SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998 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) (Zip 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 18, 1999: $64,367,978. For purposes of this calculation,
officers and directors are considered affiliates.
Number of shares of Common Stock outstanding at March 18, 1999: 18,250,781.
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/A Page
- ------------------- ----
PART I
Item 1 - Business......................................................... 1
PART II
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................13
Item 7A - Quantitative and Qualitative Disclosures About Market Risk.......23
Item 8 - Financial Statements and Supplementary Data......................24
PART III
Item 10 - Directors and Executive Officers of
the Registrant...................................................25
Item 11 - Executive Compensation...........................................28
Item 12 - Security Ownership of Certain Beneficial
Owners and Management............................................37
Item 13 - Certain Relationships and Related Transactions...................39
PART IV
Item 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K..........................................42
SIGNATURES....................................................................46
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PART I
ITEM 1. BUSINESS
Introduction
Background
FEI Company is a leader in the design, manufacture, sale and service of
products based on focused charged particle beam technology. The Company was
founded in 1971 to manufacture charged particle emitters (ion and electron
sources) and began manufacturing and selling ion and electron focusing columns
in the early 1980s. In 1997, FEI completed a reverse-acquisition, combination
transaction (the "PEO combination") of the electron optics business ("PEO
Operations") of Philips Business Electronics International B.V. ("Philips
Business Electronics"), a wholly owned subsidiary of Koninklijke Philips
Electronics N.V. ("Philips"). In the PEO combination, Philips Business
Electronics became the owner of 55 percent of FEI's outstanding common stock.
Core Technology
The emission of ions (positively or negatively charged atoms) or electrons
from a source material is fundamental to each of the Company's products.
Particle beams are focused on a sample. The fundamental properties of ion and
electron beams permit them to perform various functions. The relatively low mass
subatomic electrons interact with the sample and release secondary electrons.
When collected, these secondary electrons provide high quality images at near
atomic level resolution. The much greater mass ions dislodge surface particles,
also resulting in displacement of secondary ions and electrons. The surface can
thus be modified or milled with submicron precision by direct action of the ion
beam. Secondary electrons and ions may also be collected for imaging and
compositional analysis. The Company's ion beams and electron beam technologies
provide unique product capabilities and applications.
Products
FEI manufactures both charged particle beam systems and system components.
The Company's systems include transmission electron microscopes systems ("TEMs")
and scanning electron microscopes systems ("SEMs"). TEMs and certain SEMs,
collectively compose the Company's Electron Optics Products ("EOPs"). FEI also
manufactures SEMs designed for wafer scanning in the semiconductor integrated
circuits ("IC") industry ("Wafer SEMs"), focused ion-beam systems ("FIBs") and
products that incorporate an electron beam and an ion beam into a single system
("DualBeam Systems") (Wafer SEMs, FIBs and DualBeam Systems collectively
constituting "Microelectronic Products").
EOPs and Microelectronic Products are used in the analysis, selective
modification and measurement of products and materials for the semiconductor ICs
and electronic data storage industry, as well as for life science and general
material sciences applications. Microelectronic Products are sold primarily to
IC and electronic data storage product manufacturers. Depending on
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the specific application, EOPs and Microelectronic Products aid research,
product development, acceleration of product introduction, control and
modification of manufacturing processes and yield management. As microelectronic
features become smaller and more complex to accommodate demand for smaller
structure sizes and increased functionality, fewer tools are capable of viewing,
modifying and analyzing these features, which are approaching the 0.25 micron
level. As features have become as small as the wavelength of the illumination
sources used in optical lithography, charged particle tools are replacing
optical and laser tools, which cannot detect such small features and defects on
microelectronic structures. Optical and laser tools also subject microelectronic
structures to a greater risk of contamination than beam technologies and thus
lower production yields. By offering monitoring functions and defect review and
failure analysis of particles as small as 0.05 microns in diameter, charged
particle optics techniques can address the fabrication requirements of IC and
electronic data storage manufacturers.
FEI's systems components business consists of the manufacture of focusing
columns and emitters ("Component Products"). 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. Electron emitters are sold primarily to
manufacturers of electron beam equipment and to scientific research facilities.
The Company uses these components in its own EOPs and Microelectronic Products.
The Company sells its ion emitters primarily to research and scientific
facilities and incorporates them in its ion focusing columns and Microelectronic
Products.
Sales
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 agents, representatives and
distributors, some of whom are affiliates of Philips, located in approximately
20 additional countries. See Item 13 - "Certain Relationships and Related
Transactions."
Forward-looking Statements
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,
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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 EOPs and
Microelectronic Products 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
Electron Optics Products
The Company's SEMs and TEMs that make up its EOPs offerings provide a range
of functionality for a variety of industrial and research purposes. These
include applications in the life sciences, analysis of advanced material such as
ceramics and metals and defect review and measurement analysis for the IC
industry. Customers include research institutions, universities, materials
manufacturers and semiconductor manufacturers. The Company's EOPs are adaptable
and user-friendly--current products run on the Windows-NT operating systems. In
addition, modular hardware and software packages enable a basic instrument to be
configured to specific requirements, and easily reconfigured if requirements
change. In general, FEI's SEMs allow for effective and non-destructive large
specimen review and its current models incorporate a new electron column that
provides extremely high image resolution at low voltages. Recent innovations in
FEI's environmental SEMs ("ESEMs") permit superior resolution at low vacuum
pressure, and allow for water vapor to be used to allow 100% relative humidity
to be maintained around a hydrated specimen, making these ESEMs particularly
well suited for life science and materials research. FEI's TEMs allow for
advanced materials analysis, atomic-level image resolution and controlled
electron diffraction. Moreover, 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.
Sales of EOPs accounted for approximately 58% of the Company's net sales in
1998. See Note 19 to Consolidated Financial Statements.
Microelectronic Products
The Company is a world leader in the design, manufacture and sale of
Microelectronic Products. The Company's Microelectronic Products include Wafer
SEMs, FIBs and DualBeam Systems. Microelectronic Products are used in the IC
industry for defect review and process
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monitoring, as well as critical yield improvement and process development tasks
for semiconductor fabs and supporting failure analysis laboratories.
Applications include inspection and evaluation of lithography and etch,
monitoring metal step coverage, review of defects located by optical detection
tools, measuring overlay in cross section and conduction grain size analysis.
Included in the Microelectronic Product offerings are systems that enable users
to image, mill, cut, modify and analyze the features of samples within submicron
tolerances. By precisely focusing a high current density ion beam, FIBs enable
users to remove material and expose defects, deposit new conducting paths or
insulating layers, analyze the chemical composition of a sample and view the
area being modified, all to submicron tolerances. Other important applications
include bit fail map navigation to memory cell arrays and on-wafer TEM sample
preparation. Overall, the Company believes its Microelectronic Products
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's Microelectronic Products can be used in other submicron,
micromachining applications, including the manufacture of thin-film heads for
the electronic data storage industry. The Company believes charged particle
technology is emerging as a viable alternative to traditional disk drive
manufacturing techniques by extending trimming capabilities below those required
for the most advanced head configurations.
Sales of Microelectronic Products accounted for approximately 33% of the
Company's net sales in 1998.
Component Products
The Company's Component Products, electron and ion emitters and focusing
columns, are manufactured with a variety of technical features to meet the needs
of its customers. 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 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 EOPs and Microelectronic Products. The Company
sells its ion emitters primarily to research and scientific facilities and
incorporates them in its ion focusing columns and Microelectronic Products. 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.
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. The Company recently introduced
for use in its Microelectronic Products 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
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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.
Sales of Component Products to third party customers for 1998 were
approximately 9% of net sales. See Note 19 to Notes to Consolidated Financial
Statements.
Research and Development
The Company's research and development staff at December 31, 1998 consisted
of 165 employees, including scientists, engineers, designer draftsmen and
technicians. The Company also contracts with Philips Research Laboratories
("PRL") for basic research applicable to the Company's EOPs. In 1998, the
Company paid PRL $1.2 million under these research contracts. See Item 13 -
"Certain Relationships and Related Transactions."
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 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
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.
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 Union research and development
programs. In 1998 the Company received public funds under Dutch government and
European Union-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. For 1998, net of amounts received from MEDEA, the Company
expended approximately $4.7 million on Company-sponsored research and
development projects by third parties. The Company did not engage in a program
of customer-sponsored research and development.
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. The
Company generally intends to continue at or above its present level of research
and development expenditures and believes that continued investment will be
important to
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continued ability to address the needs of its customers. Research and
development efforts have recently been directed toward gas-selective etching and
further refining gas chemistry processes to enhance the elimination and
deposition of insulating and conducting materials. FEI is also expending efforts
on gas chemistry compatible with copper-etching. These are areas that the
Company believes hold promise of yielding significant product enhancements. In
1998, the Company terminated a development agreement with Philips
Machinefabrieken Nederland B.V. ("Philips Machine Shop"), located in Eindhoven,
The Netherlands, for development relating to the Company's FIBs and SEMs. See
Item 13 - "Certain Relationships and Related Transactions." Research and
development efforts are subject to change due to product evolution and changing
market needs. Often, such changes cannot be predicted. Research and development
expenses for 1996, 1997 and 1998 were $10.9 million, $15.4 million and $19.5
million, respectively.
Manufacturing
The Company has manufacturing operations located in Hillsboro, Oregon;
Eindhoven, The Netherlands; and Brno, Czech Republic. The Company's
Microelectronic Product manufacturing operations consist of fabricating
components, testing components and subassemblies from Eindhoven and assembling
and testing finished products. The Company's EOPs 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 Component Products at its facilities in Oregon.
The Company's production schedule for its 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 Machine Shop. See Item 13 - "Certain Relationships and Related
Transactions." In addition to the Philips Machine Shop, the Company obtains a
significant portion of its component parts from a second supplier, Turk
Manufacturing Co. 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. In the ordinary course, the Company continually evaluates its
existing suppliers and potential different or additional suppliers to determine
whether changes in suppliers may be appropriate.
6
Sales and Marketing
The Company's sales and marketing staff at December 31, 1998 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, whose efforts the Company believes
will further expand its Microelectronic Products and EOPs markets. The Company's
sales force and marketing efforts are not segmented by product market.
The Company requires sales representatives to have the technical expertise
and understanding of the businesses of the Company's principal and potential
customers to meet effectively the demanding requirements for selling the
Company's products. Normally, a sales representative will have the requisite
knowledge of, and experience with, the Company's products at the time the sales
representative is hired. If additional training is needed, the Company's
applications scientists familiarize the sales representative with the Company's
products. The Company's marketing efforts include presentations at trade shows
and publication of a semi-annual technical newsletter. In addition, Company
employees publish articles in scientific journals and make presentations at
scientific conferences.
In a typical sale, a potential customer is provided with information about
the Company's products, including specifications and performance data, by a
Company salesperson. A presentation then is made at the Company's facilities.
The customer participates in a product demonstration by the applications team,
using samples provided by the customer. The period of time between the initial
provision to the customer of product information and the receipt of a purchase
order is typically six to nine months.
FEI sells its products 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 representatives/agents/distributors and through independent
representatives/agents/distributors. See Item 13 - "Certain Relationships and
Related Transactions."
The Company's EOPs 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 anticipates further
increasing its investment in service and support activities for EOPs and
Microelectronic Products sold to this industry.
The Company's Microelectronic Products and Component Products are sold
generally with a 12-month warranty, and warranty periods have typically been
shorter for used systems. Customers of FEI's Microelectronic Products are
offered service contracts of one year or more in duration after expiration of
any warranty. The Company employs Microelectronic Product engineers in the
United States, in Europe and in Southeast Asia. The Company also contracts with
independent service
7
representatives for Microelectronic Product service in Japan, Israel, South
Korea, Taiwan and Singapore, and expects to add additional service engineers in
other locations as needed.
Sales outside North America were 58% of net product and service sales in
1998. International sales are expected to continue to represent a significant
percentage of net sales for the Company. See Note 19 of Notes to Consolidated
Financial Statements.
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 change 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 could 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. FEI has
used hedge strategies on specific sales but has no overall hedging program for
foreign currency exposure. It is currently developing policies and practices to
more carefully measure and manage its exposure to foreign currency fluctuations.
To the extent the Company does not use hedging strategies there remains an
exchange rate risk, and to the extent that it employs hedging techniques, there
is no assurance such techniques will eliminate the effects of currency
fluctuations. See Item 7A -- "Quantitative and Qualitative Disclosures About
Market Risk."
Pending Acquisition
On December 3, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Micrion Corporation, a Massachusetts
corporation engaged in the design, manufacture, sale and service of focused
particle beam instruments. Under the terms of the Merger Agreement, Micrion
would become a wholly owned subsidiary of the Company. Holders of Micrion common
stock would receive one share of the Company's common stock and $6.00 in cash
(or, in certain circumstances an equivalent amount of shares of the Company's
stock in lieu of cash) in exchange for each share of Micrion common stock.
In connection with the proposed merger, Philips Business Electronics
International B.V., the Company's majority shareholder, entered into a stock
purchase agreement with the company pursuant to which Philips Business
Electronics has agreed to finance the cash portion of the merger consideration
through the purchase from the Company of additional newly issued shares of
common stock. Philips Business Electronics also has the option to purchase
additional newly issued shares of common stock to maintain its majority
shareholder position after the issuance of shares to Micrion's stockholders.
The merger is subject to regulatory approval and approval by the
shareholders of both Micrion and the Company. On December 29, 1998, the Company
filed required information concerning the merger with the Antitrust Division of
the Department of Justice and the Federal Trade Commission ("FTC"). On January
28, 1999, the FTC requested additional information from the Company. The FTC has
not indicated whether it intends to oppose the merger. If it were to oppose
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the merger, this could delay the merger, reduce anticipated benefits, increase
expected costs or cause the merger not to occur. In turn, any of these
eventualities could have a material adverse effect on the Company's or Micrion's
results of operations or financial position.
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, 1998 was $59 million, compared with combined backlog of $53
million at December 31, 1997. For sales of Microelectronic Products, advance or
progress payments typically have not been received from customers unless the
system ordered includes custom features.
The Company expects to ship all products representing this backlog in 1999,
although there is no assurance that the Company will be able to do so. 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 Microelectronic Products, EOPs and Component
Products, are highly competitive. A number of the Company's competitors and
potential competitors may have greater financial, marketing and production
resources than the Company. Additionally, markets for the Company's products are
subject to constant change, in part due to evolving customer needs. As the
Company endeavors to respond to this change, the elements of competition as well
as specific competitors may alter. Moreover, one or more of the Company's
competitors might achieve a technological advance that would put the Company at
a competitive disadvantage.
The Company's competitors for the sale of EOPs include JEOL, Ltd., Hitachi,
Ltd., KLA-Tencor Corporation and LEO Electron Microscopy, Inc. The principal
elements of competition in the EOPs 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. FEI's ability 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.
FEI's principal competitors for the sale of Microelectronic Products
include Applied Materials Inc., Seiko Instruments Inc., Schlumberger
Technologies (ATE Division), Micrion Corporation, JEOL USA, Inc., Hitachi, Ltd.,
KLA-Tencor Corporation, Orsay Physics S.A. and NanoFab, Inc. The Company
believes the key competitive factors in the Microelectronic Products 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 Microelectronic Products and
believes price may continue to be an important factor
9
in the sale of most models. Intense price competition in the sale of
Microelectronic Products to strategic customers has in the past adversely
affected the Company's profit margins.
Competitors for the Component Products consist of such firms as DENKA,
Orsay Physics S.A., Ion Optika, Eiko Corp., Topcon Corporation, VG Scientific
and Elionix Inc. Existing competitors of the Company in the EOPs and
Microelectronic Products that manufacturer components for their own use are also
potential competitors for the Company's Component Products. With regard to
Component Products sales, the Company believes the key competitive factors for
emitters 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 and the Company believes it
competes favorably with respect to each of these factors.
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 owns, solely or
jointly, twelve U.S. patents relating to its Microelectronic Product business
and/or Component Products business and two patents issued in Taiwan. These
patents expire over a period of time beginning in the year 2000 through the year
2015. All of the patents used by the Company relating to its EOPs and certain
Microelectronics Products are licensed from Philips and its affiliates. As part
of the PEO combination, the Company acquired perpetual rights to certain patents
owned by Philips. The Company has access to technology through cross-licenses
between Philips affiliates and a large number of manufacturers in the
electronics industry worldwide, and the Company's patents are also subject to
such cross-licenses.
As part of its Microelectronic Products, 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 Microelectronic
Products 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 experience in the development of
10
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 in its principal
markets.
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
Microelectronic Products 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 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 Microelectronic Products.
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
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, 1998, the Company had approximately 1,022 full-time
employees worldwide, including approximately 378 in manufacturing, approximately
165 in research and development, and approximately 433 in customer service,
marketing and sales and finance and administration. Many of the approximately
700 employees of the Company employed outside the
11
U.S. are covered by national, industry-wide agreements, or national work
regulations that govern certain aspects of employment conditions and
compensation. 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.
