e10vk
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One) |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended August 27, 2005 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission File Number 0-17276
FSI INTERNATIONAL, INC.
(Exact Name of Registrant as specified in its charter)
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MINNESOTA
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41-1223238 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
3455 LYMAN BOULEVARD, CHASKA, MINNESOTA 55318-3052
(Address of principal executive offices and Zip Code)
Registrants telephone number, including area code:
(952) 448-5440
Securities registered pursuant to Section 12(b) of the
Securities Exchange Act:
None
Securities registered pursuant to Section 12(g) of the
Securities Exchange Act:
Common Stock, no par value; Preferred Share Purchase
Rights
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. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o
Indicate by a check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the closing price on
February 25, 2005, the last business day of the
Registrants most recently completed second fiscal quarter,
as reported on the NASDAQ National Market System, was
approximately $135,944,000. Shares of common stock held by each
officer and director have been excluded from this computation in
that such persons may be deemed to be affiliates. This amount is
provided only for purposes of this report on Form 10-K and
does not represent an admission by the Registrant or any such
person as to the status of such person.
As of October 31, 2005, the Registrant had issued and
outstanding 29,883,000 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement for
the Annual Meeting of Shareholders to be held on
January 24, 2006 and to be filed within 120 days after
the Registrants fiscal year ended August 27, 2005,
are incorporated by reference into Part III of this
Form 10-K Report. (The Audit and Finance Committee Report,
the Compensation Committee Report and the stock performance
graph of the Registrants proxy statement are expressly not
incorporated by reference herein.)
TABLE OF CONTENTS
PART I
Cautionary Information Regarding Forward-Looking
Statements
Certain statements contained in this report on Form 10-K
constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as
amended, and are subject to the safe harbor created by that
statute. Typically we identify forward-looking statements by use
of an asterisk *. 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. Such
forward-looking statements are based upon current expectations
and beliefs and involve numerous risks and uncertainties, both
known and unknown, that could cause actual events or results to
differ materially from these forward-looking statements. For a
discussion of factors that could cause actual results to differ
materially from those described in this Form 10-K, see the
discussion of risk factors set forth below in Item 7 of
this report. Although we believe that the expectations reflected
in the forward-looking statements are reasonable as of the date
of this report, we cannot guarantee future results, levels of
activity, performance or achievements. We undertake no duty to
update any of the forward-looking statements after the date of
this report.
The Company
FSI International, Inc., a Minnesota corporation organized in
1973 (FSI), designs, manufactures, markets and
supports equipment used in the fabrication of microelectronics,
such as advanced semiconductor devices. In fiscal 2005, we
provided Surface Conditioning technology solutions and
POLARIS® system support services to worldwide manufacturers
of integrated circuits.
The Surface Conditioning (SC) business manufactures,
markets and supports equipment that uses wet, vapor, cryogenic
and other chemistry techniques to clean, strip or etch the
surfaces of silicon wafers. The POLARIS Systems and Services
(PSS) business provides key services enabling
customers to achieve a reasonable life for our legacy POLARIS
Microlithography systems. Microlithography uses light to
transfer a circuit pattern or image onto a silicon wafer. Our
PSS products are used in the microlithography process to deposit
light-sensitive material onto the surface of a wafer and also to
develop the image in the photosensitive material. These
businesses are supported by service groups that provide finance,
human resources, information services, sales and service,
marketing and other administrative functions.
In fiscal 2005, our products were directly sold and serviced by
us in North America, Europe, and the Asia Pacific region. In
addition, our products are sold and serviced in Japan through
our affiliate, mFSI, LTD. Prior to March 1,
2003, our products in Europe and Asia Pacific were distributed
primarily through Metron Technology, N.V. See
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations
for additional information regarding the termination of the
Metron Technology distribution agreements.
Industry Background
The complex process of fabricating semiconductor devices
involves several distinct phases that are repeated numerous
times. Because each production phase typically requires
different processing technologies and equipment, no one
semiconductor equipment supplier currently produces all types of
tools needed to equip an entire state-of-the-art fabrication
facility. Instead, semiconductor device manufacturers typically
equip their facilities by combining manufacturing equipment
produced by a number of suppliers. Each set of equipment
performs specific functions in the manufacturing process.
Generally, increasing demand for computer chips, new computer
chip designs, new materials of fabrication and new substrate
(the underlying material upon which a semiconductor device or
integrated circuit is formed) types both size and
composition drives demand for new microelectronics
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manufacturing equipment and processes. Industries that use
microelectronics increasingly demand higher performance devices
from manufacturers. Over the last decade, device manufacturers
have reduced the feature size and substantially increased the
functionality of individual devices through a number of
technological advances. Many of these advancements are made
possible using the equipment and technologies FSI provides to
the semiconductor industry.
Our business depends upon the microelectronics
manufacturers capital equipment expenditures.
Manufacturers expenditures in turn depend on the current
and anticipated market demand for products that use
microelectronic devices. The microelectronics industry has been
cyclical in nature and has experienced periodic downturns.
Microelectronics manufacturers require equipment suppliers to
take an increasingly active role in meeting the
manufacturers technology development and capital
productivity requirements. Equipment suppliers satisfy this
requirement by developing and supporting products and processes
required to address the new trends in microelectronics
manufacturing. These trends include development of smaller
geometries, transition to new materials, migration to
300 millimeter (mm) wafers and wafer level
packaging.
A number of semiconductor device manufacturers began the
transition from 200 to 300mm diameter wafers in calendar 2000.
Based upon a report published in September 2005 by the Gartner
Group, a leading industry market research firm, the percentages
of investment in semiconductor process equipment allocated by
semiconductor manufacturers to 300mm capable products were
approximately 26% in calendar 2001, 40% in calendar 2002, 52% in
calendar 2003 and 57% in calendar 2004. Semiconductor
manufacturers investment in 300mm capable products is
forecasted to be approximately 73% of their total equipment
spending in calendar 2005 and 80% of their total equipment
spending in calendar 2006.*
The semiconductor equipment market has experienced a decline
from calendar 2000 through 2004. According to the Gartner Group,
purchases of semiconductor equipment by microelectronics
manufacturers decreased 19% from $47 billion in calendar
2000 to $38 billion in calendar 2004. Based upon the most
recent Gartner Group forecast, the semiconductor equipment
industry is expected to further decline 12% in calendar 2005.*
Products
The mix of products we sell has varied significantly from year
to year. The following table sets forth, for the periods
indicated, the amount of revenues and approximate percentages of
our total revenues by our principal product lines:
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Fiscal Year Ended | |
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August 27, | |
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August 28, | |
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August 30, | |
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2005 | |
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(Dollars in thousands) | |
Surface conditioning products
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$ |
51,857 |
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60.0 |
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56,579 |
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49.5 |
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46,594 |
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52.5 |
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POLARIS® Systems and Services products
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8,764 |
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10.2 |
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16,521 |
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14.4 |
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20,173 |
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22.7 |
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Spare parts and service
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25,749 |
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29.8 |
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41,304 |
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36.1 |
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22,059 |
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24.8 |
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$ |
86,370 |
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100.0 |
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114,404 |
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100.0 |
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88,826 |
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100.0 |
% |
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Surface Conditioning Products
Our surface conditioning products perform etching and cleaning
operations for:
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front-end-of-line (FEOL) fabrication steps, where
integrated circuits or transistors are formed in and on the
substrate during the manufacturing process; |
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back-end-of-line (BEOL) fabrication steps, where
metal wiring levels are formed on the surface of the wafer and
are connected to the transistors; and |
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wafer-level packaging surface preparation, including cleaning,
etching and stripping functions necessary to fabricate solder
bumps or other terminal structures needed to connect the chip to
the circuit board. |
In todays most advanced integrated circuit
(IC) manufacturing, there are over 100 surface
preparation steps. Many factors are considered when designing
and optimizing a surface preparation process to meet a
particular application need. These factors can include:
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cleaning and etching goals, which are related to the removal of
wafer contaminates and films; |
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selectivity goals, which are related to leaving desired films
and structures intact; and |
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manufacturing goals, which are related to cost, productivity,
safety and environmental concerns. |
The priority of each factor in determining the final surface
preparation process can vary widely across the approximately 100
different steps and depends on the contaminants that need to be
removed, the materials that need to be preserved on the wafer
surface, the dimensions of patterned features and overall
process integration. This wide variety of requirements and
priorities indicates there is no one surface preparation
technology that can provide the optimal process for each surface
preparation requirement. This is why FSI offers a range of
technologies that allow us, with our customers, to select and
optimize the best solution for each step. These technologies
include batch spray, batch immersion and single wafer cryogenic
aerosol.
Spray Processing Systems. Our spray processing
systems, which include the MERCURY® and
ZETA® Spray Cleaning Systems, are sophisticated
surface conditioning systems that remove unwanted films and
contaminations from the surface of semiconductor wafers at
various stages in the microelectronic device fabrication
process. Multiple cassettes that contain up to 26 wafers each
are placed onto a turntable inside the systems process
chamber. As the turntable rotates, dispense ports apply a
chemical spray to the wafers surfaces to dissolve and
remove the undesirable films and contaminants. After chemical
application, deionized water (ultrapure water that has been
treated and is used to remove all possible contaminants from the
surface of a silicon wafer such as ions, bacteria, silica,
particles and dissolved metals) is sprayed on the wafer surfaces
to rinse away the chemicals. Multiple chemical and rinse steps
may be employed depending on the customers specific
application. The process sequence is completed with a dry step:
a flow of nitrogen into the chamber dries the wafers and the
chamber. Our sophisticated control system and chemical mixing
manifold allows the user to define, control and monitor a
variety of chemical mixtures, temperatures and sequences. This
enables the user to rapidly develop new processes and utilize
the systems for multiple applications.
Our batch spray systems achieve state-of-the-art performance and
are well suited for applications that require removal of high
levels of contamination. Through efficient use of chemicals and
water along with small footprints, customers realize operational
costs that can be lower than competing systems.
The MERCURY® System is a semi-automated batch spray
processor designed for wafer sizes up to 200mm in diameter and
process technologies through the 130 nanometers (nm)
node. The system offers the benefits of low capital cost and low
cost of ownership in a small footprint. The MERCURY System
ranges in price from $400,000 to $1,100,000 depending on
features.
The fully-automated ZETA® System, a batch spray
processor, is currently available in configurations for both 200
and 300mm wafers. The advanced process controls, process
capability and automation are ideal for leading technology
nodes, particularly 130nm and below. Our ZETA products provide a
reliable, automated environment to move wafers to and from the
process chamber. This tools eight-chemical flow system
allows for a wide range of chemical blend ratios. The system is
also available in a semi-automated configuration capable of
processing 200mm or 150mm wafers. Our ZETA systems range in
price from $1,000,000 to $2,800,000.
Subsequent generations of the ZETA System, have increased
capabilities with the addition of new tool packages and
processes. The
FlashCleantm
Advantage package, consisting of hardware, software and process
advancements, enhances system productivity and performance by
shortening process time and
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increasing throughput. The
PlatNiStriptm
process for nickel platinum films is designed to help our
customers implement salicide formation at the 65-nm technology
node. The
EcoBlendtm
dilute acid process is a cost-effective and environmentally
friendly method to remove post-ash residues for aluminum and
tungsten interconnect applications.
To address our customers desire for more environmentally
benign processes, we supply an ozonated water generation module
for use with our MAGELLAN, ZETA and MERCURY Systems. The use of
ozone (a form of oxygen having three atoms to the molecule) in
semiconductor processing is attractive because it uses only
oxygen and water in the place of sulfuric acid and hydrogen
peroxide mixtures and lowers costs by reducing chemical
consumption, water usage and waste treatment.
CryoKinetic Processing Systems. Our ANTARES
CryoKinetic (an energy transfer process used to remove
non-chemically bonded particles from the surface of a
microelectronic device) Cleaning System is a fully automated,
single-wafer cleaning platform designed for 200 and 300mm
wafers. These systems offer a field-proven history of removing
surface particle defects and improving customer yields. The
ANTARES system cleans using an all-dry non-chemically reactive
method of removing defects from all surface types from the
beginning to the end of the device manufacturing process. Of
particular benefit to our customers is its inherent
compatibility with new device materials and increasingly smaller
device features.
CryoKinetic clean technology allows our customers to insert
particle removal steps in the manufacturing line where previous
or traditional wet cleaning and scrubber methods have been
phased out due to their incompatibility with new materials and
were found to cause watermark residue and surface charge
defects. Implementing the CryoKinetic clean allows our customers
to recover yield that would normally be lost by traditional
approaches.
The ANTARES system is also available with the
AspectCleantm
process. The AspectClean process is a method of removing
particle defects from front-end-of-line (FEOL) and
back-end-of-line (BEOL) patterned structures without
altering film properties or physically damaging the structures,
which is becoming more critical in 65nm development programs and
90nm production ramps. Traditional methods of defect reduction
have been phased out due to damage issues, where as this process
is demonstrating high removal efficiency on sensitive narrow
structures without causing damage.
We believe the technical capabilities of the ANTARES system are
extendable well beyond current technology nodes and will result
in increased customer acceptance due to the limitations of
aforementioned scrubbing methods.* ANTARES systems range in
price from $1,200,000 to $2,200,000.
Vapor Processing Systems. We are discontinuing the
EXCALIBUR product line at the end of calendar year 2005.
Changing market needs created a situation where the specialized
use of the EXCALIBUR system was no longer required. FSI will
retain the extensive portfolio of intellectual property patents
as it relates to this technology.
Immersion Processing Systems. Immersion cleaning
systems are used to clean silicon wafers by immersing wafers in
multiple tanks filled with process chemicals. These systems
enable the implementation of high performance isopropyl alcohol
(IPA) assisted drying to meet the critical cleaning
requirements for 90, 65, and 45nm technology nodes. Our MAGELLAN
Immersion Cleaning System is a fully automated immersion
cleaning system designed for either 200 or 300mm wafers at
advanced technology nodes and is capable of multiple mainstream
cleans, including critical clean, resist strip and etch. It is
differentiated from the competition through its process
performance, flexibility, extendibility, and rapid cycle time in
a footprint that is up to 40% smaller than the leading
competition when configured for specific applications. The tool
incorporates a portfolio of exclusive intellectual property,
including our Surface Tension Gradient (STG®)
rinse/dry technology,
SymFlowtm
etch technology, ozone oxide re-growth technology, and
narrow-gate-compatible
MegaLenstm
Acoustic Diffuser megasonic cleaning technology. The MAGELLAN
System is qualified for several processes including FEOL
critical clean, FEOL photoresist strip (an etch-resistant
material used for transferring an image to the surface of a
silicon wafer) and post-ash clean, oxide etch and nitride etch.
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In 2005, we expanded the MAGELLANs maximum process module
configuration from five to seven, thereby enabling optimal
configurations for integrated cleaning and multi-function
cleaning opportunities. In addition, we made numerous product
enhancements to enable tool transition from research and
development to high volume manufacturing. The MAGELLAN System
ranges in price from $2,000,000 to $5,000,000.
YieldUP Rinse Dry and Immersion Systems. An
end-of-life plan for our YieldUP systems has been initiated. See
Item 3 Legal Proceedings for
additional information on our ability to sell YieldUP
2100 modules. All YieldUP 2100 rinsing and drying modules
will be shipped by February 18, 2006. The last shipments of
YieldUP 2000 and 4000 stand-alone systems will be June 1
and July 31, 2006, respectively. YieldUP modules and
systems range in price from $170,000 to $700,000.
PSS Products
Our PSS products are microlithography products used to deposit
photoresist, which is light-sensitive, etch-resistant material
used to transfer an image to the surface of a silicon wafer and
develop the photosensitive material. Following our announcement
on March 17, 2003 to exit the resist process equipment
market, we discontinued our active manufacture and sale of these
products and established the PSS business to provide key support
services to our global POLARIS customer base. PSS offers:
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software maintenance, process applications support, engineering
and equipment maintenance. |
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customers robot refurbishment, system level and standard
upgrades, systems operations and maintenance training and spare
parts. |
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POLARIS Refresh
Programtm,
in which customers can purchase certified POLARIS clusters (an
integrated environmentally isolated manufacturing system
consisting of process, transport, and cassette modules
mechanically linked together) made of both new and pre-owned,
re-qualified modules. This allows customers to add capacity for
a lower capital investment. The ratio of new to pre-owned
modules is based on customer expectations and the availability
of used modules. These systems are able to accommodate a variety
of processes and can be purchased in a new configuration, or a
system can be reconfigured and upgraded to match installed
configurations. |
Spare Parts and Service
We offer system upgrade packages, spare part kits, software
maintenance licenses, individual spare part components and
support services that provide product and process enhancements
to extend the life of previously purchased and installed surface
conditioning and microlithography equipment. Our customer
service and process engineers assist and train customers
worldwide to perform preventive maintenance on and to service
our equipment. In addition, our process engineering groups
develop process applications to expand the capabilities of our
equipment. These upgrade and spare part packages and support
service programs enable our worldwide customers to realize a
higher return on their capital investment.
We sell a variety of process, service and maintenance programs.
A number of customers have purchased maintenance contracts in
which our service employees work at the customers facility
to provide process service and maintenance support for our
equipment.
Backlog and Seasonality
Our backlog consists of orders with delivery dates within the
next 12 months for which a customers purchase order
has been received. Our backlog at fiscal 2005 year-end was
$19.3 million, at fiscal 2004 year-end was
$20.1 million and at fiscal 2003 year-end was
$25.6 million. Approximately 53% of our backlog at fiscal
2005 year-end and 52% of our backlog at fiscal
2004 year-end was comprised of orders from two customers
for each year. Seagate Technology and Texas Instruments were the
top two customers in backlog at the end of fiscal 2005. Samsung
and Intel were the top two customers in backlog at the end of
fiscal 2004. The loss of any of these customers could have a
material adverse effect on our operations.
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All orders are subject to cancellation by the customer and in
some cases a penalty provision could apply to a cancellation.
In fiscal 2005, purchase orders aggregating approximately
$3.1 million, constituting 3.6% of sales, were canceled and
not rescheduled. In fiscal 2004, purchase orders aggregating
approximately $1.1 million, constituting 0.6% of sales,
were canceled and not rescheduled. Because of the timing and
relative size of certain orders received by us and possible
changes in delivery schedules and order cancellations, our
backlog can vary from time to time so that backlog as of any
particular date is not necessarily indicative of actual sales
for any subsequent period. Our business is not seasonal to any
significant extent. See Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations for additional sales
and backlog information.
Research and Development
We believe that our future success depends in large part on our
ability to enhance and advance, in collaboration with our
customers and other equipment and materials manufacturers, our
existing SC product lines to meet the changing needs of
microelectronics manufacturers. We believe that industry trends,
such as the use of smaller circuit geometries, increased use of
larger substrates and manufacturers increased desire for
integrated processing equipment, will make highly automated and
integrated systems, including single substrate processing
systems, more important to customers. For assistance in our
development efforts, we maintain relationships with our
customers and others, who help identify and analyze industry
trends and our development activities to meet the
industrys advanced technology needs.
Our current research and development programs are focused on
creating new processes and technologies for cleaning substrates
without damaging ever smaller patterned features being used for
the most advanced IC devices. We are also conducting programs to
increase process control and flexibility through monitoring and
software management systems and process automation, robotics
automation in the cleanroom, and integration of our product
offerings with other suppliers products. Each of these
programs involves collaboration with customers and other
equipment manufacturers to ensure proper machine configuration
and process development to meet industry requirements.
We maintain an 8,000-square-foot, state-of-the-art demonstration
and process development laboratory for our Surface Conditioning
business in our Chaska, Minnesota facility. In addition, our
Japanese affiliate, mFSI, LTD, maintains a demonstration
laboratory in its Okayama, Japan facility.
Expenditures for research and development, which are expensed as
incurred, during fiscal 2005 were approximately
$22.1 million, representing 25.6% of total sales.
Expenditures for research and development during fiscal 2004
were approximately $22.5 million, representing 19.6% of
total sales, and expenditures for research and development
during fiscal 2003 were approximately $31.1 million,
representing 35.0% of total sales. The fiscal 2003 to fiscal
2004 decline relates primarily to our decision to exit the
resist processing market in March 2003.
We expect to continue to make substantial investments in
research and development.* We also recognize the importance of
managing product transitions successfully, as the introduction
of new products could adversely affect sales of existing
products.
Marketing, Sales and Support
We market our products worldwide to manufacturers of
microelectronic devices. Our marketing and sales efforts are
focused on building long-term collaborative relationships with
our customers. These efforts are supported by marketing, sales,
and service personnel, along with applications engineers. These
worldwide FSI teams work collaboratively with individual IC
manufacturers, in FSI process laboratories and at customer
sites, to transfer FSI developed product and process
innovations, integrate them into customer process flows and
optimize them according to customer priorities.
On October 9, 2002, we announced the early termination of
our distribution agreements with Metron Technology, effective
March 1, 2003. This change occurred as a result of our
customers asking us to
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strengthen our presence in these regions and to bring them the
full capabilities of our organization. We worked closely with
Metron Technology to ensure a successful transition of sales,
applications, service and spares logistical functions.
As of the end of fiscal 2005, our sales effort was supported by
approximately 125 employees and contractors engaged in customer
service and support. During fiscal 2005, our products were
directly sold and serviced by us in North America, Europe and
the Asia Pacific region, and through our joint venture,
mFSI, LTD, in Japan.
We believe as a result of our direct selling and service
initiative, we are experiencing broader product adoption in
Europe and the Asia Pacific regions.* By providing a full
portfolio of direct support services, we have developed stronger
customer relationships and our customers are beginning to show
greater interest in expanding beyond their use of FSI
traditional spray cleaning technologies to include new BEOL and
wafer bumping applications for spray, as well as employing our
advanced immersion and CryoKinetic technologies. Our increased
responsiveness on the local level has resulted in more
productive collaborative efforts and joint development programs
with IC makers throughout the world for 90nm production and 65
and 45nm development projects.
International sales, in Europe and Asia accounted for
approximately 64% of total sales in fiscal 2005, 47% of total
sales in fiscal 2004, and 38% of total sales in fiscal 2003.
On August 16, 2004, Metron Technology entered into a Stock
and Asset Purchase Agreement (Purchase Agreement)
with Applied Materials, Inc. (Applied). On
December 14, 2004, Applied, pursuant to the Purchase
Agreement, acquired the worldwide operating subsidiaries and
business of Metron Technology. Applied paid approximately
$84,567,000 in cash to Metron Technology upon closing on
December 14, 2004. In connection with the consummation of
the asset sale to Applied, Metron Technology changed its name to
Nortem N.V. (Nortem) and began a liquidation
process. Nortem was delisted from the NASDAQ on April 15,
2005 and began trading over-the-counter. Shareholders of Nortem
received two liquidating distributions. The initial distribution
was made on March 14, 2005 at $3.75 per share. We
received $5.6 million and recorded a gain of
$4.2 million in the third quarter of fiscal 2005. In June
2005, we received the final distribution from Nortem, net of
certain Dutch withholding taxes. A portion of the final
distribution was deemed a dividend, and that portion was subject
to withholding tax. The net distribution was approximately
$1.02 per share. We received $1.5 million and recorded
a gain of approximately $1.6 million in the fourth quarter
of fiscal 2005 related to this final distribution. We also
recorded a receivable for approximately $0.1 million for a
refund of a portion of the Dutch withholding taxes.
We own a 49% equity interest in mFSI, LTD, a Japanese
joint venture company formed in 1991 with MBK Project Holdings
LTD. (formerly Mitsui & Co., LTD.) and its wholly owned
subsidiary, Chlorine Engineers Corp., LTD. (collectively,
Mitsui). Mitsui owns a 51% equity interest in
mFSI. In connection with its formation, we and Mitsui
granted mFSI certain product and technology licenses and
product distribution rights pursuant to a license agreement and
a distribution agreement. mFSI also distributes products
of other manufacturers and its own internally developed
products. In September 2004, mFSI granted FSI exclusive
rights to distribute certain of mFSIs products
outside of Japan and an exclusive license covering the patents
and related technology with regard to certain products for use
outside of Japan.
In fiscal year 2003, the majority of our international sales
were made to Metron Technology or mFSI for resale to end
users of our products. In addition to Metron Technology (prior
to the termination of our distribution agreements) and
mFSI having a direct presence in Europe and Asia, we
augmented their support to customers with sales and service
personnel located in the regions. In some cases, we also sold
directly to an international customer, in which case we paid a
commission to our affiliated distributor in connection with the
sale. When commissions are taken into account, the international
sales to our affiliates are on terms generally no less favorable
to us than international sales by us directly to non-affiliates.
8
Manufacturing, Raw Materials and Suppliers
We maintain manufacturing facilities in Chaska, Minnesota and
Allen, Texas. We typically assemble our products and systems
from components and prefabricated parts manufactured and
supplied by others, such as process controllers, robots,
integrated circuits, power supplies, stainless steel pressure
vessels, chamber bowls, valves and relays. Certain of the items
manufactured by others are made to our specifications.
Typically, final assembly and systems tests are performed by our
manufacturing personnel. Quality control is maintained through
quality assurance programs with suppliers, incoming inspection
of components, in-process inspection during equipment assembly,
and final inspection and operation of manufactured equipment
prior to shipment. We have a company-wide quality program in
place and received ISO 9001 certification in 1994 and ISO
9000:2000 certification in 2003.
Certain of the components and subassemblies included in our
products are obtained from a single supplier or a limited group
of suppliers to ensure overall quality and delivery timeliness.
Although we seek to reduce dependence on sole and limited-source
suppliers, disruption or termination of certain of these sources
could have a temporary adverse effect on our operations. We
believe that alternative sources could be obtained and qualified
to supply these products, if necessary, but that production
delays would likely occur in some cases.* Further, a prolonged
inability to obtain certain components could have an adverse
effect on our operating results, delay scheduled deliveries and
result in damage to customer relationships.
