<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended FEBRUARY 27, 1999
-------------------------------------------------
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
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FSI INTERNATIONAL, INC.
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1223238
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
322 LAKE HAZELTINE DRIVE, CHASKA, MINNESOTA 55318
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
612-448-5440
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|X| YES |_| NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date:
COMMON STOCK, NO PAR VALUE - 23,250,319 SHARES OUTSTANDING AS OF MARCH 26, 1999
1
<PAGE> 2
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
<S> <C> <C>
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets as of February 27, 1999
(Unaudited) and August 29, 1998 3
Consolidated Condensed Statements of Operations
(Unaudited) for the quarters ended February 27, 1999
and February 28, 1998 5
Consolidated Condensed Statements of Operations (Unaudited)
for the six months ended February 27, 1999 and February 28, 1998 6
Consolidated Condensed Statements of Cash Flows (Unaudited)
for the six months ended February 27, 1999 and February 28, 1998 7
Notes to Consolidated Condensed Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 25
</TABLE>
2
<PAGE> 3
PART I. Item 1. FINANCIAL INFORMATION
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
FEBRUARY 27, 1999 AND AUGUST 29, 1998
ASSETS
<TABLE>
<CAPTION>
February 27, August 29,
1999 1998
---------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 75,356,305 $ 75,384,024
Marketable securities 23,009,959 13,495,411
Trade accounts receivable, net of allowance for
doubtful accounts of $3,080,000 and $3,113,000,
respectively 23,395,621 33,818,525
Trade accounts receivable from affiliates 9,772,054 12,644,219
Inventories 48,267,588 50,152,429
Deferred income tax benefit 13,553,752 13,499,119
Refundable income taxes -- 10,637,318
Prepaid expenses and other current assets 8,946,243 8,414,318
------------- -------------
Total current assets 202,301,522 218,045,363
------------- -------------
Property, plant and equipment, at cost 114,913,534 112,248,529
Less accumulated depreciation and amortization (48,335,675) (43,460,736)
------------- -------------
66,577,859 68,787,793
------------- -------------
Investment in affiliates 14,835,456 15,408,400
Deposits and other assets 4,882,533 3,832,467
Deferred income tax benefit 12,300,412 4,383,558
------------- -------------
$ 300,897,782 $ 310,457,581
============= =============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 4
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
FEBRUARY 27, 1999 AND AUGUST 29, 1998
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
February 27, August 29,
1999 1998
------------ -------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 59,815 $ 65,418
Trade accounts payable 22,617,988 18,999,777
Accrued expenses 26,022,777 25,226,720
Customer deposits 9,273,165 4,969,645
Deferred revenue 9,115,530 12,739,504
------------- -------------
Total current liabilities 67,089,275 62,001,064
------------- -------------
Long-term debt, less current maturities 42,039,058 42,064,496
Deferred income taxes 24,450 24,016
Minority interest -- 1,991,738
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, 23,250,319
and 23,034,562 shares at February 27, 1999
and August 29, 1998, respectively 164,746,151 163,307,107
Retained earnings 27,896,718 43,033,192
Cumulative translation adjustment (897,870) (1,964,032)
------------- -------------
Total stockholders' equity 191,744,999 204,376,267
------------- -------------
$ 300,897,782 $ 310,457,581
============= =============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 5
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED FEBRUARY 27, 1999 AND FEBRUARY 28, 1998
(Unaudited)
<TABLE>
<CAPTION>
February 27, February 28,
1999 1998
------------ ------------
<S> <C> <C>
Sales (including sales to affiliates of
$9,261,000 and $26,088,000, respectively) $ 33,034,654 $ 59,431,392
Cost of sales 25,942,229 38,759,409
------------ ------------
Gross profit 7,092,425 20,671,983
Selling, general and administrative expenses 10,877,980 17,374,954
Research and development expenses 8,122,240 11,228,302
------------ ------------
Operating loss (11,907,795) (7,931,273)
Interest expense (718,850) (801,862)
Interest income 1,316,318 1,190,871
Other income (expense), net 327,664 (86,721)
------------ ------------
Loss before income taxes (10,982,663) (7,628,985)
Income tax benefit 4,282,234 3,042,384
------------ ------------
Loss before minority interest
and equity in loss of affiliates (6,700,429) (4,586,601)
Minority interest (91,528) 125,415
Equity in loss of affiliates (781,972) (135,816)
------------ ------------
Net loss ($7,573,929) ($4,597,002)
============ ============
Net loss per common share - basic ($0.33) ($0.20)
Net loss per common share - diluted ($0.33) ($0.20)
Weighted average common shares 23,169,617 22,767,469
Weighted average common
and potential common shares 23,169,617 22,767,469
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> 6
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTHS ENDED FEBRUARY 27, 1999 AND FEBRUARY 28, 1998
(Unaudited)
<TABLE>
<CAPTION>
February 27, February 28,