12
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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,
-------------------------------------
1996 1997 1998
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of sales 70.4 63.2 66.9
----- ----- -----
Gross profit 29.6 36.8 33.1
Research and development costs 9.7 9.1 10.9
Selling, general and administrative costs 19.3 21.9 23.2
Amortization of intangibles 0.0 1.2 1.4
Purchased in-process research and development 0.0 22.5 0.0
Restructuring and reorganization costs 0.0 1.5 3.0
----- ----- -----
Operating income (loss) 0.6 (19.4) (5.4)
Other income (expense), net 0.0 (0.4) (2.3)
----- ----- -----
Income (loss) before taxes 0.6 (19.8) (7.7)
Tax expense (benefit) 0.7 1.8 (2.7)
----- ----- -----
Net loss (0.1)% (21.6)% (5.0)%
===== ===== =====
Net sales. Net sales for the year ended December 31, 1998 increased $10.0
million (6%) compared to the corresponding period in 1997. The increase in sales
for the period was affected by the fact that the 1998 period includes net sales
of the combined company, while the 1997 period includes net sales of the PEO
Operations only through February 20, 1997 and net sales of the combined company
thereafter. Net sales for the year ended December 31, 1997 increased $56.4
million (50%) 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 from the date of the PEO combination, and the 1996
period includes net sales of the PEO Operations only.
Segment net sales for 1998 reflect increases of 39% and 11%, respectively,
for each of the Components and Microelectronic segments while the Electron
Optics segment sales were essentially unchanged from 1997 levels. When compared
with 1996 sales, Electron Optics segment sales were 2% higher in 1997. Industry
conditions in both the semiconductor manufacturing sector and the data storage
sector were generally weak during 1998 but showed some improvement in both the
third and fourth calendar quarters. These industry sectors represent the
principal markets for the Company's Components and Microelectronics segments.
The Microelectronics segment reported sales were reduced by fluctuations in the
foreign currency translation rates as the U.S. dollar strengthened in 1998
against the principal European currencies in which the Company transacts its
business. In 1998 as compared with 1997 these fluctuations had an approximately
2% negative effect on net sales. Foreign currency translation rate fluctuations
in Asia Pacific Region, which represented 13%, 25%
13
and 22% of total sales for 1996, 1997 and 1998 respectively, had the effect of
increasing reported Asia Pacific sales by 1%. Approximately 20% of the Company's
Asia Pacific sales were denominated in local Asia Pacific currencies.
For 1998 as compared to 1997 unit volume in the Microelectronic Products
segment increased slightly more than 5% as did average selling price.
Year-over-year pricing volatility as measured by discount from suggested list
price was slightly improved. For Electron Optics products, unit volume and unit
pricing were essentially stable.
Gross profit. Gross profit for the year ended December 31, 1998 decreased
$3.0 million (5%) compared to 1997, and for the year ended December 31, 1997,
gross profit increased $28.8 million (87%) compared to 1996. Gross profit as a
percentage of sales was 29.6%, 36.8% and 33.1% for each of the years ended
December 31, 1996, 1997 and 1998, respectively. During the third quarter of
1998, the Company recognized charges totaling $9.5 million in cost of sales for
inventory write-offs, obsolescence reserves, reserves for product upgrades, and
increased warranty reserves. Excluding the effect of these charges, the gross
profit as a percentage of sales would have been 38.4% for the year ended
December 31, 1998. In addition, the write-up of Pre-PEO combination FEI's
inventory from cost to fair market value and the resulting increase in cost of
goods sold had a negative impact on gross profit as a percentage of sales for
the year ended December 31, 1997. This write-up of Pre-PEO combination FEI's
assets was a result of the reverse acquisition accounting applied to the PEO
combination.
The increase in gross profit as a percentage of sales in 1997 compared to
1996 is primarily due to a change in product mix and a lower percentage of total
sales attributed to the service business.
Research and development costs. Research and development costs for the year
ended December 31, 1998 increased $4.1 million (27%) compared to 1997 and
increased $4.5 million (41%) for the year ended December 31, 1997 compared to
1996. As a percentage of sales, research and development costs were 9.7%, 9.1%
and 10.9% for the years ended December 31, 1996, 1997 and 1998, respectively.
The 1998 expense reflects increased efforts to develop certain technologies for
new products. Expenditures for these efforts represented $3.6 million of the
increase. The 1997 expense includes the write-off of $1.6 million of previously
capitalized software development costs in the first quarter. The 1997 costs
included Pre-PEO combination FEI from the merger date forward, while the 1996
research and development costs were for PEO Operations only.
Selling, general and administrative costs. Selling, general and
administrative costs for the year ended December 31, 1998 increased $4.4 million
(12%) compared to 1997, and increased $15.3 million (70%) for the year ended
December 31, 1997 compared to 1996. As a percentage of sales, selling, general
and administrative costs were 19.3%, 21.9% and 23.2% for the years ended
December 31, 1996, 1997 and 1998, respectively. The increase in selling, general
and administrative costs for 1998 was primarily attributable to increased salary
and related personnel costs of $5.0 million. A portion of the increase stems
from the comparison of the 1998 twelve-month period of
14
the combined company with approximately ten-months for the combined company in
the 1997 period. The first quarter of 1997 also included $1.1 million in bad
debt expenses.
The increase in selling, general and administrative costs as a percentage
of sales in 1997 compared to 1996 resulted primarily from the higher costs
incurred in 1997 when the combined company was a separate publicly reporting
entity compared to those for PEO Operations as a business within Philips.
Amortization of intangibles. Purchase accounting for the PEO 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. Amortization of intangibles for 1998 increased $0.4 million
(20.0%) compared to 1997. This increase reflects amortization of the intangibles
resulting from the PEO combination for the entire year in 1998 as compared to
amortization only from February 21, the date of the PEO combination, in 1997.
Purchased in-process research and development. Purchase accounting for the
PEO 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 of Pre-PEO combination FEI. The
intangible asset was written off with a charge to earnings immediately following
the PEO combination in keeping with the Company's policy to expense research and
development costs as they are incurred. In determining the value of acquired
in-process research and development, management identified four specific
research and development projects--a thin film FIB for the data storage
industry, in-line systems for semiconductor manufacturers, a laser-aligned
stage, and FEI's next generation platform. The thin film head FIB, in-line
systems and the laser-aligned stage shipped to customers in 1997 and 1998. FEI's
next generation platform is now under development. The Company has developed a
prototype of its next generation platform and expects to spend approximately
$6.5 million in the first three quarters of 1999 to develop the prototype into a
commercially viable product. FEI expects to begin shipping its next generation
platform in 1999. There remains the risk, however, that a technological hurdle
may be encountered that may delay or prevent the successful development of FEI's
next generation platform. Although FEI believes any hurdles could eventually be
overcome, FEI's competitive position could be harmed if its competitors are
successful first in developing a competing technology. While the semiconductor
manufacturing sector and the data storage sector were generally weak during
1998, FEI's long-term expectations for those markets and, accordingly, for these
projects, have not changed significantly. For additional information see Note 2
of the Notes to Consolidated Financial Statements.
Restructuring and reorganization costs. On July 29, 1998 the Company
announced a restructuring and reorganization program to consolidate operations,
eliminate redundant facilities, reduce operating expenses, and provide for
outsourcing of certain manufacturing activities. As announced, the program is
intended to eliminate approximately 173 positions worldwide, or about 16% of its
work force as of July 29, 1998. The charge of $5.3 million recognized in the
year ended December 31, 1998 primarily represents the cost of providing
severance, outplacement assistance, and associated benefits to affected
employees. Of this charge, $3.1 million remains as a liability at December 31,
1998. This liability will be discharged in 1999 as the Company's outsourcing
plan
15
continues to be implemented. Additional charges totaling $1.1 million are
expected to be recorded as they are incurred through June 1999 for transitional
costs of consolidating operations and outsourcing certain activities.
In March 1997, the Company transferred its ElectroScan manufacturing
activities to its manufacturing facility in Eindhoven, The Netherlands, and
abandoned the majority of the technology acquired. Consequently, a charge to
earnings of $2.5 million was recognized. The charge included the write-off of
$1.5 million of goodwill attributable to the acquisition of the assets of
ElectroScan, along with estimated severance costs for 11 ElectroScan employees
and other related costs.
The following table summarizes the December 31, 1998 status of the
restructuring and reorganization costs.
Restructuring and Reorganization Costs
--------------------------------------
1997 1998
-------- --------
Charged to Expense
ElectroScan Operation $ 2,478
Worldwide Restructuring $ 5,320
Less: Settled Amounts 779 2,012
Less: Non-Cash Write Downs 1,699 253
-------- --------
Remaining Cash Requirements at 12/31/98 $ 0 $ 3,055
======== ========
Other income (expense), net. Interest income for the years ended December
31, 1998 and 1997 represents interest earned on the investment of excess cash.
Interest expense for the same periods represents interest incurred on borrowings
under the Company's bank line of credit facilities and on borrowings from
Philips. Prior to the date of the PEO combination, the PEO Operations
participated in Philips' centralized cash management program and did not earn
interest income or incur interest expense.
In September 1998, management reduced to zero the carrying value of its
cost-method investment in Norsam Technologies, Inc. ("Norsam") and, accordingly,
recorded a $3.3 million valuation adjustment. Management revised its projections
for future cash flows that it expected to receive from its investment in Norsam
following Norsam's divestiture of certain assets.
Income tax expense. The effective income tax rate was 35% for the year
ended December 31, 1998, (9)% for the year ended December 31, 1997 and 108% for
the year ended December 31, 1996. The Company's tax rates differ from the U.S.
federal statutory tax rate primarily as a result of state and foreign taxes, the
amortization of intangible assets not deductible for income tax purposes, and
the favorable tax effect of the Company's use of a foreign sales corporation for
exports from the U.S. The Company did not recognize a tax benefit for the year
ended December 31, 1997, primarily because the $38.0 million of purchased
in-process research and
16
development cost written off immediately subsequent to the PEO combination was
non-deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had total cash and cash equivalents of
$15.2 million compared to $16.4 million at December 31, 1997 and zero at
December 31, 1996. Cash provided by operating activities for the year ended
December 31, 1998 was $2.8 million compared to $6.8 million for the year ended
December 31, 1997, and cash used by operating activities of $10.8 million for
the year ended December 31, 1996. Cash flows from operating activities before
the effect of working capital changes decreased from $8.7 million in 1997 to a
deficit of $3.0 million for 1998. This decrease, coupled with a significant use
of cash ($16.4 million) to fund receivables of the Company's expanded operations
following the PEO combination in 1997, led the Company to reconfigure its
working capital structure. A substantial portion of its 1998 account balance
with affiliates of Koninklijke Philips Electronics N.V. ("Philips") was
reclassified to a long term account in anticipation of its repayment from the
Company's new credit facility. Note 9 of the Notes to Consolidated Financial
Statements provides additional information.
Investing activities used cash of $14.2 million during the year ended
December 31, 1998, $9.4 million during the year ended December 31, 1997, and
$4.3 million during the year ended December 31, 1996. The 1998 increase is
primarily due to acquisitions of equipment and investment in software
development. In 1996, the PEO Operations used $3.2 million to acquire the assets
of ElectroScan Corporation and the PEO operations in Brno, Czech Republic. The
Company expects to continue to invest in plant and equipment and technology
needed for future business requirements, as well as to invest in internally
developed software for its products.
Financing activities provided cash of $9.0 million for 1998, $18.4 million
for 1997, and $15.1 million for 1996. The 1998 financing activities are
comprised of cash uses for net repayments under the Company's bank line of
credit in the amount of $10.6 million, offset by a $19.1 million net long-term
borrowing from Philips previously reflected in "Current account with Philips."
The 1997 amount included $8.0 million of cash contributed to the PEO Operations
as part of the PEO combination. During the third calendar quarter of 1998, the
Company violated a financial ratio covenant in its line of credit agreement and
obtained a waiver of the covenant. In February 1999 the Company negotiated a new
credit agreement, and obtained commitment on a three year $50 million revolving
credit facility from Philips. The facility allows the Company, subject to
certain financial covenants, to borrow in multiple currencies for its general
corporate needs, excluding acquisitions. Borrowings under the agreement will
bear interest at a variable LIBOR rate from 30 to 180 days, at the Company's
designation, plus a 0.75% incremental rate. See Note 9 of the Notes to
Consolidated Financial Statements for additional information. With this new $50
million revolving line of credit, the Company refinanced and replaced its $25
million revolving line of credit with a U.S. bank.
In December 1998, the Company announced that it had entered into a merger
agreement with Micrion Corporation of Peabody, Massachusetts. Subject to
shareholder and regulatory approval,
17
the Company expects that it will consummate the merger transaction in 1999 for
consideration of $6.00 in cash and one share of the Company's common stock for
each Micrion common share outstanding. Under certain conditions this
consideration could be reduced in accordance with the terms of the merger
agreement. Financing requirements for the transaction are expected to be
approximately $33 million, including the cash consideration and estimated
transaction costs as well as the issuance of approximately 5.1 million shares of
common stock to Micrion shareholders. The Company has entered into a stock
purchase agreement with its majority shareholder, Philips Business Electronics,
to finance its cash requirements for the merger. The Company expects to sell
approximately 5.6 million common shares to Philips Business Electronics at an
expected per share price of $8.02. Proceeds from this sale of shares in excess
of the cash consideration to Micrion shareholders and transaction costs will be
used to repay Micrion bank debt.
The Company is evaluating service and distribution businesses in 20
international locations. These businesses are currently operating under a
distribution agreement between the Company and a Philips affiliate. The
agreement was entered into in February 1997 and had an initial term which ends
on January 1, 2000, unless extended. The Company is evaluating purchasing some
of these businesses or obtaining alternate distributors in some locations.
Depending on a number of variables, some of which have not been quantified, the
Company may make additional investment in its service and distribution network.
The Company's global sales activities and related service and support
activities result in complex foreign currency exposures. The Company does not
have a formal hedging program in place; however, it does enter into forward
contracts to sell or purchase foreign currencies to hedge specific sales
transactions. It has been more active in hedging foreign currency sales of
Electron Optics products against the Dutch guilder than it has been in hedging
Microelectronic and Component product sales, which are predominantly dollar
denominated. As of December 31, 1998, the Company had forward purchase and sale
contracts of foreign currency totaling $7.9 million, which if settled at the
spot exchange rate at December 31, 1998 would have resulted in a loss of $0.2
million. The February 1999 credit agreement allows the Company to borrow funds
in multiple currencies. The Company expects to use this capability to better
align its currency exposures, particularly with respect to the Japanese yen.
Financing these working capital requirements, particularly those, for accounts
receivable and inventory, with local currency borrowings, will reduce the
Company's need to hedge multiple, individual sales transactions.
The introduction of the Euro also provides the Company with an opportunity
to reduce its exposure to the foreign currency translation fluctuations of the
various European Monetary Union countries in which it reports results by
adopting the Euro as its reporting currency for those operations. These
countries include France, Germany, Italy and The Netherlands. The Company is
evaluating its timetable for adoption of Euro reporting and will not be fully
converted to Euro reporting for the full calendar 1999. The Company's automated
transaction and reporting systems are capable of reporting in either local
currency or Euros without extensive modification. An important consideration in
adopting Euro reporting will be the adoption patterns of the Company's customers
and vendors in the European Monetary Union.
18
In conjunction with sales growth from 1996 to 1997 the Company's working
capital requirements increased primarily due to an increased amount in accounts
receivable. During 1998 inventory levels increased, despite valuation
adjustments, but were consistent with the stronger sales performance during the
second half of the year. The Company's working capital is subject to fluctuation
due to the timing of its shipments. Since the Company's products typically have
a large sales value per unit, the timing of specific units in a reporting period
can affect the relative levels of inventory and accounts receivable without a
corresponding change in liabilities. The Company's restructuring and
reorganization programs also affected working capital as reflected previously.
The remaining 1998 restructuring and reorganization charges, which will be
settled in 1999, total $3.1 million.
In each of the past three years, the Company has reported a net loss. The
net losses in 1997 and in 1998 have stemmed from charges related to the
write-off of purchased in-process research and development costs, restructuring
charges and material valuation adjustments to certain of its inventories and
investments. Because many of these charges did not require cash outlays in the
reporting period, the Company's liquidity has not been impaired. In addition to
internally generating cash flows from its existing business, the Company has
obtained financing and contingent financing from Philips affiliates, as
evidenced by the pending stock purchase agreement as well as the new revolving
credit agreement. The Company believes it also has access to other sources of
equity and debt capital from unrelated parties. The Company explored its
financing options and evaluated competitive arrangements before entering into
these arrangements with Philips affiliates. The Company expects to make
continued investments in tangible and intangible assets as previously described.
It believes that cash flows from these investments, from growth of its existing
businesses and from its existing credit facilities will provide adequate
liquidity on a short-term basis and for at least the next 12 to 18 months. Due
to the Company's commitment to an aggressive investment program, it does not pay
and does not plan to pay, in the foreseeable future, a dividend on its common
stock.