Competition
The semiconductor equipment industry is very competitive and
marked by ever advancing technology challenges. Significant
competitive factors in the equipment market include system
price, which encompasses total cost of ownership, quality,
process performance, reliability, flexibility, extendibility,
integration with other products, process or tool of record, and
customer support.
Many of our established competitors have greater financial,
engineering, research, development, manufacturing, marketing,
service and support resources. To remain competitive, we must
invest in research and development, marketing, customer service
and support programs, and must manage our operating expenses.
There can be no assurance that we will have sufficient resources
to continue to make these investments or that our products will
continue to be viewed as competitive as a result of
technological advances by existing or new competitors or due to
changes in semiconductor technology.
Our surface conditioning products compete with, among others,
DaiNippon Screen Manufacturing Co. Ltd., Kaijo Denki,
S.E.S. Co., Ltd., Semitool, Inc., The SEZ Group, AKrion and
Tokyo Electron Ltd. Our PSS organization competes with various
small equipment refurbishment, equipment maintenance and spare
parts providers.
Customers
We sell products from one or more of our product lines to most
major microelectronics manufacturers. We have an extensive
history of sales to several of the largest integrated circuit
manufacturers and we have over 100 active customers worldwide.
Texas Instruments accounted for approximately 14% of our total
sales in fiscal 2005, 16% of our total sales in fiscal 2004 and
24% of our total sales in fiscal 2003. Samsung Electronics
accounted for approximately 11% of our total sales in fiscal
2005 and less than 10% of our total sales in both fiscal 2004
and fiscal 2003. IBM accounted for less than 10% of our total
sales in fiscal 2005 and fiscal 2004 and approximately 14% of
our total sales in fiscal 2003. The loss of any of these
customers could have a material adverse effect on our operations.
We have experienced, and expect to continue to experience,
fluctuations in our customer mix.* The timing of an order for
our equipment is primarily dependent upon the customers
expansion program, replacement needs, or requirements to improve
productivity and yields. Consequently, a customer who places
significant orders in one year will not necessarily place
significant orders in subsequent years.
9
Sales to mFSI LTD, our international distributor,
accounted for approximately 5% of our total sales in fiscal
2005. Sales to mFSI LTD and Metron Technology, our
international distributors, accounted for approximately 13% of
our total sales in fiscal 2004, and 17% of our total sales in
fiscal 2003. Usually these systems are purchased for resale to
device manufacturers. On October 9, 2002, we announced the
termination of our distribution agreements with Metron
Technology effective March 1, 2003. See
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations
for additional information regarding the termination of the
Metron Technology distribution agreements.
Under the mFSI distribution agreement, mFSI has
exclusive distribution rights with respect to certain of our
products in Japan. A licensing agreement allows mFSI to
manufacture certain of our products. The agreements may be
terminated only upon the occurrence of certain events or
conditions or as otherwise mutually agreed. There is no
obligation under the distribution agreement for mFSI to
purchase a specified amount or percentage of our products. In
September 2004, mFSI granted FSI exclusive rights to
distribute certain products outside of Japan and FSI was granted
an exclusive license covering the patents and related technology
with regard to certain mFSI products for use outside of
Japan.
Patents, Trademarks and Intellectual Property
Our success depends upon a variety of factors, including
proprietary technology. It is important to protect our
technology by obtaining and enforcing patents. Consequently, we
have an active program to file patent applications in the United
States and other countries on inventions we consider
significant. We also possess other proprietary intellectual
property, including trademarks, know-how, trade secrets and
copyrights. We also protect our proprietary information through
confidentiality agreements with our employees and with third
parties.
We have a number of patents in the United States and other
countries, and additional applications are pending. These
patents may be challenged, invalidated or circumvented, or may
not provide any competitive advantages to us. Pending
applications may not result in patents and the claims allowed in
future patents may not be sufficiently broad to protect our
technology. The laws of some foreign countries may not permit
the protection of our proprietary rights to the same extent as
under the laws of the United States. Although we believe
that protection afforded by our patents, patent applications,
and other intellectual property rights has value, because of
rapidly changing technology, our future success is dependent on
our employees skill sets.
In the normal course of business, we from time to time receive
and make inquiries about possible patent infringement. In
dealing with such inquiries, it may be necessary or useful for
us to obtain or grant licenses or other rights. However, there
can be no assurance that such license rights will be available
to us on commercially reasonable terms, or at all. The inability
to obtain certain license or other rights, or to obtain such
licenses or rights on favorable terms, or the need to engage in
litigation could have a material adverse effect on us. See also
Item 3 Legal Proceedings for a
discussion of litigation.
Our microlithography POLARIS Cluster was offered by us under a
non-exclusive license from Texas Instruments. We have converted
the license to a fully paid-up, worldwide license to sell and
manufacture the POLARIS Cluster. We also have the non-exclusive
right to manufacture and sell related Texas Instruments modules.
The license agreement continues until terminated. It may be
terminated by either party upon a breach by the other party, and
the failure to cure, in accordance with the terms of the
agreement.
Our Surface Conditioning ANTARES CX Cleaning System is offered
by us under license agreements from IBM. The licenses require
certain minimum royalties and system-based royalties. Royalties
are based on the royalty portion revenues of
licensed equipment that excludes amounts for freight, taxes,
customers duties, insurance, discounts, and certain
equipment not manufactured by us.
We have approximately 95 U.S. patents. Expiration dates
range from April 2006 to December 2023.
10
Employees
As of August 27, 2005, we had approximately 486 full and
part-time employees. Competition for highly skilled employees is
intense. We believe that a great part of our future success
depends upon our continued ability to retain and attract
qualified employees. We are not subject to any collective
bargaining agreement and have never been subject to a work
stoppage. We believe we have good relations with our employees.
Environmental Matters
In January 2003, we received our certificate of registration
from BSI, Inc. for its ISO 14001 environmental management
system. ISO 14001 is an internationally recognized environmental
management standard that empowers organizations to address the
environmental impact of activities, services and processes. The
standard then provides a framework for enterprises to take steps
to identify issues significant to them and implement
environmental management programs to achieve improved
performance. Registration with ISO 14001 allows companies to
reaffirm that environmental processes are essential components
of their business strategy. We have a long history of
environmentally-friendly practices and research and development
programs that actively seek out ways to operate more
environmentally efficient. We registered with ISO 14001 to
emphasize our ongoing commitment to the preservation and
protection of the environment, and to support existing
environmental health and safety initiatives.
We implemented an enterprise-wide program to actively engage our
employees and to emphasize the importance of protecting the
environment in everyday life at FSI. Our programs include
recycling, water use reductions, chemical handling processes and
equipment design for the environment.
We are subject to a variety of governmental regulations related
to the discharge or disposal of toxic, volatile or otherwise
hazardous chemicals used in the manufacturing and product
development process. We believe we are in compliance with these
regulations and that we have obtained all necessary
environmental permits to conduct our business. These permits
generally relate to the disposal of hazardous wastes. If we fail
to comply with present or future regulations, fines could be
imposed, production and product development could be suspended,
or operations could cease. Such regulations could require us to
acquire significant equipment or take other actions to comply
with environmental regulations at a potentially significant cost
to us. If we fail to control the use of, or adequately restrict
the discharge or disposal of, hazardous substances, we could
incur future liabilities. See also Item 3
Legal Proceedings for a discussion of our
environmental legal proceedings.
We believe that compliance with federal, state and local
provisions that have been enacted or adopted regulating
discharges of materials into the environment, or otherwise
relating to the protection of the environment, will not have a
material effect upon our capital expenditures, earnings and
competitive position.*
International Sales
Our sales for each of the last three fiscal years are disclosed
in the financial statements included in Item 8 of this
report.
Available Information
Our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments
to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act of 1934 are
available free of charge through our website at www.fsi-intl.com
as soon as reasonably practicable after such reports have been
filed with or furnished to the Securities and Exchange
Commission.
11
Other Risk Factors
We discuss certain risk factors in the Risk Factors
Section in Managements Discussion and Analysis
of Financial Condition and Results of Operations included
in Item 7 of this report.
We own a 197,000-square-foot facility in Chaska, Minnesota,
which cost approximately $34 million to construct and
equip. The facility contains our Surface Conditioning business
and other administrative and support functions. It includes
research, laboratory and engineering facilities,
40,000 square feet of Class 1,000 and 10,000 cleanroom
space, manufacturing support operations and a customer training
center.
In February 2005, we sold our 162,000 square foot Allen,
Texas facility. Concurrent with the sale, we entered into a
sublease of approximately 40,000 square feet of space in
the facility. The lease ends on August 31, 2006; however,
we have an option to extend the sublease term for one additional
period of 12 months, by giving not less than 90 days
prior written notice.
We also maintain small leased sales and service offices
throughout Europe and Asia near our customer locations.
Management believes its existing facilities are well maintained
and in good operating condition.
|
|
ITEM 3. |
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 PRPs are unable to
contribute its proportionate share of the liability, if any,
associated with the site, those PRPs that are financially
able could be held financially responsible for the shortfall.
There has and continues to be 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. We
maintain product liability insurance in an effort to minimize
our risk. However, 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 fall 1995, pursuant to the Employee Stock Purchase and
Shareholder Agreement dated November 30, 1990 between Eric
C. Hsu and Semiconductor Systems, Inc. (SSI) (the
Shareholder Agreement) and in connection with
Mr. Hsus 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. In
12
April 1996, we acquired SSI, and SSI became our wholly owned
subsidiary. 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 SSI
and the former shareholders of SSI. The plaintiffs alleged 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 2000, certain of Mr. Hsus
claims were tried to a jury in Alameda County Superior Court in
Oakland, California. At the conclusion of the trial, the jury
found that SSI breached the Shareholder Agreement between it and
Mr. Hsu and that the damages that resulted were
approximately $2.4 million. In addition, each of the
individual defendant shareholders 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. Hsus 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
Corporation Code and damages of $2.4 million were awarded.
In proceedings subsequent to the trial, the Court determined
that the plaintiffs were entitled to an award against SSI of
prejudgment interest on the breach of contract damages
(approximately $2.4 million) at 10 percent per annum
from October 1996. In addition, the Court awarded plaintiffs
approximately $127,000 in costs and approximately
$1.8 million in attorneys fees against SSI and the
individual defendants. On November 16, 2001, the court
signed its final judgment reflecting the jurys awards,
interest, attorneys fees and costs assessed against each
of the defendants.
Following the entry of judgment, SSI and the other defendants
filed post-trial motions seeking reduction in the jurys
damage awards and/or a new trial. The court denied these
post-trial motions and there was no reduction in damages against
SSI. Mr. Hsu was awarded an additional $431,000 for
attorneys fees and expenses incurred since the judgment
was rendered in November 2001. Subsequently, SSI and the
individual defendants filed an appeal on a variety of grounds,
and we posted an appeal bond on behalf of SSI and defendants in
the amount of $8.3 million. As part of the posting of the
bond, we entered into a letter of credit in the amount of
$5.2 million with a surety company. This letter of credit
was collateralized with restricted cash of the same amount. The
appellate court upheld the original judgment.
The total judgment against SSI together with post judgment
interest and attorneys fees as of February 26, 2005
aggregated approximately $7.9 million. As a result, we
recorded a $0.3 million charge in the second quarter of
fiscal 2005. We had previously recorded $3.3 million of
charges to operations associated with this litigation. During
the third quarter of fiscal 2005, we retired the
250,000 shares of our common stock held in the escrow
created at the time of our acquisition of SSI to cover such
claims. As the SSI merger was a pooling of interests, we
decreased our stockholders equity by an amount equal to
$3.0 million. On March 28, 2005, we tendered funds
totaling approximately $7.9 million to the Hsus via a
cashiers check which we believe was the full judgment
amount plus all applicable interest. This included
$1.6 million of cash provided by the individual defendants.
Subsequently, instead of depositing the cashiers check,
the Hsus filed a motion with the court to enforce the judgment
against the appeal bond and we and the individual defendants
filed a motion to release the bond. The Hsus cashed the cashiers
check in July 2005. In August 2005, the court ruled in our favor
and an acknowledgement of full satisfaction of the judgment was
filed with the courts by the Hsus attorneys. The bond was
released in August 2005.
|
|
|
YieldUP Patent Litigation |
In September 1995, CFM Technologies, Inc. and CFMT, Inc.
(collectively CFM) filed a complaint in United
States District Court for the District of Delaware against
YieldUP, now known as SCD Mountain View, Inc., our wholly owned
subsidiary. CFM filed an additional complaint against YieldUP in
United States District Court for the District of Delaware on
December 30, 1998.
On January 3, 2001, Mattson Technology, Inc.
(Mattson) completed the merger of the semiconductor
equipment division of Steag Electronic Systems AG and CFM and
established its wet
13
products division. With the merger completed, Mattson assumed
responsibility for the two suits CFM filed against YieldUP. On
March 17, 2003, SCP Global Technologies (SCP)
acquired the wet product division of Mattson, including CFM and
assumed responsibility for the two lawsuits.
On February 19, 2004, FSI and SCP announced that they
settled the two patent infringement lawsuits pending in the
United States District Court for the District of Delaware. In an
effort to settle these lawsuits, we acknowledged the validity
and enforceability of the patents, but disputed that any of our
products infringed upon the claims of the patents.
We agreed to pay SCP $4.0 million for a release from past
infringement claims and a prospective license under all four
patents asserted against us in the two lawsuits. The release
applies to all purchasers of our products containing its Surface
Tension Gradient (STG®) technology. The
prospective license applies to all end-user customers of our
products, subject to certain limitations. In addition, we agreed
to supply SCP customers, at a pre-established price, our
rinse/dry kits to implement STG® technology for certain
applications.
As a result, we recorded a $3.4 million charge to
operations in the second quarter of fiscal 2004. We had
previously recorded a $0.6 million charge to operations
associated with this litigation. We have made payments of
$3.2 million as of August 27, 2005 and will make the
final payment of $750,000 in the second quarter of fiscal 2006.*
|
|
ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS |
There were no matters submitted to a vote of shareholders during
the fourth quarter ended August 27, 2005.
|
|
ITEM 4A. |
EXECUTIVE OFFICERS OF THE COMPANY |
The executive officers are elected by the board of directors,
generally for a term of one year, and serve until their
successor is elected and qualified. The following table and
discussion contains information regarding our current executive
officers.
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
John C. Ely(1)
|
|
|
46 |
|
|
Vice President, Global Sales and Service |
Patricia M. Hollister(2)
|
|
|
45 |
|
|
Chief Financial Officer and Assistant Secretary |
Donald S. Mitchell(3)
|
|
|
50 |
|
|
Chairman and Chief Executive Officer |
Benno G. Sand(4)
|
|
|
51 |
|
|
Executive Vice President, Business Development and Investor
Relations and Secretary |
|
|
(1) |
John Ely was named Vice President of Global Sales and Service in
June 2003. He was Executive Vice President; President, of our
Surface Conditioning Division from August 2000 to June 2003.
Mr. Ely was the Surface Conditioning Divisions Sales/
Marketing/ Applications Manager from 1997 to 2000; General
Manager from 1995 to 1997; Product Specialist/ Product Manager
from 1989 to 1995; and in direct sales from 1985 to 1989. Prior
to joining FSI, Mr. Ely was in sales and was the Western
Territory Manager based in California for Galtek, a subsidiary
of Entegris, Inc.. Mr. Ely is a director of mFSI, LTD
and SCD Mountain View, Inc, one of our subsidiaries. |
|
(2) |
Patricia Hollister has served as Chief Financial Officer since
January 1998 and as Assistant Secretary since January 2000. She
was our Corporate Controller from March 1995 to January 1998.
Prior to joining FSI, Ms. Hollister was employed by KPMG
LLP in Minneapolis, Minnesota where she served over
12 years on various audit and consulting engagements, most
recently as a Senior Manager. Ms. Hollister is a director
of various FSI-owned foreign subsidiaries as well as NVE
Corporation. |
|
(3) |
Donald Mitchell was named Chief Executive Officer and President
of FSI in December 1999 and became Chairman of the Board of
Directors for FSI in January 2002. From its formation in 1998
until December 1999, he was President of Air Products Electronic
Chemicals, Inc., located in Carlsbad, California, a division of
Pennsylvania-based Air Products and Chemicals, Inc. From 1991 to |
14
|
|
|
1998, he served as President of Schumacher, a leading global
chemical equipment and services supplier to the semiconductor
industry. Throughout his career with Schumacher, he held various
executive positions, including Vice President of Operations and
Vice President of Sales and Marketing. Mr. Mitchell is a
director of FSI and mFSI, LTD. Mr. Mitchell served as
the 1999/2000 Chairman of the Board of Directors for
Semiconductor Equipment and Materials International, a leading
global industry trade association and was a member of the Board
until July 2005. |
|
(4) |
Benno Sand has served as Executive Vice President, Business
Development and Investor Relations since January 2000. He has
served as Executive Vice President since January 1992 and
Secretary since February 2002. Mr. Sand also served as
Chief Administrative Officer from January 1998 to December 1999,
as Chief Financial Officer from October 1990 to January 1998,
and as Vice President of Finance from October 1987 to January
1992. Mr. Sand is a director of various FSI-owned United
States and foreign subsidiaries as well as PPT Vision, Inc. and
MathStar, Inc. |
PART II
|
|
ITEM 5. |
MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS |
Our common stock is traded on the NASDAQ National Market System
under the symbol FSII. The following table sets
forth the highest and lowest sale prices each day, as reported
by the NASDAQ-National Market System for the fiscal periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
High | |
|
Low | |
|
High | |
|
Low | |
|
|
| |
|
| |
|
| |
|
| |
Fiscal Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
$ |
5.56 |
|
|
$ |
3.86 |
|
|
$ |
6.67 |
|
|
$ |
4.35 |
|
|
Second
|
|
|
4.91 |
|
|
|
3.99 |
|
|
|
9.24 |
|
|
|
6.26 |
|
|
Third
|
|
|
4.77 |
|
|
|
3.22 |
|
|
|
8.70 |
|
|
|
4.70 |
|
|
Fourth
|
|
|
4.26 |
|
|
|
3.42 |
|
|
|
8.07 |
|
|
|
4.01 |
|
There were approximately 553 record holders of our common stock
on October 25, 2005.
We have never declared or paid cash dividends on our common
stock. We currently intend to retain all earnings for use in our
business, and do not anticipate paying dividends in the
foreseeable future.*
|
|
ITEM 6. |
SELECTED CONSOLIDATED FINANCIAL DATA |
The table that follows presents portions of our consolidated
financial statements and are not complete. You should read the
following selected consolidated financial data in conjunction
with our Consolidated Financial Statements and the related Notes
and with Managements Discussion and Analysis of
Financial Condition and Results of Operations included
elsewhere in this report. The Consolidated Statement of
Operations data for the years ended August 27, 2005,
August 28, 2004 and August 30, 2003, and the
Consolidated Balance Sheet data as of August 27, 2005 and
August 28, 2004, are derived from our Consolidated
Financial Statements that have been audited by KPMG LLP,
independent registered public accounting firm, and are included
elsewhere in this report. The Consolidated Statement of
Operations data for the years ended August 31, 2002 and
August 25, 2001 and the Consolidated Balance Sheet data as
of August 30, 2003, August 31, 2002 and
August 25, 2001 are derived from our audited consolidated
financial statements which do not appear in this report. We
changed our accounting for goodwill effective August 26,
2001 in accordance with Statement of Financial Accounting
Standards SFAS No. 142, Goodwill and
Other Intangible Assets. In addition, we changed our
revenue recognition policy effective August 27, 2000, based
upon guidance provided in SEC Staff Accounting
Bulletin No. 101 (SAB 101),
15
Revenue Recognition in Financial Statements.
SAB 101 was amended in fiscal 2004 by SEC Staff Accounting
Bulletin No. 104 (SAB 104), Revenue
Recognition.
The historical results presented below are not necessarily
indicative of the results to be expected for any future fiscal
year or fiscal period.
Selected Historical Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
August 27, | |
|
August 28, | |
|
August 30, | |
|
August 31, | |
|
August 25, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002(3) | |
|
2001(2) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
86,370 |
|
|
$ |
114,404 |
|
|
$ |
88,826 |
|
|
$ |
143,374 |
|
|
$ |
218,078 |
|
Gross profit(5)(7)
|
|
|
39,994 |
|
|
|
59,020 |
|
|
|
14,508 |
|
|
|
44,375 |
|
|
|
80,396 |
|
Selling, general, and administrative Expenses(8)
|
|
|
35,291 |
|
|
|
39,547 |
|
|
|
38,602 |
|
|
|
39,561 |
|
|
|
50,331 |
|
Research and development expenses
|
|
|
22,078 |
|
|
|
22,458 |
|
|
|
31,126 |
|
|
|
36,197 |
|
|
|
42,118 |
|
Gain on sale of facility(9)
|
|
|
7,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,356 |
|
|
|
|
|
Transition agreement termination fee(6)
|
|
|
|
|
|
|
|
|
|
|
2,750 |
|
|
|
|
|
|
|
|
|
Write-down of fixed assets(5)
|
|
|
|
|
|
|
|
|
|
|
7,000 |
|
|
|
|
|
|
|
|
|
Operating loss(6)
|
|
|
(10,360 |
) |
|
|
(2,985 |
) |
|
|
(64,970 |
) |
|
|
(36,739 |
) |
|
|
(12,053 |
) |
Gain on marketable securities(10)
|
|
|
5,808 |
|
|
|
1,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings (losses) of affiliates
|
|
|
450 |
|
|
|
779 |
|
|
|
(4,006 |
) |
|
|
(15 |
) |
|
|
4,196 |
|
Net (loss) income from continuing operations
|
|
|
(3,302 |
) |
|
|
141 |
|
|
|
(78,557 |
) |
|
|
(34,663 |
) |
|
|
(5,760 |
) |
Net (loss) income before cumulative effect of change in
accounting principle, net of tax
|
|
|
(3,302 |
) |
|
$ |
141 |
|
|
|
(78,557 |
) |
|
|
(34,663 |
) |
|
|
(5,760 |
) |
Cumulative effect of change in accounting principle(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,969 |
) |
Net (loss) income
|
|
$ |
(3,302 |
) |
|
$ |
141 |
|
|
$ |
(78,557 |
) |
|
$ |
(34,663 |
) |
|
$ |
(20,729 |
) |
(Loss) income per share diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
(0.11 |
) |
|
$ |
|
|
|
$ |
(2.66 |
) |
|
$ |
(1.26 |
) |
|
$ |
(0.22 |
) |
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
(0.11 |
) |
|
|
|
|
|
|
(2.66 |
) |
|
|
(1.26 |
) |
|
|
(0.22 |
) |
|
Cumulative effect of change in accounting principle, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.59 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share diluted
|
|
$ |
(0.11 |
) |
|
$ |
0.00 |
|
|
$ |
(2.66 |
) |
|
$ |
(1.26 |
) |
|
$ |
(0.81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in per share
calculations diluted
|
|
|
29,928 |
|
|
|
30,315 |
|
|
|
29,546 |
|
|
|
27,450 |
|
|
|
25,543 |
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
121,939 |
|
|
$ |
139,797 |
|
|
$ |
133,386 |
|
|
$ |
211,770 |
|
|
$ |
245,287 |
|
Total long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
99,136 |
|
|
|
110,372 |
|
|
|
109,000 |
|
|
|
179,632 |
|
|
|
184,018 |
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
We changed our revenue recognition policy effective
August 27, 2000, based on guidance provided in
SAB 101. We recorded a non-cash charge of approximately
$15 million, after reduction for income taxes of $0, or
$0.59 per diluted share, to reflect the cumulative effect
of the accounting change as of the beginning of the fiscal year. |
16
|
|
|
|
(2) |
During fiscal 2001, we recorded realignment charges of
$2.6 million which were allocated as follows:
$0.6 million to cost of goods sold, $1.5 million to
selling, general and administrative expenses and
$0.6 million to research and development expenses. |
|
|
(3) |
During fiscal 2002, we recorded realignment charges of $500,000
which were allocated as follows: $250,000 to cost of goods sold
expenses, $230,000 to selling, general and administrative
expenses and $20,000 to research and development expenses. |
|
|
(4) |
During fiscal 2002, we recorded a charge of $5.4 million
related to the impairment of goodwill. |
|
|
(5) |
During fiscal 2003, we recorded $19.0 million to cost of
goods sold for inventory obsolescence charges related to the
wind down of the Microlithography business. We also recorded an
impairment charge of $7.0 million against the property,
plant and equipment assets associated with the PSS business in
fiscal 2003. See Note 2 of the Notes to the Consolidated
Financial Statements. |
|
|
(6) |
During fiscal 2003, we entered into a transition agreement with
Metron Technology to terminate our distribution agreements and
recorded a termination fee of $2.75 million. In addition,
we recorded an impairment charge of $10.2 million in other
expense related to the other than temporary impairment of our
investment. See Note 3 of the Notes to the Consolidated
Financial Statements. |
|
|
(7) |
During fiscal 2005, we had sales of PSS inventory with an
original cost of $0.5 million that had been previously
written down to zero. During fiscal 2004, we had sales of PSS
product inventory with an original cost of $3.2 million
that had been previously written down to zero. During fiscal
2003, we had sales of PSS product inventory with an original
cost of $3.0 million that had been previously written down
to zero. See Note 2 of the Notes to the Consolidated
Financial Statements. |
|
|
(8) |
During fiscal 2004, we recorded $3.4 million to selling,
general and administrative expenses related to a patent
litigation settlement. See Note 18 of the Notes to the
Consolidated Financial Statements. |
|
|
(9) |
During fiscal 2005, we recorded a $7.0 million gain on the
sale of the Allen, Texas facility. See Note 2 of the Notes
to the Consolidated Financial Statements. |
|
|
(10) |
During fiscal 2005, we recorded a gain of $5.8 million on
the Nortem (formerly Metron Technology) distributions. During
fiscal 2004, we recorded a gain of $2.0 million on the sale
of Metron Technology common stock. See Note 1 of the Notes
to the Consolidated Financial Statements. |
|
|
ITEM 7. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
Application of Critical Accounting Policies and Estimates
In accordance with Securities and Exchange Commission guidance,
those material accounting policies that we believe are the most
critical to an investors understanding of our financial
results and condition and require complex management judgment
are discussed below.
