e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended November 26, 2005
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from
to
Commission
File Number: 0-17276
FSI INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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MINNESOTA |
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41-1223238 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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3455 Lyman Boulevard, Chaska, Minnesota
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55318 |
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(Address of principal executive offices)
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(Zip Code) |
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
þ YES o NO
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
þ YES o NO
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the
latest practicable date:
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.
o YES þ NO
Common
Stock, no par value 29,920,000 shares outstanding as of December 30, 2005
1
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
2
PART I. ITEM 1. FINANCIAL STATEMENTS
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
NOVEMBER 26, 2005 AND AUGUST 27, 2005
(unaudited)
(in thousands)
ASSETS
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November 26, |
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August 27, |
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2005 |
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2005 |
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Current assets: |
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Cash and cash equivalents |
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$ |
4,009 |
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$ |
11,352 |
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Restricted cash |
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140 |
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282 |
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Marketable securities |
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24,350 |
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20,245 |
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Trade accounts receivable, net of allowance for
doubtful accounts of $886 and $922, respectively |
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21,573 |
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21,393 |
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Trade accounts receivable from affiliate |
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2,889 |
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3,504 |
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Inventories |
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24,641 |
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24,717 |
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Prepaid expenses and other current assets |
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7,244 |
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6,924 |
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Total current assets |
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84,846 |
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88,417 |
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Property, plant and equipment, at cost |
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77,936 |
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77,726 |
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Less accumulated depreciation and amortization |
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(56,707 |
) |
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(56,170 |
) |
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21,229 |
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21,556 |
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Investment in affiliate |
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7,913 |
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8,484 |
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Other intangibles, net |
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1,649 |
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1,784 |
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Deposits and other assets |
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1,698 |
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1,698 |
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Total assets |
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$ |
117,335 |
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$ |
121,939 |
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(continued)
See accompanying notes to consolidated condensed financial statements.
3
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
NOVEMBER 26, 2005 AND AUGUST 27, 2005
(continued)
(unaudited)
(in thousands)
LIABILITIES AND STOCKHOLDERS EQUITY
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November 26, |
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August 27, |
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2005 |
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2005 |
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Current liabilities: |
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Trade accounts payable |
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$ |
5,616 |
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$ |
5,203 |
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Accrued expenses |
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10,935 |
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11,592 |
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Customer deposits |
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670 |
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1,220 |
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Deferred profit |
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5,083 |
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3,980 |
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Deferred profit with affiliate |
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191 |
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808 |
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Total current liabilities |
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22,495 |
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22,803 |
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Stockholders equity: |
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Preferred stock, no par value; 9,700 shares
authorized; none issued and outstanding |
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Series A Junior Participating Preferred Stock, no par
value; 300 shares authorized; none issued and
outstanding |
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Common stock, no par value; 50,000 shares
authorized; issued and outstanding, 29,892 and
29,874 shares, respectively |
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223,733 |
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223,675 |
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Accumulated deficit |
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(129,060 |
) |
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(124,765 |
) |
Accumulated other comprehensive income |
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(61 |
) |
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226 |
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Other stockholders equity |
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228 |
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Total stockholders equity |
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94,840 |
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99,136 |
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Total liabilities and stockholders equity |
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$ |
117,335 |
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$ |
121,939 |
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See accompanying notes to consolidated condensed financial statements.
4
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED NOVEMBER 26, 2005 AND NOVEMBER 27, 2004
(unaudited)
(in thousands, except per share amounts)
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November 26, |
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November 27, |
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2005 |
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2004 |
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Sales (including sales to affiliate of
$2,401 and $1,796, respectively) |
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$ |
18,623 |
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$ |
19,445 |
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Cost of goods sold |
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8,711 |
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9,037 |
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Gross profit |
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9,912 |
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10,408 |
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Selling, general and administrative expenses |
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8,464 |
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8,466 |
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Research and development expenses |
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5,875 |
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5,422 |
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Operating loss |
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(4,427 |
) |
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(3,480 |
) |
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Interest expense |
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(5 |
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(15 |
) |
Interest income |
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296 |
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125 |
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Other income, net |
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62 |
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42 |
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Loss before income taxes |
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(4,074 |
) |
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(3,328 |
) |
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Income taxes |
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13 |
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6 |
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Loss before equity in losses of affiliate |
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(4,087 |
) |
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(3,334 |
) |
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Equity in (losses) earnings of affiliate |
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(209 |
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58 |
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Net loss |
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$ |
(4,296 |
) |
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$ |
(3,276 |
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Net loss per common share Basic and diluted |
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$ |
(0.14 |
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$ |
(0.11 |
) |
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Weighted average common shares |
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29,881 |
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29,943 |
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Weighted average common and potential common shares |
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29,881 |
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29,943 |
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See accompanying notes to consolidated condensed financial statements.
5
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED NOVEMBER 26, 2005 AND NOVEMBER 27, 2004
(unaudited)
(in thousands)
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November 26, |
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November 27, |
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2005 |
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2004 |
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OPERATING ACTIVITIES: |
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Net loss |
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$ |
(4,296 |
) |
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$ |
(3,276 |
) |
Adjustments to reconcile net loss to net cash used in
operating activities: |
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Stock compensation expense |
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284 |
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Depreciation |
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813 |
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982 |
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Amortization |
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134 |
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380 |
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Equity in losses (earnings) of affiliate |
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209 |
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(58 |
) |
Changes in operating assets and liabilities: |
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Accounts receivable |
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434 |
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1,770 |
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Inventories |
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75 |
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(4,809 |
) |
Prepaid expenses and other current assets |
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(319 |
) |
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(381 |
) |
Trade accounts payable |
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413 |
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(2,355 |
) |
Accrued expenses |
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(712 |
) |
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(535 |
) |
Customer deposits |
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(549 |
) |
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(165 |
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Deferred profit |
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486 |
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181 |
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Net cash used in operating activities |
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(3,028 |
) |
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(8,266 |
) |
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INVESTING ACTIVITIES: |
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Capital expenditures |
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(486 |
) |
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(596 |
) |
Purchase of marketable securities |
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(118,550 |
) |
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(102,925 |
) |
Sale of marketable securities |
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114,445 |
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|
110,525 |
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Dividend from affiliate |
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208 |
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Investment in license fee |
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(510 |
) |
Investment in affiliate |
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(490 |
) |
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Net cash (used in) provided by investing activities |
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(4,383 |
) |
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6,004 |
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FINANCING ACTIVITIES: |
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Decrease (increase) in restricted cash |
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142 |
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(11 |
) |
Net proceeds from issuance of common stock |
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58 |
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|
9 |
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Net cash provided by (used in) financing activities |
|
|
200 |
|
|
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(2 |
) |
|
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|
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|
|
|
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Effect of exchange rate on cash |
|
|
(132 |
) |
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|
495 |
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|
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Decrease in cash and cash equivalents |
|
|
(7,343 |
) |
|
|
(1,769 |
) |
Cash and cash equivalents at beginning of period |
|
|
11,352 |
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|
10,344 |
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|
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Cash and cash equivalents at end of period |
|
$ |
4,009 |
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$ |
8,575 |
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|
|
|
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|
See accompanying notes to consolidated condensed financial statements.
6
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) Description of Business and Summary of Significant Accounting Policies
Description of Business
FSI International, Inc. (the Company) is a global supplier of surface conditioning equipment
(process equipment used to etch and clean organic and inorganic materials from the surface of a
silicon wafer), technology and support services for microelectronics manufacturing. The Companys
broad portfolio of batch and single-wafer cleaning products includes process technologies for
immersion (a method used to clean silicon wafers by immersing the wafer in multiple tanks filled
with process chemicals), spray (sprays chemical mixtures, water and nitrogen in a variety of
sequences on to the microelectronic substrate), vapor (utilizes gas phase chemistries to
selectively remove sacrificial surface films) and CryoKinetic (a momentum transfer process used to
remove non-chemically bonded particles from the surface of a microelectronic device). The Companys
support services programs provide product and process enhancements to extend the life of installed
FSI equipment.
