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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, 1999 or
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[ ] 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 Company 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)
Company'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 Company (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 Company 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 the Company'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 Company at
March 14, 2000: $393,446,675. For purposes of this calculation, officers and
directors are considered affiliates.
Number of shares of Common Stock outstanding at March 14, 2000: 27,871,134.
DOCUMENTS INCORPORATED BY REFERENCE
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PART OF FORM 10-K INTO
DOCUMENT WHICH INCORPORATED
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Proxy Statement for 2000 Annual
Meeting of Shareholders Part III
TABLE OF CONTENTS
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ITEM OF FORM 10-KA PAGE
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PART I
Item 1 - Business................................................................................. 1
Item 2 - Properties............................................................................... 14
Item 3 - Legal Proceedings........................................................................ 14
Item 4 - Submission of Matters to a Vote of Security Holders...................................... 15
Item 4(a) - Executive Officers of the Company........................................................ 16
PART II
Item 5 - Market for the Company's Common
Equity and Related Stockholder Matters................................................... 19
Item 6 - Selected Financial Data.................................................................. 20
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................... 21
Item 7A - Quantitative and Qualitative Disclosures About Market Risk............................... 28
Item 8 - Financial Statements and Supplementary Data.............................................. 29
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................................................... 47
PART III
Item 10 - Directors and Executive Officers of
the Company.............................................................................. 48
Item 11 - Executive Compensation................................................................... 48
Item 12 - Security Ownership of Certain Beneficial
Owners and Management.................................................................... 48
Item 13 - Certain Relationships and Related Transactions........................................... 48
i
PART IV
Item 14 - Exhibits, Financial Statement Schedules
and Reports on Form 8-K.................................................................. 49
SIGNATURES................................................................................................... 53
ii
PART I
ITEM 1. BUSINESS
INTRODUCTION
BACKGROUND
COMPANY HISTORY. FEI Company ("FEI" or 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. In 1999, the Company acquired Micrion
Corporation ("Micrion"), a company engaged in the design, manufacture, sale and
service of focused particle beam instruments.
STRUCTURAL PROCESS MANAGEMENT. The Company is a leader in the design,
manufacture, sale and service of products based on focused charged particle beam
technology. By combining a focused ion beam and an electron microscope, the
Company has developed a dual beam ("DualBeam") system that allows the Company's
equipment to provide three-dimensional imaging. The DualBeam and other Company
products deliver a range of structural process management applications for the
Semiconductor integrated circuits ("Semiconductor" or "IC"), Data Storage and
Industry and Institute markets. Structural process management applications
enable customers to obtain critical information about structural processes,
which the Company believes is increasingly valuable as demand grows for greater
information about ever-smaller structures.
CORE TECHNOLOGIES
The Company utilizes four core technologies to deliver a range of customer
solutions. The core technologies are: focused ion beams; electron beams; beam
gas chemistry and system automation. The Company combines and configures these
core technologies in various ways to create multiple products and applications.
These products and applications allow customers in the Company's markets to
better understand and manipulate the processes utilized to make certain
structures--whether those structures are integrated circuits, magnetic
electronic data storage heads, or sophisticated industrial materials. By helping
customers better understand and manipulate structures, the Company helps improve
product time to market, yield management, process management and device
fabrication.
PARTICLE BEAM TECHNOLOGIES--FOCUSED ION BEAMS AND ELECTRON BEAMS.
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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. Thus through focused ion beam
systems ("FIBS") the surface can be modified or milled with submicron
precision by direct action of the ion beam in combination with gases (as
decribed below). Secondary electrons and ions may also be collected for
imaging and compositional analysis. The Company's ion beams and electron
beam technologies, when coupled with the Company's other core
technologies--beam gas chemistries and automation, provide unique product
capabilities and applications.
BEAM GAS CHEMISTRIES.
Beam chemistry plays an important role in enabling FEI systems that
incorporate FIBs to successfully perform many tasks. Beam chemistry
involves the interaction of the primary ion beam with an injected gas near
the surface of the sample. This interaction results in either the
deposition of material or enhanced removal of material from the sample.
Both of these processes are critical to optimizing the applications of FIB
technology. The Semiconductor and Data Storage markets have expanding needs
for gas chemistry technologies, and the Company has aimed to align its
development strategy with the roadmaps of these industries to improve its
gas chemistry development.
- Deposition: Deposition of materials on the sample surface enables
a FIB system to electrically connect or isolate features on an
integrated circuit. A deposited layer of metal also can be used
prior to FIB milling to protect surface features for more
accurate cross sectioning or sample preparation.
- Etch: The removal of material is the most important function of
FIB systems. The Company's FIBs have the ability to mill specific
types of material faster than other types. This process is called
selective etching and is a core technology that FEI has been
refining for years.
SYSTEMS AUTOMATION.
A fourth core technology for the Company is system automation. Drawing on
its knowledge of industry needs and utilizing robotics and image recognition
software, the Company has developed automation capabilities that allow it to
increase system performance, speed and consistency. These capabilities have been
especially important to the Company's development efforts for in-line products
and applications in the Data Storage and Semiconductor markets. Two important
areas where the Company has developed significant automation technologies are
transmission electron microscope ("TEM") sample preparation and
three-dimensional process
2
control. TEMs are widely used in the Semiconductor and Data Storage markets to
obtain valuable high-resolution images of very small structures. TEM sample
preparation has traditionally been a slow and difficult manual process. FEI has
automated this process, dramatically improving the sample consistency and
overall throughput. Similarly, by automating three-dimensional process control
applications, FEI allows customers to acquire previously unobtainable
sub-surface process metrics directly from within the production line, improving
process management.
PRODUCTS
FEI manufactures base-line products and platforms using the Company's
core technologies. The Company's products include TEMs and scanning electron
microscope systems ("SEMs"). TEMs and certain SEMs collectively compose the
Company's Electron Optics Products ("Electron Optics Products"). FEI also
manufactures SEMs designed for wafer scanning in the IC industry ("Wafer
SEMs"). FIBs, DualBeam products, that incorporate an electron beam and an ion
beam into a single system, and Wafer SEMs collectively compose the Company `s
"Microelectronic Products".
When configured with the Company's core automation and beam gas chemistry
technologies, the Company's base-line products perform a range of structural
process management functions. More specifically, the Company' s SEM products
have applications for structural examination and are sold into the Company's
Industry and Institute market. The Company's TEMs have structural examination
applications in the Industry and Institute market and in structural metrology in
the Semiconductor and Data Storage markets. The Company's Wafer SEMs allow for
defect review in the Semiconductor and Data Storage markets. FIBs are used for
TEM sample preparation for all of FEI's served markets as well as for design
edit in the Semiconductor market and pole trimming in the Data Storage market.
FEI's DualBeam systems have structural process management applications in the
Semiconductor and Data Storage sectors.
Depending on the specific application, Electron Optics Products 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 beam techniques can address the
fabrication requirements of Semiconductor and Data Storage manufacturers.
FEI's systems components business consists of the manufacture of focusing
columns and emitters ("Component Products"). The Company's Component Products
are manufactured with a variety of technical features to meet the Company's
internal needs for its Electron Optics Products
3
and Microelectronic Products. In addition, certain components not used in the
Company's products are sold to outside customers.
MANUFACTURING, SALES AND SERVICE
The Company has manufacturing operations in Hillsboro, Oregon; Eindhoven,
The Netherlands; Peabody, Massachusetts and Brno, Czech Republic. Direct sales
and service operations are conducted in the United States and 23 other countries
through three region-based divisions--the North American, European and
Asia-Pacific Region sales and service divisions. These sales and service
divisions also manage product sales through independent representatives in
certain countries. In December 1999, the Company acquired product sales and
service channels in approximately 20 countries that had previously been operated
by Philips. In three countries, distribution was transferred to independent
representatives following the acquisition. These acquisitions permitted the
Company to obtain more direct control over product sales and support. 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. Any statements in this report
concerning increased investment in the Company's service and support activities
for products, 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 Optics Products and
Microelectronics Products business include, but are not limited to, downturns in
the IC manufacturing market, lower than expected customer orders for these
products, and changes in product sales mix. Factors that could materially reduce
the portion of the Company's sales consisting of international sales include,
but are not limited to, competitive factors, including increased international
competition, new product offerings by competitors and price pressures, exchange
rate fluctuations and business conditions and growth in the electronics industry
and general economies, both domestic and foreign. Factors that could materially
reduce the portion of the Company's sales consisting of Electron Optics Products
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: below in Summary -
"Philips Services;" in Item 1 - "Business" under the captions "Sales, Marketing
and Service," and "Competition" and "Patents and Intellectual Property;" 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."
4
PHILIPS SERVICES
The Company obtains a range of services world-wide through Philips and its
affiliates. These services include:
- Human Resources--services related to personnel and personnel
management systems; payroll services; access to Philips' collective
bargaining arrangements; access to Philips' rate for social charges in
selected countries.
- Letters of Credit--arrangements for export sales.
- Guarantees--relating to customer prepayments.
- Philips Research Laboratories--contract research with the central
Philips research laboratory.
- Corporate Purchasing--access to certain products and discounts; access
to standardized purchasing coding; central electronic payment system;
purchasing information and training; negotiation of new purchasing
arrangements.
- Central Finance and Administration--fixed asset registration, VAT,
customs and import duty services.
- Legal Services--local support outside the U.S., and corporate and
commercial support in The Netherlands.
- Philips Corporate Bureau on Environment and Energy--support and review
on environmental matters and energy costs.
- Insurance--participation in the Philips insurance program.
- Information Technologies--access to proprietary databases; use of
global network.
In the event that Philips ceases to be a majority shareholder of the Company,
some or all of these arrangements could terminate. It is unclear that in the
event of terminations the Company would be able to find replacement services at
a similar or lower price. In addition, there may be other indirect costs
associated with obtaining new vendors, including diversion of management time
and resources. This could have a material adverse affect on the Company's
results of operations.
PRODUCTS
ELECTRON OPTICS PRODUCTS
The Company's SEMs and TEMs that make up its EOP product offerings provide
a range of structure analysis functionality for a variety of industrial and
research purposes. Customers include Industry and Institute clients--research
institutions, universities and materials manufacturers, as well as Semiconductor
and Data Storage manufacturers. Specific applications include analysis of
advanced materials such as ceramics and metals and defect review and measurement
for the Semiconductor and Data Storage industries. The Company's Electron Optics
Products 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
5
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 Electron Optics Products accounted for approximately 51% of the
Company's net sales in 1999.
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. These products and applications serve customers
in all of the Company's markets. Microelectronic Products are used in the
Semiconductor industry for defect review and process 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. 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 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 43% of the
Company's net sales in 1999.
6
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
Company's internal needs for its EOP and Microelectronic products. In addition,
certain components not used in the Company' s products are sold to outside
customers. The Company sells its electron emitters primarily to manufacturers of
electron beam equipment and scientific research facilities. Ion emitters are
sold mainly to research and scientific facilities. 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. 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.
Sales of Component Products to third party customers for 1999 were
approximately 5% of net sales.
RESEARCH AND DEVELOPMENT
The Company's research and development staff at December 31, 1999 consisted
of 264 employees, including scientists, engineers, designer draftsmen and
technicians, as well as software developers. The Company also contracts with
Philips Research Laboratories ("PRL") for basic research applicable to the
Company's core focused ion beam and electron beam technologies. In 1999, the
Company paid PRL $950,000 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 1999 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 1999, net of amounts received from MEDEA, the Company
7
expended approximately $2.8 million on Company-sponsored research and
development projects by third parties. In 1999, the Company did not engage in a
program of customer-sponsored research and development. The Company also engages
in research and development programs with certain U.S. governmental agencies.
Under these contracts the Company must undertake mandated hiring practices and
other obligations required of entities contracting with the U.S. government and
failure to satisfy these obligations could result in the loss of these
contracts.
The Semiconductor and Data Storage manufacturing markets, as well as the
Industry and Institute market into which the Company sells its principal
products, are subject to rapid technological development, product innovation
and competitive pressures. Consequently, the Company has expended substantial
amounts on research and development. The Company generally intends to
continue at or above its present level of research and development
expenditures and believes that continued investment will be important to its
continued ability to address the needs of its customers. Research and
development efforts continue to be directed toward beam gas chemistry;
specifically, 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. In addition to beam chemistry, a significant
development effort has been undertaken to develop a platform for handling 300
mm IC wafers in a DualBeam configuration. Also, the Company recently
developed important system automation for a new TEM platform that was
recently introduced into the market. These are areas that the Company
believes hold promise of yielding significant product enhancements. 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 1997, 1998 and 1999 were $15.4 million, $19.5
million and $21.9 million, respectively.
MANUFACTURING
The Company has manufacturing operations located in Hillsboro, Oregon;
Eindhoven, The Netherlands; Peabody, Massachusetts 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. In 1999, the Company out-sourced
electronics subassembly manufacturing in Eindhoven to RIPA Holding B.V.
("RIPA"). The Company's Electron Optics Products 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 that 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.
8
Although many of the components and subassemblies included in the Company's
system products are standard products, a significant portion of the mechanical
parts and subassemblies are custom made by one or two suppliers, including
Philips Machinefabrieken Nederland B.V. ("Philips Machine Factory"). In addition
to the Philips Machine Factory, the Company obtains a significant portion of its
component parts from a second supplier, Turk Manufacturing Co. RIPA is currently
a sole source for electronic subassemblies that were, until recently,
manufactured at the Company's facilities in Eindhoven. The Company believes some
of the components supplied to it are available to the suppliers only from single
sources. Those parts subject to single or limited source supply are monitored by
the Company to ensure that adequate sources are available to maintain
manufacturing schedules. Although the Company believes it would be able to
develop alternate sources for any of the components used in its products,
significant delays or interruptions in the delivery of components from suppliers
or difficulties or delays in shifting manufacturing capacity to new suppliers
could have a material adverse effect on the Company. 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.