BACKLOG
The Company's backlog consists of purchase orders it has received for
products it expects to ship within the next 12 months. The Company's backlog at
December 31, 1998 was approximately $59 million. A substantial portion of the
Company's backlog relates to orders for a relatively small number of products.
As a result, the timing of the receipt of orders could have a significant impact
on the Company's backlog at any date. For this and other reasons, the amount of
backlog at any date is not necessarily determinative of revenue in future
periods.
YEAR 2000 DISCLOSURE
State of Readiness. In January 1998, the Company formed a Year 2000 Team
composed of representatives of various aspects of the Company's operations that
may be significantly affected by Year 2000 readiness issues, including hardware
and software related to the Company's manufacturing control, accounting and
other information technology systems, product software and hardware, supplier
products and post-sales support. The Year 2000 Team developed a multi-part plan
to measure and address the Company's Year 2000 readiness, consisting of: (i)
product testing
19
using test criteria developed by SEMATECH, a semiconductor industry trade
association; (ii) testing information technologies hardware and software for the
Company's manufacturing control, accounting and other systems and addressing
deficiencies; (iii) identifying and assessing non-information technologies
third-party suppliers' products raising Year 2000 compliance issues, making
inquiry of such vendors concerning their state of readiness and resolving
issues; (iv) communicating with the customer base concerning Year 2000 readiness
of the Company's products; and (v) evaluating the need for and, as appropriate,
developing a contingency plan.
The Company has analyzed and partially tested its information technology
systems and determined that, to the extent tested, those systems have no
material Year 2000 compliance deficiencies. Internal information technologies
systems tests are to be completed by the second quarter of 1999. Several
elements of the Company's information technologies remain to be tested and
testing is expected to be largely completed before the end of the 1999 second
quarter. With regard to readiness, the Company has assumed that basic public
utilities such as gas, electric and telephone services will continue to be
available for operations of the Company on and after January 1, 2000 in the
U.S., The Netherlands and the Czech Republic. If this assumption proves
incorrect, the operations of the affected manufacturing location would be
materially adversely affected for the duration of the utility interruption. The
Company has completed the testing of most products and has communicated with
customers concerning Year 2000 readiness of these products and certain third
party products sold with the Company's systems. However, the Company has not
determined the Year 2000 status of all past products or the status of some of
the third-party products sold with its products. The Company's efforts to assess
these products continues, with a goal of completing this assessment by the end
of the second quarter of 1999. The Company anticipates undertaking additional
communications with its customers and to provide instructions to post-sale field
service representatives on Year 2000 readiness before the end of the second
quarter of 1999. Based on communications to date, the Company does not believe a
material Year 2000 deficiency by any information technologies and
non-information technologies supplier exists. However, the Company has not yet
completed its inquiry of all suppliers and further communications may identify
Year 2000 deficiencies.
Costs. At this time, the Company believes costs incurred in responding to
other parties' Year 2000 computer system deficiencies, together with the cost of
any required modifications to the Company's systems, will not have a material
impact on the Company's results of operations or financial condition. In the
ordinary course the Company has improved its Year 2000 readiness through recent
systems upgrades as part of its usual capital improvement efforts. The Company
has devoted management, sales and technical resources to address Year 2000
matters and expects to continue to do so. To date, however, no specific
expenditures have been made as a result of the Year 2000 issue. The Company has
made plans to increase inventories of certain components prior to January 2000,
but has not made specific allocations for this. Overall, the Company expects to
fund any future costs through operating cash flows. Cost estimates for systems
improvements are based on the Company's estimates, which make numerous
assumptions about future events. There is no assurance that these estimates will
be correct and actual costs could differ materially from these estimates.
20
Most Reasonably Likely Worst Case Scenarios for the Company. Although the
Company will continue to devote resources to address its Year 2000 issues, there
is no assurance that these efforts will be effective in reducing or eliminating
risks associated with Year 2000 deficiencies. Moreover, there is no assurance
that the Company's products do not contain undetected Year 2000 problems or that
third-party products do not contain such problems. In addition, there is no
assurance that the Company's assessment of third-party suppliers and vendors
will be accurate or that the Company has made inquiry of the appropriate
vendors. Year 2000 problems could result in system failures, data corruption,
the generation of erroneous information and other significant disruptions of
business activities. Beyond risks related to product and vendor non-compliance,
it is possible that the Company will suffer supply chain disruptions and
transport problems due to hoarding and changes in buying and shipping patterns
caused by other parties' efforts to address Year 2000 problems. Furthermore, it
has been widely reported that a significant amount of litigation surrounding
business interruptions may arise out of Year 2000 issues. It is uncertain
whether, or to what extent, the Company may be affected by any such litigation.
The Company's Contingency Plan. The Company does not have a contingency
plan. FEI is in the process of evaluating the need for a contingency plan and
expects to finish the evaluation by mid-1999. As a contingency measure, however,
the Company is intending to increase its inventory of some component parts and
supplies in the coming months.
FORWARD-LOOKING STATEMENTS
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 plant and equipment and software development,
the portions of the Company's sales consisting of international sales, expected
capital requirements, and Year 2000 compliance by the Company and its customers
and suppliers constitute forward-looking statements that are subject to risks
and uncertainties. Factors that could materially decrease the Company's
investment in plant and equipment and software development include, but are not
limited to, downturns in the IC manufacturing market, lower than expected
customer orders 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, fluctuations in interest and exchange rates (including changes in
relevant foreign currency exchange rates between time of sale and time of
payment), changes in trade policies, tariff regulations and business conditions
and growth in the electronics industry and general economies, both domestic and
foreign. 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.
Quarterly Results of Operations
The following table presents certain unaudited financial data for each of
the eight quarters in 1997 and 1998. In the opinion of management, this
information has been prepared on the same basis as the audited consolidated
financial information appearing elsewhere in this Report and
21
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) write-off of purchased in-process research and
development costs totaling $38.0 million recognized in the PEO 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) write-off of capitalized
software costs totaling $1.6 million included in research and development
expenses.
The results for the three months ended September 27, 1998 include the
following non-recurring adjustments: (i) restructuring and reorganization costs
totaling $5.0 million in connection with the Company's reduction in force; (ii)
write-off of the Company's $3.3 million investment in Norsam; (iii) inventory
write-offs and obsolescence reserves totaling $4.2 million primarily related to
the consolidation of U.S. field service operations; (iv) increased warranty
reserves of $1.4 million reflecting the increased cost of warranty for in-line
FIBs; and (v) $3.8 million of product upgrade reserves reflecting the decision
to replace certain third party components within the installed base of one of
the Company's products. The results for the three months ended December 31, 1998
include restructuring and reorganization charges totaling $0.4 million.
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 and all four quarters of 1998
reflect the combined FEI and PEO Operations.
1997 1998
March 30 June 29 Sept. 28 Dec. 31 March 29 June 28 Sept. 27 Dec. 31
--------- --------- --------- --------- --------- --------- --------- ---------
(in thousands, except per share data)
Net sales $ 32,067 $ 43,958 $ 39,036 $ 53,735 $ 35,954 $ 44,922 $ 42,440 $ 55,455
Cost of sales 23,267 25,909 22,412 35,041 21,858 27,850 36,564 33,307
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit 8,800 18,049 16,624 18,694 14,096 17,072 5,876 22,148
Total operating expenses 55,561 14,241 12,772 12,466 14,331 15,846 21,003 17,588
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss) (46,761) 3,808 3,852 6,228 (235) 1,226 (15,127) 4,560
Other income (expense), net (197) (83) 231 (573) (216) (521) (3,509) 117
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before taxes (46,958) 3,725 4,083 5,655 (451) 705 (18,636) 4,677
Tax expense (benefit) (1,827) 1,490 1,634 1,810 (158) 247 (6,523) 1,637
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ (45,131) $ 2,235 $ 2,449 $ 3,845 $ (293) $ 458 $ (12,113) $ 3,040
Net income (loss) per share;
basic $ (3.45) $ 0.13 $ 0.14 $ 0.21 $ (0.02) $ 0.03 $ (0.67) $ 0.17
diluted $ (3.45) $ 0.12 $ 0.13 $ 0.20 $ (0.02) $ 0.02 $ (0.67) $ 0.16
Shares used in per share calculation;
basic 13,077 17,704 17,890 18,077 18,078 18,079 18,105 18,161
diluted 13,077 18,372 19,586 19,686 18,078 18,345 18,105 19,075
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
22
relatively high unit cost of the Company's Microelectronic Products and Electron
Optics Products, 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 Microelectronic Products and Electron Optics Products. 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 Optics Products 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A large portion of the Company's business is conducted outside of the
United States through a number of foreign subsidiaries. Each of the foreign
subsidiaries keeps its accounting records in its respective local currency.
These local currency denominated accounting records are translated at exchange
rates which fluctuate up or down from period to period and consequently affect
the consolidated result. The major foreign currencies in which the Company faces
periodic fluctuations are the Dutch guilder, the German mark, the British pound
sterling, the French franc, the Italian lira, and the Japanese yen. Although for
the last three years more than 60% of the Company's sales occurred outside of
the United States, a large proportion of these sales were denominated in U.S.
dollars and Dutch guilders. As a result, despite an overall strengthening of the
U.S. dollar, net sales were adversely affected by only 2%. Assets and
liabilities of foreign subsidiaries are translated as of the exchange rates in
effect at the balance sheet date. The resulting translation adjustments
increased shareholders' equity and comprehensive income for 1998 by $1.2
million. The Company's primary exposure to changes in foreign currency results
from inter-company loans made between the U.S. and Dutch subsidiaries and its
other foreign subsidiaries. The Company does not actively hedge this exposure
and the Company does not enter into derivative financial instruments for
speculative purposes. The Company does from time to time enter into forward sale
or purchase contracts for foreign currencies to hedge specific sales
transactions. As of December 31, 1998, the aggregate notional amount of these
contracts was $7.9 million. Holding other variables constant, if the U.S. dollar
weakened by 10%, the market value of foreign currency contracts outstanding at
December 31, 1998 would decrease by approximately $0.8 million. The decrease in
value would be substantially offset from the revaluation of the underlying
transactions hedged.
23
Interest Rate Sensitivity. The Company borrows funds under variable rate
borrowing arrangements. As of December 31, 1998 and during the entire 1998
period, the Company did not hedge its interest rate risk. The Company would not
experience a material impact on its income before taxes as the result of a 1%
increase in the short-term interest rates which are used to calculate its
interest expense.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are included on pages F-1 to
F-31 of this Report. The schedule of valuation and qualifying accounts is
included on page S-1.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors of FEI are elected at the FEI annual meeting to serve until
their successors are elected and qualified. If any of the nominees for director
at the FEI annual meeting becomes unavailable for election for any reason (none
being known), the proxy holders will have discretionary authority to vote
pursuant to the proxy for a suitable substitute or substitutes. The following
table briefly describes FEI's nominees for directors to be voted on at the 1999
Annual Shareholders Meeting. Information with respect to executive officers of
FEI is included under Item 4(a) of Part I of this Report.
Director
Name, Principal Occupation and Other Directorships Age Since
-------------------------------------------------- --- --------
Michael J. Attardo. Mr. Attardo joined FEI as a director in April 1999. 58 1999
Since 1992, Dr. Attardo has been General Manager of International Business
Machine Corporation's Microelectronics Division. Dr. Attardo has more than
30 years of experience in engineering, management and development at IBM.
Before being named to his current position, Dr. Attardo was General Manager
of the Manufacturing and Process Development Division for IBM. He is a
member of both the board of directors of the Semiconductor Industries
Association and the Engineering Council of the Columbia University School
of Engineering and Applied Science. He also serves on the joint
industry-government Semiconductor Technology Council for the United States
Department of Defense.
Alfred B. Bok. Mr. Bok has served as a director of FEI since February 1997. 59 1997
He is Chief Executive Officer of Philips Business Electronics International
B.V., a position he has held since August 1992. From February 1989 to
August 1992, Mr. Bok was a Vice President of Philips Medical Systems. Mr.
Bok holds an Engineers degree in applied physics and a Ph.D. in physics
from the Technical University of Delft.
William E. Curran. Mr. Curran has served as a director of FEI since 50 1997
February 1997. He is Senior Vice President, Chief Financial Officer and a
director of Philips Electronics North America Corporation, a Philips
affiliate. Mr. Curran has held those positions since February 1996. From
March 1993 to February 1996, he was Chief Operating Officer of Philips
Medical Systems and from February 1987 to February 1996 Mr. Curran was
Chief Financial Officer of Philips Medical Systems. Mr. Curran holds a B.S.
in Management Engineering from Rensselaer Polytechnic Institute and an
M.B.A. from the University of Pennsylvania.
Dr. William W. Lattin. Dr. Lattin joined FEI as a director in April 1999. 58 1999
Dr. Lattin is Executive Vice President of Synopsys, Inc.,
25
where he has been employed since October 1994. From September 1986 through
February 1994, Dr. Lattin served as President and Chief Executive Officer
of Logic Modeling Corp. From 1975 to 1986, Dr. Lattin held various
engineering and management positions with Intel Corporation. Dr. Lattin
also serves as a director on the boards of RadiSys Corporation, the Oregon
Graduate Institute, EasyStreet Online Services, Inc., and Synopsys, Inc.
Dr. Lattin holds a Ph.D. in electrical engineering from Arizona State
University and a M.S.E.E. and B.S.E.E. from the University of
California-Berkeley.
Vahe' A. Sarkissian. Mr. Sarkissian joined FEI as President, Chief Executive 56 1998
Officer and director in May 1998. From 1994 to 1995, he was President and
Chief Executive Officer of Metrologix, Inc., an electron beam metrology
company. Mr. Sarkissian was with Silicon Valley Group ("SVG") from 1989 to
1993, as President and Chief Operating Officer, and before that as
President and Chief Executive Officer of SVG Lithography Systems, a
subsidiary of SVG. Before SVG he was a Vice President of Data General Corp.
He has held several technical and management positions with semiconductor
companies, including Advanced Micro Devices, Inc. He has served as a member
of the board of directors for several technology companies. Mr. Sarkissian
holds a B.S.E.E. from Northrop University and an M.S.E.E. from the
University of Santa Clara.
Theo J.H.J. Sonnemans. Mr. Sonnemans has served as a director of FEI since 55 1997
February 1997. He is the Chief Financial Officer of Philips Business
Electronics, a position he has held since May 1995. From April 1984 to May
1995 Mr. Sonnemans was Chief Financial Officer of the Television Unit of
Philips Sound and Vision production division.
Dr. Lynwood W. Swanson. Dr. Swanson co-founded FEI in 1971 and has served 64 1971
as a director since that time. He served as President of FEI until October
1994, at which time he became Chairman of the board of directors. Dr.
Swanson was appointed Chief Scientist in May 1990 and served as Chief
Executive Officer of FEI from May 1988 to February 1997. Dr. Swanson holds
B.S. degrees in physics and chemistry from the University of the Pacific
and a Ph.D. degree in physical chemistry from the University of California
at Davis.
Karel D. van der Mast. Dr. van der Mast joined FEI as a director and as 51 1997
Executive Vice President Marketing and Chief Technical Officer 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
26
Philips Electronic Optics as Research and Development Manager. Dr. van der
Mast holds an Engineers degree and a Ph.D. in physics from the Technical
University of Delft.
Donald R. VanLuvanee. Mr. VanLuvanee has served as a director of FEI since 53 1995
November 1995. Mr. VanLuvanee has been President, Chief Executive Officer
and a director of Electro Scientific Industries, Inc., an electronics
company, since July 1992. Mr. VanLuvanee also serves as a director of Micro
Component Technology, Inc., a semiconductor equipment manufacturing
company.
FEI Board Meetings and Committees
The FEI board met seven times during 1998. No director attended fewer than
75% of the meetings of the board of directors and the committees of which the
director was a member during 1998. The standing committees of the board of
directors are the audit committee and the compensation committee.
The audit committee makes recommendations concerning the engagement of the
independent public accountants, reviews with the independent public accountants
the plans and results of the audit engagement, approves professional services
provided by the independent public accountants, reviews the independence of the
independent public accountants, considers the range of the audit and non-audit
fees and reviews the adequacy of FEI's internal accounting controls. In 1998 the
audit committee consisted of Theo Sonnemans, Lloyd Swenson and Donald R.
VanLuvanee. The compensation committee determines compensation for FEI's
executive officers and administers FEI's stock incentive plan and the employee
share purchase plan. In 1998 the compensation committee consisted of Alfred B.
Bok, William E. Curran, Lloyd Swenson and Donald R. VanLuvanee.
Under the terms of the stock incentive plan, each individual who becomes an
independent director receives a nonqualified option to purchase 5,000 shares of
common stock when the individual becomes a director. In addition, each
independent director of FEI is automatically granted an annual
non-discretionary, non-statutory option to purchase 3,000 shares of common
stock. In 1998, independent directors were each paid $7,500 per year for their
services, $1,000 for attendance at each board meeting and an additional $500 for
attendance at each committee meeting, provided the committee meeting was not
held at the same location and within 24 hours of a scheduled board meeting.
