Edgar Filing: FSI INTERNATIONAL INC

Quarterly Report for FSI International, Inc.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)


		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 24, 2001


		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-17276

FSI INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


MINNESOTA		41-1223238

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3455 Lyman Boulevard, Chaska, Minnesota		55318

(Address of principal executive offices)		(Zip Code)

952-448-5440

(Registrant’s telephone number, including area code)

322 Lake Hazeltine Drive, Chaska, Minnesota 55318

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


	YES NO

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practical date:

Common Stock, No Par Value – 26,102,904 shares outstanding as of December 18, 2001

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED):
	CONSOLIDATED CONDENSED BALANCE SHEETS AS OF NOVEMBER 24, 2001 AND AUGUST 25, 2001
	CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE QUARTERS ENDED NOVEMBER 24, 2001 AND NOVEMBER 25, 2000
	CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE QUARTERS ENDED NOVEMBER 24, 2001 AND NOVEMBER 25, 2000
	NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGE IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
	SIGNATURE

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q


PART I.	FINANCIAL INFORMATION		PAGE NO.

Item 1.	Consolidated Condensed Financial Statements (unaudited):

		Consolidated Condensed Balance Sheets as of November 24, 2001 and August 25, 2001	3

		Consolidated Condensed Statements of Operations for the quarters ended November 24, 2001 and November 25, 2000	5

		Consolidated Condensed Statements of Cash Flows for the quarters ended November 24, 2001 and November 25, 2000	6

		Notes to the Consolidated Condensed Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		29

PART II	OTHER INFORMATION


Item 1.	Legal Proceedings		30

Item 2.	Change in Securities		32

Item 3.	Defaults upon Senior Securities		32

Item 4.	Submission of Matters to a Vote of Security Holders		32

Item 5.	Other Information		32

Item 6.	Exhibits and Reports on Form 8-K		33

	SIGNATURE		36

PART I. Item 1. FINANCIAL INFORMATION

FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
NOVEMBER 24, 2001 AND AUGUST 25, 2001
(unaudited)

ASSETS


			November 24,			August 25,
			2001			2001

Current assets:
	Cash and cash equivalents		$	45,798,299		$	44,119,833
	Marketable securities			9,393,732			10,507,920
	Trade accounts receivable, net of allowance for doubtful accounts of $2,336,000 and $2,134,000, respectively			8,749,335			21,719,174
	Trade accounts receivable from affiliates			15,561,325			19,654,602
	Inventories			50,936,653			48,699,247
	Notes receivable from related party			515,629			658,205
	Prepaid expenses and other current assets			3,956,141			4,130,423
	Employee receivables			171,668			173,759

		Total current assets		135,082,782			149,663,163

Property, plant and equipment, at cost				112,787,573			112,321,671
	Less accumulated depreciation and amortization			(59,957,906	)		(57,192,997	)

				52,829,667			55,128,674
Investment in affiliates				23,437,387			22,158,516
Intangibles				13,926,620			14,594,568
Deposits and other assets				3,750,428			3,742,085

			$	229,026,884		$	245,287,006

(continued)

See accompanying notes to consolidated condensed financial statements.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
NOVEMBER 24, 2001 AND AUGUST 25, 2001
(continued)
(unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY


				November 24,			August 25,
				2001			2001

Current liabilities:
	Trade accounts payable			$	7,854,602		$	10,206,932
	Accrued expenses				22,629,602			20,712,286
	Deferred profit				18,372,298			30,350,292

			Total current liabilities		48,856,502			61,269,510

Stockholders’ equity:
		Preferred stock, no par value; 9,700,000 shares authorized, none issued and outstanding			—			—
		Series A Junior Participating Preferred Stock, no par value: 300,000 shares authorized; none issued and outstanding			—			—
		Common stock, no par value; 50,000,000 shares authorized; issued and outstanding, 26,093,904 and 25,983,804 shares at November 24, 2001 and August 25, 2001, respectively			194,695,362			194,345,102
		Accumulated deficit			(13,007,517	)		(8,264,819	)
		Accumulated other comprehensive loss			(1,517,463	)		(2,062,787	)

			Total stockholders’ equity		180,170,382			184,017,496

				$	229,026,884		$	245,287,006

See accompanying notes to consolidated condensed financial statements.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED NOVEMBER 24, 2001 AND NOVEMBER 25, 2000
(Unaudited)


			November 24,			November 25,
			2001			2000

Sales (including sales to affiliates of $6,047,000 and $34,230,000, respectively)			$	42,627,491		$	61,498,426

Cost of goods sold				29,362,331			36,870,291

	Gross profit			13,265,160			24,628,135

Selling, general and administrative expenses				10,842,462			13,148,839
Research and development expenses				8,257,839			9,301,913

	Operating income (loss)			(5,835,141	)		2,177,383

Interest expense				(21,862	)		(22,015	)

Interest income				389,597			704,675

Other income (expense), net				(8,839	)		43,730


	Income (loss) before income taxes			(5,476,245	)		2,903,773

Income taxes				—			—

	Income (loss) before equity in earnings of affiliates			(5,476,245	)		2,903,773

Equity in earnings of affiliates				733,547			1,109,387

		Net income (loss) before cumulative effect of change in accounting principle		(4,742,698	)		4,013,160

Cumulative effect of change in accounting principle, net of tax				—			(14,969,008	)

	Net loss			($4,742,698	)	$	(10,955,848	)

Net income (loss) per common share — Basic
	Before cumulative effect of change in accounting principle			($0.18	)	$	0.16
	Cumulative effect of change in accounting principle, net of tax			—			(0.59	)

	Net loss			($0.18	)		($0.43	)

Net income (loss) per common share — Diluted
	Before cumulative effect of change in accounting principle			($0.18	)	$	0.15
	Cumulative effect of change in accounting principle, net of tax			—			(0.57	)

	Net loss			($0.18	)		($0.42	)

Weighted average common shares				26,079,105			25,407,383

Weighted average common and potential common shares				26,079,105			26,080,111

See accompanying notes to consolidated condensed financial statements.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED NOVEMBER 24, 2001 AND NOVEMBER 25, 2000

(Unaudited)


					November 24,			November 25,
					2001			2000

OPERATING ACTIVITIES:
	Net loss					($4,742,698	)		($10,955,848	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
			Cumulative effect of accounting change, net of taxes			—			14,969,008
			Depreciation			2,789,334			2,883,156
			Amortization			667,948			1,259,885
			Provision for allowance for doubtful accounts			201,462			(336,186	)
			Provision for inventory reserves			1,004,000			809,000
			Disposal of inventory			(795,979	)		(831,408	)
			Equity in earnings of affiliates			(733,547	)		(1,109,387	)
			Changes in operating assets and liabilities:
				Trade accounts receivable		16,861,654			(11,154,692	)
				Inventories		(2,445,427	)		(2,982,329	)
				Prepaid expenses and other current assets		318,949			(773,215	)
				Trade accounts payable		(2,352,330	)		2,285,188
				Accrued expenses		1,917,316			397,884
				Customer deposits		—			2,161,870
				Deferred profit		(11,977,994	)		3,833,871

	Net cash provided by operating activities					712,688			456,797

INVESTING ACTIVITIES:
	Acquisition of property, plant and equipment					(490,327	)		(2,947,285	)
	Purchases of marketable securities					(6,110,520	)		(472,318	)
	Sales of marketable securities					1,753,299			—
	Maturities of marketable securities					5,471,409			—
	Increase in deposits and other assets					(8,343	)		(349,945	)

		Net cash provided by (used in) investing activities				615,518			(3,769,548	)

FINANCING ACTIVITIES:
	Principal payments on long-term debt					—			(60,341	)
	Net proceeds from issuance of common stock					350,260			191,368

		Net cash provided by financing activities				350,260			131,027

Increase (decrease) in cash and cash equivalents						1,678,466			(3,181,724	)
Cash and cash equivalents at beginning of period						44,119,833			34,637,974

Cash and cash equivalents at end of period						45,798,299		$	31,456,250

See accompanying notes to consolidated condensed financial statements.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(1)		Summary of Critical Accounting Policies

		Consolidated Condensed Financial Statements

		The accompanying consolidated condensed financial statements have been prepared by the Company without audit and reflect all adjustments (consisting only of normal and recurring adjustments) which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. The statements have been prepared in accordance with the regulations of the Securities and Exchange Commission but omit certain information and footnote disclosures necessary to present the statements in accordance with accounting principles generally accepted in the United States. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year. These consolidated condensed financial statements should be read in conjunction with the Consolidated Financial Statements and footnotes thereto included in the Company’s Annual 10-K Report for the fiscal year ended August 25, 2001 previously filed with the Securities and Exchange Commission.

