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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 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 Page
- ----------------- ----
PART I
Item 1 - Business..................................................... 1
Item 2 - Properties................................................... 11
Item 3 - Legal Proceedings............................................ 12
Item 4 - Submission of Matters to a Vote of Security Holders.......... 12
Item 4(a) - Executive Officers of the Registrant......................... 13
PART II
Item 5 - Market for the Registrant's Common
Equity and Related Shareholder Matters....................... 16
Item 6 - Selected Financial Data...................................... 17
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 19
Item 7A - Quantitative and Qualitative Disclosures About Market Risk... 30
Item 8 - Financial Statements and Supplementary Data.................. 31
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................... 31
PART III
Item 10 - Directors and Executive Officers of
the Registrant............................................... 32
Item 11 - Executive Compensation....................................... 32
Item 12 - Security Ownership of Certain Beneficial
Owners and Management........................................ 32
Item 13 - Certain Relationships and Related Transactions............... 32
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PART IV
Item 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K...................................... 33
SIGNATURES................................................................ 37
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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
5
to 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 1998 were $19.5 million or approximately 10.9% of net sales.
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. 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 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
8
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 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
9
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 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.
10
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 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.
ITEM 2. PROPERTIES
The Company's corporate headquarters and one of its manufacturing and
research and development facilities are located in four adjacent buildings
located in Hillsboro, Oregon. The leased space amounts to an aggregate of
approximately 110,600 square feet, and is used for a range of manufacturing,
research and development and administrative activities. Leases for the four
facilities expire from March 31, 2003 through January 31, 2004. Present lease
payments for the space in the four buildings totals approximately $90,000 per
month.
The Company also maintains an administrative and manufacturing facility in
Eindhoven, The Netherlands, consisting of approximately 183,000 square feet of
space leased by the Company for a ten-year term commencing February 1997.
Present lease payments amount to approximately $100,000 per month, assuming a
constant currency exchange rate of NLG2.02 per U.S. dollar. The Company also
maintains leased manufacturing facilities in Brno, Czech Republic.
The Company operates 11 sales and service offices located in leased
facilities in Canada, France, Germany, Italy, Japan, South Korea, The
Netherlands, the United Kingdom and the United States.
The Company expects that its facilities arrangements will be adequate to
meet its needs for the foreseeable future. Overall, the Company believes it can
meet increased demand for facilities
11
that may be required to meet increased demand for its products. In addition, the
Company believes that if product demand increases it can use outsourced
manufacturing of spare parts as a means of adding capacity without increasing
its direct investment in additional facilities.
ITEM 3. LEGAL PROCEEDINGS
In May 1995 Micrion Corporation filed a lawsuit against the Company in the
U.S. District Court for the District of Massachusetts (the "Court") alleging
infringement of a patent issued to Micrion relating to the use of an electron
beam to neutralize a positive charge that can develop with the use of an ion
beam in a FIB. The complaint also alleges that the Company used information
confidential to Micrion to develop devices to effect charge neutralization, to
incorporate such devices into the Company's FIBs, to manufacture certain ion
emitters, and to persuade prospective purchasers of FIBs to purchase
workstations from the Company rather than from Micrion. Micrion sought an
injunction against infringement of the Micrion patent, damages of at least $1
million for misuse of confidential information, treble damages for infringement
of the Micrion patent, attorneys' fees and other damages. The Company believes
it has valid defenses to Micrion's claims.
The Company initiated a proceeding with the American Arbitration
Association seeking to arbitrate Micrion's non-patent claims. In response to
motions filed by the Company in the Court and the U.S. District Court for the
District of Oregon, Micrion was ordered to arbitrate these matters in Oregon,
and the Court action has been stayed with respect to these matters. The Company
filed an answer and counterclaim in the Court, asserting that the patent is not
infringed and is invalid. In May 1996 the parties dismissed the Court action and
the arbitration, each without prejudice. Either Micrion or the Company may
re-initiate either the Court action or the arbitration.
In 1997 both Micrion and the Company initiated procedures to have the
United States Patent and Trademark Office reexamine the validity of the Micrion
patent. The PTO ordered that the patent be reexamined. In a Notice of Intent to
Issue Reexamination Certificate, mailed January 25, 1999, the Patent and
Trademark Office said that it would cancel three of the claims of the patent and
allow 13 amended claims and 12 new claims. As with the earlier claim for
infringement brought by Micrion, the Company believes it would have valid
defenses to an infringement claim based on the re-examined patent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company as of March 1, 1998.
