<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
FEI COMPANY
- - - - - - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - - - - - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
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<PAGE>
FEI COMPANY
7451 N.W. EVERGREEN PARKWAY
HILLSBORO, OREGON 97124-5830
Dear FEI Company Shareholder:
You are cordially invited to attend a special meeting of the shareholders of
FEI Company to be held at 9:00 a.m. local time on February 20, 1997 at the OSSHE
Facility, Room 1026, 18640 N.W. Walker Road, Beaverton, Oregon.
At the special meeting, you will be asked to consider and vote on a proposal
to approve and adopt a Combination Agreement (the "Combination Agreement")
between the Company and Philips Industrial Electronics International B.V., a
Netherlands corporation ("PIE") and wholly owned subsidiary of Philips
Electronics N.V., a Netherlands corporation ("Philips"), and the transactions
contemplated thereby, and a proposal to approve an amendment to the Second
Amended and Restated Articles of Incorporation of the Company to increase the
number of authorized shares of Common Stock from 15 million to 30 million.
Details of the proposed transaction and other important information
concerning FEI Company, PIE and Philips are more fully described in the
accompanying Proxy Statement. Please give this material your careful attention.
Very truly yours,
Dr. Lynwood W. Swanson William G. Langley
CHAIRMAN, CHIEF EXECUTIVE PRESIDENT, CHIEF FINANCIAL OFFICER
OFFICER AND CHIEF SCIENTIST AND CHIEF OPERATING OFFICER
January 28, 1997
Hillsboro, Oregon
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE URGED TO SIGN AND
PROMPTLY MAIL THE ENCLOSED PROXY IN THE RETURN ENVELOPE SO THAT YOUR STOCK CAN
BE REPRESENTED AT THE MEETING.
<PAGE>
FEI COMPANY
7451 N.W. EVERGREEN PARKWAY
HILLSBORO, OREGON 97124-5830
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1997
------------------------
TO: THE SHAREHOLDERS OF FEI COMPANY
A special meeting of the shareholders of FEI Company, an Oregon corporation
("FEI" or the "Company"), will be held at 9:00 a.m. local time on February 20,
1997 at the OSSHE Facility, Room 1026, 18640 NW Walker Road, Beaverton, Oregon
(the "Special Meeting"), for the following purposes:
1. To approve and adopt a Combination Agreement dated November 15, 1996, as
amended (the "Combination Agreement"), between the Company and Philips
Industrial Electronics International B.V., a Netherlands corporation
("PIE") and wholly owned subsidiary of Philips Electronics N.V., a
Netherlands corporation ("Philips"), and the transactions contemplated
therein, including the issuance of shares of FEI Common Stock to PIE
pursuant to the terms and conditions of the Combination Agreement (the
"Combination").
2. To approve an amendment to the Second Amended and Restated Articles of
Incorporation of the Company to increase the number of authorized shares
of Common Stock from 15 million to 30 million (the "Amendment to the
Articles").
3. To transact such other business as may properly come before the Special
Meeting or any postponements or adjournments thereof.
The Board of Directors has fixed the close of business on January 17, 1997
as the record date for the determination of the holders of FEI Common Stock
entitled to notice of, and to vote at, the Special Meeting. Accordingly, only
shareholders of record at the close of business on such date are entitled to
notice of and to vote at the Special Meeting and any adjournment or postponement
thereof. The affirmative vote of the holders of a majority of the shares of FEI
Common Stock present (in person or by proxy) at the Special Meeting is necessary
for approval of the Combination Agreement, the Combination and the Amendment to
the Articles.
Details of the proposed transactions and other important information
concerning FEI, PIE and Philips are more fully described in the accompanying
Proxy Statement. Please give this material your careful attention.
You may revoke your proxy in the manner described in the accompanying Proxy
Statement at any time before it has been voted at the Special Meeting. Any
shareholder attending the Special Meeting may vote in person even if he or she
has returned a proxy.
By Order of the Board of Directors
Lloyd R. Swenson, SECRETARY
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN,
DATE AND MAIL PROMPTLY THE ENCLOSED PROXY WHICH IS BEING SOLICITED ON BEHALF
OF THE COMPANY. A RETURN ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES IS ENCLOSED FOR THAT PURPOSE.
<PAGE>
PROXY STATEMENT
---------------------
FEI COMPANY
7451 N.W. EVERGREEN PARKWAY
HILLSBORO, OREGON 97124-5830
------------------------
This Proxy Statement is being furnished to holders of common stock (the
"Common Stock") of FEI Company, an Oregon corporation, ("FEI" or the "Company")
in connection with the solicitation of proxies by the Board of Directors of the
Company for use at the special meeting of shareholders of the Company to be held
at the OSSHE Facility, Room 1026, 18640 N.W. Walker Road, Beaverton, Oregon on
February 20, 1997 beginning at 9:00 a.m., local time, and at any adjournments or
postponements thereof (the "Special Meeting"). This Proxy Statement and the
accompanying Notice of Special Meeting of Shareholders and proxy are first being
mailed to shareholders on or about January 31, 1997. The Board of Directors has
fixed the close of business on January 17, 1997 as the record date (the "Record
Date") for the Special Meeting with respect to this solicitation.
At the Special Meeting, the shareholders will be asked to consider and vote
on the following matters (collectively, the "Combination Proposals"):
(1) A proposal to approve and adopt a Combination Agreement dated as of
November 15, 1996, as amended (the "Combination Agreement"), between the Company
and Philips Industrial Electronics International B.V., a Netherlands corporation
("PIE") and wholly owned subsidiary of Philips Electronics N.V., a Netherlands
corporation ("Philips"), and the transactions contemplated therein, including
the issuance of shares of Common Stock to PIE pursuant to the terms and
conditions of the Combination Agreement (the "Combination"). A copy of the
Combination Agreement is attached to this Proxy Statement as APPENDIX A.
Pursuant to the Combination Agreement and subject to satisfaction of the
conditions set forth therein the following transactions will occur on the date
of closing under the Combination Agreement ("Closing"):
(A) PIE will consolidate or cause to be consolidated substantially all
of the assets and liabilities of the electron optics business of Philips
(the "PEO Operations") into two newly formed, wholly owned subsidiaries of
PIE: Philips Electron Optics International B.V., a Netherlands corporation,
("PEO Holdings") and Philips Electron Optics, Inc., a Delaware corporation
("PEO-US"). The PEO Operations will not include certain assets and
liabilities that are specifically excluded from the transfer pursuant to the
Combination Agreement (the "Excluded Business"). See "The Combination
Agreement--Excluded Business."
(CONTINUED ON FOLLOWING PAGE)
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED ON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY PHILIPS OR ANY OF ITS AFFILIATES. THE DELIVERY OF THIS
PROXY STATEMENT SHALL NOT IMPLY THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION
SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY, THE PEO OPERATIONS OR PHILIPS
OR ANY OF ITS AFFILIATES SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME AFTER ITS DATE.
------------------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS
OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR
ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
THE DATE OF THIS PROXY STATEMENT IS JANUARY 28, 1997.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
(B) PIE will transfer all of the outstanding shares of PEO Holdings and
all of the outstanding shares of PEO-US to FEI. As a result of these
transfers, PEO Holdings and PEO-US will become wholly owned subsidiaries of
the Company.
(C) The Company will transfer to PIE such number of newly issued shares
of its Common Stock as will constitute, when issued, 55% of the shares of
Common Stock of the Company then outstanding, so that the Company will
become a majority-owned subsidiary of PIE. Based on the 7,956,933 shares of
Common Stock of the Company outstanding on the date of this Proxy Statement,
9,725,141 shares of Common Stock of the Company will be issued to PIE at
Closing. The Company also agrees to issue to PIE, from time to time, that
number of additional shares of Common Stock of the Company (the "Additional
Shares") necessary to maintain PIE's ownership percentage (without regard to
other possible share transactions) at not less than 55% after exercise of
options and warrants to purchase Common Stock of the Company, if those
options and warrants were outstanding, or issuable without further action by
the Company's Board of Directors, on the date of Closing. (The shares of
Common Stock to be issued to PIE at Closing and the Additional Shares to be
issued to PIE after Closing as consideration for the Combination are
collectively referred to as the "PIE Shares.")
(D) If the net operating capital (as defined in the Combination
Agreement) of the PEO Operations as of Closing exceeds 78.1 million
Netherlands guilders ("NLG") (approximately $42.3 million based on the noon
buying rate on January 27, 1997 in New York City for cable transfers in
Netherlands guilders, as certified for customs purposes by the Federal
Reserve Bank of New York (the "Dollar/Guilder Exchange Rate")), subsequent
to Closing PEO Holdings will deliver to PIE one or two promissory notes,
each dated the date of Closing, in an aggregate principal amount equal to
the amount of such excess, but not exceeding NLG 3.0 million each (NLG 6.0
million in the aggregate, or approximately $3.3 million based on the
Dollar/Guilder Exchange Rate). The first note will bear interest at 7 3/8%
per annum, and the second note will bear interest at the rate of 4% per
annum. The promissory note or notes will be due and payable on the first
anniversary of Closing.
(2) Approval of an amendment to the Second Amended and Restated Articles of
Incorporation of the Company to increase the number of authorized shares of
Common Stock from 15 million to 30 million (the "Amendment to the Articles").
This increase is needed, among other things, to allow the Company to issue the
PIE Shares. A copy of the Amendment to the Articles is attached to this Proxy
Statement as APPENDIX B.
Approval of the Combination Proposals and consummation of the Combination
will result in dilution of the aggregate ownership interest of existing
shareholders to 45% of the business to be conducted by FEI and the PEO
Operations on a combined basis after Closing (the "Combined Operations").
Shareholders are urged to read and consider carefully the information in this
Proxy Statement and to consult their personal financial advisors.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL AND
ADOPTION OF EACH OF THE COMBINATION PROPOSALS.
2
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and the rules and regulations
thereunder, and in accordance therewith files reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). Such
reports, proxy statements and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the SEC at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's
regional offices located at Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661 and Suite 1300, Seven World Trade Center, New
York, New York 10048. Copies of such material can be obtained at prescribed
rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or from the World Wide Web site maintained by the SEC at
http://www.sec.gov.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY............................................................................... 5
RISK FACTORS.......................................................................... 16
GENERAL INFORMATION................................................................... 19
PARTIES TO THE COMBINATION............................................................ 20
BACKGROUND OF THE COMBINATION......................................................... 21
RECOMMENDATIONS OF THE BOARD OF DIRECTORS AND REASONS FOR THE COMBINATION............. 23
OPINION OF FINANCIAL ADVISOR.......................................................... 25
THE COMBINATION AGREEMENT............................................................. 29
FEDERAL INCOME TAX CONSEQUENCES....................................................... 37
ACCOUNTING TREATMENT.................................................................. 37
BUSINESS NAMES........................................................................ 37
NO DISSENTERS' RIGHTS................................................................. 37
NASDAQ LISTING........................................................................ 37
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF FEI COMPANY............................ 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF FEI COMPANY...................................................................... 39
SELECTED COMBINED FINANCIAL INFORMATION OF THE PEO OPERATIONS......................... 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF THE PEO OPERATIONS............................................................... 47
PRO FORMA COMBINED FINANCIAL STATEMENTS............................................... 54
BUSINESS OF FEI COMPANY............................................................... 64
BUSINESS OF THE PEO OPERATIONS........................................................ 75
REGULATORY APPROVALS.................................................................. 78
TRANSACTIONS BETWEEN THE COMPANY AND THE PEO OPERATIONS............................... 79
INTERESTS OF CERTAIN PERSONS IN THE COMBINATION....................................... 79
MANAGEMENT AFTER THE COMBINATION...................................................... 81
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 87
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION........................... 87
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION............................... 88
PERFORMANCE GRAPH..................................................................... 90
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT..................................... 90
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS........................ 91
THE AMENDMENT TO THE ARTICLES; CAPITAL STOCK.......................................... 93
MARKET PRICE INFORMATION AND DIVIDEND POLICY.......................................... 95
INDEPENDENT PUBLIC ACCOUNTANTS........................................................ 95
INDEX TO FINANCIAL STATEMENTS......................................................... 96
</TABLE>
4
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROXY
STATEMENT AND THE ATTACHED APPENDICES. EACH SHAREHOLDER SHOULD CAREFULLY READ
THIS PROXY STATEMENT AND THE ATTACHED APPENDICES IN THEIR ENTIRETY.
THIS PROXY STATEMENT CONTAINS A NUMBER OF FORWARD-LOOKING STATEMENTS WITH
RESPECT TO FUTURE EVENTS THAT WILL HAVE AN EFFECT ON FUTURE PERFORMANCE. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE CURRENTLY
ANTICIPATED.
THIS PROXY STATEMENT RELATES TO THE PROPOSED COMBINATION OF FEI AND THE PEO
OPERATIONS PURSUANT TO A COMBINATION AGREEMENT BETWEEN FEI AND PIE DATED AS OF
NOVEMBER 15, 1996. A COPY OF THE COMBINATION AGREEMENT IS ATTACHED AS APPENDIX A
TO THIS PROXY STATEMENT AND REFERENCE IS MADE TO THAT AGREEMENT FOR A COMPLETE
DESCRIPTION OF THE TERMS OF THE TRANSACTIONS CONTEMPLATED THEREBY. PURSUANT TO
THE COMBINATION AGREEMENT, FEI WILL ACQUIRE SHARES OF TWO CORPORATIONS WHICH, AS
OF CLOSING UNDER THE COMBINATION AGREEMENT, WILL OWN THE ASSETS AND LIABILITIES
OF THE PEO OPERATIONS AND FEI WILL BECOME A MAJORITY OWNED SUBSIDIARY OF
PHILIPS. SEE "THE COMBINATION." THE FOLLOWING INFORMATION IN THIS PROXY
STATEMENT CONCERNING PHILIPS, ITS AFFILIATES, THE PEO OPERATIONS AND THEIR
RESPECTIVE BUSINESS OPERATIONS, TO THE EXTENT NOT PUBLICLY AVAILABLE OR
OTHERWISE KNOWN BY FEI OR AVAILABLE TO FEI FROM SOURCES OTHER THAN PHILIPS OR
ITS AFFILIATES, HAS BEEN OBTAINED FROM PIE BY FEI: "SUMMARY" INFORMATION
INCLUDED IN THE ORGANIZATION CHART ENTITLED "OWNERSHIP OF PEO OPERATIONS
IMMEDIATELY PRIOR TO THE COMBINATION;" "SUMMARY FINANCIAL INFORMATION OF THE PEO
OPERATIONS;" "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE PEO OPERATIONS;" "SELECTED COMBINED FINANCIAL
INFORMATION OF THE PEO OPERATIONS;" HISTORICAL FINANCIAL INFORMATION FOR THE PEO
OPERATIONS PRESENTED IN "PRO FORMA COMBINED FINANCIAL STATEMENTS;" "BUSINESS OF
THE PEO OPERATIONS;" BIOGRAPHICAL INFORMATION ABOUT PHILIPS EMPLOYEES INCLUDED
IN "MANAGEMENT AFTER THE COMBINATION;" AND "COMBINED FINANCIAL STATEMENTS OF THE
PEO OPERATIONS." EXCEPT AS OTHERWISE INDICATED, ALL OTHER INFORMATION IN THIS
PROXY STATEMENT HAS BEEN SUPPLIED BY FEI.
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING. The Special Meeting is
scheduled to be held at 9:00 a.m. local time on February 20, 1997 at the OSSHE
Facility, Room 1026, 18640 N.W. Walker Road, Beaverton, Oregon. At the Special
Meeting, shareholders will consider and vote on (i) a proposal to approve and
adopt the Combination Agreement and the Combination, (ii) a proposal to approve
the Amendment to the Articles and (iii) any other matters that may properly be
brought before the Special Meeting. The Board of Directors is not now aware of
any such other matters. See "General Information-- Matters to be Considered at
the Special Meeting."
RECORD DATE, QUORUM AND VOTING. The Record Date for the Special Meeting is
the close of business on January 17, 1997. At the close of business on the
Record Date, there were 7,956,933 shares of Common Stock outstanding and
entitled to vote, held by 91 shareholders of record. Each holder of Common Stock
on the Record Date is entitled to one vote per share held. The presence either
in person or by properly executed proxy of at least a majority of the total
number of outstanding shares of Common Stock entitled to vote at the Special
Meeting is required to constitute a quorum for the transaction of business at
the Special Meeting. See "General Information--Record Date and Quorum."
If a quorum is not present at the Special Meeting, the shareholders present
in person or by proxy, by vote of a majority of votes cast by shareholders
entitled to vote thereon, may adjourn the meeting. For such purposes, votes
"FOR" the Combination Proposals will be counted as votes in favor of adjournment
and votes "AGAINST" the Combination Proposals will be counted as voted against
adjournment. At any such adjourned meeting at which a quorum is present any
business may be transacted that might have been transacted at the meeting as
originally held, and proxies will be voted there as directed.
5
<PAGE>
PROXIES AND REVOCABILITY OF PROXIES. The enclosed proxy is being solicited
by the Company for use at the Special Meeting. The enclosed proxy permits each
shareholder to specify that shares be voted "FOR," "AGAINST" or "ABSTAIN" from
approval of the Combination Proposals. If properly executed and returned,
proxies will be voted in accordance with the choice specified. Where a signed
proxy card is returned, but no choice is specified, the shares will be voted FOR
approval and adoption of the Combination Agreement, the Combination and the
Amendment to the Articles.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. A proxy may be revoked by (i) filing
with the Secretary of the Company, at or before the vote at the Special Meeting,
a written notice of revocation dated after the date of the proxy, (ii) duly
executing a later proxy relating to the same shares and delivering it to the
Secretary of the Company before the Special Meeting or (iii) attending the
Special Meeting and voting in person (although attendance at the Special Meeting
will not in and of itself constitute a revocation of a proxy). Any written
notice revoking a proxy should be sent to FEI Company, 7451 N.W. Evergreen
Parkway, Hillsboro, OR 97124-5830, Attention: Lloyd R. Swenson, Secretary, or
hand delivered to the Secretary at or before the taking of the vote at the
Special Meeting. See "General Information--Vote Required; Revocability of
Proxies."
REQUIRED VOTE. The affirmative vote of the holders of a majority of the
outstanding shares of Common Stock of the Company present in person or by proxy
at the Special Meeting is required to approve the Combination Proposals. Each
share of Common Stock of the Company is entitled to one vote at the Special
Meeting. See "General Information--Vote Required; Revocability of Proxies."
SOLICITATION OF PROXIES. The Company is soliciting proxies pursuant to this
Proxy Statement. The cost of preparing, printing and mailing this Proxy
Statement and of soliciting proxies will be borne by the Company. Proxies will
be solicited by mail and may also be solicited by directors, officers and agents
of the Company personally or by telephone or facsimile. The Company will request
brokers, custodians, nominees and other like parties to forward copies of proxy
materials to beneficial owners of Common Stock and will reimburse such parties
for their reasonable and customary charges or expenses of doing so. The Company
has retained Allen Nelson & Company, Incorporated to aid in the solicitation of
proxies. See "General Information--Solicitation of Proxies."
PARTIES TO THE COMBINATION
FEI COMPANY. FEI is a leader in the design, manufacture and sale of focused
ion beam ("FIB") workstations and components based on field emission technology.
The Company's FIB workstations are sold primarily to semiconductor manufacturers
and are used in the design, manufacture, monitoring, defect review and analysis,
modification and repair of microelectromechanical structures. The Company was
founded in 1971 and began manufacturing and selling FIB workstations in 1989.
The Company also sells a broad line of ion and electron emitters and focusing
columns. The Company markets its products worldwide from its headquarters in
Hillsboro, Oregon and has offices or subsidiaries in Cambridge, U.K.; Munich,
Germany; Eindhoven, The Netherlands and Seoul, Korea.
PHILIPS INDUSTRIAL ELECTRONICS INTERNATIONAL B.V. Philips Industrial
Electronics International B.V. ("PIE") is a wholly owned subsidiary of Philips
and manages the Philips Industrial Electronics product division of Philips
through a number of operating companies or business units, including the PEO
Operations.
PHILIPS ELECTRONICS N.V. Philips Electronics N.V. ("Philips") is the parent
company of the Philips group of affiliated companies and operates several
product divisions throughout the world, including the Philips Industrial
Electronics product division. Philips has signed the Combination Agreement only
as to specified sections relating to certain representations and warranties,
covenants, indemnification provisions and arbitration.
6
<PAGE>
THE PEO OPERATIONS. The PEO Operations consists of substantially all of the
assets and liabilities of the electron optics business of Philips, other than
the Excluded Business, and which PIE will consolidate or cause to be
consolidated into two newly formed, wholly owned subsidiaries of PIE: PEO
Holdings and PEO-US. The PEO Operations, which is not a legal entity, is not a
party to the Combination Agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has determined that the Combination
Proposals are advisable and fair to and in the best interests of the Company and
its shareholders and has approved and adopted the Combination Agreement, the
Combination and the Amendment to the Articles by the unanimous vote of the
directors present at the meeting at which these matters were considered.
Accordingly, the Board of Directors recommends that shareholders vote "FOR"
approval and adoption of each of the Combination Proposals.
Based upon the 7,956,933 shares of Common Stock of the Company outstanding
on the date of this Proxy Statement, 9,725,141 shares of Common Stock will be
issued to PIE at Closing and 1,580,492 shares are potentially issuable as
Additional Shares. Assuming that all Additional Shares are issued to PIE, and
based on the closing price of the Common Stock of $11.75 on November 12, 1996,
the date on which the FEI Board of Directors considered and approved the
Combination Agreement, the aggregate market value of the maximum number of
shares issuable to PIE pursuant to the Combination Agreement is approximately
$133 million ($155 million on January 27, 1997, at the closing price on that
date of $13.75).
In determining to approve the Combination Proposals and to recommend
approval by the shareholders, the Board of Directors considered a number of
factors, including the range of values for the PEO Operations as presented by
Needham & Company, Inc. ("Needham"), the Company's potential to improve research
and development, marketing, breadth of product lines, sales volume and
distribution through the synergies of combined management and operations with
the PEO Operations; the financial condition and results of operations of the PEO
Operations and the Company on both historical and prospective bases, including
the recent operating performance of the PEO Operations and the Company and of
the combined entity on a pro forma combined basis; and the relationship of the
range of values of the PEO Operations to the market prices of the Company's
Common Stock.
The ranges of values for the PEO Operations presented by Needham, derived
from financial analyses performed by Needham in arriving at its opinion with
respect to the fairness of the Combination from a financial point of view,
extend from a high of approximately $257.0 million, or $25.37 per share (based
on an analysis of discounted future cash flows) to a low of approximately $20.3
million, or $2.00 per share (based on a comparison of comparable transactions
and the last 12 months net income of the PEO Operations). Per share values were
based upon the weighted average number of FEI shares outstanding calculated
using the closing price of the Common Stock on November 11, 1996 (the "Per Share
Calculation"). Needham advised the Board, and the Board concurred, that because
the PEO Operations had not been run as a stand-alone company, the more
appropriate range of values for the PEO Operations was derived from the
discounted cash flow analysis of the projected performance of the PEO
Operations. Needham believes that its analyses must be considered as a whole,
however, and that considering any portions of such analyses and of the factors
considered, without considering all analyses and factors, could create a
misleading or incomplete view of the process underlying its opinion. The range
of values for the PEO Operations derived from a discounted cash flow analysis
were from $124.9 million, or $12.33 per share, to $257.0 million, or $25.37 per
share, in both cases based on the Per Share Calculation. See "Opinion of
Financial Advisor," "Background of the Combination" and "Recommendations of the
Board of Directors and Reasons for the Combination." The ranges of implied
values discussed in "Opinion of Financial Advisor" are not necessarily
indicative of actual values, which may be significantly more or less favorable.
The implied values set forth above and discussed in "Opinion of Financial
Advisor" should not be relied on by shareholders as an indication of the future
market value of FEI Common Stock.
7
<PAGE>
OPINION OF FINANCIAL ADVISOR
On November 12, 1996, Needham, financial advisor to the Company, delivered
its oral opinion to the Board of Directors, subsequently confirmed in writing,
that, as of such date, the consideration to be paid to FEI by PIE in the
Combination is fair to the shareholders of FEI from a financial point of view.
The full text of Needham's written opinion, which sets forth the assumptions
made, general procedures followed, matters considered and limitations on and
scope of the review undertaken in connection with the opinion, is attached to
this Proxy Statement as APPENDIX C. Shareholders should read the entire opinion
carefully. See "Opinion of Financial Advisor."
RISK FACTORS
The business proposed to be conducted by the Combined Operations is subject
to risks which should be carefully reviewed by shareholders of FEI. See "Risk
Factors."
THE COMBINATION AGREEMENT
GENERAL. Subject to the provisions of the Combination Agreement, before
Closing PIE will consolidate or cause to be consolidated the assets and
liabilities of the PEO Operations into two newly formed, wholly owned
subsidiaries of PIE: PEO Holdings and PEO-US. At Closing, PIE will transfer all
of the shares of PEO Holdings and PEO-US to the Company, so that PEO Holdings
and PEO-US will become wholly owned subsidiaries of the Company. The Company
will transfer to PIE such number of newly issued shares of its Common Stock as
will constitute, when issued, 55% of the shares of Common Stock of the Company
then outstanding, so that the Company will become a majority-owned subsidiary of
PIE. To allow PIE to maintain its proportionate ownership of the Company, the
Company also agrees to issue to PIE, from time to time, that number of
additional shares of Common Stock of the Company (the "Additional Shares")
necessary to maintain PIE's percentage ownership (without regard to other
possible share transactions) at not less than 55% after exercise of options and
warrants to purchase Common Stock of the Company, if those options and warrants
were outstanding, or issuable without further action by the Company's Board of
Directors, on the date of Closing.
If the net operating capital (as defined in the Combination Agreement) of
the PEO Operations as of Closing exceeds NLG 78.1 million (approximately $42.3
million based on the Dollar/Guilder Exchange Rate), subsequent to Closing PEO
Holdings will deliver to PIE a promissory note or notes, each dated the date of
Closing, due and payable on the first anniversary of Closing, in an aggregate
principal amount equal to such excess, up to a maximum of NLG 6.0 million
(approximately $3.3 million based on the Dollar/Guilder Exchange Rate).
The following statements describe in general terms certain provisions of the
Combination Agreement and are qualified in their entirety by reference to the
more detailed statements contained in "The Combination Agreement" section of
this Proxy Statement and the Combination Agreement itself, which is attached as
APPENDIX A hereto and is incorporated by reference into this Proxy Statement.
RIGHT OF PIE TO MAINTAIN PERCENTAGE INTEREST. As long as Philips, directly
or indirectly, owns 40% or more of the outstanding voting securities of the
Company, PIE has the right to buy from the Company, at the then-market price,
additional voting securities of the Company at the time of issuances to third
parties and in amounts needed for PIE to maintain its proportionate ownership of
up to 55% of the Company's voting securities, as reduced by the net percentage
of voting securities of FEI sold by PIE at any time.
EXCLUDED BUSINESS. Certain specified assets and liabilities, consisting
primarily of (i) sales and service organizations in approximately 25 countries
in which Philips conducts its electron optics business that in the aggregate
contributed net sales of approximately $8.0 million (11.3%) of the total net
sales for the nine-month period ended September 30, 1996 for such business and
(ii) the real estate and improvements at the principal manufacturing and
administrative facility of Philips electron optics business located in
8
<PAGE>
Eindhoven, The Netherlands (the "Eindhoven Facility"), are excluded from the PEO
Operations to be transferred pursuant to the Combination Agreement (the
"Excluded Business"). Because the volume of sales by the sales and service
organizations of the Excluded Business is currently considered insufficient to
warrant the maintenance of independent electron optics sales and service
organizations in the relevant countries, these organizations will not be
included in the PEO Operations being transferred, but will instead provide sales
and service support to the Combined Operations pursuant to service and
distribution agreements. To reduce transaction costs and in consideration of
PIE's agreement that PEO Holdings will have $8 million in cash at Closing, which
will provide additional liquidity for the Combined Operations, the parties have
agreed to exclude the Eindhoven Facility from the PEO Operations to be
transferred. The Company will enter into a lease for this facility. See "The
Combination Agreement--Excluded Business," "--Other Related Agreements" and
"--Conditions to Closing of the Combination."
INTELLECTUAL PROPERTY. The PEO Operations will have the rights to all
know-how generated within the PEO Operations, subject to all prior commitments
and to the right of Philips and its affiliates to continue to use all such
know-how for their purposes. Philips will grant rights to FEI relating to
certain other know-how, software and patents and patent applications owned or
controlled by Philips. FEI will grant to Philips rights under FEI's patents
outside the scope of FEI's business. In the event Philips ceases to have
majority control of the voting securities of FEI, the Combination Agreement
provides for the transfer to FEI, subject to prior commitments, of certain
patents and patent applications. See "The Combination Agreement--Intellectual
Property."
OTHER RELATED AGREEMENTS. Philips and its affiliates now provide a variety
of services to the PEO Operations. The Combination Agreement provides that the
Company will enter into agreements by which Philips, PIE and their affiliates
will lease real property, license intellectual property rights and provide other
services to the Combined Operations. See "The Combination Agreement--Other
Related Agreements."
CASH INCLUDED IN PEO HOLDINGS. Pursuant to the Combination Agreement, the
PEO Operations will include $8.0 million in cash at Closing.
CONDITIONS TO CLOSING. Closing of the Combination is subject to various
conditions, including, among others: (i) FEI shareholders' approval of the
Combination Proposals; (ii) compliance with the filing requirements and
expiration of the applicable waiting periods imposed by the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") and any other
applicable antitrust or competition laws; (iii) the absence of any governmental
rule, injunction or threat of governmental action preventing, or restricting or
seeking to restrict, the Combination; (iv) receipt of all other necessary
governmental approvals; (v) the absence of any material adverse change in the
business, results of operations or financial condition of the Company or of the
PEO Operations since December 31, 1995; (vi) execution of employment agreements
with certain officers of FEI and (vii) the PEO Operations shall include $8.0
million in cash at Closing. See "The Combination Agreement--Conditions to the
Closing of the Combination" and "Regulatory Approvals."
TERMINATION. The Combination Agreement may be terminated before Closing (i)
by agreement of the Company and PIE, or (ii) by either the Company or PIE in
certain circumstances. See "The Combination Agreement--Termination."
ACCOUNTING TREATMENT. The Combination will be recorded as a "reverse
purchase" for accounting and financial reporting purposes, whereby PIE will be
treated as the accounting acquiror because, at Closing, PIE will acquire 55% of
the outstanding voting securities of the Company. As a result, after the
Combination, the historical financial statements of FEI will be the financial
statements of the PEO Operations for all reported periods prior to the date of
Closing.
9
<PAGE>
MANAGEMENT AFTER THE COMBINATION. At Closing, PIE's acquisition of 55% of
the outstanding voting securities of the Company will constitute a change of
control of the Company, and the composition of the Board of Directors of the
Company will change. Four members of the current Board will continue on the
Board and five employees of Philips or its affiliates will become members of the
Board. A vote to approve the Combination Agreement will constitute a vote in
favor of the change in Board composition. See "Management After the
Combination." Following Closing, the executive officers of the Combined
Operations will include management personnel from FEI and the PEO Operations.
Certain key employees of the Company will enter into employment agreements with
the Company. See "Interests of Certain Persons in the Combination" and
"Management After the Combination."
INTERESTS OF CERTAIN PERSONS IN THE COMBINATION. To induce certain key
employees of the Company to continue in its employ following Closing, the
Company will enter into employment agreements, effective as of the date of
Closing, with these key employees. These employment agreements are terminable by
either party in certain circumstances, and the employees are entitled to
termination benefits in certain circumstances. The maximum aggregate amount of
these benefits, assuming termination of all seven of the key employees 90 days
following the date of Closing, is $1,432,351. No payments will accrue to any
officers or directors of the Company solely as a result of the Combination. See
"Interests of Certain Persons in the Combination."
VOTING IN FEI DIRECTOR ELECTIONS. For so long as PIE holds a majority of
the outstanding voting securities of FEI, PIE will have the ability to elect all
of the directors of FEI. PIE has agreed, however, to vote its shares to cause
the Company to have two independent directors for a period ending two years
after the date of the Combination Agreement and to vote its shares at the
Company's first annual meeting following Closing to cause two persons who are
not present or former employees of any affiliate of Philips (other than the
Company) to be elected directors of the Company. See "The Combination
Agreement-- Voting in FEI Director Elections" and "Management After the
Combination."
BUSINESS NAMES. After Closing, FEI Company will continue to operate under
the name "FEI Company." The parties to the Combination expect that following
Closing the electron microscope business conducted by PEO Holdings and PEO-US
will operate under the name "Philips Electron Optics" and the FIB workstation
and components business conducted by FEI will operate under the name "FEI
Company."
10
<PAGE>
OWNERSHIP OF THE PEO OPERATIONS IMMEDIATELY PRIOR TO THE COMBINATION
[GRAPH]
[GRAPH SHOWING OWNERSHIP OF THE PEO OPERATIONS IMMEDIATELY PRIOR TO THE
COMBINATION]
11
<PAGE>
OWNERSHIP OF THE COMBINED OPERATIONS IMMEDIATELY AFTER THE COMBINATION
[GRAPH]
[GRAPH SHOWING OWNERSHIP OF THE COMBINED OPERATIONS IMMEDIATELY AFTER THE
COMBINATION]
12
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS; VOTING
AGREEMENTS
As of September 30, 1996, the directors, nominees for director and executive
officers of the Company beneficially owned a total of 2,075,310 shares of Common
Stock, representing approximately 25.2% of the outstanding shares of Common
Stock. Certain directors and shareholders of the Company holding an aggregate of
at least 20% of the shares of Common Stock, as of the date of this Proxy
Statement, have entered into voting agreements with PIE by which they have
agreed to vote their shares of Common Stock for the approval and adoption of the
Combination Proposals. See "Security Ownership of Management and Certain
Beneficial Owners."
MARKET PRICES OF COMMON STOCK
The Common Stock is listed on the Nasdaq National Market under the name FEI
Company and traded under the symbol "FEIC." On September 4, 1996, the last
trading day before the public announcement of the execution of the letter of
intent describing the Combination, the reported closing sale price of the Common
Stock was $10.25 per share. On January 27, 1997, the last trading day before the
date of this Proxy Statement, the reported closing sale price per share of
Common Stock was $13.75. See "Market Price Information and Dividend Policy."
SUMMARY FINANCIAL INFORMATION OF FEI COMPANY
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, (UNAUDITED)
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................ $ 17,198 $ 22,281 $ 41,691 $ 29,131 $ 33,576
Income (loss) from operations............................ 2,025 (360) 5,911 4,308 1,798
Net income (loss) (1).................................... 1,430 (225) 3,741 2,464 1,319
Net income (loss) per share (1)(2)....................... $ 0.28 $ (0.04) $ 0.57 $ 0.40 $ 0.16
Shares used in per share calculation (2)................. 5,089 5,101 6,603 6,230 8,038
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................................................... $ 1,485
Total assets....................................................................................... 51,881
Short-term borrowings.............................................................................. 3,328
Long-term debt, less current portion............................................................... --
Shareholders' equity............................................................................... 40,084
</TABLE>
- - - - - - ------------------------
(1) Net income (loss) per share for the year ended December 31, 1993 includes
the cumulative effect of an accounting change benefit of $206,000 ($0.04 per
share). See Note 13 of Notes to Consolidated Financial Statements of FEI
Company.
(2) See Notes 1 and 14 of Notes to Consolidated Financial Statements of FEI
Company.
13
<PAGE>
SUMMARY FINANCIAL INFORMATION OF THE PEO OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- ---------- --------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................................... $ 71,631 $ 84,169 $ 109,117 $ 67,743 $ 71,059
Income (loss) from operations........................... 3,945 9,473 9,245 5,213 (2,299)
Net income (loss)....................................... $ 2,426 $ 5,893 $ 5,928 $ 3,257 $ (1,819)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................................................... $ --
Total assets....................................................................................... 70,652
Total current liabilities.......................................................................... 28,204
Division equity (1)................................................................................ 41,135
</TABLE>
- - - - - - ------------------------
(1) Division equity represents the financing of the PEO Operations through
Philips intercompany accounts. No separate equity or debt financing has
existed at the PEO Operations level. See Note 3 of Notes to Combined
Financial Statements of the PEO Operations.
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF FEI COMPANY AND
THE PEO OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1995 1996
------------ -------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................................................... $ 136,601 $ 93,000
Income (loss) from operations....................................................... 10,907 (6,128)
Net income (loss)................................................................... 6,597 (4,275)
Net income (loss) per share......................................................... $ 0.44 $ (0.25)
Shares used in per share calculation................................................ 15,140 17,109
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................................................... $ 6,985
Total assets....................................................................................... 155,118
Short-term borrowings.............................................................................. 3,328
Long-term debt, less current portion............................................................... --
Equity............................................................................................. 109,876
</TABLE>
14
<PAGE>
COMPARATIVE PER SHARE DATA
Set forth below are historical earnings per share, cash dividends per share
and book value per share data of FEI Company and pro forma unaudited per share
data of FEI and the PEO Operations on a combined basis. Historical per share
data for the PEO Operations is not presented because the PEO Operations was not
a separate entity and had no outstanding shares. The data set forth below should
be read in conjunction with the Consolidated Financial Statements of FEI
Company, the Combined Financial Statements of the PEO Operations and the Pro
Forma Combined Financial Statements included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
--------------- -------------
<S> <C> <C>
(UNAUDITED)
FEI COMPANY--HISTORICAL
Net income (loss) per share....................................................... $ 0.57 $ 0.16
Cash dividends per share.......................................................... -- --
Book value per share.............................................................. $ 4.77 $ 5.04
COMBINED FEI AND PEO OPERATIONS--PRO FORMA (UNAUDITED)
Net income (loss) per share....................................................... $ 0.44 $ (0.25)
Cash dividends per share.......................................................... -- --
Book value per share.............................................................. $ 6.63 $ 6.21
</TABLE>
15
<PAGE>
RISK FACTORS
The following risk factors should be carefully considered by shareholders in
evaluating whether to approve and adopt the Combination Proposals. These factors
should be considered in conjunction with the other information included in this
Proxy Statement.
COMBINATION OF COMPANIES. Successful combination of FEI and the PEO
Operations will depend in part upon the ability of management to integrate the
operations of FEI with the PEO Operations in an efficient and effective manner.
Senior management of the Combined Operations must continue to attract, retain
and motivate qualified employees in light of organizational changes resulting
from the Combination. Assimilation of the PEO Operations into FEI will impose
additional demands on management and operational resources and may distract
attention from the day-to-day management of the Combined Operations. The
inability successfully to manage the Combined Operations or to combine existing
management or the loss of the services of key members of management could have a
material adverse effect on the Combined Operations.
Although FEI and Philips' electron optics business have been engaged in
joint research and development since 1991, and Philips' electron optics business
is FEI's supplier for FIB workstation platforms, FEI's FIB workstation and
components business and Philips' electron optics business have never been
operated as a combined entity. Management of each business believes the
Combination will be beneficial for new product development, production
efficiencies and access to new markets; however, there is no assurance
operational advantages will be achieved.
The PEO Operations contracts for a significant number of services from
Philips and its affiliates. FEI and PIE expect the Combined Operations to
continue to contract with Philips and its affiliates for many of these services.
In addition, the Combined Operations will enter into distribution agreements
with Philips sales and service organizations or other parties in each of the
countries where the Philips sales and service organization is part of the
Excluded Business. The terms of the form of Services Agreement have been
negotiated between the parties at arm's length, and the Company considers these
terms to be not less fair to the Company than they might be if negotiated with
other unaffiliated parties. Individual Services Agreements have not yet been
executed by PEO-US or the subsidiaries of PEO Holdings, but in each case the PEO
Operations entity will be entitled to contract with third parties for certain
services otherwise covered by the Services Agreement if the entity does not
believe the terms offered by the relevant Philips affiliate are fair. A form of
Distribution Agreement has been negotiated between the parties at arm's length.
The Company considers the terms of the Distribution Agreement to be not less
fair to the Company than they might be if negotiated with other unaffiliated
parties. Individual Distribution Agreements have not yet been executed and the
terms of individual Distribution Agreements may vary from the form of agreement
due to requirements in the country of distribution. See "The Combination
Agreement--Other Related Agreements."
The Combined Operations will also enter into a lease for the Eindhoven
Facility effective upon Closing. The terms of the lease will be substantially
equivalent to those reflected in the general conditions of the model lease
agreement issued by the Council of Real Property of the real estate brokers
association of The Netherlands, or any other form agreed to by the Company. See
"The Combination Agreement-- Real Property Lease." The commencement or
discontinuation of any of these agreements with Philips and its affiliates could
increase the expenses of the Combined Operations or divert management attention
from other operational responsibilities. See "The Combination Agreement--Other
Related Agreements."
SUBSTANTIAL INTERNATIONAL OPERATIONS. Pro forma to reflect the Combination,
sales outside of the U.S. accounted for 67.0%, 68.3% and 62.1% of the net sales
of the combined businesses of FEI and the PEO Operations in 1994, 1995 and the
nine months ended September 30, 1996, respectively. International sales will
continue to represent a significant percentage of net sales for the Combined
Operations. Certain risks are inherent in international operations, including
changes in demand resulting from fluctuations in interest and exchange rates,
the risk of government-financed competition, changes in trade policies, tariff
16
<PAGE>
regulations and difficulties in obtaining export licenses. In addition, a
substantial portion of international sales will be denominated in currencies
other than U.S. dollars. Consequently, a decrease in the value of a relevant
foreign currency in relation to the U.S. dollar occurring after agreement on
price and before receipt of payment would have an adverse impact on results of
operations. The impact of future exchange rate fluctuations on the results of
operations of the Combined Operations cannot be accurately predicted. The
Company has no established hedging program for foreign currency exposure, but
from time to time uses European currencies acquired as proceeds from certain
foreign sales to balance a portion of this exposure. There is no assurance that
any hedging techniques will eliminate the effects of currency fluctuations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of FEI Company--Results of Operations," Note 1 of Notes to
Consolidated Financial Statements of FEI Company, "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the PEO
Operations--Results of Operations" and Note 3 of Notes to Combined Financial
Statements of the PEO Operations.
