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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended NOVEMBER 29, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-17276
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FSI INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
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<S><C>
MINNESOTA 41-1223238
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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322 LAKE HAZELTINE DRIVE, CHASKA, MINNESOTA 55318
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(Address of principal executive offices) (Zip Code)
612-448-5440
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date:
COMMON STOCK, NO PAR VALUE - 22,630,347 SHARES OUTSTANDING AS OF DECEMBER 19,
1997
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
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PART I. FINANCIAL INFORMATION PAGE NO.
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Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets as of
November 29, 1997 (Unaudited) and August 30, 1997 3
Consolidated Condensed Statements of Operations
(Unaudited) for the quarters ended November 29, 1997
and November 30, 1996 5
Consolidated Condensed Statements of Cash Flows (Unaudited)
for the quarters ended November 29, 1997 and November 30, 1996 6
Notes to the Consolidated Condensed Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
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SIGNATURES 19
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PART I. Item 1. FINANCIAL INFORMATION
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
NOVEMBER 29, 1997 AND AUGUST 30, 1997
ASSETS
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<CAPTION>
November 29, August 30,
1997 1997
(Unaudited) (Audited)
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Current assets:
Cash and cash equivalents $ 72,222,747 $ 79,186,746
Marketable securities 10,764,670 10,022,596
Trade accounts receivable, net of allowance for
doubtful accounts of $2,196,000 and
$2,127,000, respectively 56,887,110 54,161,499
Trade accounts receivable from affiliates 15,886,925 10,092,769
Inventories 63,517,531 61,990,473
Deferred income tax benefit 11,835,427 11,835,439
Prepaid expenses and current assets 5,581,735 6,182,794
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Total current assets 236,696,145 233,472,316
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Property, plant and equipment, at cost 106,987,652 105,549,731
Less accumulated depreciation and amortization (32,628,522) (28,884,658)
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74,359,130 76,665,073
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Investment in affiliates 16,180,090 15,975,834
Deposits and other assets 3,685,266 3,937,844
Deferred income tax benefit 1,101,334 1,101,334
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$332,021,965 $331,152,401
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See accompanying notes to consolidated condensed financial statements.
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
NOVEMBER 29, 1997 AND AUGUST 30, 1997
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
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<CAPTION>
November 29, August 30,
1997 1997
(Unaudited) (Audited)
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Current liabilities:
Current maturities of long-term debt $ 102,609 $ 118,200
Trade accounts payable 17,986,318 24,349,713
Accrued expenses 27,254,511 26,398,976
Customer deposits 2,322,758 2,816,617
Deferred revenue 13,806,119 8,910,824
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Total current liabilities 61,472,315 62,594,330
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Long-term debt, less current maturities 42,110,075 42,137,894
Deferred income taxes 2,985 3,340
Minority interest 2,319,906 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, 22,628,929
and 22,583,174 shares at November 29, 1997
and August 30, 1997, respectively 159,983,478 159,706,639
Retained earnings 66,870,620 64,985,283
Cumulative translation adjustment (737,414) (352,293)
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Total stockholders' equity 226,116,684 224,339,629
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$332,021,965 $331,152,401
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See accompanying notes to consolidated condensed financial statements.