The Company announced the winding down of its Microlithography business in March 2003 and
transitioned the Microlithography (uses light to transfer a circuit pattern unto a wafer) business
to a POLARIS® Systems and Services (PSS) organization to focus on supporting the more
than 300 installed POLARIS® Systems.
The Companys customers include microelectronics manufacturers located throughout North
America, Europe and Asia.
Consolidated Condensed Financial Statements
The accompanying consolidated condensed financial statements have been prepared by the Company
without audit and reflect all adjustments (consisting only of normal and recurring adjustments,
except as disclosed in the notes) which are, in the opinion of management, necessary to present a
fair statement of the results for the interim periods presented. The statements have been prepared
in accordance with the regulations of the Securities and Exchange Commission but omit certain
information and footnote disclosures necessary to present the statements in accordance with
accounting principles generally accepted in the United States of America. The results of operations
for the interim periods presented are not necessarily indicative of the results to be expected for
the full fiscal year. These consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and footnotes to the financial statements
included in the Companys Annual Report on Form 10-K for the fiscal year ended August 27, 2005, as
amended, previously filed with the Securities and Exchange Commission.
7
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the purchase price is fixed or determinable and
collectibility is reasonably assured. If the Companys equipment sales involve sales to its
existing customers who have previously accepted the same type(s) of equipment with the same type(s)
of specifications, the Company accounts for the product sale as a multiple element arrangement. The
Company recognizes the equipment revenue upon shipment and transfer of title. The other elements
may include installation, extended warranty contracts and training. Equipment installation revenue
is valued based on estimated service person hours to complete installation and published or quoted
service labor rates and is recognized when the installation has been completed. Training revenue is
valued based on published training class prices and is recognized when the customers complete the
training classes or when a customer-specific training period has expired. The published or quoted
service labor rates and training class prices are rates actually charged and billed to the
Companys customers.
All other product sales with customer specific acceptance provisions are recognized upon
customer acceptance. Future revenues may be negatively impacted if the Company is unable to meet
customer-specific acceptance criteria. Revenue related to spare parts sales is recognized upon
shipment. Revenue related to maintenance and service contracts and extended warranty contracts is
recognized ratably over the duration of the contracts.
The timing and amount of revenue recognized are dependent on the mix of revenue recognized
upon shipment versus acceptance and for revenue recognized upon acceptance, they are dependent upon
when customer specific criteria are met.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) pertains to revenues, expenses, gains, and losses that are
not included in net income (loss), but rather are recorded directly in stockholders equity. For
the first quarters of fiscal 2006 and 2005, other comprehensive income (loss) consisted of foreign
currency translation adjustments and unrealized holding gains on investments.
Cash and Cash Equivalents
All highly liquid investments purchased with an original maturity of three months or less are
considered to be cash equivalents.
Marketable Securities
The Company classifies its marketable equity securities as available-for-sale and carries
these securities at amounts that approximate fair market value. As of February 26, 2005, the
Company began to classify its investment in auction-rate securities as marketable securities.
Previously, these investments were included in cash and cash equivalents. These investments totaled
$24.4 million as of November 26, 2005 and $20.2 million as of August 27, 2005. This change in
classification has no effect on the amounts of total current assets, total assets, net income, or
cash flows from operations of the Company.
8
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
Trade Accounts Receivable
Trade accounts receivable are recorded net of an allowance for doubtful accounts.
Allowance for Doubtful Accounts
The Company makes estimates of the uncollectibility of accounts receivable. Management
specifically analyzes accounts receivable and analyzes historical bad debts, customer
concentrations, customer credit-worthiness, current economic trends and changes in customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. Accounts receivable are
charged off after management determines that they are uncollectible.
Inventories and Inventory Reserves
Inventories are valued at the lower of cost, determined by the first in, first out method, or
market. The Company records reserves for inventory shrinkage and for potentially excess, obsolete
and slow moving inventory. The amounts of these reserves are based upon historical loss trends,
inventory levels, physical inventory and cycle count adjustments, expected product lives,
forecasted sales demand and recoverability.
Property, Plant and Equipment
Building and related costs are carried at cost and depreciated on a straight-line basis over a
5 to 30-year period. Leasehold improvements are carried at cost and depreciated over a three- to
five-year period or the term of the underlying lease, whichever is shorter. Equipment is carried at
cost and depreciated on a straight-line method over its estimated economic life. Principal economic
lives for equipment are one to seven years. Software implemented for internal use is amortized over
three to five years beginning when the system is placed in service. Maintenance and repairs are
expensed as incurred; significant renewals and improvements are capitalized.
Valuation of Long-Lived and Intangible Assets
The Company assesses the impairment of identifiable intangibles and long-lived assets whenever
events or changes in circumstances indicate that the carrying value may not be recoverable.
The Company amortizes intangible assets on a straight-line basis over their estimated economic
lives which range from two to nine years. The estimated aggregate amortization of intangible assets
for the next five years is $403,000 in the last nine months of fiscal 2006, $537,000 in fiscal
2007, $538,000 in fiscal 2008, $163,000 in fiscal 2009 and $8,000 in fiscal 2010.
If the Company determines that the carrying value of intangibles and long-lived assets may not
be recoverable, the Company measures any impairment based on a projected discounted cash flow
method using a discount rate determined by management to be commensurate with the risk inherent in
its current business model or another valuation technique. Net intangible assets and long-lived
assets amounted to $32.5 million as of November 26, 2005 and $33.5 million as of August 27, 2005.
9
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
The Company has no intangible assets with indefinite useful lives. Intangible assets as
of November 26, 2005 and August 27, 2005 consisted of the following (in thousands):
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|
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|
|
|
|
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As of November 26, 2005 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Developed
technology |
|
$ |
9,150 |
|
|
$ |
9,150 |
|
|
$ |
|
|
Patents |
|
|
4,285 |
|
|
|
3,027 |
|
|
|
1,258 |
|
License fees |
|
|
1,010 |
|
|
|
619 |
|
|
|
391 |
|
Other |
|
|
420 |
|
|
|
420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,865 |
|
|
$ |
13,216 |
|
|
$ |
1,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
The Company routinely considers whether indicators of impairment of its property and equipment
are present. If such indicators are present, the Company determines whether the sum of the
estimated undiscounted cash flows attributable to the asset in question is less than its carrying
value. If less, an impairment loss is recognized based on the excess of the carrying amount of the
asset over its fair value. Fair value is determined by discounted estimated future cash flows,
appraisals or other methods deemed appropriate. If the asset determined to be impaired is to be
held and used, the Company recognizes an impairment charge to the extent the present value of
anticipated net cash flows attributable to the asset is less than the assets carrying value.
Investment in Affiliate
The Companys investment in affiliated companies consists of a 49% interest in mFSI LTD, a
Japanese joint venture company formed in 1991. This investment is accounted for by the equity
method utilizing a two-month lag due to the affiliates year end.
The Company defers recognition of the profit on sales to mFSI LTD which remain in mFSI LTDs
inventory based on the Companys ownership percentage of mFSI LTD.
The book value of the Companys long-term investment in affiliate is reviewed for other than
temporary impairment whenever events or changes in circumstances indicate that the carrying value
may not be recoverable.
10
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
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.
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 one to two years, depending upon
the product or customer agreement. Provision is made for the estimated cost of maintaining product
warranties at the time the product is sold. Special warranty reserves are also accrued for major
rework campaigns.
Warranty provisions, claims and changes in estimates for the fiscal quarters ended November
26, 2005 and November 27, 2004 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
November 26, |
|
|
November 27, |
|
|
|
2005 |
|
|
2004 |
|
Beginning balance |
|
$ |
4,117 |
|
|
$ |
4,575 |
|
Warranty provisions |
|
|
328 |
|
|
|
203 |
|
Warranty claims |
|
|
(423 |
) |
|
|
(103 |
) |
Changes in estimates |
|
|
(356 |
) |
|
|
(384 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
3,666 |
|
|
$ |
4,291 |
|
|
|
|
|
|
|
|
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at
current exchange rates. Operating results for investees and foreign subsidiaries are translated
into U.S. dollars using the average or actual rates of exchange prevailing during the period.
