
<PAGE> 33
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 receivable, notes
payable, accounts payable and accrued expenses, approximate fair value at August
29, 1998, due to their short maturities.
As of August 29, 1998 and August 30, 1997, all marketable securities are
classified as available-for-sale. At August 29, 1998, marketable securities of
$13,495,411 consist of commercial paper, certificates of deposit and corporate
bonds that contractually mature in the next year.
At August 29, 1998, $70,981,860 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 29, 1998 and August 30, 1997. 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.
Note 4
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 System's common stock. There were approximately $800,000 of
acquisition costs and expenses charged to selling, general and administrative
expenses in fiscal 1996 related to the SSI acquisition.
Note 5
Earnings Per Share
Basic and Dilutive earnings per share are as follows:
<TABLE>
<CAPTION>
Basic Effect of Dilutive
Earnings Dilutive Earnings
(loss) per Securities (loss) per
Share Share
- --------------------------------------------------------------------------------------------------------------
Net Income Income (loss) Stock Options Income (loss)
<S> <C> <C> <C> <C>
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
(loss) Available to Available to
Common Common
Stockholders Stockholders
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
August 29, 1998*
Loss ($21,952,091) ($21,952,091) -- ($21,952,091)
Shares -- 22,801,415 -- 22,801,415
Per Share Amount -- ($0.96) -- ($0.96)
August 30, 1997
Income $4,639,975 $ 4,639,975 -- $ 4,639,975
Shares -- 22,465,928 907,668 23,373,596
Per Share Amount -- $ 0.21 ($0.01) $ 0.20
August 31, 1996
Income $ 28,548,406 $ 28,548,406 -- 28,548,406
Shares -- 22,176,641 1,030,809 23,207,450
Per Share Amount -- $ 1.29 ($0.06) $ 1.23
</TABLE>
* The effect of stock options were not included in the calculation of dilutive
earnings per share for the year ended August 29, 1998 because their inclusion
would have been anti-dilutive.
Note 6
Related Party Transactions and Other Lease Commitments
The Company has operating lease agreements for equipment and manufacturing and
office facilities. Certain of the lease agreements are with partnerships of
which a partner is an officer, director and shareholder of the Company.
The lease for the Company's headquarters is a lease with such a partnership
(Lake Hazeltine Properties). The agreement provides for a base monthly rental of
$58,333, plus payment of executory costs such as property taxes, maintenance and
insurance.
Future minimum lease payments for all leases with noncancellable lease terms in
excess of one year at August 29, 1998, are as follows:
<TABLE>
<CAPTION>
Related Party Other Leases Total
Leases
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Fiscal Year Ending August:
1999 $797,200 $1,810,110 $2,607,310
2000 797,200 1,407,250 2,204,450
2001 105,840 895,780 1,001,620
2002 105,840 28,490 134,330
2003 -- 18,010 18,010
Thereafter -- 2,820 2,820
</TABLE>
<PAGE> 35
<TABLE>
<CAPTION>
Total minimum lease payments $1,806,080 $4,162,460 $5,968,540
<S> <C> <C> <C>
</TABLE>
Rental expense for all operating leases consisted of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended August 29, 1998 August 30, 1997 August 31, 1996
- ----------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Rent expense for related party
leases $ 797,200 $ 792,400 $ 927,400
Rent expense for other operating
leases 1,765,200 2,025,900 2,027,000
$2,562,400 $2,818,300 $2,954,400
</TABLE>
Note 7
Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
August 29, 1998 August 30, 1997
--------------- ---------------
<S> <C> <C>
Finished products $ 4,220,843 $ 7,539,031
Work in process 11,347,129 18,341,911
Subassemblies 11,214,265 9,545,857
Raw materials and purchased parts 23,370,192 26,563,674
$ 50,152,429 $ 61,990,473
</TABLE>
Note 8
Property, Plant and Equipment
The components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
August 29, 1998 August 30, 1997
--------------- ---------------
<S> <C> <C>
Land $ 1,992,029 $ 1,992,029
Building and leasehold
improvements 52,751,392 52,186,798
Office furniture and equipment 33,847,970 31,096,055
Manufacturing equipment 5,993,493 5,605,442
Lab equipment 14,014,514 11,983,673
Tooling 393,782 393,782
Vehicles 184,323 139,107
Construction in progress 3,071,026 2,152,845
112,248,529 105,549,731
</TABLE>
<PAGE> 36
<TABLE>
<S> <C> <C>
Less accumulated depreciation and
amortization (43,460,736) (28,884,658)
$ 68,787,793 $ 76,665,073
</TABLE>
Interest is capitalized in connection with the construction of major projects.