		Revenue Recognition

		The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable and collectibility is reasonably assured. Certain of the Company’s product sales are accounted for as multiple-element arrangements. If the Company has met defined customer acceptance experience levels with both the customer and the specific type of equipment, the Company recognizes equipment revenue upon shipment and transfer of title, with the remainder of the total revenue recognized as the earnings process is completed for other elements. All other product sales with customer acceptance provisions are recognized upon customer acceptance. Revenue related to spare part sales is recognized upon shipment. Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts.

		The Company changed its revenue recognition policy effective August 27, 2000, based on guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition in Financial Statements.” The Company recorded a non-cash charge of $15.0 million (after reduction for income taxes of $0) or $0.59 per share, to reflect the cumulative effect of the accounting change as of the beginning of fiscal year 2001.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

		Intangible Assets

		Goodwill, patents, license fees and other intangible assets are capitalized based on their estimated fair value and amortized over their estimated economic or legal lives, whichever is shorter, ranging from 3 to 9 years. The recoverability of goodwill is determined based on analysis of the net present value of projected related revenue.

		In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Tangible Assets” which change the accounting for business combinations and goodwill. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, ceased upon adoption of that Statement. The Company adopted SFAS No. 142 in the first quarter of fiscal 2002 and accordingly evaluated its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and determined there were no reclassifications necessary in order to conform with the new criteria in SFAS 141 for recognition apart from goodwill. Upon adoption of SFAS 142, the Company reassessed the useful lives and residual values of all intangible assets acquired in purchase business combinations, and determined that there were no amortization period adjustments necessary. If an intangible asset is identified as having an indefinite useful life, the Company is required to test the intangible asset for impairment in accordance with the provisions of SFAS 142 within the first year of adoption. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.

		In connection with the transitional goodwill impairment evaluation, SFAS 142 requires the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company identified its reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company has up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit’s carrying amount. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company must perform the second step of the transitional impairment test.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

		In the second step, the Company must compare the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets (recognized and unrecognized) and liabilities (in a manner similar to a purchase price allocation) to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of an accounting change in the Company’s consolidated income statement.

		As of the date of adoption, the Company had approximately $5,356,000 of unamortized goodwill subject to the transition provisions of SFAS 141 and 142.

		For the quarters ended November 24, 2001 and November 25, 2000, the goodwill amortization, adjusted net income and basic and diluted earnings per share are as follows:


		November 24,			November 25,
		2001			2000

Net loss			($4,742,698	)		($10,955,848	)
Add back: Goodwill amortization			—			464,922

Adjusted net loss			($4,742,698	)		($10,490,926	)

Basic earnings per share:
	Net loss		($0.18	)		($0.43	)
	Goodwill amortization		—			0.02

	Adjusted net loss		($0.18	)		($0.41	)

Diluted earnings per share:
	Net loss		($0.18	)		($0.42	)
	Goodwill amortization		—			0.02

	Adjusted net loss		($0.18	)		($0.40	)

		The Company is in the process of evaluating whether it will have any transitional impairment losses which would be required to be recognized as a cumulative effect of a change in accounting principle.

		Product Warranty

		The Company, in general, warrants new equipment manufactured by the Company to the original purchaser to be free from defects in material and workmanship for one to two years, depending upon the product or customer agreement. Provision is made for the estimated cost of maintaining product warranties at the time the product is sold.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

		Net Income (Loss) Per Common Share

		Basic earnings (loss) per share are computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed using the treasury stock method to compute the weighted average common stock outstanding assuming the conversion of potential dilutive common shares. Net loss per share does not include the effect of stock options as their inclusion would be antidilutive.

		Use of Estimates

		The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that could affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

(2)		Inventories

		Inventories are summarized as follows:


	November 24,		August 25,
	2001		2001

Finished products	$	5,332,148	$	5,621,311
Work-in-process		15,415,425		13,442,526
Subassemblies		2,501,098		1,776,789
Raw materials and purchased parts		27,687,982		27,858,621

	$	50,936,653	$	48,699,247

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(3)

Supplementary Cash Flow Information


		Quarters Ended

		November 24,			November 25,
		2001			2000

Schedule of interest paid and income taxes paid (refunds received):
	Interest	$	21,862		$	22,015
	Income taxes		($495,000	)	$	29,111

(4)		Comprehensive Income (Loss)

		Other comprehensive income (loss) pertains to revenues, expenses, gains and losses that are not included in the net loss but rather are recorded directly in stockholders’ equity. For the quarters ended November 24, 2001 and November 25, 2000 the only item of other comprehensive income (loss) was related to foreign currency translation adjustments. For the quarters ended November 24, 2001 and November 25, 2000 the net loss, items of other comprehensive income (loss) and comprehensive loss are as follows:


		November 24,			November 25,
		2001			2000

Net loss			($4,742,698	)		($10,955,848	)
Items of other comprehensive income (loss):
	Foreign currency translation		545,324			(112,989	)

Comprehensive loss			($4,197,374	)		($11,068,837	)

(5)		Realignment Costs

		During the third and fourth quarters of fiscal 2001, due to the industry slowdown, the Company implemented cost reduction plans that included reductions in its workforce. Accruals of $12,000 related to severance costs which remained at August 25, 2001 were paid or utilized by the end of the first quarter of fiscal 2002.

(6)		Litigation

		In the fall of 1995, pursuant to the Employee Stock Purchase and Shareholder Agreement dated November 30, 1990 between Mr. Hsu and SSI (the “Shareholder Agreement”) and in connection with Mr. Hsu’s 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 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 Semiconductor Systems, Inc. (“SSI”), a wholly-owned subsidiary of FSI that was acquired in April 1996, and the former shareholders of SSI.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

		In September and October 2000, certain of Mr. Hsu’s claims were tried to a jury in Alameda County Superior Court in Oakland, California. At the conclusion of the trial, the jury made the following findings. The jury found that SSI breached the Shareholder Agreement between it and Eric 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. Hsu’s 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. SSI believes the damages awards are duplicative and not cumulative and that certain of these damages awards may be subject to reduction.

		In proceedings subsequent to the trial, the Court has determined that plaintiffs are 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 has awarded plaintiffs approximately $127,000 in costs and approximately $1,750,000 in attorneys’ fees against SSI and the individual defendants. On November 16, 2001, the court signed its final judgment reflecting the jury’s awards, interest, attorneys fees and costs assessed against each of the defendants. The total judgment against SSI together with post judgment interest as of the filing of this 10-Q aggregates approximately $5.6 million. The Court may award the plaintiffs additional costs and attorneys’ fees. Following the entry of judgment, SSI and the other defendants filed post-trial motions seeking reduction in the jury’s damage awards and/or a new trial. FSI and SSI intend to discuss with plaintiffs the terms of a possible settlement. If those discussions are unsuccessful and the post-trial motions denied, SSI and the individual defendants are likely to appeal the verdict on a variety of grounds. Thus, there is considerable uncertainty as to the ultimate resolution of this matter and the respective liability, if any of SSI.