Foreign currency translation adjustments are included in the accumulated other comprehensive income
account in stockholders equity.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period. Diluted net income
per common share is computed using the treasury stock method to compute the weighted average number
of common stock outstanding assuming the conversion of potential dilutive common shares. Diluted
net loss per common share for fiscal quarters ended November 26, 2005 and November 27, 2004 does
not include the effect of potential dilutive common shares as their inclusion would be
antidilutive. The number of potential dilutive common shares excluded from the computation of
diluted net loss per share was 3,944,000 for the first quarter of fiscal 2006 and 3,746,000 for the
first quarter of fiscal 2005.
11
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
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 the first quarters of fiscal 2006 or
2005.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those estimates.
Employee Stock Plans
On August 28, 2005, we adopted the fair value recognition provisions of SFAS No. 123R,
Share-Based Payment, using the modified prospective method. As a result, as of November 26, 2005,
our results of operations reflected compensation expense for new stock options granted and vested
under our stock incentive plan and employee stock purchase plan during the first quarter of fiscal
2006 and the unvested portion of previous stock option grants which vested during the first quarter
of fiscal 2006. Amounts recognized in the financial statements related to stock-based compensation
were as follows (in thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
|
November 26, |
|
|
November 27, |
|
|
|
2005 |
|
|
2004 |
|
|
|
|
Total cost of stock-based compensation |
|
$ |
284 |
|
|
$ |
|
|
Amount capitalized in inventory and
property and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts charged against earnings, before
income tax benefits |
|
|
284 |
|
|
|
|
|
Amount of income tax benefit recognized in
earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount charged against net earnings |
|
$ |
284 |
|
|
$ |
|
|
|
|
|
|
|
Impact on net loss per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
|
$ |
|
|
Diluted |
|
$ |
0.01 |
|
|
$ |
|
|
Stock-based compensation expense was reflected in the statement of operations for the first
quarter of fiscal 2006 as follows (in thousands):
|
|
|
|
|
Cost of goods sold |
|
$ |
10 |
|
Selling, general and administrative |
|
|
206 |
|
Research and development |
|
|
68 |
|
|
|
|
|
|
|
$ |
284 |
|
|
|
|
|
12
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
Prior to the first quarter of fiscal 2006, we accounted for stock-based employee
compensation arrangements in accordance with the provisions and related interpretations of
Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees. Had
compensation cost for stock-based compensation been determined consistent with SFAS No. 123R, the
net loss and net loss per share would have been adjusted to the following pro forma amounts (in
thousands, except for per share data):
|
|
|
|
|
|
|
Quarter ended |
|
|
|
November 27, 2004 |
|
Net loss, as reported |
|
$ |
(3,276 |
) |
|
|
|
|
|
Employee stock-based compensation expense included
in net earnings |
|
|
|
|
Less: stock-based employee compensation expense
determined under fair value based method |
|
|
(679 |
) |
|
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(3,955 |
) |
|
|
|
|
|
|
|
|
|
Net loss per share: |
|
|
|
|
Basic as reported |
|
$ |
(0.11 |
) |
Basic pro forma |
|
$ |
(0.13 |
) |
Diluted as reported |
|
$ |
(0.11 |
) |
Diluted pro forma |
|
$ |
(0.13 |
) |
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing method. We use historical data to estimate the expected price volatility, the
expected option life and the expected forfeiture rate. The risk-free rate is based on the U.S.
Treasury yield curve in effect at the time of grant for the estimated life of the option. The
Company has not made any dividend payments nor does it have plans to pay dividends in the
foreseeable future. The following assumptions were used to estimate the fair value of options
granted during the first quarters of fiscal 2006 and 2005 using the Black-Scholes option-pricing
model:
|
|
|
|
|
|
|
|
|
|
|
Quarters ended |
|
|
November 26, |
|
November 27, |
|
|
2005 |
|
2004 |
Volatility |
|
|
69.3 |
% |
|
|
71.5 |
% |
Risk-free interest rates |
|
|
4.2 |
% |
|
|
3.4 |
% |
Expected option life |
|
|
5.6 |
|
|
|
5.2 |
|
Stock dividend yield |
|
|
|
|
|
|
|
|
13
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
A summary of our option activity for the first quarter of fiscal 2006 is as follows (in
thousands, except price per share and contractual term):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
average |
|
|
|
|
|
|
|
|
average |
|
Remaining |
|
Aggregate |
|
|
Number of |
|
Exercise Price |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Per Share |
|
Term |
|
Value |
Outstanding at August 27, 2005 |
|
|
4,001 |
|
|
$ |
7.34 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
13 |
|
|
|
4.16 |
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
4 |
|
|
|
3.32 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
47 |
|
|
|
9.07 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
19 |
|
|
|
3.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at November 26, 2005 |
|
|
3,944 |
|
|
$ |
7.33 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at November 26, 2005 |
|
|
3,487 |
|
|
$ |
7.84 |
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no aggregate intrinsic value for options outstanding or exercisable at November 26,
2005 as the average price of our stock for the first quarter of fiscal 2006 was less than the
average exercise price of options outstanding or exercisable.
The weighted average grant date fair value based on the Black-Scholes option pricing model for
options granted in the first quarter of fiscal 2006 was $2.46 per share and for options granted in
the first quarter of fiscal 2005 was $2.49 per share. The total intrinsic value of options
exercised during the first quarter of fiscal 2006 was $17,300 and during the first quarter of
fiscal 2005 was $4,200.
A summary of the status of our unvested option shares as of November 26, 2005 is as follows
(in thousands except fair value amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
|
Number of |
|
Grant-Date Fair |
|
|
Shares |
|
Value |
Unvested at August 27, 2005 |
|
|
531 |
|
|
$ |
3.43 |
|
Options granted |
|
|
13 |
|
|
|
4.16 |
|
Options forfeited |
|
|
4 |
|
|
|
3.32 |
|
Options vested |
|
|
83 |
|
|
|
3.43 |
|
|
|
|
|
|
|
|
|
|
|
Unvested at November 26, 2005 |
|
|
457 |
|
|
$ |
3.48 |
|
|
|
|
|
|
|
|
|
|
As of November 26, 2005, there was $683,000 of total unrecognized compensation cost related to
unvested share-based compensation granted under our plans. That cost is expected to be recognized
over a weighted-average period of 1.1 years. The total fair value of option shares vested during
the first quarter of fiscal 2006 was $284,000 and the first quarter of fiscal 2005 was $679,000.
14
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, Inventory Costs. This statement requires
that items such as idle facility expense, excessive spoilage, double freight and rehandling costs
be recognized as current period charges. In addition, this statement requires that the allocation
of fixed production overheads to the cost of conversion be based on the normal capacity of the
production facilities. This statement was effective for inventory costs incurred beginning in the
Companys first quarter of fiscal 2006. The implementation of this statement did not have a
material impact on the Companys results of operation or financial condition.
Reclassifications
Certain first quarter of fiscal 2005 amounts have been reclassified to conform to the current
year presentation.