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED NOVEMBER 29, 1997 AND NOVEMBER 30, 1996
(Unaudited)
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<CAPTION>
November 29, November 30,
1997 1996
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<S> <C> <C>
Sales (including sales to affiliates of
$18,902,000 and $21,840,000, respectively) $64,914,894 $66,990,995
Cost of goods sold 38,731,022 40,226,170
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Gross profit 26,183,872 26,764,825
Selling, general and administrative expenses 14,388,564 13,218,839
Research and development expenses 10,650,836 9,677,913
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Operating income 1,144,472 3,868,073
Interest expense (797,836) (35,808)
Interest income 1,247,358 731,153
Other income (expense), net 23,910 (24,193)
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Income before income taxes 1,617,904 4,539,225
Income tax expense 517,730 1,407,126
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Income before minority interest
and equity in earnings of affiliates 1,100,174 3,132,099
Minority interest 226,711 (114,763)
Equity in earnings of affiliates 558,452 1,023,588
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Net income $ 1,885,337 $ 4,040,924
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Net income per common share $ 0.08 $ 0.18
Weighted average common shares
and common share equivalents 23,757,211 23,014,483
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED NOVEMBER 29, 1997 AND NOVEMBER 30, 1996
(Unaudited)
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<CAPTION>
November 29, November 30,
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,885,337 $ 4,040,924
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Minority interest (226,711) 114,763
Provision for deferred income taxes (343) 911
Depreciation and amortization 3,898,694 2,254,188
Equity in earnings of affiliates (558,452) (1,023,588)
Changes in operating assets and liabilities:
Trade accounts receivable (8,519,767) 12,303,893
Inventories (1,527,058) 5,762,187
Prepaid expenses and current assets 601,059 1,465,791
Trade accounts payable (6,363,395) (15,902,440)
Accrued expenses 855,535 (4,589,180)
Customer deposits (493,859) 25,937
Deferred revenue 4,895,295 1,972,824
Other (61,851) 75,356
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Net cash provided by (used in) operating activities (5,615,516) 6,501,566
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INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (1,437,921) (8,005,351)
Purchases of marketable securities (2,746,096) (4,845,071)
Sales of marketable securities 32,594 1,007,110
Maturities of marketable securities 1,971,428 600,000
Decrease (increase) in deposits and other assets 97,748 377,860
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Net cash used in investing activities (2,082,247) (10,865,452)
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FINANCING ACTIVITIES:
Minority interests' investment in FME 500,335 -
Principal payments on long-term debt (43,410) (57,502)
Net proceeds from issuance of common stock 276,839 11,217
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Net cash provided by (used in) financing activities 733,764 (46,285)
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Decrease in cash and cash equivalents (6,963,999) (4,410,171)
Cash and cash equivalents at beginning of period $79,186,746 $ 48,804,158
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Cash and cash equivalents at end of period $72,222,747 $ 44,393,987
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See accompanying notes to consolidated condensed financial statements.
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying consolidated condensed financial statements have been
prepared by the Company without audit and reflect all adjustments
(consisting only of normal and recurring adjustments) which are, in the
opinion of management, necessary to present a fair statement of the
results for the interim periods presented. The statements have been
prepared in accordance with the regulations of the Securities and Exchange
Commission but omit certain information and footnote disclosures necessary
to present the statements in accordance with generally accepted accounting
principles. The results of operations for the interim periods presented
are not necessarily indicative of the results to be expected for the full
fiscal year. These consolidated condensed financial statements should be
read in conjunction with the Consolidated Financial Statements and
footnotes thereto included in the Company's Annual 10-K Report for the
fiscal year ended August 30, 1997 previously filed with the Securities and
Exchange Commission.
(2) INVENTORIES
Inventories are summarized as follows:
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November 29, August 30,
1997 1997
(Unaudited) (Audited)
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Finished products $ 6,744,363 $ 7,539,031
Work-in-process 19,608,495 18,341,911
Subassemblies 8,904,137 9,545,857
Raw materials and purchased parts 28,260,536 26,563,674
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$63,517,531 $61,990,473
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(3) SUPPLEMENTARY CASH FLOW INFORMATION
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Quarters Ended
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November 29, November 30,
1997 1996
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<S> <C> <C>
Schedule of interest and income taxes paid:
Interest $33,286 $ 38,508
Income taxes $76,001 $2,911,535
</TABLE>
The Company realized in first quarter 1998 and 1997, a tax benefit from
disqualifying stock options and purchases of $0 and $70,280, respectively.
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST QUARTER OF FISCAL 1998 COMPARED WITH THE FIRST QUARTER OF FISCAL 1997.
The information in this discussion, except for the historical information
contained herein, contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and is subject
to the safe harbor created by that statute. Such statements are subject to
risks and uncertainties, several of which are discussed below. Readers are
directed to the Risk Factors discussion found in the Company's Report on Form
10-K for the year ended August 30, 1997. Readers also are cautioned not to
place undue reliance on these forward-looking statements as actual results
could differ materially. The Company assumes no obligation to publicly release
any revisions or updates to these forward-looking statements to reflect future
events or unanticipated occurrences. Such forward-looking statements are
marked with an asterisk (*).
The following table sets forth, for the fiscal quarter indicated, certain
income and expense items as a percent of total sales.