Following Closing, the Combined Operations will have significant
manufacturing, sales and service operations in the U.S. and numerous foreign
countries. The application of U.S. and foreign tax laws and regulations to the
Combined Operations and to the intercompany relationships created by the
Combination will be subject to audit and review by numerous, independent
national tax authorities. In addition, business practices or laws in some of the
foreign countries in which the Combined Operations will have business activities
impose costs, restrictions or requirements on such activities that differ in
significant respects from the U.S. business environment. For example, laws in
some countries restrict, or impose substantial costs with respect to, work force
reductions.
DILUTION RISK. Approval of the Combination Proposals and consummation of
the Combination will result in dilution of the aggregate ownership interest of
existing shareholders to 45% of the Combined Operations. The Combination will
result in the number of outstanding shares of Common Stock increasing from
7,956,933 shares (as of the date of this Proxy Statement) to at least 17,682,074
shares. Unless the Combined Operations generate a commensurate increase in net
earnings, earnings per share will decline. For the nine month period ended
September 30, 1996, the Company had net income per share of $0.16. After giving
effect to the Combination, based on the unaudited pro forma financial
information for the nine-month period ended September 30, 1996 for the Combined
Operations, the Combined Operations had a net loss of $0.25 per share, resulting
in dilution of $0.41 to earnings per share.
VARIABLE OPERATING RESULTS. The operating results of the Combined
Operations will likely fluctuate in the future. Fluctuations in operating
results may be caused by a variety of factors, including the relatively high
unit cost of products, competitive pricing pressure, conditions in the
semiconductor industry, the timing of orders from major customers and new
product introductions, customer cancellation or delay of shipments, long sales
cycles, changes in the mix of products sold and the proportion of domestic and
international sales, specific feature requests by customers, production delays
and currency exchange rate fluctuations. The Combined Operations will continue
to derive a substantial portion of its revenues from the sale of a relatively
small number of systems, which range in price from approximately $150,000 to
approximately $1.8 million. As a result, the timing of revenue recognition from
a single order could have a significant impact on net sales and operating
results for a period.
A substantial portion of net sales for both FEI and the PEO Operations has
generally been realized near the end of each quarter. Accordingly, delays in
shipments near the end of a quarter could have a substantial negative effect on
operating results for that quarter. In addition, unanticipated shipment
reschedulings, unsuitability of customer sites, unexpected technical
difficulties due to the complexity of systems manufactured by the Combined
Operations or delays in deliveries by suppliers may cause net sales in a
reporting period to fall significantly below management's expectations. These
events could adversely affect the Combined Operations' financial condition and
results of operations for a particular period. For example, despite an increase
of $3.3 million in net sales for the PEO Operations for the nine months ended
September 30, 1996 compared to the corresponding period in 1995, the PEO
Operations' net sales in the
17
<PAGE>
third quarter of 1996 decreased by $3.1 million compared to net sales in the
third quarter of 1995. This decline was primarily due to lower shipments of SEM
microscopes intended for the semiconductor industry, due to technical problems
related to the field emission electron focusing columns of certain models, and
lower shipments of several high-priced TEMs due to production delays in meeting
customer specifications. Announcements by the Combined Operations or its
competitors of new products and technologies could also cause customers to defer
purchases of the Combined Operations' existing systems, which could have a
material adverse effect on the Combined Operations. The impact of these and
other factors on the Combined Operations' sales and operating results in any
future period cannot be determined with certainty.
The backlog amounts of the Combined Operations at any time will not
necessarily be indicative of revenue likely to be recognized in the immediately
following quarter. There is also no assurance that actual sales will meet
forecasts. For the Combined Operations, the need for continued investment in
research and development, capital equipment and customer service and support
capability worldwide results in significant fixed costs that would be difficult
to reduce if the Combined Operations does not meet its sales objectives. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of PEO Operations."
CYCLICAL NATURE OF AND DEPENDENCE ON SEMICONDUCTOR INDUSTRY. Sales by the
Combined Operations will depend in large part upon capital expenditures by
semiconductor manufacturers and semiconductor testing laboratories, which in
turn depend on the current and anticipated market demand for integrated circuits
and products using integrated circuits. The semiconductor industry is highly
cyclical and has experienced periodic downturns, and these fluctuations have
resulted in periods of low demand for equipment used in integrated circuit
manufacturing, including products sold by the Combined Operations. There is no
assurance that the Combined Operations will not be materially and adversely
affected by future downturns in the semiconductor industry.
COMPETITION. The FIB workstation and electron microscope markets are highly
competitive, and management of FEI and the PEO Operations expect this
competition to intensify. Some competitors have substantially greater financial,
marketing and production resources than will the Combined Operations. Price
competition, which has from time to time been severe, could adversely affect the
operating margins of the Combined Operations. Announcements by the Combined
Operations or its competitors of new products or technologies could cause
customers to defer purchases of the Combined Operations' existing systems, which
could have a material adverse effect on the Combined Operations. See "Business
of FEI Company" and "Business of the PEO Operations."
NEED FOR ADDITIONAL CAPITAL. Both FEI and the PEO Operations, separately
and on a combined basis, expect to continue to require net additional cash to
fund operations. The Combined Operations will not have access to financing
through Philips' intercompany accounts and Philips and its affiliates are not
obligated to provide additional funds to the Combined Operations following
Closing pursuant to the terms of the Combination Agreement or otherwise. Philips
has also advised FEI that it has no present intention to provide any funds to
the Combined Operations following Closing. The Combined Operations will be
required to seek credit arrangements with commercial banks and other
institutional lenders, other than the existing line of credit now maintained by
FEI, or from other sources of equity or debt financing. There is no assurance
that any such additional financing will be available on terms that are favorable
to the Combined Operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of FEI Company--Liquidity and
Capital Resources" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the PEO Operations--Liquidity and Capital
Resources."
CONTROL BY PRINCIPAL SHAREHOLDER. Subsequent to Closing, PIE will own 55%
of the outstanding voting securities of FEI and will be able to control the
election of all the directors of FEI and other matters submitted to a vote of
the shareholders. PIE has agreed to vote its shares so as to cause FEI to have
two
18
<PAGE>
independent directors, in accordance with, and as defined in, Rule 4460(c) of
the Rules of the Nasdaq National Market ("Independent Directors"), for a period
ending two years after the date of Closing and to vote its shares at FEI's first
annual meeting following Closing to cause two persons who are not present or
former employees of any affiliate of Philips (other than FEI) to be elected
directors of FEI. See "The Combination Agreement--Voting in FEI Director
Elections."
GENERAL INFORMATION
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
Each copy of this Proxy Statement mailed to shareholders is accompanied by a
proxy card sent in connection with the solicitation of proxies by the Board of
Directors for use at the Special Meeting. The Special Meeting is scheduled to be
held at 9:00 a.m. local time on Thursday, February 20, 1997, at the OSSHE
Facility, Room 1026, 18640 N.W. Walker Road, Beaverton, Oregon. At the Special
Meeting, the shareholders will consider and vote on (i) a proposal to approve
and adopt the Combination Agreement and Combination and (ii) a proposal to
approve an amendment to the Second Amended and Restated Articles of
Incorporation of the Company to increase the number of authorized shares of
Common Stock. Other matters that may be properly brought before the Special
Meeting will also be considered. The Board of Directors is not now aware of any
such other matters.
The Board of Directors of the Company has determined that the Combination
Proposals (items (i) and (ii) described above) are advisable and fair to, and in
the best interests of, the Company and its shareholders and has approved the
Combination Proposals. ACCORDINGLY, THE BOARD OF DIRECTORS RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" APPROVAL OF EACH OF THE COMBINATION PROPOSALS. See
"Background of the Combination," "Recommendations of the Board of Directors and
Reasons for the Combination" and "The Amendment to the Articles; Capital Stock."
SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE
ACCOMPANYING PROXY CARD PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
RECORD DATE AND QUORUM
The Board of Directors has fixed the close of business on January 17, 1997
as the Record Date to determine the shareholders entitled to notice of and to
vote at the Special Meeting. Only shareholders of record at the close of
business on that date will be entitled to vote at the Special Meeting. At the
close of business on the Record Date, there were 7,956,933 shares of Common
Stock outstanding and entitled to vote at the Special Meeting, held by 91
shareholders of record.
Each shareholder on the Record Date will be entitled to one vote for each
share held of record. The presence, in person or by proxy, of a majority of the
outstanding shares of Common Stock entitled to be voted at the Special Meeting
is needed to constitute a quorum. Because the quorum required to act on the
Combination Proposals is based on the total number of outstanding shares of
Common Stock, the failure to submit a proxy card (or to vote in person at the
Special Meeting) may affect the Company's ability to achieve a quorum to act at
the Special Meeting.
The enclosed proxy is being solicited by the Company for use at the Special
Meeting. If the enclosed proxy card is properly executed and received by the
Company in time to be voted at the Special Meeting and not revoked, the shares
represented by it will be voted at the Special Meeting in accordance with the
instructions marked on it. Executed proxies without instructions will be voted
"FOR" approval of the Combination Proposals.
If any other matters properly come before the Special Meeting, the persons
named in the accompanying proxy will vote the shares represented by all properly
executed proxies on such matters as determined by a majority of the Board of
Directors, except that shares represented by proxies that have been voted
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"AGAINST" the Combination Proposals will not be used to vote "FOR" postponement
or adjournment of the Special Meeting.
VOTE REQUIRED; REVOCABILITY OF PROXIES
The affirmative vote of holders of a majority of the outstanding shares of
Common Stock represented at the Special Meeting in person or by proxy is needed
to approve the Combination Proposals. A proxy may be revoked by (i) filing with
the Secretary of the Company, at or before the vote at the Special Meeting, a
written notice of revocation dated after the date of the proxy, (ii) duly
executing a later proxy relating to the same shares and delivering it to the
Secretary of the Company before the Special Meeting or (iii) attending the
Special Meeting and voting in person (although attendance at the Special Meeting
will not in and of itself constitute a revocation of a proxy). Any written
notice revoking a proxy should be sent to FEI Company, 7451 N.W. Evergreen
Parkway, Hillsboro, OR 97124-5830, Attention: Lloyd R. Swenson, Secretary, or
hand delivered to the Secretary at or before the taking of the vote at the
Special Meeting.
If a quorum is not obtained, it is expected that the Special Meeting will be
postponed or adjourned to allow additional time to solicit and obtain additional
proxies or votes and, at any later reconvening of the Special Meeting, all
proxies will be voted in the same manner as they would have been voted at the
original Special Meeting, except for any proxies that have been properly revoked
or withdrawn.
No vote of the shareholders of Philips or PIE is required in connection with
the Combination Proposals. The obligations of the Company and PIE to consummate
the Combination are subject, among other things, to the condition that the FEI
shareholders approve the Combination Proposals. See "The Combination
Agreement--Conditions to Closing of the Combination."
SOLICITATION OF PROXIES
The Company will bear the costs of soliciting proxies from shareholders. In
addition to soliciting proxies by mail, directors, officers and agents of the
Company, without receiving additional compensation therefor, may solicit proxies
by telephone, by telecopy or in person. Arrangements also will be made with
brokerage firms and other custodians, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of shares held of record by such
persons, and the Company will reimburse such brokerage firms, custodians,
nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them
in connection therewith. The Company has retained Allen Nelson & Company,
Incorporated to aid in the solicitation of proxies; its fee for the solicitation
of proxies is estimated to be $5,000, plus reimbursement for out-of-pocket costs
and expenses.
PARTIES TO THE COMBINATION
FEI COMPANY. The Company is a leader in the design, manufacture and sale of
focused ion beam ("FIB") workstations and components based on field emission
technology. The Company's FIB workstations are sold primarily to integrated
circuit manufacturers and are used in the design, manufacture, monitoring,
defect review and analysis, modification and repair of microelectromechanical
structures. The Company was founded in 1971 to manufacture charged particle
emitters (ion and electron sources), began manufacturing and selling ion and
electron focusing columns in the early 1980s and evolved into a leading
manufacturer of FIB workstations in 1989. The Company continues to sell a broad
line of emitters and focusing columns. The Company markets its products
worldwide from its headquarters in Hillsboro, Oregon and has offices or
subsidiaries in Cambridge, U.K.; Munich, Germany; Eindhoven, The Netherlands;
and Seoul, Korea. The Company was incorporated in Oregon in May 1973. Its
executive offices are located at 7451 N.W. Evergreen Parkway, Hillsboro, Oregon
97124-5830 and its telephone number is (503) 640-7500.
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PHILIPS INDUSTRIAL ELECTRONICS INTERNATIONAL B.V. Philips Industrial
Electronics International B.V. ("PIE") is a wholly owned subsidiary of Philips
and manages the Philips Industrial Electronics product division of Philips
through a number of operating companies or business units, including the PEO
Operations.
PHILIPS ELECTRONICS N.V. Philips Electronics N.V. ("Philips") is the parent
company of the Philips group of affiliated companies and operates several
product divisions throughout the world, including the Philips Industrial
Electronics product division. Philips has signed the Combination Agreement only
as to specified sections generally relating to certain representations and
warranties, covenants and indemnification provisions.
THE PEO OPERATIONS. The PEO Operations consists of substantially all of the
assets and liabilities of the electron optics business of Philips, other than
the Excluded Business, and which PIE will consolidate or cause to be
consolidated into two newly formed, wholly owned subsidiaries of PIE: PEO
Holdings and PEO-US. The PEO Operations, which is not a legal entity, is not a
party to the Combination Agreement.
BACKGROUND OF THE COMBINATION
Since August 1991, FEI and Philips' electron optics business have been
engaged in joint research and development of electronics and software integrated
into subassemblies supplied by Philips' electron optics business and
incorporated into FEI's FIB workstations. The Company has an agreement with
Philips Electron Optics B.V. ("PEO BV") providing for the joint ownership of
software developed by the Company and PEO BV and for purchases from PEO BV of
FIB workstation platforms and, for FEI's DualBeam workstations, the major
components of the electron microscope included in the DualBeam workstation.
Because of their joint research and development efforts and supplier
relationship, management of FEI and Philips' electron optics business have been
in regular contact concerning a variety of matters affecting their respective
businesses and business strategies. In early April 1996, management of PIE and
PEO BV met in New York City with Dr. Lynwood W. Swanson, Chairman of the Board
of FEI, and William G. Langley, President of FEI. At that meeting, Philips
management suggested to FEI management the possibility of combining the FEI and
Philips electron optics business operations. FEI management considered the
possibility and concluded on a preliminary basis that a combination of the two
businesses would likely enhance new product development and production
efficiencies for both businesses and would provide each business with better
access to new markets for its existing product lines and technology. On April 5,
1996, the parties executed a confidentiality agreement to allow them to exchange
information relative to the proposal.
On April 19, 1996, the FEI Board of Directors met and authorized FEI
management to meet with representatives of Philips' electron optics business to
discuss in more detail the possible combination of their respective businesses.
At that meeting, the Board approved the retention of Needham as advisor to FEI
with respect to a possible transaction and to deliver a fairness opinion with
respect to such transaction.
On May 6 and 7, 1996, Dr. Swanson and Mr. Langley, together with other FEI
management personnel, the Company's counsel and its financial advisor, met in
New York City with representatives of PIE and Philips' electron optics business
and members of Philips' mergers and acquisitions department. At that meeting,
Philips representatives expressed their interest in acquiring 55 to 60 percent
of the outstanding shares of Common Stock, or approximately 9.7 million to 11.9
million shares, in order to acquire voting control and to ensure that after the
Combination FEI, as a majority-owned subsidiary of a Philips affiliate, would
have rights to use certain intellectual property of Philips. The shares of
Common Stock on those dates traded in a range between $17.50 and $18.13 and had
been as high as $19.625 during the second quarter of 1996, and at that per share
value the parties were unable to agree that the value of the PEO Operations was
sufficient consideration for a 55 to 60 percent interest in FEI, after taking
into account a premium over market value that FEI representatives believed FEI
should receive for a transfer
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of voting control to PIE. Discussions between the parties on a proposed
transaction were terminated at that time.
In mid-June 1996, Mr. William A. Whitward, General Manager of PEO BV, again
contacted Dr. Swanson to offer to renew discussions concerning a possible
combination of the Philips electron optics and FEI businesses. After
consultation with the FEI Board of Directors, Dr. Swanson and Mr. Langley were
authorized to meet again with management of the PEO Operations. At meetings held
on June 18 and 19, 1996 in New York City, management of both businesses
concluded that continuing discussions concerning the terms and conditions of a
possible business combination would be warranted, but no agreement was reached
on relative valuation.
In July 1996, Dr. Swanson and Mr. Langley were approached by representatives
of another company interested in a possible acquisition transaction. At FEI's
Board of Directors meeting held on July 19, 1996, Dr. Swanson and Mr. Langley
reported on the progress of negotiations with PIE management as well as the
unsolicited expression of interest from the other company. The Board authorized
management to execute a confidentiality agreement and exchange due diligence
information with the other company. The Board also designated a special
committee consisting of Messrs. Swenson and Beckman and Dr. Swanson, to whom
both FEI management and Needham would report with respect to either possible
transaction (the "Special Committee"). Although some due diligence information
was exchanged and a meeting held with representatives of the other interested
company, no formal proposal resulted from those discussions. No terms of a
transaction were discussed, other than the general concept of a possible
acquisition of FEI by the other interested company. The Company was notified on
August 30, 1996 that the other company no longer wished to proceed. The other
company stated in terminating the discussions that it was not in a position to
make a proposal that, in its judgment, had a reasonable prospect of being
accepted. No other reasons for terminating the discussions were communicated to
FEI.
At the July 19, 1996 meeting, the Board was provided with an update on the
progress of the negotiations with Philips, including the fact that Philips'
representatives had expressed an interest in acquiring a majority interest in
FEI. The Board then considered the implications of a transaction involving a
transfer of voting control. At the meeting, management provided to the Board an
analysis of developments in the Company's product markets and other industry
information concerning new and potential entrants into the markets as well as
consolidation trends within the semiconductor equipment business. The Board
discussed the unsolicited expression of interest from the other company as well
as other possible alternatives to a transaction involving the PEO Operations.
Following considerable discussion, the Board concluded that a combination with
the PEO Operations offered particular strategic advantages, such as access to
the technology of the PEO Operations and its new product markets.
Between August 4 and August 8, 1996, members of FEI management,
representatives of Needham and FEI's counsel traveled to the headquarters of the
PEO Operations in Eindhoven, The Netherlands, for interviews with the management
of the PEO Operations and to conduct initial due diligence. On August 9, 1996,
PIE submitted to FEI a proposed letter of intent with respect to a combination
of the businesses. FEI management reported on negotiations to the Special
Committee on a frequent basis during this period. At a telephone conference
Board meeting on August 12, 1996, FEI management reported to the Board
concerning the proposed transaction with PIE. At the August 12 meeting, the
Board authorized management to proceed to preparation of a definitive letter of
intent. On August 27 and 28, 1996, the parties and counsel met again in New York
City to negotiate the terms of a letter of intent and to discuss further matters
pertaining to the possible combination of the businesses.
A special meeting of FEI's Board of Directors was held on September 3, 1996
to approve the letter of intent. All members of the Board, except Mr. Edward H.
Cooley, were present. At the meeting, representatives of Needham presented a
financial analysis of the transaction, and copies of the letter of intent, as
negotiated between the parties, were distributed. The Special Committee reported
its recommendation in favor of the transaction. The transaction was unanimously
approved by the Board members
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present at the meeting, subject to review and approval of a definitive
combination agreement. On September 4, 1996, the letter of intent was signed by
the parties and on September 5, 1996 the pending transaction was publicly
disclosed. From then until November 12, 1996, the parties continued and
completed due diligence with respect to one another and negotiated terms and
conditions of the Combination Agreement.
On November 11, 1996, the Special Committee met to review the proposed
combination. The Special Committee reviewed with counsel the current draft of
the Combination Agreement and financial statements for the PEO Operations
prepared in U.S. dollars and in accordance with generally accepted accounting
principles. The Special Committee also met with Needham and reviewed a draft of
its fairness opinion. At the conclusion of the meeting, the Special Committee
voted to recommend to the Board approval of the Combination Agreement.
A special meeting of the Board was held on November 12, 1996 to review the
combination. All members of the Board, except Messrs. Edward H. Cooley and
Gregory J. Houser, were present. At the meeting, the Board reviewed the
financial statements of the PEO Operations together with pro forma combined
financial statements for the two businesses. The Board also reviewed the
Combination Agreement with counsel and met with Needham to review its analysis
and conclusions concerning fairness and to review the Needham fairness opinion.
The transaction and Combination Agreement were unanimously approved by the
directors present, which included a majority of the Company's nonemployee
directors.
RECOMMENDATIONS OF THE BOARD OF DIRECTORS
AND REASONS FOR THE COMBINATION
The Board of Directors of FEI has determined that the Combination Agreement,
the Combination and the Amendment to the Articles are advisable and fair to, and
in the best interests of, FEI and its shareholders and has approved each of the
Combination Proposals. Accordingly, the Board of Directors recommends that
shareholders vote "FOR" approval of each of the Combination Proposals. In
reaching its determination, the Board considered a number of factors, including,
without limitation, the following:
(i) the Company's relationship with Philips' electron optics business
involving joint projects to develop electronics and software integrated into
subassemblies supplied by PEO BV for use in FEI's FIB workstations;
(ii) the Company's potential to improve research and development,
marketing, breadth of product lines, sales volume and distribution through
the synergies of combined management and operations with the PEO Operations;
(iii) the potential to increase the Company's sales in the existing
geographic markets and the life science and materials science markets where
the PEO Operations has significant sales;
(iv) the benefits to FEI, as a majority-owned subsidiary of Philips, of
the rights to use certain intellectual property of Philips;
(v) the added value resulting from the Company's ability to use the
brand name "Philips" with both its existing customer base and the potential
new customer base;
(vi) the financial condition and results of operations of the Company
and the PEO Operations on both historical and prospective bases and of the
combined entity on a pro forma combined basis and current industry, economic
and market conditions as they would be likely to affect the PEO Operations
and the Company after the Combination;
(vii) the recent operating performance of the PEO Operations and the
adverse effect that technical problems related to certain of the PEO
Operations' field emission electron focusing columns and delays related to
meeting certain customer specifications had on the operating results of the
PEO
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Operations and the FEI Board's belief that the Combined Operations could
resolve these technical problems;
(viii) the benefits to the Company of solidifying its relationship with
Philips' electron optics business as its source of supply for certain
components essential to its manufacture of FIB workstations and the lack of
other readily available sources of supply for such components if the Philips
electron optics business were sold to another party;
(ix) the Company's liquidity constraints, the $8 million in cash agreed
by PIE to be included in the assets of PEO Holdings at Closing, and the
potential borrowing capacity that may be provided by the larger asset base
of the Combined Operations;
(x) the difficulty of identifying and entering into a suitable
acquisition or combination agreement with a party other than Philips, given
the relationship between and interdependence of FEI and the Philips electron
optics business;
(xi) the range of values for the PEO Operations derived by Needham from
different methods of financial analyses performed in arriving at its opinion
with respect to the fairness of the Combination from a financial point of
view (extending from a high of $257.0 million to a low of $20.3 million),
and the Board's concurrence with Needham that, because the PEO Operations
had not been run as a stand-alone company, the more appropriate range of
values for the PEO Operations was derived from the discounted cash flow
analysis of the projected performance of the PEO Operations (the range of
values for the PEO Operations derived from a discounted cash flow analysis
were from $124.9 million, or $12.33 per share, to $257.0 million, or $25.37
per share, in both cases based on the Per Share Calculation);
(xii) the written opinion of Needham that the consideration to be paid to
FEI by PIE in the Combination is fair to the Company's shareholders from a
financial point of view (see "Opinion of Financial Advisor"); and
(xiii) the Board's view that the interests of certain executive officers
and directors of the Company in the Combination (see "Interests of Certain
Persons in the Combination") were consistent with the fairness of the
Combination Agreement and Combination to the Company and its shareholders.
Because the proposed combination would cause a transfer of voting control to
a Philips affiliate, in the course of its deliberations the Board considered a
number of factors to determine whether the consideration to be received by FEI
for the shares to be issued to PIE constituted a premium over the current market
value of the Common Stock. The Board considered, among other things, the range
of values for the PEO Operations provided by Needham, in addition to the other,
non-quantitative factors listed in the immediately preceding subparagraphs
(including the value of the rights of majority-owned subsidiaries of Philips to
use certain intellectual property of Philips and the "Philips" brand name and
the access to Philips' broad distribution channels). The FEI Board determined
that the consideration to be received by FEI for the shares to be issued to PIE
constituted a premium over the current market value of the Common Stock.
The FEI Board did not believe it was necessary for Needham to provide a
specific value for the PEO Operations because the Board recognized the
difficulty in determining a specific value for a privately held company that has
not been operated historically on a stand-alone basis. The Board believed the
detailed quantitative information on ranges of values provided by Needham to be
informative and appropriate, and it also considered all of the non-quantitative
information described above to be important in addition to valuation information
about the PEO Operations. The FEI Board did not perform an independent valuation
of the PEO Operations and, as to the range of appropriate values of the PEO
Operations, relied on the financial analyses performed by Needham. Because of
Needham's experience as a financial advisor in mergers and acquisitions, as well
as its familiarity with companies that manufacture products that
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manipulate ions, electrons or laser beams for applications in the electronics
industry, the FEI Board believed such reliance was reasonable.
The Board also considered a number of risk factors relating to the
Combination, including risks relating to: (i) the integration of the business
and management of FEI and the PEO Operations; (ii) risks and complexities
relating to substantial international operations, including risks relating to
foreign currency exchange and foreign taxation; (iii) dilution risk; (iv) the
likelihood of future variable operating results of the Combined Operations; (v)
dependence of the Combined Operations on the semiconductor manufacturing
industry and the cyclical nature of that industry; (vi) competition in the FIB
workstation and electron microscope markets; and (vii) need for additional
working capital by the Combined Operations. See "Risk Factors."
The foregoing discussion of the information and factors discussed by the FEI
Board of Directors is not meant to be exhaustive but includes material factors
considered by the Board. The Board did not quantify or attach any particular
weight to the various factors that it considered in reaching its determination
that approval and adoption of the Combination Agreement is in the best interests
of the shareholders.
OPINION OF FINANCIAL ADVISOR
FEI retained Needham to act as exclusive financial advisor to FEI in
connection with the proposed transaction with PIE. In connection with this
engagement, FEI requested Needham to render an opinion as to whether the
consideration to be paid by PIE to FEI in the Combination is fair to the
shareholders of FEI from a financial point of view. Needham was not requested
to, and did not, make any recommendation to the FEI Board of Directors as to the
specific value of the PEO Operations. The amount of consideration to be paid in
the Combination was determined through negotiations between FEI management and
Philips and PIE management.
Based upon the 7,956,933 shares of Common Stock of the Company outstanding
on the date of the Proxy Statement, 9,725,141 shares of Common Stock will be
issued to PIE at Closing and 1,580,492 shares are potentially issuable as
Additional Shares. Assuming that all Additional Shares are issued to PIE, and
based on the closing price of the Common Stock of $11.75 on November 12, 1996,
the date on which the FEI Board of Directors considered and approved the
Combination Agreement, the aggregate market value of the maximum number of
shares issuable to PIE pursuant to the Combination Agreement is approximately
$133 million ($155 million on January 27, 1997, at the closing price on that
date of $13.75).
At a meeting of the FEI Board of Directors on November 12, 1996, Needham
delivered its oral opinion that, as of such date and based upon the matters
described therein, the consideration to be paid by PIE to FEI in the Combination
is fair to the shareholders of FEI from a financial point of view. Needham's
oral opinion was subsequently confirmed by a written opinion as of the same
date; no material differences exist between Needham's oral and written opinions.
Needham was not requested to and will not deliver an updated opinion as of any
date subsequent to November 12, 1996. NEEDHAM'S OPINION IS DIRECTED ONLY TO THE
FINANCIAL TERMS OF THE COMBINATION AGREEMENT AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY SHAREHOLDER OF FEI AS TO HOW SUCH SHAREHOLDER SHOULD VOTE
AT THE SPECIAL MEETING.
Needham is not expressing any opinion as to the price at which the Common
Stock will trade subsequent to the Combination. The complete text of the
November 12, 1996 opinion (the "Needham Opinion"), which sets forth the
assumptions made, matters considered and limitations on the review undertaken by
Needham, is attached to this Proxy Statement as APPENDIX C, and the summary of
the Needham Opinion set forth in this Proxy Statement is qualified in its
entirety by reference to the Needham Opinion. FEI SHAREHOLDERS ARE URGED TO READ
THE NEEDHAM OPINION CAREFULLY AND IN ITS ENTIRETY FOR A DESCRIPTION OF THE
PROCEDURES FOLLOWED, THE FACTORS CONSIDERED AND THE ASSUMPTIONS MADE BY NEEDHAM.
In arriving at its opinion, Needham, among other things, (i) reviewed the
most current draft of the Combination Agreement; (ii) reviewed certain other
documents relating to the Combination; (iii) reviewed
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certain publicly available information concerning the PEO Operations and FEI and
certain other relevant financial and operating data of the PEO Operations and
FEI made available from the internal records of the PEO Operations and FEI; (iv)
visited certain of the PEO Operations' and FEI's facilities; (v) held
discussions with members of senior management of the PEO Operations and FEI
concerning their current and future business prospects; (vi) reviewed certain
financial forecasts and projections prepared by the respective managements of
the PEO Operations and FEI; (vii) compared certain publicly available financial
data of companies whose securities are publicly traded, which Needham deemed
generally comparable to the business of the PEO Operations, to similar data for
the PEO Operations; (viii) reviewed the financial terms of certain other
business combinations that Needham deemed generally relevant; and (ix) performed
and/or considered such other studies, analyses, inquiries and investigations as
Needham deemed appropriate. Needham assumed and relied upon, without independent
verification, the accuracy and completeness of the information it reviewed for
purposes of its opinion. With respect to the PEO Operations' and FEI's financial
forecasts provided to Needham by their respective managements, Needham assumed
that such forecasts have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of such managements, at the time of
preparation, of the separate future operating and financial performances of the
PEO Operations and FEI, respectively. Needham did not assume any responsibility
for or make or obtain any independent evaluation, appraisal or physical
inspection of the assets or liabilities of FEI or the PEO Operations. The
Needham Opinion states that it is based on economic, monetary and market
conditions existing as of the date of such opinion.
Based on this information, Needham performed a variety of financial analyses
of the Combination and the consideration to be paid by PIE. The following
paragraphs summarize the significant quantitative and qualitative analyses
performed by Needham in arriving at its opinion presented to the FEI Board of
Directors.
CONTRIBUTION ANALYSIS. Needham reviewed and analyzed the pro forma
contribution of each of the PEO Operations and FEI to pro forma combined
operating and financial information as of and for the twelve months ended
September 30, 1996 ("LTM") and for projected 1996 and 1997 operating results.
Needham reviewed, among other things, the pro forma contributions to revenues,
net income, assets and shareholders' equity. The analysis was prepared on the
same basis as the pro forma financial statements included elsewhere in this
Proxy Statement, but without the pro forma adjustments set forth herein. Based
on this analysis, the PEO Operations contributed 70.9% of the LTM pro forma
combined revenues, 24.7% of the LTM pro forma combined net income, 57.6% of the
pro forma combined assets as of September 30, 1996 and 50.6% of the pro forma
combined shareholders' equity as of September 30, 1996; 71.8% of projected 1996
pro forma combined revenues and 61.3% of projected 1996 pro forma combined net
income; and 67.0% of projected 1997 pro forma combined revenues and 52.2% of
projected 1997 pro forma combined net income. Based on the Combination
Agreement, PIE will own 55% of FEI after the Combination. The results of the
contribution analysis are not necessarily indicative of the contributions that
the respective businesses may make in the future.
COMPARABLE COMPANY ANALYSIS. Needham compared selected historical and
projected operating and financial ratios of the PEO Operations to the
corresponding data and ratios of certain publicly traded semiconductor capital
equipment companies which it deemed generally comparable to the PEO Operations.
Such data and ratios included total market capitalization to historical and
projected revenue, price per share to historical and projected earnings per
share and market value to historical book value.
Companies that manufacture products that manipulate ions, electrons or laser
beams for applications in the electronics industry that were deemed to be
generally comparable to the PEO Operations included Etec Systems, Inc., FEI,
Micrion Corporation, Opal, Inc., Veeco Instruments, Inc. and Zygo Corporation.
For these companies, the multiples of total market capitalization to LTM
revenues ranged from 3.5 to 0.6 with a mean of 1.9 and a median of 1.8; the LTM
price-earnings multiples ranged from 38.6 to 7.4 with a mean of 22.5 and a
median of 23.6; and the multiples of market value to historical book value
ranged
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from 4.9 to 1.3 with a mean of 2.6 and a median of 2.2. The multiples of total
market capitalization to projected 1996 revenues ranged from 3.2 to 0.6 with a
mean of 1.7 and a median of 1.6; the projected 1996 price-earnings multiples
ranged from 58.0 to 6.9 with a mean of 22.4 and a median of 18.8; the multiples
of total market capitalization to projected 1997 revenues ranged from 2.2 to 0.5
with a mean of 1.3 and a median of 1.1; and the projected 1997 price-earnings
multiples ranged from 18.8 to 7.5 with a mean of 13.2 and a median of 13.6.
Applying the applicable revenues, earnings and book value of the PEO Operations
to the applicable median multiples for the comparable companies yielded the
following implied values for the PEO Operations: $188.0 million based on
projected 1996 revenues, $159.1 million based on projected 1997 revenues, $52.6
million based on projected 1996 earnings, $92.5 million based on projected 1997
earnings and $90.4 million based upon historical book value. Needham placed
relatively less emphasis on the portion of the analysis with respect to
historical earnings and book value multiples because of the expected changes in
the cost structures and synergies anticipated by FEI management to be achieved
by the Combined Operations and because the PEO Operations have not been run as a
standalone company.
COMPARABLE TRANSACTION ANALYSIS. Needham also analyzed publicly available
financial information for 21 selected mergers and acquisitions of companies in
the electronics industry. In examining these transactions, Needham analyzed
certain income statement and balance sheet parameters of the acquired companies
relative to the consideration offered, such as one-day, one-week and four-week
premiums of the consideration offered to the target's stock price; aggregate
transaction value as a multiple of LTM revenues, earnings before interest and
taxes ("EBIT") and multiples of market value to LTM net income and historical
book value. In certain cases complete financial data was not publicly available
for these transactions and only partial information was used in such instances.
Proposed and completed technology transactions analyzed by Needham included:
Eldec Corporation / Crane Company; Sunward Technologies, Incorporated /
Read-Rite Corporation; ElectroCom Automation Incorporated / AEG AG (Daimler-Benz
AG); Xyplex, Incorporated / Raytheon Company; Anthem Electronics, Incorporated /
Arrow Electronics, Incorporated; Triconex Corporation / Siebe PLC; Pyramid
Technology Corporation / Siemens Nixdorf Information Systems, Incorporated;
M/A-Com, Incorporated / AMP Incorporated; Pulse Engineering, Incorporated /
Technitrol, Incorporated; Moorco International, Inc. / FMC Corporation; Best
Power Technology, Incorporated / General Signal Corporation; Advance Circuits,
Incorporated / Johnson Matthey PLC; Megatest Corporation / Teradyne,
Incorporated; Xylogics, Incorporated / Bay Networks, Incorporated; Convex
Computer Corporation / Hewlett-Packard Company; Maxtor Corporation / Hyundai
Electronics Industries Company, Ltd.; Andros, Incorporated / Genstar Capital
Partners II LP; C.I.S. Technologies, Incorporated / National Data Corporation;
NetStar Incorporated / Ascend Communications, Incorporated; Orbit Semiconductor,
Inc. / The DII Group, Inc.; Brooktree Corporation / Rockwell International
Corporation; and Interpoint Corporation / Crane Company. For these transactions,
the multiples of transaction value to LTM sales ranged from 5.1 to 0.3 with a
mean of 1.5 and a median of 1.2 and the LTM EBIT multiples ranged from 59.4 to
4.7 with a mean of 22.3 and a median of 18.0. The multiples of market value to
LTM net income ranged from 67.7 to 7.0 with a mean of 27.7 and a median of 22.5;
and the multiples of market value to book value ranged from 11.8 to 1.1 with a
mean of 3.2 and a median of 2.7. Applying the median acquisition multiples of
LTM sales, LTM EBIT, LTM net income and book value to such data for the PEO
Operations yielded implied values of $134.9 million, $30.6 million, $20.3
million and $111.0 million, respectively. Based upon the number of shares of
Common Stock outstanding as of September 30, 1996, and the closing stock price
of $10.25 per share on the day prior to the public announcement of the
Combination, and assuming that no Additional Shares would be issued, Needham
derived a multiple of transaction value to LTM sales of 0.9, a LTM EBIT multiple
of 57.5, a multiple of market value to LTM net income of 117.1, and a multiple
of market value to book value of 2.4.
For the comparable transactions, the premiums/discounts paid by the acquirer
based on the target's stock price one day prior to the announcement of the
transaction ranged from 189.0% to -64.9% with a mean of 41.9% and a median of
40.8%; the premiums/discounts based on the target's stock price one week
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prior to the announcement ranged from 209.9% to -82.3% with a mean of 45.6% and
a median of 36.4%; and the premiums/discounts based on the target's stock price
four weeks prior to the announcement ranged from 209.9% to -83.7% with a mean of
51.2% and a median of 48.3%.
Needham applied such premiums/discounts to FEI's stock prices for the
applicable time periods prior to announcement of the Combination, which resulted
in a range of FEI per share prices of $29.62 to $3.60 with a mean of $14.54 and
a median of $14.43 based on FEI's stock price one day prior to the announcement,
a range of $30.22 to $1.73 with a mean of $14.20 and a median of $13.30 based on
FEI's stock price one week prior to the announcement, and a range of $33.31 to
$1.75 with a mean of $16.26 and a median of $15.94 based on FEI's stock price
four weeks prior to the announcement. Needham compared such results to the range
of per share values for the PEO Operations derived using the values from the
discounted cash flow analysis described below. These per share values, which
were based upon the weighted average number of FEI shares outstanding calculated
using the closing price of the FEI Common Stock on November 11, 1996, ranged
from $12.33 to $25.37.
DISCOUNTED CASH FLOW ANALYSIS. Needham analyzed the PEO Operations and FEI
based on an unleveraged discounted cash flow analysis of the projected
performance of the PEO Operations and FEI. Needham used five-year projected
financial statements for the PEO Operations and FEI provided by the respective
managements of the PEO Operations and FEI. The discounted cash flow analysis
determined the unleveraged after-tax cash flows generated over the five-year
period and then added a terminal value based upon a range of net income
multiples from 12.5x to 17.5x, which were determined based on the trading levels
of shares of companies involved in manipulating ion, electron or laser beams for
applications in the electronics industry. The unleveraged after-tax cash flows
and terminal value were discounted using a range of discount rates from 20.0% to
30.0%, which Needham deemed were appropriate risk-adjusted costs of capital for
companies deemed generally comparable in the electronics industry. This analysis
resulted in a range of discounted cash flow values for the PEO Operations from
$124.9 million to $257.0 million and a range of discounted cash flow values for
FEI from $92.6 million to $177.4 million. Needham advised the Board that because
the PEO Operations had not been run as a stand-alone company, the more
appropriate range of values for the PEO Operations was derived from this
discounted cash flow analysis of the projected performance of the PEO
Operations.
No company or transaction used in any comparable analysis as a comparison is
identical to the PEO Operations, FEI or the Combination. Accordingly, these
analyses were not simply mathematical; rather, they involved complex
considerations and judgments concerning similarities and differences in the
financial and operating characteristics of the comparable companies and other
factors that could affect the public trading value of the comparable companies
and transactions to which they were being compared.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analysis and
the application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. Needham
believes that its analyses must be considered as a whole and that considering
any portions of such analyses and of the factors considered, without considering
all analyses and factors, could create a misleading or incomplete view of the
process underlying its opinion. In its analyses, Needham made numerous
assumptions with respect to industry performance, general business and economic
and other matters, many of which are beyond the control of Philips, PIE, the PEO
Operations or FEI. Any estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable as set forth therein. Additionally,
analyses relating to the values of businesses or assets do not purport to be
appraisals or necessarily reflect the prices at which businesses or assets may
actually be sold.
Pursuant to the terms of the engagement letter between Needham and FEI, FEI
has agreed to pay Needham an advisory fee of $350,000 and an additional fee for
rendering the Needham Opinion of $250,000. Needham will receive an additional
fee of 1.25% of the aggregate purchase price paid by FEI,
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against which the $350,000 advisory fee would be credited. The "aggregate
purchase price paid" means an amount equal to the sum of the aggregate fair
market value of the shares of Common Stock of FEI to be issued to PIE pursuant
to the Combination, plus any indebtedness assumed by FEI in the Combination. The
aggregate fair market value of the shares of Common Stock of FEI will be the
value determined by the Company and Needham upon Closing. Based on a closing
price of $13.75 on January 27, 1997, and assuming that no Additional Shares are
issued and that no indebtedness of the PEO Operations will be assumed by FEI in
the Combination, Needham will receive a fee of approximately $1,671,509, against
which the $350,000 advisory fee would be credited. FEI has also agreed to
reimburse Needham for certain of its reasonable out-of-pocket expenses and to
indemnify it against certain liabilities relating to or arising out of services
performed by Needham as financial advisor to FEI.
Needham is a nationally recognized investment banking firm. As part of its
investment banking services, Needham is frequently engaged in the evaluation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and other purposes. Needham was retained by the FEI Board of
Directors to act as FEI's financial advisor in connection with the Combination
based on Needham's experience as a financial advisor in mergers and
acquisitions, as well as Needham's familiarity with companies that manufacture
products that manipulate ions, electrons or laser beams for applications in the
electronics industry. In the normal course of its business, Needham may actively
trade the equity securities of FEI for its own account or for the account of its
customers and, therefore, may at any time hold a long or short position in such
securities.
THE COMBINATION AGREEMENT
The following is a summary of the material terms of the Combination
Agreement, a copy of which is attached hereto as APPENDIX A and incorporated by
reference herein. All references to and summaries of the Combination Agreement
in this Proxy Statement are qualified in their entirety by reference to the
Combination Agreement. Shareholders are urged to read the Combination Agreement
carefully and in its entirety.
