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 November 25, 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 Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark 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 practicable date:
Common Stock, no par value 30,350,000 shares outstanding as of December 29, 2006
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
2
PART I. ITEM 1. FINANCIAL STATEMENTS
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 25, 2006 AND AUGUST 26, 2006
(unaudited)
(in thousands)
ASSETS
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November 25, |
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August 26, |
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2006 |
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2006 |
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Current assets: |
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Cash and cash equivalents |
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$ |
13,890 |
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$ |
15,672 |
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Restricted cash |
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148 |
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144 |
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Marketable securities |
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10,300 |
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11,100 |
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Trade accounts receivable, net of allowance for doubtful
accounts of $482 and $520, respectively |
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26,565 |
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22,645 |
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Trade accounts receivable from affiliate |
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2,675 |
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528 |
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Inventories |
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36,708 |
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35,682 |
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Prepaid expenses and other current assets |
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12,140 |
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11,340 |
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Total current assets |
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102,426 |
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97,111 |
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Property, plant and equipment, at cost |
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78,603 |
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77,320 |
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Less accumulated depreciation and amortization |
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(57,035 |
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(56,925 |
) |
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21,568 |
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20,395 |
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Restricted
cash |
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500 |
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Investment in affiliate |
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7,705 |
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7,632 |
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Intangible assets, net of accumulated amortization of $13,752 and
$13,619, respectively |
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1,112 |
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1,246 |
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Other assets |
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1,160 |
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1,160 |
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Total assets |
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$ |
134,471 |
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$ |
127,544 |
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(continued)
See accompanying notes to condensed consolidated financial statements.
3
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 25, 2006 AND AUGUST 26, 2006
(continued)
(unaudited)
(in thousands)
LIABILITIES AND STOCKHOLDERS EQUITY
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November 25, |
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August 26, |
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2006 |
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2006 |
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Current liabilities: |
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Trade accounts payable |
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$ |
12,779 |
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$ |
8,803 |
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Accrued expenses |
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15,194 |
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15,212 |
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Current portion of capital lease obligations |
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523 |
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Customer deposits |
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2,569 |
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5,408 |
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Deferred profit |
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4,963 |
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3,758 |
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Deferred profit with affiliate |
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1,437 |
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391 |
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Total current liabilities |
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37,465 |
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33,572 |
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Capital lease obligations |
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1,041 |
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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, 30,346 and
30,309 shares, respectively |
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225,302 |
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225,169 |
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Accumulated deficit |
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(130,164 |
) |
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(132,052 |
) |
Accumulated other comprehensive loss |
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(359 |
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(218 |
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Other stockholders equity |
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1,186 |
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1,073 |
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Total stockholders equity |
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95,965 |
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93,972 |
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Total liabilities and stockholders equity |
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$ |
134,471 |
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$ |
127,544 |
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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 NOVEMBER 25, 2006 AND NOVEMBER 26, 2005
(unaudited)
(in thousands, except per share amounts)
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November 25, |
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November 26, |
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2006 |
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2005 |
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Sales (including sales to affiliate of
$685 and $2,401, respectively) |
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$ |
37,707 |
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$ |
18,623 |
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Cost of goods sold |
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21,513 |
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8,711 |
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Gross margin |
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16,194 |
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9,912 |
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Selling, general and administrative expenses |
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8,725 |
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8,464 |
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Research and development expenses |
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5,998 |
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5,875 |
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Operating income (loss) |
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1,471 |
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(4,427 |
) |
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Interest expense |
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(52 |
) |
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(5 |
) |
Interest income |
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252 |
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296 |
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Other income, net |
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99 |
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62 |
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Income (loss) before income taxes |
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1,770 |
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(4,074 |
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Income taxes |
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42 |
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13 |
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Income (loss) before equity in earnings (losses) of affiliate |
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1,728 |
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(4,087 |
) |
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Equity in earnings (losses) of affiliate |
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160 |
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(209 |
) |
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Net income (loss) |
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$ |
1,888 |
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$ |
(4,296 |
) |
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Net income (loss) per common share: |
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Basic |
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$ |
0.06 |
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$ |
(0.14 |
) |
Diluted |
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$ |
0.06 |
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$ |
(0.14 |
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Weighted average common shares |
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30,323 |
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29,881 |
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Weighted average common and potential common shares |
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30,717 |
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29,881 |
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See accompanying notes to condensed consolidated financial statements.
