10-Q
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 29, 2008
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, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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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 31,160,000 shares outstanding as of January 7, 2009
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 29, 2008 AND AUGUST 30, 2008
(unaudited)
(in thousands)
ASSETS
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November 29, |
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August 30, |
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2008 |
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2008 |
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Current assets: |
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Cash and cash equivalents |
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$ |
11,046 |
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$ |
14,788 |
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Restricted cash |
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662 |
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275 |
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Marketable securities |
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75 |
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850 |
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Trade accounts receivable, net of allowance for doubtful
accounts of $107 and $128, respectively |
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6,109 |
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9,614 |
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Inventories |
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28,356 |
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27,169 |
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Other receivables |
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4,824 |
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4,813 |
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Prepaid expenses and other current assets |
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3,318 |
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3,339 |
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Total current assets |
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54,390 |
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60,848 |
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Property, plant and equipment, at cost |
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76,260 |
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79,076 |
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Less accumulated depreciation and amortization |
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(58,926 |
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(60,810 |
) |
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Property, plant and equipment, net |
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17,334 |
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18,266 |
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Restricted cash |
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500 |
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Long-term marketable securities |
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6,247 |
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6,447 |
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Investment |
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460 |
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460 |
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Intangible assets, net of accumulated amortization of $14,355 and
$14,294, respectively |
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61 |
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Other assets |
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1,071 |
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1,071 |
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Total assets |
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$ |
79,502 |
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$ |
87,653 |
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(continued)
See accompanying notes to condensed consolidated financial statements.
3
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 29, 2008 AND AUGUST 30, 2008
(continued)
(unaudited)
(in thousands)
LIABILITIES AND STOCKHOLDERS EQUITY
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November 29, |
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August 30, |
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2008 |
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2008 |
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Current liabilities: |
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Trade accounts payable |
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$ |
4,610 |
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$ |
4,305 |
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Accrued expenses |
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8,886 |
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10,392 |
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Current portion of capital lease obligations |
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618 |
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841 |
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Customer deposits |
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10 |
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7 |
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Deferred profit |
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2,358 |
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3,867 |
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Total current liabilities |
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16,482 |
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19,412 |
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Long-term accrued expenses |
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489 |
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583 |
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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; 30,839 shares issued and outstanding |
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226,352 |
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226,352 |
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Accumulated deficit |
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(165,284 |
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(159,967 |
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Accumulated other comprehensive loss |
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(910 |
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(997 |
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Other stockholders equity |
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2,373 |
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2,270 |
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Total stockholders equity |
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62,531 |
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67,658 |
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Total liabilities and stockholders equity |
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$ |
79,502 |
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$ |
87,653 |
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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 29, 2008 AND NOVEMBER 24, 2007
(unaudited)
(in thousands, except per share amounts)
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November 29, |
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November 24, |
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2008 |
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2007 |
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Sales |
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$ |
12,244 |
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$ |
22,439 |
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Cost of goods sold |
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7,617 |
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13,836 |
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Gross margin |
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4,627 |
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8,603 |
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Selling, general and administrative expenses |
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5,657 |
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6,735 |
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Research and development expenses |
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4,393 |
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4,286 |
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Operating loss |
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(5,423 |
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(2,418 |
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Interest expense |
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(17 |
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(36 |
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Interest income |
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132 |
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300 |
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Other (loss) income, net |
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(20 |
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35 |
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Loss before income taxes |
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(5,328 |
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(2,119 |
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Income taxes |
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(11 |
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13 |
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Net loss |
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$ |
(5,317 |
) |
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$ |
(2,132 |
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Net loss per common share: |
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Basic |
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$ |
(0.17 |
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$ |
($0.07 |
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Diluted |
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$ |
(0.17 |
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$ |
(0.07 |
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Weighted average common shares basic |
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30,839 |
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30,545 |
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Weighted average common shares diluted |
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30,839 |
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30,545 |
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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 29, 2008 AND NOVEMBER 24, 2007
(unaudited)
(in thousands)
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November 29, |
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November 24, |
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2008 |
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2007 |
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OPERATING ACTIVITIES: |
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Net loss |
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$ |
(5,317 |
) |
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$ |
(2,132 |
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Adjustments to reconcile net loss to net cash used in
operating activities: |
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Stock compensation expense |
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109 |
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137 |
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Depreciation |
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937 |
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942 |
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Amortization |
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61 |
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109 |
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Changes in operating assets and liabilities: |
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Restricted cash |
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113 |
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(1 |
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Accounts receivable |
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3,505 |
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(3,151 |
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Inventories |
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(1,187 |
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4,252 |
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Prepaid expenses and other current assets |
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10 |
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12 |
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Trade accounts payable |
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305 |
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277 |
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Accrued expenses |
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(1,605 |
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(757 |
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Customer deposits |
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3 |
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(1,046 |
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Deferred profit |
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(1,510 |
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168 |
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Net cash used in operating activities |
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(4,576 |
) |
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(1,190 |
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INVESTING ACTIVITIES: |
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Capital expenditures |
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(5 |
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(23 |
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Purchase of marketable securities |
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(27,925 |
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Sale of marketable securities |
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975 |
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28,625 |
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Net cash provided by investing activities |
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970 |
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677 |
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FINANCING ACTIVITIES: |
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Principal payments on capital lease |
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(223 |
) |
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(136 |
) |
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Net cash used in financing activities |
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(223 |
) |
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(136 |
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Effect of exchange rates on cash |
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87 |
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(176 |
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Decrease in cash and cash equivalents |
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(3,742 |
) |
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(825 |
) |
Cash and cash equivalents at beginning of period |
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14,788 |
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15,040 |
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Cash and cash equivalents at end of period |
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$ |
11,046 |
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$ |
14,215 |
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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 etch and clean organic and inorganic materials from the surfaces
of a silicon wafer), 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 silicon wafers by immersing the wafers 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 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 condensed consolidated
financial statements have been prepared in accordance with the regulations of the Securities and
Exchange Commission (SEC) but omit certain information and footnote disclosures necessary to
present the financial 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
30, 2008, previously filed with the SEC.
