e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 27, 2006
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-17276
FSI INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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MINNESOTA
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41-1223238 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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3455 Lyman Boulevard, Chaska, Minnesota
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55318 |
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(Address of principal executive offices)
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(Zip Code) |
952-448-5440
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past
90 days.
þ YES o NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act.
Large Accelerated Filer o
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Accelerated Filer þ
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Non-Accelerated Filer o |
Indicate by a checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o YES þ NO
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the
latest practical date:
Common Stock, No Par Value 30,144,000 shares outstanding as of June 28, 2006
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
2
PART I.
Item 1. FINANCIAL INFORMATION
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 27, 2006 AND AUGUST 27, 2005
ASSETS
(unaudited)
(in thousands)
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May 27, |
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August 27, |
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2006 |
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2005 |
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Current assets: |
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Cash and cash equivalents |
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$ |
10,945 |
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$ |
11,352 |
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Restricted cash |
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143 |
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282 |
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Marketable securities |
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13,100 |
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20,245 |
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Trade accounts receivable, net of
allowance for doubtful accounts of $878
and $922, respectively |
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20,769 |
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21,393 |
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Trade accounts receivable from affiliate |
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2,569 |
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3,504 |
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Inventories, net |
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31,523 |
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24,717 |
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Prepaid expenses and other current assets |
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8,203 |
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6,924 |
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Total current assets |
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87,252 |
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88,417 |
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Property, plant and equipment, at cost |
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77,510 |
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77,726 |
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Less accumulated depreciation |
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(56,578 |
) |
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(56,170 |
) |
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20,932 |
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21,556 |
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Investment in affiliate |
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7,666 |
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8,484 |
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Intangibles, net |
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1,380 |
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1,784 |
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Other assets |
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1,198 |
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1,698 |
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Total assets |
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$ |
118,428 |
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$ |
121,939 |
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See accompanying notes to condensed consolidated financial statements.
3
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 27, 2006 AND AUGUST 27, 2005
(continued)
LIABILITIES AND STOCKHOLDERS EQUITY
(unaudited)
(in thousands)
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May 27, |
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August 27, |
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2006 |
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2005 |
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Current liabilities: |
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Trade accounts payable |
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$ |
7,177 |
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$ |
5,203 |
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Accrued expenses |
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9,614 |
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11,160 |
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Customer deposits |
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7,104 |
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1,220 |
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Deferred profit |
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4,041 |
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3,980 |
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Deferred profit with affiliate |
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966 |
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1,240 |
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Total current liabilities |
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28,902 |
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22,803 |
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Stockholders equity: |
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Preferred stock, no par value; 9,700 shares
authorized; none issued and outstanding |
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Series A Junior Participating Preferred Stock, no par
value; 300 shares authorized; none issued and outstanding |
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Common stock, no par value; 50,000 shares
authorized; issued and outstanding, 30,096 and
29,874 shares, respectively |
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224,419 |
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223,675 |
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Accumulated deficit |
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(135,215 |
) |
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(124,765 |
) |
Accumulated other comprehensive (loss) income |
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(374 |
) |
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226 |
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Other stockholders equity |
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696 |
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Total stockholders equity |
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89,526 |
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99,136 |
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Total liabilities and stockholders equity |
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$ |
118,428 |
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$ |
121,939 |
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See accompanying notes to condensed consolidated financial statements.
4
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED MAY 27, 2006 AND MAY 28, 2005
(unaudited)
(in thousands, except per share data)
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May 27, |
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May 28, |
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2006 |
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2005 |
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Sales (including sales to affiliates of
$1,788 and $171, respectively) |
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$ |
31,957 |
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$ |
19,069 |
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Cost of sales |
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18,909 |
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11,093 |
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Gross margin |
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13,048 |
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7,976 |
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Selling, general and administrative expenses |
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(9,303 |
) |
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(9,145 |
) |
Research and development expenses |
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(6,305 |
) |
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(5,533 |
) |
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Operating loss |
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(2,560 |
) |
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(6,702 |
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Interest income |
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244 |
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233 |
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Gain on marketable securities |
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4,210 |
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Other expense, net |
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(53 |
) |
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(8 |
) |
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Loss before income taxes |
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(2,369 |
) |
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(2,267 |
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Income taxes |
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12 |
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12 |
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Loss before equity in (loss) earnings of affiliate |
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(2,381 |
) |
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(2,279 |
) |
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Equity in (loss) earnings of affiliate |
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(52 |
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236 |
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Net loss |
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$ |
(2,433 |
) |
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$ |
(2,043 |
) |
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Net loss per common share: |
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Basic |
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$ |
(0.08 |
) |
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$ |
(0.07 |
) |
Diluted |
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$ |
(0.08 |
) |
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$ |
(0.07 |
) |
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Weighted average common shares |
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30,075 |
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29,959 |
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Weighted average common and potential common shares |
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30,075 |
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29,959 |
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See accompanying notes to condensed consolidated financial statements.
5
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MAY 27, 2006 AND MAY 28, 2005
(unaudited)
(in thousands, except per share data)
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May 27, |
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May 28, |
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2006 |
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2005 |
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Sales (including sales to affiliate of $4,386
and $2,373, respectively) |
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$ |
72,867 |
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$ |
62,668 |
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Cost of sales |
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37,821 |
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33,538 |
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Gross margin |
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35,046 |
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29,130 |
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Selling, general and administrative expenses |
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(27,307 |
) |
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(26,509 |
) |
Research and development expenses |
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(18,379 |
) |
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(16,400 |
) |
Gain on sale of facility |
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7,015 |
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Operating loss |
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(10,640 |
) |
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|
(6,764 |
) |
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Interest income |
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|
807 |
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|
474 |
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Gain on marketable securities |
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4,210 |
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Impairment of investment |
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(500 |
) |
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Other income, net |
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75 |
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|
44 |
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Loss before income taxes |
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(10,258 |
) |
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|
(2,036 |
) |
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Income taxes |
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37 |
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|
38 |
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|
|
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|
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Loss before equity in (loss) earnings of affiliate |
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(10,295 |
) |
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(2,074 |
) |
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Equity in (loss) earnings of affiliate |
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|
(155 |
) |
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|
667 |
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|
|
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Net loss |
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$ |
(10,450 |
) |
|
$ |
(1,407 |
) |
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Net loss per common share: |
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Basic |
|
$ |
(0.35 |
) |
|
$ |
(0.05 |
) |
Diluted |
|
$ |
(0.35 |
) |
|
$ |
(0.05 |
) |
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|
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Weighted average common shares |
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|
29,979 |
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|
|
29,962 |
|
Weighted average common and potential common shares |
|
|
29,979 |
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|
29,962 |
|
See accompanying notes to condensed consolidated financial statements.
