<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 MAY 27, 2000
----------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission File Number: 0-17276
-----------------------------------------------------
FSI INTERNATIONAL, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1223238
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
322 LAKE HAZELTINE DRIVE, CHASKA, MINNESOTA 55318
--------------------------------------------------------------------------------
(Address of principal executive offices) (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 - 25,160,382 SHARES OUTSTANDING AS OF JUNE 30, 2000
1
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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:
Consolidated Condensed Balance Sheets (Unaudited) as of
May 27, 2000 and August 28, 1999 3
Consolidated Condensed Statements of Operations
Unaudited) for the quarters ended May 27, 2000 and May 29, 1999 5
Consolidated Condensed Statements of Operations (Unaudited)
for the nine months ended May 27, 2000 and May 29, 1999 6
Consolidated Condensed Statements of Cash Flows (Unaudited)
for the nine months ended May 27, 2000 and May 29, 1999 7
Notes to Consolidated Condensed Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 23
Item 2. Change in Securities 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K. 25
SIGNATURE 28
</TABLE>
2
<PAGE> 3
PART I. Item 1. FINANCIAL INFORMATION
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MAY 27, 2000 AND AUGUST 28, 1999
ASSETS
(Unaudited)
<TABLE>
<CAPTION>
May 27, August 28,
2000 1999
----------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,206,159 $ 62,326,355
Marketable securities 10,817,748 27,671,653
Trade accounts receivable, net of allowance for
doubtful accounts of $4,294,000 and $2,578,000,
respectively 18,714,510 17,662,389
Trade accounts receivable from affiliates 32,817,335 12,659,778
Inventories 52,186,799 32,911,669
Refundable income taxes - 160,915
Prepaid expenses and other current assets 3,983,506 5,568,093
---------------- ----------------
Total current assets 141,726,057 158,960,852
---------------- ----------------
Property, plant and equipment, at cost 122,808,007 114,340,509
Less accumulated depreciation and amortization (61,171,453) (50,249,286)
---------------- ----------------
61,636,554 64,091,223
Investment in affiliates 16,514,486 14,177,866
Intangibles 18,691,066 2,000,000
Deposits and other assets 4,114,416 3,473,280
---------------- ----------------
$ 242,682,579 $ 242,703,221
================ ================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 4
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MAY 27, 2000 AND AUGUST 28, 1999
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
May 27, August 28,
2000 1999
----------------- -----------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 75,319 $ 30,059,696
Trade accounts payable 20,808,752 14,956,324
Accrued expenses 18,912,101 15,380,136
Customer deposits - 453,198
Deferred revenue 8,679,929 5,538,705
---------------- ------------------
Total current liabilities 48,476,101 66,388,059
---------------- ------------------
Long-term debt, less current maturities 4,174 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; 25,142,936 and 23,391,953 shares
issued and outstanding, at May 27, 2000
and August 28, 1999, respectively 188,079,530 165,625,250
Retained earnings 6,532,749 11,915,059
Cumulative translation adjustment (409,975) (1,228,145)
---------------- ------------------
Total stockholders' equity 194,202,304 176,312,164
---------------- ------------------
$ 242,682,579 $ 242,703,221
================ ==================
</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 MAY 27, 2000 AND MAY 29, 1999
(Unaudited)
<TABLE>
<CAPTION>
May 27, May 29,
2000 1999
--------------- ---------------
<S> <C> <C>
Sales (including sales to affiliates of
$35,175,000 and $7,545,000, respectively) $ 67,747,432 $ 37,673,719
Cost of goods sold 41,694,598 27,107,950
--------------- ---------------
Gross profit 26,052,834 10,565,769
Selling, general and administrative expenses 13,238,123 8,503,531
Research and development expenses 9,434,063 7,388,035
--------------- ---------------
Operating income (loss) 3,380,648 (5,325,797)
Interest expense (21,869) (716,382)
Interest income 502,834 1,139,947
Other income (expense), net 37,043 24,650
--------------- ---------------
Income (loss) before income taxes 3,898,656 (4,877,582)
Income tax expense - 12,640,329
--------------- ---------------
Income (loss) before equity in loss of affiliates 3,898,656 (17,517,911)
Equity in loss of affiliates (204,012) (876,473)
--------------- ---------------
Net income (loss) from continuing operations 3,694,644 (18,394,384)
Discontinued operations:
Loss from operations - (1,992,452)
--------------- ---------------
Net income (loss) $ 3,694,644 $ (20,386,836)
=============== ===============
Net income (loss) per common share - basic:
Continuing operations $0.15 $(0.79)
Discontinued operations $0.00 $(0.09)
