e10vk
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
August 25, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 0-17276
FSI INTERNATIONAL,
INC.
(Exact Name of Registrant as
specified in its charter)
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MINNESOTA
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41-1223238
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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3455 LYMAN BOULEVARD, CHASKA, MINNESOTA
55318-3052
(Address of principal executive
offices and Zip Code)
Registrants telephone number, including area code:
(952) 448-5440
Securities registered pursuant to Section 12(b) of the
Securities Exchange Act:
Common Stock, no par value
Securities registered pursuant to Section 12(g) of the
Securities Exchange Act:
Indicate by a check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act of
1933. Yes o No þ
Indicate by a check mark if the Registrant is not required to
file reports pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of
1934. Yes o
No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Securities Exchange Act of 1934.
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by a check mark whether the registrant is a shell
company (as defined in
Rule 12b-2
of the Exchange Act of
1934). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the closing price on
February 23, 2007, the last business day of the
Registrants most recently completed second fiscal quarter,
as reported on the NASDAQ National Market System, was
approximately $155,700,000. Shares of common stock held by each
officer and director have been excluded from this computation in
that such persons may be deemed to be affiliates. This amount is
provided only for purposes of this report on
Form 10-K
and does not represent an admission by the Registrant or any
such person as to the status of such person.
As of October 30, 2007, the Registrant had issued and
outstanding 30,545,000 shares of common stock.
TABLE OF CONTENTS
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement for
the Annual Meeting of Shareholders to be held on
January 16, 2008 and to be filed within 120 days after
the Registrants fiscal year ended August 25, 2007,
are incorporated by reference into Part III of this
Form 10-K
Report. (The Audit and Finance Committee Report, the
Compensation Committee Report and the stock performance graph of
the Registrants proxy statement are expressly not incorporated
by reference herein.)
PART I
Cautionary
Information Regarding Forward-Looking Statements
Certain statements contained in this report on
Form 10-K
constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as
amended, and are subject to the safe harbor created by that
statute. Typically we identify forward-looking statements by use
of an asterisk *. In some cases, you can identify
forward-looking statements by terminology such as
expects, anticipates,
intends, may, should,
plans, believes, seeks,
estimates, could, would or
the negative of such terms or other comparable terminology. Such
forward-looking statements are based upon current expectations
and beliefs and involve numerous risks and uncertainties, both
known and unknown, that could cause actual events or results to
differ materially from these forward-looking statements. For a
discussion of factors that could cause actual results to differ
materially from those described in this
Form 10-K,
see the discussion of risk factors set forth below in
Item 1.A. of this report. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable as of the date of this report, we cannot guarantee
future results, levels of activity, performance or achievements.
We undertake no duty to update any of the forward-looking
statements after the date of this report.
The
Company
FSI International, Inc., a Minnesota corporation organized in
1973 (FSI), designs, manufactures, markets and
supports equipment used in the fabrication of microelectronics,
such as advanced semiconductor devices. In fiscal 2007, we
provided surface conditioning technology solutions and
microlithography systems and support services to worldwide
manufacturers of integrated circuits.
FSI manufactures, markets and supports surface conditioning
equipment that uses wet, vapor, cryogenic and other chemistry
techniques to clean, strip or etch the surfaces of silicon
wafers. The Companys
POLARIS®
Systems and Services (PSS) business provides low
cost, highly flexible products that are used to deposit and
develop light-sensitive material onto the surface of silicon
wafers and similar substrates. These businesses are supported by
service groups that provide finance, human resources,
information services, sales and service, marketing and other
administrative functions.
In fiscal 2007, we directly sold and serviced our products in
North America, Europe, and the Asia Pacific region, except for
Japan. In Japan, our products are sold and serviced through
mFSI LTD, a company in which FSI maintains a
20 percent equity ownership. See Note 4 of the Notes
to Consolidated Financial Statements for a discussion of our
equity ownership in mFSI LTD.
Industry
Background
The complex process of fabricating semiconductor devices
involves several distinct phases that are repeated numerous
times. Because each production phase typically requires
different processing technologies and equipment, no single
semiconductor equipment supplier currently produces all types of
tools needed to equip an entire state-of-the-art fabrication
facility. Instead, semiconductor device manufacturers typically
equip their facilities by combining manufacturing equipment
produced by a number of suppliers. Each set of equipment
performs specific functions in the manufacturing process.
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Generally, increasing demand for computer chips, new computer
chip designs, new materials of fabrication and new substrate
(the underlying material upon which a semiconductor device or
integrated circuit is formed) types both size and
composition drives demand for new microelectronics
manufacturing equipment and processes. Industries that use
microelectronics increasingly demand higher performance devices
from manufacturers. Over the last decade, device manufacturers
have reduced the feature size and substantially increased the
functionality of individual devices through a number of
technological advances. Many of these advancements are made
possible using the equipment and technologies FSI provides to
the semiconductor industry.
Our business depends upon the microelectronics
manufacturers capital equipment expenditures.
Manufacturers expenditures in turn depend on the current
and anticipated market demand for products that use
microelectronic devices. The microelectronics industry is
cyclical in nature and experiences periodic downturns.
Microelectronics manufacturers require equipment suppliers to
take an increasingly active role in meeting the
manufacturers technology development and capital
productivity requirements. Equipment suppliers satisfy this
requirement by developing and supporting products and processes
required to address the new trends in microelectronics
manufacturing. These trends include development of smaller
geometries, transition to new materials, migration to 300
millimeter (mm) wafers and wafer level packaging.
A number of semiconductor device manufacturers began the
transition from 200 to 300mm diameter wafers in calendar 2000.
Based upon a report published in October 2007 by the Gartner
Group, a leading industry market research firm, the percentages
of investment in semiconductor process equipment allocated by
semiconductor manufacturers to 300mm capable products were 78%
in calendar 2006 and are forecasted to be more than 87% of total
equipment spending in calendar 2008.*
According to the Gartner Group, purchases of semiconductor
equipment by microelectronics manufacturers totaled
$42 billion in calendar 2006. Based upon the most recent
Gartner Group forecast, spending on semiconductor equipment is
expected to increase by 4.1% to $44 billion in calendar
2007.*
Products
The mix of specific system sales within each product group we
sell has varied significantly from year to year. The following
table sets forth, for the periods indicated, the amount of
revenues and approximate percentages of our total revenues of
each of our principal product lines:
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Fiscal Year Ended
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August 25,
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August 26,
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August 27,
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2007
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2006
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2005
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(Dollars in thousands)
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Surface conditioning products
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$
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68,034
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58.5
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$
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65,565
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57.9
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%
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$
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51,857
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60.0
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%
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POLARIS®
Systems and Services products
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17,410
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15.0
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%
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14,796
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13.1
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%
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8,764
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10.2
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Spare parts and service
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30,789
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26.5
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%
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32,880
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29.0
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%
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25,749
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29.8
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%
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$
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116,233
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100.0
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%
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$
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113,241
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100.0
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%
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$
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86,370
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100.0
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%
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Surface
Conditioning Products
Our surface conditioning (SC) products perform
etching and cleaning operations for:
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front-end-of-line (FEOL) fabrication steps, where
integrated circuits or transistors are formed in and on the
substrate during the manufacturing process;
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back-end-of-line (BEOL) fabrication steps, where
metal wiring levels are formed on the surface of the wafer and
are connected to the transistors; and
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wafer-level packaging surface preparation, including cleaning,
etching and stripping functions necessary to fabricate solder
bumps or other terminal structures needed to connect the chip to
the circuit board.
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Todays most advanced integrated circuit (IC)
manufacturing involves more than 100 surface preparation steps.
Many factors are considered when designing and optimizing a
surface preparation process to meet a particular application
need. These factors can include:
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cleaning and etching goals, which are related to the removal of
wafer contaminates and films;
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selectivity goals, which are related to leaving desired films
and structures intact; and
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manufacturing goals, which are related to cost, productivity,
safety and environmental concerns.
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The priority of each factor in determining the final surface
preparation process can vary widely across the approximately 100
different steps and depends on the contaminants that need to be
removed, the materials that need to be preserved on the wafer
surface, the dimensions of patterned features and overall
process integration. These varied requirements and priorities
indicate that no single surface preparation technology can
provide the optimal process for each surface preparation
requirement. This is why FSI offers a range of technologies that
allow us, with our customers, to select and optimize the best
solution for each step. These technologies include batch spray,
batch immersion and single wafer cryogenic aerosol.
Batch Spray Processing Systems. Our
batch spray processing systems, which include the
ZETA®
and
MERCURY®
Spray Cleaning Systems, are sophisticated surface
conditioning systems that remove unwanted films and contaminants
from the surface of semiconductor wafers at various stages in
the microelectronic device fabrication process. Multiple
cassettes that contain up to 26 wafers each are placed onto a
turntable inside the systems process chamber. As the
turntable rotates, dispense ports apply a chemical spray to the
wafers surfaces to dissolve and remove the undesirable
films and contaminants. After chemical application, ultra pure
water is sprayed on the wafer surfaces to rinse away the
chemicals. Multiple chemical and rinse steps may be employed
depending on the customers specific application. The
process sequence is completed with a drying step where a flow of
nitrogen into the chamber dries the wafers and the chamber. Our
control system and chemical mixing manifold allow the user to
define, control and monitor a variety of chemical mixtures,
temperatures and sequences. This enables the user to rapidly
develop new processes and utilize the systems for multiple
applications.
Our batch spray systems achieve state-of-the-art performance and
are well suited for applications that require removal of high
levels of contamination, such as implanted photoresist and
unreacted salicide metal. Through efficient mixing and use of
chemicals and water packaged in a small product footprint,
customers may realize lower operational costs than with
competing systems.
The
ZETA®
System is a fully-automated batch spray processor currently
available in configurations for both 200 and 300mm wafers. The
advanced process controls, process capability and automation are
ideal for leading technology nodes, particularly from 130
nanometers (nm) down to 45nm and below. Our ZETA
products provide a reliable, automated environment to move
wafers to and from the process chamber. This tools
eight-chemical flow system allows for a wide range of chemical
blend ratios. The system is also available in a semi-automated
configuration capable of processing 200mm or 150mm wafers.
Introduced in 2006, the ZETA G3 platform builds on the
capabilities of the previous generation of ZETA systems and
offers IC manufacturers better performance and higher
productivity. The ZETAs G3 hardware uniquely enables the
implementation of
ViPRtm
technology (described below) and features enhanced robotics that
enable higher throughput for certain applications. The ZETA G3
platform is designed for 300mm batch spray FEOL and BEOL
cleaning processes with proven capability for 90, 65 and 45nm
technology nodes. Our ZETA systems range in price from
$1,000,000 to $2,400,000.
Subsequent generations of the ZETA system have increased
capabilities with the addition of new tool packages and
processes, including:
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The
FlashCleantm
Advantage package, consisting of hardware, software and process
advancements, enhances system productivity and performance by
decreasing process time and increasing throughput.
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The
PlatNiStriptm
process for nickel platinum films, which is designed to help our
customers implement salicide formation at the 65nm and 45nm
technology nodes.
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The
EcoBlendtm
dilute acid process offers a cost-effective and environmentally
friendly method to remove post-ash residues for aluminum and
tungsten interconnect applications.
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The
ViPRtm
technology is an ash-free, wet resist stripping process that
eliminates the need for ashing on most implanted photoresist
stripping steps. Ashing is a method of stripping photoresist
using an excited gas such as oxygen plasma, ozone or
hydrogen-containing plasma, which can cause surface damage and
undesired material loss. ViPR technology is available on
FSIs ZETA G3 Spray Cleaning Platform.
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To address our customers desire for environmentally
friendly processes, we supply an ozonated water module for use
with our ZETA and MERCURY spray processing systems and MAGELLAN
immersion system. The use of ozone (a form of oxygen having
three atoms to the molecule) in semiconductor processing uses
only oxygen and water instead of sulfuric acid and hydrogen
peroxide mixtures and lowers costs by reducing chemical
consumption, water usage and waste treatment.
The
MERCURY®
System is a semi-automated batch spray processor designed for
wafer sizes up to 200mm in diameter and process technologies
through the 130nm node. The system offers the benefits of low
capital cost and low cost of ownership in a small footprint. The
MERCURY System ranges in price from $400,000 to $1,100,000
depending on features.
CryoKinetic Processing Systems. Our
ANTARES CryoKinetic Cleaning System is a fully automated,
single-wafer cleaning platform designed for 200 and 300mm
wafers. Cryokinetic cleaning is a physical energy transfer
process used to remove non-chemically bonded particles from the
surface of a microelectronic device. These systems offer a
field-proven history of removing surface particle defects and
improving customer yields. The ANTARES system uses an all-dry
non-chemically reactive method for removing defects from all
surface types from the beginning to the end of the device
manufacturing process. Of particular benefit to our customers is
its inherent compatibility with new device materials and
increasingly smaller device features.
CryoKinetic clean technology allows our customers to insert
particle removal steps in the manufacturing line where previous
or traditional wet cleaning and scrubber methods have been
phased out due to their incompatibility with new materials and
their propensity to cause watermark residue and surface charge
defects. Implementing the CryoKinetic clean technology allows
our customers to recover yield that would normally be lost where
traditional approaches cannot be used, such as after in-line
electrical probing of wafers. Because of the increasing number
of BEOL wiring levels on advanced devices, IC manufacturers are
performing electrical tests on partially completed (in-line)
wafers by contacting the wafer surface with metal probes. This
in-line probing creates debris on the wafer surface that cannot
be removed with traditional cleaning methods due to the
sensitivity of the exposed materials (copper and low-k
dielectrics). This debris results in extensive yield loss as the
wafers proceed through the rest of the manufacturing process,
causing IC manufacturers to scrap those wafers which are tested
with in-line probing. The ANTARES clean can eliminate defects
created by in-line electrical probing so IC makers can collect
electrical test data without scraping wafers. In this case, the
IC makers can test more wafers for better process control, which
may result in higher yield.
The ANTARES system is also available with the
AspectCleantm
process. The AspectClean process is a method of removing
particle defects from FEOL and BEOL patterned structures without
altering film properties or physically damaging the structures,
which is becoming more critical at each progressively smaller
technology node. While traditional methods of defect reduction
have been phased out due to wafer damage issues, the AspectClean
process demonstrates a high removal efficiency on sensitive
narrow structures without causing damage.
We believe the technical capabilities of the ANTARES system are
extendable well beyond current technology nodes and may result
in increased customer acceptance due to the limitations of
scrubbing methods.* ANTARES systems range in price from
$1,000,000 to $1,900,000.
Immersion Processing Systems. Immersion
cleaning systems are used to clean silicon wafers by immersing
wafers in multiple tanks filled with process chemicals. These
systems enable the implementation of high performance isopropyl
alcohol (IPA) assisted drying to meet the critical
cleaning requirements for 90, 65, and 45 nm technology nodes.
Our MAGELLAN Immersion Cleaning System is a fully automated
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immersion cleaning product designed for either 200 or 300mm
wafers at advanced technology nodes and is capable of multiple
cleans, including critical clean, resist strip and etch. We
believe this system compares favorably to competing systems
through its process performance, flexibility, extendibility, and
rapid cycle time in a footprint that is smaller than the leading
competition when configured for specific applications. The
MAGELLAN Immersion Cleaning System incorporates a portfolio of
exclusive intellectual property, including our Surface Tension
Gradient
(STG®)
rinse/dry technology,
SymFlow®
etch technology, ozone oxide re-growth technology, and
narrow-gate-compatible
MegaLenstm
Acoustic Diffuser megasonic cleaning technology. The MAGELLAN
System is qualified for several processes including FEOL
critical clean, FEOL photoresist strip and post-ash clean, as
well as oxide etch and nitride etch. The MAGELLAN System ranges
in price from $2,500,000 to $3,800,000.
Vapor Processing Systems. We
discontinued the EXCALIBUR product line at the end of calendar
year 2005 for advanced applications, but we have retained the
extensive portfolio of intellectual property patents relating to
this technology. We will continue to fill orders for existing
customer demands, such as an EXCALIBUR system sale for an
application in the microelectromechanical market
(MEMs).
POLARIS®
Systems and Services Products
POLARIS®
Systems and Services (PSS) products are microlithography systems
used to deposit polyimide resist and photoresist,
light-sensitive, etch-resistant materials used to transfer an
image to the surface of a silicon wafer, or similar material
wafer, and then bake, chill and develop the deposited material.
Our PSS business focuses on providing cost effective solutions
to its existing base of POLARIS customers and for specialized
markets, including wafer level packaging, MEMS, thin film head
(a device manufactured on a silicon wafer which is capable of
reading and writing information onto a compact disc or other
information storage device), and radio frequency (RF) and
optical devices.
Our PSS products and services include:
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POLARIS Refresh
Programtm,
in which customers can purchase pre-owned, certified POLARIS
clusters (an integrated environmentally isolated manufacturing
system consisting of process, transport, and cassette modules
mechanically linked together) made of both new
and/or
re-manufactured modules. This allows customers to add capacity
for a lower capital investment. The ratio of new to pre-owned
modules is based on customer expectations and the availability
of used modules. These systems are able to accommodate a variety
of processes and can be purchased in a new configuration or a
system can be reconfigured and upgraded to match previously
installed configurations;
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Process applications and software support;
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Engineering and equipment maintenance;
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Robot refurbishment and replacement;
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System and subsystem upgrades;
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Systems operations and maintenance training; and
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Spare parts.
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Spare
Parts and Service
We offer system upgrade packages, spare part kits, software
maintenance licenses, individual spare part components and
support services that provide product and process enhancements
to extend the life of previously purchased and installed surface
conditioning and microlithography equipment. Our customer
service and process engineers assist and train customers
worldwide to perform preventive maintenance on, and to service,
our equipment. In addition, our process engineering groups
develop process applications to expand the capabilities of our
equipment. These upgrade and spare part packages and support
service programs enable our worldwide customers to realize a
higher return on their capital investment.
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We sell a variety of process, service and maintenance programs.
A number of customers have purchased maintenance contracts in
which our service employees work at the customers facility
to provide process service and maintenance support for our
equipment.
Backlog
and Seasonality
Our backlog consists of customer purchase orders with delivery
dates within the next 12 months. Our backlog was
$15.2 million at fiscal 2007 year-end and
$39.8 million at fiscal 2006 year-end. Approximately
42% of our backlog at fiscal 2007 year-end was comprised of
orders from Intel Corporation and Mikron JSC. Approximately 36%
of our backlog at fiscal 2006 year-end was comprised of
orders from Intel Corporation and Seagate Technology, Inc. The
loss of any of these customers could have a material adverse
effect on our operations. All orders are subject to cancellation
by the customer and in some cases a penalty provision could
apply to a cancellation.
In fiscal 2007 and 2006, no significant purchase orders were
canceled. Because of the timing and relative size of certain
orders we received and possible changes in delivery schedules
and order cancellations, our backlog can vary from time to time
so that backlog as of any particular date is not necessarily
indicative of actual sales for any subsequent period. Our
business is cyclical but is not seasonal to any significant
extent.
Research
and Development
We believe that our future success depends in large part on our
ability to enhance and advance, in collaboration with our
customers and other equipment and materials manufacturers, our
existing SC product lines to meet the changing needs of
microelectronics manufacturers. We believe that industry trends,
such as the use of smaller circuit geometries, the increased use
of larger substrates and manufacturers increased desire
for integrated processing equipment, will make highly automated
and integrated systems, including single substrate processing
systems, more important to customers. For assistance in our
development efforts, we maintain relationships with our
customers and industry consortium, who help identify and analyze
industry trends and assess how our development activities meet
the industrys advanced technology needs.
Our current research and development programs are focused on
creating new processes and technologies for cleaning substrates
without damaging the increasingly smaller patterned features
being used for the most advanced IC devices. We are also
conducting programs to increase process control and flexibility
through monitoring and software management systems and process
automation, robotics automation in the cleanroom, and
integration of our product offerings with other suppliers
products. Each of these programs involves collaboration with
customers and other equipment manufacturers to ensure proper
machine configuration and process development to meet industry
requirements.
We maintain an 8,000-square-foot, state-of-the-art demonstration
and process development laboratory for our SC business at our
Chaska, Minnesota facility. In addition, we lease
2,500 square feet of laboratory and office space in Allen,
Texas.
Expenditures for research and development, which are expensed as
incurred, during fiscal 2007 were approximately
$24.1 million, representing 20.7% of total sales.
Expenditures for research and development during fiscal 2006
were approximately $24.3 million, representing 21.5% of
total sales, and expenditures for research and development
during fiscal 2005 were approximately $22.1 million,
representing 25.6% of total sales.
We expect to continue to make substantial investments in
research and development.* We also recognize the importance of
managing product transitions successfully, as the introduction
of new products could adversely affect sales of existing
products.
Marketing,
Sales and Support
We market our products worldwide to manufacturers of
microelectronic devices. Our marketing and sales efforts are
focused on building long-term collaborative relationships with
our customers. These efforts are supported by marketing, sales,
and service personnel, along with applications engineers. These
worldwide FSI
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teams work collaboratively with individual IC manufacturers, in
FSI process laboratories and at customer sites, to integrate FSI
developed product and process innovations into customer process
flows and optimize them according to customer priorities.
As of the end of fiscal 2007, our sales effort was supported by
approximately 130 employees and contractors engaged in
customer service and support. During fiscal 2007, we directly
sold and serviced our products in North America, Europe and the
Asia Pacific region, and through mFSI, LTD in Japan.
By providing a full portfolio of direct support services, we
have developed stronger customer relationships and our customers
are beginning to show greater interest in expanding beyond their
current use of FSI traditional spray cleaning technologies to
include new FEOL, BEOL and wafer bumping applications for spray,
as well as employing our advanced immersion and CryoKinetic
technologies. Our increased responsiveness on the local level
has resulted in more collaborative efforts and joint development
programs with IC makers throughout the world for 90nm production
and 65 and 45nm development projects.
International sales accounted for approximately 69% of total
sales in fiscal 2007, 62% of total sales in fiscal 2006, and 64%
of total sales in fiscal 2005.
Manufacturing,
Raw Materials and Suppliers
We maintain manufacturing facilities in Chaska, Minnesota and
Allen, Texas. We typically assemble our products and systems
from components and prefabricated parts manufactured and
supplied by others, including process controllers, robots,
integrated circuits, power supplies, stainless steel pressure
vessels, chamber bowls, valves and relays. Certain items
manufactured by third parties are custom-made to our
specifications. Typically, final assembly and systems tests are
performed by our manufacturing personnel. Quality control is
maintained through quality assurance programs with suppliers,
incoming inspection of components, in-process inspection during
equipment assembly, and final inspection and operation of
manufactured equipment prior to shipment. We have a company-wide
quality program in place and received ISO 9001 certification in
1994 and ISO 9000:2000 certification in 2003.
