<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 NOVEMBER 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)
- --------------------------------------------------------------------------------
(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 - 24,779,760 SHARES OUTSTANDING AS OF DECEMBER 18,
1999
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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 (unaudited):
Consolidated Condensed Balance Sheets as of
November 27, 1999 and August 28, 1999 3
Consolidated Condensed Statements of Operations
for the quarters ended November 27, 1999 and
November 28, 1998 5
Consolidated Condensed Statements of Cash Flows for the
quarters ended November 27, 1999 and November 28, 1998 6
Notes to the Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K 23
--------------------------------
SIGNATURE 26
---------
</TABLE>
2
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PART I. Item 1. FINANCIAL INFORMATION
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
NOVEMBER 27, 1999 AND AUGUST 28, 1999
(unaudited)
ASSETS
<TABLE>
<CAPTION>
November 27, August 28,
1999 1999
------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $21,662,057 $62,326,355
Marketable securities 27,943,394 27,671,653
Trade accounts receivable, net of allowance for
doubtful accounts of $3,556,000 and
$2,578,000, respectively 16,912,276 17,662,389
Trade accounts receivable from affiliates 16,811,095 12,659,778
Inventories 42,925,644 32,911,669
Refundable income taxes 91,317 160,915
Prepaid expenses and other current assets 4,395,976 5,568,093
------------------- -------------------
Total current assets 130,741,759 158,960,852
------------------- -------------------
Property, plant and equipment, at cost 116,865,886 114,340,509
Less accumulated depreciation and amortization (55,039,387) (50,249,286)
------------------- -------------------
61,826,499 64,091,223
Investment in affiliates 16,144,869 14,177,866
Intangibles 20,777,736 2,000,000
Deposits and other assets 3,331,884 3,473,280
------------------- -------------------
$232,822,747 $242,703,221
=================== ===================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
NOVEMBER 27, 1999 AND AUGUST 28, 1999
(continued)
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
November 27, August 28,
1999 1999
-------------------- -------------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 74,387 $ 30,059,696
Trade accounts payable 14,527,097 14,956,324
Accrued expenses 18,917,516 15,380,136
Customer deposits 278,552 453,198
Deferred revenue 9,244,138 5,538,705
-------------------- -------------------
Total current liabilities 43,041,690 66,388,059
-------------------- -------------------
Long-term debt, less current maturities 42,065 2,998
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, 24,777,761
and 23,391,953 shares at November 27, 1999
and August 28, 1999, respectively 185,247,071 165,625,250
Retained earnings 5,195,878 11,915,059
Accumulated other comprehensive income (703,957) (1,228,145)
-------------------- -------------------
Total stockholders' equity 189,738,992 176,312,164
-------------------- -------------------
$232,822,747 $242,703,221
==================== ===================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED NOVEMBER 27, 1999 AND NOVEMBER 28, 1998
(Unaudited)
<TABLE>
<CAPTION>
November 27, November 28,
1999 1998
----------------- ----------------
<S> <C> <C>
Sales (including sales to affiliates of
$11,930,000 and $4,928,000, respectively) $30,906,761 $24,016,101
Cost of goods sold 20,797,757 16,163,246
----------------- ----------------
Gross profit 10,109,004 7,852,855
Selling, general and administrative expenses 11,061,385 9,196,708
In-process research and development write-off 6,370,000 -
Research and development expenses 8,384,811 7,928,916
----------------- ----------------
Operating loss (15,707,192) (9,272,769)
Gain on sale of investment in affiliates 5,409,744 -
Interest expense (265,805) (784,823)
Interest income 764,051 1,228,433
Other income (expense), net 48,329 4,932
----------------- ----------------
Loss before income taxes (9,750,873) (8,824,227)
Income tax benefit - (3,285,008)
----------------- ----------------
Loss before equity in losses of affiliates (9,750,873) (5,539,219)
Equity in losses of affiliates (473,308) (298,382)
----------------- ----------------
Net loss from continuing operations (10,224,181) (5,837,601)
Discontinued operations:
Loss on sale of discontinued operations (400,000) -
Net loss from discontinued operations - (1,241,119)
----------------- ----------------
Net loss (10,624,181) (7,078,720)
================= ================
Net loss per common share - Basic
Continuing operations ($0.43) ($0.25)
Discontinued operations (0.01) (0.06)
----------------- ----------------
Net loss ($0.44) ($0.31)
================= ================
Net loss per common share - Diluted
Continuing operations ($0.43) ($0.25)
Discontinued operations (0.01) (0.06)
----------------- ----------------
Net loss ($0.44) ($0.31)
================= ================
Weighted average common shares 23,955,747 23,047,629
Weighted average common and potential common shares 23,955,747 23,047,629
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED NOVEMBER 27, 1999 AND NOVEMBER 28, 1998
(Unaudited)
<TABLE>
<CAPTION>
November 27, November 28,
1999 1998
------------------ -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ($10,624,181) ($7,078,720)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Loss from discontinued operations 400,000 1,241,119
Gain on sale of investment in affiliate (5,409,744) -
Write off of in-process research and development 6,370,000 -
Depreciation and amortization 3,966,956 4,193,857
Provision for allowance for doubtful accounts 30,000 (43,814)
Provision for inventory reserves (58,355) (1,775,008)
Equity in losses of affiliates 473,308 298,382
Loss on disposition of equipment - 509,932
Changes in operating assets and liabilities:
Trade accounts receivable (2,662,453) 10,569,712
(6,298,759) 4,878,874
Inventories
Refundable income taxes 69,598 6,986,046
Prepaid expenses and other current assets (1,523,537) (53,078)
Trade accounts payable (2,002,415) (1,759,466)
Accrued expenses 2,031,852 800,488
Customer deposits (174,646) 3,873,865
Deferred revenue 3,705,433 (4,320,051)
Other 259,262 53,328
------------------ -----------------
Net cash provided by (used in) operating activities (11,447,681) 18,375,466
------------------ -----------------
INVESTING ACTIVITIES:
Acquisition of YieldUP International Corporation, net of cash
acquired (6,521,515) -
Proceeds from sale of investment in affiliate 7,398,621 -
Acquisition of property, plant and equipment (414,086) (4,340,641)
Purchases of marketable securities (1,267,161) (19,709,236)
Maturities of marketable securities 1,005,420 7,838,340
Increase in deposits and other assets (95,890) (67,154)
Proceeds from sale of equipment 622,438 470,500
------------------ -----------------
Net cash provided by (used in) investing activities 727,827 (15,808,191)
------------------ -----------------
FINANCING ACTIVITIES:
Principal payments on long-term debt (30,299,265) (15,610)
Net proceeds from issuance of common stock 354,821 27,627
------------------ -----------------
Net cash provided by (used in) financing activities (29,944,444) 12,017
------------------ -----------------
Cash provided by discontinued operations - 147,728
Increase (decrease) in cash and cash equivalents (40,664,298) 2,727,020
Cash and cash equivalents at beginning of period 62,326,355 72,789,811
------------------ -----------------
Cash and cash equivalents at end of period $21,662,057 $75,516,831
================== =================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying consolidated condensed financial statements have been
prepared by the Company without audit and reflect all adjustments
(consisting only of normal and recurring adjustments) which are, in the
opinion of management, necessary to present a fair statement of the
results for the interim periods presented. The statements have been
prepared in accordance with the regulations of the Securities and
Exchange Commission but omit certain information and footnote
disclosures necessary to present the statements in accordance with
generally accepted accounting principles. The results of operations for
the interim periods presented are not necessarily indicative of the
results to be expected for the full fiscal year. These consolidated
condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and footnotes thereto included in the
Company's Annual 10-K Report for the fiscal year ended August 28, 1999
previously filed with the Securities and Exchange Commission.