Name Age Position
- ------------------------- --- ------------------------------
Dr. Lynwood W. Swanson...... 64 Chairman of the Board of Directors and
Chief Scientist
Vahe' A. Sarkissian.......... 56 President, Chief Executive Officer and
Director
William P. Mooney........... 48 Executive Vice President and Chief
Financial Officer
Dr. Karel D. van der Mast... 50 Executive Vice President, Marketing,
Technical Officer and Director
Dr. Robert H.J. Fastenau.... 49 Senior Vice President, Research and
Development
Charles F. Lake............. 50 Senior Vice President, Manufacturing
Joseph C. Robinson.......... 45 Senior Vice President, Sales (Semiconductor)
Dr. Bernd W.M. Volbert...... 45 Senior Vice President, Sales (Analytical)
Jim D. Higgs................ 48 Senior Vice President, Human Resources
Mark V. Allred.............. 40 Controller and Assistant Treasurer
Michel G. van Woesik........ 33 Treasurer and Assistant Secretary
Lynwood W. Swanson co-founded the Company in 1971 and has served as a
director since that time. He served as President of the Company until October
1994, at which time he was elected Chairman of the Board. Dr. Swanson was
appointed Chief Scientist in May 1990 and served as Chief Executive Officer of
the Company from May 1988 to February 1997. Dr. Swanson has been a member of the
board of trustees of the Murdock Charitable Trust since 1987 and is an Adjunct
Professor of Applied Physics at the Oregon Graduate Institute. Dr. Swanson holds
B.S. degrees in physics and chemistry from University of the Pacific and a Ph.D.
degree in physical chemistry from University of California at Davis.
13
Vahe' A. Sarkissian joined the Company as President, Chief Executive
Officer and director in May 1998. From 1994 to 1995, he was President and Chief
Executive 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 prior to that, as President and Chief Executive Officer of
SVG Lithography Systems, a subsidiary of SVG. Prior to SVG he was a Vice
President of Data General Corp. He has also held several technical and
management positions with semiconductor companies, including AMD. Further, he
served on the board of 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.
William P. Mooney joined the Company as Executive Vice President and Chief
Financial Officer in February 1999. From April 1998 to February 1999 he was
Senior Vice President and Chief Financial Officer of Calgon Carbon Corporation,
an international supplier of specialty products and engineered systems for
chemical purification, concentration, and separation. He served as Chief
Financial Officer of Sylvan Inc., a global producer of fungal products for
agricultural and industrial markets from November 1990 to April 1998. Prior to
that he served as Chief Executive Officer and Chief Financial Officer of
business information services providers. Mr. Mooney holds a B.A. degree in
Economics from the University of California, Berkeley, and an MBA from the
University of Southern California.
Karel D. van der Mast joined the Company as Executive Vice President
Marketing, Technical Officer and director in February 1997. Dr. van der Mast
served as Business Manager and Strategic Marketing Manager of Philips Electron
Optics B.V. from October 1995 to February 1997. In 1988 he joined Philips
Electron Optics B.V. as Research and Development Manager. From 1983 to 1988, Dr.
van der Mast was Professor of Physics at the Technical University of Delft,
leading research in fast electron beam lithography systems. He first joined
Philips in 1978 as TEM Development Manager. Dr. van der Mast holds an Engineers
degree and a Ph.D. degree in Physics from the Technical University of Delft and
has published articles in the field of physics and electron microscopy.
Robert H.J. Fastenau joined the Company as Senior Vice President Research
and Development in February 1997. Dr. Fastenau joined Philips Electron Optics
B.V. in October 1995 as Research and Development Manager. He was department head
of a research group in materials science and devices in Philips Research from
1989 to 1995 after a one year research assignment with Signetics Co. and after
serving as the department head of the microfabrication group in Philips
Research. Dr. Fastenau holds an Engineers degree and a Ph.D degree in physics
from the Technical University of Delft.
Charles F. Lake joined the Company as Manufacturing Manager in January
1990, served as Vice President of Manufacturing from July 1991 to February 1997
and was appointed Senior Vice President Manufacturing in February 1997. From
February 1982 to January 1990 Mr. Lake was employed by Tektronix, Inc., a
manufacturer and distributor of test and analysis equipment and components, most
recently as a Manufacturing Manager. Mr. Lake holds a B.S. degree in chemical
engineering from University of Colorado and an M.B.A. degree from San Diego
State University.