Certain of the components and subassemblies included in our
products are obtained from a single supplier or a limited group
of suppliers to ensure overall quality and delivery timeliness.
We purchased 10% of our fiscal 2007 inventory purchases, 13% of
our fiscal 2006 inventory purchases and 11% of our fiscal 2005
inventory purchases from Custom Fab Solutions. We purchased 10%
of our fiscal 2006 inventory purchases from Entegris, Inc.
Although we seek to reduce dependence on sole and limited-source
suppliers, disruption or termination of certain of our inventory
sources could have a temporary adverse effect on our operations.
We believe that alternative sources could be obtained and
qualified to supply these products, if necessary, but that
production delays would likely occur in some cases.* Further, a
prolonged inability to obtain certain components could have an
adverse effect on our operating results, delay scheduled
deliveries and result in damage to customer relationships.
Competition
The semiconductor equipment industry is very competitive and
marked by continuous technological challenges. Significant
competitive factors in the equipment market include system
price, which encompasses total cost of ownership, quality,
process performance, reliability, flexibility, extendibility,
integration with other products, process or tool of record, and
customer support.
Many of our established competitors have greater financial,
engineering, research, development, manufacturing, marketing,
service and support resources. To remain competitive, we must
invest in research and development, marketing, customer service
and support programs, and also manage our operating expenses. We
cannot assure that we will have sufficient resources to continue
to make these investments or that our products will continue to
be viewed as competitive as a result of technological advances
by existing or new competitors or due to changes in
semiconductor technology.
Our SC products compete with, among others, DaiNippon Screen
Manufacturing Co. Ltd., Kaijo Denki, S.E.S. Co., Ltd.,
Semitool, Inc., The SEZ Group, Tokyo Electron Ltd. and several
smaller companies. Our PSS
8
organization competes with various small equipment
refurbishment, equipment maintenance and spare parts providers.
Customers
We sell products from one or more of our product lines to most
major microelectronics manufacturers. We have an extensive
history of sales to several of the largest integrated circuit
manufacturers and over 100 active customers worldwide. The loss
of any of these customers could have a material adverse effect
on our operations. The following customers accounted for 10% or
more of our total sales in fiscal 2007, 2006 and 2005 as follows:
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Fiscal
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|
Fiscal
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Fiscal
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Customer
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2007
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2006
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2005
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Samsung Electronics
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13
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%
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11
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%
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11
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%
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Intel Corporation
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11
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%
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*
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*
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ST Microelectronics
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*
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14
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%
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*
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Texas Instruments
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*
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13
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%
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14
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%
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Seagate Technology, Inc.
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*
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11
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%
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*
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* |
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Customer accounted for less than 10% of our total sales during
the fiscal year. |
We have experienced, and expect to continue to experience,
fluctuations in our customer mix.* The timing of an order for
our equipment is primarily dependent upon the customers
expansion program, replacement needs, or requirements to improve
productivity and yields. Consequently, a customer who places
significant orders in one year will not necessarily place
significant orders in subsequent years.
Under the new mFSI distribution agreement entered into on
May 15, 2007, mFSI has exclusive distribution rights
for five years with respect to our SC products in Japan. The
distribution agreement with mFSI may be terminated only
upon the occurrence of certain events or conditions or as
otherwise mutually agreed or at the end of the initial five-year
term. There is no current obligation under the distribution
agreement for mFSI to purchase a specified amount or
percentage of our products. However, a minimum purchase
obligation is imposed on mFSI beginning in fiscal 2009.
Patents,
Trademarks and Intellectual Property
Our success depends upon a variety of factors, including
proprietary technology. It is important to protect our
technology by obtaining and enforcing patents. Consequently, we
have an active program to file patent applications in the United
States and other countries on inventions we consider
significant. We also possess other proprietary intellectual
property, including trademarks, know-how, trade secrets and
copyrights. We also protect our proprietary information through
confidentiality agreements with our employees and various third
parties.
We have a number of patents in the United States and other
countries, with additional applications pending. These patents
may be challenged, invalidated or circumvented, or may not
provide any competitive advantages to us. Pending applications
may not result in patents and the claims allowed in future
patents may not be sufficiently broad to protect our technology.
The laws of some foreign countries may not permit the protection
of our proprietary rights to the same extent as under the laws
of the United States. Although we believe that the protections
afforded by our patents, patent applications, and other
intellectual property rights have value. Because of rapidly
changing technology, our future success depends on the skills of
our employees.
In the normal course of business, we occasionally receive and
make inquiries about possible patent infringement. In dealing
with such inquiries, it may be necessary or useful for us to
obtain or grant licenses or other rights. However, we cannot
assure that such license rights will be available to us on
commercially reasonable terms, or even at all. The inability to
obtain certain license or other rights, or to obtain such
9
licenses or rights on favorable terms, or the need to engage in
litigation could have a material adverse effect on us.
We offer our microlithography POLARIS system pursuant to a
non-exclusive license from Texas Instruments Incorporated
(TI). We have converted the license to a fully
paid-up,
worldwide license to sell and manufacture the POLARIS system. We
also have the non-exclusive right to manufacture and sell
related TI modules. The license agreement with TI continues
until terminated. It may be terminated by either party upon a
breach by the other, and the failure to cure, in accordance with
the terms of the agreement.
We offer our SC ANTARES CX Cleaning System under license
agreements from IBM. The licenses require certain minimum and
system-based royalties. Royalties are based on the royalty
portion revenues of licensed equipment that excludes
amounts for freight, taxes, customers duties, insurance,
discounts, and certain equipment not manufactured by us.
We have approximately 95 U.S. patents. Expiration dates
range from February 2008 to February 2024. In addition, we have
approximately 30 pending U.S. patent applications in
various stages of the patent examination process.
Employees
As of August 25, 2007, we had approximately 429 full and
part-time employees. Competition for highly skilled employees is
intense. We believe that a great part of our future success
depends upon our continued ability to retain and attract
qualified employees. We are not subject to any collective
bargaining agreements in the United States and have never been
subject to a work stoppage. We are subject to collective
bargaining agreements in Italy and France covering approximately
25 employees. We have never been subject to a work stoppage
in Italy or France.
Environmental
Matters
In January 2003, we received our certificate of registration
from BSI Management Systems, an independent business services
organization that certifies management systems and products, for
its ISO 14001 environmental management system. ISO 14001 is an
internationally recognized environmental management standard
that empowers organizations to address the environmental impact
of its activities, services and processes. The standard then
provides a framework for enterprises to take steps to identify
issues significant to them and implement environmental
management programs to achieve improved performance.
Registration with ISO 14001 allows companies to reaffirm that
environmental processes are essential components of their
business strategy. We have a long history of
environmentally-friendly practices including research and
development programs that actively seek ways to operate more
environmentally efficient. We registered with ISO 14001 to
emphasize our ongoing commitment to the preservation and
protection of the environment, and to support existing
environmental health and safety initiatives.
We implemented an enterprise-wide program to actively engage our
employees to develop ways to, and to emphasize the importance
of, protecting the environment in everyday life at FSI. Our
programs include recycling, water use reductions, chemical
handling processes and equipment design for the environment.
We are subject to a variety of governmental regulations related
to the discharge or disposal of toxic, volatile or otherwise
hazardous chemicals used in the manufacturing and product
development process. We believe we are in compliance with these
regulations and that we have obtained all necessary
environmental permits to conduct our business. These permits
generally relate to the disposal of hazardous wastes. If we fail
to comply with present or future regulations, fines could be
imposed, production and product development could be suspended,
or operations could cease. Such regulations could require us to
acquire significant equipment or take other actions necessary to
comply with environmental regulations at a potentially
significant cost. If we fail to control the use of, or
adequately restrict the discharge and disposal of, hazardous
substances, we could incur future liabilities.
10
We believe that compliance with federal, state and local
provisions regulating the discharge of materials into the
environment, or otherwise relating to the protection of the
environment, will not have a material effect upon our capital
expenditures, earnings or competitive position.*
International
Sales
Our international sales for each of the last three fiscal years
are disclosed in the financial statements included in
Item 8 of this report.
Available
Information
Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act of 1934 are
available free of charge through our website at www.fsi-intl.com
as soon as reasonably practicable after such reports have been
filed with or furnished to the Securities and Exchange
Commission.
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.
Since early calendar 2007, we, along with others in the
semiconductor equipment industry, have experienced a downturn in
orders for new equipment as well as delays in existing orders,
primarily from logic and flash memory manufacturers. We cannot
predict the extent and length of the current downturn in orders
and the overall softening in the industry in these segments. In
addition:
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the semiconductor equipment industry may experience other,
possibly more severe and prolonged, downturns in the future;
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any future recovery of the microelectronics industry may not
result in an increased demand by semiconductor manufacturers for
capital equipment or our products; and
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the semiconductor equipment industry may not improve in the near
future or at all.
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Our
licensing practices related to international spare parts sales
may subject us to fines and could reduce our ability to be
competitive in certain countries.
In addition to offering our customers microelectronics
manufacturing equipment, we provide replacement spare parts,
spare part kits and assemblies. In late calendar 2006, we
determined that certain of our replacement valves, pumps and
heaters could fall within the scope of United States export
licensing regulations to products that could be used in
connection with chemical weapons processes. We determined that
these
11
regulations require us to obtain licenses to ship some of our
replacement spare parts, spare part kits and assemblies to
customers in certain controlled countries as defined in the
export licensing regulations. During the second quarter of
fiscal 2007, we were granted licenses to ship replacement spare
parts, spare parts kits and assemblies to all customers in the
controlled countries where we currently conduct business.
The applicable export licensing regulations frequently change.
Moreover, the types and categories of products that are subject
to export licensing are often described in the regulations in
general terms and could be subject to differing interpretations.
In the second quarter of fiscal 2007, we made a voluntary
disclosure to the United States Department of Commerce to
clarify our licensing practices and to review our practices with
respect to prior sales of certain replacement valves, pumps and
heaters to customers in several controlled countries as defined
in the licensing regulations.
The United States Department of Commerce could assess penalties
for any past violation of export control regulations. The
licenses that were granted do not mitigate our risk with respect
to past violations.
Failure
of our products to gain market acceptance would adversely affect
our financial condition.
We believe that our growth prospects depend upon our ability to
gain customer acceptance of our products and technology,
particularly newly developed products. Market acceptance of
products depends upon numerous factors, including:
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compatibility with existing manufacturing processes and products;
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ability to displace incumbent suppliers or processes or tools of
record;
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perceived advantages over competing products; and
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the level of customer service available to support such products.
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Moreover, manufacturers often rely on a limited number of
equipment vendors to meet their manufacturing equipment needs.
As a result, market acceptance of our products may be affected
adversely to the extent potential customers utilize a
competitors manufacturing equipment. There can be no
assurance that sales of new products will remain constant or
grow or that we will be successful in obtaining broad market
acceptance of our systems and technology.
We expect to spend a significant amount of time and resources to
develop new systems and enhance existing systems. In light of
the long product development cycles inherent in our industry, we
will make these expenditures well in advance of the prospect of
deriving revenue from the sale of any new systems. Our ability
to commercially introduce and successfully market any new
systems is subject to a wide variety of challenges during this
development cycle, including
start-up
bugs, design defects and other matters that could delay
introduction of these systems to the marketplace. In addition,
since our customers are not obligated by long-term contracts to
purchase our systems, our anticipated product orders may not
materialize or orders that do materialize may be canceled. As a
result, if we do not achieve market acceptance of new products,
we may not be able to realize sufficient sales of our systems in
order to recoup research and development expenditures. The
failure of any of our new products, for example the
MAGELLAN®,
to achieve market acceptance would harm our business, financial
condition, and results of operations and cash flows.
If we
do not continue to develop new products, we will not be able to
compete effectively.
Our business and results of operations could decline if we do
not develop and successfully introduce new or improved products
that the market accepts. The technology used in microelectronics
manufacturing equipment and processes changes rapidly. Industry
standards change constantly and equipment manufacturers
frequently introduce new products. We believe that
microelectronics manufacturers increasingly rely on equipment
manufacturers like us to:
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design and develop more efficient manufacturing equipment;
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12
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design and implement improved processes for microelectronics
manufacturers to use; and
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make their equipment compatible with equipment made by other
equipment manufacturers.
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To compete, we must continue to develop, manufacture, and market
new or improved products that meet changing industry standards.
To do this successfully, we must:
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select appropriate products;
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design and develop our products efficiently and quickly;
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implement our manufacturing and assembly processes efficiently
and on time;
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make products that perform well for our customers;
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market and sell our products effectively; and
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introduce our new products in a way that does not unexpectedly
reduce sales of our existing products.
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Product
or process development problems could harm our results of
operations.
Our products are complex, and from time to time have defects or
bugs that are difficult and costly to fix. This can harm our
results of operations in the following ways:
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we may incur substantial costs to ensure the functionality and
reliability of products early in their life cycle;
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repeated defects or bugs can reduce orders, increase
manufacturing costs, adversely impact working capital and
increase service and warranty expenses; and
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we may require significant lead times between product
introduction and commercialization.
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As a result, we may have to write off inventory and other assets
related to products and could lose customers and revenue. There
is no assurance that we will be successful in preventing product
and process development problems that could potentially harm our
results of operations.
It may
be difficult for us to compete with stronger competitors
resulting from industry consolidation.
In the past several years, we have seen a trend toward
consolidation in the microelectronics equipment industry. We
expect the trend toward consolidation to continue as companies
seek to strengthen or maintain their market positions in a
rapidly changing industry.* We believe that industry
consolidations may result in competitors that are better able to
compete. This could have a significant negative impact on our
business, operating results, and financial condition.
Future
acquisitions may dilute our shareholders ownership
interests and have other adverse consequences.
Because of consolidations in the semiconductor equipment
industry we serve and other competitive factors, our management
will seek to acquire additional product lines, technologies, and
businesses if suitable opportunities develop. Acquisitions may
result in the issuance of our stock, which may dilute our
shareholders ownership interests and reduce earnings per
share. Acquisitions also may increase debt levels and the
related goodwill and other intangible assets, which could have a
significant negative effect on our financial condition and
operating results. In addition, acquisitions involve numerous
risks, including:
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difficulties in absorbing the new business, product line, or
technology;
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diversion of managements attention from other business
concerns;
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entering new markets in which we have little or no
experience; and
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possible loss of key employees of the acquired business.
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13
Because
of the volatility of our stock price, the ability to trade FSI
shares may be adversely affected and our ability to raise
capital through future equity financing may be
reduced.
Our stock price has been volatile in the past and may continue
to be so in the future. In fiscal 2007, our stock price ranged
from $2.13 to $6.90 per share and in fiscal 2006, our stock
price ranged from $3.72 to $7.18 per share.
The trading price of our common shares is subject to wide
fluctuations in response to various factors, some of which are
beyond our control, including factors discussed elsewhere in
this report, and the following:
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failure to meet the published expectations of securities
analysts for a given period;
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changes in financial estimates by securities analysts;
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press releases or announcements by, or changes in market values
of, comparable companies;
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additions or departures of key personnel; and
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involvement in or adverse results from litigation.
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The prices of technology stocks, including ours, have been
particularly affected by extreme fluctuations in price and
volume in the stock market generally. These broad stock market
fluctuations may have a negative effect on our future stock
price.
In the past, securities class action litigation has often been
brought against a company following periods of volatility in the
market price of its securities. In the future we could be the
target of this type of litigation. Securities litigation may
result in substantial costs and divert managements
attention and resources, which can seriously harm our business.
Because
our quarterly operating results are volatile, our stock price
could fluctuate.
In the past, our operating results have fluctuated from quarter
to quarter and are likely to do so in the future. These
fluctuations may have a significant impact on our stock price.
The reasons for the fluctuations in our operating results, such
as sales, gross profits, and net income, include:
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The Timing of Significant Customer Orders and Customer
Spending Patterns. During industry downturns, our
customers may ask us to delay or even cancel the shipment of
equipment orders. Delays and cancellations may adversely affect
our operating results in any particular quarter if we are unable
to recognize revenue for particular sales in the quarter in
which we expected those sales.
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The Timing of Customer Acceptances. Based on
our revenue recognition policy, certain shipments to customers
are not recognized until customer acceptance. Delays of customer
acceptances may adversely affect our operating results in any
particular quarter if we are unable to recognize revenue for
particular sales in the quarter in which we expected those sales.
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The Timing of New Product and Service Announcements By Us or
Our Competitors. New product announcements by us
and our competitors could cause our customers to delay a
purchase or to decide to purchase products of one of our
competitors which would adversely affect our revenue and,
therefore, our results of operations. New product announcements
by others may make it necessary for us to reduce prices on our
products or offer more service options, which could adversely
impact operating margins and net income.
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The Mix of Products Sold and the Market Acceptance of Our New
Product Lines. The mix of products we sell varies
from period to period, and because margins vary among or within
different product lines, this can adversely affect our results
of operations. If we fail to sell our products which generate
higher margins, our average gross margins may be lower than
expected. If we fail to sell our new product lines, our revenue
may be lower than expected.
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General Global Economic Conditions or Economic Conditions in
a Particular Region. When economic conditions in
a region or worldwide worsen, customers may delay or cancel
their orders.
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14
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There also may be an increase in the time it takes to collect
payment from our customers or even outright payment defaults.
This can negatively affect our cash flow and our results.
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As a result of these factors, our future operating results are
difficult to predict. Further, we base our current and future
expense plans in significant part on our expectations of our
longer-term future revenue. As a result, we expect our expense
levels to be relatively fixed in the short-run. An unanticipated
decline in revenue for a particular quarter may
disproportionately affect our net income in that quarter. If our
revenue is below our projections, then our operating results
will also be below expectations. Any one of the factors we list
above, or a combination of them, could adversely affect our
quarterly results of operations, and consequently may cause a
decline in our share price.
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. We have direct sales, service and
applications support and logistics responsibilities for our
products in Europe and the Asia Pacific region, and accordingly,
we incur labor, service and other expenses in foreign
currencies. As of August 25, 2007, we had not entered into
any hedging activities and our foreign currency transaction
gains and losses for fiscal 2007 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 2007, approximately 69%
of our sales revenue derived from sales outside of the United
States. In fiscal 2006, approximately 62% of our sales revenue
derived from sales outside the United States. In fiscal 2005,
approximately 64% of our sales revenue derived from sales
outside the United States. We expect that international sales
will continue to represent a significant portion of total
sales.* Sales to customers outside the United States involve a
number of risks, including the following:
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imposition of government controls;
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compliance with U.S. export laws and foreign laws;
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political and economic instability;
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trade restrictions;
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changes in taxes and tariffs;
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longer payment cycles;
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difficulty of administering business overseas; and
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general economic conditions.
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In particular, the Japanese and Asia Pacific markets are
extremely competitive. The semiconductor device manufacturers
located there are very aggressive in seeking price concessions
from suppliers, including equipment manufacturers like us.
We seek to meet technical standards imposed by foreign
regulatory bodies. However, we cannot guarantee that we will be
able to comply with those standards in the future. Any failure
by us to design products to comply with foreign standards could
have a significant negative impact on us.
15
Because
of the significant financial resources needed to offer a broad
range of products, to maintain customer service and support and
to invest in research and development, we may be unable to
compete with larger, better established
competitors.
The microelectronics equipment industry is highly competitive.
We face substantial competition throughout the world. We believe
that to remain competitive, we will need significant financial
resources to offer a broad range of products, to maintain
customer service and support, and to invest in research and
development. We believe that the microelectronics industry is
becoming increasingly dominated by large manufacturers who have
the resources to support customers on a worldwide basis. Some of
our competitors have substantially greater financial, marketing,
and customer-support capabilities than us. Large equipment
manufacturers have or may enter the market areas in which we
compete. In addition, smaller, emerging microelectronics
equipment companies provide innovative technology. We expect
that our competitors will continue to improve the design and
performance of their existing products and processes. We also
expect them to introduce new products and processes with better
performance and pricing. We cannot guarantee that we will
continue to compete effectively in the United States or
elsewhere. We may be unable to continue to invest in marketing,
research and development and engineering at the levels we
believe necessary to maintain our competitive position. Our
failure to make these investments could have a significant
negative impact on our business, operating results and financial
condition.
Manufacturing
interruptions or delays could affect our ability to meet
customer demand, while the failure to estimate customer demand
accurately could result in excess or obsolete
inventory.
Our business depends on its ability to supply equipment,
services and related products that meet the rapidly changing
requirements of its customers, which depends in part on the
timely delivery of parts, components and subassemblies
(collectively, parts) from suppliers. Some key parts may be
subject to long lead-times
and/or
obtainable only from a single supplier or limited group of
suppliers. Significant interruptions of manufacturing operations
or the delivery of services could result in delayed deliveries
to our customers, manufacturing inefficiencies, increased costs
or order cancellations as a result of:
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the failure or inability of suppliers to timely deliver quality
parts;
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volatility in the availability and cost of materials;
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difficulties or delays in obtaining required export approvals;
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information technology or infrastructure failures;
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difficulties related to planning or effecting business process
changes;
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natural disasters (such as earthquakes, floods or
storms); or
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other causes (such as regional economic downturns, pandemics,
political instability, terrorism or acts of war).
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Moreover, if actual demand for our products is different that
expected, we may purchase more/fewer parts than necessary or
incur costs for canceling, postponing or expediting delivery of
parts. Any or all of these factors could materially and
adversely affect our business, financial condition and results
of operations.
Because
we do not have long-term sales commitments with our customers,
if these customers decide to reduce, delay or cancel orders or
choose to deal with our competitors, then our results will be
adversely affected.
If our significant customers reduce, delay, or cancel orders,
then our operating results could suffer. Our largest customers
have changed from year to year, however, sales to our top five
customers accounted for approximately 42% of total revenues in
fiscal 2007, 52% of total revenues in fiscal 2006 and 48% of
total revenues in fiscal 2005. Samsung Electronics accounted for
approximately 13% of our total sales in fiscal 2007 and 11% of
our total sales in fiscal 2006 and 2005. Intel Corporation
accounted for approximately 11% of our total sales in fiscal
2007. ST Microelectronics accounted for approximately 14% of
total sales in fiscal
16
2006. Texas Instruments Incorporated accounted for approximately
13% of total sales in fiscal 2006 and 14% of total sales in
fiscal 2005. Seagate Technology, Inc. accounted for
approximately 11% of total sales in fiscal 2006. We currently
have no long-term sales commitments with any of our customers.
Instead, we generally make sales under purchase orders. All
orders are subject to cancellation or delay by the customer.
Our
backlog may not result in future net sales.
We schedule the production of our systems based in part upon
order backlog. Due to possible customer changes in delivery
schedules and cancellations of orders, our backlog at any
particular date is not necessarily indicative of actual sales
for any succeeding period. In addition, while we evaluate each
customer order on a case by case basis to determine
qualification for inclusion in backlog, there can be no
assurance that amounts included in backlog ultimately will
result in future sales. A reduction in backlog during any
particular period, or the failure of our backlog to result in
future sales, could harm our business.