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Percent of Sales
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November 29, November 30,
1997 1996
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First quarter ended
<S> <C> <C>
Sales 100.0% 100.0%
Cost of goods sold 59.7 60.0
Gross profit 40.3 40.0
Selling, general and administrative 22.1 19.7
Research and development 16.4 14.5
Operating income 1.8 5.8
Other income (expense), net 0.7 1.0
Income before income taxes 2.5 6.8
Income tax expense 0.8 2.1
Minority interest 0.3 (0.2)
Equity in earnings of affiliates 0.9 1.5
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Net income 2.9% 6.0%
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SALES:
Sales were $64.9 million for the first quarter of fiscal 1998 as compared to
$67.0 million for the first quarter of fiscal 1997. Sales were lower than
expected due to customer requested delays, primarily related to
Microlithography products for thin film head production and Chemical Management
products. Sales of the Surface Conditioning and Microlithography product lines
increased in the first quarter of fiscal 1998 as compared to the first quarter
of fiscal 1997. However, these increases were offset by sales decrease in
Chemical Management products.
International sales were $21.6 million and $22.7 million for the first quarter
of fiscal 1998 and 1997, respectively, and represented approximately 33% and
34%, respectively of sales during these periods. International sales were
approximately 36% of total sales for fiscal 1997. The decrease in
international sales in first quarter fiscal 1998 as compared to first quarter
fiscal 1997 occurred in Europe.
The recent economic and monetary turbulence in Asia has resulted in uncertainty
in the microelectronics industry. The Company's customers around the world are
more cautious given the situation in Asia. The Company has recently
experienced some delays in shipment of orders and is seeing a softening in
orders, particularly from Korean
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semiconductor manufacturers and U.S. thin film head manufacturers.
Given the uncertainty of the market, the Company could see delays or
cancellations of orders in the next few months.* Overall, the Company expects
sales to increase in fiscal 1998 from fiscal 1997 levels.* However, it is
unlikely that fiscal 1998 sales will exceed $300 million.* However, if industry
conditions continue to deteriorate and confidence in the Asian markets is not
restored, anticipated sales levels are at risk.*
GROSS PROFIT:
Gross profit as a percentage of sales for the first quarter of fiscal 1998 was
40.3% as compared to 40.0% for the first quarter of fiscal 1997. The increase
in gross profit margin was generally due to an increase in the percentage of
total sales of the Company's higher margin products.
The Company's gross profit margin may fluctuate as a result of a number of
factors, including the mix of products sold, the proportion of international
sales, competitive pricing pressures and utilization of manufacturing capacity.
The Company expects gross margins to improve in fiscal 1998 because of an
expected change in the product sales mix to higher-margin products and as the
Company begins absorbing excess manufacturing capacity.* However, due to the
anticipated mix of products to be sold in the second quarter of fiscal 1998,
the gross profit margin may be slightly lower than in the first quarter of
fiscal 1998.*
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses were $14.4 million and $13.2
million or 22.1% and 19.7% of sales during the first quarter of fiscal 1998 and
1997, respectively . The increase in the amount of SG&A expenses in the
first quarter of fiscal 1998 was primarily due to higher costs including costs
associated with the new information business system and increased
infrastructure costs. The Company expects the amount of SG&A expenses to
increase in fiscal 1998 as compared to fiscal 1997.* The Company will continue
investing in worldwide sales and support capability, continue expanding the
Company's business system applications and begin preparation for the year 2000
software change requirements.*
RESEARCH AND DEVELOPMENT EXPENSES:
Research and development expenses for the first quarter of fiscal 1998 were
$10.7 million, or 16.4% of sales, as compared to $9.7 million, or 14.5% of
sales, for the first quarter of fiscal 1997. The increase in the amount of R&D
expenses resulted primarily from the Company's continued product and process
development efforts on new and existing products, including the 300mm
EXCALIBUR(R) and ARIES(TM) CryoKinetic(TM) cleaning system, ZETA(TM) automated
surface conditioning system, new POLARIS(R) cluster models and certain new
chemical management products. The successful introduction of new products is
important to the long-term growth of the Company.* The Company expects R&D
expenses to increase on a dollar to dollar basis in fiscal 1998 but decrease as
a percentage of sales.* Overall, the Company's goal is to invest approximately
13% to 15% of sales annually on new product and process development.*
OTHER INCOME (EXPENSE), NET:
Other income (expense), net was approximately $473,000 for the first quarter of
fiscal 1998 as compared to $671,000 for the first quarter of fiscal 1997. The
majority of the change was due to an increase of approximately $762,000 in
interest expense offset by an increase in interest income of $516,000. Both
increases are a result of the Company's $42.0 million private debt placement
completed in December 1996.