STRUCTURE OF THE COMBINATION. Pursuant to the Combination Agreement and
subject to satisfaction of the conditions set forth therein, the following
transactions will occur at or prior to Closing. PIE will consolidate or cause to
be consolidated all of the assets and liabilities of the PEO Operations into two
newly formed, wholly owned subsidiaries of PIE: Philips Electron Optics
International B.V., a Netherlands corporation, ("PEO Holdings") and Philips
Electron Optics, Inc., a Delaware corporation ("PEO-US"). PIE will transfer the
following assets to the Company: (i) all of the outstanding shares of PEO
Holdings and (ii) all of the outstanding shares of PEO-US. As a result of these
transfers, PEO Holdings and PEO-US will become wholly owned subsidiaries of the
Company.
The Company will transfer to PIE such number of newly issued shares of its
Common Stock as will constitute 55% of the shares of Common Stock then
outstanding, so that the Company will become a majority-owned subsidiary of PIE.
The Company also agrees to issue to PIE, from time to time, that number of
additional shares of Common Stock necessary to maintain PIE's ownership
percentage (without regard to other possible share transactions) at not less
than 55% after exercise of options and warrants to purchase Common Stock, if
those options and warrants were outstanding, or issuable without further action
by the Company's Board of Directors, on the date of Closing.
If the net operating capital (as defined in the Combination Agreement) of
the PEO Operations as of Closing exceeds NLG 78.1 million (approximately $42.3
million based on the Dollar/Guilder Exchange Rate), PEO Holdings will deliver to
PIE one or two promissory notes in an aggregate principal amount equal to the
amount of such excess, but not exceeding NLG 3.0 million each (NLG 6.0 million
in the aggregate, or approximately $3.3 million based on the Dollar/Guilder
Exchange Rate). The first such note will bear interest at 7 3/8% per annum, and
the second note will bear interest at the rate of 4% per annum,
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each payable monthly in arrears. The promissory note or notes will be due and
payable on the first anniversary of the Closing Date.
RIGHT OF PIE TO MAINTAIN PERCENTAGE INTEREST. The Combination Agreement
grants PIE, as long as Philips, directly or indirectly, owns 40% or more of the
outstanding voting securities of the Company, the right to buy from the Company,
at the then-market price, additional voting securities of the Company at the
time of issuances of voting securities of FEI to third parties and in amounts
needed for PIE to maintain its proportionate ownership of up to 55% of the
Company's voting securities, as reduced by the net percentage of voting
securities of FEI sold by PIE at any time.
EXCLUDED BUSINESS. The assets and liabilities of the Philips electron
optics business not included in the PEO Operations to be transferred pursuant to
the Combination Agreement are (i) the sales and service organizations related to
the Philips electron optics business in approximately 25 countries other than
the U.S., Canada, Germany, France, Italy, Japan, The Netherlands and the United
Kingdom, (ii) the real estate and improvements used in the principal
manufacturing and administrative facility of the Philips electron optics
business in Eindhoven, The Netherlands (the "Eindhoven Facility"), which will be
leased to FEI by PIE or, as appropriate, one of PIE's affiliates or a third
party lessor for a term of ten years (see "Real Property Lease"), and (iii)
certain other assets and liabilities, including specified potential recoveries
and exposure to litigation, not pertaining directly to the ongoing conduct of
Philips' electron optics business. The sales and service organizations in the
various countries in which Philips conducts its electron optics business, other
than those listed above, in the aggregate contributed net sales of $8.0 million
(11.3%) of the total net sales for the nine month period ended September 30,
1996 for such business. Because the volume of sales by the sales and service
organizations of the Excluded Business is currently considered insufficient to
warrant the maintenance of independent electron optics sales and service
organizations in the relevant countries, these organizations will not be
included in the PEO Operations being transferred, but will instead provide sales
and service support to the Combined Operations pursuant to service and
distribution agreements. See "The Combination Agreement--Other Related
Agreements." The Eindhoven Facility had a book value of approximately $8.5
million at September 30, 1996. To reduce transaction costs and in consideration
of PIE's agreement that PEO Holdings will have $8 million in cash at Closing,
which will provide additional liquidity, the parties agreed to exclude the
Eindhoven Facility from the PEO Operations to be transferred and to enter into a
lease for that facility. See "Real Property Lease" and "Conditions to Closing of
the Combination."
SECONDARY OFFERING. Pursuant to the Combination Agreement, FEI and PIE
agree to cooperate in the sale to third parties, within six months following
Closing, of up to 1 million shares of Common Stock by certain shareholders of
the Company. If, on the basis of information from or presentations by the
selling shareholders, the Board of Directors of FEI is satisfied that
registration under the Securities Act of 1933, as amended (the "Securities
Act"), is necessary or will meaningfully improve the marketability of the shares
to be sold, FEI will use all reasonable efforts to effect such registration in a
timely manner. In connection with any such secondary offering, the selling
shareholders will pay their respective counsel fees and expenses and all
underwriting commissions and discounts, and the selling shareholders shall not
request any form of indemnification from FEI, PIE, Philips or any of its
affiliates. See "Interests of Certain Persons in the Combination--Secondary
Offering by Selling Shareholders."
REAL PROPERTY LEASE. Prior to Closing, FEI and PIE or, as appropriate, one
of PIE's affiliates or a third party lessor, will enter into a 10-year lease
agreement for the Eindhoven Facility (the "Lease Agreement"), on terms
substantially equivalent to those reflected in the general conditions of the
model lease agreement issued by the Council of Real Property of the real estate
brokers association of The Netherlands, or any other form agreed to by FEI. The
annual rent for the Eindhoven Facility under the Lease Agreement will be the
fair rental value as determined in accordance with the appraised value of the
Eindhoven Facility, except that for the first year the annual rent will be
$850,000.
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INTELLECTUAL PROPERTY. The PEO Operations will have the rights to all
know-how generated within the PEO Operations, subject to the right of Philips
and its affiliates to continue to use all such know-how for their purposes.
Philips will grant royalty-free, nonexclusive and nontransferable licenses to
FEI (a) to make, have made, use, sell, or otherwise dispose of any products
within the scope of FEI's business or the business of the PEO Operations on the
date of Closing under know-how utilized within the PEO Operations but generated
elsewhere within Philips or its affiliates; (b) for the use of software used by
the PEO Operations itself or as a product to be distributed, owned or co-owned
by Philips or its affiliates; and (c) for as long as Philips shall own, directly
or indirectly, a majority of the voting securities of FEI, of patents and patent
applications owned or controlled by Philips. All such transfers and grants by
Philips are subject to prior commitments, which Philips has represented are not
material with respect to the current PEO Operations, except as otherwise
previously disclosed to FEI.
FEI will grant to Philips a royalty-free and nonexclusive right and license
under its patents outside the scope of FEI's business, with the right for
Philips to sublicense within the context of its broad-scope cross-license
agreements, without field of use restrictions.
As long as it remains a majority controlled affiliate of Philips, following
the Combination FEI will participate in broad-scope cross-licenses of patents
between Philips and other large manufacturers in the electronics industry
worldwide and will make FEI's patents and patent applications subject to
existing cross-licensing, pooling and other patent-sharing or licensing
arrangements of Philips, which by their terms apply to FEI.
In the event Philips ceases to own, directly or indirectly, a majority of
the voting securities of FEI, the Combination Agreement provides for a transfer
to FEI, subject to prior commitments, of certain patents and patent applications
originating from and having their principal commercial use in the PEO Operations
(currently approximately 25 patents and patent applications). This transfer will
be subject to prior commitments, ordinary patent and patent application
management (which may include withdrawal, cancellation or modification of
patents and patent applications) and to Philips retaining a free right and
license thereunder in fields outside the scope of the business of FEI and the
PEO Operations. The Combination Agreement provides that Philips shall not make
any commitments or take any other action that would prevent it from effecting
such transfers.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Combination Agreement
contains representations and warranties of the Company for itself and its
subsidiaries regarding organization, good standing and qualification to conduct
business and own, lease and operate properties; the authority of the Company to
enter into the Combination Agreement, subject to shareholder approval and the
receipt by the Company of a fairness opinion of Needham; the making of all
governmental filings needed by the Company to complete the Combination; the
absence of material conflict between the transactions contemplated by the
Combination Agreement and the Company's organizational documents and other
agreements, documents and permits; the capitalization of the Company and its
subsidiaries; the accuracy of the Company's filings with the SEC and the
financial statements included therein; the existence of and compliance with
applicable law of the Company's employee compensation and benefit plans and the
Company's liabilities thereunder; the Company's conduct of business in the
ordinary course and the absence of certain material adverse changes in its
financial condition, properties, prospects, business or results of operations
since December 31, 1995; the absence of dividend payments, capital distributions
or changes in accounting principles, practices or methods by the Company since
December 31, 1995; the absence of undisclosed material liabilities and
litigation pending or threatened against or affecting the Company; compliance of
the Company's business with applicable law and the absence of governmental
investigations; the absence of environmental liabilities and claims on
properties operated by or for the Company; the absence of collective bargaining
agreements; the absence of any claims asserting that the Company has committed
any unfair labor practices or has had organized labor disputes involving the
Company during the last five years; the current insured status and insurability
of the Company's assets; the inapplicability of antitakeover and business
combination statutes to the Combination; the accurate
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reporting and payment of, making of reserves for and liability for, taxes; the
scope, validity and absence of infringement of the Company's intellectual
property rights; the existence and validity of, and absence of defaults with
respect to, the Company's material contracts; the absence of finders' and
brokers' fees due with respect to the Combination; the Company's lack of
knowledge of any customer or supplier who would cease doing business with the
Company after the Combination; the agreements of certain shareholders of the
Company to vote their shares of Common Stock to approve the Combination
Proposals; the lack of need of the Company for any industrial security clearance
to perform existing U.S. government contracts and the accuracy of information
given by the Company to Philips in and pursuant to the Combination Agreement.
REPRESENTATIONS AND WARRANTIES OF PHILIPS AND PIE. The Combination
Agreement also includes representations and warranties by PIE and, to the extent
provided therein, by Philips, regarding the organization, good standing and
authority to conduct business and own, lease and operate properties of PIE and
its affiliates involved in the Combination; Philips' and PIE's authority to
enter into the Combination Agreement and complete the Combination; the making of
all governmental filings needed by Philips and PIE to complete the Combination;
the absence of any breach, violation or default under the organizational
documents, contracts or permits of PIE, PEO Holdings and PEO-US caused by the
transactions contemplated by the Combination Agreement; the capitalization of
PEO Holdings and PEO-US and PIE's ownership at Closing of all of the outstanding
stock of each; the fair presentation of information contained in the audited
financial statements of the PEO Operations; the existence and compliance with
law of, and liabilities under, employee compensation and benefit plans covering
employees of the PEO Operations; the conduct of the PEO Operations in the
ordinary course and the absence of material adverse changes in such business
since December 31, 1995; the absence of undisclosed material liabilities of and
pending or threatened litigation against the PEO Operations or PEO Holdings,
PEO-US or their subsidiaries; material compliance of the PEO Operations with
applicable law; the absence of material environmental liabilities of or claims
against Philips or any of its affiliates arising from the PEO Operations; the
accurate disclosure of material collective bargaining agreements to which the
PEO Operations are subject and the absence of any claims asserting that the PEO
Operations has committed any unfair labor practices or has had any organized
labor disputes involving the PEO Operations during the last five years; the
current insured status of the assets used in the PEO Operations; the absence of
any antitakeover statute applicable to PEO Holdings or PEO-US as a result of the
Combination; the accurate reporting of, or making of adequate reserves for any
liability for taxes; the existence, validity and noninfringement of the
intellectual property rights used in the PEO Operations; the existence and
validity of, and absence of material defaults with respect to, material
contracts related to the PEO Operations; the absence of finders' fees and
brokers' fees due with respect to the Combination; PIE's lack of knowledge of
any customer or supplier that would cease doing business with PEO Holdings,
PEO-US or their subsidiaries after the Combination; the title of PEO Holdings,
PEO-US and their subsidiaries to the assets and liabilities of the PEO
Operations at Closing; the facilities shared by the PEO Operations and other
operations of Philips' affiliates; the validity and accurate disclosure of good
title or a leasehold interest of Philips or its affiliates in real property used
in the PEO Operations and the suitability, in terms of zoning, of such real
property for that use; the physical condition and suitability for use of
tangible personal property on such real property; PIE's intent to acquire the
PIE Shares solely for its own account and not with a view to their further
distribution within the meaning of Section 2(11) of the Securities Act; the
absence of any requirement for the PEO Operations to obtain industrial security
clearance to perform existing U.S. government contracts; and the absence of any
false or misleading information given by or on behalf of PIE to the Company
pursuant to the Combination Agreement.
CONDUCT OF THE BUSINESS PENDING THE COMBINATION. Between the signing of the
Combination Agreement and Closing, each of the Company, as to itself and its
subsidiaries, and PIE, as to PEO Holdings, PEO-US and their subsidiaries, agrees
that, except as expressly contemplated by the Combination Agreement or the
process by which PIE transfers the assets and liabilities of the PEO Operations
to PEO Holdings, PEO-US or their subsidiaries, or as consented to in writing by
the other, it will (i) carry on its
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business in the ordinary and usual course and use its best efforts to preserve
its business organization, relationships with third parties and goodwill; (ii)
not issue, sell, pledge, dispose of or encumber any of the capital stock of its
subsidiaries that it owns; (iii) not amend its organizational documents or
split, recombine or reclassify its capital stock, declare or pay any dividends
or distributions other than intracompany dividends or redeem or repurchase any
shares of its capital stock or securities convertible or exchangeable into such
shares; (iv) not sell, issue, pledge, dispose of or encumber any shares of or
securities convertible into or exchangeable for any shares of capital stock or
any debt securities carrying voting rights or convertible into such securities;
(v) not transfer, lease, license, guarantee, sell, mortgage, pledge, dispose of
or encumber any other property or assets except in the ordinary course of
business or incur or modify any material indebtedness or any other liability;
(vi) not make or authorize any significant capital expenditures or any
significant investment in another entity out of the ordinary course of business
except as disclosed to the other party; (vii) not enter into any joint venture,
merger or similar agreement; (viii) not change any employee's compensation
except in the ordinary course of business consistent with past practice or any
employee benefit plans or grant any new awards thereunder except in the ordinary
course of business; (ix) not settle or compromise any material claims or
litigation or, except in the ordinary course of business, modify or terminate
any material contracts or waive, release or assign any material rights or
claims; and (x) not make any tax election or allow the cancellation or
termination of any of their insurance policies except in the ordinary course of
business. FEI also agrees that except for grants of options, consistent with its
past practice, pursuant to any stock option plan to purchase no greater than
5,000 shares of Common Stock, it will not establish, adopt, enter into or make
any new grants or awards under or otherwise modify any benefit plans.
The Combination Agreement also provides that PIE shall provide to FEI all
material information required by law to be included in this Proxy Statement that
cannot reasonably be provided by FEI or its subsidiaries because such
information is exclusively within the control and knowledge of PIE or its
affiliates. PIE also agrees to supply such additional information up until the
date of the Special Meeting as is necessary such that the information provided
by PIE and included in this Proxy Statement will not contain any untrue
statement of material fact or omit to state any material fact required to be
stated herein or necessary to make the statements herein not misleading. The
Board of Directors of the Company agrees to call the Special Meeting to consider
the Combination Proposals and to recommend approval by the shareholders. The
Company agrees to take all action needed to comply with federal and state
securities laws and Nasdaq rules in connection with this Proxy Statement, the
Special Meeting and the Combination and to list the PIE Shares for quotation on
the Nasdaq National Market.
Each of PIE and the Company further agrees, in the Combination Agreement, to
use reasonable efforts to consummate the Combination; to give the other and its
representatives access to its properties, books, contracts and records (subject
to confidentiality agreements) as requested, to further investigate the
suitability of the Combination; to give the other all information concerning
itself and its affiliates that is reasonably necessary or advisable in
connection with any governmental filing needed for the Combination; to keep the
other apprised of the status of actions taken to consummate the Combination; and
to consult with the other on any public announcements regarding the Combination.
NO SOLICITATION. Pursuant to the Combination Agreement, each of PIE and the
Company has agreed that it and its affiliates and their respective officers and
directors shall not, and will use best efforts to cause their employees, agents
and representatives not to, initiate, solicit, encourage or otherwise facilitate
any inquiries or the making of any proposal or offer that constitutes, or may
reasonably be expected to lead to, any competing offer of an "Acquisition
Proposal," as defined below, or negotiate with any person or entity or give any
person or entity any confidential information in furtherance of such inquiries
or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal, except in certain limited circumstances. These
circumstances allow the Company to comply with SEC rules by which it must notify
the shareholders of its recommendation with regard to a tender offer, and to the
extent required so that the Board may, in its good faith judgment after
consultation with legal counsel, comply with its fiduciary
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duties to shareholders under applicable law and provide requested information
pursuant to a confidentiality agreement to, or negotiate with, a third party
making an unsolicited Acquisition Proposal or recommend an Acquisition Proposal
to the shareholders. The Combination Agreement contains similar exceptions to
PIE's agreement not to solicit competing offers for the assets of the PEO
Operations. An "Acquisition Proposal" means a proposal or offer with respect to
a merger, reorganization, share exchange, consolidation or similar transaction
involving, or any purchase of all or any significant portion of the assets or
any equity securities of PIE, the Company or any of their respective
subsidiaries that are the subject of the Combination Agreement.
OTHER RELATED AGREEMENTS. The Combination Agreement provides that each
entity within the PEO Operations will enter into a services agreement with a
local affiliate of Philips (the "Services Agreements") for the provision of
services to the PEO Operations in each country where the Philips electron optics
business is being transferred to FEI (the "Nonexcluded Countries"). Philips
Electron Optics B.V. ("PEO BV") will also enter into distribution agreements
(the "Distribution Agreements") for the provision of distribution services to
the PEO Operations in the countries (the "Excluded Countries") where the local
Philips electron optics business is a part of the Excluded Business.
SERVICES AGREEMENTS. The Services Agreements govern the provision by
Philips and its affiliates of services to the PEO Operations to enable the
uninterrupted continuation of the PEO Operations after Closing as well as an
orderly combination of the PEO Operations with FEI. Under the Services
Agreements, the affiliates of Philips in the Nonexcluded Countries will
continue to provide the same types of services to the PEO Operations after
the date of Closing as they provided prior to such date, to the extent such
services are deemed necessary and reasonable by the management of the
Combined Operations. Such services may include, among others, finance and
accounting, information technology, payroll, human resources, traffic and
warehouse, automotive leases and office services. While the term of each
Services Agreement is from Closing until December 31, 1998, provision is
made for earlier termination of the provision of certain services on three
months' notice. The prices of the services to be provided pursuant to the
Services Agreements will be based upon the costs incurred with respect to
such services by the affiliate of Philips providing such services. Such
costs are to be allocated consistently with budgeting and accounting
practices of the Philips group. The terms of the form of Services Agreement
have been negotiated between the parties at arm's length, and the Company
considers these terms to be not less fair to the Company than they might be
if negotiated with other unaffiliated parties. Individual Services
Agreements have not yet been executed by PEO-US or the subsidiaries of PEO
Holdings, but in each case the PEO Operations entity will be entitled to
contract with third parties for certain services otherwise covered by the
Services Agreement if the entity does not believe the terms offered by the
relevant Philips affiliate are fair.
DISTRIBUTION AGREEMENTS. Under the Distribution Agreements, PEO BV will
appoint the respective affiliate of Philips in each of the Excluded
Countries as its exclusive distributor or sales agent (the "Distributors")
with the exclusive right to sell and distribute, or cause the PEO Operations
to sell and distribute, the products of the PEO Operations in their
designated geographic areas. Reciprocally, the Distributors will each
exclusively represent the PEO Operations in such geographic areas. The
Distribution Agreements will be effective upon Closing for a term of three
years, automatically renewable for subsequent one-year terms unless
terminated by the Distributor as of a renewal date upon 180 days' prior
notice. PEO BV may terminate a Distribution Agreement at any time upon 180
days' notice. If any Distribution Agreement is terminated by PEO BV and the
Distributor is not in material breach of the Distribution Agreement, PEO BV
shall acquire the part of the Distributor's business that is principally
used in connection with the distribution of products covered by the
Distribution Agreement at a price to be agreed upon reflecting the fair
market value of the business, and PEO BV shall either (i) provide continuing
employment in comparable positions for all of the Distributor's employees
who were engaged for at least 50% of their time in the sale or servicing of
such covered products, or (ii) compensate the Distributor for all costs and
expenses, including any
34
<PAGE>
payments required to be made upon termination of any such employees,
incurred in connection with either the termination or transfer of such
employees. The Distributors' compensation will be determined based upon
transfer prices on a "market price minus" approach, providing for a 5%
profit for the Distributor and based upon sales organization costs agreed
between PEO BV and the Distributor. The Distribution Agreements will
contemplate the possible future distribution of FEI products by the
Distributor; however, such agreements currently provide for the distribution
of PEO Operations products only. A form of Distribution Agreement has been
negotiated between the parties at arm's length. The Company considers the
terms of the Distribution Agreement to be not less fair to the Company than
they might be if negotiated with other unaffiliated parties. Individual
Distribution Agreements have not yet been executed and the terms of
individual Distribution Agreements may vary from the form of agreement due
to requirements in the country of distribution.
EMPLOYEE BENEFITS. Pursuant to the Combination Agreement, the Company has
agreed to hire, or to cause PEO Holdings or PEO-US or their subsidiaries to
continue to employ, all employees of the PEO Operations that are on the U.S.
payroll on the date of Closing (other than expatriates), in comparable positions
and with substantially the same compensation and benefits given to employees of
the Company. Transferred employees are to be given credit for time worked at
Philips and its affiliates in determining eligibility for such benefits and
Philips will remain responsible for employees' claims under benefit plans
incurred before Closing. Philips will, at the Company's expense, continue to
provide benefits under employee compensation and benefit plans to non-U.S.
employees of the PEO Operations after Closing. Philips has agreed that current
employees of the Company will remain employed by the Company after the date of
Closing at substantially their current compensation and benefits. Employees of
the PEO Operations in Japan will remain employees of Philips, but will provide
services to the Company by contract.
The Company has also agreed to provide certain additional benefits to the
employees of PEO-US to compensate them for the loss of benefits now provided by
PEO-US. The additional benefits consist of (i) an aggregate of $180,226 payable
over five years to specified PEO-US employees who are near retirement age and
(ii) an aggregate of $386,619 payable over five years in the form of additional
contributions to the 401(k) retirement accounts of approximately 85 PEO-US
employees.
VOTING IN FEI DIRECTOR ELECTIONS. Directors of the Company are elected at
the annual shareholders' meeting; vacancies resulting from an increase in the
size of the Board may be filled by the Board or by the shareholders. Directors
hold office until the next annual shareholders' meeting and until their
successors are elected and qualified. Holders of Common Stock are entitled to
one vote per share on all matters on which the holders of Common Stock are
entitled to vote, including the election of directors, and do not have any
cumulative voting rights. Thus, for so long as PIE holds a majority of the
outstanding voting securities of the Company, it will be able to control the
election of all of the directors of the Company and other matters submitted to a
vote of the shareholders. PIE has agreed, however, to vote its shares so as to
cause the Company to have two Independent Directors for a period ending two
years after the date of Closing and to vote its shares at the Company's first
annual meeting following Closing to cause two persons who are not present or
former employees of any affiliate of Philips (other than FEI) to be elected
directors of FEI.
LIMITATION ON EQUITY POSITION. For one year following the date of Closing,
PIE agrees not to own, together with Philips and its affiliates, more than 70%
of the outstanding Common Stock, subject to certain conditions. The Company has
been advised by Philips that PIE has no plans to acquire any shares of Common
Stock other than those issued pursuant to the Combination Agreement.
OTHER CONDUCT PENDING CLOSING. Pending Closing, each of PIE and the Company
have agreed to negotiate license and service agreements and a lease of real
property for the Eindhoven Facility. Philips and the Company have agreed to give
the other access to information needed to investigate the advisability of
completing the Combination, subject to a confidentiality agreement; to consult
the other regarding
35
<PAGE>
publicity for the Combination before Closing; to keep insurance in effect; and
to comply with any applicable antitakeover statutes.
CONDITIONS TO CLOSING OF THE COMBINATION. Closing of the Combination is
subject to the satisfaction or waiver of various conditions, including, among
others: (i) FEI shareholders' approval of the Combination Proposals; (ii)
compliance with the filing requirements and expiration of the applicable waiting
periods imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act") and any other applicable antitrust or competition laws;
(iii) the absence of any governmental rule, injunction or threat of governmental
action preventing, or restricting or seeking to restrict, the Combination,
including the absence of any investigation under the Exon-Florio Amendment to
the 1988 Omnibus Trade and Competition Act (the "Exon Florio Amendment"); (iv)
receipt of all other necessary governmental approvals; (v) the absence of any
material adverse change in the business, results of operations or financial
condition of the Company or of the PEO Operations since December 31, 1995; (vi)
employment agreements shall have been executed with certain officers of FEI;
(vii) the assets of the PEO Operations shall include $8.0 million in cash;
(viii) the pursuit of all required employee consultation procedures to the
extent necessary to avoid a delay or change in the Combination; (ix) the listing
of the PIE Shares on the Nasdaq National Market; (x) the execution of the
Services Agreements; (xi) each party shall have performed in all material
respects all of the covenants and agreements to be performed by it before
Closing; (xii) the Company shall have taken such actions so that upon Closing
the Company's Board of Directors shall be composed of the persons agreed to in
the Combination Agreement; and (xiii) each party's representations and
warranties contained in the Combination Agreement shall be true or true in all
material respects, as specified in the Combination Agreement, as of Closing. See
"Regulatory Approvals." The Combination Agreement provides that all conditions
to Closing are waivable, but the requirement for shareholder approval will not
be waived by the Company. The Company is not aware of any consideration among
the parties to the Combination Agreement of the waiver of any conditions to
Closing.
INDEMNIFICATION. In the Combination Agreement, each of PIE, Philips and the
Company agrees to indemnify the other, its affiliates and their directors,
officers, shareholders, partners, attorneys, accountants, agents and employees
and their heirs, successors and assigns from, against and in respect of, the
excess over $1 million of aggregate losses, charges, actions, suits,
proceedings, deficiencies, taxes, interest, penalties and reasonable costs and
expenses ("Losses") imposed on, sustained, incurred or suffered by or asserted
against any of them directly or indirectly relating to or arising out of any
breach of any representation, warranty, covenant or agreement of the party
giving indemnification.
The party giving indemnification has the option to assume the defense of any
claim made by a third party in respect of such breaches. The indemnified party
may participate in such a defense at its own cost, but neither party may settle
a claim for which indemnification is sought without the consent of the other,
unless the indemnifying party elected not to defend the indemnified party
against such claim, in which case the indemnified party may settle such claim
without the consent of the indemnifying party.
PIE has agreed to retain all liabilities with respect to certain patent
infringement claims that may be brought against the PEO Operations and has
agreed that it will not settle any such claims in a manner that would prevent in
any material way the Company or the PEO Operations from engaging in their
respective businesses.
TERMINATION. The Combination Agreement may be terminated and the
Combination abandoned before Closing by agreement of PIE and the Company. Either
the Company or PIE may terminate the Combination Agreement before Closing by
giving written notice to the other if (i) the Combination is not completed by
March 31, 1997, provided that the terminating party has not caused the failure
of the Combination to occur by failing to have fulfilled its obligations under
the Combination Agreement; (ii) failure of a condition to Closing, including
failure to obtain shareholder approval of the Combination Proposals, and the
failure cannot be cured before Closing or is not cured within a reasonable time,
provided that the noncompliance of the terminating party with its obligations
under the Combination Agreement shall not have contributed to such failure;
(iii) the other has materially breached any
36
<PAGE>
representation, warranty, covenant or agreement contained in the Combination
Agreement that is not cured within a reasonable time after notice of such breach
is given, provided that such termination will not relieve the breaching party
from liability for the breach; or (iv) if the Board of Directors of the Company
recommends to the shareholders or agrees to enter into another Acquisition
Proposal.
PIE may terminate the Combination Agreement before Closing (i) if the
Company's Common Stock ceases to be quoted on the Nasdaq National Market; (ii)
if the board of management of PIE agrees to enter into another proposal for a
merger, reorganization, share exchange, consolidation, purchase or similar
transaction involving all or any significant portion of the assets of the PEO
Operations or any of the equity securities of an affiliate of Philips engaged in
the PEO Operations; or (iii) if the Board of Directors of the Company shall have
withdrawn or adversely modified its recommendation that the shareholders of the
Company approve the Combination Proposals or failed to reconfirm such
recommendation within five business days after a written request by PIE to do
so.
AMENDMENT; WAIVER. Provisions of the Combination Agreement may be amended
only by written agreement of PIE and the Company or waived only by the written
agreement of the waiving party.
FEDERAL INCOME TAX CONSEQUENCES
The acquisition by FEI of shares of PEO Holdings and PEO-US in exchange for
newly issued shares of Common Stock of FEI will not be a taxable event with
respect to FEI or its shareholders for federal income tax purposes. After
Closing, FEI and its consolidated U.S. subsidiaries (including PEO-US) will
report income and pay U.S. income taxes as a consolidated group and will not
become a part of the Philips consolidated group for U.S. income tax purposes.
Shareholders of the Company will not recognize any gain or loss for federal
income tax purposes as a result of the Combination. This federal income tax
discussion is included for general information only. FEI shareholders are urged
to consult their own tax advisors with respect to the effect, if any, of the
transaction to them, as well as advice as to the application of state, local and
foreign income and other tax laws and possible amendments to such laws.
ACCOUNTING TREATMENT
The Combination will be recorded as "reverse purchase" for accounting and
financial reporting purposes, whereby PIE will be treated as the accounting
acquiror because, at Closing, PIE will acquire 55% of the outstanding voting
securities of the Company. As a result, after the Combination, the historical
financial statements of FEI will be the financial statements of the PEO
Operations for all reported periods prior to the date of Closing.
BUSINESS NAMES
After Closing, FEI Company will continue to operate under the name "FEI
Company." The parties to the Combination expect that following Closing, the
electron microscope business conducted by PEO Holdings and PEO-US will operate
under the name "Philips Electron Optics" and the FIB workstation and components
business conducted by FEI will operate under the name "FEI Company."
NO DISSENTERS' RIGHTS
Under Oregon law, no holder of Common Stock will be entitled to demand
appraisal of, or to receive payment for, the holder's shares as a result of the
Combination or a vote against the Combination Proposals.
NASDAQ LISTING
Philips has advised the Company that it has no intention of taking any
action following Closing that would cause the Common Stock to no longer be
quoted on the Nasdaq National Market.
37
<PAGE>
SELECTED CONSOLIDATED FINANCIAL
INFORMATION OF FEI COMPANY
The selected consolidated financial data of the Company presented below for,
and as of the end of, each of the years in the three-year period ended December
31, 1995 have been derived from the audited consolidated financial statements of
the Company included elsewhere in this Proxy Statement. The selected
consolidated financial data at December 31, 1991, 1992 and 1993 and for each of
the years in the two-year period ended December 31, 1992 have been derived from
the audited financial statements of the Company not included herein. The
selected consolidated financial data for the nine-month periods ended September
30, 1996 and 1995 and as of September 30, 1996 have been derived from the
unaudited consolidated financial statements of the Company included elsewhere in
this Proxy Statement. Operating results for the nine-month period ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. In the opinion of management of
FEI, the unaudited financial statements have been prepared on the same basis as
the audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for these periods. The selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations of FEI
Company" and the Consolidated Financial Statements of FEI Company included
elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales........................................ $ 9,075 $ 12,919 $ 17,198 $ 22,281 $ 41,691 $ 29,131 $ 33,576
Cost of sales.................................... 5,102 7,083 8,662 14,150 26,017 17,846 21,605
--------- --------- --------- --------- --------- --------- ---------
Gross profit..................................... 3,973 5,836 8,536 8,131 15,674 11,285 11,971
Total operating expenses......................... 4,500 5,009 6,511 8,491 9,763 6,977 10,173
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations.................... (527) 827 2,025 (360) 5,911 4,308 1,798
Other income (expense)........................... 138 (266) (204) (128) (120) (437) 393
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before taxes....................... (389) 561 1,821 (488) 5,791 3,871 2,191
Tax expense (benefit) (1)........................ (101) 150 391 (263) 2,050 1,407 872
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................................ $ (288) $ 411 $ 1,430 $ (225) $ 3,741 $ 2,464 $ 1,319
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share (1)(2)............... $ (0.06) $ 0.08 $ 0.28 $ (0.04) $ 0.57 $ 0.40 $ 0.16
Shares used in per share calculation (2)......... 5,055 5,068 5,089 5,101 6,603 6,230 8,038
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------ --------------------
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 832 $ 421 $ 343 $ 192 $ 2,700 $ 1,485
Working capital........................................... 4,899 3,763 4,301 4,387 26,406 22,614
Equipment................................................. 2,316 3,173 4,298 5,033 4,604 8,295
Total assets.............................................. 9,773 11,181 16,682 24,414 44,642 51,881
Short-term borrowings..................................... 49 568 1,655 6,386 -- 3,328
Long-term debt, less current portion...................... 579 -- 1,999 3,445 3,500 --
Total liabilities......................................... 2,460 3,442 7,451 15,367 10,220 11,797
Shareholders' equity...................................... 7,313 7,739 9,231 9,047 34,442 40,084
</TABLE>
- - - - - - ------------------------------
(1) Tax expense for the year ended December 31, 1993 includes the cumulative
effect of an accounting change benefit of $206,000 ($0.04 per share). See
Note 13 of Notes to Consolidated Financial Statements of FEI Company.
(2) See Notes 1 and 14 of Notes to Consolidated Financial Statements of FEI
Company.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF FEI COMPANY
FEI's revenues are derived primarily from sales of FIB workstations and, to
a lesser extent, from the sale of emitters, focusing columns and services. FIB
workstations can be purchased with various options, including gas injectors, a
secondary ion mass spectrometry ("SIMS") analytical function, x-ray analysis
equipment and computer-aided design ("CAD") navigational software.
RESULTS OF OPERATIONS
The following table sets forth certain unaudited financial data for the
periods indicated as a percentage of net sales.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales
FIB workstations............................................... 63.3% 58.0% 74.1% 74.5% 67.2%
Focusing columns............................................... 15.5 20.7 10.7 9.9 16.8
Emitters....................................................... 13.8 13.0 9.1 9.9 9.3
Other.......................................................... 7.4 8.3 6.1 5.7 6.7
--------- --------- --------- --------- ---------
Total net sales.............................................. 100.0 100.0 100.0 100.0 100.0
Cost of sales.................................................... 50.4 63.5 62.4 61.3 64.3
--------- --------- --------- --------- ---------
Gross profit..................................................... 49.6 36.5 37.6 38.7 35.7
Operating expenses
Research and development....................................... 13.9 13.9 6.2 6.5 8.4
Selling and marketing.......................................... 15.0 12.6 11.0 11.1 12.7
General and administrative..................................... 8.9 9.6 6.3 6.3 9.2
Postponed stock offering and duplicate rent.................... -- 2.0 -- -- --
--------- --------- --------- --------- ---------
Total operating expenses..................................... 37.8 38.1 23.4 23.9 30.3
--------- --------- --------- --------- ---------
Operating income (loss).......................................... 11.8 (1.6) 14.2 14.8 5.4
Other income (expense)
Interest income................................................ 1.2 1.8 2.2 2.1 1.6
Interest expense............................................... (1.3) (2.7) (1.6) (1.9) (0.3)
Miscellaneous.................................................. (1.1) 0.3 (0.9) (1.7) (0.2)
--------- --------- --------- --------- ---------
Income (loss) before taxes....................................... 10.6 (2.2) 13.9 13.3 6.5
Tax expense (benefit) (1)........................................ 2.3 (1.2) 4.9 4.8 2.6
--------- --------- --------- --------- ---------
Net income (loss)................................................ 8.3% (1.0)% 9.0% 8.5% 3.9%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- - - - - - ------------------------
(1) Tax expense for the year ended December 31, 1993 includes the cumulative
effect of an accounting change benefit of 1.2%. See Note 13 of Notes to
Consolidated Financial Statements of FEI Company.
39
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET SALES. Net sales for the nine months ended September 30, 1996 increased
$4.5 million (15.3%) to $33.6 million from $29.1 million for the corresponding
period in 1995. Most of this increase can be attributed to increased sales of
components and of FIB workstations, which rose by $3.0 million and $833,000,
respectively, for the nine months ended September 30, 1996. In this period, the
Company sold three FIB workstations to Norsam Technologies, Inc. ("Norsam") for
use in a new commercial application of FIB technology providing long-term
archival and very high density data storage. The $3.3 million sales price of the
three FIB workstations was paid in the form of 500,000 shares of Norsam Series A
Preferred Stock convertible into shares of Norsam common stock at a conversion
rate of $5.00 per share.
International sales accounted for 36% of net sales for the nine months ended
September 30, 1996, compared to 57% of net sales for the nine months ended
September 30, 1995. The Company expects that international sales will continue
to represent a significant percentage of its net sales.
The Company believes that recent slowdowns in the semiconductor
manufacturing industry will result in lower sales growth for the remainder of
1996 compared to the nine months ended September 30, 1996.
GROSS PROFIT. Gross profit for the nine months ended September 30, 1996
increased $686,000 (6.1%) to $12.0 million from $11.3 million for the
corresponding period in 1995. This increase was primarily due to increased
sales. Gross profit as a percentage of sales for the nine months ended September
30, 1996 decreased to 35.7% from 38.7% for the corresponding period in 1995.
Customer service labor costs nearly doubled, increasing $740,000 for the nine
months ended September 30, 1996, as compared to the same period in 1995.
Depreciation expense, primarily depreciation of customer service inventory,
increased $331,000 for the nine months ended September 30, 1996. The second
factor causing the decline in gross profit as a percentage of sales for the
period was an increase in sales into selected strategic Asian markets, where
selling prices are lower due to greater price competition.
The Company purchases a substantial number of components for its FIB
workstations from PEO BV, for which the purchase prices are denominated in
Netherlands guilders. The prices of those components have been established
annually by the Company and management of Philips' electron optics business.
Increases in the value of the Netherlands guilder in relation to the U.S. dollar
effectively increase the cost to the Company of those components and adversely
affect the Company's gross profit margins.
RESEARCH AND DEVELOPMENT. For the nine months ended September 30, 1996,
research and development expense increased $906,000 (47.6%) to $2.8 million from
$1.9 million for the corresponding period in 1995. This increase was primarily
the result of increased engineer staffing levels, consultant costs and use of
operating supplies. The latter two factors are principally related to FIB
workstation automation and clean room development projects. Labor and related
expenses increased $781,000 for the period over the prior year's period, while
operating supplies increased $138,000. The Company is continuing to invest in
internal development of focused ion and electron beam technology.
Capitalized software development costs were $650,000 and $164,000 for the
nine months ended September 30, 1996 and 1995, respectively.
SELLING AND MARKETING. Selling and marketing expense for the nine months
ended September 30, 1996 increased $1.1 million (32.3%) to $4.3 million from
$3.2 million for the corresponding period in 1995. Selling and marketing expense
as a percentage of sales for the nine months ended September 30, 1996 increased
to 12.7% from 11.1% for the corresponding period in 1995. These increases
reflect the greater amount of sales commissions paid in connection with
increased sales volume. Sales commissions increased $272,000 for the nine months
ended September 30, 1996 as compared to the same period in 1995. Increased
sales, technical marketing and support staffing levels, plus increased travel
costs were also significant factors in the increase of selling and marketing
expenses. Labor and related expenses increased $545,000 for the nine months
ended September 30, 1996 as compared to the same period in 1995. Travel costs
increased $118,000 for the nine months ended September 30, 1996 as compared to
the same period in 1995.
40
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expense for the nine
months ended September 30, 1996 increased $1.2 million (67.6%) to $3.1 million
from $1.9 million for the corresponding period in 1995. This increase was
primarily due to the hiring of additional administrative staff, which accounted
for an increase of $885,000 for the nine months ended September 30, 1996
compared with the same period in 1995. Other factors included the additional
cost of public and shareholder reporting, which was $191,000 for the nine month
period in 1996, with no comparable expense in the same period in 1995. In
addition, because of increased sales volume, the accrual for bad debt during the
nine months ended September 30, 1996 was increased by $126,000.
OTHER INCOME (EXPENSE). Other income (expense) was $393,000 and $(437,000)
for the nine months ended September 30, 1996 and 1995, respectively. Included in
other income (expense) for these respective periods were (i) foreign currency
exchange rate loss of $(26,000) and $(312,000), (ii) interest income of $527,000
and $606,000, (iii) interest expense of $(81,000) and $(550,000) and (iv)
miscellaneous expense of $(27,000) and $(181,000). The decrease in foreign
currency exchange rate loss was attributable to relatively constant exchange
rates for the 1996 period compared with the fluctuation and the value of the
U.S. dollar against the Netherlands guilder in the 1995 comparable period.
Interest income decreased $79,000 for the nine months ended September 30, 1996
compared to the corresponding period in 1995, resulting from the liquidation of
short-term investments which had been earning interest. Interest expense
decreased $471,000 for the nine months ended September 30, 1996, compared to the
corresponding period in 1995, due to the repayment of debt with proceeds from
FEI's initial public offering. See Note 14 of Notes to Consolidated Financial
Statements of FEI Company.
TAX EXPENSE (BENEFIT). The effective income tax rate was 40% for the nine
months ended September 30, 1996 compared to an effective rate of 36% for the
nine months ended September 30, 1995. These rates vary from FEI's federal
statutory tax rate of 34% primarily due to the addition of state, foreign and
foreign sales corporation taxes and the reduction of foreign sales corporation
dividends, and various treatments of international transactions and related
taxes. The increase in the effective tax rates for the 1996 period from the
corresponding period in 1995 is primarily due to larger foreign sales
corporation tax credits during the 1995 period and higher foreign taxes during
1996.
Consolidated income before taxes includes the parent and its four wholly
owned subsidiaries. Income before taxes for the Company's subsidiaries, as a
percent of consolidated income (loss) before taxes, was 3% for the nine months
ended September 30, 1995 and (11)% for the nine months ended September 30, 1996.