Because
we depend upon our management and technical personnel for our
success, the loss of key personnel could place us at a
competitive disadvantage.
Our success depends to a significant extent upon our management
and technical personnel. The loss of a number of these key
persons could have a negative effect on our operations.
Competition is high for such personnel in our industry in all of
our locations. We periodically review our compensation and
benefit packages to ensure that they are competitive in the
marketplace and make adjustments or implement new programs for
that purpose, as appropriate. We cannot guarantee that we will
continue to attract and retain the personnel we require to
continue to grow and operate profitably.
Our
employment costs in the short-term are to a large extent fixed,
and therefore any unexpected revenue shortfall could adversely
affect our operating results.
Our operating expense levels are based in significant part on
our headcount, which generally is driven by longer-term revenue
goals. For a variety of reasons, particularly the high cost and
disruption of lay-offs and the costs of recruiting and training,
our headcount in the short-term is, to a large extent, fixed.
Accordingly, we may be unable to reduce employment costs in a
timely manner to compensate for any unexpected revenue or gross
margin shortfall, which could have a material adverse effect on
our operating results.
Because
our intellectual property is important to our success, the loss
or diminution of our intellectual property rights through legal
challenge by others or from independent development by others,
could adversely affect our business.
We attempt to protect our intellectual property rights through
patents, copyrights, trade secrets, and other measures. However,
we believe that our financial performance will depend more upon
the innovation, technological expertise, and marketing abilities
of our employees than on such protection. In connection with our
intellectual property rights, we face the following risks:
|
|
|
|
|
our pending patent applications may not be issued or may be
issued with more narrow claims;
|
|
|
|
patents issued to us may be challenged, invalidated, or
circumvented;
|
|
|
|
rights granted under issued patents may not provide competitive
advantages to us;
|
|
|
|
foreign laws may not protect our intellectual property
rights; and
|
|
|
|
others may independently develop similar products, duplicate our
products, or design around our patents.
|
As is typical in the semiconductor industry, we occasionally
receive notices from others alleging infringement claims. We
have been involved in patent infringement litigation in the past
and we could become involved in similar lawsuits or other patent
infringement claims in the future. We cannot guarantee the
outcome of such lawsuits or claims, which may have a significant
negative effect on our business or operating results.
17
We are
currently exposed to various risks related to legal proceedings
or claims.
We have in the past and may in the future be involved in legal
proceedings or claims regarding patent infringement,
intellectual property rights, contracts and other matters. These
legal proceedings and claims, whether with or without merit,
could be time-consuming and expensive to prosecute or defend,
and could divert managements attention and resources.
There can be no assurance regarding the outcome of future legal
proceedings or claims. If we are not able to resolve a claim,
negotiate a settlement of the matter, obtain necessary licenses
on commercially reasonable terms
and/or
successfully prosecute or defend its position, our business,
financial condition and results of operations could be
materially and adversely affected.
We generate minor amounts of liquid and solid hazardous waste
and use licensed haulers and disposal facilities to ship and
dispose of such waste. In the past, we have received notice from
state or federal enforcement agencies that we are a potentially
responsible party (PRP) in connection with the
investigation of several hazardous waste disposal sites owned
and operated by third parties. In each matter, we have elected
to participate in settlement offers made to all
de minimis parties with respect to such sites. The
risk of being named a PRP is that if any of the other PRPs are
unable to contribute their proportionate share of the liability,
if any, associated with the site, those PRPs that are
financially able could be held financially responsible for the
shortfall.
There has and continues to be substantial litigation regarding
patent and other intellectual property rights in the
microelectronics industry. Commercialization of new products or
further commercialization of our current products could provoke
claims of infringement by third parties. In the future,
litigation may be necessary to enforce patents issued to us, to
protect trade secrets or know-how owned by us or to defend us
against claimed infringement of the rights of others and to
determine the scope and validity of our proprietary rights. Any
such litigation could result in substantial costs and diversion
of our effort, which alone could have a material adverse impact
on our financial condition and operating results. Further,
adverse determinations in such litigation could result in our
loss of proprietary rights, subject us to significant
liabilities to third parties, require us to seek licenses from
third parties or prevent us from manufacturing or selling one or
more products, any of which could have a material adverse effect
on our financial condition and results of operations.
Certain of our product lines are intended for use with hazardous
chemicals. As a result, we are notified by our customers from
time to time of incidents involving our equipment that have
resulted in a spill or release of a hazardous chemical. We
maintain product liability insurance in an effort to minimize
our risk. However, in some cases it may be alleged that we or
our equipment are at fault. There can be no assurance that any
future litigation resulting from such claims would not have a
material adverse effect on our business or financial results.
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 at 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 effectiveness of our
internal controls. 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
18
firm does not timely attest to the evaluation, we could be
subject to increased regulatory scrutiny and the publics
perception of us may change.
Changes
to financial accounting standards may affect our reported
results of operations.
We prepare our financial statements to conform with accounting
principles generally accepted in the United States of America
(GAAP). The GAAP are subject to interpretation by
the American Institute of Certified Public Accountants, the
Securities and Exchange Commission, the Financial Accounting
Standards Board and various bodies formed to interpret and
create appropriate accounting standards. A change in those
standards can have a significant effect on our reported results
and may even affect our reporting of transactions completed
before a change is announced.
Accounting standards affecting many other aspects of our
business, including rules relating to purchase accounting for
business combinations, revenue recognition, in-process research
and development charges, employee stock purchase plans and stock
option grants, have recently been revised or are under review.
Changes to those rules or the questioning of our current
accounting practices may have a material adverse effect on our
reported financial results or on the way we conduct business. In
addition, our preparation of financial statements in accordance
with GAAP requires that we make estimates and assumptions that
affect the recorded amounts of assets and liabilities,
disclosure of those assets and liabilities at the date of the
financial statement and the recorded amounts of expenses during
the reporting period. A change in the facts and circumstances
surrounding those estimates could result in a change to our
estimates and could impact our future operating results.
We do
not intend to pay dividends.
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain any future earnings for
funding growth and, therefore, do not expect to pay any
dividends in the foreseeable future.
|
|
Item 1.B.
|
Unresolved
Staff Comments
|
We do not have any unresolved staff comments.
We own a 197,000-square-foot facility in Chaska, Minnesota. The
facility contains our SC product engineering, manufacturing,
sales, administrative and support functions. It includes a
research laboratory and 40,000 square feet of
Class 1,000 and 10,000 cleanroom space, manufacturing
support operations and a customer training center.
In February 2005, we sold our 162,000 square foot facility
in Allen, Texas. Concurrent with the sale, we entered into a
sublease of approximately 45,000 square feet of space in
the facility. The lease ends on August 31, 2008; however,
we have an option to extend the lease through August 31,
2009.
We also maintain small leased sales and service offices
throughout Europe and Asia near our customer locations.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
In fall 1995, pursuant to the Employee Stock Purchase and
Shareholder Agreement dated November 30, 1990 between Eric
C. Hsu and Semiconductor Systems, Inc. (SSI) (the
Shareholder Agreement) and in connection with
Mr. Hsus termination of his employment with SSI in
August 1995, the former shareholders of SSI purchased the shares
of SSI common stock then held by Mr. Hsu. In April 1996, we
acquired SSI, and SSI became our wholly owned subsidiary. In
October 1996, Eric C. and Angie L. Hsu (the
plaintiffs) filed a lawsuit in the Superior Court of
California, County of Alameda, Southern Division, against SSI
and the former shareholders of SSI. The plaintiffs alleged that
such purchase breached the Shareholder Agreement and
19
violated the California Corporations Code, breached the
fiduciary duty owed plaintiffs by the individual defendants and
constituted fraud.
In September and October 2000, certain of Mr. Hsus
claims were tried to a jury in Alameda County Superior Court in
Oakland, California. At the conclusion of the trial, the jury
found that SSI breached the Shareholder Agreement between it and
Mr. Hsu and that the damages that resulted were
approximately $2.4 million. In addition, each of the
individual defendant shareholders was found liable for
conversion, and damages of $4.2 million were awarded.
Certain individual defendants were also found to have
intentionally interfered with Mr. Hsus prospective
economic advantage and damages of $3.2 million were
awarded. Finally, several individual defendants and SSI were
found to have violated certain provisions of the California
Corporation Code and damages of $2.4 million were awarded.
In proceedings subsequent to the trial, the Court determined
that the plaintiffs were entitled to an award against SSI of
prejudgment interest on the breach of contract damages
(approximately $2.4 million) at 10 percent per annum
from October 1996. In addition, the Court awarded plaintiffs
approximately $127,000 in costs and approximately
$1.8 million in attorneys fees against SSI and the
individual defendants. On November 16, 2001, the court
signed its final judgment reflecting the jurys awards,
interest, attorneys fees and costs assessed against each
of the defendants.
Following the entry of judgment, SSI and the other defendants
filed post-trial motions seeking reduction in the jurys
damage awards
and/or a new
trial. The court denied these post-trial motions and there was
no reduction in damages against SSI. Mr. Hsu was awarded an
additional $431,000 for attorneys fees and expenses
incurred since the judgment was rendered in November 2001.
Subsequently, SSI and the individual defendants filed an appeal
on a variety of grounds, and we posted an appeal bond on behalf
of SSI and defendants in the amount of $8.3 million. As
part of the posting of the bond, we entered into a letter of
credit in the amount of $5.2 million with a surety company.
This letter of credit was collateralized with restricted cash of
the same amount. The appellate court upheld the original
judgment.
The total judgment against SSI together with post judgment
interest and attorneys fees as of February 26, 2005
aggregated approximately $7.9 million. As a result, we
recorded a $0.3 million charge in the second quarter of
fiscal 2005. We had recorded a total of $3.3 million of
charges to operations during fiscal 2002 and fiscal 2004
associated with this litigation. During the third quarter of
fiscal 2005, we retired the 250,000 shares of our common
stock held in the escrow created at the time of our acquisition
of SSI to cover such claims. As the SSI merger was a pooling of
interests, we decreased our stockholders equity by an
amount equal to $3.0 million. On March 28, 2005, we
tendered funds totaling approximately $7.9 million to the
Hsus via a cashiers check which we believe was the full
judgment amount plus all applicable interest. This included
$1.6 million of cash provided by the individual defendants.
Subsequently, instead of depositing the cashiers check,
the Hsus filed a motion with the court to enforce the judgment
against the appeal bond and we and the individual defendants
filed a motion to release the bond. The Hsus cashed the cashiers
check in July 2005. In August 2005, the court ruled in our favor
and an acknowledgement of full satisfaction of the judgment was
filed with the court by the Hsus attorneys. The bond was
released in August 2005.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SHAREHOLDERS
|
There were no matters submitted to a vote of shareholders during
the fourth quarter ended August 25, 2007.
20
|
|
ITEM 4A.
|
EXECUTIVE
OFFICERS OF THE COMPANY
|
The executive officers are elected by the board of directors,
generally for a term of one year, and serve until their
successor is elected and qualified. The following table and
discussion contains information regarding our current executive
officers.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
John C. Ely(1)
|
|
|
48
|
|
|
Vice President, Global Sales and Service
|
Patricia M. Hollister(2)
|
|
|
47
|
|
|
Chief Financial Officer and Assistant Secretary
|
Donald S. Mitchell(3)
|
|
|
52
|
|
|
Chairman and Chief Executive Officer
|
Benno G. Sand(4)
|
|
|
53
|
|
|
Executive Vice President, Business Development and Investor
Relations and Secretary
|
|
|
|
(1) |
|
John Ely was named Vice President of Global Sales and Service in
June 2003. He previously served as Executive
Vice President; President, of our SC Division from August
2000 to June 2003. Mr. Ely was the SC Divisions
Sales/ Marketing/Applications Manager from 1997 to 2000; General
Manager from 1995 to 1997; Product Specialist/Product Manager
from 1989 to 1995; and in direct sales from 1985 to 1989. Prior
to joining FSI, Mr. Ely was in sales and served as the
Western Territory Manager of Galtek, a subsidiary of Entegris,
Inc. Mr. Ely is a director of SCD Mountain View, Inc., one
of our subsidiaries. |
|
(2) |
|
Patricia Hollister has served as Chief Financial Officer since
January 1998 and as Assistant Secretary since January 2000. She
was our Corporate Controller from March 1995 to January 1998.
Prior to joining FSI, Ms. Hollister was employed by KPMG
LLP in Minneapolis, Minnesota where she served over
12 years on various audit and consulting engagements, most
recently as a Senior Manager. Ms. Hollister is a director
of various FSI-owned foreign subsidiaries as well as NVE
Corporation. |
|
(3) |
|
Donald Mitchell was named Chief Executive Officer and President
of FSI in December 1999 and became Chairman of the Board of
Directors for FSI in January 2002. From its formation in 1998
until December 1999, he was President of Air Products Electronic
Chemicals, Inc., a division of Pennsylvania-based Air Products
and Chemicals, Inc. From 1991 to 1998, he served as President of
Schumacher, a leading global chemical equipment and services
supplier to the semiconductor industry. Throughout his career
with Schumacher, he held various executive positions, including
Vice President of Operations and Vice President of
Sales and Marketing. Mr. Mitchell is a director of FSI and
is also a director of Advanced Materials Sciences, Inc.
Mr. Mitchell served as the 1999/2000 Chairman of the Board
of Directors for Semiconductor Equipment and Materials
International, a leading global industry trade association and
was a member of the Board until July 2005. |
|
(4) |
|
Benno Sand has served as Executive Vice President, Business
Development and Investor Relations since January 2000. He has
served as Executive Vice President since January 1992 and
Secretary since March 2002. Mr. Sand also served as Chief
Administrative Officer from January 1998 to December 1999, as
Chief Financial Officer from October 1990 to January 1998, and
as Vice President of Finance from October 1987 to January 1992.
Mr. Sand is a director of various FSI-owned United States
and foreign subsidiaries as well as mFSI LTD and MathStar,
Inc. |
21
PART II
|
|
ITEM 5.
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Our common stock is traded on the NASDAQ Global
Marketsm
under the symbol FSII. The following table sets
forth the highest and lowest daily sale prices, as reported by
the NASDAQ Global Market for the fiscal periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
Fiscal Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
$
|
6.90
|
|
|
$
|
5.27
|
|
|
$
|
4.42
|
|
|
$
|
3.72
|
|
Second
|
|
|
5.93
|
|
|
|
4.75
|
|
|
|
5.90
|
|
|
|
4.00
|
|
Third
|
|
|
5.25
|
|
|
|
4.07
|
|
|
|
5.98
|
|
|
|
4.27
|
|
Fourth
|
|
|
4.49
|
|
|
|
2.13
|
|
|
|
7.18
|
|
|
|
4.55
|
|
There were approximately 500 record holders of our common stock
on October 23, 2007.
We have never declared or paid cash dividends on our common
stock. We currently intend to retain all earnings for use in our
business and do not anticipate paying dividends in the
foreseeable future.*
|
|
ITEM 6.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
The table that follows presents portions of our consolidated
financial statements and are not complete. You should read the
following selected consolidated financial data in conjunction
with our Consolidated Financial Statements and with
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this report. The Consolidated Statement of Operations data for
the years ended August 25, 2007, August 26, 2006 and
August 27, 2005, and the Consolidated Balance Sheet data as
of August 25, 2007 and August 26, 2006, are derived
from our audited consolidated financial statements, which are
included elsewhere in this report. The Consolidated Statements
of Operations data for the years ended August 28, 2004 and
August 30, 2003 and the Consolidated Balance Sheet data as
of August 27, 2005, August 28, 2004 and
August 30, 2003 are derived from our audited consolidated
financial statements which do not appear in this report. We
changed our accounting for stock compensation expense effective
August 28, 2005 in accordance with Statement of Financial
Accounting Standards SFAS No. 123R,
Share-Based Payment.
The historical results presented below are not necessarily
indicative of the results to be expected for any future fiscal
year or fiscal period.
22
Selected
Historical Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
August 27,
|
|
|
August 28,
|
|
|
August 30,
|
|
|
|
2007(8)(10)
|
|
|
2006(8)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
116,233
|
|
|
$
|
113,241
|
|
|
$
|
86,370
|
|
|
$
|
114,404
|
|
|
$
|
88,826
|
|
Gross margin(1)(3)
|
|
|
47,123
|
|
|
|
52,850
|
|
|
|
39,994
|
|
|
|
59,020
|
|
|
|
14,508
|
|
Selling, general, and administrative expenses(4)
|
|
|
34,542
|
|
|
|
36,218
|
|
|
|
35,291
|
|
|
|
39,547
|
|
|
|
38,602
|
|
Research and development expenses
|
|
|
24,086
|
|
|
|
24,321
|
|
|
|
22,078
|
|
|
|
22,458
|
|
|
|
31,126
|
|
Gain on sale of facility(5)
|
|
|
|
|
|
|
|
|
|
|
7,015
|
|
|
|
|
|
|
|
|
|
Transition agreement termination fee(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,750
|
)
|
Write-down of fixed assets(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,000
|
)
|
Operating loss
|
|
|
(11,505
|
)
|
|
|
(7,689
|
)
|
|
|
(10,360
|
)
|
|
|
(2,985
|
)
|
|
|
(64,970
|
)
|
Impairment of investment(2)(7)(9)
|
|
|
(4,088
|
)
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,195
|
)
|
Gain on marketable securities(6)
|
|
|
|
|
|
|
|
|
|
|
5,808
|
|
|
|
1,972
|
|
|
|
|
|
Equity in earnings (losses) of affiliates
|
|
|
27
|
|
|
|
(274
|
)
|
|
|
450
|
|
|
|
779
|
|
|
|
(4,006
|
)
|
Net (loss) income
|
|
$
|
(14,586
|
)
|
|
$
|
(7,287
|
)
|
|
$
|
(3,302
|
)
|
|
$
|
141
|
|
|
$
|
(78,557
|
)
|
(Loss) income per share diluted
|
|
$
|
(0.48
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.00
|
|
|
$
|
(2.66
|
)
|
Weighted average common shares used in per share
calculations diluted
|
|
|
30,413
|
|
|
|
30,042
|
|
|
|
29,928
|
|
|
|
30,315
|
|
|
|
29,546
|
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
101,404
|
|
|
$
|
127,544
|
|
|
$
|
123,461
|
|
|
$
|
140,410
|
|
|
$
|
133,386
|
|
Total long-term debt
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
|
750
|
|
|
|
|
|
Stockholders equity
|
|
|
80,766
|
|
|
|
93,972
|
|
|
|
99,136
|
|
|
|
110,372
|
|
|
|
109,000
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During fiscal 2003, we recorded $19.0 million to cost of
goods sold for inventory obsolescence charges related to our
winding down of the Microlithography business. We also recorded
an impairment charge of $7.0 million against the property,
plant and equipment associated with the PSS business in fiscal
2003. |
|
(2) |
|
During fiscal 2003, we entered into a transition agreement with
Metron Technology to terminate our distribution agreements and
recorded a termination fee of $2.75 million. In addition,
we recorded an impairment charge of $10.2 million in other
expense related to the other than temporary impairment of our
investment. |
|
(3) |
|
During fiscal 2007, we had sales of PSS product inventory with
an original cost of $0.9 million that had previously been
written down to zero. During fiscal 2006, we had sales of PSS
product inventory with an original cost of $2.1 million
that had previously been written down to zero. During fiscal
2005, we had sales of PSS product inventory with an original
cost of $0.5 million that had been previously written down
to zero. During fiscal 2004, we had sales of PSS product
inventory with an original cost of $3.2 million that had
been previously written down to zero. During fiscal 2003, we had
sales of PSS product inventory with an original cost of
$3.0 million that had been previously written down to zero. |
|
(4) |
|
During fiscal 2004, we recorded $3.4 million in selling,
general and administrative expenses related to a patent
litigation settlement. |
|
(5) |
|
During fiscal 2005, we recorded a $7.0 million gain on the
sale of the Allen, Texas facility. |
|
(6) |
|
During fiscal 2005, we recorded a gain of $5.8 million on
the Nortem (formerly Metron Technology) distributions. During
fiscal 2004, we recorded a gain of $2.0 million on the sale
of Metron Technology common stock. See Note 9 of the Notes
to Consolidated Financial Statements for a discussion of the
Nortem distribution and sale of Metron stock. |
23
|
|
|
(7) |
|
During fiscal 2006, we recorded an impairment charge of
$0.5 million in other expense related to an investment in a
Malaysian foundry. |
|
(8) |
|
Due to the implementation of SFAS 123R as of
August 28, 2005, we recorded stock-based compensation
expense of $28,000 in cost of goods sold, $439,000 in selling,
general and administrative expenses and $126,000 in research and
development expenses during fiscal 2007 and $54,000 in cost of
goods sold, $743,000 in selling, general and administrative
expenses and $342,000 in research and development expenses
during fiscal 2006. |
|
(9) |
|
During fiscal 2007, we recorded an impairment and loss on sale
of investment of $4.1 million related to transactions with
mFSI LTD. See Note 4 of the Notes to Consolidated
Financial Statements for a discussion of our ownership of
mFSI LTD. |
|
|
|
(10) |
|
During fiscal 2007, we recorded severance and outplacement costs
of $296,000 to cost of goods sold, $923,000 to selling, general
and administrative expense and $592,000 to research and
development expense. See Note 19 of the Notes to
Consolidated Financial Statements for a discussion of certain
cost reduction initiatives implemented during fiscal 2007. |
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Application
of Critical Accounting Policies and Estimates
In accordance with Securities and Exchange Commission guidance,
those material accounting policies that we believe are the most
critical to an investors understanding of our financial
results and condition and require complex management judgment
are discussed below.
Our critical accounting policies and estimates are as follows:
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|
|
|
|
revenue recognition;
|
|
|
|
valuation of long-lived assets;
|
|
|
|
estimation of valuation allowances and accrued liabilities,
specifically product warranty, inventory provisions and
allowance for doubtful accounts;
|
|
|
|
stock-based compensation; and
|
|
|
|
income taxes.
|
Revenue
Recognition
We recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered,
the purchase price is fixed or determinable and collectibility
is reasonably assured. If our equipment sales involve sales to
our existing customers who have previously accepted the same
type(s) of equipment with the same type(s) of specifications, we
account for the product sales as a multiple element arrangement.
Revenue from multiple element arrangements is allocated among
the separate accounting units based on the residual method.
Under the residual method, the revenue is allocated to
undelivered elements based on fair value of such undelivered
elements and the residual amounts of revenue allocated to
delivered elements. We recognize the equipment revenue upon
shipment and transfer of title. The other multiple elements also
include installation, service contracts and training. Equipment
installation revenue is valued based on estimated service person
hours to complete installation and published or quoted service
labor rates and is recognized when the installation has been
completed and the equipment has been accepted by the customer.