		The Company, on behalf of SSI, has made a claim with respect to the lawsuit under the escrow created at the time of our acquisition of SSI. The escrow was established to secure certain indemnification obligations of the former shareholders of SSI. The escrow consists of an aggregate of 250,000 shares of FSI Common Stock paid to the former shareholders of SSI as consideration in the acquisition. The former shareholders have agreed to hold FSI and SSI harmless from any claim arising out of any securities transactions between SSI and the shareholders or former shareholders of SSI. The indemnification obligations of the individual SSI shareholders are capped at approximately $4.2 million in the aggregate. Any shares in the escrow returned to FSI to satisfy any indemnification obligations will be valued at $12.125 per share, the per-share price of FSI common Stock at the time of the SSI acquisition. Depending on the ultimate resolution of the case, the escrow and indemnity obligations of the individual shareholders may not be sufficient to fully protect SSI against any final judgment that may be entered in the matter.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

		CFM Technologies, Inc. and CFMT, Inc. (collectively “CFM”) filed a complaint against YieldUP in United States District Court for the District of Delaware in September 1995. The complaint alleged that the drying process incorporated in certain YieldUP products infringes a patent held by CFM. On October 14, 1997, the United States District Court held that CFM had failed to produce evidence on three separate elements of the patent claim. On June 30, 1998, the United States District Court of Delaware granted CFM’s petition for re-argument of the issue. The judge has not yet ruled as to whether to sustain his earlier ruling. If the original order is overturned, the litigation may proceed to trial, and the litigation and the associated costs may, and an unfavorable adjudication could, have a material adverse impact on FSI. CFM is asking for monetary damages and an injunction against YieldUP’s use of the products at issue. A loss, if any, resulting from an unfavorable adjudication, cannot presently be estimated.

		CFM filed an additional complaint against YieldUP in United States District Court for the District of Delaware on December 30, 1998. The complaint alleged that the cleaning process incorporated in certain of YieldUP’s products infringes two patents held by CFM: U.S. Patent Nos. 4,917,123 and 4,778,532. YieldUP plans to vigorously defend its intellectual property rights against any and all claims.

		On April 4, 2000 the United States District Court for the District of Delaware granted YieldUP’s motion for summary judgment that the ‘123 and ‘532 patents are invalid. CFM’s motion for rehearing has been denied. On July 29, 2000, the issue of whether CFM or its inventors engaged in inequitable conduct in prosecuting the ‘123 and ‘532 patents was tried before the court. On June 6, 2001, the judge issued his opinion finding that the CFM inventors engaged in inequitable conduct during the prosecution of the patent application. On June 7, 2001, the judge ordered that judgment be entered in favor of YieldUP and against CFM on YieldUP’s defenses of lack of enablement and inequitable conduct. No final appealable judgment has been entered in the second lawsuit. A loss, if any, resulting from an unfavorable adjudication, cannot presently be estimated and the associated costs, and an unfavorable adjudication could have a material adverse impact on FSI. Once judgment is entered based upon the District Court’s granting YieldUP’s summary judgment motion, the District Court’s order may be appealed by CFM.

(7)		New Accounting Pronouncements

		In August 2001, the Financial Accounting Standards Board approved SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” However, this statement retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30 “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” for

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

		the disposal of a segment of a business. However, this Statement retains the requirement of APB No. 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. This statement also amends ARB No. 51, “Consolidated Financial Statements” to eliminate the exception to consolidation for a temporarily controlled subsidiary. The Company is required and plans to adopt the provision of SFAS No. 144 in the first quarter of fiscal 2003. The impact of the adoption of SFAS No. 144 is not expected to have a material impact on the Company’s financial statements.

(8)		Subsequent Event

		On December 11, 2001, in response to the continued delay in an industry recovery, the Company implemented additional cost reduction actions which include a 7 percent reduction in the overall workforce, salary cuts for all employees, a 50 percent decrease in planned capital expenditures and a reduction in other discretionary costs. The Company’s headcount is approximately 640 after the reduction.

		The Company will record approximately $500,000 of realignment charges in the second quarter, primarily related to severance costs. The realignment charges will be allocated as follows: $250,000 to cost of goods sold, $230,000 to selling, general and administrative expense and $20,000 to research and development expense.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES


Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER OF FISCAL 2002 COMPARED WITH THE FIRST QUARTER OF FISCAL 2001.

The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, except for the historical information contained herein, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the safe harbor created by that statute. Such statements are subject to various risks and uncertainties, both known and unknown. Factors that could cause actual results to differ include the length and extent of the current industry downturn; additional order delays or cancellations; savings from our cost-cutting measures may be less than anticipated; we may incur unexpected additional costs as part of our cost cutting measures; general economic conditions; changes in customer capacity requirements and demand for microelectronics; the extent of demand for our products and our ability to meet demand; global trade policies; worldwide economic and political stability; the Company’s successful execution of internal performance plans; the cyclical nature of the Company’s business; volatility of the market for certain products; performance issues with key suppliers and subcontractors, the transition to 300mm products; the level of new orders; the timing and success of current and future product and process development programs; the success of the Company’s affiliated distributors; and legal proceedings. In addition, readers are also directed to the Risk Factors discussion found in the Company’s Report on Form 10-K for the year ended August 25, 2001. Readers also are cautioned not to place undue reliance on these forward-looking statements as actual results could differ materially. FSI assumes no obligation to publicly release any revisions or updates to these forward-looking statements to reflect future events or unanticipated occurrences. Such forward-looking statements are marked with an asterisk (*).

This discussion and analysis should be read in conjunction with the Consolidated Condensed Financial Statements and footnotes thereto appearing elsewhere in this report.

Industry:

In the wake of September 11th, many equipment analysts have indicated that any sustainable or significant recovery will not occur until the second half of calendar 2002 or even as far out as early 2003. The basis for their forecast is the anticipated duration of the worldwide recession exacerbated by the excess capacity that exists in the industry.

Calendar 2001 will go into the record books as the year that the microelectronics industry experienced the worst decline in its history. Wafer demand is expected to decrease 23 to 25 percent, semiconductor sales will likely be down over 30 percent, and the equipment sales decline is anticipated to exceed 40 percent.

With the worst conditions now likely behind us, we are focused on 2002. A number of industry research organizations have revised their expectations:

•

SEMICO is forecasting wafer demand to increase 21 percent. This growth is expected to be driven by more complex products using large die sizes (such as systems-on-a-chip), using more advanced process technologies (sub 0.13 micron) on larger wafers.

•		SIA is predicting that the slow recovery for semiconductor sales will continue in calendar 2002. They are forecasting a modest growth rate of 6 percent, bringing total semiconductor sales for the year to approximately $150 billion.

•		The SEMI consensus forecast released during SEMICON/Japan in December 2001 reflects a modest 3 percent decrease in worldwide equipment sales to $28.7 billion for 2002. Given the quarterly run rate, it would appear that sequential quarterly growth should begin in the first or second quarter of calendar 2002.

Any significant increase in equipment spending will be led by investment in 300 mm capacity, smaller device feature sizes, and process technology required for new materials such as copper and low-K dielectrics – these are all areas where FSI has focused its R&D investments the past few years.

