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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended NOVEMBER 25, 2000
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-17276
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FSI INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
MINNESOTA 41-1223238
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
322 LAKE HAZELTINE DRIVE, CHASKA, MINNESOTA 55318
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(Address of principal executive offices) (Zip Code)
952-448-5440
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date:
COMMON STOCK, NO PAR VALUE - 25,443,831 SHARES OUTSTANDING AS OF DECEMBER 18,
2000
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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 25, 2000 and August 26, 2000 3
Consolidated Condensed Statements of Operations
for the quarters ended November 25, 2000 and
November 27, 1999 5
Consolidated Condensed Statements of Cash Flows for the
quarters ended November 25, 2000 and November 27, 1999 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 22
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 24
Item 2. Change in Securities 26
Item 3. Defaults upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURE 30
---------
</TABLE>
2
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PART I. Item 1. FINANCIAL INFORMATION
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
NOVEMBER 25, 2000 AND AUGUST 26, 2000
(unaudited)
ASSETS
<TABLE>
<CAPTION>
November 25, August 26,
2000 2000
------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $31,456,250 $34,637,974
Marketable securities 8,037,540 7,565,222
Trade accounts receivable, net of allowance for
doubtful accounts of $2,893,000 and
$3,229,000, respectively 27,428,343 25,054,782
Trade accounts receivable from affiliates 39,539,216 30,421,899
Inventories 55,291,778 50,809,885
Prepaid expenses and other current assets 4,548,913 4,703,050
------------------- -------------------
Total current assets 166,302,040 153,192,812
------------------- -------------------
Property, plant and equipment, at cost 123,579,608 123,509,375
Less accumulated depreciation and amortization (64,702,741) (64,019,948)
------------------- -------------------
58,876,867 59,489,427
Investment in affiliates 20,624,470 19,628,072
Intangibles 18,471,200 19,604,070
Deposits and other assets 4,246,017 4,023,087
------------------- -------------------
$268,520,594 $255,937,468
=================== ===================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
NOVEMBER 25, 2000 AND AUGUST 26, 2000
(continued)
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
November 25, August 26,
2000 2000
-------------------- -------------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ - $ 18,997
Trade accounts payable 21,259,690 18,974,502
Accrued expenses 24,632,314 24,902,722
Customer deposits 2,161,870 -
Deferred revenue 10,934,920 10,211,208
-------------------- -------------------
Total current liabilities 58,988,794 54,107,429
Long-term debt, less current maturities - 41,344
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, 25,425,269
and 25,375,332 shares at November 25, 2000
and August 26, 2000, respectively 190,444,675 190,253,307
Retained earnings 19,858,935 12,194,209
Accumulated other comprehensive income (loss) (771,810) (658,821)
-------------------- -------------------
Total stockholders' equity 209,531,800 201,788,695
-------------------- -------------------
$268,520,594 $255,937,468
==================== ===================
</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 25, 2000 AND NOVEMBER 27, 1999
(Unaudited)
<TABLE>
<CAPTION>
November 25, November 27,
2000 1999
------------------ -----------------
<S> <C> <C>
Sales (including sales to affiliates of
$34,230,000 and $11,930,000, respectively) $70,429,769 $30,906,761
Cost of goods sold 41,768,554 20,797,757
------------------ -----------------
Gross profit 28,661,215 10,109,004
Selling, general and administrative expenses 13,530,353 11,061,385
In-process research and development write-off - 6,370,000
Research and development expenses 9,301,913 8,384,811
------------------ -----------------
Operating income (loss) 5,828,949 (15,707,192)
Gain on sale of investment in affiliates - 5,409,744
Interest expense (22,015) (265,805)
Interest income 704,675 764,051
Other income (expense), net 43,730 48,329
------------------ -----------------
Income (loss) before income taxes 6,555,339 (9,750,873)
Income taxes - -
------------------ -----------------
Income (loss) before equity in earnings (losses) of affiliates 6,555,339 (9,750,873)
Equity in earnings (losses) of affiliates 1,109,387 (473,308)
------------------ -----------------
Net income (loss) from continuing operations 7,664,726 (10,224,181)
Discontinued operations:
Loss on sale of discontinued operations - (400,000)
------------------ -----------------
Net income (loss) $7,664,726 $ (10,624,181)
================== =================
Net income (loss) per common share - Basic
Continuing operations $0.30 ($0.43)
Discontinued operations - (0.01)
------------------ -----------------
Net income (loss) $0.30 ($0.44)
================== =================