Service contract revenue is valued based on estimated service
person hours to complete the service and published or quoted
service labor rates and is recognized over the contract period.
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.
24
All other product sales with customer-specific acceptance
provisions are recognized upon customer acceptance. Future
revenues may be negatively impacted if we are unable to meet
customer-specific acceptance criteria. Revenue related to spare
part sales is recognized upon shipment or delivery based on the
trade terms. Revenues related to maintenance and service
contracts are recognized ratably over the duration of such
contracts.
The timing and amount of revenue recognized depends on whether
revenue is recognized upon shipment versus acceptance. For
revenue recognized upon acceptance, it is dependent upon when
customer-specific criteria are met.
Valuation
of Long-Lived Assets
We assess the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount may
not be recoverable, in accordance with FASB
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. An asset or asset group is
considered impaired if its carrying amount exceeds the
undiscounted future net cash flow the asset or asset group is
expected to generate. If an asset or asset group is considered
to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the asset exceeds its
fair value. If estimated fair value is less than the book value,
the asset is written down to the estimated fair value and an
impairment loss is recognized.
If we determine that the carrying amount of long-lived assets,
including intangible assets, may not be recoverable, we measure
any impairment based on a projected discounted cash flow method
using a discount rate determined by our management to be
commensurate with the risk inherent in our current business
model or another valuation technique. Net intangible assets and
long-lived assets amounted to $20.5 million as of
August 25, 2007.
Considerable management judgment is necessary in estimating
future cash flows and other factors affecting the valuation of
long-lived assets, including intangible assets, including the
operating and macroeconomic factors that may affect them. We use
historical financial information, internal plans and projections
and industry information in making such estimates.
We did not recognize any impairment charges for our long-lived
assets, including intangible assets, during fiscal 2007, 2006 or
2005. While we currently believe the expected cashflows from
these long-lived assets, including intangible assets, exceeds
the carrying amount, materially different assumptions regarding
future performance and discount rates could result in future
impairment losses. In particular, if we no longer believe we
will achieve our long-term projected sales or operating
expenses, we may conclude in connection with any future
impairment tests that the estimated fair value of our long-lived
assets, including intangible assets, are less than the book
value and recognize an impairment charge. Such impairment would
adversely affect our earnings.
Product
Warranty
We record a liability for warranty claims at the time of sale.
The amount of the liability is based on the trend in the
historical ratio of claims to sales, releases of new products
and other factors. The warranty periods for new equipment
manufactured by us range from six months to two years. Special
warranty provisions are also accrued for major rework campaigns.
Although management believes the likelihood to be relatively
low, claims experience could be materially different from actual
results because of the introduction of new, more complex
products; competition or other external forces; manufacturing
changes that could impact product quality; or as of yet
unrecognized defects in products sold.
25
Warranty provisions, claims and changes in estimates for the
fiscal years ended August 25, 2007, August 26, 2006,
and August 27, 2005 were as follows (in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
August 27,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Beginning balance
|
|
$
|
3,964
|
|
|
$
|
4,117
|
|
|
$
|
4,575
|
|
Warranty provisions
|
|
|
1,514
|
|
|
|
2,112
|
|
|
|
1,244
|
|
Warranty claims
|
|
|
(1,667
|
)
|
|
|
(2,265
|
)
|
|
|
(1,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,811
|
|
|
$
|
3,964
|
|
|
$
|
4,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
Provisions
We record provisions for inventory shrinkage and for potentially
excess, obsolete and slow moving inventory. The amounts of these
provisions are based upon historical loss trends, inventory
levels, physical inventory and cycle count adjustments, expected
product lives, forecasted sales demand and recoverability.
Results could be materially different if demand for our products
decreased because of economic or competitive conditions, length
of the industry downturn, or if products become obsolete because
of technical advancements in the industry or by us.
Since we recorded the PSS product inventory provisions 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
$9.7 million and have disposed of $6.7 million of PSS
product inventory. The original cost of PSS product inventory
available for sale or to be disposed of as of August 25,
2007 that has been written down to zero was $8.6 million.
Allowance
for Doubtful Accounts
Management must make estimates of the uncollectibility of our
accounts receivable. The most significant risk is the risk of
sudden unexpected deterioration in the financial condition of a
significant customer who is not considered in the allowance.
Management specifically analyzes accounts receivable and
analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our
customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. Results could be materially
impacted if the financial condition of a significant customer
deteriorated and related accounts receivable are deemed
uncollectible. Accounts receivable are charged off after
management determines that they are uncollectible.
A rollforward of the allowance for doubtful accounts for the
fiscal years ended August 25, 2007, August 26, 2006
and August 27, 2005 is as follows (in thousands):
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
|
|
|
at End
|
|
|
|
of Year
|
|
|
Recoveries
|
|
|
Adjustments
|
|
|
Write-Offs
|
|
|
of Year
|
|
|
Fiscal year ended August 25, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (Deducted from accounts
receivable)
|
|
$
|
520
|
|
|
$
|
(55
|
)
|
|
$
|
(43
|
)
|
|
$
|
(226
|
)
|
|
$
|
196
|
|
Fiscal year ended August 26, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (Deducted from accounts
receivable)
|
|
$
|
922
|
|
|
$
|
(336
|
)
|
|
$
|
(29
|
)
|
|
$
|
(37
|
)
|
|
$
|
520
|
|
Fiscal year ended August 27, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (Deducted from accounts
receivable)
|
|
$
|
1,286
|
|
|
$
|
|
|
|
$
|
(265
|
)
|
|
$
|
(99
|
)
|
|
$
|
922
|
|
26
We collected $55,000 of receivables in fiscal 2007 and $336,000
in fiscal 2006 that had previously been written off resulting in
credits to selling, general and administrative expenses.
Stock-Based
Compensation
We implemented the fair value recognition provisions of
SFAS No. 123R effective August 28, 2005 using the
modified prospective method. Under this method, we recognize
compensation expense for all stock-based awards granted on or
after August 28, 2005 and for previously granted awards not
yet vested as of August 28, 2005. We recorded stock
compensation expense of $593,000 in fiscal 2007 and
$1.1 million in fiscal 2006.
We utilize a Black-Scholes option pricing model to estimate fair
value of each award on the date of grant. The Black-Scholes
model requires the input of certain assumptions that involve
management judgment. Key assumptions that affect the calculation
of fair value include the expected life of stock-based awards
and our stock price volatility. Additionally, we expense for
only those shares expected to vest. The assumptions used in
calculating the fair value of stock-based awards and the
forfeiture rate of such awards reflect managements best
estimates. However, circumstances may change and additional data
may become available over time, which could result in changes to
these assumptions that materially impact the fair value
determination of future awards or their estimated rate of
forfeiture. If factors change and we use different assumptions
in the application of SFAS 123R in future periods, the
compensation expense recorded under SFAS 123R may differ
significantly from the expense recorded in the current period.
See Note 14 of Notes to Consolidated Financial Statements
for additional information on stock-based compensation.
Income
Taxes
Our effective income tax rate is based on income, statutory tax
rates and tax planning opportunities available to us in the
various jurisdictions in which we operate. We have established
valuation allowances against a portion of the U.S. and
non-U.S. net
operating losses to reflect the uncertainty of our ability to
fully utilize these benefits given the limited carryforward
periods permitted by the various jurisdictions. The evaluation
of the realizability of our net operating losses requires the
use of considerable management judgment to estimate the future
taxable income for the various jurisdictions, for which the
ultimate amounts and timing of such estimates may differ. The
valuation allowance can also be impacted by changes in the tax
regulations.
Significant judgment is required in determining our contingent
tax liabilities. We have established contingent tax liabilities
using managements best judgment and adjust these
liabilities as warranted by changing facts and circumstances. A
change in our tax liabilities in any given period could have a
significant impact on our results of operations and cash flows
for that period.
Industry
Update
Gartner Group, a leading research organization, is forecasting
that demand for semiconductors will increase approximately
4 percent to $273 billion in calendar 2007 from
$263 billion in the prior year.* The increase is being
driven by memory and microprocessor device demand. Semiconductor
demand is forecasted by Gartner Group to grow approximately
8 percent to $295 billion in calendar 2008.*
Total equipment spending in calendar 2007 is expected by Gartner
Group to increase approximately 4 percent to
$43.7 billion as compared to $42.0 billion in 2006.*
Currently analysts have a mixed view on calendar 2008 forecasted
equipment spending, ranging from a significant decline to a
modest increase. Gartner Group is forecasting equipment spending
to be flat in calendar 2008 as compared to calendar 2007 as
spending on memory device manufacturing capacity levels off to
recover from the current overcapacity.*
When compared to prior cycles, device manufacturers are managing
capacity increases carefully and acting quickly to delay new
equipment purchases in response to slowing demand to prevent an
inventory
build-up.
The current inventory levels support a cautious investment
posture for device manufacturers. We believe that equipment
spending will gradually improve each quarter throughout calendar
2008.*
27
With one or more of our flagship products placed at many of the
top semiconductor device manufacturers, including a number of
the memory suppliers, we remain optimistic with respect to our
future growth opportunities. Assuming that we execute on
existing and new tool evaluations, we believe we are in position
to participate if and when leading device manufacturers add
capacity in calendar 2008, especially at the 65 nm and lower
technology nodes.*
Overview
According to Semiconductor Equipment and Materials
International, or SEMI, a well known industry trade group:
|
|
|
|
|
Worldwide orders for semiconductor equipment declined
21 percent over the first seven months of calendar 2007.
|
|
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|
Orders for surface conditioning/clean and dry equipment, our
primary market, peaked in January 2007 at $252 million and
declined each month to $139 million in July 2007,
representing a 45 percent decline in monthly orders over a
seven month period.
|
In response to this dramatic order decline in our served market
we implemented cost reduction actions in March 2007 and again in
the fourth quarter of fiscal 2007. With our headcount now down
nearly 25 percent from the fiscal 2007 peak in January 2007
and a lower cost structure in place, we are focused on revenue
growth and margin improvement.
During fiscal 2007, we expanded our presence in Asia and added
two top memory device manufacturers to our growing list of
leading device producers for advanced applications. We continued
to place our flagship products at customers for evaluations and
anticipate acceptance of these systems and follow-on orders in
fiscal 2008.*
In fiscal 2007, we nearly doubled the throughput, number of
silicon wafers processed per hour, of our MAGELLAN immersion
cleaning system and improved its overall reliability and process
performance. We released and placed initial ZETA batch spray
processing systems running our enhanced ViPR technology. During
fiscal 2007, we progressed with platform and applications
development for our single wafer wet product. We expect to place
several evaluation systems at customers during fiscal 2008.*
In the third quarter of fiscal 2007, we completed the
restructuring of our contractual relationship with mFSI
LTD. We now own all intellectual property rights to the
technology we supply to customers in Japan and have a five year
exclusive, performance-based distribution arrangement with
mFSI. After selling a portion of our equity ownership to
several financial investors and mFSI management, we now
own 20 percent of mFSI.
Results
of Operations
Sales
Revenue and Shipments
Fiscal 2007 sales revenue increased to $116.2 million as
compared to $113.2 million in fiscal 2006. The increase in
sales in fiscal 2007 related to an increase in international
sales of $9.3 million, partially offset by a
$6.3 million decrease in domestic sales. Fiscal 2006 sales
revenues increased 31% to $113.2 million as compared to
$86.4 million in fiscal 2005. Sales increased in fiscal
2006 as compared to fiscal 2005 in all regions with increases in
Asia of $12.3 million and the United States of
$11.6 million related primarily to improved industry
conditions.
Shipments were $116.9 million in fiscal 2007 as compared to
$109.7 million in fiscal 2006 and $87.6 million in
fiscal 2005.
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.
28
International sales were $79.6 million for fiscal 2007,
representing 69% of total sales during fiscal 2007,
$70.4 million for fiscal 2006, representing 62% of total
sales during fiscal 2006, and $55.1 million for fiscal
2005, representing 64% of total sales during fiscal 2005. The
increase in fiscal 2007 international sales was related to
increases in Asia and Europe. The dollar increase in
international sales revenue in fiscal 2006 as compared to fiscal
2005 was due to increases in all regions due to improved
industry conditions, with the most significant increase in Asia.
Due to its broader customer base, SC products have a higher
percentage of international sales than PSS products. See
Note 16 of the Notes to Consolidated Financial Statements
for additional information regarding the Companys
international sales.
We ended fiscal 2007 with a backlog of approximately
$15.2 million as compared to $39.8 million at the end
of fiscal 2006. Backlog consists of orders with delivery dates
within the next 12 months for which a customer purchase
order has been received. Because of the timing and relative size
of orders and the possibility of cancellations or customer
delays, backlog is not necessarily indicative of sales for
future periods.
We expect first quarter fiscal 2008 orders to be between
$17 million and $21 million.* This assumes the receipt
of several follow-on orders that are anticipated late in the
quarter.* We expect first quarter fiscal 2008 revenue to be in
the range of $22 million to $25 million.* Achieving
the high end of the revenue range is subject to us receiving
purchase orders and obtaining timely acceptance from customers.
Gross
Margin
Our gross profit margin fluctuates due to a number of factors,
including the mix of products sold; the geographic mix of
products sold, with international sales generally having lower
gross profit than domestic sales; initial product placement
discounts; utilization of manufacturing capacity; sales of PSS
product inventory previously written down to zero; and the
competitive pricing environment.
Gross margin as a percentage of sales was 40.5% for fiscal 2007
as compared to 46.7% for fiscal 2006 and 46.3% for fiscal 2005.
The decrease in gross margins from fiscal 2006 to fiscal 2007
related to:
|
|
|
|
|
an increase in the percentage of international sales from 62% of
total sales in fiscal 2006 to 69% of total sales in fiscal 2007;
|
|
|
|
a $1.0 million increase in inventory reserves associated
with a decline in bookings;
|
|
|
|
a decrease in sales of PSS product inventory previously written
down to zero from $2.1 million in fiscal 2006 to
$0.9 million in fiscal 2007; and
|
|
|
|
$0.3 million of severance costs in fiscal 2007.
|
The increase in gross margins from fiscal 2005 to fiscal 2006
related to an increase in the amount of the original cost of PSS
product inventory sold that has been written down to zero from
$0.5 million in fiscal 2005 to $2.1 million in fiscal
2006, as well as an increase in our capacity utilization
associated with higher shipment levels of $109.7 million in
fiscal 2006 as compared to $87.6 million in fiscal 2005.
The increases were partially offset by lower margins on flagship
products that were sold at a discount in order to gain market
entry.
We will continue to try to sell the PSS product inventory that
had previously been written down to zero to our customers as
spares, refurbished systems and upgrades to existing systems. If
unsuccessful, some of the items will be disposed. Any material
sales of the impaired inventory will be disclosed.
We expect the gross profit margins for the first quarter of
fiscal 2008 to be between 40% to 42% of revenues, due to an
anticipated change in product mix, as approximately 20% of our
anticipated revenues are expected to be derived from our lower
margin MAGELLAN product.* Our factory utilization rate is not
expected to change significantly.*
Selling,
General and Administrative Expenses
Selling, general and administrative expenses in fiscal 2007 were
$34.5 million, or 29.7% of total sales, as compared to
$36.2 million, or 32.0% of total sales, in fiscal 2006 and
$35.3 million, or 40.9% of total sales,
29
in fiscal 2005. The decrease in selling, general and
administrative expenses in fiscal 2007 as compared to fiscal
2006 related primarily to savings associated with cost reduction
efforts associated with headcount reductions, partially offset
by $0.9 million of severance costs. The increase in the
dollar amount of selling, general and administrative expenses in
fiscal 2006 as compared to fiscal 2005 related to
$0.7 million of stock compensation expense which was new in
fiscal 2006, depreciation of our CRM system and increased sales
and marketing expenses due to higher sales.
Selling, general and administrative expenses for the first
quarter of fiscal 2008 are expected to be in the range of
$7.4 million to $7.6 million, as we experience a full
quarter of benefit from the cost reduction actions we took in
the fourth quarter of fiscal 2007.*
Research
and Development Expenses
Research and development expenses for fiscal 2007 were
$24.1 million, or 20.7% of total sales, as compared to
$24.3 million, or 21.5% of total sales, in fiscal 2006 and
$22.1 million, or 25.6% of total sales, in fiscal 2005. The
decrease in fiscal 2007 as compared to fiscal 2006 related
primarily to cost reduction efforts associated with headcount
reductions, partially offset by $0.6 million of severance
costs. The increase in fiscal 2006 as compared to fiscal 2005
related primarily to our broadening the application capabilities
of our products and supporting initial product placements at
customers. In addition, we experienced an increase in
engineering costs as we prepared for and shipped our first
single wafer wet cleaning system in the fourth quarter of fiscal
2006.
We expect research and development expenses to range from
$4.7 million to $4.9 million for the first quarter of
fiscal 2008, as we continue to invest in new application and
product development programs and support production of our
single wafer wet product.*
Gain
on Sale of Facility
We sold our facility in Allen, Texas in the second quarter of
fiscal 2005 and received $14.4 million in net cash proceeds
from the sale. The building and property, plant and equipment
sold had a financial statement carrying amount of approximately
$7.5 million at the close of the sale. We recorded a gain
of $7.0 million on the sale in the second quarter of fiscal
2005. See Note 2 of the Notes to Consolidated Financial
Statements for a discussion on the sale of this facility.
Gain
on Marketable Securities
Gain on marketable securities was $5.8 million in fiscal
2005. The gain resulted from the Nortem (formerly Metron
Technology) distributions in the third and fourth quarters of
fiscal 2005. See Note 9 of the Notes to Consolidated
Financial Statements for a discussion on the distributions from
Nortem.
Impairment
and Loss on Sale of Investment
We recorded $4.1 million of impairment and loss on the sale
of investment in fiscal 2007 related to transactions with
mFSI LTD. See further discussion related to the
transactions and the impairment at Note 4 of the Notes to
Consolidated Financial Statements.
We recorded a $0.5 million impairment of an investment in
fiscal 2006. We had an investment in a Malaysian foundry that
was accounted for under the cost method. The investment was
$0.5 million as of August 27, 2005. On March 22,
2006, the majority shareholder of this Malaysian foundry
announced that the foundry would merge with another foundry and
form a new entity. Subsequent to the merger announcement, we
were contacted by the majority shareholder and given the option
of selling our shares at a nominal value to the majority
shareholder or providing additional debt to the foundry as part
of a pre-merger restructuring. Based on this information, we
deemed the investment as being fully impaired as of
February 25, 2006 and recorded a loss of $0.5 million
in the second quarter of fiscal 2006. We sold our shares in the
foundry at a nominal value to the majority shareholder during
the third quarter of fiscal 2006.
30
Income
Tax Expense
We recorded income tax expense of $122,000 in fiscal 2007 and
$50,000 in fiscal 2006 and 2005, primarily as a result of
foreign and state taxes.
Our deferred tax assets on the balance sheet as of
August 25, 2007 have been fully reserved for with a
valuation allowance. We do not expect to reduce our valuation
allowance until we are consistently profitable on a quarterly
basis.*
We have net operating loss carryforwards for federal income tax
purposes of approximately $153.0 million at August 25,
2007, which will begin to expire in fiscal 2011 through fiscal
2028 if not utilized. Of this amount, approximately
$15.0 million is subject to Internal Revenue Code
Section 382 limitations on utilization, which limits the
amount that we can offset taxable income to approximately
$1.4 million per year.
Equity
in Earnings (Loss) of Affiliate
Equity in earnings (loss) of affiliates was approximately
$27,000 for fiscal 2007, ($274,000) for fiscal 2006 and $450,000
for fiscal 2005. The losses in fiscal 2006 related primarily to
a decrease in mFSI LTD sales as well as a change in
product mix.
After May 15, 2007, we discontinued recording equity in
earnings (loss) of affiliate due to transactions with mFSI
LTD. See further discussion of our relationship with mFSI
at Note 4 of the Notes to Consolidated Financial Statements.
Net
Loss
Net loss was $14.6 million in fiscal 2007 as compared to a
net loss of $7.3 million in fiscal 2006 and a net loss of
$3.3 million in fiscal 2005. The increase in net losses in
fiscal 2007 as compared to fiscal 2006 related primarily to the
impairment and loss on sale of investment of $4.1 million
related to transactions with mFSI LTD in fiscal 2007. The
increase in net losses also related to a decrease in gross
margins associated with an increase in the percentage of
international sales from 62% of total sales in fiscal 2006 to
69% of total sales in fiscal 2007, as well as a
$1.0 million increase in inventory reserves during fiscal
2007. The increase in net loss in fiscal 2006 as compared to
fiscal 2005 related primarily to the $7.0 million gain on
sale of facility in fiscal 2005.
Based upon achieving anticipated revenue, gross margin and
operating expense levels, we expect to record a net loss of
$1.5 million to $2.0 million in the first quarter of
fiscal 2008.*
Liquidity
and Capital Resources
Our cash, restricted cash, cash equivalents and marketable
securities were approximately $24.5 million as of
August 25, 2007, a decrease of $2.4 million from the
end of fiscal 2006. The net decrease was primarily due to
$4.1 million of cash used in operating activities,
$1.6 million in capital expenditures and $0.5 million
of principal payments on a capital lease. The decreases were net
of $0.8 million of proceeds from the issuance of common
stock, $2.0 million dividend received from mFSI LTD
and $1.2 million proceeds related to the sale of a portion
of our investment in mFSI LTD.
Accounts receivable decreased $5.6 million from the end of
fiscal 2006. The decrease in trade accounts receivable related
primarily to a decrease in shipments from $36.4 million in
the fourth quarter of fiscal 2006 to $21.9 million in the
fourth quarter of fiscal 2007. Trade receivables will fluctuate
quarter to quarter depending on individual customers
timing of ship dates, payment terms and cash flow conditions.
Inventory decreased approximately $6.1 million to
$29.6 million at the end of fiscal 2007, as compared to
$35.7 million at the end of fiscal 2006. The decrease in
inventory related primarily to decreases in work in process and
finished goods inventory associated with lower orders. Inventory
provisions were $14.7 million at August 25, 2007 as
compared to provisions of $13.8 million at the end of
fiscal 2006. The increase in inventory provisions related to the
decrease in bookings.
31
Trade accounts payable decreased approximately $5.3 million
to $3.5 million as of August 25, 2007 as compared to
$8.8 million at the end of fiscal 2006 related to the
decreased inventory purchases.
Deferred profit was $3.3 million at the end of fiscal 2007
and $4.1 million at the end of fiscal 2006. The decrease in
deferred profit related primarily to the decrease in shipments
from $36.4 million in the fourth quarter of fiscal 2006 to
$21.9 million in the fourth quarter of fiscal 2007.
As of August 25, 2007, our current ratio was 3.9 to 1.0,
and working capital was $58.7 million.
