e10vk
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
August 26, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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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
55318-3052
(Address of principal executive
offices and Zip Code)
Registrants telephone number, including area code:
(952) 448-5440
Securities registered pursuant to Section 12(b) of the
Securities Exchange Act:
Common Stock, no par value; Preferred Share Purchase
Rights
Securities registered pursuant to Section 12(g) of the
Securities Exchange Act:
Indicate by a check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act of
1933. Yes o No þ
Indicate by a check mark if the Registrant is not required to
file reports pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of
1934. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the Registrant is 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 Securities Exchange Act of 1934.
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by a check mark whether the registrant is a shell
company (as defined in
Rule 12b-2
of the Exchange Act of
1934). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the closing price on
February 24, 2006, the last business day of the
Registrants most recently completed second fiscal quarter,
as reported on the NASDAQ National Market System, was
approximately $176,800,000. Shares of common stock held by each
officer and director have been excluded from this computation in
that such persons may be deemed to be affiliates. This amount is
provided only for purposes of this report on
Form 10-K
and does not represent an admission by the Registrant or any
such person as to the status of such person.
As of October 31, 2006, the Registrant had issued and
outstanding 30,336,000 shares of common stock.
TABLE OF CONTENTS
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement for
the Annual Meeting of Shareholders to be held on
January 17, 2007 and to be filed within 120 days after
the Registrants fiscal year ended August 26, 2006,
are incorporated by reference into Part III of this
Form 10-K
Report. (The Audit and Finance Committee Report, the
Compensation Committee Report and the stock performance graph of
the Registrants proxy statement are expressly not incorporated
by reference herein.)
PART I
Cautionary
Information Regarding Forward-Looking Statements
Certain statements contained in this report on
Form 10-K
constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as
amended, and are subject to the safe harbor created by that
statute. Typically we identify forward-looking statements by use
of an asterisk *. In some cases, you can identify
forward-looking statements by terminology such as
expects, anticipates,
intends, may, should,
plans, believes, seeks,
estimates, could, would or
the negative of such terms or other comparable terminology. Such
forward-looking statements are based upon current expectations
and beliefs and involve numerous risks and uncertainties, both
known and unknown, that could cause actual events or results to
differ materially from these forward-looking statements. For a
discussion of factors that could cause actual results to differ
materially from those described in this
Form 10-K,
see the discussion of risk factors set forth below in
Item 1.A. of this report. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable as of the date of this report, we cannot guarantee
future results, levels of activity, performance or achievements.
We undertake no duty to update any of the forward-looking
statements after the date of this report.
The
Company
FSI International, Inc., a Minnesota corporation organized in
1973 (FSI), designs, manufactures, markets and
supports equipment used in the fabrication of microelectronics,
such as advanced semiconductor devices. In fiscal 2006, we
provided Surface Conditioning (SC) technology
solutions and
POLARIS®
system support services to worldwide manufacturers of integrated
circuits.
FSI manufactures, markets and supports surface conditioning
equipment that uses wet, vapor, cryogenic and other chemistry
techniques to clean, strip or etch the surfaces of silicon
wafers. The Companys POLARIS Systems and Services
(PSS) business enables customers to achieve a
reasonable life for our legacy POLARIS Microlithography systems.
Microlithography uses light to transfer a circuit pattern or
image onto a silicon wafer. Our PSS products are used in the
microlithography process to deposit light-sensitive material
onto the surface of a wafer and also to develop the image in the
photosensitive material. These businesses are supported by
service groups that provide finance, human resources,
information services, sales and service, marketing and other
administrative functions.
In fiscal 2006, we directly sold and serviced our products in
North America, Europe, and the Asia Pacific region. In addition,
our products are sold and serviced in Japan through our
affiliate, mFSI, LTD.
Industry
Background
The complex process of fabricating semiconductor devices
involves several distinct phases that are repeated numerous
times. Because each production phase typically requires
different processing technologies and equipment, no one
semiconductor equipment supplier currently produces all types of
tools needed to equip an entire
state-of-the-art
fabrication facility. Instead, semiconductor device
manufacturers typically equip their facilities by combining
manufacturing equipment produced by a number of suppliers. Each
set of equipment performs specific functions in the
manufacturing process.
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Generally, increasing demand for computer chips, new computer
chip designs, new materials of fabrication and new substrate
(the underlying material upon which a semiconductor device or
integrated circuit is formed) types both size and
composition drives demand for new microelectronics
manufacturing equipment and processes. Industries that use
microelectronics increasingly demand higher performance devices
from manufacturers. Over the last decade, device manufacturers
have reduced the feature size and substantially increased the
functionality of individual devices through a number of
technological advances. Many of these advancements are made
possible using the equipment and technologies FSI provides to
the semiconductor industry.
Our business depends upon the microelectronics
manufacturers capital equipment expenditures.
Manufacturers expenditures in turn depend on the current
and anticipated market demand for products that use
microelectronic devices. The microelectronics industry has been
cyclical in nature and has experienced periodic downturns.
Microelectronics manufacturers require equipment suppliers to
take an increasingly active role in meeting the
manufacturers technology development and capital
productivity requirements. Equipment suppliers satisfy this
requirement by developing and supporting products and processes
required to address the new trends in microelectronics
manufacturing. These trends include development of smaller
geometries, transition to new materials, migration to 300
millimeter (mm) wafers and wafer level packaging.
A number of semiconductor device manufacturers began the
transition from 200 to 300mm diameter wafers in calendar 2000.
Based upon a report published in October 2006 by the Gartner
Group, a leading industry market research firm, the percentages
of investment in semiconductor process equipment allocated by
semiconductor manufacturers to 300mm capable products were
approximately 40% by calendar 2002 and had increased to 74% by
calendar 2005. Semiconductor manufacturers investment in
300mm capable products is forecasted by Gartner Group to be more
than 80% of total equipment spending in calendar 2007.*
According to the Gartner Group, purchases of semiconductor
equipment by microelectronics manufacturers were
$34 billion in calendar 2005. Based upon the most recent
Gartner Group forecast, the semiconductor equipment industry is
expected to increase 24% to $42 billion in calendar 2006.*
Products
The mix of products we sell has varied significantly from year
to year. The following table sets forth, for the periods
indicated, the amount of revenues and approximate percentages of
our total revenues of each of our principal product lines:
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Fiscal Year Ended
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August 26,
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August 27,
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August 28,
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2006
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2005
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2004
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(Dollars in thousands)
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Surface conditioning products
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65,565
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57.9
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$
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51,857
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60.0
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%
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$
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58,992
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51.6
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%
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POLARIS®
Systems and Services products
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14,796
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13.1
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%
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8,764
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10.2
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%
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17,756
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15.5
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Spare parts and service
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32,880
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29.0
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%
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25,749
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29.8
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%
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37,656
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32.9
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%
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$
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113,241
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100.0
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%
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$
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86,370
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100.0
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%
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$
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114,404
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100.0
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%
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Surface
Conditioning Products
Our surface conditioning products perform etching and cleaning
operations for:
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front-end-of-line
(FEOL) fabrication steps, where integrated circuits
or transistors are formed in and on the substrate during the
manufacturing process;
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back-end-of-line
(BEOL) fabrication steps, where metal wiring levels
are formed on the surface of the wafer and are connected to the
transistors; and
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wafer-level packaging surface preparation, including cleaning,
etching and stripping functions necessary to fabricate solder
bumps or other terminal structures needed to connect the chip to
the circuit board.
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In todays most advanced integrated circuit
(IC) manufacturing, there are over 100 surface
preparation steps. Many factors are considered when designing
and optimizing a surface preparation process to meet a
particular application need. These factors can include:
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cleaning and etching goals, which are related to the removal of
wafer contaminates and films;
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selectivity goals, which are related to leaving desired films
and structures intact; and
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manufacturing goals, which are related to cost, productivity,
safety and environmental concerns.
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The priority of each factor in determining the final surface
preparation process can vary widely across the approximately 100
different steps and depends on the contaminants that need to be
removed, the materials that need to be preserved on the wafer
surface, the dimensions of patterned features and overall
process integration. These varied requirements and priorities
indicate that no single surface preparation technology can
provide the optimal process for each surface preparation
requirement. This is why FSI offers a range of technologies that
allow us, with our customers, to select and optimize the best
solution for each step. These technologies include batch spray,
batch immersion and single wafer cryogenic aerosol.
Spray Processing Systems. Our spray
processing systems, which include the
MERCURY®
and
ZETA®
Spray Cleaning Systems, are sophisticated surface
conditioning systems that remove unwanted films and contaminants
from the surface of semiconductor wafers at various stages in
the microelectronic device fabrication process. Multiple
cassettes that contain up to 26 wafers each are placed onto a
turntable inside the systems process chamber. As the
turntable rotates, dispense ports apply a chemical spray to the
wafers surfaces to dissolve and remove the undesirable
films and contaminants. After chemical application, deionized
water (ultrapure water that has been treated in order to remove
all possible contaminants from the surface of a silicon wafer
such as ions, bacteria, silica, particles and dissolved metals)
is sprayed on the wafer surfaces to rinse away the chemicals.
Multiple chemical and rinse steps may be employed depending on
the customers specific application. The process sequence
is completed with a drying step where a flow of nitrogen into
the chamber dries the wafers and the chamber. Our control system
and chemical mixing manifold allow the user to define, control
and monitor a variety of chemical mixtures, temperatures and
sequences. This enables the user to rapidly develop new
processes and utilize the systems for multiple applications.
Our batch spray systems achieve
state-of-the-art
performance and are well suited for applications that require
removal of high levels of contamination. Through efficient use
of chemicals and water along with small footprints, customers
realize operational costs that can be lower than competing
systems.
The
MERCURY®
System is a semi-automated batch spray processor designed for
wafer sizes up to 200mm in diameter and process technologies
through the 130 nanometers (nm) node. The system
offers the benefits of low capital cost and low cost of
ownership in a small footprint. The MERCURY System ranges in
price from $400,000 to $1,100,000 depending on features.
The fully-automated
ZETA®
System, a batch spray processor, is currently available in
configurations for both 200 and 300mm wafers. The advanced
process controls, process capability and automation are ideal
for leading technology nodes, particularly 130nm and below. Our
ZETA products provide a reliable, automated environment to move
wafers to and from the process chamber. This tools
eight-chemical flow system allows for a wide range of chemical
blend ratios. The system is also available in a semi-automated
configuration capable of processing 200mm or 150mm wafers.
Introduced in 2006, the ZETA G3 platform builds on the
capabilities of previous generation ZETA systems and offers IC
manufacturers better performance and higher productivity. The
ZETAs G3 hardware uniquely enables the implementation of
ViPRtm
technology (described below) and features enhanced robotics that
enable higher throughput for certain applications. The ZETA G3
platform is designed for 300mm batch spray FEOL and BEOL
cleaning processes with proven capability for 90, 65 and 45nm
technology nodes. Our ZETA systems range in price from
$1,000,000 to $2,500,000.
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Subsequent generations of the ZETA System have increased
capabilities with the addition of new tool packages and
processes, including:
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The
FlashCleantm
Advantage package, consisting of hardware, software and process
advancements, enhances system productivity and performance by
decreasing process time and increasing throughput.
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The
PlatNiStriptm
process for nickel platinum films is designed to help our
customers implement salicide formation at the 65nm technology
node.
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The
EcoBlendtm
dilute acid process offers a cost-effective and environmentally
friendly method to remove post-ash residues for aluminum and
tungsten interconnect applications.
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The
ViPRtm
technology is an ash-free, wet resist stripping process that
eliminates the need for ashing on most implanted photoresist
stripping steps. Ashing is a method of stripping photoresist
using an excited gas such as oxygen plasma, ozone or
hydrogen-containing plasma. ViPR technology is available on
FSIs ZETA G3 Spray Cleaning Platform.
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To address our customers desire for more environmentally
benign processes, we supply an ozonated water generation module
for use with our ZETA and MERCURY spray processing systems and
MAGELLAN immersion system. The use of ozone (a form of oxygen
having three atoms to the molecule) in semiconductor processing
uses only oxygen and water instead of sulfuric acid and hydrogen
peroxide mixtures and lowers costs by reducing chemical
consumption, water usage and waste treatment.
CryoKinetic Processing Systems. Our
ANTARES CryoKinetic (an energy transfer process used to remove
non-chemically bonded particles from the surface of a
microelectronic device) Cleaning System is a fully automated,
single-wafer cleaning platform designed for 200 and 300mm
wafers. These systems offer a field-proven history of removing
surface particle defects and improving customer yields. The
ANTARES system uses an all-dry non-chemically reactive method
for removing defects from all surface types from the beginning
to the end of the device manufacturing process. Of particular
benefit to our customers is its inherent compatibility with new
device materials and increasingly smaller device features.
CryoKinetic clean technology allows our customers to insert
particle removal steps in the manufacturing line where previous
or traditional wet cleaning and scrubber methods have been
phased out due to their incompatibility with new materials and
their propensity to cause watermark residue and surface charge
defects. Implementing the CryoKinetic clean allows our customers
to recover yield that would normally be lost with traditional
approaches.
The ANTARES system is also available with the
AspectCleantm
process. The AspectClean process is a method of removing
particle defects from FEOL and BEOL patterned structures without
altering film properties or physically damaging the structures,
which is becoming more critical in 65nm development programs and
90nm production ramps. While traditional methods of defect
reduction have been phased out due to wafer damage issues, the
AspectClean process is demonstrating high removal efficiency on
sensitive narrow structures without causing damage.
We believe the technical capabilities of the ANTARES system are
extendable well beyond current technology nodes and may result
in increased customer acceptance due to the limitations of
scrubbing methods.* ANTARES systems range in price from
$1,200,000 to $2,000,000.
Vapor Processing Systems. We
discontinued the EXCALIBUR product line at the end of calendar
year 2005. Changing market needs created a situation where the
specialized use of the EXCALIBUR system was no longer required.
FSI has retained the extensive portfolio of intellectual
property patents relating to this technology.
Immersion Processing Systems. Immersion
cleaning systems are used to clean silicon wafers by immersing
wafers in multiple tanks filled with process chemicals. These
systems enable the implementation of high performance isopropyl
alcohol (IPA) assisted drying to meet the critical
cleaning requirements for 90, 65, and 45 nm technology nodes.
Our MAGELLAN Immersion Cleaning System is a fully automated
immersion cleaning system designed for either 200 or 300mm
wafers at advanced technology nodes and is
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capable of multiple mainstream cleans, including critical clean,
resist strip and etch. It is differentiated from the competition
through its process performance, flexibility, extendibility, and
rapid cycle time in a footprint that is smaller than the leading
competition when configured for specific applications. The tool
incorporates a portfolio of exclusive intellectual property,
including our Surface Tension Gradient
(STG®)
rinse/dry technology,
SymFlow®
etch technology, ozone oxide re-growth technology, and
narrow-gate-compatible
MegaLenstm
Acoustic Diffuser megasonic cleaning technology. The MAGELLAN
System is qualified for several processes including FEOL
critical clean, FEOL photoresist strip (an etch-resistant
material used for transferring an image to the surface of a
silicon wafer) and post-ash clean, as well as oxide etch and
nitride etch.
In 2005, we expanded MAGELLANs maximum process module
configuration from five to seven modules, thereby enabling
additional configurations for integrated cleaning and
multi-function cleaning opportunities. In addition, we made
numerous product enhancements to enable tool transition from
research and development to high volume manufacturing. The
MAGELLAN System ranges in price from $2,000,000 to $4,000,000.
YieldUP Rinse Dry and Immersion
Systems. An
end-of-life
plan for our YieldUP systems has been initiated. See
Item 3 Legal Proceedings for
additional information on our ability to sell YieldUP 2100
modules. YieldUP 2100 rinsing and drying modules and YieldUP
4000 systems have been discontinued. The YieldUP 2000 is still
being offered for sale due to continued market interest. The
YieldUP 2000 systems range in price from $180,000 to $250,000.
PSS
Products
Our PSS products are microlithography products used to deposit
photoresist, a light-sensitive, etch-resistant material used to
transfer an image to the surface of a silicon wafer and develop
the photosensitive material. Following our announcement in March
2003 to exit the resist process equipment market, we
discontinued our active manufacture and sale of these products
and established the PSS business to provide key support services
to our global POLARIS customer base. PSS offers:
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process applications support, engineering and equipment
maintenance;
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customers robot refurbishment, system level and standard
upgrades, systems operations and maintenance training and spare
parts; and
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POLARIS Refresh
Programtm,
in which customers can purchase certified POLARIS clusters (an
integrated environmentally isolated manufacturing system
consisting of process, transport, and cassette modules
mechanically linked together) made of both new and pre-owned,
re-qualified modules. This allows customers to add capacity for
a lower capital investment. The ratio of new to pre-owned
modules is based on customer expectations and the availability
of used modules. These systems are able to accommodate a variety
of processes and can be purchased in a new configuration or a
system can be reconfigured and upgraded to match previously
installed configurations.
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Spare
Parts and Service
We offer system upgrade packages, spare part kits, software
maintenance licenses, individual spare part components and
support services that provide product and process enhancements
to extend the life of previously purchased and installed surface
conditioning and microlithography equipment. Our customer
service and process engineers assist and train customers
worldwide to perform preventive maintenance on, and to service,
our equipment. In addition, our process engineering groups
develop process applications to expand the capabilities of our
equipment. These upgrade and spare part packages and support
service programs enable our worldwide customers to realize a
higher return on their capital investment.
We sell a variety of process, service and maintenance programs.
A number of customers have purchased maintenance contracts in
which our service employees work at the customers facility
to provide process service and maintenance support for our
equipment.
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Backlog
and Seasonality
Our backlog consists of customer purchase orders with delivery
dates within the next 12 months. Our backlog was
$39.8 million at fiscal 2006 year-end and
$19.3 million at fiscal 2005 year-end. Approximately
36% of our backlog at fiscal 2006 year-end and 53% of our
backlog at fiscal 2005 year-end was comprised of orders
from two customers. Intel Corporation and Seagate Technology,
Inc. are the top two customers in backlog at the end of fiscal
2006. Seagate Technology, Inc. and Texas Instruments
Incorporated were the top two customers in backlog at the end of
fiscal 2005. The loss of any of these customers could have a
material adverse effect on our operations. All orders are
subject to cancellation by the customer and in some cases a
penalty provision could apply to a cancellation.
In fiscal 2006, there were no significant purchase orders
canceled and not rescheduled. In fiscal 2005, purchase orders
aggregating approximately $3.1 million, constituting 3.6%
of sales, were canceled and not rescheduled. Because of the
timing and relative size of certain orders we received and
possible changes in delivery schedules and order cancellations,
our backlog can vary from time to time so that backlog as of any
particular date is not necessarily indicative of actual sales
for any subsequent period. Our business is not seasonal to any
significant extent.
Research
and Development
We believe that our future success depends in large part on our
ability to enhance and advance, in collaboration with our
customers and other equipment and materials manufacturers, our
existing SC product lines to meet the changing needs of
microelectronics manufacturers. We believe that industry trends,
such as the use of smaller circuit geometries, increased use of
larger substrates and manufacturers increased desire for
integrated processing equipment, will make highly automated and
integrated systems, including single substrate processing
systems, more important to customers. For assistance in our
development efforts, we maintain relationships with our
customers and others, who help identify and analyze industry
trends and our development activities to meet the
industrys advanced technology needs.
Our current research and development programs are focused on
creating new processes and technologies for cleaning substrates
without damaging the ever smaller patterned features being used
for the most advanced IC devices. We are also conducting
programs to increase process control and flexibility through
monitoring and software management systems and process
automation, robotics automation in the cleanroom, and
integration of our product offerings with other suppliers
products. Each of these programs involves collaboration with
customers and other equipment manufacturers to ensure proper
machine configuration and process development to meet industry
requirements.
We maintain an
8,000-square-foot,
state-of-the-art
demonstration and process development laboratory for our SC
business at our Chaska, Minnesota facility. In addition, we
lease 2,500 square feet of laboratory space in Allen,
Texas. Also, our Japanese affiliate, mFSI, LTD, maintains
a demonstration laboratory at its Okayama, Japan facility.
Expenditures for research and development, which are expensed as
incurred, during fiscal 2006 were approximately
$24.3 million, representing 21.5% of total sales.
Expenditures for research and development during fiscal 2005
were approximately $22.1 million, representing 25.6% of
total sales, and expenditures for research and development
during fiscal 2004 were approximately $22.5 million,
representing 19.6% of total sales.
We expect to continue to make substantial investments in
research and development.* We also recognize the importance of
managing product transitions successfully, as the introduction
of new products could adversely affect sales of existing
products.
Marketing,
Sales and Support
We market our products worldwide to manufacturers of
microelectronic devices. Our marketing and sales efforts are
focused on building long-term collaborative relationships with
our customers. These efforts are supported by marketing, sales,
and service personnel, along with applications engineers. These
worldwide FSI
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teams work collaboratively with individual IC manufacturers, in
FSI process laboratories and at customer sites, to transfer FSI
developed product and process innovations, integrate them into
customer process flows and optimize them according to customer
priorities.
As of the end of fiscal 2006, our sales effort was supported by
approximately 136 employees and contractors engaged in customer
service and support. During fiscal 2006, we directly sold and
serviced our products in North America, Europe and the Asia
Pacific region, and through our joint venture, mFSI, LTD,
in Japan.
By providing a full portfolio of direct support services, we
have developed stronger customer relationships and our customers
are beginning to show greater interest in expanding beyond their
current use of FSI traditional spray cleaning technologies to
include new FEOL, BEOL and wafer bumping applications for spray,
as well as employing our advanced immersion and CryoKinetic
technologies. Our increased responsiveness on the local level
has resulted in more collaborative efforts and joint development
programs with IC makers throughout the world for 90nm production
and 65 and 45nm development projects.
International sales, in Europe and Asia accounted for
approximately 62% of total sales in fiscal 2006, 64% of total
sales in fiscal 2005, and 47% of total sales in fiscal 2004.
We own a 49% equity interest in mFSI, LTD, a Japanese
joint venture company formed in 1991 with MBK Project Holdings
LTD. (formerly Mitsui & Co., LTD.) and its wholly owned
subsidiary, Chlorine Engineers Corp., LTD. (collectively,
Mitsui). Mitsui owns a 51% equity interest in
mFSI. In connection with its formation, both FSI and
Mitsui granted mFSI certain product and technology
licenses and product distribution rights pursuant to a license
agreement and a distribution agreement. mFSI also
distributes products of other manufacturers and its own
internally developed products. In September 2004, mFSI
granted FSI exclusive rights to distribute certain mFSI
products outside of Japan and an exclusive license covering the
patents and related technology with regard to certain products
for use outside of Japan.
Manufacturing,
Raw Materials and Suppliers
We maintain manufacturing facilities in Chaska, Minnesota and
Allen, Texas. We typically assemble our products and systems
from components and prefabricated parts manufactured and
supplied by others, including process controllers, robots,
integrated circuits, power supplies, stainless steel pressure
vessels, chamber bowls, valves and relays. Certain of the items
manufactured by others are made to our specifications.
Typically, final assembly and systems tests are performed by our
manufacturing personnel. Quality control is maintained through
quality assurance programs with suppliers, incoming inspection
of components, in-process inspection during equipment assembly,
and final inspection and operation of manufactured equipment
prior to shipment. We have a company-wide quality program in
place and received ISO 9001 certification in 1994 and
ISO 9000:2000 certification in 2003.
Certain of the components and subassemblies included in our
products are obtained from a single supplier or a limited group
of suppliers to ensure overall quality and delivery timeliness.
We purchased 13% of our fiscal 2006 inventory purchases and 11%
of our fiscal 2005 inventory purchases from Custom Fab
Solutions. We purchased 10% of our fiscal 2006 inventory
purchases from Entegris, Inc. Although we seek to reduce
dependence on sole and limited-source suppliers, disruption or
termination of certain of these sources could have a temporary
adverse effect on our operations. We believe that alternative
sources could be obtained and qualified to supply these
products, if necessary, but that production delays would likely
occur in some cases.* Further, a prolonged inability to obtain
certain components could have an adverse effect on our operating
results, delay scheduled deliveries and result in damage to
customer relationships.