Net income (loss) per common share - Diluted
Continuing operations $0.29 ($0.43)
Discontinued operations - (0.01)
------------------ -----------------
Net income (loss) $0.29 ($0.44)
================== =================
Weighted average common shares 25,407,383 23,955,747
Weighted average common and potential common shares 26,080,111 23,955,747
</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 25, 2000 AND NOVEMBER 27, 1999
(Unaudited)
<TABLE>
<CAPTION>
November 25, November 27,
2000 1999
------------------ -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $7,664,726 ($10,624,181)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss from discontinued operations - 400,000
Gain on sale of investment in affiliate - (5,409,744)
Write off of in-process research and development - 6,370,000
Depreciation 2,883,156 3,250,461
Amortization 1,259,885 716,495
Provision for allowance for doubtful accounts (336,186) 30,000
Provision for inventory reserves 809,000 432,136
Disposal of inventory (831,408) (490,491)
Equity in (earnings) losses of affiliates (1,109,387) 473,308
Changes in operating assets and liabilities:
Trade accounts receivable (11,154,692) (2,662,453)
Inventories (4,459,485) (6,039,497)
Refundable income taxes - 69,598
Prepaid expenses and other current assets 154,137 (1,523,537)
Trade accounts payable 2,285,188 (2,002,415)
Accrued expenses 406,281 2,031,852
Customer deposits 2,161,870 (174,646)
Deferred revenue 723,712 3,705,433
------------------ -----------------
Net cash provided by (used in)operating activities 456,797 (11,447,681)
------------------ -----------------
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 (2,947,285) (414,086)
Purchases of marketable securities (472,318) (1,267,161)
Maturities of marketable securities - 1,005,420
Increase in deposits and other assets (349,945) (95,890)
Proceeds from sale of equipment - 622,438
------------------ -----------------
Net cash (used in) provided by investing activities (3,769,548) 727,827
------------------ -----------------
FINANCING ACTIVITIES:
Principal payments on long-term debt (60,341) (30,299,265)
Net proceeds from issuance of common stock 191,368 354,821
------------------ -----------------
Net cash provided by (used in) financing activities 131,027 (29,944,444)
------------------ -----------------
Decrease in cash and cash equivalents (3,181,724) (40,664,298)
Cash and cash equivalents at beginning of period 34,637,974 62,326,355
------------------ -----------------
Cash and cash equivalents at end of period $31,456,250 $21,662,057
================== =================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying consolidated condensed financial statements have been
prepared by the Company without audit and reflect all adjustments
(consisting only of normal and recurring adjustments) which are, in the
opinion of management, necessary to present a fair statement of the
results for the interim periods presented. The statements have been
prepared in accordance with the regulations of the Securities and
Exchange Commission but omit certain information and footnote
disclosures necessary to present the statements in accordance with
generally accepted accounting principles. The results of operations for
the interim periods presented are not necessarily indicative of the
results to be expected for the full fiscal year. These consolidated
condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and footnotes thereto included in the
Company's Annual 10-K Report for the fiscal year ended August 26, 2000
previously filed with the Securities and Exchange Commission.
(2) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
November 25, August 26,
2000 2000
------------------- -------------------
<S> <C> <C>
Finished products $6,445,442 $6,702,005
Work-in-process 19,174,742 17,896,233
Subassemblies 6,641,183 3,880,125
Raw materials and purchased parts 23,030,411 22,331,522
------------------- -------------------
$55,291,778 $50,809,885
=================== ===================
</TABLE>
(3) SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------
November 25, November 27,
2000 1999
------------------- -------------------
<S> <C> <C>
Schedule of interest paid and income taxes paid
(refunds received):
Interest $22,015 $670,972
Income taxes $29,111 ($69,598)
</TABLE>
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(4) RECONCILIATION OF EARNINGS AND SHARE AMOUNTS USED IN EPS CALCULATION
<TABLE>
<CAPTION>
Basic Dilutive
Income (Loss) Income (Loss)
Per Share Effect of Per Share
------------- Dilutive -------------
Income (Loss) Securities* Income (Loss)
Available ----------- Available To
Net To Common Stock Common
FOR THE QUARTERS ENDED Income (Loss) Stockholders Options Stockholders
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
NOVEMBER 25, 2000
Income $7,664,726 $ 7,664,726 - $ 7,664,726
Shares - 25,407,383 672,728 26,080,111
Per share amount - $0.30 $0.01 $0.29
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)
</TABLE>
* The effect of stock options were not included in the calculation of dilutive
earnings per share for the quarter ended November 27, 1999 because their
inclusion would have been anti-dilutive.
