SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1997 or
[ ] 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 0-22780
FEI COMPANY
(Exact name of registrant as specified in its charter)
Oregon 93-0621989
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7451 NW Evergreen Parkway
Hillsboro, Oregon 97124
(Address of principal executive offices) ip Code)
Registrant's telephone number,
including area code: (503) 640-7500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy
or information statement incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Aggregate market value of Common Stock held by nonaffiliates of the
Registrant at March 26, 1998: $88,766,093 . For purposes of this
calculation, officers and directors are considered affiliates.
Number of shares of Common Stock outstanding at March 26, 1998:
18,078,337 .
Documents Incorporated by Reference
Part of Form 10-K into
Document which incorporated
Proxy Statement for 1998 Annual
Meeting of Shareholders Part III
TABLE OF CONTENTS
Item of Form 10-K Page
PART I
Item 1 - Business................................................. 1
Item 2 - Properties............................................... 13
Item 3 - Legal Proceedings........................................ 14
Item 4 - Submission of Matters to a Vote of Security Holders...... 15
Item 4(a) - Executive Officers of the Registrant..................... 16
PART II
Item 5 - Market for the Registrant's Common
Equity and Related Shareholder Matters................... 19
Item 6 - Selected Financial Data.................................. 20
Item 7 - Management' Discussion and Analysis of Financial
Condition and Results of Operations...................... 22
Item 8 - Financial Statements and Supplementary Data.............. 30
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................... 30
PART III
Item 10 - Directors and Executive Officers of
the Registrant........................................... 31
Item 11 - Executive Compensation................................... 31
Item 12 - Security Ownership of Certain Beneficial
Owners and Management.................................... 31
Item 13 - Certain Relationships and Related
Transactions............................................. 31
PART IV
Item 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.................................. 32
SIGNATURES............................................................ 35
PART I
ITEM 1. BUSINESS
Introduction
FEI Company is a leader in the design, manufacture and sale of products
based on focused charged particle beam technology. On February 21, 1997 the
Company completed a combination transaction (the "Combination") with the
electron optics business of Philips Industrial Electronics International B.V.
("PIE"), a wholly owned subsidiary of Philips Electronics N.V. ("Philips").
Pursuant to the Combination, the Company acquired shares of two Philips'
subsidiaries owning substantially all of the assets and liabilities of Philips'
electron optics business (the "PEO Operations"), and the Company issued to PIE a
number of shares of its Common Stock equal, after issuance, to 55 percent of the
outstanding shares of Common Stock of the Company.
For periods after February 21, 1997, references in this Annual Report to
"FEI" or "the Company" include the acquired PEO Operations.
The Company's products include focused ion beam ("FIB") workstations,
transmission electron microscopes ("TEMs"), scanning electron microscopes
("SEMs") and components of these products. The Company's products are sold
primarily to manufacturers of integrated circuits ("ICs") and life science and
materials science customers. The Company's FIB workstations are sold primarily
to IC manufacturers. The Company's electron microscope products are sold
primarily to life science and materials science research institutes,
universities and industrial customers, as well as to IC manufacturers.
The Company has manufacturing operations in Hillsboro, Oregon; Eindhoven,
The Netherlands; and Brno, Czech Republic. Direct sales and service operations
are conducted in the United States and eight other countries, constituting most
of the worldwide market for the Company's products. The Company's products are
also sold under distribution agreements with affiliates of Philips located in
approximately 20 additional countries.
From time to time the Company may issue forward-looking statements that are
subject to a number of risks and uncertainties. The statements in this report
concerning increased investment in the Company's service and support activities
for its electron microscope business, the portions of the Company's sales
consisting of international sales and sales of certain products, expected
product shipments and capital requirements constitute forward-looking statements
that are subject to risks and uncertainties. Factors that could materially
decrease the Company's investment in its service and support activities for its
electron microscope business include, but are not limited to, downturns in the
IC manufacturing market, lower than expected customer orders for electron
microscopes, and changes in product sales mix. Factors that could materially
reduce the portion of the Company's sales consisting of international sales
include, but are not limited to, competitive factors, including increased
international competition, new
product offerings by competitors and price pressures, exchange rate fluctuations
and business conditions and growth in the electronics industry and general
economies, both domestic and foreign. Factors that could materially reduce the
portion of the Company's sales consisting of FIB workstations and electron
microscopes include, but are not limited to, the competitive factors mentioned
above and changes in product sales mix. Factors that could adversely affect
expected product shipments include, but are not limited to, technological
difficulties and resource constraints in developing new products, the
availability of parts and supplies at reasonable prices, product shipment
interruptions due to manufacturing difficulties and order cancellations. Factors
that could materially increase the Company's capital requirements include, but
are not limited to, receipt of a significant portion of customer orders and
product shipments near the end of a quarter and the other factors listed above.
Additional factors that may cause actual results to vary materially from those
set forth in such forward-looking statements are described in Item 1 - Business
under the captions "Sales and Marketing" and "Competition," in Item 3 - Legal
Proceedings and in Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations under the caption "Quarterly Results of
Operations."
Products
FIB Workstations
The Company is a world leader in the design, manufacture and sale of FIB
workstations. A FIB workstation consists of a vacuum stand, ion beam focusing
column, sample holder device ("stage"), associated electronics and software and
various optional enhancements. The Company's line of FIB workstations includes
the two-inch stage model 200, the eight-inch stage model 800 and the DualBeam
models 620 and 820, which place both ion and electron beam columns on a single
vacuum chamber. Sales of FIB workstations accounted for approximately 29% of the
Company's net sales in 1997.
The Company's FIB workstations enable users to image, mill, cut, modify and
analyze the features of samples within submicron tolerances. The unique
combination of capabilities of FIB workstations allows users to perform analysis
and modification with precision and speed that previously were not possible at
such tolerances. The Company believes its FIB workstations significantly speed
and improve the functions of design edit, failure analysis and process
monitoring performed by IC manufacturers, thereby shortening time to market for
new generations of ICs and increasing the yield of fabrication lines. The
Company also believes its FIB workstations can be used in other sub-micron,
micromachining applications, including the manufacture of thin-film heads.
2
The following table summarizes key features of the Company's line of FIB
workstations.
Model Stage First Features
Size Shipped
- ----------------------------------------------------------------------------------------------------------
200xP 2 September Provides fully digital control with a small
inches 1996 sample stage, using Windows NT operating
system for enhanced ease of use
- ----------------------------------------------------------------------------------------------------------
200TEM 2 February 200xP with latest generation "Magnum" FIB
inches 1998 column, tilt motorization and specialized
software for preparation of samples for TEM
and SEM analysis
- ----------------------------------------------------------------------------------------------------------
200DE 2 February 200xP with latest generation "Magnum" FIB
inches 1998 column and high accuracy stage system for
modification of flip-chip devices
- ----------------------------------------------------------------------------------------------------------
200THP 2 October 200xP with latest generation "Magnum" FIB
inches 1996 column and specialized software for
development of FIB process for thin-film head
production
- ----------------------------------------------------------------------------------------------------------
AutoTrim 200 2 September Designed for dedicated, high volume
inches 1997 manufacture of thin-film heads using the latest
x 4 generation "Magnum" FIB column and
inches specialized software for fully automated
operation
- ----------------------------------------------------------------------------------------------------------
800xP 8 February Provides fully digital control with capability to
inches 1997 navigate over full wafer; includes integrated
vacuum loadlock
- ----------------------------------------------------------------------------------------------------------
800THP 8 March 800xP with latest generation "Magnum" FIB
inches 1998 column and specialized software for
development of FIB process for thin-film head
production
- ----------------------------------------------------------------------------------------------------------
XL830 8 December Provides DualBeam capability of the Model XL
inches 1997 810 SEM, integrating a FIB column to provide
fast, accurate sectioning and analysis of surface
and sub-surface features
- ----------------------------------------------------------------------------------------------------------
XL860 8 Expected Provides DualBeam capability of the model XL
inches May 1998 850 SEM, integrating a FIB column to provide
fast, accurate sectioning and analysis for defect
characterization in the fab
- ----------------------------------------------------------------------------------------------------------
3
Electron Microscopes
The Company is also a world leader in the design, manufacture and sale of
electron microscopes. The Company's electron microscope products consist of a
range of both transmission electron microscopes ("TEMs") and scanning electron
microscopes ("SEMs"), as described below.
In the use of a TEM, the specimen is irradiated by an electron beam which
is focused onto and then passes through the specimen. The resulting image of the
internal structure of the specimen is then magnified by a series of magnetic
lens fields and projected on a fluorescent screen or an imaging camera. The
specimen, in order to be transparent to an electron beam, generally should be no
thicker than approximately 0.1 micron The required sample preparation is usually
an involved and lengthy process; however, in many cases, TEMs are the only tool
available to reveal sub-nanometer (one-billionth of a meter) features. In some
cases, FIB instruments may be used to "mill" and prepare TEM samples. TEMs
developed, manufactured and sold by the Company are used by a broad range of
hospitals, pharmaceutical laboratories, university and government biological
research centers, materials science laboratories and semiconductor research
laboratories. A market for TEM use in process development and process monitoring
in the IC industry has begun to develop.
Unlike the TEM, which produces images by passing electrons through a very
thin specimen, a SEM provides images of a specimen above one nanometer by
scanning the electron beam over the surface of the specimen. SEMs developed,
manufactured and sold by the Company are used by a broad range of hospitals,
pharmaceutical laboratories, university and government biological research
centers, materials science laboratories, semiconductor research laboratories as
well as in manufacturing processes of IC manufacturers. In addition to high
magnification imaging, SEMs are used to gather other specimen information, such
as elemental composition.
The Company's XL-series of SEMs, introduced in 1990, has a user-friendly
Windows- based interface. The Company believes the XL-series was the first SEM
to implement this technology fully and its introduction allowed Philips'
electron optics business to strengthen its position in the SEM market. The
XL-series has been further improved through advancements in specimen handling
capabilities and improved image resolution to satisfy a greater and more
demanding range of applications.
The following tables summarize key features of the Company's lines of TEMs
and SEMs.
4
TEMS
----
Model First Shipped Features
- ------------------------------------------------------------------------------------------
EM208 1996 200 kV TEM provides high contrast imaging
and enhanced ease of use
- ------------------------------------------------------------------------------------------
CM100 1993 100 kV TEM, designed for life science
applications, provides high contrast images,
with flexible recording media, complete
computerized documentation and specimen
protection
- ------------------------------------------------------------------------------------------
CM120 1993 120 kV TEM combines ergonomic user
interface for simple, secure operations, optimal
optical performance and specimen protection
- ------------------------------------------------------------------------------------------
CM120- 1995 CM120 with dedicated microscope for high
Biotwin contrast imaging of life science specimens at
liquid nitrogen temperatures
- ------------------------------------------------------------------------------------------
CM120 1997 CM120 BioTwin with energy filter and image
Bio Filter processing software to enhance life science
specimen protection
- ------------------------------------------------------------------------------------------
CM200 1993 200 kV TEM/STEM system, designed for
materials science applications; provides ultra-
high resolution to permit visualization and
characterization of crystal structures,
microstructures, composition, defects and
interfaces at atomic level
- ------------------------------------------------------------------------------------------
CM200 1993 CM 200 with field emission source provides
FEG ultra-high resolution in TEM/STEM imaging,
diffracting microanalysis and scanning
- ------------------------------------------------------------------------------------------
CM300 1994 300 kV TEM with greater penetration and
resolution capacity than CM 200
- ------------------------------------------------------------------------------------------
CM300 1994 CM 300 with field emission source provides
FEG resolution to 1 angstrom level
- ------------------------------------------------------------------------------------------
XL30 1990 General purpose 50x50 millimeter stage SEM
- ------------------------------------------------------------------------------------------
XL30S 1997 XL30 with field emission source for
FEG examination of uncoated specimens at low kV
and high magnification
- ------------------------------------------------------------------------------------------
5
SEMS
----
Model First Shipped Features
- ------------------------------------------------------------------------------------------
XL30CP 1996 XL30 with controlled pressure, permitting
specimen vacuum up to 3 torr
- ------------------------------------------------------------------------------------------
XL30 TOP 1997 XL30 plug and play requiring "mains"
connection only
- ------------------------------------------------------------------------------------------
XL30 1997 XL30 with secondary electron imaging at a
ESEM wide range of accurately controlled high
chamber pressures (20mBar or more), which
reduces charge effects and prevents desiccation
of wet specimens
- ------------------------------------------------------------------------------------------
XL30 1996 XL30 with field emission source and gaseous
ESEM secondary electron detector system
FEG
- ------------------------------------------------------------------------------------------
XL40 1991 General purpose 6 inch wafer SEM
- ------------------------------------------------------------------------------------------
XL40 FEG 1993 XL40 with field emission source for
examination of large samples, from
semiconductors to advanced materials such as
ceramics and coated metals, featuring flexible
port configuration
- ------------------------------------------------------------------------------------------
XL810 1996 SEM with 8 inch stage, provides fully digital
control and wafer navigation using the
"Hexalens" electron column for high resolution
imaging at low beam energies
- ------------------------------------------------------------------------------------------
XL850 Expected XL810 with robotic handling of wafer cassettes
1998 for defect review and wafer inspection in the
fab
- ------------------------------------------------------------------------------------------
Emitters
The Company is a world leader in ion and electron emitter research and
manufacture. The Company manufactures both ion and electron emitters with a
variety of technical features to meet the needs of its customers. Sales of
emitters accounted for approximately 3% of the Company's net sales in 1997. The
Company believes its emitters are characterized by a relatively long useful life
and provide a mechanically stable, high brightness beam. The useful life of an
emitter is limited by the natural loss of emitter material during the emission
process
6
and varies, depending on the type of emitter and customer use. The Company's
current ion emitter has a source life of approximately 1,500 hours.
The Company sells its electron emitters primarily to manufacturers of
electron beam equipment and to scientific research facilities, as well as using
them in its TEM, SEM and DualBeam systems. The Company sells its ion emitters
primarily to research and scientific facilities and incorporates them in its ion
focusing columns and FIB workstations. The prices of the Company's emitters
generally range from $500 to $2,000. The Company also manufactures single
crystal electron source rods and wire, which it sells to researchers and to
emitter manufacturers for use in electron emitter fabrication and other research
applications.
Focusing Columns
The Company is a market leader in focusing column technology. The Company
manufactures a variety of focusing columns, including single-lens electron
columns and two-lens electron and ion columns that incorporate an electronically
variable aperture. Sales of focusing columns to third party customers for 1997
on a pro forma combined basis were $9,748,000, or approximately 6% of net sales.
The Company recently introduced for use in its FIB workstations a "Magnum" ion
focusing column, which provides resolution within less than 0.007 microns (7
nanometers), and a high current density that provides improved milling
performance while maintaining a resolution accuracy among the highest in the
industry.
The Company sells electron beam columns primarily to SEM manufacturers and
sells ion beam columns primarily to manufacturers of surface analysis systems
and other ion beam systems, as well as to research and scientific facilities.