5
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED NOVEMBER 25, 2006 AND NOVEMBER 26, 2005
(unaudited)
(in thousands)
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November 25, |
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November 26, |
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2006 |
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2005 |
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OPERATING ACTIVITIES: |
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Net income (loss) |
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$ |
1,888 |
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$ |
(4,296 |
) |
Adjustments to reconcile net income (loss) to net cash used in
operating activities: |
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Stock compensation expense |
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214 |
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284 |
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Depreciation |
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842 |
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|
813 |
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Amortization |
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134 |
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134 |
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Equity in (earnings) losses of affiliate |
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(160 |
) |
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209 |
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Changes in operating assets and liabilities: |
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Restricted cash |
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(4 |
) |
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142 |
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Accounts receivable |
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(6,066 |
) |
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395 |
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Inventories |
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(1,026 |
) |
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75 |
|
Prepaid expenses and other current assets |
|
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(801 |
) |
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(924 |
) |
Trade accounts payable |
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3,976 |
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|
413 |
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Accrued expenses |
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(129 |
) |
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|
(54 |
) |
Customer deposits |
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(2,840 |
) |
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(549 |
) |
Deferred profit |
|
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2,251 |
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|
472 |
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Net cash used in operating activities |
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(1,721 |
) |
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(2,886 |
) |
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INVESTING ACTIVITIES: |
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Capital expenditures |
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(331 |
) |
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(486 |
) |
Purchase of marketable securities |
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(33,100 |
) |
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(118,550 |
) |
Sale of marketable securities |
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33,900 |
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114,445 |
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Proceeds on sale of fixed asset |
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17 |
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Dividend from affiliate |
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208 |
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Net cash provided (used in) investing activities |
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486 |
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(4,383 |
) |
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FINANCING ACTIVITIES: |
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Net proceeds from issuance of common stock |
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131 |
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58 |
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Principal payments on capital lease |
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(123 |
) |
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Increase in
restricted cash |
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(500 |
) |
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Net cash (used in) provided by financing activities |
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(492 |
) |
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58 |
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Effect of exchange rate on cash |
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(55 |
) |
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(132 |
) |
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Decrease in cash and cash equivalents |
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(1,782 |
) |
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(7,343 |
) |
Cash and cash equivalents at beginning of period |
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15,672 |
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11,352 |
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Cash and cash equivalents at end of period |
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$ |
13,890 |
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$ |
4,009 |
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See accompanying notes to condensed consolidated financial statements.
6
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 that is used to wet-etch and remove contaminates from the surfaces of
microelectronic substrates and devices), and 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 substrates and devices by immersing them
in multiple tanks filled with process chemicals), spray (sprays chemical mixtures, water and
nitrogen in a variety of sequences on to the substrates and devices), 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 substrates and devices).
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 onto microelectronic
substrates and devices) business to a POLARIS® Systems and Services (PSS) organization
to focus on supporting the more than 300 installed POLARIS® Systems, including
refurbishments, upgrades, training and spares.
The Companys customers include microelectronics manufacturers located throughout North
America, Europe, Japan and the Asia-Pacific region.
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 26, 2006, previously filed with the Securities and
Exchange Commission.
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.
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109. This
interpretation clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the
financial statement
7
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
recognition and measurement of a tax position taken or expected to be taken in
a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. This interpretation is effective for the Company
beginning in fiscal year 2008. The Company is still evaluating the impact that the adoption of this
pronouncement will have on its consolidated financial statements.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, to address diversity in practice in
quantifying the financial statement misstatements. SAB No. 108 requires that the Company quantify
misstatements based on their impact on each of the Companys financial statements and related
disclosures. SAB No. 108 is effective as of the end of fiscal year 2006, allowing a one-time
transitional cumulative effect adjustment to retained earnings as of August 27, 2006, for errors
that were not previously deemed material, but are material under the guidance in SAB No. 108. The
Company is still evaluating the impact SAB No. 108 will have on its consolidated financial
statements and anticipates adopting SAB No. 108 in the fourth quarter of fiscal 2007.
In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157,
Fair Value Measurements. SFAS No. 157 establishes a single authoritative definition of fair
value, sets out a framework for measuring fair value and requires additional disclosures about
fair-value measurements. This statement applies only to fair-value measurements that are already
required or permitted by other accounting standards, except for measurements of share-based
payments and measurements that are similar to, but not intended to be, fair value. This statement
is expected to increase the consistency of fair value measurements, but imposes no requirements for
additional fair-value measures in financial statements. The provisions under SFAS No. 157 are
effective for the Company beginning in the first quarter of fiscal 2008. The Company is still
evaluating the impact the adoption of this pronouncement will have on its consolidated financial
statements.
Reclassifications
Certain first quarter of fiscal 2006 and fourth quarter of fiscal 2006 amounts have been
reclassified to conform to the current year presentation.