(2) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
November 27, August 28,
1999 1999
------------------- -------------------
<S> <C> <C>
Finished products $9,279,114 $6,759,290
Work-in-process 18,152,909 6,667,750
Subassemblies 4,708,016 8,967,812
Raw materials and purchased parts 10,785,605 10,516,817
------------------- -------------------
$42,925,644 $32,911,669
=================== ===================
</TABLE>
(3) SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------
November 27, November 28,
1999 1998
--------------------- ------------------
<S> <C> <C>
Schedule of interest paid and income taxes paid (refunds received):
Interest $670,972 $20,272
Income taxes ($69,598) ($10,833,941)
</TABLE>
The Company realized in the first quarter of fiscal 1999, a tax benefit
from disqualifying dispositions of stock options of $30,967.
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(4) RECONCILIATION OF EARNINGS AND SHARE AMOUNTS USED IN EPS CALCULATION
<TABLE>
<CAPTION>
Basic Dilutive
Loss Loss
Per Share Effect of Per Share
--------------------- Dilutive ----------------------
Loss Securities* Loss
Available -------------------- Available To
Net To Common Stock Common
FOR THE QUARTERS ENDED Loss Stockholders Options Stockholders
------------- --------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
NOVEMBER 27, 1999
Loss ($10,624,181) ($10,624,181) - ($10,624,181)
Shares - 23,955,747 - 23,955,747
Per share amount - ($0.44) - ($0.44)
NOVEMBER 28, 1998
Loss ($7,078,720) ($7,078,720) - ($7,078,720)
Shares - 23,047,629 - 23,047,629
Per share amount - ($0.31) - ($0.31)
</TABLE>
* The effect of stock options were not included in the calculation of dilutive
earnings per share for the quarters ended November 27, 1999 and November 28,
1998 because their inclusion would have been anti-dilutive.
(5) COMPREHENSIVE LOSS
Other comprehensive income (loss) pertains to revenues, expenses, gains
and losses that are not included in the net loss but rather are
recorded directly in stockholders' equity. For quarters ended November
27, 1999 and November 28, 1998 the only item of other comprehensive
income (loss) related to foreign currency translation adjustment. For
the quarters ended November 27, 1999 and November 28, 1998 the net
loss, items of other comprehensive income (loss) and comprehensive loss
are as follows:
<TABLE>
<CAPTION>
November 27, 1999 November 28, 1998
------------------------ ------------------------
<S> <C> <C>
Net loss ($10,624,181) ($7,078,720)
Items of other comprehensive income (loss):
Foreign currency translation 524,188 324,583
------------------------ ------------------------
Comprehensive loss ($10,099,993) ($6,754,137)
======================== ========================
</TABLE>
(6) ACQUISITION OF YIELDUP
On October 20, 1999 the Company acquired YieldUP International
Corporation (YieldUP renamed SCD Mountain View, Inc.) by paying
approximately $6,083,000 in cash and issuing 1,303,000 shares of common
stock to YieldUP shareholders.
SCD Mountain View, headquartered in Mountain View, California,
develops, manufactures and markets innovative cleaning, rinsing and
drying equipment designed to enable new processes and improve
manufacturing yields of semiconductor and other defect-sensitive
industries, such as flat panel displays and magnetic disks.
Under the definitive agreement, the YieldUP shareholders received
$0.7313 and 0.1567 of a share of FSI common stock for each share of
YieldUP stock. The Company also issued options covering 209,278 shares
of company common stock in substitution for previously outstanding
options to acquire shares of
8
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YieldUP's common stock. As of August 30, 1999, there were outstanding
Series B warrants to purchase 4,155,421 shares of YieldUP common stock
at an exercise price of $11.00 per share and additional warrants to
purchase 2,439 shares at an exercise price of $10.25 per share.
Following the merger, each outstanding warrant to purchase YieldUP
common stock became a warrant to acquire, on substantially the same
terms, the amount of whole shares of FSI common stock and cash that the
warrant holder would have received if the holder had exercised the
warrant immediately before the merger. For the $11.00 Series B
warrants, the market price of FSI common stock would have to exceed
$65.50 per share before the value of the cash and shares of FSI common
stock received upon exercise would exceed the warrant exercise price.
The warrants expire in November 2000 and will not be exercisable after
that time.
The acquisition was accounted for under the purchase method of
accounting. FSI incurred an in-process R&D write-off of approximately
$6,370,000 in the first quarter of fiscal 2000 related to the
acquisition.
As part of the merger, the Company acquired projects under development,
including the YieldUP 8000 series. The YieldUP 8000 series is based on
a technology that integrates multiple gas-based cleaning technologies,
while also providing for the use of existing liquid based technologies.
In addition, the YieldUP 8000 series is being designed from the ground
up as a modular, multi-tank-cleaning solution designed to replace
conventional wet benches.
YieldUP initiated development of the 8000 series in the fourth quarter
of 1997. YieldUP has spent approximately 3.3 person-years of effort to
date in the development of the 8000 series. YieldUP believes that it
requires an additional 1.8 person-years of effort to get the 8000
series to technological feasibility. The 8000 series is expected to
reach a beta version at the beginning of the first quarter of fiscal
2001, at which point the product will be sold as an evaluation version
to be modified as necessary. The Company expects to spend another $2.9
million by the end of fourth quarter fiscal 2000 to complete the
technology.
In-process research and development was valued by discounting
forecasted cash flow directly related to the products expecting to
result from the subject research and development. In each instance
where a developed, core technology is expected to be leveraged, a
charge for core technology was deducted from the forecast to provide a
fair return on the leveraged technology. The assumed charge for core
technology is 2% of revenues on an after-tax basis.
To estimate the fair value of the in-process research and development
assets, a discount rate of 26.5% was employed, developed by analyzing
the project and market risks associated with the research and
development effort, both in terms of costs invested as of the valuation
date relative to completion costs and technical achievements. This
discount rate represents a significant premium above the discount rate
utilized in the valuation of existing product technology to account for
the additional risks associated with in-process product technologies.