6
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 27, 2006 AND MAY 28, 2005
(unaudited)
(in thousands)
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May 27, |
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May 28, |
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2006 |
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2005 |
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OPERATING ACTIVITIES: |
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Net loss |
|
$ |
(10,450 |
) |
|
$ |
(1,407 |
) |
Adjustments to reconcile net loss to net cash
used in operating activities: |
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|
|
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Stock compensation expense |
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|
807 |
|
|
|
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|
Gain on sale of facility |
|
|
|
|
|
|
(7,015 |
) |
Impairment of investment |
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|
500 |
|
|
|
|
|
Gain on marketable securities |
|
|
|
|
|
|
(4,210 |
) |
Depreciation |
|
|
2,620 |
|
|
|
2,820 |
|
Amortization |
|
|
404 |
|
|
|
649 |
|
Equity in loss (earnings) of affiliate |
|
|
155 |
|
|
|
(667 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
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Restricted cash |
|
|
139 |
|
|
|
455 |
|
Trade accounts receivable |
|
|
1,559 |
|
|
|
4,665 |
|
Inventories |
|
|
(6,806 |
) |
|
|
139 |
|
Prepaid expenses and other current assets |
|
|
(1,279 |
) |
|
|
(1,028 |
) |
Trade accounts payable |
|
|
1,974 |
|
|
|
(4,580 |
) |
Accrued expenses |
|
|
(1,657 |
) |
|
|
(8,511 |
) |
Customer deposits |
|
|
5,884 |
|
|
|
385 |
|
Deferred profit |
|
|
(213 |
) |
|
|
(387 |
) |
|
|
|
|
|
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|
Net cash used in operating activities |
|
|
(6,363 |
) |
|
|
(18,692 |
) |
|
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|
|
|
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INVESTING ACTIVITIES: |
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|
|
|
|
|
|
Capital expenditures |
|
|
(1,996 |
) |
|
|
(1,452 |
) |
Purchases of marketable securities |
|
|
(245,550 |
) |
|
|
(336,939 |
) |
Sales of marketable securities |
|
|
252,695 |
|
|
|
336,974 |
|
Dividend from affiliate |
|
|
208 |
|
|
|
|
|
Proceeds on marketable securities distribution |
|
|
|
|
|
|
5,614 |
|
Investment in license fee |
|
|
|
|
|
|
(510 |
) |
Investment in affiliate |
|
|
|
|
|
|
(490 |
) |
Proceeds from sale of property |
|
|
|
|
|
|
14,405 |
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
5,357 |
|
|
|
17,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock |
|
|
744 |
|
|
|
262 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
744 |
|
|
|
262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(145 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(407 |
) |
|
|
(822 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
11,352 |
|
|
|
10,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
10,945 |
|
|
$ |
9,522 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
7
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Description of Business and Summary of Significant Accounting Policies
Description of Business
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 and Asia.
Condensed Consolidated Financial Statements
The accompanying condensed consolidated financial statements have been prepared by the Company
without audit and reflect all adjustments (consisting only of normal and recurring adjustments,
except as disclosed in the notes) which are, in the opinion of management, necessary to present a
fair statement of the results for the interim periods presented. The statements have been prepared
in accordance with the regulations of the Securities and Exchange Commission but omit certain
information and footnote disclosures necessary to present the statements in accordance with
accounting principles generally accepted in the United States of America. The results of operations
for the interim periods presented are not necessarily indicative of the results to be expected for
the full fiscal year. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the Companys Annual Report on
Form 10-K for the fiscal year ended August 27, 2005, as amended, previously filed with the
Securities and Exchange Commission.
Revenue Recognition
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 installation 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 has expired. The published or quoted
service labor rates and training class prices are rates actually charged and billed to the
Companys customers.
8
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 is
recognized ratably over the duration of the contracts.
The timing and amount of revenue recognized are dependent on the mix of revenue recognized
upon shipment versus acceptance and for revenue recognized upon acceptance, they are 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
the third quarter and first nine months of fiscal 2006, other comprehensive income (loss) consisted
of foreign currency translation adjustments. For the third quarter and first nine months of fiscal
2005, 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.
Marketable Securities
The Company classifies its marketable equity securities as available-for-sale and carries
these securities at amounts that approximate fair market value.
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 the 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. 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 recorded a gain of approximately $1.5 million in the fourth quarter of
fiscal 2005 related to this final distribution.
Trade Accounts Receivable
Trade accounts receivable are recorded net of an allowance for doubtful accounts.
9
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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
market. 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.
Long-Lived Assets
The Company assesses the impairment of long-lived assets, including intangible assets with
definite lives, whenever events or changes in circumstances indicate that the carrying value may
not be recoverable.
The Company routinely considers whether indicators of impairment of its long-lived 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 its 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. Long-lived assets,
amounted to $31.2 million as of May 27, 2006 and $33.5 million as of August 27, 2005.
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 $134,000 in the last three months of fiscal 2006, $538,000 in fiscal
2007, $538,000 in fiscal 2008, $163,000 in fiscal 2009 and $8,000 in fiscal 2010.
10
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company has no intangible assets with indefinite useful lives. Intangible assets as of May
27, 2006 and August 27, 2005 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 27, 2006 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Developed
technology |
|
$ |
9,150 |
|
|
$ |
9,150 |
|
|
$ |
|
|
Patents |
|
|
4,285 |
|
|
|
3,245 |
|
|
|
1,040 |
|
License fees |
|
|
1,010 |
|
|
|
670 |
|
|
|
340 |
|
Other |
|
|
420 |
|
|
|
420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,865 |
|
|
$ |
13,485 |
|
|
$ |
1,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 27, 2005 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Carrying |
|
|
Accumulated |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
Investment in Affiliate
The Companys investment in affiliate consists of a 49% interest in mFSI LTD, a Japanese
joint venture company formed in 1991. This investment is accounted for by the equity method
utilizing a two-month lag due to the affiliates year end.
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.
Income Taxes
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. In
assessing the realizability of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be realized.