Competition
The semiconductor equipment industry is very competitive and
marked by ever advancing technological challenges. Significant
competitive factors in the equipment market include system
price, which encompasses total cost of ownership, quality,
process performance, reliability, flexibility, extendibility,
integration with other products, process or tool of record, and
customer support.
8
Many of our established competitors have greater financial,
engineering, research, development, manufacturing, marketing,
service and support resources. To remain competitive, we must
invest in research and development, marketing, customer service
and support programs, and also manage our operating expenses.
There can be no assurance that we will have sufficient resources
to continue to make these investments or that our products will
continue to be viewed as competitive as a result of
technological advances by existing or new competitors or due to
changes in semiconductor technology.
Our SC products compete with, among others, DaiNippon Screen
Manufacturing Co. Ltd., Kaijo Denki, S.E.S. Co., Ltd., Semitool,
Inc., The SEZ Group, Tokyo Electron Ltd. and several smaller
companies. Our PSS organization competes with various small
equipment refurbishment, equipment maintenance and spare parts
providers.
Customers
We sell products from one or more of our product lines to most
major microelectronics manufacturers. We have an extensive
history of sales to several of the largest integrated circuit
manufacturers and over 100 active customers worldwide.
ST Microelectronics accounted for approximately 14% of our total
sales in fiscal 2006 and less than 10% of our total sales in
fiscal 2005 and 2004. Texas Instruments Incorporated accounted
for approximately 13% of our total sales in fiscal 2006, 14% of
our total sales in fiscal 2005 and 16% of our total sales in
fiscal 2004. Seagate Technology, Inc. accounted for
approximately 11% of our total sales in fiscal 2006 and less
than 10% of our total sales in fiscal 2005 and 2004. Samsung
Electronics accounted for approximately 11% of our total sales
in fiscal 2006 and 2005 and less than 10% of our total sales in
fiscal 2004. The loss of any of these customers could have a
material adverse effect on our operations.
We have experienced, and expect to continue to experience,
fluctuations in our customer mix.* The timing of an order for
our equipment is primarily dependent upon the customers
expansion program, replacement needs, or requirements to improve
productivity and yields. Consequently, a customer who places
significant orders in one year will not necessarily place
significant orders in subsequent years.
Sales to mFSI LTD, our international distributor,
accounted for approximately 5% of our total sales in both fiscal
2006 and 2005. Sales to our international distributors accounted
for approximately 13% of our total sales in fiscal 2004. Usually
these systems are purchased by our distributors for resale to
device manufacturers. On October 9, 2002, we announced the
termination of our distribution agreements with Metron
Technology effective March 1, 2003.
Under the mFSI distribution agreement, mFSI has
exclusive distribution rights with respect to certain of our
products in Japan. A licensing agreement allows mFSI to
manufacture certain of our products. The agreements may be
terminated only upon the occurrence of certain events or
conditions or as otherwise mutually agreed. There is no
obligation under the distribution agreement for mFSI to
purchase a specified amount or percentage of our products. In
September 2004, mFSI granted FSI exclusive rights to
distribute certain products outside of Japan and FSI was granted
an exclusive license covering the patents and related technology
with regard to certain mFSI products for use outside of
Japan. We have not yet had any sales related to these products.
Patents,
Trademarks and Intellectual Property
Our success depends upon a variety of factors, including
proprietary technology. It is important to protect our
technology by obtaining and enforcing patents. Consequently, we
have an active program to file patent applications in the United
States and other countries on inventions we consider
significant. We also possess other proprietary intellectual
property, including trademarks, know-how, trade secrets and
copyrights. We also protect our proprietary information through
confidentiality agreements with our employees and with third
parties.
We have a number of patents in the United States and other
countries, with additional applications pending. These patents
may be challenged, invalidated or circumvented, or may not
provide any competitive
9
advantages to us. Pending applications may not result in patents
and the claims allowed in future patents may not be sufficiently
broad to protect our technology. The laws of some foreign
countries may not permit the protection of our proprietary
rights to the same extent as under the laws of the United
States. Although we believe that protection afforded by our
patents, patent applications, and other intellectual property
rights has value, because of rapidly changing technology, our
future success is dependent on the skills of our employees.
In the normal course of business, we occasionally receive and
make inquiries about possible patent infringement. In dealing
with such inquiries, it may be necessary or useful for us to
obtain or grant licenses or other rights. However, there can be
no assurance that such license rights will be available to us on
commercially reasonable terms, or at all. The inability to
obtain certain license or other rights, or to obtain such
licenses or rights on favorable terms, or the need to engage in
litigation could have a material adverse effect on us. See also
Item 3 Legal Proceedings for a
discussion of litigation.
We offered our microlithography POLARIS system pursuant to a
non-exclusive license from Texas Instruments Incorporated. We
have converted the license to a fully paid-up, worldwide license
to sell and manufacture the POLARIS system. We also have the
non-exclusive right to manufacture and sell related Texas
Instruments Incorporated modules. The license agreement
continues until terminated. It may be terminated by either party
upon a breach by the other party, and the failure to cure, in
accordance with the terms of the agreement.
We offer our SC ANTARES CX Cleaning System under license
agreements from IBM. The licenses require certain minimum and
system-based royalties. Royalties are based on the royalty
portion revenues of licensed equipment that excludes
amounts for freight, taxes, customers duties, insurance,
discounts, and certain equipment not manufactured by us.
We have approximately 95 U.S. patents. Expiration dates
range from February 2007 to December 2023. In addition, we have
approximately 30 pending U.S. patent applications in
various stages of the patent examination process.
Employees
As of August 26, 2006, we had approximately 560 full and
part-time employees. Competition for highly skilled employees is
intense. We believe that a great part of our future success
depends upon our continued ability to retain and attract
qualified employees.
We are not subject to any collective bargaining agreements in
the United States and have never been subject to a work
stoppage. We are subject to collective bargaining agreements in
Italy and France covering approximately 30 employees. We have
never been subject to a work stoppage in Italy or France.
Environmental
Matters
In January 2003, we received our certificate of registration
from BSI, Inc. for its ISO 14001 environmental management
system. ISO 14001 is an internationally recognized environmental
management standard that empowers organizations to address the
environmental impact of activities, services and processes. The
standard then provides a framework for enterprises to take steps
to identify issues significant to them and implement
environmental management programs to achieve improved
performance. Registration with ISO 14001 allows companies to
reaffirm that environmental processes are essential components
of their business strategy. We have a long history of
environmentally-friendly practices and research and development
programs that actively seek ways to operate more environmentally
efficient. We registered with ISO 14001 to emphasize our ongoing
commitment to the preservation and protection of the
environment, and to support existing environmental health and
safety initiatives.
We implemented an enterprise-wide program to actively engage our
employees to develop ways to, and to emphasize the importance
of, protecting the environment in everyday life at FSI. Our
programs include recycling, water use reductions, chemical
handling processes and equipment design for the environment.
10
We are subject to a variety of governmental regulations related
to the discharge or disposal of toxic, volatile or otherwise
hazardous chemicals used in the manufacturing and product
development process. We believe we are in compliance with these
regulations and that we have obtained all necessary
environmental permits to conduct our business. These permits
generally relate to the disposal of hazardous wastes. If we fail
to comply with present or future regulations, fines could be
imposed, production and product development could be suspended,
or operations could cease. Such regulations could require us to
acquire significant equipment or take other actions necessary to
comply with environmental regulations at a potentially
significant cost. If we fail to control the use of, or
adequately restrict the discharge and disposal of, hazardous
substances, we could incur future liabilities. See also
Item 3 Legal Proceedings for a
discussion of our environmental legal proceedings.
We believe that compliance with federal, state and local
provisions regulating the discharge of materials into the
environment, or otherwise relating to the protection of the
environment, will not have a material effect upon our capital
expenditures, earnings or competitive position.*
International
Sales
Our international sales for each of the last three fiscal years
are disclosed in the financial statements included in
Item 8 of this report.
Available
Information
Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act of 1934 are
available free of charge through our website at www.fsi-intl.com
as soon as reasonably practicable after such reports have been
filed with or furnished to the Securities and Exchange
Commission.
Item 1.A. Risk
Factors
Our business faces significant risks. The risks described below
are not the only risks we face. Additional risks and
uncertainties not presently known to us or that we currently
believe are immaterial also may impair our business operations.
If any of the events or circumstances described in the following
risks occurs, our business, operating results or financial
condition could be materially adversely affected. The following
risk factors should be read in conjunction with the other
information and risks set forth in this report.
Because
our business depends on the amount that manufacturers of
microelectronics spend on capital equipment, downturns in the
microelectronics industry may adversely affect our
results.
The microelectronics industry experiences periodic downturns,
which may have a negative effect on our sales and operating
results. Our business depends on the amounts that manufacturers
of microelectronics spend on capital equipment. The amounts they
spend on capital equipment depend on the existing and expected
demand for semiconductor devices and products that use
semiconductor devices. When a downturn occurs, some
semiconductor manufacturers experience lower demand and
increased pricing pressure for their products. As a result, they
are likely to purchase less semiconductor processing equipment
and have sometimes delayed making decisions to purchase capital
equipment. In some cases, semiconductor manufacturers have
canceled or delayed orders for our products. Typically, the
semiconductor equipment industry has experienced more pronounced
decreases in net sales than the semiconductor industry as a
whole.
We have in the past experienced downturns in orders for new
equipment as well as delays in or cancellations of existing
orders. We cannot predict the extent and length of any future
softening in the industry.
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Failure
of our products to gain market acceptance would adversely affect
our financial condition.
We believe that our growth prospects depend upon our ability to
gain customer acceptance of our products and technology,
particularly newly developed products. Market acceptance of
products depends upon numerous factors, including:
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compatibility with existing manufacturing processes and products;
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ability to displace incumbent suppliers or processes or tools of
record;
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perceived advantages over competing products; and
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the level of customer service available to support such products.
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Moreover, manufacturers often rely on a limited number of
equipment vendors to meet their manufacturing equipment needs.
As a result, market acceptance of our products may be affected
adversely to the extent potential customers utilize a
competitors manufacturing equipment. There can be no
assurance that sales of new products will remain constant or
grow or that we will be successful in obtaining broad market
acceptance of our systems and technology.
We expect to spend a significant amount of time and resources to
develop new systems and enhance existing systems. In light of
the long product development cycles inherent in our industry, we
will make these expenditures well in advance of the prospect of
deriving revenue from the sale of any new systems. Our ability
to commercially introduce and successfully market any new
systems is subject to a wide variety of challenges during this
development cycle, including
start-up
bugs, design defects and other matters that could delay
introduction of these systems to the marketplace. In addition,
since our customers are not obligated by long-term contracts to
purchase our systems, our anticipated product orders may not
materialize or orders that do materialize may be canceled. As a
result, if we do not achieve market acceptance of new products,
we may not be able to realize sufficient sales of our systems in
order to recoup research and development expenditures. The
failure of any of our new products, for example the
MAGELLAN®,
to achieve market acceptance would harm our business, financial
condition, and results of operations and cash flows.
If we
do not continue to develop new products, we will not be able to
compete effectively.
Our business and results of operations could decline if we do
not develop and successfully introduce new or improved products
that the market accepts. The technology used in microelectronics
manufacturing equipment and processes changes rapidly. Industry
standards change constantly and equipment manufacturers
frequently introduce new products. We believe that
microelectronics manufacturers increasingly rely on equipment
manufacturers like us to:
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design and develop more efficient manufacturing equipment;
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design and implement improved processes for microelectronics
manufacturers to use; and
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make their equipment compatible with equipment made by other
equipment manufacturers.
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To compete, we must continue to develop, manufacture, and market
new or improved products that meet changing industry standards.
To do this successfully, we must:
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select appropriate products;
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design and develop our products efficiently and quickly;
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implement our manufacturing and assembly processes efficiently
and on time;
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make products that perform well for our customers;
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market and sell our products effectively; and
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introduce our new products in a way that does not unexpectedly
reduce sales of our existing products.
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12
Product
or process development problems could harm our results of
operations.
Our products are complex, and from time to time have defects or
bugs that are difficult and costly to fix. This can harm our
results of operations in the following ways:
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we may incur substantial costs to ensure the functionality and
reliability of products early in their life cycle;
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repeated defects or bugs can reduce orders, increase
manufacturing costs, adversely impact working capital and
increase service and warranty expenses; and
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we may require significant lead times between product
introduction and commercialization.
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As a result, we may have to write off inventory and other assets
related to products and could lose customers and revenue. There
is no assurance that we will be successful in preventing product
and process development problems that could potentially harm our
results of operations.
It may
be difficult for us to compete with stronger competitors
resulting from industry consolidation.
In the past several years, we have seen a trend toward
consolidation in the microelectronics equipment industry. We
expect the trend toward consolidation to continue as companies
seek to strengthen or maintain their market positions in a
rapidly changing industry. We believe that industry
consolidations may result in competitors that are better able to
compete. This could have a significant negative impact on our
business, operating results, and financial condition.
Future
acquisitions may dilute our shareholders ownership
interests and have other adverse consequences.
Because of consolidations in the semiconductor equipment
industry we serve and other competitive factors, our management
will seek to acquire additional product lines, technologies, and
businesses if suitable opportunities develop. Acquisitions may
result in the issuance of our stock, which may dilute our
shareholders ownership interests and reduce earnings per
share. Acquisitions also may increase debt levels and the
related goodwill and other intangible assets, which could have a
significant negative effect on our financial condition and
operating results. In addition, acquisitions involve numerous
risks, including:
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difficulties in absorbing the new business, product line, or
technology;
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diversion of managements attention from other business
concerns;
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entering new markets in which we have little or no
experience; and
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possible loss of key employees of the acquired business.
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Because
of the volatility of our stock price, the ability to trade FSI
shares may be adversely affected and our ability to raise
capital through future equity financing may be
reduced.
Our stock price has been volatile in the past and may continue
to be so in the future. In fiscal 2006, our stock price ranged
from $3.72 to $7.18 per share and in fiscal 2005, our stock
price ranged from $3.22 to $5.56 per share.
The trading price of our common shares is subject to wide
fluctuations in response to various factors, some of which are
beyond our control, including factors discussed elsewhere in
this report and the following:
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failure to meet the published expectations of securities
analysts for a given period;
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changes in financial estimates by securities analysts;
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press releases or announcements by, or changes in market values
of, comparable companies;
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additions or departures of key personnel; and
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involvement in or adverse results from litigation.
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13
The prices of technology stocks, including ours, have been
particularly affected by extreme fluctuations in price and
volume in the stock market generally. These broad stock market
fluctuations may have a negative effect on our future stock
price.
In the past, securities class action litigation has often been
brought against a company following periods of volatility in the
market price of its securities. In the future we could be the
target of this type of litigation. Securities litigation may
result in substantial costs and divert managements
attention and resources, which can seriously harm our business.
Because
our quarterly operating results are volatile, our stock price
could fluctuate.
In the past, our operating results have fluctuated from quarter
to quarter and are likely to do so in the future. These
fluctuations may have a significant impact on our stock price.
The reasons for the fluctuations in our operating results, such
as sales, gross profits, and net income, include:
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The Timing of Significant Customer Orders and Customer
Spending Patterns. During industry downturns, our
customers may ask us to delay or even cancel the shipment of
equipment orders. Delays and cancellations may adversely affect
our operating results in any particular quarter if we are unable
to recognize revenue for particular sales in the quarter in
which we expected those sales.
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The Timing of Customer Acceptances. Based on
our revenue recognition policy, certain shipments to customers
are not recognized until customer acceptance. Delays of customer
acceptances may adversely affect our operating results in any
particular quarter if we are unable to recognize revenue for
particular sales in the quarter in which we expected those sales.
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The Timing of New Product and Service Announcements By Us or
Our Competitors. New product announcements by us
and our competitors could cause our customers to delay a
purchase or to decide to purchase products of one of our
competitors which would adversely affect our revenue and,
therefore, our results of operations. New product announcements
by others may make it necessary for us to reduce prices on our
products or offer more service options, which could adversely
impact operating margins and net income.
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The Mix of Products Sold and the Market Acceptance of Our New
Product Lines. The mix of products we sell varies
from period to period, and because margins vary among or within
different product lines, this can adversely affect our results
of operations. If we fail to sell our products which generate
higher margins, our average gross margins may be lower than
expected. If we fail to sell our new product lines, our revenue
may be lower than expected.
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General Global Economic Conditions or Economic Conditions in
a Particular Region. When economic conditions in
a region or worldwide worsen, customers may delay or cancel
their orders. There also may be an increase in the time it takes
to collect payment from our customers or even outright payment
defaults. This can negatively affect our cash flow and our
results.
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As a result of these factors, our future operating results are
difficult to predict. Further, we base our current and future
expense plans in significant part on our expectations of our
longer-term future revenue. As a result, we expect our expense
levels to be relatively fixed in the short-run. An unanticipated
decline in revenue for a particular quarter may
disproportionately affect our net income in that quarter. If our
revenue is below our projections, then our operating results
will also be below expectations. Any one of the factors we list
above, or a combination of them, could adversely affect our
quarterly results of operations, and consequently may cause a
decline in our share price.
Because
of our ownership position in mFSI LTD, adverse results of
mFSI LTD could adversely affect our results.
The profits or losses of our affiliate, mFSI LTD, can also
significantly affect our financial results. We have a 49%
interest in mFSI LTD. If this affiliate loses the business
of a significant company for which it
14
distributes or sells products, loses a significant customer, or
otherwise became less financially viable, it could have a
negative effect on our financial condition.
Changes
in demand caused by fluctuations in interest and currency
exchange rates may reduce our international sales.
Almost all of our direct international sales are denominated in
U.S. dollars. Nonetheless, changes in demand caused by
fluctuations in interest and currency exchange rates may affect
our international sales. Sales for mFSI LTD are
denominated in yen. As a result, U.S. dollar/yen exchange
rates may affect our equity interest in mFSI LTDs
earnings.
mFSI LTD sometimes engages in so-called
hedging or risk-reducing transactions to try to
limit the negative effects that the devaluation of foreign
currencies relative to the U.S. dollar could have on
operating results. mFSI LTD will do so if a sale
denominated in a foreign currency is sufficiently large to
justify the costs of hedging. To hedge a sale, mFSI LTD
typically will commit to buy U.S. dollars and sell the
foreign currency at a given price at a future date. If the
customer cancels the sale, mFSI LTD may be forced to buy
U.S. dollars and sell the foreign currency at market rates
to meet its hedging obligations and may incur a loss in doing
so. To date, the hedging activities of mFSI LTD have not
had any significant negative effect on us.
We have direct sales, service and applications support and
logistics responsibilities for our products in Europe and the
Asia Pacific region, and accordingly, we incur labor, service
and other expenses in foreign currencies. As of August 26,
2006, we had not entered into any hedging activities and our
foreign currency transaction gains and losses for fiscal 2006
were insignificant. We intend to evaluate various hedging
activities and other options to minimize fluctuations in
interest and currency exchange rates. There is no assurance that
we will be successful in minimizing foreign exchange rate risks
and such failure may reduce our international sales or
negatively impact our operating results.
Because
of the need to meet and comply with numerous foreign regulations
and policies, the potential for change in the political and
economic environments in foreign jurisdictions and the
difficulty of managing business overseas, we may not be able to
sustain our historical level of international
sales.
We operate in a global market. In fiscal 2006,
approximately 62% of our sales revenue derived from sales
outside of the United States. In fiscal 2005, approximately 64%
of our sales revenue derived from sales outside the United
States. In fiscal 2004, approximately 47% of our sales revenue
derived from sales outside the United States. We expect that
international sales will continue to represent a significant
portion of total sales.* Sales to customers outside the United
States involve a number of risks, including the following:
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imposition of government controls;
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compliance with U.S. export laws and foreign laws;
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political and economic instability;
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trade restrictions;
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changes in taxes and tariffs;
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longer payment cycles;
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difficulty of administering business overseas; and
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general economic conditions.
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In particular, the Japanese and Asia Pacific markets are
extremely competitive. The semiconductor device manufacturers
located there are very aggressive in seeking price concessions
from suppliers, including equipment manufacturers like us.
We seek to meet technical standards imposed by foreign
regulatory bodies. However, we cannot guarantee that we will be
able to comply with those standards in the future. Any failure
by us to design products to comply with foreign standards could
have a significant negative impact on us.
15
Because
of the significant financial resources needed to offer a broad
range of products, to maintain customer service and support and
to invest in research and development, we may be unable to
compete with larger, better established
competitors.
The microelectronics equipment industry is highly competitive.
We face substantial competition throughout the world. We believe
that to remain competitive, we will need significant financial
resources to offer a broad range of products, to maintain
customer service and support, and to invest in research and
development. We believe that the microelectronics industry is
becoming increasingly dominated by large manufacturers who have
the resources to support customers on a worldwide basis. Some of
our competitors have substantially greater financial, marketing,
and customer-support capabilities than us. Large equipment
manufacturers have or may enter the market areas in which we
compete. In addition, smaller, emerging microelectronics
equipment companies provide innovative technology. We expect
that our competitors will continue to improve the design and
performance of their existing products and processes. We also
expect them to introduce new products and processes with better
performance and pricing. We cannot guarantee that we will
continue to compete effectively in the United States or
elsewhere. We may be unable to continue to invest in marketing,
research and development and engineering at the levels we
believe necessary to maintain our competitive position. Our
failure to make these investments could have a significant
negative impact on our business, operating results and financial
condition.
Manufacturing
interruptions or delays could affect our ability to meet
customer demand, while the failure to estimate customer demand
accurately could result in excess or obsolete
inventory.
Our business depends on its ability to supply equipment,
services and related products that meet the rapidly changing
requirements of its customers, which depends in part on the
timely delivery of parts, components and subassemblies
(collectively, parts) from suppliers. Some key parts may be
subject to long lead-times
and/or
obtainable only from a single supplier or limited group of
suppliers. Significant interruptions of manufacturing operations
or the delivery of services could result in delayed deliveries
to our customers, manufacturing inefficiencies, increased costs
or order cancellations as a result of:
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the failure or inability of suppliers to timely deliver quality
parts;
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volatility in the availability and cost of materials;
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difficulties or delays in obtaining required export approvals;
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information technology or infrastructure failures;
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difficulties related to planning or effecting business process
changes;
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natural disasters (such as earthquakes, floods or
storms); or
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other causes (such as regional economic downturns, pandemics,
political instability, terrorism or acts of war).
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Moreover, if actual demand for our products is different that
expected, we may purchase more/fewer parts than necessary or
incur costs for canceling, postponing or expediting delivery of
parts. Any or all of these factors could materially and
adversely affect our business, financial condition and results
of operations.
Because
we do not have long-term sales commitments with our customers,
if these customers decide to reduce, delay or cancel orders or
choose to deal with our competitors, then our results will be
adversely affected.
If our significant customers reduce, delay, or cancel orders,
then our operating results could suffer. Our largest customers
have changed from year to year, however, sales to our top five
customers accounted for approximately 52% of total revenues in
fiscal 2006, 48% of total revenues in fiscal 2005 and 46% of
total revenues in fiscal 2004. ST Microelectronics accounted for
approximately 14% of total sales in fiscal 2006. Texas
Instruments Incorporated accounted for approximately 13% of
total sales in fiscal 2006, 14% of total sales in fiscal 2005
and 16% of total sales in fiscal 2004. Samsung Electronics
accounted for approximately
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11% of total sales in fiscal 2006 and 2005. Seagate Technology,
Inc. accounted for approximately 11% of total sales in fiscal
2006. We currently have no long-term sales commitments with any
of our customers. Instead, we generally make sales under
purchase orders. All orders are subject to cancellation or delay
by the customer.
