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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(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
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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/A or any amendment to
this Form 10-K/A.
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/A 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/A Report.
(The Compensation Committee Report and the stock performance graph of the
Registrant's Proxy Statement are expressly not incorporated by reference
herein.)
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PART I
ITEM 1. BUSINESS
CAUTIONARY INFORMATION REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in this Report on Form 10-K/A 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/A, 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").
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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
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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
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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.
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.
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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.
The spray processing systems offered by the Company range in price from $650,000
to $2.0 million. The Company also markets certain equipment complementary to its
spray processors, including water heaters, chemical heaters, and booster pumps.
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Vapor Processing Systems. The Company's EXCALIBUR(R) 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 varies 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 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
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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.
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 involving turnkey 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.
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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 for each year. IBM and National Semiconductor represented the
top two customers in FSI's backlog for both years. The loss of either customer
could have a material adverse effect on the Company's operations. 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.
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.
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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.
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
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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 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.*
12
<PAGE> 13
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.*
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.
13
<PAGE> 14
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 distribution 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.
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
14
<PAGE> 15
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.
The Company has approximately 40 patents with expiration dates ranging from July
1999 to July 2018.
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.
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
15
<PAGE> 16
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.
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).
16
<PAGE> 17
* 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.
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
17
<PAGE> 18
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.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
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
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
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C>
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
</TABLE>
(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 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-
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<PAGE> 20
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.
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<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
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.
21
<PAGE> 22
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.
During the fourth quarter of fiscal 1998, the Company incurred $12.5 million of
charges relating to the realignment of its business due to the industry
conditions and the length of the industry-downturn. These realignment charges
impacted all segments of the business. These charges were the results of
reduction in force and related severance costs, additional inventory reserves
due to the discontinuation and phasing out of certain product lines, increased
allowance for doubtful accounts for customers who previously purchased products
which may be impacted by the realignment and charges related to the
consolidation of facilities.
As more fully discussed in Note 2 of the financial statements, the Company
incurred approximately $12,500,000 of realignment charges consisting of the
following:
<TABLE>
<S> <C>
Reduction in workforce $1,200,000
Consolidation of facilities $1,600,000
Inventory reserves $8,800,000
Allowance for doubtful accounts $ 900,000
-------------------
$12,500,000
</TABLE>
These charges are reflected in the statement of operations as follows:
<TABLE>
<S> <C>
Cost of goods sold $9,100,000
Selling, general and administrative expenses $3,000,000
Research and development expenses $ 400,000
-------------------
$12,500,000
</TABLE>
The reduction in work force resulted in approximately 200 positions being
eliminated throughout the Company. The majority of these positions were
eliminated in July 1998 with the remaining positions being eliminated by the end
of fiscal 1998.
The realignment charge for the consolidation of facilities is for noncancellable
lease payments on a closed facility.
The Company anticipates future cash outlays related to the realignment charges
will be $1,600,000 primarily related to the consolidation of facilities. It is
anticipated this cash outlay will continue to exist until the expiration of the
lease of the closed facility, which is October 2000.
The inventory reserved for specifically related to the realignment of the
Company due to the continued downturn of the industry. Reserves were necessary
for products that are being or will be phased out or discontinued. During fiscal
1998, the Company disposed of $10.8 million of inventory as compared to $1.6
million of fiscal 1997.
The annual cost savings expected to arise from the realignment specifically
relate to the reduction in force (approximately 200 positions) and the
consolidation of facilities. Initially the savings from the reduction in force
are projected to approximate $1.4 million dollars. The savings from the
eliminated
22
<PAGE> 23
positions will be reduced as additional positions are added and as job positions
get changed and/or compensation changes occur.
The annual cost savings from the consolidation of facilities will approximate
$460,000 on an ongoing basis.
The savings from the above realignment began to be realized the first quarter of
fiscal 1999.
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
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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 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.
Due to the industry conditions and Company realignment, all divisions reviewed
their phase-out plans and discontinued products. As a result, the divisions
increased their inventory reserves.
The total increase in inventory reserves for fiscal 1998 was approximately $11.6
million as compared to an increase of $4.8 million in fiscal 1997. The large
increase is due to the continued downturn in the industry and the realignment of
the Company's business. In the past, industry cycles were shorter and inventory
levels were managed to phase-out plans and product discontinuances. During
fiscal 1998 the Company disposed of $10.8 million of inventory as compared to
$1.6 million in 1997.
The Company's gross profit margin may fluctuate as a result of a number of
factors, including the mix of products sold as some products have higher margins
than others, the proportion of international sales as international sales
generally have lower margins, 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
The dollar and percentage increase in fiscal 1998 as compared to 1997 is due to
one-time charges of approximately $5.0 million. The $5.0 million of charges
consists of $2.0 million of costs associated with
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<PAGE> 25
organizational changes announced in December 1997 and the settlement of a patent
infringement lawsuit, $1.6 million of costs associated with facilities
consolidation, $900,000 of costs associated with increased allowance for
doubtful accounts and $500,000 of severance costs and outplacement fees related
to the reduction in force. 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, 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
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<PAGE> 26
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.