1999 1998
------------- -------------
<S> <C> <C>
Sales (including sales to affiliates of
$18,231,000 and $44,990,000, respectively) $ 67,227,838 $ 124,346,286
Cost of sales 50,461,557 77,490,431
------------- -------------
Gross profit 16,766,281 46,855,855
Selling, general and administrative expenses 22,602,021 31,763,518
Research and development expenses 17,407,428 21,879,138
------------- -------------
Operating loss (23,243,168) (6,786,801)
Interest expense (1,503,934) (1,599,698)
Interest income 2,594,891 2,438,229
Other income (expense), net 287,294 (62,811)
------------- -------------
Loss before income taxes (21,864,917) (6,011,081)
Income tax benefit 8,333,387 2,524,654
------------- -------------
Loss before minority interest
and equity in earnings (loss) of affiliates (13,531,530) (3,486,427)
Minority interest (40,765) 352,126
Equity in earnings (loss) of affiliates (1,080,354) 422,636
------------- -------------
Net loss ($14,652,649) ($2,711,665)
============= =============
Net loss per common share - basic ($0.63) ($0.12)
Net loss per common share - diluted ($0.63) ($0.12)
Weighted average common shares 23,108,545 22,691,001
Weighted average common
and potential common shares 23,108,545 22,691,001
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE> 7
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED FEBRUARY 27, 1999 AND FEBRUARY 28, 1998
(Unaudited)
<TABLE>
<CAPTION>
February 27, February 28,
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ($14,652,649) ($ 2,711,665)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest 40,765 (352,126)
Deferred income taxes (7,971,053) 818
Depreciation and amortization 7,448,179 7,840,392
Allowance for doubtful accounts (32,840) 122,248
Inventory reserves (471,334) 765,777
Equity in (earnings) loss of affiliates 1,080,354 (422,636)
Changes in operating assets and liabilities:
Trade accounts receivable 13,327,909 (636,223)
Inventories 2,356,175 (8,591,800)
Prepaid and other current assets (531,925) (4,646,174)
Trade accounts payable 3,618,211 (1,423,445)
Accrued expenses 831,335 (1,147,392)
Customer deposits 4,303,520 3,846,417
Deferred revenue (3,623,974) 4,245,121
Refundable income taxes 10,637,318 --
Other 552,424 66,114
------------ ------------
Net cash provided by (used in) operating activities 16,912,415 (3,044,574)
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of equipment 470,500 --
Acquisition of property, plant and equipment (5,502,863) (2,474,032)
Purchase of minority interest in CME and CMK (2,510,000) --
Purchases of marketable securities (30,183,805) (11,142,280)
Maturities of marketable securities 17,645,827 5,000,248
Sale of marketable securities 3,023,430 --
Decrease (increase) in deposits and other assets (1,255,948) 275,936
------------ ------------
Net cash used in investing activities (18,312,859) (8,340,128)
------------ ------------
FINANCING ACTIVITIES:
Minority interest's investment in FME -- 500,335
Principal payments on long-term debt (31,041) (76,842)
Net proceeds from issuance of common stock 1,403,766 1,851,472
------------ ------------
Net cash provided by financing activities 1,372,725 2,274,965
------------ ------------
Decrease in cash and cash equivalents (27,719) (9,109,737)
Cash and cash equivalents at beginning of period 75,384,024 79,186,746
------------ ------------
Cash and cash equivalents at end of period $ 75,356,305 $ 70,077,009
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
7
<PAGE> 8
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying consolidated condensed financial statements have been
prepared by the Company without audit and reflect all adjustments
(consisting only of normal and recurring adjustments) which are, in the
opinion of management, necessary to present a fair statement of the
results for the interim periods presented. The statements have been
prepared in accordance with the regulations of the Securities and
Exchange Commission but omit certain information and footnote
disclosures necessary to present the statements in accordance with
generally accepted accounting principles. The results of operations for
the interim periods presented are not necessarily indicative of the
results to be expected for the full fiscal year. These consolidated
condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and footnotes thereto included in the
Company's Annual 10-K Report for the fiscal year ended August 29, 1998
previously filed with the Securities and Exchange Commission.
(2) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
February 27, August 29,
1999 1998
----------------- ----------------
<S> <C> <C>
Finished products $ 2,753,115 $ 4,220,843
Work-in-process 17,433,270 11,347,129
Subassemblies 7,075,678 11,214,265
Raw materials and purchased parts 21,005,525 23,370,192
----------------- ----------------
$48,267,588 $50,152,429
----------------- ----------------
(3) SUPPLEMENTARY CASH FLOW INFORMATION
Six Months Ended
--------------------------------------
February 27, February 28,
1999 1998
----------------- -----------------
Schedule of interest and income taxes paid (refunds received):
Interest $ 1,483,533 $1,579,297
Income taxes ($11,992,195) $1,313,819
</TABLE>
The Company realized a tax benefit from disqualifying dispositions of
stock options of $35,278 and $205,162 in the first half of fiscal 1999
and 1998, respectively.