Our
backlog may not result in future net sales.
We schedule the production of our systems based in part upon
order backlog. Due to possible customer changes in delivery
schedules and cancellations of orders, our backlog at any
particular date is not necessarily indicative of actual sales
for any succeeding period. In addition, while we evaluate each
customer order on a case by case basis to determine
qualification for inclusion in backlog, there can be no
assurance that amounts included in backlog ultimately will
result in future sales. A reduction in backlog during any
particular period, or the failure of our backlog to result in
future sales, could harm our business.
Because
we depend upon our management and technical personnel for our
success, the loss of key personnel could place us at a
competitive disadvantage.
Our success depends to a significant extent upon our management
and technical personnel. The loss of a number of these key
persons could have a negative effect on our operations.
Competition is high for such personnel in our industry in all of
our locations. We periodically review our compensation and
benefit packages to ensure that they are competitive in the
marketplace and make adjustments or implement new programs for
that purpose, as appropriate. We cannot guarantee that we will
continue to attract and retain the personnel we require to
continue to grow and operate profitably.
Our
employment costs in the short-term are to a large extent fixed,
and therefore any unexpected revenue shortfall could adversely
affect our operating results.
Our operating expense levels are based in significant part on
our headcount, which generally is driven by longer-term revenue
goals. For a variety of reasons, particularly the high cost and
disruption of lay-offs and the costs of recruiting and training,
our headcount in the short-term is, to a large extent, fixed.
Accordingly, we may be unable to reduce employment costs in a
timely manner to compensate for any unexpected revenue or gross
margin shortfall, which could have a material adverse effect on
our operating results.
Because
our intellectual property is important to our success, the loss
or diminution of our intellectual property rights through legal
challenge by others or from independent development by others,
could adversely affect our business.
We attempt to protect our intellectual property rights through
patents, copyrights, trade secrets, and other measures. However,
we believe that our financial performance will depend more upon
the innovation, technological expertise, and marketing abilities
of our employees than on such protection. In connection with our
intellectual property rights, we face the following risks:
|
|
|
|
|
our pending patent applications may not be issued or may be
issued with more narrow claims;
|
|
|
|
patents issued to us may be challenged, invalidated, or
circumvented;
|
|
|
|
rights granted under issued patents may not provide competitive
advantages to us;
|
|
|
|
foreign laws may not protect our intellectual property
rights; and
|
|
|
|
others may independently develop similar products, duplicate our
products, or design around our patents.
|
As is typical in the semiconductor industry, we occasionally
receive notices from others alleging infringement claims. We
have been involved in patent infringement litigation in the past
and we could become involved in similar lawsuits or other patent
infringement claims in the future. We cannot guarantee the
outcome of such lawsuits or claims, which may have a significant
negative effect on our business or operating results.
17
We are
currently exposed to various risks related to legal proceedings
or claims.
We have in the past and may in the future be involved in legal
proceedings or claims regarding patent infringement,
intellectual property rights, contracts and other matters. These
legal proceedings and claims, whether with or without merit,
could be time-consuming and expensive to prosecute or defend,
and could divert managements attention and resources.
There can be no assurance regarding the outcome of future legal
proceedings or claims. If we are not able to resolve a claim,
negotiate a settlement of the matter, obtain necessary licenses
on commercially reasonable terms
and/or
successfully prosecute or defend its position, our business,
financial condition and results of operations could be
materially and adversely affected.
Our
sales cycle is long and unpredictable, which could require us to
incur high sales and marketing expenses with no assurance that a
sale will result.
Sales cycles for some of our products can run as long as 12 to
18 months. As a result, we may not recognize revenue from
efforts to sell particular products for extended periods of
time. We believe that the length of the sales cycle may increase
as some current and potential customers centralize purchasing
decisions into one decision-making entity. We expect this may
intensify the evaluation process and require us to make
additional sales and marketing expenditures with no assurance
that a sale will result.
We are
subject to internal controls evaluations and attestation
requirements of Section 404 of the Sarbanes-Oxley Act of
2002.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
we must perform evaluations of our internal controls over
financial reporting. Beginning as of the end of fiscal 2005 and
annually thereafter, we must include with our
Form 10-K
a report on our managements assessment of the adequacy of
such internal controls, and our independent registered public
accounting firm must publicly attest to the adequacy of
managements assessment and the effectiveness of our
internal controls. We have prepared and are implementing a plan
of action for compliance. Compliance with these requirements is
complex and time-consuming. If we fail to timely or successfully
comply with the requirements of Section 404, or if our
independent registered public accounting firm does not timely
attest to the evaluation, we could be subject to increased
regulatory scrutiny and the publics perception of us may
change.
Changes
to financial accounting standards may affect our reported
results of operations.
We prepare our financial statements to conform with accounting
principles generally accepted in the United States of America
(GAAP). The GAAP are subject to interpretation by
the American Institute of Certified Public Accountants, the
Securities and Exchange Commission, the Financial Accounting
Standards Board and various bodies formed to interpret and
create appropriate accounting policies. A change in those
policies can have a significant effect on our reported results
and may even affect our reporting of transactions completed
before a change is announced.
Accounting policies affecting many other aspects of our
business, including rules relating to purchase accounting for
business combinations, revenue recognition, in-process research
and development charges, employee stock purchase plans and stock
option grants, have recently been revised or are under review.
Changes to those rules or the questioning of our current
accounting practices may have a material adverse effect on our
reported financial results or on the way we conduct business. In
addition, our preparation of financial statements in accordance
with GAAP requires that we make estimates and assumptions that
affect the recorded amounts of assets and liabilities,
disclosure of those assets and liabilities at the date of the
financial statement and the recorded amounts of expenses during
the reporting period. A change in the facts and circumstances
surrounding those estimates could result in a change to our
estimates and could impact our future operating results.
18
We do
not intend to pay dividends.
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain any future earnings for
funding growth and, therefore, do not expect to pay any
dividends in the foreseeable future.
Item 1.B. Unresolved
Staff Comments
We do not have any unresolved staff comments.
We own a
197,000-square-foot
facility in Chaska, Minnesota. The facility contains our SC
product engineering, manufacturing, sales, administrative and
support functions. It includes a research laboratory and
40,000 square feet of Class 1,000 and 10,000 cleanroom
space, manufacturing support operations and a customer training
center.
In February 2005, we sold our 162,000 square foot facility
in Allen, Texas. Concurrent with the sale, we entered into a
sublease of approximately 45,000 square feet of space in
the facility. The lease ends on August 31, 2007. We are
currently negotiating a lease extension.
We also maintain small leased sales and service offices
throughout Europe and Asia near our customer locations.
Management believes its existing facilities are well maintained
and in good operating condition.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
We generate minor amounts of liquid and solid hazardous waste
and use licensed haulers and disposal facilities to ship and
dispose of such waste. In the past, we have received notice from
state or federal enforcement agencies that we are a potentially
responsible party (PRP) in connection with the
investigation of several hazardous waste disposal sites owned
and operated by third parties. In each matter, we have elected
to participate in settlement offers made to all de minimis
parties with respect to such sites. The risk of being named
a PRP is that if any of the other PRPs are unable to contribute
their proportionate share of the liability, if any, associated
with the site, those PRPs that are financially able could be
held financially responsible for the shortfall.
There has and continues to be substantial litigation regarding
patent and other intellectual property rights in the
microelectronics industry. Commercialization of new products or
further commercialization of our current products could provoke
claims of infringement by third parties. In the future,
litigation may be necessary to enforce patents issued to us, to
protect trade secrets or know-how owned by us or to defend us
against claimed infringement of the rights of others and to
determine the scope and validity of our proprietary rights. Any
such litigation could result in substantial costs and diversion
of our effort, which alone could have a material adverse impact
on our financial condition and operating results. Further,
adverse determinations in such litigation could result in our
loss of proprietary rights, subject us to significant
liabilities to third parties, require us to seek licenses from
third parties or prevent us from manufacturing or selling one or
more products, any of which could have a material adverse effect
on our financial condition and results of operations.
Certain of our product lines are intended for use with hazardous
chemicals. As a result, we are notified by our customers from
time to time of incidents involving our equipment that have
resulted in a spill or release of a hazardous chemical. We
maintain product liability insurance in an effort to minimize
our risk. However, in some cases it may be alleged that we or
our equipment are at fault. There can be no assurance that any
future litigation resulting from such claims would not have a
material adverse effect on our business or financial results.
19
Hsu
Litigation
In fall 1995, pursuant to the Employee Stock Purchase and
Shareholder Agreement dated November 30, 1990 between Eric
C. Hsu and Semiconductor Systems, Inc. (SSI) (the
Shareholder Agreement) and in connection with
Mr. Hsus termination of his employment with SSI in
August 1995, the former shareholders of SSI purchased the shares
of SSI common stock then held by Mr. Hsu. In April 1996, we
acquired SSI, and SSI became our wholly owned subsidiary. In
October 1996, Eric C. and Angie L. Hsu (the
plaintiffs) filed a lawsuit in the Superior Court of
California, County of Alameda, Southern Division, against SSI
and the former shareholders of SSI. The plaintiffs alleged that
such purchase breached the Shareholder Agreement and violated
the California Corporations Code, breached the fiduciary duty
owed plaintiffs by the individual defendants and constituted
fraud.
In September and October 2000, certain of Mr. Hsus
claims were tried to a jury in Alameda County Superior Court in
Oakland, California. At the conclusion of the trial, the jury
found that SSI breached the Shareholder Agreement between it and
Mr. Hsu and that the damages that resulted were
approximately $2.4 million. In addition, each of the
individual defendant shareholders was found liable for
conversion, and damages of $4.2 million were awarded.
Certain individual defendants were also found to have
intentionally interfered with Mr. Hsus prospective
economic advantage and damages of $3.2 million were
awarded. Finally, several individual defendants and SSI were
found to have violated certain provisions of the California
Corporation Code and damages of $2.4 million were awarded.
In proceedings subsequent to the trial, the Court determined
that the plaintiffs were entitled to an award against SSI of
prejudgment interest on the breach of contract damages
(approximately $2.4 million) at 10 percent per annum
from October 1996. In addition, the Court awarded plaintiffs
approximately $127,000 in costs and approximately
$1.8 million in attorneys fees against SSI and the
individual defendants. On November 16, 2001, the court
signed its final judgment reflecting the jurys awards,
interest, attorneys fees and costs assessed against each
of the defendants.
Following the entry of judgment, SSI and the other defendants
filed post-trial motions seeking reduction in the jurys
damage awards
and/or a new
trial. The court denied these post-trial motions and there was
no reduction in damages against SSI. Mr. Hsu was awarded an
additional $431,000 for attorneys fees and expenses
incurred since the judgment was rendered in November 2001.
Subsequently, SSI and the individual defendants filed an appeal
on a variety of grounds, and we posted an appeal bond on behalf
of SSI and defendants in the amount of $8.3 million. As
part of the posting of the bond, we entered into a letter of
credit in the amount of $5.2 million with a surety company.
This letter of credit was collateralized with restricted cash of
the same amount. The appellate court upheld the original
judgment.
The total judgment against SSI together with post judgment
interest and attorneys fees as of February 26, 2005
aggregated approximately $7.9 million. As a result, we
recorded a $0.3 million charge in the second quarter of
fiscal 2005. We had recorded a total of $3.3 million of
charges to operations during fiscal 2002 and fiscal 2004
associated with this litigation. During the third quarter of
fiscal 2005, we retired the 250,000 shares of our common
stock held in the escrow created at the time of our acquisition
of SSI to cover such claims. As the SSI merger was a pooling of
interests, we decreased our stockholders equity by an
amount equal to $3.0 million. On March 28, 2005, we
tendered funds totaling approximately $7.9 million to the
Hsus via a cashiers check which we believe was the full
judgment amount plus all applicable interest. This included
$1.6 million of cash provided by the individual defendants.
Subsequently, instead of depositing the cashiers check,
the Hsus filed a motion with the court to enforce the judgment
against the appeal bond and we and the individual defendants
filed a motion to release the bond. The Hsus cashed the cashiers
check in July 2005. In August 2005, the court ruled in our favor
and an acknowledgement of full satisfaction of the judgment was
filed with the court by the Hsus attorneys. The bond was
released in August 2005.
YieldUP
Patent Litigation
In September 1995, CFM Technologies, Inc. and CFMT, Inc.
(collectively CFM) filed a complaint in United
States District Court for the District of Delaware against
YieldUP, now known as SCD Mountain View,
20
Inc., our wholly owned subsidiary. CFM filed an additional
complaint against YieldUP in United States District Court for
the District of Delaware on December 30, 1998.
On January 3, 2001, Mattson Technology, Inc.
(Mattson) completed the merger of the semiconductor
equipment division of Steag Electronic Systems AG and CFM and
established its wet products division. With the merger
completed, Mattson assumed responsibility for the two suits CFM
filed against YieldUP. On March 17, 2003, SCP Global
Technologies (SCP) acquired the wet products
division of Mattson, including CFM and assumed responsibility
for the two lawsuits.
On February 19, 2004, FSI and SCP announced that they
settled the two patent infringement lawsuits pending in the
United States District Court for the District of Delaware. In an
effort to settle these lawsuits, we acknowledged the validity
and enforceability of the patents, but disputed that any of our
products infringed upon the claims of the patents.
We agreed to pay SCP $4.0 million for a release from past
infringement claims and a prospective license under all four
patents asserted against us in the two lawsuits. The release
applies to all purchasers of our products containing its Surface
Tension Gradient
(STG®)
technology. The prospective license applies to all end-user
customers of our products, subject to certain limitations. In
addition, we agreed to supply SCP customers, at a
pre-established price, our rinse/dry kits to implement
STG®
technology for certain applications.
As a result, we recorded $3.4 million in selling, general
and administrative expenses in the second quarter of fiscal
2004. We had previously recorded a $0.6 million charge to
operations associated with this litigation. We have made all
payments totaling $4.0 million as of August 26, 2006.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SHAREHOLDERS
|
There were no matters submitted to a vote of shareholders during
the fourth quarter ended August 26, 2006.
ITEM 4A. EXECUTIVE
OFFICERS OF THE COMPANY
The executive officers are elected by the board of directors,
generally for a term of one year, and serve until their
successor is elected and qualified. The following table and
discussion contains information regarding our current executive
officers.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
John C. Ely(1)
|
|
|
47
|
|
|
Vice President, Global Sales and
Service
|
Patricia M. Hollister(2)
|
|
|
46
|
|
|
Chief Financial Officer and
Assistant Secretary
|
Donald S. Mitchell(3)
|
|
|
51
|
|
|
Chairman and Chief Executive
Officer
|
Benno G. Sand(4)
|
|
|
52
|
|
|
Executive Vice President, Business
Development and Investor Relations and Secretary
|
|
|
|
(1) |
|
John Ely was named Vice President of Global Sales and Service in
June 2003. He was Executive Vice President; President, of our
Surface Conditioning Division from August 2000 to June 2003.
Mr. Ely was the Surface Conditioning Divisions Sales/
Marketing/Applications Manager from 1997 to 2000; General
Manager from 1995 to 1997; Product Specialist/Product Manager
from 1989 to 1995; and in direct sales from 1985 to 1989. Prior
to joining FSI, Mr. Ely was in sales and was the Western
Territory Manager based in California for Galtek, a subsidiary
of Entegris, Inc.. Mr. Ely is a director of mFSI, LTD
and SCD Mountain View, Inc., one of our subsidiaries. |
|
(2) |
|
Patricia Hollister has served as Chief Financial Officer since
January 1998 and as Assistant Secretary since January 2000. She
was our Corporate Controller from March 1995 to January 1998.
Prior to joining FSI, Ms. Hollister was employed by KPMG
LLP in Minneapolis, Minnesota where she served over
12 years on various audit and consulting engagements, most
recently as a Senior Manager. Ms. Hollister is a director
of various FSI-owned foreign subsidiaries as well as NVE
Corporation. |
21
|
|
|
(3) |
|
Donald Mitchell was named Chief Executive Officer and President
of FSI in December 1999 and became Chairman of the Board of
Directors for FSI in January 2002. From its formation in 1998
until December 1999, he was President of Air Products Electronic
Chemicals, Inc., a division of Pennsylvania-based Air Products
and Chemicals, Inc. From 1991 to 1998, he served as President of
Schumacher, a leading global chemical equipment and services
supplier to the semiconductor industry. Throughout his career
with Schumacher, he held various executive positions, including
Vice President of Operations and Vice President of Sales and
Marketing. Mr. Mitchell is a director of FSI and
mFSI, LTD. Mr. Mitchell is also a director of
Advanced Materials Sciences, Inc. Mr. Mitchell served as
the 1999/2000 Chairman of the Board of Directors for
Semiconductor Equipment and Materials International, a leading
global industry trade association and was a member of the Board
until July 2005. |
|
(4) |
|
Benno Sand has served as Executive Vice President, Business
Development and Investor Relations since January 2000. He has
served as Executive Vice President since January 1992 and
Secretary since March 2002. Mr. Sand also served as Chief
Administrative Officer from January 1998 to December 1999, as
Chief Financial Officer from October 1990 to January 1998, and
as Vice President of Finance from October 1987 to January 1992.
Mr. Sand is a director of various FSI-owned United States
and foreign subsidiaries as well as mFSI LTD and MathStar,
Inc. |
PART II
|
|
ITEM 5.
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Our common stock is traded on the NASDAQ Global
Marketsm
under the symbol FSII. The following table sets
forth the highest and lowest daily sale prices, as reported by
the NASDAQ Global Market for the fiscal periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
Fiscal Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
$
|
4.42
|
|
|
$
|
3.72
|
|
|
$
|
5.56
|
|
|
$
|
3.86
|
|
Second
|
|
|
5.90
|
|
|
|
4.00
|
|
|
|
4.91
|
|
|
|
3.99
|
|
Third
|
|
|
5.98
|
|
|
|
4.27
|
|
|
|
4.77
|
|
|
|
3.22
|
|
Fourth
|
|
|
7.18
|
|
|
|
4.55
|
|
|
|
4.26
|
|
|
|
3.42
|
|
There were approximately 520 record holders of our common stock
on October 23, 2006.
We have never declared or paid cash dividends on our common
stock. We currently intend to retain all earnings for use in our
business and do not anticipate paying dividends in the
foreseeable future.*
|
|
ITEM 6.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
The table that follows presents portions of our consolidated
financial statements and are not complete. You should read the
following selected consolidated financial data in conjunction
with our Consolidated Financial Statements and with
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this report. The Consolidated Statement of Operations data for
the years ended August 26, 2006, August 27, 2005 and
August 28, 2004, and the Consolidated Balance Sheet data as
of August 26, 2006 and August 27, 2005, are derived
from our Consolidated Financial Statements that have been
audited by KPMG LLP, independent registered public accounting
firm, and are included elsewhere in this report. The
Consolidated Statements of Operations data for the years ended
August 30, 2003 and August 31, 2002 and the
Consolidated Balance Sheet data as of August 28, 2004,
August 30, 2003 and August 31, 2002 are derived from
our audited consolidated financial statements which do not
appear in this report. We changed
22
our accounting for stock compensation expense effective
August 28, 2005 in accordance with Statement of Financial
Accounting Standards SFAS No. 123R, Share
Based Payments.
The historical results presented below are not necessarily
indicative of the results to be expected for any future fiscal
year or fiscal period.
Selected
Historical Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
August 26,
|
|
|
August 27,
|
|
|
August 28,
|
|
|
August 30,
|
|
|
August 31,
|
|
|
|
2006(10)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002(1)
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Consolidated Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
113,241
|
|
|
$
|
86,370
|
|
|
$
|
114,404
|
|
|
$
|
88,826
|
|
|
$
|
143,374
|
|
Gross margin(3)(5)
|
|
|
52,850
|
|
|
|
39,994
|
|
|
|
59,020
|
|
|
|
14,508
|
|
|
|
44,375
|
|
Selling, general, and
administrative expenses(6)
|
|
|
36,218
|
|
|
|
35,291
|
|
|
|
39,547
|
|
|
|
38,602
|
|
|
|
39,561
|
|
Research and development expenses
|
|
|
24,321
|
|
|
|
22,078
|
|
|
|
22,458
|
|
|
|
31,126
|
|
|
|
36,197
|
|
Gain on sale of facility(7)
|
|
|
|
|
|
|
7,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,356
|
)
|
Transition agreement termination
fee(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,750
|
)
|
|
|
|
|
Write-down of fixed assets(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,000
|
)
|
|
|
|
|
Operating loss
|
|
|
(7,689
|
)
|
|
|
(10,360
|
)
|
|
|
(2,985
|
)
|
|
|
(64,970
|
)
|
|
|
(36,739
|
)
|
Impairment of investment(4)(9)
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,195
|
)
|
|
|
|
|
Gain on marketable securities(8)
|
|
|
|
|
|
|
5,808
|
|
|
|
1,972
|
|
|
|
|
|
|
|
|
|
Equity in (losses) earnings of
affiliates
|
|
|
(274
|
)
|
|
|
450
|
|
|
|
779
|
|
|
|
(4,006
|
)
|
|
|
(15
|
)
|
Net (loss) income
|
|
$
|
(7,287
|
)
|
|
$
|
(3,302
|
)
|
|
$
|
141
|
|
|
$
|
(78,557
|
)
|
|
$
|
(34,663
|
)
|
(Loss) income per
share diluted
|
|
$
|
(0.24
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.00
|
|
|
$
|
(2.66
|
)
|
|
$
|
(1.26
|
)
|
Weighted average common shares
used in per share calculations diluted
|
|
|
30,042
|
|
|
|
29,928
|
|
|
|
30,315
|
|
|
|
29,546
|
|
|
|
27,450
|
|
Consolidated Balance Sheets
Data:
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Total assets
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$
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123,737
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$
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121,939
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$
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139,797
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$
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133,386
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$
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211,770
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Total long-term debt
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Stockholders equity
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93,972
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99,136
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110,372
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109,000
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179,632
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Dividends
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(1) |
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During fiscal 2002, we recorded realignment charges of $500,000
which were allocated as follows: $250,000 to cost of goods sold,
$230,000 to selling, general and administrative expenses and
$20,000 to research and development expenses. |
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(2) |
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During fiscal 2002, we recorded a charge of $5.4 million
related to the impairment of goodwill. |
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(3) |
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During fiscal 2003, we recorded $19.0 million to cost of
goods sold for inventory obsolescence charges related to the
wind down of the Microlithography business. We also recorded an
impairment charge of $7.0 million against the property,
plant and equipment associated with the PSS business in fiscal
2003. |
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(4) |
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During fiscal 2003, we entered into a transition agreement with
Metron Technology to terminate our distribution agreements and
recorded a termination fee of $2.75 million. In addition,
we recorded an impairment charge of $10.2 million in other
expense related to the other than temporary impairment of our
investment. |
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(5) |
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During fiscal 2006, we had sales of PSS product inventory with
an original cost of $2.1 million that had previously been
written down to zero. During fiscal 2005, we had sales of PSS
product inventory with an original cost of $0.5 million
that had been previously written down to zero. During fiscal
2004, we had |
23
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sales of PSS product inventory with an original cost of
$3.2 million that had been previously written down to zero.
During fiscal 2003, we had sales of PSS product inventory with
an original cost of $3.0 million that had been previously
written down to zero. |
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(6) |
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During fiscal 2004, we recorded $3.4 millionin selling,
general and administrative expenses related to a patent
litigation settlement. See Note 18 of the Notes to the
Consolidated Financial Statements. |
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(7) |
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During fiscal 2005, we recorded a $7.0 million gain on the
sale of the Allen, Texas facility. |
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(8) |
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During fiscal 2005, we recorded a gain of $5.8 million on
the Nortem (formerly Metron Technology) distributions. During
fiscal 2004, we recorded a gain of $2.0 million on the sale
of Metron Technology common stock. See Note 1 of the Notes
to the Consolidated Financial Statements. |
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(9) |
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During fiscal 2006, we recorded an impairment charge of
$0.5 million in other expense related to an investment in a
Malaysian foundry. |
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(10) |
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Due to the implementation of FAS 123R as of August 28,
2005, we recorded stock-based compensation expense of $54,000 in
cost of goods sold, $743,000 in selling, general and
administrative expenses and $342,000 in research and development
expenses during fiscal 2006. |
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ITEM 7.