Our critical accounting policies and estimates are as follows:
|
|
|
|
|
revenue recognition; |
|
|
|
valuation of long-lived and intangible assets; and |
|
|
|
estimation of valuation allowances and accrued liabilities,
specifically product warranty, inventory reserves and allowance
for doubtful accounts. |
We recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered,
the purchase price is fixed or determinable and collectibility
is reasonably assured. If our equipment sales involve sales to
our existing customers who have previously accepted the same
type(s) of equipment with the same type(s) of specifications, we
account for the product sales as a multiple element arrangement.
We recognize the equipment revenue upon shipment and transfer of
title.
17
The other multiple elements also include installation, extended
warranty contracts and training. Equipment installation revenue
is valued based on estimated service person hours to complete
installation and published or quoted service labor rates and is
recognized when the installation has been completed. Training
revenue is valued based on published training class prices or
quoted rates and is recognized when the customers complete the
training classes or when a customer-specific training period has
expired. The published or quoted service labor rates and
training class prices are rates actually charged and billed to
our customers.
All other product sales with customer-specific acceptance
provisions are recognized upon customer acceptance. Future
revenues may be negatively impacted if we are unable to meet
customer-specific acceptance criteria. Revenue related to spare
part sales is recognized upon shipment. Revenues related to
maintenance and service contracts and extended warranty
contracts are recognized ratably over the duration of the
contracts.
Timing and amount of revenue recognized is dependent on the mix
of revenue recognized upon shipment versus acceptance. For
revenue recognized upon acceptance, it is dependent upon when
customer-specific criteria are met.
|
|
|
Valuation of Long-Lived and Intangible Assets |
We assess the impairment of identifiable intangibles and
long-lived assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable.
If we determine that the carrying value of intangibles and
long-lived assets may not be recoverable, we measure any
impairment based on a projected discounted cash flow method
using a discount rate determined by our management to be
commensurate with the risk inherent in our current business
model or another valuation technique. Net intangible assets and
long-lived assets amounted to $33.5 million as of
August 27, 2005.
Our investment in our affiliate, Metron Technology, was
accounted for by the equity method of accounting until the
beginning of the fourth quarter of fiscal 2003. While we
determined at August 30, 2002 that our investment in Metron
Technology was not other than temporarily impaired, our decision
on October 8, 2002 to use Metron Technology shares with a
value of $2.38 to settle the termination fee payment with Metron
Technology triggered an impairment loss on that date for all of
the shares we held. Accordingly, the difference between the
$6.17 per share carrying value and the $2.38 per share
value agreed upon for purposes of the Transition Agreement on
the shares held was recorded as a non-cash impairment charge of
$10.2 million in our quarter ended November 30, 2002.
The $2.38 per share value reflected the average closing
price of the common stock of Metron Technology for the five
business days prior to the execution of the Transition Agreement.
Upon completion of the termination of the distribution
agreements with Metron Technology, our ownership in Metron
Technology was reduced from approximately 21% to approximately
17%. See Note 3 of the Notes to Consolidated Financial
Statements for a discussion of the early termination of our
distribution agreements with Metron Technology. As a result, in
the fourth quarter of fiscal 2003, we began to account for our
investment in Metron Technology as a marketable equity security
available-for-sale and carried the investment at fair market per
the closing price of Metron Technologys stock as reported
on the NASDAQ National Market. During fiscal 2005, Metron
Technology was acquired by Applied Materials, Inc. and was
liquidated. See Note 1 of Notes to Consolidated Financial
Statements for discussion of the liquidation.
In the second quarter of fiscal 2003, we conducted a review of
the long-lived assets of our Microlithography business, as we
transitioned to the PSS business model. Accordingly, we recorded
a write-down of $7.0 million against the property, plant
and equipment assets of the PSS business to write the assets
down to their estimated fair value. This write-down included a
$5.0 million impairment charge associated with the PSS
facility and a $2.0 million impairment charge related to
the PSS business equipment. These impairment charges were based
upon our review of the PSS facility and business
18
equipment and their estimated fair values. See Note 2 of
Notes to Consolidated Financial Statements for a discussion of
impairment charges.
|
|
|
Product Warranty Estimation |
We record a liability for warranty claims at the time of sale.
The amount of the liability is based on the trend in the
historical ratio of claims to sales, releases of new products
and other factors. The warranty periods for new equipment
manufactured by us range from one to two years. Special warranty
reserves are also accrued for major rework campaigns. Although
management believes the likelihood to be relatively low, claims
experience could be materially different from actual results
because of the introduction of new, more complex products;
competition or other external forces; manufacturing changes that
could impact product quality; or as yet unrecognized defects in
products sold.
|
|
|
Inventory Reserves Estimation |
We record reserves for inventory shrinkage and for potentially
excess, obsolete and slow moving inventory. The amounts of these
reserves are based upon historical loss trends, inventory
levels, physical inventory and cycle count adjustments, expected
product lives, forecasted sales demand and recoverability.
Results could be materially different if demand for our products
decreased because of economic or competitive conditions, length
of the industry downturn, or if products become obsolete because
of technical advancements in the industry or by us.
|
|
|
Allowance for Doubtful Accounts Estimation |
Management must make estimates of the uncollectibility of our
accounts receivable. The most significant risk is the risk of
sudden unexpected deterioration in financial condition of a
significant customer who is not considered in the allowance.
Management specifically analyzes accounts receivable and
analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our
customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. Results could be materially
impacted if the financial condition of a significant customer
deteriorated and related accounts receivable are deemed
uncollectible. Accounts receivable are charged off after
management determines that they are uncollectible.
Industry Update
Semiconductor industry conditions were weak during the first
half of fiscal 2005, as our customers managed through the
inventory build-up that occurred during the summer of 2004. As a
result, their factory utilization rates dropped below
90 percent during the second half of our fiscal year.
However, recently, semiconductor manufacturers factory
utilization rates have improved and are now running well above
90 percent, near their capacity limits for certain devices.
Industry analysts are forecasting that demand for semiconductors
will increase 7 percent to $235 billion in calendar
2005 from $220 billion in the prior year.* The increase is
being driven by memory, micro component and ASSP
(application-specific standard product) device demand.
Semiconductor demand is forecasted to grow 8.1 percent to
$254 billion in calendar 2006.*
According to industry analysts, total equipment spending by
semiconductor manufacturers in calendar 2005 is expected to
decrease nearly 12 percent to $33 billion as compared
to approximately $38 billion in calendar 2004.* Analysts
are now forecasting equipment spending to increase modestly to
$34 billion in calendar 2006 and return to double-digit
growth in calendar 2007.* When compared to prior cycles, device
manufacturers are managing capacity increases carefully and
acting quickly to slow down new equipment purchases in response
to slow-downs in production rates. We expect this trend to
continue.
Our order pipeline remains strong as we continue to monitor an
extensive list of order opportunities. We now have one or more
of our flagship products placed at nearly all of the top ten
semiconductor manufacturers ranked by capital spending. We are
starting to see the benefit from some of these insertions.
19
Assuming we execute well on existing and new evaluation
opportunities, we believe we are in an excellent position to
participate to the extent that these leading device
manufacturers add capacity in fiscal 2006.*
Results of Operations
For the fiscal year ended August 27, 2005, we had net
losses of $3,302,000 as compared to net income of $141,000 for
the fiscal year ended August 28, 2004. The decline in
financial performance related primarily to a decrease in
domestic sales revenue. For the fiscal year ended
August 28, 2004, we had net income of $141,000 as compared
to a net loss of $78,557,000 for the fiscal year ended
August 30, 2003. The improved financial performance was a
result of increased sales revenue from $88.8 million in
fiscal 2003 to $114.4 million in fiscal 2004 due primarily
to improved industry conditions. We also improved our gross
margins to 51.6% for fiscal 2004 and reduced operating expenses
by approximately $17 million as compared to fiscal 2003.
|
|
|
Wind Down of Microlithography Business |
In March 2003, we announced that we would wind down the
Microlithography business due to uncertain economic conditions
and the weak semiconductor industry forecast. The decision was
also due to a history of operating losses of the
Microlithography business as a result of competitive pressures
and general economic and industry conditions. Subsequent to the
wind down, we provide support services for our POLARIS products
through our PSS business.
We recorded $19.0 million of inventory charges in the
second quarter of fiscal 2003 based on the estimated future
sales and recoverability, specifically related to our decision
to wind down the Microlithography business. We determined the
$19.0 million inventory charge based on the inventory
balance as of March 1, 2003 as compared to the inventory
balance expected to be used for PSS orders in backlog,
anticipated orders and anticipated order cancellations and
adjusted the net inventory balance to its net realizable value.
During fiscal 2005, we had sales of PSS product inventory with
an original cost of approximately $0.5 million that had
previously been written down to zero. During fiscal 2004, we had
sales of PSS product inventory with an original cost of
approximately $3.2 million that had previously been written
down to zero and during fiscal 2003, we had sales of PSS product
inventory with an original cost of approximately
$3.0 million that had previously been written down to zero.
In addition, we were able to reduce certain open purchase order
commitments and inventory buyback requirements. Since we
recorded the PSS product inventory reserves as a result of the
wind-down of our Microlithography business in the second quarter
of fiscal 2003, we have had sales of PSS product inventory that
had previously been written down to zero and reductions in
inventory buyback requirements of $6.7 million and have
disposed of $6.6 million of PSS product inventory. The
original cost of PSS product inventory available for sale or to
be disposed of as of August 27, 2005 was $11.7 million.
We will continue to try to sell the impaired inventory to our
customers as spares, refurbished systems and upgrades to
existing systems. If unsuccessful, some of the items will be
disposed of. Only as items are sold or disposed of will the
reserve be reversed or reduced. Gross margins will be higher if
inventory carried at a reduced cost is sold. The impact of such
sales on our margins will fluctuate depending on the amount and
timing of product sales, specific customers and specific
inventory sold.
We also recorded a write-down of $7.0 million against the
property, plant and equipment assets of the PSS business. This
write-down included a $5.0 million impairment charge for
the Microlithography business facility. This impairment charge
was based upon our estimate of fair value of the facility. As
part of our analysis, management had a competitive market
overview performed and reviewed office buildings currently on
the market and available for lease or sale. In estimating the
fair value of the facility, we assumed the building would be
marketed as office space and that the special-purpose space,
such as the clean rooms and laboratories, would be converted to
office space. This assumption was made based upon the low demand
in the area for clean room facilities and with consideration for
the electronics industry downturn that occurred in 2001 and
2002. We did not expect that we would find a buyer that would
utilize the special purpose space. We also recorded an
impairment charge of $2.0 million on the
20
Microlithography business equipment based upon managements
review of its business equipment and its estimated fair value
under SFAS 144, Accounting for Impairment or Disposal
of Long-Lived Assets.
After two years of marketing the building, in February 2005 we
sold our 162,000 square foot Allen, Texas facility,
together with the majority of the business equipment for its
special-purpose clean room facility space, to an electronics
industry buyer and received approximately $14.4 million in
net cash proceeds from the sale. The sale price was in excess of
the value we had assumed for office space use. The building and
property, plant and equipment sold was recorded on our balance
sheet at approximately $7.5 million as of the closing date
of the sale. We retained ownership of approximately four acres
of land adjacent to the Allen site. We recorded a gain of
$7.0 million in operations on the sale.
Concurrent with the sale, we entered into a sublease of
approximately 40,000 square feet of space in the facility
for our legacy POLARIS® System product group operations. As
the present value of the leaseback rentals was less than 10% of
the fair value of the facility, it was considered minor, and the
entire gain of approximately $7.0 million was recognized
upon the close of the sale. The lease was extended in the third
quarter of fiscal 2005 to end on August 31, 2006; however,
the Company has an option to extend the sublease term for one
additional period of 12 months, by giving not less than
90 days prior written notice.
The employee headcount for the PSS group was reduced from
approximately 292 employees in February 2003 to 97 employees at
the end of fiscal 2005. We started to recognize the full
financial savings of this reduction in the fourth quarter of
fiscal 2003. The savings, consisting primarily of employee
salaries and benefits from the third quarter restructuring, was
approximately $2.9 million for the fourth quarter of fiscal
2003 and approximately $11.0 million in each of fiscal 2004
and fiscal 2005.
Our focus was to successfully wind down this business and
transition it to the PSS business. Our primary goals are to
satisfy our remaining PSS customer obligations and support
requirements. We are committed to providing a path for our
customers to maximize the useful life for their POLARIS®
Systems and have established key support services programs to
support this goal.
|
|
|
Transition Agreement with Metron Technology |
On October 9, 2002, we entered into a Transition Agreement
with Metron Technology related to the early termination of our
distribution agreements with Metron Technology for Europe and
the Asia Pacific region, effective March 1, 2003. See
Note 3 of the Notes to the Consolidated Financial
Statements for discussion of our relationship with Metron
Technology.
|
|
|
Sales Revenue and Shipments |
Fiscal 2005 sales revenues were $86.4 million as compared
to $114.4 million in fiscal 2004. The majority of the
decrease in fiscal 2005 related to a decrease in domestic sales
revenue from $60.1 million in fiscal 2004 to
$31.2 million in fiscal 2005. The decrease in domestic
sales revenue related to a decrease in domestic shipments from
$57.0 million in fiscal 2004 to $31.0 million in
fiscal 2005 related primarily to our transformation, beginning
in March 2003, from the microlithography business to a
POLARIS® Systems and Services product group. Fiscal 2004
sales revenues were $114.4 million as compared to
$88.8 million for fiscal 2003. Shipments were
$87.6 million in fiscal 2005 as compared to
$111.1 million in fiscal 2004 and $93.7 million in
fiscal 2003. The increase in fiscal 2004 sales revenue as
compared to fiscal 2003, related primarily to an increase in
shipments from $93.7 million in fiscal 2003 to
$111.1 million in fiscal 2004 due to improved industry
conditions.
Based upon our revenue recognition policy, certain shipments to
customers are not recognized until customer acceptance.
Therefore depending on timing of shipments and customer
acceptances, there are time periods where shipments may exceed
sales revenue or due to timing of acceptances, sales revenue may
exceed shipments.
International sales were $55.1 million for fiscal 2005,
representing 64% of total sales during fiscal 2005,
$54.3 million for fiscal 2004, representing 47% of total
sales during fiscal 2004, and $33.9 million for
21
fiscal 2003, representing 38% of total sales during fiscal 2003.
International sales through our affiliates, mFSI LTD and
Metron Technology, represented approximately 7% of international
sales during fiscal 2005, 27% of international sales during
fiscal 2004 and 45% of international sales during fiscal 2003.
The minor dollar increase in international sales revenue in
fiscal 2005 as compared to fiscal 2004 was due to increases in
Europe partially offset by decreases in Asia. The increase in
the percentage of international sales in fiscal 2005 as compared
to fiscal 2004 related primarily to the decrease in domestic
sales revenue. The increase in international sales revenue in
fiscal 2004 as compared to fiscal 2003 related to our transition
to a direct global distribution model in March 2003 as well as
improved industry conditions in international markets. We
experienced increased sales in all international markets in
fiscal 2004. Due to its broader customer base, SC products have
a higher percentage of international sales than PSS products.
See Note 15 of the Notes to Consolidated Financial
Statements for additional information regarding the
Companys international sales.
We ended fiscal 2005 with a backlog of approximately
$19.3 million as compared to $20.1 million at the end
of fiscal 2004. Backlog consists of orders with delivery dates
within the next 12 months for which a customer purchase
order has been received. Because of the timing and relative size
of orders and the possibility of cancellations or customer
delays, backlog is not necessarily indicative of sales for
future periods. Deferred revenue was approximately
$8.0 million as of the end of fiscal 2005. Deferred revenue
is included in deferred profit which is net of deferred cost of
goods sold on the consolidated balance sheet.
As a result of the fiscal 2005 year-end backlog, deferred
revenue levels and anticipated orders of $22 to $26 million
in the first quarter of fiscal 2006, we expect first quarter
fiscal 2006 revenue to be in the range of $16 to
$19 million.* Achieving the high end of the revenue range
requires receiving timely acceptance from customers for products
that have been shipped.*
Our gross margin fluctuates due to a number of factors,
including the mix of products sold; the proportion of
international sales, as international sales, particularly in
Asia, generally have lower margins due to pricing pressures; the
result of selling through our affiliate in Japan; utilization of
manufacturing capacity; the sales of PSS product inventory
previously written down to zero; and initial product placement
discounts.
Gross margin as a percentage of sales was 46.3% for fiscal 2005
as compared to 51.6% for fiscal 2004 and 16.3% for fiscal 2003.
The decrease in margins from fiscal 2004 to fiscal 2005 related
primarily to an increase in manufacturing variances associated
with the decrease in shipments from $111.1 million in
fiscal 2004 to $87.6 million in fiscal 2005. The decrease
also related to the increase in the percentage of international
sales as well as a decrease in the amount of the original cost
of PSS product inventory that had been written down to zero from
$3.2 million in fiscal 2004 to $0.5 million in fiscal
2005. The increase in margins from fiscal 2003 to fiscal 2004
was primarily impacted by inventory charges of
$19.0 million recorded in the second quarter of 2003. See
Note 2 of the Notes to the Consolidated Financial
Statements for discussion related to the PSS product inventory
charges. The increase in gross margins for fiscal 2004 as
compared to fiscal 2003 was also due to the product sales mix
shift to SC products, our go direct initiative in Asia and
Europe and an increase in spares and service revenue to over
36 percent of total revenue in fiscal 2004 as compared to
25 percent of total revenue in fiscal 2003. Fiscal 2004
gross margins were also favorably impacted by $0.9 million
of changes in warranty estimates, primarily related to an
SC product rework program in which actual costs were less
than anticipated.
During fiscal 2005, we had sales of PSS product inventory with
an original cost of approximately $0.5 million that had
previously been written down to zero. This was primarily due to
sales revenue generated from unanticipated PSS refresh tools,
spare parts and upgrade sales. Our gross margin as a percentage
of sales for fiscal 2005 would have been 45.7% if we included
the original cost of the PSS product inventory that had
been written down to zero. Gross margin including the original
cost of the PSS product inventory that had been written
down to zero is not calculated in accordance with generally
accepted accounting principles (GAAP). Our
management believes that the presentation of gross
22
margin including the original cost of PSS product inventory that
had been written down to zero provides a useful analysis of our
on-going operating trends and helps investors compare our
operating performance period over period.
The following is a reconciliation of our fiscal 2005 gross
margin calculated in accordance with GAAP to our fiscal 2005
gross margin including the original cost of PSS product
inventory that had previously been written down to zero (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
|
|
|
Fiscal Year Ended | |
|
|
|
|
August 27, 2005 | |
|
|
|
|
|
August 27, 2005 | |
|
|
|
|
(GAAP) | |
|
% of Sales | |
|
Adjustment(1) | |
|
(Non-GAAP) | |
|
% of Sales | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Sales
|
|
$ |
86,370 |
|
|
|
|
|
|
|
|
|
|
$ |
86,370 |
|
|
|
|
|
Cost of Goods Sold
|
|
|
46,376 |
|
|
|
|
|
|
$ |
519 |
|
|
|
46,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
$ |
39,994 |
|
|
|
46.3 |
% |
|
|
|
|
|
$ |
39,475 |
|
|
|
45.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Original cost of PSS product inventory sold that had been
written down to zero. |
During fiscal 2004, we had sales of PSS product inventory with
an original cost of approximately $3.2 million that had
previously been written down to zero. This was primarily due to
sales revenues generated from unanticipated PSS refreshed tools,
spare parts and upgrades sales. Our gross margin as a percentage
of sales for fiscal 2004 would have been 48.8% if we included
the original cost of the PSS product inventory that had
been written down to zero.
The following is a reconciliation of our fiscal 2004 gross
margin calculated in accordance with GAAP to our fiscal 2004
gross margin including the original cost of PSS product
inventory that had previously been written down to zero (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
|
|
|
Fiscal Year Ended | |
|
|
|
|
August 28, 2004 | |
|
|
|
|
|
August 28, 2004 | |
|
|
|
|
(GAAP) | |
|
% of Sales | |
|
Adjustment(1) | |
|
(Non-GAAP) | |
|
% of Sales | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Sales
|
|
$ |
114,404 |
|
|
|
|
|
|
|
|
|
|
$ |
114,404 |
|
|
|
|
|
Cost of Goods Sold
|
|
|
55,384 |
|
|
|
|
|
|
$ |
3,159 |
|
|
|
58,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
$ |
59,020 |
|
|
|
51.6 |
% |
|
|
|
|
|
$ |
55,861 |
|
|
|
48.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Original cost of PSS product inventory sold that had been
written down to zero. |
Our gross margin as a percentage of sales in fiscal 2003 would
have been 34.3%, excluding the net impact of inventory charges
of $19.0 million recorded for the PSS business net of sales
of PSS product inventory with an original cost of
$3.0 million that had previously been written down to zero.
The following is a reconciliation of our fiscal 2003 gross
margin calculated in accordance with GAAP to our fiscal 2003
gross margin before the net PSS product inventory reserves (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
|
|
|
Fiscal Year Ended | |
|
|
|
|
August 30, 2003 | |
|
|
|
|
|
August 30, 2003 | |
|
|
|
|
(GAAP) | |
|
% of Sales | |
|
Adjustment(1) | |
|
(Non-GAAP) | |
|
% of Sales | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Sales
|
|
$ |
88,826 |
|
|
|
|
|
|
|
|
|
|
$ |
88,826 |
|
|
|
|
|
Cost of Goods Sold
|
|
|
74,318 |
|
|
|
|
|
|
$ |
(16,000 |
) |
|
|
58,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
$ |
14,508 |
|
|
|
16.3 |
% |
|
|
|
|
|
$ |
30,508 |
|
|
|
34.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Net PSS product inventory charges and original cost of PSS
product inventory that had been written down to zero. |
We will continue to try to sell the impaired PSS product
inventory to our customers as spares, refurbished systems and
upgrades to existing systems. If unsuccessful, some of the items
will be disposed
23
of. Only as items are sold or disposed of will the reserve be
reversed or reduced. Any reversal or reduction will be
disclosed. Gross margins will be higher if inventory carried at
a reduced cost is sold.
Margins in fiscal 2003 were also impacted by $337,000 of
severance costs that were recorded to cost of goods sold in the
third and fourth quarters of fiscal 2003.
We expect the gross profit margins for the first quarter of
fiscal 2006 to be between 42 to 45% of revenues, due to an
anticipated change in product mix and the lower margins on the
initial placement of our products at strategic customers.* Our
factory utilization rate is not expected to change
significantly, as first quarter of fiscal 2006 shipments are
expected to be in the range of $23 to $25 million in line
with the fourth quarter of fiscal 2005 level.*
|
|
|
Selling, General and Administrative Expenses |
Selling, general and administrative expenses in fiscal 2005 were
$35.3 million, or 40.9% of total sales, as compared to
$39.5 million, or 34.6% of total sales, in fiscal 2004 and
$38.6 million, or 43.5% of total sales, in fiscal 2003. The
decrease in the dollar amount of selling, general and
administrative expenses in fiscal 2005 related primarily to
$3.4 million of expense incurred in fiscal 2004 to settle
patent infringement litigation in the second quarter of fiscal
2004. The decrease also related to a decrease in depreciation
expense of approximately $1.7 million primarily due to our
SAP computer software system being fully depreciated in fiscal
2004. These decreases were partially offset by an increase in
salary expense associated with salary increases in January 2005.
The increase in dollar amount of selling, general and
administrative expenses in fiscal 2004 as compared to fiscal
2003 related to the $3.4 million patent infringement
settlement expenses in the second quarter of fiscal 2004, offset
by a decrease in information technology expenses. See
Note 18 of the Notes to the Consolidated Financial
Statements for a discussion of the patent infringement
litigation settlement. These increases in fiscal 2004 were also
offset by savings related to organizational efficiencies from
our transition to direct international distribution and the PSS
business model. Selling, general and administrative expenses
include realignment charges of $1.3 million in fiscal 2003.
Selling, general and administrative expenses for the first
quarter of fiscal 2006 are expected to be in the range of
$9.2 million to $9.4 million, as we expand our
service, product and program management resources in support of
the demonstration programs with customers in all regions.*
|
|
|
Research and Development Expenses |
Research and development expenses for fiscal 2005 were
$22.1 million, or 25.6% of total sales, as compared to
$22.5 million, or 19.6% of total sales in fiscal 2004 and
$31.1 million, or 35.0% of total sales in fiscal 2003. The
minor decrease in the dollar amount of research and development
expenses in fiscal 2005 as compared to fiscal 2004 was due
primarily to the net impact of a $1.5 million decrease in
intangible asset amortization expense associated with our fiscal
2000 acquisition of YieldUP, an increase in salary expense
associated with salary increases in January 2005 and costs
associated with new product development. The decrease in the
dollar amount of research and development expenses in fiscal
2004 as compared to fiscal 2003 related to the reduction of
engineering resources when we exited the resist processing
market in March 2003. In addition, there was $1.1 million
of realignment charges in fiscal 2003.