The Company:

The following table sets forth for FSI for the fiscal quarter indicated, certain income and expense items as a percent of total sales.


		Percent of Sales

		November 24,			November 25,
First quarter ended:		2001			2000

Sales			100.0	%		100.0	%
Cost of goods sold			68.9			60.0

Gross profit			31.1			40.0
Selling, general and administrative			25.4			21.4
Research and development			19.4			15.1

Operating income (loss)			(13.7	)		3.5
Other income (expense), net			0.9			1.2

Income (loss) before income taxes			(12.8	)		4.7
Income taxes			—			—
Equity in earnings of affiliates			1.7			1.8

	Net income (loss) before cumulative effect of change in accounting principle		(11.1	)		6.5
Cumulative effect of change in accounting principle			—			(24.3	)

	Net loss		(11.1	%)		(17.8	%)

Sales:

Sales decreased 31 percent to $42.6 million for the first quarter of fiscal 2002 as compared to $61.5 million for the first quarter of fiscal 2001. In addition, shipments in the first quarter of fiscal 2002 decreased to $15 million from $70 million in the first quarter of fiscal 2001. Both the Microlithography and Surface Conditioning Divisions experienced year over year sales decreases, with the Surface Conditioning Division recording the largest dollar decrease. The Surface Conditioning business represented 58 percent of revenue for the quarter. The spare parts and service revenue for the quarter decreased to $5.5 million from $11.1 million in the prior year, reflecting the cost containment actions implemented by many of our customers. This level of spares and service revenue is significantly below our historical rate but is reflective of current industry buying patterns. With its much larger installed base, the Surface Conditioning Division has a more significant spare parts and service business than the Microlithography Division.

International sales were $6.6 million and $42.4 million for the first quarter of fiscal 2002 and 2001, respectively, and represented approximately 15% and 69%, respectively of sales during these periods. Because of its broader customer base, the Surface Conditioning Division has a higher percentage of international sales than the Microlithography Division.

Deferred revenue was approximately $48.0 million as of November 24, 2001. Deferred revenue is included in deferred profit, net of deferred cost of goods sold.

Sales in the second quarter of fiscal 2002 are expected to be $38.0 to $43.0 million, and we expect sales to bottom in the third quarter of fiscal 2002.* We expect shipments to increase from the $15.0 million level for first quarter of fiscal 2002 to $20.0 million for the second quarter of fiscal 2002.

Gross Profit:

FSI’s gross profit margin may fluctuate as a result of a number of factors, including the mix of products sold as some products have higher margins than others, the proportion of international sales as international sales generally have lower margins, competitive pricing pressures and utilization of manufacturing capacity.

Gross profit as a percentage of sales for the first quarter of fiscal 2002 and 2001 was 31.1% and 40.0%, respectively. The decrease in margins is primarily related to product mix and the low shipments based manufacturing capacity utilization rate.

We expect gross margins to be in the range of 26 to 28 percent in the second quarter of fiscal 2002, as margins will continue to be impacted by underutilized manufacturing capacity.* Also, the foreign/domestic mix and product mix is anticipated to be less favorable.*

Selling, General and Administrative Expenses:

Selling, general and administrative expenses decreased 18 percent to $10.8 million from the same period last year and also decreased from the $11.6 million prior quarter level. The decrease reflects the cost reduction actions implemented during the second half of fiscal 2001, lower incentive compensation payments that resulted from lower orders and operating return on revenue and a reduction in amortization expense related to the implementation of SFAS No. 142. The decrease was partially offset by a litigation reserve for attorney’s fees and other appeal costs.

We expect the dollar amount of second quarter SG&A expenses to decrease sequentially from the first quarter level to $8.5 to $9.0 million as a result of cost reduction actions implemented on December 11, 2001.*

Research and Development Expenses:

Research and development expenses decreased 11 percent to $8.3 million for the first quarter of fiscal 2002 as compared to $9.3 million for the same period in fiscal 2001. The decrease is related to timing of expenses associated with key product development programs. Despite the impact on near term financial results, we expect to continue investing in key applications and product development initiatives.* We made a conscious decision not to significantly reduce our R&D expenses as part of our recent cost reductions.

R&D expenses for the second quarter of fiscal 2002 are expected to remain in the $8.5 to $9.0 million range based on the timing of expenses associated with new product development activities.* We will

continue to remain focused on critical technologies and strategically invest R&D dollars in the immersion technology for Surface Conditioning products, 300mm products for both resist processing and surface conditioning and other new applications.*

Other Income (Expense), Net:

Other income (expense), net was approximately $359,000 for the first quarter of fiscal 2002 as compared to $726,000 for the first quarter of fiscal 2001. The decrease relates to a decline in interest income due to short-term interest rates which have been impacted by the Federal Reserve’s recent rate reductions.

Interest income is expected to be between $350,000 and $400,000 per quarter for the remainder of fiscal 2002, depending upon the level of investments and the interest rates.*

Income Tax (Benefit) Expense:

FSI recorded no tax benefit or expense related to its operating income (losses) for the first quarters of fiscal 2002 and 2001.

The Company’s deferred tax assets on the balance sheet as of November 24, 2001 have been fully reserved for with a valuation allowance. We will not be significantly reducing our valuation allowance in the future until we are consistently profitable on a quarterly basis.

Overall, the Company has net operating loss carryforwards for federal purposes of approximately $56,300,000, which will begin to expire in fiscal year 2011 if not utilized. Of this amount, approximately $15,032,000 is subject to Internal Revenue Code Section 382 limitations on utilization. This limitation is approximately $1,382,000 per year.

Equity in Earnings of Affiliates:

The equity in earnings of affiliates was approximately $734,000 for the first quarter of fiscal 2002, compared to approximately $1.1 million for the first quarter of fiscal 2001. Our affiliates, m•FSI in Japan and Metron Technology, have also been impacted by the global industry recession.

We expect equity in earnings (losses) of affiliates to be a ($250,000) to ($300,000) loss in the second quarter of fiscal 2002.*

Net Income (loss):

Assuming that we can achieve the expected revenues, shipments, operating expenses and affiliate loss levels, we expect to report a second quarter net loss of $6.5 to $7.5 million, including $500,000 of realignment charges associated with the December reduction in force.*

LIQUIDITY AND CAPITAL RESOURCES

FSI’s cash and cash equivalents and marketable securities were approximately $55.2 million as of November 24, 2001, an increase of $0.6 million from the end of fiscal 2001. The increase in cash, cash equivalents, and marketable securities is primarily due to $0.7 million of cash provided by operating activities.

FSI’s accounts receivable decreased by approximately 41%, or $17.1 million, from the end of fiscal 2001. The decrease is related to the lower shipments level.

FSI’s inventory increased approximately $2.2 million to $50.9 million at November 24, 2001 compared to $48.7 million at the end of fiscal 2001. The increase is primarily due to work-in-process and subassemblies, reflecting customer requested delays, increased demo activity and the expected higher shipments level in the second quarter. The Company also had an additional $1,004,000 in reserves during the quarter, primarily associated with higher inventory levels and decreased demand.

As of November 24, 2001, FSI’s current ratio of current assets to current liabilities was 2.8 to 1.0 and working capital was $86.2 million.