(5) COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) pertains to revenues, expenses, gains
and losses that are not included in the net income (loss) but rather
are recorded directly in stockholders' equity. For quarters ended
November 25, 2000 and November 27, 1999 the only item of other
comprehensive income (loss) related to foreign currency translation
adjustment. For the quarters ended November 25, 2000 and November 27,
1999 the net income (loss), items of other comprehensive income (loss)
and comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
November 25, November 27,
2000 1999
-------------------- ---------------------
<S> <C> <C>
Net income (loss) $7,664,726 ($10,624,181)
Items of other comprehensive income (loss):
Foreign currency translation (112,989) 524,188
-------------------- ---------------------
Comprehensive income (loss) $7,551,737 ($10,099,993)
==================== =====================
</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.
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.
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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
During the quarter ended November 27, 1999, 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 of November 25, 2000 the Company owns approximately 2,690,000 shares
of Metron Technology, N.V. with a total cost basis of approximately
$15,419,000.
(8) REALIGNMENT COSTS
During the fourth quarter of fiscal 2000, the Company announced a
realignment program closing its Mountain View and Fremont, California
facilities and the discontinuance of production of the nickel
iron-plating product. The Company recorded realignment charges of
approximately $4,100,000 consisting of approximately $1,000,000 in
reduction in its workforce which included $500,000 related to the
assembled workforce intangible asset established at the time of the
YieldUP acquisition. Additionally the realignment charges also included
approximately $1,400,000 for consolidation of facilities, approximately
$1,300,000 for liabilities associated with the discontinuance of a
product and approximately $400,000 for additional inventory reserves.
During the fourth quarter of fiscal 2000, $100,000 of the realignment
cost was paid or utilized resulting in a balance of $4,000,000.
During the first quarter of fiscal 2001, $1,900,000 was paid or
utilized. The remaining balance of $2,100,000 to be paid or utilized
in future periods.
(9) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board 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. FSI
adopted SFAS No. 133 in the first quarter of fiscal 2001. The impact of
the adoption of SFAS No. 133 did not have a material impact on FSI's
financial statements. Equity in earnings of affiliates may be more
volatile due to their international operations.*
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 of revenue in financial statements of all
public registrants. The Company is 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.
Since most of the equipment the Company sells includes installation, it
is anticipated, under SAB 101, a portion of revenue recognition may be
deferred, particularly where the equipment is integrated with other
equipment. Management believes that SAB 101, to the extent applicable
to us, will not
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affect the underlying strength or weakness of our business operations
as measured by the dollar value of our product shipments and cash
flows.*
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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 2001 COMPARED WITH THE FIRST QUARTER OF FISCAL 2000.
The information in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, 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, both known and unknown. Factors that could
cause actual results to differ include overall industry and general economic
conditions; changes in customer capacity requirements and the demand for
semiconductors; global trade policies, worldwide political stability,
particularly in Asia; the demand and price for semiconductors; the Company's
successful execution of internal performance plans; cost reduction efforts; the
cyclical nature of the Company's business; volatility of the market for certain
products; the timing and success of current and future product and process
development programs; performance issues with key suppliers and subcontractors;
an ability to meet demand; the transition to 300 mm products; the success of the
Company's affiliated distributors; the level of new orders and order delays or
cancellations; legal proceedings and the timing and extent of any industry
upturn or downturn. In addition, readers are also directed to the Risk Factors
discussion found in the Company's Report on Form 10-K for the year ended August
26, 2000. Readers also are cautioned not to place undue reliance on these
forward-looking statements as actual results could differ materially. FSI
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 (*).
This discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and footnotes thereto appearing elsewhere in this report.
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 25, NOVEMBER 27,
FIRST QUARTER ENDED: 2000 1999
------------------- -------------------
<S> <C> <C>
Sales 100.0% 100.0%
Cost of goods sold 59.3 67.3
Gross profit 40.7 32.7
Selling, general and administrative 19.2 35.8
In-process research and development - 20.6
Research and development 13.2 27.1
Operating income (loss) 8.3 (50.8)
Other income (expense), net 1.0 19.3
Income (loss) before income taxes 9.3 (31.5)
Income taxes - -
Equity in earnings (losses) of affiliates 1.6 (1.6)
------------------- -------------------
Net income (loss) from continuing operations 10.9 (33.1)
Discontinued Operations:
Net loss from discontinued operations - (1.3)
------------------- -------------------
Net income (loss) 10.9% (34.4)%
=================== ===================
</TABLE>
SALES:
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Sales increased 128 percent to $70.4 million for the first quarter of fiscal
2001 as compared to $30.9 million for the first quarter of fiscal 2000. Both the
Microlithography and Surface Conditioning Divisions experienced year over year
sales increases, with the Surface Conditioning Division recording the largest
dollar increase. The Microlithography and Surface Conditioning division sales,
including their spare parts and support, each generally represent about half of
total 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 $39.4 million and $12.2 million for the first quarter
of fiscal 2001 and 2000, respectively, and represented approximately 56% and
40%, 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.