The loss for 1996 is due to start up and operating costs associated with opening
and operating the office of FEI Europe GmbH in Germany.
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 U.S. export licenses. Changes in relevant foreign
currency exchange rates between time of sale and time of payment can also have
an adverse impact on profit levels.
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NET SALES. Net sales increased $19.4 million (87.1%) to $41.7 million in
1995 from $22.3 million in 1994 and increased $5.1 million (29.6%) in 1994 from
$17.2 million in 1993. The increase in net sales in 1994 from 1993 was
attributable to an increased unit volume of sales of FEI's products as well as
sales of higher priced model 820 DualBeam FIB workstations first shipped in
December 1994. The increase in net sales in 1995 from 1994 was primarily due to
a 77% increase in the number of FIB workstations sold. Sales of FIB workstations
accounted for approximately 92.6% of the increase in net sales from 1994 to 1995
and 40.0% of the increase in net sales from 1993 to 1994.
41
<PAGE>
GROSS PROFIT. Gross profit increased $7.5 million (92.8%) in 1995 compared
to 1994 and decreased $405,000 (4.7%) in 1994 compared to 1993. Gross profit as
a percentage of net sales was 37.6%, 36.5% and 49.6% for 1995, 1994 and 1993,
respectively. The increase in dollars from 1994 to 1995 was primarily due to
higher revenues, while the increase in gross profit as a percentage of net sales
from 1994 to 1995 was primarily due to absorption of fixed manufacturing costs
over higher sales volume and volume purchase price discounts. This increase was
partially offset by an increase in sales of third party add-on options with
relatively low gross margins. The decrease in gross profit as a percentage of
net sales from 1993 to 1994 was primarily attributable to approximately $240,000
of expenses related to the accelerated delivery of FEI's model 820 DualBeam
workstation and significant price discounts on a limited number of strategic
sales of FIB workstations to enter new markets.
RESEARCH AND DEVELOPMENT. Research and development expense decreased
$541,000 (17.5%) to $2.6 million in 1995 from $3.1 million in 1994 and increased
$716,000 (29.8%) in 1994 from $2.4 million in 1993. As a percentage of net
sales, research and development expense was 6.2%, 13.9% and 13.9% in 1995, 1994
and 1993, respectively. The decrease in research and development expense from
1994 to 1995, in dollar amounts and as a percentage of net sales, was primarily
attributable to higher costs in 1994 associated with the development of FEI's
latest generation of FIB workstations. Research and development costs also
decreased as a percentage of net sales due to increased sales volume. The
increase in research and development expenses in dollar amounts from 1993 to
1994 was primarily due to the accelerated development and introduction of FEI's
model 820 DualBeam workstation. Capitalized software development costs were
$345,000, $156,000 and $219,000 for 1995, 1994 and 1993, respectively.
SELLING AND MARKETING. Selling and marketing expense increased $1.8 million
(63.5%) to $4.6 million in 1995 from $2.8 million in 1994 and increased $217,000
(8.4%) in 1994 from $2.6 million in 1993. As a percentage of net sales, selling
and marketing expense was 11.0%, 12.6% and 15.0% in 1995, 1994 and 1993,
respectively. The increase in selling and marketing expense in dollar amounts
from 1994 to 1995 reflects the greater amount of sales commissions paid in 1995
in connection with increased sales in Asia, increased support staffing levels
and increased facilities costs associated with the opening of FEI's Munich,
Germany office. In addition, the year-to-year increases in selling and marketing
expense in dollar amounts resulted from the addition over these periods of
applications scientists, direct sales engineers and other marketing personnel
and related costs, operating FIB workstations at domestic and international
trade shows and additional expenditures for product literature and promotional
material.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
$468,000 (21.8%) to $2.6 million in 1995 from $2.1 million in 1994 and increased
$614,000 (40.0%) in 1994 from $1.5 million in 1993. As a percentage of net
sales, general and administrative expense decreased to 6.3% in 1995 from 9.6% in
1994, and increased to 9.6% in 1994 from 8.9% in 1993. The increase in general
and administrative expense in dollar amounts from 1994 to 1995 was attributable
to additional administrative staff and increased professional fees, and the
decrease as a percentage of net sales from 1994 to 1995 resulted from
efficiencies achieved through higher net sales. The slight increase in 1994 as a
percentage of net sales resulted primarily from the addition of administrative
personnel.
POSTPONED STOCK OFFERING AND DUPLICATE RENT. In the first quarter of 1994,
FEI incurred a one-time expense relating to its postponed initial public
offering of Common Stock. FEI moved to its new headquarters facility in January
1994 and in the first three quarters of 1994 FEI paid rent on both its former
headquarters facility and its new facility.
OTHER INCOME (EXPENSE). Other income (expense) was $(120,000), $(128,000)
and $(204,000) for 1995, 1994 and 1993, respectively. Included in other income
(expense) for these respective periods were (i) interest expense of $(663,000),
$(591,000) and $(225,000), (ii) interest income of $935,000, $405,000 and
$207,000, (iii) currency exchange rate gain (loss) of $(208,000), $93,000 and
$(105,000) and (iv) miscellaneous expense of $(184,000), $(35,000) and
$(81,000).
42
<PAGE>
TAX EXPENSE (BENEFIT). FEI's effective tax rates for 1995, 1994 and 1993
were 35.4%, (53.9)% and 32.8%, respectively. FEI recorded a tax provision of
$2.1 million in 1995, a tax benefit of $(263,000) in 1994 and a tax provision of
$597,000 in 1993. Effective January 1, 1993 FEI adopted SFAS No. 109, Accounting
for Income Taxes. The cumulative effect of adopting the new standard was to
increase net income by $206,000 for the year ended December 31, 1993 because of
the recognition of previously unrecorded deferred tax benefits associated with
research and development tax credit carryforwards. After giving effect to this
accounting change, FEI recorded a provision of $391,000 for federal and state
income taxes for the year ended December 31, 1993. See Note 13 of Notes to
Consolidated Financial Statements of FEI Company.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited financial data for each of
the eleven quarters in the period beginning January 1, 1994 and ended September
30, 1996. In the opinion of management of FEI, this information has been
prepared on the same basis as the audited consolidated financial information
appearing elsewhere in this Proxy Statement and includes all adjustments,
consisting only of normal recurring adjustments, needed to fairly present 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.
<TABLE>
<CAPTION>
1994 1995
--------------------------------------------- ---------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales........................ $ 4,174 $ 4,576 $ 5,676 $ 7,855 $ 8,920 $ 9,201 $ 11,010 $ 12,560
Cost of sales.................... 2,522 2,783 3,210 5,635 5,277 5,695 6,874 8,171
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit..................... 1,652 1,793 2,466 2,220 3,643 3,506 4,136 4,389
Operating expenses
Research and development....... 813 738 770 786 595 627 681 663
Selling and marketing.......... 537 607 806 852 994 1,041 1,189 1,356
General and administrative..... 582 512 483 572 617 641 592 767
Postponed stock offering and
duplicate rent............... 305 77 51 -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses..... 2,237 1,934 2,110 2,210 2,206 2,309 2,462 2,786
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss).......... (585) (141) 356 10 1,437 1,197 1,674 1,603
Other income (expense)........... (29) (63) (35) (93) (179) (166) 220 213
Foreign currency gain (loss)..... (44) 80 (77) 133 (374) 170 (108) 104
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before taxes....... (658) (124) 244 50 884 1,201 1,786 1,920
Tax expense (benefit)............ (355) (66) 131 27 359 456 592 643
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)................ $ (303) $ (58) $ 113 $ 23 $ 525 $ 745 $ 1,194 $ 1,277
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share...... $ (0.06) $ (0.01) $ 0.02 $ 0.00 $ 0.10 $ 0.13 $ 0.16 $ 0.16
Shares used in per share
calculation..................... 5,100 5,101 5,101 5,101 5,101 5,867 7,701 7,741
AS A PERCENTAGE OF NET SALES:
Net sales........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................... 60.4 60.8 56.6 71.7 59.2 61.9 62.4 65.1
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit..................... 39.6 39.2 43.4 28.3 40.8 38.1 37.6 34.9
Operating expenses
Research and development....... 19.5 16.1 13.6 10.0 6.7 6.8 6.2 5.3
Selling and marketing.......... 12.9 13.3 14.2 10.9 11.1 11.3 10.8 10.8
General and administrative..... 13.9 11.0 8.5 7.3 6.9 7.0 5.4 6.1
Postponed stock offering and
duplicate rent............... 7.3 1.8 0.9 -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses..... 53.6 42.2 37.2 28.2 24.7 25.1 22.4 22.2
Operating income (loss).......... (14.0) (3.0) 6.2 0.1 16.1 13.0 15.2 12.8
Other income (expense)........... (0.7) (1.4) (0.6) (1.2) (2.0) (1.8) 2.0 1.7
Foreign currency gain (loss)..... (1.0) 1.8 (1.3) 1.7 (4.2) 1.8 (1.0) 1.0
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before taxes....... (15.7) (2.6) 4.3 0.6 9.9 13.0 16.2 15.5
Tax expense (benefit)............ (8.5) (1.4) 2.3 0.3 4.0 5.0 5.4 5.1
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)................ (7.2)% (1.2)% 2.0% 0.3% 5.9% 8.0% 10.8% 10.4%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
1996
---------------------------------
MARCH 31 JUNE 30 SEPT. 30
--------- --------- ---------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales........................ $ 11,607 $ 12,075 $ 9,894
Cost of sales.................... 7,234 7,875 6,496
--------- --------- ---------
Gross profit..................... 4,373 4,200 3,398
Operating expenses
Research and development....... 898 936 975
Selling and marketing.......... 1,412 1,299 1,553
General and administrative..... 1,000 1,047 1,053
Postponed stock offering and
duplicate rent............... -- -- --
--------- --------- ---------
Total operating expenses..... 3,310 3,282 3,581
--------- --------- ---------
Operating income (loss).......... 1,063 918 (183)
Other income (expense)........... 127 188 104
Foreign currency gain (loss)..... (21) 22 (27)
--------- --------- ---------
Income (loss) before taxes....... 1,169 1,128 (106)
Tax expense (benefit)............ 424 419 29
--------- --------- ---------
Net income (loss)................ $ 745 $ 709 $ (135)
--------- --------- ---------
--------- --------- ---------
Net income (loss) per share...... $ 0.10 $ 0.09 $ (0.02)
Shares used in per share
calculation..................... 7,831 8,244 8,039
AS A PERCENTAGE OF NET SALES:
Net sales........................ 100.0% 100.0% 100.0%
Cost of sales.................... 62.3 65.2 65.7
--------- --------- ---------
Gross profit..................... 37.7 34.8 34.3
Operating expenses
Research and development....... 7.7 7.8 9.9
Selling and marketing.......... 12.2 10.8 15.7
General and administrative..... 8.6 8.7 10.6
Postponed stock offering and
duplicate rent............... -- -- --
--------- --------- ---------
Total operating expenses..... 28.5 27.2 36.2
Operating income (loss).......... 9.2 7.6 (1.8)
Other income (expense)........... 1.1 1.6 1.1
Foreign currency gain (loss)..... (0.2) 0.2 0.3
--------- --------- ---------
Income (loss) before taxes....... 10.1 9.3 (1.1)
Tax expense (benefit)............ 3.7 3.5 0.3
--------- --------- ---------
Net income (loss)................ 6.4% 5.9% (1.4)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
43
<PAGE>
INFLATION. The impact of inflation and changing prices on FEI's operating
results has not been significant.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, FEI had total cash and cash equivalents of $1.5
million, compared to $2.7 million at December 31, 1995. Cash used by operating
activities for the nine months ended September 30, 1996 was $5.9 million,
compared to cash provided of $1.3 million for the nine months ended September
30, 1995. The primary components causing this reduction in cash from operating
activities during the 1996 nine-month period were an increase in inventory of
$7.7 million, offset by an increase in accounts payable of $1.8 million, and the
noncash sale of three FIB workstations to Norsam. The increase in inventory
resulted from lower than expected sales of FIB workstations and strategic
stocking of some FIB workstation platforms, while the increase in accounts
receivable was due to the fact that an unusually high portion (66%) of sales for
the quarter ended September 30, 1996 occurred in the last month of the quarter.
Investing activities during the nine months ended September 30, 1996
provided net cash of $426,000, compared with a net use of cash of $10.3 million
during the nine months ended September 30, 1995. During the 1996 nine-month
period, FEI received $6.4 million in cash from net sales of investments and used
cash of $5.0 million for the acquisition of equipment. During the comparable
period of 1995, the Company's principal investing activities consisted of the
purchase of investments for $8.5 million and the purchase of equipment for $1.4
million. Capital expenditures increased in the first nine months of 1996 from
the 1995 comparable period primarily because of the purchase of research and
development and training equipment. FEI expects to continue to invest in
property, plant and equipment needed for future business requirements, including
manufacturing capacity.
Financing activities provided net cash of $4.3 million for the nine months
ended September 30, 1996 and $14.8 million for the comparable 1995 period.
During 1995, FEI completed its initial public offering, which provided net
proceeds to the Company of $21.2 million. From these proceeds, the Company paid
off its bank line of credit and its outstanding long-term debt. During the
nine-month period ended September 30, 1996, FEI borrowed $3.3 million under its
$10 million bank operating line of credit. At December 31, 1996, approximately
$8.44 million was outstanding under the line of credit and approximately $1.56
million was available to be borrowed under the line of credit. On January 8,
1997 the loan agreement between the Company and the bank was amended to increase
the line of credit to $12 million. This line of credit is secured by accounts
receivable and inventory, bears interest at an annual rate equal (at FEI's
option) to (i) the bank's basic commercial lending rate (8.25% at December 31,
1996) or (ii) LIBOR plus 2.0%, and is subject to review by the bank on June 1,
1997. FEI may borrow up to the lesser of (i) $12 million and (ii) an amount
equal to the sum of 80% of eligible accounts receivable and 30% of eligible
inventory (excluding work in process). Under the terms of the line of credit,
FEI must maintain a current ratio of not less than 2.0, a minimum tangible net
worth of not less than $30 million and a senior debt to tangible net worth ratio
of not more than 1.0, each measured at the end of each calendar quarter.
Noncash investing and financing activities in the nine months ended
September 30, 1996 included the conversion of $3.5 million of long-term debt
into 466,667 shares of Common Stock and the noncash sale of three FIB
workstations to Norsam in exchange for 500,000 shares of Norsam Series A
Preferred Stock.
FEI believes its cash equivalents, investments and borrowings available
under its line of credit will be sufficient to fund operations during the near
term. Management expects inventory levels to decrease in the first quarter of
1997 as FIB systems are shipped from backlog. During the first quarter of 1997,
however, management expects borrowings under the existing line of credit to be
close to the maximum available amount. If inventory levels and accounts
receivable are not reduced or if sales are lower than expected during the
twelve-month period, however, management believes FEI may require additional
sources of capital.
44
<PAGE>
Both FEI and the PEO Operations, separately and on a combined basis, expect
to continue to use cash to fund operations. The Combined Operations will not
have access to financing through Philips' intercompany accounts and Philips and
its affiliates are not obligated to provide additional funds to the Combined
Operations following Closing, pursuant to the terms of the Combination Agreement
or otherwise. Philips has also advised FEI that it has no present intention to
provide any funds to the Combined Operations following Closing. The Combined
Operations will be required to seek credit arrangements with commercial banks
and other institutional lenders, other than the existing line of credit now
maintained by FEI, or from other sources of equity or debt financing. There is
no assurance that any such additional financing will be available on terms that
are favorable to the Company.
FOURTH QUARTER RESULTS (UNAUDITED)
FEI's net sales decreased to $12.0 million for the three months ended
December 31, 1996, compared to $12.6 million for the three months ended December
31, 1995. The Company believes the decline in net sales of $600,000, or 5.0%,
compared to the 1995 period was attributable to recent slowdowns in the
semiconductor manufacturing industry. Operating income (loss) for the period was
$(938,000), compared to $1.6 million in the fourth quarter of 1995. The decrease
in operating income resulted in part from the lower sales volume, higher costs
for certain components and systems supplied by Philips due to decreased sales
volume, accrued costs associated with upgrading installed systems for common
software platform compatibility, and higher operating expenses, for both space
and personnel, incurred in positioning the Company for future growth. For the
fourth quarter of 1996, FEI had a net loss of $(477,000), or $(.06) per share,
compared to net income of $1.3 million, or $.16 per share, for the fourth
quarter of 1995. At December 31, 1996 the Company had 224 full-time employees,
compared with 167 at December 31, 1995.
45
<PAGE>
SELECTED COMBINED FINANCIAL
INFORMATION OF THE PEO OPERATIONS
The selected combined financial data presented below for each of the years
in the three-year period ended December 31, 1995 and as of December 31, 1994 and
1995 have been derived from the audited combined financial statements of the PEO
Operations included elsewhere in this Proxy Statement. The selected combined
financial data for the nine-month periods ended September 30, 1995 and 1996 and
as of September 30, 1996 have been derived from the unaudited combined financial
statements of the PEO Operations included elsewhere in this Proxy Statement. The
selected combined financial data for the year ended December 31, 1992 and as of
December 31, 1992 and 1993 have been derived from the unaudited combined
financial statements of the PEO Operations not included herein. Operating
results for the nine-month period ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996. In the opinion of management of the PEO Operations, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for these periods.
The selected combined financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the PEO Operations" and the Combined Financial Statements of the
PEO Operations included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- -------------------------
1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
COMBINED INCOME STATEMENT DATA:
Sales................................... $ 78,487 $ 71,631 $ 84,169 $ 109,117 $ 67,743 $ 71,059
Income (loss) from operations........... 6,698 3,945 9,473 9,245 5,213 (2,299)
Net income (loss)....................... $ 4,095 $ 2,426 $ 5,893 $ 5,928 $ 3,257 $ (1,819)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, 30,
----------------------------------------------------- -----------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................ $ 34,633 $ 36,469 $ 45,748 $ 60,742 $ 70,652
</TABLE>
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF THE PEO OPERATIONS
OVERVIEW
The PEO Operations develops, manufactures and sells electron optics-based
instruments, principally electron microscopes, to governmental and
quasi-governmental institutions, research foundations and similar organizations
and to industrial users in the semiconductor, pharmaceutical, chemicals, metals
and mining industries. Customers of the PEO Operations are located worldwide,
but primarily in Europe, the U.S. and Asia. The PEO Operations' sales of its
electron microscope systems and the results of its operations depend in
significant part upon the level of capital expenditures by its customers. These
capital expenditures in turn depend on the level of grant funding and the
anticipated demands for the products of these customers.
Electron microscopes are becoming increasingly important in meeting the
demands of the semiconductor industry for the production and testing of
semiconductors, and PEO Operations' sales growth is increasingly dependent upon
demand for capital equipment by semiconductor manufacturers. The semiconductor
industry is highly cyclical and has experienced periodic downturns, and these
fluctuations have resulted in periods of low demand for equipment used in
integrated circuit manufacturing, including products sold by the PEO Operations.
Sales by the PEO Operations depend in large part upon capital expenditures by
semiconductor manufacturers and semiconductor testing laboratories, which in
turn depend on the current and anticipated market demand for integrated circuits
and products using integrated circuits.
VARIABLE OPERATING RESULTS. The PEO Operations' operating results will
likely fluctuate in the future. Fluctuations in operating results may be caused
by a variety of factors, including the relatively high unit cost of products,
competitive pricing pressure, conditions in the semiconductor industry, the
timing of orders from major customers, timing and market acceptance of new
products, 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, production delays,
currency exchange rate fluctuations and cyclicality in markets other than the
semiconductor industry.
The PEO Operations derives most of its revenues from the sale of a
relatively small number of electron microscopes, typically ranging in price from
approximately $150,000 to $1.5 million, with an average price of approximately
$300,000. In addition, a substantial portion of net sales has generally been
realized near the end of each quarter, and sales of government-funded systems
are generally realized at the end of the fiscal year of the respective
government. As a result, delays in shipments near the end of a reporting period
could have a substantial negative effect on operating results for that period.
Unanticipated shipment reschedulings, unsuitability of customer sites and
unexpected technical difficulties due to the complexity of the products or
delays in deliveries by suppliers also may cause net sales in a reporting period
to fall significantly below management's expectations. These events could
adversely affect the PEO Operations' financial condition and results of
operations for a particular period. In addition, the PEO Operations' development
and initial production of its products and product enhancements are occasionally
accompanied by design and production delays and related costs of a nature
typically associated with the introduction and transition to full-scale
manufacture of complex capital equipment.
RESULTS OF OPERATIONS
The following tables set forth combined statement of income data for the PEO
Operations both in U.S. dollars and expressed as a percentage of sales for the
periods indicated. Operating results for the nine-month period ended September
30, 1996 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1996. In the opinion of management of the PEO
Operations, the unaudited financial information has been prepared on the same
basis as the audited financial
47
<PAGE>
information and includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and the
results of operations for these periods. The following combined financial
information should be read in conjunction with the Combined Financial Statements
of the PEO Operations included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
COMBINED INCOME STATEMENT DATA:
Sales................................... $ 71,631 $ 84,169 $ 109,117 $ 67,743 $ 71,059
Cost of sales........................... 34,424 38,566 57,301 33,231 38,303
----------- ----------- ----------- ----------- -----------
Gross profit............................ 37,207 45,603 51,816 34,512 32,756
Total operating expenses................ 33,262 36,130 44,271 30,999 35,055
Other (income).......................... -- -- (1,700) (1,700) --
----------- ----------- ----------- ----------- -----------
Income (loss) from operations before
taxes................................. 3,945 9,473 9,245 5,213 (2,299)
Tax expense (benefit)................... 1,519 3,580 3,317 1,956 (480)
----------- ----------- ----------- ----------- -----------
Net income (loss)....................... $ 2,426 $ 5,893 $ 5,928 $ 3,257 $ (1,819)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Sales................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 48.1 45.8 52.5 49.1 53.9
----- ----- ----- ----- -----
Gross profit............................ 51.9 54.2 47.5 50.9 46.1
Total operating expenses................ 46.4 42.9 40.6 45.8 49.3
Other income............................ -- -- 1.6 2.5 --
----- ----- ----- ----- -----
Income (loss) from operations before
taxes................................. 5.5 11.3 8.4 7.7 (3.2)
Tax expense (benefit)................... 2.1 4.3 3.0 2.9 (0.7)
----- ----- ----- ----- -----
Net income (loss)....................... 3.4% 7.0% 5.4% 4.8% (2.5)%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
As a business unit of PIE, the PEO Operations has historically been
consolidated in the combined financial statements of Philips not included in
this Proxy Statement. The reporting currency for Philips is the Netherlands
guilder. For the specific purpose of this Proxy Statement the combined financial
statements of the PEO Operations have been prepared using the U.S. dollar as the
reporting currency. A substantial part of the PEO Operations expenses, however,
are denominated in Netherlands guilders. Fluctuations between the exchange rate
of the Netherlands guilder against the U.S. dollar affect the comparison of the
financial data over the various periods. For a discussion of the impact of
exchange rate fluctuations on the PEO Operations' financial condition and
results of operations, see "Foreign Exchange Management."
The following table sets forth, for the periods and dates indicated, certain
information concerning the exchange rate for U.S. dollars into Netherlands
guilders based on the Noon Buying Rate for cable transfers
48
<PAGE>
in foreign currencies as certified for customs purposes by the Federal Reserve
Bank of New York (the "Noon Buying Rate"):
<TABLE>
<CAPTION>
PERIOD AVERAGE
CALENDAR PERIOD END (1) RATE (2) HIGH LOW
- - - - - - --------------------------------------------------------------------- ----------- ----------- --------- ---------
(NLG PER U.S. $1)
<S> <C> <C> <C> <C>
1992................................................................. 1.82 1.76 1.89 1.57
1993................................................................. 1.95 1.87 1.96 1.76
1994................................................................. 1.74 1.81 1.98 1.67
1995................................................................. 1.60 1.60 1.75 1.52
1996 (through September 30, 1996).................................... 1.71 1.68 1.73 1.61
</TABLE>
- - - - - - ------------------------
(1) The Noon Buying Rate at such dates differed from the rates used in the
preparation of the Combined Financial Statements of the PEO Operations on
such date. See Note 1 of Notes to Combined Financial Statements of the PEO
Operations.
(2) The average of the Noon Buying Rates on the last business day of each full
calendar month during the period.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET SALES. Net sales consist of revenues from sales of electron microscope
equipment and platforms, and customer service activities related to such
equipment, to third parties and Philips. Net sales for the nine months ended
September 30, 1996 increased $3.3 million (5.0)% to $71.1 million from $67.7
million for the nine months ended September 30, 1995. This increase resulted
from higher sales of platforms for FIB workstations to FEI, which increased by
$5.3 million over sales for the nine months ended September 30, 1995. FEI is the
largest single customer of the PEO Operations, and sales to FEI amounted to
18.4% of total net sales for the nine months ended September 30, 1996, compared
to 11.4% of total net sales for the nine months ended September 30, 1995.
Excluding sales to FEI, net sales for the nine months ended September 30, 1996
decreased $2.0 million (3%) to $58.0 million from $60.0 million for the nine
months ended September 30, 1995. Sales to Philips represented approximately 3.9%
and customer service activities represented approximately 22.3% of net sales for
the nine months ended September 30, 1996. For the nine months ended September
30, 1995, sales to Philips represented 1.2% and customer service activities
approximately 22.8% of net sales.
Despite the overall increase in net sales for the nine months ended
September 30, 1996, net sales in the third quarter of 1996 decreased compared to
the quarter ended September 30, 1995. This decline was primarily due to lower
shipments of SEM microscopes intended for the semiconductor industry, due to
technical problems related to the field emission electron focusing columns of
certain models, and lower shipments of several high-priced TEMs due to
production delays in meeting customer specifications.
GROSS PROFIT. Gross profit for the nine months ended September 30, 1996
declined by $1.8 million (5.1%) compared to the corresponding period in 1995.
This decrease was attributable to a provision for inventory obsolescence of $1.2
million (see Note 5 of Notes to Combined Financial Statements of the PEO
Operations), additional costs incurred in rescheduling the production process as
a result of a decline in sales to FEI due to lower than planned demand from the
semiconductor market, and intense price competition on sales in certain
geographic areas, such as Asia.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
$600,000 (9.0%) to $7.4 million for the nine months ended September 30, 1996
from $6.8 million for the nine months ended September 30, 1995. This increase is
the result of additional expenditures for the PEO Operations' ongoing research
program in SEM technology and research and development activities at the Delmi
S.r.o. ("Delmi") and ElectroScan Corporation ("ElectroScan") facilities. These
expenses are shown net of grants which decreased by $100,000 (11.0%) to $800,000
for the nine months ended September 30, 1996
49
<PAGE>
compared to $900,000 for the nine months ended September 30, 1995. This decline
is attributable to the completion of the PEO Operations' participation in
certain research and development programs related to the XL-series sponsored by
the government of The Netherlands and the European community, including the
Joint European Submicron Semiconductor Initiative ("JESSI") program. See
"Description of Business--Research and Development" and Note 4 to the Combined
Financial Statements of the PEO Operations. Research and development expenses
included $3.1 million and $2.7 million, respectively, for the nine months ended
September 30, 1996 and 1995 for research and development-related goods and
services provided by parties outside the PEO Operations, including Philips
Research Laboratories, other Philips affiliates and third parties.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses represent the costs of sales departments and customer
service departments (including time spent by service engineers). Also included
are the allocated costs of general management and administration in the
countries, the costs of general management and administration at the production
facilities and the allocated portion of the Philips corporate costs. Selling,
general and administrative expenses increased by $3.4 million (14.2%) to $27.6
million for the nine months ended September 30, 1996 from $24.2 million for the
nine months ended September 30, 1995. This increase is attributable to greater
expenditures to develop the market share of the PEO Operations in the U.S. and
Asia, and to higher levels of expenditures to develop sales of the Environmental
SEM manufactured by the ElectroScan division of the PEO Operations.
Additional costs incurred in the nine months ended September 30, 1996
associated with Japan for extra personnel, sales, service and applications
laboratory were $889,000. During 1996 an applications laboratory was opened in
Hong Kong. Additional costs, including rent and personnel, associated with this
facility during the nine months ended September 30, 1996 were approximately
$450,000. The PEO Operations also incurred additional operational costs,
including personnel costs, as a result of the acquisition of manufacturing
facilities in the Czech Republic (Delmi) and Wilmington, Massachusetts
(ElectroScan).
OTHER INCOME AND EXPENSES. In January 1995 the PEO Operations realized
other income of $1.7 million from a single transaction involving the sale of
technology licensing rights in the U.S.
INCOME TAXES. The PEO Operations are included in the consolidated income
tax return of Philips for each country where it has operations. The PEO
Operations has accounted for income taxes using the statutory percentage over
income from operations per country as if the PEO Operations were an independent
entity. See Note 16 to the Combined Financial Statements of the PEO Operations.
NET INCOME (LOSS). As a result of the foregoing items, the PEO Operations
realized a net loss of $1.8 million for the nine months ended September 30,
1996, compared to net income of $3.3 million for the nine months ended September
30, 1995. The loss primarily resulted from $2.6 million in additional selling,
general and administrative expenses principally incurred to develop a stronger
market presence in the U.S. and Asia; the $1.2 million provision for
high-tension tank obsolescence risk; additional costs incurred to reschedule the
production process; and additional operating expenses related to the acquisition
of Delmi and ElectroScan.
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NET SALES. Net sales increased $24.9 million (29.6%) to $109.1 million in
1995 from $84.2 million in 1994, and increased $12.6 million (17.6%) in 1994
from $71.6 million in 1993. This trend was primarily due to increased sales to
FEI of platforms for FIB workstations and to exchange rate fluctuations.
Significantly, 20.3% of the increase in sales in 1995 and 43.0% of the increase
in sales in 1994 were due to increases in the number of electron microscope
systems sold to FEI. From 1994 on, the largest single customer of the PEO
Operations was FEI. Sales to FEI have increased to approximately 12% of sales in
1995 from
50
<PAGE>
approximately 8.5% of sales in 1994 and approximately 4% of sales in 1993. No
other customer accounted for more than 10% of the PEO Operations' total net
sales for 1995. Excluding sales to FEI, net sales increased $19.1 million
(24.8%) to $96.1 million in 1995 from $77.0 million in 1994, which was an
increase of $7.0 million (11.4%) from $69.1 million in 1993. Due to exchange
rate fluctuations, net sales in 1995 increased by 14.3% and in 1994 by 3.2%.
The increase in the number of FIB workstation platforms and electron
microscope systems sold to FEI was due primarily to a high level of demand among
semiconductor manufacturers for additional manufacturing and testing capacity
and was accompanied each year by an increase in sales of equipment options and
upgrades, both for new and existing systems.
Sales to Philips represented approximately 2.3% of sales for 1995, 3.0% of
sales for 1994 and 3.6% of sales for 1993.
Customer service activities represented approximately 18.5% of sales for
1995, 22.9% for 1994 and 26.6% for 1993. Customer service revenues increased
3.7% in 1995 compared to 1994 and 1.7% in 1994 compared to 1993. This trend
primarily reflects the increasing complexity of electron microscopes and the
increasing size of the installed base of products as the PEO Operations has
achieved additional sales. Customer service activities relate entirely to
service of products sold by the PEO Operations.
GROSS PROFIT. Gross profit increased $6.2 million (13.6%) to $51.8 million
in 1995 from $45.6 million in 1994, and increased $8.4 million (22.6%) to $45.6
million in 1994 from $37.2 million in 1993. Gross profit as a percentage of net
sales was 47.5%, 54.2% and 51.9% for 1995, 1994 and 1993, respectively. The
increase in gross profit as a percentage of net sales in 1994 as compared to
1993 was due to a 17.5% increase in sales exceeding a 12.0% increase in cost of
sales. The decrease in gross profit as a percentage of net sales in 1995 was
primarily due to the effect of the lower U.S. dollar-Netherlands guilder
exchange rate and the PEO Operations' increased exposure to exchange rate risk
as more sales were made over a greater geographical area. Specifically, sales in
non-European countries increased from approximately 48% of sales in 1993 to
approximately 63% of sales in 1995. The PEO Operations' sales revenues outside
of Europe are generally denominated in U.S. dollars and a large percentage of
the PEO Operations' production and purchasing expenses are denominated in
Netherlands guilders. As a result, the PEO Operations' operating income and cash
flows are significantly exposed to appreciation in the Netherlands guilder
against the U.S. dollar. See "Foreign Exchange Management."
RESEARCH AND DEVELOPMENT COSTS. Research and development costs increased by
$2.2 million (31.9%) to $9.1 million in 1995 from $6.9 million in 1994, which
was an increase of $1.8 million (35.3%) on 1993 expenses of $5.1 million. These
amounts included $3.8 million, $3.2 million and $2.3 million, respectively, for
research and development related goods and services provided by parties outside
the PEO Operations, including Philips Research Laboratories, other Philips
affiliates and third parties. The increases in research and development expenses
from 1993 to 1995 resulted from ongoing efforts to meet the requirements of the
PEO Operations' semiconductor industry customers; to upgrade the XL-series; and
to provide related equipment technology upgrades for the PEO Operations'
installed base of electron microscope systems.
As a percentage of net sales, research and development expense less certain
research and development grants was 8.4%, 8.1% and 7.2% in 1995, 1994 and 1993,
respectively. These research and development grants decreased by $300,000 (18%)
to $1.4 million in 1995 from $1.7 million in 1994, which represented a decrease
of $400,000 (19%) compared to 1993 grants of $2.1 million. These declines
primarily reflect the completion of the PEO Operations' participation in certain
research and development programs related to the XL-series sponsored by the
government of The Netherlands and the European Community, including the JESSI
program. Research and development grants are expected to continue to decline as
the European Community concludes the JESSI program. See "Business of PEO
Operations-- Research and Development" and Note 4 to Combined Financial
Statements of the PEO Operations.
51
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses represent the costs of sales departments and customer
service departments (including time spent by service engineers). Also included
are the allocated costs of general management and administration in the
countries, the costs of general management and administration at the production
facilities and the allocated portion of the Philips corporate costs. Selling,
general and administrative expenses increased by $5.9 million (20.2%) to $35.2
million in 1995 from $29.3 million in 1994, an increase of $1.2 million (4.1%)
on 1993 expenses of $28.1 million. Selling, general and administrative expenses
expressed as a percentage of sales were 32.2%, 34.8% and 39.3% in 1995, 1994 and
1993, respectively. The increases in the absolute levels of these expenses
reflect increased staffing levels in the PEO Operations' applications and sales
support functions, primarily to accommodate increased sales volumes. The
decrease in these expenses as a percentage of sales reflects increasing sales to
OEM customers, including FEI, and improved efficiencies due to the PEO
Operations' investments in its distribution channels.
FOREIGN EXCHANGE MANAGEMENT
The PEO Operations' sales revenues outside Europe (except for sales to FEI)
are generally denominated in U.S. dollars; however, most of its expenses are
denominated in Netherlands guilders. As a result, the PEO Operations' operating
income and cash flows are significantly exposed to fluctuations in the exchange
rate of the Netherlands guilder against the U.S. dollar. Furthermore, the PEO
Operations are exposed to translation risks on its equity because a substantial
part of its assets are located in The Netherlands, where the Netherlands guilder
is the functional currency. In the short term, the foreign exchange risk
relating to existing monetary positions is limited and management of the PEO
Operations has to date decided not to hedge this limited foreign currency
exposure.
INFLATION
In recent years, inflation has not had a material impact on costs of the PEO
Operations. Increases in the prices of the subsystems and components purchased
by the PEO Operations from its suppliers due to inflation, however, may have an
impact on costs of the PEO Operations which the Combined Operations may not be
able to reflect fully in its pricing structure.
52
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited financial data for each of
the eleven quarters in the period beginning January 1, 1994 and ended September
30, 1996. In the opinion of management of the PEO Operations, this information
has been prepared on the same basis as the audited combined financial
information appearing elsewhere in this Proxy Statement and includes all
adjustments (consisting only of normal recurring adjustments) needed to fairly
present 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.
<TABLE>
<CAPTION>
1994 1995
---------------------------------------------- ----------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- --------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales.......................... $ 13,634 $ 20,535 $ 17,761 $ 32,239 $ 16,815 $ 20,387 $ 30,412 $ 41,503
Cost of sales.................. 4,391 10,666 7,680 15,829 6,857 9,327 16,634 24,483
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Gross profit................... 9,243 9,869 10,081 16,410 9,958 11,060 13,778 17,020
Research and development
costs......................... 1,315 1,847 1,638 2,050 2,056 2,446 2,315 2,270
Selling, general and
administrative costs.......... 6,698 7,305 7,670 7,607 7,741 8,465 8,390 10,588
Other income................... -- -- -- -- 1,700 -- -- --
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Income (loss) from
operations.................... 1,230 717 773 6,753 1,861 149 3,073 4,162
Tax expense (benefit).......... 460 261 283 2,576 668 53 1,103 1,493
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Net income (loss).............. $ 770 $ 456 $ 490 $ 4,177 $ 1,193 $ 96 $ 1,970 $ 2,669
----------- --------- ----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- --------- ----------- ---------
<CAPTION>
1996
-----------------------------------
MARCH 31 JUNE 30 SEPT. 30
----------- --------- -----------
<S> <C> <C> <C>
Sales.......................... $ 17,593 $ 26,159 $ 27,307
Cost of sales.................. 7,374 13,531 17,398
----------- --------- -----------
Gross profit................... 10,219 12,628 9,909
Research and development
costs......................... 2,411 2,564 2,472
Selling, general and
administrative costs.......... 8,497 9,195 9,916
Other income................... -- -- --
----------- --------- -----------
Income (loss) from
operations.................... (689) 869 (2,479)
Tax expense (benefit).......... (144) 181 (517)
----------- --------- -----------
Net income (loss).............. $ (545) $ 688 $ (1,962)
----------- --------- -----------
----------- --------- -----------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The PEO Operations participates in Philips' centralized cash management
program, pursuant to which cash receipts are remitted to Philips and cash
disbursements are funded by Philips with Philips retaining any excess cash.
Specifically, cash inflows and outflows are credited and debited to Division
Equity, which serves as an intercompany receivable account. The PEO Operations
will continue to participate in Philips' centralized cash management program
until Closing. After Closing the PEO Operations will not have access to
financing through Philips' intercompany accounts. As provided in the Combination
Agreement, the PEO Operations will include $8.0 million in cash at Closing;
however, Philips and any of its affiliates are not obligated to provide
additional funds to the PEO Operations under the terms of the Combination
Agreement or otherwise. Philips has also advised FEI that it has no intention to
provide any funds to the Combined Operations following Closing.
Net cash used in operating activities for the nine months ended September
30, 1996 was $6.9 million, compared to $4.8 million for the nine months ended
September 30, 1995. Net cash used in (provided by) operating activities was $2.5
million, ($4.7 million) and ($1.2 million) for the years ended December 31,
1995, 1994 and 1993, respectively.
The primary component of net cash used in operating activities during the
nine-month periods of 1996 and 1995 was the increase in inventories of $10.9
million and $10.7 million, respectively. The high level of work in process and
purchased finished goods at the end of the third quarter reflects the planned
high level of deliveries in the fourth quarter.
Capital expenditures were $2.8 million for the nine months ended September
30, 1996, compared to $2.2 million for the nine months ended September 30, 1995.
In addition, $2.7 million was used in the 1996 nine month period for the
acquisitions of Delmi and ElectroScan, resulting in net cash used in investing
activities of $5.5 million for the nine months ended September 30, 1996. Capital
expenditures were $2.4 million, $1.8 million and $1.4 million for the years
ended December 31, 1995, 1994 and 1993, respectively.
53
<PAGE>
These capital expenditures were primarily for replacement and improvement of
processing equipment, demonstration equipment and plant modernization.
Total cash provided by Philips was $12.4 million for the nine months ended
September 30, 1996, compared to $7.0 million for the nine months ended September
30, 1995. For the years ended December 31, 1995 and 1993 Philips provided $4.9
million and $200,000 in cash, respectively. For the year ended December 31, 1994
the PEO Operations returned $2.9 million to Philips.
After Closing, the PEO Operations will require increases in working capital
to support sales growth, investments in research and development and
manufacturing facilities and equipment, and any such increase must be funded by
the Combined Operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of FEI Company--Liquidity and Capital
Resources."
PRELIMINARY FOURTH QUARTER RESULTS (UNAUDITED)
Based on unaudited preliminary information, net sales for the PEO Operations
increased to approximately $45.0 million for the three months ended December 31,
1996, compared to $41.4 million for the three months ended December 31, 1995.
This increase in net sales was due primarily to an increase in sales of scanning
electron microscopes during the three months ended December 31, 1996. During
this period, sales of platforms for FIB workstations to FEI decreased compared
with the same three month period in 1995. Operating income and net income for
the PEO Operations for the three months ended December 31, 1996 were
approximately $2.8 million and $2.1 million respectively, compared to $4.0
million and $2.3 million for the three months ended December 31, 1995. The
estimated decrease in operating income and net income of approximately $1.2
million and $200,000, respectively, resulted from an increase in cost of sales
due to a low level of production efficiency during the initial production runs
of a number of new products, and of new features on existing products,
introduced in 1996.
PRO FORMA COMBINED FINANCIAL STATEMENTS
FEI COMPANY AND PEO OPERATIONS
(UNAUDITED)
The following unaudited pro forma financial statements reflect the
combination of the business of FEI and the PEO Operations. The transaction is
accounted for using the purchase method of accounting. In applying the purchase
method of accounting, the PEO Operations has been determined to be the acquirer.
Accordingly, the financial information for the PEO Operations has been presented
at historical amounts and the purchase accounting adjustments have been applied
to the consolidated financial statements of FEI.