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INCOME TAX EXPENSE:
Income tax expense for the first quarter of fiscal 1998 was approximately
$518,000 or 32% of pre-tax profit compared to approximately $1.4 million of
income tax expense or 31% of pre-tax profit for first quarter of fiscal 1997.
The Company anticipates its effective tax rate will range from 30% to 33% in
fiscal 1998.*
EQUITY IN EARNINGS OF AFFILIATES:
The equity in earnings of affiliates was $558,000 for the first quarter of
fiscal 1998, compared to $1.0 million for the first quarter of fiscal 1997.
The decrease is due to lower earnings at both affiliates (Metron Technology
B.V. and m-FSI Ltd.)
The Company anticipates that the equity in earnings of affiliates will be down
in the second quarter of fiscal 1998 as compared to the first quarter of fiscal
1998 as a result of current industry conditions.*
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and marketable securities were
approximately $83.0 million as of November 29, 1997, a decrease of $6.2 million
from the end of fiscal 1997. The decrease in cash and cash equivalents and
marketable securities is primarily a result of funding of current operations.
The Company's accounts receivable increased by approximately 13.3%, or $8.5
million, from the end of fiscal 1997. The increase in accounts receivable is
mainly due to a higher percentage of international sales in the first quarter
of fiscal 1998 as compared to the fourth quarter of fiscal 1997 and due to a
deterioration of the accounts receivable aging.
The Company's inventory increased approximately $1.5 million to $63.5 million
at November 29, 1997 compared to $62.0 million at the end of fiscal 1997. The
majority of the increase relates to our Microlithography facility in Allen,
Texas as the Company transitions the Polaris(R) system manufacturing from
Chaska, Minnesota to Allen. As of November 29, 1997, the Company's current
ratio of current assets to current liabilities was 3.85 to 1.0 and working
capital was $175.2 million.
The Company had acquisitions of property, plant and equipment of $1.4 million
and $8.0 million for the first quarter of fiscal 1998 and fiscal 1997,
respectively. The continuing acquisitions reflect the investments in
information systems and facilities programs. It is anticipated the Company
will invest $10.0 to $15.0 million in fiscal 1998.*
The Company believes that with existing cash and cash equivalents, marketable
securities and internally generated funds, there will be sufficient funds to
meet the Company's currently projected working capital and other cash
requirements through at least fiscal 1998.*
The Company believes that success in its industry requires substantial capital
to maintain the flexibility to take advantage of opportunities as they may
arise. The Company may, from time to time, as market and business conditions
warrant, invest in or acquire complementary businesses, products or
technologies. The Company may fund such activities with additional equity or
debt financings. The sale of additional equity or debt securities could result
in additional dilution to the Company's shareholders.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share, which simplifies the standards for
computing earnings per share previously found in Accounting Principles Board
Opinion (APB) No. 15. SFAS No. 128 replaces the presentation of
primary earnings per share with a presentation of basic earnings per
share, which excludes dilution. SFAS No. 128 also requires dual presentation
of
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basic and diluted earnings per share on the face of the income statement for
all entities with complex capital structures, and requires a reconciliation.
Diluted earnings per share is computed similarly to fully diluted earnings per
share pursuant to APB No. 15. SFAS No. 128 must be adopted for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. SFAS No. 128 requires
restatement of all prior-period earnings-per-share data presented. The Company
plans to adopt SFAS No. 128 during the second quarter of fiscal 1998 and
anticipates that it will not have a material impact on the Company's financial
statement disclosures.*
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information about
Capital Structures, which was implemented 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.
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. The Company does not anticipate that SFAS No. 130 will
have a material impact on its financial statement disclosures.*
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information, which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on
the management approach to segment reporting, establishes requirements to
report selected segment information quarterly and to report entity-wide
disclosures about products and services, major customers, and the material
countries in which the entity holds assets and reports revenue. Management has
not yet evaluated the effects of this change on its reporting of segment
information. The Company will adopt SFAS No. 131 in its fiscal year 1999.