(2) Inventories
Inventories are summarized as follows (in thousands):
|
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|
|
|
|
|
|
November 25, |
|
|
August 26, |
|
|
|
2006 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Finished products |
|
$ |
3,939 |
|
|
$ |
4,756 |
|
Work-in-process |
|
|
16,283 |
|
|
|
17,435 |
|
Subassemblies |
|
|
4,023 |
|
|
|
2,911 |
|
Raw materials and purchased parts |
|
|
12,463 |
|
|
|
10,580 |
|
|
|
|
|
|
|
|
|
|
$ |
36,708 |
|
|
$ |
35,682 |
|
|
|
|
|
|
|
|
8
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(3) Accrued Expenses
Accrued expenses are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
November 25, |
|
|
August 26, |
|
|
|
2006 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Commissions |
|
$ |
182 |
|
|
$ |
179 |
|
Salaries and benefits |
|
|
3,456 |
|
|
|
3,667 |
|
Product warranty |
|
|
4,009 |
|
|
|
3,964 |
|
Professional fees |
|
|
399 |
|
|
|
489 |
|
Income taxes |
|
|
1,298 |
|
|
|
1,260 |
|
VAT |
|
|
3,880 |
|
|
|
3,807 |
|
Other |
|
|
1,970 |
|
|
|
1,846 |
|
|
|
|
|
|
|
|
|
|
$ |
15,194 |
|
|
$ |
15,212 |
|
|
|
|
|
|
|
|
(4) Supplementary Cash Flow Information
The following summarizes supplementary cash flow items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
November 25, |
|
November 26, |
|
|
2006 |
|
2005 |
Income taxes paid |
|
$ |
41 |
|
|
$ |
|
|
Interest paid |
|
|
52 |
|
|
|
5 |
|
Assets acquired by a capital lease |
|
|
1,687 |
|
|
|
|
|
(5) Comprehensive Income (Loss)
Other comprehensive income (loss) pertains to revenues, expenses, gains and losses that are
not included in the net loss but rather are recorded directly in stockholders equity. For the
quarters ended November 25, 2006 and November 26, 2005, other comprehensive income (loss) consisted
of the foreign currency translation adjustment and amounted to (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
|
November 25, |
|
November 26, |
|
|
2006 |
|
2005 |
Net income (loss) |
|
$ |
1,888 |
|
|
|
($4,296 |
) |
Items of other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
(142 |
) |
|
|
(287 |
) |
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
1,746 |
|
|
|
($4,583 |
) |
|
|
|
|
|
|
|
9
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(6) Stock-Based Compensation
Stock-based compensation expense for new stock options granted or vested under the Companys
stock incentive plan and employee stock purchase plan was reflected in the statement of operations
for the first quarter of each of fiscal 2007 and 2006 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
|
November 25, |
|
|
November 26, |
|
|
|
2006 |
|
|
2005 |
|
Cost of goods sold |
|
$ |
15 |
|
|
$ |
10 |
|
Selling, general and administrative |
|
|
131 |
|
|
|
206 |
|
Research and development |
|
|
68 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
$ |
214 |
|
|
$ |
284 |
|
|
|
|
|
|
|
|
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 expect to pay dividends in the foreseeable
future. There were no options granted during the first quarter of fiscal 2007. The following
assumptions were used to estimate the fair value of options granted during the first quarter of
fiscal 2006 using the Black-Scholes option-pricing model:
|
|
|
|
|
|
|
Quarter ended |
|
|
November 26, 2005 |
Volatility |
|
|
69.3 |
% |
Risk-free interest rates |
|
|
4.2 |
% |
Expected option life |
|
|
5.6 |
|
Stock dividend yield |
|
|
|
|
A summary of our option activity for the first quarter of fiscal 2007 is as follows (in
thousands, except price per share and contractual term):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
Weighted-average |
|
|
|
|
|
|
|
|
Exercise Price Per |
|
Remaining |
|
Aggregate Intrinsic |
|
|
Number of Shares |
|
Share |
|
Contractual Term |
|
Value |
Outstanding as of August 26, 2006 |
|
|
3,699 |
|
|
$ |
7.42 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
3 |
|
|
|
3.73 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
71 |
|
|
|
11.17 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
37 |
|
|
|
3.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of November 25, 2006 |
|
|
3,588 |
|
|
$ |
7.39 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of November 25, 2006 |
|
|
3,318 |
|
|
$ |
7.63 |
|
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no aggregate intrinsic value for options outstanding or exercisable as of November
25, 2006 as the average price of our stock for the first quarter of fiscal 2007 was less than the
average exercise price of options outstanding or exercisable.
10
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The weighted average grant date fair value based on the Black-Scholes option pricing model for
options granted in the first quarter of fiscal 2006 was $2.46 per share. The total intrinsic value
of options exercised during the first quarter of fiscal 2007 was $89,600 and during the first
quarter of fiscal 2006 was $17,300.
A summary of the status of our unvested option shares as of November 25, 2006 is as follows
(in thousands except fair value amounts):
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Weighted-average |
|
|
Shares |
|
Grant-Date Fair Value |
Unvested at August 26, 2006 |
|
|
303 |
|
|
$ |
4.41 |
|
Options granted |
|
|
|
|
|
|
|
|
Options forfeited |
|
|
3 |
|
|
|
3.73 |
|
Options vested |
|
|
30 |
|
|
|
4.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at November 25, 2006 |
|
|
270 |
|
|
$ |
4.43 |
|
|
|
|
|
|
|
|
|
|
As of November 25, 2006, there was $592,000 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 1.1 years. The total fair value of option shares vested during
the first quarter of fiscal 2007 was $214,000 and during the first quarter of fiscal 2006 was
$284,000.
(7) Capital Lease
The Company entered into a capital lease to finance lab equipment during the first quarter of
fiscal 2007. The future minimum lease payments as of November 25, 2006 are as follows (in
thousands):
|
|
|
|
|
Last nine months of fiscal 2007 |
|
$ |
485 |
|
Fiscal 2008 |
|
|
648 |
|
Fiscal 2009 |
|
|
648 |
|
|
|
|
|
|
|
|
1,781 |
|
Less imputed interest |
|
|
(217 |
) |
|
|
|
|
Total capital lease obligation |
|
$ |
1,564 |
|
|
|
|
|
(8) Contingencies
The Company generates minor amounts of liquid and solid hazardous waste and uses licensed
haulers and disposal facilities to ship and dispose of such waste. In the past, the Company has
received notices from state or federal enforcement agencies that the Company is a potentially
responsible party (PRP) in connection with the investigation of several hazardous waste disposal
sites owned and operated by third parties. In each matter, the Company has elected to participate
in settlement offers made to all de minimis parties with respect to such sites. The risk of being
named a PRP is that if any of the other PRPs are unable to contribute its proportionate share of
the liability, if any, associated with the site, those PRPs that are financially able could be
held financially responsible for the shortfall.