No directors other than independent directors receive fees or option grants
for services as a director. All directors were reimbursed in 1998 for reasonable
expenses incurred in attending meetings.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
reports of all transactions in FEI's common stock by FEI's executive officers
and directors to be filed with the
27
SEC. During 1998, one stock transaction relating to stock owned by Mr. Bernd
Volbert, an executive officer, was reported late on one Form 4.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all compensation paid by FEI with respect to
the last three years to the chief executive officer and the most highly
compensated four other current executive officers and two former executive
officers.
Long Term Compensation
Annual Compensation -------------------------
------------------------------- Awards
Other ------------------------- All
Annual Restricted Securities Other
Name and Principal Compen- Stock Underlying Compen-
Position Year Salary Bonus sation Award(s) Option sation
--------------------------------- ---- --------- --------- --------- ---------- ---------- ---------
Vahe' A. Sarkissian 1998 $ 197,923 $ 0 $ -- $ 370,313 (2) 98,760 (3) $ 36,000 (4)
Chief Executive 1997 -- -- -- -- -- --
Officer(1).................... 1996 -- -- -- -- -- --
Karel D. van der Mast 1998 $ 180,000 $ 20,000 $ -- $ -- 100,000 (3) $ --
Executive Vice 1997 127,108 13,851 -- -- -- --
President, Marketing (5)...... 1996 -- -- -- -- -- --
Joseph C. Robinson 1998 $ 137,212 $ 32,447 $ -- $ -- 55,000 (3) $ 63,130 (6)
Senior Vice President, 1997 132,000 10,400 -- -- -- --
Sales and Service............. 1996 120,129 300 -- -- 42,000 --
Dr. Lynwood W. Swanson 1998 $ 150,000 $ 15,750 $ -- $ -- 95,000 (3) $ --
Chairman and Chief 1997 161,955 11,250 -- -- -- --
Scientist..................... 1996 202,917 -- -- -- 10,000 --
Charles Lake 1998 $ 139,616 $ 12,000 $ -- $ -- 83,750 (3) $ --
Senior Vice President, 1997 124,891 10,400 -- -- -- --
Manufacturing................. 1996 109,082 -- -- -- 7,500 --
William G. Langley
Former Executive Vice 1998 $ 154,083 $ -- $ -- $ -- 25,000 (3) $270,000 (7)
President and Chief 1997 161,955 11,250 -- -- -- --
Financial Officer............. 1996 202,917 -- -- -- 10,000 --
William A. Whitward 1998 $ 137,626 $ 49,513 $ -- $ -- 50,000 (3) $ --
Former Chief 1997 132,767 26,888 -- -- -- --
Executive Officer(8).......... 1996 -- -- -- -- -- --
- --------------
(1) Mr. Sarkissian joined FEI on May 15, 1998. His compensation listed does not
include a guaranteed first-year bonus of $200,000 to be paid in May 1999.
(2) The fair market value of a 50,000 share restricted stock bonus granted to
Mr. Sarkissian on June 25, 1998, based on the closing price on that date of
$7.40625 per share. 25,000 shares of the 50,000 share stock award are
subject to forfeiture if Mr. Sarkissian's employment as Chief Executive
Officer of FEI is terminated before June 25, 1999.
(3) A portion of the stock options granted in 1998 includes options which were
canceled on September 18, 1998 as a result of an option repricing. See
"Ten-Year Option Repricings."
(4) Amount loaned to Mr. Sarkissian in 1998 for payment of state income taxes
on a stock bonus of 50,000 shares. The loan bears interest rate at 5.58%
and will be forgiven at the rate of 20% each year if Mr. Sarkissian remains
employed as Chief Executive Officer of FEI.
(5) Dr. van der Mast joined FEI in February 1997. Of the total salary and bonus
received by Dr. van der Mast in 1997, a portion was paid to him in Dutch
guilders and was converted to U.S. dollars using an average conversion rate
of 1.95.
(6) Mr. Robinson received $63,130 in moving-related expense reimbursements in
1998.
(7) Mr. Langley received $270,000 in severance payments in connection with the
termination of his employment effective September 30, 1998.
(8) Mr. Whitward joined FEI in February 1997. All of his compensation was paid
to him in Dutch guilders and was converted to U.S. dollars using an average
conversion rate of 1.95. Mr. Whitward retired from FEI effective October
31, 1998.
28
Stock Option Grants in Last Fiscal Year
The following table provides information on option grants during 1998 to
the persons named in the summary compensation table.
FEI Option Grants in Last Fiscal Year
Potential Realizable
Individual Grants Value at Assumed
-------------------------- Annual Rates of
Number of % of Total Stock Price
Securities Options Appreciation for
Underlying Granted to Exercise Option Term(1)
Options Employees in or Base Expiration ----------------------
Name Granted Fiscal Year Price Date 5% 10%
---- ---------- ------------ --------- ---------- --------- ---------
Vahe' A. Sarkissian........ 49,380 (2) 3.91% $ 6.625 9/18/2008 $ 205,738 $ 521,381
49,380 (3) 3.91% $ 10.125 -- $ 314,430 $ 796,827
Karel D. van der Mast..... 50,000 (2) 3.96% $ 6.625 9/18/2008 $ 208,321 $ 527,927
50,000 (3) 3.96% $ 9.000 -- $ 283,003 $ 717,184
Joseph C. Robinson........ 45,000 (2) 3.56% $ 6.625 9/18/2008 $ 187,489 $ 475,134
10,000 (3) 0.79% $ 13.1875 -- $ 82,935 $ 210,175
Lynwood W. Swanson........ 85,000 (2) 6.73% $ 6.625 9/18/2008 $ 354,146 $ 897,475
10,000 (3) 0.79% $ 13.1875 -- $ 82,935 $ 210,175
Charles Lake.............. 73,750 (2) 5.84% $ 6.625 9/18/2008 $ 307,274 $ 778,691
10,000 (3) 0.79% $ 13.1875 -- $ 82,935 $ 210,175
William G. Langley........ 10,000 (2) 0.79% $ 6.625 3/31/2000 $ 1,630 $ 3,230
15,000 (3)(4) 1.19% $ 13.1875 -- $ 124,403 $ 315,262
William A. Whitward....... 25,000 (2) 1.98% $ 6.6250 9/18/2003 $ 45,725 $ 101,200
25,000 (3) 1.98% $ 10.500 -- $ 72,450 $ 160,380
- --------------
(1) The 5% and 10% assumed rates of appreciation are required by the Securities
and Exchange Commission and do not represent FEI=s estimate or projection
of the future common stock price.
(2) Options granted in September 1998 in connection with a repricing of certain
outstanding stock options to an exercise price at the current market price
as of September 18, 1998. The options become exercisable at the rate of 20
percent on March 18, 1999, 20 percent on September 18, 1999, 20 percent on
September 18, 2000, 20 percent on September 18, 2001, and 20 percent on
September 18, 2002. All of Mr. Langley's and Mr. Whitward's options,
however, are immediately exercisable.
(3) Options granted in 1998 but canceled effective September 18, 1998 in
connection with the option repricing. Please refer to the "Ten Year Option
Repricings" table for more information about FEI's September 1998 option
repricing.
(4) On September 18, 1998, Mr. Langley elected to reprice options to purchase
25,000 shares. In exchange for these terminated options to purchase 25,000
shares, Mr. Langley received a new, repriced, fully exercisable option to
purchase 10,000 shares of FEI common stock exercisable through March 31,
2000. Of the remaining 95,000 options outstanding that Mr. Langley elected
not to reprice, 78,000 are fully exercisable until March 31, 2000 and
17,000 have expired. Accordingly, Mr. Langley holds options to purchase
88,000 shares of immediately exercisable stock options that expire on March
31, 2000.
29
FEI Option Exercises and Year-End Option Values
The following table sets forth, for each of the persons named in the
summary compensation table, the shares acquired and the value realized on
exercise of stock options during 1998 and the fiscal year-end number and value
of unexercised options:
Number of Value of
Shares Subject Unexercised
to Unexercised in-the-Money
Options Options
Number of at FY-End at FY-End
Shares ----------------- -----------------
Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized Unexercisable (1) Unexercisable (1)
------------------------ ----------- -------------- ----------------- -----------------
Vahe' A. Sarkissian 0 -- 0/49,380 $0/$49,380
Karel D. van der Mast 0 -- 0/50,000 $0/$50,000
Joseph C. Robinson 0 -- 0/45,000 $0/$45,000
Lynwood W. Swanson 0 -- 14,000/91,000 $0/$85,000
Charles Lake 0 -- 667/73,750 $88/$73,750
William G. Langley 0 -- 88,000/0 $11,250/$0
William A. Whitward 0 -- 25,000/0 $25,000/$0
- --------------
(1) Calculated based on the December 31, 1998 closing stock price of
$7.625, less the exercise price, multiplied by the number of shares
underlying the option.
FEI Termination Agreements
On August 28, 1998, FEI entered into an employment transition agreement
with Mr. Langley, pursuant to which he resigned as an employee, officer and
director effective September 30, 1998. In connection with Mr. Langley's
termination of employment, the exercise period for options to purchase 78,000
shares of common stock was extended from October 31, 1998 to March 31, 2000. In
addition, when Mr. Langley elected in September 1998 to reprice options for
25,000 shares, he received new options for 10,000 shares exercisable immediately
and expiring on March 31, 2000.
FEI Ten-Year Option Repricings
In September 1998 FEI offered to all stock option holders, including
executive officers and directors except Mr. Langley, the opportunity to
surrender their existing stock options in exchange for new options for an equal
number of shares with an exercise price of $6.625 per share, the fair market
value on September 18, 1998. Mr. Langley surrendered existing stock options for
25,000 shares in exchange for new options to purchase 10,000 shares with an
exercise price of $6.625 per share.
30
The following table sets forth information regarding option repricing for
persons named in the summary compensation table and for all other executive
officers.
Ten-Year Option Repricings
Market Length of
Number of Price Exercise Original
Securities of Stock at Price at Option Term
Underlying Time of Time of Remaining at
Options Repricing Repricing New Date of
Repriced or Or or Exercise Repricing or
Name Date Amended Amendment Amendment Price Amendment
- ---- -------- ----------- ----------- ----------- ----------- ------------
Vahe' A. Sarkissian 9/18/98 49,380 $ 6.625 $ 10.1250 $ 6.625 9.65 years
Chief Executive Officer..........
Karel D. van der Mast 9/18/98 50,000 $ 6.625 $ 9,000 $ 6.625 9.33 years
Executive Vice President,
Marketing........................
Joseph C. Robinson 9/18/98 18,000 $ 6.625 $ 9.2500 $ 6.625 7.25 years
Senior Vice President, Sales 10,000 6.625 13.1875 6.625 9.5 years
and Service...................... 12,000 6.625 12.000 6.625 6.58 years
5,000 6.625 15.000 6.625 6.58 years
Lynwood W. Swanson 9/18/98 10,000 $ 6.625 $ 13.1875 $ 6.625 9.5 years
Chairman and Chief 75,000 6.625 13.2500 6.625 6.83 years
Scientist........................
Charles Lake 9/18/98 10,000 $ 6.625 $ 13.1875 $ 6.625 9.5 years
Senior Vice President, 3,750 6.625 15.000 6.625 7.58 years
Manufacturing.................... 10,000 6.625 9.2500 6.625 6.25 years
50,000 6.625 13.2500 6.625 5.83 years
William G. Langley 9/18/98 10,000 (1) $ 6.625 $ 15.000 $ 6.625 7.5 years
Former Executive Vice 15,000 6.625 13.1875 6.625 9.5 years
President and Chief Financial
Officer..........................
William A. Whitward 9/18/98 25,000 $ 6.625 $ 10.5000 $ 6.625 4.58 years
Former Chief Executive
Officer..........................
Mark V. Allred 9/18/98 5,000 $ 6.625 $ 13.1875 $ 6.625 9.5 years
Corporate Controller............. 10,000 6.625 9.0000 6.625 9.75 years
Rob Fastenau 9/18/98 5,000 $ 6.625 $ 13.1875 $ 6.625 9.5 years
Senior Vice President, Research
and Development..................
Jim D. Higgs 9/18/98 20,000 $ 6.625 $ 8.7500 $ 6.625 9.4 years
Senior Vice President, Human 50,000 6.625 18.5000 6.625 9 years
Resources
Michel van Woesik 9/18/98 2,000 $ 6.625 $ 13.1875 $ 6.625 9.5 years
Treasurer, European Controller... 6.625
Bernd Volbert 9/18/98 5,000 $ 6.625 $ 13.1875 $ 6.625 9.5 years
Senior Vice President, Sales
(1) Mr. Langley surrendered existing options to purchase 25,000 shares in
exchange for repriced options to purchase 10,000 shares.
31
FEI COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION<F1>
The FEI compensation committee consists of four directors and, pursuant to
authority delegated by the board of directors, determines and administers the
compensation of FEI=s executive officers. In setting the compensation for the
executive officers other than the President and Chief Executive Officer, the
compensation committee works closely with the Chief Executive Officer, who makes
specific recommendations to the committee concerning compensation for each of
the other executive officers. Although the board of directors has granted the
compensation committee full authority to set executive compensation, in practice
the decisions of the compensation committee are usually reported as
recommendations to the full board of directors, which has in the past generally
approved the recommendations.
Internal Revenue Code Section 162(m), as adopted in 1993, limits to
$1,000,000 per person the amount that FEI may deduct for compensation paid to
any of its most highly compensated officers in any year after 1993. The levels
of salary and bonus paid by FEI have not exceeded this limit. Upon the exercise
of nonqualified incentive stock options, however, the excess of the current
market price over the option price (option spread) is treated as compensation
and, therefore, it may be possible for option exercises by an officer in any
year to cause the officer's total compensation to exceed $1,000,000. Under
certain regulations, option spread compensation from options that meet certain
requirements will not be subject to the $1,000,000 cap on deductibility, and it
is FEI's current policy generally to grant options that meet those requirements.
Compensation Principles
Executive compensation is based on several general principles, which are
summarized below:
o Provide competitive total compensation that enables FEI to attract and
retain key executives
o Link corporate and individual performance to compensation
o Encourage long-term success and align shareholder interests with
management interests by giving executives the opportunity to acquire
stock in FEI
o Reward initiative.
- --------------
<F1>This section is not "soliciting material," is not deemed "filed" with
the Securities and Exchange Commission and is not to be incorporated by
reference in any filing of FEI under the Securities Act of 1933, or the
Securities Act of 1934, regardless of date or any other general incorporation
language in such filing.
32
Compensation Components
The primary components of FEI's executive officer compensation program are
base salary, annual incentive arrangements and long-term incentive compensation
in the form of stock options.
Base Salary. FEI attempts to establish base salary levels for FEI's
executive officers that are competitive with those established by companies of
similar size in the electronics industry. When determining salaries, the
compensation committee also takes into account individual experience levels, job
responsibility and individual performance. Each executive officer's salary is
reviewed annually, and increases to base salary are made to reflect competitive
market increases and the individual factors described above.
Senior Manager Bonus Plan. In 1998 senior managers of FEI were eligible for
payment of an annual bonus, at levels generally ranging from 12% to 20% of base
salary, with the amount being determined based on a combination of company-wide,
divisional and individual performance. FEI paid senior managers bonuses ranging
from 35% to 60% of each individual's potential bonus in 1998. For 1999, the
compensation committee decided to tie pay-out of bonuses entirely to Company
performance and established certain targets for attaining the bonus. The
committee also increased the range of potential bonuses for senior managers as a
percentage of base salary to 15% to 30%. The bonus of the Chief Executive
Officer is determined separately by the compensation committee.
Long-Term Incentives--Options and Restricted Stock. FEI's primary long-term
incentive compensation is through stock options. In 1998 FEI also used
restricted stock as a part of the long-term compensation incentive for its
President and Chief Executive Officer.
The compensation committee believes that the motivation of senior managers
increases as the market value of FEI's common stock increases. In order to align
the financial interests of executive officers and other key employees with those
of the shareholders, FEI grants stock options on a periodic basis, taking into
account, among other factors, the size and terms of previous grants of
equity-based compensation and stock holdings in determining awards. On one
occasion in 1998, FEI also made a restricted stock grant as incentive
compensation to the Chief Executive Officer. Options and restricted stock
grants, in particular, reward executive officers and other key employees for
performance that results in increases in the market price of FEI's common stock,
which directly benefits all shareholders.
Options granted under the stock incentive plan generally have been granted
at an exercise price equal to the fair market value of the common stock on the
date of grant, based on the closing price as reported on the Nasdaq National
Market on the date of grant. Options generally become exercisable over a
four-year period with a specified percentage becoming exercisable each year.
Stock options generally have a ten-year term, but terminate earlier if
employment is terminated. Initial option grants to executive officers depend
upon the level of responsibility and position, and subsequent grants are made
based on the compensation committee's subjective assessment of performance,
among other factors. The compensation committee believes that these features of
the option and stock grants not only provide an incentive for executives to
remain in the employ of FEI, but also make longer term growth in
33
share prices important for the senior managers who receive stock options or
restricted stock grants.