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 has short-term debt of approximately $65,000 relating to equipment
capital leases with interest rates ranging from 8.83% to 12.68%. The Company has
long-term debt of $42.0 million. The long-term debt is a private placement
primarily of unsecured notes with various insurance companies. The long-term
debt is through December 2006 and has interest rates ranging from 7.15% to
7.27%. The notes are subject to certain affirmative and negative covenants,
including financial ratio tests such as an indebtedness ratio and a tangible net
worth test.
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<PAGE> 27
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 2000*.
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.*
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
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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
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
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<PAGE> 29
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.
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<PAGE> 30
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, 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 is 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
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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 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 is 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.
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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 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.
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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
it affiliated international distributors may be affected by these factors and
thus may adversely affect the operations and financial results of the Company.
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 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.
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YEAR 2000
The Company is addressing the issue 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 the 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 assurances as to compliance. To
date, confirmations have not been received from all of 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 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 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.*
34
<PAGE> 35
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
35
<PAGE> 36
FSI INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended August 29, 1998, August 30, 1997 and August 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ------------------ -----------------
<S> <C> <C> <C>
Sales (including sales to affiliates of $79,757,000, $217,894,406 $252,441,241 $304,040,806
$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 expenses 63,693,305 56,490,877 58,742,058
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 equity in
earnings of affiliates (23,005,340) 1,242,904 23,937,524
Minority interest 378,975 (314,380) (497,560)
Equity in earnings of affiliates 674,274 3,711,451 5,108,442
---------------- ------------------ -----------------
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
share equivalents 22,801,415 23,373,596 23,207,450
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE> 37
FSI INTERNATIONAL, INC. & SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
AUGUST 29, AUGUST 30,
ASSETS 1998 1997
- -------------------------------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
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 doubtful
accounts of $3,113,000 and $2,127,000, respectively 33,818,525 54,161,499
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
------------------ -----------------
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
------------------ -----------------
Commitments (Notes 6, 9, 11, 19 and 21)
$310,457,581 $331,152,401
================== =================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
37
<PAGE> 38
FSI INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended August 29, 1998, August 30, 1997 and August 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------ CUMULATIVE
NUMBER OF RETAINED TRANSLATION
SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL
------------- --------------- ------------- --------------- --------------
<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)
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 loss - - (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.
38
<PAGE> 39
FSI INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended August 29, 1998, August 30, 1997 and August 31, 1996
<TABLE>
<CAPTION>
1998 1997 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 11,603,435 4,779,502 3,325,778
Disposal of inventory (10,791,520) (1,619,000) (1,638,000)
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)
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)
</TABLE>
39
<PAGE> 40
<TABLE>
<S> <C> <C> <C>
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.
40
<PAGE> 41
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED
AUGUST 29, 1998, AUGUST 30, 1997 AND AUGUST 31, 1996
(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 and for initial customer
installments, which are recognized upon the successful completion of an
evaluation period. Revenue on chemical management systems, for which the Company
has certain responsibility for facilities engineering and design work, as well
as installation, is recognized upon successful completion of the projects'
phases and milestones. Losses on such projects are recognized in the period in
which it is determined that it is probable that a loss might be incurred and the
amount of loss can be reasonably estimated.
Cash and Cash Equivalents
All highly liquid investments purchased with an original effective maturity
of three months or less are considered to be cash equivalents.
Marketable Securities
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).
41
<PAGE> 42
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 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.
42
<PAGE> 43
Net Income Per Common Share
The Company adopted SFAS No. 128, "Earnings per Share" during fiscal 1998.
Basic earnings per share are 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.
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.
43
<PAGE> 44
(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.
(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.
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.
44
<PAGE> 45
(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.
(5) EARNINGS PER SHARE
Basic and Dilutive earnings per share are as follows:
<TABLE>
<CAPTION>
BASIC EFFECT OF DILUTIVE EARNINGS
EARNINGS (LOSS) DILUTIVE (LOSS) PER
PER SHARE SECURITIES SHARE
-------------------- ----------------- ---------------------
Net Income (Loss) Income (Loss)
Income available to Stock available to common
(Loss) common stockholders Options 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 was 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.
(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.
45
<PAGE> 46
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 LEASES TOTAL
---------------- ----------------- ---------------
<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
================ ================= ===============
Total minimum lease payments $1,806,080 $4,162,460 $5,968,540
================ ================= ===============
</TABLE>
Rental expense for all operating leases consisted of the following:
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 30, AUGUST 31,
FISCAL YEAR ENDED 1998 1997 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>
(7) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 30,
1998 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>
46
<PAGE> 47
(8) PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 30,
1998 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
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.
(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.
47
<PAGE> 48
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
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
</TABLE>
<TABLE>
<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>
m-FSI Ltd:
<TABLE>
<CAPTION>
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
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------
1998 1997 1996
---------------- --------------- ----------------
<S> <C> <C> <C>
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.
48
<PAGE> 49
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%.