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 1998 or 1996.
Note 9
Investments in Affiliates
On July 6, 1995, Metron Semiconductors Europa B.V., an affiliate of the Company,
acquired Transpacific Technology Corporation (TTC), 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%. In conjunction with the
acquisition of TTC, Metron Technology and five shareholder-employees entered
into an Amended and Restated Buy and Sell Agreement (the "Buy-Sell Agreement")
effective as of July 1995. The Buy-Sell Agreement provides for the repurchase,
under certain circumstances, of the outstanding shares and options of the five
shareholder-employees. Under the terms of the Buy-Sell Agreement, the
shareholder-employees have certain put rights and Metron Technology has certain
call rights on the shares and options owned by the shareholder-employees. Until
June 1, 2000, the purchase obligations of Metron Technology are subject to the
occurrence of certain specified events, namely death, permanent disability or
termination of employment of the shareholder-employees. The Buy-Sell Agreement
terminates upon a change in control or the completion of a qualified initial
public offering by Metron Technology.
Under the terms of the Buy-Sell Agreement, the maximum obligation of Metron
Technology during any fiscal year is redetermined annually until the fiscal year
beginning June 1, 2000. In general, Metron Technology's payment obligations are
subject to an annual limit equal to one half of the sum of the previous fiscal
year's net income and the non-cash flow items reported in the consolidated
financial statements. Any obligation remaining is carried forward to the
following fiscal year. At May 31, 1998 and 1997, the value of the Buy-Sell
Agreement rights for the shareholder-employees amounted to approximately
$9,700,000 and $11,000,000, respectively. Under certain conditions, the Company
along with another corporate shareholder may have to assume this obligation.
A summary of assets, liabilities and results of operations for Metron Technology
and m-FSI Ltd. accounted for by the equity method is as follows (dollars in
thousands):
Metron Technology:
<TABLE>
<CAPTION>
May 31, 1998 1997 1996
- ------- ---- ---- ----
<S> <C> <C> <C>
Current assets $81,484 $77,211 $89,594
Noncurrent assets 15,476 14,382 13,501
</TABLE>
<PAGE> 37
<TABLE>
<S> <C> <C> <C>
Current liabilities 61,359 54,934 70,471
Noncurrent liabilities 2,375 2,371 2,243
Total stockholders' equity 33,226 34,288 30,381
<CAPTION>
Fiscal Year Ended May 31, 1998 1997 1996
- ------------------------- ---- ---- ----
<S> <C> <C> <C>
Sales $224,913 $255,283 $233,302
Net income 414 4,614 9,658
</TABLE>
<TABLE>
<CAPTION>
m-FSI Ltd:
June 30, 1998 1997 1996
- -------- ---- ---- ----
<S> <C> <C> <C>
Current assets $ 14,928 $ 18,639 $ 15,609
Noncurrent assets 5,744 3,126 1,780
Current liabilities 11,610 13,660 12,438
Noncurrent liabilities 2,116 217 132
Total stockholders' equity 6,946 7,888 4,819
<CAPTION>
Fiscal Year Ended June 30, 1998 1997 1996
- -------------------------- ---- ---- ----
Sales $ 24,078 $ 30,207 $ 22,567
Net income 523 3,215 1,931
</TABLE>
Metron Technology operates mainly in Europe, Asia Pacific and the United States.
m-FSI Ltd. operates in Japan.
The Company sold approximately $79,757,000, $73,626,000 and $76,437,000 of its
products in the aggregate to Metron Technology and m-FSI Ltd. in fiscal 1998,
1997 and 1996, respectively. In addition, the Company paid Metron Technology a
commission for direct sales to Asia-Pacific customers of $1,523,000, $1,774,00
and $2,963,000 for fiscal years 1998, 1997 and 1996, respectively. At August 29,
1998 and August 30, 1997, trade accounts receivable from affiliates was
approximately $12,644,000 and $10,093,000, respectively.