As a result of the orders that were pulled into the fourth quarter of fiscal
2000, due to our sales incentive plan design and because of, certain customer
requested pushouts and a few cancellations in the first quarter, our
book-to-bill ratio was slightly below 1.0 for the first quarter of 2001. Without
the pushouts and cancellations, our book to bill would have been nicely above
1.0 for the first quarter of 2001. FSI continues to maintain a strong backlog.
Based upon current quote activity, the promising 300 mm opportunities we are
pursuing and anticipated back-end-of-line application wins, we expect bookings
to be up sequentially in the second quarter of fiscal 2001.*
Sales in the second quarter of fiscal 2001 are expected to be up sequentially
and approximate $75 million as a result of an increase in the number of POLARIS
(R) systems shipping and the continued strong sales of our Surface Conditioning
products.* FSI expects annual sales to increase in fiscal 2001 as compared to
fiscal 2000*
GROSS PROFIT:
Gross profit as a percentage of sales for the first quarter of fiscal 2001 and
2000 was 40.7% and 32.7%, respectively. The improvement in margins is due to
higher utilization of manufacturing capacity, a strong mix of higher margin
products, and cost reduction efforts, offset by higher international sales which
generally carry a lower margin.
We expect gross margins to be in the range of 40.0 to 41.0 percent in the second
quarter of fiscal 2001, as a proportionately higher percentage of sales will be
from lower margin products.* Our goal is to achieve approximately a 42% gross
margin rate by the fourth quarter of fiscal 2001.*
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, competitive pricing pressures and utilization of
manufacturing capacity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Selling, general and administrative expenses were 19.2% of sales for the first
quarter of fiscal 2001 as compared to 35.8% of sales for the first quarter of
fiscal 2000. The dollar increase in the amount of SG&A primarily relates to the
increased sales, specifically customer service costs and incentive compensation.
We expect the dollar amount of second quarter SG&A expenses to increase
sequentially from the first quarter level but to decrease to below 19% of
sales.* As a percentage of sales, FSI expects SG&A expenses for fiscal 2001 to
be in a range of 18.5% to 19.0%.*
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<PAGE> 13
RESEARCH AND DEVELOPMENT EXPENSES:
Research and development expenses were $9.3 million for the first quarter of
fiscal 2001 as compared to $8.4 million for the same period in fiscal 2000. 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 R&D expenses to increase to approximately 14% of sales in the second
quarter of fiscal 2001.* We expect full year fiscal R&D expense as a percentage
of sales to decrease in 2001 as compared to 2000 to a range of 14.0% to 14.5%.*
We will continue to remain focused on critical technologies and strategically
invest R&D dollars in the immersion technology for Surface Conditioning
products, the CALYPSO(TM) spin-on dielectric product, 300mm products for both
resist processing and surface conditioning and other new applications.*
OTHER INCOME (EXPENSE), NET:
Other income (expense), net was approximately $726,000 for the first quarter of
fiscal 2001 as compared to $6.0 million for the first quarter of fiscal 2000.
The decrease is primarily 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 of fiscal 2000, offset by
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 2001, depending upon the level of investments and the
interest rates.*
INCOME TAX (BENEFIT) EXPENSE:
FSI recorded no tax benefit or expense related to its operating losses for the
first quarter of fiscal 2001 or fiscal 2000.
The Company's deferred tax assets on the balance sheet as of November 25, 2000
have been fully reserved for with a valuation allowance. We will not be
significantly reducing our valuation allowance in the future until we are
consistently profitable on a quarterly basis. The Company anticipates it will
record approximately $125,000 of tax expense for the remaining quarters of
fiscal 2001 as it utilizes the YieldUP net operating loss (NOL) carryforward.
Although the NOL asset was reserved for with a valuation allowance, the
reduction of the valuation allowance will be offset to goodwill.
Overall, the Company has net operating loss carryforwards for federal purposes
of approximately $23,800,000, which will begin to expire in fiscal year 2011 if
not utilized. Of this amount, approximately $17,700,000 is subject to Internal
Revenue Code Section 382 limitations on utilization. This limitation is
approximately $1,400,000 per year.
EQUITY IN EARNINGS (LOSSES) OF AFFILIATES:
The equity in earnings (losses) of affiliates was approximately $1.1 million of
income for the first quarter of fiscal 2001, compared to approximately $473,000
of losses for the first quarter of fiscal 2000. The improvement in 2001 is due
to improved operations at both affiliates.