The compensation committee administers the stock incentive plan and
recommends to the full board of directors awards of stock options to senior
managers and other key employees of FEI. The compensation committee expects that
in the future, if additional grants are made, consideration will be given to the
number of options granted in the past and the exercise price of such grants.
Repriced Options. In September 1998 FEI offered to all employee option
holders and directors who held outstanding stock options the opportunity to
surrender their options with an exercise price of greater than $6.625 in
exchange for new options for an equal number of shares with an exercise price of
$6.625 per share, the current fair market price on September 18, 1998. The new
options are nonqualified stock options and, in some cases, were granted in
replacement of incentive stock options. The replacement options were granted
with a vesting schedule of 20% six months after grant, 20% one year after grant,
and 20% in each year thereafter until fully vested. Exceptions to this vesting
schedule were made for repriced options granted to Mr. Langley and Mr. Whitward,
each of whom who resigned from FEI in 1998. Mr. Langley surrendered an option to
purchase 25,000 shares and received a repriced option to purchase 10,000 shares
which was fully vested on the date of grant. Mr. Whitward surrendered an option
to purchase 25,000 shares and received a repriced option to purchase 25,000
shares, which was fully vested on the date of grant. The 1998 repricing was
offered to realign the value of all previously granted options, upon
exercisability, with the market value of the FEI common stock at the time of
repricing.
Compensation of Chief Executive Officer
Vahe' A. Sarkissian joined FEI as Chief Executive Officer in May 1998. The
principal components of compensation for the Mr. Sarkissian for fiscal 1998 were
o base salary in the amount of $310,000
o a guaranteed cash bonus for his initial 12 month period of employment
of $200,000
o an incentive stock option to purchase 49,380 shares of common stock
o a stock bonus in the amount of 50,000 shares, which vested 50%
immediately and 50% after completing 13 months of employment
o a sale of 150,620 shares of restricted stock to Mr. Sarkissian at
$7.40625 per share
o a loan in the amount of the purchase price for the restricted stock,
at an interest rate of 5.58%
34
o a loan in the amount of the taxes owed by Mr. Sarkissian on the stock
bonus, at an interest rate of 5.58%. !
Mr. Sarkissian's base salary, cash bonus, stock bonus and the receipt of a
stock option were negotiated as part of his compensation package when he joined
FEI and reflect a consideration of competitive forces as well as FEI's desire to
retain a skilled senior executive of the stature of Mr. Sarkissian, who has
significant experience in the management of semiconductor equipment
manufacturing companies. Shortly after commencing employment, at the mutual
agreement of Mr. Sarkissian and the compensation committee, a portion of the
stock option Mr. Sarkissian was to have received upon commencement of employment
was replaced with a restricted stock grant and a loan from FEI in the amount of
the purchase price of the restricted stock. The shares vested 20% on June 25,
1998 and will vest an additional 20% each June 25th thereafter for four years
until vested in full.
Compensation Committee Members<F1>
Alfred B. Bok
William E. Curran
Lloyd Swenson
Donald R. VanLuvanee
- --------------
<F1>Mr. Swenson retired from the FEI Board of directors and compensation
committee effective April 1, 1999.
35
FEI PERFORMANCE GRAPH<F2>
Set forth below is a line graph comparing the cumulative total shareholder
return of FEI common stock, with the cumulative total return of the Nasdaq Stock
Market Index ("Nasdaq Index") and the Non-Financial Nasdaq Index, assuming the
investment of $100 on June 1, 1995, the date of FEI's initial public offering,
and reinvestment of any dividends.
[Graphic line chart depicting performance omitted.]
6/1/95 12/29/95 12/31/96 12/31/97 12/31/98
------ -------- -------- -------- --------
FEI Company 100 119 104 138 69
Nasdaq Index 100 123 150 185 260
Non-Financial 100 121 147 173 253
Nasdaq Index
- --------------
<F2> This Section is not "soliciting material," is not deemed "filed" with
the Securities and Exchange Commission and is not to be incorporated by
reference in any filing of FEI under the Securities Act of 1933 or the
Securities Exchange Act of 1934, regardless of date or any general incorporation
language in such filing.
36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The common stock is the only outstanding authorized voting security of FEI.
The record date for determining holders of common stock entitled to vote at the
FEI annual meeting is April 2, 1999. On that date there were 18,250,781 shares
of common stock outstanding, entitled to one vote per share. The common stock
does not have cumulative voting rights.
The following table contains certain information regarding the beneficial
ownership as of April 2, 1999 of the common stock by (i) each person who owns
beneficially more than 5% of the outstanding shares of common stock, (ii) each
director of FEI, (iii) each executive officer of FEI named in the Summary
Compensation Table and (iv) all executive officers and directors as a group.
This information is based on information received from or on behalf of the named
individuals.
Number of
Shares
Beneficially Percentage
Beneficial Owner Owned (1) of Shares
---------------- ------------- ----------
Philips Business Electronics International B.V........................ 9,942,423 54.5%
Building VP-1, PO Box 218
5600 MD Eindhoven
The Netherlands
Lynwood W. Swanson (2)................................................ 499,313 2.7%
Vahe' A. Sarkissian (3)............................................... 211,498 1.2%
Karel D. van der Mast (4)............................................. 19,104 *
Donald R. VanLuvanee (5).............................................. 12,497 *
Charles Lake (6)...................................................... 2,667 *
Joseph C. Robinson (7)................................................ 2,300 *
Alfred B. Bok......................................................... -- --
William E. Curran..................................................... -- --
Theo J.H.J. Sonnemans................................................. -- --
Michael J. Attardo (8)................................................ 278 *
William W. Lattin (9)................................................. 139 *
All directors and executive officers as a group
(17 persons) (10)............................................ 772,832 4.2%
- --------------
* Less than 1%.
37
(1) Shares that the person has the right to acquire within 60 days after April
2, 1999 are deemed to be outstanding in calculating the percentage
ownership of the person or group but are not deemed to be outstanding as to
any other person or group.
(2) Includes shares held jointly by Dr. Swanson and his wife and 2,000 shares
subject to options exercisable within 60 days after April 2, 1999.
(3) Includes 9,876 shares subject to options exercisable within 60 days after
April 2, 1999.
(4) Includes 10,000 shares subject to options exercisable within 60 days after
April 2, 1999.
(5) Includes 1,170 shares subject to options exercisable within 60 days after
April 2, 1999.
(6) Includes 2,000 shares subject to options exercisable within 60 days after
April 2, 1999.
(7) Includes 2,000 shares subject to options exercisable within 60 days after
April 2, 1999.
(8) Represents 278 shares subject to options exercisable within 60 days after
April 2, 1999.
(9) Represents 139 shares subject to options exercisable within 60 days after
April 2, 1999.
(10) Includes 5,800 shares subject to options exercisable within 60 days after
April 2, 1999 held by executive officers not listed.
38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Machinefabrieken Contract. In January 1998 FEI and Philips Machinefabrieken
Nederland B.V. entered into a Development Agreement under which Machinefabrieken
was to develop the stage assembly for FEI's next generation of instruments. The
agreement provided for payment by FEI to Machinefabrieken of between NLG 7
million and NLG 11 million, depending on the time of completion of the project,
and provided for termination of the agreement by FEI if the subject technology
was not developed before February 28, 1999. Each entity negotiated the contract
on its own behalf on an arms-length basis. In September 1998 the contract was
terminated before completion and FEI's obligations to Machinefabrieken were
settled for $3.6 million for design and development services rendered before
termination. The amount incurred under the contract was included as research and
development expense during the year ended December 31, 1998.
Philips Services Agreements. Effective February 21, 1997, the closing date
of the PEO combination, some subsidiaries of Koninklijke Philips Electronics
N.V. began providing a variety of administrative services to non-U.S.
subsidiaries of FEI engaged in the electron optics business formerly operated by
Philips. These services arrangements were contained in approximately eight
services agreements and provided for services such as
o Human Resource Management - services related to personnel and
personnel management systems
o Letter of Credit - export sales
o Philips Research - contract research related to electron optics
microscopy technology
o Corporate Purchasing - central payment system for accounts payable,
purchasing information and training
o Central Finance and Administration - fixed asset registration, VAT,
customs and import duties services
o Corporate Bureau on Environment and Energy - support and review on
environmental matters and energy costs.
These service agreements also provide for Philips' affiliates to continue to
provide some administrative, accounting, information services, logistics,
occupancy and other services that have been provided by Philips to the PEO
operations in the past. Management believes that, had these agreements been in
place on an historical basis, they would not have resulted in any material
change in the historical results of operations of FEI. During the year ended
December 31, 1998, FEI paid Philips approximately $4.35 million for these
administrative and other services.
Philips Distribution Agreements. At the time of the PEO combination, FEI
entered into a three year distribution agreement with Philips under which
Philips' affiliates in specified territories provide sales and service
activities for FEI. FEI sells its products to these affiliates at a discount
from list price for resale to end users. In addition to sales for further
distribution, some Philips units buy products from FEI for their own use. Total
sales to Philips entities amounted to approximately $16.6 million during the
year ended December 31, 1998. The
39
distribution agreement will be renewed for successive one-year periods at the
end of 1999 unless terminated before that time. Under specified conditions of
termination, FEI has an option to purchase these distribution businesses at a
fair market value.
Philips Internal Audit. Beginning in 1998, FEI engaged the services of
Philips Corporate Internal Audit Department to perform what is expected to be an
annual operational audit of FEI and its subsidiaries. The Philips internal audit
process is generally implemented for all Philips subsidiaries and divisions and
focuses primarily on an evaluation of business processes and their function and
financial results associated with creation of management information. FEI's
audit committee determined that this type of audit of FEI would be complementary
to and not duplicative of the annual audit to be conducted by FEI's independent
financial auditors. The fee for 1998 for these services was $60,000.
Philips Stock Purchase Agreement. On December 3, 1998 FEI and Philips
Business Electronics signed a stock purchase agreement providing that Philips
Business Electronics will purchase additional newly issued shares of FEI common
stock to provide the funds to FEI for the cash portion of the consideration to
be paid to the Micrion stockholders and some of the merger transaction costs of
FEI. The terms of the stock purchase agreement are described beginning on page
75 of this joint proxy statement/prospectus.
Loans to Mr. Sarkissian. On June 25, 1998, in connection with the
commencement of his employment with FEI, Mr. Vahe' Sarkissian, the President and
Chief Executive Officer of FEI, was granted a stock bonus of 50,000 shares of
common stock of FEI, valued at $7 13/32 per share, the fair market value of
FEI's common stock on the date of grant. 25,000 shares of the stock bonus are
subject to forfeiture if Mr. Sarkissian's employment as Chief Executive Officer
of FEI terminates before June 25, 1999. FEI agreed to make loans to Mr.
Sarkissian on the following terms in connection with the payment of taxes
resulting from this stock award. The term of each note will be five years and
the interest rate will be 5.58%, with all principal and interest due at
maturity. FEI is authorized to forgive any such loan to Mr. Sarkissian, subject
to the following conditions:
(a) The loan may be forgiven ratably over a five-year period beginning on
the date of the loan, but only for so long as Mr. Sarkissian remains
employed as FEI's Chief Executive Officer during the five-year period.
(b) If Mr. Sarkissian's employment as FEI's Chief Executive Officer is
terminated before the expiration of the five-year period described
above, any portion of the loan that has not been forgiven may not be
forgiven and the balance of the loan amount outstanding plus accrued
interest will become due and payable on the terms of the note
representing the loan.
FEI entered into a Stock Bonus Agreement with Mr. Sarkissian dated June 25,
1998 containing these terms and arrangements.
Also on June 25, 1998, in connection with his commencement of employment
with FEI as Chief Executive Officer, FEI sold to Mr. Sarkissian 150,620 shares
of common stock of FEI subject to specified restrictions. The purchase price for
the shares was $7 13/32, the fair
40
market value of FEI's common stock on the date of grant. The restricted shares
purchased by Mr. Sarkissian vested 20% on June 25, 1998 and will vest an
additional 20% annually thereafter through the year 2002.
Effective June 25, 1998 FEI loaned Mr. Sarkissian the amount of $1,115,530
for the purchase of the restricted shares on the following terms:
o the loan is represented by a promissory note in the form approved by
FEI's compensation committee
o the term of the loan is four years from the date of issuance
o interest on the loan accrues at 5.58%
o interest is payable at maturity.
If before June 25, 2002 Mr. Sarkissian terminates his employment with FEI
voluntarily or if his employment is terminated for cause, FEI will have the
option to repurchase any unvested shares at the price paid by Mr. Sarkissian.
FEI will have the right to offset the repurchase payment against amounts
outstanding under the loan extended by FEI for purchase of the shares.
If during the same period Mr. Sarkissian's employment is terminated
involuntarily without cause, Mr. Sarkissian will have the option to cause FEI to
repurchase any unvested shares at a price equal to his cost plus interest owed
on the portion of the loan attributable to any unvested shares, with the
interest calculated at the same rate as the loan interest rate.
FEI entered into a Restricted Stock Purchase Agreement with Mr. Sarkissian
dated June 25, 1998 containing these terms and arrangements. For more
information about Mr. Sarkissian's compensation arrangements, you should read
the FEI Compensation Committee's Report on Executive Compensation beginning on
page 114.
Accurel Contract. Mr. Sarkissian owns 50% of the outstanding shares of
stock of Accurel Systems International Corp., a semiconductor analytical
services laboratory located in Sunnyvale, California. During 1998, Accurel
purchased products from FEI with a purchase price of $1,721,000 and received
from FEI equipment lease guaranties in the amount of $464,000. FEI believes the
transactions were made on arm's length terms.
41
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, 1997
and 1998 F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1997 and 1998 F-4
Consolidated Statements of Comprehensive Loss for the Years
Ended December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1996, 1997 and 1998 F-6
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1996, 1997 and 1998 F-7
Notes to Consolidated Financial Statements F-8
(a)(2) Financial Statement Schedules*
Valuation and Qualifying Accounts for the Years Ended S-1
December 31, 1996, 1997 and 1998.
* All other schedules have been omitted because they are inapplicable or not
required or because the information is given in the consolidated financial
statements or the notes thereto. This supplemental schedule should be read in
conjunction with the Consolidated Financial Statements and notes thereto
elsewhere in this document.
42
(a)(3) Exhibits
2.1 (4) Combination Agreement, dated November 15, 1996, as amended, between
the Registrant and Philips Business Electronics International B.V.
2.2 (7) Agreement and Plan of Merger, dated December 3, 1998, among the
Registrant, Micrion Corporation and MC Acquisition Corporation.
3.1 (4) Second Amended and Restated Articles of Incorporation, as amended
3.2 (4) Restated Bylaws
4.1 See Articles III and IV of Exhibit 3.1 and Articles I and VI of
Exhibit 3.2
10.1 (1) + 1984 Stock Incentive Plan
10.2 (4) + 1995 Stock Incentive Plan, as amended
10.3 (2) + 1995 Supplemental Stock Incentive Plan
10.4 (1) + Form of Incentive Stock Option Agreement
10.5 (1) + Form of Nonstatutory Stock Option Agreement
10.6 (1) 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 (4) Lease, dated January 11, 1996, between the Registrant and Pacific
Realty Associates, L.P.
10.8 (4) Lease, dated June 6, 1996, between the Registrant and Pacific
Realty Associates, L.P.
10.9 (1) # Agreement, dated February 9, 1994, between the Registrant and
Philips Electron Optics B.V.
10.10 (6) Lease, dated November 25, 1997, between the Registrant and Pacific
Realty Associates, L.P.
10.11 (5) Lease Agreement, dated October 27, 1997, between Philips Business
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.
43
10.12 (5) Employment Agreement, dated July 1, 1997, between the Registrant
and William G. Langley
10.13 (5) Employment Agreement, dated August 1, 1997, between the Registrant
and Karel D. van der Mast
10.14 (5) Revolving Credit Agreement, dated as of July 1, 1997, between the
Registrant and KeyBank National Association
10.15 (5) Amendment No. 1, dated as of August 31, 1997, to Revolving Credit
Agreement between the Registrant and Key Bank National Association
10.16 (6) Amendment No. 2, dated December 23, 1997, to Loan Agreement between
the Registrant and Key Bank of Oregon
10.17 (7) + Stock Bonus Agreement, dated as of June 25, 1998, between the
Registrant and Vahe' Sarkissian
10.18 (7) + Restricted Stock Purchase Agreement, dated as of June 25, 1998,
between the Registrant and Vahe' Sarkissian
10.19 (8) 19.9% Stock Option Agreement, dated as of December 3, 1998, between
Micrion Corporation and the Registrant
10.20 (8) Stock Purchase Agreement, dated as of December 3, 1998, between
Philips Business Electronics International B.V. and the Registrant
21.1 (7) Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Accountants N.V.
27.1 Financial Data Schedule
- --------------
(1) 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).