SALES, MARKETING AND SERVICE
The Company's sales and marketing staff at December 31, 1999 consisted of
approximately 212 employees, including direct salespersons, product marketing
engineers, 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 Electron Optics Products markets. The Company's sales force and
marketing efforts are not segmented by product market, but are organized through
three geographic sales and services divisions--for North America, Europe and the
Asia Pacific Region.
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 of product information to the customer of product information and the
receipt of a purchase order is typically six to nine months.
9
FEI's North American, European and Asia-Pacific Region sales and service
divisions sell products in the United States and 23 other countries, including
the United Kingdom, France, Germany, Italy, Japan, South Korea , The
Netherlands. In December 1999, the Company acquired sales and service channels
in approximately 20 countries that had previously been operated by affiliates of
Philips, thereby obtaining direct control of channels in these markets. See Item
13 - "Certain Relationships and Related Transactions."
The Company's Microelectronic Products, Electron Optics 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 and Electron Optics Products may purchase service
contracts of one year or more in duration after expiration of any warranty.
Warranty and service obligations are carried out under the direction of the
Company's North American, European and Asia Pacific sales and service divisions.
The Company employs service engineers in each of these regions. The Company also
contracts with independent service representatives for Microelectronic Products
service in Japan, Israel, South Korea, Taiwan and Singapore, and expects to add
additional service engineers in other locations as needed. Due to a shift in
sales towards the Semiconductor 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 Electron Optics
Products and Microelectronic Products sold to this industry.
Sales outside North America were 56% of net product and service sales in
1999. International sales are expected to continue to represent a significant
percentage of net sales for the Company.
Certain risks are inherent in international operations, including changes
in demand resulting from fluctuations in interest and exchange rates, the risk
of government-financed competition, changes in trade policies, tariff
regulations and difficulties in obtaining export licenses. In addition, a
substantial portion of the Company's international sales are denominated in
currencies other than U.S. dollars. Consequently, a 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 hedging 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."
MICRION ACQUISITION
In August 1999, FEI Company completed its merger with Micrion. Under the
terms of the Merger Agreement, Micrion became a wholly owned subsidiary of the
Company. Holders of
10
Micrion common stock received one share of the Company's common
stock and $6.00 in cash in exchange for each share of Micrion
common stock.
In connection with the Micrion merger, Philips Business Electronics, the
Company's majority shareholder, pursuant to a stock purchase agreement with the
Company, financed the cash portion of the merger consideration through the
purchase from the Company of additional newly issued shares of common stock,
amounting to 3,913,299 shares at $8.02 for a total of $31,385,000. See Item 13 -
"Certain Relationships and Related Transactions."
COMPETITION
The markets for sale of Microelectronic Products, Electron Optics Products
and Component Products, are highly competitive. A number of the Company's
competitors and potential competitors may have greater financial, marketing and
production resources than the Company. Additionally, markets for the Company's
products are subject to constant change, in part due to evolving customer needs.
As the Company endeavors to respond to this change, the elements of competition
as well as specific competitors may alter. Moreover, one or more of the
Company's competitors might achieve a technological advance that would put the
Company at a competitive disadvantage.
The Company's competitors for the sale of Electron Optics Products include
JEOL, Ltd., Hitachi, Ltd., KLA-Tencor Corporation and LEO Electron Microscopy,
Inc. The principal elements of competition in the Electron Optics Products
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), 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 Electron Optics
Products and Microelectronic Products that manufacture components for their own
use are also potential competitors for the Company's Component Products. The
Company believes its component products have features that allow it to compete
favorably with others in this segment of its business.
11
In each of the Company's markets, there are few barriers to entry. Given
the fact that these markets are in the developmental stage, there is no
assurance that other companies, including but not limited to certain of the
Company's customers, will not enter one or more of these markets in the future.
PATENTS AND INTELLECTUAL PROPERTY
The Company relies on a combination of trade secret protection,
nondisclosure agreements and patents to establish and protect its proprietary
rights. There is no assurance, however, that any of these intellectual property
rights will have commercial value or will be sufficiently broad to protect the
aspect of the Company's technology to which they relate or that competitors will
not design around the patents. FEI owns, solely or jointly, 25 U.S. patents,
including patents acquired in the Micrion merger. The Company also owns foreign
patents corresponding to many of these U.S. patents. Further, the Company has an
exclusive license for one patent. 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 Electron Optics
Products 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 used in the Company's products. In
addition, 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. Some of these cross-licenses provide the Company with the right
to use intellectual property that relate to its core technologies. In general
these cross licenses are subject to continued majority ownership of the Company
by Philips, and if that ownership ceased, the Company would lose these rights.
Loss of these cross-licenses could result in the Company being unable to
practice the previously cross-licensed technology, the Company having to
undertake licensing arrangements and pay royalties or the Company being
subjected patent infringement actions. Some of the potential implications of
patent infringement claims are described below.
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. None of these allegations has resulted in litigation.
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,
12
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.
The Company claims trade marks on a number of its products and has obtained
registration for some of these marks; however, use of the registered and
unregistered marks may be subject to challenge with the consequence that the
Company would have to cease using marks or pay fees for their use. In addition,
under the PEO Combination agreement, the Company has the right to use of the
Philips trade marks and word marks. If Philips ceased holding a majority of the
outstanding common stock, the Company would be required, over a period of time,
to discontinue using the Philips marks. This could have an adverse effect on
product sales in certain of the Company's markets.
The Company's automation software incorporates software from third party
suppliers, which is licensed to end-users along with the Company's proprietary
software. The Company depends on these outside software suppliers to continue to
develop automation capacities, and the failure of these suppliers to continue to
offer and develop software consistent with the Company's automation efforts
could undermine the Company's ability to deliver present or anticipated product
applications.
Policing unauthorized use of the Company's technology and other
intellectual property is difficult, and there is no assurance that measures
taken by the Company to protect its intellectual property 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, are also significant in maintaining the
Company's competitive position in its principal markets.
EMPLOYEES
At December 31, 1999, the Company had approximately 1310 full-time
employees worldwide, including approximately 369 in manufacturing, approximately
264 in research and development, and approximately 331 in customer service,
marketing and sales and finance and administration. Some of the approximately
699 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 subject to collective bargaining agreements, and the Company has
never experienced a work stoppage, slowdown or strike. The Company believes it
maintains good employee relations. Through the majority shareholdings of
Philips, the Company has the benefit of certain collective bargaining
arrangements and the Philips rate for social charges in The Netherlands and
other countries. If Philips were to no longer be the majority shareholder, the
Company would have to negotiate new collective bargaining arrangements and could
be subject to higher social charge rates, both of which could result in
increased labor costs for the Company.
13
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 115,715 square feet, and is used for a range of manufacturing,
research and development and administrative activities. The leases for the four
facilities expire from March 31, 2003 through January 31, 2004. Present lease
payments for the space in the four buildings total approximately $90,000 per
month. The Company recently voluntarily relocated out of approximately 10,000
square feet of space in one of these four buildings and is attempting to
sublease this space.
The Company also maintains an administrative, development 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 $104,000 per
month, assuming a constant currency exchange rate of NLG2.1 per U.S. dollar. The
Company maintains leased manufacturing facilities in Brno, Czech Republic. The
Company leases approximately 91,000 square feet for its administrative,
development and manufacturing operations in Peabody, Massachusetts at a cost of
$70,000 per month.
The Company operates principal 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, as well as other smaller
offices in the 14 other countries where the Company has direct sales and service
operations. In some of these locations, the Company leases space directly and in
others obtains space through service agreements with affiliates of Philips.
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 that may be required to meet increased
demand for its products. In addition, the Company believes that if product
demand increases, it can use out-sourced manufacturing of spare parts as a means
of adding capacity without increasing its direct investment in additional
facilities. In connection with the recently out-sourced subassembly manufacture
in Eindhoven to RIPA, the Company has provided RIPA with space to undertake its
manufacturing operations. Under the outsourcing arrangement, RIPA will move
these operations to its own facilities in the near term, which could leave the
Company with certain unutilized space in Eindhoven.
ITEM 3. LEGAL PROCEEDINGS
The Company acquired Micrion in August 1999. On August 2, 1996, an action
was filed in the U.S. District Court for the District of Massachusetts against
Micrion, Nicholas P. Economou, who at the time was a director and officer of
Micrion and is presently an officer and director of the Company, and other
former officers of Micrion. On September 9, 1996, another action was filed in
the same court against Micrion, Dr. Economou and these former officers as well
as Billy W. Ward, who at the time was also an officer of Micrion. Mr. Ward is
presently an employee of the Company. On December 6, 1996, the plaintiffs in
both actions filed an
14
amended consolidated complaint. The consolidated complaint does not contain a
claim against Mr. Ward. The consolidated complaint purports to be brought on
behalf of a class of purchasers of Micrion's common stock from April 26, 1996
through June 21, 1996. It asserts claims for violations under the federal
securities laws, alleging that Micrion made false and misleading statements to
the public concerning the nature of its sales agreement with a customer. Factual
discovery in the case has been completed. Micrion filed a motion for summary
judgment to dismiss the case, which was denied on September 24, 1998. At a
hearing on September 22, 1999, the Court invited the defendants to file a
renewed motion for summary judgment, which was heard on November 22, 1999. On
December 6, 1999, the Court granted defendants renewed summary judgement motion.
On December 22, 1999, the plaintiffs filed notice of appeal of the decision with
the U.S. Court of Appeals for the First Circuit. The Company expects that it
will be several months before the appeal is briefed, argued and decided. The
Company continues to believe the consolidated complaint to be without merit and
intends to carry on its vigorous defense of the claims. There is no assurance,
however, that the Company will be successful in defending this lawsuit or that
money damages, if awarded, would not have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
15
ITEM 4(a). EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
executive officers of the Company as of March 1, 2000.
NAME AGE POSITION
Dr. Lynwood W. Swanson................................... 65 Chairman of the Board of Directors and
Chief Scientist
Vahe A. Sarkissian....................................... 57 President, Chief Executive Officer and
Director
Dr. Nicholas P. Economou................................. 51 Chief Operating Officer and Director
Dr. Karel D. van der Mast................................ 51 Executive Vice President and General
Manager, Microelectronics Product Division
William P. Mooney........................................ 49 Executive Vice President and Chief
Financial Officer
Nico Vrijenhoek.......................................... 59 Senior Vice President and General Manager,
Electron Optics Product Division
Bradley J. Thies......................................... 39 General Counsel and Secretary
Mark V. Allred........................................... 41 Controller and Assistant Treasurer
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.
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
16
with Semiconductor companies, including Advanced Micro Devices, Inc. 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.
NICHOLAS P. ECONOMOU. Dr. Economou has served as a director and Chief
Operating Officer of FEI since August 1999. Dr. Economou joined Micrion
Corporation in 1984 as Vice President of Engineering and served most recently as
its Chief Executive Officer and Chairman of the Board of Directors since August
1993. Dr. Economou holds a B.A. in physics from Dartmouth College and an M.A.
and Ph.D. in physics from Harvard University.
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 fields of physics and electron microscopy.
NICO VRIJENHOEK was named Senior Vice President and General Manager of the
Company's Electron Optics Product Division in 1998. From 1994 to 1998, Mr.
Vrijenhoek was Chief Executive Officer of Panta Electronics, a provider of
advance power supplies to the telecommunications industry.
BRADLEY J. THIES became General Counsel to the Company in February 1999 and
Secretary to the Company in June 1999. From March 1998 through February 1999,
Mr. Thies was General Counsel and Secretary of DataWorks Corporation, an
enterprise resource planning software company. From January 1994 until December
1996, Mr. Thies was General Counsel and Assistant to the Chairman of HomeTown
Buffet, Inc., a restaurant company. Prior to that time Mr. Thies was in private
practice with Stoel Rives LLP. Mr. Thies holds a B.A. in political science and
history from Willamette University and a J.D. from Columbia Law School.
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
17
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.
18
PART II
ITEM 5. MARKET FOR THE COMPANY'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 Stock
Market's National Market.
HIGH LOW
1998
First Quarter $15 1/18 $ 8
Second Quarter 12 5/8 6 1/2
Third Quarter 9 3/4 5 3/16
Fourth Quarter 10 5 3/8
1999
First Quarter 12 1/4 7 7/16
Second Quarter 8 7/8 6 1/2
Third Quarter 9 3/4 6 3/4
Fourth Quarter 15 15/16 6 3/4
As of March 14, 2000 there were approximately 151 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.
19
ITEM 6. SELECTED FINANCIAL DATA
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, 1999 and the
selected consolidated balance sheet data presented below as of December 31,
1998 and 1999 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,
1995 and 1996 and the selected consolidated balance sheet data as of
December 31, 1995, 1996 and 1997 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, 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 years ended December 31, 1998 and 1999 reflect the combined FEI and
PEO Operations.