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<PAGE> 14
We expect equity in earnings of affiliates to be in the $500,000 to $1.0 million
range in each quarter of fiscal 2001. Second quarter of fiscal 2001 equity in
earnings of affiliates is expected to be at the high end of the range.*
LIQUIDITY AND CAPITAL RESOURCES
FSI's cash and cash equivalents and marketable securities were approximately
$39.5 million as of November 25, 2000 a decrease of $2.7 million from the end of
fiscal 2000. The decrease in cash, cash equivalents, and marketable securities
is primarily due to $2.6 million of property, plant and equipment acquisitions.
FSI's accounts receivable increased by approximately 20.7%, or $11.5 million,
from the end of fiscal 2000. The majority of the increase is due to an increase
in accounts receivable from affiliates of $9.1 million. The increased level of
accounts receivables from affiliates was due to a higher percentage of
international sales which generally have a longer collection period.
FSI's inventory increased approximately $4.5 million to $55.3 million at
November 25, 2000 compared to $50.8 million at the end of fiscal 2000. The
increase in inventory was primarily in work-in process and raw materials due to
FSI's backlog.
As of November 25, 2000, FSI's current ratio of current assets to current
liabilities was 2.8 to 1.0 and working capital was $107.3 million.
FSI had acquisitions of property, plant and equipment of approximately $2.6
million and $414,000 for the first quarter of fiscal 2001 and fiscal 2000,
respectively. It is anticipated FSI will invest between $12 and $14 million in
fiscal 2001 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 2002.*
FSI believes that success in its industry requires substantial capital to
maintain the flexibility to take advantage of opportunities as they arise. One
of FSI's strategic objectives is, as market and business conditions warrant,
consider divestitures, investments or acquisitions of businesses, products or
technologies particularly those that are complementary to our surface
conditioning business.* 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 Financial Accounting Standards Board 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. FSI adopted SFAS No. 133 in the
first quarter of fiscal 2001. The impact of the adoption of SFAS No. 133 did not
have a material impact on FSI's financial statements. Equity in earnings of
affiliates may be more volatile due to their international operations.*
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 of revenue in
financial statements of all public registrants. The Company is evaluating
various practical implementation considerations. Changes in our revenue
recognition policy
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resulting from the interpretation of SAB 101, to the extent applicable, would
be effective in the fourth quarter of fiscal 2001. Since most of the equipment
the Company sells includes installation, it is anticipated, under SAB 101, a
portion of revenue recognition may be deferred, particularly where the equipment
is integrated with other equipment. 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 we operate the following
risk factors should be considered in addition to others described above. Our
business faces significant risks. These risks include those described below and
may include additional risks and uncertainties not presently known to us or that
we currently believe are immaterial. If any of the events or circumstances
described in the following risks occurs, our business, operating results or
financial condition could be materially adversely affected. These risks should
be read in conjunction with the other information set forth in this report.
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. Our business depends on the
amount that 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. When this occurs, some semiconductor manufacturers
experience lower demand and increased pricing pressure for their products. As a
result, they are likely to purchase 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
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- Implement our manufacturing and assembly processes efficiently and on time
- Make products that perform well for our customers
- Market and sell our products effectively; and
- 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
BECAUSE OF THE VOLATILITY OF OUR STOCK PRICE, THE ABILITY TO TRADE FSI SHARES
MAY BE ADVERSELY AFFECTED AND OUR ABILITY TO RAISE CAPITAL THROUGH FUTURE EQUITY
FINANCING 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 2000 fiscal year, for example, our stock price ranged from
$6.19 to $24.00 per share.
The trading price of our common shares is subject to wide fluctuations in
response to various factors, some of which are beyond our control, including
factors discussed elsewhere in this report and the following:
- Failure to meet the published expectations of securities analysts for a
given quarterly period
- Changes in financial estimates by securities analysts
- Press releases or announcements by or changes in market values of
comparable companies
- Stock market price and volume fluctuations, which is particularly common
among securities of high technology companies
- Stock market price and volume fluctuations attributable to inconsistent
trading volume levels
- Additions or departures of key personnel; and
- Involvement in litigation
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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.
In the past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
To date we have not been subject to such claims, however we may in the future be
the target of this type of litigation. Securities litigation may result in
substantial costs and divert management's attention and resources, which can
seriously harm our business.
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:
- The Timing of Significant Customer Orders and Customer Spending Patterns.
During industry downturns, our customers may ask us to delay or even cancel
the shipment of previously firm orders. Delays and cancellations may
adversely affect our operating results in any particular quarter if we are
unable to recognize revenue for particular sales in the quarter in which
those sales were expected.