Recently, the Company determined that certain of its replacement valves, pumps and heaters
could fall within the scope of United States export licensing regulations to products that could be
used in connection with chemical weapons processes. The Company determined that these regulations
require it to obtain licenses to ship some of its replacement spare parts, spare parts kits and
assemblies to customers in certain controlled countries as defined in the export licensing
regulations.
11
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The applicable export licensing regulations frequently change. Moreover, the types and
categories of products that are subject to export licensing are often described in the regulations
in general terms and could be subject to differing interpretations.
The Company recently made a voluntary disclosure to the United States Department of Commerce
to clarify its licensing practices and to review its practices with respect to prior sales of
certain replacement valves, pumps and heaters to customers in several controlled countries as
defined in the licensing regulations.
The United States Department of Commerce could assess penalties for any past violation of
export control regulations. The potential penalties are dependent upon the number of shipments in
violation of the export control regulations. The penalties can range from zero to $50,000 per
violation. Management believes that the resolution of this matter will not have a material adverse
impact to the Companys consolidated financial condition.
12
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
|
|
|
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 statements are subject to various risks and
uncertainties, both known and unknown. Factors that could cause actual results to differ include,
but are not limited to, expected orders, expected revenues, expected financial results, expected
cash usage and other expected financial performance for the second quarter of fiscal 2007; 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
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; legal proceedings; 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 included in this report. 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 condensed consolidated
financial statements and footnotes thereto appearing elsewhere in this report.
Industry
Calendar 2006 semiconductor demand is forecasted by Gartner Group, a leading research
organization, to increase 11 percent from the calendar 2005 level of $235 billion.* Gartner Group,
is forecasting that demand for semiconductors will increase approximately 9 percent to $283 billion
in calendar 2007 from the forecasted $259 billion level in calendar 2006.* The anticipated 11
percent 2006 increase in device demand is being driven by increased demand for memory, micro
component and ASSPs (Application-Specific Standard Product).* Gartner Group anticipates that demand
for NOR (a type of flash memory chip with capabilities for applications in which programs run
directly from memory) and NAND (a type of flash memory chip used for high density storage
applications) flash and micro components will drive the 2007 year-over-year increase, partially
related to the new Microsoft Vista release which is expected to result in increased memory content
in personal computers.*
Total capital equipment spending in calendar 2006 is expected to increase approximately 25
percent to $42 billion as compared to $34 billion in 2005, as reported by Gartner Group.* In
general, industry analysts have a mixed view on calendar 2007 forecasted capital equipment spending
with a range from a 10 percent decline to a modest increase.* However, Gartner Group is currently
forecasting a return to double digit growth in calendar 2008.*
Overview
In the first quarter of fiscal 2007, we made progress on our core initiatives to gain Tool of
Record and/or Process of Record status for one or more of our flagship products with the top
semiconductor manufacturers when ranked by total calendar year capital spending. We received an
initial product acceptance and multi-unit follow on orders from several of our strategic customers
during the first quarter.
13
From a development perspective, we are making good progress toward enhancing the throughput
capacity of our MAGELLAN immersion platform. We expect to be capable of more than doubling our
throughput level by the middle of calendar 2007, depending upon the tool configuration.* This
should position the MAGELLAN product for additional opportunities with logic suppliers and make us
a competitive alternative for memory producers.* The process performance of this platform remains
its primary selling point today. However, we must lower the manufacturing cost of this product in
order to meet our long-term gross profit margin contribution goal.
It is anticipated that a significant portion of our expected revenue growth in fiscal 2007
will come from repeat and new customer orders for the ZETA system running the ViPR application
that we introduced in fiscal 2006.* We now have approximately ten tools in production at leading
device manufacturers and have received and expect to receive additional follow-on orders.* In
addition, we have an extensive list of customers for which we have performed or are planning to
perform lab demonstrations. Several of these prospective customers have requested on-site
evaluations and we expect several of them to place initial orders in fiscal 2007.*
We are anticipating an increase in unit sales for our ANTARES platform in fiscal 2007, as
compared to the prior year, as device manufacturers are expected to ramp their 65nm production and
continue the qualification of products for 45nm applications. During our first quarter of fiscal
2007, we received orders for several ANTARES tools, and we anticipate additional orders and
evaluation placements as the fiscal year progresses.*
To address the future needs of our customers, we plan to continue allocating resources to key
product development and application expansion programs at the sub 65nm technology nodes.* For
example, we are progressing with the development of a new single wafer wet cleaning product. We are
undergoing qualification of this new product with our first beta system under a customer joint
development program at a European research facility.