14
Joseph C. Robinson joined the Company as Executive Vice President of Sales
and Marketing in December 1995 and was appointed Senior Vice President Sales
(Semiconductor) in February 1997. From March 1993 to December 1995 Mr. Robinson
was Director of Sales and Marketing for Kevex Inc. (a division of Fisons
Instruments), a manufacturer of dispersive x-ray and image analyzers. From
October 1989 to March 1993 Mr. Robinson was Semiconductor Product Marketing
Manager for Amray, specializing in scanning electron microscopes. Mr. Robinson
has a B.A. degree from Colgate University, is a member of Beta Beta Beta
Biological Society and has completed supplemental studies in Strategic Marketing
at Duke University.
Bernd W.M. Volbert joined the Company as Senior Vice President Sales
(Analytical) in February 1997. Dr. Volbert has also served as International
Sales and Service Manager of Philips Electron Optics B.V. since 1992, and as
Marketing Manager of Philips Electron Optics B.V. from 1990 to 1992. Dr. Volbert
is also a director of Philips Electron Optics Nederland B.V. Dr. Volbert holds a
Ph.D. degree in Physics from Muenster University.
Jim D. Higgs joined the Company as Senior Vice President, Human Resources
in November 1997. From January 1996 through October 1997 he was Oregon Site
Management Director of Synopsys, Inc. ("Synopsys") and from October 1990 through
December 1995 he was Vice President, Human Resources of Logic Modeling
Corporation, a software company acquired by Synopsys in 1994. Before 1990 he was
Vice President, Human Resources at BiiN (an Intel/Siemens joint venture) and
held various senior human resource management positions during 14 years at Intel
Corporation. Mr. Higgs holds two B.S. degrees from the University of Oregon: one
in Business and Personnel Management and the other in Physics and Psychology.
Mark V. Allred joined the Company as Controller in December 1997. From
November 1996 to November 1997 Mr. Allred was Controller for Epitope, Inc., a
biotechnology company. From May 1982 to November 1996 Mr. Allred was employed by
Deloitte & Touche LLP, most recently as Senior Audit Manager. Mr. Allred holds a
B.S. degree in Accounting from Portland State University and an M.B.A. degree
from the University of Minnesota. Mr. Allred is a certified public accountant.
Michel G. van Woesik joined the Company as Treasurer in December 1997. From
August 1995 to November 1997, Mr. van Woesik was Treasurer and Controller for
Philips Business Electronics International B.V. from 1990 to August 1995 he held
various financial management positions in the Finance department of Philips. Mr.
van Woesik holds a degree in business economics from the Catholic University of
Brabant.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "FEIC." The following table sets forth, for the periods indicated,
the high and low bid prices for the Common Stock, as reported by the Nasdaq
National Market.
High Low
---- ---
1997
First Quarter $ 14 1/4 $ 6 3/4
Second Quarter 15 3/4 6 7/8
Third Quarter 21 3/4 14 3/4
Fourth Quarter 24 12 7/16
1998
First Quarter $ 15 1/8 $ 8
Second Quarter 12 5/8 6 1/2
Third Quarter 9 3/32 5 1/4
Fourth Quarter 9 9/16 5 1/2
As of March 1, 1999 there were approximately 85 holders of record of the
Company's Common Stock. The Company believes the number of beneficial owners is
substantially greater than the number of record holders because a large portion
of the Company's outstanding Common Stock is held of record in broker "street
names" for the benefit of individual investors.
The Company has never declared or paid a dividend and does not anticipate
doing so in the foreseeable future. The Company expects to retain earnings to
finance the expansion and development of its business.
16
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated statement of operations data presented below for
each of the years in the three-year period ended December 31, 1998 and the
selected consolidated balance sheet data presented below as of December 31, 1997
and 1998 have been derived from the audited consolidated financial statements of
the Company included elsewhere in this report. The selected consolidated
statement of operations data for the years ended December 31, 1994 and 1995 and
the selected consolidated balance sheet data as of December 31, 1994, 1995 and
1996 have been derived from audited financial statements of the Company not
included herein. The selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and notes
thereto included elsewhere in this report.
The selected consolidated financial data as of and for the years ended
December 31, 1994, 1995 and 1996 reflect the PEO Operations on a stand-alone
basis. The selected consolidated financial data as of and for the year ended
December 31, 1997 reflect the PEO Operations from January 1, 1997 to February
20, 1997 and the combined FEI and PEO Operations from February 21, 1997 to
December 31, 1997. The selected consolidated financial data as of and for the
year ended December 31, 1998 reflect the combined FEI and PEO Operations.