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
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Operating Lease Obligations
|
|
$
|
1,908
|
|
|
$
|
1,213
|
|
|
$
|
614
|
|
|
$
|
81
|
|
|
$
|
|
|
Capital Lease Obligations
|
|
|
1,295
|
|
|
|
648
|
|
|
|
647
|
|
|
|
|
|
|
|
|
|
Purchase Accruals
|
|
|
1,494
|
|
|
|
1,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty Accruals
|
|
|
381
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-Term Obligations
|
|
|
2,000
|
|
|
|
250
|
|
|
|
500
|
|
|
|
500
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,078
|
|
|
$
|
3,986
|
|
|
$
|
1,761
|
|
|
$
|
581
|
|
|
$
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other long-term obligations represent payments related to
minimum royalty payments or discounts granted under a license
agreement. |
The contractual obligations table above does not include
$1.3 million of income tax contingency accruals, as the
timing of payments or reversals is uncertain.
Capital expenditures were $1.6 million in fiscal 2007,
$2.2 million in fiscal 2006, and $1.8 million in
fiscal 2005. We expect capital expenditures to be less than
$300,000 in the first quarter of fiscal 2008.* Depreciation and
amortization is expected to be between approximately
$1.1 million and $1.2 million in the first quarter of
fiscal 2008.*
At the expected revenue and expense run rate, we anticipate
using $1.0 million to $2.0 million of cash for
operations in the first quarter of fiscal 2008.* The cash usage
assumes that we will continue to reduce our current inventory
levels and experience an increase in accounts receivable from
the fiscal 2007 year-end level.* We believe that with
existing cash, cash receipts, cash equivalents, marketable
securities and internally generated funds, there will be
sufficient funds to meet our currently projected working capital
requirements, and to meet other cash requirements through at
least fiscal 2008.* We believe that success in our industry
requires substantial capital to maintain the flexibility to take
advantage of opportunities as they arise. One of our strategic
objectives is, as market and business conditions warrant, to
consider divestitures, investments or acquisitions of
businesses, products or technologies, particularly those that
are complementary to our surface conditioning business.* We may
fund such activities with additional equity or debt financing.*
The sale of additional equity or debt securities, whether to
maintain flexibility or to meet strategic objectives, could
result in additional dilution to our shareholders.* We currently
do not have a line of credit arrangement.
Off-Balance
Sheet Arrangements
We do not have any off balance sheet arrangements.
New
Accounting Pronouncements
In June 2006, the FASB ratified the Emerging Issues Task Force
(EITF) consensus on EITF Issue
No. 06-3
How Taxes Collected From Customers and Remitted to
Governmental Authorities Should be Presented in the Income
Statement (That Is, Gross versus Net Presentation)
(EITF
No. 06-3).
The scope of EITF
No. 06-3
includes any tax assessed by a governmental authority that is
directly imposed on a revenue-
32
producing transaction between a seller and a customer, and
provides that a company may adopt a policy of presenting taxes
either gross within revenue or on a net basis. For any such
taxes that are reported on a gross basis, a company should
disclose the amounts of those taxes for each period for which an
income statement is presented if those amounts are significant.
This statement is effective to financial reports for interim and
annual reporting periods beginning after December 15, 2006.
EIFT
No. 06-3
became effective for us as of February 25, 2007. We collect
various sales and value-added taxes on certain product and
service sales, which are accounted for on a net basis.
In June 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109. This
interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. This interpretation
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. It also
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. This interpretation is effective for us beginning in
fiscal year 2008. We are still evaluating the impact that the
adoption of this pronouncement will have on our consolidated
financial statements.
In September 2006, the Securities and Exchange Commission
(SEC) issued Staff Accounting
Bulletin No. 108 (SAB 108),
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements, to address diversity in practice in
quantifying financial statement misstatements.
SAB No. 108 requires that we quantify misstatements
based on their impact on each of our financial statements and
related disclosures. SAB No. 108 is effective as of
the end of fiscal year 2006, allowing a one-time transitional
cumulative effect adjustment to retained earnings as of
August 27, 2006 for errors that were not previously deemed
material, but are material under the guidance in
SAB No. 108. We applied the provisions of SAB 108
using the cumulative effect transaction method in connection
with the preparation of our annual financial statements for the
year ended August 25, 2007. The application of SAB 108
resulted in a $310,000 decrease in accrued professional fees and
other accrued expenses and a corresponding decrease in
accumulated deficit as of August 27, 2006.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Our cash flows and earnings are subject to fluctuations in
foreign exchange rates due to investments in foreign-based
affiliates. As of August 25, 2007, our investments included
a 20% interest in mFSI LTD, which operates in Japan. We
denominate the majority of our sales outside of the U.S. in
U.S. dollars.
Because we assumed direct sales, service and applications
support and logistics responsibilities for our products in
Europe and the Asia Pacific region starting in March 2003, we
have and will continue to incur labor, service and other
expenses in foreign currencies. As a result, we may be exposed
to fluctuations in foreign exchange rate risks.* As of
August 25, 2007, we had not entered into any hedging
activities and our foreign currency transaction gains and losses
for fiscal 2007 were insignificant. We are currently evaluating
various hedging activities and other options to minimize these
risks.
We do not have significant exposure to changing interest rates
as we currently have no material long-term debt. As of the end
of fiscal 2007, 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
$245,000 based on our cash, restricted cash, cash equivalents
and marketable securities balances as of August 25, 2007.
33
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
FSI
INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years Ended August 25, 2007, August 26, 2006 and
August 27, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Sales (including sales to affiliates of $5,355, $5,924, and
$4,130, respectively)
|
|
$
|
116,233
|
|
|
$
|
113,241
|
|
|
$
|
86,370
|
|
Cost of goods sold
|
|
|
69,110
|
|
|
|
60,391
|
|
|
|
46,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
47,123
|
|
|
|
52,850
|
|
|
|
39,994
|
|
Selling, general and administrative expenses
|
|
|
34,542
|
|
|
|
36,218
|
|
|
|
35,291
|
|
Research and development expenses
|
|
|
24,086
|
|
|
|
24,321
|
|
|
|
22,078
|
|
Gain on sale of facility
|
|
|
|
|
|
|
|
|
|
|
7,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(11,505
|
)
|
|
|
(7,689
|
)
|
|
|
(10,360
|
)
|
Interest income
|
|
|
916
|
|
|
|
1,132
|
|
|
|
735
|
|
Gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
5,808
|
|
Impairment and loss on sale of investment
|
|
|
(4,088
|
)
|
|
|
(500
|
)
|
|
|
|
|
Other income, net
|
|
|
186
|
|
|
|
94
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(14,491
|
)
|
|
|
(6,963
|
)
|
|
|
(3,702
|
)
|
Income tax expense
|
|
|
122
|
|
|
|
50
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in earnings (loss) of affiliate
|
|
|
(14,613
|
)
|
|
|
(7,013
|
)
|
|
|
(3,752
|
)
|
Equity in earnings (loss) of affiliate
|
|
|
27
|
|
|
|
(274
|
)
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,586
|
)
|
|
$
|
(7,287
|
)
|
|
$
|
(3,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.48
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.11
|
)
|
Diluted
|
|
$
|
(0.48
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.11
|
)
|
Weighted average common shares
|
|
|
30,413
|
|
|
|
30,042
|
|
|
|
29,928
|
|
Weighted average common and potential common shares
|
|
|
30,413
|
|
|
|
30,042
|
|
|
|
29,928
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
34
FSI
INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,040
|
|
|
$
|
15,672
|
|
Restricted cash
|
|
|
151
|
|
|
|
144
|
|
Marketable securities
|
|
|
8,800
|
|
|
|
11,100
|
|
Trade accounts receivable, less allowance for doubtful accounts
of $196 and $520, respectively
|
|
|
17,609
|
|
|
|
22,646
|
|
Trade accounts receivable from affiliate
|
|
|
|
|
|
|
528
|
|
Inventories
|
|
|
29,625
|
|
|
|
35,682
|
|
Other receivables
|
|
|
4,551
|
|
|
|
4,297
|
|
Prepaid expenses and other current assets
|
|
|
2,951
|
|
|
|
7,042
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
78,727
|
|
|
|
97,111
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
20,022
|
|
|
|
20,395
|
|
Restricted cash
|
|
|
500
|
|
|
|
|
|
Investment
|
|
|
460
|
|
|
|
7,632
|
|
Intangible assets, net
|
|
|
496
|
|
|
|
1,246
|
|
Deposits and other assets
|
|
|
1,199
|
|
|
|
1,160
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
101,404
|
|
|
$
|
127,544
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
3,458
|
|
|
$
|
8,803
|
|
Accrued expenses
|
|
|
11,365
|
|
|
|
15,212
|
|
Current portion of capital lease obligations
|
|
|
561
|
|
|
|
|
|
Customer deposits
|
|
|
1,306
|
|
|
|
5,408
|
|
Deferred profit
|
|
|
3,332
|
|
|
|
3,758
|
|
Deferred profit with affiliate
|
|
|
|
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
20,022
|
|
|
|
33,572
|
|
Capital lease obligations
|
|
|
616
|
|
|
|
|
|
Commitments and contingencies (Notes 5 and
21) Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, no par value; 9,700 shares authorized;
none issued and outstanding
|
|
|
|
|
|
|
|
|
Series A Junior Participating Preferred stock, no par
value; 300 shares authorized; none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value; 50,000 shares authorized;
issued and outstanding, 30,545 and 30,309 shares,
respectively
|
|
|
225,974
|
|
|
|
225,169
|
|
Accumulated deficit
|
|
|
(146,328
|
)
|
|
|
(132,052
|
)
|
Accumulated other comprehensive loss
|
|
|
(575
|
)
|
|
|
(218
|
)
|
Other stockholders equity
|
|
|
1,695
|
|
|
|
1,073
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
80,766
|
|
|
|
93,972
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
101,404
|
|
|
$
|
127,544
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
35
FSI
INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE
LOSS
Years
Ended August 25, 2007, August 26, 2006 and
August 27, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Other
|
|
|
Other
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
(Loss) Income
|
|
|
Equity
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance August 28, 2004
|
|
|
29,942
|
|
|
$
|
226,078
|
|
|
$
|
(121,463
|
)
|
|
$
|
5,757
|
|
|
$
|
|
|
|
$
|
110,372
|
|
Stock issuance
|
|
|
182
|
|
|
|
628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
628
|
|
Retirement of stock
|
|
|
(250
|
)
|
|
|
(3,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,031
|
)
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding gains on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,243
|
)
|
|
|
|
|
|
|
(5,243
|
)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(288
|
)
|
|
|
|
|
|
|
(288
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(3,302
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance August 27, 2005
|
|
|
29,874
|
|
|
|
223,675
|
|
|
|
(124,765
|
)
|
|
|
226
|
|
|
|
|
|
|
|
99,136
|
|
Stock issuance
|
|
|
435
|
|
|
|
1,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,494
|
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(444
|
)
|
|
|
|
|
|
|
(444
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(7,287
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,731
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,073
|
|
|
|
1,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance August 26, 2006
|
|
|
30,309
|
|
|
|
225,169
|
|
|
|
(132,052
|
)
|
|
|
(218
|
)
|
|
|
1,073
|
|
|
|
93,972
|
|
Cumulative effect adjustment as a result of the adoption of
SAB 108
|
|
|
|
|
|
|
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
310
|
|
Stock issuance
|
|
|
236
|
|
|
|
805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
805
|
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(357
|
)
|
|
|
|
|
|
|
(357
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(14,586
|
)
|
|
|
|
|
|
|
|
|
|
|
(14,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,943
|
)
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
622
|
|
|
|
622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance August 25, 2007
|
|
|
30,545
|
|
|
$
|
225,974
|
|
|
$
|
(146,328
|
)
|
|
$
|
(575
|
)
|
|
$
|
1,695
|
|
|
$
|
80,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
36
FSI
INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years Ended August 25, 2007, August 26, 2006 and
August 27, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,586
|
)
|
|
$
|
(7,287
|
)
|
|
$
|
(3,302
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
593
|
|
|
|
1,139
|
|
|
|
|
|
Impairment and loss on sale of investment
|
|
|
4,088
|
|
|
|
500
|
|
|
|
|
|
Gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
(5,808
|
)
|
Gain on sale of facility
|
|
|
|
|
|
|
|
|
|
|
(7,015
|
)
|
Depreciation
|
|
|
3,663
|
|
|
|
3,389
|
|
|
|
3,630
|
|
Amortization
|
|
|
508
|
|
|
|
538
|
|
|
|
783
|
|
Equity in (earnings) loss of affiliate
|
|
|
(27
|
)
|
|
|
274
|
|
|
|
(450
|
)
|
Gain on sale or disposal of equipment
|
|
|
(17
|
)
|
|
|
|
|
|
|
(1
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(6
|
)
|
|
|
138
|
|
|
|
5,755
|
|
Trade accounts receivable
|
|
|
5,564
|
|
|
|
2,056
|
|
|
|
(2,625
|
)
|
Inventories
|
|
|
6,057
|
|
|
|
(10,965
|
)
|
|
|
2,662
|
|
Prepaid expenses and other current assets
|
|
|
3,837
|
|
|
|
(3,226
|
)
|
|
|
(1,356
|
)
|
Trade accounts payable
|
|
|
(5,345
|
)
|
|
|
3,600
|
|
|
|
(4,267
|
)
|
Accrued expenses
|
|
|
(3,520
|
)
|
|
|
2,463
|
|
|
|
(7,867
|
)
|
Customer deposits
|
|
|
(4,102
|
)
|
|
|
4,189
|
|
|
|
965
|
|
Deferred profit
|
|
|
(817
|
)
|
|
|
(1,071
|
)
|
|
|
1,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(4,110
|
)
|
|
|
(4,263
|
)
|
|
|
(17,283
|
)
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,590
|
)
|
|
|
(2,228
|
)
|
|
|
(1,755
|
)
|
Purchases of marketable securities
|
|
|
(85,850
|
)
|
|
|
(292,250
|
)
|
|
|
(440,774
|
)
|
Sales of marketable securities
|
|
|
88,150
|
|
|
|
301,395
|
|
|
|
439,709
|
|
Proceeds from sale of investment
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
Dividend from affiliate
|
|
|
2,047
|
|
|
|
208
|
|
|
|
|
|
Proceeds on marketable securities distribution
|
|
|
|
|
|
|
|
|
|
|
7,212
|
|
Investment in affiliate
|
|
|
|
|
|
|
|
|
|
|
(490
|
)
|
Investment in license fee
|
|
|
|
|
|
|
|
|
|
|
(510
|
)
|
(Increase) decrease in deposits and other assets
|
|
|
(39
|
)
|
|
|
38
|
|
|
|
(46
|
)
|
Proceeds from sale of property, plant and equipment
|
|
|
17
|
|
|
|
|
|
|
|
14,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
3,973
|
|
|
|
7,163
|
|
|
|
17,751
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
|
805
|
|
|
|
1,494
|
|
|
|
628
|
|
Increase in restricted cash
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
Principle payments on capital lease
|
|
|
(511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(206
|
)
|
|
|
1,494
|
|
|
|
628
|
|
Effect of exchange rate on cash
|
|
|
(289
|
)
|
|
|
(74
|
)
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(632
|
)
|
|
|
4,320
|
|
|
|
1,008
|
|
Cash and cash equivalents at beginning of year
|
|
|
15,672
|
|
|
|
11,352
|
|
|
|
10,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
15,040
|
|
|
$
|
15,672
|
|
|
$
|
11,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
37
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal
Years Ended August 25, 2007, August 26, 2006 and
August 27, 2005
|
|
(1)
|
Description
of Business and Summary of Significant Accounting
Policies
|
Description
of Business
FSI International, Inc. (the Company) is a global
supplier of surface conditioning equipment (process equipment
used to etch and clean organic and inorganic materials from the
surface of a silicon wafer) and technology and support services
for microelectronics manufacturing. The Companys broad
portfolio of batch and single-wafer cleaning products includes
process technologies for immersion (a method used to clean
silicon wafers by immersing the wafer in multiple tanks filled
with process chemicals), spray (sprays chemical mixtures, water
and nitrogen in a variety of sequences on to the microelectronic
substrate), vapor (utilizes gas phase chemistries to selectively
remove sacrificial surface films) and CryoKinetic (a momentum
transfer process used to remove non-chemically bonded particles
from the surface of a microelectronic device). The
Companys support services programs provide product and
process enhancements to extend the life of installed FSI
equipment.
The Company announced the winding down of its Microlithography
business in March 2003 and transitioned the Microlithography
(uses light to transfer a circuit pattern unto a wafer) business
to a
POLARIS®
Systems and Services (PSS) organization to focus on
supporting the more than 300 installed
POLARIS®
Systems, including refurbishments, upgrades, training and spares.
The Companys customers include microelectronics
manufacturers located throughout North America, Europe, Japan
and the Asia Pacific region.
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of FSI International, Inc. and its wholly owned
subsidiaries, FSI International Asia, Ltd., FSI International
Semiconductor Equipment Pte. Ltd., FSI International (France)
SARL, FSI International (Germany) GmbH, FSI International
(Italy) S.r.l., FSI International (Holding) B.V., FSI
International Netherlands B.V., FSI International (UK) Limited,
FSI International (Shanghai) Co., Ltd., FSI International
(Korea) Co., Ltd., FSI International Israel, Ltd.,
SCD Mountain View, Inc., and Semiconductor Systems, Inc.
All significant intercompany balances and transactions have been
eliminated in consolidation. During fiscal 2007, the Company
closed its branch office, FSI Malaysia SDN GHD. During fiscal
2005, the Company closed FSI International, Ltd., a foreign
sales corporation (FSC).
The Companys fiscal year ends on the last Saturday in
August and is comprised of 52 or 53 weeks. Fiscal 2007,
2006 and 2005 consisted of 52-week periods.
Revenue
Recognition
The Company recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred or services have been
rendered, the purchase price is fixed or determinable and
collectibility is reasonably assured. If the Companys
equipment sales involve sales to its existing customers who have
previously accepted the same type(s) of equipment with the same
type(s) of specifications, the Company accounts for the product
sale as a multiple element arrangement. Revenue from multiple
element arrangements is allocated among the separate accounting
units based on the residual method. Under the residual method,
the revenue is allocated to undelivered elements based on fair
value of such undelivered elements and the residual amounts of
revenue allocated to delivered elements. The Company recognizes
the equipment revenue upon shipment and transfer of title. The
other elements may include installation, service contracts and
training. Equipment installation revenue is valued based on
estimated service person hours to complete installation and
published or quoted service labor rates and is recognized when
the labor has been completed and the equipment has been accepted
by the customer. Service contract revenue is valued based on
estimated service
38
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
person hours to complete the service and published or quoted
service labor rates and is recognized over the contract period.
Training revenue is valued based on published training class
prices and is recognized when the customers complete the
training classes or when a customer-specific training period has
expired. The published or quoted service labor rates and
training class prices are rates actually charged and billed to
the Companys customers.
All other product sales with customer specific acceptance
provisions are recognized upon customer acceptance. Revenue
related to spare parts sales is recognized upon shipment or
delivery based on the trade terms. Revenue related to
maintenance and service contracts are recognized ratably over
the duration of the contracts.
Other
Comprehensive Loss
Other comprehensive loss pertains to revenues, expenses, gains,
and losses that are not included in net (loss) income, but
rather are recorded directly in stockholders equity. For
fiscal 2007, 2006 and 2005, other comprehensive 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 accounts for its marketable securities as
available-for-sale.
Allowance
for Doubtful Accounts
The Company makes estimates of the uncollectibility of accounts
receivable. Management specifically analyzes accounts receivable
and analyzes historical bad debts, customer concentrations,
customer credit-worthiness, current economic trends and changes
in customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. Accounts receivable are charged
off after management determines that they are uncollectible.
A rollforward of the allowance for doubtful accounts for the
fiscal years ended August 25, 2007, August 26, 2006
and August 27, 2005 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
|
|
|
at End
|
|
|
|
of Year
|
|
|
Recoveries
|
|
|
Adjustments
|
|
|
Write-Offs
|
|
|
of Year
|
|
|
Fiscal year ended August 25, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (Deducted from accounts
receivable)
|
|
$
|
520
|
|
|
$
|
(55
|
)
|
|
$
|
(43
|
)
|
|
$
|
(226
|
)
|
|
$
|
196
|
|
Fiscal year ended August 26, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (Deducted from accounts
receivable)
|
|
$
|
922
|
|
|
$
|
(336
|
)
|
|
$
|
(29
|
)
|
|
$
|
(37
|
)
|
|
$
|
520
|
|
Fiscal year ended August 27, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (Deducted from accounts
receivable)
|
|
$
|
1,286
|
|
|
$
|
|
|
|
$
|
(265
|
)
|
|
$
|
(99
|
)
|
|
$
|
922
|
|
We collected $55,000 of receivables in fiscal 2007 and $336,000
in fiscal 2006 that had previously been written down to zero,
resulting in credits to selling, general and administrative
expenses.
39
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories
Inventories are valued at the lower of cost, determined by the
first-in,
first-out method, or net realizable value. The Company records
provisions for inventory shrinkage and for potentially excess,
obsolete and slow moving inventory. The amounts of these
provisions 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 fifteen-year period or the term of
the underlying lease, whichever is shorter. All other property,
plant and equipment assets are carried at cost and depreciated
on a straight-line method over their estimated economic lives.
Principal economic lives for these assets are one to seven
years. Software developed for internal use is depreciated over
three to five years beginning when the system is placed in
service. Maintenance and repairs are expensed as incurred;
significant renewals and improvements are capitalized.
Intangible
Assets
The Company amortizes intangible assets on a straight-line basis
over their estimated economic lives which range from two to nine
years.
Impairment
of Long-Lived Assets
The Company assesses the impairment of long-lived assets,
including identifiable intangible assets, whenever events or
changes in circumstances indicate that the carrying amount may
not be recoverable, in accordance with FASB
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. An asset or asset group is
considered impaired if its carrying amount exceeds the
undiscounted future net cash flow the asset or asset group is
expected to generate. If an asset or asset group is considered
to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the asset exceeds its
fair value. If estimated fair value is less than the book value,
the asset is written down to the estimated fair value and an
impairment loss is recognized.
The Company routinely considers whether indicators of impairment
of its property and equipment assets are present. If such
indicators are present, the Company determines whether the sum
of the estimated undiscounted cash flows attributable to the
asset in question is less than the carrying amount of the asset.
If less, an impairment loss is recognized based on the excess of
the carrying amount of the asset over its fair value. Fair value
is determined by discounted estimated future cash flows,
appraisals or other methods deemed appropriate. If the asset
determined to be impaired is to be held and used, the Company
recognizes an impairment charge to the extent that the carrying
amount of the asset exceeds its fair value. Net intangible
assets and long-lived assets amounted to $20.5 million as
of August 25, 2007.