RISK FACTORS
Due to the nature of business and the industry in which the Company operates,
the following risk factors should be considered in addition to others described
above.
CYCLICALITY AND VOLATILITY IN THE MICROELECTRONICS INDUSTRY:
The Company's business depends upon the capital equipment expenditures of
microelectronics manufacturers, which in turn depend on the current and
anticipated market demand for semiconductor devices and products utilizing
semi-conductor devices. The microelectronics industry has been cyclical in
nature and has experienced periodic downturns. Certain semiconductor device
manufacturers have experienced slowdowns in terms of product demand and
volatility in terms of product pricing. Industry slowdowns and volatility have
caused the semiconductor device manufacturers to reduce their demand for
semiconductor processing equipment and, in some instances, to delay capital
equipment decisions. In some cases this has resulted in order cancellations or
delays of orders and delays of delivery dates for the Company's products. No
assurance can be given that the Company's sales and operating results will not
be adversely affected during downturns in the semiconductor industry.
In addition, the need for continued investments in research and development,
substantial capital equipment requirements and extensive ongoing worldwide
customer service and support capability will limit the Company's ability to
reduce expenses. Accordingly, there is no assurance that the Company will be
able to remain profitable in the future.
RISK OF DELAYS IN INTRODUCING NEW PRODUCTS AND THE MARKET'S ACCEPTANCE OF SUCH
PRODUCTS:
Microelectronics manufacturing equipment and processes are subject to rapid
technological change and new product introductions, as well as evolving
industry standards. The Company believes microelectronics manufacturers are
increasingly relying on equipment manufacturers to design and develop more
efficient equipment, to design and
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implement improved processes for the benefit of microelectronics
manufacturers and to integrate their equipment with that of other equipment
manufacturers. The Company must continue to develop, manufacture and market
new products that conform to evolving industry standards and that require a
significant commitment of resources and capital. The success of the Company in
developing, introducing and selling new and enhanced equipment depends upon a
variety of factors including product selection, timely and efficient completion
of product design and development, timely and efficient implementation of
manufacturing and assembly processes, product performance in the field, and
effective sales and marketing. The Company must also manage product
transitions successfully, as introductions of new products could adversely
affect the sales of existing products. The Company's failure to develop and
successfully introduce new products or enhancements to its existing products
and processes or achieve market acceptance of the new products or enhancements
could adversely affect the Company's business and results of operations.
NEW FACILITIES AND RELATED INFRASTRUCTURE COSTS:
The Company added manufacturing capacity with new facilities during fiscal
1997. This additional manufacturing capacity will have a negative impact on
gross profit margins if the Company's anticipated revenue levels are not met.
These additional facilities and related infrastructure costs will also increase
the overall operating expenses of the Company. The potential impact of idle
manufacturing capacity on gross margins and related infrastructure costs could
also have an adverse impact on the Company's future financial results.
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. FSI may
experience significant fluctuations in its quarterly sales, gross profits,
operating results, and net income. Factors which may influence FSI's operating
results in a given quarter include specific economic conditions in the
microelectronics industry, the financial results of FSI's affiliates, the
timing of the receipt of orders from major customers, the mix of products sold
by FSI, competetive pricing pressures, the proportion of international sales,
product modifications requested by customers, and production ability. During a
specific quarter, a significant portion of the Company's revenue may be derived
from the sale of a relatively small number of systems. Accordingly, a small
change in the 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.
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LITIGATION:
The Company is currently involved in litigation regarding a patent and could
become involved in additional litigation in the future. There can be no
assurance about the outcome of current or any future litigation or patent
infringement inquiries and whether it will adversely impact the Company's
business or results of operations.
HIGHLY COMPETITIVE INDUSTRY:
The microelectronics processing equipment industry is highly competitive. The
Company faces substantial competition throughout the world. The Company
believes that to remain competitive, it will require significant financial
resources to offer a broad range of products, to maintain customer service and
support centers worldwide, and to invest in product and process research and
development. There can be no assurance that financial resources with favorable
terms would be available when required. The Company believes that the
microelectronics industry is becoming increasingly dominated by large
manufacturers that have the resources to support customers on a worldwide
basis. Certain of the Company's competitors have substantially greater
financial, marketing, and customer service and support capabilities than the
Company. There is the possibility of large equipment companies entering the
market areas in which the Company competes. In addition, there are smaller
emerging microelectronics equipment companies that provide innovative
technology. The Company expects its competitors to continue to improve the
design and performance of their current products and processes and to introduce
new products and processes with improved price and performance characteristics.