(IN THOUSANDS, EXCEPT PER SHARE DATA) PEO OPERATIONS COMBINED COMPANY
- ------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995 1996 1997 1998 1999
- ------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net sales $ 109,117 $ 112,384 $ 168,796 $ 178,771 $ 216,152
Cost of sales 72,686 79,065 106,629 119,579 131,143
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit 36,431 33,319 62,167 59,192 85,009
Total operating expenses (1) 28,886 32,632 95,040 68,768 87,524
- ------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 7,545 687 (32,873) (9,576) (2,515)
Other income (expense), net 1,700 -- (622) (4,129) (65)
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 9,245 687 (33,495) (13,705) (2,580)
Tax expense (benefit) 3,317 740 3,107 (4,797) 4,800
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5,928 $ (53) $ (36,602) $ (8,908) $ (7,380)
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share, basic
and assuming dilution $ 0.61 $ (0.01) $ (2.19) $ (0.49) $ (0.34)
- ------------------------------------------------------------------------------------------------------------------------------
Shares used in per share calculation,
basic and assuming dilution (2) 9,728,807 9,728,807 16,677,336 18,105,808 21,745,065
(IN THOUSANDS, EXCEPT PER SHARE DATA) PEO OPERATIONS COMBINED COMPANY
- --------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash and cash equivalents $ -- $ -- $ 16,394 $ 15,198 $ 11,124
Working capital 23,844 31,113 64,496 70,350 84,957
Equipment 6,039 5,570 19,246 23,845 28,768
Total assets 60,742 71,824 183,022 191,138 288,100
Long-term interest bearing debt -- -- 17,844 26,349 36,012
Shareholders' equity 32,551 43,070 104,889 97,627 152,577
(1) Total operating expenses include nonrecurring expenses in 1997, 1998 and
1999. Included in 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. Included in 1998 total operating expenses is a restructuring
charge of $5.3 million. Included in 1999 total operating expenses is a
charge of $14.1 million to write-off acquired in-process research and
development in connection with the Micrion acquisition and a
restructuring charge of $0.1 million. See Notes 2 and 3 of Notes to
Consolidated Financial Statements.
(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.
20
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.
YEARS ENDED DECEMBER 31, 1997 1998 1999
- --------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 63.2 66.9 60.7
- --------------------------------------------------------------------------------
Gross profit 36.8 33.1 39.3
Research and
development 9.1 10.9 10.1
Selling, general
and administrative 21.9 23.2 22.0
Amortization of
purchased goodwill
and technology 1.2 1.4 1.7
Purchased in-process
research
and development 22.6 0.0 6.5
Restructuring and
reorganization costs 1.5 3.0 0.1
- --------------------------------------------------------------------------------
Operating loss (19.4) (5.4) (1.2)
Other expense, net (0.4) (2.3) 0.0
- --------------------------------------------------------------------------------
Loss before taxes (19.8) (7.7) (1.2)
Tax expense (benefit) 1.8 (2.7) 2.2
- --------------------------------------------------------------------------------
Net loss (21.7)% (5.0)% (3.4)%
- --------------------------------------------------------------------------------
NET SALES. Net sales for the year ended December 31, 1999 increased $37.4
million (21%) compared to the year ended December 31, 1998. The acquisition
of Micrion, completed in August 1999, contributed $12.8 million to 1999 net
sales. Net sales for the year ended December 31, 1998 increased $10.0 million
(6%) compared to the corresponding period in 1997. The 1998 period included
net sales of the combined company, while the 1997 period included net sales
of the PEO Operations only through February 20, 1997 and net sales of the
combined company thereafter.
Microelectronics segment product sales increased $29.5 million (54%) in
1999 compared to 1998. Of this increase, $9.3 million was attributable to the
Micrion product division. Microelectronics segment service sales increased
$4.6 million (90%) in 1999 compared to 1998, with Micrion contributing $3.5
million of the increase. Industry conditions in both the
semiconductor-manufacturing sector and the data storage sector were generally
stronger in 1999 than in 1998. In addition, the development of new
applications for the Microelectronics segment products contributed to
increased demand. Unit volume in the segment increased by 17% from 1998 to
1999 and average selling price also increased by 17%. The increase in average
selling price is partially due to increased prices, and partially due to
changes in product mix towards higher value systems. From 1997 to 1998,
Microelectronics segment product sales increased $5.8 million (12%), while
service revenues for this segment increased $0.3 million (5%). Unit volume in
the segment increased by 5% from 1998 to 1999 and average selling price
increased by 5%.
Electron Optics segment product sales increased $3.3 million (4%) in
1999 compared to 1998. Electron Optics segment service sales increased $3.8
million (16%) in 1999 compared to 1998. The Company introduced a new series
of TEM products in late 1998 and strong demand for these products contributed
to the sales increase in 1999. Sales of the Company's SEM products decreased
from 1998 to 1999, primarily due to increased competition. Growth in 1999
segment service revenues was due to the Company's increasing installed base
of systems and the acquisition of additional sales and service businesses
from Philips in late 1999, which contributed $0.5 million in 1999 service
revenues. From 1997 to 1998, Electron Optics segment product sales decreased
$4.3 million (5%), primarily due to increased competition and softness in the
materials and life sciences market sectors, while service revenues for this
segment increased $3.9 million (20%) from 1997 to 1998. Growth in 1998
segment service revenues was due to the Company's increasing installed base.
Product sales in the Components segment decreased $3.8 million (24%) in
1999 compared to 1998. The demand for Components segment products was weak in
the first half of 1999, due to customers' utilization of on-hand inventories.
From 1997 to 1998, Components segment product sales increased $4.2 million
(37%) due to strong demand from OEM manufacturers.
YEARS ENDED DECEMBER 31, 1997 1998 1999
- --------------------------------------------------------------------------------
Sales by Geographic Region:
North America 42% 42% 44%
Europe 31 34 29
Asia Pacific 25 22 25
Rest of World 2 2 2
- --------------------------------------------------------------------------------
100% 100% 100%
- --------------------------------------------------------------------------------
Year over year sales increased from 1998 to 1999 in each of the three major
geographic regions in which the Company sells; North America, Europe, and
Asia Pacific. In North America, sales increased by $19.7 million (27%) from
1998 to 1999 due to increased demand in the semiconductor industry in that
region. In Europe, sales increased by $2.2 million (4%) from
21
1998 to 1999 largely due to increased service revenue resulting from the
increase in the Company's installed base of systems and also the acquisition
of additional sales and service businesses from Philips in late 1999. In the
Asia Pacific region, sales increased by $13.7 million (35%) from 1998 to 1999
due to increased demand in the data storage industry in that region. From
1997 to 1998, sales in North America increased $2.9 million (4%), sales in
Europe increased $9.5 million (19%) and sales in the Asia Pacific region
decreased $3.5 million (8%). The increase in 1998 sales in Europe was
primarily due to the increase in Electron Optics service sales. Sales
declined in the Asia Pacific region in 1998 largely due to the depressed
general economic condition of the region.
In addition to the U.S. Dollar, the Company conducts significant
business in Euros, British Pounds, and Japanese Yen. In general, the U.S.
Dollar was stronger in relation to the Euro (and the underlying European
currencies) and British Pound and weaker in relation to the Japanese Yen
during 1999 as compared to 1998. Accordingly, the translation of sales
denominated in European currencies resulted in lower reported sales in U.S.
Dollars in 1999 as compared to 1998. The translation of sales denominated in
Japanese Yen resulted in higher reported sales in U.S. Dollars in 1999 as
compared with 1998. In 1998, the U.S. Dollar was generally stronger in
relation to European currencies and weaker in relation to the Japanese Yen as
compared to 1997.
GROSS PROFIT. Gross profit as a percentage of sales ("gross margin") was
36.8%, 33.1% and 39.3% for each of the years ended December 31, 1997, 1998
and 1999, respectively. The 1999 gross profit was negatively impacted by $1.0
million of non-cash inventory step-up adjustments related to the Micrion
acquisition. Without these purchase accounting effects, the gross margin
would have been 39.8%. 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
margin would have been 38.4% for the year ended December 31, 1998. In
addition, the write-up of Pre- 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-combination FEI's assets was a result of the
reverse acquisition accounting applied to the PEO Combination.
The improvement in the Company's gross margin over the last three years
was primarily due to changes in product mix, partially off-set by a higher
percentage of total sales attributed to the service business, on which the
Company earns a lower gross margin than on product sales. The gross margin
also benefited from the purchase of the additional sales and distribution
businesses from Philips in late 1999, which resulted in a higher proportion
of direct sales versus distributor sales. In general, distributor sales carry
a lower gross margin but require lower levels of selling, general and
administrative costs. In late 1999 the Company expanded its distributor
arrangements in the Asia Pacific region and anticipates that increased
distributor sales in Asia Pacific will off-set the increased direct sales in
Europe. Other margin improvement contributions resulted from outsourcing
activities which occurred in 1998 and 1999 for several mechanical and
electrical subassemblies. In addition, the Company's service business is not
expected to grow as rapidly as the anticipated growth in product sales over
the near term.
RESEARCH AND DEVELOPMENT COSTS. Research and development ("R&D") costs for
1999 increased $2.4 million (12%) compared to 1998 and increased $4.1 million
(27%) in 1998 compared to 1997. As a percentage of sales, R&D costs were
9.1%, 10.9% and 10.1% for 1997, 1998 and 1999, respectively. Micrion
accounted for $2.3 million of additional R&D expenses in 1999. R&D expense is
reported net of subsidies and capitalized software development costs. These
off-sets to 1999 R&D expense increased by $1.9 million from 1998 to 1999.
Excluding the effects of these increased off-sets and the effect of the
Micrion acquisition, 1999 R&D expense increased $2.1 million (9%) from 1998
to 1999. The 1998 increase reflects increased efforts to develop certain
technologies for new products. Expenditures for these efforts represented
$3.6 million of the 1998 increase over 1997 expenditures. The 1997 expense
includes the write-off of $1.6 million of previously capitalized software
development costs in the first quarter. The 1997 costs do not include
Pre-combination FEI prior to the PEO Combination date of February 21, 1997.
SELLING, GENERAL AND ADMINISTRATIVE COSTS. Selling, general and
administrative ("SG&A") costs for 1999 increased $6.2 million (15%) compared
to 1998, and increased $4.4 million (12%) in 1998 compared to 1997. As a
percentage of sales, SG&A costs were 21.9%, 23.2% and 22.0% in 1997, 1998 and
1999, respectively. The increase in SG&A costs in 1999 was primarily
attributable to the acquisition of Micrion in August 1999, which added $4.5
million in 1999
22
expenses, as well as the acquisition of the additional sales and service
businesses from Philips, which added $0.6 million to the 1999 expense. The
increase in SG&A 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 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.
AMORTIZATION OF PURCHASED GOODWILL AND TECHNOLOGY. 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. Purchase accounting for the Micrion
acquisition as of August 13, 1999 resulted in the recognition of intangible
assets in the amount of $16.3 million for existing technology that is being
amortized over a 10-year period, and goodwill of $24.1 million that is being
amortized over a 12-year period. Amortization of purchased goodwill and
technology increased by $1.2 million (48%) in 1999 compared with 1998 as a
result of the Micrion acquisition. Amortization of purchased goodwill and
technology for 1998 increased $0.4 million (20.0%) compared to 1997,
reflecting 12 months amortization from the PEO Combination compared to
approximately ten months amortization in 1997. Amortization of purchased
goodwill and technology is expected to increase to approximately $6.1 million
in 2000 from the effects of a full year of amortization of the Micrion
acquisition intangibles.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. Purchase accounting for the
PEO Combination in 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-combination FEI. Purchase
accounting for the Micrion acquisition in 1999 resulted in the recognition of
an intangible asset in the amount of $14.1 million representing the estimated
fair value of in-process research and development of Micrion at the date of
acquisition. In keeping with the Company's policy to expense research and
development costs as they are incurred, these intangible assets were written
off with a charge to earnings immediately following the acquisitions.
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, 1998 and 1999. The fourth project was
still under development at the end of 1999 and is expected to begin to
generate revenue in 2000. The Company's long-term expectations for its
markets and, accordingly, for these projects, have not changed significantly.
In connection with the purchase accounting for the Micrion acquisition, the
Company identified four significant projects under development at the date of
the acquisition. Two of those categories represent enhancements to the
resolution and automation of existing products designed primarily for the
semiconductor industry. Micrion, which has become a division of the Company,
is also enhancing the automation of its products for the data storage
industry. Finally, the Micrion division is continuing to develop its products
for the lithography photo mask repair market. None of the projects in these
categories had been proven technologically feasible or had generated revenue
as of the date of the evaluation; however, these projects are expected to
begin generating revenue in 2000. Because of the nature of these projects,
there is always the risk that a technological hurdle may be encountered that
may delay, prevent or increase the cost of development of these projects. For
additional information see Note 2 of the Notes to Consolidated Financial
Statements.
RESTRUCTURING AND REORGANIZATION COSTS. 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 $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. In 1998 the
Company implemented a restructuring and reorganization program to consolidate
operations, eliminate redundant facilities, reduce operating expenses, and
provide for outsourcing of certain manufacturing activities. The program was
to eliminate approximately 173 positions worldwide, or about 16% of its work
force as of July 1998. The charge of $5.3 million recognized in 1998
represented the cost of providing severance, outplacement assistance, and
associated benefits to affected employees, as well as moving and lease
abandonment costs associated with closing duplicate facilities. The charge of
$0.1 million recognized in 1999 represents the cost of relocating certain
office facilities. Of this charge, $1.7 million remains as a liability at
December 31, 1999. This liability will be discharged in 2000 as the Company's
long-term employment termination obligations are
23
paid and as the abandoned facility leases expire. The following table
summarizes the December 31, status of the restructuring and reorganization
costs.
YEARS ENDED DECEMBER 31, 1997 1998 1999
- --------------------------------------------------------------------------------
Restructuring and Reorganization Costs
Charged to expense:
ElectroScan operation $2,478
Worldwide restructuring
and reorganization $5,320 $ 131
Less settled amounts 779 2,012 1,499
Less non-cash write downs 1,699 253 --
- --------------------------------------------------------------------------------
Remaining cash requirements
at year end $ -- $3,055 $1,687
- --------------------------------------------------------------------------------
OTHER INCOME (EXPENSE), NET. Interest income for 1997, 1998 and 1999
represents interest earned on the short-term temporary investment of excess
cash. The increase in interest income in 1999 compared to 1998 is primarily
the result of increased principal invested. 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. 1999 interest
expense generally reflects higher levels of borrowing off-set by lower
interest rates under the Philips credit facility, as compared to the
Company's previous borrowings. The increase in interest expense in 1998
compared to 1997 primarily reflects higher levels of borrowing.