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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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:
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revenue recognition;
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valuation of long-lived assets; and
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estimation of valuation allowances and accrued liabilities,
specifically product warranty, inventory reserves and allowance
for doubtful accounts.
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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
INCO terms. Revenues related to maintenance and service
contracts are recognized ratably over the duration of such
contracts.
24
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 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,
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 $22.8 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 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 of yet
unrecognized defects in products sold.
Inventory
Reserves Estimation
We record reserves for inventory shrinkage and for potentially
excess, obsolete and slow moving inventory. The amounts of these
reserves are based upon historical loss trends, inventory
levels, physical inventory and cycle count adjustments, expected
product lives, forecasted sales demand and recoverability.
Results could be materially different if demand for our products
decreased because of economic or competitive conditions, length
of the industry downturn, or if products become obsolete because
of technical advancements in the industry or by us.
Since we recorded the PSS product inventory reserves as a result
of the wind-down of our Microlithography business in the second
quarter of fiscal 2003, we have had sales of PSS product
inventory that had previously been written down to zero and
reductions in inventory buyback requirements of
$8.8 million and have disposed of $6.6 million of PSS
product inventory. The original cost of PSS product inventory
available for sale or to be disposed of as of August 26,
2006 that has been written down to zero was $9.5 million.
Allowance
for Doubtful Accounts Estimation
Management must make estimates of the uncollectibility of our
accounts receivable. The most significant risk is the risk of
sudden unexpected deterioration in the financial condition of a
significant customer who is not considered in the allowance.
Management specifically analyzes accounts receivable and
analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our
customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. Results could be materially
impacted if the financial condition of a significant customer
deteriorated and related accounts receivable are deemed
uncollectible. Accounts receivable are charged off after
management determines that they are uncollectible.
During fiscal 2006, we collected $336,000 of receivables that
had previously been written off resulting in a credit to
selling, general and administrative expenses.
25
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 for
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.
See Note 13 under the Notes to Consolidated Financial
Statements for additional information on stock-based
compensation.
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.
Industry
Update
Gartner Group, a leading research organization, is forecasting
that demand for semiconductors will increase approximately
11 percent to $260 billion in calendar 2006 from
$235 billion in the prior year.* The increase is being
driven by memory, optoelectronics and ASSP (Application-Specific
Standard Product) device demand. Semiconductor demand is
forecasted to grow approximately 9 percent to
$285 billion in calendar 2007.*
Gartner Group is forecasting equipment spending in calendar 2006
to increase approximately 24% to $41 billion as compared to
approximately $33 billion in calendar 2005.* Currently,
analysts have a mixed view on calendar 2007 forecasted equipment
spending, ranging from a small decline to a modest increase,
with a return to double-digit growth in calendar 2008.*
When compared to prior cycles, device manufacturers are managing
capacity increases carefully and acting quickly to delay new
equipment purchases in response to slowing demand to prevent an
inventory build-up. Device manufacturers ability to more
quickly respond to changes in demand for their product should
have a dampening effect on future industry cycles.*
We continue to monitor our extensive list of order
opportunities. With one or more of our flagship products placed
at many of the top semiconductor device manufacturers, we are
benefiting from some of these insertions. Assuming that we
execute well on existing and new evaluation opportunities, we
believe we are in position to participate as these leading
device manufacturers continue to add capacity in calendar 2007.*
26
Results
of Operations
For the fiscal year ended August 26, 2006, we had net
losses of $7.3 million as compared to net losses of
$3.3 million for the fiscal year ended August 27,
2005. For fiscal 2006, we had losses from operations of
$7.7 million as compared to losses from operations of
$10.4 million in fiscal 2005. The increase in net losses in
fiscal 2006 related to gains on marketable securities of
$5.8 million in fiscal 2005 partially offset by improved
operations related to increased sales revenue in fiscal 2006.
While improved industry conditions contributed to our improved
orders and financial performance in fiscal 2006, we also
progressed on many of the strategies we established at the
beginning of the year, including:
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Establishing a Tool Of Record status at new
customers while broadening our product position at several
existing customers;
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Deploying Best Known Methods for several targeted
process applications while expanding the overall applications
capabilities of our flagship products;
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Increased the frequency of technology roadmap exchanges with key
customers while initiating a plan to conduct our successful
Knowledge
Servicestm
Seminar in other regions of the world; and
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Reported a sequential improvement in our quarterly financial
performance in fiscal 2006 with a return to profitability in the
fourth quarter.
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We now have one or more of our flagship products placed at 14 of
the top 20 semiconductor manufacturers, ranked by calendar 2005
spending, and anticipate follow-on high volume manufacturing
orders from several of these customers in fiscal 2007.*
Sales
Revenue and Shipments
Fiscal 2006 sales revenues increased 31% to $113.2 million
as compared to $86.4 million in fiscal 2005. Sales
increased in all regions with increases in Asia of
$12.3 million and the United States of $11.6 million.
The increases in fiscal 2006 related primarily to improved
industry conditions. Fiscal 2005 sales revenues were
$86.4 million as compared to $114.4 million for fiscal
2004. The majority of the decrease in fiscal 2005 sales revenue
as compared to fiscal 2004 related to a decrease in domestic
shipments from $57.0 million in fiscal 2004 to
$31.0 million in fiscal 2005 related primarily to our
transformation, beginning in March 2003, from the
Microlithography business to a
POLARIS®
Systems and Services Product group.
Shipments were $109.7 million in fiscal 2006 as compared to
$87.6 million in fiscal 2005 and $111.1 million in
fiscal 2004.
Based upon our revenue recognition policy, certain shipments to
customers are not recognized until customer acceptance.
Therefore, depending on timing of shipments and customer
acceptances, there are time periods where shipments may exceed
sales revenue or due to timing of acceptances, sales revenue may
exceed shipments.
International sales were $70.4 million for fiscal 2006,
representing 62% of total sales during fiscal 2006,
$55.1 million for fiscal 2005, representing 64% of total
sales during fiscal 2005, and $54.3 million for fiscal
2004, representing 47% of total sales during fiscal 2004.
International sales through our affiliate, mFSI LTD,
represented approximately 8% of international sales during
fiscal 2006 and 7% of international sales during fiscal 2005.
International sales through our affiliates mFSI LTD and
Metron Technology represented 27% of international sales during
fiscal 2004.The dollar increase in international sales revenue
in fiscal 2006 as compared to fiscal 2005 was due to increases
in all regions, with the most significant increase in Asia due
to improved industry conditions. The increase in the percentage
of international sales in fiscal 2005 as compared to fiscal 2004
related primarily to the decrease in domestic sales revenue. The
increase in international sales revenue in fiscal 2005 as
compared to fiscal 2004 related to our transition to a direct
global distribution model in March 2003 as well as improved
industry conditions in international markets. Due to its broader
customer
27
base, SC products have a higher percentage of international
sales than PSS products. See Note 15 of the Notes to
Consolidated Financial Statements for additional information
regarding the Companys international sales.
We ended fiscal 2006 with a backlog of approximately
$39.8 million as compared to $19.3 million at the end
of fiscal 2005. Backlog consists of orders with delivery dates
within the next 12 months for which a customer purchase
order has been received. Because of the timing and relative size
of orders and the possibility of cancellations or customer
delays, backlog is not necessarily indicative of sales for
future periods.
As a result of the fiscal 2006 year-end backlog, deferred
revenue levels and anticipated orders of $35 to $40 million
in the first quarter of fiscal 2007, we expect first quarter
fiscal 2007 revenue to be in the range of $35 to
$40 million.* Achieving the high end of the revenue range
requires receiving purchase orders and obtaining timely
acceptance from customers for products that have been shipped.*
Gross
Margin
Our gross 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 46.7% for fiscal 2006
as compared to 46.3% for fiscal 2005 and 51.6% for fiscal 2004.
The increase in gross margins from fiscal 2005 to fiscal 2006
related to an increase in the amount of the original cost of PSS
product inventory sold that has been written down to zero from
$0.5 million in fiscal 2005 to $2.1 million in fiscal
2006, as well as an increase in our capacity utilization
associated with higher shipment levels of $109.7 million in
fiscal 2006 as compared to $87.6 million in fiscal 2005.
The increases were partially offset by lower margins on flagship
products that were sold at a discount in order to gain market
entry. The decrease in margins from fiscal 2004 to fiscal 2005
related primarily to an increase in manufacturing variances
associated with the decrease in shipments from
$111.1 million in fiscal 2004 to $87.6 million in
fiscal 2005. The decrease also related to the increase in the
percentage of international sales as well as a decrease in the
amount of the original cost of PSS product inventory sold that
had been written down to zero from $3.2 million in fiscal
2004 to $0.5 million in fiscal 2005.
We will continue to try to sell the PSS product inventory that
had previously been written down to zero to our customers as
spares, refurbished systems and upgrades to existing systems. If
unsuccessful, some of the items will be disposed. Any material
sales of the impaired inventory will be disclosed. Since we
recorded the PSS product inventory reserves as a result of the
wind-down of our Microlithography business in the second quarter
of fiscal 2003, we have had sales of PSS product inventory that
had previously been written down to zero and reductions in
inventory buyback requirements of $8.8 million and have
disposed of $6.6 million of PSS product inventory. The
original cost of PSS product inventory available for sale or to
be disposed of as of August 26, 2006 was $9.5 million.
We expect the gross profit margins for the first quarter of
fiscal 2007 to be between 41% to 43% of revenues, due to an
anticipated change in product mix and lower margins on the
initial placement of our products at strategic customers.* Our
factory utilization is not expected to change significantly, as
first quarter of fiscal 2007 shipments are expected to be in the
range of $35 to $40 million.*
Selling,
General and Administrative Expenses
Selling, general and administrative expenses in fiscal 2006 were
$36.2 million, or 32.0% of total sales, as compared to
$35.3 million, or 40.9% of total sales, in fiscal 2005 and
$39.5 million, or 34.6% of total sales, in fiscal 2004. The
increase in the dollar amount of selling, general and
administrative expenses in fiscal 2006 as compared to fiscal
2005 related to $0.7 million of stock compensation expense
which was new in fiscal 2006, depreciation of our CRM system and
increased sales and marketing expenses due to higher sales. The
decrease in selling, general and administrative expenses as a
percent of total sales in fiscal 2006 as compared to fiscal 2005
related to the increase in sales. The decrease in the dollar
amount of selling, general and administrative expenses in fiscal
2005 related primarily to the $3.4 million expense incurred
in fiscal 2004 to settle a patent infringement lawsuit in the
second quarter of fiscal 2004. The decrease also related to a
28
decrease in depreciation expense of approximately
$1.7 million primarily due to our SAP computer software
system being fully depreciated in fiscal 2004. These decreases
were partially offset by an increase in salary expense
associated with salary increases in January 2005.
Selling, general and administrative expenses for the first
quarter of fiscal 2007 are expected to be in the range of
$9.3 million to $9.5 million, as we increase our
personnel resources to support a direct presence in Israel.*
Research
and Development Expenses
Research and development expenses for fiscal 2006 were
$24.3 million, or 21.5% of total sales, as compared to
$22.1 million, or 25.6% of total sales, in fiscal 2005 and
$22.5 million, or 19.6% of total sales, in fiscal 2004. The
increase in fiscal 2006 as compared to fiscal 2005 related
primarily to our broadening the application capabilities of our
products and supporting initial product placements at customers.
In addition, we experienced an increase in engineering costs as
we prepared for and shipped our first single wafer wet cleaning
system in the fourth quarter of fiscal 2006. The minor decrease
in the dollar amount of research and development expenses in
fiscal 2005 as compared to fiscal 2004 was due primarily to the
net impact of a $1.5 million decrease in intangible asset
amortization expense associated with our fiscal 2000 acquisition
of YieldUP, offset by an increase in salary expense associated
with salary increases in January 2005 and costs associated with
new product development.
We expect research and development expenses to range from
$5.9 million to $6.1 million for the first quarter of
fiscal 2007 as we continue to invest in new applications and
product development programs and support our initial single
wafer wet product.*
Gain
on Sale of Facility
We sold our facility in Allen, Texas in the second quarter of
fiscal 2005 and received $14.4 million in net cash proceeds
from the sale. The building and property, plant and equipment
sold had a financial statement carrying value of approximately
$7.5 million at the close of the sale. We recorded a gain
of $7.0 million on the sale in the second quarter of fiscal
2005.
Gain
on Marketable Securities
Gain on marketable securities was $5.8 million in fiscal
2005. The gain resulted from the Nortem (formerly Metron
Technology) distributions in the third and fourth quarters of
fiscal 2005. Gain on sale of marketable securities was
$2.0 million in fiscal 2004. The gain resulted from the
gain on the sale of approximately 627,000 shares of Metron
Technology common stock in the first quarter of fiscal 2004.
Impairment
of Investment
We recorded a $0.5 million impairment of an investment in
fiscal 2006. We had an investment in a Malaysian foundry that
was accounted for under the cost method. The investment was
$0.5 million as of August 27, 2005. On March 22,
2006, the majority shareholder of this Malaysian foundry
announced that the foundry would merge with another foundry and
form a new entity. Subsequent to the merger announcement, we
were contacted by the majority shareholder and given the option
of selling our shares at a nominal value to the majority
shareholder or providing additional debt to the foundry as part
of a pre-merger restructuring. Based on this information, we
deemed the investment as being fully impaired as of
February 25, 2006 and recorded a loss of $0.5 million
in the second quarter of fiscal 2006. The Company sold its
shares at a nominal value to the majority shareholder during the
third quarter of fiscal 2006.
Income
Tax Expense
We recorded a tax expense of $50,000 in fiscal 2006, 2005 and
2004, primarily as a result of state taxes.
29
Our deferred tax assets on the balance sheet as of
August 26, 2006 have been fully reserved for with a
valuation allowance. We do not expect to reduce our valuation
allowance until we are consistently profitable on a quarterly
basis.*
We have net operating loss carryforwards for federal income tax
purposes of approximately $153.0 million at August 26,
2006, 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, which limits the
amount that we can offset taxable income to approximately
$1.4 million per year.
Equity
in (Losses) Earnings of Affiliate
Equity in (losses) earnings of affiliates was approximately
($274,000) for fiscal 2006, $450,000 for fiscal 2005, and
$779,000 for fiscal 2004. The losses in fiscal 2006 related
primarily to a decrease in mFSI LTD sales as well as a
change in product mix. The decrease in fiscal 2005 earnings
related to increased product development investments by
mFSI LTD.
Net
(Loss) Income
Net loss was $7.3 million in fiscal 2006 as compared to a
net loss of $3.3 million in fiscal 2005 and net income of
$0.1 million in fiscal 2004.
Based upon achieving anticipated revenue, gross margin and
operating expense levels, we expect to record a net income of
$500,000 to $1.5 million in the first quarter of fiscal
2007.*
Liquidity
and Capital Resources
Our cash, restricted cash, cash equivalents and marketable
securities were approximately $26.9 million as of
August 26, 2006, a decrease of $5.0 million from the
end of fiscal 2005. The net decrease was primarily due to
$4.3 million of cash used in operating activities and
$2.2 million in capital expenditures. The decreases were
net of $1.5 million of proceeds from the issuance of common
stock and $0.2 million dividend received from mFSI
LTD.
Accounts receivable decreased $2.1 million from the end of
fiscal 2005. The decrease in trade accounts receivable related
primarily to the timing of shipments in the fourth quarter of
fiscal 2006 as compared to the fourth quarter of fiscal 2005.
Shipments increased at the end of fiscal 2005 as compared to
being evenly distributed in the fourth quarter of fiscal 2006.
Trade receivables will fluctuate quarter to quarter depending on
individual customers timing of ship dates, payment terms
and cash flow conditions.
Inventory increased approximately $11.0 million to
$35.7 million at the end of fiscal 2006, as compared to
$24.7 million at the end of fiscal 2005. The increase in
inventory related primarily to increases in work in process and
finished goods inventory associated with higher orders and
shipment levels. In addition, the increase related to the
manufacturing ramp of our
MAGELLAN®
product which, due to its complexity, has a longer manufacturing
cycle time. Inventory reserves were $13.8 million at
August 26, 2006 as compared to reserves of
$15.3 million at the end of fiscal 2005. The decrease
related primarily to sales of PSS product inventory with an
original cost of $2.1 million that had previously been
written down to zero. The PSS product inventory reserves were
$9.5 million at August 26, 2006 as compared to
$11.7 million at the end of fiscal 2005.
Trade accounts payable increased approximately $3.6 million
to $8.8 million as of August 26, 2006 as compared to
$5.2 million at the end of fiscal 2005 related to the
increased inventory purchases.
Deferred profit was $4.1 million at the end of fiscal 2006
and $5.2 million at the end of fiscal 2005. The decrease in
deferred profit related primarily to fewer tools deferred as of
August 26, 2006 as compared to the end of fiscal 2005
related to the timing of shipments and customer acceptances.
As of August 26, 2006, our current ratio was 3.1 to 1.0,
and working capital was $63.5 million.
30
The following table provides aggregate information about our
contractual payment obligations and the periods in which
payments are due (in thousands):
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Payments Due by Period
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Less than
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1-3
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3-5
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More than
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Contractual Obligations
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Total
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1 Year
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Years
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Years
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5 Years
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Operating Lease Obligations
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$
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2,378
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$
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1,247
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$
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1,052
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$
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79
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$
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Purchase Obligations
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13,670
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13,670
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|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty Obligations
|
|
|
225
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-Term Commitments(1)
|
|
|
2,025
|
|
|
|
25
|
|
|
|
500
|
|
|
|
500
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,298
|
|
|
$
|
15,167
|
|
|
$
|
1,552
|
|
|
$
|
579
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other long-term commitments represent payments related to
minimum royalty payments or discounts granted under a license
agreement. |
Subsequent to year-end, we entered into a capital lease with
minimum lease payments of $648,000 due within twelve months and
$1,295,000 due in one to three years.
Capital expenditures were $2.2 million in fiscal 2006,
$1.8 million in fiscal 2005, and $1.7 million in
fiscal 2004. We expect capital expenditures to be less than
$2.5 million in the first quarter of fiscal 2007, including
the acceptance of a new particle counter, financed through a
capital lease, that will be used for applications development in
our SC lab.* Depreciation and amortization is expected to be
between approximately $0.9 million and $1.0 million in
the first quarter of fiscal 2007.*
At the expected revenue and expense run rate, we anticipate
using $2.0 to $3.0 million of cash for operations in the
first quarter of fiscal 2007.* This cash usage assumes that we
will reduce our current inventory levels and experience an
increase in accounts receivable from the fiscal
2006 year-end level.* We believe that with existing cash,
cash receipts, cash equivalents, marketable securities and
internally generated funds, there will be sufficient funds to
meet our currently projected working capital requirements, and
to meet other cash requirements through at least fiscal 2007.*
We believe that success in our industry requires substantial
capital to maintain the flexibility to take advantage of
opportunities as they arise. One of our strategic objectives is,
as market and business conditions warrant, to consider
divestitures, investments or acquisitions of businesses,
products or technologies, particularly those that are
complementary to our surface conditioning business.* We may fund
such activities with additional equity or debt financing.* The
sale of additional equity or debt securities, whether to
maintain flexibility or to meet strategic objectives, could
result in additional dilution to our shareholders.* We currently
do not have a line of credit arrangement.
Off-Balance
Sheet Arrangements
We do not have any off balance sheet arrangements.
New
Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 151, Inventory Costs. This
statement requires that items such as idle facility expense,
excessive spoilage, double freight and rehandling costs be
recognized as current period charges. In addition, this
statement requires that the allocation of fixed production
overheads to the cost of conversion be based on the normal
capacity of the production facilities. This statement was
effective for inventory costs incurred beginning in our first
quarter of fiscal 2006. The implementation of this statement did
not have an impact on our results of operations or financial
position.*
In December 2004, the FASB issued SFAS No. 123
(Revised 2004), Share-Based Payment.
SFAS No. 123R is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation and
supersedes Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance.
SFAS No. 123R focuses primarily on accounting for
transactions in which
31
an entity obtains employee services through share-based payment
transactions. SFAS No. 123R requires a public entity
to measure the cost of employee services received in exchange
for an award of equity instruments based on the fair value of
the award at the date of grant. The cost will be recognized over
the period during which an employee is required to provide
service in exchange for the award. SFAS No. 123R is
effective as of the beginning of the first annual reporting
period that begins after June 15, 2005 and we adopted this
standard August 28, 2005 using the modified prospective
method. Beginning in fiscal 2006, our results of operations
reflected compensation expense for new stock options granted
under our stock incentive plan, and for the unvested portion of
previous stock options granted. We recorded $1.1 million of
stock-based compensation expense in fiscal 2006.
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.
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 currently evaluating the impact
SAB No. 108 will have on our Consolidated Financial
Statements.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Our cash flows and earnings are subject to fluctuations in
foreign exchange rates due to investments in foreign-based
affiliates. As of August 26, 2006, our investments in
affiliate included a 49% interest in mFSI LTD, which
operates in Japan. We denominate the majority of our sales
outside of the U.S. in U.S. dollars.
Because we assumed direct sales, service and applications
support and logistics responsibilities for our products in
Europe and the Asia Pacific region starting in March 2003, we
have and will continue to incur labor, service and other
expenses in foreign currencies. As a result, we may be exposed
to fluctuations in foreign exchange rate risks.* As of
August 26, 2006, we had not entered into any hedging
activities and our foreign currency transaction gains and losses
for fiscal 2006 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.
We had no outstanding indebtedness as of August 26, 2006.
As of the end of fiscal 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 $269,000 based on our cash, restricted cash, cash
equivalents and marketable securities balances as of
August 26, 2006.