--------------- ---------------
Net income (loss) $0.15 $(0.88)
=============== ===============
Net income (loss) per common share - diluted:
Continuing operations $0.14 $(0.79)
Discontinued operations $0.00 $(0.09)
--------------- ---------------
Net income (loss) $0.14 $(0.88)
=============== ===============
Weighted average common shares 25,121,546 23,251,363
Weighted average common and potential common shares 26,374,790 23,251,363
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> 6
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE-MONTHS ENDED MAY 27, 2000 AND MAY 29, 1999
(Unaudited)
<TABLE>
<CAPTION>
May 27, May 29,
2000 1999
---------------- -----------------
<S> <C> <C>
Sales (including sales to affiliates of
$68,430,000 and $17,350,000, respectively) $ 144,451,929 $ 80,836,840
Cost of goods sold 91,144,045 56,965,694
---------------- -----------------
Gross profit 53,307,884 23,871,146
Selling, general and administrative expenses 35,783,554 26,148,497
In-process research and development write-off 6,370,000 -
Research and development expenses 26,682,735 22,078,711
---------------- -----------------
Operating loss (15,528,405) (24,356,062)
Gain on sale of investment in affiliates 5,409,744 -
Interest expense (343,092) (2,219,426)
Interest income 1,856,114 3,653,531
Other income (expense), net 116,002 217,189
---------------- -----------------
Loss before income taxes (8,489,637) (22,704,768)
Income tax expense - 5,844,990
---------------- -----------------
Loss before equity in loss of affiliates (8,489,637) (28,549,758)
Equity in loss of affiliates (1,127,334) (1,956,827)
---------------- -----------------
Net loss from continuing operations (9,616,971) (30,506,585)
Discontinued operations:
Income (loss) from operations (400,000) (4,532,900)
---------------- -----------------
Net loss $ (10,016,971) $ (35,039,485)
================ =================
Net loss per common share - basic:
Continuing operations $(0.39) $(1.32)
Discontinued operations $(0.02) $(0.19)
---------------- -----------------
Net loss $(0.41) $(1.51)
================ =================
Net loss per common share - diluted:
Continuing operations $(0.39) $(1.32)
Discontinued operations $(0.02) $(0.19)
---------------- -----------------
Net loss $(0.41) $(1.51)
================ =================
Weighted average common shares 24,659,444 23,156,150
Weighted average common and potential common shares 24,659,444 23,156,150
</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 NINE MONTHS ENDED MAY 27, 2000 AND MAY 29, 1999
(Unaudited)
<TABLE>
<CAPTION>
May 27, May 29,
2000 1999
------------------ -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (10,016,971) $ (35,039,485)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Gain on sale of investment in affiliates (5,409,744) -
Loss from discontinued operations 400,000 4,532,900
Write-off of in-process research and development 6,370,000 -
Provision for deferred income taxes - (9,497,045)
Valuation reserve for deferred income taxes - 16,609,667
Allowance for doubtful accounts 919,967 (391,887)
Inventory reserves (1,831,318) 651,826
Depreciation and amortization 12,588,455 8,957,772
Equity in loss of affiliates 1,127,334 1,956,827
Changes in operating assets and liabilities:
Trade accounts receivable (21,360,894) 4,160,091
Inventories (13,527,689) 4,604,114
Refundable income taxes 160,915 9,769,314
Prepaid expenses and other current assets (6,009,640) 203,968
Trade accounts payable 4,279,240 3,007,073
Accrued expenses 6,926,009 (1,942,304)
Customer deposits (453,198) 834,789
Deferred revenue 3,141,224 (8,168,245)
Other - 19,613
------------------ -----------------
Net cash (used in) provided by operating activities (22,696,310) 268,988
INVESTING ACTIVITIES:
Proceeds from sale of investment in affiliates 7,398,621 -
Acquisition of property, plant and equipment (6,362,753) (7,487,017)
Investment in YieldUP, net of cash (6,522,515) -
Purchase of marketable securities (1,156,997) (53,583,790)
Sales of marketable securities - 6,971,481
Maturities of marketable securities 18,020,902 27,771,154
Increase in deposits and other assets (1,274,638) (1,081,601)
Proceeds from sale of equipment 622,438 470,500
------------------ -----------------
Net cash (used in) provided by investing activities 10,725,058 (26,939,273)
FINANCING ACTIVITIES:
Principal payments on long-term debt (30,336,224) (55,158)
Net proceeds from issuance of common stock 3,187,280 1,610,836
------------------ -----------------
Net cash (used in) provided by financing activities (27,148,944) 1,555,678
Cash (used in) discontinued operations - (233,605)
------------------ -----------------
Decrease in cash and cash equivalents (39,120,196) (25,348,212)
Cash and cash equivalents at beginning of period 62,326,355 72,789,811
------------------ -----------------
Cash and cash equivalents at end of period $ 23,206,159 $ 47,441,599
================== =================
</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 28, 1999, previously filed with the Securities and Exchange
Commission.