(4) RECONCILIATION OF EARNINGS AND SHARE AMOUNTS USED IN EPS CALCULATION
Basic earnings per common share was computed by dividing net income by
the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per common share for the quarters
and six months ended February 27, 1999 and February 28, 1998 was
calculated using the treasury stock method to compute the weighted
average common stock outstanding assuming the conversion of dilutive
potential common shares.
8
<PAGE> 9
<TABLE>
<CAPTION>
Dilutive
Basic Loss
Loss Per Share Effect of Per Share
Net Loss To Common Dilutive Loss To Common
FOR THE QUARTERS ENDED Loss Stockholders Securities* Stockholders
- ---------------------- ------------ -------------- ----------- --------------
<S> <C> <C> <C>
FEBRUARY 27, 1999
Loss ($7,573,929) ($7,573,929) - ($7,573,929)
Shares - 23,169,617 - 23,169,617
Per share amount - ($0.33) - ($0.33)
FEBRUARY 28, 1998
Loss ($4,597,002) ($4,597,002) - ($4,597,002)
Shares - 22,767,469 - 22,767,469
Per share amount - ($0.20) - ($0.20)
FOR THE SIX MONTHS ENDED
- ---------------------------------------
FEBRUARY 27, 1999
Loss ($14,652,649) ($14,652,649) - ($14,652,649)
Shares - 23,108,545 - 23,108,545
Per share amount - ($0.63) - ($0.63)
FEBRUARY 28, 1998
Loss ($2,711,665) ($2,711,665) - ($2,711,665)
Shares - 22,691,001 - 22,691,001
Per share amount - ($0.12) - ($0.12)
</TABLE>
* The effect of stock options were not included in the calculation of dilutive
earnings per share for the quarter and six months ended February 27, 1999 and
February 28, 1998 because their inclusion would have been anti-dilutive.
(5) COMPREHENSIVE INCOME (LOSS)
Effective August 30, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive
Income." SFAS No. 130 requires that an entity report a total for
comprehensive income (loss) in condensed financial statements of
interim periods issued to shareholders. For the quarters and six months
ended February 27, 1999 and February 28, 1998 net income (loss), items
of other comprehensive income and comprehensive income (loss) are as
follows:
<TABLE>
<CAPTION>
February 27, February 28,
1999 1998
------------------ -----------------
FOR THE QUARTERS ENDED:
<S> <C> <C>
Net loss ($7,573,929) ($4,597,002)
Items of other comprehensive income (loss):
Foreign currency translation 741,579 (350,880)
------------------ -----------------
Comprehensive loss ($6,832,350) ($4,947,882)
================== =================
FOR THE SIX MONTHS ENDED:
Net loss ($14,652,649) ($2,711,665)
Items of other comprehensive income (loss):
Foreign currency translation 1,066,162 (736,001)
------------------ -----------------
Comprehensive loss ($13,586,487) ($3,447,666)
================== =================
</TABLE>
9
<PAGE> 10
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SECOND QUARTER AND FIRST HALF OF FISCAL 1999 COMPARED WITH THE SECOND QUARTER
AND FIRST HALF OF FISCAL 1998.
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;
expenses associated with the pending YieldUP International Corporation (YieldUP)
acquisition; patent infringement litigation of YieldUP if the acquisition of
YieldUP is consummated; the timing and success of current and future product and
process development programs; the success of the Company's affiliated
distributors; the timing and extent of any industry upturn or downturn and the
successful implementation of new business systems. Readers are directed to the
Risk Factors discussion found in the Company's Report on Form 10-K for the year
ended August 29, 1998. 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 (*).
FSI International, Inc., ("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 and thin film heads.
Overall industry softness continues due to pricing pressures, a faster than
expected move to smaller line widths, delays in the transition to 300mm wafers
and the increased availability of used equipment. The move to smaller line
widths allows device manufacturers to produce more chips on each wafer by
shrinking the die size. Manufacturers are able to increase production without
buying a significant amount of new equipment or moving to the next generation
300-mm wafer size, resulting in a delay of 300-mm production and the need to
purchase equipment.
However, it appears DRAM pricing has stabilized somewhat and that the disk drive
manufacturers are experiencing modestly better order rates. This may be
occurring because of the strong PC unit demand related to Year 2000 upgrade
requirements, improving economic conditions in Asia and the availability of low
cost PC's.