Inventories are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
November 26, |
|
|
August 27, |
|
|
|
2005 |
|
|
2005 |
|
Finished products |
|
$ |
2,328 |
|
|
$ |
2,329 |
|
Work-in-process |
|
|
11,553 |
|
|
|
9,971 |
|
Subassemblies |
|
|
916 |
|
|
|
1,146 |
|
Raw materials and purchased parts |
|
|
9,844 |
|
|
|
11,271 |
|
|
|
|
|
|
|
|
|
|
$ |
24,641 |
|
|
$ |
24,717 |
|
|
|
|
|
|
|
|
Accrued expenses are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
November 26, |
|
|
August 27, |
|
|
|
2005 |
|
|
2005 |
|
Commissions |
|
$ |
119 |
|
|
$ |
243 |
|
Salaries and benefits |
|
|
2,301 |
|
|
|
2,707 |
|
Product warranty |
|
|
3,666 |
|
|
|
4,117 |
|
Professional fees |
|
|
710 |
|
|
|
719 |
|
Patent litigation |
|
|
750 |
|
|
|
750 |
|
Income taxes |
|
|
1,276 |
|
|
|
1,264 |
|
Other |
|
|
2,113 |
|
|
|
1,792 |
|
|
|
|
|
|
|
|
|
|
$ |
10,935 |
|
|
$ |
11,592 |
|
|
|
|
|
|
|
|
15
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(4) Supplementary Cash Flow Information
The following summarizes supplementary cash flow items (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
|
November 26, |
|
|
November 27, |
|
|
|
2005 |
|
|
2004 |
|
Interest paid, net |
|
$ |
5 |
|
|
$ |
15 |
|
(5) Comprehensive Income (Loss)
Other comprehensive income (loss) pertains to revenues, expenses, gains and losses that are
not included in the net loss but rather are recorded directly in stockholders equity. For the
quarters ended November 26, 2005 and November 27, 2004, other comprehensive income (loss) consisted
of the foreign currency translation adjustment and unrealized holding gains on investments and
amounted to (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
|
November 26, |
|
|
November 27, |
|
|
|
2005 |
|
|
2004 |
|
Net loss |
|
|
($4,296 |
) |
|
|
($3,276 |
) |
Items of other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
(287 |
) |
|
|
376 |
|
Unrealized holding gains on investments |
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
Comprehensive loss |
|
|
($4,583 |
) |
|
|
($2,915 |
) |
|
|
|
|
|
|
|
(6) Segment and Other Information
Segment information
The Company historically had two product lines, Surface Conditioning and POLARIS®
Systems and Services and provided segment information. With the wind-down of the
Microlithography business, which began in fiscal 2003, the Company has integrated the operations of
its product lines.
In accordance with SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, the Companys chief operating decision-maker has been identified as the President and
Chief Executive Officer. Due to the level of integration of the two product lines, the Companys
chief operating decision-maker reviews consolidated operating results to make decisions about
allocating resources and assessing performance for the entire Company. The two product lines are a
part of one segment for the manufacture, marketing and servicing of equipment for the
microelectronics industry.
16
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(7) Litigation
The Company generates 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, the Company has
received notices from state or federal enforcement agencies that the Company is a potentially
responsible party (PRP) in connection with the investigation of several hazardous waste disposal
sites owned and operated by third parties. In each matter, the Company has elected to participate
in settlement offers made to all de minimis parties with respect to such sites. The risk of being
named a PRP is that if any of the other PRPs are unable to contribute its proportionate share of
the liability, if any, associated with the site, those PRPs that are financially able could be
held financially responsible for the shortfall.
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 the Companys current products could provoke claims of infringement by third
parties. In the future, litigation may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company or to defend the Company against claimed
infringement of the rights of others and to determine the scope and validity of its proprietary
rights. Any such litigation could result in substantial costs and diversion of effort by the
Company, which by itself could have a material adverse impact on the Companys financial condition
and operating results. Further, adverse determinations in such litigation could result in the
Companys loss of proprietary rights, subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties or prevent the Company from
manufacturing or selling one or more products, any of which could have a material adverse effect on
the Companys financial condition and results of operations.
Certain of the Companys product lines are intended for use with hazardous chemicals. As a
result, the Company is notified by its customers from time to time of incidents involving the
Companys equipment that have resulted in a spill or release of a hazardous chemical. The Company
maintains product liability insurance in an effort to minimize its risk. However, in some cases it
may be alleged that the Company or its equipment is at fault. There can be no assurance that any
future litigation resulting from such claims would not have a material adverse effect on the
Companys business or financial results.
Hsu Litigation
See Note 18 of the Notes to Consolidated Financial Statements in the Companys fiscal 2005
annual report on Form 10-K, as amended, for a discussion of the Hsu litigation.
YieldUP Patent Litigation
See Note 18 of the Notes to Consolidated Financial Statements in the Companys fiscal 2005
annual report on Form 10-K, as amended, for a discussion of the YieldUP patent litigation.
17
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this report, except for the historical information contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and is subject to the safe harbor created by that statute. Typically, we identify forward-looking
statements by use of an asterisk *. In some cases, you can identify forward-looking statements by
terminology such as expects, anticipates, intends, may, should, plans, believes,
seeks, estimates, could, would, or the negative of such terms or other comparable
terminology. These statements are subject to various risks and uncertainties, both known and
unknown. Factors that could cause actual results to differ include, but are not limited to,
expected orders, revenues, net loss, cash usage and other financial performance for the second
quarter of fiscal 2006; industry, semiconductor and equipment demand for calendar 2006; the length
and extent of the current industry recovery; order delays or cancellations; general economic
conditions; changes in customer capacity requirements and demand for microelectronics; the extent
of demand for our products and our ability to meet demand; global trade policies; worldwide
economic and political stability; our successful execution of internal performance plans; the
cyclical nature of our business; volatility of the market for certain products; performance issues
with key suppliers and subcontractors; the level of new orders; the timing and success of current
and future product and process development programs; the success of our affiliated distributor in
Japan; the success of our direct distribution organization; and the potential impairment of
long-lived assets; as well as other factors listed from time to time in our SEC reports including,
but not limited to, the Risk Factors included in this report. Readers also are cautioned not to
place undue reliance on these forward-looking statements as actual results could differ materially.
We undertake no duty to update any of the forward-looking statements after the date of this report.
This discussion and analysis should be read in conjunction with the Consolidated Condensed
Financial Statements and footnotes thereto appearing elsewhere in this report.
Industry
Gartner Dataquest, an industry research group, is currently forecasting that:
|
|
|
demand for semiconductors will increase approximately seven percent to $235 billion
in calendar 2005 from $220 billion in the prior year, and that such increase will be
driven by memory, micro component and ASSP (application-specific standard product)
device demand;* |
|
|
|
|
semiconductor demand to grow approximately eight percent to $253 billion in calendar
2006;* |
|
|
|
|
demand for NOR (a type of flash memory chip with capabilities for applications in
which programs run directly from memory) and NAND (a type of flash memory chip used for
high density storage applications) and micro components to drive the increase in
calendar 2006;* |
|
|
|
|
total equipment spending in calendar 2005 to decrease approximately 11 percent to
$33 billion as compared to $38 billion in 2004;* and |
|
|
|
|
equipment spending to increase approximately eight percent to $36 billion in
calendar 2006 based upon device manufacturers current factory utilization rates and the
anticipated increase in semiconductor unit demand and return to double digit growth in
calendar 2007 and 2008.* |
Device manufacturers are managing capacity increases carefully and are asking equipment
manufacturers to shorten equipment delivery lead times. We expect this trend to continue.*
We believe that global economic conditions will remain robust in calendar 2006 and the top
semiconductor suppliers in the world will continue to add advanced 300mm capacity in an effort to
reduce their unit manufacturing cost and meet leading edge device demand.* In addition, we believe
that our broadening applications capability and focus on new product placements at the top spenders
allows us the potential to grow faster than the market segments that we serve.*
18
Application of Critical Accounting Policies and Estimates
In accordance with Securities and Exchange Commission guidance, those material accounting
policies that we believe are the most critical to an investors understanding of our financial
results and condition and require complex management judgment are discussed below.
Our critical accounting policies and estimates are as follows:
|
|
|
revenue recognition; |
|
|
|
|
valuation of long-lived and intangible assets; and |
|
|
|
|
estimation of valuation allowances and accrued liabilities, specifically product
warranty, inventory reserves and allowance for doubtful accounts. |
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred
or services have been rendered, the purchase price is fixed or determinable and collectibility is
reasonably assured. If our equipment sales involve sales to our existing customers who have
previously accepted the same type(s) of equipment with the same type(s) of specifications, we
account for the product sale as a multiple element arrangement. We recognize the equipment revenue
upon shipment and transfer of title. The other multiple elements also include installation,
extended warranty contracts and training. Equipment installation revenue is valued based on
estimated service person hours to complete installation and published or quoted service labor rates
and is recognized when the installation has been completed. Training revenue is valued based on
published training class prices or quoted rates and is recognized when the customers complete the
training classes or when a customer-specific training period has expired. The published or quoted
service labor rates and training class prices are rates actually charged and billed to our
customers.