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 of future cash flows that it expected to receive from this
investment based on Norsam's operating results and its divestiture of certain
operating assets.
INCOME TAX EXPENSE. The effective income tax rate was (186)% for the year
ended December 31, 1999, 35% for the year ended December 31, 1998 and (9)%
for the year ended December 31, 1997. The Company's effective tax rate
differs from the U.S. federal statutory tax rate primarily as a result of the
amortization and immediate write-off of intangible assets not deductible for
income tax purposes. The effective tax rate also differs from the U.S.
federal statutory rate due to state and foreign taxes and the favorable tax
effect of the Company's use of a foreign sales corporation for exports from
the U.S., among other factors.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations increased to $16.2 million, 474% higher than
1998, and 140% higher than 1997, primarily due to improved operating results.
Increased sales lead to a $25.8 million increase in gross profit for 1999.
This increase was offset by a $8.7 million increase in R&D and selling,
general and administrative costs. For 1998, cash received from customers
increased $32.6 million over 1997. However, this increase was more than
offset by increases in cash paid to suppliers and employees, which increased
approximately $36.5 million due to increases in inventories as well as
reductions in amounts owed to those parties. For 1998, non-cash expenses for
depreciation and amortization were $ 8.6 million combined, 37% lower than
1999. Accounts receivable increased $24.0 million from 1998 to 1999. The
increase was due to third and fourth quarter business combinations and higher
year-end shipping volumes. Similarly in 1997, receivable levels increased
significantly ($15.4 million) in conjunction with the business combination
with Philips. The 1999 business combinations also contributed to an increase
in other assets, principally spare parts inventory which is not expected to
be utilized within a twelve month period.
Management assesses liquidity needs by evaluating cash balances on
hand, available borrowings under its credit lines, working capital trends,
and expected cash flows from operating activities versus its investment
needs. The Company has invested both through research expenditures and
through investments in business combinations to expand its position in the
Microelectronics business segment. During 1999 the Microelectronics segment
increased its operating income to $8.4 million following a loss in 1998.
Management believes that this segment will continue to increase in sales and
operating profits and provide sufficient cash flows to warrant continued
investment.
The Company operates sales and service operations on a worldwide basis
and transacts in numerous foreign currencies whose value in relation to the
US dollar fluctuates daily. Its principal raw materials, labor, and other
manufacturing costs are primarily denominated in US dollars, Dutch guilders,
and Euros. The Company attempts to mitigate its currency translation and
transaction exposures by using forward exchange contracts and by borrowing in
multiple currencies. It also negotiates the selling currency with its
customers. The mandate of the conversion to the Euro in many European
countries affords an opportunity to reduce the number of cross currency
transactions.
24
The Company entered into a $50 million unsecured revolving credit
agreement on February 25, 1999 with Philips, its majority shareholder. The
agreement matures on February 26, 2002. It provides the Company with
increased borrowing capacity, replacing the $25 million facility, which was
in place during 1997 and 1998. The funds may be drawn either in the U. S. or
offshore in a choice of three currencies. Under terms of the agreement, the
Company must comply with customary banking terms and conditions including
financial covenants which require specific minimum equity levels and minimum
cash flow to interest expense ratios. As of December 31,1999, the Company was
in compliance with the covenants in the agreement. Interest on the
outstanding balance is based on an applicable LIBOR rate for one, three, or
six months at the Company's option plus .75%. As of December 31, 1999,
borrowings under the credit facility were $34.8 million, providing unused
credit capacity of $15.2 million. The Company also maintains a $5 million
uncommitted line of credit with a U. S. Bank, which is utilized to support
standby letters of credit, as well as certain limited credit facilities in
foreign countries.
In August 1999, in connection with the business combination with
Micrion, the Company sold 3,913,299 shares to Philips in a private
transaction providing $31.4 million in net proceeds. The Company also issues
shares to fund its Employee Stock Purchase Plan which enables employees to
purchase Company shares at a 15% discount to market price at fixed points in
time. The Company also grants options to purchase Company shares to many of
its employees and Directors as part of incentive and other compensation
programs. During 1999, 1,161,565 shares were sold or granted under these
programs as compared to 1,790,818 shares sold or granted in 1998, and 187,104
shares sold in 1997.
During 1999 the Company made several business investments in addition
to ongoing investments in equipment and product development. The largest of
these investments was the August 1999 purchase of Micrion Corporation.
Purchase consideration for this transaction, including transaction costs,
consisted of cash and Company shares totaling $69.4 million. In September
1999, the Company invested $3.0 million to acquire a 9.5 % interest in a
"start-up" company, which is introducing an atomic force microscopy tool for
the semiconductor industry. In conjunction with the investment, the Company
entered into a distribution agreement through which it will market, sell, and
service the equipment. The Company also obtained an option to purchase
additional equity at a predetermined price and may make a follow-on
investment in the future. During the fourth quarter of 1999, the Company
acquired sales and service capabilities in a number of smaller market areas.
Purchase consideration included a preliminary cash payment of $3.3 million.
The Company expects to continue to utilize acquisition and investment
opportunities to augment its growth and market position.
The Company also made capital expenditures for acquisition of equipment
of $8.3 million in 1999, 30 % lower than the $11.9 million invested in 1998
and 11% lower than the $9.4 million expended in 1997. These expenditures are
primarily for application laboratory and demonstration systems, which exhibit
the capabilities of the Company's equipment to its customers and potential
customers. The lower capital spending level was in anticipation of the
business combination with Micrion, which added both domestic and offshore
application laboratory and demonstration equipment. Capital expenditures in
2000 are expected to increase to the $12 million to $16 million range for
this type of equipment as well as equipment used for research and
development. The Company also invests in internally developed software, which
controls its equipment and provides information from the equipment for use by
customers. In 1999, capitalized amounts for internally developed software
increased to $2.9 million from the 1998 investment of $2.3 million and the
1997 investment of $1.4 million. These expenditures are expected to continue
to increase as the Company introduces new products and adds new applications
to its existing products.
BOOKINGS AND BACKLOG
The Company's backlog consists of purchase orders it has received for
products and services it expects to ship and deliver within the next 12
months. At December 31, 1999 the Company's product backlog was $89 million
and its field service backlog was $13 million for a total backlog of $102
million. For 1999, the Company's consolidated book-to-bill ratio for both
products and service was 1.2 to 1. At December 31, 1998 the Company's product
backlog was $64 million and its field service backlog was $9 million for a
total backlog of $73 million. The Company expects to ship all products
representing this backlog in 2000, although there is no assurance that the
Company will be able to do so. A substantial portion of the Company's backlog
relates to orders for products with a relatively high average selling price.
As a result, the timing of the receipt of orders or the shipment of products
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
indicative of revenue in future periods.
25
YEAR 2000 DISCLOSURE
In 1998 the Company began working to address Year 2000 issues. The Company
focused its efforts on testing and addressing deficiencies in the following
areas: (i) products; (ii) hardware and software of the Company's
manufacturing control, accounting and other information technology systems;
(iii) identification and assessment of other third suppliers' products; and
(iv) communications with the customer base concerning Year 2000 readiness of
the Company's products. The Company completed its efforts in these areas in
the fourth quarter of 1999. With the passing of January 1, 2000, the Company
reports that no significant Year 2000 problems arose. The Company did not
specifically track expenditures related to its Year 2000 preparedness effort;
any such costs were expensed as incurred. No further significant expenditures
related to the Year 2000 issue are expected.
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 1998 and 1999. 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 paragraphs), 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 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 and consolidation of duplicate facilities; (ii) valuation adjustment
related to 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
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 results for the three months ended April 4, 1999 include
restructuring and reorganization charges of $0.1 million. The results for the
three months ended October 3, 1999 include a charge of $12.0 million for
estimated purchased in-process research and development associated with the
acquisition of Micrion. The results for the three months ended December 31,
1999 include a charge of $2.1 million for the final purchased in-process
research and development associated with the acquisition of Micrion.
26
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1999
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 29 JUNE 28 SEPT. 27 DEC. 31 APRIL 4 JULY 4 OCT. 3 DEC. 31
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 35,954 $ 44,922 $ 42,440 $ 55,455 $ 45,408 $ 45,722 $ 52,044 $ 72,978
Cost of sales 21,858 27,850 36,564 33,307 28,083 27,552 32,017 43,491
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 14,096 17,072 5,876 22,148 17,325 18,170 20,027 29,487
Total operating expenses 14,331 15,846 21,003 17,588 16,513 16,342 29,919 24,750
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (235) 1,226 (15,127) 4,560 812 1,828 (9,892) 4,737
Other income (expense), net (216) (521) (3,509) 117 326 (166) (286) 61
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes (451) 705 (18,636) 4,677 1,138 1,662 (10,178) 4,798
Tax expense (benefit) (158) 247 (6,523) 1,637 432 688 867 2,813
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (293) $ 458 $(12,113) $ 3,040 $ 706 $ 974 $(11,045) $ 1,985
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share;
basic $ (0.02) $ 0.03 $ (0.67) $ 0.17 $ 0.04 $ 0.05 $ (0.48) $ 0.07
diluted $ (0.02) $ 0.02 $ (0.67) $ 0.16 $ 0.04 $ 0.05 $ (0.48) $ 0.07
Shares used in per share calculation;
basic 18,078 18,079 18,105 18,161 18,205 18,319 23,017 27,417
diluted 18,078 18,345 18,105 19,075 19,260 19,314 23,017 28,510
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 pressures, conditions in the company's principal markets,
the timing of orders from major customers and new product introductions,
customer cancellation or delay of shipments, long sales cycles, changes in
the mix of products sold and the proportion of domestic and international
sales, specific feature requests by customers, product delays and currency
exchange rate fluctuations. The Company will continue to derive a substantial
portion of its revenues from the sale of a relatively small number of
Microelectronic Products and Electron Optics Products. As a result, the
timing of revenue recognition from a single order could have a significant
impact on the Company's net sales and operating results for a reporting
period.
A substantial portion of the Company's net sales have generally been
realized near the end of each quarter and sales of Electron Optics Products
to government-funded customers have generally been significantly higher in
the fourth quarter. Accordingly, delays in shipments near the end of a
quarter could have a substantial negative effect on operating results for
that quarter. Announcements by the Company or its competitors of new products
and technologies could cause customers to defer purchases of the Company's
existing systems, which could also have a material adverse effect on the
Company's business, financial condition and results of operations. The impact
of these and other factors on the Company's sales and operating results in
any future period cannot be forecast with certainty.
27
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 results. The major foreign currencies in
which the Company faces periodic fluctuations are the Euro (and the
underlying European currencies), the British pound sterling, and the Japanese
yen. Although for each of the last three years more than 57% of the Company's
sales occurred outside of the United States, a large proportion of these
sales were denominated in U.S. dollars and Dutch guilders (the Euro in 1999).
As a result, despite an overall strengthening of the U.S. dollar against
European currencies in 1999, net sales were not materially affected since the
impact of the strengthening of the U.S. dollar against European currencies
was fully offset by the impact of the dollar weakening against the Japanese
yen. Assets and liabilities of foreign subsidiaries are translated using the
exchange rates in effect at the balance sheet date. The resulting translation
adjustments reduced shareholders' equity and comprehensive income for 1999 by
$2.0 million, net of tax benefit.
The Company's primary exposure to changes in foreign currency exchange
rates results from intercompany loans made between the U.S. and Dutch
subsidiaries and its other foreign subsidiaries. The Company hedges its
investment in a Japanese subsidiary but does not otherwise actively hedge
this exposure. 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, 1999, the aggregate notional
amount of these contracts was $2.8 million. Holding other variables constant,
if the U.S. dollar weakened by 10%, the market value of foreign currency
contracts outstanding as of December 31, 1999 would decrease by approximately
$0.3 million. The decrease in value would be substantially offset from the
revaluation of the underlying hedged transactions.