FSI had acquisitions of property, plant and equipment of approximately $490,000 and $2.9 million for the first quarter of fiscal 2002 and fiscal 2001, respectively. It is anticipated FSI will invest between $3.0 and $3.5 million in fiscal 2002 in property, plant and equipment, with depreciation and amortization of $13.5 to $14.5 million.*

The Company’s goal is to limit its fiscal 2002 cash burn rate to $10.0 to $15.0 million.* FSI believes that with existing cash, cash equivalents, marketable securities and internally generated funds, there will be sufficient funds to meet FSI’s currently projected working capital and other cash requirements through at least mid fiscal 2003.*

FSI believes that success in its industry requires substantial capital to maintain the flexibility to take advantage of opportunities as they arise. One of FSI’s strategic objectives is, as market and business conditions warrant, consider divestitures, investments or acquisitions of businesses, products or technologies particularly those that are complementary to our surface conditioning business.* FSI may fund such activities with additional equity or debt financings.* The sale of additional equity or debt securities could result in additional dilution to our shareholders.*

NEW ACCOUNTING PRONOUNCEMENT

In August 2001, the Financial Accounting Standards Board approved SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” However, this statement retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale.

SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30 “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” for the disposal of a segment of a business. However, this Statement retains the requirement of APB No. 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. This statement also amends ARB No. 51, “Consolidated Financial Statements” to eliminate the exception to consolidation for a temporarily controlled subsidiary. The Company is required and plans to adopt the provision of SFAS No. 144 in the first quarter of fiscal 2003. The impact of the adoption of SFAS No. 144 is not expected to have a material impact on the Company’s financial statements.

RISK FACTORS

Our business faces significant risks. These risks include those described below and may include additional risks and uncertainties not presently known to us or that we currently believe are immaterial. Given the business and the industry in which we operate the following risk factors should be considered in addition to others described in this report. 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. These risks should be read in conjunction with the other information 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 slowdowns, which may have a negative effect on our sales and operating results. Our business depends on the amount that manufacturers of microelectronics spend on capital equipment. The amount they spend on capital equipment depends on the existing and expected demand for semiconductor devices and products that use semiconductor devices. The microelectronics industry has experienced alternating upturns and downturns in business activity; the industry is currently experiencing a significant downturn. In fact, in calendar 2001 the industry experienced the worst decline in its history. When a downturn occurs, 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. The semiconductor industry experienced a downturn in 1998 and 1999, which seriously harmed our operating results during that period. Typically, the semiconductor equipment industry has experienced more pronounced decreases in net sales than the semiconductor industry as a whole.

We, along with others in the industry, have recently experienced a significant slowdown in orders for new equipment as well as delays in or cancellations of existing orders. The extent and length of the current slowdown cannot be predicted. Although there are some indications that the semiconductor industry may begin to recover from the current slowdown sometime in the later half of calendar 2002 or early 2003, the rate of improvement, if any, is expected to be much lower than in fiscal 2000. However:

•		the semiconductor industry may experience other, possibly more severe and prolonged, downturns in the future;

•		any future recovery of the semiconductor industry may not result in an increased demand by semiconductor manufacturers for capital equipment or our products; and

•		the semiconductor industry may not improve in the near future.

If we do not continue to develop new products, we will not be able to compete effectively.

Our business and results of operations could decline if we do not develop and successfully introduce new or improved products that the market accepts. The technology used in microelectronics manufacturing equipment and processes changes rapidly. Industry standards change constantly and equipment manufacturers frequently introduce new products. We believe that microelectronics manufacturers increasingly rely on equipment manufacturers like us to:

•		Design and develop more efficient manufacturing equipment;

•		Design and implement improved processes for microelectronics manufacturers to use; and

•		Make their equipment compatible with equipment made by other equipment manufacturers.

To compete, we must continue to develop, manufacture, and market new or improved products that meet changing industry standards. To do this successfully, we must:

•		Select appropriate products;

•		Design and develop our products efficiently and quickly;

•		Implement our manufacturing and assembly processes efficiently and on time;

•		Make products that perform well for our customers;

•		Market and sell our products effectively; and

•		Introduce our new products in a way that does not reduce sales of our existing products.

Failure of our product 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 300 mm products. Market acceptance of products depends upon numerous factors, including compatibility with existing manufacturing processes and products, perceived advantages over competing products and the level of customer service available to support such products. Moreover, manufactures 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 adversely affected to the extent potential customers utilize a competitor’s 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, these expenditures will be made 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 to achieve market acceptance would harm our business, financial condition, and results of operation and cash flows.

Future acquisitions may dilute our stockholders’ ownership interests and have other adverse consequences.

Because of consolidations in the semiconductor equipment industry served by us 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 stockholders’ ownership interests and reduce earnings per share. Acquisitions may also increase debt levels and the related goodwill and other intangible assets, which could have a significant negative effect on our financial condition and operating results. In addition, acquisitions involve numerous risks, including:

•		Difficulties in absorbing the new business, product line, or technology;

•		Diversion of management’s attention from other business concerns;

•		Entering new markets in which we have little or no experience; and

•		Possible loss of key employees of the acquired business.

Because of the volatility of our stock price, the ability to trade FSI shares may be adversely affected and our ability to raise capital through future equity financing may be reduced.

The price of our stock has been volatile in the past and may continue to be so in the future. In the 2001 fiscal year, for example, our stock price ranged from $7.75 to $18.50 per share. In the first quarter of fiscal 2002, our stock price ranged from $6.71 to $16.25.

The trading price of our common shares is subject to wide fluctuations in response to various factors, some of which are beyond our control, including factors discussed elsewhere in this report and the following:

•		Failure to meet the published expectations of securities analysts for a given quarterly period;

•		Changes in financial estimates by securities analysts;

•		Press releases or announcements by or changes in market values of comparable companies;

•		Stock market price and volume fluctuations, which is particularly common among securities of high technology companies;

•		Stock market price and volume fluctuations attributable to inconsistent trading volume levels;

•		Additions or departures of key personnel; and

•		Involvement in or adverse results from litigation.

The prices of technology stocks, including ours, have been particularly affected by extreme fluctuations in price and volume in the stock market generally. These fluctuations have often been unrelated to the

operating performance of the companies whose stock is traded. 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. To date we have not been subject to such claims, however we could in the future be the target of this type of litigation. Securities litigation may result in substantial costs and divert management’s attention and resources, which can seriously harm our business.

Because our quarterly operating results are volatile, our stock price could decrease.

In the past, our operating results have fluctuated from quarter to quarter and are likely to do so in the future. These fluctuations may have a significant impact on our stock price. The reasons for the fluctuations in our operating results, such as sales, gross profits, and net income, include:

•		The Timing of Significant Customer Orders and Customer Spending Patterns. During industry downturns, our customers may ask us to delay or even cancel the shipment of equipment orders. Delays and cancellations may adversely affect our operating results in any particular quarter if we are unable to recognize revenue for particular sales in the quarter in which those sales were expected.

•		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.

•		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.

•		General Global Economic Conditions or Economic Conditions in a Particular Region. When economic conditions in a region or worldwide worsen, customers may delay or cancel their orders. There may also be an increase in the time it takes to collect payment from our customers or even outright defaults in payments. This can negatively affect our cash flow and our results.

As a result of the factors listed above, 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 and, as we have in the past, we may even have losses in the short-run. Any one of the factors listed above, or a combination of them, could adversely affect our quarterly results of operations, and consequently may cause a decline in our share price.

Because international sales are important to us, and because most of our international sales are through our affiliated distributors, reductions in the sales efforts of these affiliates could adversely affect our results.

The profits or losses of our affiliated distributors, Metron Technology B.V. and m•FSI Ltd., can also significantly affect our financial results. We make most of our international sales through these affiliated distributors. As of August 25, 2001 we have a 21% ownership interest in Metron and a 49% interest in m•FSI. Fiscal 2001 sales through m•FSI were $18.0 million or 8% of our total sales. Fiscal 2001 sales through Metron were $93.2 million or 43% of our total sales. In addition, these affiliates also provide service and support to many of our international customers. Metron and m•FSI also distribute or sell products for companies other than us. If either of these affiliates reduced its sales efforts, lost the business of a significant company for which it distributes or sells products, lost a significant customer, or otherwise became less financially viable, it could have a negative effect on our operating results.