We expect research and development expenses to range from $5.8
to $6.0 million for the first quarter of fiscal 2006 as we
continue to invest in new application and product development
programs and continue to support our flagship products: the
MAGELLAN, the ANTARES and the ZETA Systems.*
We sold our facility in Allen, Texas in the second quarter of
fiscal 2005 and received $14.4 million in net cash proceeds
from the sale. The building and property, plant and equipment
sold were recorded on our balance sheet at approximately
$7.5 million at the close of the sale. We recorded a gain
of $7.0 million
24
on the sale in the second quarter of fiscal 2005. Nee
Note 2 of the Notes to the Consolidated Financial
Statements for further discussion of the sale of the facility.
|
|
|
Transition Agreement Termination Fee |
In the first quarter of fiscal 2003, we recorded a charge of
approximately $2.8 million associated with the early
termination of the distribution agreements with Metron
Technology. See Note 3 of the Notes to the Consolidated
Financial Statements for a discussion related to the Transition
Agreement with Metron Technology.
|
|
|
Write-Down of Property, Plant and Equipment |
In the second quarter of fiscal 2003, we conducted a review of
the long-lived assets of the PSS business because of the
decision to wind down the Microlithography business and recorded
a write-down of $7.0 million against the property, plant
and equipment assets of the PSS business to write the assets
down to their estimated fair value. This write-down included a
$5.0 million impairment charge for the PSS business
facility and a $2.0 million impairment charge related to
the PSS business equipment. These impairment charges were based
upon our review of the PSS business equipment and their
estimated fair values. See Note 2 of the Notes to the
Consolidated Financial Statements for a discussion related to
the write-down of property, plant and equipment.
|
|
|
Other Income (Expense), Net and Impairment of Investment
in Affiliate |
Other income (expense), net and impairment of investment in
affiliate was approximately $0.9 million of income, or 1.0%
of total sales, for fiscal 2005, as compared to
$0.4 million of income, or 0.4% of total sales, for fiscal
2004 and $9.5 million of expense, or 10.7% of total sales,
for fiscal 2003. The increase for fiscal 2005 as compared to
fiscal 2004 related primarily to an increase in interest income
associated with higher interest rates. The change for fiscal
2004 as compared to fiscal 2003 related primarily to an
approximately $10.2 million non-cash impairment charge in
the first quarter of fiscal 2003 for the shares of Metron
Technology that we owned.
Interest income is expected to be approximately $200,000 to
$300,000 for the first quarter of fiscal 2006, given our current
level of cash reserves and the anticipated interest rates.*
|
|
|
Gain on Marketable Securities |
Gain on marketable securities was $5.8 million in fiscal
2005. The gain was due to the gains on the Nortem (formerly
Metron Technology) distributions in the third and fourth
quarters of fiscal 2005. Gain on sale of marketable securities
was $2.0 million in fiscal 2004. The gain was due to the
gain on the sales of approximately 627,000 shares of Metron
Technology common stock in the first quarter of fiscal 2004.
|
|
|
Income Tax (Benefit) Expense |
We recorded a tax expense of $50,000 in fiscal 2005, fiscal 2004
and fiscal 2003, primarily as a result of state taxes.
Our deferred tax assets on the balance sheet as of
August 27, 2005 have been fully reserved for with a
valuation allowance. We do not expect to reduce our valuation
allowance until we are consistently profitable on a quarterly
basis.*
We have net operating loss carryforwards for federal income tax
purposes of approximately $147.6 million at August 27,
2005, which will begin to expire in fiscal 2011 through fiscal
2023 if not utilized. Of this amount, approximately
$15.0 million is subject to Internal Revenue Code
Section 382 limitations on utilization, which limits the
amount that we can offset taxable income to approximately
$1.4 million per year.
25
Tax legislation has been enacted to repeal certain tax
incentives that we have qualified for in the past. The
legislation also includes provisions that allow for a deduction
for qualified product activities. These provisions will not
impact our tax rate in the near-term due to the full valuation
allowance. The longer-term impact will depend on the level of
our profitability and the mix of domestic and international
earnings.
|
|
|
Equity in Earnings (Losses) of Affiliates |
Equity in earnings (losses) of affiliates was approximately
$450,000 of income for fiscal 2005, $779,000 of income for
fiscal 2004, and $4.0 million of losses for fiscal 2003.
The decrease in fiscal 2005 earnings related to increased
product development investments by mFSI LTD. The change in
fiscal 2004 related to improved financial performance for
mFSI in fiscal 2004 due to improved industry conditions in
Japan. In fiscal 2003, Metron Technology wrote off a significant
amount of its goodwill and incurred additional expenses in
connection with the transition of its FSI product distribution
business to FSI and the losses from Metron Technology were
partially offset by a positive contribution from mFSI LTD.
During fiscal 2005, we determined that audited financial
statements of mFSI were required to be filed as an exhibit
to our 2005 and 2004 annual reports on Form 10-K.
mFSI and its auditors are in the process of finalizing the
U.S. GAAS (generally accepted auditing standards) audit on
their fiscal 2005 and 2004 financial statements. We anticipate
filing an amendment to this Form 10-K to include the
appropriate mFSI financial statements for their fiscal
2005 and 2004 as an exhibit. Historically,
mFSIs financial statements have been stated in
accordance with Japanese accounting principles.
In fiscal 2004, we no longer recorded equity in losses from
Metron Technology, as our ownership, in Metron Technology had
been below 20 percent since the fourth quarter of fiscal
2003. In fiscal 2005, Applied Materials, Inc. acquired the
worldwide operating subsidiaries and business of Metron
Technology. See Item 1. Business Marketing,
Sales and Support for a discussion of the Metron Technology
disposition and liquidation.
We anticipate that equity in losses from mFSI LTD, our
Japanese affiliate, will be approximately $100,000 to $200,000
in the first quarter of fiscal 2006 as mFSI LTD expects
that the timing of customer acceptances will impact their first
quarter performance.*
Based upon achieving anticipated revenue, gross margin and
operating expense levels, we expect to record a net loss of $6.0
to $8.0 million in the first quarter of fiscal 2006.*
Liquidity and Capital Resources
Our cash, restricted cash, cash equivalents and marketable
securities were approximately $31.9 million as of
August 27, 2005, a decrease of $10.3 million from the
end of fiscal 2004. The net decrease was primarily due to
$23.0 million of cash used in operating activities,
including $6.3 million related to the Hsu litigation
settlement. The decrease was also due to capital expenditures of
$1.8 million and $1.0 million of investments in
affiliate and a license fee. The decreases were partially offset
by $14.4 million in proceeds from the sale of the Allen,
Texas facility and $0.6 million of proceeds from the
issuance of common stock.
Accounts receivable increased $2.6 million from the end of
fiscal 2004. The increase in trade accounts receivable related
primarily to the timing of shipments in the fourth quarter of
fiscal 2004 as compared to the fourth quarter of fiscal 2005.
Trade receivables will fluctuate quarter to quarter depending on
individual customers timing of ship dates, payment terms
and cash flow conditions.
The balance in trade accounts receivable from affiliate as of
August 27, 2005 represented approximately 85% of the fiscal
2005 sales to affiliate due primarily to the majority of fiscal
2005 shipments to affiliate occurring in our fiscal fourth
quarter. The timing of shipments to affiliate is impacted by our
affiliates receipt of customer purchase orders, our
production lead times and the ultimate ship dates.
26
Inventory decreased approximately $2.7 million to
$24.7 million at the end of fiscal 2005, as compared to
$27.4 million at the end of fiscal 2004. The decrease in
inventory related primarily to a decrease in finished goods
inventory associated with the sale of demonstration tools in
fiscal 2005. Inventory reserves were $15.3 million at
August 27, 2005 as compared to reserves of
$19.7 million at the end of fiscal 2004. The decrease in
inventory reserves related primarily to the disposal of
$4.6 million of obsolete inventory, including the disposal
of $3.5 million of obsolete PSS product inventory during
fiscal 2005. The PSS product inventory reserves were
$11.7 million at August 27, 2005 as compared to
$15.8 million at the end of fiscal 2004. We disposed of
$2.1 million of obsolete PSS product inventory in fiscal
2004 and $1.0 million in fiscal 2003. Since we recorded the
PSS product inventory reserves as a result of the wind-down of
our Microlithography business in the second quarter of fiscal
2003, we have had sales of PSS product inventory that had
previously been written down to zero and reductions in inventory
buyback requirements of $6.7 million and have disposed of
$6.6 million of PSS product inventory. The original cost of
PSS product inventory available for sale or to be disposed of as
of August 27, 2005 was $11.7 million.
Trade accounts payable decreased approximately $4.3 million
to $5.2 million as of August 27, 2005 as compared to
$9.5 million at the end of fiscal 2004. The decrease in
trade accounts payable related primarily to a decrease in
inventory purchases related to a decrease in forecasted
shipments as a result of lower bookings.
Deferred profit increased approximately $1.7 million to
$4.8 million at the end of fiscal 2005, as compared to
$3.1 million at the end of fiscal 2004. The increase
relates primarily to the mix of products deferred with higher
margin products deferred as of the end of fiscal 2005 as
compared to the end of fiscal 2004.
As of August 27, 2005, our current ratio was 3.9 to 1.0,
and working capital was $65.6 million.
The following table provides aggregate information about our
contractual payment obligations and the periods in which
payments are due (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
|
|
|
|
Less Than | |
|
|
|
More Than | |
Contractual Obligations |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Operating Lease Obligations
|
|
$ |
2,695 |
|
|
$ |
1,196 |
|
|
$ |
1,344 |
|
|
$ |
155 |
|
|
|
|
|
Purchase Obligations
|
|
|
5,497 |
|
|
|
5,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-Term Liabilities(1)
|
|
|
3,250 |
|
|
|
1,000 |
|
|
|
500 |
|
|
|
500 |
|
|
$ |
1,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
11,442 |
|
|
$ |
7,693 |
|
|
$ |
1,844 |
|
|
$ |
655 |
|
|
$ |
1,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Other long-term liabilities represent payments related to a
patent litigation settlement and minimum royalty payments or
discounts granted under a license agreement. |
As of August 27, 2005, we had guarantees totaling $268,000
related to auto leases, VAT and payroll requirements in Europe.
These guarantees were collateralized with $282,000 of restricted
cash.
Capital expenditures were $1.8 million in fiscal 2005,
$1.7 million in fiscal 2004, and $3.9 million in
fiscal 2003. We expect capital expenditures to be less than
$600,000 in the first quarter of fiscal 2006.* Depreciation and
amortization is expected to be between approximately $0.9 and
$1.0 million in the first quarter of fiscal 2006.*
At the expected revenue and expense run rate, we anticipate
using $4.5 to $5.5 million of cash for operations in the
first quarter of fiscal 2006.* We believe that with existing
cash, cash receipts, cash equivalents, marketable securities and
internally generated funds, there will be sufficient funds to
meet our currently projected working capital requirements, and
to meet other cash requirements through at least fiscal 2006.*
We believe that success in our industry requires substantial
capital to maintain the flexibility to take advantage of
opportunities as they arise. One of our strategic objectives is,
as market and business conditions warrant, to consider
divestitures, investments or acquisitions of businesses,
products or
27
technologies particularly those that are complementary to our
surface conditioning business.* We may fund such activities with
additional equity or debt financing.* The sale of additional
equity or debt securities, whether to maintain flexibility or to
meet strategic objectives, could result in additional dilution
to our shareholders.* We currently do not have a line of credit
arrangement.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 151, Inventory Costs.
This statement requires that items such as idle facility
expense, excessive spoilage, double freight and rehandling costs
be recognized as current period charges. In addition, this
statement requires that the allocation of fixed production
overheads to the cost of conversion be based on the normal
capacity of the production facilities. This statement is
effective for inventory costs incurred beginning in our first
quarter of fiscal 2006. The implementation of this statement is
not expected to have a material impact on our results of
operations or financial position.*
In December 2004, the FASB issued SFAS No. 123
(Revised 2004), Share-Based Payment.
SFAS No. 123R is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation and
supersedes Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance.
SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services
through share-based payment transactions.
SFAS No. 123R requires a public entity to measure the
cost of employee services received in exchange for an award of
equity instruments based on the fair value of the award at the
date of grant. The cost will be recognized over the period
during which an employee is required to provide service in
exchange for the award. SFAS No. 123R is effective as
of the beginning of the first annual reporting period that
begins after June 15, 2005 and we adopted this standard
August 28, 2005 using the modified prospective method.
Beginning in fiscal 2006, our results of operations will reflect
compensation expense for new stock options granted under our
stock incentive plan, and for the unvested portion of previous
stock options granted. While we cannot precisely determine the
impact on net earnings as a result of the adoption of
SFAS No. 123R, we estimate our equity-based
compensation expense will be between $1.0 million and
$1.2 million for fiscal year 2006.* The decrease in the
expected expense in fiscal 2006 compared to the pro-forma
expense of $4.0 million in fiscal 2005 is due primarily to
the reduction in unvested options as of the beginning of fiscal
2006 versus earlier years due to the acceleration of vesting of
unvested options during the third quarter of fiscal 2005. The
ultimate amount of equity-based compensation expense will be
dependent on the number of option shares granted during the
year, as well as the timing, the vesting period, and the
determined fair value of the awards, and other factors such as
future forfeitures.
Risk Factors
Our business faces significant risks. The risks described below
are not the only risks we face. Additional risks and
uncertainties not presently known to us or that we currently
believe are immaterial also may impair our business operations.
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. The following
risk factors should be read in conjunction with the other
information and risks 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 downturns,
which may have a negative effect on our sales and operating
results. Our business depends on the amounts that manufacturers
of
28
microelectronics spend on capital equipment. The amounts they
spend on capital equipment depend on the existing and expected
demand for semiconductor devices and products that use
semiconductor devices. When a downturn 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
canceled or delayed orders for our products. Typically, the
semiconductor equipment industry has experienced more pronounced
decreases in net sales than the semiconductor industry as a
whole.
We, along with others in the semiconductor equipment industry,
have recently experienced a downturn in orders for new equipment
as well as delays in or cancellations of existing orders. We
cannot predict the extent and length of the current softening in
the industry. In addition:
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|
the semiconductor equipment industry may experience other,
possibly more severe and prolonged, downturns in the future; |
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|
any future recovery of the microelectronics industry may not
result in an increased demand by semiconductor manufacturers for
capital equipment or our products; and |
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the semiconductor equipment industry may not improve in the near
future or at all. |
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Failure of our products to gain market acceptance would
adversely affect our financial condition. |
We believe that our growth prospects depend upon our ability to
gain customer acceptance of our products and technology,
particularly newly developed products. Market acceptance of
products depends upon numerous factors, including:
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|
compatibility with existing manufacturing processes and products; |
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|
ability to displace incumbent suppliers or processes or tools of
record; |
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perceived advantages over competing products; and |
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the level of customer service available to support such products. |
Moreover, manufacturers often rely on a limited number of
equipment vendors to meet their manufacturing equipment needs.
As a result, market acceptance of our products may be affected
adversely to the extent potential customers utilize a
competitors manufacturing equipment. There can be no
assurance that sales of new products will remain constant or
grow or that we will be successful in obtaining broad market
acceptance of our systems and technology.
We expect to spend a significant amount of time and resources to
develop new systems and enhance existing systems. In light of
the long product development cycles inherent in our industry, we
will make these expenditures well in advance of the prospect of
deriving revenue from the sale of any new systems. Our ability
to commercially introduce and successfully market any new
systems is subject to a wide variety of challenges during this
development cycle, including start-up bugs, design defects and
other matters that could delay introduction of these systems to
the marketplace. In addition, since our customers are not
obligated by long-term contracts to purchase our systems, our
anticipated product orders may not materialize or orders that do
materialize may be canceled. As a result, if we do not achieve
market acceptance of new products, we may not be able to realize
sufficient sales of our systems in order to recoup research and
development expenditures. The failure of any of our new
products, for example the MAGELLAN®, to achieve market
acceptance would harm our business, financial condition, and
results of operations and cash flows.
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|
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
29
manufacturers frequently introduce new products. We believe that
microelectronics manufacturers increasingly rely on equipment
manufacturers like us to:
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|
design and develop more efficient manufacturing equipment; |
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design and implement improved processes for microelectronics
manufacturers to use; and |
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make their equipment compatible with equipment made by other
equipment manufacturers. |
To compete, we must continue to develop, manufacture, and market
new or improved products that meet changing industry standards.
To do this successfully, we must:
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select appropriate products; |
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design and develop our products efficiently and quickly; |
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implement our manufacturing and assembly processes efficiently
and on time; |
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make products that perform well for our customers; |
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market and sell our products effectively; and |
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introduce our new products in a way that does not unexpectedly
reduce sales of our existing products. |
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Product or process development problems could harm our
results of operations. |
Our products are complex, and from time to time have defects or
bugs that are difficult and costly to fix. This can harm our
results of operations in the following ways:
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|
we may incur substantial costs to ensure the functionality and
reliability of products early in their life cycle; |
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repeated defects or bugs can reduce orders, increase
manufacturing costs, adversely impact working capital and
increase service and warranty expenses; and |
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we may require significant lead times between product
introduction and commercialization. |
As a result, we may have to write off inventory and other assets
related to products and could lose customers and revenue. There
is no assurance that we will be successful in preventing product
and process development problems that could potentially harm our
results of operations.
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|
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.
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Future acquisitions may dilute our shareholders
ownership interests and have other adverse consequences. |
Because of consolidations in the semiconductor equipment
industry we serve 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
shareholders ownership interests and reduce earnings per
share. Acquisitions also may increase debt levels and the
related 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:
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difficulties in absorbing the new business, product line, or
technology; |
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diversion of managements attention from other business
concerns; |
30
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entering new markets in which we have little or no
experience; and |
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possible loss of key employees of the acquired business. |
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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. |
Our stock price has been volatile in the past and may continue
to be so in the future. In fiscal 2005, our stock price ranged
from $3.22 to $5.56 per share and in fiscal 2004, our stock
price ranged from $4.01 to $9.24 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:
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failure to meet the published expectations of securities
analysts for a given period; |
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|
changes in financial estimates by securities analysts; |
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|
press releases or announcements by, or changes in market values
of, comparable companies; |
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additions or departures of key personnel; and |
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involvement in or adverse results from litigation. |
The prices of technology stocks, including ours, have been
particularly affected by extreme fluctuations in price and
volume in the stock market generally. 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. In the future we could be the
target of this type of litigation. Securities litigation may
result in substantial costs and divert managements
attention and resources, which can seriously harm our business.
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Because our quarterly operating results are volatile, our
stock price could fluctuate. |
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:
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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 equipment
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
we expected those sales. |
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The Timing of Customer Acceptances. Based on our revenue
recognition policy, certain shipments to customers are not
recognized until customer acceptance. Delays of customer
acceptances 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 we expected those sales. |
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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. |
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|
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 |
31
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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. |
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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 also may be an increase in the time it takes to collect
payment from our customers or even outright payment defaults.
This can negatively affect our cash flow and our results. |
As a result of these factors, 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. Any one of the factors we list
above, or a combination of them, could adversely affect our
quarterly results of operations, and consequently may cause a
decline in our share price.
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|
Because of our ownership position in mFSI LTD.,
adverse results of mFSI LTD could adversely affect our
results. |
The profits or losses of our affiliate, mFSI LTD., can
also significantly affect our financial results. We have a 49%
interest in mFSI LTD. If this affiliate loses the business
of a significant company for which it distributes or sells
products, loses a significant customer, or otherwise became less
financially viable, it could have a negative effect on our
financial condition.
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|
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. Sales for mFSI LTD are
denominated in yen. As a result, U.S. dollar/yen exchange
rates may affect our equity interest in mFSI LTDs
earnings.
mFSI LTD sometimes engages 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. mFSI LTD will do so if a sale
denominated in a foreign currency is sufficiently large to
justify the costs of hedging. To hedge a sale, mFSI LTD
typically will 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, mFSI LTD 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 mFSI LTD have not
had any significant negative effect on us.
Because we assumed direct sales, service and applications
support and logistics responsibilities for our products in
Europe and the Asia Pacific region starting in March 2003, we
incur labor, service and other expenses in foreign currencies.
As of August 27, 2005, we had not entered into any hedging
activities and our foreign currency transaction loss for fiscal
2005 was insignificant. We intend to evaluate various hedging
activities and other options to minimize fluctuations in
interest and currency exchange rates. There is no assurance that
we will be successful in minimizing foreign exchange rate risks
and such failure may reduce our international sales or
negatively impact our operating results.
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|
Because of the need to meet and comply with numerous
foreign regulations and policies, the potential for change in
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 operate in a global market. In fiscal 2005, approximately 64%
of our sales revenue derived from sales outside of the United
States. In fiscal 2004, approximately 47% of our sales revenue
derived from sales outside the United States. In fiscal 2003,
approximately 38% of our sales revenue derived from sales
32
outside the United States. 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; |
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compliance with U.S. export laws and foreign laws; |
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|
political and economic instability; |
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|
trade restrictions; |
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|
changes in taxes and tariffs; |
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longer payment cycles; |
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|
difficulty of administering business overseas; and |
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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.
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.
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|
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 have or 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. We may be unable to continue to invest in marketing,
research and development and engineering at the levels we
believe necessary to maintain our competitive position. Our
failure to make these investments could have a significant
negative impact on our business, operating results and financial
condition.
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|
Because we do not have long-term sales commitments with
our customers, if these customers decide to reduce, delay or
cancel orders or choose to deal with our competitors, then our
results will be adversely affected. |
If our significant customers reduce, delay, or cancel orders,
then our operating results could suffer. Our largest customers
have changed from year to year, however, sales to our top five
customers accounted for approximately 48% of total sales in
fiscal 2005, 46% of total revenues in fiscal 2004 and 59% of
total revenues in fiscal 2003. Texas Instruments accounted for
approximately 14% of total sales in fiscal 2005, 16% of total
sales in fiscal 2004 and 24% of total sales in fiscal 2003.
Samsung Electronics accounted for approximately 11% of total
sales in fiscal 2005. IBM accounted for approximately 14% of
total sales in fiscal 2003. We currently have no long-term sales
commitments with any of our customers. Instead, we
33
generally make sales under purchase orders. All orders are
subject to cancellation or delay by the customer.
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Our backlog may not result in future net sales. |
We schedule the production of our systems based in part upon
order backlog. Due to possible customer changes in delivery
schedules and cancellations of orders, our backlog at any
particular date is not necessarily indicative of actual sales
for any succeeding period. In addition, while we evaluate each
customer order on a case by case basis to determine
qualification for inclusion in backlog, there can be no
assurance that amounts included in backlog ultimately will
result in future sales. A reduction in backlog during any
particular period, or the failure of our backlog to result in
future sales, could harm our business.
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|
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 of
our 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.
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|
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. |
Our operating expense levels are based in significant part on
our headcount, which generally is 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 headcount 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.
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|
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:
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our pending patent applications may not be issued or may be
issued with more narrow claims; |
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patents issued to us may be challenged, invalidated, or
circumvented; |
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rights granted under issued patents may not provide competitive
advantages to us; |
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foreign laws may not protect our intellectual property
rights; and |
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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 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.
34
|
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|
We are currently exposed to various risks related to legal
proceedings or claims. |
We have in the past and may in the future be involved in legal
proceedings or claims regarding patent infringement,
intellectual property rights, contracts and other matters. These
legal proceedings and claims, whether with or without merit,
could be time-consuming and expensive to prosecute or defend,
and could divert managements attention and resources.
There can be no assurance regarding the outcome of future legal
proceedings or claims. If we are not able to resolve a claim,
negotiate a settlement of the matter, obtain necessary licenses
on commercially reasonable terms and/or successfully prosecute
or defend its position, our business, financial condition and
results of operations could be materially and adversely affected.
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|
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.
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|
We are subject to internal controls evaluations and
attestation requirements of Section 404 of the
Sarbanes-Oxley Act of 2002. |
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
we must perform evaluations of our internal controls over
financial reporting. Beginning as of the end of fiscal 2005 and
annually thereafter, we must include with our Form 10-K a
report on our managements assessment of the adequacy of
such internal controls, and our independent registered public
accounting firm must publicly attest to the adequacy of
managements assessment and the effectiveness of our
internal controls. We have prepared and are implementing a plan
of action for compliance. Compliance with these requirements is
complex and time-consuming. If we fail to timely or successfully
comply with the requirements of Section 404, or if our
independent registered public accounting firm does not timely
attest to the evaluation, we could be subject to increased
regulatory scrutiny and the publics perception of us may
change.
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Changes to financial accounting standards may affect our
reported results of operations. |
We prepare our financial statements to conform with accounting
principles generally accepted in the United States of America
(GAAP). The GAAP are subject to interpretation by
the American Institute of Certified Public Accountants, the
Securities and Exchange Commission, the Financial Accounting
Standards Board and various bodies formed to interpret and
create appropriate accounting policies. A change in those
policies can have a significant effect on our reported results
and may even affect our reporting of transactions completed
before a change is announced.
Accounting policies affecting many other aspects of our
business, including rules relating to purchase accounting for
business combinations, revenue recognition, in-process research
and development charges, employee stock purchase plans and stock
option grants, have recently been revised or are under review.
Changes to those rules or the questioning of our current
accounting practices may have a material adverse effect on our
reported financial results or on the way we conduct business. In
addition, our preparation of financial statements in accordance
with GAAP requires that we make estimates and assumptions that
affect the recorded amounts of assets and liabilities,
disclosure of those assets and liabilities at the date of the
financial statement and the recorded amounts of expenses during
the reporting period. A change in the facts and circumstances
surrounding those estimates could result in a change to our
estimates and could impact our future operating results.
35
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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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ITEM 7A. |
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 August 27, 2005, our investments in
affiliate included a 49% interest in mFSI LTD, which
operates in Japan. We denominate the majority of our sales
outside of the U.S. in U.S. dollars.
Because we assumed direct sales, service and applications
support and logistics responsibilities for our products in
Europe and the Asia Pacific region starting in March 2003, we
have and will continue to incur labor, service and other
expenses in foreign currencies. As a result, we may be exposed
to fluctuations in foreign exchange rate risks.* As of
August 27, 2005, we had not entered into any hedging
activities and our foreign currency transaction loss for fiscal
2005 was insignificant. We are currently evaluating various
hedging activities and other options to minimize these risks.