On July 13, 1998, Metron Technology acquired substantially all the outstanding
shares of Kyser. Under the terms of the Merger Agreement, each outstanding share
of Kyser's common stock acquired was converted into 16.5 shares of the Metron
Technology's common shares. Accordingly, Metron Technology issued 1,582,683 new
common shares to the shareholders of Kyser. Kyser is a stocking distributor of
materials and components which markets both high-purity and industrial-use
products in Texas and five other states.
The merger will be accounted for as a pooling of interests. As a result of this
merger, the Company's ownership was diluted to 31.8%.
Note 10
Accrued Expenses
<PAGE> 38
Accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
August 29, 1998 August 30, 1997
--------------- ---------------
<S> <C> <C>
Commissions $ 880,038 $ 1,206,077
Commissions due to affiliates 123,377 582,100
Income taxes -- 1,276,587
Salaries and bonuses 4,904,684 4,857,761
Pension and profit sharing 1,475,569 1,397,293
Product warranty 8,931,188 10,795,916
Other 8,911,864 6,283,242
$ 25,226,720 $ 26,398,976
</TABLE>
Note 11
Debt
<TABLE>
<CAPTION>
Long-term debt is summarized as follows:
August 29, 1998 August 30, 1997
--------------- ---------------
<S> <C> <C>
Unsecured Senior Notes; interest
rates ranging from 7.15% to 7.27%
through December, 2006 $42,000,000 $42,000,000
Capital leases on equipment;
interest rates ranging from 8.83%
to 12.68% through September,
2000, secured by underlying
equipment 129,914 249,700
Other -- 6,394
42,129,914 42,256,094
Less current maturities (65,418) (118,200)
$42,064,496 $42,137,894
</TABLE>
Future payments of long-term debt are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
<S> <C>
1999 $ 65,418
2000 6,059,535
2001 7,719,247
2002 7,714,286
2003 7,714,286
Thereafter 12,857,142
$ 42,129,914
</TABLE>
<PAGE> 39
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 convenants, including financial ratio tests such as an indebtedness
ratio and a tangible net worth test.
At August 29, 1998, the Company had a stand-by letter of credit for
approximately $1,400,000. This stand-by letter of credit was issued in
connection with a performance bond for a chemical management project and can be
drawn against if certain performance requirements are not met.
Note 12
Income Taxes
The provision for income tax (benefit) expense is summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended August 29,1998 August 30,1997 August 31, 1996
- ----------------- -------------- -------------- ---------------
<S> <C> <C> <C>
Current:
Federal ($9,490,000) $2,763,000 $11,997,000
Foreign (260,000) 333,000 419,000
State 52,000 459,000 1,781,000
(9,698,000) 3,555,000 14,197,000
Deferred:
Federal (2,698,000) (3,750,000) (3,694,000)
Foreign -- 32,000 26,000
State (1,604,000) (512,000) (279,000)
(4,302,000) (4,230,000) (3,947,000)
($14,000,000) ($675,000) $10,250,000
</TABLE>
In fiscal 1998, 1997 and 1996, there was a tax benefit of $234,696, $264,394 and
$2,932,197, respectively, credited to stockholders' equity associated with the
exercise of stock options.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at August 29, 1998 and
August 30, 1997 are as follows:
<TABLE>
<CAPTION>
August 29, 1998 August 30, 1997
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Inventory differences $ 4,808,000 $ 3,318,000
Deferred revenue 811,000 1,209,000
Accounts receivable 1,190,000 808,000
Property, plant and equipment 682,000 1,220,000
Alternative minimum tax 2,572,000 --
</TABLE>
<PAGE> 40
<TABLE>
<S> <C> <C>
carry forwards
Net operating loss carry forwards 1,199,000 --
Accruals 4,583,000 5,557,000
Other, net 2,038,000 854,000
Total gross deferred tax assets 17,883,000 12,966,000
Deferred tax liabilities:
Other, net 24,000 32,000
Total gross deferred tax
liabilities 24,000 32,000
Net deferred tax assets $17,859,000 $12,934,000
</TABLE>
The effective income tax (benefit) expense differs from the expected statutory
federal income tax as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended August 29, 1998 August 30, 1997 August 31, 1996
- ----------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Expected federal income tax ($12,951,000) $ 199,000 $ 11,966,000
(benefit) expense
State income (benefit) expense,
net of federal (benefit) expense (1,009,000) (52,000) 991,000
Research activities credit (412,000) (580,000) (171,000)
Tax-exempt interest income (2,000) (489,000) (490,000)
Foreign sales corporation -- (18,000) (685,000)
S Corporation net income -- -- (263,000)
Establishment of S Corporation
deferred tax asset -- -- (1,500,000)
Other items, net 374,000 265,000 402,000
($14,000,000) ($ 675,000) $ 10,250,000
</TABLE>
The Company has net operating loss carryforwards for federal purposes of
approximately $500,000 that will expire in the fiscal year 2018 if not utilized.