- The Timing of New Product and Service Announcements By Us or Our
Competitors. New product announcements by us and our competitors could
cause our customers to delay a purchase or to decide to purchase products
of one of our competitors, which would adversely affect our revenue and,
therefore, our results of operations. New product announcements by others
may make it necessary for us to reduce prices on our products or offer more
service options, which could adversely impact operating margins and net
income.
- The Mix of Products Sold And The Market Acceptance of Our New Product
Lines. The mix of products we sell varies from period to period, and
because margins vary among or within different product lines, this can
adversely affect our results of operations. If we fail to sell our products
which generate higher margins, our average gross margins may be lower than
expected. If we fail to sell our new product lines, our revenue may be
lower than expected.
- General Global Economic Conditions or Economic Conditions in a Particular
Region. When economic conditions in a region or worldwide worsen, customers
may delay or cancel their orders. There may also be an increase in the time
it takes to collect from our customers or even outright defaults in
payments. This can negatively affect our cash flow and our results.
As a result of the factors listed above, our future operating results are
difficult to predict. Further, we base our current and future expense plans in
significant part on our expectations of our longer-term future revenue. As a
result, we expect our expense levels to be relatively fixed in the short-run. An
unanticipated decline in revenue for a particular quarter may disproportionately
affect our net income in that quarter. If our revenue is below our projections,
then our operating results will also be below expectations and, as we have in
the past, we may even have losses in the short-run. Any one of the factors
listed above, or a combination thereof, could adversely affect our quarterly
results of operations, and consequently may cause a decline in our share price.
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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. As of November
25, 2000 we have a 20.2% ownership interest in Metron and a 49% interest in
moFSI. Fiscal 2000 sales through moFSI were $11.1 million or 5.1% of our total
sales. Fiscal 2000 sales through Metron were $89.7 million or 40.8% of our total
sales. In addition, these affiliates also provide service and support to many of
our international customers. Metron and moFSI 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,
lost a significant customer, or otherwise became less financially viable.
We cannot guarantee that Metron or moFSI will continue to successfully
distribute our products or the products of other companies. The failure of
Metron or moFSI 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. Sales for moFSI are denominated in yen. As a result,
U.S. dollar/yen exchange rates may affect our equity interest in moFSI's
earnings.
Metron and moFSI 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 moFSI 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 moFSI 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 moFSI have not had any significant negative effect on
us. The adoption of SFAS 133 by Metron and moFSI may cause more volatility in
our equity in earnings of affiliates.*
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 2000, approximately
53% of our sales revenue derived from sales outside the United States. In fiscal
1999, this figure was 29%, and in fiscal 1998 it was 39%. These figures include
sales through Metron and moFSI, which accounted for 87% of international sales
in 2000, 92% in 1999 and 95% in 1998. 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:
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- 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; and
- 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 2000, approximately 25% 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.
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.
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If our significant customers, including IBM, Texas Instruments,
STMicroelectronics, 1st Silicon or Seagate Technology, reduce, delay, or cancel
orders, then our operating results could suffer. Our largest customers have
changed from year to year. Sales to FSI's top five customers accounted for
approximately 45%, 49% and 41% of total sales in fiscal 2000, 1999 and 1998,
respectively. STMicroelectronics represented 11% of revenues in fiscal 2000.
Texas Instruments accounted for 15% of revenues in fiscal 2000 and 13% of
revenues during fiscal 1999. IBM accounted for 24% of revenues during fiscal
1999 and 14% of revenues during fiscal 1998. National Semiconductor accounted
for 12% of revenues in fiscal 1998. We currently have no long-term sales
commitments with any of our customers. Instead, we generally make sales under
purchase orders. Our backlog at August 26, 2000 was $184 million of which 51%
was comprised of orders from three customers. As of August 26, 2000 we had
received approximately $48 million in orders from two customers that are
scheduled to ship in fiscal 2002 and 2003. All orders are subject to
cancellation or delay by the customer.
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. During the first quarter of 2000, FSI
continued to negotiate the final closing balance sheet for the CMD divestiture
to BOC. Upon the completion of those negotiations, FSI established an additional
$400,000 accrual 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. If we experience liabilities or charges in excess of established
reserves and it is ultimately determined that an adjustment in 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.
IT MAY BE DIFFICULT FOR US TO COMPETE WITH STRONGER COMPETITORS RESULTING FROM
INDUSTRY CONSOLIDATION.