FSI developed a calculation of the value of in-process research and
development assets that excludes cash flows attributable to remaining
development efforts required to develop the acquired incomplete
technology into commercially viable products. The calculation of
excluded cash flow was determined by evaluating the costs, development
time, and technological complexity required to develop the in-process
technology into commercially viable products. Based upon FSI
management's estimate that the in-process technology is 65% complete,
it is our opinion that the value of the in-process research and
development assets as of the valuation date is reasonably estimated at
$6,370,000.
The 8000 series represents a high-risk in-process technology asset
since the 8000 series is based on an entirely new platform from
YieldUP's current products. Certain technology developed by YieldUP for
the 8000 series is revolutionary as the 8000 series represents
YieldUP's first product to integrate both multiple gas-based cleaning
technologies and gas-based drying technology within a modular
configuration design with a low cost of ownership. Some of this
technical risk is moderated by the project's late stage of development.
Market research indicates that there could be significant demand for a
fully integrated wafer cleaning solution, such as the 8000 series.
However, FSI is a new entrant in the wet bench market and may face
significant competition from more established players.
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<PAGE> 10
Therefore, an unusual charge of approximately $6,370,000 is reflected in
the income statement of FSI in the first quarter of 2000 due to the
immediate write-off of in-process research and development. At the
effective date, the technological feasibility of the acquired technology
had not been established and the technology had no alternative uses.
Prior to the acquisition, two patent infringement lawsuits were filed
against YieldUP, which if resolved unfavorably could have a material
adverse impact on the Company. The probability of loss and related
amount cannot be presently estimated.
(7) SALE OF INVESTMENT IN AFFILIATE
The Company sold approximately 612,000 shares of its investment in
Metron Technology N.V. (Metron) stock as part of Metron's initial public
offering.
As a result of the sale, the Company received proceeds of $7,398,621 and
recognized a gain of $5,409,744. The Company's ownership percentage
decreased from 32.7% to 21.7% as a result of this sale and the public
offering. As a result of the initial public offering and Metron's total
capitalization, the Company recorded an increase to retained earnings of
$3,905,000.
As of November 27, 1999 the Company owns approximately 2,690,000 shares
of Metron Technology, N.V. with a total carrying value of approximately
$12,700,000.
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FIRST QUARTER OF FISCAL 2000 COMPARED WITH THE FIRST QUARTER OF FISCAL 1999.
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 cancellation of orders; competitive pricing
pressures; 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 up turn or down turn; the successful
integration of the YieldUP acquisition and the successful optimization of the
Company's 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, 1999. 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 (*).
The following table sets forth for the fiscal quarter indicated, certain income
and expense items as a percent of total sales.
<TABLE>
<CAPTION>
PERCENT OF SALES
-----------------------------------------
NOVEMBER 27, NOVEMBER 28,
FIRST QUARTER ENDED: 1999 1998
------------------- ------------------
<S> <C> <C>
Sales 100.0 % 100.0 %
Cost of goods sold 67.3 67.3
Gross profit 32.7 32.7
Selling, general and administrative 35.8 38.3
In-process research and development 20.6 -
Research and development 27.1 33.0
Operating loss (50.8) (38.6)
Other income, net 19.3 1.9
Loss before income taxes (31.5) (36.7)
Income tax benefit - (13.7)
Equity in losses of affiliates (1.6) (1.3)
------------------- ------------------
Net loss from continuing operations (33.1) (24.3)
Discontinued Operations:
Net loss from discontinued operations (1.3) (5.2)
------------------- ------------------
Net loss (34.4)% (29.5)%
=================== ==================
</TABLE>
SALES:
Sales increased 29 percent to $30.9 million for the first quarter of fiscal 2000
as compared to $24.0 million for the first quarter of fiscal 1999. The increase
occurred in the Surface Conditioning Division. The Microlithography and Surface
Conditioning division sales, including their spare parts and support, generally
represents about half of total
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<PAGE> 12
sales. With its much larger installed base, the Surface Conditioning Division
has a more significant spare parts and support business than the
Microlithography Division.
International sales were $12.3 million and $4.8 million for the first quarter of
fiscal 2000 and 1999, respectively, and represented approximately 40% and 20%,
respectively of sales during these periods. Because of its broader customer
base, the Surface Conditioning Division has a higher percentage of international
sales than the Microlithography Division.
FSI's book-to-bill ratio was significantly above 1.0 for the first quarter of
2000, with a substantial increase in Surface Conditioning Division orders as
compared to the fourth quarter of fiscal 1999. FSI is expecting continued strong
bookings for the second quarter of fiscal 2000.* Sales in the second quarter of
fiscal 2000 are expected to be up sequentially.* FSI expects annual sales to
increase in fiscal 2000 as compared to fiscal 1999.*
GROSS PROFIT:
Gross profit as a percentage of sales for the first quarter of fiscal 2000 and
1999 was 32.7%. The lower than expected margin rate for first quarter 2000 is
due to lower margins on Microlithography Division products. The division's
margins were impacted by the high POLARIS(R) 2500 manufacturing costs and
competitive pricing pressures. FSI also had a larger percentage of foreign sales
in the first quarter of fiscal 2000 as compared to fiscal 1999.
FSI'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 and competitive pricing pressures.
In general, both divisions' gross margins are being impacted by the Company's
excess manufacturing capacity. However, as sales volumes increase, we expect
margins to improve.* Therefore, if FSI achieves a sales volume increase in
fiscal 2000 and the Microlithography Division is successful in reducing the
POLARIS(R) product costs, FSI expects gross margins for the year to be in the
mid to upper 30 percent range.*
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses were $11.1 million for the first
quarter of fiscal 2000 as compared to $9.2 million for the first quarter of
fiscal 1999. The increase in the amount of SG&A was primarily due to additional
depreciation costs associated with the new business system, SAP, and the
amortization of YieldUP intangibles. We expect the dollar amount of SG&A
expenses to increase in fiscal 2000 as compared to 1999 primarily due to
intangibles amortization and SAP depreciation.* However, we expect that the
quarterly dollar amount of SG&A expenses for the remainder of 2000 to decrease
from the first quarter of 2000 levels.*
The Company will continue investing in worldwide sales and support capability
and continue optimizing the Company's business system applications.*
RESEARCH AND DEVELOPMENT EXPENSES:
Research and development expenses were $8.4 million for the first quarter of
fiscal 2000 as compared to $7.9 million for the same period in fiscal 1999. Also
in the first quarter of fiscal 2000, the Company recorded a $6.4 million
in-process R&D write-off relating to the acquisition of YieldUP International
Corporation.
We expect the percent of R&D to decrease in 2000 as compared to 1999.* However,
the dollar amount will increase as compared to 1999.* We will continue to remain
focused on critical technologies and strategically invest in the immersion
technology for Surface Conditioning products, the CALYPSO(TM) spin-on dielectric
product, and 300mm products in both the Microlithography and Surface
Conditioning Divisions.
12
<PAGE> 13
OTHER INCOME (EXPENSE), NET:
Other income (expense), net was approximately $6.0 million for the first quarter
of fiscal 2000 as compared to $449,000 for the first quarter of fiscal 1999. The
increase is due to the $5.4 million gain recognized on the sale of approximately
612,000 shares of Metron Technology's (our affiliate) stock in its initial
public offering. The increase is also due to reduced interest expense as a
result of the debt repayment.