The industry has seen some minor signs of improvement in recent months in
equipment bookings; however, the Company remains cautious and is managing its
business to reflect expected lower revenues as compared to fiscal 1998*. The
Company's goal is to effectively manage its assets during the industry downturn
while continuing to invest in key strategic programs.
During October 1998, the Company implemented additional cost control measures
including a reduction of force of approximately 150 employees and contractors.
In addition, the Company initiated three weeks of scheduled plant shutdowns
during the first half of fiscal 1999. The Company had a charge of approximately
$800,000 for severance and outplacement costs in the first quarter of fiscal
1999.
The Company has four segments, Surface Conditioning Division (SCD), Chemical
Management Division (CMD), Microlithography Division (MLD) and Shared Services
(SS).
10
<PAGE> 11
Due to the similarity of production processes, distribution methods, customer
base and products/services, the reporting of segment information is aggregated
for the Surface Conditioning and Microlithography Divisions.
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 and thin film head
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.
The following table sets forth on a consolidated basis, for the fiscal period
indicated, certain income and expense items as a percent of total sales.
<TABLE>
<CAPTION>
Percent of Sales Percent of Sales
Quarter Ended Six Months Ended
------------------------------------ -----------------------------------
February 27, February 28, February 27, February 28,
1999 1998 1999 1998
----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 78.5 65.2 75.1 62.3
Gross profit 21.5 34.8 24.9 37.7
Selling, general and administrative 32.9 29.2 33.6 25.5
Research and development 24.6 18.9 25.9 17.6
Operating loss (36.0) (13.3) (34.6) (5.4)
Other income (expense), net 2.8 0.5 2.1 0.6
Loss before income taxes (33.2) (12.8) (32.5) (4.8)
Income tax (benefit) expense (13.0) (5.1) (12.4) (2.0)
Minority interest (0.3) 0.2 (0.1) 0.3
Equity in earnings (loss) of affiliates (2.4) (0.2) (1.6) 0.3
------------ ----------- ----------- ----------
Net loss (22.9%) (7.7%) (21.8%) (2.2%)
============ =========== =========== ==========
</TABLE>
Segment information is as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------------------------------ -----------------------------------
February 27, February 28, February 27, February 28,
1999 1998 1999 1998
----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
MLD & SCD
- ----------------------------------------------
Revenue from external customers 19,147,019 44,122,570 43,163,120 94,720,768
Depreciation and amortization 1,178,485 1,338,189 2,566,945 2,710,138
Segment operating profit (loss) (5,322,488) 803,606 (9,693,179) 8,339,335
CMD
- ----------------------------------------------
Revenue from external customers 13,887,635 15,308,822 24,064,718 29,625,518
Depreciation and amortization 282,799 295,043 572,009 577,413
Segment operating profit (loss) (2,150,298) 450,835 (4,212,904) 891,595
SHARED SERVICES
- ----------------------------------------------
Revenue from external customers -- -- -- --
Depreciation and amortization 2,420,693 2,308,466 4,309,225 4,552,841
Segment operating loss (4,435,009) (9,185,714) (9,337,085) (16,017,731)
</TABLE>
11
<PAGE> 12
SALES
Sales were $33.0 million for the second quarter of fiscal 1999 as compared to
$59.4 million for the second quarter of fiscal 1998. Sales were $67.2 million
for the first half of fiscal 1999 as compared to $124.3 million for the first
half of fiscal 1998. Due to the current industry conditions, sales decreased
across all product lines for the second quarter and first half of fiscal 1999 as
compared to the prior year's comparable period, with MLD and SCD experiencing
the most significant reduction.
International sales were $14.0 million, and $26.5 million for the second quarter
of fiscal 1999 and 1998, respectively, and represented approximately 42% and
45%, respectively of sales during these periods. International sales were $25.0
million and $48.0 million for the first half of fiscal 1999 and 1998,
respectively, and represented 37% and 39%, respectively, of sales during these
periods. Due to industry conditions, our sales to affiliates, Metron Technology
B.V. and m-FSI Ltd. were significantly impacted. The decrease in international
sales in the second quarter and the first half of fiscal 1999 as compared to the
same fiscal 1998 periods occurred primarily in Europe and Japan.
With the significantly lower fiscal 1999 beginning backlog and delay in orders,
fiscal 1999 sales will be below fiscal 1998 levels.*
GROSS PROFIT
Gross profit as a percentage of sales for the second quarter of fiscal 1999 was
21.5% as compared to 34.8% for the second quarter of fiscal 1998. Gross profit
as a percentage of sales for the first half of fiscal 1999 was 24.9% as compared
to 37.7% for the first half of fiscal 1998. The gross profit margin percentage
for the second quarter and first half of fiscal 1999 were significantly impacted
by the margin deterioration on one large Asian Chemical Management Division
project. This deterioration in margin was due to various change orders and other
unanticipated costs. The decrease in gross margin percentages is also due to
lower revenue levels, pricing pressures for all products and excess capacity.