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 September, 2006, the Financial Accounting Standards Board (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 were adopted by the Company in the first quarter of
fiscal 2009. See Note 9 of the Notes to Condensed Consolidated Financial Statements for the
disclosure of the impact from the adoption of this pronouncement.
7
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In February 2007, the FASB issued SFAS No.159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS No. 159 amends SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, and permits entities to choose to measure many financial instruments
and certain other items at fair value. SFAS No. 159 was adopted by the Company in the first quarter
of fiscal 2009. The Company does not measure any of its financial instruments at fair value as
permitted under SFAS 159.
In December 2007, the FASB issued SFAS 141 (revised 2007) (SFAS 141R), Business
Combinations, and SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, to
improve, simplify, and converge internationally the accounting for business combinations and the
reporting of noncontrolling interests in consolidated financial statements, respectively. The
provisions of SFAS 141R and SFAS 160 are effective for the Company beginning in the first quarter
of fiscal 2010. The Company is still evaluating the impact the adoption of these pronouncements
will have on its consolidated financial statements.
(2) Inventories
Inventories are summarized as follows (in thousands):
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November 29, |
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August 30, |
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2008 |
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2008 |
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Finished products |
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$ |
1,999 |
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$ |
1,999 |
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Work-in-process |
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11,578 |
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9,319 |
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Subassemblies |
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4,986 |
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4,992 |
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Raw materials and purchased parts |
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9,793 |
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10,859 |
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$ |
28,356 |
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$ |
27,169 |
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(3) Accrued Expenses
Accrued expenses are summarized as follows (in thousands):
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November 29, |
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August 30, |
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2008 |
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2008 |
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Salaries and benefits |
|
$ |
2,130 |
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$ |
1,934 |
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Vacation |
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|
1,526 |
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|
1,582 |
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Realignment |
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1,325 |
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|
1,991 |
|
Product warranty |
|
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2,442 |
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|
2,757 |
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Other |
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|
1,463 |
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2,128 |
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|
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|
|
|
|
|
|
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$ |
8,886 |
|
|
$ |
10,392 |
|
|
|
|
|
|
|
|
See Note 8 of the Notes to Condensed Consolidated Financial Statements for discussion related
to the realignment accrual.
8
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) Supplementary Cash Flow Information
The following summarizes supplementary cash flow items (in thousands):
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Quarters Ended |
|
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November 29, |
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November 24, |
|
|
2008 |
|
2007 |
Income taxes received |
|
$ |
(17 |
) |
|
$ |
(5 |
) |
Interest paid |
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|
|
|
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|
36 |
|
(5) Comprehensive Loss
Other comprehensive 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 29, 2008 and November 24, 2007, other comprehensive loss consisted of the
foreign currency translation adjustment. The components of comprehensive loss are summarized as
follows (in thousands):
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Quarters Ended |
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November 29, |
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November 24, |
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|
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2008 |
|
|
2007 |
|
Net loss |
|
$ |
(5,317 |
) |
|
$ |
(2,132 |
) |
Items of other comprehensive income (loss): |
|
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|
|
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|
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Foreign currency translation |
|
|
87 |
|
|
|
(177 |
) |
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(5,230 |
) |
|
$ |
(2,309 |
) |
|
|
|
|
|
|
|
(6) Stock-Based Compensation
Stock-based compensation expense for new stock options granted or vested under the Companys
stock incentive plans and employee stock purchase plan was reflected in the condensed consolidated
statements of operations for the first quarter of each of fiscal 2009 and 2008 as follows (in
thousands):
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|
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Quarters Ended |
|
|
|
November 29, |
|
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November 24, |
|
|
|
2008 |
|
|
2007 |
|
Cost of goods sold |
|
$ |
10 |
|
|
$ |
2 |
|
Selling, general and administrative |
|
|
79 |
|
|
|
112 |
|
Research and development |
|
|
20 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
$ |
109 |
|
|
$ |
137 |
|
|
|
|
|
|
|
|
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 2008 and 5,000 options
were granted in the first quarter of fiscal 2009.