Considerable management judgment is necessary in estimating
future cash flows and other factors affecting the valuation of
long-lived assets, including intangible assets, including the
operating and macroeconomic factors that may affect them. The
Company uses historical financial information, internal plans
and projections and industry information in making such
estimates.
The Company did not recognize any impairment charges for our
long-lived assets, including intangible assets, during fiscal
2007, fiscal 2006 or fiscal 2005. Although the Company has not
generated positive cash flows in certain prior years, management
believes that based on cost reduction actions and revenue growth
and margin improvement initiatives, that the Company will have
cash flows from these long-lived assets in the future. While the
Company currently believes the expected cash flows from these
long-lived assets, including
40
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
intangible assets, exceeds the carrying amount, materially
different assumptions regarding future performance and discount
rates could result in future impairment losses. In particular,
if the Company no longer believes it will achieve its long-term
projected sales or operating expenses, the Company may conclude
in connection with any future impairment tests that the
estimated fair value of its long-lived assets, including
intangible assets, are less than the book value and recognize an
impairment charge. Such impairment would adversely affect the
Companys earnings.
Income
Taxes
Deferred income taxes are provided in amounts sufficient to give
effect to temporary differences between financial and tax
reporting. The Company accounts for tax credits as reductions of
income tax expense in the year in which such credits are
allowable for tax purposes.
The Companys effective income tax rate is based on income,
statutory tax rates and tax planning opportunities available to
it in the various jurisdictions in which it operates. The
Company has established valuation allowances against its
U.S. and
non-U.S. net
operating losses to reflect the uncertainty of its ability to
fully utilize these benefits given the limited carryforward
periods permitted by the various jurisdictions. The evaluation
of the realizability of the Companys net operating losses
requires the use of considerable management judgment to estimate
the future taxable income for the various jurisdictions, for
which the ultimate amounts and timing of such estimates may
differ. The valuation allowance can also be impacted by changes
in the tax regulations.
Significant judgment is required in determining the
Companys contingent tax liabilities. The Company has
established contingent tax liabilities using managements
best judgment and adjusts these liabilities as warranted by
changing facts and circumstances.
Product
Warranty
Generally, the Company warrants to the original purchaser that
new equipment manufactured by it is free from defects in
material and workmanship for six months to two years, depending
upon the product or customer agreement. Provision is made for
the estimated cost of maintaining product warranties at the time
the product is sold. Special warranty provisions are also
accrued for major rework campaigns.
Warranty provisions, claims and changes in estimates for the
fiscal years ended August 25, 2007, August 26, 2006,
and August 27, 2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
August 27,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Beginning balance
|
|
$
|
3,964
|
|
|
$
|
4,117
|
|
|
$
|
4,575
|
|
Warranty provisions
|
|
|
1,514
|
|
|
|
2,112
|
|
|
|
1,244
|
|
Warranty claims
|
|
|
(1,667
|
)
|
|
|
(2,265
|
)
|
|
|
(1,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
3,811
|
|
|
$
|
3,964
|
|
|
$
|
4,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translation
For each of our foreign operating subsidiaries the functional
currency is generally its local currency. Assets and liabilities
of foreign operations are translated into U.S. dollars
using month-end exchange rates, and revenue and expenses are
translated into U.S. dollars using average exchange rates.
The effects of foreign currency translation adjustments are
included as a component of accumulated other comprehensive
(loss) income in stockholders equity.
41
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Foreign currency transaction gains and losses are a result of
the effect of exchange rate changes on transactions denominated
in currencies other than the functional currency. Foreign
currency transaction gains (losses) are included in other
income, net.
Loss
Per Common Share
Basic loss per share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding
during the period. Diluted loss per common share for fiscal
years 2007, 2006 and 2005 does not include the effect of
potential dilutive common shares as their inclusion would be
antidilutive. The number of potential dilutive common shares
excluded from the computation of diluted loss per share was
3,578,000 for fiscal 2007, 3,699,000 for fiscal 2006 and
4,001,000 for fiscal 2005.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that could affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of sales
revenue and expenses during the reporting period. Actual results
could differ from those estimates.
Employee
Stock Plans
On March 25, 2005, the Compensation Committee of the Board
of Directors of the Company approved the accelerated vesting of
all unvested options that had an exercise price of $4.06 or
greater held by current employees as of March 25, 2005. The
accelerated vesting affected options with respect to
approximately 857,000 shares of the Companys common
stock. The acceleration of options in the third quarter of
fiscal 2005 resulted in higher pro forma stock-based employee
compensation expense in fiscal 2005 than there would have been
had the Company not accelerated the options. The Company
accelerated the vesting of the identified stock options in
fiscal 2005 because it resulted in lower compensation charges in
future periods under SFAS No. 123R.
On August 28, 2005, the Company adopted the fair value
recognition provisions of SFAS No. 123R,
Share-Based Payment, using the modified prospective
method. As a result, for fiscal 2007 and 2006, the
Companys results of operations reflect compensation
expense for new stock options granted and vested under its stock
incentive plan and employees stock purchase plan during the
fiscal year and the unvested portion of previous stock option
grants which vested during the fiscal year.
New
Accounting Pronouncements
In June 2006, the FASB ratified the Emerging Issues Task Force
(EITF) consensus on EITF Issue
No. 06-3
How Taxes Collected From Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation)
(EITF
No. 06-3).
The scope of EITF
No. 06-3
includes any tax assessed by a governmental authority that is
directly imposed on a revenue-producing transaction between a
seller and a customer, and provides that a company may adopt a
policy of presenting taxes either gross within revenue or on a
net basis. For any such taxes that are reported on a gross
basis, a company should disclose the amounts of those taxes for
each period for which an income statement is presented if those
amounts are significant. This statement is effective to
financial reports for interim and annual reporting periods
beginning after December 15, 2006. EITF
No. 06-3
became effective for the Company as of February 25, 2007.
The Company collects various sales and value-added taxes on
certain product and service sales, which are accounted for on a
net basis.
42
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109. This
interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. This interpretation
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. It also
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. This interpretation is effective for the Company
beginning in fiscal year 2008. The Company is still evaluating
the impact that the adoption of this pronouncement will have on
its financial statements.
In September 2006, the Securities and Exchange Commission
(SEC) issued Staff Accounting
Bulletin No. 108 (SAB 108) ,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements, to address diversity in practice in
quantifying the financial statement misstatements.
SAB No. 108 requires that we quantify misstatements
based on their impact on each of our financial statements and
related disclosures. SAB No. 108 is effective as of
the end of fiscal year 2006, allowing a one-time transitional
cumulative effect adjustment to retained earnings as of
August 27, 2006, for errors that were not previously deemed
material, but are material under the guidance in
SAB No. 108. The Company applied the provisions of
SAB 108 using the cumulative effect transition method in
connection with the preparation of its annual financial
statements for the year ended August 25, 2007. The
application of SAB 108 resulted in a $310,000 decrease in
accrued professional fees and other accrued expenses and a
corresponding decrease in accumulated deficit as of
August 27, 2006.
Revisions
Current assets and current liabilities as of August 26,
2006 have both been adjusted to reflect a $3.8 million
increase to properly present VAT receivables and payables on a
gross basis.
|
|
(2)
|
Sale of
Allen Facility
|
In February 2005, the Company sold its Allen, Texas facility,
together with the majority of the business equipment to an
electronics industry buyer and received approximately
$14.4 million in net cash proceeds from the sale. The
building and property, plant and equipment sold had a financial
statement carrying amount of approximately $7.5 million as
of the closing date of the sale. The Company retained ownership
of approximately four acres of land adjacent to the site. The
Company recorded a gain of $7.0 million on the sale.
Concurrent with the sale, the Company entered into a sublease of
approximately 45,000 square feet of space in the facility
for the Companys
POLARIS®
system and service operations. As the present value of the
leaseback rentals was less than 10% of the fair value of the
facility, it was considered minor, and the entire gain of
approximately $7.0 million was recognized upon the close of
the sale. The sublease expires on August 31, 2008; however,
the Company has an option to extend the lease through
August 31, 2009.
|
|
(3)
|
Concentration
of Risk and Financial Instruments
|
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash equivalents, marketable securities and trade accounts
receivable.
The Companys customers consist of microelectronics
manufacturers located throughout the world. The Company performs
ongoing credit evaluations of its customers financial
conditions and generally requires no collateral from them. The
Company maintains an allowance for doubtful accounts receivable
based upon expected collectibility of all accounts receivable.
43
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company invests in a variety of financial instruments such
as municipal bonds, auction-rate securities, commercial paper
and money market fund shares. The Company, by policy, limits the
amount of credit exposure with any one financial or commercial
issuer.
The carrying amount of the Companys financial instruments,
which includes cash equivalents, marketable securities, accounts
receivable, accounts payable and accrued expenses, approximate
fair value at August 25, 2007, due to their short
maturities.
As of August 25, 2007 and August 26, 2006, all
marketable securities were classified as available-for-sale. The
carrying amount of marketable securities was $8,800,000 as of
August 25, 2007 and $11,100,000 as of August 26, 2006.
Gross unrealized holding gains were immaterial as of
August 25, 2007 and August 26, 2006. The Company
manages its cash equivalents and short-term investments as a
single portfolio of highly marketable securities, all of which
are intended to be available to meet the Companys current
cash requirements.
|
|
(4)
|
Related
Party Transactions
|
Prior to the transaction described below, the Company owned a
49 percent equity interest in mFSI, LTD
(mFSI), a Japanese joint venture company
formed in 1991 among the Company, Mitsui & Co., Ltd.
(Mitsui) and Mitsuis wholly owned subsidiary,
Chlorine Engineers Corp., Ltd. (CEC). mFSI is
engaged in the manufacturing and distribution in the Japanese
market of semiconductor equipment and products, including
certain products of the Company. On May 15, 2007 (the
Closing Date), the Company, CEC, Mizuho Capital Co.,
Ltd, (Mizuho), The Yasuda Enterprise Development
III, Limited Partnership (Yasuda) and certain
mFSI managers (mFSI Management Group)
entered into a Stock Purchase Agreement (the
Agreement). The mFSI Management Group does not
include any officers or employees of the Company. Under the
Agreement, mFSI paid on the Closing Date, a
$4.2 million dividend to its shareholders prior to the
sales contemplated in the Agreement, of which the Company
received approximately $2.0 million. Under the Agreement,
CEC and MBK Project Holdings Ltd. (MPH), a wholly
owned subsidiary of Mitsui, sold all of their combined
51 percent equity ownership in mFSI and the Company
sold 28.4 percent of its equity ownership in mFSI, or
a total of 79.4 percent, to Yasuda, Mizuho and the
mFSI Management Group for a total purchase price of
$1.8 million. On the Closing Date, the Company received
total proceeds of $3.2 million, net of applicable taxes. At
the end of fiscal 2007, the Company had a 20% equity ownership
in mFSI. As a result of the transaction, the
Companys ownership and business relationship with
mFSI changed such that the Company no longer had the
ability to exercise significant influence over mFSI.
Therefore, the Company began to account for its investment in
mFSI under the cost method after completion of the
transaction. Previously, the Company accounted for its
investment in mFSI under the equity method. On the Closing
Date, the Company entered into a Termination and Release
Agreement with Mitsui, CEC, MPH and mFSI, for the
termination of the following agreements and any amendments
thereto:
(i) the mFSI Distribution Agreement, dated
September 17, 2004, providing the Company with the
exclusive rights to distribute mFSI surface conditioning
products outside of Japan,
(ii) the FSI Distribution Agreement, dated June 5,
1991, providing mFSI with exclusive rights to distribute
the Company surface conditioning products in Japan,
(iii) the mFSI License Agreement, dated
September 17, 2004, pursuant to which mFSI granted to
the Company a license to certain mFSI intellectual
property and technology,
(iv) the FSI License Agreement, dated June 5, 1991,
pursuant to which the Company granted to mFSI a license to
certain of the Companys intellectual property and
technology, and
(v) the Shareholders Agreement, dated June 5, 1991,
among the Company, CEC and MPH related to the establishment of
mFSI.
44
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company and mFSI also entered into a new distribution
agreement, with an initial five-year term, providing mFSI
with the exclusive right to sell, lease or otherwise distribute
the Companys SC products in Japan.
The Company sold approximately $5,355,000 in fiscal 2007,
$5,924,000 in fiscal 2006 and $4,130,000 in fiscal 2005 of its
products in the aggregate to mFSI LTD as an affiliate.
Trade accounts receivable from mFSI LTD was $528,000 at
August 26, 2006 and deferred profit with mFSI LTD was
$391,000 at August 26, 2006. As of August 25, 2007,
mFSI LTD is no longer considered an affiliate.
The Company has capital and operating lease agreements for
equipment and manufacturing and office facilities. The future
net minimum lease payments for all leases with noncancellable
lease terms in excess of one year at August 25, 2007 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Capital
|
|
|
|
Leases
|
|
|
Lease
|
|
|
Fiscal Year Ending August:
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
1,213
|
|
|
$
|
648
|
|
2009
|
|
|
433
|
|
|
|
647
|
|
2010
|
|
|
181
|
|
|
|
|
|
2011
|
|
|
79
|
|
|
|
|
|
2012
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
1,908
|
|
|
$
|
1,295
|
|
|
|
|
|
|
|
|
|
|
Less imputed interest
|
|
|
|
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
Total lease obligations
|
|
|
|
|
|
$
|
1,177
|
|
|
|
|
|
|
|
|
|
|
Rental expense for all operating leases consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
August 25,
|
|
August 26,
|
|
August 27,
|
|
|
2007
|
|
2006
|
|
2005
|
|
Rent expense for operating leases
|
|
$
|
1,723
|
|
|
$
|
1,735
|
|
|
$
|
1,552
|
|
Inventories are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
Finished goods
|
|
$
|
3,614
|
|
|
$
|
4,756
|
|
Work in process
|
|
|
10,961
|
|
|
|
17,435
|
|
Subassemblies
|
|
|
3,480
|
|
|
|
2,911
|
|
Raw materials and purchased parts
|
|
|
11,570
|
|
|
|
10,580
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,625
|
|
|
$
|
35,682
|
|
|
|
|
|
|
|
|
|
|
45
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(7)
|
Property,
Plant and Equipment
|
The components of property, plant and equipment are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
$
|
224
|
|
|
$
|
224
|
|
Building and leasehold improvements
|
|
|
33,079
|
|
|
|
32,749
|
|
Office furniture and equipment
|
|
|
4,410
|
|
|
|
4,477
|
|
Computer hardware and software
|
|
|
18,727
|
|
|
|
19,850
|
|
Manufacturing equipment
|
|
|
1,955
|
|
|
|
1,969
|
|
Lab equipment
|
|
|
19,948
|
|
|
|
17,303
|
|
Tooling
|
|
|
265
|
|
|
|
515
|
|
Capital programs in progress
|
|
|
43
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,651
|
|
|
|
77,320
|
|
Less accumulated depreciation and amortization
|
|
|
(58,629
|
)
|
|
|
(56,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,022
|
|
|
$
|
20,395
|
|
|
|
|
|
|
|
|
|
|
Lab equipment as of August 25, 2007 included $1,687,000 of
assets acquired under a capital lease.
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 two years is $436,000 in fiscal 2008 and
$60,000 in fiscal 2009.
The Company has no intangible assets with indefinite useful
lives. Intangible assets as of August 25, 2007 and
August 26, 2006 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 25, 2007
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Developed technology
|
|
$
|
9,150
|
|
|
$
|
9,150
|
|
|
$
|
|
|
Patents
|
|
|
4,285
|
|
|
|
3,789
|
|
|
|
496
|
|
License fees
|
|
|
500
|
|
|
|
500
|
|
|
|
|
|
Other
|
|
|
420
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,355
|
|
|
$
|
13,859
|
|
|
$
|
496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 26, 2006
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Developed technology
|
|
$
|
9,150
|
|
|
$
|
9,150
|
|
|
$
|
|
|
Patents
|
|
|
4,285
|
|
|
|
3,353
|
|
|
|
932
|
|
License fees
|
|
|
1,010
|
|
|
|
696
|
|
|
|
314
|
|
Other
|
|
|
420
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,865
|
|
|
$
|
13,619
|
|
|
$
|
1,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(9)
|
Gain on
Sale of Marketable Securities
|
The Company accounted for its investment in Metron Technology as
a marketable equity security available-for-sale and carried the
investment at fair market value per the closing price of Metron
Technologys stock as reported on the Nasdaq National
Market. On August 16, 2004, Metron Technology entered into
a Stock and Asset Purchase Agreement (Purchase
Agreement) with Applied Materials, Inc.
(Applied). On December 14, 2004, Applied,
pursuant to the Purchase Agreement, acquired the worldwide
operating subsidiaries and business of Metron Technology.
Applied paid $84.6 million in cash to Metron Technology
upon closing on December 14, 2004. In connection with the
consummation of the asset sale to Applied, Metron Technology
changed its name to Nortem N.V. (Nortem) and began a
liquidation process. Nortem was delisted from the Nasdaq
National Market on April 15, 2005 and began trading
over-the-counter. Shareholders of Nortem received two
liquidating distributions. The initial distribution was made on
March 14, 2005 at $3.75 per share. The Company received
$5.6 million and recorded a gain of $4.2 million in
the third quarter of fiscal 2005. In June 2005, the Company
received the final distribution from Nortem, net of certain
Dutch withholding taxes. A portion of the final distribution was
deemed a dividend, and that portion was subject to withholding
tax. The net distribution was approximately $1.02 per share. The
Company recorded a gain of $1.6 million in the fourth
quarter of fiscal 2005 related to this final distribution.
Accrued expenses are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
Salaries and benefits
|
|
$
|
4,348
|
|
|
$
|
3,667
|
|
Product warranty
|
|
|
3,811
|
|
|
|
3,964
|
|
Professional fees
|
|
|
307
|
|
|
|
489
|
|
Income taxes
|
|
|
1,175
|
|
|
|
1,260
|
|
VAT taxes
|
|
|
321
|
|
|
|
4,257
|
|
Other
|
|
|
1,403
|
|
|
|
1,575
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,365
|
|
|
$
|
15,212
|
|
|
|
|
|
|
|
|
|
|
Deferred profit as of the end of the fiscal year consists of (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred revenue
|
|
$
|
5,826
|
|
|
$
|
5,163
|
|
Deferred cost of goods sold
|
|
|
(2,494
|
)
|
|
|
(1,014
|
)
|
|
|
|
|
|
|
|
|
|
Deferred profit
|
|
$
|
3,332
|
|
|
$
|
4,149
|
|
|
|
|
|
|
|
|
|
|
47
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Loss before income taxes and equity in earnings (losses) of
affiliate was derived from the following sources (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
August 27,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Domestic
|
|
$
|
(10,574
|
)
|
|
$
|
(3,521
|
)
|
|
$
|
(108
|
)
|
Foreign
|
|
|
(3,917
|
)
|
|
|
(3,442
|
)
|
|
|
(3,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(14,491
|
)
|
|
$
|
(6,963
|
)
|
|
$
|
(3,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
August 27,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
$
|
102
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
20
|
|
|
|
50
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
122
|
|
|
$
|
50
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at August 25, 2007 and August 26, 2006 are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
6,460
|
|
|
$
|
6,085
|
|
Deferred profit
|
|
|
491
|
|
|
|
604
|
|
Accounts receivable
|
|
|
74
|
|
|
|
198
|
|
Property, plant and equipment, net
|
|
|
195
|
|
|
|
109
|
|
Credit carryforwards
|
|
|
5,498
|
|
|
|
2,450
|
|
Net operating loss carryforwards
|
|
|
62,750
|
|
|
|
61,200
|
|
Accruals
|
|
|
2,127
|
|
|
|
2,114
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
77,595
|
|
|
|
72,760
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
189
|
|
|
|
354
|
|
Other, net
|
|
|
131
|
|
|
|
156
|
|
Investment in foreign affiliate
|
|
|
118
|
|
|
|
2,043
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
438
|
|
|
|
2,553
|
|
Less valuation allowance
|
|
|
(77,157
|
)
|
|
|
(70,207
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
48
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The effective income tax expense differs from the expected
statutory federal income tax as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
August 27,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected federal income tax benefit
|
|
$
|
(5,072
|
)
|
|
$
|
(2,437
|
)
|
|
$
|
(1,296
|
)
|
State income tax benefit before valuation allowance
|
|
|
(413
|
)
|
|
|
(185
|
)
|
|
|
(106
|
)
|
Research activities credit
|
|
|
(390
|
)
|
|
|
(50
|
)
|
|
|
|
|
Valuation allowance
|
|
|
5,627
|
|
|
|
2,261
|
|
|
|
1,384
|
|
Stock compensation expense
|
|
|
207
|
|
|
|
|
|
|
|
|
|
Foreign withholding tax
|
|
|
102
|
|
|
|
|
|
|
|
|
|
Other items, net
|
|
|
61
|
|
|
|
461
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
122
|
|
|
$
|
50
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded a tax liability of $122,000 for fiscal 2007
and $50,000 for each of fiscal 2006 and 2005, which is the
result of foreign and state taxes.
The Company has net operating loss carryforwards for federal
purposes of approximately $153.0 million at August 25,
2007, which will begin to expire in fiscal 2011 through fiscal
2028 if not utilized. Of this amount, approximately
$15.0 million is subject to Internal Revenue Code
Section 382 limitations on utilization. This limitation is
approximately $1.4 million per year. The Company has net
operating loss carryforwards for state purposes of approximately
$68.8 million which will expire at various times, beginning
with fiscal year 2008, if not utilized.
The Company maintains a valuation allowance to fully reserve
against its net deferred tax assets due to uncertainty over the
ability to realize these assets. The change in the valuation
allowance during the fiscal year 2007 was $7.0 million. The
change impacted tax expense equal to $5.6 million. Included
in the August 25, 2007 valuation allowance balance of
$77.2 million is $3.6 million, which will be recorded
as a credit to stockholders equity, if it is determined in
the future that this portion of the valuation allowance is no
longer required.
The Company has an Employee 401(k) Retirement Plan, which allows
for discretionary profit sharing contributions, covering
eligible employees. Contributions under the plans are determined
by means of a formula or at the discretion of the Board of
Directors. Beginning in January 2005, the Company contributed 3%
of employee salaries to the 401(k). The Company contributed
approximately $877,000 in fiscal 2007, $869,000 in fiscal 2006
and $517,000 in fiscal 2005.
In addition, the Company has statutory pension plans in Europe
and Asia.
The Companys 1997 Omnibus Stock Plan (the
Plan), which was approved by the Companys
shareholders, authorizes stock-based awards (Awards)
to purchase up to 5,100,000 shares of the Companys
common stock, expired in January 2007. The Company has awards
outstanding under this and other inactive plans. Under the Plan,
the Plan Committee had the power to make Awards, to determine
when and to whom Awards will be granted, the form of each Award,
the amount of each Award, and any other terms or conditions of
each Award consistent with the Plan. Awards generally vest over
a three-year period and expire in ten years.