No assurance can be given that the Company will continue to compete
successfully in the United States or elsewhere.
DEPENDENCE ON KEY PERSONNEL:
The Company's success depends to a significant extent upon 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.
INDUSTRY CONSOLIDATION:
There has been a trend toward industry consolidation for several years. During
fiscal 1997, the Company saw this trend continue with the completion of two
large industry mergers. The Company expects this trend toward industry
consolidation to continue as companies attempt to strengthen or hold their
market positions in a rapidly changing industry. The Company believes that the
industry consolidation may result in competitors that are better able to
compete. This could have a material adverse affect on the Company's business
operating results and financial condition.
VOLATILITY OF GLOBAL MARKETS:
The Company and its affiliates operate in a global market. Global operations
are subject to risks, including political and economic instability, general
economic conditions, imposition of government controls, fluctuations of
exchange rates, the need to comply with a wide variety of foreign and United
States export laws, trade restrictions and the greater difficulty of
administering business overseas. Although substantially all the Company's
direct international sales are denominated in United States dollars, both
direct sales by the Company and sales through its affiliated international
distributors may be affected by these factors and thus may adversely affect
the operations and financial results of the Company.
Recently the South East Asian currency crisis and the impact the crisis has had
upon the capital markets has resulted in lowered expectations for the
semiconductor capital industry. Due to the uncertainty in the South East Asia
region,
13
<PAGE> 14
the Company has seen a recent slow down in the industry. Anticipated sales
levels are at risk if industry conditions continue to deteriorate and
confidence in the Asian markets is not restored.
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 millenium issue presents for the year 2000.
The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test the systems for the year 2000
compliance. It is anticipated that all reprogramming efforts will be complete
by December 31, 1998, allowing adequate time for testing. To date,
confirmations have been received from some of the Company's vendors that
plans are being developed to address processing of transactions in the year
2000. Management has not yet assessed the year 2000 compliance expense and
related potential effect on the Company's earnings. The year 2000 problem
creates risk for the Company from unforeseen problems in its own computer
systems and from the Company's vendors. The failures of the Company's or its
vendor's computer systems could have a material impact on the Company's
operations.
14
<PAGE> 15
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGE IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
15
<PAGE> 16
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a)(3) Exhibits
* An asterisk next to a listed Exhibit indicates it is an executive
compensation plan or arrangement.
<TABLE>
<S> <C>
2.1 Agreement and Plan of Reorganization dated December 23, 1994 by
and among the Company, ACS Acquisition Corp., Applied Chemical
Solutions, and certain significant shareholders of Applied
Chemical Solutions.(1)
2.2 Share Purchase Agreement dated December 14, 1994 by and among the
Company, Metron Semiconductors Europa B.V., Christopher
Springall, Anthony Springall, Roger Springall, David Springall
and Michael Springall. (2)
2.3 Agreement and Plan of Reorganization by and Among FSI
International, Inc., Spectre Acquisition Corp., and Semiconductor
Systems, Inc. (12)
3.1 Restated Articles of Incorporation of the Company. (3)
3.2 Restated By-Laws. (4)
3.3 Amendment to Restated By-Laws. (5)
4.1 Note Purchase Agreement between FSI International, Inc. and Metropolitan Life
Insurance Company and other certain purchasers. (Schedule A omitted) (14)
4.2 Form of Rights Agreement dated as of May 22, 1997 between FSI International,
Inc. and Harris Trust and Savings Bank, National Association, as Rights Agent
(15)
*10.1 FSI International, Inc. 1997 Omnibus Stock Plan (14)
*10.2 Split Dollar Insurance Agreement and Collateral Assignment
Agreement dated December 28, 1989, between the Company and Joel
A. Elftmann. (Similar agreements between the Company and each of
Robert E. Cavins, Benjamin J. Sloan, Dale A. Courtney, Peter A.