Year Ended December 31,
----------------------------------------------------------------
(PEO Operations) (Combined Company)
--------------------------------------- -----------------------
1994 1995 1996 1997 1998
-------- --------- --------- --------- ---------
(in thousands, except per share data)
Statement of Operations Data:
Net sales $ 84,169 $ 109,117 $ 112,384 $ 168,796 $ 178,771
Cost of sales 52,932 72,686 79,065 106,629 119,579
-------- --------- --------- --------- ---------
Gross profit 31,237 36,431 33,319 62,167 59,192
Total operating expenses (1) 21,764 28,886 32,632 95,040 68,768
-------- --------- --------- --------- ---------
Operating income (loss) 9,473 7,545 687 (32,873) (9,576)
Other income (expense), net - 1,700 - (622) (4,129)
-------- --------- --------- --------- ---------
Income (loss) before taxes 9,473 9,245 687 (33,495) (13,705)
Tax expense (benefit) 3,580 3,317 740 3,107 (4,797)
-------- --------- --------- --------- ---------
Net income (loss) $ 5,893 $ 5,928 $ (53) $ (36,602) $ (8,908)
======== ========= ========= ========= =========
Net income (loss) per share, basic and
assuming dilution (2) $ 0.61 $ 0.61 $ (0.01) $ (2.19) $ (0.49)
======== ========= ========= ========= =========
Shares used in per share calculation, basic
and assuming dilution (2) 9,729 9,729 9,729 16,677 18,106
17
Year Ended December 31,
--------------------------------------------------------------------
(PEO Operations) (Combined Company)
--------------------------------------- ---------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
Balance Sheet Data:
Cash and cash equivalents $ - $ - $ - $ 16,394 $ 15,198
Working capital 12,847 23,844 31,113 64,496 70,350
Equipment 5,189 6,039 5,570 19,246 23,845
Total assets 45,748 60,742 71,824 183,022 191,138
Line of credit borrowings - - - 17,844 7,250
Shareholders' equity 20,090 32,551 43,070 104,889 97,627
- --------------
(1) Total operating expenses include non-recurring expenses in 1997 and 1998.
Included in the 1997 total operating expenses is a charge of $38.0 million
to write-off acquired in-process research and development in connection
with the PEO combination and a restructuring charge
of $2.5 million. See Notes 2 and 3 of Notes to Consolidated Financial
Statements. Included in the 1998 total operating expenses is a
restructuring charge of $5.3 million.
(2) 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 Notes 2 and 13 of Notes to Consolidated Financial Statements.
18
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
19
represented 13%, 25% 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
20
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 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 connection with the purchase
accounting for the PEO combination, the Company identified four significant
projects under development. The development of three of those four projects was
completed in 1997 and 1998, with revenue recognized in late 1997 and 1998. The
fourth project is still under development. It is expected to generate revenue in
1999. While the semiconductor manufacturing sector and the data storage sector
were generally weak during 1998, the Company'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 163 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 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
21
$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 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
22
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 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, 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
23
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.
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
24
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 and from growth of its
existing businesses will provide adequate liquidity. 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 using test criteria developed by Sematech, a semiconductor
industry trade association; (ii) testing hardware and software of the Company's
manufacturing control, accounting and other information technology systems and
addressing deficiencies; (iii) identification and assessment of other third
suppliers' products raising Year 2000 compliance issues and making direct
inquiry to such vendors concerning their state of readiness and resolving
issues; (iv) communications with the customer base concerning Year 2000
readiness of the Company's products; and (v) evaluate the need for and as
appropriate, develop a contingency plan.
25
The Company has analyzed and partially tested its internal manufacturing
control, accounting and other information technology systems and determined
that, to the extent tested, those systems have no material Year 2000 compliance
deficiencies. Internal systems tests are to be completed by the second quarter
of 1999. In its analysis, 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 its products and has communicated with customers concerning Year
2000 readiness of these products and third party products incorporated into
systems sold by the Company. The Company anticipates undertaking additional
communications with its customers prior to the end of the second quarter of
1999. The Company will complete by the end of the second quarter of 1999,
instructions to post-sale field service representatives on Year 2000 readiness
of products that are under service contracts. Based on communications to date,
the Company has not received notice of or become aware of a material Year 2000
deficiency by a supplier. 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 ancillary 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. To
date, no specific expenditures have been made as a result of the Year 2000
issue. 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 can be no
assurance that these estimates will be correct and actual costs could differ
materially from these estimates.