32
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
FSI
INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years ended August 26, 2006, August 27, 2005 and
August 28, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Sales (including sales to
affiliates of $5,924, $4,130, and $14,637, respectively)
|
|
$
|
113,241
|
|
|
$
|
86,370
|
|
|
$
|
114,404
|
|
Cost of goods sold
|
|
|
60,391
|
|
|
|
46,376
|
|
|
|
55,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
52,850
|
|
|
|
39,994
|
|
|
|
59,020
|
|
Selling, general and
administrative expenses
|
|
|
36,218
|
|
|
|
35,291
|
|
|
|
39,547
|
|
Research and development expenses
|
|
|
24,321
|
|
|
|
22,078
|
|
|
|
22,458
|
|
Gain on sale of facility
|
|
|
|
|
|
|
7,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(7,689
|
)
|
|
|
(10,360
|
)
|
|
|
(2,985
|
)
|
Interest income
|
|
|
1,132
|
|
|
|
735
|
|
|
|
310
|
|
Gain on marketable securities
|
|
|
|
|
|
|
5,808
|
|
|
|
1,972
|
|
Impairment of investment
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
94
|
|
|
|
115
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(6,963
|
)
|
|
|
(3,702
|
)
|
|
|
(588
|
)
|
Income tax expense
|
|
|
50
|
|
|
|
50
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in (losses)
earnings of affiliates
|
|
|
(7,013
|
)
|
|
|
(3,752
|
)
|
|
|
(638
|
)
|
Equity in (losses) earnings of
affiliates
|
|
|
(274
|
)
|
|
|
450
|
|
|
|
779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(7,287
|
)
|
|
$
|
(3,302
|
)
|
|
$
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.24
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.00
|
|
Diluted
|
|
$
|
(0.24
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.00
|
|
Weighted average common shares
|
|
|
30,042
|
|
|
|
29,928
|
|
|
|
29,792
|
|
Weighted average common and
potential common shares
|
|
|
30,042
|
|
|
|
29,928
|
|
|
|
30,315
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
33
FSI
INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
August 26,
|
|
|
August 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,672
|
|
|
$
|
11,352
|
|
Restricted cash
|
|
|
144
|
|
|
|
282
|
|
Marketable securities
|
|
|
11,100
|
|
|
|
20,245
|
|
Trade accounts receivable, less
allowance for doubtful accounts of $520 and $922, respectively
|
|
|
22,304
|
|
|
|
21,393
|
|
Trade accounts receivable from
affiliate
|
|
|
528
|
|
|
|
3,504
|
|
Inventories
|
|
|
35,682
|
|
|
|
24,717
|
|
Prepaid expenses and other current
assets
|
|
|
7,874
|
|
|
|
6,924
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
93,304
|
|
|
|
88,417
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
20,395
|
|
|
|
21,556
|
|
Investment in affiliate
|
|
|
7,632
|
|
|
|
8,484
|
|
Intangible assets, net
|
|
|
1,246
|
|
|
|
1,784
|
|
Deposits and other assets
|
|
|
1,160
|
|
|
|
1,698
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
123,737
|
|
|
$
|
121,939
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
8,803
|
|
|
$
|
5,203
|
|
Accrued expenses
|
|
|
11,405
|
|
|
|
11,160
|
|
Customer deposits
|
|
|
5,408
|
|
|
|
1,220
|
|
Deferred profit
|
|
|
3,758
|
|
|
|
3,980
|
|
Deferred profit with affiliate
|
|
|
391
|
|
|
|
1,240
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
29,765
|
|
|
|
22,803
|
|
Commitments and contingencies
(Notes 3 and 18)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, no par value;
9,700 shares authorized; none issued and outstanding
|
|
|
|
|
|
|
|
|
Series A Junior Participating
Preferred stock, no par value; 300 shares authorized; none
issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value;
50,000 shares authorized; issued and outstanding, 30,309
and 29,874 shares, respectively
|
|
|
225,169
|
|
|
|
223,675
|
|
Accumulated deficit
|
|
|
(132,052
|
)
|
|
|
(124,765
|
)
|
Accumulated other comprehensive
(loss) income
|
|
|
(218
|
)
|
|
|
226
|
|
Other stockholders equity
|
|
|
1,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
93,972
|
|
|
|
99,136
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
123,737
|
|
|
$
|
121,939
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
34
FSI
INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE (LOSS) INCOME
Years ended August 26, 2006, August 27, 2005 and
August 28, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Other
|
|
|
Other
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
(Loss) Income
|
|
|
Equity
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance August 30, 2003
|
|
|
29,655
|
|
|
$
|
224,717
|
|
|
$
|
(121,604
|
)
|
|
$
|
5,887
|
|
|
$
|
|
|
|
$
|
109,000
|
|
Stock issuance
|
|
|
287
|
|
|
|
1,361
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
1,361
|
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding gains
on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(984
|
)
|
|
|
|
|
|
|
(984
|
)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
854
|
|
|
|
|
|
|
|
854
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance August 28, 2004
|
|
|
29,942
|
|
|
|
226,078
|
|
|
|
(121,463
|
)
|
|
|
5,757
|
|
|
|
|
|
|
|
110,372
|
|
Stock issuance
|
|
|
182
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
628
|
|
Retirement of stock
|
|
|
(250
|
)
|
|
|
(3,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,031
|
)
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding gains
on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,243
|
)
|
|
|
|
|
|
|
(5,243
|
)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(288
|
)
|
|
|
|
|
|
|
(288
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(3,302
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance August 27, 2005
|
|
|
29,874
|
|
|
|
223,675
|
|
|
|
(124,765
|
)
|
|
|
226
|
|
|
|
|
|
|
|
99,136
|
|
Stock issuance
|
|
|
435
|
|
|
|
1,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,494
|
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(444
|
)
|
|
|
|
|
|
|
(444
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(7,287
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,731
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,073
|
|
|
|
1,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance August 26, 2006
|
|
|
30,309
|
|
|
$
|
225,169
|
|
|
$
|
(132,052
|
)
|
|
$
|
(218
|
)
|
|
$
|
1,073
|
|
|
$
|
93,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
35
FSI
INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended August 26, 2006, August 27, 2005 and
August 28, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(7,287
|
)
|
|
$
|
(3,302
|
)
|
|
$
|
141
|
|
Adjustments to reconcile net
(loss) income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
1,139
|
|
|
|
|
|
|
|
|
|
Impairment of investment
|
|
|
500
|
|
|
|
|
|
|
|
|
|
Gain on marketable securities
|
|
|
|
|
|
|
(5,808
|
)
|
|
|
(1,972
|
)
|
Gain on sale of facility
|
|
|
|
|
|
|
(7,015
|
)
|
|
|
|
|
Depreciation
|
|
|
3,389
|
|
|
|
3,630
|
|
|
|
5,654
|
|
Amortization
|
|
|
538
|
|
|
|
783
|
|
|
|
2,266
|
|
Equity in losses (earnings) of
affiliates
|
|
|
274
|
|
|
|
(450
|
)
|
|
|
(779
|
)
|
(Gain) loss on disposal of
equipment
|
|
|
|
|
|
|
(1
|
)
|
|
|
17
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
138
|
|
|
|
5,755
|
|
|
|
(2,688
|
)
|
Trade accounts receivable
|
|
|
2,065
|
|
|
|
(2,625
|
)
|
|
|
(4,694
|
)
|
Inventories
|
|
|
(10,965
|
)
|
|
|
2,662
|
|
|
|
(7,917
|
)
|
Prepaid expenses and other current
assets
|
|
|
(950
|
)
|
|
|
(1,356
|
)
|
|
|
(723
|
)
|
Trade accounts payable
|
|
|
3,600
|
|
|
|
(4,267
|
)
|
|
|
5,249
|
|
Accrued expenses
|
|
|
179
|
|
|
|
(7,867
|
)
|
|
|
962
|
|
Customer deposits
|
|
|
4,188
|
|
|
|
965
|
|
|
|
255
|
|
Deferred profit
|
|
|
(1,071
|
)
|
|
|
1,613
|
|
|
|
(1,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(4,263
|
)
|
|
|
(17,283
|
)
|
|
|
(5,657
|
)
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(2,228
|
)
|
|
|
(1,755
|
)
|
|
|
(1,723
|
)
|
Purchase of marketable securities
|
|
|
(292,250
|
)
|
|
|
(440,774
|
)
|
|
|
(311,218
|
)
|
Sale of marketable securities
|
|
|
301,395
|
|
|
|
439,709
|
|
|
|
318,548
|
|
Dividend from affiliate
|
|
|
208
|
|
|
|
|
|
|
|
|
|
Proceeds on marketable securities
distribution
|
|
|
|
|
|
|
7,212
|
|
|
|
|
|
Investment in affiliate
|
|
|
|
|
|
|
(490
|
)
|
|
|
|
|
Investment in license fee
|
|
|
|
|
|
|
(510
|
)
|
|
|
|
|
Decrease (increase) in deposits
and other assets
|
|
|
38
|
|
|
|
(46
|
)
|
|
|
596
|
|
Proceeds from sale of property,
plant and equipment
|
|
|
|
|
|
|
14,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing
activities
|
|
|
7,163
|
|
|
|
17,751
|
|
|
|
6,203
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of
common stock
|
|
|
1,494
|
|
|
|
628
|
|
|
|
1,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
1,494
|
|
|
|
628
|
|
|
|
1,361
|
|
Effect of exchange rate on cash
|
|
|
(74
|
)
|
|
|
(88
|
)
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash
equivalents
|
|
|
4,320
|
|
|
|
1,008
|
|
|
|
2,103
|
|
Cash and cash equivalents at
beginning of year
|
|
|
11,352
|
|
|
|
10,344
|
|
|
|
8,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
15,672
|
|
|
$
|
11,352
|
|
|
$
|
10,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
36
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended August 26, 2006, August 27, 2005
and August 28, 2004
(1) Description
of Business and Summary of Significant Accounting
Policies
Description
of Business
FSI International, Inc. (the Company) is a global
supplier of surface conditioning equipment (process equipment
used to etch and clean organic and inorganic materials from the
surface of a silicon wafer) 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 wafer in multiple tanks filled
with process chemicals), spray (sprays chemical mixtures, water
and nitrogen in a variety of sequences on to the microelectronic
substrate), vapor (utilizes gas phase chemistries to selectively
remove sacrificial surface films) and CryoKinetic (a momentum
transfer process used to remove non-chemically bonded particles
from the surface of a microelectronic device). The
Companys support services programs provide product and
process enhancements to extend the life of installed FSI
equipment.
The Company announced the winding down of its Microlithography
business in March 2003 and transitioned the Microlithography
(uses light to transfer a circuit pattern unto a wafer) business
to a
POLARIS®
Systems and Services (PSS) organization to focus on
supporting the more than 300 installed
POLARIS®
Systems, including refurbishments, upgrades, training and spares.
The Companys customers include microelectronics
manufacturers located throughout North America, Europe, Japan
and the Asia Pacific region.
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of FSI International, Inc. and its wholly owned
subsidiaries, FSI International Asia, Ltd., FSI International
Semiconductor Equipment Pte. Ltd., FSI International
(France) SARL, FSI International (Germany) GmbH, FSI
International (Italy) S.r.l., FSI International (Holding)
B.V., FSI International Netherlands B.V., FSI International (UK)
Limited, FSI International (Shanghai) Co., Ltd., FSI
International (Korea) Co., Ltd., FSI International Israel, Ltd.,
SCD Mountain View, Inc., Semiconductor Systems, Inc., and its
branch office, FSI Malaysia SDN GHD. All significant
intercompany balances and transactions have been eliminated in
consolidation. During fiscal 2005, the Company closed FSI
International, Ltd., a foreign sales corporation (FSC). During
fiscal 2004, the Company closed the Shanghai Representative
Office of FSI International, Inc. and the Tianjin Representative
Office of FSI International, Inc.
The Companys fiscal year ends on the last Saturday in
August and is comprised of 52 or 53 weeks. Fiscal 2006,
2005 and 2004 consisted of
52-week
periods.
Revenue
Recognition
The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred or services have been
rendered, the purchase price is fixed or determinable and
collectibility is reasonably assured. If the Companys
equipment sales involve sales to its existing customers who have
previously accepted the same type(s) of equipment with the same
type(s) of specifications, the Company accounts for the product
sale as a multiple element arrangement. 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. The Company recognizes
the equipment revenue upon shipment and transfer of title. The
other elements may 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 labor has been completed and the
37
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
equipment has been accepted by the customer. Training revenue is
valued based on published training class prices and is
recognized when the customers complete the training classes or
when a customer-specific training period has expired. The
published or quoted service labor rates and training class
prices are rates actually charged and billed to the
Companys customers.
All other product sales with customer specific acceptance
provisions are recognized upon customer acceptance. Revenue
related to spare parts sales is recognized upon shipment or
delivery based on the INCO terms. Revenue related to maintenance
and service contracts are recognized ratably over the duration
of the contracts.
Other
Comprehensive (Loss) Income
Other comprehensive (loss) income pertains to revenues,
expenses, gains, and losses that are not included in net (loss)
income, but rather are recorded directly in stockholders
equity. For fiscal 2006, 2005 and 2004, other comprehensive
(loss) income consisted of foreign currency translation
adjustments and unrealized holding gains on investments.
Cash
and Cash Equivalents
All highly liquid investments purchased with an original
maturity of three months or less are considered to be cash
equivalents.
Marketable
Securities
Upon completion of the termination of the distribution
agreements with Metron Technology in fiscal 2003, the
Companys ownership in Metron Technology was reduced from
approximately 21% to 17%. As a result, the Company began to
account for its investment in Metron Technology as a marketable
equity security
available-for-sale
and carry the investment at fair market value per the closing
price of Metron Technologys stock as reported on the
Nasdaq National Market.
During the first quarter of fiscal 2004, the Company sold
627,000 shares of Metron Technology stock and its ownership
in Metron Technology was approximately 12% as of August 28,
2004. The Company recorded gains in other income,
net of approximately $2.0 million related to the
sales of the 627,000 shares of Metron Technology stock
during the first quarter of fiscal 2004. As of August 28,
2004, the fair market value of its investment in Metron
Technology was $6,647,000, including unrealized holding gains of
$5,243,000.
On August 16, 2004, Metron Technology entered into a Stock
and Asset Purchase Agreement (Purchase Agreement)
with Applied Materials, Inc. (Applied). On
December 14, 2004, Applied, pursuant to the Purchase
Agreement, acquired the worldwide operating subsidiaries and
business of Metron Technology. Applied paid $84.6 million
in cash to Metron Technology upon closing on December 14,
2004. In connection with the consummation of the asset sale to
Applied, Metron Technology changed its name to Nortem N.V.
(Nortem) and began a liquidation process. Nortem was
delisted from the Nasdaq National Market on April 15, 2005
and began trading
over-the-counter.
Shareholders of Nortem received two liquidating distributions.
The initial distribution was made on March 14, 2005 at
$3.75 per share. The Company received $5.6 million and
recorded a gain of $4.2 million in the third quarter of
fiscal 2005. In June 2005, the Company received the final
distribution from Nortem, net of certain Dutch withholding
taxes. A portion of the final distribution was deemed a
dividend, and that portion was subject to withholding tax. The
net distribution was approximately $1.02 per share. The
Company recorded a gain of $1.6 million in the fourth
quarter of fiscal 2005 related to this final distribution.
38
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Allowance
for Doubtful Accounts
The Company makes estimates of the uncollectibility of accounts
receivable. Management specifically analyzes accounts receivable
and analyzes historical bad debts, customer concentrations,
customer credit-worthiness, current economic trends and changes
in customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. Accounts receivable are charged
off after management determines that they are uncollectible.
A rollforward of the allowance for doubtful accounts for the
fiscal years ended August 26, 2006, August 27, 2005
and August 28, 2004 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
|
|
|
at End
|
|
|
|
of Year
|
|
|
Recoveries
|
|
|
Additions
|
|
|
Deletions
|
|
|
of Year
|
|
|
Fiscal year ended August 26,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
(Deducted from accounts receivable)
|
|
$
|
922
|
|
|
$
|
(336
|
)
|
|
$
|
(29
|
)
|
|
$
|
(37
|
)
|
|
$
|
520
|
|
Fiscal year ended August 27,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
(Deducted from accounts receivable)
|
|
$
|
1,286
|
|
|
$
|
|
|
|
$
|
(265
|
)
|
|
$
|
(99
|
)
|
|
$
|
922
|
|
Fiscal year ended August 28,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
(Deducted from accounts receivable)
|
|
$
|
1,235
|
|
|
$
|
|
|
|
$
|
235
|
|
|
$
|
(184
|
)
|
|
$
|
1,286
|
|
During fiscal 2006, we collected $336,000 of receivables that
had previously been written down to zero, resulting in a credit
to selling, general and administrative expenses.
Inventories
Inventories are valued at the lower of cost, determined by the
first in, first out method, or net realizable value. The Company
records reserves for inventory shrinkage and for potentially
excess, obsolete and slow moving inventory. The amounts of these
reserves are based upon historical loss trends, inventory
levels, physical inventory and cycle count adjustments, expected
product lives, forecasted sales demand and recoverability.
Property,
Plant and Equipment
Building and related costs are carried at cost and depreciated
on a straight-line basis over a 5 to
30-year
period. Leasehold improvements are carried at cost and
depreciated over a three- to five-year period or the term of the
underlying lease, whichever is shorter. All other property,
plant and equipment assets are carried at cost and depreciated
on a straight-line method over their estimated economic lives.
Principal economic lives for these assets are one to seven
years. Software developed for internal use is depreciated over
three to five years beginning when the system is placed in
service. Maintenance and repairs are expensed as incurred;
significant renewals and improvements are capitalized.
Intangible
Assets
The Company amortizes intangible assets on a straight-line basis
over their estimated economic lives which range from two to nine
years.
39
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impairment
of Long-Lived Assets
The Company assesses the impairment of long-lived assets,
including identifiable intangible assets, whenever events or
changes in circumstances indicate that the carrying value may
not be recoverable.
The Company routinely considers whether indicators of impairment
of its property and equipment assets are present. If such
indicators are present, the Company determines whether the sum
of the estimated undiscounted cash flows attributable to the
asset in question is less than the carrying value of the asset.
If less, an impairment loss is recognized based on the excess of
the carrying amount of the asset over its fair value. Fair value
is determined by discounted estimated future cash flows,
appraisals or other methods deemed appropriate. If the asset
determined to be impaired is to be held and used, the Company
recognizes an impairment charge to the extent the present value
of anticipated net cash flows attributable to the asset is less
than the assets carrying value. Net intangible assets and
long-lived assets amounted to $22.8 million as of
August 26, 2006.
Investment
in Affiliate
The Companys investment in affiliated companies consists
of a 49% interest in mFSI LTD. This investment is
accounted for by the equity method utilizing a two-month lag due
to the affiliates year end.
The Company defers recognition of the revenue and cost of goods
sold on sales to mFSI LTD which remain in mFSI
LTDs inventory based on the Companys ownership
percentage of mFSI LTD.
The book value of the Companys long-term investment in
affiliate is reviewed for other than temporary impairment
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable.
Income
Taxes
Deferred income taxes are provided in amounts sufficient to give
effect to temporary differences between financial and tax
reporting. The Company accounts for tax credits as reductions of
income tax expense in the year in which such credits are
allowable for tax purposes.
The Companys effective income tax rate is based on income,
statutory tax rates and tax planning opportunities available to
it in the various jurisdictions in which it operates. The
Company has established valuation allowances against a portion
of the U.S. and
non-U.S. net
operating losses to reflect the uncertainty of its ability to
fully utilize these benefits given the limited carryforward
periods permitted by the various jurisdictions. The evaluation
of the realizability of the Companys 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. The Company has 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 the Companys
results of operations and cash flows for that period.*
Product
Warranty
The Company, in general, warrants new equipment manufactured by
the Company to the original purchaser to be free from defects in
material and workmanship for six months to two years, depending
upon the product or customer agreement. Provision is made for
the estimated cost of maintaining product warranties at the time
the product is sold. Special warranty reserves are also accrued
for major rework campaigns.
40
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Warranty provisions, claims and changes in estimates for the
fiscal years ended August 26, 2006, August 27, 2005,
and August 28, 2004 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 26,
|
|
|
August 27,
|
|
|
August 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Beginning balance
|
|
$
|
4,117
|
|
|
$
|
4,575
|
|
|
$
|
5,201
|
|
Warranty provisions
|
|
|
1,947
|
|
|
|
1,210
|
|
|
|
1,318
|
|
Warranty claims
|
|
|
(2,265
|
)
|
|
|
(1,702
|
)
|
|
|
(1,734
|
)
|
Changes in estimates
|
|
|
165
|
|
|
|
34
|
|
|
|
(210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
3,964
|
|
|
$
|
4,117
|
|
|
$
|
4,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translation
For each of our foreign operating subsidiaries the functional
currency is generally its local currency. Assets and liabilities
of foreign operations are translated into U.S. dollars
using month-end exchange rates, and revenue and expenses are
translated into U.S. dollars using average exchange rates.
The effects of foreign currency translation adjustments are
included as a component of accumulated other comprehensive
(loss) income in stockholders equity.
Foreign currency transaction gains and losses are a result of
the effect of exchange rate changes on transactions denominated
in currencies other than the functional currency. Foreign
currency transaction gains (losses) are included in other
income, net.
(Loss)
Income Per Common Share
Basic (loss) income per share is computed by dividing net (loss)
income by the weighted average number of shares of common stock
outstanding during the period. Diluted (loss) income per common
share is computed using the treasury stock method to compute the
weighted average number of common stock outstanding assuming the
conversion of potential dilutive common shares. Diluted loss per
common share for fiscal years 2006 and 2005 does not include the
effect of potential dilutive common shares as their inclusion
would be antidilutive. The number of potential dilutive common
shares excluded from the computation of diluted loss per share
was 3,699,000 for fiscal 2006 and 4,001,000 for fiscal 2005. The
number of potential dilutive common shares included in the
computation of diluted income per share was 523,000 for fiscal
2004. Options to purchase 3,244,000 shares of common stock
were outstanding in fiscal 2004 but were not included in the
computation of diluted income per common share because the
exercise price of the options exceeds the average market price
and would have been antidilutive.
Derivative
Instruments and Hedging Activities
The Company does not use derivative financial instruments for
trading or speculative purposes. The Company did not engage in
any hedging activities during fiscal 2006, 2005, or 2004.
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.
41
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Employee
Stock Plans
On March 25, 2005, the Compensation Committee of the Board
of Directors of the Company approved the accelerated vesting of
all unvested options that had an exercise price of $4.06 or
greater held by current employees as of March 25, 2005. The
accelerated vesting affected options with respect to
approximately 857,000 shares of the Companys common
stock. The acceleration of options in the third quarter of
fiscal 2005 resulted in higher pro forma stock-based employee
compensation expense in fiscal 2005 than there would have been
had the Company not accelerated the options. The Company
accelerated the vesting of the identified stock options in
fiscal 2005 because it resulted in lower compensation charges in
future periods under SFAS No. 123R.
On August 28, 2005, the Company adopted the fair value
recognition provisions of SFAS No. 123R,
Share-Based Payment, using the modified prospective
method. As a result, for fiscal 2006, the Companys results
of operations reflect compensation expense for new stock options
granted and vested under its stock incentive plan and employees
stock purchase plan during fiscal 2006 and the unvested portion
of previous stock option grants which vested during fiscal 2006.
New
Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 151,
Inventory Costs. This statement requires that items
such as idle facility expense, excessive spoilage, double
freight and rehandling costs be recognized as current period
charges. In addition, this statement requires that the
allocation of fixed production overheads to the cost of
conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs
incurred beginning in the Companys first quarter of fiscal
2006. The implementation of this statement did not have an
impact on the Companys results of operation or financial
condition.
In December 2004, the FASB issues SFAS No. 123
(Revised 2004), Share-Based Payment.
SFAS No. 123R is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation and
supersedes Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance,
SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services
through share-based payment transactions.
SFAS No. 123R requires a public entity to measure the
cost of employee services received in exchange for an award of
equity instruments based on the fair value of the award at the
date of grant. The cost will be recognized over the period
during which an employee is required to provide service in
exchange for the award. SFAS No. 123R is effective as
of the beginning of the first annual reporting period that
begins after June 15, 2005, and the Company adopted this
standard August 28, 2005 using the modified prospective
method. Beginning in fiscal 2006, the Companys results of
operations reflected compensation expense for new stock options
granted under our stock incentive plan, and for the unvested
portion of previous stock options granted. The Company recorded
$1.1 million of stock-based compensation expense in fiscal
2006.
In June 2006, the 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 the Company
beginning in fiscal year 2008. The Company is still evaluating
the impact that the adoption of this pronouncement will have on
its financial statements.
42
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 currently evaluating the impact
SAB No. 108 will have on our Consolidated Financial
Statements.
Reclassifications
Certain fiscal 2005 and 2004 amounts have been reclassified to
conform to the current year presentation.
(2) Sale
of Allen Facility
In the second quarter of fiscal 2003, when the Company decided
to exit the resist processing market, an impairment charge of
$7.0 million was recorded against property, plant and
equipment. This write-down included a $5.0 million
impairment charge for the Microlithography business facility in
Allen, Texas. As part of the Companys analysis, management
had a competitive market overview performed and reviewed office
buildings currently on the market and available for lease or
sale. The impairment charge was based upon the Companys
estimate of fair value of the facility. In estimating the fair
value of the facility, the Company assumed the building would be
marketed as office space and that the special-purpose space,
such as the clean rooms and laboratories, would be converted to
office space. This assumption was made based upon the low demand
in the area for clean room facilities and considered the
electronics industry downturn that occurred in 2001 and 2002.