For specialty uses, the Company manufactures customized focusing columns to
purchaser specifications. Columns manufactured for sale as stand-alone products
are packaged as compact units on standard flanges. These columns can be adapted
to existing microscopy, lithography and other systems to supplement the
capabilities of those systems.
Research and Development
The Company's research and development staff at December 31, 1997 consisted
of 160 employees, including scientists, engineers, designer draftsmen and
technicians. The Company also contracts with Philips Research Laboratories for
basic research applicable to the Company's electron optics product line.
The Company believes its knowledge of field emission technology and
products incorporating focused ion beams is critical to its past and future
performance in the focused charged particle beam business. In developing new
field-emission based products, the Company has been able to combine its own
experience since formation in 1971 with a number of outside resources. Drawing
on these resources, the Company has developed a number of product innovations,
including the enhanced etch process to remove metals, insulators and
carbon-based materials quickly and accurately during ion milling and to heighten
surface contrast for electron
7
imaging, SIMSmap for visual display of chemical and elemental analysis, a rigid
stacked disk focusing column for greater beam control, a process for deposition
of insulating layers in IC modification and enhanced processes for wafer mapping
and coordination between FIB tools and CAD navigational software.
The PEO Operations, which the Company acquired in the Combination,
introduced its first TEM in 1949 and has continued to be a leader in the design,
manufacture and sale of TEMs and SEMs. The Company has recently developed 200 kV
and 300kV TEMs, which can provide atomic resolution imaging for materials
science applications, as well as 100kV TEMs with integrated atomic element
mapping for life sciences applications. The Company's SEMs are user friendly,
and have used a Windows-based user interface since 1990. The Company's latest
SEMs incorporate its new electron column which provides extremely high image
resolution at low voltages, and its environmental SEMs ("ESEMs") provide
superior resolution at low vacuum pressure.
From time to time the Company engages in joint research and development
projects with certain of its customers and other parties. Electron microscope
development is conducted in collaboration with universities and research
institutions, often supported by European Community research and development
programs. In 1997 the Company received public funds under Dutch government and
European Community-funded research and development programs, the most
significant of which is the Micro-Electronics Development for European
Applications ("MEDEA") program, which was established in 1997. The Company also
maintains other informal collaborative relationships with universities and other
research institutions and the Company works with several of its customers for
evaluation of new products.
The semiconductor manufacturing market and other markets into which the
Company sells its principal products are subject to rapid technological
development, product innovation and competitive pressures. Consequently, the
Company has expended substantial amounts on research and development, and it
generally intends to continue at or above its present level of research and
development expenditures. Research and development expenses for 1997 were $15.4
million and on a pro forma combined basis would have been $16.4 million, or
approximately 9.5% of net sales.
Manufacturing
The Company has manufacturing operations located in Hillsboro, Oregon;
Eindhoven, The Netherlands; and Brno, Czech Republic. The Company's FIB
workstation manufacturing operations consist of fabricating components, testing
components and subassemblies from Eindhoven and assembling and testing finished
products. The Company's electron microscope manufacturing operations consist
primarily of the assembly of electronic and mechanical modules and final
assembly and testing of systems to meet customer specifications. Orders are
executed using an integrated logistics automation system which controls the flow
of goods. The Company also fabricates electron and ion source materials and
manufactures electron and ion emitters and columns at its facilities in Oregon.
8
The Company's production schedule for its systems products is generally
based on a combination of sales forecasts and the receipt of specific customer
orders. All components, subassemblies and finished products are inspected for
compliance with Company and customer specifications. Following assembly, all
products are shipped in custom protective packaging to prevent damage during
shipment.
Although many of the components and subassemblies included in the Company's
system products are standard products, a significant portion of the mechanical
parts and subassemblies are custom made by one or two suppliers, including
Philips Machinefabrieken B.V. (Philips Machine Shop), located in Eindhoven. The
Company believes some of the components supplied to it are available to the
suppliers only from single sources. Those parts subject to single or limited
source supply are monitored by the Company to ensure that adequate sources are
available to maintain manufacturing schedules. Although the Company believes it
would be able to develop alternate sources for any of the components used in its
products, significant delays or interruptions in the delivery of components from
suppliers or difficulties or delays in shifting manufacturing capacity to new
suppliers could have a material adverse effect on the Company.
Sales and Marketing
The Company's sales and marketing staff at December 31, 1997 consisted of
approximately 140 employees, including direct salespersons, applications
specialists and technical writers. Applications specialists identify and develop
new applications for the Company's products, which the Company believes will
further expand its FIB workstation and electron microscope markets.
Products manufactured by the Company are sold in Canada, France, Germany,
Italy, Japan, The Netherlands, the United Kingdom and the United States through
wholly owned sales and service subsidiaries of the Company, and elsewhere in the
world through Philips' affiliated agents/distributors and through independent
agents/distributors.
The Company's FIB workstations and columns are sold generally with a
12-month warranty, and warranty periods have typically been shorter for used
workstations. The Company's FIB workstations are generally covered by service
contracts after expiration of any warranty. The Company employs FIB workstation
engineers in the United States, in Europe and in Southeast Asia. The Company
also contracts with independent service representatives for FIB workstation
service in Japan, Israel, South Korea, Taiwan and Singapore, and the Company
expects to add additional service engineers in other locations as needed.
The Company's electron optics products typically have a 12-month warranty
and are generally covered by service contracts at the end of the warranty
period. Service contracts are specific to customer requirements, but typically
cover parts, materials and labor and include one routine maintenance per year.
Due to a shift in sales towards the IC manufacturing market, which generally has
higher demands for responsiveness and 24-hour support, the Company
9
anticipates further increasing its investment in service and support activities
for its electron microscope business.
The Company uses sales-type leases to enhance the affordability of its FIB
workstations. As of December 31, 1997, the Company had six lease contracts for
FIB workstations, with an aggregate outstanding balance of approximately $1.7
million. The Company anticipates using third party leasing for future sales that
require purchaser financing.
International sales (defined as sales outside the United States) were 60%
of net sales in 1997. International sales are expected to continue to represent
a significant percentage of net sales for the Company.
Certain risks are inherent in international operations, including changes
in demand resulting from fluctuations in interest and exchange rates, the risk
of government-financed competition, changes in trade policies, tariff
regulations and difficulties in obtaining export licenses. In addition, a
substantial portion of the Company's international sales are denominated in
currencies other than U.S. dollars. Consequently, a decrease in the value of a
relevant foreign currency in relation to the U.S. dollar occurring after
agreement on price and before receipt of payment would have an adverse impact on
results of operations. The impact of future exchange rate fluctuations on the
results of operations of the Company cannot be accurately predicted. The Company
is establishing a hedging program for foreign currency exposure, but there is no
assurance that any hedging techniques will eliminate the effects of currency
fluctuations.
Backlog
The Company's backlog consists of purchase orders it has received for
products it expects to ship within the next nine months. The Company's backlog
at December 31, 1997 was $53.0 million, compared with a pro forma combined
backlog of $47.5 million at December 31, 1996. The Company expects to ship all
products representing this backlog in 1998, although there is no assurance the
Company will be able to do so.
For sales of FIB workstations, advance or progress payments typically have
not been received from customers unless the system ordered includes custom
features. A significant portion of the Company's backlog consists of relatively
high unit price products. As a result, the timing of the receipt of an order
from a single customer could have a material impact on the Company's backlog at
any date. For this and other reasons, the amount of backlog at any date is not
necessarily indicative of revenue in future periods.
Competition
The markets for sale of FIB workstations, electron microscopes and related
components, are highly competitive. The Company's principal competitors for the
sale of FIB workstations are Seiko Instruments Inc., Schlumberger Technologies
(ATE Division), Micrion Corporation,
10
JEOL USA, Inc. and Hitachi, Ltd. The Company's principal competitors for the
sale of electron microscopes are JEOL, Ltd., Hitachi, Ltd., Amray Inc. and LEO
Electron Microscopy, Inc. A number of the Company's competitors and potential
competitors may have greater financial, marketing and production resources than
the Company. Additionally, these markets are rapidly changing, and one or more
of the Company's competitors might achieve a technological advance that would
put the Company at a competitive disadvantage.
The Company believes the key competitive factors in the FIB workstation
market are performance, range of features, reliability and price. The Company
believes it is competitive with respect to each of these factors. The Company
has experienced price competition in the sale of its FIB workstations and
believes price may continue to be an important factor in the sale of most
models. Intense price competition in the sale of FIB workstations to strategic
customers has in the past adversely affected the Company's profit margins.
The principal elements of competition in the electron microscope market are
the performance characteristics of the system and the cost of ownership of the
system, based on purchase price and maintenance costs. The Company believes it
is competitive with respect to each of these factors. In both the TEM and SEM
markets, the ability of the Company to remain competitive will depend in part
upon its success in developing new and enhanced systems and introducing these
systems at competitive prices on a timely basis.
The Company believes the key competitive factors in the emitter market are
emitter life, brightness, stability, ease of use and price. The Company believes
it competes favorably with respect to each of these factors. Although the
Company has relatively few competitors in the manufacture and sale of
specialized electron beam and ion beam focusing columns, many of the Company's
customers, including certain manufacturers of electron microscopes, have the
technical and other resources to manufacture focusing columns. The Company
believes other key competitive factors in the focusing column business are beam
performance, packaging and reliability. The Company believes it competes
favorably with respect to each of these factors in the focusing column market.
In each of the Company's markets, there are few barriers to entry. Given
the fact that these markets are in the developmental stage, there is no
assurance that other companies, including but not limited to certain of the
Company's customers, will not enter one or more of these markets in the future.
Patents and Intellectual Property
The Company relies on a combination of trade secret protection,
nondisclosure agreements and patents to establish and protect its proprietary
rights. There is no assurance, however, that any of these intellectual property
rights will have commercial value or will be sufficiently broad to protect the
aspect of the Company's technology to which the patents relate or that
competitors will not design around the patents. The Company has nine U.S.
patents and one patent application pending relating to its FIB workstation
business. All of the patents used
11
by the Company relating to its electron microscope products are licensed from
Philips and its affiliates. The Company also has access to technology through
cross-licenses between Philips affiliates and a large number of manufacturers in
the electronics industry worldwide.
As part of its FIB workstations, the Company sells the software used for
control of its ion and electron focusing columns and does not retain ownership
rights to the software. CAD software incorporated into FIB workstations is
provided to the Company on an OEM basis. Policing unauthorized use of the
Company's technology is difficult, and there is no assurance that measures taken
by the Company to protect this technology will be successful. Although the
Company's competitive position may be affected by its ability to protect its
proprietary information, the Company believes that other factors, such as the
Company's 20 years of experience in the development of charged particle emission
technology, its technical expertise, its name recognition and its continuing
product support and enhancement, may be more significant in maintaining the
Company's competitive position.
Several of the Company's competitors hold patents covering a variety of
focused ion beam products and applications and methods of use of focused ion and
electron beam products. Some of the Company's customers may use the Company's
FIB workstations for applications that are similar to those covered by these
patents. From time to time the Company and its customers have received
correspondence from competitors of the Company claiming that certain of the
Company's products, as used by its customers, may be infringing one or more of
these patents. Other than as described below under "Item 3 - Legal Proceedings,"
none of these allegations has resulted in litigation. The Company believes it
has credible arguments that these patents are either invalid, not infringed or
would not be enforced by a court.
The Company is aware of a patent held by Micrion Corporation ("Micrion")
which, if valid, could be infringed by the sale of the Company's ion focusing
columns, whether sold separately or as part of the Company's FIB workstations.
The patent relates to the use of certain materials in the construction of parts
of an ion focusing column. The Company believes, however, that if infringement
were alleged, the patent would either be construed narrowly so as not to cover
products sold by the Company or their use or would be invalid based upon prior
art references which the Company believes anticipate or render obvious those
claims and based upon sales by the Company of focusing columns that incorporated
the patented technology more than one year prior to the patent application date.
The Company has not received any allegation of infringement or any other formal
communication from Micrion with respect to this patent. The Company believes the
ion focusing columns manufactured by all of its other competitors also use
technology that could infringe the patent if valid. To the Company's knowledge,
no other focusing column manufacturer has received any allegation of
infringement with respect to this patent.
There is no assurance that competitors or others will not assert
infringement claims against the Company or its customers in the future with
respect to current or future products or uses or that any such assertion may not
result in costly litigation or require the Company to obtain a license to
intellectual property rights of others. There is no assurance that such licenses
12
will be available on satisfactory terms or at all. If claims of infringement are
asserted against customers of the Company, those customers may seek
indemnification from the Company for damages or expenses they incur. As the
number and sophistication of focused ion and electron beam products in the
industry increase through the continued introduction of new products by the
Company and others, and the functionality of these products further overlaps,
manufacturers and users of ion and electron beam products may become
increasingly subject to infringement claims.
Employees
At December 31, 1997, the Company had approximately 940 full-time employees
worldwide, including approximately 330 in manufacturing, approximately 160 in
research and development, approximately 140 in marketing and sales,
approximately 50 in finance, accounting and information services, approximately
225 in customer service and approximately 35 in administration. Many of the
approximately 575 employees of the Company employed outside the U.S. participate
in collective labor agreements. None of the Company's U.S. employees are
represented by a labor union, and the Company has never experienced a work
stoppage, slowdown or strike. The Company believes it maintains good employee
relations.
ITEM 2. PROPERTIES
The Company's corporate headquarters and one of its manufacturing and
research and development facilities are located in four adjacent buildings
located in Hillsboro, Oregon. The first consists of approximately 43,950 square
feet of leased space used for research and development and administrative
activities. The initial term of the lease expires January 31, 2004, with an
option to renew for two successive five-year periods. Lease payments are
approximately $28,500 per month until January 1999 and $33,000 per month for the
remaining period of the initial term of the lease, plus, for each period, an
additional amount comprised primarily of the Company's proportionate share of
certain building operating expenses.
The second facility consists of a 34,700 square feet building used for the
Company's components business. Lease payments on this facility, which the
Company has occupied since June 1996, are approximately $27,000 per month for
the first five years of the lease and $30,700 per month thereafter until
March 31, 2003, when the lease expires, plus certain building operating
expenses. The third facility consists of 28,750 square feet of leased space and
is used for manufacturing FIB workstations. Lease payments on this facility are
$23,288 per month for the first five years and $26,306 thereafter until
March 31, 2003, when the lease expires, plus certain building operating
expenses. The fourth facility consists of 10,249 square feet of leased space and
is used for administrative functions. Lease payments on this facility are $8,302
per month through May 31, 2001 and $9,377 per month thereafter until April 30,
2003, when the lease expires, plus certain building operating expenses.
13
The Company operates 11 sales and service offices located in leased
facilities in Canada, France, Germany, Italy, Japan, South Korea, The
Netherlands, the United Kingdom and the United States.