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 assets; |
|
|
|
|
estimation of valuation allowances and accrued liabilities, specifically product
warranty, inventory reserves and allowance for doubtful accounts; |
|
|
|
|
stock-based compensation; and |
|
|
|
|
income taxes. |
14
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 sales as a multiple element arrangement. Revenue from multiple element
arrangements is allocated among the separate accounting units based on the residual method. Under
the residual method, the revenue is allocated to undelivered elements based on fair value of such
undelivered elements and the residual amounts of revenue allocated to delivered elements. We
recognize the equipment revenue upon shipment and transfer of title. The other multiple elements
also include installation, service 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 and the equipment has been
accepted by the customer. Training revenue is valued based on published training class prices or
quoted rates and is recognized when the customers complete the training classes or when a
customer-specific training period has expired. The published or quoted service labor rates and
training class prices are rates actually charged and billed to our customers.
All other product sales with customer-specific acceptance provisions are recognized upon
customer acceptance. Future revenues may be negatively impacted if we are unable to meet
customer-specific acceptance criteria. Revenue related to spare part sales is recognized upon
shipment or delivery based on the title transfer terms. Revenues related to maintenance and service
contracts are recognized ratably over the duration of such contracts.
The timing and amount of revenue recognized depends on whether revenue is recognized upon
shipment versus acceptance. For revenue recognized upon acceptance, it is dependent upon when
customer-specific criteria are met.
Valuation of Long-Lived Assets
We assess the impairment of identifiable 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 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 $22.7
million as of November 25, 2006 and $21.6 million as of August 26, 2006.
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 as yet unrecognized
defects in products sold.
Inventory Reserves Estimation
We record reserves for inventory shrinkage and for potentially excess, obsolete and slow
moving inventory. These reserves are based upon historical loss trends, inventory levels, physical
inventory and cycle count adjustments, expected product lives, forecasted sales demand and
recoverability. Results could be materially different if demand for our products decreased because
of economic or competitive conditions, length of the industry downturn, or if products become
obsolete because of technical advancements in the industry or by us.
15
We had sales of POLARIS® Systems and Services (PSS) product inventory that had
previously been written down to zero with original costs of $87,000 in the first quarter of fiscal
2007 and $784,000 in the first quarter of fiscal 2006. 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 approximately $8.9 million and have
disposed of approximately $6.6 million of PSS product inventory. The original cost of PSS product
inventory available for sale or to be disposed of as of November 25, 2006 that has been written
down to zero was approximately $9.5 million.
Allowance for Doubtful Accounts Estimation
Management must estimate the uncollectibility of our accounts receivable. The most significant
risk is a sudden unexpected deterioration in financial condition of a significant customer who is
not considered in the allowance. Management specifically analyzes accounts receivable, 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.
Stock-Based Compensation
We implemented the fair value recognition provisions of SFAS No. 123R effective August 28,
2005 using the modified prospective method. Under this method, we recognize compensation expense
for all stock-based awards granted on or after August 28, 2005 and for previously granted awards
not yet vested as of August 28, 2005.
We utilize a Black-Scholes option pricing model to estimate fair value of each award on the
date of grant. The Black-Scholes model requires the input of certain assumptions that involve
management judgment. Key assumptions that affect the calculation of fair value include the expected
life of stock-based awards and our stock price volatility. Additionally, we expense only those
shares expected to vest. The assumptions used in calculating the fair value of stock-based awards
and the forfeiture rate of such awards reflect managements best estimates. However, circumstances
may change and additional data may become available over time, which could result in changes to
these assumptions that materially impact the fair value determination of future awards or their
estimated rate of forfeiture. If factors change and we use different assumptions in the application
of SFAS 123R in future periods, the compensation expense recorded under SFAS 123R may differ
significantly from the expense recorded in the current period.
Income Taxes
Our effective income tax rate is based on income, statutory tax rates and tax planning
opportunities available to us in the various jurisdictions in which we operate. We have established
valuation allowances against a portion of the U.S. and non-U.S. net operating losses to reflect the
uncertainty of our ability to fully utilize these benefits given the limited carryforward periods
permitted by the various jurisdictions. The evaluation of the realizability of our net operating
losses requires the use of considerable management judgment to estimate the future taxable income
for the various jurisdictions, for which the ultimate amounts and timing of such estimates may
differ. The valuation allowance can also be impacted by changes in the tax regulations.
Significant judgment is required in determining our contingent tax liabilities. We have
established contingent tax liabilities using managements best judgment and adjust these
liabilities as warranted by changing facts and circumstances. A change in our tax liabilities in any given period could have a
significant impact on our results of operations and cash flows for that period.