We do not have significant exposure to changing interest rates
as all material outstanding debt was repaid on September 3,
1999. As of the end of fiscal 2005, amortized cost approximated
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 on loss before income
taxes of a 1% change in short-term interest rates would be
approximately $319,000 based on cash, restricted cash, cash
equivalents and marketable securities balances as of
August 27, 2005.
36
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ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
FSI INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended August 27, 2005, August 28, 2004 and
August 30, 2003
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2005 | |
|
2004 | |
|
2003 | |
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| |
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| |
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| |
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|
(In thousands, except per | |
|
|
share amounts) | |
Sales (including sales to affiliates of $4,130, $14,637 and
$15,362, respectively)
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|
$ |
86,370 |
|
|
$ |
114,404 |
|
|
$ |
88,826 |
|
Cost of goods sold
|
|
|
46,376 |
|
|
|
55,384 |
|
|
|
74,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
39,994 |
|
|
|
59,020 |
|
|
|
14,508 |
|
Selling, general and administrative expenses
|
|
|
35,291 |
|
|
|
39,547 |
|
|
|
38,602 |
|
Research and development expenses
|
|
|
22,078 |
|
|
|
22,458 |
|
|
|
31,126 |
|
Gain on sale of facility
|
|
|
7,015 |
|
|
|
|
|
|
|
|
|
Transition agreement termination fee
|
|
|
|
|
|
|
|
|
|
|
2,750 |
|
Write-down of fixed assets
|
|
|
|
|
|
|
|
|
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(10,360 |
) |
|
|
(2,985 |
) |
|
|
(64,970 |
) |
Interest income
|
|
|
735 |
|
|
|
310 |
|
|
|
559 |
|
Gain on marketable securities
|
|
|
5,808 |
|
|
|
1,972 |
|
|
|
|
|
Impairment of investment in affiliate
|
|
|
|
|
|
|
|
|
|
|
(10,195 |
) |
Other income, net
|
|
|
115 |
|
|
|
115 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(3,702 |
) |
|
|
(588 |
) |
|
|
(74,501 |
) |
Income tax expense
|
|
|
50 |
|
|
|
50 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in earnings (losses) of affiliates
|
|
|
(3,752 |
) |
|
|
(638 |
) |
|
|
(74,551 |
) |
Equity in earnings (losses) of affiliates
|
|
|
450 |
|
|
|
779 |
|
|
|
(4,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(3,302 |
) |
|
$ |
141 |
|
|
$ |
(78,557 |
) |
|
|
|
|
|
|
|
|
|
|
(Loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.11 |
) |
|
$ |
0.00 |
|
|
$ |
(2.66 |
) |
|
Diluted
|
|
$ |
(0.11 |
) |
|
$ |
0.00 |
|
|
$ |
(2.66 |
) |
Weighted average common shares
|
|
|
29,928 |
|
|
|
29,792 |
|
|
|
29,546 |
|
Weighted average common and potential common shares
|
|
|
29,928 |
|
|
|
30,315 |
|
|
|
29,546 |
|
The accompanying notes are an integral part of the consolidated
financial statements.
37
FSI INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27, | |
|
August 28, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
11,352 |
|
|
$ |
10,344 |
|
|
Restricted cash
|
|
|
282 |
|
|
|
6,037 |
|
|
Marketable securities
|
|
|
20,245 |
|
|
|
25,827 |
|
|
Trade accounts receivable, less allowance for doubtful accounts
of $922 and $1,286, respectively
|
|
|
21,393 |
|
|
|
18,487 |
|
|
Trade accounts receivable from affiliates
|
|
|
3,504 |
|
|
|
3,785 |
|
|
Inventories
|
|
|
24,717 |
|
|
|
27,378 |
|
|
Prepaid expenses and other current assets
|
|
|
6,924 |
|
|
|
5,568 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
88,417 |
|
|
|
97,426 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
21,556 |
|
|
|
30,918 |
|
Investment in affiliates
|
|
|
8,484 |
|
|
|
7,744 |
|
Other intangible assets, net
|
|
|
1,784 |
|
|
|
2,057 |
|
Deposits and other assets
|
|
|
1,698 |
|
|
|
1,652 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
121,939 |
|
|
$ |
139,797 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$ |
5,203 |
|
|
$ |
9,470 |
|
|
Accrued expenses
|
|
|
11,592 |
|
|
|
15,854 |
|
|
Customer deposits
|
|
|
1,220 |
|
|
|
255 |
|
|
Deferred profit
|
|
|
3,980 |
|
|
|
2,358 |
|
|
Deferred profit with affiliates
|
|
|
808 |
|
|
|
738 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
22,803 |
|
|
|
28,675 |
|
Long-term liabilities
|
|
|
|
|
|
|
750 |
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, no par value; 9,700 shares authorized;
none issued and outstanding
|
|
|
|
|
|
|
|
|
|
Series A Junior Participating Preferred stock, no par
value; 300 shares authorized; none issued and outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, no par value; 50,000 shares authorized;
issued and outstanding, 29,874 and 29,942 shares,
respectively
|
|
|
223,675 |
|
|
|
226,078 |
|
|
Accumulated deficit
|
|
|
(124,765 |
) |
|
|
(121,463 |
) |
|
Accumulated other comprehensive income
|
|
|
226 |
|
|
|
5,757 |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
99,136 |
|
|
|
110,372 |
|
Commitments and contingencies (Notes 5 and 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
121,939 |
|
|
$ |
139,797 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
38
FSI INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Years ended August 27, 2005, August 28, 2004 and
August 30, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
Common Stock | |
|
|
|
Other | |
|
|
|
|
| |
|
|
|
Comprehensive | |
|
|
|
|
Number of | |
|
|
|
Accumulated | |
|
Income | |
|
|
|
|
Shares | |
|
Amount | |
|
Deficit | |
|
(Loss) | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance August 31, 2002
|
|
|
29,463 |
|
|
$ |
224,043 |
|
|
$ |
(43,047 |
) |
|
$ |
(1,364 |
) |
|
$ |
179,632 |
|
Stock issuance
|
|
|
192 |
|
|
|
674 |
|
|
|
|
|
|
|
|
|
|
|
674 |
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding gains on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,227 |
|
|
|
6,227 |
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,024 |
|
|
|
1,024 |
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(78,557 |
) |
|
|
|
|
|
|
(78,557 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71,306 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance August 30, 2003
|
|
|
29,655 |
|
|
|
224,717 |
|
|
|
(121,604 |
) |
|
|
5,887 |
|
|
|
109,000 |
|
Stock issuance
|
|
|
287 |
|
|
|
1,361 |
|
|
|
|
|
|
|
|
|
|
|
1,361 |
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding gains on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(984 |
) |
|
|
(984 |
) |
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
854 |
|
|
|
854 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
141 |
|
|
|
|
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance August 28, 2004
|
|
|
29,942 |
|
|
|
226,078 |
|
|
|
(121,463 |
) |
|
|
5,757 |
|
|
|
110,372 |
|
Stock issuance
|
|
|
182 |
|
|
|
628 |
|
|
|
|
|
|
|
|
|
|
|
628 |
|
Retirement of stock
|
|
|
(250 |
) |
|
|
(3,031 |
) |
|
|
|
|
|
|
|
|
|
|
(3,031 |
) |
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding gains on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,243 |
) |
|
|
(5,243 |
) |
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(288 |
) |
|
|
(288 |
) |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(3,302 |
) |
|
|
|
|
|
|
(3,302 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,833 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance August 27, 2005
|
|
|
29,874 |
|
|
$ |
223,675 |
|
|
$ |
(124,765 |
) |
|
$ |
226 |
|
|
$ |
99,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
39
FSI INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended August 27, 2005 August 28, 2004 and
August 30, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(3,302 |
) |
|
$ |
141 |
|
|
$ |
(78,557 |
) |
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on marketable securities
|
|
|
(5,808 |
) |
|
|
(1,972 |
) |
|
|
|
|
|
Gain on sale of facility
|
|
|
(7,015 |
) |
|
|
|
|
|
|
|
|
|
Write-down of fixed asset, net
|
|
|
|
|
|
|
|
|
|
|
6,930 |
|
|
Impairment of investment in affiliate
|
|
|
|
|
|
|
|
|
|
|
10,195 |
|
|
Transition agreement termination fee
|
|
|
|
|
|
|
|
|
|
|
1,351 |
|
|
Depreciation
|
|
|
3,630 |
|
|
|
5,654 |
|
|
|
9,065 |
|
|
Amortization
|
|
|
783 |
|
|
|
2,266 |
|
|
|
2,313 |
|
|
Equity in (earnings) losses of affiliates
|
|
|
(450 |
) |
|
|
(779 |
) |
|
|
4,006 |
|
|
Loss on disposal of equipment
|
|
|
(1 |
) |
|
|
17 |
|
|
|
346 |
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(2,625 |
) |
|
|
(4,694 |
) |
|
|
1,851 |
|
|
|
Inventories
|
|
|
2,662 |
|
|
|
(7,917 |
) |
|
|
25,298 |
|
|
|
Prepaid expenses and other current assets
|
|
|
(1,356 |
) |
|
|
(723 |
) |
|
|
(112 |
) |
|
|
Trade accounts payable
|
|
|
(4,267 |
) |
|
|
5,249 |
|
|
|
(4,925 |
) |
|
|
Accrued expenses
|
|
|
(7,946 |
) |
|
|
962 |
|
|
|
(3,234 |
) |
|
|
Customer deposits
|
|
|
965 |
|
|
|
255 |
|
|
|
|
|
|
|
Deferred profit
|
|
|
1,692 |
|
|
|
(1,428 |
) |
|
|
409 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(23,038 |
) |
|
|
(2,969 |
) |
|
|
(25,064 |
) |
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,755 |
) |
|
|
(1,723 |
) |
|
|
(3,927 |
) |
Purchase of marketable securities
|
|
|
(440,774 |
) |
|
|
(311,218 |
) |
|
|
(500,760 |
) |
Sale of marketable securities
|
|
|
439,709 |
|
|
|
318,548 |
|
|
|
527,810 |
|
Maturities of marketable securities
|
|
|
|
|
|
|
|
|
|
|
5,709 |
|
Proceeds on marketable securities distribution
|
|
|
7,212 |
|
|
|
|
|
|
|
|
|
Investment in affiliate
|
|
|
(490 |
) |
|
|
|
|
|
|
|
|
Investment in license fee
|
|
|
(510 |
) |
|
|
|
|
|
|
|
|
(Increase) decrease in deposits and other assets
|
|
|
(46 |
) |
|
|
596 |
|
|
|
93 |
|
Proceeds from sale of property, plant and equipment
|
|
|
14,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
17,751 |
|
|
|
6,203 |
|
|
|
28,925 |
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash
|
|
|
5,755 |
|
|
|
(2,688 |
) |
|
|
(218 |
) |
Net proceeds from issuance of common stock
|
|
|
628 |
|
|
|
1,361 |
|
|
|
674 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
6,383 |
|
|
|
(1,327 |
) |
|
|
456 |
|
|
Effect of exchange rate on cash
|
|
|
(88 |
) |
|
|
196 |
|
|
|
(104 |
) |
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
1,008 |
|
|
|
2,103 |
|
|
|
4,213 |
|
Cash and cash equivalents at beginning of year
|
|
|
10,344 |
|
|
|
8,241 |
|
|
|
4,028 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
11,352 |
|
|
$ |
10,344 |
|
|
$ |
8,241 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
40
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended August 27, 2005, August 28, 2004
and August 30, 2003
|
|
(1) |
Description of Business and Summary of Significant Accounting
Policies |
FSI International, Inc. (the Company) is a global
supplier of surface conditioning equipment (process equipment
used to etch and clean organic and inorganic materials from the
surface of a silicon wafer), technology and support services for
microelectronics manufacturing. The Companys broad
portfolio of batch and single-wafer cleaning products includes
process technologies for immersion (a method used to clean
silicon wafers by immersing the wafer in multiple tanks filled
with process chemicals), spray (sprays chemical mixtures, water
and nitrogen in a variety of sequences on to the microelectronic
substrate), vapor (utilizes gas phase chemistries to selectively
remove sacrificial surface films) and CryoKinetic (a momentum
transfer process used to remove non-chemically bonded particles
from the surface of a microelectronic device). The
Companys support services programs provide product and
process enhancements to extend the life of installed FSI
equipment.
The Company announced the winding down of its Microlithography
business in March 2003 and transitioned the Microlithography
(uses light to transfer a circuit pattern unto a wafer) business
to a POLARIS® Systems and Services (PSS)
organization to focus on supporting the more than 300 installed
POLARIS® Systems.
The Companys customers include microelectronics
manufacturers located throughout North America, Europe, Japan
and the Asia Pacific region.
|
|
|
Principles of Consolidation |
The accompanying consolidated financial statements include the
accounts of FSI International, Inc. and its wholly owned
subsidiaries, FSI International Asia, Ltd., FSI International
Semiconductor Equipment Pte. Ltd., FSI International (France)
SARL, FSI International (Germany) GmbH, FSI International
(Italy) S.r.l., FSI International (Holding) B.V., FSI
International Netherlands B.V., FSI International
(UK) Limited, FSI International (Shanghai) Co., Ltd., FSI
International (Korea) Co., Ltd., SCD Mountain View, Inc.,
Semiconductor Systems, Inc., and its branch office, FSI Malaysia
SDN GHD. All significant intercompany balances and
transactions have been eliminated in consolidation. During
fiscal 2005, the Company closed FSI International, Ltd., a
foreign sales corporation (FSC). During fiscal 2004, the Company
closed the Shanghai Representative Office of FSI International,
Inc. (U.S.) and the Tianjin Representative Office of FSI
International.
The Companys fiscal year ends on the last Saturday in
August and is comprised of 52 or 53 weeks. Fiscal 2005,
2004 and 2003 consisted of 52-week periods.
The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred or services have been
rendered, the purchase price is fixed or determinable and
collectibility is reasonably assured. If the Companys
equipment sales involve sales to its existing customers who have
previously accepted the same type(s) of equipment with the same
type(s) of specifications, the Company accounts for the product
sale as a multiple element arrangement. The Company recognizes
the equipment revenue upon shipment and transfer of title. The
other elements may include installation, extended warranty
contracts and training. Equipment installation revenue is valued
based on estimated service person hours to complete installation
and published or quoted service labor rates and is recognized
when the labor has been completed. Training revenue is valued
based on published training class prices and is recognized when
the customers complete the training classes or when a
customer-specific training period
41
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
has expired. The published or quoted service labor rates and
training class prices are rates actually charged and billed to
the Companys customers.
All other product sales with customer specific acceptance
provisions are recognized upon customer acceptance. Future
revenues may be negatively impacted if the Company is unable to
meet customer-specific acceptance criteria. Revenue related to
spare parts sales is recognized upon shipment. Revenue related
to maintenance and service contracts and extended warranty
contracts are recognized ratably over the duration of the
contracts.
The timing and amount of revenue recognized is dependent on the
mix of revenue recognized upon shipment versus acceptance and
for revenue recognized upon acceptance, it is dependent upon
when customer specific criteria are met.
|
|
|
Other Comprehensive Income (Loss) |
Other comprehensive income (loss) pertains to revenues,
expenses, gains, and losses that are not included in net income
(loss), but rather are recorded directly in stockholders
equity. For fiscal 2005, 2004 and 2003, other comprehensive
income (loss) consisted of foreign currency translation
adjustments and unrealized holding gains on investments.
|
|
|
Cash and Cash Equivalents |
All highly liquid investments purchased with an original
maturity of three months or less are considered to be cash
equivalents.
The Company classifies its marketable equity securities as
available-for-sale and carries these securities at amounts that
approximate fair market value. At February 26, 2005, the
Company began to classify its investment in auction-rate
securities as marketable securities. Previously, these
investments were included in cash and cash equivalents. These
investments totaled $20.2 million as of August 27,
2005 and $19.2 million at the end of fiscal 2004. This
change in classification has no effect on the amounts of total
current assets, total assets, net income, or cash flows from
operations of the Company.
Upon completion of the termination of the distribution
agreements with Metron Technology in fiscal 2003, the
Companys ownership in Metron Technology was reduced from
approximately 21% to 17%. As a result, the Company began to
account for its investment in Metron Technology as a marketable
equity security available-for-sale and carry the investment at
fair market value per the closing price of Metron
Technologys stock as reported on the Nasdaq National
Market.
During the first quarter of fiscal 2004, the Company sold
627,000 shares of Metron Technology stock and its ownership
in Metron Technology was approximately 12% as of August 28,
2004. The Company recorded gains in other income,
net of approximately $2.0 million related to the
sales of the 627,000 shares of Metron Technology stock
during the first quarter of fiscal 2004. As of August 28,
2004, the fair market value of its investment in Metron
Technology was $6,647,000, including unrealized holding gains of
$5,243,000.
On August 16, 2004, Metron Technology entered into a Stock
and Asset Purchase Agreement (Purchase Agreement)
with Applied Materials, Inc. (Applied). On
December 14, 2004, Applied, pursuant to the Purchase
Agreement, acquired the worldwide operating subsidiaries and
business of Metron Technology. Applied paid approximately
$84,567,000 in cash to Metron Technology upon closing on
December 14, 2004. In connection with the consummation of
the asset sale to Applied, Metron Technology changed its name to
Nortem N.V. (Nortem) and began a liquidation
process. Nortem was
42
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
delisted from the Nasdaq National Market on April 15, 2005
and began trading over-the-counter. Shareholders of Nortem
received two liquidating distributions. The initial distribution
was made on March 14, 2005 at $3.75 per share. The
Company received $5.6 million and recorded a gain of
$4.2 million in the third quarter of fiscal 2005. In June
2005, the Company received the final distribution from Nortem,
net of certain Dutch withholding taxes. A portion of the final
distribution was deemed a dividend, and that portion was subject
to withholding tax. The net distribution was approximately
$1.02 per share. The Company received $1.5 million and
recorded a gain of $1.6 million in the fourth quarter of
fiscal 2005 related to this final distribution. The Company also
recorded a receivable for approximately $0.1 million for a
refund of a portion of the Dutch withholding taxes.
|
|
|
Trade Accounts Receivable |
Trade accounts receivable are recorded net of an allowance for
doubtful accounts.
|
|
|
Allowance for Doubtful Accounts |
The Company makes estimates of the uncollectibility of accounts
receivable. Management specifically analyzes accounts receivable
and analyzes historical bad debts, customer concentrations,
customer credit-worthiness, current economic trends and changes
in customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. Accounts receivable are charged
off after management determines that they are uncollectible.
|
|
|
Inventories and Inventory Reserves |
Inventories are valued at the lower of cost, determined by the
first in, first out method, or net realizable value. The Company
records reserves for inventory shrinkage and for potentially
excess, obsolete and slow moving inventory. The amounts of these
reserves are based upon historical loss trends, inventory
levels, physical inventory and cycle count adjustments, expected
product lives, forecasted sales demand and recoverability.
|
|
|
Property, Plant and Equipment |
Building and related costs are carried at cost and depreciated
on a straight-line basis over a 5 to 30-year period. Leasehold
improvements are carried at cost and depreciated over a three-
to five-year period or the term of the underlying lease,
whichever is shorter. Equipment is carried at cost and
depreciated on a straight-line method over its estimated
economic life. Principal economic lives for equipment are one to
seven years. Software implemented for internal use is amortized
over three to five years beginning when the system is placed in
service. Maintenance and repairs are expensed as incurred;
significant renewals and improvements are capitalized.
|
|
|
Valuation of Long-Lived and Intangible Assets |
The Company assesses the impairment of identifiable intangibles
and long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable.
The Company amortizes intangible assets on a straight-line basis
over their estimated economic lives which range from two to nine
years. The estimated aggregate amortization of intangible assets
for the next five years is $538,000 in fiscal 2006, $537,000 in
fiscal 2007, $538,000 in fiscal 2008, $163,000 in fiscal 2009
and $8,000 in fiscal 2010.
If the Company determines that the carrying value of intangibles
and long-lived assets may not be recoverable, the Company
measures any impairment based on a projected discounted cash
flow method using a discount rate determined by its management
to be commensurate with the risk inherent in its
43
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
current business model or another valuation technique. Net
intangible assets and long-lived assets amounted to
$33.5 million as of August 27, 2005.
The Company has no intangible assets with indefinite useful
lives. Intangible assets as of August 27, 2005 and
August 28, 2004 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 27, 2005 | |
|
|
| |
|
|
Gross Carrying | |
|
Accumulated | |
|
Net Carrying | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
|
| |
|
| |
|
| |
Developed technology
|
|
$ |
9,150 |
|
|
$ |
9,150 |
|
|
$ |
|
|
Patents
|
|
|
4,285 |
|
|
|
2,918 |
|
|
|
1,367 |
|
License fees
|
|
|
1,010 |
|
|
|
593 |
|
|
|
417 |
|
Other
|
|
|
420 |
|
|
|
420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,865 |
|
|
$ |
13,081 |
|
|
$ |
1,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 28, 2004 | |
|
|
| |
|
|
Gross Carrying | |
|
Accumulated | |
|
Net Carrying | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
|
| |
|
| |
|
| |
Developed technology
|
|
$ |
9,150 |
|
|
$ |
8,896 |
|
|
$ |
254 |
|
Patents
|
|
|
4,285 |
|
|
|
2,482 |
|
|
|
1,803 |
|
License fees
|
|
|
500 |
|
|
|
500 |
|
|
|
|
|
Other
|
|
|
420 |
|
|
|
420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,355 |
|
|
$ |
12,298 |
|
|
$ |
2,057 |
|
|
|
|
|
|
|
|
|
|
|
The Company routinely considers whether indicators of impairment
of its property and equipment assets are present. If such
indicators are present, the Company determines whether the sum
of the estimated undiscounted cash flows attributable to the
asset in question is less than their carrying value. If less, an
impairment loss is recognized based on the excess of the
carrying amount of the asset over its fair value. Fair value is
determined by discounted estimated future cash flows, appraisals
or other methods deemed appropriate. If the asset determined to
be impaired is to be held and used, the Company recognizes an
impairment charge to the extent the present value of anticipated
net cash flows attributable to the asset is less than the
assets carrying value.
See discussion of the Companys impairment of property,
plant and equipment assets in the second quarter of fiscal 2003
in Note 2, Sale of Allen, Texas facility and Wind Down of
Microlithography Business.
The Companys investment in affiliated companies consists
of a 49% interest in mFSI LTD. This investment is
accounted for by the equity method utilizing a two-month lag due
to the affiliates year end. At the completion of the
transition with Metron Technology, the Companys ownership
interest in Metron Technology was reduced from approximately 21%
to approximately 17%. (See Note 3). Due to the utilization
of a three-month lag, the Company continued to account for its
investment in Metron Technology by the equity method through the
third quarter of fiscal 2003. In the fourth quarter of fiscal
2003, the Company began to account for its investment in Metron
Technology as a marketable equity security available-for-sale
and carried the investment at fair market value based on the
closing price of Metron Technologys stock as reported on
the Nasdaq National Market. The Company recorded the change in
the fair market value in other comprehensive income (loss).
During fiscal 2005, the worldwide operating subsidiaries and
business of Metron Technology were purchased by Applied.
44
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company defers recognition of the profit on sales to
mFSI LTD which remain in mFSI LTDs inventory
based on the Companys ownership percentage of mFSI
LTD.
The book value of the Companys long-term investment in
affiliate is reviewed for other than temporary impairment
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. (See Note 3.)
Deferred income taxes are provided in amounts sufficient to give
effect to temporary differences between financial and tax
reporting. The Company accounts for tax credits as reductions of
income tax expense in the year in which such credits are
allowable for tax purposes.
The Company, in general, warrants new equipment manufactured by
the Company to the original purchaser to be free from defects in
material and workmanship for one to two years, depending upon
the product or customer agreement. Provision is made for the
estimated cost of maintaining product warranties at the time the
product is sold. Special warranty reserves are also accrued for
major rework campaigns.
Warranty provisions, claims and changes in estimates for the
fiscal years ended August 27, 2005, August 28, 2004
and August 30, 2003 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27, | |
|
August 28, | |
|
August 30, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Beginning balance
|
|
$ |
4,575 |
|
|
$ |
5,201 |
|
|
$ |
5,865 |
|
Warranty provisions
|
|
|
(164 |
) |
|
|
1,466 |
|
|
|
1,543 |
|
Warranty claims
|
|
|
(708 |
) |
|
|
(1,164 |
) |
|
|
(2,788 |
) |
Changes in estimates
|
|
|
414 |
|
|
|
(928 |
) |
|
|
581 |
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$ |
4,117 |
|
|
$ |
4,575 |
|
|
$ |
5,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation |
Assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at current exchange rates.
Operating results for investees and foreign subsidiaries are
translated into U.S. dollars using the average or actual
rates of exchange prevailing during the period. Foreign currency
translation adjustments are included in the accumulated other
comprehensive income account in stockholders equity.
|
|
|
Net Income (Loss) Per Common Share |
Basic income (loss) per share is computed by dividing net income
(loss) by the weighted average number of shares of common stock
outstanding during the period. Diluted income per common share
is computed using the treasury stock method to compute the
weighted average number of common stock outstanding assuming the
conversion of potential dilutive common shares. The number of
potential dilutive common shares included in the computation of
diluted income per share was 523,000 for fiscal 2004. Options to
purchase 3,244,000 shares of common stock were
outstanding in fiscal 2004 but were not included in the
computation of diluted income per common share because the
exercise price of the options exceeds the average market price
and would have been antidilutive. Diluted loss per common share
for fiscal years 2005 and 2003 does not include the effect of
potential dilutive common shares as their inclusion would be
antidilutive. The number of potential dilutive common shares
excluded from the computation of diluted net income (loss) per
share was 4,001,000 for fiscal 2005 and 3,695,000 for fiscal
2003.
45
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Derivative Instruments and Hedging Activities |
The Company does not use derivative financial instruments for
trading or speculative purposes. The Company did not engage in
any hedging activities during fiscal 2005, 2004, or 2003.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that could affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could
differ from those estimates.