All other product sales with customer-specific acceptance provisions are recognized upon
customer acceptance. Future revenues may be negatively impacted if we are unable to meet
customer-specific acceptance criteria. Revenue related to spare part sales is recognized upon
shipment. Revenues related to maintenance and service contracts and extended warranty contracts are
recognized ratably over the duration of the contracts.
Timing and amount of revenue recognized are dependent on the mix of revenue recognized upon
shipment versus acceptance. For revenue recognized upon acceptance, they are dependent upon when
customer-specific criteria are met.
Valuation of Long-Lived and Intangible Assets
We assess the impairment of identifiable intangibles and long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be recoverable.
If we determine that the carrying value of intangibles and long-lived assets may not be
recoverable, we measure any impairment based on a projected discounted cash flow method using a
discount rate
19
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 $32.5 million as of November 26, 2005 and $33.5 million as of August 27, 2005.
Product Warranty Estimation
We record a liability for warranty claims at the time of sale. The amount of the liability is
based on the trend in the historical ratio of claims to sales, releases of new products and other
factors. The warranty periods for new equipment manufactured by us typically range from one to two
years. Special warranty reserves are also accrued for major rework campaigns. Although management
believes the likelihood to be relatively low, claims experience could be materially different from
actual results because of the introduction of new, more complex products; competition or other
external forces; manufacturing changes that could impact product quality; or as yet unrecognized
defects in products sold.
Inventory Reserves Estimation
We record reserves for inventory shrinkage and for potentially excess, obsolete and slow
moving inventory. These reserves are based upon historical loss trends, inventory levels, physical
inventory and cycle count adjustments, expected product lives, forecasted sales demand and
recoverability. Results could be materially different if demand for our products decreased because
of economic or competitive conditions, length of the industry downturn, or if products become
obsolete because of technical advancements in the industry or by us.
Allowance for Doubtful Accounts Estimation
Management must make estimates of the uncollectibility of our accounts receivable. The most
significant risk is the risk of sudden unexpected deterioration in financial condition of a
significant customer who is not considered in the allowance. Management specifically analyzes
accounts receivable and analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts. Results could be materially
impacted if the financial condition of a significant customer deteriorated and related accounts
receivable are deemed uncollectible. Accounts receivable are charged off after management
determines that they are uncollectible.
20
FIRST QUARTER OF FISCAL 2006 COMPARED WITH FIRST QUARTER OF FISCAL 2005
The Company
The following table sets forth for the fiscal quarter indicated, certain income and expense
items as a percent of our total sales.
|
|
|
|
|
|
|
|
|
|
|
Percent of Sales |
|
|
|
November 26, |
|
|
November 27, |
|
First quarter ended: |
|
2005 |
|
|
2004 |
|
Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
46.8 |
|
|
|
46.5 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
53.2 |
|
|
|
53.5 |
|
Selling, general and administrative |
|
|
45.5 |
|
|
|
43.5 |
|
Research and development |
|
|
31.5 |
|
|
|
27.9 |
|
|
|
|
|
|
|
|
Operating loss |
|
|
(23.8 |
) |
|
|
(17.9 |
) |
Other income, net |
|
|
1.9 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
Losses before income taxes |
|
|
(21.9 |
) |
|
|
(17.1 |
) |
Income taxes |
|
|
0.1 |
|
|
|
|
|
Equity in (losses) earnings of affiliate |
|
|
(1.1 |
) |
|
|
0.3 |
|
|
|
|
|
|
|
|
Net loss |
|
|
(23.1 |
%) |
|
|
(16.8 |
%) |
|
|
|
|
|
|
|
Sales Revenues and Shipments
Sales revenues decreased 4% to $18.6 million for the first quarter of fiscal 2006 as compared
to $19.4 million for the first quarter of fiscal 2005. International sales were $12.7 million,
representing 68% of total sales during the first quarter of fiscal 2006 and $13.3 million,
representing 68% of total sales, during the first quarter of fiscal 2005. The decrease in the
amount of total sales revenue related primarily to a decrease in sales to Europe, partially offset
by an increase in sales to Asia.
Shipments in the first quarter of fiscal 2006 increased to $22.1 million from $19.6 million in
the first quarter of fiscal 2005. The increase was primarily in domestic shipments.
Based upon our revenue recognition policy, certain shipments to customers are not recognized
until customer acceptance. Therefore depending on timing of shipments and customer acceptances,
there are time periods where shipments may exceed sales revenue or due to timing of acceptances,
sales revenue may exceed shipments.
We currently expect second quarter revenues to be between $20 and $24 million.* A portion of
this expected revenue is subject to us receiving purchase orders or obtaining timely acceptance
from our customers, including gaining acceptance for several systems that are now being qualified
by customers.* Also, in the existing industry environment, customers could request delivery delays
or cancel orders.
Gross Margin
Our gross profit margin fluctuates due to a number of factors, including the mix of products
sold; the proportion of international sales, as international sales, particularly in Asia,
generally have lower margins due to pricing pressures; the result of selling through our affiliate
in Japan; utilization of manufacturing capacity; the sales of PSS product inventory previously
written down to zero; and initial product placement discounts.
Gross profit as a percentage of sales was 53.2% for the first quarter of fiscal 2006 and was
53.5% for the first quarter of fiscal 2005.
21
During the first quarter of fiscal 2006, we had sales of PSS product inventory with an
original cost of $0.8 million that had previously been written down to zero. This was primarily due
to sales revenues generated from unanticipated PSS refurbished systems, spare parts and upgrades
sales. Our gross margin as a percentage of sales in the first quarter of fiscal 2006 would have
been 49.0% if we had included in cost of goods sold the original cost of the PSS product inventory
that had been written down to zero. Gross margin including the original cost of the PSS product
inventory that had been written down to zero is not calculated in accordance with generally
accepted accounting principles (GAAP). Our management believes that the presentation of gross
margin including the original cost of the PSS inventory that had been written down to zero provides
a useful analysis of our ongoing operating trends and helps investors compare our operating
performance period over period. During the first quarter of fiscal 2005, we had no significant
sales of PSS product inventory that had previously been written down to zero.
The following is a reconciliation of our first quarter fiscal 2006 gross margin calculated in
accordance with GAAP to our first quarter fiscal 2006 gross margin including the original cost of
PSS product inventory in cost of goods sold that had previously been written down to zero (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended |
|
|
|
|
|
|
|
|
|
|
First Quarter Ended |
|
|
|
|
|
|
November 26, 2005 |
|
|
% of |
|
|
|
|
|
|
November 26, 2005 |
|
|
% of |
|
|
|
(GAAP) |
|
|
Sales |
|
|
Adjustment |
|
|
(Non-GAAP) |
|
|
Sales |
|
Sales |
|
$ |
18,623 |
|
|
|
|
|
|
|
|
|
|
$ |
18,623 |
|
|
|
|
|
Cost of Goods Sold |
|
|
8,711 |
|
|
|
|
|
|
$ |
784 |
(1) |
|
|
9,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
$ |
9,912 |
|
|
|
53.2 |
% |
|
|
|
|
|
$ |
9,128 |
|
|
|
49.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Original cost of PSS product inventory sold that had previously been
written down to zero. |
We will continue to try to sell the impaired inventory to our customers as refurbished
systems, spare parts and upgrades to existing systems. If unsuccessful, some of the items will be
disposed of. Any significant sales of the impaired inventory will be disclosed. Gross margins will
be higher if inventory carried at a reduced cost is sold.
Gross profit margins are expected to decrease to 44% to 46% of revenues for the second quarter
of fiscal 2006, due to both a foreign/domestic sales mix and product mix shift compared to the
first quarter of fiscal 2006.*
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $8.5 million in the first quarters of fiscal
2006 and fiscal 2005.