(2) Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(3) Incorporated by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K, dated November 22, 1996.
44
(4) Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
(5) Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 28, 1997.
(6) Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
(7) Previously filed with the annual report on Form 10-K to which this
amendment relates.
(8) Incorporated by reference to Exhibits to Registrant's Current
Report on Form 8-K, dated December 9, 1998.
+ 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.
On December 9, 1998, the Company filed a Form 8-K in connection with having
entered into an Agreement and Plan of Merger with Micrion. Pursuant to the
merger agreement and subject to the terms and conditions thereof, upon closing,
Micrion will become a wholly-owned subsidiary of FEI.
45
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, hereunto duly authorized.
FEI COMPANY
By: VAHE' SARKISSIAN
-------------------------------------
Vahe' A. Sarkissian
President and
Chief Executive Officer
Date: April 29, 1999
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 April 29, 1999.
Signature Title
VAHE' SARKISSIAN President, Chief Executive Officer and
- ---------------------------------- Director (Principal Executive
Vahe' A. Sarkissian Officer)
WILLIAM P. MOONEY Executive Vice President and Chief
- ---------------------------------- Financial Officer
William P. Mooney (Principal Financial Officer)
MARK V. ALLRED Controller and Assistant Treasurer
- ---------------------------------- (Principal Accounting Officer)
Mark V. Allred
LYNWOOD W. SWANSON Chairman of the Board and Director
- ----------------------------------
Lynwood W. Swanson
KAREL D. VAN DER MAST Executive Vice President Marketing,
- ---------------------------------- Technical Officer and Director
Karel D. van der Mast
ALFRED B. BOK Director
- ----------------------------------
Alfred B. Bok
46
WILLIAM E. CURRAN Director
- ----------------------------------
William E. Curran
THEO J.H.J. SONNEMANS Director
- ----------------------------------
Theo J.H.J. Sonnemans
Director
- ----------------------------------
Michael J. Attardo
Director
- ----------------------------------
Donald R. VanLuvanee
Director
- ----------------------------------
William W. Lattin
47
FEI COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
INDEPENDENT AUDITORS' REPORTS............................................ F-1
FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 1997 and 1998............ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 ............................... F-4
Consolidated Statements of Comprehensive Loss for the Years
Ended December 31, 1996, 1997 and 1998.......................... F-5
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1996, 1997 and 1998.......................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 ............................... F-7
Notes to Consolidated Financial Statements........................... F-8
INDEPENDENT AUDITORS' REPORT
FEI Company
Hillsboro, Oregon
We have audited the accompanying consolidated balance sheets of FEI Company and
Subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, comprehensive loss, shareholders' equity, and cash
flows for the years then ended. Our audits also included the financial statement
schedule listed in the Index at Item 14. These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the companies as of December 31,
1998 and 1997, and the results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Portland, Oregon
February 26, 1999
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Philips Business Electronics International B.V.:
We have audited the combined income statement, combined statement of
comprehensive loss and combined cash flow statement for the year ended December
31, 1996 of Philips Electron Optics Operations. 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 audit 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 audit provides 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 PEO combination Agreement between Philips Business 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 cash flows and the results of operations
of the Philips Electron Optics Operations to be transferred to FEI Company for
the year 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, 1997 AND 1998
(In Thousands, Except Share Data)
ASSETS 1997 1998
CURRENT ASSETS:
Cash and cash equivalents $ 16,394 $ 15,198
Receivables (Note 4) 56,168 56,046
Inventories (Note 5) 39,207 43,518
Deferred income taxes (Note 11) 2,484 9,926
Other 2,497 1,872
-------- --------
Total current assets 116,750 126,560
EQUIPMENT (Note 6) 19,246 23,845
OTHER ASSETS (Note 7) 47,026 40,733
-------- --------
TOTAL $183,022 $191,138
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,984 $ 12,929
Current account with Philips (Note 15) 9,074 5,043
Accrued payroll liabilities 3,248 3,638
Accrued warranty reserves 4,239 6,186
Deferred revenue 11,236 15,744
Income taxes payable 2,731 952
Accrued restructuring costs (Note 3) 89 3,055
Other current liabilities (Note 8) 5,653 8,663
-------- --------
Total current liabilities 52,254 56,210
LINE OF CREDIT BORROWINGS (Note 9) 17,844 7,250
LONG-TERM ACCOUNT WITH PHILIPS (Note 9) - 19,099
DEFERRED INCOME TAXES (Note 11) 7,544 7,861
OTHER LIABILITIES 491 3,091
SHAREHOLDERS' EQUITY (Note 12):
Preferred stock - 500,000 shares authorized;
none issued and outstanding - -
Common stock - 30,000,000 shares authorized;
18,077,793 and 18,167,475 shares issued and
outstanding at December 31, 1997 and 1998 149,149 149,635
Accumulated deficit (36,602) (45,510)
Accumulated other comprehensive loss (7,658) (6,498)
-------- --------
Total shareholders' equity 104,889 97,627
-------- --------
TOTAL $183,022 $191,138
======== ========
See notes to consolidated financial statements.
F-3
FEI COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(In Thousands, Except Share Data)
1996 1997 1998
NET SALES $ 112,384 $ 168,796 $ 178,771
COST OF SALES (Note 8) 79,065 106,629 119,579
----------- ----------- -----------
Gross profit 33,319 62,167 59,192
----------- ----------- -----------
OPERATING EXPENSES:
Research and development (Note 15) 10,893 15,396 19,506
Selling, general and administrative 21,739 37,024 41,426
Amortization of intangibles - 2,096 2,516
Purchased in-process research and
development (Note 2) - 38,046 -
Restructuring and reorganization
costs (Note 3) - 2,478 5,320
----------- ----------- -----------
Total operating expenses 32,632 95,040 68,768
----------- ----------- -----------
OPERATING INCOME (LOSS) 687 (32,873) (9,576)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income - 255 360
Interest expense - (846) (1,164)
Valuation adjustment (Note 7) - - (3,267)
Other - (31) (58)
----------- ----------- -----------
Total other expense, net - (622) (4,129)
----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES 687 (33,495) (13,705)
TAX EXPENSE (BENEFIT) (Note 11) 740 3,107 (4,797)
----------- ----------- -----------
NET LOSS $ (53) $ (36,602) $ (8,908)
=========== =========== ===========
PER SHARE DATA (Note 13):
Net loss per share, basic and assuming dilution $ (0.01) $ (2.19) $ (0.49)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING (Note 13):
Basic and assuming dilution 9,728,807 16,677,336 18,105,808
=========== =========== ===========
See notes to consolidated financial statements.
F-4
FEI COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(In Thousands)
- -------------------------------------------------------------------------------------------------------
1996 1997 1998
NET LOSS $ (53) $ (36,602) $ (8,908)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment,
zero taxes provided in 1996, 1997 and 1998 (4,481) (7,658) 1,160
----------- ----------- -----------
COMPREHENSIVE LOSS $ (4,534) $ (44,260) $ (7,748)
=========== =========== ===========
See notes to consolidated financial statements.
F-5
FEI COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(In Thousands, Except Share Data)
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock Accumulated
-------------------------- Other
Accumulated Division Comprehensive
Shares Amount Deficit Equity Loss Total
BALANCE, JANUARY 1, 1996 - $ - $ - $ 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 assumed - 5,134 - - - 5,134
FEI shares outstanding on date
of PEO combination (Note 2) 7,959,933 99,209 - - - 99,209
Shares issued to PBE on date
of PEO combination (Note 2) 9,728,807 43,070 - (43,070) - -
Net loss - - (36,602) - - (36,602)
Proceeds from exercise of
options (Note 12) 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
Net loss - - (8,908) - - (8,908)
Proceeds from employee purchases
of common stock through employee
stock purchase plan (Note 12) 79,344 422 - - - 422
Proceeds from exercise of options
(Note 12) 10,338 64 - - - 64
Translation adjustment - - - - 1,160 1,160
---------- ---------- ----------- ---------- ------------- ---------
BALANCE, DECEMBER 31, 1998 18,167,475 $ 149,635 $ (45,510) $ - $ (6,498) $ 97,627
========== ========== =========== ========== ============= =========
See notes to consolidated financial statements.
F-6
FEI COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(In Thousands)
- --------------------------------------------------------------------------------------------------------
1996 1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (53) $(36,602) $ (8,908)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 2,599 3,963 5,621
Amortization - 2,207 3,004
Loss on disposal of fixed assets 309 817 1,101
Purchased in-process research and development - 38,046 -
Deferred taxes on income - (2,861) (7,125)
Write-off of intangible assets - 3,152 -
Valuation adjustment - - 3,267
Decrease (increase) in assets:
Receivables (2,175) (16,378) 122
Inventories (5,509) 5,180 (3,940)
Other assets (3,606) 711 2,876
Increase (decrease) in liabilities:
Accounts payable 180 1,749 (3,055)
Current accounts with Philips (1,130) 7,917 (4,031)
Accrued payroll liabilities (1,793) 485 390
Accrued warranty reserves (97) 1,208 1,947
Deferred revenue 2,948 (1,164) 4,508
Accrued restructuring - 89 2,966
Other liabilities (2,436) (1,744) 4,084
-------- -------- --------
Net cash provided by (used in)
operating activities (10,763) 6,775 2,827
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in the PEO combination - 1,420 -
Acquisition of equipment - (9,412) (11,883)
Investment in software development (1,090) (1,409) (2,291)
Purchase of businesses (3,200) - -
-------- -------- --------
Net cash used in investing activities (4,290) (9,401) (14,174)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) from line of credit - 8,708 (10,594)
Proceeds from exercise of stock options
and employee stock purchases - 1,736 486
Proceeds from long-term borrowings from Philips - - 19,099
Net cash provided by Philips 15,053 8,000 -
-------- -------- --------
Net cash provided by financing activities 15,053 18,444 8,991
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - 576 1,160
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - 16,394 (1,196)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - - 16,394
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ - $ 16,394 $ 15,198
======== ======== ========
See notes to consolidated financial statements.
F-7
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, market and service products based on focused
charged particle beam technology. The Company's products include transmission
electron microscopes systems ("TEMs") and scanning electron microscopes systems
("SEMs"). FEI also manufactures SEMs designed for wafer scanning in the
semiconductor integrated circuits industry ("Wafer SEMs"), focused ion-beam
systems ("FIBs") and products that incorporate an electron beam and an ion beam
into a single system ("DualBeam Systems"). The Company has manufacturing
operations in Hillsboro, Oregon; Eindhoven, The Netherlands; and Brno, Czech
Republic. Sales and service operations are conducted in the United States and
eight other countries, 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 Koninklijke Philips Electronics N.V.
("Philips") located in approximately 20 additional countries. The Company also
sells its products through independent representatives in certain countries. The
Company's FIBs, Wafer SEMs and DualBeam Systems are sold primarily to
semiconductor manufacturers and to thin film head manufacturers in the data
storage industry, and are used in the design, manufacture and testing of
integrated circuits and thin film heads. The Company's SEMs and TEMs products
are sold primarily to life science and materials science research institutes,
universities and industrial customers, as well as to semiconductor and thin film
head manufacturers.
PEO Combination - In 1997 the shareholders of FEI Company approved an
agreement (the "PEO Combination Agreement") between the Company and Philips
Business Electronics International B.V. ("Philips Business Electronics"), a
wholly owned subsidiary of Philips. Under the PEO Combination Agreement, FEI
acquired on February 21, 1997 all of the stock of each of a Dutch holding
company and a U.S. 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 "PEO 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 Philips Business Electronics was treated as the accounting
acquiror because Philips Business Electronics obtained 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
PEO combination are presented as if the PEO Operations had existed as an entity
separate from Philips during the
F-8
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 were
allocated using various methods such as sales volume, number of employees,
number of computer terminals, square footage occupied, etc. 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. See Note 15.
The financial statements for the periods prior to the PEO 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.
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
one or two suppliers, including the Philips Machine Shop. In addition to the
Philips Machine Shop, the Company obtains a significant portion of its component
parts from a second supplier. 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. See Note 15.
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. These estimates and assumptions
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. 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.
F-9
Forward Exchange Contracts - Most of the Company's subsidiaries transact
business in their functional currencies as well as currencies other than their
functional currencies. As a result, changes in foreign currency exchange rates
may have an impact on the Company's operating results. Forward exchange
contracts are used to hedge a portion of the risk of foreign currency
fluctuations. Realized and unrealized gains on such contracts are deferred and
recognized in income concurrent with the hedged transaction.
Asset Impairment - In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, the Company evaluates the remaining
life and recoverability of equipment and other assets, including intangibles,
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.
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 exceed the estimated requirements for 12 months based on
recent usage levels, are reported as noncurrent assets. Management has
established inventory reserves based on their estimates of excess and/or
obsolete current and noncurrent inventory.
Equipment, including systems used in research and development activities,
production and in demonstration laboratories, 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.
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 acquired in the PEO combination
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.
Product Warranty - The Company's products generally carry a one-year
warranty. A reserve is established at the time of sale 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.
F-10
Revenue Recognition - Product sales are recorded at the time of shipment.
Where a service contract exists, service revenues are recognized ratably over
the contract period; otherwise, service revenues are recognized as services are
provided.
Research and Development costs are expensed as incurred.
Taxes and Tax Credits - Deferred taxes are provided for temporary
differences between the amounts of assets and liabilities for financial and tax
reporting purposes.
Stock-Based Compensation - The Company continues 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. The
Company provides pro forma disclosures of net income and earnings per share as
if the method prescribed by SFAS No. 123, Accounting for Stock-Based
Compensation, had been applied in measuring compensation expense. See Note 12.
Supplemental Cash Flow Information - Cash paid for interest totaled $770
and $1,226 for the years ended December 31, 1997 and 1998, respectively. Cash
paid for income taxes totaled $1,230 and $4,107 for the years ended December 31,
1997 and 1998, respectively.
Reclassification - Certain reclassifications have been made to the prior
year financial statements to conform to the current year presentation.
Recently Issued Accounting Pronouncements - During 1998, the Financial
Accounting Standards Board issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which has not yet been adopted by the
Company, but is required to be adopted on January 1, 2000.
Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new Statement will have a significant effect
on earnings or the financial position of the Company.
2. MERGERS AND ACQUISITIONS
Philips Electron Optics
See Note 1, PEO Combination. On February 21, 1997, FEI Company ("Pre-PEO
combination FEI") acquired the PEO Operations of Philips Business Electronics.
Pre-PEO combination FEI acquired the PEO Operations in exchange for 9,728,807
newly issued shares of the Company's common stock, which constituted, when
issued to Philips Business Electronics, 55% of the shares of common stock then
outstanding. The PEO combination was treated as a "reverse acquisition" for
accounting and financial reporting purposes whereby purchase accounting was
applied to the financial statements of Pre-PEO combination FEI. The results of
operations of Pre-PEO combination FEI are excluded from the consolidated
financial statements prior to 1997. The
F-11
1997 results of operations reflect the results of the PEO Operations through
February 20, 1997, and the combined results of the Company from February 21,
1997 and thereafter.
Management estimated the fair market value of the assets acquired in order
to allocate the total purchase price of $122,872 to the various assets. To
determine the value of each of Pre-PEO combination FEI's product lines,
management projected product revenues, gross margins, operating expenses, income
taxes and returns on requisite assets. The resulting operating income
projections for each product line were discounted to a net present value using
discount rates ranging from 18 percent to 21 percent. 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 as
of the date of the PEO combination. As a result of this valuation, the fair
values of in-process research and development, existing technology and goodwill
of Pre-PEO combination FEI were determined to be $38,046, $16,490 and $17,122,
respectively.
In accordance with FEI's policy to expense research and development costs
as incurred, a one-time charge of $38,046 for the write-off of acquired
in-process research and development was recorded immediately subsequent to the
closing of the PEO combination. In determining the value of acquired in-process
research and development, FEI identified four specific research and development
projects--a thin film head FIB for the data storage industry, in-line systems
for semiconductor manufacturers, a laser-aligned stage and FEI's next generation
platform. FEI derived the value of the acquired in-process research and
development by forecasting revenues, margins and operating expenses associated
with developing, marketing and selling each of these projects for a period of 15
years. In developing its forecast, FEI management used margins ranging from 37%
to 44% in various periods. Estimated selling, general and administrative costs
averaged 15% of revenue for the first five years. To determine the value of the
acquired in-process research and development, the forecasted operating income
for each year was discounted to present value using a discount rate of 21%. The
acquired research and development projects were not expected to have a material
impact on net income until the year ended December 31, 1999.
The thin film head FIB for the data storage industry, in-line systems for
semiconductor manufacturers, a laser-aligned stage shipped to customers in 1997
and 1998. FEI's next generation platform is now under development. FEI has
developed a prototype of its next generation platform and expects to work in the
first three quarters of 1999 to develop the prototype into a commercially viable
product. FEI expects to begin shipping its next generation platform in 1999.
There remains the risk, however, that a technological hurdle may be encountered
that may delay or prevent the successful development of FEI's next generation
platform. Although FEI believes any hurdles could eventually be overcome, FEI's
competitive position could be harmed if its competitors are successful first in
developing a competing technology.