Pope, Benno G. Sand and J. Wayne Stewart have
been omitted, but will be filed upon the request of the
Commission).(6)
10.3 Lease dated June 27, 1985, between the Company and Lake Hazeltine
Properties. (4)
10.4 Lease dated September 1, 1985, between the Company and Elftmann,
Wyers, Blackwood Partnership. (4)
10.5 Lease dated September 1, 1985, between the Company and Elftmann,
Wyers Partnership. (4)
*10.6 1989 Stock Option Plan. (5)
*10.7 Amended and Restated Employees Stock Purchase Plan. (3)
10.8 Shareholders Agreement among FSI International, Inc. and Mitsui
& Co., Ltd. and Chlorine Engineers Corp. Ltd. dated as of August
14, 1991. (6)
10.9 FSI Exclusive Distributorship Agreement dated as of August 14,
1991 between FSI International, Inc. and moFSI, Ltd. (6)
10.10 FSI Licensing Agreement dated as of August 14, 1991, between FSI
International, Inc. and moFSI, Ltd. (6)
10.11 License Agreement, dated October 15, 1991, between the Company
and Texas Instruments Incorporated. (7)
10.12 Amendment No. 1, dated April 10, 1992, to the License Agreement,
dated October 15, 1991, between the Company and Texas Instruments
Incorporated. (7)
10.13 Amendment effective October 1, 1993 to the License Agreement,
dated October 15, 1991 between the Company and Texas Instruments Incorporated (8)
*10.14 Amended and Restated Directors' Nonstatutory Stock Option Plan. (9)
*10.15 Management Agreement between FSI International, Inc. and Robert E. Cavins,
effective as of March 28, 1994. (9)
*10.16 Management Agreement between FSI International, Inc. and Dale A. Courtney,
</TABLE>
16
<PAGE> 17
<TABLE>
<S><C>
effective as of March 28, 1994. (9)
*10.17 Management Agreement between FSI International, Inc. and Joel A. Elftmann,
effective as of March 28, 1994 (9)
*10.19 Management Agreement between FSI International, Inc. and Peter A. Pope,
effective as of March 28, 1994. (9)
*10.20 Management Agreement between FSI International, Inc. and Benno G. Sand,
effective as of March 31, 1994. (9)
*10.21 Management Agreement between FSI International, Inc. and Benjamin J. Sloan,
effective as of March 28, 1994. (9)
*10.22 Management Agreement between FSI International, Inc. and J. Wayne Stewart,
effective as of March 28, 1994. (9)
*10.23 Management Agreement between FSI International, Inc. and Charles Wofford
effective as of February 5, 1996. (13)
*10.24 FSI International, Inc. 1994 Omnibus Stock Plan. (10)
*10.25 FSI International, Inc. 1997 Incentive Plan.
10.26 First Amendment to Lease made and entered into October 31, 1995 by and between
Lake Hazeltine Properties and FSI International, Inc. (11)
10.27 Distribution Agreement made and entered into as of July 6, 1995 by and between
FSI International, Inc. and Metron Semiconductors Europa B.V. (Exhibits to
Agreement omitted) (11)
10.28 Lease dated August 9, 1995 between Skyline Builders, Inc. and FSI International,
Inc. (11)
10.29 Lease Rider dated August 9, 1995 between Skyline Builders, Inc. and FSI
International, Inc. (11)
10.30 Lease Amendment dated November, 1995 between Roland A. Stinski and FSI
International, Inc. (Exhibits to Amendment omitted) (11)
11.1 Computation of Per Share Earnings of FSI International, Inc.
(1) Filed as an Exhibit to the Company's Report on Form 8-K dated January
5, 1995, as amended, File No. 0-17276, and incorporated by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form
S-3 dated January 5, 1995, SEC File No. 33-88250 and incorporated by
reference.
(3) Filed as an Exhibit to the Company's Report on Form 10-Q for the
quarter ended February 24, 1990, SEC File No. 0-17276, and incorporated
by reference.
(4) Filed as an Exhibit to the Company's Registration Statement on Form
S-1, SEC File No. 33-25035, and incorporated by reference.
(5) Filed as an Exhibit to the Company's Report on Form 10-K for the
fiscal year ended August 26, 1989, SEC File No. 0-17276, and
incorporated by reference.
(6) Filed as an Exhibit to the Company's Report on Form 10-K for the
fiscal year ended August 31, 1991, as amended by Form 8 dated January 7,
1992, SEC File No. 0-17276, and incorporated by reference.
(7) Filed as an Exhibit to the Company's Report on Form 10-K for the
fiscal year ended August 29, 1992, File No. 0-17276, and incorporated by
reference.