The Company has net operating loss carryforwards for state purposes of
approximately $20,000,000 which will expire at various times, beginning in
fiscal year 2004, if not utilized.
The Company utilized approximately $259,000 of net operating loss carryforwards
from ACS in fiscal year 1996.
<PAGE> 41
At August 29, 1998, the Company has recorded net deferred tax assets of
$17,859,000. Based on an assessment of the Company's taxable earnings history
and prospective future taxable income as well as tax planning strategies
available to management, which includes sale or disposal of assets to produce
current taxable income, management has determined that it is more likely than
not that its net deferred tax assets will be realized in future periods. The
Company may be required to provide a valuation allowance for this asset in the
future if it does not generate sufficient taxable income as planned.
At August 29, 1998, there were approximately $12,684,000 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 13
Pension and Profit Sharing Plans
The Company has a defined contribution pension plan covering substantially all
employees. Total pension cost for fiscal 1998, 1997 and 1996 was $1,966,310,
$1,818,376 and $1,408,086, respectively. There is no past service liability.
The Company's joint venture, CME, has a fully insured pension plan for its
present directors and employees. Total pension cost for fiscal 1998, 1997 and
1996 for CME was approximately $135,400, $66,500 and $74,500, 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 means of a formula or at the
discretion of the Board of Directors. Contributions accrued for in fiscal 1996
were $250,000. There were no contributions accrued in 1998 and 1997.
Note 14
Stockholders' Equity
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 stock based awards ("Awards") to purchase up to 1,750,000 shares of
the Company's common stock. Under the Plan, the Plan Committee has the power to
make Awards, to determine when and to whom Awards will be granted, the form of
each Award, the amount of each Award, and any other terms or conditions of each
Award consistent with the Plan. The activity under stock option plans of the
Company is as follows:
<TABLE>
<CAPTION>
Number Of Shares
Activity Description Available For Grant Outstanding Weighted Average
- -------------------- ------------------- ----------- ----------------
<S> <C> <C> <C>
</TABLE>
<PAGE> 42
<TABLE>
<CAPTION>
Exercise Price Per
Share
------------------
<S> <C> <C> <C>
August 26, 1995 106,713 1,589,312 $ 6.64
Additional shares authorized for 500,000 -- --
1994 Omnibus Stock Option Plan
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 1,000,000 -- --
1997 Omnibus Stock Option Plan
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
Additional shares authorized for 750,000 -- --
1997 Omnibus Stock Option Plan
Granted (822,499) 822,499 9.70
Exercised -- (181,959) 4.80
Canceled 66,500 (159,467) 12.63
August 29, 1998 430,001 2,579,865 9.33
Number of shares exercisable at
August 29, 1998 1,150,567 $ 7.60
</TABLE>
The weighted-average fair value of options granted during 1998 and 1997 was
$6.12 and $6.66, respectively.
At August 29, 1998, the range of exercise prices and weighted-average remaining
contractual life of outstanding options was $0.94 - $20.88 and 6.7 years,
respectively.