11
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
During the second quarter of fiscal 2006, management determined that the accumulated
undistributed earnings related to the Companys investment in mFSI LTD were no longer considered
permanently reinvested. Accordingly, a deferred tax liability amounting to $2.1 million was
established on the underlying book-to-tax basis difference in this investment. Since the amount of
the deferred tax liability resulted in a corresponding reduction to the Companys valuation
allowance on its deferred tax assets, the establishment of the liability did not have an impact on
the Companys effective tax rate.
Product Warranty
The Company, in general, warrants new and refurbished equipment manufactured by the Company to
the original purchaser to be free from defects in material and workmanship for six months 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.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at
current exchange rates. Operating results for mFSI LTD and our 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
(loss) account in stockholders equity.
Net Income (Loss) Per Common Share
Basic income (loss) per common share is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding during the period. Diluted net income per
common share is computed using the treasury stock method to compute the weighted average number of
shares of common stock outstanding assuming the conversion of potential dilutive common shares. The
dilutive effect of shares of common shares excludes all options for which the exercise price was
higher than the average market price for the period. Diluted net loss per share 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 net loss per share was
3,857,000 for the third quarter of fiscal 2006 and for the first nine months of fiscal 2006. The
number of potential dilutive common shares excluded from the computation of net loss per share was
3,785,000 for the third quarter of fiscal 2005 and for the first nine months of fiscal 2005.
Use of Estimates
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.
12
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Employee Stock Plans
On August 28, 2005, the Company adopted the fair value recognition provisions of SFAS No.
123R, Share-Based Payment, using the modified prospective method. As a result, as of May 27,
2006, the Companys results of operations reflected compensation expense for new stock options
granted and vested under its stock incentive plan and employee stock purchase plan during the first
nine months of fiscal 2006 and the unvested portion of previous stock option grants which vested
during the first nine months of fiscal 2006. Amounts recognized in the financial statements related
to stock-based compensation are as follows (in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
May 27, |
|
|
May 27, |
|
|
|
2006 |
|
|
2006 |
|
Total cost of stock-based
compensation |
|
$ |
283 |
|
|
$ |
806 |
|
Amount capitalized in inventory
and property and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts charged against (loss)
earnings, before income tax
benefits |
|
|
283 |
|
|
|
806 |
|
Amount of income tax benefit
recognized in earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount charged against net loss |
|
$ |
283 |
|
|
$ |
806 |
|
|
|
|
|
|
|
|
Impact on net loss per common
share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.01 |
) |
|
$ |
(0.03 |
) |
Diluted |
|
$ |
(0.01 |
) |
|
$ |
(0.03 |
) |
Stock-based compensation expense was reflected in the statement of operations for the third
quarter and first nine months of fiscal 2006 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
May 27, 2006 |
|
|
May 27, 2006 |
|
Cost of goods sold |
|
$ |
11 |
|
|
$ |
32 |
|
Selling, general and administrative |
|
|
193 |
|
|
|
550 |
|
Research and development |
|
|
79 |
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
$ |
283 |
|
|
$ |
806 |
|
|
|
|
|
|
|
|
13
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Prior to the first quarter of fiscal 2006, the Company accounted for stock-based employee
compensation arrangements in accordance with the provisions and related interpretations of
Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees. Had
compensation cost for stock-based compensation been determined consistent with SFAS No. 123R, the
net loss and net loss per share would have been adjusted to the following pro forma amounts (in
thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
|
May 28, 2005 |
|
|
May 28, 2005 |
|
Net loss, as reported |
|
$ |
(2,043 |
) |
|
$ |
(1,407 |
) |
|
|
|
|
|
|
|
|
|
Employee stock-based
compensation expense included
in net earnings |
|
|
|
|
|
|
|
|
Less: stock-based employee
compensation expense
determined under fair value
based method |
|
|
(2,217 |
) |
|
|
(3,698 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(4,260 |
) |
|
$ |
(5,105 |
) |
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
(0.07 |
) |
|
$ |
(0.05 |
) |
Basic pro forma |
|
$ |
(0.14 |
) |
|
$ |
(0.17 |
) |
Diluted as reported |
|
$ |
(0.07 |
) |
|
$ |
(0.05 |
) |
Diluted pro forma |
|
$ |
(0.14 |
) |
|
$ |
(0.17 |
) |
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing method. The Company uses historical data to estimate the expected price volatility,
the expected option life and the expected forfeiture rate. The risk-free rate is based on the U.S.
Treasury yield curve in effect at the time of grant for the estimated life of the option. The
Company has not made any dividend payments nor does it have plans to pay dividends in the
foreseeable future. The following assumptions were used to estimate the fair value of options
granted under the Companys option plan and Employees Stock Purchase Plan (ESPP) during the third
quarters and first nine months of fiscal 2006 and 2005 using the Black-Scholes option-pricing
model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
Nine Months Ended |
|
|
May 27, |
|
May 28, |
|
May 27, |
|
May 28, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Stock options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility |
|
|
68.0 |
% |
|
|
70.3 |
% |
|
|
68.5 |
% |
|
|
70.7 |
% |
Risk-free interest rates |
|
|
4.9 |
% |
|
|
4.0 |
% |
|
|
4.5 |
% |
|
|
3.7 |
% |
Expected option life |
|
|
5.5 |
|
|
|
5.3 |
|
|
|
5.6 |
|
|
|
5.4 |
|
Stock dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility |
|
|
* |
|
|
|
* |
|
|
|
68.3 |
% |
|
|
70.9 |
% |
Risk-free interest rates |
|
|
* |
|
|
|
* |
|
|
|
4.3 |
% |
|
|
2.6 |
% |
Expected option life |
|
|
* |
|
|
|
* |
|
|
|
0.5 |
|
|
|
0.5 |
|
Stock dividend yield |
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
|
|
There were no stock purchase rights granted under the ESPP in the third quarter of fiscal
2006 or the third quarter of fiscal 2005.
14
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A summary of the option activity for the first nine months of fiscal 2006 is as follows (in
thousands, except price per share and contractual term):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
average |
|
|
|
|
|
|
|
|
average |
|
Remaining |
|
Aggregate |
|
|
Number of |
|
Exercise Price |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Per Share |
|
Term |
|
Value |
Outstanding at August 27, 2005 |
|
|
4,001 |
|
|
$ |
7.34 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
186 |
|
|
|
4.91 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(20 |
) |
|
|
3.42 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
(176 |
) |
|
|
9.18 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(134 |
) |
|
|
3.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at May 27, 2006 |
|
|
3,857 |
|
|
$ |
7.29 |
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at May 27, 2006 |
|
|
3,460 |
|
|
$ |
7.65 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no aggregate intrinsic value for options outstanding or exercisable at May 27, 2006
as the average price of the Companys stock for the first nine months of fiscal 2006 was less than
the average exercise price of options outstanding or exercisable.