9
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following assumptions were used to estimate the fair value of options granted during the
first quarter of fiscal 2009 using the Black-Scholes option-pricing model:
|
|
|
|
|
|
|
Quarter Ended |
|
|
November 29, |
|
|
2008 |
Stock options: |
|
|
|
|
Volatility |
|
|
71.0 |
% |
Risk-free interest rates |
|
|
2.2 |
% |
Expected option life |
|
|
5.4 |
|
Stock dividend yield |
|
|
|
|
A summary of our option activity for the first quarter of fiscal 2009 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 as of August 30, 2008 |
|
|
3,679 |
|
|
$ |
6.58 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
5 |
|
|
|
1.17 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(10 |
) |
|
|
3.06 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
(14 |
) |
|
|
6.78 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of November 29, 2008 |
|
|
3,660 |
|
|
$ |
6.58 |
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of November 29, 2008 |
|
|
3,285 |
|
|
$ |
7.07 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value for options outstanding or exercisable as of November 29, 2008 was zero,
as the closing price of the Companys stock at the end of the first quarter of fiscal 2009 was less
than the exercise price of the options outstanding or exercisable.
A summary of the status of our unvested option shares as of November 29, 2008 is as follows
(in thousands except fair value amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
|
Number of |
|
Grant-Date Fair |
|
|
Shares |
|
Value |
Unvested at August 30, 2008 |
|
|
428 |
|
|
$ |
1.51 |
|
Options granted |
|
|
5 |
|
|
|
0.72 |
|
Options forfeited |
|
|
(10 |
) |
|
|
1.92 |
|
Options vested |
|
|
(48 |
) |
|
|
1.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at November 29, 2008 |
|
|
375 |
|
|
$ |
1.43 |
|
|
|
|
|
|
|
|
|
As of November 29, 2008, there was $450,000 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 0.9 years. The total fair value of option shares vested during
the first quarters of fiscal 2009 and fiscal 2008 was $109,000 and $137,000, respectively.
10
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(7) Product Warranty
Warranty provisions and claims for the quarters ended November 29, 2008 and November 24, 2007
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
November 29, 2008 |
|
|
November 24, 2007 |
|
Beginning
balance warranty accrual |
|
$ |
2,757 |
|
|
$ |
3,811 |
|
Warranty provisions |
|
|
101 |
|
|
|
465 |
|
Warranty claims |
|
|
(416 |
) |
|
|
(443 |
) |
|
|
|
|
|
|
|
Ending balance warranty accrual |
|
$ |
2,442 |
|
|
$ |
3,833 |
|
|
|
|
|
|
|
|
(8) Cost Reductions and Realignment
In fiscal 2008, the Company committed to a plan to reduce its headcount by approximately 60
positions, or about 14% of the Companys global workforce from the end of the third quarter of
fiscal 2008. The plan was implemented in September 2008. In conjunction with the staff
reductions, the Companys European and United States sales and service organizations were
consolidated to better support the customer base in these regions. Also, the Company refocused its
remaining Allen, Texas and Chaska, Minnesota-based engineering resources toward products which the
Company believes will provide the most significant opportunity for near-term revenue and future
market share gains. A total of 63 positions were eliminated in September 2008 of which 19 were
manufacturing positions, 19 were sales, service and marketing positions, five were administration
positions and 20 were engineering positions. Severance and outplacement costs recorded in fiscal
2008 were allocated as follows: $1,314,000 to selling, general and administrative expense,
$536,000 to research and development expense and $142,000 to cost of goods sold.
The
fiscal 2008 severance and outplacement costs are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Paid |
|
|
|
|
|
|
Amount |
|
|
Through |
|
|
Accrual at |
|
|
|
Charged |
|
|
November 29, |
|
|
November 29, |
|
|
|
Fiscal 2008 |
|
|
2008 |
|
|
2008 |
|
Selling, general and administrative expenses |
|
$ |
1,314 |
|
|
$ |
269 |
|
|
$ |
1,045 |
|
Research and development expenses |
|
|
536 |
|
|
|
283 |
|
|
|
253 |
|
Cost of goods sold |
|
|
142 |
|
|
|
115 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
Total severance and outplacement costs |
|
$ |
1,992 |
|
|
$ |
667 |
|
|
$ |
1,325 |
|
|
|
|
|
|
|
|
|
|
|
(9) Marketable Securities and Impairment of Investment
As of November 29, 2008, the Company had investments in taxable auction rate securities
(ARS) reported at a fair value of $6.3 million after reflecting a $0.4 million other than
temporary impairment against $6.7 million par value. The other than temporary impairment has been
recorded in other expense in fiscal 2008. The Company valued the majority of ARS using a
mark-to-model approach that relies on discounted cash flows, market data and inputs derived from
similar instruments. This model takes into account, among other variables, the base interest rate,
credit spreads, downgrade risks and default/recovery risk, the estimated time required to work out
the disruption in the traditional auction process and its effect on liquidity, and the effects of
insurance and other credit enhancements.