(8) Filed as an Exhibit to the Company's Report on Form 10-K for the
fiscal year ended August 28, 1993, SEC File No. 0-17276, and
incorporated by reference.
(9) Filed as an Exhibit to the Company's Report on Form 10-Q for the
fiscal quarter ended May 28, 1994, SEC File No. 0-17276, and
incorporated by reference.
(10) Filed as an Exhibit to the Company's Report on Form 10-K for the
fiscal year ended August 27, 1994, SEC File No. 0-17276, and
incorporated by reference.
(11) Filed as an Exhibit to the Company's Report on Form 10-K for the
fiscal year ended August 26, 1995, SEC File No. 0-17276 and incorporated
reference.
(12) Filed as an Exhibit to the Company's Registration Statement on Form
S-4 (as amended) dated March 21, 1996, SEC File No. 333-1509 and
incorporated by reference.
(13) Filed as an Exhibit to the Company's Report on Form 10-K for the
fiscal year ended August 31, 1996, SEC File No.
0-17276 and incorporated by reference.
(14) Filed as an Exhibit to the Company's Report on Form 10-Q for the
fiscal quarter ended March 1, 1997, SEC File No. 0-17276, and
incorporated by reference.
(15) Filed as an Exhibit to the Company's Report on Form 8-K, filed by the
Company on June 5, 1997, SEC File No. 0-17276, and incorporated by
reference.
</TABLE>
___________________________
17
<PAGE> 18
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter ended November
29, 1997.
18
<PAGE> 19
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FSI INTERNATIONAL, INC.
. . . . . . . . . . . . . . . . . .
[Registrant]
DATE: January 13, 1998
By: /s/Benno Sand
----------------------------
Benno Sand
Executive Vice President and
Chief Financial Officer
on behalf of the
Registrant and as
Principal Financial Officer
19
<PAGE> 1
EXHIBIT 11.1
FSI INTERNATIONAL, INC.
COMPUTATION OF INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
QUARTER ENDED: QUARTER ENDED:
----------------------------------------
NOV 29, 1997 NOV 30, 1996
----------------------------------------
<S> <C> <C>
PRIMARY:
AVERAGES SHARES OUTSTANDING 22,614,865 22,363,331
NET EFFECT OF DILUTIVE STOCK OPTIONS
AND WARRANTS -- BASED ON THE TREASURY
STOCK METHOD 1,142,346 651,152
----------- -----------
TOTAL 23,757,211 23,014,483
=========== ===========
NET INCOME $ 1,885,337 $ 4,040,924
=========== ===========
PRIMARY PER SHARE AMOUNTS $ 0.08 $ 0.18
=========== ===========
FULLY DILUTED:
AVERAGE SHARES OUTSTANDING 22,614,865 22,363,331
NET EFFECT OF DILUTIVE STOCK OPTIONS
AND WARRANTS -- BASED ON THE TREASURY
STOCK METHOD 912,125 822,153
----------- -----------
TOTAL 23,526,990 23,185,484
=========== ===========
NET INCOME $ 1,885,337 $ 4,040,924
=========== ===========
FULLY DILUTED PER SHARE AMOUNTS $ 0.08 $ 0.17
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-START> AUG-31-1997
<PERIOD-END> NOV-29-1997
<CASH> 72,222,747
<SECURITIES> 10,764,670
<RECEIVABLES> 74,970,035
<ALLOWANCES> 2,196,000
<INVENTORY> 63,517,531
<CURRENT-ASSETS> 236,696,145
<PP&E> 106,987,652
<DEPRECIATION> 32,628,522
<TOTAL-ASSETS> 332,021,965
<CURRENT-LIABILITIES> 61,472,315
<BONDS> 42,000,000
0
0
<COMMON> 159,983,478
<OTHER-SE> 66,133,206
<TOTAL-LIABILITY-AND-EQUITY> 332,021,965
<SALES> 64,914,894
<TOTAL-REVENUES> 64,914,894
<CGS> 38,731,022
<TOTAL-COSTS> 38,731,022
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 69,000
<INTEREST-EXPENSE> 797,836
<INCOME-PRETAX> 1,617,904
<INCOME-TAX> 517,730
<INCOME-CONTINUING> 1,885,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,885,337
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