The weighted average grant date fair value based on the Black-Scholes option pricing model for
options granted in the third quarter of fiscal 2006 was $3.04 per share, for options granted in the
first nine months of fiscal 2006 was $2.94 per share, for options granted in the third quarter of
fiscal 2005 was $2.06 per share, and for options granted in the first nine months of fiscal 2005
was $2.58 per share. The total intrinsic value of options exercised was $92,000 during the third
quarter of fiscal 2006, $203,700 during the first nine months of fiscal 2006, $0 during the third
quarter of fiscal 2005 and $4,600 during the first nine months of fiscal 2005.
A summary of the status of our unvested option shares as of May 27, 2006 is as follows (in
thousands, except fair value amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
|
Number of |
|
Grant-Date Fair |
|
|
Shares |
|
Value |
Unvested at August 27, 2005 |
|
|
531 |
|
|
$ |
3.43 |
|
Options granted |
|
|
186 |
|
|
|
4.91 |
|
Options forfeited |
|
|
(20 |
) |
|
|
3.42 |
|
Options vested |
|
|
(300 |
) |
|
|
3.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at May 27, 2006 |
|
|
397 |
|
|
$ |
4.19 |
|
|
|
|
|
|
|
|
|
|
As
of May 27, 2006, there was $824,000 of total unrecognized compensation cost related to
unvested share-based compensation granted under our plans. That cost is expected to be recognized
over a weighted-average period of 1.2 years. The total fair value of option shares vested was
$283,000 during the third quarter of fiscal 2006, $806,000 during the first nine months of fiscal
2006, $2,217,000 during the third quarter of fiscal 2005 and $3,698,000 during the first nine
months of fiscal 2005.
15
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 was effective for inventory costs incurred beginning in the
Companys first quarter of fiscal 2006. The implementation of this statement did not have an impact
on the Companys results of operation or financial condition.
Reclassifications
Certain fiscal 2005 amounts have been reclassified to conform to the current year
presentation.
(2) Sale of the Allen, Texas Facility
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 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 No. 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 2006
to end on August 31, 2007.
16
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(3) Inventories, Net
Inventories, net are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
May 27, |
|
|
August 27, |
|
|
|
2006 |
|
|
2005 |
|
Finished products |
|
$ |
3,853 |
|
|
$ |
2,329 |
|
Work-in-process |
|
|
9,923 |
|
|
|
9,971 |
|
Subassemblies |
|
|
1,450 |
|
|
|
1,146 |
|
Raw materials and purchased parts |
|
|
16,297 |
|
|
|
11,271 |
|
|
|
|
|
|
|
|
|
|
$ |
31,523 |
|
|
$ |
24,717 |
|
|
|
|
|
|
|
|
(4) Accrued Expenses
Accrued expenses, current and long-term, are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
May 27, |
|
|
August 27, |
|
|
|
2006 |
|
|
2005 |
|
Commissions |
|
$ |
148 |
|
|
$ |
243 |
|
Salaries and benefits |
|
|
2,598 |
|
|
|
2,707 |
|
Product warranty |
|
|
3,016 |
|
|
|
4,117 |
|
Professional fees |
|
|
507 |
|
|
|
719 |
|
Patent litigation settlement |
|
|
|
|
|
|
750 |
|
Income taxes |
|
|
1,269 |
|
|
|
1,264 |
|
Other |
|
|
2,076 |
|
|
|
1,360 |
|
|
|
|
|
|
|
|
Total current accrued expenses |
|
$ |
9,614 |
|
|
$ |
11,160 |
|
|
|
|
|
|
|
|
(5) Supplementary Cash Flow Information
The following summarizes the supplementary cash flow item (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
May 27, |
|
May 28, |
|
|
2006 |
|
2005 |
Income taxes paid, net |
|
$ |
32 |
|
|
$ |
45 |
|
17
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(6) Comprehensive Loss
Other comprehensive loss pertains to revenues, expenses, gains and losses that are not
included in net loss but rather are recorded directly in stockholders equity. For the third
quarters and nine months ended May 27, 2006 and May 28, 2005, other comprehensive loss consisted of
the foreign currency translation adjustment and unrealized holding gains in investments and
amounted to (in thousands):
|
|
|
|
|
|
|
|
|
|
|
May 27, |
|
|
May 28, |
|
|
|
2006 |
|
|
2005 |
|
For the Quarters Ended: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,433 |
) |
|
$ |
(2,043 |
) |
Items of other comprehensive loss -
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
(53 |
) |
|
|
(457 |
) |
Change in unrealized holding gains on investments |
|
|
|
|
|
|
(4,016 |
) |
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(2,486 |
) |
|
$ |
(6,516 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(10,450 |
) |
|
$ |
(1,407 |
) |
Items of other comprehensive loss - |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
(600 |
) |
|
|
80 |
|
Change in unrealized holding gains on investments |
|
|
|
|
|
|
(3,791 |
) |
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(11,050 |
) |
|
$ |
(5,118 |
) |
|
|
|
|
|
|
|
(7) Segment Information
Segment information
The Company historically had two product lines, Surface Conditioning (SC) and POLARIS®
Systems and Services (PSS) and 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, 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.
(8) Litigation
Hsu Litigation
See Note 18 of the Notes to Consolidated Financial Statements in the Companys fiscal 2005
annual report on Form 10-K, as amended, for a discussion of the Hsu litigation.
18
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
YieldUP Patent Litigation
During the second quarter of fiscal 2006, the Company made the final payment of $750,000
related to the litigation settlement. See Note 18 of the Notes to Consolidated Financial Statements
in the Companys fiscal 2005 annual report on Form 10-K, as amended, for a discussion of the
YieldUP patent litigation.
(9) Impairment of Investment
The Company had an investment in a Malaysian foundry that was accounted for under the cost
method. The investment was $0.5 million as of August 27, 2005. On March 22, 2006, the majority
shareholder of this Malaysian foundry announced that the foundry would merge with another foundry
and form a new entity. Subsequent to the merger announcement, the Company was contacted by the
majority shareholder and given the option of selling its shares at a nominal value to the majority
shareholder or providing additional debt to the foundry as part of a pre-merger restructuring.