Interest income is expected to be between $500,000 and $700,000 per quarter for
the remainder of fiscal 2000, depending upon the level of investments and the
interest rates.*
INCOME TAX (BENEFIT) EXPENSE:
FSI recorded no tax benefit related to its operating losses for the first
quarter of fiscal 2000. FSI did record a tax benefit of $3.3 million for the
first quarter of 1999.
FSI does not expect to record any tax benefit or expense in the future until the
Company is consistently profitable on a quarterly basis. FSI's deferred tax
assets on the balance sheet as of November 27, 1999 have been fully reserved for
with a valuation allowance.
EQUITY IN LOSSES OF AFFILIATES:
The equity in losses of affiliates was approximately $473,000 for the first
quarter of fiscal 2000, compared to approximately $298,000 for the first quarter
of fiscal 1999. The increase in loss is due primarily to losses at moFSI, Ltd.,
the Company's Japanese affiliate.
DISCONTINUED OPERATIONS:
During the first quarter of 2000, FSI continued to negotiate the final closing
balance sheet for the CMD divestiture to BOC. As a result of current
negotiations, FSI established an additional $400,000 reserve for expected costs
associated with completing two projects that were in process when BOC purchased
the division.
LIQUIDITY AND CAPITAL RESOURCES
FSI's cash and cash equivalents and marketable securities were approximately
$49.6 million as of November 27, 1999, a decrease of $40.4 million from the end
of fiscal 1999. The decrease in cash, cash equivalents, and marketable
securities is due to approximately $11.4 million in cash flow used to fund
operations and approximately $30.0 million used to repay long-term debt. In
addition, during the first quarter of fiscal 2000, the Company made $6.1 million
in payments to YieldUP shareholders as part of the acquisition consideration and
received cash proceeds of $7.4 million from the sale of Metron Technology stock.
FSI's accounts receivable increased by approximately 11%, or $3.4 million, from
the end of fiscal 1999. The increased level of accounts receivables was due to
the majority of the first quarter sales being in the latter half of the quarter.
FSI's inventory increased approximately $10 million to $42.9 million at November
27, 1999 compared to $32.9 million at the end of fiscal 1999. The increase in
inventory is due to FSI's improved order activity. The increase in inventory was
primarily in work-in process.
As of November 27, 1999, FSI's current ratio of current assets to current
liabilities was 3.0 to 1.0 and working capital was $87.7 million.
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FSI had acquisitions of property, plant and equipment of approximately $414,000
and $4.3 million for the first quarter of fiscal 2000 and fiscal 1999,
respectively. It is anticipated FSI will invest between $5 and $7 million in
fiscal 2000 in property, plant and equipment.*
FSI believes that with existing cash, cash equivalents, marketable securities
and internally generated funds, there will be sufficient funds to meet FSI's
currently projected working capital and other cash requirements through at least
mid fiscal 2001.*
FSI believes that success in its industry requires substantial capital to
maintain the flexibility to take advantage of opportunities as they arise. FSI
may, from time to time, as market and business conditions warrant, invest in or
acquire complementary businesses, products or technologies. FSI may fund such
activities with additional equity or debt financings. The sale of additional
equity or debt securities could result in additional dilution to our
shareholders.
NEW ACCOUNTING PRONOUNCEMENTS
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, as amended by SFAS
No. 137 must be adopted for financial statements issued for fiscal years
beginning after June 15, 2000. It is anticipated that FSI will adopt SFAS No.
133 in fiscal 2001. The impact of the adoption of SFAS No. 133 is not expected
to have a material impact on FSI's financial statements.*
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.
BECAUSE OUR BUSINESS DEPENDS ON THE AMOUNT THAT MANUFACTURERS OF
MICROELECTRONICS SPEND ON CAPITAL EQUIPMENT, DOWNTURNS IN THE MICROELECTRONICS
INDUSTRY MAY ADVERSELY AFFECT OUR RESULTS
The microelectronics industry experiences periodic slowdowns, which may have a
negative effect on our sales and operating results. For example, in fiscal 1996,
before the most recent industry slowdown, we reported net income from continuing
operations of $21 million. In contrast, in fiscal 1999, we reported a net loss
from continuing operations of $40 million. Our business depends on the amount
manufacturers of microelectronics spend on capital equipment. The amount they
spend on capital equipment depends on the existing and expected demand for
semiconductor devices and products that use semiconductor devices. The
microelectronics industry has experienced alternating upturns and downturns in
business activity. Some semiconductor manufacturers have experienced lower
demand and increased pricing pressure for their products. As a result, they have
purchased less semiconductor processing equipment and have sometimes delayed
making decisions to purchase capital equipment. In some cases, semiconductor
manufacturers have cancelled or delayed orders for our products.
IF WE DO NOT CONTINUE TO DEVELOP NEW PRODUCTS, WE WILL NOT BE ABLE TO COMPETE
EFFECTIVELY
Our business and results of operations could decline if we do not develop and
successfully introduce new or improved products that the market accepts. The
technology used in microelectronics manufacturing equipment and processes
changes rapidly. Industry standards change constantly and equipment
manufacturers frequently introduce new products. We believe that
microelectronics manufacturers increasingly rely on equipment manufacturers like
us to:
- - Design and develop more efficient manufacturing equipment
- - Design and implement improved processes for microelectronics manufacturers to
use
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- - Make their equipment compatible with equipment made by other equipment
manufacturers
To compete, we must continue to develop, manufacture, and market new or improved
products that meet changing industry standards. To do this successfully, we
must:
- - Select appropriate products
- - Design and develop our products efficiently and quickly
- - Implement our manufacturing and assembly processes efficiently and on time
- - Make products that perform well for our customers
- - Market and sell our products effectively
- - Introduce our new products in a way that does not reduce sales of our existing
products
IF WE CANNOT EFFECTIVELY INTEGRATE YIELDUP'S OPERATIONS, THEN POTENTIAL BENEFITS
OF THE MERGER MAY NOT BE REALIZED.
We will have to integrate YieldUP's manufacturing, research and development, and
sales and marketing efforts. If we are not successful in this integration, then
our results of operations could be adversely affected, employee morale could
decline, and key employees could leave. In addition, until YieldUP's existing
customers have had the opportunity to determine how well the combined
organization operates, they may cancel existing orders or delay placing new
ones.
FUTURE ACQUISITIONS MAY DILUTE OUR STOCKHOLDERS' OWNERSHIP INTERESTS AND HAVE
OTHER ADVERSE CONSEQUENCES
Because of consolidations in the semiconductor equipment industry served by us
and other competitive factors, our management will seek to acquire additional
product lines, technologies, and businesses if suitable opportunities develop.