11
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The ARS held by the Company are marketable securities with long-term stated maturities for
which the interest rates are reset through a Dutch auction every 28 days. The auctions have
historically provided
a liquid market for these securities as investors historically could readily sell their
investments at auction. Due to the liquidity issues experienced in global credit and capital
markets, the ARS held by the Company have experienced multiple failed auctions, beginning on
February 19, 2008, as the amount of securities submitted for sale has exceeded the amount of
purchase orders. During fiscal 2008, $0.8 million of the ARS held by the Company were partially
redeemed. An additional $1.0 million were redeemed in the first quarter of fiscal 2009 and an
additional $0.3 million were redeemed in December 2008.
All of the ARS held by the Company continue to carry investment grade ratings and have not
experienced any payment defaults. Of the ARS held by the Company, $6.6 million in par value are
backed by student loans and are collateralized, insured and guaranteed by the United States Federal
Department of Education and are classified as long-term. In the first quarter of fiscal 2009, an
issuer of certain of these ARS offered to repurchase such ARS in a conditional tender offer
received by the Company in October 2008 from the issuer. The tender offer expired December 4, 2008
without meeting the minimum participation requirements. ARS that did not successfully auction,
reset to the maximum interest rate as prescribed in the underlying indenture and all of the
Companys holdings continue to be current with their interest payments. If uncertainties in the
credit and capital markets continue, these markets deteriorate further or any ARS the Company holds
are downgraded by the rating agencies, the Company may be required to recognize additional
impairment charges.
SFAS No. 157 defines and establishes a framework for measuring fair value and expands
disclosure about fair value measurements. Furthermore, SFAS No. 157 specifies a hierarchy of
valuation techniques based upon whether the inputs to those valuation techniques reflect
assumptions other market participants would use based upon market data obtained from independent
sources (observable inputs) or reflect the Companys own assumptions of market participant
valuation (unobservable inputs). The Company valued its ARS based on level 3 inputs in which
values are based on prices or valuation techniques that require inputs that are both unobservable
and significant to the overall fair value measurement. These level 3 inputs reflect managements
own assumptions about the assumptions a market participant would use in pricing the asset.
(10) Contingencies
In late calendar 2006, 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. During the second quarter of fiscal 2007, the Company was granted licenses
to ship replacement spare parts, spare parts kits and assemblies to all customers in the controlled
countries where the Company conducts business.
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.
In the second quarter of fiscal 2007, the Company 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. The licenses that were granted during the second quarter of
fiscal 2007 do not necessarily mitigate the Companys risk with respect to past violations.
12
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(11) Share Repurchase Plan
In October 2008, the Company authorized the repurchase of up to $3 million of the Companys
common stock to be effected from time to time in transactions in the public markets or in private
purchases. The timing and extent of any repurchases will depend upon market conditions, the trading
price of the Companys shares and other factors, subject to the restrictions relating to volume,
price and timing of share repurchases under applicable law. The repurchase program may be modified,
suspended or terminated at any time by the Company without notice. The Company did not repurchase
any of its common stock during the first quarter of fiscal 2009.
13
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 forward-looking statements 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 2009. 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, changes 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 level of new
orders; the timing and success of current and future product and process development programs; the
success of our direct distribution organization; legal proceedings; the potential impairment of
long-lived assets; and the potential adverse financial impacts resulting from declines in the fair
value and liquidity of investments we presently hold; 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 our Form 10-K
for the fiscal year ended August 30, 2008. 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 notes thereto appearing elsewhere in this report.
Industry
Gartner, Inc. (Gartner), a leading equipment industry research group, in December 2008
revised downward its semiconductor demand forecast for calendar 2008 and 2009. Gartner now
predicts that demand for semiconductors will decrease approximately 4.4 percent in calendar 2008
from the $274 billion calendar 2007 level. Gartner attributes the decline primarily to lower
memory device demand. Quarterly memory system orders have now declined 82 percent from the
calendar 2007 first quarter run rate to the calendar 2008 third quarter run rate. Gartner is
forecasting a 16.3 percent decrease in demand for semiconductors in calendar 2009 from calendar
2008, as Gartner expects consumer and corporate demand for microelectronics to remain weak.
Many device producers have announced operation shutdowns with some announcing the possibility
of additional shutdown periods in calendar 2009 if conditions do not improve. Some device
manufacturers have announced the closing of less productive fabrication facilities. Increasingly,
device manufacturers are adopting some form of fabrication light manufacturing philosophy by
outsourcing a portion of the manufacturing to third parties in an attempt to reduce capital
investments and transition their business from a fixed cost to a variable cost model.