Based upon our current operations, we expect selling, general and administrative expenses in
the second quarter of fiscal 2006 to be in the range of $8.8 to $9.0 million as we continue to
focus on supporting product evaluations in process at our customers facilities and increasing our
field service headcount to support the anticipated increase in unit shipments in future quarters.*
22
Research and Development Expenses
Research and development expenses were $5.9 million for the first quarter of fiscal 2006 and
$5.4 million for the first quarter of fiscal 2005. The majority of our research and development
investment is focused on expanding the applications capabilities of our products, supporting
customer evaluations and expanding our product portfolio.
We expect research and development expenses to range from $5.9 to $6.1 million for the second
quarter of fiscal 2006 as we continue to invest in new application and product development programs
and continue to support our flagship products: the MAGELLAN, the ANTARES and the ZETA Systems.*
Other Income (Expense), Net
Other income (expense), net was approximately $353,000 of income for the first quarter of
fiscal 2006 as compared to $152,000 of income for the first quarter of fiscal 2005. The increase
relates primarily to an increase in interest income associated with higher interest rates.
Interest income for the second quarter of fiscal 2006 is expected to be between $200,000 to
$300,000, given our current cash position and the anticipated interest rates.*
Income Tax
We recorded a tax expense of $13,000 in the first quarter of fiscal 2006 and $6,000 in the
first quarter of fiscal 2005.
Our deferred tax assets on the balance sheet as of November 26, 2005 have been fully reserved
for with a valuation allowance. We do not expect to significantly reduce our valuation allowance
until we are consistently profitable on a quarterly basis.*
We have net operating loss carryforwards for federal income tax purposes of approximately
$151.9 million, which will begin to expire in fiscal 2011 through fiscal 2023 if not utilized. Of
this amount, approximately $15.0 million is subject to Internal Revenue Code Section 382
limitations on utilization. This limitation is approximately $1.4 million per year.
Tax legislation has been enacted to repeal certain export tax incentives that we have
qualified for in the past. The legislation also includes provisions that allow for a deduction for
qualified production activities. These provisions will not impact our tax rate in the near term due
to the full valuation allowance. The longer term impact will depend on the level of our
profitability and the domestic and foreign mix of earnings.
Equity in (Losses) Earnings of Affiliate
The equity in (losses) earnings of affiliate was approximately $209,000 of losses for the
first quarter of fiscal 2006, compared to approximately $58,000 of income for the first quarter of
fiscal 2005. The decrease related to mFSI LTDs operations.
We expect to report equity in earnings of affiliate between $200,000 to $300,000 in the second
quarter of fiscal 2006 due to the expected timing of acceptance of mFSI LTDs products in their
second quarter.*
23
Net Loss
Assuming that we can achieve the expected revenues, gross margin, operating expenses, interest
income and affiliate earning levels, we expect to report a net loss of approximately $3.5 to $4.5
million in the second quarter of fiscal 2006.*
Liquidity and Capital Resources
Our cash, restricted cash, cash equivalents and marketable securities were approximately $28.5
million as of November 26, 2005, a decrease of $3.4 million from the end of fiscal 2005. The
decrease in cash, restricted cash, and cash equivalents was due primarily to $3.0 million of net
cash used for operations, $0.5 million of property, plant and equipment acquisitions and $0.1
million of negative currency impact. The decreases were net of a $0.2 million dividend received
from our affiliate, mFSI LTD.
Accounts receivables will fluctuate quarter to quarter depending on individual customers
timing of ship dates, payment terms and cash flow conditions. Accounts receivable decreased $0.4
million from the end of fiscal 2005. The decrease in trade accounts receivable related to a
decrease in shipments from $25.1 million in the fourth quarter of fiscal 2005 to $22.1 million in
the first quarter of fiscal 2006.
Inventory was approximately $24.6 million at November 26, 2005 and $24.7 million at the end of
fiscal 2005. The slight decrease in inventory related primarily to a decrease in raw materials
offset by an increase in work-in-process inventory. Inventory reserves were $14.5 million at
November 26, 2005, and $15.3 million at the end of fiscal 2005. The PSS product inventory reserves
were $11.0 million at November 26, 2005 as compared to $11.7 million at the end of fiscal 2005.
This decrease was primarily due to the sales in the first quarter of fiscal 2006 of PSS product
inventory with an original cost of $0.8 million that had previously been written down to zero.
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 $7.5 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 November 26,
2005 was $11.0 million.
Trade accounts payable increased approximately $0.4 million to $5.6 million as of November 26,
2005 as compared to $5.2 million at the end of fiscal 2005. The increase in trade accounts payable
related primarily to the timing of inventory receipts.
Deferred profit increased approximately $0.5 million to $5.3 million as of November 26, 2005,
as compared to $4.8 million at the end of fiscal 2005. The increase in deferred profit related
primarily to the timing of system acceptances.
As of November 26, 2005, our current ratio was 3.8 to 1.0, and working capital was $62.4
million. We did not have any outstanding loans with our affiliate and had no lines of credit or
guarantees of affiliate as of November 26, 2005. As of November 26, 2005, we had guarantees
totaling $256,000 related to auto leases, VAT and payroll requirements in Europe. These guarantees
were collateralized with $140,000 of restricted cash.
24
The following table provides aggregate information about our contractual payment obligations
and the periods in which payments are due (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
|
More than 5 |
|
Contractual Obligations: |
|
Total |
|
|
Year |
|
|
1-3 years |
|
|
3-5 years |
|
|
years |
|
Operating Lease
Obligations |
|
$ |
2,290 |
|
|
$ |
1,056 |
|
|
$ |
768 |
|
|
$ |
466 |
|
|
$ |
|
|
Purchase Obligations |
|
|
4,729 |
|
|
|
4,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-Term
Liabilities (1) |
|
|
3,388 |
|
|
|
1,138 |
|
|
|
500 |
|
|
|
500 |
|
|
|
1,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,407 |
|
|
$ |
6,923 |
|
|
$ |
1,268 |
|
|
$ |
966 |
|
|
$ |
1,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Other long-term liabilities represent payments related to a patent litigation
settlement and minimum royalty payments or discounts granted under a license
agreement. |
Capital expenditures were $0.5 million in the first quarter of fiscal 2006 and $0.6 million in
the first quarter of fiscal 2005. We expect capital expenditures to be less than $1.0 million in
the second quarter of fiscal 2006.* Depreciation and amortization for the second quarter of fiscal
2006 is expected to be between approximately $1.0 and $1.2 million.*
At the second quarter expected run rate, we anticipate using between $2.5 and $3.5 million of
net cash for operations, including the final patent litigation payment of $0.8 million, in the
second quarter of fiscal 2006.* We believe that with existing cash, cash receipts, cash
equivalents, marketable securities and internally generated funds, there will be sufficient funds
to meet our currently projected working capital requirements, and to meet other cash requirements
through at least fiscal 2006.* We believe that success in our industry requires substantial capital
to maintain the flexibility to take advantage of opportunities as they arise. One of our strategic
objectives is, as market and business conditions warrant, to consider divestitures, investments or
acquisitions of businesses, products or technologies particularly those that are complementary to
our surface conditioning business. We may fund such activities with additional equity or debt
financing. The sale of additional equity or debt securities, whether to maintain flexibility or to
meet strategic objectives, could result in additional dilution to our shareholders.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
New Accounting Pronouncements
In 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 a material impact
on our results of operations or financial position.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment. SFAS No.
123R is a revision of SFAS No. 123, Accounting for Stock-Based Compensation and supersedes
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions
in which an entity obtains employee services through share-based payment transactions. SFAS No.
123R
25
requires a public entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the fair value of the award at the date of grant. The cost
will be recognized over the period during which an employee is required to provide service in
exchange for the award. SFAS No. 123R is effective as of the beginning of the first annual
reporting period that begins after June 15, 2005 and we adopted this standard on August 28, 2005
using the modified prospective method. Our results of operations in the first quarter of fiscal
2006 reflected $284,000 of compensation expense for new stock options granted under our stock
incentive plan, and for the unvested portion of previous stock options granted under our stock
incentive plan and our employee stock purchase plan.
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.