The following table summarizes information with respect to options outstanding
and exercisable at August 29, 1998:
<TABLE>
<CAPTION>
Options Options
Outstanding Exercisable
----------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
Range Of Number Of Weighted- Weighted- Number Of Weighted-
</TABLE>
<PAGE> 43
<TABLE>
<CAPTION>
Exercise Shares Average Average Shares Average
Prices Remaining Exercise Exercise Price
Contractual Price
Life
- ----------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 0.94 - $ 5.00 381,520 2.9 $ 2.20 381,520 $ 2.20
$ 5.01 - $ 9.00 776,265 7.9 $ 7.40 255,132 $ 6.89
$ 9.01 - $13.00 1,153,330 7.0 $11.63 446,895 $11.50
$13.01 - $17.00 226,750 8.2 $14.67 46,682 $13.95
$17.01 - $20.88 42,000 5.6 $17.43 20,338 $17.31
$ 0.94 - $20.88 2,579,865 6.7 $ 9.33 1,150,567 $ 7.60
</TABLE>
At August 29, 1998 and August 30, 1997, currently exercisable options aggregated
1,150,567 shares and 981,453 shares of common stock, respectively, and the
weighted-average exercise price of those options was $7.60 and $5.51,
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 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 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. In general, 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 (SFAS) 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 (APB) 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
1998, 1997 or 1996 under APB No. 25.
<PAGE> 44
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 1998 1997 1996
amounts) ---- ---- ----
<S> <C> <C> <C>
Net (loss) income
As reported ($21,952) $4,640 $28,548
Pro forma ($25,942) $2,159 $27,233
Diluted net (loss) income per
common share
As reported ($ 0.96) $ 0.20 $ 1.23
Pro forma ($ 1.14) $ 0.09 $ 1.17
</TABLE>
NOTE: The pro forma effect on net income (loss) for 1998, 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 the Black-Scholes option-pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
Options ESPP
------------------------------ -------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Annualized stock price
volatility 59.0% 59.0% 59.0% 45.0% 66.0% 66.0%
Risk free interest rate 5.1% 6.3% 5.5% 5.1% 5.8% 5.1%
Expected life (years) 5.5 3.8 3.8 0.5 1.0 1.0
</TABLE>
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 annualized 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 15
Employee Stock Purchase Plan
<PAGE> 45
The Company has an employee stock purchase plan (the Plan) that enables
employees to contribute up to 10% of their wages toward the purchase of the
Company's common stock at 85% of the lower of market value at the beginning or
the end of the purchase period. Effective January 1, 1998, the Plan was amended
from an annual to a semiannual basis plan. In January 1998, the shareholders
authorized 350,000 additional shares for the Plan. On June 30, 1998, 123,993
shares were issued at $8.26 per share. On December 31, 1997 and 1996, 150,067
shares were issued at $10.09 per share and 91,765 shares were issued at $12.22
per share, respectively, under the Plan.
At August 29, 1998, there were 406,526 shares reserved for future employee
purchases of stock under the Plan.
Note 16
Additional Sales Information
International sales for the fiscal years 1998, 1997 and 1996 were approximately
41%, 36% and 35%, respectively, of total sales. The basis for determining sales
by geographic region is the location that the product is shipped. Included in
these percentages and the table below are sales to affiliates (See Note 9.)
International sales by geographic area, consisting principally of export sales,
are summarized as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended August 29, 1998 August 30, 1997 August 31, 1996
- ----------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Asia $33,503,000 $37,058,000 $ 54,018,500
Europe 55,619,200 52,192,800 51,862,200
Other 691,700 447,300 2,007,500
$89,813,900 $89,698,100 $ 107,888,200
</TABLE>
The following summarizes significant customers comprising 10% or more of the
Company's customer sales, which includes sales through affiliates to end users:
<TABLE>
<CAPTION>
Fiscal Year Ended August 29, 1998 August 30, 1997 August 31, 1996
- ----------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Customer A * * 12%
Customer B 11% 17% 11%
</TABLE>
* Sales to respective customer is less than 10% during the fiscal year.
Note 17
Segment Information
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information, "which requires companies to report selected
segment information based on the management's approach to internal segment
reporting.
The Company has four segments, Surface Conditioning Division (SCD), Chemical
Management Division (CMD), Microlithography Division (MLD) and Shared Services
(SS).
<PAGE> 46
Due to the similarity of production processes, distribution methods, customer
base and products/services, the reporting of segment information will be
aggregated for Surface Conditioning and Microlithography.
The Surface Conditioning segment sells products and processes using wet vapor
and cryogenic techniques to prepare the surfaces of silicon wafers for
subsequent processing and the Microlithography segment supplies photoresist
processing equipment and services for the semiconductor, thin film head and
multichip module markets.
The Chemical Management segment supplies a wide range of chemical management
systems for microelectronics manufacturers. These systems generate, blend and
deliver chemicals to all points of use in a manufacturing facility.