Acquisitions may result in the issuance of our stock, which may dilute our
stockholders' ownership interests and reduce earnings per share. Acquisitions
may also increase debt levels and the amortization of goodwill and other
intangible assets, which could have a significant negative effect on our
financial condition and operating results. In addition, acquisitions involve
numerous risks, including:
- - Difficulties in absorbing the new business, product line, or technology
- - Diversion of management's attention from other business concerns
- - Entering new markets in which we have little or no experience
- - Possible loss of key employees of the acquired business
COSTS ASSOCIATED WITH OUR IDLE FACILITIES HAVE INCREASED AS A PERCENT OF SALES
WHILE REVENUES HAVE DECREASED
We are not currently able to fully utilize the new manufacturing facilities we
added in the last several years. These additional facilities and related costs
have increased our overall operating expenses. These higher expenses, together
with lower revenues, are having a negative effect on our gross profit margins.
This negative effect will continue until we are able to increase our use of our
facilities.
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BECAUSE OF THE VOLATILITY OF OUR STOCK PRICE, YOUR ABILITY TO TRADE FSI SHARES
MAY BE ADVERSELY AFFECTED AND OUR ABILITY TO RAISE CAPITAL THROUGH FUTURE EQUITY
FINANCINGS MAY BE REDUCED
The price of our stock has been volatile in the past and may continue to be so
in the future. In the 1999 fiscal year, for example, our stock price ranged from
$3.50 to $14.31 per share. The reasons for this volatility include:
- - Variations in our actual or anticipated financial results from quarter to
quarter
- - Announcements made by us, our competitors, or our customers
- - Government regulations
- - Industry developments
- - General market conditions
The prices of technology stocks, including ours, have been particularly affected
by extreme fluctuations in price and volume in the stock market generally. These
fluctuations have often been unrelated to the operating performance of the
companies whose stock is traded. These broad stock market fluctuations may have
a negative effect on our future stock price.
BECAUSE OUR QUARTERLY OPERATING RESULTS ARE VOLATILE, OUR STOCK PRICE COULD
DECREASE
In the past, our operating results have fluctuated from quarter to quarter and
are likely to do so in the future. These fluctuations may have a significant
impact on our stock price. The reasons for the fluctuations in our operating
results, such as sales, gross profits, and net income, include:
- - Economic conditions in the microelectronics industry
- - Financial results of our affiliates
- - A large portion of revenues being generated by a small number of sales
- - Timing of orders placed by major customers
- - Competitive pricing pressures
- - The proportion of total sales made up by international sales
- - Product modifications requested by customers
- - Product mix and performance
- - Utilization of manufacturing capacity
BECAUSE INTERNATIONAL SALES ARE IMPORTANT TO US, AND BECAUSE MOST OF OUR
INTERNATIONAL SALES ARE THROUGH OUR AFFILIATED DISTRIBUTORS, REDUCTIONS IN THE
SALES EFFORTS OF THESE AFFILIATES COULD ADVERSELY AFFECT OUR RESULTS
The profits or losses of our affiliated distributors, Metron Technology B.V. and
moFSI Ltd., can also significantly affect our financial results. We make most of
our international sales through these affiliated distributors. We have a 21.7%
ownership interest in Metron and a 49% interest in moFSI. Fiscal 1999 sales
through moFSI were $1.5 million or 1.3% of our total sales. Fiscal 1999 sales
through Metron were $28.7 million or 25.3% of our total sales. In addition,
these affiliates also provide service and support to many of our international
customers. Metron
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and m-FSI also distribute or sell products for companies other than us. It could
have a negative effect on our operating results if either of these affiliates
reduced its sales efforts, lost the business of a significant company for which
it distributes or sells products, or otherwise became less financially viable.
We cannot guarantee that Metron or m-FSI will continue to successfully
distribute our products or the products of other companies. The failure of
Metron or m-FSI to do so could have a significant negative effect on our results
of operations.
CHANGES IN DEMAND CAUSED BY FLUCTUATIONS IN INTEREST AND CURRENCY EXCHANGE RATES
MAY REDUCE OUR INTERNATIONAL SALES
Almost all of our direct international sales are denominated in U.S. dollars.
Nonetheless, changes in demand caused by fluctuations in interest and currency
exchange rates may affect our international sales. Most of our international
sales, however, are through our affiliated distributors. Metron's sales of our
products and other companies' products are primarily denominated in U.S.
dollars, but its expenses are generally denominated in foreign currencies.
Accordingly, fluctuations in interest and currency exchange rates may affect
Metron's financial results. m-FSI sales are denominated in yen. As a result,
U.S. dollar/yen exchange rates may affect our equity interest in m-FSI's
earnings.
Metron and m-FSI sometimes engage in so-called "hedging" or risk-reducing
transactions to try to limit the negative effects that the devaluation of
foreign currencies relative to the U.S. dollar could have on operating results.
They will do so if a sale denominated in a foreign currency is sufficiently
large to justify the costs of hedging. To hedge a sale, Metron or m-FSI will
typically commit to buy U.S. dollars and sell the foreign currency at a given
price at a future date. If the customer cancels the sale, Metron or m-FSI may be
forced to buy U.S. dollars and sell the foreign currency at market rates to meet
its hedging obligations and may incur a loss in doing so. To date, the hedging
activities of Metron and m-FSI have not had any significant negative effect on
us.
BECAUSE OF THE NEED TO MEET AND COMPLY WITH NUMEROUS FOREIGN REGULATIONS AND
POLICIES, THE CHANGEABILITY OF THE POLITICAL AND ECONOMIC ENVIRONMENTS IN
FOREIGN JURISDICTIONS AND THE DIFFICULTY OF MANAGING BUSINESS OVERSEAS, WE MAY
NOT BE ABLE TO SUSTAIN OUR HISTORICAL LEVEL OF INTERNATIONAL SALES
We and our affiliates operate in a global market. In fiscal 1999, approximately
29% of our sales revenue derived from sales outside the United States. In fiscal
1998, this figure was 39%, and in fiscal 1997 it was 32%. These figures include
sales through Metron and m-FSI, which accounted for 92% of international sales
in 1999, 95% in 1998, and 98% in 1997. We expect that international sales will
continue to represent a significant portion of total sales. Sales to customers
outside the United States involve a number of risks, including the following:
- - Imposition of government controls
- - Compliance with U.S. export laws and foreign laws
- - Political and economic instability
- - Trade restrictions
- - Changes in taxes and tariffs
- - Longer payment cycles
- - Difficulty of administering business overseas
- - General economic conditions
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In particular, the Japanese and Asia Pacific markets are extremely competitive.
The semiconductor device manufacturers located there are very aggressive in
seeking price concessions from suppliers, including equipment manufacturers like
us. In fiscal 1999, approximately 29% of our international sales were
attributable to these markets. Total sales to these markets have declined from
$21.2 million in fiscal 1997 to $9.4 million in fiscal 1999.
We seek to meet technical standards imposed by foreign regulatory bodies.
However, we cannot guarantee that we will be able to comply with those standards
in the future. Any failure by us to design products to comply with foreign
standards could have a significant negative impact on us.