The Company also maintains an administrative and manufacturing facility in
Eindhoven, The Netherlands, consisting of approximately 17,000 square meters of
space leased by the Company for a ten-year term commencing February 1997. The
lease payment for the first year was $850,000, and, assuming a constant currency
exchange rate of NLG2.02 per U.S. dollar, will be approximately $1,258,000 in
years two through ten under the lease. The Company also maintains leased
manufacturing facilities in Brno, Czech Republic.
The Company expects that its facilities will be adequate to meet its needs
for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In May 1995 Micrion Corporation ("Micrion"), a principal competitor of the
Company, filed a lawsuit against the Company in the U.S. District Court for the
District of Massachusetts (the "Court") alleging infringement of a patent issued
to Micrion relating to the use of an electron beam to neutralize a positive
charge that can develop with the use of an ion beam in a FIB workstation. The
complaint also alleges that the Company used information confidential to Micrion
to develop devices to effect charge neutralization, to incorporate such devices
into the Company's FIB workstations, to manufacture certain ion emitters, and to
persuade prospective purchasers of FIB workstations to purchase workstations
from the Company rather than from Micrion. Micrion sought an injunction against
infringement of the Micrion patent, damages of at least $1 million for misuse of
confidential information, treble damages for infringement of the Micrion patent,
attorneys' fees and other damages. The Company believes it has valid defenses to
Micrion's claims.
The Company initiated a proceeding with the American Arbitration
Association seeking to arbitrate Micrion's non-patent claims. In response to
motions filed by the Company in the Court and the U.S. District Court for the
District of Oregon, Micrion was ordered to arbitrate these matters in Oregon,
and the Court action has been stayed with respect to these matters. The Company
filed an answer and counterclaim in the Court, asserting that the patent is not
infringed and is invalid. In May 1996 the parties dismissed the Court action and
the arbitration, each without prejudice. Either Micrion or the Company may
re-initiate either the Court action or the arbitration.
In 1997 both Micrion and the Company initiated procedures to have the
United States Patent and Trademark Office (the "PTO") reexamine the validity of
the Micrion patent. The PTO ordered that the patent be reexamined, and the
reexamination proceeding is pending. The PTO has so far rejected all the claims
that it has reexamined, and Micrion may attempt to overcome these rejections by
argument or by amending its claims.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
15
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company as of March 1, 1998.
Name Age Position
- ------------------------------ --- -------------------------------------
Dr. Lynwood W. Swanson........ 63 Chairman of the Board of Directors
and Chief Scientist
William A. Whitward........... 59 President, Chief Executive Officer
and Director
William G. Langley............ 48 Executive Vice President, Chief
Financial Officer, Secretary and
Director
Karel D. van der Mast......... 49 Executive Vice President,
Marketing,
Technical Officer and Director
Robert H.J. Fastenau.......... 45 Senior Vice President, Research and
Development
Charles F. Lake............... 49 Senior Vice President,
Manufacturing
Joseph C. Robinson............ 45 Senior Vice President, Sales
(Semiconductor)
Bernd W.M. Volbert............ 44 Senior Vice President, Sales
(Analytical)
Jim D. Higgs.................. 47 Senior Vice President, Human
Resources
Mark V. Allred................ 39 Controller and Assistant Treasurer
Michel G. van Woesik.......... 32 Treasurer and Assistant Secretary
Dr. Lynwood W. Swanson co-founded the Company in 1971 and has served as a
director since that time. He served as President of the Company until October
1994, at which time he was elected Chairman of the Board. Dr. Swanson was
appointed Chief Scientist in May 1990 and served as Chief Executive Officer of
the Company from May 1988 to February 1997. Dr. wanson has been a member of the
board of trustees of the Murdock Charitable Trust since 1987 and is an Adjunct
Professor of Applied Physics at the Oregon Graduate Institute.
16
Dr. Swanson holds B.S. degrees in physics and chemistry from University of the
Pacific and a Ph.D. degree in physical chemistry from University of California
at Davis.
William A. Whitward joined the Company as President, Chief Executive
Officer and director in February 1997. Mr. Whitward served as the General
Manager of Philips Electron Optics B.V. from June 1993 to February 1997. He
joined Philips Electron Optics B.V. after 14 years as General Manager of a
former affiliate of Philips, its Test & Measurement unit, which produced
oscilloscopes, voltmeters and similar equipment. Mr. Whitward holds a bachelor's
degree in engineering from Natal University, South Africa.
William G. Langley joined the Company as Vice President, Chief Financial
Officer and in-house legal counsel in September 1992, served as President and
Chief Operating Officer from October 1994 to February 1997 and as Assistant
Secretary and Assistant Treasurer from July 1993 to February 1997, and was
appointed Executive Vice President and Secretary in February 1997. In October
1994 he was elected a director of the Company. From April 1990 to September
1992, Mr. Langley served as a Vice President with the Chariot Group, Inc., an
investment company specializing in the acquisition, finance and operation of
mid-size businesses. Mr. Langley holds a B.A. degree from Albertson College, a
J.D. degree from Northwestern School of Law of Lewis and Clark College and an
LL.M. degree from New York University. Mr. Langley is an attorney and certified
public accountant.
Karel D. van der Mast joined the Company as Executive Vice President
Marketing, Technical Officer and director in February 1997. Dr. van der Mast
served as Business Manager and Strategic Marketing Manager of Philips Electron
Optics B.V. from October 1995 to February 1997. In 1988 he joined Philips
Electron Optics B.V. as Research and Development Manager. From 1983 to 1988, Dr.
van der Mast was Professor of Physics at the Technical University of Delft,
leading research in fast electron beam lithography systems. He first joined
Philips in 1978 as TEM Development Manager. Dr. van der Mast holds an Engineers
degree and a Ph.D. degree in Physics from the Technical University of Delft and
has published articles in the field of physics and electron microscopy.
Robert H.J. Fastenau joined the Company as Senior Vice President Research
and Development in February 1997. Dr. Fastenau joined Philips Electron Optics
B.V. in October 1995 as Research and Development Manager. He was department head
of a research group in materials science and devices in Philips Research from
1989 to 1995 after a one year research assignment with Signetics Co. and after
serving as the department head of the microfabrication group in Philips
Research. Dr. Fastenau holds an Engineers degree and a Ph.D degree in physics
from the Technical University of Delft.
Charles F. Lake joined the Company as Manufacturing Manager in January
1990, served as Vice President of Manufacturing from July 1991 to February 1997
and was appointed Senior Vice President Manufacturing in February 1997. From
February 1982 to January 1990 Mr. Lake was employed by Tektronix, Inc., a
manufacturer and distributor of test and analysis equipment and components, most
recently as a Manufacturing Manager. Mr. Lake holds a B.S.
17
degree in chemical engineering from University of Colorado and an M.B.A. degree
from San Diego State University.
Joseph C. Robinson joined the Company as Executive Vice President of Sales
and Marketing in December 1995 and was appointed Senior Vice President Sales
(Semiconductor) in February 1997. From March 1993 to December 1995 Mr. Robinson
was Director of Sales and Marketing for Kevex Inc. (a division of Fisons
Instruments), a manufacturer of dispersive x-ray and image analyzers. From
October 1989 to March 1993 Mr. Robinson was Semiconductor Product Marketing
Manager for AMRAY, Inc., specializing in scanning electron microscopes. Mr.
Robinson has a B.A. degree from Colgate University, is a member of Beta Beta
Beta Biological Society and has completed supplemental studies in Strategic
Marketing at Duke University.
Bernd W.M. Volbert joined the Company as Senior Vice President Sales
(Analytical) in February 1997. Dr. Volbert has also served as International
Sales and Service Manager of Philips Electron Optics B.V. since 1992, and as
Marketing Manager of Philips Electron Optics B.V. from 1990 to 1992. Dr. Volbert
is also a director of Philips Electron Optics Nederland B.V. Dr. Volbert holds a
Ph.D. degree in Physics from Muenster University.
Jim D. Higgs joined the Company as Senior Vice President, Human Resources
in November 1997. From January 1996 through October 1997 he was Oregon Site
Management Director of Synopsys, Inc. ("Synopsys") and from October 1990 through
December 1995 he was Vice President, Human Resources of Logic Modeling
Corporation, a software company acquired by Synopsys in 1994. Before 1990 he was
Vice President, Human Resources at BiiN (an Intel/Siemens joint venture) and
held various senior human resource management positions during 14 years at Intel
Corporation. Mr. Higgs holds two B.S. degrees from the University of Oregon: one
in Business and Personnel Management and the other in Physics and Psychology.
Mark V. Allred joined the Company as Controller in December 1997. From
November 1996 to November 1997 Mr. Allred was Controller for Epitope, Inc., a
biotechnology company. From May 1982 to November 1996 Mr. Allred was employed by
Deloitte & Touche LLP, most recently as Senior Audit Manager. Mr. Allred holds a
B.S. degree in Accounting from Portland State University and an M.B.A. degree
from the University of Minnesota. Mr. Allred is a certified public accountant.
Michel G. van Woesik joined the Company as Treasurer in December 1997. From
August 1995 to November 1997, Mr. van Woesik was Treasurer and Controller for
PIE and from 1990 to August 1995 he held various financial management positions
in the Finance department of Philips. Mr. van Woesik holds a degree in business
economics from the Catholic University of Brabant.
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "FEIC." The following table sets forth, for the periods indicated,
the highest and lowest closing sales price for the Common Stock, as reported by
the Nasdaq National Market.
High Low
------- ---------
L
1996
First Quarter $13 $10 1/4
Second Quarter 19 5/8 10 1/4
Third Quarter 13 3/4 6 1/2
Fourth Quarter 13 8 13/16
1997
First Quarter 14 1/4 7 3/8
Second Quarter 15 1/4 6 3/4
Third Quarter 21 1/4 14 14
Fourth Quarter 24 12
As of March 26, 1998 there were approximately 83 holders of record of the
Company's Common Stock. The Company believes the number of beneficial owners is
substantially greater than the number of record holders because a large portion
of the Company's outstanding Common Stock is held of record in broker "street
names" for the benefit of individual investors.
The Company has never declared or paid a dividend and does not anticipate
doing so in the foreseeable future. The Company expects to retain earnings to
finance the expansion and development of its business. The payment of dividends
is within the discretion of the Company's Board of Directors and will depend on
the earnings, capital requirements and operating and financial condition of the
Company, among other factors.
19
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated statement of operations data presented below for
each of the years in the three-year period ended December 31, 1997 and the
selected consolidated balance sheet data presented below as of December 31, 1996
and 1997 have been derived from the audited consolidated financial statements of
the Company included elsewhere in this report. The selected consolidated
statement of operations data for the years ended December 31, 1994 and 1993 and
the selected consolidated balance sheet data as of December 31, 1995 and 1994
have been derived from audited financial statements of the Company not included
herein. The selected consolidated balance sheet data as of December 31, 1993
have been derived from unaudited financial statements of the Company not
included herein. The selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and notes
thereto included elsewhere in this Report.
The selected consolidated financial data for, and as of the end of, the
years ended December 31, 1993, 1994, 1995 and 1996 reflect the PEO Operations on
a stand-alone basis. The selected consolidated financial data for, and as of the
end of, the year ended December 31, 1997 reflect the PEO Operations from
January 1, 1997 to February 20, 1997 and the combined FEI and PEO Operations
from February 21, 1997 to December 31, 1997.
Year Ended December 31,
----------------------------------------------------------------
(Combined
(PEO Operations) Company)
--------------------------------------------------- ---------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of Operations Data:
Net sales $ 71,631 $ 84,169 $109,117 $112,384 168,796
Cost of Sales 48,563 52,932 72,686 79,065 106,629
-------- -------- -------- -------- --------
Gross profit 23,068 31,327 36,431 33,319 62,167
Total operating expenses 19,123 21,764 28,886 32,632 95,040
-------- -------- -------- -------- --------
Income (loss) from operations 3,945 9,473 7,545 687 (32,873)
-------- -------- -------- -------- --------
Other income (expense) -- -- 1,700 -- (622)
-------- -------- -------- -------- --------
Income (loss) before taxes 3,945 9,473 9,245 687 (33,495)
Tax expense 1,519 3,580 3,317 740 3,107
-------- -------- -------- -------- --------
Net income (loss) $ 2,426 $ 5,893 $ 5,928 $ (53) $(36,602)
======== ======== ======== ======== ========
Net income (loss) per share (1) .25 .61 .61 (.01) (2.19)
Shares used in per share 9,729 9,729 9,729 9,729 16,677
calculation(1)
20
December 31,
------------------------------------------------------------------------
(Combined
(PEO Operations) Company)
------------------------------------------------------------- ---------
1993 1994 1995 1996 1997
-------- -------- -------- -------- ---------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents -- -- -- -- $ 16,394
Working capital (2) $ 12,847 $ 23,844 $ 31,113 63,895
Equipment (2) 5,189 6,039 5,570 19,246
Total assets $ 36,469 45,748 60,742 71,824 183,022
Line of credit borrowings -- -- -- -- 17,844
Shareholders'equity (2) $ 20,090 $ 32,551 $ 43,070 $ 105,688
___________________
(1) Earnings per share have been calculated assuming the shares of the Company
issued to PIE in the Combination were outstanding for the PEO Operations
and the combined Company for all periods presented and assuming the shares
of the Company outstanding prior to the Combination were issued as of the
closing date of the Combination. See Notes 2 and 12 of Notes to
Consolidated Financial Statements.
(2) Information not readily available.
21
ITEM 7. MANAGEMENT"S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
FEI Company is a leader in the design, manufacture and sale of products
based on charged particle beam technology. On February 21, 1997 the Company
completed a combination transaction (the "Combination") with the electron optics
business of Philips Industrial Electronics International B.V. ("PIE"), a wholly
owned subsidiary of Philips Electronics N.V. ("Philips"). Pursuant to the
Combination, the Company acquired shares of two Philips' subsidiaries owning
substantially all of the assets and liabilities of Philips' electron optics
business (the "PEO Operations"), and the Company issued to PIE 9,728,807 shares
of its Common Stock equal, after issuance, to 55 percent of the outstanding
shares of Common Stock of the Company. Because PIE acquired control of the
Company by acquiring 55% of the outstanding voting securities of the Company,
the Combination was treated as a "reverse acquisition" for accounting and
financial reporting purposes whereby purchase accounting was applied to the
financial statements of Pre-Combination FEI. The results of operations of Pre-
Combination FEI are excluded from the consolidated financial statements prior to
February 21, 1997. The financial statements for 1996 and earlier periods
represent the results of only the PEO Operations.
In February 1996 the Company acquired Delmi S.r.o., a Czech Republic
company ("PEO Brno"), with headquarters in Brno, Czech Republic for $400,000.
PEO Brno's results of operations are included in the consolidated financial
statements of the Company for periods after January 1996. In July 1996 the
Company acquired substantially all of the assets of ElectroScan Corporation, a
Massachusetts corporation ("ElectroScan"), for $2.8 million. ElectroScan"s
results of operations are included in the Company"s consolidated financial
statements for periods after June 1996.