Based on this information, the Company deemed its investment as being fully impaired as of February
25, 2006 and recorded a loss of $0.5 million in the second quarter of fiscal 2006. The Company
agreed to sell its shares at a nominal value to the majority shareholder during the third quarter
of fiscal 2006.
19
|
|
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The information in this report, except for the historical information, contains
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and is subject to the safe harbor created by that statute. 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. These forward-looking statements include expected orders,
revenues, gross margin, operating expense run rate, net income, cash usage and other financial
performance measures for the fourth quarter of fiscal 2006. These statements are subject to various
risks and uncertainties, both known and unknown. Factors that could cause actual results to differ
from these forward-looking statements include, but are not limited to a change in industry
conditions; order delays or cancellations; general economic conditions; changes in customer
capacity requirements and demand for microelectronics; the extent of demand for our products and
our ability to meet demand; global trade policies; worldwide economic and political stability; our
successful execution of internal performance plans; the cyclical nature of our business; volatility
of the market for certain products; performance issues with key suppliers and subcontractors; the
transition to 300mm products; the level of new orders; the timing and success of current and future
product and process development programs; the success of our affiliated distributor in Japan; the
success of our direct distribution organization; and the potential impairment of long-lived assets;
as well as other factors listed from time to time in our SEC reports including, but not limited to,
the Risk Factors set forth in the Form 10-K, as amended, for the fiscal year ended August 27,
2005. Readers also are cautioned not to place undue reliance on these forward-looking statements as
actual results could differ materially. We undertake no duty to update any of the forward-looking
statements after the date of this report.
This discussion and analysis should be read in conjunction with the Consolidated Condensed
Financial Statements and footnotes thereto appearing elsewhere in this report.
Industry
It appears that semiconductor manufacturers have for the most part avoided the inventory
build-up that occurred during the summer and fall of 2005. In addition, many device manufacturers,
particularly FLASH (a non-volatile memory device that can be erased and reprogrammed sector by
sector in a circuit without removal from the system) and DRAM (dynamic random access memory is a
volatile memory device which stores data as an electrical charge on a capacitor) manufacturers, are
incrementally adding capacity to meet an expected increase in demand.
Several industry analysts are forecasting that device manufacturers will increase their second
half of calendar 2006 spending over the first half level due to expected sustained factory
utilization rates and the expected increase in demand for leading edge devices.* However, we
believe that if device manufacturers start to experience an inventory build-up, they would likely
delay their anticipated investment in wafer fab equipment.*
Recently, Semiconductor Industry Association, a leading industry research organization,
updated its growth forecast for semiconductor devices in calendar 2006 to 9.8 percent from a
previous estimate of up 7.9 percent. Also, they are now predicting calendar 2007 growth of 11
percent and calendar 2008 growth of 12 percent for semiconductor devices.*
Overview
The investments we made in our three flagship products and the more aggressive demo/evaluation
system placement initiatives over the past few years are starting to yield the anticipated results
of increased bookings. In addition to increasing the acceptance of the flagship products, our
challenge over the coming year is to improve our gross margin rates while controlling our operating
costs.
20
During the quarter, we introduced our new ViPR technology on our ZETA® G3 spray
cleaning system. This new technology eliminates the need for ashing on most implanted photoresist
striping steps. By eliminating approximately 80 percent of the front-end-of-line ashing steps
device manufacturers now have another mechanism for reducing surface damage, material loss,
manufacturing cycle time and capital investment.
We partnered with a key Asian customer to develop this technology and shipped initial
ZETA® systems configured with the ViPR capability early in the third quarter. Several of
these systems were accepted during the quarter and we anticipate follow-on orders from this and
other customers in the fourth quarter. We expect that the ViPR technology will be adopted for 65
and 45nm manufacturing.
In the third quarter, we gained acceptance from a U.S. based semiconductor manufacturer, for a
MAGELLAN® system that shipped in the second quarter of 2006. The customer qualified the
MAGELLAN system for several surface conditioning applications leading to a multiple unit order
early in the fourth quarter. We anticipate follow-on orders for our MAGELLAN system from this and
other customers in the fourth quarter as they recognize the etch uniformity, particle removal
efficiency and reduction in defects that this product offers.
Finally, during the quarter we continued to make good progress qualifying the process
capabilities of our fourth flagship product our single wafer wet cleaning system. An initial beta
single wafer wet cleaning system is scheduled for installation in the fourth quarter of fiscal 2006
after a successful source inspection. This product is targeted for advanced single wafer cleaning
application in both the front-end and back-end of line semiconductor process flow. The introduction
of this product allows us to address the fastest growing surface conditioning market segment and
will give device manufacturers the ability to have nearly all of their surface conditioning process
steps addressed by us.
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. |
Revenue Recognition
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 sale as a multiple element arrangement. We recognize the equipment revenue
upon shipment and transfer of title. 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.
21
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 are dependent on the mix of revenue recognized upon
shipment versus acceptance. For revenue recognized upon acceptance, they are 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 $31.2 million as of May 27, 2006 and $33.5 million as of August 27, 2005.
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 typically 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 yet to be recognized
defects in products sold.
Inventory Reserves Estimation
We record reserves for inventory shrinkage and for potentially excess, obsolete and slow
moving inventory. 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 any 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.