BECAUSE OF THE SIGNIFICANT FINANCIAL RESOURCES NEEDED TO OFFER A BROAD RANGE OF
PRODUCTS, TO MAINTAIN CUSTOMER SERVICE AND SUPPORT AND TO INVEST IN RESEARCH AND
DEVELOPMENT, WE MAY BE UNABLE TO COMPETE WITH LARGER, BETTER-ESTABLISHED
COMPETITORS
The microelectronics equipment industry is highly competitive. We face
substantial competition throughout the world. We believe that to remain
competitive, we will need significant financial resources to offer a broad range
of products, to maintain customer service and support, and to invest in research
and development. We believe that the microelectronics industry is becoming
increasingly dominated by large manufacturers who have the resources to support
customers on a worldwide basis. Some of our competitors have substantially
greater financial, marketing, and customer-support capabilities than us. Large
equipment manufacturers may enter the market areas in which we compete. In
addition, smaller, emerging microelectronics equipment companies provide
innovative technology. We expect that our competitors will continue to improve
the design and performance of their existing products and processes. We also
expect them to introduce new products and processes with better performance and
pricing. We cannot guarantee that we will continue to compete effectively in the
United States or elsewhere.
BECAUSE WE DO NOT HAVE LONG-TERM SALES COMMITMENTS WITH OUR CUSTOMERS, IF THESE
CUSTOMERS DECIDE TO REDUCE, DELAY OR CANCEL ORDERS OR CHOOSE TO DEAL WITH OUR
COMPETITORS, THEN OUR RESULTS WILL BE ADVERSELY AFFECTED
If our significant customers, including IBM, Texas Instruments, or National
Semiconductor, reduce, delay, or cancel orders, then our operating results will
suffer. Our largest customers have changed from year to year. Sales to FSI's top
five customers accounted for approximately 49%, 41% and 45% of total sales in
fiscal 1999, 1998, and 1997, respectively. IBM accounted for more than 10% of
revenue during each of the last three years, representing 24% in fiscal 1999,
14% in fiscal 1998 and 22% in fiscal 1997. Texas Instruments accounted for 13%
of revenues during fiscal 1999. National Semiconductor accounted for 12% and 10%
of revenues in fiscal 1998 and 1997. We currently have no long-term sales
commitments with any of our customers. Instead, we generally make sales under
purchase orders.
BECAUSE WE RETAINED CERTAIN LIABILITIES FROM THE DIVESTITURE OF THE CHEMICAL
MANAGEMENT DIVISION OR AGREED TO INDEMNIFY BOC WITH RESPECT TO SPECIFIED
OBLIGATIONS AND LIABILITIES, WE MAY EXPERIENCE CHARGES IN EXCESS OF THE RESERVES
ESTABLISHED AT THE TIME OF THE DIVESTITURE WHICH COULD NEGATIVELY IMPACT RESULTS
FROM OPERATIONS
In connection with the divestiture of the Chemical Management Division, we
retained certain liabilities and agreed to indemnify BOC with respect to certain
specified obligations and liabilities. In addition, the purchase price is
subject to adjustment based upon the closing statement of net assets. We have
prepared the closing statement, but BOC has raised certain objections to it. The
parties are undertaking to resolve those objections and come to an agreement
regarding any necessary purchase price adjustments. That closing statement has
not yet been agreed to by the parties. At the time of the divestiture, we
recorded reserves for known liabilities. As a result of current negotiations, in
the first quarter of fiscal 2000, we established an additional $400,000 reserve
for expected costs associated with completing two projects that were in process
when BOC purchased the division. If we experience liabilities or charges in
excess of established reserves or the parties disagree or are unable to resolve
the differences with respect to the closing statement of net assets and it is
ultimately determined that an adjustment in
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favor of BOC is warranted, our results of operations could be adversely impacted
due to additional costs associated with those reserves or the request to return
to BOC a portion of the purchase price because of such adjustments.
BECAUSE WE DEPEND UPON OUR MANAGEMENT AND TECHNICAL PERSONNEL FOR OUR SUCCESS,
THE LOSS OF KEY PERSONNEL COULD PLACE US AT A COMPETITIVE DISADVANTAGE
Our success depends to a significant extent upon our management and technical
personnel. The loss of a number of these key persons could have a negative
effect on our operations. Competition is high for such personnel in our industry
in all locations. We periodically review our compensation and benefit packages
to ensure that they are competitive in the marketplace and make adjustments or
implement new programs for that purpose, as appropriate. We cannot guarantee
that we will continue to attract and retain the personnel we require to continue
to grow and operate profitably.
BECAUSE OUR INTELLECTUAL PROPERTY IS IMPORTANT TO OUR SUCCESS, THE LOSS OR
DIMINUTION OF OUR INTELLECTUAL PROPERTY RIGHTS THROUGH LEGAL CHALLENGE BY OTHERS
OR FROM INDEPENDENT DEVELOPMENT BY OTHERS, COULD ADVERSELY AFFECT OUR BUSINESS
We attempt to protect our intellectual property rights through patents,
copyrights, trade secrets, and other measures. However, we believe that our
financial performance will depend more upon the innovation, technological
expertise, and marketing abilities of our employees than on such protection. In
connection with our intellectual property rights, we face the following risks:
- - Our pending patent applications may not be issued or may be issued with more
narrow claims
- - Patents issued to us may be challenged, invalidated, or circumvented
- - Rights granted under issued patents may not provide competitive advantages to
us
- - Foreign laws may not protect our intellectual property rights
- - Others may independently develop similar products, duplicate our products, or
design around our patents
As is typical in the semiconductor industry, we occasionally receive notices
from others alleging infringement claims. We have been involved in patent
infringement litigation in the past and SCD Mountain View is currently involved
in such litigation. We could become involved in similar lawsuits or other patent
infringement claims in the future. We cannot guarantee the outcome of such
lawsuits or claims, which may have a significant negative effect on our business
or operating results.
IF WE AND/OR OUR THIRD-PARTY VENDORS ARE NOT YEAR 2000 COMPLIANT, THEN WE MAY BE
INCAPABLE OF CONDUCTING BUSINESS
As of January 10, 2000, we have not experienced any significant Year 2000
compliance issues internally nor have our customers reported to our management
any Year 2000 problems with our products.
We believe that our information technology (IT) systems are Year 2000 compliant
and our current standard product lines are believed to be Year 2000 compliant.
However, there can be no assurance that we will not experience serious
unanticipated negative consequences or material costs caused by undetected
errors or defects in the technology used in our internal operating systems,
which are composed predominately of third party software and hardware technology
or by the inability of vendors to correct their Year 2000 issues if such issues
should occur. In addition, there can be no assurance that our current products
do not contain undetected errors or defects associated with Year 2000 date
functions that might
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result in material costs to the Company, including repair and replacement costs
and costs incurred in litigation due to any such defects. We do have a
contingency plan if our IT and non-IT systems are not Year 2000 compliant.
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, there can be no assurance that we will not be materially adversely
affected by claims related to Year 2000 compliance.