The Company's products include focused ion beam ("FIB") workstations,
transmission electron microscopes ("TEMs"), scanning electron microscopes
("SEMs") and components of these products. The Company"s FIB workstations are
sold primarily to manufacturers of integrated circuits ("ICs") and are used in
the design, failure analysis and process monitoring of ICs. The Company's
electron microscope products are sold primarily to life science and materials
science research institutes, universities and industrial customers, as well as
to IC manufacturers.
22
Results of Operations
The following table sets forth certain unaudited financial data for the
periods indicated as a percentage of net sales.
Year Ended
December 31,
------------------------------------------
(Combined
(PEO Operations) Company)
------------------------ ---------
1995 1996 1997
------- ------- ---------
Net sales
FIB workstations.................................. -- -- 28.9%
Electron microscopes.............................. 81.0% 79.0% 49.9
Components........................................ -- -- 6.7
Service........................................... 19.0 21.0 14.5
Total net sales................................. 100.0 100.0 100.0
Cost of sales..................................... 66.6 70.4 63.2
Gross profit...................................... 33.4 29.6 36.8
Total operating expenses.......................... 26.5 29.0 56.3
Operating income (loss)........................... 6.9 0.6 (19.5)
Other income (expense)............................ 1.5 -- ( 0.3)
Income (loss) before taxes........................ 8.4 0.6 (19.8)
Income tax expense................................ 3.0 0.6 1.8
Net income (loss)................................. 5.4% 0.0% (21.7)%
____________________
Years ended December 31, 1997 and 1996 (1997 Combined Company Operations
Compared to 1996 PEO Operations)
Net Sales. Net sales for the year ended December 31, 1997 increased $56.4
million (50.2%) compared to the year ended December 31, 1996. The increase in
sales is primarily attributable to the fact that the 1997 period includes net
sales of the combined company, and the 1996 period includes net sales of the PEO
Operations only. Pre-Combination FEI contributed approximately $64.9 million in
revenue for the period from the closing of the Combination on February 21, 1997
("Closing") to December 31, 1997. Sales of electron microscopes decreased $4.6
million for the year ended December 31, 1997 compared to the 1996 period as
reported. However, a portion of the Company's sales are eliminated in
consolidation for the period subsequent to the Combination. Before eliminations
for intercompany sales, electron microscope sales increased approximately
$9.8 million from 1996 to 1997.
Sales outside the U.S. for the combined company accounted for 60% of sales for
the year ended December 31, 1997 and 75% for the PEO Operations for the year
ended December 31, 1996. The decrease in percentage of international sales
reflects the historically lower percentage of pre-
23
Combination FEI sales made outside the United States. The Company expects that
sales outside the U.S. will continue to represent a significant percentage of
its net sales.
Gross Profit. Gross profit for the year ended December 31, 1997 increased $28.8
million (86.6%) compared to the year ended December 31, 1996. Gross profit as a
percentage of sales for the year ended December 31, 1997, increased to 36.8%
from 29.6% for 1996, primarily due to changes in product mix and a lower
percentage of total sales attributed to the service business. These increases in
gross margin were partially offset by purchase accounting adjustments that
"stepped up" the basis in inventory of Pre-Combination FEI at the date of the
Combination and obsolescence charges related to certain discontinued parts.
Research and Development. Research and development expense increased $4.5
million (41.3%) for the year ended December 31, 1997, compared to the year ended
December 31, 1996. This increase primarily reflects the fact that research and
development costs for the 1996 period were those of the PEO Operations only, and
the 1997 period costs are those of the combined company. Research and
development costs of Pre-Combination FEI were $5.4 million for the period from
the Combination through December 31, 1997.
As a percentage of sales, research and development expense was 9.1% for the year
ended December 31, 1997 compared to 9.7% for the year ended December 31, 1996.
This comparative decrease as a percentage of sales during 1997 was the result of
increased sales volume, and the averaging effect which resulted from combining
the historically lower percentage research and development expense of
Pre-Combination FEI and the historically higher percentage research and
development expense of the PEO Operations.
General, Selling and Administrative. General, selling and administrative
expenses for the year ended December 31, 1997 increased $15.3 million (70.3%)
compared to the year ended December 31, 1996. This increase primarily reflects
the fact that the 1997 period included the operations of the combined Company,
and the 1996 period included the operations of only the PEO Operations.
General, selling and administrative expenses incurred by Pre-Combination FEI
were $12.7 million for the period from the Combination through December 31,
1997. General, selling and administrative expenses as a percentage of sales were
21.9% and 19.3% for the years ended December 31, 1997 and December 31, 1996,
respectively. The increase in these expenses as a percentage of sales in 1997
compared to 1996 resulted primarily from the higher costs incurred as a separate
publicly reporting entity compared to the PEO Operations expenses as a business
unit within Philips.
Amortization of Intangibles. Purchase accounting for the Combination as of
February 21, 1997 resulted in the recognition of intangible assets in the amount
of $16.5 million for existing technology that is being amortized over a 12-year
period, and goodwill of $17.1 million that is being amortized over a 15-year
period.
24
Purchased In-Process Research and Development. Purchase accounting for the
Combination as of February 21, 1997 resulted in the recognition of an intangible
asset in the amount of $38.0 million representing the estimated fair value of
in-process research and development at Pre- Combination FEI. This intangible
asset was written off with a charge to earnings immediately following the
Combination in keeping with the Company's policy to expense all research and
development costs as they are incurred.
Restructuring and Reorganization Costs. In March 1997 a charge to earnings of
$2.5 million was recognized in connection with the Company' plan to move
manufacturing of certain products from Massachusetts to Eindhoven, The
Netherlands. The charge included $1.5 million for the write-off of goodwill
related to the Company's 1996 acquisition of ElectroScan along with estimated
severance costs for certain ElectroScan employees and other related costs.
Other Income (Expense). Prior to the date of the Combination, the PEO Operations
participated in Philips' centralized cash management program and therefore
earned no interest income and incurred no interest expense. Interest income for
the year ended December 31, 1997 represents interest earned on the investment of
excess cash. Interest expense for the year ended December 31, 1997 represents
interest incurred on borrowings under the Company's line of credit bank facility
and on borrowings from Philips.
Income Tax Expense. The effective income tax rate was (9%) and 108% for the year
ended December 31, 1997 and December 31, 1996, respectively. The Company did not
record a tax benefit for the year ended December 31, 1997, primarily because the
$38.0 million of purchased in-process research and development costs written off
immediately subsequent to the Closing were non-deductible for income tax
purposes. The Company's tax rates generally vary from the U.S. federal statutory
tax rate of 34% primarily as a result of state and foreign taxes and the
amortization of intangible assets.
Risks of International Operations. Certain risks are inherent in international
operations, including changes in demand resulting from fluctuations in interest
and exchange rates, the risk of government financed competition, changes in
trade policies, tariff regulations and difficulties in obtaining export
licenses. Changes in relevant foreign currency exchange rates between time of
sale and time of payment can also have a material effect on reported financial
results.
Years ended December 31, 1996 and 1995 (1996 PEO Operations Compared to 1995 PEO
Operations)
Net Sales. Net sales of the PEO Operations consisted of revenues from sales of
electron microscope equipment and platforms and related customer service
activities. Net sales for the year ended December 31, 1996 increased $3.3
million (3.0%) compared to the year ended December 31, 1995.
Gross Profit. Gross profit for the year ended December 31, 1996 declined by $3.1
million (8.5%) compared to the year ended December 31, 1995. Gross profit as a
percentage of sales
25
for the year ended December 31, 1996 decreased to 29.6% from 33.4% for 1995.
This decrease was primarily attributable to a provision for inventory
obsolescence of $1.2 million, additional costs incurred in rescheduling the
production process as a result of a decline in sales due to lower than planned
demand from the semiconductor market and intense price competition on sales in
certain geographic areas, such as Asia.
Research and Development. Research and development expenses increased by $1.8
million (19.9%) for the year ended December 31, 1996 compared to the year ended
December 31, 1995. This increase was the result of additional expenditures for
the PEO Operations' ongoing research program in SEM technology and research and
development activities conducted at ElectroScan and PEO Brno, each of which were
acquired in 1996.
General, Selling and Administrative Expenses. General, selling and
administrative expenses for the PEO Operations represented the costs of sales
departments and the allocated costs of general management and administration in
the countries where the PEO Operations had sales offices, the costs of general
management and administration at the production facilities and the allocated
portion of Philips' corporate costs. General, selling and administrative
expenses increased by $1.9 million (9.8%) for the year ended December 31, 1996
compared to the year ended December 31, 1995. This increase is attributable to
greater expenditures to develop the market share of the PEO Operations in the
U.S. and Asia, and to higher levels of expenditures to develop sales of
Environmental SEM products.
Other Income and Expenses. In January 1995 the PEO Operations realized other
income of $1.7 million from a single transaction involving the sale of
technology licensing rights in the U.S.
Income Taxes. The PEO Operations were included in the consolidated income tax
return of Philips for each country where the PEO Operations had operations. The
PEO Operations accounted for income taxes using the statutory percentage over
income from operations per country as if the PEO Operations were an independent
entity.
26
Liquidity and Capital Resources
The following table presents a summary of the Company's cash flows for each
of 1995, 1996 and 1997.
Year Ended
December 31,
---------------------------------------
Combined
PEO Operations Company
------------------------ --------
1995 1996 1997
--------- --------- --------
(in thousands)
Net cash provided by (used in) operating activities.......$ (2,518) $ (11,072) $ 4,781
Net cash used in investing activities..................... (2,351) (3,981) (7,407)
Net cash provided by financing activities................. 4,869 15,053 18,444
Foreign currency translation adjustment................... --- --- 576
--------- --------- --------
Net increase in cash and cash equivalents ................$ --- $ --- $ 16,394
========= ========= ========
At December 31, 1997, the Company had total cash and cash equivalents of
$16.4 million, compared to zero at December 31, 1996 and 1995. Before the
Combination cash for the PEO Operations was maintained in a Philips intercompany
account under Philips' centralized cash management program, pursuant to which
cash receipts were remitted to Philips and cash disbursements were funded by
Philips, with Philips retaining any excess cash. Specifically, cash inflows and
outflows were credited and debited to division equity, which served as an
intercompany receivable account.
Net cash provided by operating activities was $4.8 million in 1997 compared
to net cash used by operating activities of $11.1 million in 1996 and $2.5
million in 1995. The primary factor causing the increase in 1997 was improved
operating results, after excluding the impact of non-cash charges for the
write-off of purchased in-process research and development and the amortization
of intangibles resulting from the Combination. The primary factors causing cash
used in operating activities to increase in 1996 from 1995 were the change in
net income (loss), the increase in other assets, and the comparative net change
in accounts payable.
Investing activities for 1997 used net cash of $7.4 million, compared with
net cash used by the PEO Operations of $4.0 million and $2.4 million for 1996
and 1995, respectively. In 1996 the PEO Operations used $3.2 million to acquire
ElectroScan and PEO Brno. In 1995, the PEO Operations used $2.4 million to
acquire equipment. The Company expects to continue to invest in property, plant
and equipment needed for future business requirements, including expanding
manufacturing capacity.
Financing activities provided net cash of $18.4 million for the combined
Company for 1997 and $15.1 million and $4.9 million for the PEO Operations for
1996 and 1995, respectively. The 1997 amount included $8.0 million of cash
contributed to the PEO Operations as part of the Combination transaction. At
December 31, 1997, approximately $17.8 million was outstanding under the
Company' $25 million bank operating line of credit and approximately $7.2
million was available to be borrowed under the line of credit. This line of
credit is secured by accounts receivable and inventory, bears interest at an
annual rate equal (at the Company' option) to (i) the bank's basic commercial
lending rate (8.5% at December 31,
27
1997) or (ii) LIBOR plus 2.0%, and expires on July 31, 1999. The Company may
borrow up to the lesser of (i) $25 million and (ii) an amount equal to the sum
of 80% of eligible accounts receivable and 30% of eligible inventory (excluding
work in process). Under the terms of the line of credit, the Company must
maintain a current ratio of not less than 2.0, a minimum tangible net worth of
not less than $70 million and a senior debt to tangible net worth ratio of not
more than 0.5, each measured at the end of each calendar quarter.
The Company believes its cash equivalents, investments and borrowings
available under its line of credit will be sufficient to fund operations during
the near term. The Company, however, expects to continue to need cash to fund
growth and business expansion. The Company expects to be required to seek credit
arrangements with commercial banks and other institutional lenders, other than
the existing line of credit now maintained by the Company, or from other sources
of equity or debt financing. There is no assurance that any such financing will
be available on terms that are favorable to the Company.
Year 2000 Computer System Impact
The Company has analyzed the impact of the Year 2000 issue on its
information systems and believes its enterprise management information system
addresses the Year 2000 issues on all core Company business systems.
Accordingly, the Company expects the Year 2000 issue will not have a material
financial impact on the Company. The Company has other ancillary systems,
however, that may require modification to address the Year 2000 issue, and the
Company continues to evaluate its information systems in connection with the
Year 2000 issue. The Company has not thoroughly analyzed the impact of other
parties' computer system failures, but the Company believes costs incurred in
responding to other parties' Year 2000 computer system failures, together with
the cost of any required modifications to the Company's ancillary systems, will
not have a material impact on the Company's results of operations or financial
condition.
Quarterly Results of Operations
The following table presents certain unaudited financial data for each of
the eight quarters in 1996 and 1997. In the opinion of management of the
Company, this information has been prepared on the same basis as the audited
consolidated financial information appearing elsewhere in this Report and
includes all adjustments, consisting only of normal recurring adjustments
(except for the adjustments described in the following paragraph), necessary for
a fair presentation of the financial position and results of operations for
these periods. The operating results for any quarter are not necessarily
indicative of results for any future period.
The results for the three months ended March 31, 1997 include the following
non- recurring adjustments: (i) writeoff of purchased in-process research and
development costs totaling $38.0 million recognized in the Combination; (ii)
restructuring and reorganization costs totaling $2.5 million in connection with
the Company's decision to transfer certain manufacturing processes from
Massachusetts to Eindhoven, The Netherlands; and (iii) writeoff
28
of capitalized software costs totaling $1.6 million included in research and
development expenses.
The unaudited financial data for each of the quarters in 1996 reflect the
PEO Operations on a stand-alone basis. The unaudited financial data for the
first quarter in 1997 reflect the PEO Operations from January 1, 1997 to
February 20, 1997 and the combined FEI and PEO Operations from February 21, 1997
to March 30, 1997. The unaudited financial data for each of the remaining
quarters in 1997 reflect the combined FEI and PEO Operations.