22
THIRD QUARTER AND FIRST NINE MONTHS OF FISCAL 2006 COMPARED TO THIRD QUARTER AND FIRST NINE MONTHS
OF FISCAL 2005
The Company
The following table sets forth on a consolidated basis, for the fiscal period indicated,
certain income and expense items as a percent of total sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Sales |
|
Percent of Sales |
|
|
Quarter Ended |
|
Nine Months Ended |
|
|
May 27, |
|
May 28, |
|
May 27, |
|
May 28, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
59.2 |
|
|
|
58.2 |
|
|
|
51.9 |
|
|
|
53.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
40.8 |
|
|
|
41.8 |
|
|
|
48.1 |
|
|
|
46.5 |
|
Selling, general and administrative |
|
|
29.1 |
|
|
|
48.0 |
|
|
|
37.5 |
|
|
|
42.3 |
|
Research and development |
|
|
19.7 |
|
|
|
29.0 |
|
|
|
25.2 |
|
|
|
26.2 |
|
Gain on sale of facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(8.0 |
) |
|
|
(35.2 |
) |
|
|
(14.6 |
) |
|
|
(10.8 |
) |
Other income, net |
|
|
0.6 |
|
|
|
23.3 |
|
|
|
0.5 |
|
|
|
7.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(7.4 |
) |
|
|
(11.9 |
) |
|
|
(14.1 |
) |
|
|
(3.3 |
) |
Income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in (loss) earnings of affiliate |
|
|
(0.2 |
) |
|
|
1.2 |
|
|
|
(0.2 |
) |
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(7.6 |
)% |
|
|
(10.7 |
)% |
|
|
(14.3 |
)% |
|
|
(2.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Revenue and Shipments
Sales revenue increased $12.9 million, or 68%, to $32.0 million for the third quarter of
fiscal 2006 as compared to $19.1 million for the third quarter of fiscal 2005. The increase in
sales revenue related primarily to an increase in domestic sales and sales in Asia of $15.2
million, in the aggregate, partially offset by a decrease of sales in Europe of $2.3 million. Sales
revenue increased $10.2 million, or 16%, to $72.9 million for the first nine months of fiscal 2006
as compared to $62.7 million for the first nine months of fiscal 2005. The increase in sales
revenue related to an increase in domestic sales of $11.3 million associated with increased
domestic customer demand for products that are used to manufacture devices on 200mm wafers.
Shipments in the third quarter of fiscal 2006 increased to $28.6 million from $18.9 million
for the third quarter of fiscal 2005. The increase in shipments in the third quarter of fiscal 2006
related primarily to increased SC product shipments both domestically and internationally.
Shipments in the first nine months of fiscal 2006 increased to $73.3 million from $62.5 million in
the first nine months of fiscal 2005. The increase in the first nine months of fiscal 2006 related
primarily to increased domestic SC product shipments.
Based upon our revenue recognition policy, certain shipments to customers are not recognized
until customer acceptance. Therefore, depending on the timing of shipments and customer
acceptances, there are time periods where shipments may exceed sales revenue or sales revenue may
exceed shipments.
International sales were $18.7 million, representing 59% of total sales, during the third
quarter of fiscal 2006 and $12.6 million, representing 66% of total sales, during the third quarter
of fiscal 2005. The increase in the dollar amount of international sales related primarily to
increased sales in Asia of $8.4 million partially offset by decreased sales in Europe of $2.3
million. International sales were $42.4 million, representing 58% of total sales, during the first
nine months of fiscal 2006 and $43.5 million, representing 69% of total sales, during the first
nine months of fiscal 2005. The minor decrease in the dollar amount of international sales related
primarily to decreased sales in Europe of $5.9 million partially offset by increased sales in Asia
of $4.8 million.
23
We expect fourth quarter of fiscal 2006 orders to be between $40 and $45 million.* We have
already received several significant orders; however, there are several additional multi-unit
orders that are anticipated in the fourth quarter.* We currently expect fourth quarter of fiscal
2006 revenues to be between $35 and $40 million.* A portion of the expected revenue is subject to
us obtaining timely acceptance from our customers and orders are subject to cancellation.
Gross Margin
Our gross profit margin fluctuates due to a number of factors, including the mix of products
sold; the proportion of international sales, as international sales generally have lower margins;
utilization of manufacturing capacity; the sales of PSS product inventory previously written down
to zero; initial product placement discounts; and the competitive pricing environment.
Gross margin as a percentage of sales for the third quarter of fiscal 2006 was 40.8% as
compared to 41.8% for the third quarter of fiscal 2005. The decrease in the third quarter of fiscal
2006 as compared to the third quarter of fiscal 2005 related primarily to the mix of products sold.
Gross margin as a percentage of sales for the first nine months of fiscal 2006 was 48.1% as
compared to 46.5% for the first nine months of fiscal 2005. The increase in margin in the first
nine months was primarily due to sales in the first nine months of fiscal 2006 of PSS product
inventory with an original cost of $2.0 million that had previously been written down to zero
partially offset by lower margin sales on initial product placements. The sale of PSS product
inventory previously written down to zero was primarily due to revenues generated from
unanticipated sales of PSS refurbished tools, spare parts and upgrades. During the first nine
months of fiscal 2005, there were sales of PSS product inventory with an original cost of $0.4
million that has previously been written down to zero.
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. Any
material sales of the impaired inventory will be disclosed. 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 $8.7 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 May 27, 2006 was $9.7 million.
Gross margins for the fourth quarter of fiscal 2006 are expected to be between 40% to 43% of
revenues due to product mix, the foreign/domestic sales mix and initial product placements.*
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $9.3 million for the third quarter
of fiscal 2006 as compared to $9.1 million for the third quarter of fiscal 2005. Selling, general
and administrative expenses were $27.3 million for the first nine months of fiscal 2006 as compared
to $26.5 million for the same period in fiscal 2005. The increases in selling, general and
administrative expenses for 2006 related primarily to an increase in sales and service personnel in
Asia as well as certain realignment costs incurred in the second quarter of fiscal 2006 in Europe.
We expect selling, general and administrative expenses in the fourth quarter of fiscal 2006 to
be in the range of $9.2 to $9.4 million as we continue to focus on supporting product evaluations
in process at our customers facilities and increasing our field service capabilities to support
the anticipated increase in unit shipments.*
24
Research and Development Expenses
Research and development expenses were $6.3 million for the third quarter of fiscal 2006 as
compared to $5.5 million for the third quarter in fiscal 2005. Research and development expenses
were $18.4 million for the first nine months of fiscal 2006 as compared to $16.4 million for the
same period in fiscal 2005. The majority of our research and development investment is focused on
expanding the application capabilities of our products, supporting customer evaluations and
expanding our product portfolio. We experienced an increase in engineering material costs in the
third quarter of fiscal 2006 related to development of our initial single wafer wet cleaning
system.
Research and development expenses for the fourth quarter of fiscal 2006 are expected to be in
the range of $6.1 to $6.3 million as we continue to invest in new application and product
development programs and provide support for customer evaluation programs.*
Gain on Sale of Facility
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 on the sale in the second quarter of fiscal 2005. See Note 2 of the
Notes to the Condensed Consolidated Financial Statements of this report for further discussion of
the sale of the facility.
Interest Income
Interest income was $244,000 in the third quarter of fiscal 2006 and $807,000 in the first
nine months of fiscal 2006 as compared to $233,000 in the third quarter of fiscal 2005 and $474,000
in the first nine months of fiscal 2005. The increases in interest income in the fiscal 2006
periods related primarily to higher interest rates.