49
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On August 28, 2005, the Company adopted the fair value
recognition provisions of SFAS No. 123R,
Share-Based Payment, using the modified prospective
method. As a result, for the year ended August 26, 2006,
the Companys results of operations reflected compensation
expense for new stock options granted and vested under its stock
incentive plan and employees stock purchase plan during fiscal
2007 and 2006 and the unvested portion of previous stock option
grants which vested during the fiscal years. Amounts recognized
in the statements of operations for the fiscal years related to
stock-based compensation are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
Total cost of stock-based compensation
|
|
$
|
593
|
|
|
$
|
1,139
|
|
Amount capitalized in inventory and property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts charged against loss before income taxes
|
|
|
593
|
|
|
|
1,139
|
|
Amount of income tax benefit recognized in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount charged against net loss
|
|
$
|
593
|
|
|
$
|
1,139
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense was reflected in the statements
of operations for fiscal 2007 and 2006 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cost of goods sold
|
|
$
|
28
|
|
|
$
|
54
|
|
Selling, general and administrative
|
|
|
439
|
|
|
|
743
|
|
Research and development
|
|
|
126
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
Amount charged against net loss
|
|
$
|
593
|
|
|
$
|
1,139
|
|
|
|
|
|
|
|
|
|
|
Prior to the first quarter of fiscal 2006, the Company accounted
for stock-based employee compensation arrangements in accordance
with the provisions and related interpretations of Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. Had compensation cost for stock-based
compensation been determined consistent with
SFAS No. 123R, the net loss and net loss per share
would have been adjusted to the following pro forma amounts (in
thousands, except for per share data):
|
|
|
|
|
|
|
2005
|
|
|
Net loss, as reported
|
|
$
|
(3,302
|
)
|
Add: Stock-based employee compensation expense recognized in
statements of operations
|
|
|
|
|
Less: Stock-based employee compensation expense determined
under fair value based method
|
|
|
(3,979
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(7,281
|
)
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
Basic as reported
|
|
$
|
(0.11
|
)
|
Basic pro forma
|
|
$
|
(0.24
|
)
|
Diluted as reported
|
|
$
|
(0.11
|
)
|
Diluted pro forma
|
|
$
|
(0.24
|
)
|
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing method. The Company
uses historical data to estimate the expected price volatility,
the expected option
50
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
life and the expected forfeiture rate. The risk-free rate is
based on the U.S. Treasury yield curve in effect at the
time of grant for the estimated life of an option. The Company
has not made any dividend payments nor does it have plans to pay
dividends in the foreseeable future. The following assumptions
were used to estimate the fair value of options granted under
the Companys Plan and the Employees Stock Purchase Plan
(ESPP) during fiscal 2007, 2006 and 2005 using the
Black-Scholes option-pricing model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
ESPP
|
|
Fiscal Year
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Annualized dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected stock price volatility
|
|
|
69.0
|
%
|
|
|
68.5
|
%
|
|
|
70.5
|
%
|
|
|
69.0
|
%
|
|
|
68.2
|
%
|
|
|
69.8
|
%
|
Risk free interest rate
|
|
|
4.7
|
%
|
|
|
4.5
|
%
|
|
|
3.8
|
%
|
|
|
5.0
|
%
|
|
|
4.8
|
%
|
|
|
3.3
|
%
|
Expected life (in years)
|
|
|
5.5
|
|
|
|
5.6
|
|
|
|
5.3
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
A summary of the option activity for fiscal 2007 is as follows
(in thousands, except price per share and contractual term):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Contractual Term
|
|
|
Value
|
|
|
Outstanding at August 26, 2006
|
|
|
3,699
|
|
|
$
|
7.42
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
173
|
|
|
|
5.20
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(20
|
)
|
|
|
4.40
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(220
|
)
|
|
|
10.76
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(54
|
)
|
|
|
3.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 25, 2007
|
|
|
3,578
|
|
|
$
|
7.19
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at August 25, 2007
|
|
|
3,302
|
|
|
$
|
7.38
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value for options outstanding or exercisable at
August 25, 2007 was insignificant, as the closing price of
the Companys stock at the end of fiscal 2007 was less than
the exercise price of the majority of the options outstanding or
exercisable.
The weighted average grant date fair value based on the
Black-Scholes option-pricing model for options granted in fiscal
2007 was $3.32 per share, for options granted in fiscal 2006 was
$2.94 per share and for options granted in fiscal 2005 was $2.41
per share. The total intrinsic value of options exercised was
$108,000 during fiscal 2007, $628,000 during fiscal 2006 and
$21,000 during fiscal 2005.
A summary of the status of unvested option shares as of
August 25, 2007 is as follows (in thousands, except fair
value amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant-date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at August 26, 2006
|
|
|
303
|
|
|
$
|
2.75
|
|
Options granted
|
|
|
173
|
|
|
|
3.32
|
|
Options forfeited
|
|
|
(20
|
)
|
|
|
2.77
|
|
Options vested
|
|
|
(180
|
)
|
|
|
2.82
|
|
|
|
|
|
|
|
|
|
|
Unvested at August 25, 2007
|
|
|
276
|
|
|
$
|
3.07
|
|
|
|
|
|
|
|
|
|
|
51
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of August 25, 2007, there was $783,000 of total
unrecognized compensation cost related to unvested share-based
compensation granted under our plans. That cost is expected to
be recognized over a weighted-average period of 0.9 years.
The total fair value of option shares vested was $593,000 during
fiscal 2007, $1,139,000 during fiscal 2006 and $3,979,000 during
fiscal 2005.
The activity under stock option plans of the Company is as
follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of Shares
|
|
|
Average
|
|
|
|
Available
|
|
|
|
|
|
Exercise Price
|
|
|
|
for Grant
|
|
|
Outstanding
|
|
|
per Share
|
|
|
Activity Description
|
|
|
|
|
|
|
|
|
|
|
|
|
August 28, 2004
|
|
|
570
|
|
|
|
3,767
|
|
|
$
|
7.93
|
|
Additional shares authorized for 1997 Omnibus Stock Option Plan
|
|
|
300
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(549
|
)
|
|
|
549
|
|
|
|
4.09
|
|
Exercised
|
|
|
|
|
|
|
(26
|
)
|
|
|
3.14
|
|
Canceled
|
|
|
229
|
|
|
|
(289
|
)
|
|
|
9.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 27, 2005
|
|
|
550
|
|
|
|
4,001
|
|
|
|
7.34
|
|
Granted
|
|
|
(186
|
)
|
|
|
186
|
|
|
|
4.91
|
|
Exercised
|
|
|
|
|
|
|
(261
|
)
|
|
|
3.32
|
|
Canceled
|
|
|
220
|
|
|
|
(227
|
)
|
|
|
8.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 26, 2006
|
|
|
584
|
|
|
|
3,699
|
|
|
|
7.42
|
|
Granted
|
|
|
(173
|
)
|
|
|
173
|
|
|
|
5.20
|
|
Exercised
|
|
|
|
|
|
|
(54
|
)
|
|
|
3.50
|
|
Canceled
|
|
|
41
|
|
|
|
(240
|
)
|
|
|
10.24
|
|
Expired Plan
|
|
|
(452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 25, 2007
|
|
|
|
|
|
|
3,578
|
|
|
$
|
7.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information with respect to
options outstanding and exercisable at August 25, 2007
(number of options outstanding and exercisable in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
of Options
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$2.33 $5.00
|
|
|
1,122
|
|
|
|
6.6
|
|
|
$
|
3.65
|
|
|
|
1,030
|
|
|
$
|
3.61
|
|
$5.01 $8.50
|
|
|
1,342
|
|
|
|
5.5
|
|
|
|
7.20
|
|
|
|
1,158
|
|
|
|
7.52
|
|
$8.51 $12.00
|
|
|
937
|
|
|
|
3.4
|
|
|
|
10.17
|
|
|
|
937
|
|
|
|
10.17
|
|
$12.01 $15.50
|
|
|
162
|
|
|
|
2.2
|
|
|
|
13.44
|
|
|
|
162
|
|
|
|
13.44
|
|
$15.51 $16.81
|
|
|
15
|
|
|
|
2.6
|
|
|
|
16.69
|
|
|
|
15
|
|
|
|
16.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.33 $16.81
|
|
|
3,578
|
|
|
|
5.1
|
|
|
$
|
7.19
|
|
|
|
3,302
|
|
|
$
|
7.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were 3,396,000 currently exercisable options at a
weighted-average exercise price of $7.69 at August 26,
2006, and 3,470,000 currently exercisable options at a
weighted-average exercise price of $7.94 at August 27, 2005.
52
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On May 22, 1997, the Company adopted a Shareholder Rights
Plan (the Rights Plan). Pursuant to the Rights Plan,
rights were distributed as a dividend at the rate of one
preferred share purchase right (Right) for each
outstanding share of common stock of the Company. The Rights
Plan and related Rights expired on June 10, 2007.
|
|
(15)
|
Employees
Stock Purchase Plan
|
The Companys ESPP enables employees to contribute up to
10% of their wages toward the purchase of the Companys
common stock at 85% of the lower of market value at the
beginning or the end of the semiannual purchase period.
Stockholders authorized the issuance of 250,000 additional
shares of common stock to the ESPP in fiscal 2005.
Shares were issued on the following dates for the following
prices (in thousands except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per
|
|
Date
|
|
Shares
|
|
|
Share
|
|
|
December 31, 2004
|
|
|
64
|
|
|
$
|
3.97
|
|
June 30, 2005
|
|
|
93
|
|
|
|
3.17
|
|
December 31, 2005
|
|
|
88
|
|
|
|
3.29
|
|
June 30, 2006
|
|
|
85
|
|
|
|
3.91
|
|
December 31, 2006
|
|
|
75
|
|
|
|
4.39
|
|
June 30, 2007
|
|
|
106
|
|
|
|
2.70
|
|
As of August 25, 2007, there were 118,000 shares
reserved for future employee purchases of stock under the ESPP.
|
|
(16)
|
Segment
and Other Information
|
Segment
information
The Company has two product lines, Surface Conditioning
(SC) and
POLARIS®
Systems and Services (PSS). Historically, the
Company provided segment information. With the wind-down of the
Microlithography business, which began in fiscal 2003, the
Company has integrated the operations of its product lines.
In accordance with SFAS No. 131
(SFAS 131), Disclosures About Segments of
an Enterprise and Related Information, the Companys
chief operating decision-maker has been identified as the
President and Chief Executive Officer. Due to the level of
integration of the two product lines, the Companys chief
operating decision-maker reviews consolidated operating results
to make decisions about allocating resources and assessing
performance for the entire Company. The two product lines are a
part of one segment for the manufacture, marketing and servicing
of equipment for the microelectronics industry.
Geographic
Information
International sales were approximately 69% of total sales in
fiscal year 2007, approximately 62% of total sales in fiscal
year 2006, and approximately 64% of total sales in fiscal 2005.
The basis for determining sales by geographic region is the
location that the product is shipped to. Included in these
percentages and the table
53
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
below are sales to related parties (see Note 4). Sales by
geographic area are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
August 27,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Asia
|
|
$
|
41,779
|
|
|
$
|
36,654
|
|
|
$
|
24,366
|
|
Europe
|
|
|
37,476
|
|
|
|
33,704
|
|
|
|
30,723
|
|
Other
|
|
|
381
|
|
|
|
9
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
79,636
|
|
|
|
70,367
|
|
|
|
55,129
|
|
Domestic
|
|
|
36,597
|
|
|
|
42,874
|
|
|
|
31,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
116,233
|
|
|
$
|
113,241
|
|
|
$
|
86,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2007, South Korea accounted for 15% of our total sales
and Israel accounted for 10% of our total sales. In fiscal 2006,
the United Kingdom accounted for 11% of our total sales and
South Korea accounted for 11% of our total sales. In fiscal
2005, South Korea accounted for 12% of our total sales and
Germany accounted for 11% of our total sales.
Long-lived
Assets
The Company does not have significant long-lived assets in
foreign countries.
Customer
Information
The following summarizes significant customers comprising 10% or
more of the Companys trade accounts receivable as of
August 25, 2007 and August 26, 2006 and 10% or more of
sales for fiscal 2007, 2006 and 2005, which includes sales
through affiliates to end-users:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Trade Accounts
|
|
|
|
|
|
|
Receivable as of
|
|
|
% of Sales for the Fiscal Year Ended
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
August 25,
|
|
|
August 26,
|
|
|
August 27,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Customer A
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
13
|
%
|
|
|
14
|
%
|
Customer B
|
|
|
*
|
|
|
|
17
|
%
|
|
|
*
|
|
|
|
14
|
%
|
|
|
*
|
|
Customer C
|
|
|
*
|
|
|
|
*
|
|
|
|
13
|
%
|
|
|
11
|
%
|
|
|
11
|
%
|
Customer D
|
|
|
*
|
|
|
|
*
|
|
|
|
11
|
%
|
|
|
*
|
|
|
|
*
|
|
Customer E
|
|
|
*
|
|
|
|
12
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer F
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
11
|
%
|
|
|
*
|
|
Customer G
|
|
|
12
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer H
|
|
|
11
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer I
|
|
|
10
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
* |
|
Trade accounts receivable from or sales to respective customer
were less than 10% as of the end of or during the fiscal year. |
The Company, in the ordinary course of business, enters into
various licensing agreements. These agreements generally provide
for technology transfers between the Company and the licensors
in exchange for minimum royalty payments
and/or a
fixed royalty to the licensors. The total accrued royalty
license fees
54
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
included in accrued expenses were $381,000 at August 25,
2007 and $225,000 at August 26, 2006. These agreements can
generally be terminated by the Company with appropriate notice
to the licensors.
|
|
(18)
|
Supplementary
Cash Flow Information
|
The following summarizes supplementary cash flow items (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
August 25,
|
|
|
August 26,
|
|
|
August 25,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Income taxes paid, net
|
|
$
|
106
|
|
|
$
|
54
|
|
|
$
|
62
|
|
Interest paid, net
|
|
|
195
|
|
|
|
43
|
|
|
|
47
|
|
Assets acquired by a capital lease
|
|
$
|
1,687
|
|
|
$
|
|
|
|
$
|
|
|
In fiscal 2007, the Company implemented cost reduction actions
including a 25% reduction in headcount to approximately
430 employees and other operating cost initiatives. The
cost reduction actions were related to industry conditions in
the semiconductor device and thin film head) segments that the
Company serves, coupled with a delay in certain
customer-specific equipment purchases. A total of 136 positions
were eliminated in connection with this reduction of which 61
were manufacturing positions, 28 were sales, service and
marketing positions, 13 were administration positions and 34
were engineering positions. The terminations all occurred in
fiscal 2007. Severance and outplacement costs recorded in fiscal
2007 were allocated as follows: $923,000 to selling, general and
administrative expense, $592,000 to research and development
expense and $296,000 to cost of goods sold.
The fiscal 2007 severance and outplacement costs are summarized
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Paid
|
|
|
|
|
|
|
Amount
|
|
|
through
|
|
|
Accrual at
|
|
|
|
Charged
|
|
|
August 25,
|
|
|
August 25,
|
|
|
|
Fiscal 2007
|
|
|
2007
|
|
|
2007
|
|
|
Selling, general and administrative expenses
|
|
$
|
923
|
|
|
$
|
389
|
|
|
$
|
534
|
|
Research and development expenses
|
|
|
592
|
|
|
|
487
|
|
|
|
105
|
|
Cost of goods sold
|
|
|
296
|
|
|
|
243
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total severance and outplacement costs
|
|
$
|
1,811
|
|
|
$
|
1,119
|
|
|
$
|
692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accruals are expected to be paid in the first quarter of
fiscal 2008. Anticipated savings related to the reduction in
force on an annual basis is estimated to be approximately
$8.0 million, beginning in the first quarter of fiscal 2008.
In fall 1995, pursuant to the Employee Stock Purchase and
Shareholder Agreement dated November 30, 1990 between Eric
C. Hsu and Semiconductor Systems, Inc. (SSI) (the
Shareholder Agreement) and in connection with
Mr. Hsus termination of his employment with SSI in
August 1995, the former shareholders of SSI purchased the shares
of SSI common stock then held by Mr. Hsu. In April 1996,
the Company acquired SSI, and SSI became a wholly owned
subsidiary of the Company. In October 1996, Eric C. and Angie L.
Hsu (the plaintiffs) filed a lawsuit in the Superior
Court of California, County of Alameda, Southern Division,
against SSI and the former shareholders of SSI. The plaintiffs
alleged that such purchase breached the Shareholder Agreement
and violated the California Corporations Code, breached the
fiduciary duty owed plaintiffs by the individual defendants and
constituted fraud.
55
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In September and October 2000, certain of Mr. Hsus
claims were tried to a jury in Alameda County Superior Court in
Oakland, California. At the conclusion of the trial, the jury
found that SSI breached the Shareholder Agreement between it and
Mr. Hsu and that the damages that resulted were
approximately $2.4 million. In addition, each of the
individual defendant shareholders was found liable for
conversion and damages of $4.2 million were awarded.
Certain individual defendants were also found to have
intentionally interfered with Mr. Hsus prospective
economic advantage and damages of $3.2 million were
awarded. Finally, several individual defendants and SSI were
found to have violated certain provisions of the California
Corporation Code and damages of $2.4 million were awarded.
In proceedings subsequent to the trial, the Court determined
that the plaintiffs were entitled to an award against SSI of
prejudgment interest on the breach of contract damages
(approximately $2.4 million) at 10 percent per annum
from October 1996. In addition, the Court awarded plaintiffs
approximately $127,000 in costs and approximately
$1.8 million in attorneys fees against SSI and the
individual defendants. On November 16, 2001, the court
signed its final judgment reflecting the jurys awards,
interest, attorneys fees and costs assessed against each
of the defendants.
Following the entry of judgment, SSI and the other defendants
filed post-trial motions seeking reduction in the jurys
damage awards
and/or a new
trial. The court denied these post-trial motions and there was
no reduction in damages against SSI. Mr. Hsu was awarded an
additional $431,000 for attorneys fees and expenses
incurred since the judgment was rendered in November 2001.
Subsequently, SSI and the individual defendants filed an appeal
on a variety of grounds, and the Company posted an appeal bond
on behalf of SSI and defendants in the amount of
$8.3 million. As part of the posting of the bond, the
Company entered into a letter of credit in the amount of
$5.2 million with a surety company. This letter of credit
was collateralized with restricted cash of the same amount. The
appellate court upheld the original judgment.
The total judgment against SSI together with post judgment
interest and attorneys fees as of February 26, 2005
aggregated approximately $7.9 million. As a result, the
Company recorded a $0.3 million charge in the second
quarter of fiscal 2005. The Company had recorded a total of
$3.3 million of charges to operations during fiscal 2002
and fiscal 2004 associated with this litigation. During the
third quarter of fiscal 2005, the Company retired the
250,000 shares held in the escrow account created at the
time of the Companys acquisition of SSI to cover such
claims. As the SSI merger was a pooling of interests, the
Company decreased its stockholders equity by an amount
equal to $3.0 million. On March 28, 2005, the Company
tendered funds totaling approximately $7.9 million to the
Hsus via a cashiers check which the Company believes was
the full judgment amount plus all applicable interest. This
included $1.6 million of cash provided by the individual
defendants. Subsequently, instead of depositing the
cashiers check, the Hsus filed a motion with the court to
enforce the judgment against the appeal bond and the Company and
the individual defendants filed a motion to release the bond.
The Hsus cashed the cashiers check in July 2005. In August 2005,
the court ruled in the Companys favor and an
acknowledgement of full satisfaction of the judgment was filed
with the courts by the Hsus attorneys. The bond was
released in August 2005.
In late calendar 2006, the Company determined that certain of
its replacement valves, pumps and heaters could fall within the
scope of United States export licensing regulations to products
that could be used in connection with chemical weapons
processes. The Company determined that these regulations require
it to obtain licenses to ship some of its replacement spare
parts, spare parts kits and assemblies to customers in certain
controlled countries as defined in the export licensing
regulations. During the second quarter of fiscal 2007, the
Company was granted licenses to ship replacement spare parts,
spare parts kits and assemblies to all customers in the
controlled countries where the Company conducts business.
56
FSI
INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The applicable export licensing regulations frequently change.
Moreover, the types and categories of products that are subject
to export licensing are often described in the regulations in
general terms and could be subject to differing interpretations.
In the second quarter of fiscal 2007, the Company made a
voluntary disclosure to the United States Department of Commerce
to clarify its licensing practices and to review its practices
with respect to prior sales of certain replacement valves, pumps
and heaters to customers in several controlled countries as
defined in the licensing regulations.
The United States Department of Commerce could assess penalties
for any past violation of export control regulations. The
potential penalties are dependent upon the number of shipments
in violation of the export control regulations. The penalties
can range from zero to $50,000 per violation. Management
believes that the resolution of this matter will not have a
material adverse impact to the Companys consolidated
financial condition. The licenses that were granted during the
second quarter of fiscal 2007 do not necessarily mitigate the
Companys risk with respect to past violations.
57
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
FSI International, Inc.:
We have audited the accompanying consolidated balance sheets of
FSI International, Inc. and subsidiaries (the
Company) as of August 25, 2007 and
August 26, 2006, and the related consolidated statements of
operations, stockholders equity and comprehensive loss,
and cash flows for each of the years in the three-year period
ended August 25, 2007. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of FSI International, Inc. and subsidiaries as of
August 25, 2007 and August 26, 2006, and the results
of their operations and their cash flows for each of the years
in the three-year period ended August 25, 2007, in
conformity with U.S. generally accepted accounting
principles.
As disclosed in Notes 1 and 13 to the consolidated
financial statements, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, on August 28,
2005 and Securities and Exchange Commission Staff Accounting
Bulletin No. 108, Considering the Effects of Prior
Year Misstatements When Quantifying Misstatements in Current
Year Financial Statements, as of August 27, 2006.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of FSI International, Inc.s internal control
over financial reporting as of August 25, 2007, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated October 31, 2007 expressed an unqualified opinion on
the effective operation of internal control over financial
reporting.