The Company's gross profit margin fluctuates as a result of a number of factors,
including the mix of products sold, the proportion of international sales, OEM
systems content, competitive pricing pressures and utilization of manufacturing
capacity.
With the excess capacity and continuing pricing pressures for all products, the
Company expects overall gross margins to remain below 35% for fiscal 1999.*
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 37% to $10.9 million for
the second quarter of fiscal 1999 as compared to $17.4 million for the second
quarter of fiscal 1998. Selling, general and administrative expenses decreased
29% to $22.6 million for the first half of fiscal 1999 as compared to $31.8
million for the same period in fiscal 1998. The decrease in the amount of SG&A
expenses in the second quarter and first half of fiscal 1999 as compared to the
second quarter and first half of 1998 was primarily due to the reduction in
force and the overall cost controls implemented during the fourth quarter of
fiscal 1998 and the first quarter of 1999. In addition, the second quarter of
fiscal 1998 had approximately $2.0 million of costs associated with
organizational changes and a patent lawsuit infringement settlement. The Company
expects the amount of SG&A expenses to increase in the second half of fiscal
1999 as compared to the first half of fiscal 1999.* The expected increase in the
second half of fiscal 1999 as compared to the first half of fiscal 1999 is
primarily due to approximately three weeks of plant shut downs in the first half
of fiscal 1999 and salary increases in the second half of the fiscal year.*
However, the Company anticipates that the amounts of SG&A expenses will be less
than comparable amounts for the second half of 1998 due to the previously
discussed cost controls.* The Company will continue investing in worldwide sales
and support capability, continue expanding the Company's business system
applications and completing the Year 2000 hardware and software changes.*
12
<PAGE> 13
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased 28% to $8.1 million for the second
quarter of fiscal 1999 as compared to $11.2 million for the same period in
fiscal 1998. Research and development expenses decreased 21% to $17.4 million
for the first half of fiscal 1999 as compared to $21.9 million for the same
period in fiscal 1998. The Company's reduction in force and other cost controls
implemented during fiscal 1998 and the first quarter of fiscal 1999 were
strategic in nature in order to minimize the impact on key research and
development programs. The successful introduction of new products is important
to the long-term growth of the Company.* The Company expects the amount of R&D
expenses to increase in the second half of fiscal 1999 as compared to the first
half of fiscal 1999.* The expected increase is due to the first half of fiscal
1999 having approximately three weeks of plant shutdown and salary increases
primarily in the second half of the fiscal year.* However, the Company
anticipates the amounts of R&D expenses for the remainder of fiscal 1999 will be
less than comparable amounts for the second half of 1998 due to the previously
discussed cost controls.* The Company will continue to remain focused on
critical technologies and strategically invest R&D dollars.
OTHER INCOME (EXPENSE), NET
Other income (expense), net was approximately $925,000 and $1,378,000 for the
second quarter and first half of fiscal 1999 as compared to $302,000 and
$776,000 for the second quarter and first half of fiscal 1998. The increase in
the amounts for the fiscal 1999 periods is due to higher levels of marketable
securities generating income and approximately $360,000 of miscellaneous income
including foreign currency transaction gains and lease financing.
INCOME TAX BENEFIT
Income tax benefit for the second quarter and first half of fiscal 1999 was
approximately $4.3 million and $8.3 million or 39% and 38% of pre-tax loss,
respectively, compared to approximately $3.0 million and $2.5 million, or 40%
and 42% of pre-tax loss, for the second quarter and first half of fiscal 1998,
respectively.
As of February 27, 1999, the Company had recorded net deferred tax assets of
approximately $25.9 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 that it is 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 (LOSS) OF AFFILIATES
The equity in earnings (loss) of affiliates was approximately ($782,000) loss
for the second quarter of fiscal 1999, compared to approximately ($136,000) of
loss for the second quarter of fiscal 1998. The equity in earnings (loss) of
affiliates was approximately ($1,080,000) loss for the first half of fiscal
1999, compared to $423,000 of income for the first half of fiscal 1998. The
increase in losses is due to lower earnings at both affiliates (Metron
Technology B.V. and m-FSI Ltd.), particularly Metron Technology. The Company
does not anticipate significant improvements in its affiliates performance until
late calendar 1999.*
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and marketable securities were
approximately $98.4 million as of February 27, 1999, an increase of $9.5 million
from the end of fiscal 1998. The increase in cash, cash equivalents and
marketable securities is due to approximately $16.9 million in cash flow from
operations offset by approximately $5.5 million of capital expenditures.
13
<PAGE> 14
The Company's accounts receivable decreased by approximately 28.6% or $13.3
million from the end of fiscal 1998. The decrease in accounts receivable is due
to lower sales revenues along with additional resources being dedicated to
collection efforts.