We cannot guarantee that Metron or m•FSI will continue to successfully distribute our products or the products of other companies. The failure of Metron or m•FSI to do so could have a significant negative effect on our results of operations.

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. Most of our international sales, however, are through our affiliated distributors. Metron’s sales of our products and other companies’ products are primarily denominated in U.S. dollars, but its expenses are generally denominated in foreign currencies. Accordingly, fluctuations in interest and currency exchange rates may affect Metron’s financial results. Sales for m•FSI are denominated in yen. As a result, U.S. dollar/yen exchange rates may affect our equity interest in m•FSI’s earnings.

Metron and m•FSI sometimes engage in so-called “hedging” or risk-reducing transactions to try to limit the negative effects that the devaluation of foreign currencies relative to the U.S. dollar could have on operating results. They will do so if a sale denominated in a foreign currency is sufficiently large to justify the costs of hedging. To hedge a sale, Metron or m•FSI will typically commit to buy U.S. dollars and sell the foreign currency at a given price at a future date. If the customer cancels the sale, Metron or m•FSI may be forced to buy U.S. dollars and sell the foreign currency at market rates to meet its hedging obligations and may incur a loss in doing so. To date, the hedging activities of Metron and m•FSI have not had any significant negative effect on us. The adoption of SFAS 133 by Metron and m•FSI may cause more volatility in our equity in earnings of affiliates.*

Because of the need to meet and comply with numerous foreign regulations and policies, the changeability of 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 and our affiliates operate in a global market. In fiscal 2001, approximately 60% of our sales revenue derived from sales outside the United States. In fiscal 2000, this figure was 53%, and in fiscal 1999 it was 29%. These figures include sales through Metron and m•FSI, which accounted for 85% of international sales in 2001, 87% in 2000 and 92% in 1999. 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:

•		Imposition of government controls;

•		Compliance with U.S. export laws and foreign laws;

•		Political and economic instability;

•		Trade restrictions;

•		Changes in taxes and tariffs;

•		Longer payment cycles;

•		Difficulty of administering business overseas; and

•		General economic conditions.

In particular, the Japanese and Asia Pacific markets are extremely competitive. The semiconductor device manufacturers located there are very aggressive in seeking price concessions from suppliers, including equipment manufacturers like us. In fiscal 2001, approximately 38% of our international sales were attributable to these markets.

We seek to meet technical standards imposed by foreign regulatory bodies. However, we cannot guarantee that we will be able to comply with those standards in the future. Any failure by us to design products to comply with foreign standards could have a significant negative impact on us.

Because of the significant financial resources needed to offer a broad range of products, to maintain customer service and support and to invest in research and development, we may be unable to compete with larger, better established competitors.

The microelectronics equipment industry is highly competitive. We face substantial competition throughout the world. We believe that to remain competitive, we will need significant financial resources to offer a broad range of products, to maintain customer service and support, and to invest in research and development. We believe that the microelectronics industry is becoming increasingly dominated by large manufacturers who have the resources to support customers on a worldwide basis. Some of our competitors have substantially greater financial, marketing, and customer-support capabilities than us. Large equipment manufacturers 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.

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, including IBM, Texas Instruments, STMicroelectronics, Philips Semiconductor or 1st Silicon, reduce, delay, or cancel orders, then our operating results could suffer. Our largest customers have changed from year to year, however, sales to FSI’s top five customers accounted

for approximately 46%, 45% and 49% of total sales in fiscal 2001, 2000 and 1999, respectively. Philips Semiconductor accounted for approximately 10% of our sales in fiscal 2001. Texas Instruments accounted for 14%, 15% and 13% of revenues in fiscal 2001, 2000 and 1999, respectively. STMicroelectronics represented 11% of revenues in fiscal 2000. IBM accounted for approximately 24% of revenues for fiscal 1999. We currently have no long-term sales commitments with any of our customers. Instead, we generally make sales under purchase orders. Our backlog at August 25, 2001 was $37.1 million of which 44% was comprised of orders from two customers. 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 will ultimately 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 retained certain liabilities from the divestiture of the Chemical Management Division or agreed to indemnify BOC with respect to specified obligations and liabilities, we may experience charges in excess of the reserves established at the time of the divestiture which could negatively impact results from operations.

In connection with the divestiture of the Chemical Management Division, we retained certain liabilities and agreed to indemnify BOC with respect to certain specified obligations and liabilities. If we experience liabilities or charges in excess of established reserves and it is ultimately determined that an adjustment in favor of BOC is warranted, our results of operations could be adversely impacted due to additional costs associated with those reserves or the request to return to BOC a portion of the purchase price because of such adjustments.

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.

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 head count, which is generally 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 head count 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 SCD Mountain View is involved in such litigation. 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.

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.*

Adoption of the common European currency may adversely affect us and our affiliated distributors by requiring systems modifications and possibly increasing their currency exchange risks.

The use of the Euro (a common European currency unit) began on January 1, 1999 and the transition period expired January 1, 2002. We do not expect the cost of any necessary systems modification to be

material and do not anticipate that the introduction and use of the Euro will materially affect our results.* Nor do we expect the Euro to have a material effect on the currency exchange risks of our or our affiliated distributors’ businesses.* Our affiliate, Metron’s new operations management information system is designed to accommodate the elimination of the legacy currencies. If their new system is not successfully implemented, this could have a material adverse effect on their business. Our management will continue to monitor the effect of the implementation of the Euro.

Changes to financial accounting standards may affect the Company’s reported results of operations.

The Company prepares its 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 SEC and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on the Company’s reported results and may even affect its reporting of transactions completed before a change is announced.

Accounting policies affecting many other aspects of our business, including rules relating to purchase and pooling-of-interests accounting for business combinations, revenue recognition, in-process research and development changes, employee stock purchase plans and stock option grants, have recently been revised or are under review. Changes to those rules or the questioning of the Company’s current accounting practices may have a material adverse effect on the Company’s reported financial results or on the way it conducts business. In addition, the Company’s preparation of financial statements in accordance with GAAP requires that it 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 the Company’s estimates and could impact its 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.

Special note regarding forward-looking statements.

Some of the statements under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this report are “forward-looking statements.” These statements involve known and unknown risks, uncertainties, and other factors that may cause our, or our industry’s, actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. These factors are listed under “Risk Factors’ and elsewhere in this report.

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.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we

nor any other person assumes responsibility for the accuracy and completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

Item 3. 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 November 24, 2001 our investments in affiliates include a 21% interest in Metron Technology (Metron) and a 49% interest in m•FSI Ltd. Metron operates mainly in Europe, Asia Pacific and the United States. m•FSI Ltd. operates in Japan. Approximately 84% of fiscal 2001 sales to affiliates were to Metron. We denominate all U.S. export sales in U.S. dollars.

Metron attempts to limit its exposure to changing foreign currency exchange rates through operational and financial market actions. Products are sold in a number of countries throughout the world resulting in a diverse portfolio of transactions denominated in foreign currencies. Certain short-term foreign currency exposures are managed by the purchase of forward contracts to offset the earnings and cash flow impact of non-functional currency denominated receivables and payables.

We do not have significant exposure to changing interest rates as all material outstanding debt was repaid on September 3, 1999 and all marketable securities consist of debt instruments, 100% of which mature within one year. As of year-end, amortized cost approximates 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 of a 1% change in short-term interest rates would be approximately a $550,000 annual change in investment income based on cash, cash equivalents and marketable security balances as of November 24, 2001.