INTEREST RATE SENSITIVITY. The Company borrows funds under variable rate
borrowing arrangements. As of December 31, 1999 and during the entirety of
1999, the Company did not hedge its exposure to 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.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31, 1998 1999
- ---------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 15,198 $ 11,124
Receivables (Note 4) 53,645 77,628
Current account with Philips (Note 15) -- 95
Inventories (Note 5) 43,518 59,517
Deferred income taxes (Note 11) 9,926 16,699
Other 4,273 6,796
- ---------------------------------------------------------------------------------------------------
Total current assets 126,560 171,859
Equipment (Note 6) 23,845 28,768
Purchased Goodwill And Technology (Note 2) 29,000 65,586
Other Assets (Note 7) 11,733 21,887
- ---------------------------------------------------------------------------------------------------
Total $ 191,138 $ 288,100
- ---------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 10,607 $ 21,362
Current account with Philips (Note 15) 5,043 --
Accrued payroll liabilities 3,908 6,795
Accrued warranty reserves 6,186 8,779
Deferred revenue 15,744 20,627
Income taxes payable 952 6,105
Accrued restructuring costs (Note 3) 3,055 426
Other current liabilities (Note 8) 10,715 22,808
- ---------------------------------------------------------------------------------------------------
Total current liabilities 56,210 86,902
Bank Line Of Credit Borrowings (Note 9) 7,250 1,192
Credit Facility With Philips (Note 9) 19,099 34,820
Deferred Income Taxes (Note 11) 7,861 10,637
Other Liabilities 3,091 1,972
Commitments And Contingencies (Notes 10 and 17) -- --
Shareholders' Equity (Note 12):
Preferred stock - 500,000 shares authorized; none issued and outstanding -- --
Common stock - 30,000,000 shares authorized; 18,318,095 issued and
outstanding as of December 31, 1998. 45,000,000 shares authorized;
27,544,280 issued and outstanding as of December 31, 1999 150,751 218,406
Note receivable from shareholder (1,116) (1,116)
Accumulated deficit (45,510) (56,185)
Accumulated other comprehensive loss (6,498) (8,528)
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity 97,627 152,577
- ---------------------------------------------------------------------------------------------------
Total $ 191,138 $ 288,100
- ---------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31, 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------
Net Sales $ 168,796 $ 178,771 $ 216,152
Cost Of Sales (Note 8) 106,629 119,579 131,143
- -----------------------------------------------------------------------------------------------------------
Gross profit 62,167 59,192 85,009
- -----------------------------------------------------------------------------------------------------------
Operating Expenses:
Research and development (Note 15) 15,396 19,506 21,937
Selling, general and administrative 37,024 41,426 47,650
Amortization of purchased goodwill and technology (Note 2) 2,096 2,516 3,717
Purchased in-process research and development (Note 2) 38,046 -- 14,089
Restructuring and reorganization costs (Note 3) 2,478 5,320 131
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 95,040 68,768 87,524
- -----------------------------------------------------------------------------------------------------------
Operating Loss (32,873) (9,576) (2,515)
- -----------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 255 360 715
Interest expense (846) (1,164) (1,162)
Valuation adjustment (Note 7) -- (3,267) --
Other (31) (58) 382
- -----------------------------------------------------------------------------------------------------------
Total other expense, net (622) (4,129) (65)
Loss Before Taxes (33,495) (13,705) (2,580)
Tax Expense (Benefit) (Note 11) 3,107 (4,797) 4,800
- -----------------------------------------------------------------------------------------------------------
Net Loss $ (36,602) $ (8,908) $ (7,380)
- -----------------------------------------------------------------------------------------------------------
Net Loss Per Share (Note 13):
Basic and assuming dilution $ (2.19) $ (0.49) $ (0.34)
- -----------------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding (Note 13):
Basic and assuming dilution 16,677,336 18,105,808 21,745,065
- -----------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 1997 1998 1999
- -------------------------------------------------------------------------------------------------
Net Loss $(36,602) $(8,908) $(7,380)
Other Comprehensive Income (Loss):
Foreign currency translation adjustment, zero taxes provided in
1997 and 1998, $1,136 taxes provided in 1999 (7,658) 1,160 (2,030)
- -------------------------------------------------------------------------------------------------
Comprehensive Loss $(44,260) $(7,748) $(9,410)
- -------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE ACCUMULATED
RECEIVABLE OTHER
YEARS ENDED DECEMBER 31, COMMON STOCK FROM ACCUMULATED DIVISION COMPREHENSIVE
1997, 1998 AND 1999 SHARES AMOUNT SHAREHOLDER DEFICIT EQUITY LOSS
- -----------------------------------------------------------------------------------------------------------
Balance, January 1, 1997 -- $ -- $ -- $ -- $ 43,070 $ --
Cash contributed by Philips,
net of liabilities assumed -- 5,134 -- -- -- --
FEI shares outstanding on
date of PEO combination
(Note 2) 7,959,933 99,209 -- -- -- --
Shares issued to Philips
Business Electronics at the
PEO Combination (Note 2) 9,728,807 43,070 -- -- (43,070) --
Net loss -- -- -- (36,602) -- --
Stock options exercised (Note 12) 389,053 1,736 -- -- -- --
Translation adjustment -- -- -- -- -- (7,658)
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 18,077,793 149,149 -- (36,602) -- (7,658)
Net loss -- -- -- (8,908) -- --
Employee purchases of common
stock through employee stock
purchase plan (Note 12) 79,344 422 -- -- -- --
Stock options exercised (Note 12) 10,338 64 -- -- -- --
Restricted stock purchase
(Note 12) 150,620 1,116 (1,116) -- -- --
Translation adjustment -- -- -- -- -- 1,160
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 18,318,095 150,751 (1,116) (45,510) -- (6,498)
Net loss -- -- -- (7,380) -- --
Sale of stock to Philips (Note 2) 3,913,299 31,385 -- -- -- --
Shares issued to Micrion
shareholders on date of
Micrion merger (Note 2) 5,064,150 34,684 -- -- -- --
Employee purchases of common
stock through employee stock
purchase plan (Note 12) 141,815 764 -- -- -- --
Stock options exercised
(Note 12) 56,921 452 -- -- -- --
Dividend paid to Philips (Note 2) -- -- -- (3,295) --
Restricted stock award (Note 12) 50,000 370 -- -- -- --
Translation adjustment -- -- -- -- -- (2,030)
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 27,544,280 $218,406 $(1,116) $(56,185) $ -- $(8,528)
- -----------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net loss $(36,602) $ (8,908) $ (7,380)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation 3,963 5,621 8,513
Amortization 2,207 3,004 5,198
Retirement of fixed assets and demonstration systems 817 1,101 1,355
Purchased in-process research and development 38,046 -- 14,089
Deferred taxes on income (2,861) (7,125) (1,190)
Write-off of intangible assets 3,152 -- --
Valuation adjustment -- 3,267 --
Restricted stock award -- -- 370
Decrease (increase) in assets:
Receivables (15,379) 1,524 (11,172)
Inventories 5,180 (3,940) 7,015
Other assets (288) 1,474 (7,450)
Increase (decrease) in liabilities:
Accounts payable 1,749 (3,055) 7,226
Current accounts with Philips 7,917 (4,031) (6,307)
Accrued payroll liabilities 485 390 2,000
Accrued warranty reserves 1,208 1,947 (3,778)
Deferred revenue (1,164) 4,508 (3,129)
Accrued restructuring 89 2,966 (2,629)
Other liabilities (1,744) 4,084 13,496
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,775 2,827 16,227
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Acquisition of equipment (9,412) (11,883) (8,335)
Investment in software development (1,409) (2,291) (2,866)
Cash acquired in the PEO Combination (Note 2) 1,420 -- --
Investment in unconsolidated affiliate (Note 7) -- -- (3,000)
Purchase of Micrion, net of cash acquired (Note 2) -- -- (32,869)
Purchase of sales and service organizations, net of cash acquired (Note 2) -- -- 170
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,401) (14,174) (46,900)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net proceeds from (repayments of) bank lines of credit (Note 9) 8,708 (10,594) (16,398)
Proceeds from exercise of stock options and employee stock purchases 1,736 486 1,216
Borrowings under credit facility with Philips (Note 9) -- 19,099 15,721
Proceeds from sale of stock to Philips (Note 2) -- -- 31,385
Dividend paid to Philips (Note 2) -- -- (3,295)
Net cash provided by Philips 8,000 -- --
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 18,444 8,991 28,629
- -----------------------------------------------------------------------------------------------------------------
Effect Of Exchange Rate Changes On Cash 576 1,160 (2,030)
- -----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash And Cash Equivalents 16,394 (1,196) (4,074)
Cash And Cash Equivalents, Beginning Of Year -- 16,394 15,198
- -----------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents, End Of Year $ 16,394 $ 15,198 $ 11,124
- -----------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
33
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 ("TEMs"), scanning electron microscopes ("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 also sells some of the
components of electron microscopes and FIBs to other manufacturers. The Company
has manufacturing operations in Hillsboro, Oregon; Peabody, Massachusetts;
Eindhoven, The Netherlands; and Brno, Czech Republic. Sales and service
operations are conducted in the United States and 23 other countries,
constituting a majority of the worldwide market for the Company's products.
Prior to December 1999, the Company's products were sold through distribution
agreements with affiliates of Koninklijke Philips Electronics N.V. ("Philips")
located in approximately 20 countries. The Company also sells its products
through independent representatives in certain countries. The Company's FIBs 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 are sold to life science and materials science research
institutes, universities and industrial customers, as well as to semiconductor
and thin film head manufacturers.
BASIS OF PRESENTATION The consolidated financial statements include the accounts
of FEI Company and all of its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
On February 21, 1997, FEI Company ("Pre-Combination FEI") acquired
substantially all of the assets and liabilities of the electron optics business
of Philips Business Electronics International B.V. ("Philips Business
Electronics"), a wholly-owned subsidiary of Philips, in a transaction accounted
for as a reverse acquisition (the "PEO Combination"). Accordingly, purchase
accounting was applied to the assets and liabilities of Pre-Combination FEI. The
1997 results of operations reflect only the acquired business through February
21, 1997 and the results of the combined company from February 22, 1997 and
thereafter (see Note 2).
On August 13, 1999, FEI Company acquired Micrion Corporation ("Micrion"),
a Massachusetts corporation engaged in the design, manufacture, sale and service
of focused charged particle beam systems. Accordingly, purchase accounting was
applied to the assets and liabilities of Micrion. Micrion's results of
operations have been included in the consolidated financial statements for the
period subsequent to August 13, 1999 (see Note 2).
DEPENDENCE ON SUPPLIERS Though many of the components and subassemblies included
in the Company's system products are standard products, a significant portion of
the mechanical parts and subassemblies are custom made by one or two suppliers,
including Philips Machinefabrieken Nederland B.V. ("Philips Machine Factory").
In addition to Philips Machine Factory, the Company obtains a significant
portion of its component parts from a second supplier, Turk Manufacturing Co. A
third supplier, RIPA Holding B.V., is currently a sole source for electronic
sub-assemblies that were, until recently, manufactured at the Company's
facilities in Eindhoven. The Company believes some of the components supplied to
it are available to the suppliers only from single sources. Those parts subject
to single or limited source supply are monitored by the Company to ensure that
adequate sources are available to maintain manufacturing schedules. Although the
Company believes it would be able to develop alternate sources for any of the
components used in its products, significant delays or interruptions in the
delivery of components from suppliers or difficulties or delays in shifting
manufacturing capacity to new suppliers could have a material adverse effect on
the Company. 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.
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.
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,
34
costs and expenses are translated using an average rate of exchange for the
period. Realized and unrealized foreign currency transaction gains and losses
are included in the consolidated statements 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 fluctuations. Realized and
unrealized gains on such contracts are deferred and recognized in the
consolidated statements of operations concurrent with the hedged transaction.
ASSET IMPAIRMENT The Company evaluates the remaining life and recoverability of
equipment and other assets, including intangible assets, whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. If impairment is indicated, the Company adjusts the carrying
amount of the asset to the lower of its carrying value or its fair value.
CASH AND CASH EQUIVALENTS Money market funds and other highly liquid instruments
with maturities of three months or less at the date of acquisition 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 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.
PURCHASED GOODWILL AND TECHNOLOGY Purchased goodwill, which represents the
excess of cost over the fair value of net assets acquired, is amortized on a
straight-line basis over the estimated economic life. Existing technology
intangible assets purchased in a business combination, which represent the
estimated value of products utilizing technology existing as of the combination
date discounted to their net present value, are amortized on a straight-line
basis over the estimated useful life of the technology. The value of purchased
in-process research and development in a business combination, which represents
the net present value of products under development as of the combination date,
is expensed immediately following the date of business combination. Changes in
technology could impact the Company's estimate of the useful lives of such
assets. See Note 2.
OTHER ASSETS Certain computer software development costs are capitalized. These
costs are 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. See Note 7.
PRODUCT WARRANTY COSTS 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 Revenue is recognized when it is realized or realizable and
earned, the price is fixed or determinable, and collectibility is reasonably
assured. Product sales are recorded at the time of delivery and ownership
transfer to the buyer. Where a service contract exists, service revenues are
recognized ratably over the service contract period. For time and materials
service arrangements, service revenues are recognized when the services are
provided.
RESEARCH AND DEVELOPMENT costs are expensed as incurred.
TAXES AND TAX CREDITS Deferred taxes are provided for temporary differences
between the amounts of assets and liabilities for financial and tax reporting
purposes.
STOCK-BASED COMPENSATION The Company continues to measure compensation expense
for its stock-based employee compensation plans using the method prescribed by
APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company
provides pro forma disclosures of net income and earnings per share as if the
method prescribed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, had
been applied in measuring compensation expense. See Note 12.
SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest totaled $770, $1,226
and $1,121 for the years ended December 31, 1997, 1998 and 1999, respectively.
Cash paid for income taxes totaled $1,230, $4,107 and $336 for the years ended
December 31, 1997, 1998 and 1999, 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
35
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, 2001. 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.
In December, 1999, the Securities and exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which
the Company is required to adopt in the second quarter of 2000. The Company has
not yet completed the analyses required to determine the impact, if any, on
earnings or the financial position of the Company upon adoption.
2. MERGERS AND ACQUISITIONS
PHILIPS ELECTRON OPTICS
On February 21, 1997, Pre-Combination FEI acquired from Philips Business
Electronics its electron optics manufacturing operations and most of its
electron optics sales and service operations (the "PEO Operations").
Pre-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-Combination FEI.
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 Company obtained an independent appraisal of the fair market value of
the intangible assets, inventory, and equipment acquired in order to assist
management in allocating the total purchase price of $122,872 to the assets
acquired and liabilities assumed. To determine the value of each of
Pre-Combination FEI's product lines, management projected product revenues,
gross margins, operating expenses, future research and development costs, 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 yet 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-Combination FEI were determined by management 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 recognized in the PEO Combination were 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, 1997, are as follows:
YEAR ENDED DECEMBER 31, 1997*
- --------------------------------------------------------------------------------
Net sales $ 172,214
Net loss $ (37,656)
- --------------------------------------------------------------------------------
Pro forma per share data:
Net loss per share, basic and
assuming dilution $ (2.11)
- --------------------------------------------------------------------------------
Pro forma weighted average
shares outstanding:
Basic and assuming dilution 17,840,000
- --------------------------------------------------------------------------------
* PRO FORMA RESULTS FOR 1997 INCLUDE THE $38,046 CHARGE FOR IN-PROCESS RESEARCH
AND DEVELOPMENT RESULTING FROM THE PEO COMBINATION.