1996 1997
------------------------------------------ --------------------------------------------
(PEO Operations) (Combined Company)
------------------------------------------ --------------------------------------------
March 31 June 30 Sept. 29 Dec. 31 March 30 June 29 Sept. 28 Dec. 31
-------- ------- -------- -------- -------- -------- -------- --------
(in thousands, except per share data)
Net sales ..................... $ 17,593 $ 26,159 $ 27,307 $ 41,325 $ 32,067 $ 43,958 $ 39,036 $ 53,735
Cost of sales.................. 11,752 17,909 21,777 27,627 23,267 25,909 22,412 35,041
-------- -------- --------- -------- --------- -------- -------- --------
Gross profit................... 5,841 8,250 5,530 13,698 8,800 18,049 16,624 18,694
Total operating expenses....... 6,530 7,381 8,009 10,712 55,561 14,241 12,772 12,466
-------- -------- --------- -------- --------- -------- -------- --------
Operating income (loss)........ (689) 869 (2,479) 2,986 (46,761) 3,808 3,852 6,228
Other income (expense)......... -- (197) (83) 231 (573)
-- -- --
Income (loss) before taxes..... (689) 869 (2,479) 2,986 (46,958) 3,725 4,083 5,655
Tax expense (benefit).......... (144) 181 (517) 1,220 (1,827) 1,490 1,634 1,810
------- ------- --------- -------- --------- -------- -------- --------
Net income (loss).............. $ (545) $ 688 $ (1,962) $ 1,766 $ (45,131) $ 2,235 $ 2,449 $ 3,845
======= ======== ========= ======== ========= ======== ======== ========
Net income (loss) per share;
basic......................... $ (0.06) $ 0.07 $ (0.20) $ 0.18 $ (3.46) $ 0.13 $ 0.14 $ 0.21
Net income (loss) per share;
diluted ...................... $ (0.06) $ 0.07 $ (0.20) $ 0.18 $ (3.46) $ 0.12 $ 0.13 $ 0.20
Shares used in per share
calculation; basic............ 9,729 9,729 9,729 9,729 13,037 17,704 17,890 18,077
Shares used in per share
calculation; diluted ......... 9,729 9,729 9,729 9,729 13,037 18,372 19,586 19,686
The Company has restated its results of operations for the quarter ended
March 31, 1997 from the results of operations previously reported on Form 10-Q/A
as follows:
As
Reported in
the Form
10-Q/A for
the Quarter
Ended
March 30, As Reported
1997 Adjustment Herein
Net sales ..................... $ 32,067 $ 32,067
Cost of Sales ................. 24,957 $ (1,690) 23,267
Gross profit .................. 7,110 8,800
Total operating expenses ...... 52,448 3,113 55,561
Income (loss) from operations . (45,358) 1,423 (46,761)
Other income (expense) ........ (197) -- (197)
Income (loss) before taxes .... (45,535) 1,423 (46,958)
Tax expense ................... (1,300) 527 (1,827)
Net income (loss) ............. $ (44,235) $ 896 $ (45,131)
29
Net income (loss) per share;
basic and diluted ........... $ (3.59) (.07) (3.46)
Shares used in per share
calculation; basic and
diluted...................... 13,037 -- 13,037
The restatement was primarily the result of the Company evaluating its
capitalized software development costs and determining that the impairment of
value was an event that occurred in the quarter ended March 31, 1997.
The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future. Fluctuations in operating results may be
caused by a variety of factors, including the relatively high unit cost of the
Company's FIB workstations and electron microscopes, competitive pricing
pressure, conditions in the semiconductor industry, the timing of orders from
major customers and new product introductions, customer cancellation or delay of
shipments, long sales cycles, changes in the mix of products sold and the
proportion of domestic and international sales, specific feature requests by
customers, product delays and currency exchange rate fluctuations. The Company
will continue to derive a substantial portion of its revenues from the sale of a
relatively small number of FIB workstations and electron microscopes. As a
result, the timing of revenue recognition from a single order could have a
significant impact on the Company's net sales and operating results for a
reporting period.
A substantial portion of the Company's net sales have generally been
realized near the end of each quarter and sales of electron microscopes by the
PEO Operations to government-funded customers have generally been significantly
higher in the fourth quarter. Accordingly, delays in shipments near the end of a
quarter could have a substantial negative effect on operating results for that
quarter. Announcements by the Company or its competitors of new products and
technologies could cause customers to defer purchases of the Company's existing
systems, which could also have a material adverse effect on the Company's
business, financial condition and results of operations. The impact of these and
other factors on the Company's sales and operating results in any future period
cannot be forecast with certainty.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are included on pages F-1 to
F-25 of this Report. No supplementary data is required in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company will be included under
"Election of Directors" in the Company's definitive proxy statement for its 1998
Annual Meeting of Shareholders to be filed not later than 120 days after the end
of the fiscal year covered by this Report and is incorporated herein by
reference. Information with respect to executive officers of the Company is
included under Item 4(a) of Part I of this Report. Information with respect to
compliance with Section 16(a) of the Securities Exchange Act is included under
"Compliance with Section 16(a) of the Exchange Act" in the Company's definitive
proxy statement for its 1998 Annual Meeting of Shareholders filed or to be filed
no later than 120 days after the end of the fiscal year covered by this Report
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be included under
"Executive Compensation" in the Company's definitive proxy statement for its
1998 Annual Meeting of Shareholders to be filed not later than 120 days after
the end of the fiscal year covered by this Report and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management will be included under "ecurity Ownership of Certain Beneficial
Owners and Management"in the Company' definitive proxy statement for its 1998
Annual Meeting of Shareholders filed or to be filed not later than 120 days
after the end of the fiscal year covered by this Report and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
with management will be included under "ertain Transactions"in the Company'
definitive proxy statement for its 1998 Annual Meeting of Shareholders to be
filed not later than 120 days after the end of the fiscal year covered by this
Report and is incorporated herein by reference.
31
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a)(1) Financial Statements Page in this Report
Independent Auditors' Reports F-1
Consolidated Balance Sheets at December 31, 1996
and 1997 F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1995, 1996 and 1997 F-4
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1995, 1996 and 1997 F-5
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1995, 1996 and 1997 F-6
Notes to Consolidated Financial Statements F-7
(a)(2) Financial Statement Schedules
None
(a)(3) Exhibits
****2.1 Combination Agreement, dated November 15, 1996, as amended, between
the Registrant and Philips Industrial Electronics International
B.V.
****3.1 Second Amended and Restated Articles of Incorporation, as amended
****3.2 Restated Bylaws
4.1 See Articles III and IV of Exhibit 3.1 and Articles I and VI of
Exhibit 3.2
+*10.1 1984 Stock Incentive Plan
+****10.2 1995 Stock Incentive Plan, as amended
+**10.3 1995 Supplemental Stock Incentive Plan
+*10.4 Form of Incentive Stock Option Agreement
32
+*10.5 Form of Nonstatutory Stock Option Agreement
*10.6 Lease, dated as of November 20, 1992, between the Registrant and
Capital Consultants, Inc. as agent for United Association Union
Local 290, Plumber, Steamfitter and Shipfitter Industry Pension
Fund
****10.7 Lease, dated January 11, 1996, between the Registrant and Pacific
Realty Associates, L.P.
****10.8 Lease, dated June 6, 1996, between the Registrant and Pacific
Realty Associates, L.P.
#*10.9 Agreement, dated February 9, 1994, between the Registrant and
Philips Electron Optics B.V.
10.10 Lease, dated November 25, 1997, between the Registrant and Pacific
Realty Associates, L.P.
*****10.11 Lease Agreement, dated October 27, 1997, between Philips Industrial
Electronix International B.V. as lessor and Philips Electron Optics
B.V., a wholly owned indirect subsidiary of the Registrant, as
lessee, including a guarantee by the Registrant of the lessee's
obligations thereunder.
*****10.12 Employment Agreement, dated July 1, 1997, between the Registrant
and William G. Langley
*****10.13 Employment Agreement, dated August 1, 1997, between the Registrant
and Karel D. van der Mast
*****10.14 Revolving Credit Agreement, dated as of July 1, 1997, between the
Registrant and KeyBank National Association
*****10.15 Amendment No. 1, dated as of August 31, 1997, to Revolving Credit
Agreement between the Registrant and Key Bank National Association
10.16 Amendment No. 2, dated December 23, 1997, to Loan Agreement between
the Registrant and Key Bank of Oregon
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Accountants N.V.
27.1 Financial Data Schedule
33
________________
* Incorporated by reference to Exhibits to the Registrant's
Registration Statement on Form S-1, as amended, effective May 31,
1995 (Commission Registration No. 33-71146).
** Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
*** Incorporated by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K, dated November 22, 1996.
**** Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
***** Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 28, 1997
+ This exhibit constitutes a management contract or compensatory plan
or arrangement.
# Confidential treatment has been granted by the Commission for
certain portions of this agreement.
(b) Reports on Form 8-K.
None.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FEI COMPANY
By: ________________________________________
William A. Whitward
President and Chief Executive Officer
Date: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the following capacities on March 30, 1998.
Signature Title
--------- -----
- ------------------------------ President and Chief Executive Officer
William A. Whitward (Principal Executive Officer)
- ------------------------------ Executive Vice President, Chief Financial
William G. Langley Officer and Secretary (Principal Financial
Officer)
- ------------------------------ Controller and Assistant Treasurer (Principal
Mark V. Allred Accounting Officer)
- ------------------------------ Chairman of the Board
Lynwood W. Swanson
- ------------------------------ Executive Vice President Marketing,
Karel D. van der Mast Technical Officer and Director
- ------------------------------ Director
Alfred B. Bok
- ------------------------------ Director
William Curran
35
- ------------------------------ Director
Theo J.H.J. Sonnemans
- ------------------------------ Director
Lloyd R. Swenson
- ------------------------------ Director
Donald R. VanLuvanee
37
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
- --------- ----------- ----------
***2.1 Combination Agreement, dated November 15, 1996, as
amended, between the Registrant and Philips Industrial
Electronics International B.V
****3.1 Second Amended and Restated Articles of Incorporation, as
amended
****3.2 Restated Bylaws
4.1 See Articles III and IV of Exhibit 3.1 and Articles I and
VI of Exhibit 3.2
+*10.1 1984 Stock Incentive Plan
+****10.2 1995 Stock Incentive Plan, as amended
+**10.3 1995 Supplemental Stock Incentive Plan
+*10.4 Form of Incentive Stock Option Agreement
+*10.5 Form of Nonstatutory Stock Option Agreement
*10.6 Lease, dated as of November 20, 1992, between the Registrant
and Capital Consultants, Inc. as agent for United Association
Union Local 290, Plumber, Steamfitter and Shipfitter Industry
Pension Fund
****10.7 Lease, dated January 11, 1996, between the Registrant and
Pacific Realty Associates, L.P.
****10.8 Lease, dated June 6, 1996, between the Registrant and Pacific
Realty Associates, L.P.
#*10.9 Agreement, dated February 9, 1994, between the Registrant
and Philips Electron Optics B.V.
10.10 Lease, dated November 25, 1997, between the Registrant and
Pacific Realty Associates, L.P.
*****10.11 Lease Agreement, dated October 27, 1997, between Philips
Industrial Electronics International B.V. as lessor and Philips
Electron Optics B.V., a wholly owned indirect subsidiary of the
Registrant, as lessee, including a guarantee by the Registrant of
the lessee's obligations thereunder
*****10.12 Employment Agreement, dated July 1, 1997, between the
Registrant and William G. Langley
37
Exhibit Sequential
No. Description Page No.
- ---------- ----------- ----------
*****10.13 Employment Agreement, dated August 1, 1997, between the
Registrant and Karel D. van der Mast
*****10.14 Revolving Credit Agreement, dated as of July 1, 1997, between
the Registrant KeyBank National Association
*****10.15 Amendment No. 1, dated as of August 31, 1997, to Revolving
Credit Agreement between the Registrant and KeyBank
National Association
10.16 Amendment No. 2, dated December 23, 1997, to Loan
Agreement between the Registrant and Key Bank of Oregon
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Accountants N.V.
27.1 Financial Data Schedule
________________
* Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-1, as amended, effective May 31, 1995 (Commission
Registration No. 33-71146).
** Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
*** Incorporated by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K, dated November 22, 1996.
**** Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
***** Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 28, 1997
+ This exhibit constitutes a management contract or compensatory plan or
arrangement.
# Confidential treatment has been granted by the Commission for certain
portions of this agreement.
38
FEI COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORTS..................................... F-1
FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 1996 and 1997..... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997............................ F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1995, 1996 and 1997............... F-5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1995, 1996 and 1997............... F-6
Notes to Consolidated Financial Statements.................... F-7
39
INDEPENDENT AUDITORS' REPORT
Board of Directors
FEI Company
Hillsboro, Oregon
We have audited the accompanying consolidated balance sheet of FEI Company and
Subsidiaries as of December 31, 1997, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements present fairly, in
all material respects, the financial position of FEI Company and Subsidiaries as
of December 31, 1997, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
March 24, 1998
F - 1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Philips Industrial Electronics International B.V.:
We have audited the combined balance sheet of the Philips Electron Optics
Operations to be transferred to FEI Company as of December 31, 1996, and the
related combined income statements and combined cash flow statements for each of
the years in the two-year period ended December 31, 1996. These combined
financial statements are the responsibility of the management of Philips
Electron Optics. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in The Netherlands, which do not differ substantially from generally accepted
auditing standards in the United States. These standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The combined financial statements are prepared in accordance with generally
accepted accounting principles in the United States on the basis of Notes 1 and
2 pursuant to the Combination Agreement between Philips Industrial Electronics
International B.V. and FEI Company to transfer a substantial part of Philips
Electron Optics to FEI Company. The Philips Electron Optics Operations were a
component of several operating units of Philips Electronics N.V. and its
subsidiaries and did not constitute a separate legal or reporting entity.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Philips Electron
Optics Operations to be transferred to FEI Company as of December 31, 1996, the
cash flows and the results of their operations for each of the years in the
two-year period ended December 31, 1996, on the basis described in Notes 1 and
2, in conformity with generally accepted accounting principles in the United
States.
KPMG Accountants N.V.
Eindhoven, The Netherlands
April 9, 1997
F - 2
FEI COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(In Thousands except share data)
- -------------------------------------------------------------------------------------------------------
ASSETS 1996 1997
CURRENT ASSETS:
Cash and cash equivalents $ - $ 16,394
Receivables (Note 3) 25,349 56,168
Current accounts with Philips (Note 14) 1,639 -
Inventories (Note 4) 29,019 37,807
Deferred income taxes (Note 10) - 2,484
Other 1,426 2,497
Total current assets 57,433 115,350
EQUIPMENT (Note 5) 5,570 19,246
LEASES RECEIVABLE (Note 6) - 946
OTHER ASSETS (Note 7) 8,821 47,870
--------- ---------
TOTAL $ 71,824 $ 183,022
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,585 $ 15,984
Current account with Philips (Note 14) - 9,074
Accrued payroll liabilities 1,648 3,248
Accrued warranty reserves 1,217 4,239
Deferred revenue 9,498 11,236
Income taxes payable - 2,731
Other current liabilities 6,372 5,742
--------- ---------
Total current liabilities 26,320 52,254
LINE OF CREDIT (Note 8) - 17,844
DEFERRED INCOME TAXES (Note 10) 1,232 7,544
OTHER LIABILITIES 1,202 491
SHAREHOLDERS' EQUITY (Note 11):
Preferred stock - 500,000 shares authorized; none issued and
outstanding; no par value - -
Common stock - 30,000,000 shares authorized; 18,077,793 shares
issued and outstanding at December 31, 1997; no par value - 149,149
Retained earnings - (36,602)
Division equity 43,070 -
Cumulative foreign currency translation adjustment - (7,658)
--------- ---------
Total shareholders' equity 43,070 104,889
--------- ---------
TOTAL $ 71,824 $ 183,022
========= =========
See notes to consolidated financial statements.