Our investment in our affiliate, Metron, is accounted for by the equity method of accounting and has a carrying value on the balance sheet of approximately $17.3 million. The fair value of Metron is subject to stock market fluctuations. Based on the closing stock price of Metron of $6.55 per share on November 23, 2001, the fair value of our investment in Metron, was approximately $17.6 million. The stock price of Metron ranged from $3.13 to $14.00 per share during fiscal 2001 and from $6.00 to $7.29 per share during the first quarter of fiscal 2002.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

We generate minor amounts of liquid and solid hazardous waste and use licensed haulers and disposal facilities to ship and dispose of such waste. In the past, we have received 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 PRP’s are unable to contribute their proportionate share of the liability, if any, associated with the site, those PRP’s that are financially able could be held financially responsible for the shortfall.*

There has and continues to be substantial litigation regarding patent and other intellectual property rights in the microelectronics industry. Commercialization of new products or further commercialization of our current products could provoke claims of infringement by third parties. In the future, litigation may be necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us or to defend us against claimed infringement of the rights of others and to determine the scope and validity of our proprietary rights. Any such litigation could result in substantial costs and diversion of effort by us, which by itself could have a material adverse impact on our financial condition and operating results. Further, adverse determinations in such litigation could result in our loss of proprietary rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties or prevent us from manufacturing or selling one or more products, any of which could have a material adverse effect on our financial condition and results of operations.*

Certain of our product lines are intended for use with hazardous chemicals. As a result, we are notified by our customers from time to time of incidents involving our equipment that have resulted in a spill or release of a hazardous chemical. 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.*

In the fall of 1995, pursuant to the Employee Stock Purchase and Shareholder Agreement dated November 30, 1990 between Mr. Hsu and SSI (the “Shareholder Agreement”) and in connection with Mr. Hsu’s 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 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 Semiconductor Systems, Inc. (“SSI”), a wholly-owned subsidiary of FSI that was acquired in April 1996, and the former shareholders of SSI.

In September and October 2000, certain of Mr. Hsu’s claims were tried to a jury in Alameda County Superior Court in Oakland, California. At the conclusion of the trial, the jury made the following findings. The jury found that SSI breached the Shareholder Agreement between it and Eric 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. Hsu’s 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. SSI believes the damages awards are duplicative and not cumulative and that certain of these damages awards may be subject to reduction.

In proceedings subsequent to the trial, the Court has determined that plaintiffs are 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 has awarded plaintiffs approximately $127,000 in costs and approximately $1,750,000 in attorneys’ fees against SSI and the individual defendants. On November 16, 2001, the court signed its final judgment reflecting the jury’s awards, interest, attorneys fees and costs assessed against each of the defendants. The total judgment against SSI together with post judgment interest as of the filing of this 10-Q aggregates approximately $5.6 million. The Court may award the plaintiffs additional costs and attorneys’ fees. Following the entry of judgment, SSI and the other defendants filed post-trial motions seeking reduction in the jury’s damage awards and/or a new trial. FSI and SSI intend to discuss with plaintiffs the terms of a possible settlement. If those discussions are unsuccessful and the post-trial motions denied, SSI and the individual defendants are likely to appeal the verdict on a variety of grounds. Thus, there is considerable uncertainty as to the ultimate resolution of this matter and the respective liability, if any of SSI.

The Company, on behalf of SSI, has made a claim with respect to the lawsuit under the escrow created at the time of our acquisition of SSI. The escrow was established to secure certain indemnification obligations of the former shareholders of SSI. The escrow consists of an aggregate of 250,000 shares of FSI Common Stock paid to the former shareholders of SSI as consideration in the acquisition. The former shareholders have agreed to hold FSI and SSI harmless from any claim arising out of any securities transactions between SSI and the shareholders or former shareholders of SSI. The indemnification obligations of the individual SSI shareholders are capped at approximately $4.2 million in the aggregate. Any shares in the escrow returned to FSI to satisfy any indemnification obligations will be valued at $12.125 per share, the per-share price of FSI common Stock at the time of the SSI acquisition. Depending on the ultimate resolution of the case, the escrow and indemnity obligations of the individual shareholders may not be sufficient to fully protect SSI against any final judgment that may be entered in the matter.

CFM Technologies, Inc. and CFMT, Inc. (collectively “CFM”) filed a complaint against YieldUP in United States District Court for the District of Delaware in September 1995. The complaint alleged that the drying process incorporated in certain YieldUP products infringes a patent held by CFM. On October 14, 1997, the United States District Court held that CFM had failed to produce evidence on three separate elements of the patent claim. On June 30, 1998, the United States District Court of Delaware granted CFM’s petition for re-argument of the issue. The judge has not yet ruled as to whether to sustain his earlier ruling. If the original order is overturned, the litigation may proceed to trial, and the litigation and the associated costs may, and an unfavorable adjudication could, have a material adverse impact on FSI.* CFM is asking for monetary damages and an injunction against YieldUP’s use of the products at issue. A loss, if any, resulting from an unfavorable adjudication, cannot presently be estimated.

CFM filed an additional complaint against YieldUP in United States District Court for the District of Delaware on December 30, 1998. The complaint alleged that the cleaning process incorporated in certain of YieldUP’s products infringes two patents held by CFM: U.S. Patent Nos. 4,917,123 and 4,778,532. YieldUP plans to vigorously defend its intellectual property rights against any and all claims.

On April 4, 2000 the United States District Court for the District of Delaware granted YieldUP’s motion for summary judgment that the ‘123 and ‘532 patents are invalid. CFM’s motion for rehearing has been denied. On July 29, 2000, the issue of whether CFM or its inventors engaged in inequitable conduct in prosecuting the ‘123 and ‘532 patents was tried before the court. On June 6, 2001, the judge issued his

opinion finding that the CFM inventors engaged in inequitable conduct during the prosecution of the patent application. On June 7, 2001, the judge ordered that judgment be entered in favor of YieldUP and against CFM on YieldUP’s defenses of lack of enablement and inequitable conduct. No final appealable judgment has been entered in the second lawsuit. A loss, if any, resulting from an unfavorable adjudication, cannot presently be estimated and the associated costs, and an unfavorable adjudication could have a material adverse impact on FSI. Once judgment is entered based upon the District Court’s granting YieldUP’s summary judgment motion, the District Court’s order may be appealed by CFM.

ITEM 2. Change in Securities


	None

ITEM 3. Defaults upon Senior Securities


	None

ITEM 4. Submission of Matters to a Vote of Security Holders


	None

ITEM 5. Other Information


	None

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

ITEM 6 Exhibits and Reports on Form 8-K

(a)(3) Exhibits


	* An asterisk next to a listed Exhibit indicates it is an executive compensation plan or arrangement