The Company's inventory decreased approximately $1.9 million to $48.3 million at
February 27, 1999 compared to $50.2 million at the end of fiscal 1998. The
decrease in inventory is due to the Company's emphasis on inventory management
and reduction in inventory purchases. As of February 27, 1999, the Company's
current ratio of current assets to current liabilities was 3.0 to 1.0 and
working capital was $135.2 million.
The Company had acquisitions of property, plant and equipment of approximately
$5.5 million and $2.5 million for the first half of fiscal 1999 and 1998,
respectively. The continuing acquisitions reflect investments in information
systems and other strategic programs. It is anticipated the Company will invest
approximately $10.0 to $12.0 million in fiscal 1999 in property, plant and
equipment.*
During the second quarter of 1999, we announced the proposed acquisition of
YieldUP. We are in the process of filing the necessary regulatory documents and
are anticipating closing later in the third quarter or early in the fourth
quarter of fiscal 1999. Upon consummation of the proposed merger, each
outstanding share of YieldUP Common Stock will be converted into the right to
receive 0.1567 shares of Common Stock of the Company and cash in the amount of
$0.7313. Cash also will be paid in lieu of the issuance of any fractional
shares. As of March 31, 1999, YieldUP had approximately 8,260,000 of common
shares outstanding. This acquisition will provide the Surface Conditioning
Division with an entree into the critical cleaning immersion market. By
acquiring YieldUP and its intellectual property, the Company believes that it is
obtaining unique immersion technologies that will expand the Company's
capabilities to create a total cleaning solution for customers. This acquisition
will be accounted for under the purchase accounting method and will be dilutive
for fiscal 1999.*
The Company believes that with existing cash and cash equivalents, marketable
securities and internally generated funds, there will be sufficient funds to
meet the Company's current projected working capital and other cash requirements
through fiscal 2000.*
The Company believes that success in its industry requires substantial capital
to maintain the flexibility to take advantage of opportunities as they may
arise. The Company may, from time to time, as market and business conditions
warrant, invest in or acquire complementary businesses, products or
technologies. The Company may fund such activities with additional equity or
debt financings. The sale of additional equity or debt securities could result
in additional dilution to the Company's stockholders.
NEW ACCOUNTING PRONOUNCEMENTS
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, and is
currently studying the expected impact.
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.
14
<PAGE> 15
CYCLICALITY AND VOLATILITY IN THE MICROELECTRONICS INDUSTRY
The Company's business depends upon the capital equipment expenditures of
microelectronics manufacturers, which in turn depend on the current and
anticipated market demand for semiconductor devices and products utilizing
semi-conductor devices. The microelectronics industry has been cyclical in
nature and has experienced periodic downturns. 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 that are currently being experienced.
These additional facilities and related infrastructure costs have also increased
the overall operating expenses of the Company. The potential impact of idle
manufacturing capacity on gross margins and related infrastructure costs will
have an adverse impact on the Company's future financial results until the
Company is able to increase its utilization rates.
VOLATILITY OF STOCK PRICE
The Company's common stock has experienced in the past, and could experience in
the future, substantial price volatility as a result of a number of factors,
including quarter-to-quarter variations in the actual or anticipated financial
results of the Company, announcements by the Company, its competitors or
customers, government regulations and developments in the industry. In addition,
the stock market has experienced extreme price and volume fluctuations, which
have affected the market price of many technology companies in particular, and
which have at times been unrelated to the operating performance of the specific
companies whose stock is traded. Broad market fluctuations, as well as economic
conditions generally and, in the microelectronics industry specifically, may
adversely affect the market price of the Company's common stock.
15
<PAGE> 16
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., ("Metron") and m-FSI Ltd.
("m-FSI"). 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 consumable 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 interests in the earnings of m-FSI are affected by U.S.
dollar/yen exchange rates.
The Company's affiliated distributors periodically engage in hedging
transactions in an effort to lessen the potentially negative effect of foreign
currency devaluation in relation to the U.S. dollar. This typically occurs in
those instances where a sale by an affiliated distributor has been both in a
foreign currency (usually at the request of a foreign-domiciled customer) and of
a size to justify the costs of engaging in hedging activity. The Company's
affiliated distributors generally have hedged such transactions by buying
forward U.S. dollars and selling forward the applicable local currency. If the
order that is the subject of a hedging transaction is subsequently canceled by
the customer, the affiliated distributor may be required to satisfy its hedging
obligations by buying and/or selling the applicable currencies at market prices
that could result in losses to the affiliated distributor. To date, the Company
has not experienced any material adverse effect as a result of the hedging
activities of its affiliated distributors. There can be no assurance that Metron
or m-FSI will continue to distribute, or to distribute successfully, the
Company's products or the products of other microelectronics and consumable
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.