As recently forecasted by Gartner, total wafer fabrication equipment spending in calendar 2008
is expected to decrease approximately 31 percent, when compared to the $36 billion calendar 2007
level. In general, analysts have a mixed view on how significant the calendar 2009 forecasted
total equipment spending will decline; however, most are forecasting another significant
year-over-year decline as semiconductor manufacturers factory utilization rates continue to
decline. Gartner is currently forecasting that total wafer fabrication equipment spending will
decrease 33 percent in calendar 2009 as compared to calendar 2008.
14
We do not expect to see much of an investment in capital spending by device manufacturers in
calendar 2009. Indeed, many device manufacturers remain cautious toward placing new orders; in
addition, we expect to continue to receive requests from device manufacturers to provide evaluation
systems or extended payment terms as they deal with the current credit crunch.
Application of Critical Accounting Policies and Estimates
In accordance with SEC 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 provisions and allowance for doubtful accounts; |
|
|
|
|
stock-based compensation; and |
|
|
|
|
income taxes. |
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
include installation, service contracts and training. Equipment installation revenue is valued
based on estimated service person hours to complete installation and quoted service labor rates and
is recognized when the installation has been completed and the equipment has been accepted by the
customer. Service contract revenue is valued based on estimated service person hours to complete
the service and quoted service labor rates and is recognized over the contract period. Training
revenue is valued based on quoted training class prices and is recognized when the customers
complete the training classes or when a customer-specific training period has expired. The 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 trade 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.
15
Valuation of Long-Lived Assets
We assess the impairment of long-lived assets whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable, in accordance with the FASBs SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. An asset or asset group is
considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset
or asset group is expected to generate. If an asset or asset group is considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the asset
exceeds its fair value. If estimated fair value is less than the book value, the asset is written
down to the estimated fair value and an impairment loss is recognized.
If we determine that the carrying amount of long-lived assets, including intangible 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 $17.3 million as of November 29, 2008.
In fiscal 2008, we had positive cash flows from operations. If we do not continue to yield
positive cash flows in excess of the carrying amount of our long-lived assets, we would anticipate
possible future impairments of those assets.*
Considerable management judgment is necessary in estimating future cash flows and other
factors affecting the valuation of long-lived assets, including intangible assets, and the
operating and macroeconomic factors that may affect them. We use historical financial information,
internal plans and projections and industry information in making such estimates.
We did not recognize any impairment charges for our long-lived assets, including intangible
assets, during the first quarters of fiscal 2009 or 2008. We currently believe the fair value of
those long-lived assets exceeds the carrying amount.
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 six months
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 Provisions 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, 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.
Since we recorded the POLARIS® system product inventory reserves primarily as a
result of the wind-down of our microlithography business in the second quarter of fiscal 2003, we
have had sales of POLARIS System product inventory that had previously been written down to zero
and reductions in inventory buyback requirements of approximately $10.8 million, have disposed of
approximately $6.8 million of POLARIS system product inventory and have recorded additional
reserves of $1.8 million. The original cost of POLARIS system product inventory available for sale
or to be disposed of as of November 29, 2008 that has been written down to zero was approximately
$8.7 million.
16
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
written off after management determines that they are uncollectible. We collected receivables of
$21,000 in the first quarter of fiscal 2009 and $67,000 in the first quarter of fiscal 2008 that
had previously been written down to zero, resulting in credits to selling, general and
administrative expenses.
Stock-Based Compensation
We utilize the 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.
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 for all 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 unrecognized tax benefits. We have established
accruals for unrecognized tax benefits using managements best judgment and adjust these accruals
as warranted by changing facts and circumstances. A change in our accruals in any given period
could have a significant impact on our results of operations for that period.
We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109 (FIN48) during the first quarter of fiscal
2008, which had no impact on our financial position or results of operation. The accrual for
unrecognized benefits decreased by $11,000 for the first quarter of fiscal 2009 and zero for the
first quarter of fiscal 2008.
17
FIRST QUARTER OF FISCAL 2009 COMPARED WITH FIRST QUARTER OF FISCAL 2008
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 29, |
|
November 24, |
First quarter ended: |
|
2008 |
|
2007 |
Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
62.2 |
|
|
|
61.7 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
37.8 |
|
|
|
38.3 |
|
Selling, general and administrative |
|
|
46.2 |
|
|
|
30.0 |
|
Research and development |
|
|
35.9 |
|
|
|
19.1 |
|
|
|
|
|
|
|
|
Operating loss |
|
|
(44.3 |
) |
|
|
(10.8 |
) |
Other income, net |
|
|
0.8 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(43.5 |
) |
|
|
(9.5 |
) |
Income taxes |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(43.4 |
%) |
|
|
(9.5 |
%) |
|
|
|
|
|
|
|
Sales Revenues and Shipments
Sales revenues decreased to $12.2 million for the first quarter of fiscal 2009 as compared to
$22.4 million for the first quarter of fiscal 2008. The decrease related primarily to industry and
overall global economic conditions. The decreases occurred in all regions with the most
significant decrease occurring in European sales where sales decreased 78% in the first quarter of
fiscal 2009 from the first quarter of fiscal 2008. International sales were $9.3 million,
representing 76% of total sales during the first quarter of fiscal 2009 and $19.1 million,
representing 85% of total sales, during the first quarter of fiscal 2008.