Most Reasonably Likely Worst Case Scenarios for the Company. The Company
will continue to devote resources to address its Year 2000 issues. There is no
assurance, however, that the Company's products do not contain undetected Year
2000 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. Furthermore, it has been widely
reported that a significant amount of litigation surrounding business
interruptions will arise out of Year 2000 issues. It is uncertain whether, or to
what extent, the Company may be affected by such litigation. Year 2000 problems
could result in system failures, data corruption, the generation of erroneous
information and other significant disruptions of business activities.
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.
26
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 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 $2.0 million reflecting the increased cost of warranty for in-line
FIBs; and (v) $3.2 million of product upgrade reserves reflecting the decision
to replace certain third party components within the installed
27
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 $ (3.46) $ 0.13 $ 0.14 $ 0.21 $ (0.02) $ 0.03 $ (0.67) $ 0.17
Net income (loss) per share;
diluted $ (3.46) $ 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
Shares used in per share
calculation; diluted 13,077 18,372 19,586 19,686 18,078 18,345 18,105 19,075
The Company has restated its results of operations for the quarters ended
March 29, June 28, and September 27, 1998 from the results of operations
previously reported on Form 10-Q as follows:
28
March 29, 1998 June 28, 1998 September 27, 1998
-----------------------------------------------------------------------------------------------------
As As As
Reported in As Reported As Reported As
the Form Reported in the Reported in the Form Reported
10-Q Adjustment Herein Form 10-Q Adjustment Herein 10-Q Adjustment Herein
-----------------------------------------------------------------------------------------------------
Net sales $ 35,954 $ - $35,954 $ 44,922 $ - $ 44,922 $ 42,440 $ - $ 42,440
Cost of sales 21,858 - 21,858 27,850 - 27,850 36,564 - 36,564
-------- ------- ------- -------- ------- -------- -------- ------- --------
Gross profit 14,096 - 14,096 17,072 - 17,072 5,876 - 5,876
Total operating expenses 12,952 1,379 14,331 14,988 858 15,846 23,240 (2,237) 21,003
-------- ------- ------- -------- ------- -------- -------- ------- --------
Operating income (loss) 1,144 (1,379) (235) 2,084 (858) 1,226 (17,364) 2,237 (15,127)
Other expense (216) - (216) (521) - (521) (3,509) - (3,509)
-------- ------- ------- -------- ------- -------- -------- ------- --------
Income (loss) before taxes 928 (1,379) (451) 1,563 (858) 705 (20,873) 2,237 (18,636)
Tax expense (benefit) 326 (484) (158) 546 (299) 247 (7,306) 783 (6,523)
-------- ------- ------- -------- ------- -------- -------- ------- --------
Net income (loss) $ 602 $ (895) $ (293) $ 1,017 $ (559) $ 458 $(13,567) $1,454 $(12,113)
======================================================================================================
Net income (loss) per share;
basic $ 0.03 $ (0.05) $ (0.02) $ 0.06 $ (0.03) $ 0.03 $ (0.75) $ 0.08 $ (0.67)
Net income (loss) per share;
diluted $ 0.03 $ (0.05) $ (0.02) $ 0.06 $ (0.04) $ 0.02 $ (0.75) $ 0.08 $ (0.67)
Shares used in per share
calculation; basic 18,078 18,078 18,079 18,079 18,105 18,105
Shares used in per share
calculation; diluted 18,590 18,078 18,345 18,345 18,105 18,105
Through the third quarter of 1998, the Company accounted for its research
and development arrangement with Philips Machinefabrieken Nederland B.V.
("Philips Machine Shop"), a related party, in accordance with its terms, whereby
the Company would only pay for successful research and development efforts.
Accounting literature states that such accounting is permitted in related party
transactions when the presumption of repayment is overcome. In September 1998,
the Company terminated the research and development contract before its
completion and agreed to settle obligations to Philips Machine Shop aggregating
approximately $3.6 million. Given that amounts were paid to Philips Machine
Shop. for reasons other than the successful completion of the research and
development efforts, the Company believes it can no longer assert that the
presumption of repayment was overcome. Accordingly, the Company has restated its
quarterly results for the first, second and third quarters of 1998 to recognize
the research and development costs in the quarters they were incurred.
The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future. Fluctuations in operating results may be
caused by a variety of factors, including the relatively high unit cost of the
Company's 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
29
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 Italian lira, and the Japanese yen. Although for the last three
years more than 60% of the Company's sales occur outside of the United States, a
large proportion of these sales are 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.