F-3
FEI COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(In Thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------------
1995 1996 1997
NET SALES $ 109,117 $ 112,384 $ 168,796
COST OF SALES 72,686 79,065 106,629
---------- ---------- ----------
Gross profit 36,431 33,319 62,167
---------- ---------- ----------
OPERATING EXPENSES:
Research and development 9,087 10,893 15,396
General, selling, and administrative 19,799 21,739 37,024
Amortization of intangibles - - 2,096
Purchased in-process research and development - - 38,046
Restructuring and reorganization costs - - 2,478
---------- ---------- ----------
Total operating expenses 28,886 32,632 95,040
---------- ---------- ----------
OPERATING INCOME (LOSS) 7,545 687 (32,873)
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income - - 255
Interest expense - - (846)
Other 1,700 - (31)
---------- ---------- ----------
Total other income (expense) 1,700 - (622)
---------- ---------- ----------
INCOME (LOSS) BEFORE TAXES 9,245 687 (33,495)
TAX EXPENSE (Note 10) 3,317 740 3,107
---------- ---------- ----------
NET INCOME (LOSS) $ 5,928 $ (53) $ (36,602)
========== ========== ==========
PER SHARE DATA (Note 12):
Net income (loss) per share, basic $ 0.61 $ (0.01) $ (2.19)
========== ========== ==========
Net income (loss) per share, assuming dilution $ 0.61 $ (0.01) $ (2.19)
========== ========== ==========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (Note 12):
Basic and assuming dilution 9,728,807 9,728,807 16,677,336
========== ========== ==========
See notes to consolidated financial statements.
F-4
FEI COMPANY AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(In Thousands, except share data)
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative
Foreign
Common Stock Currency
------------------------ Retained Division Translation
Shares Amount Earnings Equity Adjustment Total
---------- --------- --------- ---------- ---------- ---------
BALANCE, JANUARY 1, 1995 - $ - $ - $ 20,090 $ - $ 20,090
Net income - - - 5,928 - 5,928
Capital infusions from Philips - - - 110,533 - 110,533
Dividends paid to Philips - - - (105,664) - (105,664)
Translation adjustment - - - 1,664 - 1,664
---------- --------- --------- ---------- --------- ---------
BALANCE, DECEMBER 31, 1995 - - - 32,551 - 32,551
Net loss - - - (53) - (53)
Capital infusions from Philips - - - 125,262 - 125,262
Dividends paid to Philips - - - (110,209) - (110,209)
Translation adjustment - - - (4,481) - (4,481)
---------- --------- --------- ---------- --------- ---------
BALANCE, DECEMBER 31, 1996 - - - 43,070 - 43,070
Cash contributed by Philips, net
of liabilities contributed - 5,134 - - - 5,134
FEI shares outstanding on date of
Combination (Note 2) 7,959,933 99,209 - - - 99,209
Shares issued to PIE on date of
Combination (Note 2) 9,728,807 43,070 - (43,070) - -
Net loss - - (36,602) - - (36,602)
Proceeds from exercise of options for
389,053 shares of common stock
(Note 11) 389,053 1,736 - - - 1,736
Translation adjustment - - - - (7,658) (7,658)
---------- --------- --------- ---------- --------- ---------
BALANCE, DECEMBER 31, 1997 18,077,793 $ 149,149 $ (36,602) $ - $ (7,658) $ 104,889
========== ========= ========= ========== ========= =========
See notes to consolidated financial statements.
F-5
FEI COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(In Thousands)
- -----------------------------------------------------------------------------------------------------------------------
1995 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,928 $ (53) $ (36,602)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,844 2,599 5,388
Purchased in-process research and development - - 38,046
Deferred taxes on income - - (2,861)
Writeoff of intangibles - - 3,152
Decrease (increase) in assets:
Receivables (3,453) (2,175) (16,378)
Current accounts with Philips (127) (1,130) 7,917
Inventories (6,951) (5,509) 6,580
Other assets (813) (3,606) (1,084)
Increase (decrease) in liabilities:
Accounts payable 2,465 180 1,749
Accrued payroll liabilities (73) (1,793) 485
Accrued warranty reserves - (97) 1,208
Deferred revenue (1,537) 2,948 (1,164)
Other liabilities 199 (2,436) (1,655)
------- ------- ---------
Net cash used in operating activities (2,518) (11,072) 4,781
------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in combination - - 1,420
Acquisition of equipment (2,351) - (9,412)
Investment in software development - (1,090) (1,409)
Net investment in lease receivables - - 395
Net proceeds from disposal of equipment - 309 1,599
Purchase of businesses - (3,200) -
------- ------- ---------
Net cash provided by (used in) investing activities (2,351) (3,981) (7,407)
------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit - - 8,708
Proceeds from exercise of stock options - - 1,736
Net cash provided by Philips 4,869 15,053 8,000
------- ------- ---------
Net cash provided by financing activities 4,869 15,053 18,444
------- ------- ---------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT - - 576
------- ------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS - - 16,394
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - - -
------- ------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ - $ - $ 16,394
======= ======= =========
F-6
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - FEI Company and its wholly-owned subsidiaries (the
"Company") design, manufacture, and market focused ion beam ("FIB")
workstations, transmission electron microscopes ("TEMs"), scanning
electron microscopes ("SEMs"), and components of these products. The
Company has manufacturing operations in Hillsboro, Oregon; Eindhoven, The
Netherlands; and Brno, Czech Republic. Sales and service operations are
conducted in eight countries and the U.S., constituting a majority of the
worldwide market for the Company's products. In addition, the Company's
products are sold through distribution agreements with affiliates of
Philips Electronics N.V. ("Philips") located in approximately 20
additional countries.
The Company's FIB workstations are sold primarily to semiconductor
manufacturers and are used in the design, manufacture, and testing of
integrated circuits. The Company's electron microscope products are sold
primarily to life science and materials science research institutes,
universities and industrial customers, as well as to a limited number of
semiconductor manufacturers.
Combination - On February 20, 1997, the shareholders of FEI Company
approved an agreement (the "PEO Combination Agreement") between the
Company and Philips Industrial Electronics International B.V. ("PIE"), a
wholly-owned subsidiary of Philips Electronics N.V. of The Netherlands
("Philips"), wherein FEI acquired on February 21, 1997 all of the stock of
each of a Dutch holding company and a U.S. holding company, which
conducted substantially all of the electron optics activities of Philips,
in exchange for 55% of the common stock of FEI Company then outstanding
(the "Combination"). The Philips electron optics businesses acquired
include manufacturing, sales, and service operations in nine countries
including the United States ("PEO Operations"). The transaction was
accounted for as a "reverse acquisition" for accounting and financial
reporting purposes, whereby PIE was treated as the accounting acquiror
because PIE acquired control of the Company by acquiring 55% of the
outstanding voting securities of the Company in the transaction. As a
result, the historical financial statements of the Company prior to 1997
are the historical financial statements of the PEO Operations only. See
Note 2.
Basis of Presentation - The financial statements for periods prior to the
Combination are presented as if the PEO Operations had existed as an
entity separate from Philips during the periods presented and include the
historical assets, liabilities, sales and expenses that are directly
related to the PEO Operations.
Because the PEO Operations transferred were historically part of the
Philips group, certain allocations of liabilities and expenses have been
included in the financial statements. These liabilities and expenses are
allocated using various methods depending upon the nature of the liability
or expense. In the opinion of management, the methods used to allocate
these liabilities and expenses to the PEO Operations are reasonable.
The financial statements for the periods prior to the Combination are not
necessarily indicative of the financial position and results of operations
that would have occurred had the PEO Operations been a separate entity.
F-7
Need for New Product Development - The market for tools to analyze and
modify materials with submicron precision is highly competitive and
subject to rapid change. The Company devotes a portion of its revenue to
continued research and development in an effort to lead that change
through the development of new and better uses of field electron and ion
emission technology. There is, however, the possibility that alternative
technologies or developments in the semiconductor industry will render the
Company's products unsuitable for the needs of that industry. Such changes
could significantly impact the Company's ability to recognize its
investments in existing technology, inventory and developed software.
Customer Concentration - Sales of FIB workstations are highly dependent
upon capital expenditures by semiconductor manufacturers and semiconductor
testing laboratories. While that industry is currently expanding, there is
no assurance that the growth can be sustained.
Dependence on Suppliers - Because of the highly specialized nature of the
Company's products, certain of the components and subassemblies included
in the Company's products are made to the Company's specifications and
obtained from a single or a limited number of suppliers. Management
believes that certain components and subassemblies are available only from
Philips. A significant delay or disruption in obtaining components and
subassemblies from this supplier would have a material adverse effect on
the Company's results of operations during the period in which alternative
sources of supply were developed. See Note 14.
Shared Philips Resources - Philips and its affiliates provide certain
services to the Company, such as research and development (product and
production technology), general corporate resources, and marketing and
sales (brand name, distribution, and sales representation). See Note 14.
Use of Estimates in Financial Reporting - The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that 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 amount of revenues and expenses during the reporting period.
Actual results could differ from estimates.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its subsidiaries: FEI Europe,
Ltd.; FEI Europe GmbH; FEI Asia Corporation; FEI Company FSC, Ltd.; PEO
B.V.; PEO International B.V.; PEO, Inc.; PEO Canada, Ltd.; PEO Czech
Republic, S.r.o; PEO UK, Ltd.; Philips Optique Electronique S.A.S.; PEO
GmbH; PEO Italy Srl; PEO Japan, Ltd.; PEO Nederland B.V.; and ElectroScan
Corporation. All significant intercompany accounts and transactions have
been eliminated.
Foreign Currency Translation - Assets and liabilities denominated in a
foreign currency are translated to U.S. dollars at the exchange rate in
effect on the respective balance sheet date. Translation adjustments are
shown separately in shareholders' equity. Revenues, costs and expenses are
translated using an average rate of exchange for the period involved.
Realized and unrealized foreign currency transaction gains and losses are
included in the consolidated statement of operations.
Revenue Recognition - Product sales are generally recorded at the time of
shipment. Maintenance service revenues are billed in advance and recorded
as deferred revenue. Where a service contract exists, service revenues are
recognized ratably over the contract period; otherwise, revenues are
recognized as services are provided. The Company makes periodic
evaluations of the credit-worthiness of its customers and generally does
not require collateral.
F-8
The Company's products are constantly updated. In certain situations,
customers have the opportunity to trade in a workstation as part of the
purchase price of a new workstation. The Company believes there is a
market for used workstations, which may be resold or leased to customers
requiring less advanced product technology and applications.
Cash and Cash Equivalents - Money market funds and other highly-liquid
instruments with original maturities of three months or less are
considered to be cash equivalents.
Inventories are stated at lower of cost or market with cost determined by
standard cost methods which approximate the first-in, first-out method.
Inventory costs include material, labor and manufacturing overhead.
Service inventories which are in excess of the current requirements based
on recent sales levels are reported as noncurrent assets. Management has
established an inventory reserve based on their estimate of excess and/or
obsolete inventory.
Equipment, including leased FIB systems, is stated at cost and depreciated
over the estimated useful life of approximately three to seven years using
the straight-line method. Leasehold improvements are amortized over the
shorter of their economic lives or the lease term. Maintenance and repairs
are expensed as incurred.
Leases Receivable - For sales-type leases, the amount recorded as revenue
is the present value of the minimum lease payments computed at the
interest rate implicit in the lease. The cost of equipment is considered
as cost of sales in the period in which the lease is executed, and the
excess of the aggregate rentals over the recorded revenue amount is
accounted for as finance income over the term of the lease.
Other Assets - Goodwill, which represents the excess of cost over the fair
value of net assets acquired, is amortized on a straight-line basis over
15 years. The existing focused ion beam technology, which is now in its
third year of commercialization, is being amortized on a straight-line
basis over 12 years. Certain computer software development costs have been
capitalized. These costs are being amortized over three to five years, the
estimated economic life of the software, using the straight-line method.
Changes in technology could impact the Company's estimate of the useful
life of such assets.
Research and Development costs are expensed as incurred. The Company
periodically participates in joint ventures for research and development
projects and records its proportionate expense as it is incurred over the
life of the project. Timing of the expenditures coincides with the terms
of the agreements.
Product Warranty - Warranties based on usage from the date of sale are
provided for certain emitter products. Other products generally have a
one-year warranty. A reserve is established to cover estimated warranty
costs and certain commitments for product upgrades. The Company's estimate
of warranty cost is based on its history of warranty repairs. While most
new products are extensions of existing technology, the estimate could
change if new products require a significantly different level of repair
than similar products have required in the past.
Taxes and Tax Credits - The Company uses an asset and liability approach
for financial accounting and reporting for income taxes. Deferred taxes
are provided for temporary differences between the amounts of assets and
liabilities for financial and tax reporting purposes.
F-9
Stock-Based Compensation - The Company adopted SFAS No. 123, Accounting
for Stock-Based Compensation, effective January 1, 1996. The Company will
continue to measure compensation expense for its stock-based employee
compensation plans using the method prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees, but will provide pro forma
disclosures of net income and earnings per share as if the method
prescribed by SFAS No. 123 had been applied in measuring compensation
expense. See Note 11.
Net Income (Loss) Per Share - The Company adopted SFAS No. 128, Earnings
per Share, effective January 1, 1997. The newly adopted standard replaces
the presentation of primary net income (loss) per share with a
presentation of basic net income (loss) per share. It also requires dual
presentation of basic and diluted net income (loss) per share on the face
of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the
basic net income (loss) per share computation to the numerator and
denominator of the diluted net income (loss) per share computation.
Outstanding options and warrants for common stock have been included in
the calculation of common equivalent shares outstanding using the treasury
stock method. All prior period net income (loss) per share data have been
restated to conform to the SFAS No. 128 presentation.
Supplemental Cash Flow Information - Cash paid for interest totaled $770
for the year ended December 31, 1997.
Asset Impairment - The Company evaluates the remaining life and
recoverability of equipment and other assets whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. If impairment is indicated, the Company adjusts the carrying
amount of the asset to the lower of its carrying value or its fair value.