We incurred approximately $516,000 to address the Year 2000 problem during 1999
and incurred approximately $96,000 in the first quarter of 2000*. We expect to
incur approximately $89,000 in the remainder of fiscal 2000.*
ADOPTION OF THE COMMON EUROPEAN CURRENCY MAY ADVERSELY AFFECT US AND OUR
AFFILIATED DISTRIBUTORS BY REQUIRING SYSTEMS MODIFICATIONS AND POSSIBLY
INCREASING THEIR CURRENCY EXCHANGE RISKS
We are in the process of analyzing the issues raised by the introduction of the
common European currency unit, the "Euro." The use of the Euro began on January
1, 1999 and will be phased-in through January 1, 2002. We do not expect the cost
of any necessary systems modification to be material and do not anticipate that
the introduction and use of the Euro will materially affect our results or those
of our affiliated distributors' international business operations.* Nor do we
expect the Euro to have a material effect on the currency exchange risks of our
or our affiliated distributors' businesses.* Our management will continue to
monitor the effect of the implementation of the Euro.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash flows and earnings are subject to fluctuations in foreign exchange
rates due to investments in foreign-based affiliates. Our investments in
affiliates include a 21.7% interest in Metron Technology (Metron) and a 49%
interest in moFSI Ltd. Metron operates mainly in Europe, Asia Pacific and the
United States. moFSI Ltd. operates in Japan. Approximately 95% of fiscal 1999
sales to affiliates were to Metron. We denominate all U.S. export sales in U.S.
dollars
Metron attempts to limit its exposure to changing foreign currency exchange
rates through operational and financial market actions. Products are sold in a
number of countries throughout the world resulting in a diverse portfolio of
transactions denominated in foreign currencies. Certain short-term foreign
currency exposures are managed by the purchase of forward contracts to offset
the earnings and cash flow impact of non-functional currency denominated
receivables and payables.
Our investment in our affiliate, Metron, is accounted for by the equity method
of accounting and has a carrying value on the balance sheet of approximately
$12.7 million. The fair value of Metron is subject to stock market
fluctuations. Based on the closing stock price of Metron on November 26, 1999,
the fair value of our investment in Metron, was approximately $47.1 million.
We do not have significant exposure to changing interest rates as all material
outstanding debt was repaid on September 3, 1999 and all marketable securities
consist of debt instruments, 85% of which mature within one year. All marketable
securities mature within two years. As of November 27, 1999, amortized cost
approximates market value for all outstanding marketable securities. We do not
undertake any specific actions to cover our exposure to interest rate risk and
we are not party to any interest rate risk management transactions.
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.
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There has been substantial litigation regarding patent and other
intellectual property rights in the microelectronics industry recently
and further commercialization of FSI's products could provoke claims
of infringement by third parties. In the future, litigation may be
necessary to enforce patents issued to FSI, to protect trade secrets
or know-how owned by FSI or to defend FSI against claimed infringement
of the rights of others and to determine the scope and validity of
FSI's proprietary rights. Any such litigation could result in
substantial costs and diversion of effort by FSI, which by itself
could have a material adverse impact on FSI's financial condition and
operating results. Further, adverse determinations in such litigation
could result in FSI's loss of proprietary rights, subject FSI to
significant liabilities to third parties, require FSI to seek licenses
from third-parties or prevent FSI from manufacturing or selling one or
more products, any of which could have a material adverse effect on
FSI'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. ("SSI"), a
wholly-owned subsidiary of FSI that was acquired in April 1996, and
the former shareholders of SSI. In the fall of 1995, pursuant to the
Employee Stock Purchase and Shareholder Agreement dated November 30,
1990 between Mr. Hsu and SSI (the "Shareholder Agreement") and in
connection with Mr. Hsu's termination of his employment with SSI in
August 1995, the former shareholders of SSI purchased the shares of
SSI common stock then held by Mr. Hsu. The plaintiffs are claiming,
among other things, that such purchase breached the Shareholder
Agreement and violated the California Corporations Code, breached the
fiduciary duty owed plaintiffs by the individual defendants and
constituted fraud. The plaintiffs are seeking, among other things,
damages in an amount to be proven at trial, punitive damages,
attorneys' fees and a constructive trust over the shares held in the
escrow mentioned below. Plaintiffs' claim for punitive damages was
dismissed by the trial court. SSI intends to vigorously defend the
lawsuit and FSI currently believes the trial will commence in early
2000.
FSI, on behalf of SSI, has made a claim with respect to the lawsuit
under the escrow created at the time of FSI's acquisition of SSI. The
escrow was established to secure certain indemnification obligations
of the former shareholders of SSI. The former shareholders have agreed
to hold FSI and SSI harmless from any claim arising out of any
securities transactions between the shareholders or former
shareholders of SSI and SSI. The escrow consists of an aggregate of
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250,000 shares of FSI Common Stock paid to the former shareholders of
SSI as consideration in the acquisition.
CFM Technologies, Inc. and CFMT, Inc. (collectively "CFM") filed a
complaint against YieldUP in United States District Court for the
District of Delaware in September 1995. The complaint alleged that the
drying process incorporated in certain YieldUP products infringes a
patent held by CFM. On October 14, 1997, a federal court for the
District of Delaware ruled in YieldUP's favor. In a written opinion
granting summary judgment for YieldUP, the United States District
Court held that CFM had failed to produce evidence on three separate
elements of the patent claim. To establish infringement, evidence of
all three elements was required. On June 30, 1998, the United States
District Court of Delaware granted CFM's petition for re-argument of
the summary judgment motion, and the re-argument briefs have been
filed by both parties. The court may not sustain its original order.
The judge has not yet ruled as to whether to sustain his earlier
ruling. If the original order is overturned, the litigation may
proceed to trial, and the litigation and the associated costs may, and
an unfavorable adjudication could, have a material adverse impact on
FSI.* A loss, if any resulting from an unfavorable adjudication,
cannot presently be estimated.
CFM filed an additional complaint against YieldUP in United States
District Court for the District of Delaware on December 30, 1998. The
complaint alleged that the cleaning process incorporated in certain of
YieldUP's products infringes patents held by CFM. FSI believes that
the additional CFM patent infringement lawsuit is without merit and
that none of YieldUP's technology and products infringes any of the
CFM patents asserted in that litigation. YieldUP's technology is
substantially different from CFM's patented technology. YieldUP has
filed an answer to the complaint and a counter claim for
non-infringement and invalidity of CFM's patents. Trial of the matter
is currently scheduled to begin in May 2000. YieldUP plans to
vigorously defend its intellectual property rights against any and all
claims. The associated costs may, and an unfavorable adjudication
could, have a material adverse impact on FSI. In both lawsuits filed
by CFM, CFM is asking for monetary damages and an injunction against
YieldUP's use of those products at issue. A loss, if any, resulting
from an unfavorable adjudication, cannot presently be estimated.