The Shared Services segment consists of legal, corporate sales and marketing,
finance, information services, human resources and other administrative
activities. None of the Shared Service costs are allocated to the other
segments. Segment information is as follows:
<TABLE>
<CAPTION>
CMD MLD & SCD Shared Services Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Revenue from external customers $ 56,199,292 $ 161,695,114 $ -- $ 217,894,406
Depreciation and amortization 1,133,044 5,662,564 9,092,240 15,887,848
Segment (loss) (1,930,880) (5,197,218) (31,300,727) (38,428,825)
1997:
Revenue from external customers $ 89,552,821 $ 162,888,420 $ -- $ 252,441,241
Depreciation and amortization 842,063 4,179,231 7,264,699 12,285,993
Segment profit (loss) 13,116,415 12,028,707 (27,036,013) (1,890,891)
1996:
Revenue from external customers $ 70,802,189 $ 233,238,617 $ $ 304,040,806
Depreciation and amortization 775,270 2,998,231 4,435,906 8,209,407
Segment profit (loss) 10,807,571 45,209,086 (25,954,218) 30,062,439
</TABLE>
Total assets located outside the United States are as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
United Kingdom $8,154,015 $5,061,656
Korea $ 790,592 $1,535,092
</TABLE>
<PAGE> 47
Note 18
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 $1,918,900, $276,500 and $0 of third party funding in fiscal years
1998, 1997 and 1996, respectively.
Note 19
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 20
Supplementary Cash Flow Information
The Company paid interest, net of amounts capitalized, in fiscal 1998, 1997, and
1996 of $3,154,632, $1,124,884 and $467,283, respectively. Income taxes paid in
fiscal years 1998, 1997 and 1996 were $1,898,213, $4,818,723 and $11,424,910,
respectively. Capital leases entered into for financing purchases of equipment
during fiscal 1998, 1997 and 1996 were $0, $0 and $241,610, respectively. In
addition, the Company realized, in fiscal years 1998, 1997 and 1996, a tax
benefit from the exercise of stock options in the amount of $234,696, $264,394
and $2,932,197, respectively.
Note 21
Litigation
During fiscal 1998, the Company settled a patent infringement lawsuit relating
to its EXCALIBUR(R) systems, which had been brought by Purusar Corporation in
October 1995. In exchange for a one-time lump sum payment, Purusar has dismissed
the lawsuit and released the Company and its customers from any past or future
claims of infringement relating to the patent at issue. The Company did not and
will not pay any royalties to Purusar as a result of the settlement.
In the normal course of business, the Company, from time to time, becomes
involved in litigation that may ultimately result in a liability to the Company.
It is the opinion of management that facts known at the present time do not
indicate that there is a probability that any such litigation would have a
material
<PAGE> 48
effect on the Company's operations or its financial position. As of August 29,
1998, the Company believes it is not involved in any litigation that will have a
material impact on the Company.
Note 22
Subsequent Event
On October 8, 1998, the Company implemented additional cost control measures
including a reduction of force of approximately 150 employees and contractors.
In addition, the Company announced four weeks of scheduled plant shutdowns
during the first half of fiscal 1999 related to the October reduction in force.
The Company expects to report a charge of approximately $800,000 for severance
and outplacement costs in the first quarter of fiscal 1999.
Quarterly Data
<TABLE>
<CAPTION>
(In thousands, except per-share First Quarter Second Quarter Third Quarter Fourth Quarter
data) ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
1998 (unaudited)
Sales $ 64,915 $ 59,431 $ 55,836 $ 37,712
Gross profit (loss) 26,184 20,672 21,410 (27)
Operating (loss) income 1,144 (7,931) (4,034) (27,608)
Net (loss) income 1,885 (4,597) (1,987) (17,253)
Diluted net (loss) income per
common share $ 0.08 ($ 0.20) ($ 0.09) ($ 0.75)
1997 (unaudited)
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
Diluted net (loss) income per
common share $ 0.18 $ 0.08 ($ 0.12) $ 0.06
</TABLE>
During the fourth quarter of fiscal 1998, the Company recorded realignment
charges of $12.5 million (see Note 2 to Notes to Consolidated Financial
Statements.)
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.
Common Stock Prices
The Company's common stock is traded on the NASDAQ National Market System under
the symbol FSII. The following table sets forth the highest and lowest sale
prices, as reported by the NASDAQ-NMS, for the periods indicated.