(2) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
May 27, August 28,
2000 1999
------------------ -------------------
<S> <C> <C>
Finished
products $ 6,687,193 $ 6,759,290
Work-in-process 20,092,486 6,667,750
Subassemblies 4,315,750 8,967,812
Raw materials and purchased parts 21,091,370 10,516,817
------------------ -------------------
$52,186,799 $32,911,669
================== ===================
</TABLE>
(3) SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended
May 27, May 29,
2000 1999
-
------------------ --------------------
Schedule of interest and income taxes (received) paid:
<S> <C> <C>
Interest $748,259 $ 1,434,474
Income taxes ($23,576) ($11,840,284)
</TABLE>
The Company realized a tax benefit from the exercise of stock options of $0
and $49,718 in the first nine months of fiscal 2000 and 1999, respectively.
8
<PAGE> 9
(4) RECONCILIATION OF EARNINGS AND SHARE AMOUNTS USED IN EPS CALCULATION
<TABLE>
<CAPTION>
Basic Dilutive Income
Income(Loss) (Loss) Per
Per Share Share
------------------- Effective of ---------------------
Income(Loss) Dilutive Income
Net Available to Securities* (Loss)Available
Income Common Stock to Common
FOR THE QUARTERS ENDED (Loss) Stockholders Options Stockholders
------------------------------- ------------------- ------------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
MAY 27, 2000
Income $3,694,644 $3,694,644 - $3,694,644
Shares - 25,121,546 1,253,244 26,374,790
Per share amount - $0.15 - $0.14
MAY 29, 1999
Loss ($20,386,836) ($20,386,836) - ($20,386,836)
Shares - 23,251,363 - 23,251,363
Per share amount - ($0.88) - ($0.88)
FOR THE NINE MONTHS ENDED
---------------------------------------
MAY 27, 2000
Loss ($10,016,971) ($10,016,971) - ($10,016,971)
Shares - 24,659,444 - 24,659,444
Per share amount - ($0.41) - ($0.41)
MAY 29, 1999
Loss ($35,039,485) ($35,039,485) - ($35,039,485)
Shares - 23,156,150 - 23,156,150
Per share amount - ($1.51) - ($1.51)
</TABLE>
* The effect of stock options were not included in the calculation of dilutive
earnings per share for the quarter ended May 29, 1999 and for the nine months
ended May 27, 2000 and May 29, 1999 because their inclusion would have been
anti-dilutive.
(5) COMPREHENSIVE INCOME (LOSS)
For the quarters and nine months ended May 27, 2000 and May 29, 1999 net
loss, items of other comprehensive income (loss) and comprehensive loss are
as follows:
<TABLE>
<CAPTION>
May 27, 2000 May 29, 1999
-------------------- --------------------
<S> <C> <C>
FOR THE QUARTERS ENDED:
Net income (loss) $3,694,644 ($20,386,836)
Items of other comprehensive income (loss):
Foreign currency translation (55,337) (399,168)
-------------------- --------------------
Comprehensive income (loss) $3,639,307 ($20,786,004)
==================== ====================
FOR THE NINE MONTHS ENDED:
Net loss ($10,016,971) ($35,039,485)
Items of other comprehensive income (loss):
Foreign currency translation 818,170 666,994
-------------------- --------------------
Comprehensive loss ($9,198,801) ($34,372,491)
==================== ====================
</TABLE>
9
<PAGE> 10
(6) ACQUISITION OF YIELDUP
On October 20, 1999 the Company acquired YieldUP International Corporation
(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 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 $6,370,000 in the first quarter
of fiscal 2000 related to the acquisition.