Interest income in the fourth quarter of fiscal 2006 is expected to be between $150,000 and
$200,000, given our current cash position and the anticipated interest rates.*
Gain on Marketable Securities
Gain on marketable securities was $4.2 million in the third quarter and first nine months of
fiscal 2005. The gain was due to the gain on the Nortem distribution in the third quarter of fiscal
2005.
Impairment of Investment
We recorded $0.5 million of impairment of investment for the first nine months of fiscal 2006.
See further discussion related to the impairment in Note 9 of the Notes to the Condensed
Consolidated Financial Statements.
Income Taxes
We recorded tax expense of $12,000 in the third quarter of fiscal 2006 and 2005 and $38,000 in
the first nine months of fiscal 2006 and 2005.
Our deferred tax assets on the balance sheet as of May 27, 2006 have been fully reserved with
a valuation allowance. We do not expect to significantly reduce our valuation allowance until we
are consistently profitable on a quarterly basis.*
25
We have net operating loss carryforwards for federal income tax purposes of approximately
$156.9 million, which will begin to expire in fiscal year 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.
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
production 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 foreign earnings.
Equity in (Loss) Earnings of Affiliate
The equity in (loss) earnings of affiliate was approximately $52,000 of loss for the third
quarter of fiscal 2006, compared to approximately $236,000 of income for the third quarter of
fiscal 2005. The equity in (loss) earnings of affiliate was approximately $155,000 of loss for the
first nine months of fiscal 2006, compared to $667,000 of income for the first nine months of
fiscal 2005. The change from the fiscal 2005 periods to the fiscal 2006 periods related primarily
to a change in revenue product mix to lower margin products representing a greater portion of sales
revenue in fiscal 2006.
We expect to report equity in earnings of affiliate of $100,000 to $200,000 in the fourth
quarter of fiscal 2006.*
Net Income
Assuming that we can achieve the projected revenue, gross margin, operating expense levels,
interest income and affiliate earnings, we expect to report net income of $1.0 to $2.0 million for
the fourth quarter of fiscal 2006.*
LIQUIDITY AND CAPITAL RESOURCES
Cash, restricted cash, cash equivalents and marketable securities were approximately $24.2
million as of May 27, 2006, a decrease of $7.7 million from the end of fiscal 2005. The net
decrease in cash, restricted cash, cash equivalents and marketable securities was primarily due to
$6.5 million of cash used in operating activities, excluding the increase in restricted cash, $2.0
million in capital expenditures, including an additional Surface Conditioning system in our
laboratory, and $0.1 million of negative currency impact. The decreases were net of a $0.2 million
dividend received for our affiliate, mFSI LTD and $0.7 million of proceeds from the issuance of
common stock.
Accounts receivable decreased $1.6 million from the end of fiscal 2005 to $23.3 million as of
May 27, 2006. The decrease in accounts receivable was primarily due to the timing of shipments
within the third quarter of fiscal 2006 as compared to the fourth quarter of fiscal 2005 from 76%
of the quarter shipments in the last month of the fourth quarter of fiscal 2005 to 37% of the
quarter shipments in the last month of the third quarter of fiscal 2006. Accounts receivable will
fluctuate from quarter to quarter, depending on individual customers timing of ship dates and
payment terms.
Inventory increased approximately $6.8 million to $31.5 million at May 27, 2006 as compared to
$24.7 million at the end of fiscal 2005. The increase in inventory was primarily in raw materials
and purchased parts due to an increase in orders from $26.2 million in the fourth quarter of fiscal
2005 to $43.7 million in the third quarter of fiscal 2006. The inventory increase was also due to
anticipated follow-on orders from several customers. Inventory reserves were $13.7 million at May
27, 2006 as compared to reserves of $15.3 million at the end of fiscal 2005. The decrease in
inventory reserves was due to sales in the first nine months of fiscal 2006 of PSS product
inventory with an original cost of $2.0 million that had previously been written down to zero and
the disposal of $0.4 million of obsolete inventory offset by $0.8 million of additional SC product
inventory reserves during the first nine months of fiscal 2006.
26
Trade accounts payable increased approximately $2.0 million to $7.2 million as of May 27, 2006
as compared to $5.2 million at the end of fiscal 2005. The increase in trade accounts payable
related primarily to an increase in inventory purchases.
Customer deposits increased approximately $5.9 million to $7.1 million as of May 27, 2006 as
compared to $1.2 million at the end of fiscal 2005. The increase relates primarily to an increase
in PSS product bookings which require deposits.
Deferred profit decreased approximately $0.2 million to $5.0 million at May 27, 2006 as
compared to $5.2 million at the end of fiscal 2005.
As of May 27, 2006, our current ratio of current assets to current liabilities was 3.0 to 1.0
and working capital was $58.4 million. We did not have any outstanding loans with our affiliate, or
lines of credit for affiliate, as of May 27, 2006. As of May 27, 2006, we had guarantees of
$260,000 related to auto leases, VAT and payroll requirements in Europe. These guarantees were
collateralized with $143,000 of restricted cash.
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 5 |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 years |
|
|
3-5 years |
|
|
years |
|
Contractual Obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
$ |
2,206 |
|
|
$ |
1,110 |
|
|
$ |
1,068 |
|
|
$ |
28 |
|
|
|
|
|
Purchase obligations |
|
|
11,713 |
|
|
|
11,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
(1) |
|
|
2,375 |
|
|
|
250 |
|
|
|
500 |
|
|
|
500 |
|
|
$ |
1,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,294 |
|
|
$ |
13,073 |
|
|
$ |
1,568 |
|
|
$ |
528 |
|
|
$ |
1,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other long-term liabilities related to minimum royalty payments or discounts
granted under a license agreement. |
Capital expenditures were approximately $2.0 million in the first nine months of fiscal 2006
and $1.5 million in the first nine months of fiscal 2005. The fiscal 2006 expenditures included
placing additional Surface Conditioning equipment in our laboratory allowing us to reduce the cycle
time for new applications development and the backlog of customer demonstrations. We expect total
capital expenditures, consisting of primarily a new metrology system in our laboratory, to be
approximately $2.0 million in the fourth quarter of fiscal 2006.* Depreciation and amortization for
the fourth quarter of fiscal 2006 is expected to be between approximately $1.0 to $1.2 million.*
At the expected revenue and expense run rate, we anticipate using approximately $3.0 to $5.0
million in net cash for operations in the fourth 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 2007.* 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
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.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
27
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 was effective for inventory costs incurred beginning in our
first quarter of fiscal 2006. The implementation of this statement did not have an 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 on August 28, 2005
using the modified prospective method. Our results of operations in the first nine months of fiscal
2006 reflected $806,000 of compensation expenses for new stock options granted under our stock
incentive plan, and for the unvested portion of previous stock options granted under our stock
incentive plan and our employee stock purchase plan.
|
|
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our cash flows and earnings are subject to fluctuations in foreign exchange rates due to our
investment in a foreign-based affiliate. As of May 27, 2006, our investment 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 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 May 27, 2006 we had not entered
into any hedging activities and our foreign currency transaction gains and losses for the first
nine months of fiscal 2006 were insignificant. We continue to evaluate various hedging activities
and other options to minimize these risks.