<PAGE> 49
<TABLE>
<CAPTION>
1998 1997
----------------------- ----------------------
Fiscal Quarter High Low High Low
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First $23 5/8 $13 3/8 $15 3/8 $ 10
Second 15 3/8 10 7/8 18 1/4 12 1/2
Third 13 3/8 10 3/4 15 1/4 10 7/8
Fourth 11 1/2 51 3/16 20 3/16 13 3/4
</TABLE>
There were approximately 1,430 stockholder accounts of record on October 30,
1998, and an estimated 15,000 stockholders who held the 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.
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 and
Chief Executive Officer
Dr. Thomas D. George
President and General Manager
Motorola (retired)
(Semiconductor products sector)
Terrence W. Glarner
President
West Concord Ventures, Inc.
(Venture capital)
Joanna T. Lau
President
Lau Technologies
(Electronics manufacturer and biometric technology access control and security
systems)
<PAGE> 50
Charles R. Wofford
FSI Vice Chairman
Senior Vice President
Texas Instruments (retired)
(Semiconductor Group)
Corporate Officers
Joel A. Elftmann
Chairman and Chief Executive Officer
Co-founded FSI in 1973
Benno G. Sand
Chief Administrative Officer
Office of the President and Secretary
Joined FSI in 1982
Dr. Benjamin J. Sloan
Chief Operating Officer
Office of the President
Joined FSI in 1992
Mark A. Ahmann
Vice President
Human Resources
Joined FSI in 1997
Dale A. Courtney
President
Surface Conditioning Division
Joined FSI in 1987
Patricia M. Hollister
Chief Financial Officer and Corporate Controller
Joined FSI in 1995
Luke R. Komarek
General Counsel
Joined FSI in 1995
Dale M. Pescatrice
President
Chemical Management Division
Joined FSI in 1998
<PAGE> 51
Charles R. Wofford
Vice Chairman
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
Stockholder and investor questions may be directed to:
Benno Sand
FSI International, Inc.
Corporate Headquarters
612/444-8936
Financial statements and information about FSI International are also available
electronically via the World Wide
Web at:
http://www.fsi-intl.com
Form 10-K
The Annual Report on Form 10-K filed with the Securities and Exchange Commission
is available electronically via the World Wide Web or on request by contacting
the Investor Relations Department at Corporate Headquarters.
Annual Meeting
All stockholders and other interested parties are invited to attend the
Company's annual meeting, scheduled for January 26, 1999, at 3:00 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
<PAGE> 52
WORLDWIDE SALES AND
SUPPORT OFFICES
Corporate Headquarters
322 Lake Hazeltine Drive
Chaska, Minnesota
55318-1096
Phone: 612/448-5440
Fax: 612/448-2825
World Wide Web:
http://www.fsi-intl.com
Domestic:
Tempe, Arizona
Fremont, California
Hollister, California
Marlboro, Massachusetts
Chaska, Minnesota
Bedminster, New Jersey
Allen, Texas
Austin, Texas
Lubbock, Texas
Williston, Vermont
Vancouver, Washington
International:
(FSI and affiliates Metron Technology and m-FSI)
Beijing, China
Shanghai, China
Basingstoke, England
Newhaven, England
Evry, France
Grenoble, France
Meyreuil, France
Aschheim, Germany
Dresden, Germany
Wanchai, Hong Kong
Bangalore, India
Dublin, Ireland
Netanya, Israel
Milano, Italy
Tokyo, Japan
Okayama, Japan
<PAGE> 53
Bundang-Ku, Korea
Metro Manila, Philippines
Moscow, Russia
West Lothian, Scotland
Singapore
Stockholm, Sweden
Hsin Chu City, Taiwan R.O.C.
Bankok, Thailand
Almere, The Netherlands
FSI International, Inc.
Corporate Headquarters
322 Lake Hazeltine Drive
Chaska, MN 55318 USA
Phone: 612/448-5440
Fax: 612/448-2825
www.fsi-intl.com
<PAGE> 1
EXHIBIT 21.0
SUBSIDIARIES
JURISDICTION OF
NAME INCORPORATION
- ---- ---------------
Applied Chemical Solutions, Inc. Minnesota
FSI International, Ltd. Guam
FSI Chemical Management Europe, Ltd. England
Semiconductor Systems, Inc. California
FSI Chemical Management Company-Korea, Ltd. Korea
- -------------------
*FSI International, Inc. also owns interests in Metron Technology B.V. (31.8%)
and m-FSI Ltd. (49%).