In the past several years, we have seen a trend toward consolidation in the
microelectronics equipment industry We expect the trend toward consolidation to
continue as companies seek to strengthen or maintain their market positions in a
rapidly changing industry. We believe that industry consolidations may result in
competitors that are better able to compete. This could have a significant
negative impact on our business, operating results, and financial condition
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.
OUR EMPLOYMENT COSTS IN THE SHORT-TERM ARE TO A LARGE EXTENT FIXED, AND
THEREFORE ANY UNEXPECTED REVENUE SHORTFALL COULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
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Our operating expense levels are based in significant part on our head count,
which is generally driven by longer-term revenue goals. For a variety of
reasons, particularly the high cost and disruption of lay-offs and the costs of
recruiting and training, our head count in the short-term is, to a large extent,
fixed. Accordingly, we may be unable to reduce employment costs in a timely
manner to compensate for any unexpected revenue or gross margin shortfall, which
could have a material adverse effect on our operating results.
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.
OUR SALES CYCLE IS LONG AND UNPREDICTABLE, WHICH COULD REQUIRE US TO INCUR HIGH
SALES AND MARKETING EXPENSES WITH NO ASSURANCE THAT A SALE WILL RESULT.
Sales cycles for some of our products can run as long as 12 to 18 months. As a
result, we may not recognize revenue from efforts to sell particular products
for extended periods of time. We believe that the length of the sales cycle may
increase as some current and potential customers centralize purchasing decisions
into one decision-making entity. We expect this may intensify the evaluation
process and require us to make additional sales and marketing expenditures with
no assurance that a sale will result.
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future.
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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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.
Some of the statements under the captions "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this report are "forward-looking statements." These
statements involve known and unknown risks, uncertainties, and other factors
that may cause our, or our industry's, actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by the
forward-looking statements. These factors are listed under "Risk Factors' and
elsewhere in this report.
In some cases, you can identify forward-looking statements by terminology such
as "expects," "anticipates," "intends," "may," should," "plans," "believes,"
"seeks," "estimates," "could," would" or the negative of such terms or other
comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this report to conform these statements to actual results.
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. As of November 25, 2000
our investments in affiliates include a 20.2% 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 89%
of fiscal 2000 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, 100% of which mature within one year. As of
year-end, 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. The impact of a 1% change
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in short-term interest rates would be approximately $400,000 based on cash, cash
equivalents and marketable security balances as of August 26, 2000.
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
$15.4 million. The fair value of Metron is subject to stock market fluctuations.
Based on the closing stock price of Metron of $7.13 per share on November 24,
2000, the fair value of our investment in Metron, was approximately $19.2
million. The stock price of Metron ranged from $6.63 to $36.00 per share during
fiscal 2000 and from $7.13 to $13.75 per share during the first quarter of
fiscal 2001.
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We generate minor amounts of liquid and solid hazardous waste and use licensed
haulers and disposal facilities to ship and dispose of such waste. In the past,
we have received notice from state or federal enforcement agencies that we are a
potentially responsible party ("PRP") in connection with the investigation of
several hazardous waste disposal sites owned and operated by third parties. In
each matter, we have elected to participate in settlement offers made to all de
minimis parties with respect to such sites. The risk of being named a PRP is
that if any of the other PRP's are unable to contribute their proportionate
share of the liability, if any, associated with the site, those PRP's that are
able could be held financially responsible for the shortfall.
There has recently been substantial litigation regarding patent and other
intellectual property rights in the microelectronics industry. Commercialization
of new products or further commercialization of our current products could
provoke claims of infringement by third parties. In the future, litigation may
be necessary to enforce patents issued to us, to protect trade secrets or
know-how owned by us or to defend us against claimed infringement of the rights
of others and to determine the scope and validity of our proprietary rights. Any
such litigation could result in substantial costs and diversion of effort by us,
which by itself could have a material adverse impact on our financial condition
and operating results. Further, adverse determinations in such litigation could
result in our loss of proprietary rights, subject us to significant liabilities
to third parties, require us to seek licenses from third parties or prevent us
from manufacturing or selling one or more products, any of which could have a
material adverse effect on our financial condition and results of operations.
Certain of our product lines are intended for use with hazardous chemicals. As a
result, we are notified by our customers from time to time of incidents
involving our equipment that have resulted in a spill or release of a hazardous
chemical. In some cases it may be alleged that we or our equipment are at fault.
There can be no assurance that any future litigation resulting from such claims
would not have a material adverse effect on our business or financial results.
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
Semiconductor 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 claimed, 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.