In accordance with the provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, the Company
elected to continue to apply the provisions of Accounting
Principles Boards Opinion No. 25 (APB No. 25),
Accounting for Stock Issued to Employees, and
related interpretations in accounting for its employee stock
option and stock purchase plans and therefore is not required to
recognize compensation expense in connection with these plans as
long as the quoted market price of the Companys stock at
the date of grant equals the amount the employee must pay to
acquire the stock. Companies that continue to use APB
No. 25 are required to present in the notes to the
consolidated financial statements, on an annual basis, the pro
forma effects on reported net (loss) income and (loss) income
per share as if compensation expense had been recognized based
on the fair value of options granted. With the adoption of
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, the
Company began reporting this information on a quarterly basis in
the third quarter of fiscal 2003.
The Company has adopted the disclosure-only provisions of
SFAS No. 123 but applies APB No. 25 and related
interpretations in accounting for its plans. Accordingly,
compensation cost for stock options is measured as the excess,
if any, of the quoted market price of the Companys stock
at the date of the grant over the amount an employee must pay to
acquire the stock. The Company recognized no compensation
expense in fiscal 2005, 2004, or 2003 under APB No. 25.
If the Company had elected to recognize compensation cost for
the stock option plan and employee stock purchase plan based on
the fair value at the grant dates for awards under those plans,
consistent with the method prescribed by SFAS No. 123,
net income (loss) and net income (loss) per common share would
have been changed to the pro forma amounts indicated below (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net (loss) income, as reported
|
|
$ |
(3,302 |
) |
|
$ |
141 |
|
|
$ |
(78,557 |
) |
Add: Stock-based employee compensation expense recognized in
statements of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Stock-based employee compensation expense determined under
fair value based method
|
|
|
(3,979 |
) |
|
|
(4,408 |
) |
|
|
(4,829 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(7,281 |
) |
|
$ |
(4,267 |
) |
|
$ |
(83,386 |
) |
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
(0.11 |
) |
|
$ |
0.00 |
|
|
$ |
(2.66 |
) |
Basic pro forma
|
|
$ |
(0.24 |
) |
|
$ |
(0.14 |
) |
|
$ |
(2.82 |
) |
Diluted as reported
|
|
$ |
(0.11 |
) |
|
$ |
0.00 |
|
|
$ |
(2.66 |
) |
Diluted pro forma
|
|
$ |
(0.24 |
) |
|
$ |
(0.14 |
) |
|
$ |
(2.82 |
) |
46
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of stock options used to compute pro forma net
income (loss) and net income (loss) per common share under
SFAS No. 123 is the estimated value at the grant date
using the Black-Scholes option-pricing model with the following
weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options | |
|
ESPP | |
|
|
| |
|
| |
Fiscal Year |
|
2005 | |
|
2004 | |
|
2003 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Annualized dividend yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected stock price volatility
|
|
|
70.5 |
% |
|
|
72.2 |
% |
|
|
73.2 |
% |
|
|
69.8 |
% |
|
|
71.8 |
% |
|
|
73.2 |
% |
Risk free interest rate
|
|
|
3.8 |
% |
|
|
3.3 |
% |
|
|
3.5 |
% |
|
|
3.3 |
% |
|
|
1.7 |
% |
|
|
1.2 |
% |
Expected life (in years)
|
|
|
5.3 |
|
|
|
5.1 |
|
|
|
5.2 |
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
The weighted average grant date fair value, based on the
Black-Scholes option pricing model, for options granted in
fiscal 2005 was $2.41 per share, for options granted in
fiscal 2004 was $4.53 per share and for options in fiscal
2003 was $1.86 per share.
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 123 (Revised 2004), Share-Based
Payment. SFAS No. 123R is a revision of
SFAS No. 123 and supersedes APB 25, and its
related implementation guidance. SFAS No. 123R focuses
primarily on accounting for transactions in which an entity
obtains employee services through share-based payment
transactions. SFAS No. 123R requires a public entity
to measure the cost of employee services received in exchange
for an award of equity instruments based on the fair value of
the award at the date of grant. The cost will be recognized over
the period during which an employee is required to provide
service in exchange for the award. SFAS No. 123R is
effective as of the beginning of the first annual reporting
period that begins after June 15, 2005 and we adopted this
standard on August 28, 2005 using the modified prospective
method. Beginning in fiscal year 2006, our results of operations
will reflect compensation expense for new stock options granted
under our stock incentive plan, and for the unvested portion of
previous stock options granted. The ultimate amount of
equity-based compensation expense will be dependent on the
number of option shares granted during the year, as well as the
timing, vesting period, and the determined fair value of the
awards, and other factors such as future forfeitures.
On March 25, 2005, the Compensation Committee of the Board
of Directors of the Company approved the accelerated vesting of
all unvested options that have an exercise price of $4.06 or
greater held by current employees as of March 25, 2005. The
accelerated vesting affected options with respect to
approximately 857,000 shares of the Companys common
stock. The acceleration of options in the third quarter of
fiscal 2005 resulted in higher pro forma stock-based employee
compensation expense in fiscal 2005 than there would have been
had the Company not accelerated the options. We accelerated the
vesting of the identified stock options in fiscal 2005 because
it will result in lower compensation charges in future periods
under SFAS No. 123R.
|
|
|
New Accounting Pronouncements |
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs. This statement requires that items
such as idle facility expense, excessive spoilage, double
freight and rehandling costs be recognized as current period
charges. In addition, this statement requires that the
allocation of fixed production overheads to the cost of
conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs
incurred beginning in the Companys first quarter of fiscal
2006. The implementation of this statement is not expected to
have a material impact on the Companys results of
operation or financial condition.
47
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Certain fiscal 2004 and 2003 amounts have been reclassified to
conform to the current year presentation.
|
|
(2) |
Sale of Allen, Texas Facility and Wind Down of
Microlithography Business |
In March 2003, the Company announced that it was winding down
the Microlithography business due to uncertain economic
conditions and the weak semiconductor industry forecast. The
decision was also due to a history of operating losses of the
Microlithography business due to competitive pressures and
general economic and industry conditions.
The Companys decision to wind down the Microlithography
business was made after exploring the following options:
|
|
|
1. Continue to fund the operating losses of the
Microlithography business with a goal to gain marketshare with
300mm customers and ultimately return the business to
profitability. |
|
|
2. Establish a strategic relationship with another
semiconductor process equipment manufacturer. |
|
|
3. Divest of the business to another process equipment
company or a financial investor group. |
|
|
4. Spin out the business to a strategic and financial
investor group. |
|
|
5. Discontinue strategic and new product applications
development and operate the business in a maintenance
mode until industry conditions improve. |
Prior to the Companys decision to wind down the
Microlithography business, it had discussions with prospective
strategic partners and a number of financial partners. A number
of these prospective partners conducted technology, customer,
financial and operations due diligence.
The Company also approached several of the semiconductor
manufacturers that are investing in 300mm facilities to see if
they would have an interest in supporting it with multiple
orders.
Even though a number of these customers had a strong interest in
supporting a second source in addition to Tokyo Electron Ltd.
for this technology, they were unable to make the investment
commitment under the timeline that was proposed.
None of these efforts yielded the results the Company was
seeking. As a result, the Company announced in March 2003 that
it would discontinue its Microlithography business operations
and wind down the business operations over the next several
quarters.
For the fiscal year ended August 31, 2002, the
Microlithography business revenue represented $61 million,
or 43 percent, of the Companys total revenue of
$143 million. Prior to the wind down of the
Microlithography business, approximately 292 of the
Companys 714 employees worked in this business. The
Company recorded an accrual of $2.7 million for severance
expenses in fiscal 2003. The severance expense was allocated as
follows: $0.3 million to cost of goods sold,
$1.3 million to selling, general and administrative expense
and $1.1 million to research and development expense. The
Company paid $2.4 million of the fiscal 2003 severance
accruals in fiscal 2003 and $0.3 million in fiscal 2004.
The Company recorded $85,000 in severance expense in fiscal 2004
and paid the $85,000 in the first quarter of fiscal 2005.
In the second quarter of fiscal 2003, when the Company decided
to exit the resist processing market, an impairment charge of
$7.0 million was recorded against property, plant and
equipment. This write-down included a $5.0 million
impairment charge for the Microlithography business facility in
Allen, Texas. As part of the Companys analysis, management
had a competitive market overview performed and reviewed
48
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
office buildings currently on the market and available for lease
or sale. The impairment charge was based upon the Companys
estimate of fair value of the facility. In estimating the fair
value of the facility, the Company assumed the building would be
marketed as office space and that the special-purpose space,
such as the clean rooms and laboratories, would be converted to
office space. This assumption was made based upon the low demand
in the area for clean room facilities and with consideration for
the electronics industry downturn that occurred in 2001 and
2002. The Company did not expect that it would find a buyer that
would utilize the special purpose space.
During the second quarter of fiscal 2003, the Company also
recorded an impairment charge of $2.0 million on the
Microlithography business equipment based upon managements
review of its business equipment and its estimated fair value
under SFAS 144, Accounting for Impairment or Disposal
of Long-Lived Assets.
After two years of marketing the building, in February 2005 the
Company sold its 162,000 square foot Allen, Texas facility,
together with the majority of the business equipment for its
special-purpose clean room facility space, to an electronics
industry buyer and received approximately $14.4 million in
net cash proceeds from the sale. The sale price was in excess of
the value the Company had assumed for office space use. The
building and property, plant and equipment sold was recorded on
the Companys balance sheet at approximately
$7.5 million as of the closing date of the sale. The
Company retained ownership of approximately four acres of land
adjacent to the site. The Company recorded a gain of
$7.0 million on the sale.
Concurrent with the sale, the Company entered into a sublease of
approximately 40,000 square feet of space in the facility
for the Companys legacy POLARIS® System product group
operations. As the present value of the leaseback rentals was
less than 10% of the fair value of the facility, it was
considered minor, and the entire gain of approximately
$7.0 million was recognized upon the close of the sale. The
lease was extended in the third quarter of fiscal 2005 to end on
August 31, 2006; however, the Company has an option to
extend the sublease term for one additional period of
12 months, by giving not less than 90 days prior
written notice.
The Company recorded $19.0 million of inventory charges in
the second quarter of fiscal 2003 based on the estimated future
sales and recoverability, specifically related to its decision
to wind down the Microlithography business. The Company
determined the $19.0 million inventory charge based on the
inventory balance as of March 1, 2003 as compared to the
inventory balance expected to be used for Microlithography
orders in backlog, anticipated orders and anticipated order
cancellations and adjusted the net inventory balance to its net
realizable value. During fiscal 2005, the Company had sales of
PSS product inventory with an original cost of
approximately $0.5 million that had previously been written
down to zero. During fiscal 2004, the Company had sales of PSS
product inventory with an original cost of approximately
$3.2 million that had previously been written down to zero
and during fiscal 2003, the Company had sales of PSS product
inventory with an original cost of approximately
$3.0 million that had previously been written down to zero.
In addition, the Company was able to reduce certain open
purchase order commitments and inventory buyback requirements.
Since the Company recorded the PSS product inventory reserves as
a result of the wind-down of our Microlithography business in
the second quarter of fiscal 2003, we have had sales of PSS
product inventory that had previously been written down to zero
and reductions in inventory buyback requirements of
$6.7 million and have disposed of $6.6 million of
PSS product inventory. The original cost of PSS product
inventory available for sale or to be disposed of as of
August 27, 2005 was $11.7 million.
The Company will continue to try to sell the impaired inventory
to its customers as spares, refurbished systems and upgrades to
existing systems. If unsuccessful, some of the items will be
disposed of. Only as items are sold or disposed of will the
reserve be reversed or reduced. Gross margins will be higher if
and when inventory carried at a reduced cost is sold.
49
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(3) |
Transition Agreement with Metron Technology |
On October 9, 2002, the Company entered into a Transition
Agreement with Metron Technology related to the early
termination of the Companys distribution agreements with
Metron Technology for Europe and the Asia-Pacific region,
effective March 1, 2003 (Closing Date). Under
the terms of the Transition Agreement, the Company assumed
direct sales, service and applications support and logistics
responsibilities for the surface conditioning and
microlithography products in Europe and the Asia-Pacific region
as of the Closing Date, while Metron Technology continued to
represent FSI products in Israel.
In conjunction with this transaction, the Company agreed to
advance up to $4.0 million to Metron Technology on a
secured basis to repurchase inventory. The Company advanced
$3.0 million pursuant to a note receivable shortly after it
entered into the Transition Agreement and had a potential
obligation to advance up to an additional $1.0 million.
After completing a review of the inventory relative to the
Companys purchase obligations, it was determined that the
Companys obligation to repurchase inventory was
approximately $2.0 million. The Company recorded
approximately $2.0 million of sales returns related to the
inventory repurchased from Metron Technology during the second
quarter of fiscal 2003.
Under the terms of the Transition Agreement, the Company agreed
to pay Metron Technology on the Closing Date an early
termination fee of approximately $2.8 million. The Company
originally anticipated surrendering approximately
1.154 million Metron Technology common shares owned by the
Company in payment of this early termination fee as approved by
Metron Technologys shareholders. As a result of the
inventory repurchase obligation being less than the advance of
$3.0 million, the Company delivered 567,105 shares,
less than the 1.154 million Metron Technology common shares
originally contemplated. The Company owned approximately
2.1 million shares, or approximately 17% of Metron
Technology, after surrendering the 567,105 shares in April
2003.
The Company recorded a charge of approximately $2.8 million
in the first quarter of fiscal 2003 associated with the early
termination fee. The Company also recorded a non-cash impairment
charge of approximately $10.2 million in the first quarter
of fiscal 2003 for the shares of Metron Technology that the
Company owned. The impairment charges were based upon the
difference between the $6.17 per share carrying value and
the $2.38 per share value agreed upon for purposes of the
Transition Agreement. The $2.38 per share value reflected
the average closing price of the common stock of Metron
Technology for the five business days prior to the execution of
the Transition Agreement.
On the Closing Date, the Company offered employment to
approximately 90 Metron Technology employees that had been
dedicated to sales, technical service and applications
engineering activities related to the distribution of the
Companys products in Europe and the Asia Pacific region.
|
|
(4) |
Concentration of Risk and Financial Instruments |
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash equivalents, marketable securities and trade accounts
receivable.
The Companys customers consist of microelectronics
manufacturers located throughout the world. The Company performs
ongoing credit evaluations of its customers financial
conditions and generally requires no collateral from them. The
Company maintains an allowance for doubtful accounts receivable
based upon expected collectibility of all accounts receivable.
The Company invests in a variety of financial instruments such
as municipal bonds, auction-rate securities, commercial paper
and money market fund shares. The Company, by policy, limits the
amount of credit exposure with any one financial or commercial
issuer.
50
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The carrying value of the Companys financial instruments
reflected on the balance sheet, including cash, cash
equivalents, marketable securities, accounts receivable,
accounts payable and accrued expenses, approximate fair value at
August 27, 2005, due to their short maturities.
As of August 27, 2005 and August 28, 2004, all
marketable securities were classified as available-for-sale.
Marketable securities were $20,245,000 as of August 27,
2005 and $25,827,000 as of August 28, 2004.
Investments in debt securities purchased with an original
effective maturity date of less than three months of
$10.6 million as of August 27, 2005 and
$5.8 million as of August 28, 2004 are included in
cash and cash equivalents on the consolidated balance sheets.
Gross unrealized holding gains were $0 as of August 27,
2005 and $5,243,000 as of August 28, 2004. The Company
manages its cash equivalents and short-term investments as a
single portfolio of highly marketable securities, all of which
are intended to be available to meet the Companys current
cash requirements.
|
|
(5) |
Related Party Transactions, Lease Commitments and
Guarantees |
|
|
|
Related Party Transactions |
The Company sold approximately $4,130,000 in fiscal 2005 of its
products in the aggregate to mFSI LTD. The Company
sold approximately $14,637,000 in fiscal 2004 and $15,362,000 in
fiscal 2003, of its products in the aggregate to mFSI LTD
and Metron Technology. In addition, the Company paid Metron
Technology a commission for direct sales to customers of $20,000
in fiscal 2004 and $972,000 in fiscal 2003. Trade accounts
receivable from affiliates was $3,504,000 at August 27,
2005 and $3,785,000 at August 28, 2004 and deferred profit
with affiliates was $808,000 at August 27, 2005 and
$738,000 at August 28, 2004.
As of August 27, 2005 and August 28, 2004, the Company
did not have any outstanding loans with mFSI LTD.
The Company has operating lease agreements for equipment and
manufacturing and office facilities. The future net minimum
lease payments for all other leases with noncancellable lease
terms in excess of one year at August 27, 2005 are as
follows (in thousands):
|
|
|
|
|
|
Fiscal Year Ending August:
|
|
|
|
|
|
2006
|
|
$ |
1,196 |
|
|
2007
|
|
|
874 |
|
|
2008
|
|
|
470 |
|
|
2009
|
|
|
155 |
|
|
|
|
|
Total minimum lease payments
|
|
$ |
2,695 |
|
|
|
|
|
Rental expense for all operating leases consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
August 27, | |
|
August 28, | |
|
August 30, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Rent expense for operating leases
|
|
$ |
1,552 |
|
|
$ |
1,557 |
|
|
$ |
1,305 |
|
51
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of August 27, 2005, we had guarantees of $268,000
related to auto leases, VAT and payroll requirements in Europe.
These guarantees were collateralized with $282,000 of restricted
cash.
Inventories are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 27, | |
|
August 28, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Finished goods
|
|
$ |
2,329 |
|
|
$ |
5,621 |
|
Work in process
|
|
|
9,971 |
|
|
|
10,807 |
|
Subassemblies
|
|
|
1,146 |
|
|
|
797 |
|
Raw materials and purchased parts
|
|
|
11,271 |
|
|
|
10,153 |
|
|
|
|
|
|
|
|
|
|
$ |
24,717 |
|
|
$ |
27,378 |
|
|
|
|
|
|
|
|
|
|
(7) |
Property, Plant and Equipment |
The components of property, plant and equipment are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 27, | |
|
August 28, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Land
|
|
$ |
224 |
|
|
$ |
982 |
|
Building and leasehold improvements
|
|
|
32,725 |
|
|
|
44,814 |
|
Office furniture and equipment
|
|
|
4,539 |
|
|
|
5,736 |
|
Computer hardware and software
|
|
|
19,299 |
|
|
|
21,483 |
|
Manufacturing equipment
|
|
|
1,959 |
|
|
|
2,896 |
|
Lab equipment
|
|
|
16,774 |
|
|
|
18,757 |
|
Tooling
|
|
|
492 |
|
|
|
426 |
|
Capital programs in progress
|
|
|
1,714 |
|
|
|
1,001 |
|
|
|
|
|
|
|
|
|
|
|
77,726 |
|
|
|
96,095 |
|
Less accumulated depreciation and amortization
|
|
|
(56,170 |
) |
|
|
(65,177 |
) |
|
|
|
|
|
|
|
|
|
$ |
21,556 |
|
|
$ |
30,918 |
|
|
|
|
|
|
|
|
|
|
(8) |
Investments in Affiliate |
The Company owns a 49% equity interest in mFSI LTD, a
Japanese joint venture company formed in 1991 with MBK Project
Holdings LTD. (formerly Mitsui & Co., Ltd.) and its
wholly owned subsidiary, Chlorine Engineers Corp., Ltd.
(collectively, Mitsui). Mitsui owns a 51% equity
interest in mFSI LTD. In connection with its
formation, the Company and Mitsui granted mFSI certain
product and technology licenses and product distribution rights.
mFSI also distributes products of other manufacturers and
its own internally developed products. In September 2004,
mFSI LTD granted the Company exclusive rights to
distribute certain products outside of Japan and an exclusive
license covering the patents and related technology with regard
to certain products for use outside of Japan.
52
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of assets, liabilities and results of operations for
mFSI LTD, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Current assets
|
|
$ |
20,095 |
|
|
$ |
28,879 |
|
Noncurrent assets
|
|
|
16,915 |
|
|
|
16,106 |
|
Current liabilities
|
|
|
14,791 |
|
|
|
21,968 |
|
Noncurrent liabilities
|
|
|
6,070 |
|
|
|
7,718 |
|
Total stockholders equity
|
|
|
16,149 |
|
|
|
15,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Sales
|
|
$ |
46,117 |
|
|
$ |
43,892 |
|
|
$ |
26,381 |
|
Net income
|
|
|
1,186 |
|
|
|
1,325 |
|
|
|
386 |
|
Accrued expenses are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 27, | |
|
August 28, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Commissions
|
|
$ |
243 |
|
|
$ |
214 |
|
Salaries and benefits
|
|
|
2,707 |
|
|
|
2,558 |
|
Product warranty
|
|
|
4,117 |
|
|
|
4,575 |
|
Professional fees
|
|
|
719 |
|
|
|
3,648 |
|
Patent litigation
|
|
|
750 |
|
|
|
750 |
|
Income taxes
|
|
|
1,264 |
|
|
|
1,276 |
|
Other
|
|
|
1,792 |
|
|
|
2,833 |
|
|
|
|
|
|
|
|
|
|
$ |
11,592 |
|
|
$ |
15,854 |
|
|
|
|
|
|
|
|
Deferred profit as of the end of the fiscal year consists of (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
August 27, | |
|
August 28, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred revenue
|
|
$ |
8,045 |
|
|
$ |
6,820 |
|
Deferred cost of goods sold
|
|
|
(3,257 |
) |
|
|
(3,724 |
) |
|
|
|
|
|
|
|
Deferred profit
|
|
$ |
4,788 |
|
|
$ |
3,096 |
|
|
|
|
|
|
|
|
Loss before income taxes was derived from the following sources
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
August 27, | |
|
August 28, | |
|
August 30, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Domestic
|
|
$ |
(108 |
) |
|
$ |
2,994 |
|
|
$ |
(68,948 |
) |
Foreign
|
|
|
(3,594 |
) |
|
|
(3,582 |
) |
|
|
(5,553 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,702 |
) |
|
$ |
(588 |
) |
|
$ |
(74,501 |
) |
|
|
|
|
|
|
|
|
|
|
53
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income tax expense is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
August 27, | |
|
August 29, | |
|
August 30, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
50 |
|
|
|
50 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
50 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
50 |
|
|
$ |
50 |
|
|
$ |
50 |
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at August 27, 2005 and August 28, 2004
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27, | |
|
August 28, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$ |
1,912 |
|
|
$ |
1,239 |
|
|
Deferred profit
|
|
|
983 |
|
|
|
580 |
|
|
Accounts receivable
|
|
|
350 |
|
|
|
490 |
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
1,772 |
|
|
Research and development credit carryforwards
|
|
|
2,370 |
|
|
|
2,470 |
|
|
Net operating loss carryforwards
|
|
|
60,400 |
|
|
|
52,600 |
|
|
Accruals
|
|
|
2,255 |
|
|
|
2,295 |
|
|
Other, net
|
|
|
4,979 |
|
|
|
9,239 |
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
73,249 |
|
|
|
70,685 |
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
(243 |
) |
|
|
|
|
|
Intangibles
|
|
|
(520 |
) |
|
|
(782 |
) |
|
Investment in foreign affiliate
|
|
|
|
|
|
|
(1,765 |
) |
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
(763 |
) |
|
|
(2,547 |
) |
|
Less valuation allowance
|
|
|
(72,486 |
) |
|
|
(68,138 |
) |
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
54
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effective income tax expense differs from the expected
statutory federal income tax as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
August 27, | |
|
August 28, | |
|
August 30, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Expected federal income tax benefit
|
|
$ |
(1,296 |
) |
|
$ |
(206 |
) |
|
$ |
(26,076 |
) |
State income tax benefit before valuation allowance
|
|
|
(106 |
) |
|
|
(15 |
) |
|
|
(1,860 |
) |
Research activities credit
|
|
|
|
|
|
|
(100 |
) |
|
|
(200 |
) |
Valuation allowance change
|
|
|
1,384 |
|
|
|
312 |
|
|
|
28,083 |
|
Other items, net
|
|
|
68 |
|
|
|
59 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
50 |
|
|
$ |
50 |
|
|
$ |
50 |
|
|
|
|
|
|
|
|
|
|
|
The Company recorded a tax liability of $50,000 for each of
fiscal 2005, 2004 and 2003, which is the result of state taxes.
The Company has net operating loss carryforwards for federal
purposes of approximately $147.6 million at August 27,
2005, which will begin to expire in fiscal 2011 through fiscal
2023 if not utilized. Of this amount, approximately
$15.0 million is subject to Internal Revenue Code
Section 382 limitations on utilization. This limitation is
approximately $1.4 million per year. The Company has net
operating loss carryforwards for state purposes of approximately
$141.4 million which will expire at various times,
beginning with fiscal year 2006, if not utilized.
The Company maintains a valuation allowance to fully reserve
against its net deferred tax assets due to uncertainty over the
ability to realize these assets. The change in the valuation
allowance during the fiscal year 2005 was $4.3 million.
This change impacted tax expense equal to $1.3 million.
Included in the August 27, 2005 valuation allowance balance
of $72.5 million is $3.2 million, which will be
recorded as a credit to paid-in capital, if it is determined in
the future that this portion of the valuation allowance is no
longer required. Additionally, $1.4 million of the
valuation allowance is attributable to net deferred tax assets
the Company obtained through its acquisition of YieldUP; if it
is determined in the future that this portion of the valuation
allowance is no longer required, the offset will be recorded as
a reduction of other intangible assets.
At August 27, 2005, there were approximately
$5.5 million of accumulated undistributed earnings of
subsidiaries outside the United States that are considered to be
reinvested indefinitely. It is not practicable to estimate the
deferred tax liability related to such undistributed earnings.