<PAGE> 1
EXHIBIT 23.0
Independent Auditors' Consent
The Board of Directors and Stockholders of 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, 333-01509, and 333-50991) on Form
S-8 of FSI International, Inc. of our reports dated October 9, 1998, relating
to the consolidated balance sheets of FSI International, Inc. and subsidiaries
as of August 29, 1998 and August 30, 1997, 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 29,
1998, which reports appear in or are incorporated by reference in the August
29, 1998 annual report on Form 10-K of FSI International, Inc.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 23, 1998
<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, Patricia M. Hollister, 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 29, 1998 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, 1998.
/s/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, Patricia M. Hollister, 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 29, 1998 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 28th day of
October, 1998.
/s/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, Patricia M. Hollister, 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 29, 1998 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, 1998.
/s/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, Patricia M. Hollister, 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 29, 1998 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 28th day of
October, 1998.
/s/Thomas D. George
<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, Patricia M. Hollister, 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 29, 1998 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 28th day of
October, 1998.
/s/Terrence W. Glarner
<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, Patricia M. Hollister, 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 29, 1998 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 28th day of
October, 1998.
/s/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, Patricia M. Hollister, 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 29, 1998 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 30th day of
October, 1998.
/s/Charles R. Wofford
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-START> AUG-31-1997
<PERIOD-END> AUG-29-1998
<CASH> 75,384,024
<SECURITIES> 13,495,411
<RECEIVABLES> 49,575,744
<ALLOWANCES> 3,113,000
<INVENTORY> 50,152,429
<CURRENT-ASSETS> 218,045,363
<PP&E> 112,248,529
<DEPRECIATION> 43,460,736
<TOTAL-ASSETS> 310,457,581
<CURRENT-LIABILITIES> 62,001,064
<BONDS> 42,000,000
0
0
<COMMON> 163,307,107
<OTHER-SE> 41,069,160
<TOTAL-LIABILITY-AND-EQUITY> 310,457,581
<SALES> 217,894,406
<TOTAL-REVENUES> 217,894,406
<CGS> 149,655,006
<TOTAL-COSTS> 149,655,006
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 986,000
<INTEREST-EXPENSE> 3,195,435
<INCOME-PRETAX> (37,005,340)
<INCOME-TAX> (14,000,000)
<INCOME-CONTINUING> (21,952,091)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,952,091)
<EPS-PRIMARY> (0.96)
<EPS-DILUTED> (0.96)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EARNINGS PER SHARE HAVE BEEN RESTATED TO REFLECT THE IMPLEMENTATION OF THE FASB
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 128, EARNINGS PER SHARE.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-30-1997
<PERIOD-START> SEP-01-1997
<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> 0.21
<EPS-DILUTED> 0.20
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EARNINGS PER SHARE HAVE BEEN RESTATED TO REFLECT THE IMPLEMENTATION OF THE FASB
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) N0. 128, EARNINGS PER SHARE.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> AUG-27-1995
<PERIOD-END> AUG-31-1996
<CASH> 48,804,158
<SECURITIES> 23,116,484
<RECEIVABLES> 82,604,374
<ALLOWANCES> 1,843,000
<INVENTORY> 64,075,294
<CURRENT-ASSETS> 229,994,250
<PP&E> 68,227,403
<DEPRECIATION> 22,632,786
<TOTAL-ASSETS> 293,283,381
<CURRENT-LIABILITIES> 73,645,989
<BONDS> 0
0
0
<COMMON> 157,731,828
<OTHER-SE> 60,395,537
<TOTAL-LIABILITY-AND-EQUITY> 293,283,381
<SALES> 304,040,806
<TOTAL-REVENUES> 304,040,806
<CGS> 174,238,449
<TOTAL-COSTS> 174,238,449
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 609,000
<INTEREST-EXPENSE> 464,583
<INCOME-PRETAX> 34,187,524
<INCOME-TAX> 10,250,000
<INCOME-CONTINUING> 28,548,406
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,548,406
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.23
</TABLE>