During 1997, the Company charged $3,152 to operations as a result of
abandoning certain technology and certain software development projects.
See Notes 2 and 7.
Reclassification - Certain reclassifications have been made to the prior
year financial statements to conform with the current year presentation.
Recently Issued Accounting Pronouncements - During 1997, the Financial
Accounting Standards Board issued the following accounting pronouncements
which have not yet been adopted by the Company.
In June 1997, SFAS No. 130, Reporting Comprehensive Income, was issued.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. The
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Adoption of
SFAS No. 130 will not impact amounts previously reported for net income
(loss) or affect the comparability of the financial statements.
In June 1997, SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, was issued. The statement establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and
F-10
major customers. In the initial year of application, comparative
information for earlier years is to be restated. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. The
Company has not yet completed the analysis necessary to determine what
additional information, if any, will be disclosed in its financial
statements when the Company adopts SFAS No. 131.
2. ACQUISITIONS
Philips Electron Optics
On February 21, 1997, FEI Company ("Pre-Combination FEI") acquired
substantially all of the assets and liabilities of the PEO Operations. The
PEO Operations were acquired in exchange for 9,728,807 newly issued shares
of the Company's Common Stock, which constituted, when issued to PIE, 55%
of the shares of Common Stock then outstanding. Because PIE acquired
control of the Company by acquiring 55% of the outstanding voting
securities of the Company, the Combination was treated as a "reverse
acquisition" for accounting and financial reporting purposes whereby
purchase accounting was applied to the financial statements of
Pre-Combination FEI. The results of operations of Pre-Combination FEI are
excluded from the consolidated financial statements for all periods
presented prior to 1997. The 1997 results of operations reflect the
results of the PEO operations through February 21, 1997, and the combined
results of the Company from February 22, 1997 through December 31, 1997.
The PEO Operations transferred to FEI consisted of the worldwide
activities of the Electron Optics business unit of PIE (including
substantially all of the related assets and liabilities and personnel) on
a going-concern basis, other than the following:
-- Philips Electron Optics sales and service organizations in countries
other than the United States, Canada, France, Germany, Italy, Japan,
The Netherlands and the United Kingdom.
-- Ownership of the real property located at Eindhoven, The Netherlands,
and certain other assets and liabilities used in the PEO Operations.
In conjunction with the Combination, the Company entered into a
10-year lease with PIE for the real property in Eindhoven, The
Netherlands. See Note 9.
In accordance with the Combination Agreement, at Closing the PEO
Operations included $8.0 million in cash.
The Company obtained an appraisal of the fair market value of the
intangible assets acquired to serve as a basis for allocation of the
purchase price to the various classes of assets. The $122,872 purchase
price consisted of $99,209, representing the fair market value of
Pre-Combination FEI stock issued, and $22,825, representing the fair
market value of liabilities assumed. The Company allocated the purchase
price to the assets acquired as follows:
Current assets $ 43,893
Equipment 8,321
Leases receivable 1,341
Other assets 4,744
Existing technology intangible 16,490
In-process research and product development 38,046
Goodwill and other intangibles 17,122
Deferred income taxes (7,085)
---------
Total $ 122,872
=========
F-11
To determine the value of each of Pre-Combination FEI's product lines,
projected revenue net of provision for operating expenses, income taxes,
and returns on requisite assets were discounted to a present value. This
approach was applied to existing technology as well as to research and
development projects which had not been proven technologically feasible
and which had not generated revenue at the date of the Combination. As a
result of this valuation, the fair value of existing technology and
in-process technology were determined to be $16,490 and $38,046,
respectively.
The amortization periods for existing technology and goodwill have been
established at 12 years and 15 years, respectively. The existing focused
ion beam technology, which is now in its third year of commercialization,
is estimated to have a 15-year life. Management will evaluate these
amortization periods from time to time. It is possible that estimates of
anticipated future gross revenues, the remaining estimated economic life
of products or technologies, or both may be reduced due to competitive
pressures or other factors.
In accordance with the Company's policy to expense research and
development costs as incurred, a one-time charge of $38,046 associated
with the write-off of acquired in-process research and product development
was recorded immediately subsequent to the closing of the Combination.
Pro forma combined statement of operations data, presented as if the
Combination had occurred on January 1, 1996 and January 1, 1997, are as
follows:
Year Ended December 31,
------------------------------
1996 1997
Net sales $ 142,996 $ 172,214
Cost of sales 97,466 109,598
----------- -----------
Gross profit 45,530 62,616
----------- -----------
Expenses:
Research and development costs 14,664 16,362
Selling, general, and administrative costs 31,822 39,611
Amortization of goodwill and other intangibles 2,324 2,096
Restructuring and reorganization - 2,478
----------- -----------
Total expenses 48,810 60,547
----------- -----------
Operating income (loss) (3,280) 2,069
Other income (expense) 435 (759)
----------- -----------
Income (loss) before taxes (2,845) 1,310
Tax expense (benefit) (243) 920
----------- -----------
Net income (loss) $ (2,602) $ 390
=========== ===========
Pro forma per share data:
Net income (loss) per share, basic $ (0.15) $ 0.02
=========== ===========
Net income (loss) per share, assuming dilution $ (0.15) $ 0.02
=========== ===========
Pro forma weighted average shares outstanding:
Basic 17,403,000 17,840,000
=========== ===========
Assuming dilution 17,403,000 18,869,000
=========== ===========
F-12
Pro forma total expenses for the years ended December 31, 1996 and 1997 do
not include the $38,046 write-off of in-process research and development
resulting from the Combination.
ElectroScan Corporation
On July 11, 1996, the Company acquired substantially all of the assets of
ElectroScan Corporation, a Massachusetts corporation, for $2,800,
resulting in $1,695 of goodwill. The goodwill was to be amortized over 60
months. The acquisition was accounted for as a purchase. The ElectroScan
operations have been consolidated with the PEO Operations since July 1996.
Pursuant to the ElectroScan purchase agreement, the Company will pay $25
of additional consideration to the former ElectroScan Corporation
shareholders for each eight-inch ESEM model XL50 sold by the Company
subsequent to closing of the ElectroScan acquisition until December 31,
2001, up to an aggregate of $4,000. In March 1997, management of the
Company transferred the manufacturing activities of ElectroScan to the
manufacturing facility in Eindhoven, The Netherlands, and abandoned the
majority of the technology acquired. The remaining goodwill of $1,525
attributable to the acquisition of the assets of ElectroScan Corporation
was written off and charged to income in the first quarter of 1997, along
with estimated severance costs for eleven ElectroScan employees, and other
related costs.
Delmi S.r.o.
On February 6, 1996, the Company acquired Delmi S.r.o., now called Philips
Electron Optics Czech Republic S.r.o., at Brno, Czech Republic, for a
consideration of approximately $400. The acquisition was accounted for as
a purchase and did not result in the recording of any goodwill. The Delmi
operations have been consolidated with the PEO Operations for financial
reporting purposes since February 1996.
Norsam Technologies
The Company has an exclusive vendor relationship with Norsam Technologies,
Inc. ("Norsam") for the purchase of up to 20 workstations for use in a new
commercial application of FIB technology providing long-term archival and
very high density data storage. The Company owns 500,000 shares of Norsam
Series A Preferred Stock it initially received in exchange for three FIB
workstations sold to Norsam by Pre-Combination FEI in 1996. Each share of
Series A Preferred Stock is convertible into shares of Norsam common stock
at a conversion rate of $5 per share. The carrying value of the Norsam
preferred stock is $3,267, representing the estimated fair value of the
FIB workstations exchanged. The Company's investment is being carried at
its cost since the Norsam stock is not readily marketable.
3. RECEIVABLES
Receivables consist of the following:
December 31,
----------------------------
1996 1997
Trade $ 25,952 $ 56,957
Other - 238
Current portion of leases receivable (see Note 6) - 761
-------- --------
25,952 57,956
Allowance for doubtful accounts (603) (1,788)
-------- --------
Total receivables $ 25,349 $ 56,168
======== ========
F-13
4. INVENTORIES
Inventories consist of the following:
December 31,
----------------------------
1996 1997
Raw materials and assembled parts $ 12,790 $ 24,987
Work in process 9,599 12,123
Finished goods 8,954 5,998
-------- --------
Total inventories 31,343 43,108
Reserve for obsolete inventory (2,324) (5,301)
-------- --------
Net inventories $ 29,019 $ 37,807
======== ========
Included in raw materials and assembled parts are $862 and $1,568 of
current requirement service inventories at December 31, 1996 and 1997,
respectively.
5. EQUIPMENT
Equipment consists of the following:
December 31,
----------------------------
1996 1997
Land and buildings $ 729 $ -
Leasehold improvements - 1,464
Machinery and equipment 4,006 19,625
Demonstration inventory 3,888 4,273
Other fixed assets 6,769 3,804
-------- --------
15,392 29,166
Accumulated depreciation (9,822) (9,920)
-------- --------
Total equipment $ 5,570 $ 19,246
======== ========
Under the terms of the PEO Combination Agreement, certain land and a
manufacturing and office building located in Acht, The Netherlands, were
retained by Philips and leased to the Company under an operating lease
agreement. Accordingly, the land and building have been excluded from the
accompanying combined balance sheets. The combined income statements for
the years ended December 31, 1995 and 1996 include $348 and $332,
respectively, of depreciation expense related to such facilities,
representing an assumed charge to the Company from Philips for the use of
the land and building.
F-14
6. LEASES RECEIVABLE
Leases receivable consists of the following at December 31, 1997:
Minimum lease receipts $ 2,076
Unearned finance charges (369)
-------
1,707
Less current portion included in current
receivables (Note 3) (761)
-------
Noncurrent leases receivable $ 946
=======
Finance income (reported as a component of interest income in the
consolidated statements of operations) earned during the year ended
December 31, 1997 was $223.
Minimum receipts on the lease receivables are due as follows:
Year Ending
December 31,
1998 $ 962
1999 434
2000 361
2001 275
2002 44
-------
Total $ 2,076
=======
7. OTHER ASSETS
Other assets consist of the following:
December 31,
----------------------------
1996 1997
Service inventories, noncurrent, net of obsolescence reserves
of $2,661 and $2,462, respectively $ 4,908 $ 10,035
Capitalized software development costs, net of amortization
of zero and $111, respectively 2,388 2,059
Goodwill, net of amortization of $170 and $951, respectively 1,525 16,171
Existing technology, net of amortization of zero and $1,145,
respectively - 15,345
Patents, net of amortization of zero and $18, respectively - 303
Investment in Norsam - 3,267
Deposits and other - 300
-------- --------
Total other assets $ 8,821 $ 47,480
======== ========
Software development costs capitalized during the years ended December 31,
1996 and 1997 were $1,090 and $1,409, respectively. During 1997, the
Company determined that changes in development plans for certain products
had reduced the future utility of some of the Company's software projects.
F-15
Accordingly, previously capitalized software development costs of $1,627
were charged to research and development expense in 1997. Amortization of
software development costs was $111 for the year ended 1997.
8. LINE OF CREDIT
A $25,000 operating line of credit is available at prime (8.5% at December
31, 1997) or LIBOR draws of 30-, 60-, 90-, or 180-day periods, at the
borrower's option, not to exceed the maturity date of the facility. The
line of credit agreement expires on July 31, 1999. Based on management's
intent, the outstanding balance is classified as a noncurrent liability. A
total of $17,844 was outstanding under the operating line of credit at
December 31, 1997. Borrowings under the line of credit are secured by
eligible receivables, inventories, and equipment. Under the terms of the
line of credit, the Company must maintain a current ratio of not less than
2.0, a minimum tangible net worth of not less than $70 million, and a
senior debt to tangible net worth ratio of not more than 0.5.
9. LEASE OBLIGATION
Operations are conducted in manufacturing and administrative facilities
under operating leases that extend through 2006, including the Company's
facilities in Eindhoven, The Netherlands, which are leased from PIE. Rent
expense is recognized on a straight-line basis over the term of the lease.
Rent expense for the year ended December 31, 1997 was approximately
$2,850. See also Note 14.
Also included in a building lease is a provision for a $500 buildout loan,
the full amount of which was borrowed during 1994. Amounts borrowed bear
interest at 9% and are payable ratably, in the form of additional lease
payments, over the initial lease term.
The approximate future minimum rental payments due under these agreements
as of December 31, 1997 are $3,342, $2,497, $2,356, $2,429, and $2,416 for
the years ending December 31, 1998 through 2002, respectively.
10. TAXES
Income tax expense consisted of the following:
Year Ended December 31,
------------------------------------
1995 1996 1997
Current:
Federal $ - $ - $ 1,043
State - - 236
Foreign 2,753 1,142 2,682
-------- -------- --------
Subtotal 2,753 1,142 3,961
Deferred 564 (402) (854)
-------- -------- --------
Total tax expense $ 3,317 $ 740 $ 3,107
======== ======== ========
F-16
The effective income tax rate varies from the statutory rate due to the
following:
Year Ended December 31,
-------------------------------------
1995 1996 1997
Expected tax expense (benefit) at statutory rates $ 3,235 $ 240 $ (11,723)
Increase (reduction) in income taxes resulting from:
Foreign taxes 109 (180) 529
Write-off of in-process technology - - 13,316
Other (27) 680 985
-------- -------- ----------
Total tax expense $ 3,317 $ 740 $ 3,107
======== ======== ==========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as
follows:
December 31,
----------------------------
1996 1997
Deferred tax assets:
Net operating loss carryforwards $ 1,139 $ -
Warranty reserve - 1,185
Inventory reserves - 766
Allowance for bad debts - 626
Other assets 186 241
Valuation allowance (1,139) -
-------- --------
186 2,818
Deferred tax liability:
Inventories (1,418) -
Existing technology and other intangibles - (6,383)
Basis difference in fixed assets - (785)
Other liabilities - (710)
-------- --------
Net deferred tax liability $ (1,232) $ (5,060)
======== ========
These deferred tax components are reflected in the consolidated balance
sheet as follows:
December 31,
--------------------------
1996 1997
Deferred tax:
Current asset $ - $ 2,484
Long-term liability (1,232) (7,544)
--------- ---------
Net deferred tax liability $ (1,232) $ (5,060)
========= =========
11. SHAREHOLDERS' EQUITY
Capital Stock - As of December 31, 1997, 1,376,257 shares of common stock
were reserved for stock incentive plans.
F-17
As part of the PEO Combination Agreement, the Company agreed to issue to
PIE, from time to time, that number of additional shares of common stock
of the Company necessary to maintain PIE's ownership percentage (without
regard to other possible share transactions) at not less than 55% after
exercise of options and warrants to purchase common stock of the Company,
if those options and warrants were outstanding, or issuable without
further action by the Company's Board of Directors, on February 21, 1997.
As of December 31, 1997, 1,242,048 shares of the Company's common stock
are reserved for issuance as a result of this agreement.