Minneapolis, Minnesota
November 1, 2007
58
Data for the fiscal quarters of our last two fiscal years is as
follows (in thousands, except per share data):
Quarterly
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Quarter
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
(a), (b), (c),
|
|
|
Quarter
|
|
|
|
(b), (c),(e)
|
|
|
(b), (c), (d),(e)
|
|
|
(d), (e)
|
|
|
(a), (b), (c),(e)
|
|
|
|
(In thousands, except per share data)
|
|
|
|
(Unaudited)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
37,707
|
|
|
$
|
33,350
|
|
|
$
|
25,227
|
|
|
$
|
19,949
|
|
Gross margin
|
|
|
16,194
|
|
|
|
14,218
|
|
|
|
9,387
|
|
|
|
7,324
|
|
Operating income (loss)
|
|
|
1,471
|
|
|
|
(793
|
)
|
|
|
(5,303
|
)
|
|
|
(6,880
|
)
|
Net income (loss)
|
|
|
1,888
|
|
|
|
(4,286
|
)
|
|
|
(5,643
|
)
|
|
|
(6,545
|
)
|
Diluted net income (loss) per common share
|
|
$
|
0.06
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.21
|
)
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
18,623
|
|
|
$
|
22,287
|
|
|
$
|
31,957
|
|
|
$
|
40,373
|
|
Gross margin
|
|
|
9,912
|
|
|
|
12,086
|
|
|
|
13,048
|
|
|
|
17,804
|
|
Operating (loss) income
|
|
|
(4,427
|
)
|
|
|
(3,653
|
)
|
|
|
(2,560
|
)
|
|
|
2,951
|
|
Net (loss) income
|
|
|
(4,296
|
)
|
|
|
(3,722
|
)
|
|
|
(2,433
|
)
|
|
|
3,164
|
|
Diluted net (loss) income per common share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.10
|
|
|
|
|
(a) |
|
During the third and fourth quarters of fiscal 2007, the Company
recorded severance and outplacement costs as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
|
|
|
Fourth
|
|
|
Fiscal
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
2007
|
|
|
Cost of sales
|
|
$
|
142
|
|
|
$
|
154
|
|
|
$
|
296
|
|
Selling, general and administrative expenses
|
|
|
216
|
|
|
|
707
|
|
|
|
923
|
|
Research and development expenses
|
|
|
216
|
|
|
|
376
|
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
574
|
|
|
$
|
1,237
|
|
|
$
|
1,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
|
During fiscal 2007 and 2006, the Company recorded stock-based
compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Fiscal
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
2007
|
|
|
Cost of sales
|
|
$
|
15
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
28
|
|
Selling, general and administrative expenses
|
|
|
131
|
|
|
|
73
|
|
|
|
112
|
|
|
|
123
|
|
|
|
439
|
|
Research and development expenses
|
|
|
68
|
|
|
|
1
|
|
|
|
20
|
|
|
|
37
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
214
|
|
|
$
|
76
|
|
|
$
|
138
|
|
|
$
|
165
|
|
|
$
|
593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Fiscal
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
2006
|
|
Cost of sales
|
|
$
|
10
|
|
|
$
|
11
|
|
|
$
|
11
|
|
|
$
|
22
|
|
|
$
|
54
|
|
Selling, general and administrative expenses
|
|
|
206
|
|
|
|
151
|
|
|
|
193
|
|
|
|
193
|
|
|
|
743
|
|
Research and development expenses
|
|
|
68
|
|
|
|
77
|
|
|
|
79
|
|
|
|
118
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
284
|
|
|
$
|
239
|
|
|
$
|
283
|
|
|
$
|
333
|
|
|
$
|
1,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
(c) |
|
During fiscal 2007 and 2006, the Company had sales of PSS
product inventory with an original cost that had previously been
written down to zero as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Fiscal
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
$
|
87
|
|
|
$
|
800
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
887
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
$
|
784
|
|
|
$
|
813
|
|
|
$
|
410
|
|
|
$
|
136
|
|
|
$
|
2,143
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) |
|
During the second quarter of fiscal 2007, the Company recorded a
$3.6 million impairment of investment and during the third
quarter of fiscal 2007, the Company recorded a $0.5 million
impairment of investment. During the second quarter of fiscal
2006, the Company recorded a $0.5 million impairment of an
investment. |
|
(e) |
|
Service revenue of $33,000, $270,000 and $976,000 and associated
cost of goods sold of $9,000, $75,000 and $270,000 should have
been recorded in the first, second and third quarters of fiscal
2006, respectively. The Company recorded the amounts as an
out-of-period adjustment in the fourth quarter of fiscal 2006.
The Company recorded $1.2 million related to service
revenue and $0.3 million of associated cost of goods sold
which had a $0.9 million, or $0.03 per share, impact on
fourth quarter of fiscal 2006 profit. The entry had no impact on
the full year fiscal 2006 financial results. |
The Companys fiscal quarters are generally 13 weeks,
all ending on a Saturday. The fiscal year ends on the last
Saturday in August and consists of 52 or 53 weeks.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in
Rule 13a-15(f)
under the Exchange Act of 1934 (the Exchange Act).
The Companys internal control system was designed to
provide reasonable assurance to the Companys management
and Board of Directors regarding the preparation and fair
presentation of published financial statements. Under the
supervision and with the participation of management, including
our Chairman and Chief Executive Officer and Chief Financial
Officer, we conducted an assessment of the effectiveness of our
internal control over financial reporting as of August 25,
2007. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control
Integrated Framework.
Based on our assessment using the criteria set forth by COSO in
Internal Control Integrated Framework,
management concluded that our internal control over financial
reporting was effective as of August 25, 2007.
The Companys independent registered public accounting firm
has issued an attestation report on the Companys internal
control over financial reporting. This report appears on the
following page.
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
As of the end of the period covered by this report, we conducted
an evaluation, under the supervision and with the participation
of the principal executive officer and principal financial
officer, of our disclosure controls and procedures (as defined
in
Rules 13a-14(c)
and
15d-14(c)
under the Exchange Act). Based on this evaluation, the principal
executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that
we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
Changes
in Internal Controls Over Financial Reporting
There was no changes in our internal control over financial
reporting during our most recently completed fiscal quarter that
have materially affected, or were reasonably likely to
materially affect, our internal control over financial reporting.
60
Report of
Independent Registered Public Accounting Firm Regarding
Internal
Control Over Financial Reporting
The Board of Directors and Stockholders
FSI International, Inc.:
We have audited FSI International Inc.s (the
Company) internal control over financial reporting
as of August 25, 2007, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). FSI International Inc.s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, FSI International, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of August 25, 2007, based on criteria
established in Internal Control Integrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of FSI International, Inc. and
subsidiaries as of August 25, 2007 and August 26,
2006, and the related consolidated statements of operations,
stockholders equity and comprehensive loss, and cash flows
for each of the years in the three-year period ended
August 25, 2007, and our report dated November 1, 2007
expressed an unqualified opinion on those consolidated financial
statements. As disclosed in Notes 1 and 13 to the
consolidated financial statements, the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment, on
August 28, 2005 and Securities and Exchange Commission
Staff Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements, as of
August 27, 2006.
Minneapolis, Minnesota
November 1, 2007
61
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
Certain information required by Part III is incorporated by
reference to our definitive proxy statement for the annual
meeting of shareholders to be held on January 16, 2008 and
which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days after
August 25, 2007.
Except for those portions specifically incorporated in this
report by reference to our proxy statement for the annual
meeting of shareholders to be held on January 16, 2008, no
other portions of the proxy statement are deemed to be filed as
part of this Report on
Form 10-K.
|
|
ITEM 10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
The information concerning our directors and our board
committees required by this item is incorporated by reference to
the information under the captions Election of
Directors and Compliance with Section 16(a) of
the Securities and Exchange Act of 1934 in our proxy
statement for the annual meeting of shareholders to be held on
January 16, 2008. For information concerning executive
officers, see Item 4A of this
Form 10-K
Report.
Audit Committee Financial Expert
Our board of directors has determined that at least one member
of our Audit and Finance Committee, Mr. James A. Bernards,
is an audit committee financial expert, as that term
is defined under Section 407 of the Sarbanes-Oxley Act of
2002 and the rules promulgated by the SEC in furtherance of
Section 407. Mr. Bernards is independent, as that term
is defined under the National Association of Securities
Dealers listing standards.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics applicable
to all of our directors and employees, including our principal
executive officer, principal financial officer, controller and
other employees performing similar functions. A copy of this
code of business conduct and ethics is available on our website
at www.fsi-intl.com.
We intend to disclose any waiver of our code of business conduct
and ethics for our directors or executive officers in future
Form 8-K
filings within four business days following the date of such
waiver. We also intend to post on our website at
www.fsi-intl.com any amendment to, or waiver from, a provision
of our code of business conduct and ethics that applies to our
principal executive officer, principal financial officer,
controller and other employees performing similar functions
within four business days following the date of such amendment
or waiver.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this item is incorporated by
reference to the information under the captions Executive
Compensation and Compensation of Directors in
our proxy statement for the annual meeting of shareholders to be
held on January 16, 2008.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by this item is incorporated by
reference to the information under the captions Security
Ownership of Management and Certain Beneficial Owners and
Equity Compensation Plan Information in our proxy
statement for the annual meeting of shareholders to be held on
January 16, 2008.
62
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
The information required by this item is incorporated by
reference to the information under the caption Interests
of Management and Others in Certain Transactions in our
proxy statement for the annual meeting of shareholders to be
held on January 16, 2008.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required by this item is incorporated by
reference to the information under the captions
Independent Auditors Fees and Auditor
Independence in our proxy statement for the annual meeting
of shareholders to be held on January 16, 2008.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a)(1)
Index to Financial Statements
|
|
|
|
|
|
|
Page Number
|
|
|
in this Report
|
|
Consolidated Statements of Operations Years ended
August 25, 2007, August 26, 2006 and August 27,
2005
|
|
|
34
|
|
Consolidated Balance Sheets August 25, 2007 and
August 26, 2006
|
|
|
35
|
|
Consolidated Statements of Stockholders Equity and
Comprehensive (Loss) Income Years ended
August 25, 2007, August 26, 2006 and August 27,
2005
|
|
|
36
|
|
Consolidated Statements of Cash Flows Years ended
August 25, 2007, August 26, 2006 and August 27,
2005
|
|
|
37
|
|
Notes to Consolidated Financial Statements
|
|
|
38
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
58
|
|
Quarterly financial data for fiscal 2007 and 2006 (unaudited)
|
|
|
59
|
|
(a)(2)
Financial Statement Schedule
All schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial
statements or notes thereto.
(a)(3)
Exhibits
|
|
|
|
|
|
2
|
.1
|
|
Agreement and Plan of Reorganization, dated as of
January 21, 1999 among FSI International, Inc., BMI
International, Inc. and YieldUP International Corporation.(7)
|
|
2
|
.2
|
|
Agreement and Plan of Reorganization by and Among FSI
International, Inc., Spectre Acquisition Corp., and
Semiconductor Systems, Inc.(1)
|
|
2
|
.3
|
|
Asset Purchase Agreement dated as of June 9, 1999 between
FSI International, Inc. and The BOC Group, Inc.(8)
|
|
3
|
.1
|
|
Restated Articles of Incorporation of the Company.(2)
|
|
3
|
.2
|
|
Restated and Amended By-Laws.(15)
|
|
3
|
.5
|
|
Articles of Amendment of Restated Articles of Incorporation.(9)
|
|
10
|
.1
|
|
FSI International, Inc. 1997 Omnibus Stock Plan (as amended and
restated April 2001).(13)
|
|
10
|
.2
|
|
Form of Incentive Stock Option Agreement for the FSI
International, Inc. 1997 Omnibus Stock Plan, as amended.(16)
|
|
10
|
.3
|
|
Form of Incentive Stock Option Agreement for Outside Directors
for the FSI International, Inc. 1997 Omnibus Stock Plan, as
amended.(16)
|
|
10
|
.9
|
|
Amended and Restated Employees Stock Purchase Plan.(13)
|
63
|
|
|
|
|
|
10
|
.15
|
|
License Agreement, dated October 15, 1991, between the
Company and Texas Instruments Incorporated.(3)
|
|
10
|
.16
|
|
Amendment No. 1, dated April 10, 1992, to the License
Agreement, dated October 15, 1991, between the Company and
Texas Instruments Incorporated.(3)
|
|
10
|
.17
|
|
Amendment effective October 1, 1993 to the License
Agreement, dated October 15, 1991 between the Company and
Texas Instruments Incorporated.(4)
|
|
10
|
.18
|
|
Amended and Restated Directors Nonstatutory Stock Option
Plan.(5)
|
|
10
|
.19
|
|
Management Agreement between FSI International, Inc. and Donald
S. Mitchell, effective as of January 2, 2001. (Similar
agreements between the Company and its executive officers have
been omitted but will be filed if requested in writing by the
commission.) (12)#
|
|
10
|
.20
|
|
FSI International, Inc. 1994 Omnibus Stock Plan.(6)
|
|
10
|
.26
|
|
Summary of Employment Arrangement between the Company and Don
Mitchell dated December 12, 1999. (11)#
|
|
10
|
.30
|
|
Employment Agreement entered into as of December 12, 1999
by and between FSI International, Inc. and Donald S. Mitchell.
(10)#
|
|
10
|
.31
|
|
Agreement made and entered into as of March 4, 2001 by and
between FSI International, Inc. and Benno G. Sand. (14)#
|
|
10
|
.40
|
|
Termination and Release Agreement dated as of May 15, 2007
with Mitsui & Co., Ltd., Chlorine engineers Corp.,
Ltd., MBK Project Holdings Ltd. and mFSI LTD.(17)
|
|
10
|
.41
|
|
Stock Purchase Agreement dated as of May 15, 2007 by an
among FSI International, Inc., MBK Project Holdings Ltd.,
Chlorine Engineers Corp. Ltd., Yasuda Enterprise
Development III Limited Partnership, Mizuho Capital Co.,
Ltd., Mr. Hideki Kawai, Mr. Takanori Yoshioka and
Mr. Satoshi Shikami. (exhibits omitted)(17)
|
|
21
|
.0
|
|
Subsidiaries of the Company. (filed herewith)
|
|
23
|
.0
|
|
Consent of KPMG LLP, independent registered public accounting
firm. (filed herewith)
|
|
24
|
.0
|
|
Powers of Attorney from the Directors of FSI International, Inc.
(filed herewith)
|
|
31
|
.1
|
|
Certification by Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (filed
herewith)
|
|
31
|
.2
|
|
Certification by Principal Financial and Accounting Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(filed herewith)
|
|
32
|
.1
|
|
Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(filed herewith)
|
|
|
|
# |
|
Identified exhibit is a management contract, compensation plan
or arrangement. |
|
(1) |
|
Filed as an Exhibit to the Companys Registration Statement
on
Form S-4
(as amended) dated March 21, 1996, SEC File
No. 333-1509
and incorporated by reference. |
|
(2) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the quarter ended February 24, 1990, SEC File
No. 0-17276,
and incorporated by reference. |
|
(3) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 29, 1992, File
No. 0-17276,
and incorporated by reference. |
|
(4) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 28, 1993, SEC File
No. 0-17276,
and incorporated by reference. |
|
(5) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the fiscal quarter ended May 28, 1994, SEC File
No. 0-17276,
and incorporated by reference. |
|
(6) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 27, 1994, SEC File
No. 0-17276,
and incorporated by reference. |
|
(7) |
|
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. |
64
|
|
|
(8) |
|
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. |
|
(9) |
|
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. |
|
(10) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the fiscal quarter ended February 26, 2000, SEC File
No. 0-17276
and incorporated by reference. |
|
(11) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 26, 2000, SEC File
No. 0-17276
and incorporated by reference. |
|
(12) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the fiscal quarter ended February 24, 2001, SEC File
No. 0-17276
and incorporated by reference. |
|
(13) |
|
Filed as an Exhibit to the Companys Registration Statement
on
Form S-8,
filed by the Company on March 28, 2003, SEC File
No. 333-104088
and incorporated by reference. |
|
(14) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 31, 2002, SEC File
No. 0-17276
and incorporated by reference. |
|
(15) |
|
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. |
|
(16) |
|
Filed as an Exhibit to the Companys Current Report on
Form 8-K,
filed by the Company on October 20, 2004, SEC File
No. 0-17276
and incorporated by reference. |
|
(17) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the quarter ended May 26, 2007, SEC File
No. 0-17276
and incorporated by reference. |
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FSI INTERNATIONAL, INC.
|
|
|
|
By:
|
/s/ Donald
S. Mitchell
|
Donald S. Mitchell, Chairman and
Chief Executive Officer
(Principal Executive Officer)
Dated: November 2, 2007
|
|
|
|
By:
|
/s/ Patricia
M. Hollister
|
Patricia M. Hollister, Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following
persons, constituting a majority of the Board of Directors, on
behalf of the Registrant and in the capacities and on the dates
indicated.
James A. Bernards, Director*
Terrence W. Glarner, Director*
Willem D. Maris, Director*
Donald S. Mitchell, Director*
David V. Smith, Director*
|
|
|
|
*By:
|
/s/ Patricia
M. Hollister
|
Patricia M. Hollister, Attorney-in-fact
Dated: November 2, 2007
66
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.(7)
|
|
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.(8)
|
|
Incorporated by reference
|
|
3
|
.1
|
|
Restated Articles of Incorporation of the Company.(2)
|
|
Incorporated by reference
|
|
3
|
.2
|
|
Restated and Amended By-Laws.(15)
|
|
Incorporated by reference
|
|
3
|
.5
|
|
Articles of Amendment of Restated Articles of Incorporation.(9)
|
|
Incorporated by reference
|
|
10
|
.1
|
|
FSI International, Inc. 1997 Omnibus Stock Plan (as amended and
restated April 2001).(13)
|
|
Incorporated by reference
|
|
10
|
.2
|
|
Form of Incentive Stock Option Agreement for the FSI
International, Inc. 1997 Omnibus Stock Plan, as amended.(16)
|
|
Incorporated by reference
|
|
10
|
.3
|
|
Form of Incentive Stock Option Agreement for Outside Directors
for the FSI International, Inc. 1997 Omnibus Stock Plan, as
amended.(16)
|
|
Incorporated by reference
|
|
10
|
.9
|
|
Amended and Restated Employees Stock Purchase Plan.(13)
|
|
Incorporated by reference
|
|
10
|
.15
|
|
License Agreement, dated October 15, 1991, between the
Company and Texas Instruments Incorporated.(3)
|
|
Incorporated by reference
|
|
10
|
.16
|
|
Amendment No. 1, dated April 10, 1992, to the License
Agreement, dated October 15, 1991, between the Company and
Texas Instruments Incorporated.(3)
|
|
Incorporated by reference
|
|
10
|
.17
|
|
Amendment effective October 1, 1993 to the License
Agreement, dated October 15, 1991 between the Company and
Texas Instruments Incorporated.(4)
|
|
Incorporated by reference
|
|
10
|
.18
|
|
Amended and Restated Directors Nonstatutory Stock Option
Plan.(5)
|
|
Incorporated by reference
|
|
10
|
.19
|
|
Management Agreement between FSI International, Inc. and Donald
S. Mitchell, effective as of January 2, 2001. (Similar
agreements between the Company and its executive officers have
been omitted but will be filed if requested in writing by the
commission.) (12)#
|
|
Incorporated by reference
|
|
10
|
.20
|
|
FSI International, Inc. 1994 Omnibus Stock Plan.(6)
|
|
Incorporated by reference
|
|
10
|
.26
|
|
Summary of Employment Arrangement between the Company and Don
Mitchell dated December 12, 1999. (11)#
|
|
Incorporated by reference
|
|
10
|
.30
|
|
Employment Agreement entered into as of December 12, 1999
by and between FSI International, Inc. and Donald S.
Mitchell.(10)#
|
|
Incorporated by reference
|
|
10
|
.31
|
|
Agreement made and entered into as of March 4, 2001 by and
between FSI International, Inc. and Benno G. Sand. (14)#
|
|
Incorporated by reference
|
|
10
|
.40
|
|
Termination and Release Agreement dated as of May 15, 2007
with Mitsui & Co., Ltd., Chlorine engineers Corp.,
Ltd., MBK Project Holdings Ltd. and mFSI LTD.(17)
|
|
Incorporated by reference
|
|
10
|
.41
|
|
Stock Purchase Agreement dated as of May 15, 2007 by an
among FSI International, Inc., MBK Project Holdings Ltd.,
Chlorine Engineers Corp. Ltd., Yasuda Enterprise
Development III Limited Partnership, Mizuho Capital Co.,
Ltd., Mr. Hideki Kawai, Mr. Takanori Yoshioka and
Mr. Satoshi Shikami. (exhibits omitted)(17)
|
|
Incorporated by reference
|
|
21
|
.0
|
|
Subsidiaries of the Company.
|
|
Filed herewith
|
|
23
|
.0
|
|
Consent of KPMG LLP, independent registered public accounting
firm.
|
|
Filed herewith
|
|
24
|
.0
|
|
Powers of Attorney from the Directors of FSI International, Inc.
|
|
Filed herewith
|
67
|
|
|
|
|
|
|
Exhibit
|
|
Description
|
|
Method of Filing
|
|
|
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.
|
|
Field herewith
|
|
32
|
.1
|
|
Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Filed herewith
|
|
|
|
# |
|
Identified exhibit is a management contract, compensation plan
or arrangement. |
|
(1) |
|
Filed as an Exhibit to the Companys Registration Statement
on
Form S-4
(as amended) dated March 21, 1996, SEC File
No. 333-1509
and incorporated by reference. |
|
(2) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the quarter ended February 24, 1990, SEC File
No. 0-17276,
and incorporated by reference. |
|
(3) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 29, 1992, File
No. 0-17276,
and incorporated by reference. |
|
(4) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 28, 1993, SEC File
No. 0-17276,
and incorporated by reference. |
|
(5) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the fiscal quarter ended May 28, 1994, SEC File
No. 0-17276,
and incorporated by reference. |
|
(6) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 27, 1994, SEC File
No. 0-17276,
and incorporated by reference. |
|
(7) |
|
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. |
|
(8) |
|
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. |
|
(9) |
|
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. |
|
(10) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the fiscal quarter ended February 26, 2000, SEC File
No. 0-17276
and incorporated by reference. |
|
(11) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 26, 2000, SEC File
No. 0-17276
and incorporated by reference. |
|
(12) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the fiscal quarter ended February 24, 2001, SEC File
No. 0-17276
and incorporated by reference. |
|
(13) |
|
Filed as an Exhibit to the Companys Registration Statement
on
Form S-8,
filed by the Company on March 28, 2003, SEC File
No. 333-104088
and incorporated by reference. |
|
(14) |
|
Filed as an Exhibit to the Companys Report on
Form 10-K
for the fiscal year ended August 31, 2002, SEC File
No. 0-17276
and incorporated by reference. |
|
(15) |
|
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. |
|
(16) |
|
Filed as an Exhibit to the Companys Current Report on
Form 8-K,
filed by the Company on October 20, 2004, SEC File
No. 0-17276
and incorporated by reference. |
|
(17) |
|
Filed as an Exhibit to the Companys Report on
Form 10-Q
for the quarter ended May 26, 2007, SEC File
No. 0-17276
and incorporated by reference. |
68