MICRION CORPORATION
On August 13, 1999, the Company acquired all of the outstanding common stock of
Micrion in exchange for 5,064,150 newly issued shares of the Company's Common
Stock plus $30,385 in cash. The merger was accounted for as a purchase, and,
accordingly, purchase accounting was applied to the assets and liabilities of
Micrion. The total purchase price of $69,355 consisted of the fair value of the
Company's newly issued shares of Common Stock, the cash paid to Micrion
shareholders, and transaction costs of $4,286 including investment banking fees
and legal fees associated with required regulatory processes.
The Company obtained independent appraisals of the fair market value of
the intangible assets, inventory, and equipment acquired in order to assist
management in allocating the total purchase price to the assets acquired and
liabilities assumed. To determine the value of each of Micrion's product lines,
management projected product revenues, gross margins, operating expenses, future
research and development costs, income taxes and returns on requisite assets.
The resulting operating income
36
projections for each product line were discounted to a net present value. This
approach was applied to existing technology as well as to research and
development projects which have not yet been proven technologically feasible and
which had not yet generated revenue at the date of the acquisition. For existing
technology product lines, the discount rate used was 15 percent representing
management's estimate of the equity cost of capital for Micrion. For products
which had not yet been proven technologically feasible, the discount rates
applied ranged from 21 to 23 percent, reflecting the estimated equity cost of
capital plus a premium for the risk and uncertainty associated with successful
completion and market acceptance for such unproven products.
Management allocated the Micrion purchase price to the assets acquired and
liabilities assumed as follows:
Current assets, including cash of $1,801 $ 32,683
Equipment 6,342
Existing technology intangible asset 16,277
Goodwill 24,091
In-process research and development 14,089
Deferred income taxes 2,807
Liabilities assumed (26,934)
- --------------------------------------------------------------------------------
Total purchase price $ 69,355
- --------------------------------------------------------------------------------
In estimating the value of purchased in-process research and development, the
Company identified four significant categories of projects under development at
the date of the acquisition. Two of those categories represent enhancements to
the resolution and automation of existing products designed primarily for the
semiconductor industry. Micrion, which has become a division of the Company, is
also enhancing the automation of its products for the data storage industry.
Finally, the Micrion division is continuing to develop its products for the
lithography photo mask repair market. None of the projects in these categories
had been proven technologically feasible or had generated revenue as of the date
of the evaluation; however, these projects are expected to begin generating
revenue in 2000. In accordance with the Company's policy to expense research and
development costs as they are incurred, a one-time charge of $14,089 associated
with the write-off of acquired in-process research and development was recorded
immediately subsequent to the closing of the merger. Because of the nature of
these projects, there is always the risk that a technological hurdle may be
encountered that may delay, prevent or increase the cost of development of these
projects.
In estimating the value of existing technology acquired, five existing
product categories were identified. Three of those product categories are
designed primarily for the semiconductor industry, one of those product
categories is designed primarily for the data storage industry and another of
those product categories is designed for the mask repair market. All of the
above product categories are currently generating revenue for the Company.
The amortization periods for existing technology and goodwill have been
established at 10 and 12 years, respectively. The product lines associated with
the existing technology are expected to continue to generate revenues for an
extended period of time. The Company's major product lines consist of basic
platform systems, which are modified and enhanced over time as new features and
capabilities are added to the platform. 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. Management periodically evaluates the remaining economic
useful lives and amortization periods for these intangible assets.
Pro forma combined statements of operations data, presented as if the
merger had occurred on January 1 of each year are as follows:
YEAR ENDED DECEMBER 31, 1998 1999*
- --------------------------------------------------------------------------------
Net sales $ 224,194 $ 235,890
- --------------------------------------------------------------------------------
Net loss $ (17,845) $ (17,480)
- --------------------------------------------------------------------------------
Pro forma net loss per share $ (0.66) $ (0.64)
- --------------------------------------------------------------------------------
Pro forma weighted average
shares outstanding 27,083 27,356
- --------------------------------------------------------------------------------
*PRO FORMA RESULTS FOR 1999 INCLUDE THE $14,089 CHARGE FOR IN-PROCESS RESEARCH
AND DEVELOPMENT RESULTING FROM THE MICRION ACQUISITION.
Concurrent with the merger, Philips Business Electronics purchased from the
Company 3,913,299 newly issued shares of common stock for $31,385 in cash.
ADDITIONAL PHILIPS SALES AND SERVICE ORGANIZATIONS
During 1999, the Company acquired from Philips Business Electronics, its
electron optics sales distribution and service operations located in 19
countries. The purchase price for these businesses was their Net Operating
Capital ("NOC") at the time of acquisition, plus $3,295. The final purchase
price is subject to adjustment based on a review of NOC at each of the acquired
businesses. The preliminary purchase price totaled $3,125, consisting of
preliminary NOC of $(170), plus $3,295. Because the transaction was conducted
among parties under common control, the assets acquired and liabilities assumed
were recorded at net book value and the $3,295 additional payment to
37
Philips was treated as a dividend. During 1999, the Company transferred such
businesses in three countries to independent representatives and intends to
transfer additional such businesses to independent representatives in certain
smaller market countries during 2000.
PURCHASED GOODWILL AND TECHNOLOGY
Purchased goodwill and technology consisted of the following:
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
Existing technology from PEO
Combination, net of
amortization of $2,519
and $3,893, respectively $13,971 $12,597
Existing technology from
Micrion acquisition, net
of amortization of $543 -- 15,734
Goodwill from PEO
Combination, net of
amortization of $2,093
and $3,330, respectively 15,029 13,822
Goodwill from Micrion
acquisition, net of
amortization of $658 -- 23,433
- --------------------------------------------------------------------------------
Purchased goodwill
and technology, net $29,000 $65,586
- --------------------------------------------------------------------------------
3. RESTRUCTURING AND REORGANIZATION
1997 RESTRUCTURING AND REORGANIZATION
In March 1997, the Company implemented a restructuring and reorganization plan
for its SEM manufacturing and research and development operation in
Massachusetts. The plan involved the transfer of 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 in March
1997. The Company also discontinued the principal product produced at that
location. Consequently, $1,699 of intangible assets attributable to the 1996
acquisition of this business was written off and charged to income in the first
quarter of 1997, based on projections of future losses and negative cash flows.
In addition, the estimated severance costs for 11 manufacturing and development
employees, and other related costs of the plan were charged to income.
As of December 31, 1998, all of the affected employees were terminated and
there were no remaining liabilities from this activity reflected in the
Company's balance sheets.
The components of this 1997 restructuring and reorganization charge were
as follows:
YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Severance, outplacement, transition bonuses and
related benefits for terminated employees $ 621
Remaining lease obligation 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 implemented a restructuring and reorganization
plan to consolidate operations, eliminate redundant facilities, reduce operating
expenses, and provide for outsourcing of certain manufacturing activities. The
plan included the elimination of 173 positions worldwide, or about 16% of the
Company's work force as of July 29, 1998. The positions affected include
manufacturing, marketing, administrative, field service and sales personnel.
During the third quarter of 1998, all affected employees were informed of the
planned terminations and the related severance benefits they would be entitled
to receive. Of the 173 positions targeted for elimination, 76 employees were
terminated in 1998, 88 were terminated in 1999, and 9 employees remain to be
terminated in 2000. The positions remaining to be terminated as of December 31,
1999 are primarily located in The Netherlands and Canada. For certain of the
terminated employees in foreign countries, the Company is required to make
continuing payments for a period of time after employment ends under existing
employment laws and regulations.
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 in 1998.
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
38
incurred in 1998 and $131 was incurred in 1999 for the cost of consolidating
these facilities.
The various components of this charge were as follows:
YEAR BEGINNING CHARGED ENDING
ENDED ACCRUED TO ACCRUED
DECEMBER 31, 1998: LIABILITY EXPENSE SETTLED (1) LIABILITY
- --------------------------------------------------------------------------------
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 --
Abandonment of
leasehold improvements
and fixed assets in
location vacated;
non-cash charge -- 253 253 --
- --------------------------------------------------------------------------------
1998 Totals $- $5,320 $2,265 $3,055
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999:
- --------------------------------------------------------------------------------
Severance, outplacement
and related benefits
for terminated
employees $2,701 $ -- $1,036 $1,665
Lease abandonment costs
for vacated facilities 354 -- 332 22
Relocation and moving
expenses for employees
and facilities -- 131 131 --
- --------------------------------------------------------------------------------
1999 Totals $3,055 $131 $1,499 $1,687
- --------------------------------------------------------------------------------
(1) Represents cash payments as well as effects of changes in currency
translation on recorded liabilities.
These amounts are reported in the consolidated balance sheets as follows:
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
Accrued restructuring costs $3,055 $ 426
Accrued payroll liabilities -- 1,261
- --------------------------------------------------------------------------------
Total $3,055 $1,687
- --------------------------------------------------------------------------------
4. RECEIVABLES
Receivables consisted of the following:
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
Trade accounts receivable $ 55,587 $ 80,680
Allowance for
doubtful accounts (1,942) (3,052)
- --------------------------------------------------------------------------------
Total receivables $ 53,645 $ 77,628
- --------------------------------------------------------------------------------
5. INVENTORIES
Inventories consisted of the following:
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
Raw materials and
assembled parts $ 20,574 $ 29,148
Service inventories;
current requirements 5,093 6,540
Work in process 11,853 20,896
Finished goods 10,439 17,824
- --------------------------------------------------------------------------------
47,959 74,408
Reserve for obsolete inventory (4,441) (14,891)
- --------------------------------------------------------------------------------
Total inventories $ 43,518 $ 59,517
- --------------------------------------------------------------------------------
6. EQUIPMENT
Equipment consisted of the following:
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
Leasehold improvements $ 2,157 $ 2,962
Machinery and equipment 13,226 16,874
Demonstration systems 15,439 17,976
Other fixed assets 8,824 10,693
- --------------------------------------------------------------------------------
39,646 48,505
Accumulated depreciation (15,801) (19,737)
- --------------------------------------------------------------------------------
Total equipment $ 23,845 $ 28,768
- --------------------------------------------------------------------------------
7. OTHER ASSETS
Other assets consisted of the following:
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
Service inventories, noncurrent,
net of obsolescence reserves
of $6,810 and $8,537,
respectively $ 7,037 $11,716
Capitalized software
development costs, net of
amortization of $478 and
$1,938, respectively 3,469 4,821
Patents, net of amortization
of $39 and $60, respectively 282 261
Investment in
unconsolidated affiliates -- 3,000
Deposits and other 945 2,089
- --------------------------------------------------------------------------------
Total other assets $11,733 $21,887
- --------------------------------------------------------------------------------
39
Software development costs capitalized during the years ended December 31, 1997,
1998 and 1999 were $1,409, $2,291 and $2,866, 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 $111, $459 and $1,562 for the years ended December 31,
1997, 1998 and 1999.
The Company owns 500,000 shares of Norsam Technologies, Inc. ("Norsam")
Series A Preferred Stock. In September 1998 the Company reevaluated the carrying
value of this cost-method investment. Management revised its projections of
future cash flows that it expected to receive from this investment based on
Norsam's operating results and its divestiture of certain operating assets.
Accordingly, management determined that the carrying value of its investment was
permanently impaired and recorded a valuation adjustment of $3,267 and reduced
the carrying value of this investment to zero.
On September 28, 1999 the Company purchased a 10 percent interest in
Surface/Interface, Inc. ("Surface/Interface") for $3,000 in cash.
Surface/Interface is a semiconductor capital equipment company. The Company also
received a warrant to purchase an additional 9.5 percent interest in
Surface/Interface. The Company also entered into a distribution agreement with
Surface/Interface whereby the Company obtained exclusive rights to distribute
and service Surface/Interface's stylus-based atomic force microscopy tool in
Europe and North America. The exclusivity arrangement of the distribution
agreement does not include mask repair applications.
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. $1,349 and $846, representing the estimated
cost of the program over the next twelve months, were included in other current
liabilities as of December 31, 1998 and 1999, respectively. $2,148 and $1,144,
representing the non-current portion of the estimated program cost, was included
in other liabilities as of December 31, 1998 and 1999, respectively.
9. BANK LINES OF CREDIT AND CREDIT FACILITY
WITH PHILIPS
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 Philips credit
facility provides borrowing capacity of up to $50,000, interest at LIBOR plus
0.75%, and matures on February 26, 2002. The line provides up to $10,000 in
revolving advances and fixed borrowing periods of one, three or six months. The
line of credit is unsecured, allows borrowing in three different currencies, and
requires that the Company meet certain financial covenants. As of December 31,
1999, the Company was in compliance with all of the covenants of the agreement.
As of December 31, 1999 the weighted average interest rate on outstanding
borrowings was 5.02%.
Based on management's intent, borrowings outstanding under the Philips
line of credit are classified as long-term. Borrowings outstanding as of
December 31, 1998, under the Company's bank line of credit, which were
refinanced on February 25, 1999, were also classified as long-term based on
management's intent. A large portion of the account payable to Philips as of
December 31, 1998 was also classified as long-term in anticipation of
refinancing 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, 1999, the Company had outstanding standby letters of
credit totaling approximately $876, which reduce the amount available under the
$5,000 bank borrowing facility.