The amortization periods for existing technology and goodwill have been
established at 12 years and 15 years, respectively. 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.
F-12
Pro forma combined statement of operations data, presented as if the PEO
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
Net loss $ (2,602) $ (37,656)
========== ==========
Pro forma per share data:
Net loss per share, basic and assuming dilution $ (0.15) $ (2.11)
========== ==========
Pro forma weighted average shares outstanding:
Basic and assuming dilution 17,403,000 17,840,000
========== ==========
Pro forma results for the year ended December 31, 1997 include the $38,046
write-off of in-process research and development resulting from the PEO
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 intangible assets. The acquisition was accounted for as a purchase.
The intangible assets were to be amortized over 60 months. Pursuant to the
ElectroScan purchase agreement, the Company agreed to 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 a maximum aggregate of
$4,000. Through December 31, 1998, no such additional consideration has been
incurred.
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
approximately $400. The acquisition was accounted for as a purchase and did not
result in the recording of any intangible assets.
Micrion Corporation
On December 3, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Micrion Corporation ("Micrion"), a
Massachusetts corporation engaged in the design, manufacture, sale and service
of focused particle beam instruments. The merger is subject to regulatory
approval and approval by the shareholders of both Micrion and the Company. Under
terms of the Merger Agreement, Micrion would become a wholly owned subsidiary of
the Company. Holders of Micrion common stock would receive one share of the
Company's common stock and $6.00 in cash (or, in certain circumstances an
equivalent amount of shares of the Company's stock in lieu of cash) in exchange
for each share of Micrion common stock. The cash portion (or shares in lieu
thereof) may be reduced if Micrion's indebtedness at closing of the merger
exceeds certain levels set forth in the Merger Agreement.
F-13
In connection with the proposed merger, Philips Business Electronics
entered into a stock purchase agreement with the Company pursuant to which
Philips Business Electronics has agreed to finance the cash portion of the
merger consideration through the purchase from the Company of additional newly
issued shares of common stock. Philips Business Electronics also has the option
to purchase additional newly issued shares of common stock to maintain its
majority shareholder position after the issuance of shares to Micrion's
stockholders.
3. RESTRUCTURING AND REORGANIZATION
1997 Restructuring and Reorganization
In March 1997, the Company implemented a restructuring and reorganization
plan for its ElectroScan operation in Massachusetts. The plan involved the
transfer of the ElectroScan manufacturing activities to the Company's
manufacturing facility in Acht, The Netherlands and termination of 11 employees.
The Company informed all affected employees of the planned terminations and the
related severance benefits that they would receive. The Company also
discontinued the principal product produced by ElectroScan. Consequently, $1,699
of intangible assets attributable to the acquisition of the assets of
ElectroScan was written off and charged to income in the first quarter of 1997,
based on projections of future losses and cash flows. In addition, the estimated
severance costs for 11 ElectroScan manufacturing and development employees, and
other related costs of the plan were charged to income.
As of December 31, 1997, ten of the affected employees were terminated and
a liability of $89 remained on the Company's balance sheet. As of December 31,
1998, all of the affected employees were terminated and there were no remaining
liabilities from this activity reflected in the Company's balance sheets.
The components of this 1997 charge were as follows:
Year Ended
December 31,
1997
-------------------
Severance, outplacement, transition bonuses and related benefits for
terminated employees $ 621
Remaining rent on vacated facilities 158
Valuation adjustment on intangible assets related to abandoned technology 1,699
-------
1997 restructuring and reorganization charge $ 2,478
=======
1998 Restructuring and Reorganization
On July 29, 1998 the Company announced a restructuring and reorganization
program to consolidate operations, eliminate redundant facilities, reduce
operating expenses, and provide for outsourcing of certain manufacturing
activities. The Company plans to eliminate 173 positions worldwide, or about 16%
of its work force as of July 29, 1998. The positions affected include
F-14
manufacturing, marketing, administrative, field service, sales, and
manufacturing personnel. During the third quarter of 1998, all affected
employees were informed of the planned terminations and the related severance
benefits they would be entitled to receive. Of the 173 positions targeted for
elimination, 76 employees had been terminated as of December 31, 1998 and 97
positions remain to be eliminated during 1999. Of the positions remaining at
December 31, 1998, the majority are located in the Company's manufacturing
facilities in Acht, The Netherlands where a significant number of positions are
expected to be eliminated following the outsourcing of certain manufacturing
operations.
During the third quarter of 1998, the Company reorganized and consolidated
its US field service function. The majority of the Company's operations in
Mahwah, New Jersey were moved to Hillsboro, Oregon and consolidated with the US
field service operations located there. The cost of this US field service
reorganization included $87 in employee severance, outplacement and related
benefits for terminated employees, and $189 in relocation and moving expenses
for certain transferred employees and the assets formerly located in Mahwah. The
charge also included $336 for lease abandonment costs of vacating leased
premises in Mahwah. These charges are included in the table of restructuring
charges shown below. Associated with this move and consolidation of US field
service operations were inventory write-offs and additional obsolescence
reserves for field service inventory, which totaled $3,278. This amount was
charged to cost of sales along with $236 charged to selling, general and
administrative expenses in 1998. As of December 31, 1998, approximately $1,524
of the charge to cost of sales is included in service inventory reserves.
In the third quarter of 1998, the Company also undertook a plan to close
its Massachusetts office and relocate a portion of the employees. Lease
abandonment costs of $108 are included in the table below for the estimated
lease termination costs associated with this relocation. Also in the third
quarter of 1998, the Company implemented a plan to consolidate its duplicate
facilities in each of the UK and Germany. $129 was incurred in 1998 for the cost
of consolidating these facilities.
F-15
The various components of this charge were as follows:
Year Ended December 31, 1998 Accrued
---------------------------- Liability
Charged as of
to Paid December 31,
Expense in Cash 1998
------- ------- ----
Severance, outplacement and related benefits for
terminated employees $ 4,137 $ 1,436 $ 2,701
Lease abandonment costs for vacated facilities 444 90 354
Relocation and moving expenses for employees and
facilities 318 318 -
Cost related to transferring property to vendors 168 168 -
------- ------- -------
5,067 $ 2,012 $ 3,055
======= ======= =======
Non-Cash Asset Write-Downs:
Abandonment of leasehold improvements and fixed
assets in location vacated 253
-------
1998 restructuring and reorganization charge $ 5,320
=======
4. RECEIVABLES
Receivables consist of the following:
December 31,
-------------------------
1997 1998
Trade $ 56,957 $ 55,587
Other 999 2,401
-------- --------
57,956 57,988
Allowance for doubtful accounts (1,788) (1,942)
-------- --------
Total receivables $ 56,168 $ 56,046
======== ========
F-16
5. INVENTORIES
Inventories consist of the following:
December 31,
-----------------------
1997 1998
Raw materials and assembled parts $ 24,987 $ 25,667
Work in process 12,123 11,853
Finished goods 5,998 10,439
-------- --------
43,108 47,959
Reserve for obsolete inventory (3,901) (4,441)
-------- --------
Total inventories $ 39,207 $ 43,518
======== ========
Included in raw materials and assembled parts are $1,568 and $5,093 of
current requirement service inventories at December 31, 1997 and 1998,
respectively.
6. EQUIPMENT
Equipment consists of the following:
December 31,
-----------------------
1997 1998
Leasehold improvements $ 1,464 $ 2,157
Machinery and equipment 19,625 13,226
Demonstration inventory 4,273 15,439
Other fixed assets 3,804 8,824
-------- --------
29,166 39,646
Accumulated depreciation (9,920) (15,801)
-------- --------
Total equipment $ 19,246 $ 23,845
======== ========
F-17
7. OTHER ASSETS
Other assets consist of the following:
December 31,
-------------------------
1997 1998
Service inventories, noncurrent, net of obsolescence reserves
of $3,862 and $6,810, respectively $ 8,635 $ 7,037
Capitalized software development costs, net of amortization
of $111 and $478, respectively 2,059 3,469
Goodwill, net of amortization of $951 and $2,093, respectively 16,171 15,029
Existing technology, net of amortization of $1,145 and $2,519,
respectively 15,345 13,971
Patents, net of amortization of $18 and $39, respectively 303 282
Investment in Norsam 3,267 -
Deposits and other 1,246 945
-------- --------
Total other assets $ 47,026 $ 40,733
======== ========
Software development costs capitalized during the years ended December 31,
1996, 1997 and 1998 were $1,090, $1,409 and $2,291, 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.
Accordingly, previously capitalized software development costs of $1,627 were
charged to research and development expense in 1997. Amortization of software
development costs was $0, $111 and $459 for the years ended December 31, 1996,
1997 and 1998.
The Company owns 500,000 shares of Norsam Technologies, Inc. ("Norsam")
Series A Preferred Stock. The carrying value of the Norsam preferred stock was
$3,267 at December 31, 1997. In September 1998 the Company evaluated its
investment in Norsam and reduced to zero the carrying value of its cost-method
investment. Management revised its projections for future cash flows that it
expected to receive from its investment in Norsam following Norsam's divestiture
of certain assets. Accordingly, management determined that the carrying value of
its investment in Norsam was permanently impaired and recorded a valuation
adjustment of $3,267.
8. PRODUCT UPGRADE PROGRAM
During 1998 the Company re-evaluated an upgrade program undertaken to
replace certain third party manufactured parts within the installed base of a
TEM product series. In 1998 management concluded that continuing to repair the
defective parts was not a viable solution, and that substantially all of the
installed base would have to be upgraded with replacement parts. A charge to
cost of sales of $3,751 was recognized in 1998 to reflect the decision to
proceed with these replacements. As of December 31, 1998, $1,349, representing
the estimated cost of the program over the next twelve months, is included in
other current liabilities. The $2,148 non-current portion of the estimated
program cost is included in other liabilities.
F-18
9. LINE OF CREDIT BORROWINGS
At December 31, 1997 and 1998, the Company maintained a $25,000 bank line
of credit, available on revolving advances at prime (8.5% at December 31, 1997
and 1998) or on 30, 60, 90, or 180-day draw periods at LIBOR plus 1.65%. A total
of $6,693 was outstanding under the bank line of credit at December 31, 1998.
Borrowings under the line of credit were secured by eligible receivables,
inventories, and equipment. Under the terms of the line of credit, the Company
was required to meet certain financial covenants.
On February 25, 1999, the Company entered into a new credit facility with
Philips and terminated its existing bank line of credit. The entire outstanding
balance under the existing bank line of credit was paid off. The new credit
facility provides borrowing capacity of up to $50,000, interest at LIBOR plus
0.75%, and matures on February 26, 2002. The line of credit is unsecured, and
requires that the Company meet certain financial covenants.
Based on management's intent, the amount of borrowings outstanding as of
December 31, 1998, under the Company's line of credit, which was refinanced on
February 25, 1999, is classified as long-term. A large portion of the account
with Philips was also classified as long-term in anticipation of repayment at
the initiation of the new credit facility.
The Company also maintains a $5,000 unsecured and uncommitted bank
borrowing facility in the US and certain limited facilities in selected foreign
countries. At December 31, 1998, the Company had outstanding standby letters of
credit totaling approximately $3,300.
10. LEASE OBLIGATION
Operations are conducted in manufacturing and administrative facilities
under operating leases that extend through 2006, including the Company's
facilities in Acht, The Netherlands. Rent expense is recognized on a
straight-line basis over the term of the lease. Rent expense for the years ended
December 31, 1997 and 1998 was approximately $2,850 and $3,792. The combined
statement of operations for the year ended December 31, 1996 includes $332 of
depreciation expense related to the facilities in Acht, representing an assumed
charge from Philips for the use of the land and building. See also Note 15.
The lease agreements generally provide for payment of base rental amounts
plus the Company's share of property taxes and common area costs. The leases
generally provide renewal options at current market rates.
The approximate future minimum rental payments due under these agreements
as of December 31, 1998 are $3,729, $3,043, $3,098, $3,182, and $2,607 for the
years ending December 31, 1999 through 2003, respectively, and $4,031
thereafter.
F-19
11. TAXES
Income tax expense consisted of the following:
Year Ended December 31,
-------------------------------------
1996 1997 1998
Current:
Federal $ - $ 1,043 $ 2,200
State - 236 404
Foreign 1,142 2,682 (276)
------- ------- -------
Subtotal 1,142 3,961 2,328
Deferred benefit (402) (854) (7,125)
------- ------- -------
Total tax expense (benefit) $ 740 $ 3,107 $(4,797)
======= ======= =======
The effective income tax rate varies from the US federal statutory rate due
to the following:
Year Ended December 31,
--------------------------------------
1996 1997 1998
Expected tax expense (benefit) at statutory rates $ 240 $(11,723) $(4,611)
Increase (reduction) in income taxes resulting from:
Foreign taxes (180) 529 7
Write-off of in-process technology - 13,316 -
State income taxes - 153 (478)
Goodwill amortization - 333 524
Other 680 499 (239)
-------- -------- -------
Total tax expense (benefit) $ 740 $ 3,107 $(4,797)
======== ======== =======
F-20
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,
---------------------
1997 1998
Deferred tax assets:
Accrued liabilities $ 229 $ 2,205
Warranty reserve 1,185 1,685
Inventory reserves 766 3,478
Allowance for bad debts 626 696
Basis differences in investment - 1,346
Other assets 12 1,147
-------- -------
2,818 10,557
-------- -------
Deferred tax liabilities:
Capitalized software development costs (420) (1,024)
Existing technology and other intangibles (6,383) (5,757)
Basis difference in fixed assets (785) (697)
Other liabilities (290) (1,014)
-------- -------
(7,878) (8,492)
-------- -------
Net deferred tax asset (liability) $ (5,060) $ 2,065
======== =======
These deferred tax components are reflected in the consolidated balance
sheet as follows:
December 31,
---------------------
1997 1998
Deferred tax:
Current asset $ 2,484 $ 9,926
Long-term liability (7,544) (7,861)
-------- -------
Net deferred tax asset (liability) $ (5,060) $ 2,065
======== =======
12. SHAREHOLDERS' EQUITY
Capital Stock - As of December 31, 1998, 2,000,841 shares of common stock
were reserved for stock incentive plans.
As part of the PEO Combination Agreement, the Company agreed to issue to
Philips Business Electronics, from time to time, that number of additional
shares of common stock of the Company necessary to maintain Philips Business
Electronics' 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
F-21
December 31, 1998, 1,032,328 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 1,600,000 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.
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
Options granted 1,711,474 7.87
Options exercised (8,550) 7.50
Options expired or cancelled (1,406,709) 11.92
---------- -------
Balance, December 31, 1998 1,493,530 $ 7.39
========== =======
Exercisable at December 31, 1998 284,051 $ 9.99
========== =======
During 1998, all current employees and directors of the Company with
outstanding option grants were given the option of returning stock options
granted prior to September 10, 1998 for cancellation and receiving replacement
options with new terms. In response to this program, employees of the Company
surrendered existing options and received new options covering a total of
1,181,348 shares. The new options were granted on September 18, 1998 at an
exercise price of
F-22
$6.625 and vest 20 percent six months from grant date, 20 percent one year from
grant date and 20 percent per year thereafter.
Additional information regarding options outstanding as of December 31,
1998 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 1998 Life (yrs) Price 1998 Price
$5.55 - $7.40 1,208,698 9.5 $ 6.62 63,629 $ 6.77
$7.40 - $9.25 132,293 6.0 8.41 86,035 8.27
$9.25 - $11.10 29,519 2.8 9.73 25,047 9.77
$11.10 - $12.95 10,000 7.3 12.00 6,000 12.00
$12.95 - $14.80 103,020 1.9 13.25 97,340 13.25
$14.80 - $16.65 10,000 7.3 15.00 6,000 15.00
--------- --- ------- -------- ------
1,493,530 8.5 $ 7.39 284,051 $ 9.99
========= === ======= ======== ======
The weighted average fair value of options granted was $9.00 and $5.95 for
the years ended December 31, 1997 and 1998, respectively.
Employee Stock Purchase Plan - During 1998 the Company implemented an
Employee Stock Purchase Plan ("ESPP"). Under the ESPP, employees may elect to
have compensation withheld and placed in a designated stock subscription account
for purchase of common stock of the Company. The purchase price is set at a 15
percent discount from market price at the beginning or end of each six-month
purchase period, whichever is lower. The ESPP allows a maximum purchase of 1,000
shares by each employee during any 12-month purchase period. During 1998,
employees purchased 79,344 shares at an average purchase price of $5.32. At
December 31, 1998, 170,656 shares of common stock were reserved for issuance
under the ESPP. The weighted average fair value of ESPP shares granted was $5.47
for the year ended December 31, 1998.