16
FIRST QUARTER OF FISCAL 2007 COMPARED WITH FIRST QUARTER OF FISCAL 2006
The Company
The following table sets forth for the fiscal quarter indicated, certain income and expense
items as a percent of our total sales.
|
|
|
|
|
|
|
|
|
|
|
Percent of Sales |
|
|
November 25, |
|
November 26, |
|
|
2006 |
|
2005 |
First quarter ended: |
|
|
|
|
|
|
|
|
Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
57.1 |
|
|
|
46.8 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
42.9 |
|
|
|
53.2 |
|
Selling, general and administrative |
|
|
23.1 |
|
|
|
45.5 |
|
Research and development |
|
|
15.9 |
|
|
|
31.5 |
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
3.9 |
|
|
|
(23.8 |
) |
Other income, net |
|
|
0.8 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
4.7 |
|
|
|
(21.9 |
) |
Income taxes |
|
|
0.1 |
|
|
|
0.1 |
|
Equity in earnings (losses) of affiliate |
|
|
0.4 |
|
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
5.0 |
% |
|
|
(23.1 |
%) |
|
|
|
|
|
|
|
|
|
Sales Revenues and Shipments
Sales revenues increased 102% to $37.7 million for the first quarter of fiscal 2007 as
compared to $18.6 million for the first quarter of fiscal 2006. The increase related primarily to
improved industry conditions and an increase in the purchases of our products by leading
semiconductor manufacturers. International sales were $28.2 million, representing 75% of total
sales during the first quarter of fiscal 2007 and $12.7 million, representing 68% of total sales,
during the first quarter of fiscal 2006. The increase in the amount of total international sales
revenue related primarily to increases in Europe and the Far East.
Shipments in the first quarter of fiscal 2007 increased to $42.2 million from $22.1 million in
the first quarter of fiscal 2006. The increase was primarily in international shipments.
Based upon our revenue recognition policy, certain shipments to customers are not recognized
until customer acceptance. Therefore depending on timing of shipments and customer acceptances,
there are time periods where shipments may exceed sales revenue or, due to timing of acceptances,
sales revenue may exceed shipments.*
We currently expect second quarter revenues to be between $32 and $35 million.* In order to
achieve this revenue level, we will need to gain acceptance for systems that are now being
qualified by customers and obtain several system orders that can be shipped and recognized as
revenue in the second quarter.*
17
Gross Margin
Our gross profit margin fluctuates due to a number of factors, including the mix of products
sold; the geographic mix of products sold; initial product placement discounts; utilization of
manufacturing capacity; the sales of PSS product inventory previously written down to zero; and the
competitive pricing environment.
Gross margin as a percentage of sales was 42.9% for the first quarter of fiscal 2007 and 53.2%
for the first quarter of fiscal 2006. The decrease in gross margin related to a decrease in the
sales of PSS product inventory that had been previously written down to zero from $784,000 in the
first quarter of fiscal 2006 to $87,000 in the first quarter of fiscal 2007. The decrease in gross
margin is also due to a higher mix of lower margin products.
Gross profit margins are expected to remain relatively flat at 42% to 44% of revenues for the
second quarter of fiscal 2007, primarily due to a product mix shift compared to the first quarter
of fiscal 2007 offset by reduced capacity utilization as a result of an anticipated lower shipment
level.*
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $8.7 million in the first quarter of fiscal
2007 and $8.5 million in the first quarter of fiscal 2006. The increase related primarily to higher
sales revenues.
Based upon our current operations, we expect selling, general and administrative expenses in
the second quarter of fiscal 2007 to be in the range of $8.6 to $8.9 million as we continue to
focus on managing costs.*
Research and Development Expenses
Research and development expenses were $6.0 million for the first quarter of fiscal 2007 and
$5.9 million for the first quarter of fiscal 2006. 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 expect research and development expenses to range from $5.9 to $6.1 million for the second
quarter of fiscal 2007.* This reflects the engineering resources required to support evaluation
tool placements and other development initiatives.*
Income Taxes
We recorded a tax expense of $42,000 in the first quarter of fiscal 2007 and $13,000 in the
first quarter of fiscal 2006. The increase in income tax expense related primarily to alternative
minimum tax associated with the net income in the first quarter of fiscal 2007.
Our net deferred tax assets on the balance sheet as of November 25, 2006 have been fully
reserved for with a valuation allowance. We do not expect to significantly reduce our valuation
allowance until we are consistently profitable on a quarterly basis.*
We have net operating loss carryforwards for federal income tax purposes of approximately
$148.7 million, which will begin to expire in fiscal 2011 through fiscal 2027 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.
18
Equity in Earnings (Losses) of Affiliate
The equity in earnings of affiliate was approximately $160,000 for the first quarter of fiscal
2007, compared to a loss of approximately $209,000 for the first quarter of fiscal 2006. The
improvement resulted from improved mFSI LTD sales.
Net Income (Loss)
Net income was $1.9 million in the first quarter of fiscal 2007 as compared to a net loss of
$4.3 million in the first quarter of fiscal 2006. The improvement was primarily due to increased
sales revenue.
Assuming that we can achieve the expected revenues, gross margin and operating expense levels,
we expect to report breakeven to a $1.5 million net loss in the second quarter of fiscal 2007.*
Liquidity and Capital Resources
Our cash, restricted cash, cash equivalents and marketable securities were approximately $24.8
million as of November 25, 2006, a decrease of $2.1 million from the end of fiscal 2006. The
decrease in cash, restricted cash, and cash equivalents was due primarily to $1.7 million of net
cash used for operations, $0.3 million of property, plant and equipment acquisitions and $0.1
million of principal payments on the capital lease. The decreases were net of $0.1 million of
proceeds from the issuance of common stock.