Stock Incentive Plans - The Company maintains stock incentive plans for
selected directors, officers, employees, and certain other parties which
allow the Board of Directors to grant options (incentive and
nonqualified), stock and cash bonuses, stock appreciation rights, and to
sell restricted stock.
The 1995 Stock Incentive Plan ("1995 Plan") allows for issuance of a
maximum of 800,000 shares. The Board of Directors' ability to grant
options under the 1995 Plan will terminate when all shares reserved for
issuance have been issued and all restrictions on such shares have lapsed
or earlier, at the option of the Board of Directors.
The 1995 Supplemental Stock Incentive Plan ("1995 Supplemental Plan")
allows for issuance of a maximum of 500,000 shares. The Board of
Directors' ability to grant options under the 1995 Supplemental Plan will
terminate when all shares reserved for issuance have been issued and all
restrictions on such shares have lapsed or earlier, at the option of the
directors.
The 1984 Stock Incentive Plan ("1984 Plan") allows for issuance of a
maximum of 1,200,000 shares. The Board of Directors' ability to grant
options under the 1984 Plan terminated in January 1995.
Options are granted under various vesting arrangements, up to a maximum of
five years. Options expire after a maximum of ten years. Options
outstanding are summarized as follows:
Weighted
Number Average
of Shares Exercise Price
Balance, December 31, 1996 - -
Options outstanding at date of Combination 1,253,223 11.63
Options granted 187,104 12.18
Options exercised (177,224) 9.80
Options expired (65,788) 10.83
--------- ---------
Balance, December 31, 1997 1,197,315 12.03
========= =========
Exercisable at December 31, 1997 646,902 11.76
========= =========
F-18
Additional information regarding options outstanding as of December 31,
1997 is as follows:
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------
Outstanding Weighted Avg. Weighted Exercisable Weighted
as of Remaining Average as of Average
Range of December 31, Contractual Exercise December 31, Exercise
Exercise Prices 1997 Life (yrs) Price 1997 Price
$7.40 to $9.25 310,951 5.5 $ 8.74 166,976 $ 8.45
$9.25 to $11.10 120,330 5.0 9.88 78,102 9.91
$11.10 to $12.95 72,834 8.1 12.13 21,974 12.08
$12.95 to $14.80 558,450 7.2 13.25 335,996 13.25
$14.80 to $16.65 79,750 8.3 15.00 29,800 15.00
$16.65 to $18.50 55,000 9.6 18.48 14,054 18.43
--------- ------ ------- -------- -------
1,197,315 6.8 $ 12.03 646,902 $ 11.76
========= ====== ======= ======== =======
The weighted average fair value of options granted in the year ended
December 31, 1997 was $9.00. As discussed in Note 1, the Company has
adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no
compensation cost has been recognized for stock options granted at the
fair value on the date of grant. Had compensation cost for the Company's
stock option plans been determined based on the estimated fair value of
the options at the date of grant, the Company's net income and income per
share would have been reduced to the pro forma amounts shown below for the
year ended December 31, 1997:
Net income (loss):
As reported $ (36,602)
Pro forma (37,034)
Net income (loss) per share:
As reported $ (2.19)
Pro forma (2.22)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1997:
Dividend yield 0.0 %
Expected volatility (based on historical volatility) 64.4 %
Weighted average risk-free interest rate 6.3 %
Weighted average expected term 7.9 years
In accordance with the transition provisions of SFAS No. 123, compensation
expense associated with stock options granted prior to January 1, 1995 has
not been calculated. Because the Company's options vest over a period of
years, the pro forma net income (loss) and the pro forma net income (loss)
per share reported above do not include compensation expense associated
with options granted prior to January 1, 1995.
F-19
12. EARNINGS PER SHARE
Pro forma earnings per share have been calculated assuming the shares of
the Company issued to PIE in the Combination were outstanding for the PEO
Operations and the combined company for all periods presented and assuming
the shares of the Company outstanding prior to the Combination were issued
as of the closing date of the Combination. See Note 2.
Effective as of the closing of the Combination, division equity of the PEO
Operations was reclassified to paid-in capital of the Company. The
following table sets forth the computation of basic and diluted earnings
per share:
1995 1996 1997
Numerator:
Net income (loss) $ 5,928 $ (53) $ (36,602)
========== ========== ===========
Denominator:
Denominator for basic earnings per
share-weighted average shares
outstanding 9,728,807 9,728,807 16,677,336
---------- ---------- -----------
Denominator for diluted earnings per
share-adjusted weighted-average
shares and assumed conversions 9,728,807 9,728,807 16,677,336
========== ========== ===========
Basic earnings (loss) per share $ 0.61 $ (0.01) $ (2.19)
========== ========== ===========
Diluted earnings (loss) per share $ 0.61 $ (0.01) $ (2.19)
========== ========== ===========
There were no potentially dilutive securities outstanding during 1995 and
1996. Potentially dilutive securities outstanding during 1997 have been
excluded from the calculation for the year because their effect would
reduce the net loss per share.
Options to purchase 317,875 shares of common stock outstanding during 1997
had exercise prices greater than the average market price of the common
shares during the year.
13. EMPLOYEE BENEFIT PLANS
Employee pension plans have been established in many countries in
accordance with the legal requirements, customs and the local situation in
the countries involved. The majority of employees in Europe are covered by
defined benefit plans. The benefits provided by these plans are based
primarily on years of service and employees' compensation near retirement.
The funding policy for the plans is consistent with local requirements in
the countries of establishment. The pension obligations have, in most
cases, been transferred to separate pension funds or to third parties,
limiting any further obligations of the Company to the beneficiaries.
Pension assets and liabilities resulting from the accounting for pension
costs in accordance with SFAS No. 87 are recorded by Philips at the
corporate level in the countries and therefore not shown in the balance
sheets herein.
F-20
The following table sets forth the funded status of the Philips corporate
defined benefits plans in the relevant countries:
December 31,
----------------------------------
1996 1997
Present value of benefit obligations:
Vested $ 14,770,000 $ 15,535,000
Nonvested 62,000 85,000
Accumulated benefit obligations 14,832,000 15,620,000
Salary increase assumption 1,193,000 1,217,000
Projected benefit obligation 16,025,000 16,837,000
Plan assets at fair value 19,083,000 19,276,000
Plan assets in excess of projected benefit obligation 3,058,000 2,439,000
Unrecognized net (gain) loss (2,318,000) (1,781,000)
Unrecognized prior service cost 178,000 216,000
Unrecognized net transition asset (711,000) (547,000)
Pension asset; recognized in the consolidated
balance sheets of Philips $ 207,000 $ 327,000
Assumptions used by Philips in the pension computation were:
1996 1997
---------- ----------
Weighted average discount rate 7.0% 7.0%
Compensation increase rate 2.7 - 6.5% 2.7 - 6.0%
Expected asset return rate at January 1 7.0 - 9.0% 5.0 - 9.0%
The Company's employees represent less than 1% of the total active
participants in these plans. In view of the insignificance of the
Company's share in these plans, the Company does not account for its share
of plan assets and obligations, except for a plan in Germany. This plan is
not funded with a separate pension fund. The provision on the Company's
balance sheet covers the projected benefit obligations for the employees
who participate in this German plan as well as certain supplementary
payments to certain employees in France.
Provision for Postretirement Benefits Other Than Pensions - In the
Netherlands and the U.S., Philips provides certain postretirement benefits
other than pensions. In accordance with SFAS No. 106, Philips began
accruing for this liability over 20 years at the corporate level. The
accrual commenced in 1993 for plans in the U.S. and in 1995 for plans in
The Netherlands. The portion of the corporate provision allocable to the
Company's operations in the U.S. is allocated to the Company and is
included in long-term provisions. On the basis of the number of employees
in the Company in The Netherlands at December 31, 1996 and 1997, an amount
of approximately $75 each year, would have been allocated to the Company
in The Netherlands. The unrecognized part of the liabilities allocated on
the same basis to the Company amounts to approximately $700 at both
December 31, 1996 and 1997, respectively.
F-21
The following table sets forth the unfunded postretirement benefit
liability of Philips in total:
December 31,
----------------------------
1996 1997
Accumulated postretirement benefit obligation:
Retirees $ 257,000 $ 250,000
Active plan participants 170,000 167,000
--------- ---------
Total obligation 427,000 417,000
Unrecognized net transition liability (190,000) (169,000)
Unrecognized net gain 45,000 42,000
--------- ---------
Accrued postretirement benefit liability $ 282,000 $ 290,000
========= =========
The accumulated postretirement benefit obligation was determined using an
average 7.0% discount rate.
Profit Share Incentive Plan - The Company's employee profit share
incentive plan is based on growth of operating income on a year-to-year
basis. During the year ended December 31, 1997, the Company did not
contribute to the plan.
Profit Sharing 401(k) Plan - The Company has a profit sharing 401(k) Plan
which covers substantially all U.S. employees. Employees may defer a
portion of their compensation and the Company may contribute an amount
approved by the Board of Directors. Effective September 1, 1995, the Board
of Directors approved a 100% match of employee contributions to the
401(k), up to 3% of each employee's salary. For the year ended December
31, 1997, the Company contributed $504 to the plan.
14. RELATED-PARTY TRANSACTIONS
Corporate Allocations - Through February 20, 1997, Philips provided
substantial services to the Company, including general management,
treasury, tax, financial audit, financial reporting, insurance, and legal
services. Philips has historically charged the Company for such services
through corporate allocations generally based on a percentage of sales.
The amount of the charge was dependent upon the total amount of
anticipated allocable costs incurred by Philips, less amounts charged as a
direct cost or expense rather than by allocation. Included in selling,
general, and administrative expenses are charges of $1,070 and $1,271 for
the years ended December 31, 1995 and 1996, respectively.
Sales to Philips Organizations - A number of Philips sales organizations
act as distributors for the Company's products in their respective
countries. In addition to sales for further distribution, some Philips
units buy products manufactured by the Company. Sales to Philips units
amounted to approximately $11,200, $15,300, and $13,600 during the years
ended December 31, 1995, 1996, and 1997, respectively.
Leased Facilities - The Company leases its manufacturing and
administrative facilities in Eindhoven, The Netherlands, from PIE under a
10-year lease expiring in 2006. The Company paid $850 in 1997 to PIE under
this lease arrangement. From 1998 through 2006, the annual rent is NLG
2,540 ($1,257 at the December 31, 1997 exchange rate).
F-22
Purchases Through Philips - From time to time, the Company purchases
materials and supplies under collective purchase agreements and purchase
conditions negotiated by Philips for the benefit of its group companies.
For this service, the Company has paid a fixed annual fee amounting to
approximately $43, $43, and $50 for the years ended December 31, 1995,
1996, and 1997, respectively, which has been charged to cost of sales. The
benefits for the Company of these arrangements cannot be calculated
precisely, but management believes that such benefits relating to the
arrangements between the Company and the Philips group are immaterial to
the Company's operating results when compared to similar arrangements
which could have been entered into had the Company operated on a
stand-alone basis.
Dependence on Philips Suppliers - See Note 1. A substantial portion of the
subassemblies included in the Company's FIB, TEM, and SEM workstations are
purchased from the Philips machine shop (Philips Machinefabrieken B.V.).
Purchases from Philips and other Philips-owned entities amounted to
approximately $14,000 and $12,100 for the years ended December 31, 1996
and 1997, respectively.
Intercompany Current Accounts - Current accounts with Philips represent
accounts receivable and accounts payable between the Company and other
Philips units. Most of the current account transactions relate to
deliveries of goods.
Current accounts with Philips consist of the following:
December 31,
-------------------------
1996 1997
Current accounts receivable $ 2,471 $ 7,678
Current accounts payable (832) (16,752)
Total $ 1,639 $ (9,074)
Other Services - In connection with the Combination Agreement, the Company
entered into agreements with Philips affiliates for the purpose of
defining their ongoing relationship. These agreements set forth certain
rights and obligations of the Company, Philips and their respective
affiliates on a prospective basis, afford the Company continued access to
the research and development resources of Philips on a fee basis, provide
for the parties' respective rights to intellectual property, and provide a
framework under which Philips affiliates will continue to provide certain
administrative and other services that have been provided to the Company
in the past. Management believes that, had these agreements been in place
on a historical basis, they would not have resulted in any material change
in the historical position or results of operations of the Company. During
the year ended December 31, 1997, the Company paid Philips approximately
$3,300 for administrative and other services.
Subsequent to year end, the Company entered into a research and
development arrangement with the Philips Machinefabrieken B.V. for the
development of a new technology. In the event that the project is
successful, the Company will pay Philips Machinefabrieken B.V. up to
11,000 NLG ($5,446 at the December 31, 1997 exchange rate) for exclusive
rights to the technology.
F-23
15. SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION
The following table summarizes sales, income from operations, and
identifiable assets of the Company in The Netherlands, U.S., Germany, and
other countries:
Netherlands U.S. Germany Other Combined
1995:
Sales $ 43,275 $ 28,239 $ 14,393 $ 23,210 $ 109,117
Income from operations 3,941 1,973 725 906 7,545
Identifiable assets 43,751 7,921 763 8,307 60,742
1996:
Sales 42,916 28,245 11,664 $ 29,559 112,384
Income (loss) from operations (2,083) 1,308 611 851 687
Identifiable assets 50,391 10,375 744 10,314 71,824
1997:
Sales 32,420 85,503 15,633 35,240 168,796
Income (loss) from operations 2,608 (37,840) 781 1,578 (32,873)
Identifiable assets 36,538 114,199 6,532 25,753 183,022
The following table summarizes sales to customers in the listed countries:
Netherlands U.S. Germany Other Combined
1995:
Sales $ 34,581 $ 28,239 $ 14,393 $ 31,904 $ 109,117
1996:
Sales 35,017 28,245 11,664 $ 37,458 112,384
1997:
Sales 19,852 67,821 14,676 66,447 168,796
The following table summarizes sales by product line:
Service Com-
TEM/SEM FIB Activities ponents Combined
1995:
Sales $ 88,385 $ - $ 20,732 $ - $ 109,117
1996:
Sales 88,783 - 23,601 - 112,384
1997:
Sales 84,181 48,764 24,543 11,308 168,796
Service Revenues - For the years ended December 31, 1995, 1996, and 1997,
customer service activities represented approximately 19%, 21%, and 15%,
respectively, of combined sales.
F-24
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes the carrying amounts of cash and cash equivalents,
receivables, line of credit, notes payable, accounts payable, accrued
payroll liabilities, and other current liabilities are a reasonable
approximation of the fair value of those financial instruments.
The fair value of the Company's investment in Norsam is not readily
determinable as Norsam's securities are not actively traded. However,
based on the last known trade, management estimates that the carrying
value of the Norsam investment approximates its fair value.
17. LITIGATION
The Company is a party to litigation arising in the ordinary course of
business. In the opinion of management, these actions will not have a
material adverse effect, if any, on the Company's financial position,
results of operations, or liquidity.
* * * * * *
F-25