(10) ACCRUED EXPENSES
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>
49
<PAGE> 50
(11) DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 30,
1998 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>
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 $1,400,000. This stand-by letter of credit was issued in
connection with a performance bond for a chemical management project and can be
drawn against if certain performance requirements are not met.
50
<PAGE> 51
(12) INCOME TAXES
The provision for income tax (benefit) expense is summarized as
follows:
<TABLE>
<CAPTION>
August 29, August 30, August 31,
Fiscal Year Ended 1998 1997 1996
------------------- ---------------- ------------------
<S> <C> <C> <C>
Current:
Federal ($ 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, AUGUST 30,
1998 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
Alternativeminimumtaxcarry forwards 2,572,000 -
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>
51
<PAGE> 52
The effective income tax (benefit) expense differs from the expected
statutory federal income tax as follows:
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 30, AUGUST 31,
FISCAL YEAR ENDED 1998 1997 1996
------------------- --------------- --------------
<S> <C> <C> <C>
Expected federal income tax (benefit) expense ($12,951,000) $ 199,000 $11,966,000
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.
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.
(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.
52
<PAGE> 53
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.
(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
-------------------------------------- WEIGHTED
AVERAGE
AVAILABLE EXERCISE
FOR PRICE PER
ACTIVITY DESCRIPTION GRANT OUTSTANDING SHARE
---------------- ----------------- -----------------
<S> <C> <C> <C>
August 26, 1995 106,713 1,589,312 $6.64
Additional shares authorized for
1994 Omnibus Stock Option Plan 500,000 - -
Granted (422,161) 422,161 16.85
Exercised - (227,300) 2.10
Canceled 62,880 (64,547) 15.28
---------------- ----------------
August 31, 1996 247,432 1,719,626 9.43
Additional shares authorized for
1997 Omnibus Stock Option Plan 1,000,000 - -
Granted (1,019,817) 1,019,817 12.02
Exercised - (129,360) 4.78
Canceled 208,385 (511,291) 17.83
---------------- ----------------
August 30, 1997 436,000 2,098,792 $9.01
Additional shares authorized for
1997 Omnibus Stock Option Plan 750,000 - -
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>
53
<PAGE> 54
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 OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------- ------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE OF REMAINING EXERCISE OF EXERCISE
PRICES SHARES CONTRACTUAL LIFE PRICE SHARES PRICE
- ------------------------ --------------- ------------------- ---------------- ------------- ----------------
<S> <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
54
<PAGE> 55
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.
If the Company had elected to recognize compensation cost for the stock
option plan and employee stock purchase plan based on the fair value at the
grant dates for awards under those plans, consistent with the method prescribed
by SFAS No. 123, net income and net income per common share would have been
changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1998 1997 1996
--------------- --------------- ------------
<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>
Annualized dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Expected 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.
55
<PAGE> 56
(15) EMPLOYEE STOCK PURCHASE PLAN
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 to
the end of the purchases 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 (grant date fair value of these shares was
$9.72). On December 31, 1997 and 1996, 150,067 shares were issued at $10.09 per
share (grant date fair value of these shares was $11.87) and 91,765 shares were
issued at $12.22 per share (grant date fair value of these shares was $14.38),
respectively, under the Plan.
At August 29, 1998, there were 406,526 shares reserved for future employee
purchases of stock under the Plan.
(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>
AUGUST 29, AUGUST 30, AUGUST 31,
FISCAL YEAR ENDED 1998 1997 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>
AUGUST 29, AUGUST 30, AUGUST 31,
FISCAL YEAR ENDED 1998 1998 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.
(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.
56
<PAGE> 57
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.
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>
MLD SHARED
CMD & SCD 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)
Realignment charges 1,224,000 9,276,000 2,000,000 12,500,000
Total assets 33,496,000 81,382,000 195,580,000 310,458,000
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)
Total assets 38,427,000 104,172,000 188,553,000 331,152,000
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>
57
<PAGE> 58
(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.
(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.
(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.
(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 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.
(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.
58
<PAGE> 59
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/A. The Proxy Statement is furnished
solely for the information of the Securities and Exchange Commission.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
included in the Proxy Statement and is incorporated by reference. For
information concerning executive officers, see Item 4A of this Form 10-K/A
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
59
<PAGE> 60
<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........................................... 64
Schedule II - Valuation and Qualifying Accounts.................................... 65
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>
60
<PAGE> 61
(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 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)
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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)
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(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/A 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/A 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/A 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/A 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/A for the fiscal
year and 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/A 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.
62
<PAGE> 63
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: August 31, 1999
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: August 31, 1999
<PAGE> 64
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 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
<PAGE> 65
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 of Balance at
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
- --------------------------------------------------------------------------------------------------------------------
Fiscal year ended August 29, 1998
Inventory reserves
(Deducted from inventory) $8,981,260 $11,603,415 $(10,791,500) $9,791,895
Fiscal year ended August 30, 1997
Inventory reserves
(Deducted from inventory) $5,820,758 $ 4,779,502 $ (1,619,000) $8,981,260
Fiscal year ended August 31, 1996
Inventory reserves
(Deducted from inventory) $4,132,980 $ 3,325,778 $ (1,638,000) $5,820,758
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