The Company did not expect that it would find a buyer that would
utilize the special purpose space.
During the second quarter of fiscal 2003, the Company also
recorded an impairment charge of $2.0 million on the
Microlithography business equipment based upon managements
review of its business equipment and its estimated fair value.
After two years of marketing the building, in February 2005 the
Company sold its 162,000 square foot Allen, Texas facility,
together with the majority of the business equipment for its
special-purpose clean room facility space, to an electronics
industry buyer and received approximately $14.4 million in
net cash proceeds from the sale. The sale price was in excess of
the value the Company had assumed for office space use. The
building and property, plant and equipment sold had a financial
statement carrying value of approximately $7.5 million as
of the closing date of the sale. The Company retained ownership
of approximately four acres of land adjacent to the site. The
Company recorded a gain of $7.0 million on the sale.
Concurrent with the sale, the Company entered into a sublease of
approximately 45,000 square feet of space in the facility
for the Companys
POLARIS®
system and service operations. As the present value of the
leaseback rentals was less than 10% of the fair value of the
facility, it was considered minor, and the entire gain of
approximately $7.0 million was recognized upon the close of
the sale. The sublease expires on August 31, 2007; however,
the Company is currently negotiating to extend the term.
(3) Concentration
of Risk and Financial Instruments
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash equivalents, marketable securities and trade accounts
receivable.
The Companys customers consist of microelectronics
manufacturers located throughout the world. The Company performs
ongoing credit evaluations of its customers financial
conditions and generally requires no
43
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
collateral from them. The Company maintains an allowance for
doubtful accounts receivable based upon expected collectibility
of all accounts receivable.
The Company invests in a variety of financial instruments such
as municipal bonds, auction-rate securities, commercial paper
and money market fund shares. The Company, by policy, limits the
amount of credit exposure with any one financial or commercial
issuer.
The carrying value of the Companys financial instruments
reflected on the balance sheet, including cash, cash
equivalents, marketable securities, accounts receivable,
accounts payable and accrued expenses, approximate fair value at
August 26, 2006, due to their short maturities.
As of August 26, 2006 and August 27, 2005, all
marketable securities were classified as
available-for-sale.
The carrying amount of marketable securities was $11,100,000 as
of August 26, 2006 and $20,245,000 as of August 27,
2005.
Gross unrealized holding gains were immaterial as of
August 26, 2006 and August 27, 2005. The Company
manages its cash equivalents and short-term investments as a
single portfolio of highly marketable securities, all of which
are intended to be available to meet the Companys current
cash requirements.
(4) Related
Party Transactions and Lease Commitments
Related
Party Transactions
The Company sold approximately $5,924,000 in fiscal 2006 and
$4,130,000 in fiscal 2005 of its products in the aggregate to
mFSI LTD. The Company sold approximately $14,637,000 in
fiscal 2004 of its products in the aggregate to mFSI LTD
and Metron Technology. Trade accounts receivable from affiliates
was $528,000 at August 26, 2006 and $3,504,000 at
August 27, 2005 and deferred profit with mFSI LTD was
$391,000 at August 26, 2006 and $1,240,000 at
August 27, 2005.
As of August 26, 2006 and August 27, 2005, the Company
did not have any outstanding loans with mFSI LTD.
Lease
Commitments
The Company has operating lease agreements for equipment and
manufacturing and office facilities. The future net minimum
lease payments for all leases with noncancellable lease terms in
excess of one year at August 26, 2006 are as follows (in
thousands):
|
|
|
|
|
Fiscal Year Ending August:
|
|
|
|
|
2007
|
|
$
|
1,247
|
|
2008
|
|
|
728
|
|
2009
|
|
|
324
|
|
2010
|
|
|
72
|
|
2011
|
|
|
7
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
2,378
|
|
|
|
|
|
|
Rental expense for all operating leases consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
August 26,
|
|
August 27,
|
|
August 28,
|
|
|
2006
|
|
2005
|
|
2004
|
|
Rent expense for operating leases
|
|
$
|
1,735
|
|
|
$
|
1,552
|
|
|
$
|
1,557
|
|
44
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Subsequent to year-end, the Company entered into a capital lease
with minimum lease payment of $648,000 in fiscal 2007, $648,000
in fiscal 2008 and $647,000 in fiscal 2009.
(5) Inventories
Inventories are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 26,
|
|
|
August 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
Finished goods
|
|
$
|
4,756
|
|
|
$
|
2,329
|
|
Work in process
|
|
|
17,435
|
|
|
|
9,971
|
|
Subassemblies
|
|
|
2,911
|
|
|
|
1,146
|
|
Raw materials and purchased parts
|
|
|
10,580
|
|
|
|
11,271
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,682
|
|
|
$
|
24,717
|
|
|
|
|
|
|
|
|
|
|
(6) Property,
Plant and Equipment
The components of property, plant and equipment are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 26,
|
|
|
August 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
$
|
224
|
|
|
$
|
224
|
|
Building and leasehold improvements
|
|
|
32,749
|
|
|
|
32,725
|
|
Office furniture and equipment
|
|
|
4,477
|
|
|
|
4,539
|
|
Computer hardware and software
|
|
|
19,850
|
|
|
|
19,299
|
|
Manufacturing equipment
|
|
|
1,969
|
|
|
|
1,959
|
|
Lab equipment
|
|
|
17,303
|
|
|
|
16,774
|
|
Tooling
|
|
|
515
|
|
|
|
492
|
|
Capital programs in progress
|
|
|
233
|
|
|
|
1,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,320
|
|
|
|
77,726
|
|
Less accumulated depreciation and
amortization
|
|
|
(56,925
|
)
|
|
|
(56,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,395
|
|
|
$
|
21,556
|
|
|
|
|
|
|
|
|
|
|
(7) Intangible
Assets
The Company amortizes intangible assets on a straight-line basis
over their estimated economic lives which range from two to nine
years. The estimated aggregate amortization of intangible assets
for the next four years is $537,000 in fiscal 2007, $538,000 in
fiscal 2008, $163,000 in fiscal 2009 and $8,000 in fiscal 2010.
45
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has no intangible assets with indefinite useful
lives. Intangible assets as of August 26, 2006 and
August 27, 2005 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 26, 2006
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Developed technology
|
|
$
|
9,150
|
|
|
$
|
9,150
|
|
|
$
|
|
|
Patents
|
|
|
4,285
|
|
|
|
3,353
|
|
|
|
932
|
|
License fees
|
|
|
1,010
|
|
|
|
696
|
|
|
|
314
|
|
Other
|
|
|
420
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,865
|
|
|
$
|
13,619
|
|
|
$
|
1,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 27, 2005
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Developed technology
|
|
$
|
9,150
|
|
|
$
|
9,150
|
|
|
$
|
|
|
Patents
|
|
|
4,285
|
|
|
|
2,918
|
|
|
|
1,367
|
|
License fees
|
|
|
1,010
|
|
|
|
593
|
|
|
|
417
|
|
Other
|
|
|
420
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,865
|
|
|
$
|
13,081
|
|
|
$
|
1,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8) Investments
in Affiliate
The Company owns a 49% equity interest in mFSI LTD, a
Japanese joint venture company formed in 1991 with MBK Project
Holdings LTD. (formerly Mitsui & Co., Ltd.) and its
wholly-owned subsidiary, Chlorine Engineers Corp., Ltd.
(collectively, Mitsui). Mitsui owns a 51% equity
interest in mFSI LTD. In connection with its formation,
the Company and Mitsui granted mFSI certain product and
technology licenses and product distribution rights. mFSI
also distributes products of other manufacturers and its own
internally developed products. In September 2004, mFSI LTD
granted the Company exclusive rights to distribute certain
products outside of Japan and an exclusive license covering the
patents and related technology with regard to certain products
for use outside of Japan.
A summary of assets, liabilities and results of operations for
mFSI LTD, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Current assets
|
|
$
|
27,764
|
|
|
$
|
20,095
|
|
Noncurrent assets
|
|
|
14,844
|
|
|
|
16,915
|
|
Current liabilities
|
|
|
22,732
|
|
|
|
14,791
|
|
Noncurrent liabilities
|
|
|
4,305
|
|
|
|
6,070
|
|
Total stockholders equity
|
|
|
15,571
|
|
|
|
16,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2006
|
|
2005
|
|
2004
|
|
Sales
|
|
$
|
34,484
|
|
|
$
|
46,117
|
|
|
$
|
43,892
|
|
Net (loss) income
|
|
|
(360
|
)
|
|
|
1,186
|
|
|
|
1,325
|
|
At the completion of the transition with Metron Technology, the
Companys ownership interest in Metron Technology was
reduced from approximately 21% to approximately 17%. Due to the
utilization of a
46
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
three-month
lag, the Company continued to account for its investment in
Metron Technology by the equity method through the third quarter
of fiscal 2003. In the fourth quarter of fiscal 2003, the
Company began to account for its investment in Metron Technology
as a marketable equity security
available-for-sale
and carried the investment at fair market value based on the
closing price of Metron Technologys stock as reported on
the Nasdaq Global
Marketsm.
The Company recorded the change in the fair market value in
other comprehensive (loss) income. During fiscal 2005, the
worldwide operating subsidiaries and business of Metron
Technology were purchased by Applied Materials, Inc.
(9) Accrued
Expenses
Accrued expenses are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 26,
|
|
|
August 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
Commissions
|
|
$
|
179
|
|
|
$
|
243
|
|
Salaries and benefits
|
|
|
3,667
|
|
|
|
2,707
|
|
Product warranty
|
|
|
3,964
|
|
|
|
4,117
|
|
Professional fees
|
|
|
489
|
|
|
|
719
|
|
Patent litigation
|
|
|
|
|
|
|
750
|
|
Income taxes
|
|
|
1,260
|
|
|
|
1,264
|
|
Other
|
|
|
1,846
|
|
|
|
1,360
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,405
|
|
|
$
|
11,160
|
|
|
|
|
|
|
|
|
|
|
(10) Deferred
Profit
Deferred profit as of the end of the fiscal year consists of (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
August 26,
|
|
|
August 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred revenue
|
|
$
|
5,163
|
|
|
$
|
8,764
|
|
Deferred cost of goods sold
|
|
|
(1,014
|
)
|
|
|
(3,544
|
)
|
|
|
|
|
|
|
|
|
|
Deferred profit
|
|
$
|
4,149
|
|
|
$
|
5,220
|
|
|
|
|
|
|
|
|
|
|
(11) Income
Taxes
Loss before income taxes was derived from the following sources
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
August 26,
|
|
|
August 27,
|
|
|
August 28,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Domestic
|
|
$
|
(3,521
|
)
|
|
$
|
(108
|
)
|
|
$
|
2,994
|
|
Foreign
|
|
|
(3,442
|
)
|
|
|
(3,594
|
)
|
|
|
(3,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(6,963
|
)
|
|
$
|
(3,702
|
)
|
|
$
|
(588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income tax expense is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
August 26,
|
|
|
August 27,
|
|
|
August 28,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
50
|
|
|
|
50
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
50
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50
|
|
|
$
|
50
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at August 26, 2006 and August 27, 2005 are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 26,
|
|
|
August 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
6,085
|
|
|
$
|
6,279
|
|
Deferred profit
|
|
|
604
|
|
|
|
1,332
|
|
Accounts receivable
|
|
|
198
|
|
|
|
350
|
|
Property, plant and equipment, net
|
|
|
109
|
|
|
|
77
|
|
Research and development credit
carryforwards
|
|
|
2,450
|
|
|
|
2,370
|
|
Net operating loss carryforwards
|
|
|
61,200
|
|
|
|
58,207
|
|
Accruals
|
|
|
2,114
|
|
|
|
2,296
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
72,760
|
|
|
|
70,911
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
354
|
|
|
|
520
|
|
Other, net
|
|
|
156
|
|
|
|
155
|
|
Investment in foreign affiliate
|
|
|
2,043
|
|
|
|
2,099
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax
liabilities
|
|
|
2,553
|
|
|
|
2,774
|
|
Less valuation allowance
|
|
|
(70,207
|
)
|
|
|
(68,137
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
48
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effective income tax expense differs from the expected
statutory federal income tax as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
August 26,
|
|
|
August 27,
|
|
|
August 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Expected federal income tax benefit
|
|
$
|
(2,437
|
)
|
|
$
|
(1,296
|
)
|
|
$
|
(206
|
)
|
State income tax benefit before
valuation allowance
|
|
|
(185
|
)
|
|
|
(106
|
)
|
|
|
(15
|
)
|
Research activities credit
|
|
|
(50
|
)
|
|
|
|
|
|
|
(100
|
)
|
Valuation allowance change
|
|
|
2,261
|
|
|
|
1,384
|
|
|
|
312
|
|
Other items, net
|
|
|
461
|
|
|
|
68
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50
|
|
|
$
|
50
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded a tax liability of $50,000 for each of
fiscal 2006, 2005 and 2004, which is the result of state taxes.
The Company has net operating loss carryforwards for federal
purposes of approximately $153.0 million at August 26,
2006, 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. The Company has net
operating loss carryforwards for state purposes of approximately
$68.6 million which will expire at various times, beginning
with fiscal year 2007, if not utilized.
The Company maintains a valuation allowance to fully reserve
against its net deferred tax assets due to uncertainty over the
ability to realize these assets. The change in the valuation
allowance during the fiscal year 2006 was $2.1 million.
Included in the August 26, 2006 valuation allowance balance
of $70.2 million is $3.6 million, which will be
recorded as a credit to paid-in capital, if it is determined in
the future that this portion of the valuation allowance is no
longer required. Additionally, $0.9 million of the
valuation allowance is attributable to net deferred tax assets
the Company obtained through its acquisition of YieldUP; if it
is determined in the future that this portion of the valuation
allowance is no longer required, the offset will be recorded as
a reduction of other intangible assets.
(12) Retirement
Plans
The Company has an Employee 401(k) Retirement Plan, which allows
for discretionary profit sharing contributions, covering
eligible employees. Contributions under the plans are determined
by means of a formula or at the discretion of the Board of
Directors. Beginning in January 2005, the Company contributed 3%
of employee salaries to the 401(k). The Company contributed
approximately $869,000 in fiscal 2006 and $517,000 in fiscal
2005. There were no contributions by the Company in fiscal 2004.
In addition, the Company has statutory pension plans in Europe
and Asia.
(13) Stock
Options
The Companys 1997 Omnibus Stock Plan (the Plan), which was
approved by the Companys stockholders, authorizes
stock-based awards (Awards) to purchase up to
5,100,000 shares of the Companys common stock. In
addition, the Company has awards outstanding under inactive
plans. Under the Plan, the Plan Committee has the power to make
Awards, to determine when and to whom Awards will be granted,
the form of each Award, the amount of each Award, and any other
terms or conditions of each Award consistent with the Plan.
Awards generally vest over a three year period and expire in ten
years.
49
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On August 28, 2005, the Company adopted the fair value
recognition provisions of SFAS No. 123R,
Share-Based Payment, using the modified prospective
method. As a result, for the year ended August 26, 2006,
the Companys results of operations reflected compensation
expense for new stock options granted and vested under its stock
incentive plan and employees stock purchase plan during fiscal
2006 and the unvested portion of previous stock option grants
which vested during fiscal 2006. Amounts recognized in the
statement of operations for fiscal 2006 related to stock-based
compensation are as follows (in thousands, except for per share
data):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
August 26, 2006
|
|
|
Total cost of stock-based
compensation
|
|
$
|
1,139
|
|
Amount capitalized in inventory
and property and equipment
|
|
|
|
|
|
|
|
|
|
Amounts charged against loss
before income taxes
|
|
|
1,139
|
|
Amount of income tax benefit
recognized in earnings
|
|
|
|
|
|
|
|
|
|
Amount charged against net loss
|
|
$
|
1,139
|
|
|
|
|
|
|
Impact on net loss per common
share:
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
Diluted
|
|
|
(0.04
|
)
|
Stock-based compensation expense was reflected in the statement
of operations for fiscal 2006 as follows (in thousands):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
August 26, 2006
|
|
|
Cost of goods sold
|
|
$
|
54
|
|
Selling, general and administrative
|
|
|
743
|
|
Research and development
|
|
|
342
|
|
|
|
|
|
|
Amount charged against net loss
|
|
$
|
1,139
|
|
|
|
|
|
|
Prior to the first quarter of fiscal 2006, the Company accounted
for stock-based employee compensation arrangements in accordance
with the provisions and related interpretations of Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. Had compensation cost for stock-based
compensation been determined consistent with
SFAS No. 123R, the net loss and net loss per share
would have been adjusted to the following pro forma amounts (in
thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Net (loss) income, as reported
|
|
$
|
(3,302
|
)
|
|
$
|
141
|
|
Add: Stock-based employee
compensation expense recognized in statements of operations
|
|
|
|
|
|
|
|
|
Less: Stock-based employee
compensation expense determined under fair value based method
|
|
|
(3,979
|
)
|
|
|
(4,408
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(7,281
|
)
|
|
$
|
(4,267
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
(0.11
|
)
|
|
$
|
0.00
|
|
Basic pro forma
|
|
$
|
(0.24
|
)
|
|
$
|
(0.14
|
)
|
Diluted as reported
|
|
$
|
(0.11
|
)
|
|
$
|
0.00
|
|
Diluted pro forma
|
|
$
|
(0.24
|
)
|
|
$
|
(0.14
|
)
|
50
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 an option.
The Company has not made any dividend payments nor does it have
plans to pay dividends in the foreseeable future. The following
assumptions were used to estimate the fair value of options
granted under the Companys option plan and Employees Stock
Purchase Plan (ESPP) during fiscal 2006, 2005 and
2004 using the Black-Scholes option-pricing model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
ESPP
|
|
Fiscal Year
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Annualized dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected stock price volatility
|
|
|
68.5
|
%
|
|
|
70.5
|
%
|
|
|
72.2
|
%
|
|
|
68.2
|
%
|
|
|
69.8
|
%
|
|
|
71.8
|
%
|
Risk free interest rate
|
|
|
4.5
|
%
|
|
|
3.8
|
%
|
|
|
3.3
|
%
|
|
|
4.8
|
%
|
|
|
3.3
|
%
|
|
|
1.7
|
%
|
Expected life (in years)
|
|
|
5.6
|
|
|
|
5.3
|
|
|
|
5.1
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
A summary of the option activity for fiscal 2006 is as follows
(in thousands, except price per share and contractual term):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Weighted-Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise Price
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Number of Shares
|
|
|
per Share
|
|
|
Contractual Term
|
|
|
Value
|
|
|
Outstanding at August 27, 2005
|
|
|
4,001
|
|
|
$
|
7.34
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
186
|
|
|
|
4.91
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(28
|
)
|
|
|
3.48
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(199
|
)
|
|
|
9.29
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(261
|
)
|
|
|
3.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 26, 2006
|
|
|
3,699
|
|
|
$
|
7.42
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at August 26, 2006
|
|
|
3,396
|
|
|
$
|
7.69
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no aggregate intrinsic value for options outstanding
or exercisable at August 26, 2006 as the average price of
the Companys stock for fiscal 2006 was less than the
average exercise price of options outstanding or exercisable.
The weighted average grant date fair value based on the
Black-Scholes option pricing model for options granted in fiscal
2006 was $2.94 per share, for options granted in fiscal
2005 was $2.41 per share and for options granted in fiscal
2004 was $4.53 per share. The total intrinsic value of
options exercised was $628,000 during fiscal 2006, $21,000 in
fiscal 2005 and $396,000 in fiscal 2004.
A summary of the status of unvested option shares as of
August 26, 2006 is as follows (in thousands, except fair
value amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at August 27, 2005
|
|
|
531
|
|
|
$
|
3.43
|
|
Options granted
|
|
|
186
|
|
|
|
4.91
|
|
Options forfeited
|
|
|
(28
|
)
|
|
|
3.48
|
|
Options vested
|
|
|
(386
|
)
|
|
|
3.37
|
|
|
|
|
|
|
|
|
|
|
Unvested at August 26, 2006
|
|
|
303
|
|
|
$
|
4.41
|
|
|
|
|
|
|
|
|
|
|
51
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of August 26, 2006, there was $805,000 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 1.0 year.
The total fair value of option shares vested was $1,139,000
during fiscal 2006, $3,979,000 during fiscal 2005 and $4,408,000
during fiscal 2004.
The activity under stock option plans of the Company is as
follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Weighted Average
|
|
|
|
Available
|
|
|
|
|
|
Exercise Price
|
|
|
|
for Grant
|
|
|
Outstanding
|
|
|
per Share
|
|
|
Activity Description
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2003
|
|
|
510
|
|
|
|
3,695
|
|
|
$
|
8.12
|
|
Additional shares authorized for
1997 Omnibus Stock Option Plan
|
|
|
300
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(669
|
)
|
|
|
669
|
|
|
|
7.65
|
|
Exercised
|
|
|
|
|
|
|
(148
|
)
|
|
|
5.23
|
|
Canceled
|
|
|
429
|
|
|
|
(449
|
)
|
|
|
9.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 28, 2004
|
|
|
570
|
|
|
|
3,767
|
|
|
|
7.93
|
|
Additional shares authorized for
1997 Omnibus Stock Option Plan
|
|
|
300
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(549
|
)
|
|
|
549
|
|
|
|
4.09
|
|
Exercised
|
|
|
|
|
|
|
(26
|
)
|
|
|
3.14
|
|
Canceled
|
|
|
229
|
|
|
|
(289
|
)
|
|
|
9.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27, 2005
|
|
|
550
|
|
|
|
4,001
|
|
|
|
7.34
|
|
Granted
|
|
|
(186
|
)
|
|
|
186
|
|
|
|
4.91
|
|
Exercised
|
|
|
|
|
|
|
(261
|
)
|
|
|
3.32
|
|
Canceled
|
|
|
220
|
|
|
|
(227
|
)
|
|
|
8.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 26, 2006
|
|
|
584
|
|
|
|
3,699
|
|
|
$
|
7.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information with respect to
options outstanding and exercisable at August 26, 2006
(number of options outstanding and exercisable in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
Range of
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
of Options
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Prices
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$ 2.33 - $ 5.00
|
|
|
1,167
|
|
|
|
7.5
|
|
|
$
|
3.61
|
|
|
|
976
|
|
|
$
|
3.54
|
|
$ 5.01 - $ 8.50
|
|
|
1,249
|
|
|
|
6.0
|
|
|
|
7.43
|
|
|
|
1,137
|
|
|
|
7.66
|
|
$ 8.51 - $12.00
|
|
|
1,089
|
|
|
|
4.0
|
|
|
|
10.35
|
|
|
|
1,089
|
|
|
|
10.35
|
|
$12.01 - $15.50
|
|
|
171
|
|
|
|
3.1
|
|
|
|
13.46
|
|
|
|
171
|
|
|
|
13.46
|
|
$15.51 - $17.38
|
|
|
23
|
|
|
|
2.5
|
|
|
|
16.93
|
|
|
|
23
|
|
|
|
16.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 2.33 - $17.38
|
|
|
3,699
|
|
|
|
5.7
|
|
|
$
|
7.42
|
|
|
|
3,396
|
|
|
$
|
7.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
There were 3,470,000 currently exercisable options at a
weighted-average exercise price of $7.94 at August 27,
2005, and 2,426,000 currently exercisable options at a
weighted-average exercise price of $9.12 at August 28, 2004.
On May 22, 1997, the Company adopted a Shareholder Rights
Plan (the Rights Plan). Pursuant to the Rights Plan, rights were
distributed as a dividend at the rate of one preferred share
purchase right (Right) for each outstanding share of common
stock of the Company. The Rights expire on June 10, 2007,
unless extended or earlier redeemed or exchanged by the Company.