Shipments were $9.6 million in the first quarter of fiscal 2009 as compared to $20.7 million
in the first quarter of fiscal 2008.
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 of fiscal 2009 revenues to be between $11 and $14 million.*
In order to achieve this revenue level, we will need to receive several system orders that can be
shipped and recognized as revenue in the second quarter.*
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, with international sales generally having lower gross
profit than domestic sales; initial product placement discounts; utilization of manufacturing
capacity; the sales of inventory previously written down to zero; and the competitive pricing
environment.
Gross margin as a percentage of sales was 37.8% for the first quarter of fiscal 2009 compared
to 38.3% for the first quarter of fiscal 2008. The decrease in gross margin was primarily related
to a decrease in capacity utilization of manufacturing related to the decline in shipments. This
was partially offset by a change in product mix in which the sale of spare parts and service
represented 42% of our total sales in the first quarter of fiscal 2009 as compared to 29% of our
total sales in the first quarter of fiscal 2008, as spare parts and service generally have higher
margins.
18
Gross profit margins are expected to be 40% to 42% of revenues for the second quarter of
fiscal 2009.* We anticipate improved capacity utilization as a result of expected higher shipments
in the second quarter of fiscal 2009 as compared to the first quarter of fiscal 2009.*
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $5.7 million in the first quarter of fiscal
2009 and $6.7 million in the first quarter of fiscal 2008. The decrease related primarily to cost
reduction initiatives associated with reductions in headcount taken in the first quarter of fiscal
2009. For additional information regarding these initiatives, see Note 8 of the Notes to Condensed
Consolidated Financial Statements.
We expect selling, general and administrative expenses in the second quarter of fiscal 2009 to
be in the range of $5.6 to $5.8 million as we continue to focus on managing costs.*
Research and Development Expenses
Research and development expenses were $4.4 million for the first quarter of fiscal 2009 and
$4.3 million for the first quarter of fiscal 2008. The increase related primarily to new product
and process development expenses. The majority of our research and development investment is
focused on expanding the application capabilities of our products, supporting customer evaluations
and continuous improvement programs for our products and services.
We expect research and development expenses to range from $4.1 to $4.3 million for the second
quarter of fiscal 2009.* This reflects the engineering resources required to support customer
demonstrations, evaluation tool placements and our ORION® System introduction
initiative.
Income Taxes
We recorded an income tax benefit of $11,000 in the first quarter of fiscal 2009 and income
tax expense of $13,000 in the first quarter of fiscal 2008.
Our net deferred tax assets on the balance sheet as of November 29, 2008 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
$169.2 million, which will begin to expire in fiscal 2011 through fiscal 2029 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.
Net Loss
The net loss was $5.3 million in the first quarter of fiscal 2009 as compared to a net loss of
$2.1 million in the first quarter of fiscal 2008.
Assuming that we can achieve the projected revenues, gross margin and operating expense
levels, we expect to report a net loss between $4.0 and $5.5 million in the second quarter of
fiscal 2009.*
19
Liquidity and Capital Resources
Our cash, restricted cash, cash equivalents and marketable securities were approximately $18.0
million as of November 29, 2008, a decrease of $4.8 million from the end of fiscal 2008. The
decrease was due
primarily to $4.6 million of net cash used for operations.
As of November 29, 2008, we had investments in auction rate securities (ARS) reported at a
fair value of $6.3 million after reflecting a $0.4 million other than temporary impairment against
$6.7 million par value. The other than temporary impairment was recorded in other expense for
fiscal 2008. We value the majority of our ARS using a mark-to-model approach that relies on
discounted cash flows, market data and inputs derived from similar instruments. This model takes
into account, among other variables, the base interest rate, credit spreads, downgrade risks and
default/recovery risk, the estimated time required to work out the disruption in the traditional
auction process and its effect on liquidity, and the effects of insurance and other credit
enhancements.
The ARS we hold are marketable securities with long-term stated maturities for which the
interest rates are reset through a Dutch auction every 28 days. The auctions have historically
provided a liquid market for these securities as investors historically could readily sell their
investments at auction. Due to the liquidity issues experienced in global credit and capital
markets, the ARS held by us have experienced multiple failed auctions, beginning on February 19,
2008, as the amount of securities submitted for sale has exceeded the amount of purchase orders.
During fiscal 2008, $0.8 million of ARS were partially redeemed. An additional $1.0 million were
redeemed in the first quarter of fiscal 2009 and an additional $0.3 million were redeemed in
December 2008.