Accounts receivable will fluctuate quarter to quarter depending on individual customers
timing of ship dates, payment terms and cash flow conditions. Accounts receivable increased $6.1
million from the end of fiscal 2006. The increase in trade accounts receivable related to an
increase in shipments from $36.4 million in the fourth quarter of fiscal 2006 to $42.2 million in
the first quarter of fiscal 2007.
Inventory was approximately $36.7 million at November 25, 2006 and $35.7 million at the end of
fiscal 2006. The increase in inventory related primarily to an increase in raw materials and
subassemblies offset by a decrease in work-in-process and finished products inventory, primarily
due to shipment schedules. Inventory reserves were $13.9 million at November 25, 2006, and $13.8
million at the end of fiscal 2006.
Trade accounts payable increased approximately $4.0 million to $12.8 million as of November
25, 2006 as compared to $8.8 million at the end of fiscal 2006. The increase in trade accounts
payable related primarily to the timing of inventory receipts and payments to vendors.
Deferred profit increased approximately $2.3 million to $6.4 million as of November 25, 2006,
as compared to $4.1 million at the end of fiscal 2006. The increase in deferred profit related
primarily to the increase in shipments in the first quarter of fiscal 2007 as compared to the
fourth quarter of fiscal 2006.
We entered into a capital lease to finance lab equipment during the first quarter of fiscal
2007. The total capital lease obligations as of November 25, 2006 were $1.6 million.
As of November 25, 2006, our current ratio was 2.7 to 1.0, and working capital was $65.0
million. We did not have any outstanding loans with our affiliate and had no lines of credit or
guarantees of affiliate as of November 25, 2006.
19
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 1 |
|
|
|
|
|
|
|
|
|
|
More than 5 |
|
Contractual Obligations: |
|
Total |
|
|
Year |
|
|
1-3 years |
|
|
3-5 years |
|
|
years |
|
Operating lease
obligations |
|
$ |
2,098 |
|
|
$ |
929 |
|
|
$ |
1,078 |
|
|
$ |
91 |
|
|
$ |
|
|
Capital lease obligations |
|
|
1,781 |
|
|
|
648 |
|
|
|
1,133 |
|
|
|
|
|
|
|
|
|
Purchase obligations |
|
|
9,399 |
|
|
|
9,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty obligations |
|
|
309 |
|
|
|
309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term
commitments(1) |
|
|
2,125 |
|
|
|
125 |
|
|
|
500 |
|
|
|
500 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
15,712 |
|
|
$ |
11,410 |
|
|
$ |
2,711 |
|
|
$ |
591 |
|
|
$ |
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other long-term commitments represent payments related to minimum royalty payments or
discounts granted under a license agreement. |
Capital expenditures were $2.0 million in the first quarter of fiscal 2007, including $1.7
million financed through a capital lease, as compared to $0.5 million in the first quarter of
fiscal 2006. We expect capital expenditures to be less than $0.5 million in the second quarter of
fiscal 2007.* Depreciation and amortization for the second quarter of fiscal 2007 is expected to be
between $1.0 and $1.1 million.*
At the second quarter expected run rate, we anticipate using between $2.0 and $3.0 million of
net cash for operations in the second quarter of fiscal 2007.* We believe that with existing cash,
restricted cash, cash equivalents and marketable securities, there will be sufficient funds to meet
our currently projected working capital requirements, and to meet our 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.
New Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109. This
interpretation clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. It also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. This interpretation is effective for us
beginning in fiscal year 2008. We are still evaluating the impact that the adoption of this
pronouncement will have on our consolidated financial statements.
20
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements, to address diversity in practice in
quantifying financial statement misstatements. SAB No. 108 requires that we quantify misstatements
based on their impact on each of our financial statements and related disclosures. SAB No. 108 is
effective as of the end of fiscal year 2006, allowing a one-time transitional cumulative effect
adjustment to retained earnings as of August 27, 2006 for errors that were not previously deemed
material, but are material under the guidance in SAB No. 108. We are still evaluating the impact
SAB No. 108 will have on our consolidated financial statements and anticipate adopting SAB No. 108
in the fourth quarter of fiscal 2007.
In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157,
Fair Value Measurements. SFAS No. 157 establishes a single authoritative definition of fair
value, sets out a framework for measuring fair value and requires additional disclosures about
fair-value measurements. This statement applies only to fair-value measurements that are already
required or permitted by other accounting standards, except for measurements of share-based
payments and measurements that are similar to, but not intended to be, fair value. This statement
is expected to increase the consistency of fair value measurements, but imposes no requirements for
additional fair-value measures in financial statements. The provisions under SFAS No. 157 are
effective for us beginning in the first quarter of fiscal 2008. We are still evaluating the impact
the adoption of this pronouncement will have on our consolidated financial statements.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash flows and earnings are subject to fluctuations in foreign exchange rates due to an
investment in our foreign-based affiliate. As of November 25, 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 starting in March 2003, we
have and will continue to incur labor, service and other expenses in foreign currencies. As a
result, we may be exposed to fluctuations in foreign exchange rate risks.* As of November 25, 2006,
we had not entered into any hedging activities and our foreign currency transaction gains and
losses for the first quarter of fiscal 2007 were insignificant. We are currently evaluating various
hedging activities and other options to minimize these risks.