If such earnings were remitted to the Company, applicable
U.S. federal income and foreign withholding taxes would be
substantially offset by available foreign tax credits.
|
|
(12) |
Pension and Profit Sharing Plans |
The Company has an Employee 401(k) Retirement Plan, which allows
for discretionary profit sharing contributions, covering
eligible employees. Contributions under the plans are determined
by means of a formula or at the discretion of the Board of
Directors. Beginning in January 2005, the Company contributed 3%
of employee salaries to the 401(k). In fiscal 2005, the Company
contributed approximately $517,000. There were no contributions
by the Company in fiscal 2004 and 2003.
The Companys 1997 Omnibus Stock Plan (the Plan), which was
approved by the Companys stockholders, authorizes
stock-based awards (Awards) to purchase up to
5,100,000 shares of the
55
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys common stock. In addition, the Company has awards
outstanding under inactive plans. Under the Plan, the Plan
Committee has the power to make Awards, to determine when and to
whom Awards will be granted, the form of each Award, the amount
of each Award, and any other terms or conditions of each Award
consistent with the Plan. Awards generally vest over a three
year period and expire in ten years.
The activity under stock option plans of the Company is as
follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares | |
|
|
|
|
| |
|
Weighted Average | |
|
|
Available | |
|
|
|
Exercise Price | |
|
|
for Grant | |
|
Outstanding | |
|
per Share | |
|
|
| |
|
| |
|
| |
Activity Description
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2002
|
|
|
275 |
|
|
|
3,361 |
|
|
$ |
10.17 |
|
|
Additional shares authorized for 1997 Omnibus Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Plan
|
|
|
650 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(1,071 |
) |
|
|
1,071 |
|
|
|
3.18 |
|
|
Exercised
|
|
|
|
|
|
|
(3 |
) |
|
|
2.89 |
|
|
Canceled
|
|
|
656 |
|
|
|
(734 |
) |
|
|
10.35 |
|
|
|
|
|
|
|
|
|
|
|
August 31, 2003
|
|
|
510 |
|
|
|
3,695 |
|
|
|
8.12 |
|
|
Additional shares authorized for 1997 Omnibus Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Plan
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(669 |
) |
|
|
669 |
|
|
|
7.65 |
|
|
Exercised
|
|
|
|
|
|
|
(148 |
) |
|
|
5.23 |
|
|
Canceled
|
|
|
429 |
|
|
|
(449 |
) |
|
|
9.92 |
|
|
|
|
|
|
|
|
|
|
|
August 28, 2004
|
|
|
570 |
|
|
|
3,767 |
|
|
|
7.93 |
|
|
Additional shares authorized for 1997 Omnibus Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Plan
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(549 |
) |
|
|
549 |
|
|
|
4.09 |
|
|
Exercised
|
|
|
|
|
|
|
(26 |
) |
|
|
3.14 |
|
|
Canceled
|
|
|
229 |
|
|
|
(289 |
) |
|
|
9.55 |
|
|
|
|
|
|
|
|
|
|
|
August 27, 2005
|
|
|
550 |
|
|
|
4,001 |
|
|
$ |
7.34 |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information with respect to
options outstanding and exercisable at August 27, 2005
(number of options outstanding and exercisable in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted- | |
|
|
|
|
|
|
|
|
Average | |
|
Weighted- | |
|
|
|
Weighted- | |
|
|
Number of | |
|
Remaining | |
|
Average | |
|
|
|
Average | |
|
|
Options | |
|
Contractual | |
|
Exercise | |
|
|
|
Exercise | |
Range of Exercise Prices |
|
Outstanding | |
|
Life | |
|
Price | |
|
Exercisable | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$ 2.33 $ 5.00
|
|
|
1,402 |
|
|
|
8.3 |
|
|
$ |
3.52 |
|
|
|
871 |
|
|
$ |
3.58 |
|
$ 5.01 $ 8.50
|
|
|
1,199 |
|
|
|
6.6 |
|
|
|
7.68 |
|
|
|
1,199 |
|
|
|
7.68 |
|
$ 8.51 $12.00
|
|
|
1,186 |
|
|
|
4.9 |
|
|
|
10.34 |
|
|
|
1,186 |
|
|
|
10.34 |
|
$12.01 $15.50
|
|
|
191 |
|
|
|
4.0 |
|
|
|
13.45 |
|
|
|
191 |
|
|
|
13.45 |
|
$15.51 $17.38
|
|
|
23 |
|
|
|
3.5 |
|
|
|
16.93 |
|
|
|
23 |
|
|
|
16.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 2.33 $17.38
|
|
|
4,001 |
|
|
|
6.6 |
|
|
$ |
7.34 |
|
|
|
3,470 |
|
|
$ |
7.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
There were 2,426,000 currently exercisable options at a
weighted-average exercise price of $9.12 at August 28,
2004, and 1,991,000 currently exercisable options at a
weighted-average exercise price of $10.28 at August 30,
2003.
On May 22, 1997, the Company adopted a Shareholder Rights
Plan (the Rights Plan). Pursuant to the Rights Plan, rights were
distributed as a dividend at the rate of one preferred share
purchase right (Right) for each outstanding share of common
stock of the Company. The Rights expire on June 10, 2007,
unless extended or earlier redeemed or exchanged by the Company.
Under the Rights Plan, each Right entitles the registered holder
to purchase one-hundredth of a Series A Junior
Participating Preferred Share, no par value (Preferred Shares),
of the Company at a price of $90. In general, the Rights will
become exercisable only if a person or group acquires beneficial
ownership of 15% or more of the Companys common stock or
commences a tender offer or exchange offer upon consummation of
which such person or group would beneficially own 15% or more of
the Companys common stock.
|
|
(14) |
Employees Stock Purchase Plan |
The Company has an employees stock purchase plan (the ESPP) that
enables employees to contribute up to 10% of their wages toward
the purchase of the Companys common stock at 85% of the
lower of market value at the beginning or the end of the
semiannual purchase period. Stockholders authorized the issuance
of 250,000 additional shares of common stock to the ESPP in
fiscal 2005.
Shares were issued on the following dates for the following
prices (in thousands except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per | |
Date |
|
Shares | |
|
Share | |
|
|
| |
|
| |
December 31, 2002
|
|
|
97 |
|
|
$ |
3.91 |
|
June 30, 2003
|
|
|
90 |
|
|
|
3.19 |
|
December 31, 2003
|
|
|
89 |
|
|
|
3.15 |
|
June 30, 2004
|
|
|
49 |
|
|
|
6.18 |
|
December 31, 2004
|
|
|
64 |
|
|
|
3.97 |
|
June 30, 2005
|
|
|
93 |
|
|
$ |
3.17 |
|
At August 27, 2005, there were 473,000 shares reserved
for future employee purchases of stock under the ESPP.
|
|
(15) |
Segment and Other Information |
The Company has two product lines, Surface Conditioning
(SC) and POLARIS® Systems and Services
(PSS). Historically, the Company provided segment
information. With the wind-down of the Microlithography business
which began in fiscal 2003, the Company has integrated the
operations of its product lines.
In accordance with SFAS No. 131
(SFAS 131), Disclosures About Segments of
an Enterprise and Related Information, the Companys
chief operating decision-maker has been identified as the
President and Chief Executive Officer. Due to the level of
integration of the two product lines, the Companys chief
operating decision-maker reviews consolidated operating results
to make decisions about allocating resources and assessing
performance for the entire Company. The two product lines are a
part of one segment for the manufacture, marketing and servicing
of equipment for the microelectronics industry.
57
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
International sales were approximately 64% of total sales in
fiscal year 2005, approximately 47% of total sales in fiscal
year 2004, and approximately 38% of total sales in fiscal 2003.
The basis for determining sales by geographic region is the
location that the product is shipped. Included in these
percentages and the table below are sales to related parties
(see Note 5). Sales by geographic area are summarized as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
August 27, | |
|
August 28, | |
|
August 30, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Asia
|
|
$ |
24,366 |
|
|
$ |
26,391 |
|
|
$ |
17,532 |
|
Europe
|
|
|
30,723 |
|
|
|
27,835 |
|
|
|
16,305 |
|
Other
|
|
|
40 |
|
|
|
57 |
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
55,129 |
|
|
|
54,283 |
|
|
|
33,915 |
|
Domestic
|
|
|
31,241 |
|
|
|
60,121 |
|
|
|
54,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
86,370 |
|
|
$ |
114,404 |
|
|
$ |
88,826 |
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2005, South Korea accounted for 12% of our total sales
and Germany accounted for 11% of our total sales. In fiscal
2003, Japan accounted for 12% of our total sales. There was no
individual foreign country that represented more than 10% of
sales in fiscal 2004.
The Company does not have significant long-lived assets in
foreign countries.
The following summarizes significant customers comprising 10% or
more of the Companys trade accounts receivable as of
August 27, 2005 and August 28, 2004 and 10% of sales
for fiscal 2005, 2004 and 2003, which includes sales through
affiliates to end-users:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Trade Accounts | |
|
|
|
|
Receivable as of | |
|
% of Sales for the Fiscal Year Ended | |
|
|
| |
|
| |
|
|
August 27, | |
|
August 28, | |
|
August 27, | |
|
August 28, | |
|
August 30, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Customer A
|
|
|
19 |
% |
|
|
* |
|
|
|
14 |
% |
|
|
16 |
% |
|
|
24 |
% |
Customer B
|
|
|
* |
|
|
|
18 |
% |
|
|
* |
|
|
|
* |
|
|
|
14 |
% |
Customer C
|
|
|
* |
|
|
|
* |
|
|
|
11 |
% |
|
|
* |
|
|
|
* |
|
Customer D
|
|
|
14 |
% |
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
Customer E
|
|
|
10 |
% |
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
* |
Trade accounts receivable from or sales to respective customer
were less than 10% as of the end of or during the fiscal year. |
The Company, in the ordinary course of business, enters into
various licensing agreements. These agreements generally provide
for technology transfers between the Company and the licensors
in exchange for minimum royalty payments and/or a fixed royalty
to the licensors. The total accrued royalty license
58
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fees included in accrued expenses were $249,000 at
August 27, 2005 and $34,000 at August 28, 2004. These
agreements can generally be terminated by the Company with
appropriate notice to the licensors.
|
|
(17) |
Supplementary Cash Flow Information |
The following summarizes supplementary cash flow items (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended | |
|
|
| |
|
|
August 27, | |
|
August 28, | |
|
August 30, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Income taxes paid, net
|
|
$ |
62 |
|
|
$ |
44 |
|
|
$ |
122 |
|
In fall 1995, pursuant to the Employee Stock Purchase and
Shareholder Agreement dated November 30, 1990 between Eric
C. Hsu and Semiconductor Systems, Inc. (SSI) (the
Shareholder Agreement) and in connection with
Mr. Hsus 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. In April 1996,
the Company acquired SSI, and SSI became a wholly owned
subsidiary of the Company. 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 SSI and the former shareholders of SSI. The plaintiffs
alleged 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 2000, certain of Mr. Hsus
claims were tried to a jury in Alameda County Superior Court in
Oakland, California. At the conclusion of the trial, the jury
found that SSI breached the Shareholder Agreement between it and
Mr. Hsu and that the damages that resulted were
approximately $2.4 million. In addition, each of the
individual defendant shareholders 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. Hsus 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
Corporation Code and damages of $2.4 million were awarded.
In proceedings subsequent to the trial, the Court determined
that the plaintiffs were entitled to an award against SSI of
prejudgment interest on the breach of contract damages
(approximately $2.4 million) at 10 percent per annum
from October 1996. In addition, the Court awarded plaintiffs
approximately $127,000 in costs and approximately
$1.8 million in attorneys fees against SSI and the
individual defendants. On November 16, 2001, the court
signed its final judgment reflecting the jurys awards,
interest, attorneys fees and costs assessed against each
of the defendants.
Following the entry of judgment, SSI and the other defendants
filed post-trial motions seeking reduction in the jurys
damage awards and/or a new trial. The court denied these
post-trial motions and there was no reduction in damages against
SSI. Mr. Hsu was awarded an additional $431,000 for
attorneys fees and expenses incurred since the judgment
was rendered in November 2001. Subsequently, SSI and the
individual defendants filed an appeal on a variety of grounds,
and the Company posted an appeal bond on behalf of SSI and
defendants in the amount of $8.3 million. As part of the
posting of the bond, the Company entered into a letter of credit
in the amount of $5.2 million with a surety company. This
letter of credit was collateralized with restricted cash of the
same amount. The appellate court upheld the original judgment.
59
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The total judgment against SSI together with post judgment
interest and attorneys fees of February 26, 2005
aggregated approximately $7.9 million. As a result, the
Company recorded a $0.3 million charge in the second
quarter of fiscal 2005. The Company had previously recorded
$3.3 million of charges to operations associated with this
litigation. During the third quarter of fiscal 2005, the Company
retired the 250,000 shares held in the escrow account
created at the time of the Companys acquisition of SSI to
cover such claims. As the SSI merger was a pooling of interests,
the Company decreased its stockholders equity by an amount
equal to $3.0 million. On March 28, 2005, the Company
tendered funds totaling approximately $7.9 million to the
Hsus via a cashiers check which the Company believes was
the full judgment amount plus all applicable interest. This
included $1.6 million of cash provided by the individual
defendants. Subsequently, instead of depositing the
cashiers check, the Hsus filed a motion with the court to
enforce the judgment against the appeal bond and the Company and
the individual defendants filed a motion to release the bond.
The Hsus cashed the cashiers check in July 2005. In August 2005,
the court ruled in the Companys favor and an
acknowledgement of full satisfaction of the judgment was filed
with the courts by the Hsus attorneys. The bond was
released in August 2005.
|
|
|
YieldUP Patent Litigation |
In September 1995, CFM Technologies, Inc. and CFMT, Inc.
(collectively CFM) filed a complaint in United
States District Court for the District of Delaware against
YieldUP, now known as SCD Mountain View, Inc., a wholly owned
subsidiary of the Company. CFM filed an additional complaint
against YieldUP in United States District Court for the District
of Delaware on December 30, 1998.
On January 3, 2001, Mattson Technology, Inc.
(Mattson) completed the merger of the semiconductor
equipment division of Steag Electronic Systems AG and CFM and
established its wet products division. With the merger
completed, Mattson assumed responsibility for the two suits CFM
filed against YieldUP. On March 17, 2003, SCP Global
Technologies (SCP) acquired the wet product division
of Mattson, including CFM, and assumed responsibility for the
two lawsuits.
On February 19, 2004, the Company and SCP announced that
they settled the two patent infringement lawsuits pending in the
United States District Court for the District of Delaware. In an
effort to settle these lawsuits, the Company acknowledged the
validity and enforceability of the patents, but disputed that
any of its products infringed upon the claims of the patents.
The Company agreed to pay SCP $4.0 million for a release
from past infringement claims and a prospective license under
all four patents asserted against the Company in the two
lawsuits. The release applies to all purchasers of the
Companys products containing SCPs Surface Tension
Gradient (STG®) technology. The prospective
license applies to all end-user customers of the Companys
products, subject to certain limitations. In addition, the
Company agreed to supply SCP customers, at a pre-established
price, the Companys rinse/dry kits to implement the
Companys STG® technology for certain applications.
As a result, the Company recorded a $3.4 million charge to
operations in its second quarter of fiscal 2004. The Company had
previously recorded a $0.6 million charge to operations
associated with this litigation. The Company has made payments
of $3.2 million as of August 27, 2005 and will make
the final payment of $750,000 in the second quarter of fiscal
2006.
60
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
FSI International, Inc.:
We have audited the accompanying consolidated balance sheets of
FSI International, Inc. and subsidiaries as of August 27,
2005 and August 28, 2004, and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the three fiscal years in the three-year
period ended August 27, 2005. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards of
the Public Company Accounting Oversight Board (United States of
America). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of FSI International, Inc. and subsidiaries as of
August 27, 2005 and August 28, 2004, and the results
of their operations and their cash flows for each of the three
fiscal years in the three-year period ended August 27,
2005, in conformity with U.S. generally accepted accounting
principles.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of FSI International, Inc.s internal control
over financial reporting as of August 27, 2005, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated November 10, 2005 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
Minneapolis, Minnesota
November 10, 2005
61
Report of Independent Registered Public Accounting Firm
Regarding
Internal Control Over Financial Reporting
The Board of Directors and Stockholders
FSI International, Inc.:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that FSI International, Inc. and
subsidiaries maintained effective internal control over
financial reporting as of August 27, 2005, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). FSI
Internationals management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that FSI
International, Inc. maintained effective internal control over
financial reporting as of August 27, 2005, is fairly
stated, in all material respects, based on criteria established
in Internal Control Integrated Framework
issued by COSO. Also, in our opinion, FSI International, Inc.
maintained, in all material respects, effective internal control
over financial reporting as of August 27, 2005, based on
criteria established in Internal Control
Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of FSI International, Inc. and
subsidiaries as of August 27, 2005 and August 28,
2004, and the related consolidated statements of operations,
stockholders equity and cash flows for each of the three
fiscal years in the three-year period ended August 27,
2005, and our report dated November 10, 2005 expressed an
unqualified opinion on those consolidated financial statements.
Minneapolis, Minnesota
November 10, 2005
62
Data for the fiscal quarters of our last two fiscal years is as
follows:
Quarterly Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
Quarter | |
|
|
(b) (c) (e) | |
|
(a), (c), (d) | |
|
(b), (c) | |
|
(b), (c) | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
|
|
(Unaudited) | |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
19,445 |
|
|
$ |
24,153 |
|
|
$ |
19,069 |
|
|
$ |
23,702 |
|
Gross margin
|
|
|
10,408 |
|
|
|
10,745 |
|
|
|
7,976 |
|
|
|
10,864 |
|
Operating (loss) income
|
|
|
(3,480 |
) |
|
|
3,417 |
|
|
|
(6,702 |
) |
|
|
(3,596 |
) |
Net (loss) income
|
|
|
(3,276 |
) |
|
|
3,911 |
|
|
|
(2,043 |
) |
|
|
(1,895 |
) |
Diluted net (loss) income per common share
|
|
$ |
(0.11 |
) |
|
$ |
0.13 |
|
|
$ |
(0.07 |
) |
|
$ |
(0.06 |
) |
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
22,491 |
|
|
$ |
22,265 |
|
|
$ |
36,309 |
|
|
$ |
33,338 |
|
Gross margin
|
|
|
10,495 |
|
|
|
11,311 |
|
|
|
19,433 |
|
|
|
17,781 |
|
Operating (loss) income
|
|
|
(3,352 |
) |
|
|
(6,080 |
) |
|
|
3,596 |
|
|
|
2,850 |
|
Net (loss) income
|
|
|
(1,015 |
) |
|
|
(6,077 |
) |
|
|
3,998 |
|
|
|
3,235 |
|
Diluted net (loss) income per common share
|
|
$ |
(0.03 |
) |
|
$ |
(0.20 |
) |
|
$ |
0.13 |
|
|
$ |
0.11 |
|
|
|
|
(a) |
|
During the second quarter of fiscal 2005, the Company recorded a
gain of $7.0 million in operations on the sale of the
Allen, Texas facility. (See Note 2 of the Notes to the
Consolidated Financial Statements.) |
|
(b) |
|
During the third quarter of fiscal 2005, the Company recorded a
gain of $4.2 million on a distribution from Nortem. During
the fourth quarter of fiscal 2005, the Company recorded a gain
of $1.6 million on a distribution from Nortem. During the
first quarter of fiscal 2004, the Company recorded a gain of
$2.0 million on the sale of Metron Technology common stock.
(See Note 1 of the Notes to the Consolidated Financial
Statements.) |
|
(c) |
|
During the third quarter of fiscal 2005, the Company had sales
of PSS product inventory with an original cost of approximately
$0.4 million that had previously been written down to zero.
During the fourth quarter of fiscal 2005, the Company had sales
of PSS product inventory with an original cost of approximately
$0.1 million that had previously been written down to zero.
During the first quarter of fiscal 2004, the Company had sales
of PSS product inventory with an original cost of approximately
$1.3 million that had been previously written down to zero.
During the second quarter of fiscal 2004, the Company had sales
of PSS product inventory with an original cost of approximately
$0.1 million that had been previously written down to zero.
During the third quarter of fiscal 2004, the Company had sales
of PSS product inventory with an original cost of approximately
$1.8 million that had been previously written down to zero.
(See Note 2 of the Notes to the Consolidated Financial
Statements.) |
|
(d) |
|
During the second quarter of fiscal 2004 the Company recorded
$3.4 million of expense related to a patent litigation
settlement in selling, general and administrative expenses. (See
Note 18 of the Notes to the Consolidated Financial
Statements.) |
|
(e) |
|
During the first quarter of fiscal 2004, the Company recorded a
$2.0 million gain on the sale of marketable securities.
(See Note 1 of the Notes to the Consolidated Financial
Statements.) |
The Companys fiscal quarters are generally 13 weeks,
all ending on a Saturday. The fiscal year ends on the last
Saturday in August and consists of 52 or 53 weeks.
63
Report of Independent Registered Public Accounting Firm on
Schedule
The Board of Directors and Shareholders
FSI International, Inc.:
Under the date of November 10, 2005, we reported on the
consolidated balance sheets of FSI International, Inc. and
subsidiaries as of August 27, 2005 and August 28,
2004, and the related consolidated statements of operations,
stockholders equity and cash flows for each of the three
fiscal years in the three-year period ended August 27,
2005, as contained herein. In connection with our audits of the
aforementioned consolidated financial statements, we also have
audited the related financial statement schedule as listed in
the accompanying index. The financial statement schedule is the
responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
Minneapolis, Minnesota
November 10, 2005
64
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II
Valuation And Qualifying Accounts
For The Fiscal Years Ended
August 27, 2005, August 28, 2004 and
August 30, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
|
|
|
|
Balance | |
|
|
Beginning | |
|
|
|
|
|
at End | |
|
|
of Year | |
|
Additions | |
|
Deletions | |
|
of Year | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Fiscal year ended August 27, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (Deducted from accounts
receivable)
|
|
$ |
1,286 |
|
|
$ |
(265 |
) |
|
$ |
99 |
|
|
$ |
922 |
|
Fiscal year ended August 28, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (Deducted from accounts
receivable)
|
|
$ |
1,235 |
|
|
$ |
235 |
|
|
$ |
184 |
|
|
$ |
1,286 |
|
Fiscal year ended August 30, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (Deducted from accounts
receivable)
|
|
$ |
1,609 |
|
|
$ |
(347 |
) |
|
$ |
27 |
|
|
$ |
1,235 |
|
See accompanying report of Independent Registered Public
Accounting Firm.
65
|
|
ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
ITEM 9A. |
CONTROLS AND PROCEDURES |
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) under
the Exchange Act of 1934 (the Exchange Act).
The Companys internal control system was designed to
provide reasonable assurance to the Companys management
and Board of Directors regarding the preparation and fair
presentation of published financial statements. Under the
supervision and with the participation of management, including
our Chairman and Chief Executive Officer and Chief Financial
Officer, we conducted an assessment of the effectiveness of our
internal control over financial reporting as of August 27,
2005. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal
Control Integrated Framework.
Based on our assessment using the criteria set forth by COSO in
Internal Control Integrated Framework,
management concluded that our internal control over financial
reporting was effective as of August 27, 2005.
KPMG LLP, an independent registered public accounting firm, has
issued an audit report on managements assessment of the
Companys internal control over financial reporting.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. It
should be noted that any system of controls, however well
designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be
met. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As of the end of the period covered by this report, we conducted
an evaluation, under the supervision and with the participation
of the principal executive officer and principal financial
officer, of our disclosure controls and procedures (as defined
in Rules 13a-14(c) and 15d-14(c) under the Exchange Act).
Based on this evaluation, the principal executive officer and
principal financial officer concluded that our disclosure
controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and
Exchange Commission rules and forms. There was no change in our
internal control over financial reporting during our most
recently completed fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal
control over financial reporting.
|
|
ITEM 9B. |
OTHER INFORMATION |
None.
PART III
Certain information required by Part III is incorporated by
reference to our definitive proxy statement for the annual
meeting of shareholders to be held on January 24, 2006 and
which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days after
August 27, 2005.
66
Except for those portions specifically incorporated in this
report by reference to our proxy statement for the annual
meeting of shareholders to be held on January 24, 2006, no
other portions of the proxy statement are deemed to be filed as
part of this Report on Form 10-K.
|
|
ITEM 10. |
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
The information concerning our directors and our board
committees required by this item is incorporated by reference to
the information under the captions Election of
Directors and Compliance with Section 16(a) of
the Securities and Exchange Act of 1934 in our proxy
statement for the annual meeting of shareholders to be held on
January 24, 2006. For information concerning executive
officers, see Item 4A of this Form 10-K Report.
|
|
|
Audit Committee Financial Expert |
Our board of directors has determined that at least one member
of our Audit and Finance Committee, Mr. James A. Bernards,
is an audit committee financial expert, as that term
is defined under Section 407 of the Sarbanes-Oxley Act of
2002 and the rules promulgated by the SEC in furtherance of
Section 407. Mr. Bernards is independent, as that term
is defined under the National Association of Securities
Dealers listing standards.
|
|
|
Code of Business Conduct and Ethics |
We have adopted a code of business conduct and ethics applicable
to all of our directors and employees, including our principal
executive officer, principal financial officer, controller and
other employees performing similar functions. A copy of this
code of business conduct and ethics is available on our website
at www.fsi-intl.com.
We intend to disclose any waiver of our code of business conduct
and ethics for our directors or executive officers in future
Form 8-K filings within four business days following the
date of such waiver. We also intend to post on our website at
www.fsi-intl.com any amendment to, or waiver from, a provision
of our code of business conduct and ethics that applies to our
principal executive officer, principal financial officer,
controller and other employees performing similar functions
within four business days following the date of such amendment
or waiver.
|
|
ITEM 11. |
EXECUTIVE COMPENSATION |
The information required by this item is incorporated by
reference to the information under the captions Executive
Compensation and Compensation of Directors in
our proxy statement for the annual meeting of shareholders to be
held on January 24, 2006.
|
|
ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this item is incorporated by
reference to the information under the captions Security
Ownership of Management and Certain Beneficial Owners and
Equity Compensation Plan Information in our proxy
statement for the annual meeting of shareholders to be held on
January 24, 2006.
|
|
ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
The information required by this item is incorporated by
reference to the information under the caption Interests
of Management and Others in Certain Transactions in our
proxy statement for the annual meeting of shareholders to be
held on January 24, 2006.