16
<PAGE> 17
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 of 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 interests
in the earnings of m-FSI are affected by fluctuations in U.S. 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 settled a patent infringement lawsuit in fiscal 1998. 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 it 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 February 27,
1999, the Company believes it is not involved in any litigation that will have a
material impact on the Company.
The Company has previously announced a proposed acquisition with YieldUP.
YieldUP is currently involved in patent infringement litigation with CFMT, Inc.
and CFM Technologies, Inc.
Patent litigation can be costly and involve a significant amount of management
time and attention. Assuming successful completion of the acquisition of
YieldUP, there can be no assurance about the outcome of such litigation and
whether it will adversely impact the Company's business or results of operation.
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 that have the resources to support
customers on a worldwide basis. Certain of the Company's competitors have
substantially greater financial, marketing, and
17
<PAGE> 18
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. Through
the proposed acquisition of YieldUP and in the future the Company may pursue
additional acquisitions of product lines, technologies or businesses. Such
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 such as the proposed acquisition of YieldUP, 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 the proposed YieldUP
acquisition or any future acquisition does occur, there can be no assurance to
the effect thereof on the Company's business, financial condition or operating
results.
VOLATILITY OF GLOBAL MARKETS
The Company and its affiliates operate in a global market. Global operations are
subject to risks, including political and economic instability, general economic
conditions, imposition of government controls, fluctuations of exchange rates,
the need to comply with a wide variety of foreign and U.S. export laws, trade
restrictions and the greater difficulty of administering business overseas.
Although substantially all the Company's direct international sales are
denominated in U.S. dollars, both direct sales by the Company and sales through
its affiliated international distributors may be affected by these factors and
thus may adversely affect the operations and financial results of the Company.
18
<PAGE> 19
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.
RISK OF RECOVERABILITY OF DEFERRED TAX ASSETS
As of February 27, 1999 the Company had recorded net deferred tax assets of
approximately $25.9 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. The recording of a valuation allowance would have a negative impact on
the Company's reported results of operations.
YEAR 2000
The Company is addressing the issues associated with date related data and 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 used by the Company. 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.
19
<PAGE> 20
It is anticipated that all reprogramming and Year 2000 testing efforts for
internally used IT systems will be complete by September 1, 1999, allowing time
for testing.* The non-IT systems generally require third-party assurances as to
compliance with Year 2000. 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. Availability of resources,
unexpected delays as well as coding issues may impact the Company's ability to
complete the reprogramming by September 1, 1999 or of our vendors ability to
become Year 2000 compliant.* There can be no assurance that the Company will not
experience serious unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
operating systems, which are composed predominantly of third party software and
hardware technology or by the inability of vendors to correct their Year 2000
issues.
Each of the business segments have completed the analysis of each of their
product lines to determine if hardware and software are Year 2000 compliant and
if necessary, determined and began the implementation of the appropriate fixes.
The majority of the Company's current standard product lines are believed to be
Year 2000 compliant. It is the Company's goal to have all of its products Year
2000 compliant by June 1999.*
There can be no assurance that the Company's current products do not contain
undetected errors or defects associated with Year 2000 date functions that may
result in material costs to the Company, including repair and replacement costs
and costs incurred in litigation due to any such defects. Many commentators have
stated that a significant amount of litigation will arise out of Year 2000
compliance issues. Because of the unprecedented nature of such litigation, and
the Company's current lack of knowledge as to whether its products are Year 2000
complaint, 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 $915,000 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 September 1999.*
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
The Company's market risk exposure includes interest rate risk related to its
cash and cash equivalents and investments in marketable securities. The Company
has investment guidelines which limit the types of securities in which it may
invest as well as the length of maturities. No investment will have a maturity
date in excess of eighteen months.
The table below provides information about the Company's cash and cash
equivalents and marketable securities as of February 27, 1999.
<TABLE>
<CAPTION>
Cost Fair Value
---- ----------
<S> <C> <C>
Due within one year $88,533,752 $88,605,894
Due after one year and less than two years 9,832,512 9,740,430
----------- -----------
$98,366,264 $98,346,324
=========== ===========
</TABLE>
The Company is also exposed to certain market risks based on outstanding debt
obligations of $42 million as of February 27, 1999. The fixed interest rates of
these debt obligations range from 7.15% to 7.27% and have maturity dates through
December 2006. The Company does not have investments in derivative financial
instruments.
20
<PAGE> 21
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGE IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on
January 26, 1999, the shareholders approved the following:
(1) Election of two Class III Directors to serve a three-year
term. Each nominated director was elected as follows:
DIRECTOR-NOMINEE VOTES FOR VOTES ABSTENTIONS
---------------- --------- -----------------
Terrence W. Glarner 20,373,734 105,830
Charles R. Wofford 20,371,640 107,916
James A. Bernards and Joanna T. Lau, as Class I Directors, and Neil
R. Bonke, Joel A. Elftmann and Thomas D. George, as Class II
Directors, continue to serve as directors of the Company.