The total acquisition cost of FEI has been determined and the constituent
amounts have been allocated to the assets to be acquired and obligations to be
assumed as follows:
<TABLE>
<S> <C> <C>
Equity, based on 7,957,000 shares outstanding and an average
price per share (for the five trading days immediately
preceding and following the September 5, 1996 announcement
date) of $11.40................................................ $ 90,709,000
Fair market value of outstanding stock options, valued according
to the Black Scholes method (options covering 1,293,000
shares)........................................................ 8,500,000
Liabilities
Current liabilities............................................ 11,308,000
Deferred tax liabilities....................................... 489,000
Deferred tax liabilities (transaction related)................. 6,054,000
Capitalized transaction costs.................................. 2,500,000
Total liabilities.............................................. 20,351,000
-------------
Total estimated purchase price................................... $ 119,560,000
-------------
-------------
</TABLE>
54
<PAGE>
The unaudited pro forma combined balance sheet as of September 30, 1996 was
prepared as if the Combination had occurred on that date. The unaudited pro
forma combined statements of operations for the year ended December 31, 1995 and
the nine months ended September 30, 1996 were prepared as if the Combination had
occurred at the beginning of the respective periods. The pro forma combined
statements of operations do not include a nonrecurring charge of $36.2 million
related to the portion of the fair value of FEI allocated to in-process
technology. This amount will be expensed by the Combined Operations upon
Closing. The pro forma combined balance sheet at September 30, 1996 is presented
as if the in-process technology were written off on January 1, 1996.
In the opinion of management of FEI, all adjustments necessary to present
fairly such pro forma financial statements have been made based on the proposed
terms and structure of the Combination. FEI anticipates, however, that changes
in the composition of the assets to be acquired and liabilities to be assumed
will occur due to changes in the ordinary course of business of the respective
companies prior to Closing. FEI believes any related change in adjustments will
not be material to the pro forma combined financial statements. Changes in the
progress made on research and development projects, however, could have a
significant impact on the allocation of the purchase price among existing
technology, in-process technology and goodwill. Pursuant to the Combination
Agreement, FEI and Philips are required to operate the FEI business and the PEO
Operations in the ordinary course until Closing.
These unaudited pro forma combined financial statements are not necessarily
indicative of what actual results would have been if the Combination had
occurred at the beginning of the respective periods nor do they purport to
indicate the results of future operations of FEI and the PEO Operations. These
unaudited pro forma combined financial statements should be read in conjunction
with the accompanying notes and historical financial statements and notes
thereto of FEI and the PEO Operations, respectively, included elsewhere in this
Proxy Statement.
Before the Combination, the PEO Operations was operated as a business unit
of PIE. Management of Philips allocated certain costs in preparation of the
historical financial statements of the PEO Operations. No assurance is given
that these cost allocations reflect the actual costs that would have been
incurred by the PEO Operations if it had been operated as a stand-alone
business. See "Combined Financial Statements of the PEO Operations" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the PEO Operations."
55
<PAGE>
FEI COMPANY AND PEO OPERATIONS
PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
PEO FEI ADJUSTMENTS COMBINED
--------- --------- --------------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents...................................... $ -- $ 1,485 $ 5,500(a) $ 6,985
Trade accounts receivable...................................... 17,161 12,232 (2,126)(b) 27,267
Other accounts receivable/prepaid expenses..................... 2,071 421 2,492
Inventories.................................................... 35,915 18,790 (3,422)(c) 51,283
Current accounts with Philips.................................. 1,293 -- 1,293
Deferred income taxes.......................................... -- 994 994
--------- --------- --------------- ----------
Total current assets........................................... 56,440 33,922 (48) 90,314
Investments.................................................... -- 1,000 1,000
Tangible fixed assets.......................................... 7,403 8,295 3,177(d) 18,875
Lease receivables.............................................. -- 2,532 2,532
Other assets................................................... 4,912 6,132 11,044
Goodwill and other intangibles................................. 1,897 -- 16,956(e) 18,853
Existing technology............................................ -- -- 12,500(e) 12,500
--------- --------- --------------- ----------
TOTAL ASSETS................................................... $ 70,652 $ 51,881 $ 32,585 $ 155,118
--------- --------- --------------- ----------
--------- --------- --------------- ----------
LIABILITIES AND EQUITY
Line of credit................................................. $ -- $ 3,328 $ 3,328
Accounts payable............................................... 7,198 4,358 (2,126)(b) 9,430
Accrued payroll liabilities.................................... 394 802 1,196
Prepayments received........................................... 5,321 -- 5,321
Accrued expenses/deferred income............................... 11,959 1,302 13,261
Short-term provisions.......................................... 3,332 1,121 4,453
Income taxes payable........................................... -- 397 397
--------- --------- --------------- ----------
Total current liabilities.................................. 28,204 11,308 (2,126) 37,386
Long-term provisions........................................... 1,313 -- 1,313
Deferred income taxes.......................................... -- 489 6,054(f) 6,543
Equity
Preferred stock--500,000 shares authorized;
none issued and outstanding................................ -- -- --
Common stock--15,000,000 shares authorized;
7,956,933 shares issued and outstanding, FEI historical;
17,682,074 shares issued and outstanding, pro forma
combined................................................... -- 31,658 78,218 109,876
Retained earnings............................................ -- 8,418 (8,418) --
Cumulative foreign currency translation adjustment........... -- 8 (8) --
Division equity.............................................. 41,135 -- (41,135) --
--------- --------- --------------- ----------
Total equity............................................... 41,135 40,084 28,657 109,876
TOTAL LIABILITIES AND EQUITY................................... $ 70,652 $ 51,881 $ 32,585 $ 155,118
--------- --------- --------------- ----------
--------- --------- --------------- ----------
</TABLE>
See Notes to Pro Forma Combined Balance Sheet
56
<PAGE>
NOTES TO PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C>
a. Adjustment to cash and cash equivalents consists of the following:
To reflect the cash contribution by Philips to the PEO Operations at Closing
pursuant to the terms of the Combination Agreement............................ $ 8,000,000
To reflect estimated costs of the Combination................................... (2,500,000)
------------
$ 5,500,000
------------
------------
b. Adjustment to trade accounts receivable and accounts payable consists of the
following:
To reflect the elimination of intercompany payables between FEI and the PEO
Operations. At September 30, 1996 approximately $50,000 was due to FEI for
emitter products, and approximately $2,076,000 was due to the PEO Operations
for platforms and spare parts................................................. $ (2,126,000)
------------
------------
c. Adjustment to inventories consists of the following:
To reflect the elimination of intercompany investment in inventories............ $ (3,422,000)
------------
------------
d. Adjustment to tangible fixed assets consists of the following:
To reflect the difference between the fair market value and the book value of
FEI's fixed assets............................................................ $ 3,177,000
------------
------------
e. Adjustment to record the difference between the estimated purchase price and the
tangible net worth of FEI. Under the reverse acquisition method of accounting,
whereby the PEO Operations is deemed to have acquired the assets of FEI, the
total acquisition cost of FEI has been determined and the constituent amounts
have been allocated to the assets to be acquired and obligations to be
assumed, as follows:
Excess of estimated costs of acquisition over the estimated fair values of
tangible and identifiable intangible assets of FEI............................ $ 16,956,000
------------
------------
Existing technology, representing the estimated net present value of future
gross margins, less associated operating expenses, for the current product
lines of FEI.................................................................. $ 12,500,000
------------
------------
In addition, a one-time charge of $36,163,000 associated with the writeoff of
acquired in-process research and product development will reduce operating
income and shareholders' equity subsequent to the date of Closing. The pro
forma combined balance sheet is presented as if the in-process technology were
written off on January 1, 1996.
The amortization periods for existing technology and goodwill have been
established at 12 years and 15 years respectively. The existing focused ion
beam technology, which is now in its third year of commercialization, is
estimated to have a 15-year life. Management expects to evaluate these
amortization periods from time to time. It is possible that estimates of
anticipated future gross revenues, the remaining estimated economic life of
products or technologies, or both may be reduced due to competitive pressures
or other factors.
f. Adjustment to deferred income taxes consists of the following:
To reflect the impact of tax effects on creation of the existing technology
asset and the additional value of fixed assets................................ $ (6,054,000)
------------
------------
</TABLE>
57
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31, 1995 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------- PRO FORMA PRO FORMA
PEO FEI ADJUSTMENTS COMBINED
---------- --------- --------------- ----------
<S> <C> <C> <C> <C>
Net sales................................................... $ 109,117 $ 41,691 $ (14,207)(a) $ 136,601
Cost of sales............................................... 57,301 26,017 4,727(b) 88,045
---------- --------- --------------- ----------
Gross profit............................................ 51,816 15,674 (18,934) 48,556
Operating expenses:
Research and development expenses......................... 9,087 2,566 340(c) 11,993
Selling, general and administrative expenses.............. 35,184 7,197 (17,197)(d) 25,184
Amortization of intangibles............................... -- -- 2,172(e) 2,172
Other (income)............................................ (1,700) -- -- (1,700)
---------- --------- --------------- ----------
Income from operations...................................... 9,245 5,911 (4,249) 10,907
Other income (expense)...................................... -- (120) (57)(f) (177)
---------- --------- --------------- ----------
Income before taxes......................................... 9,245 5,791 (4,300) 10,730
Income tax expense.......................................... 3,317 2,050 (1,234)(g) 4,133
---------- --------- --------------- ----------
Net income.................................................. $ 5,928 $ 3,741 $ (3,072) $ 6,597
---------- --------- --------------- ----------
---------- --------- --------------- ----------
Pro forma net income per share.............................. $ 0.44
----------
----------
Weighted average shares outstanding......................... 6,603 8,537(h) 15,140
--------- --------------- ----------
--------- --------------- ----------
</TABLE>
See Notes to Pro Forma Combined Statement of Operations
for the Year Ended December 31, 1995
58
<PAGE>
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
a. Adjustment to sales consists of the following:
To reflect a net elimination of sales from the PEO Operations to FEI of
$13,691,000 and from FEI to the PEO Operations of $516,000.................... $ (14,207,000)
-------------
-------------
b. Adjustments to cost of sales consist of the following:
To eliminate intercompany profit in ending inventories.......................... $ 1,423,000
To reclassify customer service costs of the PEO Operations to cost of sales..... 17,085,000
To record estimated rent ($600,000, which consists of 50% of the estimated total
annual rent of $1.2 million (the "Estimated Annual Rent") allocated to cost of
sales) and eliminate depreciation expense ($174,000, which consists of 50% of
the total depreciation expense of $349,000 (the "Total Annual Depreciation
Expense") allocated to cost of sales) for land and building located in
Eindhoven, The Netherlands not acquired pursuant to the Combination Agreement
(the Eindhoven property)...................................................... 426,000
To eliminate sales from PEO Operations to FEI of $13,691,000 and from FEI to PEO
Operations of $516,000........................................................ (14,207,000)
-------------
$ 4,727,000
-------------
-------------
c. Adjustment to research and development expense consists of the following:
To record estimated rent ($480,000, which consists of 40% of the Estimated
Annual Rent allocated to research and development expense) and eliminate
depreciation expense ($140,000, which consists of 40% of the Total Annual
Depreciation Expense allocated to research and development expense) for the
Eindhoven property attributable to research and development activities........ $ 340,000
-------------
-------------
d. Adjustments to selling, general and administrative expense consist of the
following:
To reflect estimated increases in administrative expense resulting from the
Combination for increased professional services ($100,000) and increased
personnel expense to provide services formerly provided by Philips and
included in Philips' corporate charges ($200,000)............................. $ 300,000
To record estimated rent ($120,000, which consists of 10% of the Estimated
Annual Rent allocated to selling, general and administrative expense) and
eliminate depreciation expense ($35,000, which consists of 10% of the Total
Annual Depreciation Expense allocated to research and development expense) for
the Eindhoven property attributable to selling and administrative activities.. 85,000
To eliminate corporate charges from Philips to the PEO Operations to be
discontinued following Closing................................................ (1,070,000)
To reclassify customer service costs of the PEO Operations to cost of sales..... (17,085,000)
To reflect the increased depreciation expense for the estimated fair market
value of FEI's fixed assets................................................... 630,000
To eliminate intercompany interest paid to FEI by the PEO Operations in late
1995 for early payments, accounted for by the PEO Operations as a sales
discount...................................................................... (57,000)
-------------
$ (17,197,000)
-------------
-------------
</TABLE>
59
<PAGE>
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED) (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
e. Amortization of intangibles consists of the following:
To reflect amortization of $16,956,000 of goodwill and $12,500,000 of existing
technology over estimated useful lives of 12 to 15 years...................... $ 2,172,000
-------------
-------------
f. Adjustment to other income (expense) consists of the following:
To eliminate intercompany interest paid to FEI by the PEO Operations for early
payments in 1995, accounted for by FEI as interest income..................... $ (57,000)
-------------
-------------
g. Adjustment to provision for income taxes (at an assumed effective rate of
approximately 39%) consists of the following:
To reflect the income tax effect of pro forma adjustments in (a) through (f)
above......................................................................... $ (1,234,000)
-------------
-------------
h. Adjustment to weighted average shares outstanding for the year ended December
31, 1995 consists of the following:
To reflect shares to be issued to PIE pursuant to the Combination Agreement,
consisting of approximately 7,229,000 shares (based on approximately 5,915,000
average shares outstanding for the year ended December 31, 1995), plus
approximately 1,308,000 shares assumed issued to account for dilutive options
and warrants to purchase an aggregate of approximately 1,070,000 shares
outstanding for the year ended December 31, 1995.............................. 8,537,000
-------------
-------------
</TABLE>
60
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
PEO FEI ADJUSTMENTS COMBINED
--------- --------- --------------- ---------
<S> <C> <C> <C> <C>
Net sales...................................................... $ 71,059 $ 33,576 $ (11,635)(a) $ 93,000
Cost of sales.................................................. 38,303 21,605 4,722(b) 64,630
--------- --------- --------------- ---------
Gross profit............................................... 32,756 11,971 (16,357) 28,370
Operating expenses:
Research and development expense............................. 7,447 2,809 260(c) 10,516
Selling, general and administrative expense.................. 27,608 7,364 (12,619)(d) 22,353
Amortization of intangibles.................................. -- -- 1,629(e) 1,629
--------- --------- --------------- ---------
Income (loss) from operations.................................. (2,299) 1,798 (5,627) (6,128 )
Other income (expense)......................................... -- 393 -- 393
--------- --------- --------------- ---------
Income (loss) before taxes..................................... (2,299) 2,191 (5,627) (5,735 )
Income tax expense (benefit)................................... (480) 872 (1,852)(f) (1,460 )
--------- --------- --------------- ---------
Net income (loss).............................................. $ (1,819) $ 1,319 $ (3,775) $ (4,275 )
--------- --------- --------------- ---------
--------- --------- --------------- ---------
Pro forma net income (loss) per share.......................... $ (0.25 )
---------
---------
Weighted average shares outstanding............................ 8,038 9,071(g) 17,109
--------- --------------- ---------
--------- --------------- ---------
</TABLE>
See Notes to Pro Forma Combined Statement of Operations
for the Nine Months Ended September 30, 1996
61
<PAGE>
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<S> <C> <C>
a. Adjustment to sales consists of the following:
To reflect a net elimination of sales from the PEO Operations to FEI of
$11,199,000 and from FEI to the PEO Operations of $436,000.................... $ (11,635,000)
-------------
-------------
b. Adjustments to cost of sales consist of the following:
To eliminate intercompany profit in ending inventories.......................... $ 3,422,000
To reclassify customer service costs of the PEO Operations to cost of sales..... 12,610,000
To record estimated rent ($450,000, which consists of 50% of the estimated total
nine-month period rent of $900,000 (the "Estimated Period Rent") allocated to
cost of sales) and eliminate depreciation expense ($125,000, which consists of
50% of the total period depreciation expense of $250,000 (the "Total Period
Depreciation Expense") allocated to cost of sales) for the Eindhoven
property...................................................................... 325,000
To eliminate sales from the PEO Operations to FEI of $11,199,000 and from FEI to
the PEO Operations of $436,000................................................ (11,635,000)
-------------
$ 4,722,000
-------------
-------------
c. Adjustment to research and development expense consists of the following:
To record estimated rent ($360,000, which consists of 40% of the Estimated
Period Rent allocated to research and development expense) and eliminate
depreciation expense ($100,000, which consists of 40% of the Total Period
Depreciation Expense allocated to research and development expense) for the
Eindhoven property attributable to research and development activities........ $ 260,000
-------------
-------------
d. Adjustments to selling, general and administrative costs for the nine months
ended September 30, 1996 consist of the following:
To reflect estimated increases in administrative expense resulting from the
Combination for increased professional services ($75,000) and increased
personnel expense to provide services formerly provided by Philips and
included in Philips' corporate charges ($175,000)............................. $ 250,000
To record estimated rent ($90,000, which consists of 10% of the Estimated Period
Rent allocated to selling, general and administrative expense) and eliminate
depreciation expense ($25,000, which consists of 10% of the Total Period
Depreciation Expense allocated to research and development expense) for the
Eindhoven property attributable to selling and administrative activities...... 65,000
To eliminate corporate charges from Philips to the PEO Operations to be
discontinued following Closing................................................ (794,000)
To reclassify the PEO Operations' customer service costs to cost of sales....... (12,610,000)
To reflect the increased depreciation expense for the estimated fair market
value of FEI's fixed assets................................................... 470,000
-------------
$ (12,619,000)
-------------
-------------
</TABLE>
62
<PAGE>
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED) (CONTINUED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<S> <C> <C>
e. Amortization of intangibles consists of the following:
To reflect amortization of $16,956,000 of goodwill and $12,500,000 of existing
technology over estimated useful lives of 12 to 15 years...................... $ 1,629,000
-------------
-------------
f. Adjustment to provision for income taxes (at an assumed effective rate of
approximately 25%) consists of the following:
To reflect the income tax effect of pro forma adjustments in (a) through (e)
above......................................................................... $ (1,852,000)
-------------
-------------
g. Adjustment to weighted average shares outstanding for the nine months ended
September 30, 1996 consists of the following:
To reflect shares to be issued to PIE pursuant to the Combination Agreement,
consisting of approximately 9,410,000 shares (based on approximately 7,699,000
average shares outstanding for the nine months ended September 30, 1996), less
approximately 339,000 shares assumed outstanding under the treasury stock
method that are antidilutive because the Combined Operations would have
generated a net loss for the nine months ended September 30, 1996............. 9,071,000
-------------
-------------
</TABLE>
63
<PAGE>
BUSINESS OF FEI COMPANY
INTRODUCTION
FEI is a leader in the design, manufacture, and sale of focused ion beam
("FIB") workstations and components based on field emission technology. By
precisely focusing a high current density ion beam, an FIB workstation enables
its user 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 within submicron tolerances. FEI's FIB workstations are
sold primarily to integrated circuit ("IC") manufacturers and are used in the
design, manufacture, monitoring, defect review and analysis, modification and
repair of microelectronic structures. The capabilities of a FIB workstation
allow its user to perform analysis and modification using a single system, with
accuracy, precision and speed that previously were not possible. FEI believes
its FIB workstation is a cost-effective tool that allows microelectronics
manufacturers to reduce time to market and achieve and maintain the high
manufacturing yields needed in the competitive microelectronics market.
FEI was founded in 1971 to manufacture charged particle emitters (ion and
electron sources), began manufacturing and selling ion and electron focusing
columns in the early 1980s and evolved into a manufacturer of FIB workstations
in 1989. Its latest line of FIB workstations is fully digital, controlled by a
Windows-based graphical user interface and is available in both ion beam and
dual ion-electron beam models. FEI continues to sell a broad line of emitters
and focusing columns and believes its expertise and experience in the
manufacture of emitters and focusing columns, in particular its technical
background in field emission technology, give it a competitive advantage in the
FIB workstation market. As microelectronic structures become smaller,
contamination control becomes increasingly important to microelectronics
manufacturers. FEI's latest models of FIB workstations are intended to address
cleanroom concerns by providing robotic wafer handling and automatic wafer
alignment.
FEI's principal customers include Advanced Micro Devices, Inc., Cirrus
Logic, Inc., Hewlett-Packard Company, Hyundai Electronic Industrial Co. Ltd.,
Intel Corporation, International Business Machines Corporation, Micron
Technology, Inc., Motorola, Inc., SGS-Thomson Microelectronics Inc. and Philips
Semiconductors Inc.
FEI markets its products worldwide from its headquarters in Hillsboro,
Oregon, and has offices or subsidiaries in Cambridge, U.K.; Munich, Germany;
Eindhoven, The Netherlands and Seoul, Korea. FEI's sales strategy has been to
use its global direct sales force in the U.S. and Europe and independent sales
representatives and distributors in Asia and other non-European foreign markets.
SCIENTIFIC BACKGROUND
FEI is a world leader in the research and development of charged particle
(ion and electron) emission technology and has 25 years of experience with this
technology. The emission of ions (positively or negatively charged atoms) or
electrons from a source material is fundamental to each of FEI's products.
There are two general mechanisms for particle emission: thermionic and field
emission. In thermionic emission, which applies to the release of electrons, the
source material is heated, thermally "exciting" electrons over the potential
energy barrier and out of the source. Electrons are then drawn off by the
application of an electric extraction field. Thermionic emission is used to
produce electron beams for electron microscopes and other traditional surface
analysis applications. In field emission, which applies to both electron and ion
emission, an electric field is applied directly to the tip of the source
material to weaken the potential energy barrier. Electrons or ions then "tunnel"
through the source material, producing a significantly brighter charged particle
beam than produced by thermionic emission. Field emission is used in FIB
workstations, in critical dimension tools and in high performance scanning and
transmission electron microscopes.
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<PAGE>
The source material for an ion or electron beam is formed into a
needle-shaped tip. This electron or ion source is referred to as an "emitter."
Electron emitters are manufactured from a variety of source materials, including
a single crystal of lanthanum hexaboride for use in thermionic emission and a
tungsten or zirconium/tungsten cathode for use in electron field emission. Ion
emitters are manufactured from a variety of liquid metal materials, including
gallium, indium and various alloys of other elements. The liquid metal ion
("LMI") source consists of a needle and a coiled wire support structure that
holds a droplet of liquid metal. A spray of ions is released when a high energy
electric field is applied to the source.
In both ion and electron emission, the spray formation of the ion or
electron beam must be focused for use in FIB workstations or electron
microscopes. Focusing columns use electrodes to generate one or more
electrostatic fields that serve as lenses to focus the maximum beam current into
a very small area.
The fundamental properties of ion and electron beams permit them to perform
different functions. The relatively low mass subatomic electrons interact with
the sample and release secondary electrons. When collected, these secondary
electrons provide high quality images at near atomic level resolution. The much
greater mass ions dislodge surface particles, also resulting in displacement of
secondary ions and electrons. The surface is thus modified or milled with
submicron precision by direct action of the ion beam. Secondary electrons and
ions may be collected for imaging and compositional analysis.
PRODUCTS
FEI's principal products are FIB workstations, which incorporate an ion
emitter and a two-lens focusing column on a vacuum chamber. FEI's latest
generation of FIB workstations has fully digital electronic control and beam
placement accuracy within 0.25 microns. FEI also manufactures and sells ion and
electron emitters and focusing columns.
FIB WORKSTATIONS
FEI's line of FIB workstations includes the moderately priced two-inch stage
model 200, the eight-inch stage model 800 and the DualBeam models 620 and 820,
which place field emission ion and scanning electron beam columns on a single
vacuum chamber. Sales of FIB workstations accounted for approximately 58%, 74%
and 67% of FEI's net sales in 1994, 1995 and the nine months ended September 30,
1996, respectively. FEI shipped its first FIB workstation in June 1989 and the
first of its line of fully digital workstations in the third quarter of 1993.
FEI's FIB workstations are comprised of an emitter and a focusing column on a
vacuum chamber, with computer-controlled sample stage and associated
electronics. Proprietary Windows-based software controls column focusing, stage
manipulation, imaging and other functions of the workstation.
By precisely focusing a high current density ion beam derived from the
emitter, FEI's FIB workstations allow users to view, mill, cut, deposit material
on and determine the chemical composition of samples, all within submicron
tolerances. Computer-assisted tilt and rotation permit the sample to be
manipulated on any of five axes. The rotation capability eases manipulation of
samples for metal vapor deposition, three-dimensional cross section milling and
similar complex operations, while the tilt capability is valuable for rapid,
direct observation of cross sections. See "FIB Applications."
Computer control of the ion column, digital image acquisition and stage
position are provided to the operator through pull-down menus and images on a
single screen by means of Windows-based software written by FEI. Control of the
focusing column in FEI's new line of workstations is fully digital, increasing
ease of use and facilitating further software enhancements. Software options
provide digital image processing with color-coded output possibilities. The
software is compatible with Microsoft Windows application programs, enabling the
user to incorporate workstation images directly from the screen into written
reports.
65
<PAGE>
FEI's DualBeam workstation consists of an ion beam column and an electron
beam column in a V-shaped configuration with the electron beam column in a
vertical position. FEI believes this configuration provides greater electron
beam performance, including greater stability, than alternative configurations,
and thus is more attractive for cleanroom applications. This design allows any
target area on the sample to be placed in position for rapid and efficient
alternation between ion beam milling and electron beam viewing. Separate scan
generators for the two beams permit coupled or independent beam use. The
location of both ion and electron beams in the same vacuum chamber permits the
user to perform a wider variety of procedures on a sample without moving the
sample repeatedly from one vacuum chamber to another, thereby reducing exposure
to contaminants and decreasing work time. FEI's DualBeam workstations also
provide certain capabilities not possible with the use of stand-alone ion and
electron beam tools. These include cross section electron imaging during FIB
milling, immediate high-resolution electron microscope imaging of FIB cross
sections without the slight erosion of features entailed in FIB imaging and
electron and ion beam-assisted material deposition. FEI is developing new
DualBeam models with eight-inch stages that are cleanroom-compatible in-line
systems, one of which includes robotics for wafer handling. FEI has shipped one
prototype cleanroom compatible FIB workstation and has received an order for a
beta version of its cleanroom DualBeam model with robotics.
The following table summarizes key features of FEI's line of FIB
workstations.
<TABLE>
<CAPTION>
STAGE BASE SYSTEM FIRST
MODEL SIZE PRICE SHIPPED FEATURES
- - - - - - --------- --------- ----------- --------------- -----------------------------------------------------------------------
<C> <C> <C> <C> <S>
200 2 inches $ 325,000 September 1993 Provides fully digital control with a smaller sample stage, making FIB
capabilities available to a wider group of users
800 8 inches $ 750,000 September 1993 Supports the semiconductor industry trend to eight-inch wafers; fully
digital control, superior stage accuracy, with integrated vacuum
loadlock
620 6 inches $ 875,000 July 1993 DualBeam model incorporating fully digitally controlled ion and
electron beams on a single vacuum chamber for integrated FIB and SEM
capability
820 8 inches $1,100,000 December 1994 Provides the DualBeam capability of the model 620 with the eight-inch
wafer handling capability of the model 800; supports advanced
semiconductor industry process technology
</TABLE>
OPTIONS AVAILABLE WITH FEI FIB WORKSTATIONS
Options available with FEI's FIB workstations include gas injectors for use
with FEI's enhanced etch process and metal and insulator vapor deposition, the
SIMS analysis system, a sample entry loadlock chamber, a CAD navigation system,
an optical microscope, a Polaroid photoprinter and a video printer. FEI believes
that features substantially comparable to its enhanced etch process and SIMSmap
analysis system are not available on the products of its competitors. Key
options are:
GAS INJECTION. The gas injector option allows the user to deliver several
process gases to modify the sample. The gas injector can deliver a metal-bearing
gas directly to the target area for metal or insulating materials deposition
using an ion beam. The gas injector can also be used to deliver a reactive gas
for enhanced etch. In September 1996, FEI introduced a selective carbon milling
process option to remove photoresist and hydrocarbon insulating layers without
significantly removing conducting layers. See "FIB Applications."
SECONDARY ION MASS SPECTROMETRY. The SIMS option expands the capabilities
of certain of FEI's FIB workstations by allowing device and failure analysis
engineers to combine traditional FIB techniques with elemental and chemical
identification in the same vacuum chamber. See "FIB Applications."
GRAIN SIZE ANALYSIS. This software option eliminates tedious hand counting
by rapidly converting the visual information from grain structure images into
statistical data tables and graphs. The grain structure of the aluminum or other
conductive material provides the user with information on the electrical
properties and reliability of the ICs.
66
<PAGE>
EDX ANALYTICAL PACKAGE. Using an FEI DualBeam model, this option permits
the user to perform high resolution, nondestructive elemental microanalysis of a
sample. The operator scans the sample with an electron beam, and the
element-specific x-rays released from the sample are collected and analyzed.
CAD NAVIGATION SOFTWARE. Analysis and modification of ICs require
repeatedly locating a specific feature within a die to within micron and
submicron tolerances. FEI's FIB workstations are available with a software
option that permits the user to share a CAD navigation database for that die
with the FIB control software. The CAD navigation software is licensed by FEI
from an independent supplier.
WAFER NAVIGATION SOFTWARE. Analysis of wafer defects requires locating
previously located defects within micron tolerances. FEI's FIB workstations are
available with a software option that permits the user to import a database of
defect particle locations and allows the FIB control software to navigate to
these locations. The wafer navigation software is licensed by FEI from an
independent supplier.
NAVIGATION VIA IMAGE TO IMAGE REGISTRATION. An electronic device may vary
from its CAD design. This option enables the user to navigate accurately by
overlaying images that contain additional information about the device structure
on the FIB system image. These images can be imported from tools such as optical
microscopes or emission microscopes.
EMITTERS
FEI is a world leader in ion and electron emitter research and manufacture.
FEI manufactures both ion and electron emitters with a variety of shapes and
mountings to meet the needs of its customers. Sales of emitters accounted for
approximately 13%, 9% and 9% of FEI's net sales in 1994, 1995 and the nine
months ended September 30, 1996, respectively. FEI believes its emitters are
characterized by a relatively long useful life and provide a mechanically
stable, high brightness beam. The useful life of an emitter is limited by the
natural loss of emitter material during the emission process and varies,
depending on the type of emitter and customer use. FEI's most recently developed
ion emitter has a guaranteed source life of 1,500 hours, approximately three
times the guaranteed life of the version it replaced.
FEI sells its electron emitters primarily to manufacturers of electron beam
equipment and to scientific research facilities. FEI sells its ion emitters
primarily to research and scientific facilities and incorporates them in its ion
focusing columns and FIB workstations. The prices of FEI's emitters generally
range from $500 to $2,000. FEI also manufactures single crystal electron source
rods and wire, which it sells to researchers and to emitter manufacturers for
use in electron emitter fabrication and other research applications.
FOCUSING COLUMNS
FEI believes it is a world leader in focusing column technology. FEI
manufactures a variety of focusing columns, including single-lens electron
columns and two-lens electron and ion columns that incorporate an electronically
variable aperture. Sales of focusing columns accounted for approximately 21%,
11% and 17% of FEI's net sales in 1994, 1995 and the nine months ended September
30, 1996, respectively. FEI has updated its prelens ion focusing column to
provide resolution of less than seven nanometers, a resolution accuracy among
the highest in the industry.
FEI sells electron beam columns primarily to scanning electron microscope
("SEM") manufacturers and sells ion beam columns primarily to manufacturers of
surface analysis systems and to competitive suppliers of FIB workstations, as
well as to research and scientific facilities. For specialty uses, FEI
manufactures customized focusing columns to purchaser specifications. Columns
manufactured for sale as stand-alone products are packaged as compact units on
standard flanges and are engineered to be relatively insensitive to working
distance considerations. These columns can be adapted to existing microscopy,
lithography and other systems to supplement the capabilities of those systems.
FEI's electron and ion beam focusing columns and related electronics are
generally priced between $10,000 and $150,000.
67
<PAGE>
FIB APPLICATIONS
FEI sells its FIB workstations principally to IC manufacturers for use in
design edit, defect review, process monitoring and failure analysis. In
addition, FEI has sold a limited number of FIB workstations for use in materials
sciences and fabrication of microelectromechanical systems. FEI also believes
its FIB workstations have applications in the magnetic head and disk assembly
markets and the biological sciences, and one order for use of a FIB workstation
in magnetic head assembly has been received by FEI. Charged particle technology
extends trimming capabilities below those required for the most advanced disk
head configurations to permit reading/writing of such thin film heads with
higher resolution. The precise cutting function of an ion beam can remove the
surface of a cell or prepare cross sections of organisms as small as viruses to
allow novel methods of observation under an electron microscope.
<TABLE>
<CAPTION>
PROCESSES DESCRIPTION
- - - - - - --------------------------------- -------------------------------------------------------------------------------
<S> <C>
Cross-sectioning................. A FIB workstation permits precise multiple cross sections of device features
and structural defects that would be impractical using conventional cleaving
or lapping techniques.
Cut-and-splice................... The ion beam cuts portions of the circuit and is then used with the gas
injector to deposit a new conductive path or a new insulating layer.
Slice-and-view................... A DualBeam workstation permits rapid and accurate cross-sectioning of
sub-micron features by alternately milling with the ion beam and quickly
imaging with the electron beam.
Enhanced etch.................... Access to buried circuit layers is facilitated by use of FEI's enhanced etch.
While the ion beam mills, an etchant gas is sprayed through a needle
positioned near the sample surface. The etchant gas reacts chemically with
the milled material, converting it into a gas that does not redeposit along
the crater walls and increasing the removal rate. This process can be used
with metals, photoresist or insulating layers.
Decorative etching............... Decorative etching provides the topographical contrast necessary to obtain
sharp, high-resolution electron microscopic images of cross-sections.
Different materials react at varying rates to an etchant gas introduced into
the vacuum chamber, removing different amounts of each material and enhancing
image contrast.
SIMS analysis.................... The ion beam releases secondary ions that are collected and analyzed in a mass
spectrometer. FEI's proprietary SIMSmap chemical analysis system provides a
visual display of the detected elements.
EDX analytical package........... The electron beam in a DualBeam model is used to generate x-rays from the
sample for nondestructive elemental analysis in an energy dispersive x-ray
spectrometer.
Grain size analysis.............. Eliminates hand counting by rapidly converting the visual information from
grain structure images into statistical data tables and graphs.
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL USE PROCESSES
- - - - - - --------------------------------- -------------------------------------------------------------------------------
<S> <C>
Semiconductor industry
Design edit.................... During IC design and testing, a combination of FEI's focused ion beam and gas
injector technology can be used to access design problems and then to perform
rapid cut-and-splice modification of the circuit to speed the fabrication and
debug of prototypes.
Manufacturing.................. Defect review: When selected wafers are removed from the fabrication line the
FIB workstation can be used to analyze surface and subsurface defects to
improve manufacturing yields.
Process monitoring: The FIB workstation can be used on selected wafers to
cross-section critical structures to provide three-dimensional monitoring of
process performance against specified criteria.
Testing (Failure analysis)..... FEI's FIB workstations are used to diagnose the cause of an IC malfunction
quickly and efficiently and to locate a subsurface defect, which minimize
downtime and increase yield on the IC fabrication line.
TEM sample preparation........... FEI's FIB workstations are used to prepare the extremely thin specimens needed
to support the increasing use of transmission electron microscope ("TEMs") in
monitoring the IC manufacturing process. FIB techniques are substantially
faster than conventional sample preparation techniques.
Materials science................ FEI's FIB workstations can prepare cross sections of complex alloys and layered
materials and the extremely thin specimens needed for TEM. The SIMS option
performs compositional analysis.
Microstructures.................. An ion beam's submicron milling can be used in manufacturing or testing
microelectromechanical systems such as acceleration detectors. Other hard
surface applications include micromachining fresnel lenses and sharpening
scanning tunneling microscope tips.
Archival data storage............ FEI's FIB workstations have been used to record text and images in analog or
digital form in silicon or other metal surfaces at substantially higher
densities and with substantially longer lives than current techniques.
</TABLE>
RESEARCH AND DEVELOPMENT
FEI's research and development staff consists of 40 people, including nine
scientists, 18 engineers, six designer draftsmen and four technicians. FEI
believes its knowledge of field emission technology and products incorporating
focused ion beams is critical to its past and future performance. In developing
new products, FEI has been able to combine its own experience since formation in
1971 with academic resources in Oregon, one of the few locations for
concentrated research in field emission science. Drawing on these resources, FEI
has developed a number of product innovations, including the enhanced etch
process to speed material removal 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.
Since August 1991 FEI has been engaged with Philips electron optics business
in joint research and development of the electronics and software integrated
into the subassemblies, supplied by Philips electron optics business, for FEI's
FIB workstations. Certain expenses incurred by Philips electron optics business
69
<PAGE>
in connection with these efforts are reflected in prices to FEI for components
and subassemblies. FEI believes that in the absence of these research and
development arrangements with Philips, FEI's research and development expenses
would have been substantially higher and its cost of goods sold would have been
lower.
In December 1995 FEI entered into a license agreement with North Carolina
State University ("NCSU") with respect to technology relating to a method for
water vapor-enhanced charged particle beam machining (the "Machining
Technology"). Under the agreement, NCSU granted FEI a worldwide exclusive
license to make, have made, use and sell products that use the Machining
Technology. The license remains in effect, on a country-by-country basis, until
the end of the term or terms for which patent rights with respect to the
Machining Technology are issued. In exchange for the license, FEI is obligated
to pay a royalty to NCSU per product sold pursuant to the license, subject to
certain minimum annual royalties.
From time to time FEI has engaged in joint research and development projects
with certain of its customers and other parties. The most important of these
projects has been with Philips electron optics business for the development of
components and related software and electronics used in FEI's FIB workstations
and with Intel for the development of SIMSmap. See "Manufacturing and
Suppliers." FEI has also maintained informal collaborative relationships with
universities and other research institutions.
The semiconductor manufacturing market and other markets into which FEI
sells its principal products are subject to rapid technological development,
product innovation and competitive pressures. Consequently, FEI has expended
substantial amounts on research and development. In 1994, 1995 and the first
nine months of 1996, research and development expenses were $3.1 million, $2.6
million and $2.8 million respectively, and represented 14%, 6% and 8% of net
sales, respectively, for those periods.
SALES AND MARKETING
FEI's sales and marketing staff consists of 45 people, including 17 direct
sales people, 15 applications specialists and six technical writers.
Applications specialists identify and develop new applications for FEI's
products, which FEI believes will further expand the FIB workstation market. FEI
markets its products in Europe and Asia through offices or subsidiaries located
in Cambridge, U.K.; Munich, Germany; Eindhoven, The Netherlands and Seoul,
Korea. FEI also markets its products through a network of independent sales
representatives or distributors in Asia and other non-European foreign markets.
FEI requires all sales representatives to have the technical expertise and
understanding of the businesses of FEI's principal and potential customers to
meet effectively the demanding requirements for selling FEI's complex FIB
workstations and other products. FEI'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 given information about FEI's products, including specifications and
performance data, by a Company salesperson. A presentation then is made at FEI's
facilities. The customer participates in a product demonstration by the
applications team, using samples provided by the customer. The period of time
between the initial provision to the customer of product information and the
receipt of a purchase order is typically six to nine months.
FEI's FIB workstations and columns have generally been sold with a 12 month
limited warranty, although FEI has provided a longer warranty period on some FIB
workstations, and warranty periods have typically been shorter for used
workstations. For workstations, the warranty includes two preventive maintenance
service calls during the first year. In addition, FEI has made available
extended service contracts to its FIB workstation customers and provides
emergency service worldwide on 24 to 72 hours' notice. FEI employs 17 service
engineers and four service technicians in the U.S., five in Europe and three in
Southeast Asia. FEI has also contracted with independent service representatives
in Japan, Israel,
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Korea, Taiwan and Singapore, and FEI expects to add additional service engineers
in other locations as needed.
FEI has generally required that at least 80% of the purchase price of a FIB
workstation be paid on delivery and the balance be paid on installation and
testing of the workstation at the customer's facility. In 1991 FEI began using
installment sales and operating leases to enhance the affordability of its FIB
workstations. As of September 30, 1996, FEI had 11 installment sales contracts
for FIB workstations, with an aggregate outstanding balance of approximately
$3.8 million, and one FIB workstation operating lease.
International sales accounted for 30%, 41%, and 36% of FEI's net sales in
1994, 1995, and the first nine months of 1996, respectively. Sales to Intel in
1994 represented 10% of total net sales and sales to Motorola in 1995
represented 12% of total net sales.
MANUFACTURING AND SUPPLIERS
FEI manufactures most of its products at its headquarters facility in
Hillsboro, Oregon. FEI has manufactured a small number of FIB workstations in
space it leases from Philips in Eindhoven, The Netherlands. FEI's FIB
workstation manufacturing operation consists of fabricating components, testing
components and subassemblies purchased from suppliers and assembling finished
products. FEI also fabricates electron and ion source materials and manufactures
electron and ion emitters and columns at its facility in Oregon.
FEI's production schedule for its FIB workstations is generally based on a
combination of sales forecasts and the receipt of specific customer orders. When
the primary components of a workstation are in FEI's inventory, final assembly
and testing requires approximately four to eight weeks for completion, depending
on system configuration and options requested by the customer. If orders for FIB
workstations exceed sales forecasts, product availability time could be
significantly longer due to the long lead times required to order many
components.
Many of the components and subassemblies purchased by FEI are standard
products, although certain items are custom-made to FEI's specifications. All
components, subassemblies and finished products are inspected for compliance
with Company and customer specifications. Following assembly, emitters, columns
and complete FIB workstations are shipped in custom protective packaging to
minimize damage during shipment.
Certain of the components and subassemblies included in FEI's workstations
are obtained from a single or limited number of suppliers, including the sample
stage and vacuum chamber. In addition, FEI believes certain components supplied
to it are available to the suppliers only from single sources. FEI has monitored
parts subject to single or limited source supply to ensure that adequate sources
are available to maintain manufacturing schedules. 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 FEI.
Since August 1991 FEI has been engaged with Philips electron optics business
in joint research and development of the electronics and software integrated
into the subassemblies supplied by Philips electron optics business and
incorporated into FEI's FIB workstations. FEI has had an agreement with PEO BV
providing for the joint ownership of software developed by FEI and PEO BV and
pursuant to which FEI has purchased FIB workstation platforms and, for its
DualBeam workstations, the major components of the electron microscope. FEI's
agreement with PEO BV provides for payment by FEI in Dutch guilders. The price
to FEI of those components has been agreed to annually. An increase in the value
of the Dutch guilder in relation to the U.S. dollar would effectively increase
the cost to FEI of components purchased under this agreement and adversely
affect FEI's gross profit margin. For 1994, 1995 and the first nine months of
1996 FEI had foreign currency exchange rate gains (losses) of $93,000,
$(208,000) and $(26,000), respectively.