We do not have significant exposure to changing interest rates as we currently have no
long-term debt. As of May 27, 2006, 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 net
loss before income taxes of a 1% change in short-term interest rates would be approximately
$242,000 based on cash, restricted cash, cash equivalents and marketable security balances as of
May 27, 2006.
28
ITEM 4. CONTROLS AND PROCEDURES
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 Securities Exchange Act of 1934 (the Exchange Act)). Based on this evaluation, the
principal executive officer and the 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.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Hsu Litigation
See Note 18 of the Notes to Consolidated Financial Statements in our fiscal 2005 annual report
on Form 10-K, as amended, for a discussion of the Hsu litigation.
YieldUP Patent Litigation
During the second quarter of fiscal 2006, we made the final payment of $750,000 related to the
litigation settlement. See Note 18 of the Notes to Consolidated Financial Statements in our fiscal
2005 annual report on Form 10-K, as amended, for a discussion of the YieldUP patent litigation.
ITEM 1A. Risk Factors
There have not been any material changes from the risk factors previously disclosed in our
Form 10-K for the fiscal year ended August 27, 2005 except as set forth below.
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
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 in the past experienced
downturns in orders for new equipment as well as delays in or cancellations of existing orders. We
cannot predict the extent and length of any future softening in the industry.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
29
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
30
ITEM 6 Exhibits and Reports on Form 8-K
(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. (5) |
|
|
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. (6) |
|
|
3.1 |
|
Restated Articles of Incorporation of the Company. (2) |
|
|
3.2 |
|
Restated and amended By-Laws. (9) |
|
|
3.5 |
|
Articles of Amendment of Restated Articles of Incorporation. (7) |
|
|
3.6 |
|
Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Shares. (3) |
|
|
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. (3) |
|
|
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. (4) |
|
|
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. (8) |
|
|
4.4 |
|
Third Amendment dated April 3, 2002 to Rights Agreement dated May
22, 1997, as amended on March 26, 2008 and March 9, 2000 by and
between FSI and Harris Trust and Savings Bank, as Rights Agent.
(10) |
|
|
4.5 |
|
Form of Fourth Amendment to Share Rights Agreement, dated as of
May 22, 1997, as amended on March 26, 1998, March 9, 2000 and
April 3, 2002 by and between FSI and Computershare Investor
Services (formerly Harris Trust and Savings Bank), as Rights
Agent. (11) |
|
|
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 Finance 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) |
|
|
|
(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 8-A, filed by the Company on June 5,
1997, SEC File No. 0-17276, and incorporated by reference. |
|
(4) |
|
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. |
|
(5) |
|
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. |
|
(6) |
|
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. |
|
(7) |
|
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. |
31
|
|
|
(8) |
|
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. |
|
(9) |
|
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. |
|
(10) |
|
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. |
|
(11) |
|
Filed as an Exhibit to the Companys Current Report on Form 8-K, filed by the Company on
January 11, 2005, SEC File No. 0-17276, and incorporated by reference. |
32
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
FSI INTERNATIONAL, INC.
[Registrant]
|
|
|
By: |
/s/ Patricia M. Hollister
|
|
|
|
Patricia M. Hollister |
|
DATE: June 30, 2006 |
|
Chief Financial Officer
on behalf of the
Registrant and as
Principal Financial Officer |
|
|
33
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. (5)
|
|
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. (6)
|
|
Incorporated by reference. |
|
|
|
|
|
|
|
|
3.1 |
|
|
Restated Articles of Incorporation of the Company. (2)
|
|
Incorporated by reference. |
|
|
|
|
|
|
|
|
3.2 |
|
|
Restated and amended By-Laws. (9)
|
|
Incorporated by reference. |
|
|
|
|
|
|
|
|
3.5 |
|
|
Articles of Amendment of Restated Articles of Incorporation. (7)
|
|
Incorporated by reference. |
|
|
|
|
|
|
|
|
3.6 |
|
|
Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Shares. (3)
|
|
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. (3)
|
|
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.
(4)
|
|
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. (8)
|
|
Incorporated by reference. |
|
|
|
|
|
|
|
|
4.4 |
|
|
Third Amendment dated April 3, 2002 to Rights Agreement dated
May 22, 1997, as amended on March 26, 2008 and March 9, 2000 by
and between FSI and Harris Trust and Savings Bank, as Rights
Agent. (10)
|
|
Incorporated by reference. |
|
|
|
|
|
|
|
|
4.5 |
|
|
Form of Fourth Amendment to Share Rights Agreement, dated as of
May 22, 1997, as amended on March 26, 1998, March 9, 2000 and
April 3, 2002 by and between FSI and Computershare Investor
Services (formerly Harris Trust and Savings Bank), as Rights
Agent. (11)
|
|
Incorporated by reference. |
|
|
|
|
|
|
|
|
31.1 |
|
|
Certification by Principal Executive Officer Pursuant to
section 302 of the Sarbanes-Oxley Act.
|
|
Filed herewith. |
|
|
|
|
|
|
|
|
31.2 |
|
|
Certification by Principal Financial and Accounting Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act.
|
|
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. |
|
|
|
(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 8-A, filed by the Company on June 5,
1997, SEC File No. 0-17276, and incorporated by reference. |
|
(4) |
|
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. |
|
(5) |
|
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. |
34
|
|
|
(6) |
|
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. |
|
(7) |
|
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. |
|
(8) |
|
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. |
|
(9) |
|
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. |
|
(10) |
|
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. |
|
(11) |
|
Filed as an Exhibit to the Companys Current Report on Form 8-K, filed by the Company on
January 11, 2005, SEC File No. 0-17276, and incorporated by reference. |
35