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. For a discussion of the litigation, see Part
II, Item 1.
(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
during the first quarter of fiscal 2000.
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 20.4% as a result of this sale, the public offering
and additional stock issuance. As of May 27, 2000 the Company owns
approximately 2,690,000 shares of Metron with a total cost basis of
approximately $14,500,000.
(8) SUBSEQUENT EVENT
In an effort to improve operating efficiencies and reduce costs, on July 6,
2000, the Company initiated a program to consolidate its California
operations into one facility. In conjunction with this action, the
Company's immersion products manufacturing operation in Mountain View,
California will be transferred to its Chaska, Minnesota Surface
Conditioning facility. Also the Company's SOD product development and
manufacturing operations will be transferred from Fremont, California to
its Allen, Texas Microlithography facility. The remaining California
operations will be consolidated into the Company's Mountain View facility.
The Company will continue to have product design, sales, service and
applications support organizations in California. The Company anticipates
savings in fiscal 2001 in excess of $2.0 million as a result of the
facilities consolidation and operations transfer.
The Company expects to record a charge of approximately $0.9 to $1.3
million in the fourth quarter of fiscal
10
<PAGE> 11
2000 for costs associated with the termination of the Fremont lease, the
write-off of leasehold improvements, severance and other related costs.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIRD QUARTER AND FIRST NINE MONTHS OF FISCAL 2000 COMPARED WITH THE THIRD
QUARTER AND FIRST NINE MONTHS 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 industry conditions including general economic conditions; the
demand and price for semiconductors; the level of new orders and order delays or
cancellations; 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. Other factors that could
cause the results of the Company to differ materially from those contained in
any forward-looking statements of the Company are included in the Company's
Report on Form 10-K for the 1999 fiscal year and other documents recently filed
by the Company with the Securities and Exchange Commission. 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 on a consolidated basis, for the fiscal period
indicated, certain income and expense items from continuing operations as a
percent of total sales.
<TABLE>
<CAPTION>
Percent of Sales Percent of Sales
Quarter Ended Nine Months Ended
---------------------------------- -------------------------------
May 27, May 29, May 27, May 29,
2000 1999 2000 1999
--------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 61.5 72.0 63.1 70.5
Gross profit 38.5 28.0 36.9 29.5
Selling, general and administrative 19.6 22.6 24.8 32.3
In-process research and development - - 4.4 -
Research and development 13.9 19.6 18.5 27.3
Operating income (loss) 5.0 (14.2) (10.8) (30.1)
Other income (expense), net 0.8 1.2 4.9 2.0
Income (loss) before income taxes 5.8 (13.0) (5.9) (28.1)
Income tax expense - 33.5 - 7.2
Equity in loss of affiliates (0.3) (2.3) (0.8) (2.4)
--------------- --------------- -------------- ------------
Net income (loss) from continuing operations 5.5 (48.8) (6.7) (37.7)
Discontinued operations:
Net loss from discontinued operations - (5.3) (0.3) (5.6)
--------------- --------------- -------------- ------------
Net income (loss) 5.5 % (54.1) % (7.0) % (43.3) %
=============== =============== ============== ============
</TABLE>
12
<PAGE> 13
SALES
Sales were $67.7 million for the third quarter of fiscal 2000 as compared to
$37.7 million for the third quarter of fiscal 1999. The increase in sales
occurred in the Surface Conditioning products and in spare parts and service
sales. Sales were $144.5 million for the first nine months of fiscal 2000 as
compared to $80.8 million for the first nine months of fiscal 1999. Both the
Microlithography and Surface Conditioning Divisions experienced sales increases
with the Surface Conditioning Division having the most significant increase. We
anticipate that sales of Surface Conditioning products and spares and service
will represent approximately 60 percent of total fiscal 2000 revenues.*
International sales were $44.4 million, and $10.1 million for the third
quarter of fiscal 2000 and 1999, respectively, and represented approximately 66%
and 27%, respectively, of sales during these periods. International sales were
$77.0 million and $20.0 million for the first nine months of fiscal 2000 and
1999, respectively, and represented 53% and 25%, respectively, of sales during
these periods. The increase in international sales occurred in all international
markets which reflects our continued strong performance in Europe and improving
participation in the foundry expansion in Asia. Fourth quarter fiscal 2000 sales
are expected to be up sequentially as compared to third quarter.* Fiscal 2000
sales are expected to be significantly above the fiscal 1999 level, with a
higher foreign mix.* FSI's book-to-bill ratio was significantly above 1.0 for
the third quarter of fiscal 2000 and bookings exceeded $100 million, a record
level. The book-to-bill ratio for the third quarter and first nine months of
fiscal 2000 was above industry levels.