All of the ARS held by us continue to carry investment grade ratings and have not experienced
any payment defaults. Of the ARS held by us, $6.6 million par value are backed by student loans and
are collateralized, insured and guaranteed by the United States Federal Department of Education and
are classified as long-term. In the first quarter of fiscal 2009, an issuer of certain of these ARS
offered to repurchase such ARS in a conditional tender offer received by us in October 2008 from
the issuer. The tender offer expired December 4, 2008 without meeting the minimum participation
requirements. ARS that did not successfully auction reset to the maximum interest rate as
prescribed in the underlying indenture and all of our holdings continue to be current with their
interest payments. If uncertainties in the credit and capital markets continue, these markets
deteriorate further or any ARS we hold are downgraded by the rating agencies, we may be required to
recognize additional impairment charges.
In addition, these ARS may not provide the liquidity to us as we need it, and it could take
until the final maturity of the underlying notes (from 5 to 35 years) to realize our investments
recorded value. Currently, there is a very limited market for any of these securities and future
liquidations at this time, if possible, would likely be at a significant discount.
Accounts receivable decreased $3.5 million from the end of fiscal 2008. The decrease in
accounts receivable related primarily to the decrease in shipments to $9.6 million in the first
quarter of fiscal 2009 as compared to $13.1 million in the fourth quarter of fiscal 2008. Accounts
receivable will fluctuate quarter to quarter depending on individual customers timing of shipping
dates and payment terms.
Inventory was approximately $28.4 million at November 29, 2008 and $27.2 million at the end of
fiscal 2008. The increase in inventory related primarily to an increase in work-in-process
inventory associated with anticipated demonstration tool and new product placement orders.
Inventory provisions were $15.9 million at the end of fiscal 2008 and remained the same at the end
of the first quarter of fiscal 2009.
Trade accounts payable increased to $4.6 million as of November 29, 2008 as compared to $4.3
million at the end of fiscal 2008. The increase in trade accounts payable related primarily to the
timing of inventory receipts and payments to vendors.
As of November 29, 2008, our current ratio of current assets to current liabilities was 3.3 to
1.0, and working capital was $37.9 million.
20
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 |
|
$ |
1,338 |
|
|
$ |
815 |
|
|
$ |
505 |
|
|
$ |
18 |
|
|
$ |
|
|
Capital lease obligations |
|
|
640 |
|
|
|
640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations |
|
|
3,161 |
|
|
|
3,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty obligations |
|
|
143 |
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term
commitments
(1) |
|
|
1,625 |
|
|
|
125 |
|
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,907 |
|
|
$ |
4,884 |
|
|
$ |
1,005 |
|
|
$ |
518 |
|
|
$ |
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other long-term commitments represent payments related to minimum royalty payments or
discounts granted under a license agreement. |
The contractual obligations table does not include $0.5 million of accruals for unrecognized
tax benefits, as the timing of payments or reversals is uncertain.
Capital expenditures were $5,000 in the first quarter of fiscal 2009, as compared to $23,000
in the first quarter of fiscal 2008. We expect capital expenditures to be less than $300,000 in the
second quarter of fiscal 2009.* Depreciation and amortization for the second quarter of fiscal 2009
is expected to be between $0.9 and $1.0 million.*
In October 2008, we authorized the use of up to $3 million of our cash to repurchase
outstanding shares of our common stock to be effected from time to time in transactions in the
public markets or in private purchases. The timing and extent of any repurchases will depend upon
market conditions, the trading price of our shares and other factors, subject to the restrictions
relating to volume, price and timing of share repurchases under applicable law. The repurchase
program may be modified, suspended or terminated at any time by us without notice. We did not
repurchase any of our common stock during the first quarter of fiscal 2009.
We anticipate using $5.0 to $6.5 million of net cash for operations in the second quarter of
fiscal 2009.* This is dependent upon the timing of shipments, timely accounts receivable
collections and successful inventory, accounts payable and capital investment management. We
believe that with existing cash, restricted cash, cash equivalents and marketable securities, there
will be sufficient funds to meet our projected working capital and cash requirements through at
least fiscal 2009.* 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. We may fund such activities with additional
equity or debt financing. The sale of additional equity or debt securities, whether to maintain
flexibility or to meet strategic objectives, could result in additional dilution to our
shareholders. We currently do not have a line of credit arrangement.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
21
New Accounting Pronouncements
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 were effective for
us beginning in the first quarter of fiscal 2009. See Note 9 of the Notes to Condensed
Consolidated Financial Statements for a discussion of the impact on us due to the adoption of this
pronouncement.
In February 2007, the FASB issued SFAS No.159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS No. 159 amends SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, and permits entities to choose to measure many financial instruments
and certain other items at fair value. SFAS No. 159 was effective for us beginning in the first
quarter of fiscal 2009. We do not measure any of our financial instruments at fair value as
permitted under SFAS 159.