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If FEI were unable to obtain FIB workstation components from Philips
electron optics business, FEI believes it could obtain similar platforms and
components from other manufacturers within 12 to 18 months or could undertake
some of the manufacturing that would otherwise be done by Philips electron
optics business. In-house manufacturing would require increases in personnel and
would cause delays in product shipment.
BACKLOG
FEI's backlog consists of purchase orders it has received for products it
expects to ship within the next nine months. FEI's backlog at September 30, 1996
was $9.7 million, compared with a backlog of $10.7 million at September 30,
1995. Typically advance or progress payments have not been received from
customers unless the system ordered includes custom features. Purchase orders
are generally cancellable without penalty unless the cancellation occurs late in
the manufacturing process, and there is no assurance cancellations will not
occur. A substantial portion of FEI's backlog relates to orders for a relatively
small number of FIB workstations. As a result, the timing of the receipt of an
order from a single customer could have a significant impact on FEI's backlog at
any date. For this and other reasons, the amount of backlog at any date is not
necessarily indicative of revenue in future periods.
COMPETITION
Although only a small number of companies manufacture FIB workstations, the
industry is highly competitive. FEI's principal competitors for the sale of FIB
workstations are Micrion Corporation, Seiko Instruments Inc. and Schlumberger
Technologies (ATE Division). Some of FEI's competitors and potential competitors
have substantially greater financial, marketing and production resources than
FEI. Among FEI's potential competitors, Hitachi, Ltd., an IC manufacturer, has
begun manufacture of a FIB workstation. Knowledge of the IC industry may give an
IC manufacturer a competitive advantage in manufacturing and marketing FIB
workstations. FEI is also encountering sales competition from JEOL USA, Inc.,
primarily in Asia. FEI believes the key competitive factors in the FIB
workstation market are performance, particularly focusing column performance,
range of features, reliability and price. FEI believes it is competitive with
respect to each of these factors. FEI has experienced price competition more
significantly in the sale of its FIB workstations and believes that price may
continue to be an important factor in the sale of most models. Intense price
competition in the sale of FIB workstations to strategic customers in 1994 and
1995 adversely affected FEI's profit margins.
FEI has two principal competitors in the emitter market. FEI believes the
key competitive factors in this market are emitter life, brightness, stability,
ease of use and price. FEI believes it competes favorably with respect to each
of these factors. Although FEI has relatively few competitors in the manufacture
and sale of specialized electron beam and ion beam focusing columns, many of
FEI's customers, including certain manufacturers of electron microscopes, have
the technical and other resources to manufacture focusing columns. Consequently,
the market for focusing columns is, in general, more price sensitive than the
markets for emitters and FIB workstations. FEI believes other key competitive
factors in the focusing column business are beam performance, packaging and
reliability. FEI believes it competes favorably with respect to each of these
factors in the focusing column market.
PATENTS AND INTELLECTUAL PROPERTY
FEI relies on a combination of trade secret protection, nondisclosure
agreements and patents to establish and protect its proprietary rights. FEI has
eleven U.S. patents and one patent application pending. One of the issued
patents relates to the use of iodine to improve ion beam effectiveness for
enhanced etch, an option requested by the majority of FEI's FIB workstation
customers, and one relates to a precision electrostatic lens structure, together
with a method of manufacture of precision electrostatic lens structures. There
is no assurance that these patents will have commercial value, will be
sufficiently
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broad to enable the related technology to provide the Company a significant
competitive advantage or will prevent competitors from readily designing around
the patents.
As part of its FIB workstations, FEI sells the software used for control of
its ion and electron focusing columns and does not retain ownership rights to
the software. CAD and defect review software incorporated into FIB workstations
is provided to FEI on an OEM basis. Policing unauthorized use of FEI's
technology is difficult, and there is no assurance that measures taken by FEI to
protect this technology will be successful.
Several of FEI's competitors hold patents covering a variety of focused ion
and electron beam products and applications and methods of use of focused ion
and electron beam products. Some of FEI's customers may use FEI's FIB
workstations for applications that are similar to those covered by these
patents. From time to time FEI and its customers have received correspondence
from competitors of FEI claiming that certain of FEI's products, as used by its
customers, may be infringing one or more of these patents. Other than as
described below under "Litigation," none of these allegations has resulted in
litigation. FEI believes it has credible arguments that these patents are either
invalid, not infringed or unenforceable.
FEI is aware of a patent held by Micrion that, if valid, could be infringed
by the sale of FEI's ion focusing columns, whether sold separately or as part of
FEI's FIB workstations. The patent relates to the use of certain materials in
the construction of parts of an ion focusing column. FEI believes, however, that
if infringement were alleged, the patent would either be construed narrowly so
as not to cover products sold by FEI or their use or would, if construed to
cover any of these products or their use, be invalid based on prior art
references that FEI believes anticipate or render obvious those claims and based
on sales by FEI of focusing columns that incorporated the patented technology
more than one year before the patent application date. FEI has not received any
allegation of infringement or any other formal communication from Micrion with
respect to this patent. FEI believes the ion focusing columns manufactured by
all of its other competitors also use technology that could infringe the patent
if valid. To FEI's knowledge, no other focusing column manufacturer has received
any allegation of infringement with respect to this patent.
There is no assurance, however, that competitors or others will not assert
infringement claims against FEI 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 FEI 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 FEI, those customers may seek indemnification from FEI for damages
or expenses they incur. As the number and sophistication of focused ion and
electron beam products in the industry increases through the continued
introduction of new products by FEI 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.
LITIGATION
In May 1995 Micrion, a principal competitor of FEI, filed a lawsuit against
FEI in the U.S. District Court for the District of Massachusetts (the "Court")
alleging infringement of a patent issued to Micrion relating to the use of an
electron beam to neutralize a positive charge that can develop with the use of
an ion beam in a FIB workstation. The complaint also alleges that FEI used
information confidential to Micrion to develop devices to effect charge
neutralization, to incorporate such devices into FEI's FIB workstations, to
manufacture certain ion emitters, and to persuade prospective purchasers of FIB
workstations to purchase workstations from FEI rather than from Micrion. Micrion
sought an injunction against infringement of the Micrion patent, damages of at
least $1 million for misuse of confidential information, treble damages for
infringement of the Micrion patent, attorneys' fees and other damages. FEI
believes it has valid defenses to Micrion's claims.
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FEI initiated a proceeding with the American Arbitration Association seeking
to arbitrate Micrion's non-patent claims. In response to motions filed by FEI in
the Court and the U.S. District Court for the District of Oregon, Micrion was
ordered to arbitrate these matters in Oregon, and the Court action has been
stayed with respect to these matters. FEI has filed an answer and counterclaim
in the Court, asserting that the patent is not infringed and is invalid.
In May 1996, the parties agreed to dismiss the Court action and the
arbitration, both without prejudice. Either Micrion or FEI may re-initiate
either the Court action or the arbitration. Although FEI believes it has valid
defenses to Micrion's claims, a determination that the Micrion patent is valid
and infringed or that FEI has misused confidential information could result in
an award of damages to Micrion or an injunction against sale of certain of FEI's
products, which could have a material adverse effect on FEI's financial
condition and results of operations. Regardless of its outcome, the litigation
could result in substantial costs and diversion of management and other
resources.
EMPLOYEES
At December 31, 1996, FEI had 224 full-time employees, including 75 in
manufacturing, 40 in engineering and research and development, 45 in marketing
and sales, 14 in finance, accounting and information services, 39 in customer
service and 11 in administration. None of FEI's employees is represented by a
labor union, and FEI has never experienced a work stoppage, slowdown or strike.
FEI believes it maintains good employee relations.
FACILITIES
FEI's corporate headquarters, manufacturing and research and development
facility is located in Hillsboro, Oregon and consists of approximately 43,950
square feet of leased space. The initial term of the lease expires January 31,
2004, with an option to renew for two successive five-year periods. Lease
payments are approximately $28,500 per month until January 1999 and $33,000 per
month for the remaining period of the initial term of the lease, plus, for each
period, an additional amount comprised primarily of FEI's proportionate share of
certain building operating expenses.
FEI also leases two additional facilities directly adjacent to its
headquarters facility. The first facility is a 34,700 square feet building used
for FEI's components business. Lease payments on this facility, which FEI has
occupied since June 1996, are approximately $27,000 per month for the first five
years of the lease and $30,700 per month thereafter until March 31, 2003, when
the lease expires, plus certain building operating expenses. The second facility
consists of 28,750 square feet of leased space and will be used for manufacture
of FIB systems. Lease payments on this facility will be $23,288 for the first
five years and $26,306 thereafter until March 31, 2003, when the lease expires,
plus certain building operating expenses.
FEI also leases a sales and service facility in Cambridge, U.K., in Munich,
Germany and in Seoul, Korea and leases an administration, research and
development and manufacturing facility from Philips in Eindhoven, The
Netherlands. FEI expects that its facilities will be adequate to meet its needs
for the foreseeable future.
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BUSINESS OF THE PEO OPERATIONS
INTRODUCTION
Philips is the parent company of the Philips group of affiliated companies
and operates several product divisions, including the Philips Industrial
Electronics product division. The Philips Industrial Electronics product
division includes a number of "operating companies" or business units, one of
which is the Philips Electron Optics business unit, which includes the PEO
Operations. The PEO Operations develops, manufactures, sells and services
electron optics-based instruments, principally electron microscopes. For the
year ended 1995, the PEO Operations had net sales of approximately $109 million.
The principal business offices of the PEO Operations are located in Eindhoven,
The Netherlands. As of December 31, 1996, 706 people were employed in the PEO
Operations.
The PEO Operations are managed by the management of Philips Electron Optics
B.V. ("PEO BV") in The Netherlands. The manufacturing activities of the PEO
Operations are conducted by PEO BV, Philips Electron Optics Czech Republic
S.r.o. in the Czech Republic ("PEO CR") and Philips Electronics North America
Corporation in the U.S. The sales and service activities of the PEO Operations
to be transferred to FEI are conducted through Philips' subsidiaries
incorporated in Canada, France, Germany, Italy, Japan, The Netherlands
(including PEO BV), the United Kingdom and the U.S. (the "Nonexcluded
Countries"). In each of these countries, these corporations also presently
engage in business activities for other Philips business units.
Prior to Closing, Philips will restructure the corporate entities conducting
the PEO Operations in the following manner: PEO Holdings will be incorporated as
a new wholly owned subsidiary of PIE and new sales and service corporations will
be incorporated in each of the Nonexcluded Countries. The PEO-related assets and
liabilities of the sales and service organizations in each of the Nonexcluded
Countries will be transferred to these newly formed sales and service
corporations. All of the shares of stock or ownership interests in PEO BV, PEO
CR and the new PEO sales and service corporations (other than in the U.S.) will
then be transferred to PEO Holdings. The shares of stock of the new U.S.
corporation, PEO-US, will be transferred directly to PIE.
At the completion of this restructuring and prior to Closing, all of the
assets and liabilities of the PEO Operations to be transferred to FEI pursuant
to the Combination Agreement will be owned, directly or indirectly, by PEO
Holdings and PEO-US.
PRODUCTS
The PEO Operations products consist of transmission electron microscopes
("TEMs"), scanning electron microscopes ("SEMs") and system platforms,
consisting of a sample stage, vacuum chamber and associated electronics, sold to
third parties including FEI.
In a TEM, the specimen is irradiated by a static electron beam which is
focused onto and then passes through the specimen. The resulting image of the
internal structure of the specimen is then magnified by a series of magnetic
lens fields and projected on a fluorescent screen or an imaging camera. The
specimen, in order to be transparent to 100KV to 300KV electrons, must be no
thicker than several atoms to several microns. The required sample preparation
is usually an involved and lengthy process; however, in many cases, TEMs are the
only tool available to reveal submicron structures in their original
environment. TEMs developed, manufactured and sold by the PEO Operations are
used by a broad range of hospitals, pharmaceutical laboratories, university and
government biological research centers, materials science laboratories and
semiconductor research laboratories.
Unlike the TEM, which produces images by passing electrons through a very
thin specimen, a SEM provides topographic information about a solid specimen
from the signals generated by scanning the electron beam over the surface of the
specimen. In general, a SEM requires less complicated sample preparation and
provides greater ease of operation than a TEM. The PEO Operations believes its
SEMs
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provide high level stage quality, with high definition, low vibration and image
accuracy due to fine mechanics. In particular, most PEO Operations SEMs have
eucentric stages, which means that the image is maintained as the specimen is
tilted and rotated. In addition to the original secondary electron signals,
other signals are used to gather additional specimen information, for example,
elemental x-ray analysis.
In 1990, the Philips electron optics business introduced a line of SEMs
known as the XL-series. In the XL-series, the entire microscope is
mouse-controlled using a Windows interface. Management of the PEO Operations
believes the XL-series was the first SEM to implement this technology fully and
its introduction allowed the PEO Operations to strengthen its position in the
SEM market. The PEO Operations has continued to improve the XL-series through
further advancements in specimen handling capabilities and improved image
resolution to satisfy a greater range of applications.
MANUFACTURING
The principal development and manufacturing facilities of the PEO Operations
are located in Eindhoven, The Netherlands. In May 1996, the PEO Operations
acquired Delmi, located in Brno, Czech Republic to increase manufacturing and
development capacity for an entry level range of TEMs and SEMs. In addition, in
July 1996, the PEO Operations acquired substantially all of the assets of
ElectroScan, a U.S. manufacturer of environmental SEMs ("ESEM"), which permit
greater ease of sample preparation. Specifically, ESEMs allow uncoated,
nonconducting or wet specimens to be examined without prior preparation. These
ESEM manufacturing operations are located in Wilmington, Massachusetts.
The PEO Operations manufacturing activities consist primarily of the
assembly of electronic modules and final assembly and testing of completed
systems. Production is mainly based on an assemble-to-order principle. Orders
are executed using an integrated logistics automation system which controls the
entire flow of goods. Almost all mechanical parts and the majority of mechanical
assemblies are outsourced to several machine shops, principally Philips
Machinefabrieken B.V., the Philips machine shop, which is also located in
Eindhoven.
DISTRIBUTION AND SERVICE
TEMs and SEMs manufactured by the PEO Operations are sold worldwide through
Philips affiliates located in approximately 35 countries. In each of Canada,
France, Germany, Italy, Japan, The Netherlands, the United Kingdom and the U.S.,
the assets and liabilities of a new or existing sales and service corporation
will be transferred to FEI as part of the Combination. In the remaining
countries, the existing Philips sales and service corporations will sell
products of the PEO Operations pursuant to distribution agreements with FEI. See
"The Combination Agreement--Other Related Agreements."
Most of the equipment sold by the PEO Operations is covered by an add-on
service contract at the end of the warranty period. The standard warranty period
is 12 months. Service contracts are specific to customer requirements, but
typically cover parts, materials and labor and include one routine maintenance
per year. Due to a shift in sales towards the semiconductor manufacturing
market, which generally has higher demands for responsiveness and 24 hour
support, the PEO Operations is further increasing investment in service and
support activities.
RESEARCH AND DEVELOPMENT
The PEO Operations' research and development expenditures were $9.1 million
and $7.4 million for 1995 and the first nine months of 1996, respectively. The
PEO Operations has a product development group of approximately 100 employees
and an additional 18 engineers working on product applications and
demonstrations. The PEO Operations also contracts with Philips Research
Laboratories for basic research applicable to the electron optics product line.
Following completion of the Combination, FEI expects to continue to contract
with Philips for basic research and development pursuant to the Services
Agreement. See "The Combination Agreement--Other Related Agreements." From time
to time the
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PEO Operations also conducts joint research and development in the field of
particle optics with outside parties, such as the Technical University Delft in
The Netherlands.
The PEO Operations has participated in programs for research and development
funded by the Dutch government and by the European Union. In 1995, it received
$1.4 million in public funding under such programs. The PEO Operations has also
been a participant in the JESSI program, which is now in its final year, in
connection with development of a SEM for semiconductor defect review, a high
resolution electron focusing column and the software incorporated in the
XL-series. This program had as its principal aim the advancement of basic
semiconductor technology within Europe. A successor program, Micro-Electronics
Development for European Applications, or MEDEA, has been established to succeed
the JESSI program in 1996. The MEDEA program has different aims, however, and
participation by the PEO Operations is not assured.
COMPETITION
Both the TEM and SEM markets are intensely competitive. Because the cost to
develop new electron microscopy systems is extremely high, however, only a small
number of companies manufacture electron microscopes. Major competitors of the
PEO Operations include JEOL, Ltd., Hitachi, Ltd., Amray Inc. and LEO Electron
Microscopy, Inc. The principal elements of competition in the electron
microscope market are the performance characteristics of the system and the cost
of ownership of the system, based on purchase price and maintenance costs. In
both the TEM and SEM markets, the ability of the PEO Operations 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.
PATENTS AND INTELLECTUAL PROPERTY
The PEO Operations relies on a combination of patents, license arrangements
and trade secret protection to establish its proprietary intellectual property
rights. Philips and its affiliates hold patents in the field of electron optics,
electron sources and electron microscopy. The PEO Operations has the right to
use the technology relating to these patents through license arrangements with
Philips and these affiliates. In addition, the PEO Operations has access to
technology through cross-licenses between its Philips affiliates and a large
number of manufacturers in the electronics industry worldwide.
PROPERTIES
The corporate headquarters and primary manufacturing facility of the PEO
Operations is located in Eindhoven, The Netherlands and consists of
approximately 17,000 square meters of space. Following the Combination, this
property will be leased to FEI for a ten-year term. The lease payment by FEI for
the first year will be $850,000, and rent in subsequent years will be at a
market rate established in accordance with the terms of the Combination
Agreement. See "The Combination Agreement--Real Property Lease." The PEO
Operations manufacturing facilities in Brno, the Czech Republic and the
ElectroScan facility in Wilmington, Massachusetts occupy leased space. All of
the PEO Operations sales and service businesses are located in leased
facilities, which will generally be subleased to FEI at Closing.
LITIGATION
The PEO Operations has extensive international operations and is involved in
a number of pending and threatened legal proceedings incidental to those
operations. Management of the PEO Operations believes that the outcome of such
proceedings is not likely to have a material adverse effect on the financial
position of the PEO Operations. In addition, PIE has agreed to retain all
liabilities with respect to certain patent infringement claims that may be
brought against the PEO Operations. See "The Combination
Agreement--Indemnification."
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REGULATORY APPROVALS
HART-SCOTT-RODINO. The Hart-Scott-Rodino Antitrust Improvements Act of
1976, 15 U.S.C. 18a, (the "HSR Act") provides that certain merger and
acquisition transactions (including the Combination) may not be consummated
until notifications and certain information have been given to the Antitrust
Division of the U.S. Department of Justice (the "Antitrust Division") and the
U.S. Federal Trade Commission (the "FTC") and certain waiting period
requirements have been satisfied. The Antitrust Division and the FTC have
received the required information from all parties involved in the Combination.
The waiting period imposed by the HSR Act began on November 21, 1996, and
expired at 11:59 p.m. on December 21, 1996. At any time before or after the
consummation of the Combination, the Antitrust Division, the FTC or another
third party could seek to enjoin or rescind the Combination on antitrust
grounds. In addition, at any time before or after the consummation of the
Combination, and notwithstanding that the waiting period under the HSR Act has
expired, any state could take action under state antitrust laws that it deems
necessary or desirable in the public interest.
EXON-FLORIO. The Exon-Florio Amendment gives the President of the United
States power to suspend or prohibit any acquisition, merger or takeover that
results in foreign control of an entity engaged in interstate commerce in the
U.S. if the transaction threatens to impair national security. Under the Exon-
Florio regulations, parties to foreign acquisitions may, but are not required
to, give the President's Committee on Foreign Investment in the U.S. ("CFIUS")
confidential notice of transactions, containing a summary description of the
transaction, the business activities and product lines of the acquired company
and the identification of contracts with the U.S. Department of Defense or other
military agencies. The parties to the Combination filed a voluntary notice on
November 21, 1996 and were notified on December 23, 1996 that CFIUS concluded
not to investigate the Combination. Accordingly, CFIUS may not conduct a later
investigation or enter a divestment order.
STATUS OF REGULATORY APPROVALS AND OTHER INFORMATION. PIE and FEI have
filed applications with all applicable regulatory agencies and have taken, or
will take, other appropriate action with respect to any requisite approvals or
other action of any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, whose consent,
approval, order or authorization, or with whom registration, declaration, or
filing of Combination Agreement is required to consummate the Combination,
subject to the provisions of the Combination Agreement.
The Combination Agreement provides that the obligation of each of PIE and
FEI to consummate the Combination is conditioned on the termination of any
applicable waiting period under the HSR Act and the absence of any injunction
against the Combination on antitrust or other grounds. There is no assurance
that any governmental agency will approve or take any other required action with
respect to the Combination and, if approvals are received or action is taken,
that such approvals or action will not be conditioned on matters that would
cause the parties to abandon the Combination or that no action will be brought
challenging such approvals or action, including a challenge by the Antitrust
Division or, if such challenge is made, the result thereof. See "The Combination
Agreement--Conditions to the Closing of the Combination."
The parties are not aware of any governmental approvals or actions required
to consummate the Combination other than as described above, but will seek other
approval or action if it is required. There is no assurance, however, that any
such approval or action, if needed, could be obtained and would not be
conditioned in a manner that would cause the parties to abandon the Combination.
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TRANSACTIONS BETWEEN THE COMPANY
AND THE PEO OPERATIONS
Since August 1991 the Company has been engaged with Philips' electron optics
business in joint research and development of the electronics and software
integrated into subassemblies supplied by Philips' electron optics business for
the Company's FIB workstations. The Company has an agreement with PEO BV
providing for the joint ownership of software developed by the Company and
Philips' electron optics business and for purchases from PEO BV of FIB
workstation platforms and, for FEI's DualBeam workstations, the major components
of the electron microscope. Certain expenses incurred by Philips' electron
optics business in connection with these efforts are reflected in prices to the
Company for components and subassemblies.
INTERESTS OF CERTAIN PERSONS IN THE COMBINATION
In considering the recommendation of the FEI Board of Directors with respect
to the Combination Proposals, shareholders of FEI should be aware that certain
directors and officers of FEI have interests in the Combination different from
the interests of other FEI shareholders. The Board was informed of the interests
described below prior to approving the Combination Proposals. Four executive
officers of FEI, Dr. Lynwood W. Swanson, Mr. William G. Langley, Mr. Charles T.
Riddle and Mr. Noel A. Martin, were also members of the Company's nine-person
Board of Directors when the Board approved the Combination. The Combination
Agreement, the Combination and the Amendment to the Articles were unanimously
approved by the directors present when such matters were considered and were
approved by a majority of the Company's nonemployee directors.
EMPLOYMENT AGREEMENTS OF KEY EMPLOYEES OF THE COMPANY
To induce certain key employees of the Company (the "Key Employees") to
continue in its employ following Closing, the Company will enter into employment
agreements, effective as of the Closing Date (collectively the "Employment
Agreements"), with the Key Employees. The term of each Employment Agreement is
two years, commencing on the date of Closing. The Key Employees are: Robert L.
Gerlach, Frederick A. M. Gordon, Charles F. Lake, William G. Langley, John M.
Lindquist, Douglas S. Rathkey and Joseph C. Robinson.
The Employment Agreements will provide for base salaries for the Key
Employees based upon and substantially similar to their respective current base
salaries and will provide that the Company's Board of Directors shall have the
authority, in its sole discretion, to award additional bonus payments the Board
deems appropriate. Annually, the Board will review the Key Employees' base
salaries and, in its sole discretion, may also increase such base salary, after
taking into account such factors as it deems appropriate.
In addition, the Employment Agreements provide for (a) the Key Employees'
participation in the Company's incentive compensation plans, (b) the Key
Employees' participation in, subject to eligibility requirements, all applicable
incentive, savings and retirement plans, practices, policies and programs and in
all other such benefits and perquisites of the Company, (c) the Key Employees'
and their spouses' and eligible dependents' participation in, and receipt of
benefits under, subject to eligibility requirements, all applicable welfare
benefit plans, practices and policies, including life, disability and accidental
death or dismemberment insurance.
The Employment Agreements are terminable by either party in certain
circumstances, and the Key Employees are entitled to termination benefits in
certain circumstances. The circumstances in which the Employment Agreements
provide for termination benefits are, among others, where a Key Employee
terminated his Employment Agreement with Good Reason (as defined in the
Employment Agreements) or when the Company terminates a Key Employee without
Cause (as defined in the Employment Agreements). Termination in such
circumstances triggers the following termination benefits: (i) base salary
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<PAGE>
payable to the terminated Key Employee for the period from the date of
termination (the "Termination Date") to and including the expiration date (the
"Expiration Date") of the Employment Agreement, (ii) maintenance in effect for
the continued benefit of the terminated Key Employee, his spouse and his
dependents of all medical and dental benefits and life and disability insurance
policies of the Company then in effect for the Key Employee, for the period from
the Termination Date to the earlier of the Expiration Date or such time as the
Key Employee commences equivalent benefits with a new employer, and (iii) for
the period from the Termination Date to the earlier of the Expiration Date or
the date on which the Employee reaches age 65, the benefits the Key Employee
would have received under the Key Employee's retirement plan.
Assuming the employment of each of the Key Employees is terminated with Good
Reason (as defined in the Employment Agreements) by the Employee or by the
Company without Cause (as defined in the Employment Agreements) 90 days
following the date of Closing, the Key Employees would receive the following
severance benefits pursuant to their respective Employment Agreements. These
amounts represent salary and insurance premiums for the period from the assumed
Termination Date to the Expiration Date (21 months), based on amounts in effect
on the date of this Proxy Statement, and are set forth below with respect to the
executive officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
21 MONTHS'
MEDICAL, DENTAL,
21 MONTHS' LIFE AND DISABILITY
NAME BASE SALARY INSURANCE PREMIUMS
- - - - - - ---------------------------------------- ----------- -------------------
<S> <C> <C>
William G. Langley...................... $ 280,000 $ 14,788
Robert L. Gerlach....................... 218,750 15,324
Joseph C. Robinson...................... 210,000 8,957
</TABLE>
In addition, an aggregate of $643,125, representing salary, and an aggregate of
$41,407, representing insurance premiums, would be payable to the four other Key
Employees who are not named in the Summary Compensation Table, based on amounts
in effect on the date of this Proxy Statement. No payments will accrue to any
officers or directors of the Company solely as a result of the Combination.
POTENTIAL EARLY VESTING OF OPTIONS
Each nonemployee director of the Company received an automatic option grant
to purchase 5,000 shares of Common Stock on the date of closing of the Company's
initial public offering or at the time of becoming a director and an option to
purchase 1,000 shares of Common Stock of the Company annually thereafter. Each
option vests over a three-year period from the date of grant and terminates, to
the extent not vested, 30 days after termination of service on the Board (12
months in the event of death). After Closing, management of the Company intends
to recommend to the Company's Board of Directors that all such options held by
nonemployee directors not continuing on the Board following Closing be amended
to become immediately exercisable in full. There is no assurance the Board will
approve this recommendation, but if approved, options to purchase 6,000 shares
of Common Stock held by each of Mr. John C. Beckman, Mr. Edward H. Cooley and
Mr. Gregory J. Houser will become exercisable at a price of $9.50 per share with
respect to 5,000 of such options and at a price of $18.25 per share with respect
to 1,000 of such options. All such options expire 10 years after the date of
grant. Assuming a price upon exercise of $9.375 per share, which was the closing
price per share on December 31, 1996, none of these options would be in the
money.
SECONDARY OFFERING BY SELLING SHAREHOLDERS
The Combination Agreement provides that, within six months following the
Closing, FEI will cooperate with certain of its shareholders (the "Selling
Shareholders") to assist them in selling to third parties an aggregate of up to
one million shares of Common Stock held by such shareholders. In providing
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<PAGE>
such assistance, the Company's Board of Directors may agree to register the
shares under the Securities Act. The Selling Shareholders will pay their counsel
fees and expenses and all underwriting commissions and discounts for, and FEI
and the Selling Shareholders will split equally the other out-of-pocket expenses
of, the secondary offering. Neither FEI, Philips, PIE nor any of their
affiliates will provide any indemnification to the Selling Shareholders in
connection with the secondary offering. The Selling Shareholders include Lloyd
R. Swenson, Noel A. Martin and Edward H. Cooley, each of whom is a current
director of FEI; Charles T. Riddle and Lynwood W. Swanson, each of whom is an
officer and current director of FEI; Monford A. Orloff, who is a former officer
and director of FEI; the spouses of Messrs. Swenson, Martin and Orloff; and
certain shareholders of FEI for whom Capital Consultants, Inc. has investment
power. Gregory J. Houser, who is a current director of FEI, is a principal
shareholder and executive officer of Capital Consultants, Inc.
MANAGEMENT AFTER THE COMBINATION
The Combination Agreement provides that, at Closing, the composition of the
Board of Directors of the Company will change. Dr. Lynwood W. Swanson, Chairman
of the Board and Chief Executive Officer of the Company, and Mr. William G.
Langley, President, Chief Financial Officer and Chief Operating Officer of the
Company, will continue on the Board of Directors. In addition, Lloyd R. Swenson
and Donald R. VanLuvanee will continue on the Board of Directors as independent
directors. Effective as of Closing, Mr. Swenson will resign as Secretary and
Treasurer of the Company. All other current directors of FEI will resign from
the Board effective as of Closing. Messrs. William A. Whitward, Alfred B. Bok,
William Curran, Theo J.H.J. Sonnemans and Karel D. van der Mast, employees of
Philips or its affiliates, will become members of the Board of Directors of the
Company, effective as of Closing. If any such nominee becomes unavailable for
election for any reason, Philips will have the right to propose an alternate
nominee and the proxy holders will have discretionary authority to vote pursuant
to the proxy for a substitute or substitutes.
A shareholder vote approving the Combination Agreement will constitute a
vote in favor of the election of Messrs. Whitward, Bok, Curran, Sonnemans and
van der Mast to the FEI Board of Directors to fill the vacancies to be created
by the resignation of Messrs. Charles T. Riddle, Noel A. Martin, John C.
Beckman, Edward H. Cooley and Gregory J. Houser. The election of the new
directors and the resignations of outgoing directors will be effective as of
Closing. Because holders of Common Stock are not entitled to cumulate votes in
the election of directors, after Closing PIE will be able to control the
election of all directors of FEI.
Provided below is information about Dr. Swanson, Messrs. Langley, Swenson
and VanLuvanee and Philips' nominees for the FEI Board of Directors.
<TABLE>
<CAPTION>
NAME AGE
- - - - - - ------------------------------------------------------------ ---
<S> <C>
Alfred B. Bok............................................... 56
William Curran.............................................. 48
William G. Langley.......................................... 47
Theo J.H.J. Sonnemans....................................... 52
Dr. Lynwood W. Swanson...................................... 62
Lloyd R. Swenson............................................ 71
Karel D. van der Mast....................................... 48
Donald R. VanLuvanee........................................ 51
William A. Whitward......................................... 58
</TABLE>
ALFRED B. BOK is Chief Executive Officer of PIE. He has held that position
since August 1992. From February 1989 to August 1992, Mr. Bok was a Vice
President of Philips Medical Systems. Mr. Bok holds an Engineers degree in
Applied Physics and a Ph.D. in Physics from the Technical University of Delft.
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<PAGE>
WILLIAM CURRAN is Senior Vice President, Chief Financial Officer and
director of Philips Electronics North America Corporation, a Philips affiliate.
He has held those positions since February 1996. From March 1993 to February
1996, he was Chief Operating Officer of Philips Medical Systems and from
February 1987 to February 1996, Mr. Curran was Chief Financial Officer of
Philips Medical Systems. Mr. Curran holds a B.S. in Management Engineering from
Rensselaer Polytechnic Institute and an M.B.A. from the University of
Pennsylvania.
WILLIAM G. LANGLEY is the President, Chief Financial Officer and Chief
Operating Officer of the Company and serves as a director. He has held those
positions since October 1994. Mr. Langley joined the Company in September 1992
as Vice President, Chief Financial Officer and legal counsel. From April 1990 to
September 1992, Mr. Langley served as a Vice President of The Chariot Group,
Inc., an investment company specializing in the acquisition, finance and
operation of mid-size businesses. Mr. Langley holds a B.A. degree from Albertson
College, a J.D. degree from Northwestern School of Law of Lewis and Clark
College and an LL.M. degree from New York University. Mr. Langley is an attorney
and certified public accountant.
THEO J.H.J. SONNEMANS is the Chief Financial Officer of PIE. He has held
that position since May 1995. From April 1984 to May 1995, Mr. Sonnemans was
Chief Financial Officer of the Television Unit of Philips Sound and Vision
product division.
DR. LYNWOOD W. SWANSON co-founded the Company in 1971. He served as
President of the Company until October 1994, at which time he became Chairman of
the Board of Directors. Dr. Swanson was appointed Chief Scientist in May 1990
and Chief Executive Officer of the Company in May 1988. 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.
LLOYD R. SWENSON co-founded the Company in 1971 and has served as a director
since that time. From 1985 to 1990 Mr. Swenson was President of Swenson
Enterprises, Inc., a personal money management company. Mr. Swenson holds a B.S.
degree from San Jose State University, an M. Div. degree from Princeton
Theological Seminary and an M.B.A. from University of Santa Clara.
KAREL D. VAN DER MAST is Business Manager and Strategic Marketing Manager of
Philips Electron Optics B.V. He has held that position since October 1995. In
1988 he joined Philips Electron Optics B.V. as Research and Development Manager.
From 1983 to 1988, Dr. van der Mast was Professor of Physics at the Technical
University of Delft, leading research in fast electron beam lithography systems.
He first joined Philips in 1978 as TEM Development Manager. Dr. van der Mast
holds an Engineers degree and a Ph.D. degree in Physics from the Technical
University of Delft and has published articles in the field of physics and
electron microscopy.
DONALD R. VANLUVANEE has served as a director of the Company since November
1995. Mr. VanLuvanee has been President, Chief Executive Officer and a director
of Electro Scientific Industries, Inc., an electronics company, since July 1992.
From August 1991 to August 1992, Mr. VanLuvanee was President, Chief Executive
Officer and a director of Mechanical Technology, Inc. ("MTI"). MTI develops and
manufactures technologically advanced equipment used in the test/measurement and
defense/aerospace markets. From December 1990 to August 1991, Mr. VanLuvanee was
President and Chief Executive Officer of BCT Spectrum, a semiconductor equipment
manufacturing company. Mr. VanLuvanee also serves as a director of Micro
Component Technology, Inc., a semiconductor equipment manufacturing company.
WILLIAM A. WHITWARD is a General Manager of Philips Electron Optics B.V., a
position he has held since June 1993. He joined Philips Electron Optics B.V.
after 14 years as manager of a former affiliate of
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Philips, its Test & Measurement unit, which produced oscilloscopes, voltmeters
and similar equipment. Mr. Whitward holds a bachelor's degree in engineering
from Natal University, South Africa.
The executive management of FEI immediately following Closing will include
William A. Whitward as Chief Executive Officer, Dr. Lynwood W. Swanson as
Chairman of the Board of Directors and Chief Scientist and William G. Langley as
Chief Financial Officer. The executive management team will also include Karel
van der Mast. Mr. Whitward has stated to the Board of Directors that, for
personal reasons, he will not be able to continue in the position of Chief
Executive Officer on a long-term basis. Executive management of FEI and the PEO
Operations and the FEI Board of Directors has agreed that a search for a Chief
Executive Officer to succeed Mr. Whitward should commence after Closing. Mr.
Whitward has agreed to serve in this capacity until a qualified candidate for
the Chief Executive Officer position has been retained.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of FEI met nine times during 1996. Edward H. Cooley
attended two-thirds of the meetings of the Board of Directors and one-half of
the meetings of the Compensation Committee during 1996. No other director
attended fewer than 75% of the aggregate of all meetings of the Board of
Directors and the committees of which the director was a member during 1996. The
standing committees of the Board of Directors are the Executive Committee, the
Audit Committee and the Compensation Committee. The Company does not have a
nominating committee.
The Executive Committee develops business strategy for the Company, subject
to oversight and approval by the Board of Directors on matters requiring such
approval. The Executive Committee now consists of Dr. Swanson and Mr. Langley.
The Audit Committee makes recommendations concerning the engagement of the
independent public accountants, reviews with the independent public accountants
the plans and results of the audit engagement, approves professional services
provided by the independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit fees
and reviews the adequacy of the Company's internal accounting controls. The
Audit Committee has consisted of Lloyd R. Swenson, John C. Beckman and Gregory
J. Houser, the latter two of whom will resign from the Board effective as of
Closing. It is expected that Mr. Swenson will continue on the Audit Committee
and that Mr. VanLuvanee will be appointed a member of the Audit Committee after
Closing. The Compensation Committee determines compensation for the Company's
executive officers and administers the Company's 1984 Stock Incentive Plan, the
1995 Stock Incentive Plan and the 1995 Supplemental Stock Incentive Plan. The
Compensation Committee has consisted of Dr. Swanson, Mr. Beckman and Mr. Cooley,
the latter two of whom will resign from the Board effective as of Closing. The
Company has not yet determined the composition of the Compensation Committee
after Closing.
Nonemployee directors other than the Chairman of the Board are paid $3,600
per year for their services. All directors are paid $500 for attendance at each
Board meeting, $250 for participation at Board meetings by telephone conference
and $250 for attendance at committee meetings, except for the chairman of the
committee, who is paid $300 for attendance at committee meetings. Directors are
also reimbursed for reasonable expenses incurred in attending meetings. Pursuant
to the terms of the 1995 Stock Incentive Plan, each individual who becomes a
nonemployee director receives a non-statutory option to purchase 5,000 shares of
Common Stock when the individual becomes a director. In addition, each non-
employee director of the Company automatically is granted an annual
non-discretionary, non-statutory option to purchase 1,000 shares of Common
Stock. Officers are appointed by the Board of Directors and serve at its
discretion.
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<PAGE>
EXECUTIVE COMPENSATION
COMPENSATION SUMMARY. The following table sets forth all compensation paid
by the Company with respect to the last three years to the Chief Executive
Officer, the most highly compensated four other executive officers and two key
employees.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
- - - - - - -------------------------------------------------- ------- ---------- ---------- ----------------
<S> <C> <C> <C> <C>
Dr. Lynwood W. Swanson,
Chairman, Chief Executive Officer and
Chief Scientist............................... 1996 $ 202,917 -- --
1995 158,150 -- --
1994 157,893 $ 300 --
William G. Langley,
President, Chief Financial Officer and
Chief Operating Officer....................... 1996 159,852 -- --
1995 135,000 -- --
1994 114,666 300 --
Dr. Robert L. Gerlach,
Vice President, Engineering/Research and
Development................................... 1996 126,340 -- --
1995 115,920 -- --
1994 113,215 300 --
Joseph C. Robinson,
Executive Vice President, Sales and Marketing... 1996 120,129 300 --
1995(2) 2,280 -- --
1994 -- -- --
Charles T. Riddle,
Executive Vice President, Strategic Planning.... 1996 109,847 -- --
1995 108,675 -- --
1994 105,613 300 --
R. Brent Townsend................................. 1996 97,704 300 30,979
1995 98,436 14,583 51,535
1994(3) -- -- --
Thomas G. Richards................................ 1996 85,200 300 33,250
1995(4) 15,104 -- 1,388
1994 -- -- --
</TABLE>
- - - - - - ------------------------
(1) Represents sales commissions.
(2) Mr. Robinson joined FEI as Executive Vice President, Sales and Marketing in
December 1995.
(3) Mr. Townsend joined FEI as Asia Regional Manager in January 1995.
(4) Mr. Richards joined FEI as Eastern Regional Sales Manager, Systems Group, in
October 1995.
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<PAGE>
OPTIONS GRANTED IN LAST FISCAL YEAR. The following table provides
information regarding all stock options granted in 1996 to the executive
officers and key employees named in the Summary Compensation Table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
NUMBER OF PERCENT OF APPRECIATION FOR
SHARES OPTIONS GRANTED EXERCISE OPTION TERM(1)
UNDERLYING TO EMPLOYEES PRICE PER EXPIRATION ---------------------
NAME OPTIONS GRANTED IN FISCAL YEAR SHARE DATE 5% 10%
- - - - - - -------------------------------- --------------- -------------------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dr. Lynwood W. Swanson.......... 10,000(2) 4.6% $ 15.00 4/18/01 $ 41,400 $ 94,300
William G. Langley.............. 10,000(2) 4.6% 15.00 4/18/01 41,400 94,300
Dr. Robert L. Gerlach........... 3,750(2) 1.7% 15.00 4/18/01 15,525 35,363
Joseph C. Robinson.............. 20,000(3) 9.2% 12.00 4/05/01 66,400 146,600
5,000(2) 2.3% 15.00 4/18/01 20,700 45,800
Charles T. Riddle............... 0 -- -- -- -- --
R. Brent Townsend............... 9,200(4) 4.2% 10.50 1/18/01 26,680 58,972
10,000(5) 4.6% 10.50 1/18/01 29,000 64,100
Thomas G. Richards.............. 10,000(3) 4.6% 12.00 4/05/01 33,200 73,300
</TABLE>
- - - - - - ------------------------
(1) In accordance with rules of the Securities and Exchange Commission, these
amounts are the hypothetical gains or option spreads that would exist for
the respective options based on assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the options were granted over the
full option term.
(2) This option became immediately exercisable with respect to 20% of the total
shares granted on April 18, 1996, and the remaining shares become
exercisable at the rate of 20% of the total shares per year over the
subsequent four-year period.
(3) This option became immediately exercisable with respect to 20% of the total
shares granted on April 5, 1996, and the remaining shares became exercisable
at the rate of 20% of the total shares per year over the subsequent
four-year period.
(4) This option became immediately exercisable on January 18, 1996.
(5) This option became immediately exercisable with respect to 20% of the total
shares granted on January 18, 1996, and the remaining shares become
exercisable at the rate of 20% of the total shares per year over the
subsequent four-year period.