GROSS PROFIT
FSI's gross profit margin does fluctuate due to 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, OEM system content, competitive pricing pressures and utilization of
manufacturing capacity.
Gross profit as a percentage of sales for the third quarter of fiscal 2000 was
38.5% as compared to 28.0% for the third quarter of fiscal 1999. Gross profit as
a percentage of sales for the first nine months of fiscal 2000 was 36.9% as
compared to 29.5% for the first nine months of fiscal 1999. The improvement in
gross profit margin percentage for the third quarter and first nine months of
fiscal 2000 as compared to the same periods in 1999 is due to higher
manufacturing capacity utilization, stronger mix of higher margin products and
other cost reduction activities. The improvement in margins is being offset by
the higher level of foreign sales, which generally have lower margins and also
due to increased OEM content in our products. In addition, fiscal 2000 third
quarter and first nine months margins were impacted by approximately $1.4
million and $2.0 million, respectively relating to sales of YieldUP finished
goods inventory which was marked up to fair market value at the time of the
closing of the YieldUP acquisition. We will recognize full margins on YieldUP
product sales beginning in the fourth quarter of fiscal 2000. With a continued
increase in sales volume and successful product cost reduction programs, gross
margins could improve to above 40 percent.*
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $13.2 million for the
third quarter of fiscal 2000 as compared to $8.5 million for the third quarter
of fiscal 1999. Selling, general and administrative expenses increased to $35.8
million for the first nine months of fiscal 2000 as compared to $26.1 million
for the same period in fiscal 1999. The increase in the amount of SG&A expense
in the third quarter and the first nine months of fiscal 2000 as compared to the
third quarter and first nine months of fiscal 1999 was primarily due to
additional depreciation costs associated with the new business system, SAP, the
amortization of intangibles relating to the YieldUP acquisition and increased
service and commission expense due to significantly higher sales. Additionally,
the increase in the third quarter of fiscal 2000 as compared to the third
quarter of fiscal 1999 is due to an accrual for expected payouts under the
profit sharing plan.
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FSI expects the quarterly amount of SG&A expense to be below $13 million for the
fourth quarter of fiscal 2000.* Therefore, as a percent of sales, SG&A is
expected to decrease again in the fourth quarter of fiscal 2000.*
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $9.4 million for the third
quarter of fiscal 2000 as compared to $7.4 million for the same period in fiscal
1999. Research and development expenses increased to $26.7 million for the first
nine months of fiscal 2000 as compared to $22.1 million for the same period in
fiscal 1999. The increases in the fiscal 2000 periods reflect FSI's continued
investment in new products, enhancements to existing products and expanded
applications development on existing platforms. Also in the first quarter of
fiscal 2000, FSI recorded a $6.4 million in-process R&D write-off relating to
the acquisition of YieldUP International Corporation. R&D expenses in the fourth
quarter of fiscal 2000 are expected to exceed those of the third quarter of
2000, in particular due to enhancements to our POLARIS(R) 3500 300mm platform,
and the ZETA(R) platform and as we continue to develop the immersion product.*
OTHER INCOME (EXPENSE), NET
Other income (expense), net was approximately $518,000 and $7,039,000 for the
third quarter and first nine months of fiscal 2000, respectively, as compared to
$448,000 and $1,651,000 for the third quarter and first nine months of fiscal
1999, respectively. The increase in the amounts for the third quarter and first
nine months of fiscal 2000 as compared to the third quarter and first nine
months of fiscal 1999 is due to reduced interest expense as a result of the debt
repayment offset by reduced interest income due to lower cash and cash
equivalents and marketable securities amounts. Additionally, the increase for
the first nine months of fiscal 2000 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 during the first quarter.
INCOME TAX EXPENSE (BENEFIT)
FSI recorded no tax benefit related to its operating losses for the third
quarter and first nine months of fiscal 2000. FSI recorded a tax expense of
$12.6 million and $5.8 million for the third quarter and first nine months of
fiscal 1999, respectively.
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 May 27, 2000 of approximately $24 million have
been fully reserved for with a valuation allowance.