Under the Rights Plan, each Right entitles the registered holder
to purchase one-hundredth of a Series A Junior
Participating Preferred Share, no par value (Preferred Shares),
of the Company at a price of $90. In general, the Rights will
become exercisable only if a person or group acquires beneficial
ownership of 15% or more of the Companys common stock or
commences a tender offer or exchange offer upon consummation of
which such person or group would beneficially own 15% or more of
the Companys common stock.
(14) Employees
Stock Purchase Plan
The Company has an employees stock purchase plan (the ESPP) that
enables employees to contribute up to 10% of their wages toward
the purchase of the Companys common stock at 85% of the
lower of market value at the beginning or the end of the
semiannual purchase period. Stockholders authorized the issuance
of 250,000 additional shares of common stock to the ESPP in
fiscal 2005.
Shares were issued on the following dates for the following
prices (in thousands except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per
|
|
Date
|
|
Shares
|
|
|
Share
|
|
|
December 31, 2003
|
|
|
89
|
|
|
$
|
3.15
|
|
June 30, 2004
|
|
|
49
|
|
|
|
6.18
|
|
December 31, 2004
|
|
|
64
|
|
|
|
3.97
|
|
June 30, 2005
|
|
|
93
|
|
|
|
3.17
|
|
December 31, 2005
|
|
|
88
|
|
|
|
3.29
|
|
June 30, 2006
|
|
|
85
|
|
|
|
3.91
|
|
At August 26, 2006, there were 299,682 shares reserved
for future employee purchases of stock under the ESPP.
(15) Segment
and Other Information
Segment
information
The Company has two product lines, Surface Conditioning
(SC) and
POLARIS®
Systems and Services (PSS). Historically, the
Company provided segment information. With the wind-down of the
Microlithography business which began in fiscal 2003, the
Company has integrated the operations of its product lines.
In accordance with SFAS No. 131
(SFAS 131), Disclosures About Segments of
an Enterprise and Related Information, the Companys
chief operating decision-maker has been identified as the
President and Chief Executive Officer. Due to the level of
integration of the two product lines, the Companys chief
operating decision-maker reviews consolidated operating results
to make decisions about allocating resources and assessing
performance for the entire Company. The two product lines are a
part of one segment for the manufacture, marketing and servicing
of equipment for the microelectronics industry.
53
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Geographic
Information
International sales were approximately 62% of total sales in
fiscal year 2006, approximately 64% of total sales in fiscal
year 2005, and approximately 47% of total sales in fiscal 2004.
The basis for determining sales by geographic region is the
location that the product is shipped. Included in these
percentages and the table below are sales to related parties
(see Note 4). Sales by geographic area are summarized as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
August 26,
|
|
|
August 27,
|
|
|
August 28,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Asia
|
|
$
|
36,660
|
|
|
$
|
24,366
|
|
|
$
|
26,391
|
|
Europe
|
|
|
33,704
|
|
|
|
30,723
|
|
|
|
27,835
|
|
Other
|
|
|
9
|
|
|
|
40
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
70,373
|
|
|
|
55,129
|
|
|
|
54,283
|
|
Domestic
|
|
|
42,868
|
|
|
|
31,241
|
|
|
|
60,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
113,241
|
|
|
$
|
86,370
|
|
|
$
|
114,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2006, the United Kingdom accounted for 11% of our
total sales and South Korea accounted for 11% of our total
sales. In fiscal 2005, South Korea accounted for 12% of our
total sales and Germany accounted for 11% of our total sales.
There was no individual foreign country that represented more
than 10% of sales in fiscal 2004.
Long-lived
Assets
The Company does not have significant long-lived assets in
foreign countries.
Customer
Information
The following summarizes significant customers comprising 10% or
more of the Companys trade accounts receivable as of
August 26, 2006 and August 27, 2005 and 10% or more of
sales for fiscal 2006, 2005 and 2004, which includes sales
through affiliates to end-users:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Trade Accounts
|
|
|
|
|
|
|
Receivable as of
|
|
|
% of Sales for the Fiscal Year Ended
|
|
|
|
August 26,
|
|
|
August 27,
|
|
|
August 26,
|
|
|
August 27,
|
|
|
August 28,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Customer A
|
|
|
*
|
|
|
|
19
|
%
|
|
|
13
|
%
|
|
|
14
|
%
|
|
|
16
|
%
|
Customer B
|
|
|
17
|
%
|
|
|
*
|
|
|
|
14
|
%
|
|
|
*
|
|
|
|
*
|
|
Customer C
|
|
|
*
|
|
|
|
*
|
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
*
|
|
Customer D
|
|
|
*
|
|
|
|
14
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer E
|
|
|
*
|
|
|
|
10
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer F
|
|
|
12
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer G
|
|
|
*
|
|
|
|
*
|
|
|
|
11
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
|
* |
|
Trade accounts receivable from or sales to respective customer
were less than 10% as of the end of or during the fiscal year. |
54
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(16) License
Agreements
The Company, in the ordinary course of business, enters into
various licensing agreements. These agreements generally provide
for technology transfers between the Company and the licensors
in exchange for minimum royalty payments
and/or a
fixed royalty to the licensors. The total accrued royalty
license fees included in accrued expenses were $225,000 at
August 26, 2006 and $249,000 at August 27, 2005. These
agreements can generally be terminated by the Company with
appropriate notice to the licensors.
(17) Supplementary
Cash Flow Information
The following summarizes supplementary cash flow items (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
August 26,
|
|
August 27,
|
|
August 28,
|
|
|
2006
|
|
2005
|
|
2004
|
|
Income taxes paid, net
|
|
$
|
54
|
|
|
$
|
62
|
|
|
$
|
44
|
|
(18) Litigation
Hsu
Litigation
In fall 1995, pursuant to the Employee Stock Purchase and
Shareholder Agreement dated November 30, 1990 between Eric
C. Hsu and Semiconductor Systems, Inc. (SSI) (the
Shareholder Agreement) and in connection with
Mr. Hsus termination of his employment with SSI in
August 1995, the former shareholders of SSI purchased the shares
of SSI common stock then held by Mr. Hsu. In April 1996,
the Company acquired SSI, and SSI became a wholly owned
subsidiary of the Company. In October 1996, Eric C. and Angie L.
Hsu (the plaintiffs) filed a lawsuit in the Superior
Court of California, County of Alameda, Southern Division,
against SSI and the former shareholders of SSI. The plaintiffs
alleged that such purchase breached the Shareholder Agreement
and violated the California Corporations Code, breached the
fiduciary duty owed plaintiffs by the individual defendants and
constituted fraud.
In September and October 2000, certain of Mr. Hsus
claims were tried to a jury in Alameda County Superior Court in
Oakland, California. At the conclusion of the trial, the jury
found that SSI breached the Shareholder Agreement between it and
Mr. Hsu and that the damages that resulted were
approximately $2.4 million. In addition, each of the
individual defendant shareholders was found liable for
conversion and damages of $4.2 million were awarded.
Certain individual defendants were also found to have
intentionally interfered with Mr. Hsus prospective
economic advantage and damages of $3.2 million were
awarded. Finally, several individual defendants and SSI were
found to have violated certain provisions of the California
Corporation Code and damages of $2.4 million were awarded.
In proceedings subsequent to the trial, the Court determined
that the plaintiffs were entitled to an award against SSI of
prejudgment interest on the breach of contract damages
(approximately $2.4 million) at 10 percent per annum
from October 1996. In addition, the Court awarded plaintiffs
approximately $127,000 in costs and approximately
$1.8 million in attorneys fees against SSI and the
individual defendants. On November 16, 2001, the court
signed its final judgment reflecting the jurys awards,
interest, attorneys fees and costs assessed against each
of the defendants.
Following the entry of judgment, SSI and the other defendants
filed post-trial motions seeking reduction in the jurys
damage awards
and/or a new
trial. The court denied these post-trial motions and there was
no reduction in damages against SSI. Mr. Hsu was awarded an
additional $431,000 for attorneys fees and expenses
incurred since the judgment was rendered in November 2001.
Subsequently, SSI and the individual defendants filed an appeal
on a variety of grounds, and the Company posted an appeal bond
on behalf of SSI and defendants in the amount of
$8.3 million. As part of the posting of the bond, the
Company entered into a
55
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
letter of credit in the amount of $5.2 million with a
surety company. This letter of credit was collateralized with
restricted cash of the same amount. The appellate court upheld
the original judgment.
The total judgment against SSI together with post judgment
interest and attorneys fees as of February 26, 2005
aggregated approximately $7.9 million. As a result, the
Company recorded a $0.3 million charge in the second
quarter of fiscal 2005. The Company had recorded a total of
$3.3 million of charges to operations during fiscal 2002
and fiscal 2004 associated with this litigation. During the
third quarter of fiscal 2005, the Company retired the
250,000 shares held in the escrow account created at the
time of the Companys acquisition of SSI to cover such
claims. As the SSI merger was a pooling of interests, the
Company decreased its stockholders equity by an amount
equal to $3.0 million. On March 28, 2005, the Company
tendered funds totaling approximately $7.9 million to the
Hsus via a cashiers check which the Company believes was
the full judgment amount plus all applicable interest. This
included $1.6 million of cash provided by the individual
defendants. Subsequently, instead of depositing the
cashiers check, the Hsus filed a motion with the court to
enforce the judgment against the appeal bond and the Company and
the individual defendants filed a motion to release the bond.
The Hsus cashed the cashiers check in July 2005. In August 2005,
the court ruled in the Companys favor and an
acknowledgement of full satisfaction of the judgment was filed
with the courts by the Hsus attorneys. The bond was
released in August 2005.
YieldUP
Patent Litigation
In September 1995, CFM Technologies, Inc. and CFMT, Inc.
(collectively CFM) filed a complaint in United
States District Court for the District of Delaware against
YieldUP, now known as SCD Mountain View, Inc., a wholly owned
subsidiary of the Company. CFM filed an additional complaint
against YieldUP in United States District Court for the District
of Delaware on December 30, 1998.
On January 3, 2001, Mattson Technology, Inc.
(Mattson) completed the merger of the semiconductor
equipment division of Steag Electronic Systems AG and CFM and
established its wet products division. With the merger
completed, Mattson assumed responsibility for the two suits CFM
filed against YieldUP. On March 17, 2003, SCP Global
Technologies (SCP) acquired the wet products
division of Mattson, including CFM, and assumed responsibility
for the two lawsuits.
On February 19, 2004, the Company and SCP announced that
they settled the two patent infringement lawsuits pending in the
United States District Court for the District of Delaware. In an
effort to settle these lawsuits, the Company acknowledged the
validity and enforceability of the patents, but disputed that
any of its products infringed upon the claims of the patents.
The Company agreed to pay SCP $4.0 million for a release
from past infringement claims and a prospective license under
all four patents asserted against the Company in the two
lawsuits. The release applies to all purchasers of the
Companys products containing SCPs Surface Tension
Gradient
(STG®)
technology. The prospective license applies to all end-user
customers of the Companys products, subject to certain
limitations. In addition, the Company agreed to supply SCP
customers, at a pre-established price, the Companys
rinse/dry kits to implement the Companys
STG®
technology for certain applications.
As a result, the Company recorded $3.4 million in selling,
general and administrative expenses in its second quarter of
fiscal 2004. The Company had previously recorded a
$0.6 million charge to operations associated with this
litigation. The Company made all payments totaling
$4.0 million as of August 26, 2006.
56
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
FSI International, Inc.:
We have audited the accompanying consolidated balance sheets of
FSI International, Inc. and subsidiaries as of August 26,
2006 and August 27, 2005, and the related consolidated
statements of operations, stockholders equity and
comprehensive (loss) income, and cash flows for each of the
years in the three-year period ended August 26, 2006. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of FSI International, Inc. and subsidiaries as of
August 26, 2006 and August 27, 2005, and the results
of their operations and their cash flows for each of the years
in the three-year period ended August 26, 2006, in
conformity with U.S. generally accepted accounting
principles.
As disclosed in Note 1 to the consolidated financial
statements, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123R, Share Based
Payment, on August 28, 2005.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of FSI International, Inc.s internal control
over financial reporting as of August 26, 2006, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated November 2, 2006 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
Minneapolis, Minnesota
November 2, 2006
57
Data for the fiscal quarters of our last two fiscal years is as
follows:
Quarterly
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(a), (b)
|
|
|
(a), (b), (c), (d)
|
|
|
(a), (b), (e), (f)
|
|
|
(a), (b) (d), (e), (f)
|
|
|
|
(In thousands, except per share data)
|
|
|
|
(Unaudited)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
18,623
|
|
|
$
|
22,287
|
|
|
$
|
31,957
|
|
|
$
|
40,373
|
|
Gross margin
|
|
|
9,912
|
|
|
|
12,086
|
|
|
|
13,048
|
|
|
|
17,804
|
|
Operating (loss) income
|
|
|
(4,427
|
)
|
|
|
(3,653
|
)
|
|
|
(2,560
|
)
|
|
|
2,951
|
|
Net (loss) income
|
|
|
(4,296
|
)
|
|
|
(3,722
|
)
|
|
|
(2,433
|
)
|
|
|
3,164
|
|
Diluted net (loss) income per
common share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.10
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
19,445
|
|
|
$
|
24,153
|
|
|
$
|
19,069
|
|
|
$
|
23,702
|
|
Gross margin
|
|
|
10,408
|
|
|
|
10,745
|
|
|
|
7,976
|
|
|
|
10,864
|
|
Operating (loss) income
|
|
|
(3,480
|
)
|
|
|
3,417
|
|
|
|
(6,702
|
)
|
|
|
(3,596
|
)
|
Net (loss) income
|
|
|
(3,276
|
)
|
|
|
3,911
|
|
|
|
(2,043
|
)
|
|
|
(1,895
|
)
|
Diluted net (loss) income per
common share
|
|
$
|
(0.11
|
)
|
|
$
|
0.13
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
(a) |
|
During fiscal 2006, the Company recorded stock-based
compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Fiscal
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
2006
|
|
|
Cost of sales
|
|
$
|
10
|
|
|
$
|
11
|
|
|
$
|
11
|
|
|
$
|
22
|
|
|
$
|
54
|
|
Selling, general and
administrative expenses
|
|
|
206
|
|
|
|
151
|
|
|
|
193
|
|
|
|
193
|
|
|
|
743
|
|
Research and development expenses
|
|
|
68
|
|
|
|
77
|
|
|
|
79
|
|
|
|
118
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
284
|
|
|
$
|
239
|
|
|
$
|
283
|
|
|
$
|
333
|
|
|
$
|
1,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
During fiscal 2006 and 2005, the Company had sales of PSS
product inventory with an original cost that had previously been
written down to zero as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Fiscal
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Year
|
|
Fiscal 2006
|
|
$
|
784
|
|
|
$
|
813
|
|
|
$
|
410
|
|
|
$
|
136
|
|
|
$
|
2,143
|
|
Fiscal 2005
|
|
|
|
|
|
|
|
|
|
$
|
442
|
|
|
$
|
77
|
|
|
$
|
519
|
|
|
|
|
(c) |
|
During the second quarter of fiscal 2006, the Company recorded a
$0.5 million impairment of an investment. |
|
(d) |
|
During the second quarter of fiscal 2005, the Company recorded a
gain of $7.0 million in operations on the sale of the
Allen, Texas facility. |
|
(e) |
|
During the third quarter of fiscal 2005, the Company recorded a
gain of $4.2 million on a distribution from Nortem. During
the fourth quarter of fiscal 2005, the Company recorded a gain
of $1.6 million on a distribution from Nortem. (See
Note 1 of the Notes to the Consolidated Financial
Statements.) |
|
(f) |
|
Service revenue of $33,000, $270,000 and $976,000 and associated
cost of goods sold of $9,000, $75,000 and $270,000 should have
been recorded in the first, second and third quarters of fiscal
2006, respectively. The Company recorded the amounts as an
out-of-period
adjustment in the fourth quarter of fiscal 2006. The Company
recorded $1.2 million related to service revenue and
$0.3 million of associated cost of goods sold which had a
$0.9 million, or $0.03 per share, impact on fourth
quarter profit. The entry had no impact on the full year fiscal
2006 financial results. |
58
The Companys fiscal quarters are generally 13 weeks,
all ending on a Saturday. The fiscal year ends on the last
Saturday in August and consists of 52 or 53 weeks.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in
Rule 13a-15(f)
under the Exchange Act of 1934 (the Exchange Act).
The Companys internal control system was designed to
provide reasonable assurance to the Companys management
and Board of Directors regarding the preparation and fair
presentation of published financial statements. Under the
supervision and with the participation of management, including
our Chairman and Chief Executive Officer and Chief Financial
Officer, we conducted an assessment of the effectiveness of our
internal control over financial reporting as of August 26,
2006. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control
Integrated Framework.
Based on our assessment using the criteria set forth by COSO in
Internal Control Integrated Framework,
management concluded that our internal control over financial
reporting was effective as of August 26, 2006.
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
As of the end of the period covered by this report, we conducted
an evaluation, under the supervision and with the participation
of the principal executive officer and principal financial
officer, of our disclosure controls and procedures (as defined
in
Rules 13a-14(c)
and
15d-14(c)
under the Exchange Act). Based on this evaluation, the principal
executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that
we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
Changes
in Internal Controls Over Financial Reporting
There was no changes in our internal control over financial
reporting during our most recently completed fiscal quarter that
have materially affected, or were reasonably likely to
materially affect, our internal control over financial reporting.
59
Report of
Independent Registered Public Accounting Firm Regarding Internal
Control Over Financial Reporting
The Board of Directors and Stockholders
FSI International, Inc.:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that FSI International, Inc. and
subsidiaries maintained effective internal control over
financial reporting as of August 26, 2006, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). FSI
International Inc.s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that FSI
International, Inc. maintained effective internal control over
financial reporting as of August 26, 2006, is fairly
stated, in all material respects, based on criteria established
in Internal Control Integrated Framework
issued by COSO. Also, in our opinion, FSI International, Inc.
maintained, in all material respects, effective internal control
over financial reporting as of August 26, 2006, based on
criteria established in Internal Control
Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of FSI International, Inc. and
subsidiaries as of August 26, 2006 and August 27,
2005, and the related consolidated statements of operations,
stockholders equity and comprehensive (loss) income, and
cash flows for each of the years in the three-year period ended
August 26, 2006, and our report dated November 2, 2006
expressed an unqualified opinion on those consolidated financial
statements. As disclosed in Note 1 to the consolidated
financial statements, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123R,
Share Based Payment, on August 28, 2005.
Minneapolis, Minnesota
November 2, 2006
60
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
Certain information required by Part III is incorporated by
reference to our definitive proxy statement for the annual
meeting of shareholders to be held on January 17, 2007 and
which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days after
August 26, 2006.
Except for those portions specifically incorporated in this
report by reference to our proxy statement for the annual
meeting of shareholders to be held on January 17, 2007, no
other portions of the proxy statement are deemed to be filed as
part of this Report on
Form 10-K.
|
|
ITEM 10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
The information concerning our directors and our board
committees required by this item is incorporated by reference to
the information under the captions Election of
Directors and Compliance with Section 16(a) of
the Securities and Exchange Act of 1934 in our proxy
statement for the annual meeting of shareholders to be held on
January 17, 2007. For information concerning executive
officers, see Item 4A of this
Form 10-K
Report.
Audit
Committee Financial Expert
Our board of directors has determined that at least one member
of our Audit and Finance Committee, Mr. James A. Bernards,
is an audit committee financial expert, as that term
is defined under Section 407 of the Sarbanes-Oxley Act of
2002 and the rules promulgated by the SEC in furtherance of
Section 407. Mr. Bernards is independent, as that term
is defined under the National Association of Securities
Dealers listing standards.
Code of
Business Conduct and Ethics
We have adopted a code of business conduct and ethics applicable
to all of our directors and employees, including our principal
executive officer, principal financial officer, controller and
other employees performing similar functions. A copy of this
code of business conduct and ethics is available on our website
at
www.fsi-intl.com.
We intend to disclose any waiver of our code of business conduct
and ethics for our directors or executive officers in future
Form 8-K
filings within four business days following the date of such
waiver. We also intend to post on our website at
www.fsi-intl.com any amendment to, or waiver from, a provision
of our code of business conduct and ethics that applies to our
principal executive officer, principal financial officer,
controller and other employees performing similar functions
within four business days following the date of such amendment
or waiver.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this item is incorporated by
reference to the information under the captions Executive
Compensation and Compensation of Directors in
our proxy statement for the annual meeting of shareholders to be
held on January 17, 2007.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by this item is incorporated by
reference to the information under the captions Security
Ownership of Management and Certain Beneficial Owners and
Equity Compensation Plan Information in our proxy
statement for the annual meeting of shareholders to be held on
January 17, 2007.
61
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
The information required by this item is incorporated by
reference to the information under the caption Interests
of Management and Others in Certain Transactions in our
proxy statement for the annual meeting of shareholders to be
held on January 17, 2007.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required by this item is incorporated by
reference to the information under the captions
Independent Auditors Fees and Auditor
Independence in our proxy statement for the annual meeting
of shareholders to be held on January 17, 2007.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page Number
|
|
|
|
|
in This Report
|
|
|
(a)(1)
|
|
|
Index to Financial Statements
|
|
|
|
|
|
|
|
|
Consolidated Statements of
Operations Years ended August 26, 2006,
August 27, 2005, and August 28, 2004
|
|
|
33
|
|
|
|
|
|
Consolidated Balance
Sheets August 26, 2006 and August 27, 2005
|
|
|
34
|
|
|
|
|
|
Consolidated Statements of
Stockholders Equity and Comprehensive (Loss)
Income Years ended August 26, 2006,
August 27, 2005, and August 28, 2004
|
|
|
35
|
|
|
|
|
|
Consolidated Statements of Cash
Flows Years ended August 26, 2006,
August 27, 2005, and August 28, 2004
|
|
|
36
|
|
|
|
|
|
Notes to Consolidated Financial
Statements
|
|
|
37
|
|
|
|
|
|
Report of Independent Registered
Public Accounting Firm
|
|
|
57
|
|
|
|
|
|
Quarterly financial data for
fiscal 2006 and 2005 (unaudited)
|
|
|
58
|
|
|
(a)(2)
|
|
|
Financial Statement Schedule
|
|
|
|
|
|
|
|
|
All schedules are omitted because
they are not applicable or the required information is shown in
the consolidated financial statements or notes thereto.
|
|
|
|
|
(a)(3) Exhibits
|
|
|
|
|
|
2
|
.1
|
|
Agreement and Plan of
Reorganization, dated as of January 21, 1999 among FSI
International, Inc., BMI International, Inc. and YieldUP
International Corporation.(10)
|
|
2
|
.2
|
|
Agreement and Plan of
Reorganization by and Among FSI International, Inc., Spectre
Acquisition Corp., and Semiconductor Systems, Inc.(1)
|
|
2
|
.3
|
|
Asset Purchase Agreement dated as
of June 9, 1999 between FSI International, Inc. and The BOC
Group, Inc.(11)
|
|
3
|
.1
|
|
Restated Articles of Incorporation
of the Company.(2)
|
|
3
|
.2
|
|
Restated and Amended By-Laws.(19)
|
|
3
|
.5
|
|
Articles of Amendment of Restated
Articles of Incorporation.(12)
|
|
3
|
.6
|
|
Certificate of Designation,
Preferences and Rights of Series A Junior Participating
Preferred Shares.(8)
|
|
4
|
.1
|
|
Form of Rights Agreement dated as
of May 22, 1997 between FSI International, Inc. and Harris
Trust and Savings Bank, National Association, as Rights Agent.(8)
|
|
4
|
.2
|
|
Amendment dated March 26,
1998 to Rights Agreement dated May 22, 1997 by and between
FSI International, Inc. and Harris Trust and Saving Bank,
National Association as Rights Agent.(9)
|
62
|
|
|
|
|
|
4
|
.3
|
|
Amendment dated March 9, 2000
to Rights Agreement dated May 22, 1997, as amended
March 26, 1998 by and between FSI International, Inc. and
Harris Trust and Savings Bank as Rights Agent.(14)
|
|
4
|
.4
|
|
Third Amendment dated
April 3, 2002 to Rights Agreement dated May 22, 1997,
as amended on March 26, 1998 and March 9, 2000 by and
between FSI and Harris Trust and Savings Bank, as Rights
Agent.(20)
|
|
4
|
.5
|
|
Form of Purchase Agreement, dated
April 4, 2002.(21)
|
|
4
|
.6
|
|
Schedule of Purchasers which have
executed the Form of Purchase Agreement, dated April 4,
2002.(22)
|
|
10
|
.1
|
|
FSI International, Inc. 1997
Omnibus Stock Plan (as amended and restated April 2001).(17)
|
|
10
|
.2
|
|
Form of Incentive Stock Option
Agreement for the FSI International, Inc. 1997 Omnibus Stock
Plan, as amended.(25)
|
|
10
|
.3
|
|
Form of Incentive Stock Option
Agreement for Outside Directors for the FSI International, Inc.