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<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES. The following table sets forth for each of the executive officers and
key employees named in the Summary Compensation Table the shares acquired and
the value realized on each exercise of stock options during the year ended
December 31, 1996 and the fiscal year-end number and value of unexercised
options:
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
SUBJECT TO UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS AT FY-END OPTIONS AT FY-END (1)
SHARES ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED (1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- - - - - - ---------------------------------------- --------------- ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Dr. Lynwood W. Swanson.................. 0 $ -- 36,000/59,000 $ 4,000/$ 6,000
William G. Langley...................... 0 -- 76,000/59,000 44,000/ 6,000
Dr. Robert L. Gerlach................... 10,000 18,750(1) 29,283/35,801 10,667/ 6,000
Joseph C. Robinson...................... 6,000 48,750(2) 11,000/38,000 6,000/ 18,000
Charles T. Riddle....................... 0 -- 12,000/18,000 --/--
R. Brent Townsend....................... 0 -- 16,000/15,200 --/--
Thomas G. Richards...................... 0 -- 4,000/11,000 --/--
</TABLE>
- - - - - - ------------------------
(1) Calculated based on the December 31, 1996 closing stock price of $9.375,
less the exercise price, multiplied by the number of shares underlying the
option.
(2) Calculated based on the aggregate price at which the shares acquired on
exercise were sold, less the aggregate exercise price.
LEGAL PROCEEDINGS
The Company knows of no legal proceedings in which any director, officer, or
affiliate of the Company, any owner of record or beneficially of more than five
percent of any class of its voting securities, or any associate of any of them
has an interest adverse to the Company.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1988 the Company borrowed $50,000 from Lloyd R. Swenson, a
director of the Company, and $25,000 from June Swenson, the wife of Lloyd
Swenson, as trustee of the Pond Living Trust. Interest on these loans ranged
from 9% to 10% per annum, and the loans were repaid in September 1993. In
connection with these loans the Company issued warrants (i) to Mr. Swenson to
purchase 33,334 shares of Common Stock and (ii) to Ms. Swenson to purchase
16,667 shares of Common Stock, in each case for $3.00 per share. These warrants
were exercised in full before October 3, 1996. The holders of the Common Stock
issued on exercise of these warrants are entitled to certain registration
rights.
Capital Consultants, Inc. ("Capital Consultants"), of which Gregory J.
Houser, a director of the Company, is a principal shareholder, acted as agent
for the United Association Union Local 290, Plumbers, Steamfitters and
Shipfitters Industry Pension Trust (the "Pension Trust"), an investor advised by
Capital Consultants, in connection with the execution of the lease between the
Company and the Pension Trust dated as of November 2, 1992 for the Company's
headquarters facility. The Company borrowed $500,000 from the Pension Trust for
tenant improvements. The loan bears interest at an annual rate of 9% and is
payable ratably over the initial five-year lease term. The Company believes the
terms of the lease are no less favorable to the Company than could have been
obtained from an unaffiliated party.
In August 1993 the Company entered into a Note Purchase Agreement (the "Note
Purchase Agreement") and certain related agreements with Capital Consultants as
agent for the Pension Trust. Pursuant to the Note Purchase Agreement, the
Company borrowed $1.5 million from the Pension Trust. In October 1994 the Note
Purchase Agreement and the note were amended and restated to provide for
borrowings of up to an additional $3 million from the Pension Trust. Amounts
advanced under the Note Purchase Agreement were convertible at maturity or upon
prepayment or default into shares of Common Stock at the rate of $7.50 per share
for the first $3.5 million (466,667 shares) and $6.00 per share for the last
$1.0 million (166,667 shares), subject to certain limitations. At December 31,
1995, $3.5 million principal amount was outstanding under the Note Purchase
Agreement. On March 1, 1996 the note was converted to 466,667 shares of Common
Stock of the Company. The holder of Common Stock issued on conversion of the
note is entitled to certain registration rights. See Note 12 of Notes to
Consolidated Financial Statements of FEI Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996 Messrs. Swenson, Beckman and Cooley served on the Company's
Compensation Committee. Mr. Swenson also served as Secretary and Treasurer of
the Company during this period. In October 1988 the Company borrowed $50,000
from Mr. Swenson and $25,000 from June Swenson, the wife of Mr. Swenson, as
trustee of the Pond Living Trust. The loans were repaid in September 1993. In
connection with these loans, the Company issued warrants to Mr. Swenson to
purchase 33,334 shares of Common Stock and to Ms. Swenson to purchase 16,667
shares of Common Stock, in each case for $3.00 per share. These warrants were
exercised before October 3, 1996. See "Certain Relationships and Related
Transactions."
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<PAGE>
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION (1)
The Compensation Committee consists of three directors and, pursuant to
authority delegated by the Board of Directors, determines and administers the
compensation of the Company's executive officers. In setting the compensation
for the executive officers other than the President and Chief Executive Officer,
the Compensation Committee works closely with the chairman and Chief Executive
Officer, who makes specific recommendations to the committee concerning
compensation for each of the other executive officers. Although the Board of
Directors has granted the Compensation Committee full authority to set executive
compensations, in practice the decisions of the Compensation Committee are
usually reported as recommendations to the full Board of Directors, which has in
the past generally approved the recommendations.
Internal Revenue Code Section 162(m), as adopted in 1993, limits to
$1,000,000 per person the amount that the Company may deduct for compensation
paid to any of its most highly compensated officers in any year after 1993. The
levels of salary and bonus paid by the Company have not exceeded this limit.
Upon the exercise of nonstatutory incentive stock options, however, the excess
of the current market price over the option price (option spread) is treated as
compensation and, therefore, it may be possible for option exercises by an
officer in any year to cause the officer's total compensation to exceed
$1,000,000. Under certain regulations, option spread compensation from options
that meet certain requirements will not be subject to the $1,000,000 cap on
deductibility, and it is the Company's current policy generally to grant options
that meet those requirements.
COMPENSATION PRINCIPLES
Executive compensation is based on several general principles, which are
summarized below:
- Provide competitive total compensation that enables the Company to attract
and retain key executives.
- Link corporate and individual performance to compensation.
- Encourage long-term success and align shareholder interests with
management interests by giving executives the opportunity to acquire stock
in the Company.
- Reward initiative.
COMPENSATION COMPONENTS
The primary components of the Company's executive officer compensation
program are base salary, annual incentive arrangements and long-term incentive
compensation in the form of stock options.
BASE SALARY. The Company attempts to establish base salary levels for the
Company's executive officers that are competitive with those established by
companies of similar size in the electronics industry, but no consideration was
given to the executive compensation paid by electronics companies included in
the Nasdaq Stock Market Index reported in the Comparison of Cumulative Total
Return Table set forth below. When determining salaries, the Compensation
Committee also takes into account individual experience levels, job
responsibility and individual performance. Each executive officer's salary is
reviewed annually, and increases to base salary are made to reflect competitive
market increases and the individual factors described above.
- - - - - - ------------------------
(1) This Section is not "soliciting material," is not deemed "filed" with the
Securities and Exchange Commission and is not to be incorporated by
reference in any filing of the Company under the Securities Act of 1933, or
the Securities Exchange Act of 1934, regardless of date or any general
incorporation language in such filing.
88
<PAGE>
STOCK OPTIONS. The Company's 1995 Stock Incentive Plan (the "Plan") is
intended as a long-term incentive plan for executive officers, managers and
other key employees of the Company. The objectives of the Plan are to align
employee and shareholder long-term interests by creating a direct link between
compensation and shareholder value. The Compensation Committee administers the
Plan and recommends to the full Board of Directors awards of stock options to
executive officers and other employees of the Company. In the past options
granted under the Plan generally have been granted at an exercise price equal to
the fair market value of the Common Stock on the date of grant. Prior to the
Company's initial public offering in June 1995, fair market value was based on a
good faith determination by the Board of Directors or the Compensation
Committee. For options granted after the initial public offering, fair market
value was established by the Board of Directors, upon recommendation of the
Compensation Committee, as the closing price as reported on the Nasdaq National
Market on the date of grant. Options generally become exercisable over a
four-year period with 20% of the options exercisable immediately upon the date
of grant. Stock options generally have a five-year term, but terminate earlier
if employment is terminated. Initial option grants to executive officers depend
upon the level of responsibility and position, and subsequent grants are made
based on the Compensation Committee's subjective assessment of performance,
among other factors. In 1996 the Board of Directors, upon recommendation of the
Compensation Committee, made the following option grants under the 1995 Plan of
Common Stock to officers of the Company: Philip T. Fischer--3,750, Robert L.
Gerlach--3,750, Frederick A.M. Gordon-- 8,750, Charles F. Lake--3,750, William
G. Langley--10,000, John M. Lindquist--3,750, Douglas S. Rathkey--3,750, Joseph
C. Robinson--25,000, and Lynwood W. Swanson--10,000. The Compensation Committee
expects that in the future, if additional grants are made, consideration will be
given to the number of options granted in the past and the exercise price of
such grants.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
In setting compensation for Dr. Swanson for 1996, the Board of Directors
employed the same criteria that it used to set compensation for other executive
officers. The Board believes Dr. Swanson's salary is competitive with salary
levels for executives with similar experience and ability and recognizes Dr.
Swanson's individual performance and important contributions to the Company's
increased revenue and earnings growth.
COMPENSATION COMMITTEE MEMBERS
Lloyd R. Swenson
John C. Beckman
Edward H. Cooley
89
<PAGE>
PERFORMANCE GRAPH (2)
Set forth below is a line graph comparing the cumulative total shareholder
return of the Common Stock, assuming reinvestment of dividends, with the
cumulative total return of the Nasdaq Stock Market Index ("Nasdaq Index") and
the Non-Financial Nasdaq Index.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FEI U.S. NASDAQ NON-FINANCIAL NASDAQ
<S> <C> <C> <C>
5/95 100 100 100
12/95 119 123 121
11/96 117 151 148
</TABLE>
- - - - - - ------------------------
(2) This Section is not "soliciting material," is not deemed "filed" with the
Securities and Exchange Commission and is not to be incorporated by
reference in any filing of the Company under the Securities Act of 1933 or
the Securities Exchange Act of 1934, regardless of date or any general
incorporation language in such filing.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's executive officers,
directors and persons who own more than ten percent of the Common Stock to file
reports of ownership and changes in ownership with the SEC. Executive officers,
directors and beneficial owners of more than ten percent of the Common Stock are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on a review of the copies of such forms
received by the Company and on written representations from certain reporting
persons that they have complied with the relevant filing requirements, the
Company believes that during 1996 all Section 16(a) filing requirements
applicable to its executive officers and directors were complied with.
90
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
As of September 30, 1996, the directors, nominees for director and executive
officers of the Company beneficially owned a total of 2,075,310 shares of Common
Stock representing approximately 25.2% of such shares outstanding. Certain
directors and shareholders of the Company have entered into voting agreements
with PIE by which they have agreed to vote their shares of Common Stock for the
approval and adoption of the Combination Proposals.
The following table sets forth certain information as of September 30, 1996
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person who owns beneficially more than 5% of the outstanding shares of
Common Stock, (ii) each director and nominee to be a director of the Company,
(iii) the Company's Chief Executive Officer and four other executive officers
most highly compensated in 1995 and (iv) all directors and executive officers as
a group. This information is based on information received from or on behalf of
the named individuals.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
NAME NUMBER PERCENT(1)
- - - - - - -------------------------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
Capital Consultants, Inc. (2)......................................................... 1,254,671 15.8%
2300 SW First Avenue
Portland, OR 97201
Lloyd R. Swenson (3).................................................................. 494,002 6.2%
659 Martis Peak Drive
Incline Village, NV 89450
Lynwood W. Swanson, Ph.D. (4)......................................................... 517,613 6.5%
7451 NW Evergreen Parkway
Hillsboro, OR 97124
Noel A. Martin (5).................................................................... 405,502 5.1%
7451 NW Evergreen Parkway
Hillsboro, OR 97124
Charles T. Riddle (6)................................................................. 167,282 2.1%
Edward H. Cooley (7).................................................................. 158,190 2.0%
William G. Langley (8)................................................................ 100,667 1.3%
Philip T. Fischer (9)................................................................. 58,817 *
Dr. Robert L. Gerlach (10)............................................................ 44,284 *
John C. Beckman (11).................................................................. 24,836 *
Gregory J. Houser (12)................................................................ 12,836 *
Donald R. VanLuvanee (13)............................................................. 2,363 *
Alfred B. Bok......................................................................... -- --
William Curran........................................................................ -- --
Theo J.H.J. Sonnemans................................................................. -- --
Karel van der Mast.................................................................... -- --
William A. Whitward................................................................... -- --
All directors, nominees, and executive officers as a group (20 persons)
(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14)........................................... 2,075,310 25.2%
</TABLE>
- - - - - - ------------------------
* Less than 1%.
(1) Shares that the person has the right to acquire within 60 days after
September 30, 1996 are deemed to be outstanding in calculating the
percentage ownership of the person or group but are not deemed to be
outstanding as to any other person or group.
91
<PAGE>
(2) Represents shares held by clients for which Capital Consultants, Inc. holds
investment power. None of these clients individually holds more than 5% of
the Common Stock. Gregory J. Houser, a director of the Company, is a
principal shareholder and executive officer of Capital Consultants, Inc.
(3) Includes shares held by Mr. Swenson's wife and a trust for the benefit of
his children and 2,836 shares subject to options exercisable within 60 days
after September 30, 1996.
(4) Includes shares held jointly by Dr. Swanson and his wife and 34,000 shares
subject to options exercisable within 60 days after September 30, 1996.
(5) Includes shares held by Mr. Martin's wife and shares held jointly by Mr.
Martin and his wife.
(6) Includes 155,282 shares held jointly by Mr. Riddle and his wife and 12,000
shares subject to options exercisable within 60 days after September 30,
1996.
(7) Consists of 153,354 shares held jointly by Mr. Cooley and his wife and
4,836 shares subject to options exercisable within 60 days after September
30, 1996.
(8) Includes 74,000 shares subject to options exercisable within 60 days after
September 30, 1996.
(9) Includes 38,817 shares subject to options exercisable within 60 days after
September 30, 1996.
(10) Includes 1,000 shares held by Mr. Gerlach's daughter and 27,284 shares
subject to options exercisable within 60 days after September 30, 1996.
(11) Includes 2,836 shares subject to options exercisable within 60 days after
September 30, 1996.
(12) Includes 2,836 shares subject to options exercisable within 60 days after
September 30, 1996. Does not include 1,182,577 shares held by clients of
Capital Consultants, Inc., for which Mr. Houser disclaims beneficial
ownership. Mr. Houser, a director of the Company, is a principal shareholder
and executive officer of Capital Consultants, Inc.
(13) Includes 1,863 shares subject to options exercisable within 60 days after
September 30, 1996.
(14) Includes 84,584 shares subject to options exercisable within 60 days after
September 30, 1996 held by executive officers not listed.
92
<PAGE>
THE AMENDMENT TO THE ARTICLES; CAPITAL STOCK
The authorized capital stock of the Company consists of 15,000,000 shares of
Common Stock and 500,000 shares of Preferred Stock. The proposed Amendment to
the Articles authorizes an additional 15,000,000 shares of Common Stock. Of the
total of 30,000,000 authorized shares, 9,725,141 shares of Common Stock will be
issued to PIE at Closing, and 1,580,500 shares will be reserved for future
issuance to PIE as Additional Shares. See "The Combination Agreement--Structure
of the Combination."
The proposed amendment is also designed to enable the Company's Board of
Directors to issue additional Common Stock when, in its judgment, such issuance
would benefit the Company, without further action by shareholders. Although the
Company has no specific plans, arrangements or understandings to issue
additional Common Stock other than the shares to be issued to PIE in connection
with the Combination and in connection with options outstanding under the
Company's stock incentive plans, the Board believes that the ability to issue
additional shares without the delay and expense of obtaining shareholder
approval can be an advantage to the Company in pursuing acquisition
opportunities, in financings, in providing incentive compensation and in
connection with possible stock splits or stock dividends. The additional shares
of Common Stock for which authorization is sought will be identical to the
shares of Common Stock now authorized.
The availability of additional authorized shares of Common Stock in excess
of those required to complete the Combination will provide the Board with the
ability to issue additional shares of Common Stock and thereby dilute existing
shareholders at any time without seeking shareholder approval for such issuance.
The availability of such shares may have an anti-takeover effect, because the
Board would possess the ability to dilute the position of a major shareholder by
issuing additional shares of the same class, which may make a takeover more
difficult or less attractive. Except with respect to the Combination, the Board
is not aware of any effort to obtain control of the Company, and the proposed
amendment is not part of a plan by management to adopt a series of anti-takeover
measures.
COMMON STOCK. As of the date of this Proxy Statement, 7,956,933 shares of
Common Stock were outstanding, held of record by 91 shareholders. Holders of
Common Stock are entitled to receive dividends as may from time to time be
declared by the Board of Directors of the Company out of funds legally available
therefor. Holders of Common Stock are entitled to one vote per share on all
matters on which the holders of Common Stock are entitled to vote and do not
have any cumulative voting rights. Holders of Common Stock have no preemptive,
conversion, redemption or sinking fund rights. As long as Philips, directly or
indirectly, owns 40% or more of the outstanding voting securities of the
Company, PIE has the right to buy from the Company, at the then-market price,
additional voting securities of the Company at the time of issuances to third
parties and in amounts needed for PIE to maintain its proportionate ownership of
up to 55% of the Company's voting securities, as reduced by the net percentage
of voting securities of FEI sold by PIE at any time.
In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share equally and ratably in the assets
of the Company, if any, remaining after the payment of all liabilities of the
Company and the liquidation preference of any outstanding class or series of
Preferred Stock. The outstanding shares of Common Stock are, and the shares of
Common Stock to be issued as a result of the Combination will be, fully paid and
nonassessable. The rights, preferences, and privileges of holders of Common
Stock are subject to any series of Preferred Stock that the Company may issue in
the future, as described below.
PREFERRED STOCK. The Company's Board of Directors has the authority to
issue Preferred Stock in one or more series and to fix the number of shares
constituting any such series and the preferences, limitations, and relative
rights, including dividend rights, dividend rate, voting rights, terms of
redemption, redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any series, without any further vote or
action by the shareholders of the Company. The issuance of Preferred Stock by
the Board could adversely affect the rights of holders of Common Stock.
93
<PAGE>
The potential issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company, may discourage bids for the
Common Stock at a premium over the market price of the Common Stock and may
adversely affect the market price of, and the voting and other rights of the
holders of, Common Stock. The Company has no plans to issue shares of Preferred
Stock.
OREGON CONTROL SHARE AND BUSINESS COMBINATION STATUTES. FEI is subject to
the Oregon Control Share Act (the "Control Share Act"). The Control Share Act by
its terms is not applicable to the Combination, however, because the Control
Share Act provides that the acquisition of any voting shares of an issuing
public corporation does not constitute a control share acquisition in a
transaction in which the voting shares are acquired from the issuing public
corporation. The Control Share Act generally provides that a person (the
"Acquiror") who acquires voting stock of an Oregon corporation in a transaction
that results in the Acquiror holding more that 20%, 33 1/3% or 50% of the total
voting power of the corporation (a "Control Share Acquisition") cannot vote the
shares it acquires in the Control Share Acquisition ("control shares") unless
voting rights are accorded to the control shares by (i) a majority of each
voting group entitled to vote and (ii) the holders of a majority of the
outstanding voting shares, excluding the control shares held by the Acquiror and
shares held by the Company's officers and inside directors. The term "Acquiror"
is broadly defined to include persons acting as a group.
The Acquiror may, but is not required to, submit to the Company a statement
setting forth certain information about the Acquiror and its plans with respect
to the Company. The statement may also request that the Company call a special
meeting of shareholders to determine whether voting rights will be accorded to
the control shares. If the Acquiror does not request a special meeting of
shareholders, the issue of voting rights of control shares will be considered at
the next annual or special meeting of shareholders. If the Acquiror's control
shares are accorded voting rights and represent a majority or more of all voting
power, shareholders who do not vote in favor of voting rights for the control
shares will have the right to receive the appraised "fair value" of their
shares, which may not be less than the highest price paid per share by the
Acquiror for the control shares.
FEI is also subject to certain provisions of the Oregon Business Corporation
Act that govern business combinations between corporations and interested
shareholders (the "Business Combination Act"). The restrictions on business
combinations contained in the Business Combination Act are not applicable to the
Combination. The Business Combination Act generally provides that if a person or
entity acquires 15% or more of the voting stock of an Oregon corporation (an
"Interested Shareholder"), the corporation and the Interested Shareholder, or
any affiliated entity of the Interested Shareholder, may not engage in certain
business combination transactions for three years following the date the person
became an Interested Shareholder. Business combination transactions for this
purpose include (a) a merger or plan of share exchange, (b) any sale, lease,
mortgage or other disposition of 10% or more of the assets of the corporation
and (c) certain transactions that result in the issuance of capital stock of the
corporation to the Interested Shareholder. These restrictions do not apply if
(i) the Interested Shareholder, as a result of the transaction in which such
person became an Interested Shareholder, owns at least 85% of the outstanding
voting stock of the corporation (disregarding shares owned by directors who are
also officers and certain employee benefit plans), (ii) the board of directors
approves the share acquisition or business combination before the Interested
Shareholder acquires 15% or more of the corporation's voting stock or (iii) the
board of directors and the holders of at least two-thirds of the outstanding
voting stock of the corporation (disregarding shares owned by the Interested
Shareholder) approve the transaction after the Interested Shareholder acquires
15% or more of the corporation's voting stock.
94
<PAGE>
MARKET PRICE INFORMATION AND DIVIDEND POLICY
The Common Stock is listed on the Nasdaq National Market under the name FEI
Company and traded under the symbol "FEIC." It is a condition to Closing that
the PIE Shares be approved for listing on the Nasdaq National Market. On
September 4, 1996, the last trading day before the public announcement of the
execution of the letter of intent describing the Combination, the reported
closing sale price of Common Stock was $10.25 per share. On January 27, 1997,
the last full trading day before the date of this Proxy Statement, the reported
closing sale price per share of Common Stock was $13.75. The following table
sets forth, for the periods indicated, the high and low sales prices per share
of Common Stock, as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
1995
Second Quarter (from June 1, 1995)........................... $ 14 1/2 $ 10
Third Quarter................................................ 14 1/4 12
Fourth Quarter............................................... 13 1/4 8 3/4
1996
First Quarter................................................ 13 10 1/4
Second Quarter............................................... 19 5/8 10 3/4
Third Quarter................................................ 13 3/4 6 1/2
Fourth Quarter............................................... 13 8 13/16
</TABLE>
The Company has never declared or paid a dividend and does not expect to do
so in the foreseeable future. The Company expects to retain earnings to finance
the expansion and development of its business. The payment of dividends is
within the discretion of the Company's Board of Directors and will depend on the
earnings, capital requirements and operating and financial condition of the
Company, among other factors.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of FEI at December 31, 1994 and 1995
and for the three years ended December 31, 1995, included in this Proxy
Statement, have been included in reliance on the report of Deloitte & Touche
LLP, independent certified public accountants. A representative of Deloitte &
Touche LLP will be at the Special Meeting to answer questions by shareholders
and will have the opportunity to make a statement.
The combined financial statements of the PEO Operations at December 31, 1994
and 1995 and for the three years ended December 31, 1995, included in this Proxy
Statement, have been included in reliance on the report of KPMG Accountants
N.V., independent certified public accountants. A representative of KPMG
Accountants N.V. will not be at the Special Meeting to answer questions by
shareholders and will not have the opportunity to make a statement.
95
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FEI COMPANY
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Independent Auditors' Report.............................................. F-1
Consolidated Balance Sheets at December 31, 1994 and 1995 and September
30, 1996................................................................. F-2
Consolidated Statements of Operations for the three years ended December
31, 1995 and the nine months ended September 30, 1995 and 1996........... F-3
Consolidated Statements of Shareholders' Equity for the three years ended
December 31, 1995 and the nine months ended September 30, 1996........... F-4
Consolidated Statements of Cash Flows for the three years ended December
31, 1995 and the nine months ended September 30, 1995 and 1996........... F-5
Notes to Consolidated Financial Statements................................ F-6
PHILIPS ELECTRON OPTICS OPERATIONS
Independent Auditors' Report.............................................. F-21
Combined Balance Sheets at December 31, 1994 and 1995 and September 30,
1996..................................................................... F-22
Combined Income Statements for the three years ended December 31, 1995 and
the nine months ended September 30, 1995 and 1996........................ F-23
Combined Cash Flow Statements for the three years ended December 31, 1995
and the nine months ended September 30, 1995 and 1996.................... F-24
Notes to Combined Financial Statements.................................... F-26
</TABLE>
96
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
FEI Company
Hillsboro, Oregon
We have audited the accompanying consolidated balance sheets of FEI Company
and Subsidiaries as of December 31, 1994 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. The consolidated 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, the consolidated financial statements present fairly, in all
material respects, the financial position of FEI Company and Subsidiaries as of
December 31, 1994 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
As discussed in Note 13 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in the year ended
December 31, 1993.
DELOITTE & TOUCHE LLP
Portland, Oregon
January 19, 1996
F-1
<PAGE>
FEI COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND
SEPTEMBER 30, 1996
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2)......................................... $ 192 $ 2,700 $ 1,485
Investments (Note 3)....................................................... -- 4,961 --
Receivables (Note 4)....................................................... 7,896 13,769 12,232
Tax refund receivable...................................................... 74 36 17
Inventories (Note 5)....................................................... 6,370 10,425 18,790
Prepaid expenses........................................................... 333 159 404
Deferred income taxes (Note 13)............................................ 444 626 994
--------- --------- -------------
Total current assets..................................................... 15,309 32,676 33,922
INVESTMENTS (Note 3)......................................................... -- 2,540 1,000
EQUIPMENT (Note 6)........................................................... 5,033 4,604 8,295
LEASE RECEIVABLES (Note 7)................................................... 2,567 2,663 2,532
OTHER ASSETS (Note 8)........................................................ 1,505 2,159 6,132
--------- --------- -------------
TOTAL........................................................................ $ 24,414 $ 44,642 $ 51,881
--------- --------- -------------
--------- --------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit and notes payable (Note 9).................................. $ 6,386 $ -- $ 3,328
Accounts payable........................................................... 3,553 2,597 4,358
Accrued payroll liabilities................................................ 394 606 802
Accrued warranty reserves.................................................. 541 892 1,121
Deferred revenue........................................................... 229 434 491
Current portion of long-term debt (Note 12)................................ 403 -- --
Income taxes payable....................................................... 30 870 397
Other current liabilities (Note 10)........................................ 386 871 811
--------- --------- -------------
Total current liabilities................................................ 11,922 6,270 11,308
COMMITMENTS AND CONTINGENCIES (Notes 11 and 19).............................. -- -- --
LONG-TERM DEBT (Note 12)..................................................... 3,445 3,500 --
DEFERRED INCOME TAXES (Note 13).............................................. -- 450 489
SHAREHOLDERS' EQUITY (Note 14)
Preferred stock--500,000 shares authorized;
None issued and outstanding.............................................. -- -- --
Common stock--15,000,000 shares authorized;
4,363,705, 7,222,394 and 7,956,933 shares issued and outstanding......... 5,549 27,150 31,658
Warrants--400,001, 200,001 and zero issued and outstanding................. 119 59 --
Retained earnings.......................................................... 3,358 7,099 8,418
Unrealized gain on marketable securities................................... -- 96 --
Cumulative foreign currency translation adjustment......................... 21 18 8
--------- --------- -------------
Total shareholders' equity............................................... 9,047 34,442 40,084
--------- --------- -------------
TOTAL........................................................................ $ 24,414 $ 44,642 $ 51,881
--------- --------- -------------
--------- --------- -------------
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
FEI COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
NET SALES.................................................. $ 17,198 $ 22,281 $ 41,691 $ 29,131 $ 33,576
COST OF SALES.............................................. 8,662 14,150 26,017 17,846 21,605
--------- --------- --------- --------- ---------
Gross profit............................................. 8,536 8,131 15,674 11,285 11,971
--------- --------- --------- --------- ---------
OPERATING EXPENSES:
Research and development................................. 2,391 3,107 2,566 1,903 2,809
Selling and marketing.................................... 2,585 2,802 4,580 3,224 4,264
General and administrative............................... 1,535 2,149 2,617 1,850 3,100
Postponed stock offering and duplicate rent (Notes 11 and
14).................................................... -- 433 -- -- --
--------- --------- --------- --------- ---------
Total operating expenses............................... 6,511 8,491 9,763 6,977 10,173
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS).................................... 2,025 (360) 5,911 4,308 1,798
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Foreign currency gain (loss)............................. (105) 93 (208) (312) (26)
Interest income.......................................... 207 405 935 606 527
Interest expense......................................... (225) (591) (663) (550) (81)
Other.................................................... (81) (35) (184) (181) (27)
--------- --------- --------- --------- ---------
Total other income (expense)........................... (204) (128) (120) (437) 393
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE TAXES................................. 1,821 (488) 5,791 3,871 2,191
TAX EXPENSE (BENEFIT) (Note 13)............................ 597 (263) 2,050 1,407 872
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE ACCOUNTING CHANGE..................... 1,224 (225) 3,741 2,464 1,319
Cumulative effect of change in accounting for income
taxes (Note 13)........................................ 206 -- -- -- --
--------- --------- --------- --------- ---------
NET INCOME (LOSS).......................................... $ 1,430 $ (225) $ 3,741 $ 2,464 $ 1,319
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
PER SHARE DATA:
Income (loss) before accounting change................... $ 0.24 $ (0.04) $ 0.57 0.40 $ 0.16
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cumulative effect of change in accounting for income
taxes.................................................. 0.04 -- -- -- --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) PER SHARE................................ $ 0.28 $ (0.04) $ 0.57 0.40 $ 0.16
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING (Note 14).................................... 5,089 5,101 6,603 6,230 8,038
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
FEI COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED GAIN
COMMON STOCK WARRANTS (LOSS) ON
--------------------- ---------------------- RETAINED MARKETABLE
SHARES AMOUNT SHARES AMOUNT EARNINGS SECURITIES
---------- --------- --------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993......................... 4,318,494 $ 5,456 400,001 $ 119 $ 2,153 $ --
Net income....................................... -- -- -- -- 1,430 --
Proceeds from exercise of options for 26,478
shares of common stock (Note 14)................ 26,478 48 -- -- -- --
Foreign currency translation adjustment.......... -- -- -- -- -- --
---------- --------- --------- ----- ----------- ---
BALANCE, DECEMBER 31, 1993....................... 4,344,972 5,504 400,001 119 3,583 --
Net loss......................................... -- -- -- -- (225) --
Proceeds from exercise of options for 18,733
shares of common stock (Note 14)................ 18,733 37 -- -- -- --
Stock options granted below market value......... -- 8 -- -- -- --
Foreign currency translation adjustment.......... -- -- -- -- -- --
---------- --------- --------- ----- ----------- ---
BALANCE, DECEMBER 31, 1994....................... 4,363,705 5,549 400,001 119 3,358 --
Net income....................................... -- -- -- 3,741 --
Proceeds from exercise of options for 210,539
shares of common stock (Note 14)................ 210,539 393 -- -- -- --
Proceeds from sale of 2,500,000 shares of common
stock, less $2,602 costs of issuance............ 2,500,000 21,148 -- -- -- --
Conversion of 200,000 warrants into 148,150
shares of common stock (Note 12)................ 148,150 60 (200,000) (60) -- --
Unrealized gain (loss) on marketable securities
(Note 3)........................................ -- -- -- -- -- 96
Foreign currency translation adjustment.......... -- -- -- -- -- --
---------- --------- --------- ----- ----------- ---
BALANCE, DECEMBER 31, 1995....................... 7,222,394 27,150 200,001 59 7,099 96
Net income (unaudited)........................... -- -- -- -- 1,319 --
Proceeds from exercise of options for 108,020
shares of common stock (unaudited) (Note 14).... 108,020 949 -- -- -- --
Exercise of convertible options for 466,667
shares of common stock (unaudited).............. 466,667 3,500 -- -- -- --
Conversion of 200,001 warrants into 159,882
shares of common stock (unaudited).............. 159,882 59 (200,001) (59) -- --
Unrealized gain (loss) on marketable securities
(unaudited) (Note 3)............................ -- -- -- -- -- (96)
Foreign currency translation adjustment
(unaudited)..................................... -- -- -- -- -- --
---------- --------- --------- ----- ----------- ---
BALANCE, SEPTEMBER 30, 1996 (unaudited).......... 7,956,963 $ 31,658 -- $ -- $ 8,418 $ --
---------- --------- --------- ----- ----------- ---
---------- --------- --------- ----- ----------- ---
<CAPTION>
CUMULATIVE
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENT TOTAL
------------- ---------
<S> <C> <C>
BALANCE, JANUARY 1, 1993......................... $ 11 $ 7,739
Net income....................................... -- 1,430
Proceeds from exercise of options for 26,478
shares of common stock (Note 14)................ -- 48
Foreign currency translation adjustment.......... 14 14
--- ---------
BALANCE, DECEMBER 31, 1993....................... 25 9,231
Net loss......................................... -- (225)
Proceeds from exercise of options for 18,733
shares of common stock (Note 14)................ -- 37
Stock options granted below market value......... -- 8
Foreign currency translation adjustment.......... (4) (4)
--- ---------
BALANCE, DECEMBER 31, 1994....................... 21 9,047
Net income....................................... -- 3,741
Proceeds from exercise of options for 210,539
shares of common stock (Note 14)................ -- 393
Proceeds from sale of 2,500,000 shares of common
stock, less $2,602 costs of issuance............ -- 21,148
Conversion of 200,000 warrants into 148,150
shares of common stock (Note 12)................ -- --
Unrealized gain (loss) on marketable securities
(Note 3)........................................ -- 96
Foreign currency translation adjustment.......... (3) (3)
--- ---------
BALANCE, DECEMBER 31, 1995....................... 18 34,422
Net income (unaudited)........................... -- 1,319
Proceeds from exercise of options for 108,020
shares of common stock (unaudited) (Note 14).... -- 949
Exercise of convertible options for 466,667
shares of common stock (unaudited).............. -- 3,500
Conversion of 200,001 warrants into 159,882
shares of common stock (unaudited).............. -- --
Unrealized gain (loss) on marketable securities
(unaudited) (Note 3)............................ -- (96)
Foreign currency translation adjustment
(unaudited)..................................... (10) (10)
--- ---------
BALANCE, SEPTEMBER 30, 1996 (unaudited).......... $ 8 $ 40,084
--- ---------
--- ---------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
FEI COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 1,430 $ (225) $ 3,741 $ 2,464 $ 1,319
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................. 1,250 1,409 1,564 1,161 1,210
Deferred taxes on income...................... (7) (347) 268 128 (329)
Stock options granted below market value...... -- 8 -- -- --
Decrease (increase) in assets:
Receivables................................. 103 (4,115) (5,873) (3,867) (1,713)
Inventories................................. (1,970) (1,548) (2,796) (1,214) (7,700)
Prepaid expenses and tax refund............. (492) 220 212 218 (226)
Other assets................................ 55 2 (24) (7) (179)
Increase (decrease) in liabilities:
Accounts payable............................ 1,233 1,250 (956) 757 1,761
Accrued payroll liabilities................. 180 (39) 212 314 196
Accrued warranty reserves................... 93 217 351 288 229
Deferred revenue............................ 24 58 205 58 57
Income taxes payable........................ (146) (13) 840 708 (473)
Other current liabilities................... (102) 180 485 313 (60)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities.............................. $ 1,651 $ (2,943) $ (1,771) $ 1,321 $ (5,908)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment........................ $ (2,365) $ (3,144) $ (2,789) $ (1,355) $ (5,026)
Investment in software development.............. (219) (156) (345) (164) (650)
Purchase of marketable securities and other
investments................................... -- -- (9,405) (8,516) (1,038)
Sales of marketable securities.................. -- -- 2,000 -- 7,427
Net investment in lease receivables (Note 11)... (1,863) (336) (96) (339) (316)
Net disposals of equipment...................... -- 1 111 32 29
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities.............................. $ (4,447) $ (3,635) $ (10,524) $ (10,342) $ 426
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from initial public offering of
common stock.................................. -- -- $ 21,148 $ 21,152 --
Net proceeds from (payments on) line of credit
and notes payable............................. 1,087 4,731 (6,386) (6,386) 3,328
Proceeds from exercise of stock options and
warrants...................................... 48 37 393 368 949
Accrued interest on notes....................... (32) -- -- -- --
Proceeds from issuances of long-term debt....... 2,259 1,941 1,000 1,000 --
Payments on long-term debt...................... (658) (278) (1,348) (1,348) --
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities..... $ 2,704 $ 6,431 $ 14,807 $ 14,786 $ 4,277
----------- ----------- ----------- ----------- -----------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT........... $ 14 $ (4) $ (4) 13 (10)
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... (78) (151) 2,508 5,778 (1,215)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.... 421 343 192 192 2,700
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......... $ 343 $ 192 $ 2,700 $ 5,970 $ 1,485
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION--
Cash paid during the period for:
Interest........................................ $ 221 $ 584 $ 682 $ 582 $ 81
Income taxes paid............................... 563 34 836 534 1,694
Income tax refunds received..................... -- 72 -- -- --
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of long-term debt into 466,667 shares
of the Company's common stock (Note 12)....... $ -- $ -- $ -- $ -- $ 3,500
Exchange of receivable for investment in Norsam
Technologies, Inc. (Note 7)................... -- -- -- -- 3,250
Repossession of leased FIB workstation............ -- -- -- -- 447
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS--FEI Company and its wholly owned subsidiaries (the
"Company") design, manufacture and market focused ion beam ("FIB") workstations
and components based on field emission technology. The Company sells its FIB
workstations principally to integrated circuit manufacturers and sells
components to manufacturers of electron microscopes and other devices
incorporating field emission technology. The Company's customers are located
primarily in the United States, Europe and Asia.
NEED FOR NEW PRODUCT DEVELOPMENT--The market for tools to analyze and modify
materials with submicron precision is highly competitive and subject to rapid
change. The Company devotes a portion of its revenue to continued research and
development in an effort to develop new and better uses of field electron and
ion emission technology. There is, however, the possibility that alternative
technologies or developments in the semiconductor industry will render the
Company's products unsuitable for the needs of that industry. Such changes could
have a significant adverse effect on the Company's ability to recognize its
investments in inventory and developed software.
CUSTOMER CONCENTRATION--Sales of FIB workstations, which represent more than
50% of revenues from product sales, are highly dependent upon capital
expenditures by semiconductor manufacturers and semiconductor testing
laboratories. While that industry is currently expanding, there is no assurance
that the growth can be sustained.
DEPENDENCE ON SUPPLIERS--Because of the highly specialized nature of the
Company's products, certain of the components and subassemblies included in the
Company's products are made to the Company's specifications and obtained from a
single supplier or a limited number of suppliers. A substantial portion of the
subassemblies included in the Company's FIB workstations are purchased from the
electron optics business unit of Philips Electronics N.V. ("Philips"). The
Company believes that certain of the components in the subassemblies are
available only from the Philips electron optics business. A significant delay or
disruption in obtaining components and subassemblies from this supplier would
have a material adverse effect on the Company's results of operations during the
period in which alternative sources of supply were developed.
USE OF ESTIMATES IN FINANCIAL REPORTING--The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from
estimates.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the Company and its subsidiaries, FEI Europe, Ltd., FEI Europe
GmbH, FEI Asia Corporation and FEI Company FSC, Ltd. All significant
intercompany accounts and transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION--Assets and liabilities denominated in a
foreign currency are translated to U.S. dollars at the exchange rate on the
balance sheet date. Translation adjustments are shown separately in
shareholders' equity. Revenues, costs and expenses are translated using an
average rate. Realized and unrealized foreign currency transaction gains and
losses are included in the consolidated statement of operations.
INVESTMENT--As required under Statement of Financial Accounting Standards
No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, the
Company classifies securities into one of three
F-6
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
categories: held to maturity, available for sale or trading. At December 31,
1995, all such investments were classified as available for sale and, as such,
are reported at market value. The difference between the amortized cost of such
securities and their market value is reported as a separate component of
shareholders' equity. Cost of securities sold is determined on a
weighted-average cost basis.
REVENUE RECOGNITION--Product sales are recorded at the time of shipment.
Maintenance service revenues are billed in advance and recorded as deferred
revenue. Where a service contract exists, service revenues are recognized
ratably over the contract period; otherwise, revenues are recognized as services
are provided. A substantial portion of the Company's sales are made to a limited
number of customers (see Note 17). The Company makes periodic evaluations of the
credit-worthiness of its customers and generally does not require collateral. To
date, the Company has not experienced any significant trade accounts receivable
write-offs, but there is no assurance that such write-offs will not be
significant in future periods.
The Company's products are frequently updated. In certain situations,
customers have the opportunity to trade in a workstation as part of the purchase
price of a new workstation. The Company believes there is a market for used
workstations, which may be resold or leased to customers requiring less advanced
product technology and applications.
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 in excess of current requirements, based on recent sales levels, are
reported as noncurrent assets, and management has established an inventory
reserve based on their best estimate of those amounts.
EQUIPMENT, including leased FIB systems, is stated at cost and depreciated
over the estimated useful life of approximately three to five 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.
LEASE RECEIVABLE--For the sales-type lease, the amount recorded as revenue
is the present value of the minimum lease payments computed at the interest rate
implicit in the lease. The cost of equipment is considered as cost of sales in
the period in which the lease is executed, and the excess of the aggregate
rentals over the recorded revenue amount is accounted for as finance income over
the term of the lease.
OTHER ASSETS--Goodwill, which represents the excess of cost over fair value
of net assets acquired, is amortized on a straight-line basis over eight years.
Certain computer software development costs have been capitalized. These costs
are being amortized over three to five years, the estimated economic life of the
software, using the straight-line method. Changes in technology could affect the
Company's estimate of the useful life of such assets.
RESEARCH AND DEVELOPMENT costs are expensed as incurred. The Company
periodically participates in joint ventures for research and development
projects and records its proportionate expense over the life of the project.
Timing of the expenditures coincides with the terms of the agreements.
PRODUCT WARRANTY--Warranties based on usage from the date of sale are
provided for certain emitter products. Other products generally have a one-year
warranty. A reserve is established to cover estimated warranty costs and certain
commitments for product upgrades made. The Company's estimate of warranty cost
is based on its history of warranty repairs. While most new products are
extensions of existing
F-7
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
technology, the estimate could change if new products require a significantly
different level of repair than similar products have required in the past.