In September and October of this year, certain of Mr. Hsu's claims were tried to
a jury in Alameda County Superior Court in Oakland, California. At the
conclusion of the trial, the jury made the following findings. The jury found
that SSI breached the Shareholder Agreement between it and Eric Hsu either by
allowing the other shareholders to purchase Mr. Hsu's shares or by allowing an
untimely purchase of Mr. Hsu's shares and that the damages that resulted were
$2.4 million. This finding may allow Mr. Hsu to seek recovery of certain of his
attorney's fees. In addition, each of the individual defendant shareholders
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was found liable for conversion and damages of $4.2 million were awarded.
Certain individual defendants were also found to have intentionally interfered
with Mr. Hsu's prospective economic advantage and damages of $3.2 million were
awarded. Finally, several individual defendants and SSI were found to have
violated certain provisions of the California Corporations Code and damages of
$2.4 million were awarded. The judge has not yet heard arguments regarding the
jury verdict but SSI believes the damages awards will be found to be duplicative
and not cumulative and that certain of these damages awards may be subject to
reduction, including for among other things, on account of the amount paid to
Mr. Hsu in connection with the purchase of his shares.
Certain equitable claims of Mr. Hsu still must be tried to and decided by the
court. For this reason, damages have not yet been allocated among the respective
defendants and final judgment has not yet been entered. Once judgment is
entered, the matter is appealable and SSI and the individual defendants are
likely to appeal the verdict on a variety of grounds. Thus, there is
considerable uncertainty as to the ultimate resolution of this matter and the
respective liability, if any, of the individual defendants or SSI.
We, on behalf of SSI, have made a claim with respect to the lawsuit under the
escrow created at the time of our acquisition of SSI. The escrow was established
to secure certain indemnification obligations of the former shareholders of SSI.
The escrow consists of an aggregate of 250,000 shares of our Common Stock paid
to the former shareholders of SSI as consideration in the acquisition. There is
no cash in the escrow. The former shareholders have agreed to hold FSI and SSI
harmless from any claim arising out of any securities transactions between SSI
and the shareholders or former shareholders of SSI. The indemnification
obligations of the individual SSI shareholders are capped at approximately $4.2
million in the aggregate. Any shares in the escrow returned to FSI to satisfy
any indemnification obligations will be valued at $12.125 per share, the
per-share price of FSI Common Stock at the time of the SSI acquisition.
Depending on the ultimate resolution of the case, it is possible that the escrow
and indemnity obligations of the individual shareholders may not be sufficient
to fully protect SSI against any judgment that may be entered in the matter.
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.
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
25
<PAGE> 26
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. CFM's motion for rehearing has been denied. On July 29, the issue of
whether CFM and its inventors had engaged in inequitable conduct in prosecuting
the `123 and `532 patents was tried before the court. In early September the
parties filed their briefs on the matter of inequitable conduct. The judge has
yet to rule on the issue. If the judge finds CFM engaged in inequitable conduct,
YieldUP will request the court to order CFM to pay YieldUP's attorneys fees in
defending this suit. 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
our business, there is no material litigation to which we are a party or of
which any of our 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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<PAGE> 27
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a)(3) Exhibits
* An asterisk next to a listed Exhibit indicates it is an executive compensation plan or arrangement
<S> <C>
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 and amended By-Laws. (3)
3.5 Articles of Amendment of Restated Articles of Incorporation (17)
4.1 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)
4.2 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)
4.3 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. (20)
*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 Patricia M. Hollister, Luke R. Komarek, Benno G. Sand, Benjamin J. Sloan, Arnie DeWitt,
Mark Ahmann and John Ely 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 (18)
</TABLE>
27
<PAGE> 28
<TABLE>
<S> <C>
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)
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)
10.22 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)
*10.26 Summary of Employment Arrangement between the Company and Don Mitchell dated December 12, 1999. (21)
10.27 Distribution Agreement between FSI International, Inc.'s. Surface Conditioning Division and Metron
Technology B.V. effective July 10, 2000. (21)
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)
</TABLE>
<TABLE>
<S> <C>
(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.
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C>
(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.
(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, 200, SEC
File No. 0-17276 and incorporated by reference.
(20) Filed as an Exhibit to the Company's Report on Form 10-Q for the fiscal quarter ended May 27, 2000, SEC File
No. 0-17276 and incorporated by reference.
(21) Filed as an Exhibit to the Company's Report on Form 10-K for the fiscal year ended August 26, 2000, SEC File
No. 0-17276, and incorporated by reference.
</TABLE>
----------------
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter ended
November 25, 2000.
29
<PAGE> 30
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 8, 2001
By: /s/Patricia M. Hollister
------------------------
Patricia M. Hollister,
Chief Financial Officer
on behalf of the
Registrant and as
Principal Financial and Accounting Officer
30