2.0		Agreement and Plan of Reorganization, dated as of January 21, 1999 among FSI International, Inc., BMI International, Inc. and YieldUP International, Corporation (14)
2.1		License Agreement for Microelectronic Technology between YieldUP International, Corporation and FSI International, Inc. dated January 21, 1999. (14)
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. (15)
3.1		Restated Articles of Incorporation of the Company. (2)
3.2		Restated and amended By-Laws. (3)
3.5		Articles of Amendment of Restated Articles of Incorporation (16)
4.1		Form of Rights Agreement dated as of May 22, 1997 between FSI International, Inc. and Harris Trust and Savings Bank, National Association, as Rights Agent (5)
4.2		Amendment dated March 26, 1998 to Rights Agreement dated May 22, 1997 by and between FSI International, Inc. and Harris Trust and Saving Bank, National Association as Rights Agent. (6)
4.3		Amendment dated March 9, 2000 to Rights Agreement dated May 22, 1997, as amended March 26, 1998 by and between FSI International, Inc. and Harris Trust and Savings Bank as Rights Agent. (19)
*10.1		FSI International, Inc. 1997 Omnibus Stock Plan (as amended and restated April 2001). (22)
*10.2		Split Dollar Insurance Agreement and Collateral Assignment Agreement dated December 28, 1989, between the Company and Joel A. Elftmann. (Similar agreements between the Company and each of Patricia M. Hollister, Luke R. Komarek, Benno G. Sand, Mark Ahmann and John Ely, have been omitted, but will be filed if requested in writing by the Commission.) (7)
10.3		Lease dated June 27, 1985, between the Company and Lake Hazeltine Properties. (3)
10.4		Lease dated September 1, 1985, between the Company and Elftmann, Wyers, Blackwood Partnership. (3)
10.5		Lease dated September 1, 1985, between the Company and Elftmann, Wyers Partnership. (3)
10.6		Amendment No. 1 dated February 11, 1991 to lease between the Company and Elftmann, Wyers, Blackwood Partnership. (16)
10.7		Amendment No. 2 dated July 31, 1999 to lease between the Company and Elftmann, Wyers, Blackwood Partnership. (16)
*10.8		1989 Stock Option Plan. (4)
*10.9		Amended and Restated Employees Stock Purchase Plan.(22)
10.10		Shareholders Agreement among FSI International, Inc. and Mitsui & Co., Ltd. and Chlorine Engineers Corp. Ltd. dated as of August 14, 1991. (7)
10.11		FSI Exclusive Distributorship Agreement dated as of August 14, 1991 between FSI International, Inc. and m•FSI, Ltd. (7)
10.12		FSI Licensing Agreement dated as of August 14, 1991, between FSI International, Inc. and m•FSI, Ltd. (7)
10.13		Amendment to FSI/Metron Distribution Agreement dated July 31, 1999. (17)
10.15		License Agreement, dated October 15, 1991, between the Company and Texas Instruments Incorporated. (8)


10.16		Amendment No. 1, dated April 10, 1992, to the License Agreement, dated October 15, 1991, between the Company and Texas Instruments Incorporated. (8)
10.17		Amendment effective October 1, 1993 to the License Agreement, dated October 15, 1991 between the Company and Texas Instruments Incorporated. (9)
*10.18		Amended and Restated Directors’ Nonstatutory Stock Option Plan. (10)
*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.)(21)
*10.20		FSI International, Inc. 1994 Omnibus Stock Plan. (11)
10.21		FSI International, Inc. 1998 Incentive Plan. (13)
10.22		First Amendment to Lease made and entered into October 31, 1995 by and between Lake Hazeltine Properties and FSI International, Inc. (12)
10.23		Distribution Agreement made and entered into as of March 31, 1998 by and between FSI International, Inc. and Metron Technology B.V. (Exhibits to Agreement omitted) (13)
*10.26		Summary of Employment Arrangement between the Company and Don Mitchell dated December 12, 1999. (20)
10.27		Distribution Agreement between FSI International, Inc’s. Surface Conditioning Division and Metron Technology B.V. effective July 10, 2000. (20)
*10.30		Employment Agreement entered into as of December 12, 1999 by and between FSI International, Inc. and Donald S. Mitchell. (18)
10.31		Agreement made and entered into as of March 4, 2001 by and between FSI International, Inc. and Benno G. Sand. (23)

(1)		Filed as an Exhibit to the Company’s 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 Company’s 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 Company’s Registration Statement on Form S-1, SEC File No. 33-25035, and incorporated by reference.

(4)		Filed as an Exhibit to the Company’s Report on Form 10-K for the fiscal year ended August 26, 1989, SEC File No. 0-17276, and incorporated by reference.

(5)		Filed as an Exhibit to the Company’s Report on Form 8-K, filed by the Company on June 5, 1997, SEC File No. 0-17276, and incorporated by reference.

(6)		Filed as an Exhibit to the Company’s Report on Form 8-A/A-1, filed by the Company on April 16, 1998, Sec File No. 0-17276 and incorporated by reference.

(7)		Filed as an Exhibit to the Company’s Report on Form 10-K for the fiscal year ended August 31, 1991, as amended by Form 8 dated January 7, 1992, SEC File No. 0-17276, and incorporated by reference.

(8)		Filed as an Exhibit to the Company’s Report on Form 10-K for the fiscal year ended August 29, 1992, File No. 0-17276, and incorporated by reference.

(9)		Filed as an Exhibit to the Company’s Report on Form 10-K for the fiscal year ended August 28, 1993, SEC File No. 0-17276, and incorporated by reference.

(10)		Filed as an Exhibit to the Company’s Report on Form 10-Q for the fiscal quarter ended May 28, 1994, SEC File No. 0-17276, and incorporated by reference.

(11)		Filed as an Exhibit to the Company’s Report on Form 10-K for the fiscal year ended August 27, 1994, SEC File No. 0-17276, and incorporated by reference.

(12)		Filed as an Exhibit to the Company’s Report on Form 10-K for the fiscal year ended August 26, 1995, SEC File No. 0-17276 and incorporated by reference.

(13)		Filed as an Exhibit to the Company’s Report on Form 10-K/A for the fiscal year ended August 29, 1998, (as amended) SEC File No. 0-17276, and incorporated by reference.

(14)		Filed as an Exhibit to the Company’s Report on Form 8-K, filed by the Company on January 21, 1999, SEC File No. 0-17276 and incorporated by reference.

(15)		Filed as an Exhibit to the Company’s Report on Form 8-K, filed by the Company on June 23, 1999, SEC File No. 0-17276 and incorporated by reference.

(16)		Filed as an Exhibit to the Company’s Report on Form 10-K for the fiscal year ended August 28, 1999, SEC File No. 0-17276, and incorporated by reference.

(17)		Filed as an Exhibit to the Company’s Report on Form 10-Q for the fiscal quarter ended November 27, 1999, SEC File No. 0-17276 and incorporated by reference.

(18)		Filed as an Exhibit to the Company’s Report on Form 10-Q for the fiscal quarter ended February 26, 2000, SEC File No. 0-17276 and incorporated by reference.

(19)		Filed as an Exhibit to the Company’s Report on Form 10-Q for the fiscal quarter ended May 27, 2000, SEC File No. 0-17276 and incorporated by reference.

(20)		Filed as an Exhibit to the Company’s Report on Form 10-K for the fiscal year ended August 26, 2000, SEC File No. 0-17276 and incorporated by reference.

(21)		Filed as an Exhibit to the Company’s Report on Form 10-Q for the fiscal quarter ended February 24, 2001, SEC File No. 0-17276 and incorporated by reference.

(22)		Filed as an Exhibit to the Company’s Report on Form 10-Q for the fiscal quarter ended May 26, 2001, SEC File No. 0-17276 and incorporated by reference.

(23)		Filed as an Exhibit to the Company’s Report on Form 10-K for the fiscal year ended August 25, 2001, SEC File No. 0-17276 and incorporated by reference.

(b) Reports on Form 8-K


	No reports on Form 8-K were filed during the first quarter ended November 24, 2001.

FSI INTERNATIONAL, INC. AND SUBSIDIARIES

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		FSI INTERNATIONAL, INC.

		[Registrant]
DATE:	January 4, 2002
		By: /s/Patricia M. Hollister

		Patricia M. Hollister,
		Chief Financial Officer
		on behalf of the
		Registrant and as
		Principal Financial and Accounting Officer

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