EQUITY IN (LOSS) EARNINGS OF AFFILIATES
The equity in (loss) earnings of affiliates was approximately a $204,000 loss
for the third quarter of fiscal 2000, compared to approximately a $876,000 loss
for the third quarter of fiscal 1999. The equity in (loss) earnings of
affiliates was approximately a $1.1 million loss for the first nine months of
fiscal 2000, compared to a $2.0 million loss for the first nine months of fiscal
1999. The decrease in loss is due to higher earnings of Metron.
We expect a significant improvement in earnings from affiliates in the fourth
quarter of fiscal 2000 as compared to the third quarter of fiscal 2000 as
Metron's performance continues to improve.* Also m-FSI, our Japanese affiliated
distributor, is expecting a significant improvement in its performance as they
begin to recognize revenues related to the strong orders in Japan in the first
half of fiscal 2000.*
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DISCONTINUED OPERATIONS
During the first half of 2000, FSI continued to negotiate the final closing
balance sheet for the CMD divestiture to BOC. During the first quarter FSI
established an additional $400,000 reserve for expected costs associated with
completing two projects that were in process when BOC purchased the division
During the second quarter, the parties settled on a final closing balance sheet
and no additional reserves were recorded.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and marketable securities were
approximately $34 million as of May 27, 2000, a decrease of $56 million from the
end of fiscal 1999. The decrease in cash, cash equivalents and marketable
securities is due to approximately $22.7 million in cash flow used to fund
operations and approximately $30 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.
The Company's accounts receivable increased by approximately 70% or $21.2
million from the end of fiscal 1999. The increase in accounts receivable is due
to higher sales revenues and the higher mix of foreign sales as the collection
period is generally longer for foreign accounts receivable.
The Company's inventory increased approximately $19.3 million to $52.2 million
at May 27, 2000 compared to $32.9 million at the end of fiscal 1999. The
increase in inventory was primarily in work-in-process and raw materials as we
purchased materials to support the higher order activity and the anticipated
increase in fourth quarter sales.
As of May 27, 2000, the Company's current ratio of current assets to current
liabilities was 2.9 to 1.0 and working capital was $93.3 million.
The Company had acquisitions of property, plant and equipment of approximately
$6.4 million and $7.5 million for the first nine months of fiscal 2000 and 1999,
respectively. It is anticipated FSI will invest approximately $8.0 to $11.0
million in fiscal 2000 property, plant and equipment.*
The Company believes that with existing cash, cash equivalents, marketable
securities and internally generated funds, there will be sufficient funds to
meet FSI's current projected working capital and other cash requirements through
at least mid-year 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
stockholders.
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 must be adopted for
financial statements issued for fiscal years beginning after June 15, 2000. It
is anticipated that the Company will adopt SFAS No. 133 in fiscal 2001. The
adoption of SFAS No. 133 is not anticipated to have a material impact on FSI's
financial statements.*
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB 101
provides guidance on the recognition, presentation, and disclosure
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of revenue in financial statements of all public registrants. The semiconductor
capital equipment industry and the accounting profession are currently
evaluating various practical implementation considerations. Changes in our
revenue recognition policy resulting from the interpretation of SAB 101, to the
extent applicable, would be effective in the fourth quarter of fiscal 2001. At
the current time, it is not possible to determine the effect this change will
have on our financial statements. However, management believes that SAB 101, to
the extent applicable to us, will not affect the underlying strength or weakness
of our business operations as measured by the dollar value of our product
shipments and cash flows.*
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. In response, 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
- 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
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- Market and sell our products effectively
- Introduce our new products in a way that does not reduce sales of our
existing products
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, is having a negative effect on our gross profit margins.
This negative effect will decrease as we are able to increase our use of our
facilities.
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. In the first nine months of our current fiscal year,
our stock price has ranged from $6.19 to $23.63 per share. The potential 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.
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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
m-FSI Ltd., can also significantly affect our financial results. We make most of
our international sales through these affiliated distributors. We have a 20.4%
ownership interest in Metron and a 49% interest in m-FSI. Fiscal 1999 sales
through m-FSI 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 and m-FSI also distributes or sells 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
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
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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.
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BECAUSE OF THE NEED TO MEET AND COMPLY WITH NUMEROUS FOREIGN REGULATIONS AND
POLICIES, THE VOLATILITY 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 was 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
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.