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.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are included on pages F-1 to
F-30 of this Report. The schedule of valuation and qualifying accounts is
included on page F-31.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company will be included under
"Election of Directors" in the Company's definitive proxy statement for its 1999
Annual Meeting of Shareholders to be filed not later than 120 days after the end
of the fiscal year covered by this Report and is incorporated herein by
reference. Information with respect to executive officers of the Company is
included under Item 4(a) of Part I of this Report. Information with respect to
compliance with Section 16(a) of the Securities Exchange Act is included under
"Compliance with Section 16(a) of the Exchange Act" in the Company's definitive
proxy statement for its 1999 Annual Meeting of Shareholders filed or to be filed
no later than 120 days after the end of the fiscal year covered by this Report
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be included under
"Executive Compensation" in the Company's definitive proxy statement for its
1999 Annual Meeting of Shareholders to be filed not later than 120 days after
the end of the fiscal year covered by this Report and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management will be included under "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for its 1999
Annual Meeting of Shareholders filed or to be filed not later than 120 days
after the end of the fiscal year covered by this Report and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
with management will be included under "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for its 1999 Annual
Meeting of Shareholders to be filed not later than 120 days after the end of the
fiscal year covered by this Report and is incorporated herein by reference.
32
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 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.
33
(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
Reigstrant, Micrion Corporation and MC Acqisition 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
34
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+ Stock Bonus Agreement, dated as of June 25, 1998, between the
Registrant and Vahe' Sarkissian
10.18+ Restricted Stock Purchase Agreement, dated as of June 25, 1998,
between the Registrant and Vahe' Sarkissian
10.19(7) 19.9% Stock Option Agreement, dated as of December 3, 1998, between
Micrion Corporation and the Registrant.
10.20(7) Stock Purchase Agreement, dated as of December 3, 1998, between
Philips Business Electronics International B.V. and the Registrant.
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Accountants N.V.
27.1 Financial Data Schedule
- ----------------
(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) Incorporated by reference to Exhibits to Registrant's Current Report
on Form 8-K, dated December 9, 1998.
35
+ 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.
36
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: /s/ VAHE' SARKISSIAN
-------------------------------------
Vahe' A. Sarkissian
President and
Chief Executive Officer
Date: March 24, 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 March 30, 1998.
Signature Title
--------- -----
/s/ VAHE' SARKISSIAN
- -------------------------
Vahe' A. Sarkissian President and Chief Executive Officer
(Principal Executive Officer)
/s/ WILLIAM P. MOONEY
- -------------------------
William P. Mooney Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
/s/ MARK V. ALLRED
- -------------------------
Mark V. Allred Controller and Assistant Treasurer
(Principal Accounting Officer)
/s/ LYNWOOD W. SWANSON
- -------------------------
Lynwood W. Swanson Chairman of the Board and Director
/s/ KAREL D. VAN DER MAST
- -------------------------
Karel D. van der Mast Executive Vice President Marketing,
Technical Officer and Director
/s/ ALFRED B. BOK
- -------------------------
Alfred B. Bok Director
37
/s/ WILLIAM E. CURRAN
- -------------------------
William E.Curran Director
/s/ THEO J.H.J. SONNEMANS
- -------------------------
Theo J.H.J. Sonnemans Director
/s/ LLOYD R. SWENSON
- -------------------------
Lloyd R. Swenson Director
/s/ DONALD R. VANLUVANEE
- -------------------------
Donald R. VanLuvanee Director
38
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
39
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.
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
F-9
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.
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.
F-10
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 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.
F-11
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 the Company'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. 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.
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.
F-12
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.
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.
F-13
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 163 positions worldwide, or about 16%
of its work force as of July 29, 1998. The positions affected include
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 163 positions targeted for
elimination, 66 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-14
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-15
5. INVENTORIES
Inventories consist of the following:
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-16
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-17
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-18
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:
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-19
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-20
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-21
$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 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-22
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-23
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-24
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-25
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 "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 $84,000.
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-26
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.
F-27
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 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-28
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 operating income of each of the segments
includes a restructuring and reorganization charge. The
F-29
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-30
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 FEI at the date of
the PEO combination.
F-31
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.
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
Businessl 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
Exhibit Description Sequential
No. Page No.
- ------- ----------- ----------
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 Stock Bonus Agreement, dated as of June 25, 1998, between
the Registrant and Vahe' Sarkissian
10.18 Restricted Stock Purchase Agreement, dated as of June 25,
1998, between the Registrant and Vahe' Sarkissian
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Accountants N.V.
27.1 Financial Data Schedule
- ----------------
(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.
+ 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.