In December 2007, the FASB issued SFAS 141 (revised 2007) (SFAS 141R), Business
Combinations, and SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, to
improve, simplify, and converge internationally the accounting for business combinations and the
reporting of noncontrolling interests in consolidated financial statements, respectively. The
provisions of SFAS 141R and SFAS 160 are effective for us beginning in the first quarter of fiscal
2010. We are still evaluating the impact the adoption of these pronouncements 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
investments in foreign-based subsidiaries. As of November 29, 2008, our investments included 100%
interests in our sales and service offices located in Europe and Asia and a 20% interest in
Apprecia Technology, Inc. (formerly known as mFSI LTD), which operates as a distributor for us in
Japan. We denominate the majority of our sales outside of the U.S. in U.S. dollars.
We have direct sales, service and applications support and logistics responsibilities for our
products in Europe and the Asia Pacific region and 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 29, 2008, we had not entered into any hedging activities and our foreign currency
transaction gains and losses for the first quarter of fiscal 2009 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
long-term debt. As of November 29, 2008, 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 $180,000 based on cash, restricted cash, cash equivalents and marketable securities
balances as of November 29, 2008.
As of November 29, 2008, our investment portfolio included ARS reported at a fair value of
$6.3 million after reflecting a $0.4 million other than temporary impairment against $6.7 million
par value. ARS are usually found in the form of municipal bonds, preferred stock, a pool of student
loans or collateralized debt obligations. The interest rates of our ARS are reset every 28 days
through an auction process and at the end of each reset period, investors can sell or continue to
hold the securities at par.
Of the ARS held by us, $6.6 million par value are backed by student loans and are
collateralized, insured and guaranteed by the United States Federal Department of Education. All
ARS held by us are rated by the major independent rating agencies and carry investment grade
ratings and have not experienced any payment defaults.
22
All of our ARS have experienced failed auctions due to sell orders exceeding buy orders. These
failures are not believed to be a credit issue, but rather reflect a lack of liquidity in the
market for these securities. Under the contractual terms, the issuer is obligated to pay penalty
interest rates should an auction fail. In the event we need to access funds associated with failed
auctions, they are not expected to be accessible until a successful auction occurs, the issuer
redeems the issue, a buyer is found outside of the auction process or the underlying securities
have matured and are paid upon maturity in accordance with their terms.
We determined and recorded an other than temporary impairment of approximately $0.4 million in
fiscal 2008. If the issuers of the ARS are unable to successfully close future auctions or do not
redeem the ARS, or the United States government fails to support its guaranty of the obligations,
we may be required to record additional impairment charges.
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 SEC 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.
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In late calendar 2006, 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.
During the second quarter of fiscal 2007, we were granted licenses to ship replacement spare parts,
spare parts kits and assemblies to all customers in the controlled countries where we currently
conduct business.
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.
In the second quarter of fiscal 2007, we 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
23
that the resolution of this matter will not have a material adverse impact on our consolidated
financial condition. The licenses that were granted during the second quarter of fiscal 2007 do
not necessarily mitigate our risk with respect to past violations.
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 30, 2008.
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
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 (3) |
|
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. (4) |
|
3.1 |
|
Restated Articles of Incorporation of the Company. (2) |
|
3.2 |
|
Restated and amended By-Laws. (6) |
|
3.5 |
|
Articles of Amendment of Restated Articles of Incorporation (5) |
|
31.1 |
|
Certification by Principal Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.(filed herewith) |
|
31.2 |
|
Certification by Principal Financial and Accounting Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(filed
herewith) |
|
32.1 |
|
Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.(filed herewith) |
|
|
|
(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-K, filed by the Company on January
27, 1999, SEC File No. 0-17276 and incorporated by reference. |
|
(4) |
|
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. |
|
(5) |
|
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. |
|
(6) |
|
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. |
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 8, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (3)
|
|
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. (4)
|
|
Incorporated by reference. |
|
|
|
|
|
3.1
|
|
Restated Articles of Incorporation of the Company. (2)
|
|
Incorporated by reference. |
|
|
|
|
|
3.2
|
|
Restated and amended By-Laws. (6)
|
|
Incorporated by reference. |
|
|
|
|
|
3.5
|
|
Articles of Amendment of Restated Articles of Incorporation (5)
|
|
Incorporated by reference. |
|
|
|
|
|
31.1
|
|
Certification by Principal Executive Officer Pursuant to
section 302 of the Sarbanes-Oxley Act of 2002.
|
|
Filed herewith. |
|
|
|
|
|
31.2
|
|
Certification by Principal Financial and Accounting Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
Filed herewith. |
|
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Filed herewith. |
|
|
|
(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-K, filed by the Company on January
27, 1999, SEC File No. 0-17276 and incorporated by reference. |
|
(4) |
|
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. |
|
(5) |
|
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. |
|
(6) |
|
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. |
26