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:
|
|
|
compatibility with existing manufacturing processes and products; |
|
|
|
|
ability to displace incumbent suppliers or processes or tools of record; |
|
|
|
|
perceived advantages over competing products; and |
|
|
|
|
the level of customer service available to support such products. |
Moreover, manufacturers often rely on a limited number of equipment vendors to meet their
manufacturing equipment needs. As a result, market acceptance of our products may be affected
adversely to the extent potential customers utilize a competitors manufacturing equipment. There
can be no assurance that sales of new products will remain constant or grow or that we will be
successful in obtaining broad market acceptance of our systems and technology.
26
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:
|
|
|
design and develop more efficient manufacturing equipment; |
|
|
|
|
design and implement improved processes for microelectronics manufacturers to use; and |
|
|
|
|
make their equipment compatible with equipment made by other equipment manufacturers. |
To compete, we must continue to develop, manufacture, and market new or improved products that
meet changing industry standards. To do this successfully, we must:
|
|
|
select appropriate products; |
|
|
|
|
design and develop our products efficiently and quickly; |
|
|
|
|
implement our manufacturing and assembly processes efficiently and on time; |
|
|
|
|
make products that perform well for our customers; |
|
|
|
|
market and sell our products effectively; and |
|
|
|
|
introduce our new products in a way that does not unexpectedly reduce sales of our
existing products. |
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:
|
|
|
we may incur substantial costs to ensure the functionality and reliability of products
early in their life cycle; |
27
|
|
|
repeated defects or bugs can reduce orders, increase manufacturing costs, adversely
impact working capital and increase service and warranty expenses; and |
|
|
|
|
we may require significant lead times between product introduction and commercialization. |
As a result, we may have to write off inventory and other assets related to products and could
lose customers and revenue. There is no assurance that we will be successful in preventing product
and process development problems that could potentially harm our results of operations.
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:
|
|
|
difficulties in absorbing the new business, product line, or technology; |
|
|
|
|
diversion of managements attention from other business concerns; |
|
|
|
|
entering new markets in which we have little or no experience; and |
|
|
|
|
possible loss of key employees of the acquired business. |
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 the
first quarter of fiscal 2006, our stock price ranged from $3.72 to $4.42 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:
|
|
|
failure to meet the published expectations of securities analysts for a given period; |
|
|
|
|
changes in financial estimates by securities analysts; |
28
|
|
|
press releases or announcements by, or changes in market values of, comparable companies; |
|
|
|
|
additions or departures of key personnel; and |
|
|
|
|
involvement in or adverse results from litigation. |
The prices of technology stocks, including ours, have been particularly affected by extreme
fluctuations in price and volume in the stock market generally. These broad stock market
fluctuations may have a negative effect on our future stock price.
In the past, securities class action litigation has often been brought against a company
following periods of volatility in the market price of its securities. In the future we could be
the target of this type of litigation. Securities litigation may result in substantial costs and
divert managements attention and resources, which can seriously harm our business.
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:
|
|
|
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. |
|
|
|
|
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. |
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
29
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 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.
Because we assumed direct sales, service and applications support and logistics
responsibilities for our products in Europe and the Asia Pacific region starting in March 2003, we
incur labor, service and other expenses in foreign currencies. As of November 26, 2005, we had not
entered into any hedging activities and our foreign currency transaction gains and losses for the
first quarter of 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 2005, approximately 64% of our sales revenue derived
from sales outside of the United States. In fiscal 2004, approximately 47% of our sales revenue
derived from sales outside the United States. In fiscal 2003, approximately 38% of our sales
revenue derived from sales 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; |
30
|
|
|
compliance with U.S. export laws and foreign laws; |
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|
political and economic instability; |
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|
trade restrictions; |
|
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|
changes in taxes and tariffs; |
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|
longer payment cycles; |
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|
difficulty of administering business overseas; and |
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|
general economic conditions. |
In particular, the Japanese and Asia Pacific markets are extremely competitive. The
semiconductor device manufacturers located there are very aggressive in seeking price concessions
from suppliers, including equipment manufacturers like us.
We seek to meet technical standards imposed by foreign regulatory bodies. However, we cannot
guarantee that we will be able to comply with those standards in the future. Any failure by us to
design products to comply with foreign standards could have a significant negative impact on us.
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.
Because we do not have long-term sales commitments with our customers, if these customers
decide to reduce, delay or cancel orders or choose to deal with our competitors, then our results
will be adversely affected.
If our significant customers reduce, delay, or cancel orders, then our operating results could
suffer. Our largest customers have changed from year to year, however, sales to our top five
customers accounted for approximately 48% of total sales in fiscal 2005, 46% of total revenues in
fiscal 2004 and 59% of total revenues in fiscal 2003. Texas Instruments accounted for approximately
14% of total sales in fiscal 2005, 16% of total sales in fiscal 2004 and 24% of total sales in
fiscal 2003. Samsung
31
Electronics accounted for approximately 11% of total sales in fiscal 2005. IBM
accounted for approximately 14% of total sales in fiscal 2003. We currently have no long-term sales
commitments with any of our customers. Instead, we 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:
|
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our pending patent applications may not be issued or may be issued with more narrow claims; |
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|
patents issued to us may be challenged, invalidated, or circumvented; |
|
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|
rights granted under issued patents may not provide competitive advantages to us; |
|
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|
foreign laws may not protect our intellectual property rights; and |
32
|
|
|
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.
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 implemented procedures 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 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
33
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.
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 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash flows and earnings are subject to fluctuations in foreign exchange rates due to an
investment in our foreign-based affiliate. As of November 26, 2005, our investment in affiliate
included a 49% interest in mFSI LTD, which operates in Japan. We denominate the majority of our
sales outside of the U.S. in U.S. dollars.
Because we assumed direct sales, service and applications support and logistics
responsibilities for our products in Europe and the Asia Pacific region starting in March 2003, we
have and will continue to incur labor, service and other expenses in foreign currencies. As a
result, we may be exposed to fluctuations in foreign exchange rate risks.* As of November 26, 2005,
we had not entered into any hedging activities and our foreign
currency transaction gains and losses for the
first quarter of 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 as we currently have no
long-term debt. As of November 26, 2005, amortized cost approximated market value for all
outstanding marketable securities. We do not undertake any specific actions to cover our exposure
to interest rate risk and we are not party to any interest rate risk management transactions. The
impact on loss before income taxes of a 1% change in short-term interest rates would be
approximately $285,000 based on cash, restricted cash, cash equivalents and marketable securities
balances as of November 26, 2005.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of the principal executive officer and principal financial
officer, of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934 (the Exchange Act)). Based on this evaluation, the
principal executive officer and the principal financial officer concluded that our disclosure
controls and procedures are effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and forms.
There was no change in our internal control over financial reporting during our most recently
completed fiscal quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
34
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
We generate minor amounts of liquid and solid hazardous waste and use licensed haulers and
disposal facilities to ship and dispose of such waste. In the past, we have received notices from
state or federal enforcement agencies that we are a potentially responsible party (PRP) in
connection with the investigation of several hazardous waste disposal sites owned and operated by
third parties. In each matter, we have elected to participate in settlement offers made to all de
minimis parties with respect to such sites. The risk of being named a PRP is that if any of the
other PRPs are unable to contribute its proportionate share of the liability, if any, associated
with the site, those PRPs that are financially able could be held financially responsible for the
shortfall.
There has and continues to be substantial litigation regarding patent and other intellectual
property rights in the microelectronics industry. Commercialization of new products or further
commercialization of our current products could provoke claims of infringement by third parties. In
the future, litigation may be necessary to enforce patents issued to us, to protect trade secrets
or know-how owned by us or to defend us against claimed infringement of the rights of others and to
determine the scope and validity of our proprietary rights. Any such litigation could result in
substantial costs and diversion of effort by us, which by itself could have a material adverse
impact on our financial condition and operating results. Further, adverse determinations in such
litigation could result in our loss of proprietary rights, subject us to significant liabilities to
third parties, require us to seek licenses from third parties or prevent us from manufacturing or
selling one or more products, any of which could have a material adverse effect on our financial
condition and results of operations.