40
10. LEASE OBLIGATIONS
Operations are conducted in manufacturing and administrative facilities under
operating leases that extend through 2006, including the Company's facilities in
Acht, The Netherlands. 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.
Rent expense is recognized on a straight-line basis over the term of the
lease. Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $2,850, $3,792 and $3,876, respectively.
The approximate future minimum rental payments due under these agreements
as of December 31, 1999 are $5,227, $4,694, $3,520, $3,226, and $2,346 for the
years ending December 31, 2000 through 2004, respectively, and $2,005
thereafter.
11. INCOME TAXES
Income tax expense consisted of the following:
YEAR ENDED DECEMBER 31, 1997 1998 1999
- --------------------------------------------------------------------------------
Current:
Federal $ 1,043 $ 2,200 $ 1,415
State 236 404 (11)
Foreign 2,682 (276) 4,586
- --------------------------------------------------------------------------------
Subtotal 3,961 2,328 5,990
Deferred benefit (854) (7,125) (1,190)
- --------------------------------------------------------------------------------
Total tax expense (benefit) $ 3,107 $(4,797) $ 4,800
- --------------------------------------------------------------------------------
The effective income tax rate varies from the US federal statutory rate due to
the following:
YEAR ENDED DECEMBER 31, 1997 1998 1999
- --------------------------------------------------------------------------------
Expected tax benefit at
statutory rates $(11,723) $(4,611) $ (858)
Increase (reduction) in income
taxes resulting from:
Foreign taxes 529 7 (73)
Purchased in-process research
and development 13,316 -- 4,931
State income taxes 153 (478) (5)
Goodwill amortization 333 524 676
Other 499 (239) 129
- --------------------------------------------------------------------------------
Total tax expense (benefit) $ 3,107 $(4,797) $ 4,800
- --------------------------------------------------------------------------------
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, 1998 1999
- --------------------------------------------------------------------------------
Deferred tax assets:
Accrued liabilities $ 2,205 $ 2,716
Warranty reserves 1,685 2,768
Inventory reserves 3,478 8,319
Allowance for bad debts 696 779
Basis differences in investments 1,346 2,069
Net operating loss carryforwards -- 2,194
Research and development tax
credit carryforwards -- 632
Other assets 1,147 1,265
- --------------------------------------------------------------------------------
Total deferred tax assets 10,557 20,742
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Capitalized software
development costs (1,024) (1,574)
Existing technology and
other intangibles (5,757) (11,786)
Basis difference in equipment (697) (971)
Other liabilities (1,014) (349)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (8,492) (14,680)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 2,065 $ 6,062
- --------------------------------------------------------------------------------
These deferred tax components are reflected in the consolidated balance sheet as
follows:
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
Deferred tax:
Current asset $ 9,926 $ 16,699
Long-term liability (7,861) (10,637)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 2,065 $ 6,062
- --------------------------------------------------------------------------------
The net operating loss carryforwards will expire in varying amounts in the years
2004 through 2019, if not utilized by the Company. The research and development
tax credit carryforwards will expire in varying amounts in the years 2002
through 2007, if not utilized by the Company.
12. SHAREHOLDERS' EQUITY
CAPITAL STOCK As of December 31, 1999, 2,333,492 shares of common stock were
reserved for stock incentive plans.
As part of the PEO Combination, 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
41
without further action by the Company's Board of Directors, as of February 21,
1997. As of December 31, 1999, 184,739 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 2,000,000 shares. 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 either the 1995 Plan or the
1995 Supplemental Plan will terminate, if the plans are not amended, 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.
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
- --------------------------------------------------------------------------------
Options granted 1,019,750 8.24
Options exercised (56,921) 7.93
Options expired or cancelled (170,566) 8.54
- --------------------------------------------------------------------------------
Balance, December 31, 1999 2,285,793 $ 7.66
- --------------------------------------------------------------------------------
During 1998, 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 and directors 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 $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,
1999 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 1999 LIFE (YRS) PRICE 1999 PRICE
- -----------------------------------------------------------------------------------
$5.55 to
$7.40 1,621,477 8.9 $6.84 477,122 $6.63
$7.40 to
$9.25 362,516 8.1 8.17 102,705 8.43
$9.25 to
$11.10 222,280 8.4 10.77 22,280 9.81
$12.95 to
$14.80 69,520 1.0 13.25 68,620 13.25
$14.80 to
$16.65 10,000 6.3 15.00 8,000 15.00
- -----------------------------------------------------------------------------------
2,285,793 8.5 $7.66 678,727 $7.78
- -----------------------------------------------------------------------------------
The weighted average fair value of options granted was $9.00, $5.95 and $5.56
for the years ended December 31, 1997, 1998 and 1999, 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. During
1999, employees purchased 141,815 shares at an average purchase price of $5.39.
At December 31, 1999, 128,841 shares of common stock were reserved for issuance
under the ESPP. The weighted average fair value of ESPP shares purchased was
$5.47 and $2.42 for the years ended December 31, 1998 and 1999, respectively.
RESTRICTED STOCK AWARD AND PURCHASE On June 25, 1998, in connection with the
commencement of his employment with FEI, Mr. Vahe Sarkissian, President and
Chief Executive Officer, was granted a stock bonus of 50,000 shares of common
stock of FEI. The stock was valued at $7.40625 per share, or $370, the fair
market value on the date of grant. 25,000 shares of the stock bonus were subject
to forfeiture if Mr. Sarkissian's employment as Chief Executive Officer of FEI
had terminated before June 25, 1999.
Also on June 25, 1998, in connection with his commencement of employment
with FEI as Chief Executive Officer, FEI sold to Mr. Sarkissian 150,620 shares
of common stock of FEI subject to specified restrictions. The purchase price for
the shares was $7.40625, or $1,116, the fair market value on the date of
purchase. The restricted shares purchased by Mr. Sarkissian vested 20% on June
25, 1998 and will
42
vest an additional 20% annually thereafter through the year 2002. Effective June
25, 1998 FEI loaned Mr. Sarkissian the amount of $1,116 for the purchase of the
restricted shares.
DISCLOSURE OF STOCK BASED COMPENSATION COSTS No compensation cost has been
recognized for stock options granted or ESPP shares issued at fair value on the
date of grant or issuance. 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:
YEAR ENDED DECEMBER 31, 1997 1998 1999
- --------------------------------------------------------------------------------
Net loss:
As reported $ (36,602) $ (8,908) $ (7,380)
Pro forma (37,034) (10,036) (10,550)
Net loss per share, basic and assuming dilution:
As reported $ (2.19) $ (0.49) $ (0.34)
Pro forma (2.22) (0.55) (0.49)
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 1999
- --------------------------------------------------------------------------------
Dividend yield 0.0% 0.0% 0.0%
Expected volatility
(based on historical
volatility) 64.4% 77.6% 72.3%
Weighted average
risk-free
interest rate 6.3% 5.3% 5.7%
Weighted average
expected term 7.9 years 7.2 years 5.7 years
The fair value of ESPP shares was estimated at the start of each purchase period
using the Black-Scholes option-pricing model with the following assumptions:
YEAR ENDED DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
Dividend yield 0.0% 0.0%
Expected volatility
(based on historical
volatility) 77.6% 72.3%
Weighted average
risk-free
interest rate 4.5% 5.1%
Weighted average
expected term 0.5 years 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
prior to the PEO Combination 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.
Potentially dilutive securities outstanding during 1997, 1998 and 1999
have been excluded from the calculation for those years 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.
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 pension plans sponsored by Philips. Employees in the US are not
covered by defined benefit pension 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's allocated
pension cost (benefit) under such plans was $468, $240 and ($81) for the years
ended December 31, 1997, 1998 and 1999, respectively.
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 within the Philips sponsored plans. The Company also
maintains limited pension plans for selected employees in certain European
countries. These supplemental pension plans are not funded. A liability for the
projected benefit obligations of these supplemental plans of $827 is included in
other non-current liabilities as of December 31, 1999.
PROVISION FOR POST-EMPLOYMENT BENEFITS OTHER THAN PENSIONS The Company's
employees in The Netherlands are generally covered by Philips sponsored plans
providing post-employment benefits other than pensions. In accordance with SFAS
No. 106, Philips began accruing for the related transition obligation over a 20
year period at the corporate level, commencing in 1993. The portion of the
corporate provision allocable to the Company's operations is charged to the
Company. On the basis of the number of the Company's employees located in The
Netherlands, an amount of approximately $75 each year was allocated
43
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, 1998 and
1999, respectively.
PROFIT SHARE INCENTIVE PLAN The Company's employee incentive plan ("EIP") is
based on achieving certain targeted levels of operating income determined by the
Board of Directors on a year-to-year basis. There was no EIP payment for the
year ended December 31, 1997. For the years ended December 31, 1998 and 1999,
the Company paid $118 and $695, respectively, under this plan.
PROFIT SHARING 401(K) PLAN The Company has a profit sharing 401(k) plan that
covers substantially all United States 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 100 percent of employee contributions to
the 401(k) plan, up to three percent of each employee's salary. For the years
ended December 31, 1997, 1998 and 1999 the Company contributed $504, $559 and
$676 to the plan.
15. RELATED-PARTY TRANSACTIONS
SALES TO PHILIPS ORGANIZATIONS A number of Philips sales organizations acted as
distributors for the Company's products through November 1999 in their
respective countries (see Note 2). In addition, certain Philips business units
purchase the Company's products for internal use. Sales to Philips amounted to
$13,600, $16,684 and $17,763 during the years ended December 31, 1997, 1998, and
1999, respectively.
MATERIALS PURCHASES FROM PHILIPS See Note 1. A substantial portion of the
subassemblies included in the Company's FIBs, TEMs and SEMs are purchased from
Philips Machine Factory. Materials purchases from Philips and other
Philips-owned entities amounted to approximately $12,100, $14,450 and $18,600
for the years ended December 31, 1997, 1998 and 1999, respectively.
PURCHASES UNDER PHILIPS ARRANGEMENTS From time to time, the Company purchases
materials, supplies and services under collective purchase agreements and
purchase conditions negotiated by Philips for the benefit of its group of
companies. For this service, the Company has paid a fixed annual fee amounting
to approximately $50, $67 and $186 for the years ended December 31, 1997, 1998,
and 1999, respectively. The Company also participates in certain business
insurance programs under terms arranged by Philips. The benefits to the Company
of these arrangements cannot be calculated precisely, but management believes
that the costs of procuring these goods and services on a stand alone basis
would be higher than the cost under the Philips arrangements.
Through the majority shareholdings of Philips, the Company has the benefit
of certain collective bargaining arrangements and the Philips rate for social
charges in The Netherlands and other countries. If Philips were to no longer be
the majority shareholder, the Company would have to negotiate new collective
bargaining arrangements and there would be a new social charge rate applied to
the Company, both of which could result in increased labor costs for the
Company.
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 also leases sales, service and administrative facilities from
Philips in certain countries under various services agreements (see "Other
Services Provided by Philips" below).
DEVELOPMENT SERVICES PROVIDED BY PHILIPS During 1998, the Company entered into a
research and development contract with the Philips Machine Factory 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 Factory 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.
The Company also purchases research and development services from Philips
central research facility. During the years ended December 31, 1997, 1998 and
1999, the Company paid $125, $300 and $950, respectively, for such services.
All of the patents used by the Company relating to its Electron Optics
business segment and certain Microelectronics business segment 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. In
addition, 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. Some of these cross-licenses provide the Company with the right
to use intellectual property that relates to its core technologies. In general
these cross licenses are subject to continued majority ownership of the Company
by Philips and if that ownership ceased the Company might lose these rights.
This could result in increased royalty costs, or patent infringement actions and
the costs associated with such claims, including direct costs as well as the
diversion of management and technical resources.
44
OTHER SERVICES PROVIDED BY PHILIPS In connection with the PEO Combination, 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 (see
above), 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, customs, export, human resources,
import, information technology, logistics, occupancy, and other services that
have been provided to the Company in the past. During the years ended December
31, 1997, 1998 and 1999, the Company paid Philips approximately $3,600, $3,250
and $2,750 for these administrative and other services.
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.
Current accounts with Philips, after reclassification of a portion of the
balance from December 31, 1998 to long term liabilities (see Note 9), consist of
the following:
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
Current accounts receivable $ 5,689 $ 4,921
Current accounts payable (10,732) (4,826)
- --------------------------------------------------------------------------------
Total $ (5,043) $ 95
- --------------------------------------------------------------------------------
OTHER RELATED PARTY TRANSACTIONS During the years ended December 31, 1998 and
1999, the Company made equipment sales of $1,721 and $372, respectively, to a
customer in which the Company's Chief Executive Officer has an ownership
interest. As of December 31, 1999, the Company also had outstanding $492 in
lease guarantees for this customer (see Note 17).
In September 1999 the Company made an investment of $3,000 in an
unconsolidated affiliate in which the Company's Chief Executive Officer has an
ownership interest (see Note 2).
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes the carrying amounts of cash and cash equivalents,
receivables, current account with Philips, accounts payable and other current
liabilities are a reasonable approximation of the fair value of those financial
instruments because of the nature of the underlying transactions and the
short-term maturities involved. Management believes that the carrying amounts of
bank line of credit borrowings and the credit facility with Philips are a
reasonable approximation of the fair value of those financial instruments
because they bear interest at revolving market rates and because of the
short-term maturities involved. The fair value of the Company's investment in
unconsolidated affiliates is not readily determinable as the securities are not
actively traded.