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 or ESPP shares granted at fair value on the date of
grant. Had compensation cost for the Company's stock option and ESPP plans been
determined based on the estimated fair value of the options or shares at the
date of grant, the Company's net loss and loss per share would have been reduced
to the pro forma amounts shown below:
F-23
Year Ended December 31,
------------------------
1997 1998
Net loss:
As reported $ (36,602) $ (8,908)
Pro forma (37,034) (10,036)
Net loss per share, basic and assuming dilution:
As reported $ (2.19) $ (0.49)
Pro forma (2.22) (0.55)
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:
Year Ended December 31,
---------------------------
1997 1998
Dividend yield 0.0% 0.0%
Expected volatility (based on historical volatility) 64.4% 77.6%
Weighted average risk-free interest rate 6.3% 5.3%
Weighted average expected term 7.9 years 7.2 years
The fair value of ESPP shares granted but not yet purchased was estimated
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions:
Year Ended
December 31,
1998
Dividend yield 0.0%
Expected volatility (based on historical volatility) 77.6%
Weighted average risk-free interest rate 4.5%
Weighted average expected term 0.5 years
13. EARNINGS PER SHARE
Earnings per share have been calculated assuming the shares of the Company
issued to Philips Business Electronics in the PEO 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 PEO combination were
issued as of the closing date of the PEO combination. See Note 2. Effective at
the closing of the PEO combination, division equity of the PEO Operations was
reclassified to paid-in capital of the Company.
There were no potentially dilutive securities outstanding during 1996.
Potentially dilutive securities outstanding during 1997 and 1998 have been
excluded from the calculation for those years
F-24
because their effect would reduce the net loss per share. Accordingly, the
diluted loss per share is equivalent to the basic loss per share for all periods
presented.
Options to purchase 317,875 shares of common stock outstanding during 1997
and 799,869 shares of common stock outstanding during 1998 had exercise prices
greater than the average market price of the common shares during the respective
year.
14. 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, Japan and Canada are
covered by defined benefit plans sponsored by Philips. Employees in the US are
not 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. Contributions to the plans are determined by Philips
and charged to the Company. The Company was not charged and did not contribute
to such plans during the years ended December 31, 1996, 1997 and 1998.
As the Company's employees represent less than 1% of the total active
participants in these plans, and as separate pension records are not maintained
for each participating company, the Company does not account for its share of
plan assets and obligations, except for a plan in Germany. That plan is not
funded with a separate pension fund. Noncurrent liabilities on the Company's
balance sheet cover the projected benefit obligations for the few employees who
participate in the German plan as well as certain supplementary payments to
selected 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 other liabilities. On the basis of
the number of the Company's employees located in The Netherlands at December 31,
1997 and 1998, an amount of approximately $75 each year was allocated to the
Company. The unrecognized part of the liabilities allocated on the same basis to
the Company amounts to approximately $700 at both December 31, 1997 and 1998,
respectively.
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
years ended December 31, 1997 and 1998, the Company did not contribute to the
plan.
Profit Sharing 401(k) Plan - The Company has a profit sharing 401(k) plan
that 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. The Company matches
F-25
100 percent of employee contributions to the 401(k) Plan, up to 3 percent of
each employee's salary. For the years ended December 31, 1997 and 1998, the
Company contributed $504 and $559 to the plan.
15. RELATED-PARTY TRANSACTIONS
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
$15,300, $13,600, and $16,684 during the years ended December 31, 1996, 1997,
and 1998, respectively.
Distribution Agreements with Philips - In conjunction with the PEO
combination, the Company entered into a three year distribution agreement with
Philips whereby its affiliates in certain territories provide sales and services
activities for the Company. The Company sells its products to these affiliates
at a discount from list price. The agreement will terminate on January 1, 2000
unless terminated prior to that time. Under certain conditions of termination,
the Company has an option to purchase these distribution businesses at fair
market value.
Purchases from Philips Suppliers - See Note 1. A substantial portion of the
subassemblies included in the Company's FIBs, TEMs and SEMs are purchased from
Philips Machinefabrieken Nederland B.V. ("Philips Machine Shop"). Purchases from
Philips and other Philips-owned entities amounted to approximately $14,000,
$12,100 and $28,600 for the years ended December 31, 1996, 1997 and 1998,
respectively.
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 of Philips
Business Electronics companies. For this service, the Company has paid a fixed
annual fee amounting to approximately $43, $50, and $67 for the years ended
December 31, 1996, 1997, and 1998, respectively, which has been charged to cost
of sales. The benefits to the Company of these arrangements cannot be calculated
precisely, but management believes that such benefits are comparable to similar
arrangements which could have been entered into had the Company operated on a
stand-alone basis.
Leased Facilities from Philips - In conjunction with the PEO combination,
the Company entered into a 10-year operating lease agreement for its
manufacturing and administrative facilities in Acht, The Netherlands, with
Philips Business Electronics. During 1997, Philips Business Electronics sold the
property and assigned the lease with the Company to an unrelated third party.
The Company paid $850 to Philips Business Electronics in 1997 under this lease
arrangement. The Company was allocated $332 of depreciation expense related to
these facilities in 1996. The Company also leases sales, service and
administrative facilities from Philips in certain countries under various
services agreements (see "Other Services Provided by Philips" below).
F-26
Development Services Provided by Philips - During 1998, the Company entered
into a research and development contract with the Philips Machine Shop for the
development of the stage assembly for the Company's next generation of
instruments. In September 1998, the contract was terminated before completion
and the Company agreed to settle its obligations to Philips Machine Shop for
design and development services rendered under the contract for $3,581. This
amount is included in research and development expense in the year ended
December 31, 1998.
Other Services Provided by Philips - In connection with the PEO Combination
Agreement, the Company entered into various services 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. The agreements afford the
Company continued access to the research and development resources of Philips on
a fee basis, and provide for the parties' respective rights to intellectual
property. These service agreements also provide for Philips affiliates to
continue to provide certain administrative, accounting, information services,
logistics, occupancy, 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 results of operations of the Company. During the years ended December
31, 1997 and 1998, the Company paid Philips approximately $3,600 and $4,350 for
these administrative and other services (see "Pre-Combination Corporate
Allocations from Philips" below).
Pre-Combination Corporate Allocations from Philips - Through February 20,
1997, Philips provided substantial services to the PEO Operations, including
general management, treasury, tax, financial audit, accounting, financial
reporting, human resource management, information technology, insurance, and
legal services. Prior to the PEO combination, Philips charged 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 $1,271 for such services for the year
ended December 31, 1996. No such allocations were made for the years ended
December 31, 1997 and 1998.
Philips Internal Audit - Commencing in 1998, the Company engaged the
services of Philips Corporate Internal Audit Department to perform what is
expected to be an annual operational audit of the Company and its subsidiaries.
The Philips internal audit process is generally implemented for all Philips
subsidiaries and divisions and focuses primarily on an evaluation of business
processes and their function and financial results associated with creation of
management information. The fee for 1998 for these services was $60,000.
Current Accounts with Philips - 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.
F-27
Current accounts with Philips, after reclassification of a portion of the
balance to long term liabilities, consist of the following (see Note 9):
1997 1998
Current accounts receivable $ 7,678 $ 5,689
Current accounts payable (16,752) (10,732)
---------- --------
Total $ (9,074) $ (5,043)
========== ========
Other Related Party Transactions - During 1998, the Company had equipment
sales totaling $1,721 to a customer in which the Company's Chief Executive
Officer has an ownership interest. As of December 31, 1998, the Company also had
outstanding $464 in lease guarantees for this customer (see Note 18).
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.
International operations give rise to market risks from changes in foreign
currency exchange rates. Forward exchange contracts are utilized to hedge a
portion of the risk of foreign currency fluctuations. As of December 31, 1998,
forward exchange contracts outstanding totaled approximately $7,915 maturing at
various dates through March 1999. The difference between the contracted rate and
the spot rate at December 31, 1998 amounted to an unrealized loss of $174.
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.
18. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is self-insured for certain aspects of its property and
liability insurance program and is responsible for deductible amounts under
certain policies. The deductible amounts generally range from $10 to $250 per
claim.
The Company participates in a third party equipment lease financing program
with a US financial institution for a small portion of products sold. Under this
arrangement, the financial institution has recourse with the Company for the
greater of 10 percent of each outstanding lease
F-28
portfolio or $500. As of December 31, 1998, the Company had guarantees
outstanding under this lease financing program, which totaled $1,229, related to
transactions from 1996 through 1998.
19. SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION
The Company operates in three segments. The Components segment manufactures
and markets electron and ion emitters, focusing columns, and components thereof.
The Microelectronics segment manufactures, markets, and services FIB
workstations and DualBeam systems that combine a FIB column with a SEM column
onto a single instrument. The Electron Optics segment manufactures, markets and
services SEMs and TEMs. Certain models of SEMs are also manufactured by Electron
Optics but marketed through Microelectronics for use in the semiconductor
industry. Such sales are reflected as Microelectronics sales in the table below.
The demand and market forces for these products differ significantly among the
segments. See Note 1.
F-29
The following table summarizes various financial amounts for each of the
Company's segments:
Corporate
Micro- Electron and
Components electronics Optics Eliminations Total
1996:
Product sales to customers $ - $ - $ 88,783 $ - $ 88,783
Service sales to customers - - 23,601 - 23,601
---------- ---------- ----------- ---------- ----------
Total sales - - 112,384 - 112,384
Gross profit - - 33,319 - 33,319
Depreciation & amortization - - 2,599 2,599
Operating income - - 687 - 687
Total assets - - 71,824 - 71,824
1997:
Product sales to customers 11,308 48,764 84,181 - 144,253
Service sales to customers - 4,874 19,669 - 24,543
Inter-segment sales 4,572 - 11,000 (15,572) -
---------- ---------- ----------- ---------- ----------
Total sales 15,880 53,638 114,850 (15,572) 168,796
Gross profit 6,368 19,380 36,501 (82) 62,167
Depreciation & amortization 480 4,647 1,043 - 6,170
Operating income (loss) 4,055 (38,852) 1,803 121 (32,873)
Total assets 7,244 98,376 87,669 (10,267) 183,022
1998:
Product sales to customers 15,528 54,596 79,906 - 150,030
Service sales to customers - 5,141 23,600 - 28,741
Inter-segment sales 6,554 - 11,490 (18,044) -
---------- ---------- ----------- ---------- ----------
Total sales 22,082 59,737 114,996 (18,044) 178,771
Gross profit 8,364 15,854 34,974 - 59,192
Depreciation & amortization 750 5,723 2,152 - 8,625
Operating income (loss) 5,931 (13,587) (1,822) (98) (9,576)
Total assets 6,904 93,763 97,691 (7,220) 191,138
Inter-segment sales from Components to Microelectronics are recorded at
cost, with no markup for gross profit within the Components segment.
Inter-segment sales from Electron Optics to Microelectronics are recorded at
transfer prices, which approximate arm's length prices and include a markup for
gross profit within the Electron Optics product division. Shared corporate
expenses are allocated pro-rata to the operating segments on the basis of total
sales. Assets that cannot be assigned to a specific segment are shown as
corporate assets. The 1997 gross margin of Microelectronics includes the effect
of the step-up in inventory at the date of the PEO combination which increased
cost of goods sold in 1997. The 1997 results of Microelectronics also include
the $38,046 write-off of purchased in-process research and development resulting
from the PEO combination. The 1997 operating income of Electron Optics includes
a restructuring and reorganization charge of $2,478 related to the Company's
ElectroScan operations. The 1998
F-30
operating income of each of the segments includes a restructuring and
reorganization charge. The amount of the charge was $26, $1,850 and $3,444 for
Components, Microelectronics and Electron Optics respectively.
The Company's long-lived assets were geographically located as follows:
December 31,
--------------------------
1997 1998
US $ 51,986 $ 46,951
The Netherlands 5,835 5,097
Other 8,451 12,530
-------- --------
Total $ 66,272 $ 64,578
======== ========
The following table summarizes sales by geographic region:
North Europe Asia Other Total
America Pacific
1996:
Total sales $ 45,822 $ 48,707 $ 14,288 $ 3,567 $ 112,384
======== ======== ======== ======= =========
1997:
Total sales $ 71,522 $ 51,510 $ 42,949 $ 2,815 $ 168,796
======== ======== ======== ======= =========
1998:
Product sales to customers $ 58,933 $ 48,881 $ 38,370 $ 3,846 $ 150,030
Service sales to customers 15,468 12,178 1,095 - 28,741
-------- -------- -------- ------- ---------
Total sales $ 74,401 $ 61,059 $ 39,465 $ 3,846 $ 178,771
======== ======== ======== ======= =========
Sales to customers in the US were $44,155 (including sales of $15,910 from
the PEO Operations to Pre-PEO Combination FEI), $67,821 and $73,190 for the
years ended December 31, 1996, 1997 and 1998, respectively. Sales to customers
in Germany were $11,664 for the year ended December 31, 1996. No other country
represented more than 10 percent of total sales in 1996, 1997 or 1998.
Major Customers - None of the Company's customers accounted for 10% or more
of its revenue.
* * * * * *
F-31
FEI COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
------------------------
Balance at Charged to (2) Balance at
Beginning of Costs and Other End of
Period Expenses Additions Deductions Period
------ -------- --------- ---------- ------
Year ended December 31, 1998:
Reserve for obsolete inventory $ 3,901 $ 2,056 $ - $ (1,516) $ 4,441
Reserve for obsolete service inventory 3,862 3,760 - (812) 6,810
Allowance for doubtful accounts 1,788 379 - (225) 1,942
================================================================
Total $ 9,551 $ 6,195 $ - $ (2,553) $ 13,193
================================================================
Year ended December 31, 1997:
Reserve for obsolete inventory $ 2,324 $ 1,806 $ 426 $ (655) $ 3,901
Reserve for obsolete service inventory 2,661 926 1,067 (792) 3,862
Allowance for doubtful accounts 603 1,623 450 (888) 1,788
================================================================
Total $ 5,588 $ 4,355 $ 1,943 $ (2,335) $ 9,551
================================================================
Year ended December 31, 1996: (1)
(1) Amounts for the PEO Operations for the year ended December 31, 1996 are not
available.
(2) Represents amounts outstanding for Pre-PEO Combination at the date of the
PEO combination.
S-1
EXHIBIT INDEX
Exhibit Description Sequential
No. Page No.
- ------- ----------
2.1 (3) Combination Agreement, dated November 15, 1996, as
amended, between the Registrant and Philips
Business Electronics International B.V. Agreement
and Plan of Merger, dated December 3, 1998, among
the Registrant,
2.2 (7) Micrion Corporation and MC Acquisition
Corporation.
3.1 (4) Second Amended and Restated Articles of
Incorporation, as amended
3.2 (4) Restated Bylaws
4.1 See Articles III and IV of Exhibit 3.1 and
Articles I and VI of Exhibit 3.2
10.1 (1) + 1984 Stock Incentive Plan
10.2 (4) + 1995 Stock Incentive Plan, as amended
10.3 (2) + 1995 Supplemental Stock Incentive Plan
10.4 (1) + Form of Incentive Stock Option Agreement
10.5 (1) + Form of Nonstatutory Stock Option Agreement
10.6 (1) 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 (4) Lease, dated January 11, 1996, between the
Registrant and Pacific Realty Associates, L.P.
10.8 (4) Lease, dated June 6, 1996, between the Registrant
and Pacific Realty Associates, L.P.
10.9 (1) # Agreement, dated February 9, 1994, between the
Registrant and Philips Electron Optics B.V.
10.10 (6) Lease, dated November 25, 1997, between the
Registrant and Pacific Realty Associates, L.P.
10.11 (5) Lease Agreement, dated October 27, 1997, between
Philips Business 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 (5) Employment Agreement, dated July 1, 1997, between
the Registrant and William G. Langley
10.13 (5) Employment Agreement, dated August 1, 1997,
between the Registrant and Karel D. van der Mast
10.14 (5) Revolving Credit Agreement, dated as of July 1,
1997, between the Registrant KeyBank National
Association
10.15 (5) Amendment No. 1, dated as of August 31, 1997, to
Revolving Credit Agreement between the Registrant
and KeyBank National Association
10.16 (6) Amendment No. 2, dated December 23, 1997, to Loan
Agreement between the Registrant and Key Bank of
Oregon
10.17 (7) + Stock Bonus Agreement, dated as of June 25, 1998,
between the Registrant and Vahe' Sarkissian
10.18 (7) + Restricted Stock Purchase Agreement, dated as of
June 25, 1998, between the Registrant and Vahe'
Sarkissian
10.19 (8) 19.9% Stock Option Agreement, dated as of December
3, 1998, between Micrion Corporation and the
Registrant Stock Bonus
10.20 (8) Stock Purchase Agreement, dated as of December 3,
1998, between Philips Business Electronics
International B.V. and the Registrant
21.1 (7) Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Accountants N.V.
27.1 Financial Data Schedule
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(1) 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).
(2) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995.
(3) Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report
on Form 8-K, dated November 22, 1996.
(4) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996.
(5) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 28, 1997
(6) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
(7) Previously filed with the annual report on Form 10-K to which this
amendment relates.
(8) Incorporated by reference to Exhibits to Registrant's Current Report on
Form 8-K, dated December 9, 1998.
+ 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.