Other than the litigation described above or routine litigation
incidental to FSI's business, there is no material litigation to which
FSI is a party or of which any of its property is subject.
ITEM 2. CHANGE IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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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 (16)
2.1 License Agreement for Microelectronic Technology between YieldUP
International, Corporation and FSI International, Inc. dated January
21, 1999. (16)
2.2 Agreement and Plan of Reorganization by and Among FSI International,
Inc., Spectre Acquisition Corp., and Semiconductor Systems, Inc. (1)
2.3 Asset Purchase Agreement dated as of June 9, 1999 between FSI
International, Inc. and The BOC Group, Inc. (15)
3.1 Restated Articles of Incorporation of the Company. (2)
3.2 Restated By-Laws. (3)
3.3 Amendment to Restated By-Laws. (4)
3.4 Amendment to Restated By-Laws. (17)
3.5 Articles of Amendment of Restated Articles of Incorporation (17)
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 Amendment No. 1 dated February 11, 1991 to lease between the Company
and Elftmann, Wyers, Blackwood Partnership (17)
10.7 Amendment No. 2 dated July 31, 1999 to lease between the Company and
Elftmann, Wyers, Blackwood Partnership (17)
*10.8 1989 Stock Option Plan. (4)
*10.9 Amended and Restated Employees Stock Purchase Plan.(14)
10.10 Shareholders Agreement among FSI International, Inc. and Mitsui &
Co., Ltd. and Chlorine Engineers Corp. Ltd. dated as of August 14,
1991. (8)
10.11 FSI Exclusive Distributorship Agreement dated as of August 14, 1991
between FSI International, Inc. and moFSI, Ltd. (8)
10.12 FSI Licensing Agreement dated as of August 14, 1991, between FSI
International, Inc. and moFSI, Ltd. (8)
10.13 Amendment to FSI/Metron Distribution Agreement dated July 31, 1999
(filed herewith) 10.14 Amendment to FSI Exclusive Distribution
Agreement dated July 31, 1999 (filed herewith)
10.15 License Agreement, dated October 15, 1991, between the Company and
Texas Instruments Incorporated. (9)
10.16 Amendment No. 1, dated April 10, 1992, to the License Agreement,
dated October 15, 1991, between the Company and Texas Instruments
Incorporated. (9)
23
<PAGE> 24
10.17 Amendment effective October 1, 1993 to the License Agreement, dated
October 15, 1991 between the Company and Texas Instruments
Incorporated (10)
*10.18 Amended and Restated Directors' Nonstatutory Stock Option Plan. (11)
*10.19 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.)(14)
*10.20 FSI International, Inc. 1994 Omnibus Stock Plan. (12)
*10.21 FSI International, Inc. 1998 Incentive Plan. (filed herewith) (14)
10.22 First Amendment to Lease made and entered into October 31, 1995 by and
between Lake Hazeltine Properties and FSI International, Inc. (13)
10.23 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)
10.24 Lease dated August 9, 1995 between Skyline Builders, Inc. and FSI
International, Inc. (13)
10.25 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)
27.1 Financial Data Schedule (filed herewith)
27.2 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 June 23, 1999, SEC File No. 0-17276 and incorporated by
reference.
(16)Filed as an Exhibit to the Company's Report on Form S-4, filed by the
Company on September 13, 1999, SEC File No. 333-87003 and incorporated by
reference.
(17)Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal
year ended August 28, 1999, SEC File No. 0-17276, and incorporated by
reference.
----------------
24
<PAGE> 25
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K/A dated December 15, 1999 with
respect to the acquisition of YieldUP International, Inc. The following
financial statements were included in a Report on Form 8-K/A.
(i) Pro Forma Information of FSI International, Inc. and YieldUP
Unaudited Pro Forma Financial Information of FSI International, Inc.
and YieldUP as of and for the fiscal year ended August 28, 1999:
Unaudited Pro Forma Combined Balance Sheet
Unaudited Pro Forma Combined Statement of Operations
Notes to Unaudited Pro Forma Combined Financial Statements
25
<PAGE> 26
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: January 11, 2000
By: /s/Patricia M. Hollister
-------------------------
Chief Financial Officer
on behalf of the
Registrant and as
Principal Financial Officer
26
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-28-1999
<PERIOD-START> AUG-30-1998
<PERIOD-END> NOV-28-1998
<CASH> 75,516,831
<SECURITIES> 25,366,307
<RECEIVABLES> 24,130,240
<ALLOWANCES> 2,345,797
<INVENTORY> 36,784,340
<CURRENT-ASSETS> 197,109,285
<PP&E> 109,239,921
<DEPRECIATION> 43,689,445
<TOTAL-ASSETS> 285,115,482
<CURRENT-LIABILITIES> 45,864,094
<BONDS> 42,000,000
0
0
<COMMON> 163,365,701
<OTHER-SE> 33,831,198
<TOTAL-LIABILITY-AND-EQUITY> 285,115,482
<SALES> 24,016,101
<TOTAL-REVENUES> 24,016,101
<CGS> 16,163,246
<TOTAL-COSTS> 16,163,246
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (43,814)
<INTEREST-EXPENSE> 784,823
<INCOME-PRETAX> (8,824,227)
<INCOME-TAX> (3,285,008)
<INCOME-CONTINUING> (5,837,601)
<DISCONTINUED> (1,241,119)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,078,720)
<EPS-BASIC> (0.25)<F1>
<EPS-DILUTED> (0.25)<F2>
<FN>
<F1>This amount represents Basic EPS from continuing operations. Basic EPS from
Net Income (loss) is ($0.31)
<F2>This amount represents Diluted EPS from continuing operations. Diluted EPS from
Net Income (loss) is ($0.31)
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-26-2000
<PERIOD-START> AUG-29-1999
<PERIOD-END> NOV-27-1999
<CASH> 21,662,057
<SECURITIES> 27,943,394
<RECEIVABLES> 37,279,461
<ALLOWANCES> 3,556,090
<INVENTORY> 42,925,644
<CURRENT-ASSETS> 130,741,759
<PP&E> 116,865,886
<DEPRECIATION> 55,039,387
<TOTAL-ASSETS> 232,822,747
<CURRENT-LIABILITIES> 43,041,690
<BONDS> 0
0
0
<COMMON> 185,247,071
<OTHER-SE> 4,491,921
<TOTAL-LIABILITY-AND-EQUITY> 232,822,747
<SALES> 30,906,761
<TOTAL-REVENUES> 30,906,761
<CGS> 20,797,757
<TOTAL-COSTS> 20,797,757
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 265,805
<INCOME-PRETAX> (9,750,873)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,224,181)
<DISCONTINUED> (400,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,624,181)
<EPS-BASIC> (0.43)<F1>
<EPS-DILUTED> (0.43)<F2>
<FN>
<F1>This amount represents Basic EPS from continuing operations. Basic EPS from
Net Income (loss) is ($0.44)
<F2>This amount represents Diluted EPS from continuing operations. Diluted EPS
from Net Income (loss) is ($0.44)
</FN>
</TABLE>