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. It is the Company's
practice generally to hold such hedge contracts to maturity. The fair value of
such contracts is not material. The counter-parties to such transactions are
major financial institutions. Accordingly, no provision for counter-party
non-performance has been made. As of December 31, 1999, the notional amount of
forward exchange contracts outstanding totaled approximately $2,819 maturing at
various dates through January 2000. The difference between the contracted rate
and the spot rate at December 31, 1999 amounted to an unrealized loss of $22.
17. COMMITMENTS AND CONTINGENT LIABILITIES
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
cash flows.
In conjunction with the acquisition of Micrion in August 1998, the Company
assumed potential liability in connection with a 1996 class action securities
suit brought against Micrion. In December 1999, the Court granted the Company's
renewed summary judgement motion. In January, 2000, the plaintiffs appealed the
decision to the US Court of Appeals for the First Circuit. The Company expects
that it will be several months before the appeal is briefed, argued and decided.
The Company continues to believe the complaint to be without merit and intends
to continue its vigorous defense of the claims.
The Company is self-insured for certain aspects of its property and
liability insurance program for a medical plan covering former employees of
Micrion and is responsible for deductible amounts under certain policies. The
deductible amounts generally range from $10 to $250 per claim.
The Company participates in third party equipment lease financing programs
with US financial institutions for a small portion of products sold. Under these
arrangements, the financial institutions have limited recourse with the Company
a portion of the outstanding lease portfolio. Under certain circumstances, the
Company is obligated to exercise best efforts to re-market instruments which are
reacquired by the financial institutions. As of December 31, 1999, the Company
had guarantees outstanding under these lease financing programs, which totaled
$1,330, related to transactions from 1996 through 1998.
45
18. SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION
The Company operates in three business segments. The Components segment
manufactures and markets electron and ion emitters, focusing columns, and
components thereof. These components are used in the Company's FIB, SEM and TEM
systems, and are also sold to other electron microscope manufacturers. 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. Microelectronics segment products are sold primarily to the
semiconductor and data storage industries. The Electron Optics segment
manufactures, markets and services SEMs and TEMs. Electron Optics products are
sold in the materials and life sciences markets as well as in the semiconductor
and data storage markets. The demand and market forces for these products differ
significantly among the segments. See Note 1.
The following table summarizes various financial amounts for each of the
Company's business segments:
CORPORATE
MICRO- ELECTRON AND
COMPONENTS ELECTRONICS OPTICS ELIMINATIONS TOTAL
- ------------------------------------------------------------------------------------
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 4,120 -- 7,334 (11,454) --
- ------------------------------------------------------------------------------------
Total sales 15,428 53,638 111,184 (11,454) 168,796
Gross profit 5,916 25,401 33,286 (2,436) 62,167
Depreciation & amortization 480 2,551 1,043 2,096 6,170
Operating income (loss) 2,603 7,311 2,066 (44,853) (32,873)
Total assets 10,175 60,662 87,669 24,516 183,022
- ------------------------------------------------------------------------------------
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 4,215 -- 7,660 (11,875) --
- ------------------------------------------------------------------------------------
Total sales 19,743 59,737 111,166 (11,875) 178,771
Gross profit 8,364 16,122 34,974 (268) 59,192
Depreciation & amortization 750 3,207 2,152 2,516 8,625
Operating income (loss) 4,831 (7,019) 814 (8,202) (9,576)
Total assets 6,904 64,763 97,691 21,780 191,138
- ------------------------------------------------------------------------------------
1999:
Product sales to customers 11,733 84,061 83,159 -- 178,953
Service sales to customers -- 9,769 27,430 -- 37,199
Inter-segment sales 4,274 -- 10,169 (14,443) --
- ------------------------------------------------------------------------------------
Total sales 16,007 93,830 120,758 (14,443) 216,152
Gross profit 5,339 41,050 39,597 (977) 85,009
Depreciation & amortization 1,027 4,799 3,899 3,986 13,711
Operating income (loss) 2,615 8,389 9,662 (23,181) (2,515)
Total assets 5,925 122,230 95,308 64,637 288,100
46
The Microelectronics segment includes the activity of Micrion from August 14,
1999 and thereafter, including 1999 sales of $12,779. The 1998 gross profit and
operating income (loss) reflect nonrecurring charges of $3,083 in the
Microelectronics segment and $6,443 in the Electron Optics Segment.
Inter-segment sales are shown at cost, with no markup for gross profit within
the selling segment, and are eliminated in consolidation. Corporate
administration expenses, amortization of purchased goodwill and technology,
charges for in-process research and development, and restructuring and
reorganization costs are not allocated to the Company's business segments.
Assets that cannot be assigned to a specific segment are shown as corporate
assets, including purchased goodwill and technology. The Company's long-lived
assets were geographically located as follows:
DECEMBER 31, 1998 1999
---------------------------------------------------------
US $ 53,459 $ 102,093
The Netherlands 7,668 8,714
Other 3,451 5,434
---------------------------------------------------------
Total $ 64,578 $ 116,241
=========================================================
The following table summarizes sales by geographic region:
NORTH ASIA
AMERICA EUROPE PACIFIC OTHER TOTAL
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
1999:
Product sales to customers $ 74,093 $ 49,402 $ 50,052 $ 5,406 $178,953
Service sales to customers 20,036 13,818 3,148 197 37,199
- -------------------------------------------------------------------------------
Total sales $ 94,129 $ 63,220 $ 53,200 $ 5,603 $216,152
- -------------------------------------------------------------------------------
Sales to customers in the US were $67,821, $73,190 and $92,590 for the years
ended December 31, 1997, 1998 and 1999, respectively. Sales to no other country
represented 10 percent or more of total sales in 1997, 1998 or 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Incorporated into this document by reference to the sections captioned
"Number and Election of Directors" "Certain Information Regarding the Board
of Directors of the Company," and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Proxy Statement for the Annual
Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended December 31,
1999. For information concerning executive officers, see Item 4(a) of this
Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated into this document by reference to the section captioned
"Compensation of Executive Officers" in the Proxy Statement for the Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days of the close of the fiscal year ended December 31, 1999;
provided, however that the subsection captioned "Compensation Committee Report
on Executive Compensation" is not incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated into this document by reference to the section captioned
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement for the Annual Meeting of Shareholders to be filed with the Securities
and Exchange Commission within 120 days of the close of the fiscal year ended
December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated into this document by reference to the section captioned
"Certain Relationships and Related Transactions" in the Proxy Statement for the
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended December 31,
1999.
48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS PAGE IN THIS REPORT
-------------------
Consolidated Balance Sheets at December 31, 1998
and December 31, 1999 29
Consolidated Statements of Operations
each of the three years ended December 31, 1997,
1998 and 1999 30
Consolidated Statements of Stockholders' Equity
each of the three years ended December 31, 1997,
1998 and 1999 31
Consolidated Statements of Cash Flows for
each of the three years ended December 31, 1997,
1998 and 1999 32
Notes to Consolidated Financial Statements 34
Independent Auditors Report of Deloitte & Touche LLP 52
(a)(2) FINANCIAL STATEMENT SCHEDULES**
Independent Auditors Report S-1
Valuation and Qualifying Accounts for the Years S-2
Ended December 31, 1997, 1998 and 1999.
** 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
incorporated into this document by reference to the Company's 1999 Annual
Report.
(a)(3) EXHIBITS
(General List)
49
(a)(3) EXHIBITS
2.1(4) Combination Agreement, dated November 15, 1996, as amended, between
the Company and Philips Business Electronics International B.V.
2.2(7) Agreement and Plan of Merger, dated December 3, 1998, among the
Company, Micrion Corporation and MC Acquisition Corporation.
3.1(4) Second Amended and Restated Articles of Incorporation, as amended
3.2(4) Restated Bylaws
4.1 See Articles III and IV of Exhibit 3.1 and Articles I and VI of
Exhibit 3.2
10.1(1)+ 1984 Stock Incentive Plan
10.2(4)+ 1995 Stock Incentive Plan, as amended
10.3(2)+ 1995 Supplemental Stock Incentive Plan
10.4(1)+ Form of Incentive Stock Option Agreement
10.5(1)+ Form of Nonstatutory Stock Option Agreement
10.6(1) Lease, dated as of November 20, 1992, between the Company 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 Company and Pacific Realty
Associates, L.P.
10.8(4) Lease, dated June 6, 1996, between the Company and Pacific Realty
Associates, L.P.
10.9(1)# Agreement, dated February 9, 1994, between the Company and Philips
Electron Optics B.V.
10.10(6) Lease, dated November 25, 1997, between the Company 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 Company, as lessee,
including a guarantee by the Company of the lessee's obligations
thereunder.
50
10.12 Credit Agreement dated February 25, 1999 between the Company and
Koninklijke Philips Electronics N.V.
10.13(5) Employment Agreement, dated August 1, 1997, between the Company and
Karel D. van der Mast
10.14 Master Divestment Agreement between the Company and Koninklijke
Philips Electronics B.V. dated October 28, 1999
10.15 Employment Agreement dated August 12, 1999, between the Company and
Nicholas P. Economou
10.16 Offer Letter between the Company and Vahe A. Sarkissian dated May 14,
1998.
10.17(7)+ Stock Bonus Agreement, dated as of June 25, 1998, between the Company
and Vahe A. Sarkissian
10.18(7)+ Restricted Stock Purchase Agreement, dated as of June 25, 1998,
between the Company and Vahe A. Sarkissian
10.20(8) Stock Purchase Agreement, dated as of December 3, 1998, between
Philips Business Electronics International B.V. and the Company
13 Annual Report to Securities Holders, or the Fiscal year ended
December 31, 1999.
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
- ----------------
(1) Incorporated by reference to Exhibits to the Company'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 Company's Annual Report
on Form 10-K for the year ended December 31, 1995
(3) Incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K, dated November 22, 1996
(4) Incorporated by reference to Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996
51
(5) Incorporated by reference to Exhibits to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 28, 1997
(6) Incorporated by reference to Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997
(7) Incorporated by reference to Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1998
(8) Incorporated by reference to Exhibits to Company's Current Report on
Form 8-K, dated December 9, 1998
+ This exhibit constitutes a management contract or compensatory plan or
arrangement.
# Confidential treatment has been granted by the Commission for certain
portions of this agreement.
(b) REPORTS ON FORM 8-K
None.
ANNUAL REPORT AND PROXY STATEMENT
With the exception of the matters specifically incorporated herein by
reference to the Company's 1999 Annual Report to Shareholders or to the
Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on May 18, 2000, no other provisions of the 1998 Annual Report to
Shareholders or Proxy Statement are deemed to be filed as part of this
Annual Report on Form 10-K.
52
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
FEI Company
Hillsboro, Oregon
We have audited the consolidated financial statements of FEI Company and
subsidiaries as of December 31, 1999 and 1998, and for each of the three years
in the period ended December 31, 1999, and have issued our report thereon dated
February 8, 2000; such consolidated financial statements and report are included
in your 1999 Annual Report to Stockholders and are incorporated herein by
reference. Our audits also included the financial statement schedule of FEI
Company and subsidiaries, listed in Item 14. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
DELOITTE & TOUCHE LLP
Portland, Oregon
February 8, 2000
S-1
SCHEDULE II
FEI COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
-------------------
Balance at Charged to (1) Balance at
Beginning of Costs and Other End
Period Expenses Additions Deductions Period
------ -------- --------- ---------- ------
Year ended December 31, 1999:
Reserve for obsolete inventory $ 4,441 $ 1,330 $11,351 $(2,231) $14,891
Reserve for obsolete service inventory 6,810 1,128 2,328 (1,729) 8,537
Allowance for doubtful accounts 1,942 1,753 197 (840) 3,052
------------------------------------------------
Total $13,193 $ 4,211 $13,876 $(4,800) $26,480
------------------------------------------------
------------------------------------------------
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
------------------------------------------------
------------------------------------------------
(1) Amounts for 1997 represent the balance of Pre-Combination FEI at the date
of the merger. Amounts for 1999 represent the balances at the dates of
acquisition of Micrion and the Philips sales and service organizations.
S-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
FEI Company
Hillsboro, Oregon
We have audited the accompanying consolidated balance sheets of FEI Company and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, comprehensive loss, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our 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 FEI Company and subsidiaries as of
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
February 8, 2000
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, hereunto duly authorized.
FEI COMPANY
By: /s/ Vahe A. Sarkissian
-------------------------------
Vahe A. Sarkissian
President and
Chief Executive Officer
Date: March 29, 2000
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 Company and in the following capacities on March 29, 2000.
SIGNATURE TITLE
--------- -----
/s/ Lynwood W. Swanson
- ---------------------------------- Chairman of the Board and Director
Lynwood W. Swanson
/s/ Vahe A. Sarkissian
- ---------------------------------- President, Chief Executive Officer
Vahe A. Sarkissian and Director
(Principal Executive Officer
- ---------------------------------- Chief Operating Officer and Director
Nicholas P. Economou
/s/ Karel D. van der Mast
- ---------------------------------- Executive Vice President and
Karel D. van der Mast General Manager,
Microelectronics Product Division
53
SIGNATURE TITLE
--------- -----
/s/ William P. Mooney
- ---------------------------------- Executive Vice President and Chief
William P. Mooney Financial Officer
(Principal Financial Officer)
/s/ Mark V. Allred
- ---------------------------------- Corporate Controller and Assistant
Mark V. Allred Treasurer
(Principal Accounting Officer)
- ---------------------------------- Director
Michael J. Attardo
/s/ William E. Curran
- ---------------------------------- Director
William E. Curran
- ---------------------------------- Director
Eric Goeld
/s/ William W. Lattin
- ---------------------------------- Director
William W. Lattin
/s/ Jan C. Lobbezoo
- ---------------------------------- Director
Jan C. Lobbezoo
/s/ Donald R. VanLuvanee
- ---------------------------------- Director
Donald R. VanLuvanee
54