1997 Omnibus Stock Plan, as amended.(25)
|
|
10
|
.9
|
|
Amended and Restated Employees
Stock Purchase Plan.(17)
|
|
10
|
.10
|
|
Shareholders Agreement among FSI
International, Inc. and Mitsui & Co., Ltd. and Chlorine
Engineers Corp. Ltd. dated as of August 14, 1991.(3)
|
|
10
|
.11
|
|
FSI Exclusive Distributorship
Agreement dated as of August 14, 1991 between FSI
International, Inc. and mufti LTD(3)
|
|
10
|
.12
|
|
FSI Licensing Agreement dated as
of August 14, 1991, between FSI International, Inc. and
mFSI LTD(3)
|
|
10
|
.13
|
|
Amendment to FSI/Metron Technology
Distribution Agreement dated July 31, 1999.(12)
|
|
10
|
.15
|
|
License Agreement, dated
October 15, 1991, between the Company and Texas Instruments
Incorporated.(4)
|
|
10
|
.16
|
|
Amendment No. 1, dated
April 10, 1992, to the License Agreement, dated
October 15, 1991, between the Company and Texas Instruments
Incorporated.(4)
|
|
10
|
.17
|
|
Amendment effective
October 1, 1993 to the License Agreement, dated
October 15, 1991 between the Company and Texas Instruments
Incorporated.(5)
|
|
10
|
.18
|
|
Amended and Restated
Directors Nonstatutory Stock Option Plan.(6)
|
|
10
|
.19
|
|
Management Agreement between FSI
International, Inc. and Donald S. Mitchell, effective as of
January 2, 2001. (Similar agreements between the Company
and its executive officers have been omitted but will be filed
if requested in writing by the commission.) (16)#
|
|
10
|
.20
|
|
FSI International, Inc. 1994
Omnibus Stock Plan.(7)
|
|
10
|
.26
|
|
Summary of Employment Arrangement
between the Company and Don Mitchell dated December 12,
1999. (15)#
|
|
10
|
.30
|
|
Employment Agreement entered into
as of December 12, 1999 by and between FSI International,
Inc. and Donald S. Mitchell. (13)#
|
|
10
|
.31
|
|
Agreement made and entered into as
of March 4, 2001 by and between FSI International, Inc. and
Benno G. Sand. (18)#
|
|
10
|
.32
|
|
Metron Technology Transition
Agreement dated October 9, 2003 by and between FSI
International, Inc. and Metron Technology B.V., portion of which
have been omitted pursuant to a request for confidential
treatment. These portions are identified by [***]. (23).
|
|
10
|
.33
|
|
First Amendment to the Metron
Technology Transition Agreement dated February 5, 2003. (24)
|
|
10
|
.34
|
|
Second Amendment to the Metron
Technology Transition Agreement dated February 28,
2003. (24)
|
|
10
|
.35
|
|
FSI/Metron Technology Distribution
Agreement dated February 28, 2003 by and between FSI
International, Inc. and Metron Technology, N.V. (24)
|
|
10
|
.36
|
|
Amendment to Article 7. Warranty
of Exclusive Distribution Agreement Between FSI International
and mFSI LTD effective 16 April, 1999. (26)
|
63
|
|
|
|
|
|
10
|
.37
|
|
Amendment to FSI Exclusive
Distributorship Agreement made as of July 31, 1999 among
FSI International, Inc., mFSI LTD and BOC Edwards. (26)
|
|
10
|
.38
|
|
Amendment to Shareholders
Agreement dated June 5, 1991 among FSI International, Inc.
and Mitsui & Co., LTD and Chlorine Engineers Corp., LTD
and MBK Project Holdings LTD dated as of September 17,
2004. (26)
|
|
10
|
.39
|
|
Amendment to FSI Exclusive
Distributorship Agreement dated August 14, 1991 between FSI
International, Inc. and mFSI LTD dated as of
November 14, 2003. (26)
|
|
21
|
.0
|
|
Subsidiaries of the Company.
(filed herewith)
|
|
23
|
.0
|
|
Consent of KPMG LLP, independent
registered public accounting firm. (filed herewith)
|
|
24
|
.0
|
|
Powers of Attorney from the
Directors of FSI International, Inc. (filed herewith)
|
|
31
|
.1
|
|
Certification by Principal
Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (filed herewith)
|
|
31
|
.2
|
|
Certification by Principal
Financial and Accounting Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. (filed herewith)
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer and Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (filed herewith)
|
|
|
|
# |
|
Identified exhibit is a management contract, compensation
plan or arrangement. |
|
|
|
(1) |
|
Filed as an Exhibit to the Companys Registration Statement
on
Form S-4
(as amended) dated March 21, 1996, SEC File
No. 333-1509
and incorporated by reference. |
|
(2) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the quarter ended February 24, 1990, SEC File
No. 0-17276,
and incorporated by reference. |
|
(3) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 31, 1991, as amended by
Form 8 dated January 7, 1992, SEC File
No. 0-17276,
and incorporated by reference. |
|
(4) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 29, 1992, File
No. 0-17276,
and incorporated by reference. |
|
(5) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 28, 1993, SEC File
No. 0-17276,
and incorporated by reference. |
|
(6) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the fiscal quarter ended May 28, 1994, SEC File
No. 0-17276,
and incorporated by reference. |
|
(7) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 27, 1994, SEC File
No. 0-17276,
and incorporated by reference. |
|
(8) |
|
Filed as an Exhibit to the Companys Report on
Form 8-A,
filed by the Company on June 5, 1997, SEC File
No. 0-17276,
and incorporated by reference. |
|
(9) |
|
Filed as an Exhibit to the Companys Report on
Form 8-A/A-1,
filed by the Company on April 16, 1998, Sec File
No. 0-17276
and incorporated by reference. |
|
(10) |
|
Filed as an Exhibit to the Companys Report on
Form 8-K,
filed by the Company on January 27, 1999, SEC File
No. 0-17276
and incorporated by reference. |
|
(11) |
|
Filed as an Exhibit to the Companys Report on
Form 8-K,
filed by the Company on June 24, 1999, SEC File
No. 0-17276
and incorporated by reference. |
|
(12) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 28, 1999, SEC File
No. 0-17276,
and incorporated by reference. |
|
(13) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the fiscal quarter ended February 26, 2000, SEC File
No. 0-17276
and incorporated by reference. |
|
(14) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the fiscal quarter ended May 27, 2000, SEC File
No. 0-17276
and incorporated by reference. |
64
|
|
|
(15) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 26, 2000, SEC File
No. 0-17276
and incorporated by reference. |
|
(16) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the fiscal quarter ended February 24, 2001, SEC File
No. 0-17276
and incorporated by reference. |
|
(17) |
|
Filed as an Exhibit to the Companys Registration Statement
on
Form S-8,
filed by the Company on March 28, 2003, SEC File
No. 333-104088
and incorporated by reference. |
|
(18) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 31, 2002, SEC File
No. 0-17276
and incorporated by reference. |
|
(19) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the fiscal quarter ended February 23, 2002, SEC File
No. 0-17276
and incorporated by reference. |
|
(20) |
|
Filed as an Exhibit to the Companys Registration Statement
on Form
8-A/A2,
filed by the Company on April 9, 2002, SEC File
No. 0-17276,
and incorporated by reference. |
|
(21) |
|
Filed as an Exhibit to the Companys Current Report on
Form 8-K,
filed by the Company on April 5, 2002, SEC File
No. 0-17276,
and incorporated by reference. |
|
(22) |
|
Filed as an Exhibit to the Companys Registration Statement
on
Form S-3
dated April 12, 2002, SEC File
No. 333-86148,
and incorporated by reference. |
|
(23) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q/A
for the quarter ended November 30, 2002, SEC File
No. 0-17276
and incorporated by reference. |
|
(24) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the quarter ended March 1, 2003, SEC File
No. 0-17276
and incorporated by reference. |
|
(25) |
|
Filed as an Exhibit to the Companys Current Report on
Form 8-K,
filed by the Company on October 20, 2004, SEC File
No. 0-17276
and incorporated by reference. |
|
(26) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 28, 2004, SEC File
No. 0-17276
and incorporated by reference. |
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FSI INTERNATIONAL, INC.
|
|
|
|
By:
|
/s/ Donald
S. Mitchell
|
Donald S. Mitchell,
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated: November 8, 2006
|
|
|
|
By:
|
/s/ Patricia
M. Hollister
|
Patricia M. Hollister,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following
persons, constituting a majority of the Board of Directors, on
behalf of the Registrant and in the capacities and on the dates
indicated.
James A. Bernards, Director*
Terrence W. Glarner, Director*
Willem D. Maris, Director*
Donald S. Mitchell, Director*
David V. Smith, Director*
|
|
|
|
*By:
|
/s/ Patricia
M. Hollister
|
Patricia M. Hollister,
Attorney-in-fact
Dated: November 8, 2006
66
INDEX TO
EXHIBITS
|
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
Method of Filing
|
|
|
2
|
.1
|
|
Agreement and Plan of
Reorganization, dated as of January 21,
|
|
Incorporated by reference
|
|
|
|
|
1999 among FSI International,
Inc., BMI International, Inc. and
|
|
|
|
|
|
|
YieldUP International
Corporation.(10)
|
|
|
|
2
|
.2
|
|
Agreement and Plan of
Reorganization by and Among FSI
|
|
Incorporated by reference
|
|
|
|
|
International, Inc., Spectre
Acquisition Corp., and Semiconductor
|
|
|
|
|
|
|
Systems, Inc.(1)
|
|
|
|
2
|
.3
|
|
Asset Purchase Agreement dated as
of June 9, 1999 between FSI
|
|
Incorporated by reference
|
|
|
|
|
International, Inc. and The BOC
Group, Inc.(11)
|
|
|
|
3
|
.1
|
|
Restated Articles of Incorporation
of the Company.(2)
|
|
Incorporated by reference
|
|
3
|
.2
|
|
Restated and Amended By-Laws.(19)
|
|
Incorporated by reference
|
|
3
|
.5
|
|
Articles of Amendment of Restated
Articles of Incorporation.(12)
|
|
Incorporated by reference
|
|
3
|
.6
|
|
Certificate of Designation,
Preferences and rights of Series A
|
|
Incorporated by reference
|
|
|
|
|
Junior Participating Preferred
Shares.(8)
|
|
|
|
4
|
.1
|
|
Form of Rights Agreement dated as
of May 22, 1997 between FSI
|
|
Incorporated by reference
|
|
|
|
|
International, Inc. and Harris
Trust and Savings Bank, National
|
|
|
|
|
|
|
Association, as Rights Agent.(8)
|
|
|
|
4
|
.2
|
|
Amendment dated March 26,
1998 to Rights Agreement dated May 22,
|
|
Incorporated by reference
|
|
|
|
|
1997 by and between FSI
International, Inc. and Harris Trust and
|
|
|
|
|
|
|
Saving Bank, National Association
as Rights Agent.(9)
|
|
|
|
4
|
.3
|
|
Amendment dated March 9, 2000
to Rights Agreement dated May 22,
|
|
Incorporated by reference
|
|
|
|
|
1997, as amended March 26,
1998 by and between FSI International,
|
|
|
|
|
|
|
Inc. and Harris Trust and Savings
Bank as Rights Agent.(14)
|
|
|
|
4
|
.4
|
|
Third Amendment dated
April 3, 2002 to Rights Agreement dated May
|
|
Incorporated by reference
|
|
|
|
|
22, 1997, as amended on
March 26, 1998 and March 9, 2000 by and
|
|
|
|
|
|
|
between FSI and Harris Trust and
Savings Bank, as Rights
|
|
|
|
|
|
|
Agent.(20)
|
|
|
|
4
|
.5
|
|
Form of Purchase Agreement, dated
April 4, 2002.(21)
|
|
Incorporated by reference
|
|
4
|
.6
|
|
Schedule of Purchasers which have
executed the Form of Purchase
|
|
Incorporated by reference
|
|
|
|
|
Agreement, dated April 4,
2002.(22)
|
|
|
|
10
|
.1
|
|
FSI International, Inc. 1997
Omnibus Stock Plan (as amended
|
|
Incorporated by reference
|
|
|
|
|
and restated April 2001).(17)
|
|
|
|
10
|
.2
|
|
Form of Incentive Stock Option
Agreement for the FSI
|
|
Incorporated by reference
|
|
|
|
|
International, Inc. 1997 Omnibus
Stock Plan, as amended.(25)
|
|
|
|
10
|
.3
|
|
Form of Incentive Stock Option
Agreement for Outside Directors
|
|
Incorporated by reference
|
|
|
|
|
for the FSI International, Inc.
1997 Omnibus Stock Plan, as
|
|
|
|
|
|
|
amended.(25)
|
|
|
|
10
|
.9
|
|
Amended and Restated Employees
Stock Purchase Plan.(17)
|
|
Incorporated by reference
|
|
10
|
.10
|
|
Shareholders Agreement among FSI
International, Inc. and Mitsui &
|
|
Incorporated by reference
|
|
|
|
|
Co., Ltd. and Chlorine Engineers
Corp. Ltd. dated as of August
|
|
|
|
|
|
|
14, 1991.(3)
|
|
|
|
10
|
.11
|
|
FSI Exclusive Distributorship
Agreement dated as of August 14,
|
|
Incorporated by reference
|
|
|
|
|
1991 between FSI International,
Inc. and mFSI, LTD(3)
|
|
|
67
|
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
Method of Filing
|
|
|
10
|
.12
|
|
FSI Licensing Agreement dated as
of August 14, 1991, between
|
|
Incorporated by reference
|
|
|
|
|
FSI International, Inc. and
mFSI, LTD(3)
|
|
|
|
10
|
.13
|
|
Amendment to FSI/Metron Technology
Distribution Agreement dated
|
|
Incorporated by reference
|
|
|
|
|
July 31, 1999.(12)
|
|
|
|
10
|
.15
|
|
License Agreement, dated
October 15, 1991, between the Company
|
|
Incorporated by reference
|
|
|
|
|
and Texas Instruments
Incorporated.(4)
|
|
|
|
10
|
.16
|
|
Amendment No. 1, dated
April 10, 1992, to the License Agreement,
|
|
Incorporated by reference
|
|
|
|
|
dated October 15, 1991,
between the Company and Texas Instruments
|
|
|
|
|
|
|
Incorporated.(4)
|
|
|
|
10
|
.17
|
|
Amendment effective
October 1, 1993 to the License Agreement,
|
|
Incorporated by reference
|
|
|
|
|
dated October 15, 1991
between the Company and Texas Instruments
|
|
|
|
|
|
|
Incorporated.(5)
|
|
|
|
10
|
.18
|
|
Amended and Restated
Directors Nonstatutory Stock Option Plan.(6)
|
|
Incorporated by reference
|
|
10
|
.19
|
|
Management Agreement between FSI
International, Inc. and Donald
|
|
Incorporated by reference
|
|
|
|
|
S. Mitchell, effective as of
January 2, 2001. (Similar agreements
|
|
|
|
|
|
|
between the Company and its
executive officers have been omitted
|
|
|
|
|
|
|
but will be filed if requested in
writing by the commission.) (16)#
|
|
|
|
10
|
.20
|
|
FSI International, Inc. 1994
Omnibus Stock Plan.(7)
|
|
Incorporated by reference
|
|
10
|
.26
|
|
Summary of Employment Arrangement
between the Company and
|
|
Incorporated by reference
|
|
|
|
|
Don Mitchell dated
December 12, 1999. (15)#
|
|
|
|
10
|
.30
|
|
Employment Agreement entered into
as of December 12, 1999 by
|
|
Incorporated by reference
|
|
|
|
|
and between FSI International,
Inc. and Donald S. Mitchell.(13)#
|
|
|
|
10
|
.31
|
|
Agreement made and entered into as
of March 4, 2001 by and between
|
|
Incorporated by reference
|
|
|
|
|
FSI International, Inc. and Benno
G. Sand. (18)#
|
|
|
|
10
|
.32
|
|
Metron Technology Transition
Agreement dated October 9, 2002 by
|
|
Incorporated by reference
|
|
|
|
|
and between FSI International,
Inc. and Metron Technology, B.V.,
|
|
|
|
|
|
|
portions of which have been
omitted pursuant to a request for
|
|
|
|
|
|
|
confidential treatment. These
portions are identified by [***] (23)
|
|
|
|
10
|
.33
|
|
First Amendment to the Transition
Agreement dated February 5,
|
|
Incorporated by reference
|
|
|
|
|
2003.(24)
|
|
|
|
10
|
.34
|
|
Second Amendment to the Transition
Agreement dated February 28,
|
|
Incorporated by reference
|
|
|
|
|
2003.(24)
|
|
|
|
10
|
.35
|
|
FSI/Metron Technology Distribution
Agreement dated February 28,
|
|
Incorporated by reference
|
|
|
|
|
2003 by and between FSI
International, Inc. and Metron Technology,
|
|
|
|
|
|
|
N.V.(24)
|
|
|
|
10
|
.36
|
|
Amendment to Article 7.
Warranty of Exclusive Distribution
|
|
Incorporated by reference
|
|
|
|
|
Agreement Between FSI
International and mFSI LTD effective 16
|
|
|
|
|
|
|
April, 1999. (26)
|
|
|
|
10
|
.37
|
|
Amendment to FSI Exclusive
Distributorship Agreement made as of
|
|
Incorporated by reference
|
|
|
|
|
July 31, 1999 among FSI
International, Inc., mFSI LTD and BOC
|
|
|
|
|
|
|
Edwards. (26)
|
|
|
68
|
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
Method of Filing
|
|
|
10
|
.38
|
|
Amendment to Shareholders
Agreement dated June 5, 1991 among FSI
|
|
Incorporated by reference
|
|
|
|
|
International, Inc. and
Mitsui & Co., LTD and Chlorine Engineers
|
|
|
|
|
|
|
Corp., LTD and MBK Project
Holdings LTD dated as of September 17,
|
|
|
|
|
|
|
2004. (26)
|
|
|
|
10
|
.39
|
|
Amendment to FSI Exclusive
Distributorship Agreement dated August
|
|
Incorporated by reference
|
|
|
|
|
14, 1991 between FSI
International, Inc. and mFSI LTD dated as of
|
|
|
|
|
|
|
November 14, 2003. (26)
|
|
|
|
21
|
.0
|
|
Subsidiaries of the Company
|
|
Filed herewith
|
|
23
|
.0
|
|
Consent of KPMG LLP, independent
registered public accounting firm
|
|
Filed herewith
|
|
24
|
.0
|
|
Powers of Attorney from the
Directors of FSI International, Inc.
|
|
Filed herewith
|
|
31
|
.1
|
|
Certification by Principal
Executive Officer Pursuant to Section
|
|
Filed herewith
|
|
|
|
|
302 of the Sarbanes-Oxley Act
|
|
|
|
31
|
.2
|
|
Certification by Principal
Financial and Accounting Officer
|
|
Field herewith
|
|
|
|
|
Pursuant to Section 302 of
the Sarbanes-Oxley Act
|
|
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer Pursuant to 18 U.S.C
|
|
Filed herewith
|
|
|
|
|
Section 1350, as Adopted
Pursuant to Section 906 of the
|
|
|
|
|
|
|
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
# |
|
Identified exhibit is a management contract, compensation
plan or arrangement. |
|
|
|
(1) |
|
Filed as an Exhibit to the Companys Registration Statement
on
Form S-4
(as amended) dated March 21, 1996, SEC File
No. 333-1509
and incorporated by reference. |
|
(2) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the quarter ended February 24, 1990, SEC File
No. 0-17276,
and incorporated by reference. |
|
(3) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 31, 1991, as amended by
Form 8 dated January 7, 1992, SEC File
No. 0-17276,
and incorporated by reference. |
|
(4) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 29, 1992, File
No. 0-17276,
and incorporated by reference. |
|
(5) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 28, 1993, SEC File
No. 0-17276,
and incorporated by reference. |
|
(6) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the fiscal quarter ended May 28, 1994, SEC File
No. 0-17276,
and incorporated by reference. |
|
(7) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 27, 1994, SEC File
No. 0-17276,
and incorporated by reference. |
|
(8) |
|
Filed as an Exhibit to the Companys Report on
Form 8-A,
filed by the Company on June 5, 1997, SEC File
No. 0-17276,
and incorporated by reference. |
|
(9) |
|
Filed as an Exhibit to the Companys Report on
Form 8-A/A-1,
filed by the Company on April 16, 1998, SEC File
No. 0-17276
and incorporated by reference. |
|
(10) |
|
Filed as an Exhibit to the Companys Report on
Form 8-K,
filed by the Company on January 27, 1999, SEC File
No. 0-17276
and incorporated by reference. |
|
(11) |
|
Filed as an Exhibit to the Companys Report on
Form 8-K,
filed by the Company on June 24, 1999, SEC File
No. 0-17276
and incorporated by reference. |
|
(12) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 28, 1999, SEC File
No. 0-17276,
and incorporated by reference. |
|
(13) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the fiscal quarter ended February 26, 2000, SEC File
No. 0-17276
and incorporated by reference. |
69
|
|
|
(14) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the fiscal quarter ended May 27, 2000, SEC File
No. 0-17276
and incorporated by reference. |
|
(15) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 26, 2000, SEC File
No. 0-17276
and incorporated by reference. |
|
(16) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the fiscal quarter ended February 24, 2001, SEC File
No. 0-17276
and incorporated by reference. |
|
(17) |
|
Filed as an Exhibit to the Companys Registration Statement
on
Form S-8,
filed by the Company on March 28, 2003, SEC File
No. 333-104088
and incorporated by reference. |
|
(18) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 31, 2002, SEC File
No. 0-17276
and incorporated by reference. |
|
(19) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the fiscal quarter ended February 23, 2002, SEC File
No. 0-17276
and incorporated by reference. |
|
(20) |
|
Filed as an Exhibit to the Companys Registration Statement
on Form
8-A/A2,
filed by the Company on April 9, 2002, SEC File
No. 0-17276,
and incorporated by reference. |
|
(21) |
|
Filed as an Exhibit to the Companys Current Report on
Form 8-K,
filed by the Company on April 5, 2002, SEC File
No. 0-17276,
and incorporated by reference. |
|
(22) |
|
Filed as an Exhibit to the Companys Registration Statement
on
Form S-3
dated April 12, 2002,
SEC File No. 333-86148,
and incorporated by reference. |
|
(23) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q/A
for the quarter ended November 30, 2002, SEC File
No. 0-17276
and incorporated by reference. |
|
(24) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the quarter ended March 1, 2003, SEC File
No. 0-17276
and incorporated by reference. |
|
(25) |
|
Filed as an Exhibit to the Companys Current Report on
Form 8-K,
filed by the Company on October 20, 2004, SEC File
No. 0-17276
and incorporated by reference. |
|
(26) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 28, 2004, SEC File
No. 0-17276
and incorporated by reference. |
70