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.
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BECAUSE CUSTOMERS CAN DECIDE TO REDUCE, DELAY OR CANCEL ORDERS OR CHOOSE TO DEAL
WITH OUR COMPETITORS, IF THEY DO 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.
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. We had prepared the closing statement,
but BOC raised certain objections to it. The parties have resolved those
objections and came to an agreement regarding a purchase price adjustment. At
the time of the divestiture, we recorded reserves for known liabilities. As a
result of the closing statement of net assets 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, our results of operations could be adversely impacted due to
additional costs associated with reserves.
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
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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. See also the
discussion on legal proceedings in Part II, Item 1.
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
The use of the Euro began on January 1, 1999 and will be phased-in through
January 1, 2002. We are experiencing little impact to date. 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 affiliate in Europe is
assessing their information technology systems to determine whether they will
accommodate the eventual elimination of the legacy currencies. If their
information technology systems are unable to do so, they would have to be
upgraded or replaced. 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 20.4% interest in Metron Technology (Metron) and a 49%
interest in m-FSI Ltd. Metron operates mainly in Europe, Asia Pacific and the
United States. m-FSI 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.
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, all of which mature within one year. As of May 27,
2000, 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.
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
$14.5 million. The fair value of Metron is subject to stock market fluctuations.
Based on the closing stock price of Metron on May 26, 2000, the fair value of
our investment in Metron, was approximately $28.2 million.
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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. Commercialization of
new products or further commercialization of FSI's current 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 later in 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 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 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.* CFM is asking for monetary damages and an injunction
against YieldUP's use of the products at issue. A loss, if any resulting from an
unfavorable adjudication, cannot presently be estimated.
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
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 two patents held by CFM; U.S. Patent Nos. 4,917,123 and 4,778,532.
YieldUP plans to vigorously defend its intellectual property rights against any
and all claims. 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. FSI believes 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. 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. The
associated costs may, and an unfavorable adjudication could, have a material
adverse impact on FSI.
On April 4, 2000 the United States District Court for the District of Delaware
granted YieldUP's motion for summary judgment that the `123 and `532 patents are
invalid. Certain of YieldUP's counterclaims are still pending and FSI
anticipates that they will be tried later this fiscal year. Once judgment is
entered based upon the District Court's granting YieldUP's summary judgment
motion, the District Court's order may be appealed by CFM.
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 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.
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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)
2.3 Asset Purchase Agreement dated as of June 9, 1999 between FSI International, Inc. and The BOC Group,
Inc. (16)
3.1 Restated Articles of Incorporation of the Company. (2)
3.2 Restated and Amended By-Laws. (filed herewith)
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)
4.4 Amendment dated March 9, 2000 to Rights Agreement dated May 22, 1997, as amended March 26, 1998 by
and between FSI International, Inc. and Harris Trust and Savings Bank as Rights Agent. (filed
herewith)
*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 m-FSI, Ltd. (8)
10.12 FSI Licensing Agreement dated as of August 14, 1991, between FSI International, Inc.
and m-FSI, Ltd. (8)
10.13 Amendment to FSI/Metron Distribution Agreement dated July 31, 1999 (18)
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)
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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 (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. (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)
*10.30 Employment Agreement entered into as of December 12, 1999 by and between FSI International, Inc. and
Donald S. Mitchell. (19)
27.0 Financial Data Schedule. (filed herewith)
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(1) Filed as an Exhibit to the Company's Registration Statement on Form S-4 (as
amended) dated March 21, 1996, SEC File No. 333-1509 and incorporated by
reference.
(2) Filed as an Exhibit to the Company's Report on Form 10-Q for the quarter
ended February 24, 1990, SEC File No. 0-17276, and incorporated by
reference.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
SEC File No. 33-25035, and incorporated by reference.
(4) Filed as an Exhibit to the Company's Report on Form 10-K 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.
(16) 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.
26
<PAGE> 27
(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.
(18) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
quarter ended November 27, 1999, SEC File No. 0-17276 and incorporated by
reference.
(19) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal
quarter ended February 26, 2000, SEC File No. 0-17276 and incorporated by
reference.
---------------------------
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter ended May27,
2000.
27
<PAGE> 28
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: July 10, 2000
By: /s/Patricia M. Hollister
--------------------------
Patricia M. Hollister
Chief Financial Officer
on behalf of the
Registrant and as
Principal Financial Officer
28