(2) Proposal to increase the number of shares authorized under
the FSI International, Inc. Employee Stock Purchase Plan by
250,000 shares. The proposal received 19,912,285 votes for and
315,243 votes against. There were 252,036 abstentions.
(3) Proposal to increase the number of shares authorized under
FSI International, Inc.'s 1997 Omnibus Stock Plan by 350,000
shares. The proposal received 14,687,106 votes for and
5,525,911 votes against. There were 266,547 abstentions.
ITEM 5. OTHER INFORMATION
None
21
<PAGE> 22
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a)(3) Exhibits
* An asterisk next to a listed Exhibit indicates it is an executive
compensation plan or arrangement.
2.0 Agreement and Plan of Reorganization, dated as of January 21,
1999 among FSI International, Inc., BMI International, Inc.
and YieldUP International, Corporation. (15)
2.1 License Agreement for Microelectronic Technology between
YieldUP International, Corporation and FSI International,
Inc. dated January 21, 1999. (15)
2.2 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).(8)
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. (14)
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 (Similar agreements
between the Company and its executive officers have been
omitted but will be filed if requested in writing by the
Commission. (14)
*10.16 FSI International, Inc. 1994 Omnibus Stock Plan. (12)
*10.17 FSI International, Inc. 1998 Incentive Plan. (14)
10.18 First Amendment to Lease made and entered into October 31,
1995 by and between Lake Hazeltine Properties and FSI
International, Inc. (13)
22
<PAGE> 23
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). (14)
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)
27.0 Financial Data Schedule. (filed herewith)
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-4
(as amended) dated March 21, 1996, SEC File No. 333-1509 and
incorporated by reference.
(2) Filed as an Exhibit to the Company's Report on Form 10-Q for the quarter
ended February 24, 1990, SEC File No. 0-17276, and incorporated by
reference.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
SEC File No. 33-25035, and incorporated by reference.
(4) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 26, 1989, SEC File No. 0-17276, and incorporated by
reference.
(5) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
quarter ended March 1, 1997, SEC File No. 0-17276, and incorporated by
reference.
(6) Filed as an Exhibit to the Company's Report on Form 8-K, filed by the
Company on June 5, 1997, SEC File No. 0-17276, and incorporated by
reference.
(7) Filed as an Exhibit to the Company's Report on Form 8-A/A-1, filed by
the Company on April 16, 1998, Sec File No. 0-17276 and incorporated by
reference.
(8) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 31, 1991, as amended by Form 8 dated January 7, 1992,
SEC File No. 0-17276, and incorporated by reference.
(9) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 29, 1992, File No. 0-17276, and incorporated by
reference.
(10) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 28, 1993, SEC File No. 0-17276, and incorporated by
reference.
(11) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
quarter ended May 28, 1994, SEC File No. 0-17276, and incorporated by
reference.
(12) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 27, 1994, SEC File No. 0-17276, and incorporated by
reference.
(13) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 26, 1995, SEC File No. 0-17276 and incorporated by
reference.
(14) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 29, 1998, SEC File No. 0-17276, and incorporated by
reference.
(15) Filed as an Exhibit to the Company's Report on Form 8-K, filed by the
Company on January 21, 1999, SEC File No. 0-17276 and incorporated by
reference.
---------------------------
(b) Reports on Form 8-K
23
<PAGE> 24
The Company filed a Form 8-K on January 21, 1999, reporting that the
Company entered into an Agreement and Plan of Reorganization, dated as
of January 21, 1999 (the "Reorganization Agreement"), with YieldUP
International Corporation, a Delaware corporation ("YieldUP"), and BMI
International, Inc., a Minnesota corporation and wholly owned
subsidiary of the Company ("Sub"), providing for the statutory merger
of YieldUP with and into Sub (the "Merger"), with Sub remaining as a
wholly owned subsidiary of the Company.
Under the terms of the Reorganization Agreement, upon consummation of
the Merger each outstanding share of YieldUP Common Stock will be
converted into the right to receive 0.1567 shares of Common Stock of
the Company ("FSI Common Stock") and cash in the amount of $0.7313.
Cash also will be paid in lieu of the issuance of any fractional
shares.
24
<PAGE> 25
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FSI INTERNATIONAL, INC.
.......................
[Registrant]
DATE: April 12, 1999
By: /s/Patricia M. Hollister
-----------------------------------
Patricia M. Hollister
Chief Financial Officer and
Corporate Controller
on behalf of the
Registrant and as
Principal Financial Officer
25
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