Certain of our product lines are intended for use with hazardous chemicals. As a result, we
are notified by our customers from time to time of incidents involving our equipment that have
resulted in a spill or release of a hazardous chemical. We maintain product liability insurance in
an effort to minimize our risk. However, in some cases it may be alleged that we or our equipment
are at fault. There can be no assurance that any future litigation resulting from such claims would
not have a material adverse effect on our business or financial results.
Hsu Litigation
See Note 18 of the Notes to Consolidated Financial Statements in our fiscal 2005 annual report
on Form 10-K, as amended, for a discussion of the Hsu litigation.
YieldUP Patent Litigation
See Note 18 of the Notes to Consolidated Financial Statements in our fiscal 2005 annual report
on Form 10-K, as amended, for a discussion of the YieldUP patent litigation.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3. Defaults upon Senior Securities
None
35
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits
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(a) Exhibits |
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2.1
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Agreement and Plan of Reorganization, dated as of January 21, 1999
among FSI International, Inc., BMI International, Inc. and YieldUP
International Corporation (5) |
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2.2
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Agreement and Plan of Reorganization by and Among FSI
International, Inc., Spectre Acquisition Corp., and Semiconductor
Systems, Inc. (1) |
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2.3
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Asset Purchase Agreement dated as of June 9, 1999 between FSI
International, Inc. and The BOC Group, Inc. (6) |
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3.1
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Restated Articles of Incorporation of the Company. (2) |
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3.2
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Restated and amended By-Laws. (9) |
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3.5
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Articles of Amendment of Restated Articles of Incorporation (7) |
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3.6
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Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Shares.(3) |
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4.1
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Form of Rights Agreement dated as of May 22, 1997 between FSI
International, Inc. and Harris Trust and Savings Bank, National
Association, as Rights Agent (3) |
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4.2
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Amendment dated March 26, 1998 to Rights Agreement dated May 22,
1997 by and between FSI International, Inc. and Harris Trust and
Saving Bank, National Association as Rights Agent. (4) |
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4.3
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Amendment dated March 9, 2000 to Rights Agreement dated May 22,
1997, as amended March 26, 1998 by and between FSI International,
Inc. and Harris Trust and Savings Bank as Rights Agent. (8) |
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4.4
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Third Amendment dated April 3, 2002 to Rights Agreement dated May
22, 1997, as amended on March 26, 2008 and March 9, 2000 by and
between FSI and Harris Trust and Savings Bank, as Rights Agent.
(10) |
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31.1
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Certification by Principal Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.(filed herewith) |
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31.2
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Certification by Principal Finance and Accounting Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.(filed herewith) |
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32.1
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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) |
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(1) |
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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) |
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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.
|
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(3) |
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Filed as an Exhibit to the Companys Report on Form 8-A, filed by the Company on June 5,
1997, SEC File No. 0-17276, and incorporated by reference. |
|
(4) |
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Filed as an Exhibit to the Companys Report on Form 8-A/A-1, filed by the Company on
April 16, 1998, Sec File No. 0-17276 and incorporated by reference. |
|
(5) |
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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. |
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(6) |
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Filed as an Exhibit to the Companys Report on Form 8-K, filed by the Company on June 24,
1999, SEC File No. 0-17276 and incorporated by reference. |
|
(7) |
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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. |
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(8) |
|
Filed as an Exhibit to the Companys Report on Form 10-Q for the fiscal quarter ended May
27, 2000, SEC File No. 0-17276 and incorporated by reference. |
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(9) |
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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. |
36
(10) |
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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. |
37
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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FSI INTERNATIONAL, INC.
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.................................................. |
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[Registrant] |
DATE: January 5, 2006 |
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By: /s/ Patricia M. Hollister |
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Patricia M. Hollister,
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Chief Financial Officer |
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on behalf of the
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Registrant and as |
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Principal Financial and Accounting Officer |
38
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit |
|
Description |
|
Method of Filing |
2.1
|
|
Agreement and Plan of Reorganization, dated as of January 21,
1999 among FSI International, Inc., BMI International, Inc.
and YieldUP International Corporation (5)
|
|
Incorporated by reference. |
|
2.2
|
|
Agreement and Plan of Reorganization by and Among FSI
International, Inc., Spectre Acquisition Corp., and
Semiconductor Systems, Inc. (1)
|
|
Incorporated by reference. |
|
2.3
|
|
Asset Purchase Agreement dated as of June 9, 1999 between FSI
International, Inc. and The BOC Group, Inc. (6)
|
|
Incorporated by reference. |
|
3.1
|
|
Restated Articles of Incorporation of the Company. (2)
|
|
Incorporated by reference. |
|
3.2
|
|
Restated and amended By-Laws. (9)
|
|
Incorporated by reference. |
|
3.5
|
|
Articles of Amendment of Restated Articles of Incorporation (7)
|
|
Incorporated by reference. |
|
3.6
|
|
Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Shares.(3)
|
|
Incorporated by reference. |
|
4.1
|
|
Form of Rights Agreement dated as of May 22, 1997 between FSI
International, Inc. and Harris Trust and Savings Bank,
National Association, as Rights Agent (3)
|
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Incorporated by reference. |
|
4.2
|
|
Amendment dated March 26, 1998 to Rights Agreement dated May
22, 1997 by and between FSI International, Inc. and Harris
Trust and Saving Bank, National Association as Rights Agent.
(4)
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|
Incorporated by reference. |
|
4.3
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|
Amendment dated March 9, 2000 to Rights Agreement dated May
22, 1997, as amended March 26, 1998 by and between FSI
International, Inc. and Harris Trust and Savings Bank as
Rights Agent. (8)
|
|
Incorporated by reference. |
|
4.4
|
|
Third Amendment dated April 3, 2002 to Rights Agreement dated
May 22, 1997, as amended on March 26, 2008 and March 9, 2000
by and between FSI and Harris Trust and Savings Bank, as
Rights Agent. (10)
|
|
Incorporated by reference. |
|
31.1
|
|
Certification by Principal Executive Officer Pursuant to
section 302 of the Sarbanes-Oxley Act.
|
|
Filed herewith. |
|
31.2
|
|
Certification by Principal Financial and Accounting Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act.
|
|
Filed herewith. |
|
32.1
|
|
Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Filed herewith. |
|
|
|
(1) |
|
Filed as an Exhibit to the Companys Registration Statement on Form S-4 (as amended)
dated March 21, 1996, SEC File No. 333-1509 and incorporated by reference. |
|
(2) |
|
Filed as an Exhibit to the Companys Report on Form 10-Q for the quarter ended February
24, 1990, SEC File No. 0-17276, and incorporated by reference. |
|
(3) |
|
Filed as an Exhibit to the Companys Report on Form 8-A, filed by the Company on June 5,
1997, SEC File No. 0-17276, and incorporated by reference. |
|
(4) |
|
Filed as an Exhibit to the Companys Report on Form 8-A/A-1, filed by the Company on
April 16, 1998, Sec File No. 0-17276 and incorporated by reference. |
|
(5) |
|
Filed as an Exhibit to the Companys Report on Form 8-K, filed by the Company on January
27, 1999, SEC File No. 0-17276 and incorporated by reference. |
|
(6) |
|
Filed as an Exhibit to the Companys Report on Form 8-K, filed by the Company on June 24,
1999, SEC File No. 0-17276 and incorporated by reference. |
|
(7) |
|
Filed as an Exhibit to the Companys Report on Form 10-K for the fiscal year ended August
28, 1999, SEC File No. 0-17276, and incorporated by reference. |
|
(8) |
|
Filed as an Exhibit to the Companys Report on Form 10-Q for the fiscal quarter ended May
27, 2000, SEC File No. 0-17276 and incorporated by reference. |
|
(9) |
|
Filed as an Exhibit to the Companys Report on Form 10-Q for the fiscal quarter ended
February 23, 2002, SEC File No. 0-17276 and incorporated by reference. |
|
(10) |
|
Filed as an Exhibit to the Companys Registration Statement on Form 8-A/A2, filed by the
Company on April 9, 2002, SEC File No. 0-17276, and incorporated by reference. |
39