67
|
|
ITEM 14. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this item is incorporated by
reference to the information under the captions
Independent Auditors Fees and Auditor
Independence in our proxy statement for the annual meeting
of shareholders to be held on January 24, 2006.
PART IV
|
|
ITEM 15. |
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K |
|
|
|
|
|
|
|
|
|
|
|
Page Number | |
|
|
|
|
in This Report | |
|
|
|
|
| |
(a)(1)
|
|
Index to Financial Statements |
|
|
|
|
|
|
Consolidated Statements of Operations
Years ended August 27, 2005, August 28, 2004 and
August 30, 2003 |
|
|
37 |
|
|
|
Consolidated Balance Sheets
August 27, 2005 and August 28, 2004 |
|
|
38 |
|
|
|
Consolidated Statements of Stockholders
Equity Years ended August 27, 2005,
August 28, 2004 and August 30, 2003 |
|
|
39 |
|
|
|
Consolidated Statements of Cash Flows
Years ended August 27, 2005, August 28, 2004 and
August 30, 2003 |
|
|
40 |
|
|
|
Notes to Consolidated Financial Statements |
|
|
41 |
|
|
|
Report of Independent Registered Public Accounting
Firm |
|
|
61 |
|
|
|
Quarterly financial data for fiscal 2005 and 2004
(unaudited) |
|
|
63 |
|
|
(a)(2)
|
|
Financial Statement Schedules |
|
|
|
|
|
|
The following report and financial statement schedule are found
in this Report at the pages indicated: |
|
|
|
|
|
|
Report of Independent Registered Public Accounting
Firm on Schedule |
|
|
64 |
|
|
|
Schedule II Valuation and
Qualifying Accounts |
|
|
65 |
|
|
|
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or notes thereto. |
|
|
|
|
(a)(3) Exhibits
|
|
|
|
|
|
2 |
.1 |
|
Agreement and Plan of Reorganization, dated as of
January 21, 1999 among FSI International, Inc., BMI
International, Inc. and YieldUP International Corporation.(10) |
|
|
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.(11) |
|
|
3 |
.1 |
|
Restated Articles of Incorporation of the Company.(2) |
|
|
3 |
.2 |
|
Restated and Amended By-Laws.(19) |
|
|
3 |
.5 |
|
Articles of Amendment of Restated Articles of Incorporation.(12) |
|
|
3 |
.6 |
|
Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Shares.(8) |
|
|
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.(8) |
|
|
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.(9) |
68
|
|
|
|
|
|
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.(14) |
|
|
4 |
.4 |
|
Third Amendment dated April 3, 2002 to Rights Agreement
dated May 22, 1997, as amended on March 26, 1998 and
March 9, 2000 by and between FSI and Harris Trust and
Savings Bank, as Rights Agent.(20) |
|
|
4 |
.5 |
|
Form of Purchase Agreement, dated April 4, 2002.(21) |
|
|
4 |
.6 |
|
Schedule of Purchasers which have executed the Form of Purchase
Agreement, dated April 4, 2002.(22) |
|
|
10 |
.1 |
|
FSI International, Inc. 1997 Omnibus Stock Plan (as amended and
restated April 2001).(17) |
|
|
10 |
.2 |
|
Form of Incentive Stock Option Agreement for the FSI
International, Inc. 1997 Omnibus Stock Plan, as amended.(25) |
|
|
10 |
.3 |
|
Form of Incentive Stock Option Agreement for Outside Directors
for the FSI International, Inc. 1997 Omnibus Stock Plan, as
amended.(25) |
|
|
10 |
.9 |
|
Amended and Restated Employees Stock Purchase Plan.(17) |
|
|
10 |
.10 |
|
Shareholders Agreement among FSI International, Inc. and
Mitsui & Co., Ltd. and Chlorine Engineers Corp.
Ltd. dated as of August 14, 1991.(3) |
|
|
10 |
.11 |
|
FSI Exclusive Distributorship Agreement dated as of
August 14, 1991 between FSI International, Inc. and
mufti LTD(3) |
|
|
10 |
.12 |
|
FSI Licensing Agreement dated as of August 14, 1991,
between FSI International, Inc. and mFSI LTD(3) |
|
|
10 |
.13 |
|
Amendment to FSI/ Metron Technology Distribution Agreement dated
July 31, 1999.(12) |
|
|
10 |
.15 |
|
License Agreement, dated October 15, 1991, between the
Company and Texas Instruments Incorporated.(4) |
|
|
10 |
.16 |
|
Amendment No. 1, dated April 10, 1992, to the License
Agreement, dated October 15, 1991, between the Company and
Texas Instruments Incorporated.(4) |
|
|
10 |
.17 |
|
Amendment effective October 1, 1993 to the License
Agreement, dated October 15, 1991 between the Company and
Texas Instruments Incorporated.(5) |
|
|
10 |
.18 |
|
Amended and Restated Directors Nonstatutory Stock Option
Plan.(6) |
|
|
10 |
.19 |
|
Management Agreement between FSI International, Inc. and Donald
S. Mitchell, effective as of January 2, 2001. (Similar
agreements between the Company and its executive officers have
been omitted but will be filed if requested in writing by the
commission.)(16)# |
|
|
10 |
.20 |
|
FSI International, Inc. 1994 Omnibus Stock Plan.(7) |
|
|
10 |
.26 |
|
Summary of Employment Arrangement between the Company and Don
Mitchell dated December 12, 1999.(15)# |
|
|
10 |
.30 |
|
Employment Agreement entered into as of December 12, 1999
by and between FSI International, Inc. and Donald S.
Mitchell.(13)# |
|
|
10 |
.31 |
|
Agreement made and entered into as of March 4, 2001 by and
between FSI International, Inc. and Benno G. Sand.(18)# |
|
|
10 |
.32 |
|
Metron Technology Transition Agreement dated October 9,
2003 by and between FSI International, Inc. and Metron
Technology B.V., portion of which have been omitted pursuant to
a request for confidential treatment. These portions are
identified by [***].(23) |
|
|
10 |
.33 |
|
First Amendment to the Metron Technology Transition Agreement
dated February 5, 2003.(24) |
|
|
10 |
.34 |
|
Second Amendment to the Metron Technology Transition Agreement
dated February 28, 2003. (24) |
|
|
10 |
.35 |
|
FSI/ Metron Technology Distribution Agreement dated
February 28, 2003 by and between FSI International,
Inc. and Metron Technology, N.V.(24) |
|
|
10 |
.36 |
|
Amendment to Article 7. Warranty of Exclusive Distribution
Agreement Between FSI International and mFSI LTD
effective 16 April, 1999.(26) |
69
|
|
|
|
|
|
10 |
.37 |
|
Amendment to FSI Exclusive Distributorship Agreement made as of
July 31, 1999 among FSI International, Inc.,
mFSI LTD and BOC Edwards.(26) |
|
|
10 |
.38 |
|
Amendment to Shareholders Agreement dated June 5, 1991
among FSI International, Inc. and Mitsui & Co., LTD and
Chlorine Engineers Corp., LTD and MBK Project Holdings LTD dated
as of September 17, 2004.(26) |
|
|
10 |
.39 |
|
Amendment to FSI Exclusive Distributorship Agreement dated
August 14, 1991 between FSI International, Inc. and
mFSI LTD dated as of November 14, 2003.(26) |
|
|
21 |
.0 |
|
Subsidiaries of the Company. (filed herewith) |
|
|
23 |
.0 |
|
Consent of KPMG LLP. (filed herewith) |
|
|
24 |
.0 |
|
Powers of Attorney from the Directors of FSI International, Inc.
(filed herewith) |
|
|
31 |
.1 |
|
Certification by Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (filed
herewith) |
|
|
31 |
.2 |
|
Certification by Principal Financial and Accounting Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(filed herewith) |
|
|
32 |
.1 |
|
Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(filed herewith) |
|
|
99 |
.1 |
|
Financial Statements of mFSI LTD for the fiscal years
ended June 30, 2005 and 2004 (27) |
|
|
|
|
# |
Identified exhibit is a management contract, compensation plan
or arrangement. |
|
|
|
|
(1) |
Filed as an Exhibit to the Companys 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 Companys 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 Companys 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. |
|
|
(4) |
Filed as an Exhibit to the Companys Report on
Form 10-K for the fiscal year ended August 29, 1992,
File No. 0-17276, and incorporated by reference. |
|
|
(5) |
Filed as an Exhibit to the Companys Report on
Form 10-K for the fiscal year ended August 28, 1993,
SEC File No. 0-17276, and incorporated by reference. |
|
|
(6) |
Filed as an Exhibit to the Companys Report on
Form 10-Q for the fiscal quarter ended May 28, 1994,
SEC File No. 0-17276, and incorporated by reference. |
|
|
(7) |
Filed as an Exhibit to the Companys Report on
Form 10-K for the fiscal year ended August 27, 1994,
SEC File No. 0-17276, and incorporated by reference. |
|
|
(8) |
Filed as an Exhibit to the Companys Report on
Form 8-A, filed by the Company on June 5, 1997, SEC
File No. 0-17276, and incorporated by reference. |
|
|
(9) |
Filed as an Exhibit to the Companys Report on
Form 8-A/ A-1, filed by the Company on April 16, 1998,
Sec File No. 0-17276 and incorporated by reference. |
|
|
(10) |
Filed as an Exhibit to the Companys Report on
Form 8-K, filed by the Company on January 27, 1999,
SEC File No. 0-17276 and incorporated by reference. |
|
(11) |
Filed as an Exhibit to the Companys Report on
Form 8-K, filed by the Company on June 24, 1999, SEC
File No. 0-17276 and incorporated by reference. |
|
(12) |
Filed as an Exhibit to the Companys Report on
Form 10-K for the fiscal year ended August 28, 1999,
SEC File No. 0-17276, and incorporated by reference. |
|
(13) |
Filed as an Exhibit to the Companys Report on
Form 10-Q for the fiscal quarter ended February 26,
2000, SEC File No. 0-17276 and incorporated by reference. |
70
|
|
(14) |
Filed as an Exhibit to the Companys Report on
Form 10-Q for the fiscal quarter ended May 27, 2000,
SEC File No. 0-17276 and incorporated by reference. |
|
(15) |
Filed as an Exhibit to the Companys Report on
Form 10-K for the fiscal year ended August 26, 2000,
SEC File No. 0-17276 and incorporated by reference. |
|
(16) |
Filed as an Exhibit to the Companys Report on
Form 10-Q for the fiscal quarter ended February 24,
2001, SEC File No. 0-17276 and incorporated by reference. |
|
(17) |
Filed as an Exhibit to the Companys Registration Statement
on Form S-8, filed by the Company on March 28, 2003,
SEC File No. 333-104088 and incorporated by reference. |
|
(18) |
Filed as an Exhibit to the Companys Report on
Form 10-K for the fiscal year ended August 31, 2002,
SEC File No. 0-17276 and incorporated by reference. |
|
(19) |
Filed as an Exhibit to the Companys Report on
Form 10-Q for the fiscal quarter ended February 23,
2002, SEC File No. 0-17276 and incorporated by reference. |
|
(20) |
Filed as an Exhibit to the Companys Registration Statement
on Form 8-A/ A2, filed by the Company on April 9,
2002, SEC File No. 0-17276, and incorporated by reference. |
|
(21) |
Filed as an Exhibit to the Companys Current Report on
Form 8-K, filed by the Company on April 5, 2002, SEC
File No. 0-17276, and incorporated by reference. |
|
(22) |
Filed as an Exhibit to the Companys Registration Statement
on Form S-3 dated April 12, 2002, SEC File
No. 333-86148, and incorporated by reference. |
|
(23) |
Filed as an Exhibit to the Companys Report on
Form 10-Q/ A for the quarter ended November 30, 2002,
SEC File No. 0-17276 and incorporated by reference. |
|
(24) |
Filed as an Exhibit to the Companys Report on
Form 10-Q for the quarter ended March 1, 2003, SEC
File No. 0-17276 and incorporated by reference. |
|
(25) |
Filed as an Exhibit to the Companys Current Report on
Form 8-K, filed by the Company on October 20, 2004,
SEC File No. 0-17276 and incorporated by reference. |
|
(26) |
Filed as an Exhibit to the Companys Report on
Form 10-K for the fiscal year ended August 28, 2004,
SEC File No. 0-17276 and incorporated by reference. |
|
(27) |
To be filed by amendment. |
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
By: |
/s/ Donald S. Mitchell |
|
|
|
|
|
Donald S. Mitchell, Chairman and |
|
Chief Executive Officer |
|
(Principal Executive Officer) |
Dated: November 10, 2005
|
|
|
|
By: |
/s/ Patricia M. Hollister |
|
|
|
|
|
Patricia M. Hollister, Chief Financial Officer |
|
(Principal Financial and Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following
persons, constituting a majority of the Board of Directors, on
behalf of the Registrant and in the capacities and on the dates
indicated.
James A. Bernards, Director*
Terrence W. Glarner, Director*
Willem D. Maris, Director*
Donald S. Mitchell, Director*
Krishnamurthy (Raj) Rajagopal, Director*
|
|
|
|
*By: |
/s/ Patricia M. Hollister |
|
|
|
|
|
Patricia M. Hollister, Attorney-in-fact |
Dated: November 10, 2005
72
INDEX TO EXHIBITS
|
|
|
|
|
|
|
Exhibit | |
|
Description |
|
Method of Filing |
| |
|
|
|
|
|
2 |
.1 |
|
Agreement and Plan of Reorganization, dated as of
January 21, 1999 among FSI International, Inc., BMI
International, Inc. and YieldUP International Corporation.(10) |
|
Incorporated by reference |
|
|
2 |
.2 |
|
Agreement and Plan of Reorganization by and Among
FSI International, Inc., Spectre Acquisition Corp., and
Semiconductor Systems, Inc.(1) |
|
Incorporated by reference |
|
|
2 |
.3 |
|
Asset Purchase Agreement dated as of June 9, 1999 between
FSI International, Inc. and The BOC Group, Inc.(11) |
|
Incorporated by reference |
|
|
3 |
.1 |
|
Restated Articles of Incorporation of the Company.(2) |
|
Incorporated by reference |
|
|
3 |
.2 |
|
Restated and Amended By-Laws.(19) |
|
Incorporated by reference |
|
|
3 |
.5 |
|
Articles of Amendment of Restated Articles of Incorporation.(12) |
|
Incorporated by reference |
|
|
3 |
.6 |
|
Certificate of Designation, Preferences and rights of
Series A Junior Participating Preferred Shares.(8) |
|
Incorporated by reference |
|
|
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.(8) |
|
Incorporated by reference |
|
|
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.(9) |
|
Incorporated by reference |
|
|
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.(14) |
|
Incorporated by reference |
|
|
4 |
.4 |
|
Third Amendment dated April 3, 2002 to Rights Agreement
dated May 22, 1997, as amended on March 26, 1998 and
March 9, 2000 by and between FSI and Harris Trust and
Savings Bank, as Rights Agent.(20) |
|
Incorporated by reference |
|
|
4 |
.5 |
|
Form of Purchase Agreement, dated April 4, 2002.(21) |
|
Incorporated by reference |
|
|
4 |
.6 |
|
Schedule of Purchasers which have executed the Form of Purchase
Agreement, dated April 4, 2002.(22) |
|
Incorporated by reference |
|
|
10 |
.1 |
|
FSI International, Inc. 1997 Omnibus Stock Plan (as amended and
restated April 2001).(17) |
|
Incorporated by reference |
|
|
10 |
.2 |
|
Form of Incentive Stock Option Agreement for the
FSI International, Inc. 1997 Omnibus Stock Plan, as
amended.(25) |
|
Incorporated by reference |
|
|
10 |
.3 |
|
Form of Incentive Stock Option Agreement for Outside Directors
for the FSI International, Inc. 1997 Omnibus Stock Plan, as
amended.(25) |
|
Incorporated by reference |
|
|
10 |
.9 |
|
Amended and Restated Employees Stock Purchase Plan.(17) |
|
Incorporated by reference |
|
|
10 |
.10 |
|
Shareholders Agreement among FSI International, Inc. and
Mitsui & Co., Ltd. and Chlorine Engineers Corp. Ltd.
dated as of August 14, 1991.(3) |
|
Incorporated by reference |
|
|
10 |
.11 |
|
FSI Exclusive Distributorship Agreement dated as of
August 14, 1991 between FSI International, Inc. and
mFSI, LTD(3) |
|
Incorporated by reference |
|
|
10 |
.12 |
|
FSI Licensing Agreement dated as of August 14, 1991,
between FSI International, Inc. and mFSI, LTD(3) |
|
Incorporated by reference |
|
|
10 |
.13 |
|
Amendment to FSI/ Metron Technology Distribution Agreement dated
July 31, 1999.(12) |
|
Incorporated by reference |
73
|
|
|
|
|
|
|
Exhibit | |
|
Description |
|
Method of Filing |
| |
|
|
|
|
|
|
10 |
.15 |
|
License Agreement, dated October 15, 1991, between the
Company and Texas Instruments Incorporated.(4) |
|
Incorporated by reference |
|
|
10 |
.16 |
|
Amendment No. 1, dated April 10, 1992, to the License
Agreement, dated October 15, 1991, between the Company and
Texas Instruments Incorporated.(4) |
|
Incorporated by reference |
|
|
10 |
.17 |
|
Amendment effective October 1, 1993 to the License
Agreement, dated October 15, 1991 between the Company and
Texas Instruments Incorporated.(5) |
|
Incorporated by reference |
|
|
10 |
.18 |
|
Amended and Restated Directors Nonstatutory Stock Option
Plan.(6) |
|
Incorporated by reference |
|
|
10 |
.19 |
|
Management Agreement between FSI International, Inc. and Donald
S. Mitchell, effective as of January 2, 2001. (Similar
agreements between the Company and its executive officers have
been omitted but will be filed if requested in writing by the
commission.)(16)# |
|
Incorporated by reference |
|
|
10 |
.20 |
|
FSI International, Inc. 1994 Omnibus Stock Plan.(7) |
|
Incorporated by reference |
|
|
10 |
.26 |
|
Summary of Employment Arrangement between the Company and Don
Mitchell dated December 12, 1999.(15)# |
|
Incorporated by reference |
|
|
10 |
.30 |
|
Employment Agreement entered into as of December 12, 1999
by and between FSI International, Inc. and Donald S.
Mitchell.(13)# |
|
Incorporated by reference |
|
|
10 |
.31 |
|
Agreement made and entered into as of March 4, 2001 by and
between FSI International, Inc. and Benno G. Sand.(18)# |
|
Incorporated by reference |
|
|
10 |
.32 |
|
Metron Technology Transition Agreement dated October 9,
2002 by and between FSI International, Inc. and Metron
Technology, B.V., portions of which have been omitted pursuant
to a request for confidential treatment. These portions are
identified by [***].(23) |
|
Incorporated by reference |
|
|
10 |
.33 |
|
First Amendment to the Transition Agreement dated
February 5, 2003.(24) |
|
Incorporated by reference |
|
|
10 |
.34 |
|
Second Amendment to the Transition Agreement dated
February 28, 2003.(24) |
|
Incorporated by reference |
|
|
10 |
.35 |
|
FSI/ Metron Technology Distribution Agreement dated
February 28, 2003 by and between FSI International, Inc.
and Metron Technology, N.V.(24) |
|
Incorporated by reference |
|
|
10 |
.36 |
|
Amendment to Article 7. Warranty of Exclusive Distribution
Agreement Between FSI International and mFSI LTD effective
16 April, 1999.(26) |
|
Incorporated by reference |
|
|
10 |
.37 |
|
Amendment to FSI Exclusive Distributorship Agreement made as of
July 31, 1999 among FSI International, Inc., mFSI LTD
and BOC Edwards.(26) |
|
Incorporated by reference |
|
|
10 |
.38 |
|
Amendment to Shareholders Agreement dated June 5, 1991
among FSI International, Inc. and Mitsui & Co., LTD and
Chlorine Engineers Corp., LTD and MBK Project Holdings LTD dated
as of September 17, 2004.(26) |
|
Incorporated by reference |
|
|
10 |
.39 |
|
Amendment to FSI Exclusive Distributorship Agreement dated
August 14, 1991 between FSI International, Inc. and
mFSI LTD dated as of November 14, 2003.(26) |
|
Incorporated by reference |
|
|
21 |
.0 |
|
Subsidiaries of the Company |
|
Filed herewith |
|
|
23 |
.0 |
|
Consent of KPMG LLP. |
|
Filed herewith |
|
|
24 |
.0 |
|
Powers of Attorney from the Directors of FSI International,
Inc. |
|
Filed herewith |
|
|
31 |
.1 |
|
Certification by Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act. |
|
Filed herewith |
74
|
|
|
|
|
|
|
Exhibit | |
|
Description |
|
Method of Filing |
| |
|
|
|
|
|
|
31 |
.2 |
|
Certification by Principal Financial and Accounting Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act. |
|
Field herewith |
|
|
32 |
.1 |
|
Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
Filed herewith |
|
99 |
.1 |
|
Financial Statements of mFSI LTD for the fiscal years
ended June 30, 2005 and 2004. (27) |
|
To be filed by amendment |
|
|
|
|
# |
Identified exhibit is a management contract, compensation plan
or arrangement. |
|
|
|
|
(1) |
Filed as an Exhibit to the Companys 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 Companys 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 Companys 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. |
|
|
(4) |
Filed as an Exhibit to the Companys Report on
Form 10-K for the fiscal year ended August 29, 1992,
File No. 0-17276, and incorporated by reference. |
|
|
(5) |
Filed as an Exhibit to the Companys Report on
Form 10-K for the fiscal year ended August 28, 1993,
SEC File No. 0-17276, and incorporated by reference. |
|
|
(6) |
Filed as an Exhibit to the Companys Report on
Form 10-Q for the fiscal quarter ended May 28, 1994,
SEC File No. 0-17276, and incorporated by reference. |
|
|
(7) |
Filed as an Exhibit to the Companys Report on
Form 10-K for the fiscal year ended August 27, 1994,
SEC File No. 0-17276, and incorporated by reference. |
|
|
(8) |
Filed as an Exhibit to the Companys Report on
Form 8-A, filed by the Company on June 5, 1997, SEC
File No. 0-17276, and incorporated by reference. |
|
|
(9) |
Filed as an Exhibit to the Companys Report on
Form 8-A/ A-1, filed by the Company on April 16, 1998,
SEC File No. 0-17276 and incorporated by reference. |
|
|
(10) |
Filed as an Exhibit to the Companys Report on
Form 8-K, filed by the Company on January 27, 1999,
SEC File No. 0-17276 and incorporated by reference. |
|
(11) |
Filed as an Exhibit to the Companys Report on
Form 8-K, filed by the Company on June 24, 1999, SEC
File No. 0-17276 and incorporated by reference. |
|
(12) |
Filed as an Exhibit to the Companys Report on
Form 10-K for the fiscal year ended August 28, 1999,
SEC File No. 0-17276, and incorporated by reference. |
|
(13) |
Filed as an Exhibit to the Companys Report on
Form 10-Q for the fiscal quarter ended February 26,
2000, SEC File No. 0-17276 and incorporated by reference. |
|
(14) |
Filed as an Exhibit to the Companys Report on
Form 10-Q for the fiscal quarter ended May 27, 2000,
SEC File No. 0-17276 and incorporated by reference. |
|
(15) |
Filed as an Exhibit to the Companys Report on
Form 10-K for the fiscal year ended August 26, 2000,
SEC File No. 0-17276 and incorporated by reference. |
|
(16) |
Filed as an Exhibit to the Companys Report on
Form 10-Q for the fiscal quarter ended February 24,
2001, SEC File No. 0-17276 and incorporated by reference. |
|
(17) |
Filed as an Exhibit to the Companys Registration Statement
on Form S-8, filed by the Company on March 28, 2003,
SEC File No. 333-104088 and incorporated by reference. |
|
(18) |
Filed as an Exhibit to the Companys Report on
Form 10-K for the fiscal year ended August 31, 2002,
SEC File No. 0-17276 and incorporated by reference. |
75
|
|
(19) |
Filed as an Exhibit to the Companys Report on
Form 10-Q for the fiscal quarter ended February 23,
2002, SEC File No. 0-17276 and incorporated by reference. |
|
(20) |
Filed as an Exhibit to the Companys Registration Statement
on Form 8-A/ A2, filed by the Company on April 9,
2002, SEC File No. 0-17276, and incorporated by reference. |
|
(21) |
Filed as an Exhibit to the Companys Current Report on
Form 8-K, filed by the Company on April 5, 2002, SEC
File No. 0-17276, and incorporated by reference. |
|
(22) |
Filed as an Exhibit to the Companys Registration Statement
on Form S-3 dated April 12, 2002, SEC File
No. 333-86148, and incorporated by reference. |
|
(23) |
Filed as an Exhibit to the Companys Report on
Form 10-Q/ A for the quarter ended November 30, 2002,
SEC File No. 0-17276 and incorporated by reference. |
|
(24) |
Filed as an Exhibit to the Companys Report on
Form 10-Q for the quarter ended March 1, 2003, SEC
File No. 0-17276 and incorporated by reference. |
|
(25) |
Filed as an Exhibit to the Companys Current Report on
Form 8-K, filed by the Company on October 20, 2004,
SEC File No. 0-17276 and incorporated by reference. |
|
(26) |
Filed as an Exhibit to the Companys Report on
Form 10-K for the fiscal year ended August 28, 2004,
SEC File No. 0-17276 and incorporated by reference. |
|
(27) |
To be filed by amendment. |
76