We do not have significant exposure to changing interest rates as we currently have no
material long-term debt. As of November 25, 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 loss before income taxes of a 1% change in short-term interest rates would be
approximately $248,000 based on cash, restricted cash, cash equivalents and marketable securities
balances as of November 25, 2006.
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-15(e) and 15d-15(e)
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.
21
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
We generate minor amounts of liquid and solid hazardous waste and use licensed haulers and
disposal facilities to ship and dispose of such waste. In the past, we have received notices from
state or federal enforcement agencies that we are a potentially responsible party (PRP) in
connection with the investigation of several hazardous waste disposal sites owned and operated by
third parties. In each matter, we have elected to participate in settlement offers made to all de
minimis parties with respect to such sites. The risk of being named a PRP is that if any of the
other PRPs are unable to contribute its proportionate share of the liability, if any, associated
with the site, those PRPs that are financially able could be held financially responsible for the
shortfall.
Recently, we determined that certain of our replacement valves, pumps and heaters could fall
within the scope of United States export licensing regulations to products that could be used in
connection with chemical weapons processes. We determined that these regulations require us to
obtain licenses to ship some of our replacement spare parts, spare parts kits and assemblies to
customers in certain controlled countries as defined in the export licensing regulations.
The applicable export licensing regulations frequently change. Moreover, the types and
categories of products that are subject to export licensing are often described in the regulations
in general terms and could be subject to differing interpretations.
We recently made a voluntary disclosure to the United States Department of Commerce to clarify
our licensing practices and to review our practices with respect to prior sales of certain
replacement valves, pumps and heaters to customers in several controlled countries as defined in
the licensing regulations.
The United States Department of Commerce could assess penalties for any past violation of
export control regulations. The potential penalties are dependent upon the number of shipments in
violation of the export control regulations. The penalties can range from zero to $50,000 per
violation. We believe that the resolution of this matter will not have a material adverse impact to
our consolidated financial condition.
ITEM 1.A. 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 26, 2006, 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.
22
We, along with others in the semiconductor equipment industry, have recently experienced a
downturn in orders for new equipment as well as delays in existing orders. We cannot predict the
extent and length of the current softening in the industry. In addition:
|
|
|
the semiconductor equipment industry may experience other, possibly more severe
and prolonged, downturns in the future; |
|
|
|
|
any future recovery of the microelectronics industry may not result in an
increased demand by semiconductor manufacturers for capital equipment or our products;
and |
|
|
|
|
the semiconductor equipment industry may not improve in the near future or at
all. |
Our licensing practices related to international spare parts sales may subject us to fines and
could reduce our ability to be competitive in certain countries.
In addition to offering our customers microelectronics manufacturing equipment, we provide
replacement spare parts, spare part kits and assemblies. Recently, we determined that certain of
our replacement valves, pumps and heaters could fall within the scope of United States export
licensing regulations to products that could be used in connection with chemical weapons processes.
We have determined that these regulations require us to obtain licenses to ship some of our
replacement spare parts, spare part kits and assemblies to customers in certain controlled
countries as defined in the export licensing regulations.
The applicable export licensing regulations frequently change. Moreover, the types and
categories of products that are subject to export licensing are often described in the regulations
in general terms and could be subject to differing interpretations.
We recently made a voluntary disclosure to the United States Department of Commerce to clarify
our licensing practices and to review our practices with respect to prior sales of certain
replacement valves, pumps and heaters to customers in several controlled countries as defined in
the licensing regulations.
The United States Department of Commerce could assess penalties for any past violation of
export control regulations. In addition, we recently filed applications for export licenses in
China, Singapore, Malaysia, Israel and Taiwan, and we are in the process of upgrading our processes
and procedures in an effort to better manage our compliance with export licensing regulations. Any
delay in the issuance of the export licenses could result in lost sales.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
23
ITEM 6. Exhibits
(a) 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, 1998 and March 9, 2000 by and
between FSI and Harris Trust and Savings Bank, as Rights Agent.
(10) |
|
|
|
4.5
|
|
Fourth Amendment dated January 12, 2005 to Rights Agreement dated
May 22, 1997, as amended on March 26, 1998, March 9, 2000 and
April 3, 2002 by and between FSI and 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. |
|
(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 Registration Statement on Form 8-A/A3, filed by the
Company on January 13, 2005, SEC File No. 0-17276, and incorporated by reference. |
24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
FSI INTERNATIONAL, INC.
[Registrant]
|
|
DATE: January 4, 2007 |
|
|
|
|
By: |
/s/ Patricia M. Hollister
|
|
|
|
Patricia M. Hollister, |
|
|
|
Chief Financial Officer
on behalf of the
Registrant and as
Principal Financial and Accounting Officer |
|
25
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, 1998 and March 9, 2000
by and between FSI and Harris Trust and Savings Bank, as
Rights Agent. (10)
|
|
Incorporated by reference. |
|
|
|
|
|
4.5
|
|
Fourth Amendment dated January 12, 2005 to Rights Agreement
dated May 22, 1997, as amended on March 26, 1998, March 9,
2000 and April 3, 2002 by and between FSI and 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. |
|
(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 Registration Statement on Form 8-A/A3, filed by the
Company on January 13, 2005, SEC File No. 0-17276, and incorporated by reference. |
26