TAXES AND TAX CREDITS--Effective January 1, 1993, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 109, ACCOUNTING FOR
INCOME TAXES. This statement requires an asset and liability approach for
financial accounting and reporting for income taxes. SFAS No. 109 was adopted
prospectively, and the cumulative effect was recorded in the first quarter of
1993.
STOCK-BASED COMPENSATION--The Company adopted Statement of Financials
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation,"
effective January 1, 1996. SFAS No. 123 defines a fair value based method of
accounting for employee stock options or similar instruments and permits
companies to adopt that method of accounting for all of their employee stock
compensation plans. However, it also allows a company to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25 ("APB No. 25"), "Accounting for
Stock Issued to Employees." The Company has elected to continue to measure
compensation cost in conformity with APB No. 25 and to make pro forma
disclosures of net income and earnings per share in its annual report on Form
10-K for the year ended December 31, 1996, as if the fair value based method of
accounting defined in SFAS No. 123 had been applied.
NET INCOME (LOSS) PER SHARE IS computed on the basis of the weighted average
number of common and common equivalent shares outstanding. Outstanding options
for common stock have been included in the calculation of common and common
equivalent shares outstanding using the treasury stock method. Also, in
accordance with the accounting rules of the Securities and Exchange Commission,
shares issued or options granted within one year prior to the filing date of the
Company's initial public offering have been included in the calculation of
common and common equivalent shares as if they were outstanding for all periods
presented using the treasury stock method.
STATEMENT OF CASH FLOWS--Money market funds and other highly liquid
instruments with original maturities of less than three months are considered to
be cash equivalents.
RECLASSIFICATION--Certain amounts from prior years have been reclassified to
conform with the 1995 method of presentation. These reclassifications had no
effect on previously reported consolidated net income; however, noncurrent
service inventories were reclassified from inventory to other assets which
changed previously reported current assets.
INTERIM FINANCIAL INFORMATION--The interim financial information as of
September 30, 1996 and for the nine months ended September 30, 1995 and 1996
included herein has been prepared by the Company without audit and, while not
necessarily indicative of results to be expected for the full fiscal year,
reflects all adjustments, consisting of normal recurring accruals, which in the
opinion of the Company are necessary for a fair presentation of the results for
such periods.
F-8
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash............................................................. $ 192 $ 590 $ 1,188
Money market funds............................................... -- 2,110 297
--------- --------- ------
Total cash and cash equivalents.................................. $ 192 $ 2,700 $ 1,485
--------- --------- ------
--------- --------- ------
</TABLE>
3. INVESTMENTS
Investments, classified as available for sale, consist of the following (in
thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1995 COST GAINS LOSSES VALUE
- - - - - - -------------------------------------------------------------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Debt securities issued by the U.S. Treasury and other U.S.
Government corporations and agencies.............................. $ 1,908 $ 24 $ -- $ 1,932
Debt securities issued by states of the U.S. and political
subdivisions thereof.............................................. 3,508 56 -- 3,564
Corporate obligations............................................... 989 1 -- 990
Preferred stock..................................................... 1,000 15 -- 1,015
----------- ----------- ----------- ---------
Total............................................................. $ 7,405 $ 96 $ -- $ 7,501
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
<CAPTION>
SEPTEMBER 30, 1996
(UNAUDITED)
- - - - - - --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Preferred Stock..................................................... $ 1,000 $ -- $ -- $ 1,000
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
</TABLE>
These investments have been reported as follows:
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER 30,
31, 1995 1996
----------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets--investments......................................... $ 4,961 $ --
Noncurrent assets--investments...................................... 2,540 1,000
----------- ------
Total............................................................. $ 7,501 $ 1,000
----------- ------
----------- ------
</TABLE>
F-9
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. RECEIVABLES
Receivables consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER
1994 1995 30, 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Trade.......................................................... $ 7,238 $ 12,000 $ 11,284
Foreign tax deposit and other.................................. 68 587 300
Current position of lease receivable (see Note 7).............. 691 1,277 868
--------- --------- -----------
7,997 13,864 12,452
Allowance for doubtful accounts................................ (101) (95) (220)
--------- --------- -----------
Total receivables............................................ $ 7,896 $ 13,769 $ 12,232
--------- --------- -----------
--------- --------- -----------
</TABLE>
5. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER
1994 1995 30, 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials and assembled parts.............................. $ 4,208 $ 6,933 $ 10,449
Work in process................................................ 1,929 1,866 5,778
Finished goods................................................. 233 1,626 2,563
--------- --------- -----------
$ 6,370 $ 10,425 $ 18,790
--------- --------- -----------
--------- --------- -----------
</TABLE>
Included in raw materials and assembled parts are $419,000, $1,004,000 and
$2,218,000 of current requirement service inventories at December 31, 1994 and
1995 and September 30, 1996.
6. EQUIPMENT
Equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER
1994 1995 30, 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Equipment and office furniture................................. $ 7,137 $ 7,413 $ 8,995
Computer equipment............................................. 1,113 1,106 1,941
Leased FIB systems............................................. 421 412 1,468
Leasehold improvements......................................... 138 162 1,092
--------- --------- -----------
8,809 9,093 13,496
Accumulated depreciation....................................... (3,776) (4,489) (5,201)
--------- --------- -----------
Total equipment.............................................. $ 5,033 $ 4,604 $ 8,295
--------- --------- -----------
--------- --------- -----------
</TABLE>
Leased FIB systems consist of equipment leased under principally
month-to-month operating leases.
F-10
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LEASE RECEIVABLES
Lease receivables consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER
1994 1995 30, 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Minimum lease receipts......................................... $ 4,270 $ 4,937 $ 4,529
Unearned finance charges....................................... (1,012) (997) (1,130)
--------- --------- -----------
3,258 3,940 3,399
Less current portion included in current receivables (Note
4)........................................................... (691) (1,277) (868)
--------- --------- -----------
Total lease receivables...................................... $ 2,567 $ 2,663 $ 2,531
--------- --------- -----------
--------- --------- -----------
</TABLE>
Finance income (reported as a component of interest income in the
consolidated statements of operations) earned during the years ended December
31, 1993, 1994 and 1995 and the nine months ended September 30, 1996 was
$152,000, $395,000, $489,000 and $330,000, respectively.
Minimum receipts on the lease receivable are due as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- - - - - - -------------------------------------------------------------------------------------
<S> <C>
1996................................................................................. $ 1,760
1997................................................................................. 1,335
1998................................................................................. 1,152
1999................................................................................. 557
2000................................................................................. 133
Thereafter........................................................................... --
---------
Total............................................................................ $ 4,937
---------
---------
</TABLE>
During September 1996, the Company repossessed a FIB workstation that had
been leased to BeamIt, Inc. The balance of the lease obligation, after deducting
the FIB workstation taken back, was $800,000. On September 30, 1996, BeamIt
signed an agreement to repay the remaining balance by providing marketing
services to the Company during the next five years.
F-11
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER
1994 1995 30, 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Service inventories, noncurrent, net of reserves of $229, $375
and $800, respectively....................................... $ 1,000 $ 1,500 $ 1,500
Investment in Norsam Technologies, Inc......................... -- -- 3,266
Capitalized software development costs, net of amortization of
$351, $545 and $651, respectively............................ 347 499 1,043
Goodwill, net of amortization of $80, $102 and $118,
respectively................................................. 95 73 57
Cash surrender value of life insurance......................... 58 77 77
Deposits and other............................................. 5 10 189
--------- --------- -----------
Total other assets........................................... $ 1,505 $ 2,159 $ 6,132
--------- --------- -----------
--------- --------- -----------
</TABLE>
Software development costs capitalized during the year ended December 31,
1994 and 1995 and the nine months ended September 30, 1996 were $156,000,
$345,000 and $650,000, respectively. Amortization of software development costs
was $107,000, $158,000, $194,000 and $106,000 for the years ended 1993, 1994 and
1995 and the nine months ended September 30, 1996, respectively.
During the nine months ended September 30, 1996, the Company sold three FIB
workstations to Norsam Technologies, Inc. ("Norsam") for use in a new commercial
application of FIB technology providing long-term archival and very high density
data storage. In addition, the Company has entered into an exclusive vendor
relationship with Norsam for the purchase of up to an additional 20
workstations. The consideration paid by Norsam to FEI for the three FIB systems
was 500,000 shares of Norsam Series A Preferred Stock. Each share of Series A
Preferred Stock is convertible into shares of Norsam common stock at a
conversion rate of $5.00 per share. The aggregate value of this transaction was
$3,250,000.
9. LINE OF CREDIT AND NOTES PAYABLE
A $10.0 million ($5.0 million at December 31, 1995) operating line of credit
is available at the bank's variable basic rate (8.5% at December 31, 1995 and
September 30, 1996). A foreign exchange line of credit is available at the same
rate in a maximum amount of $3.5 million (zero at December 31, 1995). Amounts
outstanding under the operating line of credit at December 31, 1994 and 1995 and
September 30, 1996 were $4,136,000, zero and $3,328,000, respectively. The
demand line is subject to review on July 31, 1997. Borrowings under the line of
credit are secured by eligible receivables, inventories and equipment. No amount
was outstanding under the foreign exchange line of credit at September 30, 1996.
During 1994, the Company also borrowed $2,250,000 from a bank. The loan was
paid on February 15, 1995.
F-12
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued royalties and commissions.................. $ 98 $ 455 $ 437
Accrued sales and use taxes........................ 185 160 (7)
Other accrued expenses............................. 103 256 381
--------- --------- -----
$ 386 $ 871 $ 811
--------- --------- -----
--------- --------- -----
</TABLE>
11. LEASE OBLIGATION
Operations are conducted in manufacturing and administrative facilities
under leases that extend through December 2010. Rent expense is recognized on a
straight-line basis over the term of the lease. Rent expense for the years ended
December 31, 1993, 1994 and 1995 and the nine months ended September 30, 1996
was approximately $365,000, $746,000, $601,000 and $572,000, respectively.
Included in the year ended December 31, 1994 was duplicate rent for the former
headquarters facility of $203,000.
Included in the building lease is a provision for a $500,000 buildout loan,
the full amount of which was borrowed during 1994. Amounts borrowed bear
interest at 9% and are payable ratably over the initial lease term.
The approximate future minimum rental payments due under these agreements as
of December 31, 1995 are $629,000, $757,000, $797,000, $810,000 and $810,000 for
the years ending December 31, 1996 through 2000, respectively. Subsequent to
year end, the Company entered into two additional lease agreements for
additional manufacturing facilities. The lease payments related to the first
such lease are included in the above minimum rental payments. Minimum lease
payments with respect to the second such lease are not material.
12. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable.................................... $ 2,500 $ 3,500 --
Lease finance line.............................. 1,348 -- --
--------- --------- ------
Subtotal.................................... 3,848 3,500 --
Less current portion............................ (403) -- --
--------- --------- ------
Total long-term debt........................ $ 3,445 $ 3,500 --
--------- --------- ------
--------- --------- ------
</TABLE>
During 1994, the Company's note payable to a nonbank lender, for whom a
director of the Company acts as an agent, was amended and restated to provide
for borrowings up to $4,500,000. Draws were subject to a $500,000 minimum. The
first $3,500,000 of borrowings were convertible into common shares at $7.50 per
share. Additional borrowings were convertible at a conversion price of $6.00 per
share, subject to
F-13
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LONG-TERM DEBT (CONTINUED)
certain limitations. On August 18, 1995, the Company notified the lender of its
intent to repay the borrowings and the lender elected to convert the debt into
466,667 shares of common stock on March 1, 1996. If the conversion right had
been exercised on January 1, 1995, net income for the year ended December 31,
1995 would have increased approximately $233,000 resulting in net income of
$3,974,000, or $.58 per share.
On June 30, 1993, the Company entered into a lease financing arrangement
("lease finance line") with a financial institution whereby a $2,000,000 credit
facility was available to support installment sales and leasing activities.
Borrowings were secured by the related lease receivables and the underlying
equipment subject to the lease, bore interest at an annual rate of the bank's
variable basic rate plus 1% or 1.25% and were generally for a term approximately
equal to the term of the underlying lease. During 1995, the Company repaid the
outstanding balance on the line, and the lease finance line expired.
In connection with previous loan agreements with a state agency and certain
shareholders, the Company issued warrants to purchase 400,000 shares of common
stock for $3.00 per share. The warrants were valued by calculating the
difference between the market rate of interest offered to the Company by a major
commercial bank and the interest rate on the debt. On June 5, 1995, 70,347
warrants were converted into 48,132 shares of common stock; on September 5,
1995, 129,653 warrants were converted into 100,018 shares of common stock; on
June 5, 1996, 150,000 warrants were converted into 122,050 shares of common
stock and on September 13, 1996, 50,000 warrants were converted to 37,832 shares
of common stock. Each warrant was converted into a number of shares of Common
Stock equal to the total number of shares for which the warrant was exercisable,
less a number of shares representing the aggregate exercise price of the warrant
shares purchased, valued at the market price on the date of exercise.
13. TAXES
The tax expense (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal............................. $ 305 $ (47) $ 1,268 $ 813 $ 881
State............................... 73 49 335 239 205
Foreign............................. 69 82 179 98 115
--------- --------- --------- --------- ---------
Subtotal.......................... 447 84 1,782 1,150 1,201
Deferred............................ 150 (347) 268 257 (329)
--------- --------- --------- --------- ---------
Total tax expense (benefit)....... $ 597 $ (263) $ 2,050 $ 1,407 $ 872
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-14
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. TAXES (CONTINUED)
The effective income tax rate varies from the statutory rate due to the
following (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected tax expense (benefit) at statutory rates..... $ 619 $ (166) $ 1,969 $ 1,316 $ 745
Increase (reduction) in income taxes resulting from:
Transactions eliminated for financial statement
purposes.......................................... (9) (4) 7 (7) (3)
FSC commissions..................................... (33) -- (172) (114) (31)
Foreign taxes....................................... 14 4 (11) 7 85
Nondeductible life insurance premiums............... 6 -- 4 -- --
State income taxes, net of federal income tax
benefit........................................... 65 (31) 232 170 97
Research and development tax credits................ (92) (58) -- -- --
FSC tax............................................. 12 -- 57 40 8
Other............................................... 15 (8) (36) (5) (29)
--------- --------- --------- --------- ---------
Total tax expense (benefit)....................... $ 597 $ (263) $ 2,050 $ 1,407 $ 872
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Effective January 1, 1993, the Company adopted SFAS No. 109, ACCOUNTING FOR
INCOME TAXES. This statement requires an asset and liability approach for
financial accounting and reporting for income taxes. The Statement superseded
APB Opinion 11, as amended, which the Company had previously used. The
cumulative effect of adopting SFAS No. 109 on the Company's financial statement
was to increase income by $206,000 ($0.04 per share) for the year ended December
31, 1993.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Reserves and accruals.......................... $ 444 $ 548 $ 896
Research and development tax credit
carryforwards................................ 345 -- --
Alternative minimum tax credit carryforwards... 126 -- --
Other assets................................... 38 78 98
Deferred tax liability:
Accumulated depreciation....................... (344) (294) (222)
Other liabilities.............................. (165) (156) (267)
--------- --------- -----
Net deferred tax asset....................... $ 444 $ 176 $ 505
--------- --------- -----
--------- --------- -----
Deferred tax:
Current asset.................................. $ 444 $ 626 $ 994
Long-term liability............................ -- (450) (489)
--------- --------- -----
Net deferred tax............................. $ 444 $ 176 $ 505
--------- --------- -----
--------- --------- -----
</TABLE>
F-15
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SHAREHOLDERS' EQUITY
STOCK SPLIT--Effective May 15, 1995, the Board of Directors approved a
two-for-three reverse stock split. All share data has been restated accordingly.
CAPITAL STOCK--Total authorized shares of 15,500,000 consist of 15,000,000
shares designated as common stock and 500,000 shares as preferred stock. No
shares of the preferred stock were issued or outstanding during the years ended
December 31, 1993, 1994 or 1995 or the nine months ended September 30, 1996.
Reserved shares of common stock as of December 31, 1993, 1994 and 1995 and
September 30, 1996 were 1,571,264; 1,552,531; 1,889,375 and 1,414,687,
respectively. These shares were reserved for stock incentive plans, the warrants
issued in connection with previous loan agreements and shares issuable upon
conversion of a loan.
PUBLIC OFFERING--On June 1, 1995, the Company completed its initial public
offering by issuing 2,500,000 shares of common stock at $9.50 per share.
Proceeds, net of underwriters' commissions and other offering costs, aggregated
$21,148,000. Approximately $6,165,000 of the proceeds were used to pay off the
Company's line of credit and lease finance line.
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 the sale of restricted stock.
The 1995 Stock Incentive Plan ("1995 Plan") allows for issuance of a maximum
of 500,000 shares. The Board of Directors' ability to grant options under the
1995 Plan will terminate when all shares reserved for issuance have been issued
and all restrictions on such shares have lapsed or earlier, at the option of the
Board of Directors.
The 1995 Supplemental Stock Incentive Plan ("1995 Supplemental Plan") allows
for issuance of a maximum of 800,000 shares (500,000 at December 31, 1995). The
Board of Directors' ability to grant options under the 1995 Plan will terminate
when all shares reserved for issuance have been issued and all restrictions on
such shares have lapsed or earlier, at the option of the directors.
The 1984 Stock Incentive Plan ("1984 Plan") allowed for issuance of a
maximum of 1,200,000 shares. The Board of Directors' ability to grant options
under the 1984 Plan terminated in January 1995. During the year ended December
31, 1994, options were granted for less than $9.50 per share. Such options were
considered compensatory and $8,000 was recorded as an expense.
F-16
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SHAREHOLDERS' EQUITY (CONTINUED)
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:
<TABLE>
<CAPTION>
SHARES
AVAILABLE OUTSTANDING
FOR GRANT OPTIONS
---------- -----------
<S> <C> <C>
Balance, January 1, 1993............................................ 136,533 427,876
Options granted..................................................... (41,682) 41,682
Options exercised................................................... -- (26,478)
Options expired..................................................... 1,217 (1,217)
---------- -----------
Balance, December 31, 1993.......................................... 96,068 441,863
Options granted..................................................... (17,000) 17,000
Options exercised................................................... -- (18,733)
Options expired..................................................... 5,250 (5,250)
---------- -----------
Balance, December 31, 1994.......................................... 84,318 434,880
Options available under the 1995 Plan
and the 1995 Supplemental Plan.................................... 1,000,000 --
Options granted..................................................... (967,872) 967,872
Options exercised................................................... -- (210,539)
Options expired..................................................... 8,354 (8,354)
Plan expiration..................................................... (85,952) --
---------- -----------
Balance, December 31, 1995.......................................... 38,848 1,183,859
Options available under the 1995 Plan
and the 1995 Supplemental Plan (unaudited)........................ 300,000 --
Options granted (unaudited)......................................... 221,850 221,850
Options exercised (unaudited)....................................... -- (108,020)
Options expired (unaudited)......................................... 4,532 (4,532)
---------- -----------
Balance, September 30, 1996 (unaudited)............................. 121,530 1,293,157
---------- -----------
---------- -----------
Exercisable at December 31, 1995.................................... 374,433
-----------
-----------
Exercisable at September 30, 1996 (unaudited)....................... 516,724
-----------
-----------
</TABLE>
Options are exercisable at prices ranging from $.375 to $18.75 ($.375 to
$14.00 at December 31, 1995) per share. Options exercised during 1993 were at
prices ranging from $.375 to $7.50 per share, during 1994 and 1995 at prices
ranging from $.375 to $14.00 per share and during the nine months ended
September 30, 1996 at prices ranging from $7.50 to $13.25 per share.
POSTPONED STOCK OFFERING--During the year ended December 31, 1994, the
Company wrote off $230,000 associated with a postponed stock offering.
F-17
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. EMPLOYEE BENEFIT PLANS
Through April 30, 1993, the Company's employee profit share incentive plan
was based on operating income exceeding a specified return on operating assets.
A modified plan was adopted April 16, 1993 which is based on growth of operating
income on a year-to-year basis. During the year ended 1994, the Company did not
contribute to the plan. During the years ended 1993 and 1995, the Company
contributed $125,000 and $278,000 to the plan, respectively.
Effective January 1, 1988, a Profit Sharing (401k) Plan was adopted. Under
the plan, which covers substantially all employees, employees may defer a
portion of their compensation and the Company may contribute an amount approved
by the Board of Directors. During the years ended 1993, 1994, and 1995, there
were no Company contributions to this plan. Effective September 1, 1995 the
Board of Directors approved a 100% match of employee contributions to the 401k
Plan, up to 3% of each employee's salary. For the year ended December 31, 1995
and for the nine months ended September 30, 1996 FEI contributed $50,000 and
$152,000, respectively, to the 401k plan.
The Company had an executive bonus program pursuant to which $67,500 was
paid for the year ended December 31, 1993. No amount was accrued as of December
31, 1994. The program was terminated effective January 1, 1995.
16. RELATED-PARTY TRANSACTIONS
LICENSING AGREEMENT--Licensing fees were paid to a college which employed a
director of the Company. The licensing agreement provided for a fixed fee per
ion focusing column sale in exchange for the right to use technology developed
by the college. Although the agreement remains in effect, the Company no longer
produces focusing columns covered by this patent.
LEASING AGREEMENTS--From January 1, 1991 to August 1994, a shareholder,
owning approximately 8% of the outstanding shares of common stock of the
Company, owned the operating facilities leased by the Company. The Company moved
into new facilities during 1994 and ceased paying rent on the former facility in
August 1994. The Company leases its manufacturing and administrative facilities
from a company for whom a director of the Company acts as an agent.
F-18
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION
The Company operates in one industry segment. Export sales, primarily to
customers in Europe and Asia, were approximately 28%, 30%, 41% and 52% of net
sales during the years ended December 31, 1993, 1994 and 1995 and the nine
months ended September 30, 1996, respectively.
The following table sets forth certain information for FEI Europe, Ltd. and
FEI Europe GmbH (collectively "FEI Europe"), wholly owned subsidiaries of the
parent.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales
Sales to customers........... $ 12,450 $ 15,579 $ 24,530 $ 12,457 $ 16,067
Export sales to customers.... 2,125 2,281 8,630 9,905 10,612
Sales to affiliates.......... 1,807 3,644 6,457 5,192 5,422
--------- --------- --------- --------- ---------
Total parent sales......... 16,382 21,504 39,617 27,443 32,101
FEI Europe sales............... 2,623 4,421 8,531 6,769 6,897
Eliminations................... (1,807) (3,644) (6,457) (5,192) (5,422)
--------- --------- --------- --------- ---------
Net sales.................. $ 17,198 $ 22,281 $ 41,691 $ 29,131 $ 33,576
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) before taxes:
Parent....................... $ 1,633 $ (729) $ 5,787 $ 2,752 $ 1,751
FEI Europe................... 160 229 56 (14) (370)
Eliminations................. 28 12 (52) (274) (62)
--------- --------- --------- --------- ---------
Income (loss) before
taxes.................... $ 1,821 $ (488) $ 5,791 $ 2,464 $ 1,319
Total assets:
Parent....................... $ 16,637 $ 24,177 $ 44,065 $ 43,603 $ 51,736
FEI Europe................... 1,138 1,270 2,686 4,858 1,780
Eliminations................. (1,093) (1,033) (2,109) (4,071) (1,635)
--------- --------- --------- --------- ---------
Total assets................. $ 16,682 $ 24,414 $ 44,642 $ 44,390 $ 51,881
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Sales by the parent to FEI Europe are recorded at arms-length prices.
Intercompany profits are eliminated in consolidation.
During the year ended December 31, 1993, one customer accounted for 16% of
net sales and approximately 45% of year-end trade receivables related to such
customer. During the year ended December 31, 1994, two customers accounted for
19% of net sales and approximately 15% of year-end trade receivables related to
one such customer. During the year ended December 31, 1995, one customer
accounted for 13% of net sales and approximately 15% of year-end trade
receivables related to such customer. In addition, one other customer accounted
for 12% of accounts receivable at December 31, 1995. During the nine months
ended September 30, 1996, no customer accounted for 10% or more of net sales.
F-19
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments and the
methods and assumptions used to estimate such fair values are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investments...................................... $ 7,501 $ 7,501 $ 1,000 $ 1,000
Long-term convertible debt....................... 3,500 5,017 -- --
</TABLE>
Management believes the carrying amounts of cash and cash equivalents,
receivables, accounts payable, accrued payroll liabilities and other current
liabilities are a reasonable approximation of the fair value of those financial
instruments.
The fair value of investments is determined by quoted market prices or
dealer quotes, if available. If a quoted price is not available, fair value is
estimated using quoted market prices for similar securities. The fair value of
convertible debt is estimated as the market value of the Company's stock at
December 31, 1995 multiplied by the shares obtainable upon conversion.
19. LITIGATION
On May 12, 1995, Micrion Corporation ("Micrion"), a principal competitor of
the Company, filed suit against the Company alleging infringement of a patent
issued to Micrion relating to the use of an electron gun to neutralize the
positive charge that can develop with the use of an ion beam in FIB
workstations. Micrion sought an injunction against the alleged infringement of
the Micrion patent, damages of at least $1,000,000, treble damages for
infringement of the Micrion patent, attorney's fees and other damages. In May
1996, the parties agreed to dismiss the court action without prejudice.
The Company believes it has valid defenses and intends to vigorously defend
the litigation. The Company believes the likelihood of a material finding in
favor of Micrion is remote and, accordingly, has not recorded a liability with
respect to this contingency. Nonetheless, it is not possible to predict the
outcome of this matter with certainty.
20. SUBSEQUENT EVENT
Pursuant to a letter of intent signed in September 1996, an agreement (the
"Combination Agreement") was signed as of November 15, 1996, between Philips
Industrial Electronics International B.V. ("PIE"), a wholly owned subsidiary of
Philips Electronics N.V. of The Netherlands ("Philips"), wherein FEI will
acquire all of the stock of each of a Dutch holding company and a U.S. holding
company, which will conduct substantially all of the electron optics activities
of Philips, in exchange for 55% of the common stock of the Company. The Philips
electron optics business to be acquired includes manufacturing, sales and
service operations in nine countries including the United States ("PEO
Operations"). Assuming the transaction is approved by the shareholders and
regulators, the transaction will be accounted for as a "reverse acquisition,"
with PEO Operations being treated as the accounting acquirer.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Philips Industrial Electronics International B.V.
We have audited the accompanying combined balance sheets of the Philips
Electron Optics Operations to be transferred to FEI Company as of December 31,
1994 and 1995, and the related combined income statements and combined cash flow
statements for each of the years in the three-year period ended December 31,
1995. These combined financial statements are the responsibility of the
management of Philips Electron Optics. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in The Netherlands, which do not differ substantially from generally
accepted auditing standards in the United States. These standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying combined financial statements are prepared in accordance
with generally accepted accounting principles in the United States on the basis
of Notes 1 and 3 pursuant to the Combination Agreement between Philips
Industrial Electronics International B.V. and FEI Company to transfer a
substantial part of Philips Electron Optics to FEI Company. The Philips Electron
Optics Operations were a component of several operating units of Philips
Electronics N.V. and its subsidiaries and did not constitute a separate legal or
reporting entity.
In our opinion the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Philips Electron
Optics Operations to be transferred to FEI Company as of December 31, 1995 and
1994, the cash flows and the results of their operations for each of the years
in the three-year period ended December 31, 1995, on the basis described in
Notes 1 and 3, in conformity with generally accepted accounting principles in
the United States.
Eindhoven,
The Netherlands
November 15, 1996
KPMG Accountants N.V.
F-21
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
COMBINED BALANCE SHEETS
(THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Trade accounts receivable (Note 4)......................................... $ 18,760 $ 23,037 $ 17,161
Other accounts receivable/prepaid expenses................................. 945 1,157 2,071
Inventories (Note 5)....................................................... 16,722 25,045 35,915
Current accounts with Philips (Note 6)..................................... 877 1,460 1,293
--------- --------- -------------
Total current assets....................................................... 37,304 50,699 56,440
Other assets (Note 7)...................................................... 3,255 4,004 4,912
Tangible fixed assets (Note 8)............................................. 5,189 6,039 7,403
Intangible fixed assets (Note 9)........................................... -- -- 1,897
--------- --------- -------------
Total assets............................................................... $ 45,748 $ 60,742 $ 70,652
--------- --------- -------------
--------- --------- -------------
LIABILITIES AND DIVISION EQUITY
Trade creditors............................................................ $ 6,074 $ 8,936 $ 7,198
Payroll liabilities........................................................ 2,057 2,303 394
Pre-payments received...................................................... 2,938 1,570 5,321
Accrued expenses (Note 10)................................................. 10,001 10,353 11,959
Short term provisions (Note 11)............................................ 3,387 3,693 3,332
--------- --------- -------------
Total current liabilities.................................................. 24,457 26,855 28,204
Long term provisions (Note 12)............................................. 1,201 1,336 1,313
Division equity (Note 13).................................................. 20,090 32,551 41,135
--------- --------- -------------
Total liabilities and division equity...................................... $ 45,748 $ 60,742 $ 70,652
--------- --------- -------------
--------- --------- -------------
</TABLE>
See accompanying notes to the combined financial statements.
Philips' Electron Optics operations to be transferred pursuant to the
Combination Agreement between Philips Industrial Electronics International B.V.
and FEI Company.
F-22
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
COMBINED INCOME STATEMENTS
(THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales................................................... $ 71,631 $ 84,169 $ 109,117 $ 67,743 $ 71,059
Cost of sales........................................... 34,424 38,566 57,301 33,231 38,303
--------- --------- ---------- --------- ---------
Gross profit............................................ 37,207 45,603 51,816 34,512 32,756
Research and development costs (Note 14)................ 5,132 6,850 9,087 6,817 7,447
Selling, general and administrative costs............... 28,130 29,280 35,184 24,182 27,608
Other (income) (Note 15)................................ -- -- (1,700) (1,700) --
--------- --------- ---------- --------- ---------
Income (loss) from operations........................... 3,945 9,473 9,245 5,213 (2,299)
Tax expense (benefit) (Note 16)......................... 1,519 3,580 3,317 1,956 (480)
--------- --------- ---------- --------- ---------
Net income (loss)....................................... $ 2,426 $ 5,893 $ 5,928 $ 3,257 $ (1,819)
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
</TABLE>
See accompanying notes to the combined financial statements.
Philips' Electron Optics operations to be transferred pursuant to the
Combination Agreement between Philips Industrial Electronics International B.V.
and FEI Company.
F-23
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
COMBINED CASH FLOW STATEMENTS
(THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ 2,426 $ 5,893 $ 5,928 $ 3,257 $ (1,819)
Adjustment to reconcile net income (loss) to net cash
provided by/used in operating activities:
Depreciation and amortization......................... 1,290 1,447 1,844 1,483 1,758
Decrease (increase) in assets:
Receivables......................................... (3,021) (1,085) (3,453) 2,213 6,146
Other receivables/prepaid expenses.................. 129 (18) (158) (510) (1,234)
Inventories (1)..................................... 344 (4,982) (6,951) (10,725) (10,870)
Other assets (1).................................... 28 (655) (541) (966)
Current accounts with Philips (1)................... 928 (127) (185) (133)
Increase (decrease) in liabilities:
Trade creditors (1)................................. 542 2,465 973 (1,745)
Accrued payroll liabilities (1)..................... 165 (73) (1,698) (1,814)
Pre-payments received (1)........................... (726) (1,537) 653 3,763
Accrued expenses/deferred income (1)................ 1,116 73 (76) 249
Provisions (1)...................................... 1,361 126 327 (211)
--------- --------- --------- ---------- ----------
Net cash provided by (used in) operating
activities........................................ 1,168 4,669 (2,518) (4,829) (6,876)
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisition of equipment/capital expenditures......... (1,408) (1,769) (2,351) (2,173) (2,789)
Purchase of businesses................................ -- -- -- -- (2,703)
--------- --------- --------- ---------- ----------
Net cash used in investing activities............... (1,408) (1,769) (2,351) (2,173) (5,492)
CASH FLOW FROM FINANCING ACTIVITIES:
Net cash provided by (returned to) Philips (2)........ $ 240 $ (2,900) $ 4,869 $ 7,002 $ 12,368
--------- --------- --------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.... 0 0 0 0 0
</TABLE>
- - - - - - ------------------------
(1) In 1993 a substantial part of the liabilities and all current accounts with
Philips were managed and accounted for at the corporate level with Philips.
Accordingly, the increases/decreases in these items during 1993 are not
available at the level of the Philips' Electron Optics operations, and the
decrease in inventories includes the change in other assets.
F-24
<PAGE>
(2) Net cash provided by (returned to) Philips consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash provided by Philips................................ $ 68,850 $ 80,184 $ 110,533 $ 76,958 $ 89,573
Cash returned to Philips................................ 68,610 83,084 105,664 69,956 77,205
--------- --------- ---------- --------- ---------
Net cash provided by (returned to) Philips.............. $ 240 $ (2,900) $ 4,869 $ 7,002 $ 12,368
</TABLE>
Principally due to the effect of currency translation differences, certain
amounts in the cash flow statements do not correspond to the difference between
the balance sheet amounts for the corresponding items.
See accompanying notes to the combined financial statements.
Philips' Electron Optics operations to be transferred pursuant to the
Combination Agreement between Philips Industrial Electronics International B.V.
and FEI Company.
F-25
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. STRUCTURE OF THE PHILIPS' ELECTRON OPTICS OPERATIONS PURSUANT TO THE
COMBINATION AGREEMENT BETWEEN PHILIPS INDUSTRIAL ELECTRONICS INTERNATIONAL
B.V. AND FEI COMPANY
In November 1996 an agreement (the "Combination Agreement") was entered into
between Philips Industrial Electronics International B.V. ("PIE"), a Netherlands
corporation and wholly owned subsidiary of Philips Electronics N.V. ("Philips"),
and FEI Company, an Oregon corporation ("FEI") pursuant to which Philips'
Electron Optics business unit and FEI would be combined. The Electron Optics
operations to be transferred to FEI (the "PEO Operations") include business
activities in nine countries, and the Combination Agreement provides that these
various operations will be separated from their respective Philips organizations
and incorporated into new legal entities. Philips will transfer to FEI 100% of
the ownership interest in these new legal entities. See Note 19. Pursuant to the
Combination Agreement, PIE will receive 55% of the outstanding Common Stock of
FEI. The closing of the transactions contemplated by the Combination Agreement
is expected to occur in February 1997 (the "Closing").
The PEO Operations to be transferred to FEI consists of the world-wide
activities of the Electron Optics business unit of PIE (including substantially
all of the related assets and liabilities and personnel) on a going-concern
basis, other than the Excluded Business (as hereinafter defined), and including
the relatively small acquisitions in 1996 of the business of ElectroScan
Corporation, a Massachusetts corporation, and the former Delmi S.r.o. located in
Brno, Czech Republic. The Combination Agreement also provides that at Closing
the PEO Operations will include $8.0 million in cash.
The "Excluded Business," which is not included in the combined financial
statements, means:
I. Philips' Electron Optics sales and service organizations in countries
other than the United States, Canada, France, Germany, Italy, Japan, The
Netherlands and the United Kingdom.
II. Ownership of the real property located at Eindhoven, The Netherlands,
and certain other assets and liabilities used in the PEO Operations.
The Combination Agreement provides that the Eindhoven real property will be
leased for a ten-year term at a market-related rate. A reduced rental rate of
$850,000 will apply for the first year. The parties to the Combination Agreement
have not yet agreed on rental rates for years two through ten of the lease
period.
2. NATURE OF BUSINESS
DESCRIPTION OF PHILIPS' ELECTRON OPTICS BUSINESS. The PEO Operations
develops, manufactures and sells electron optics instruments, principally
electron microscopes, to governmental and quasi-governmental institutions,
research foundations and similar institutions and to industrial users in the
semiconductor, pharmaceutical, chemical, metals and mining industries. Customers
of the PEO Operations are located worldwide, but primarily in Europe, the U.S.
and Asia.
DEPENDENCE ON SUPPLIERS. The PEO Operations relies on other Philips
businesses and outside vendors to manufacture the components and subassemblies
used in its microscopes, many of which are obtained from a sole supplier or a
small number of suppliers. A substantial portion of the subassemblies included
in its electron microscopes are purchased from the Philips machine shop (Philips
Machinefabrieken B.V.). Management of the PEO Operations believes that certain
components and subassemblies are available only from Philips. A significant
delay or disruption in obtaining components and subassemblies from Philips would
have a material adverse effect on the PEO Operations' results of operations
during the period in which alternative sources of supply were developed.
F-26
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. NATURE OF BUSINESS (CONTINUED)
SHARED PHILIPS RESOURCES. Philips and its affiliates provide certain
services to the PEO Operations, such as research and development (product and
production technology), general corporate resources and marketing and sales
(brand name, distribution and sales representation). See Note 17.
3. ACCOUNTING POLICIES
BASIS OF PRESENTATION. The combined financial statements have been prepared
in accordance with generally accepted accounting principles in the U.S. applied
on a consistent basis, taking into account SEC regulations, and include the
accounts of the PEO Operations to be transferred to FEI, i.e., the PEO
Operations organizations in the U.S., Canada, France, Germany, Italy, Japan, The
Netherlands and the United Kingdom. The accounts of Philips Electron Optics
Czech Republic s.r.o. (former Delmi S.r.o.) are included from January 1, 1996.
The accounts of ElectroScan Corporation are included from July 1, 1996. All
profits and losses derived from intercompany transactions are eliminated. The
combined financial statements are presented as if the PEO Operations had existed
as an entity separate from Philips during the periods presented and include the
historical assets, liabilities, sales and expenses that are directly related to
the PEO Operations.
Because the PEO Operations transferred have historically been part of the
Philips group, certain allocations of liabilities and expenses have been
included in the combined financial statements. These liabilities and expenses
are allocated using various methods depending upon the nature of the liability
or expense. In the opinion of Philips, the methods used to allocate these
liabilities and expenses to the PEO Operations as if they were a separate entity
are reasonable.
The combined financial statements are not necessarily indicative of the
financial position and results of operations that would have occurred had the
PEO Operations been a separate entity.
USE OF ESTIMATES IN FINANCIAL REPORTING. The preparation of financial
statements in conformity with generally accepted accounting principles requires
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. In addition, certain allocations included in the
combined financial statements are based on estimates. Actual amounts and results
could differ from estimates.
FOREIGN CURRENCY TRANSLATION. For the purpose of the combined financial
statements the U.S. dollar has been used as the reporting currency. Assets and
liabilities denominated in foreign currencies are translated to U.S. dollars at
the official exchange rates on the respective balance sheet dates. Translation
adjustments are shown separately in Division Equity. Revenues, costs and
expenses are translated using the average rates of exchange for the periods
involved. Realized and unrealized foreign currency transaction gains and losses
are included in the combined income statement.
F-27
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTING POLICIES (CONTINUED)
The following table sets forth, for the periods and as of the dates
indicated, the foreign exchange translation rates used (expressed in U.S.
dollars per NLG) in the combined financial statements:
<TABLE>
<CAPTION>
AVERAGE RATE
FOR RATE AT
PERIOD ENDED PERIOD END
--------------- -----------
<S> <C> <C>
December 31, 1993............................................... 0.5377 0.5155
December 31, 1994............................................... 0.5525 0.5780
September 30, 1995.............................................. 0.6211 0.6250
December 31, 1995............................................... 0.6211 0.6250
September 30, 1996.............................................. 0.5988 0.5917
</TABLE>
REVENUE RECOGNITION. Product sales are recorded at the time of shipment.
Maintenance service revenues, when billed in advance, are recorded as deferred
revenue and recognized ratably over the contract period; otherwise, revenues are
recognized as services are provided.
CASH AND CASH EQUIVALENTS/CASH FLOW. The net cash position of the PEO
Operations has been managed through the centralized treasury system of Philips.
Accordingly, transfers of cash within the treasury system are recorded through
intercompany accounts, which are reflected as a component of Division Equity in
the combined balance sheets. In addition, intercompany balances arising from
purchase and sale transactions with other Philips affiliates and allocated
charges for services have been treated as the equivalent of cash transactions in
the combined financial statements and are included as a component of Division
Equity.
RECEIVABLES. Receivables and prepaid expenses are stated at face value,
less a valuation adjustment for doubtful accounts. The PEO Operations makes
periodic evaluations of the creditworthiness of its customers and generally does
not require collateral.
INVENTORIES. Inventories are valued at the lower of cost or market. Cost is
defined as purchase price or cost of manufacture, determined under the
first-in-first-out (FIFO) method. Costs include material, labor and
manufacturing overhead taking into account the stage of completion. Service
inventories in excess of the current requirements, based on recent sales levels,
are reported as noncurrent assets (Other assets). Obsolescence is calculated for
inventories in excess of anticipated future requirements.
TANGIBLE FIXED ASSETS. Tangible fixed assets are presented at purchase
price or cost of manufacture, less accumulated depreciation. Depreciation is
calculated using the straight-line method over the expected economic life of the
asset. For machinery and installations as well as other fixed assets, the
expected economic lives primarily range from two to seven years.
INTANGIBLE FIXED ASSETS. With respect to business acquisitions accounted
for using the purchase method, the excess of the cost of acquisition over the
fair value of the identifiable net assets acquired is capitalized as goodwill.
Goodwill is amortized using the straight-line method over the lesser of its
estimated economic life or 40 years.
LIABILITIES. Liabilities are stated at face value. For purposes of these
statements, certain liabilities have been allocated to the PEO Operations.
PROVISIONS. Provisions are stated at face value, with the exception of
provisions for employee pension plans and other post-retirement benefits, which
are stated at the estimated present value of the future
F-28
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTING POLICIES (CONTINUED)
obligation. The provision for product warranty repairs and replacements is
established to cover estimated warranty costs and certain commitments for
product updates. Products generally have a one-year warranty period. Provisions
include both reserves based on a percentage of sales for normal warranty and
replacement during agreed warranty periods and reserves based on a case-by-case
calculation.
DIVISION EQUITY. Division equity represents the financing of the PEO
Operations through Philips intercompany accounts. No separate equity or debt
financing has existed at the level of the PEO Operations.
SALES. Sales represent the revenues derived from deliveries of products and
customer service to third parties and to Philips organizations not to be
transferred.
COST OF SALES. Cost of sales represents the cost of material, production
and shipment of products to the sales organizations which is incurred at the
production facilities at Eindhoven, The Netherlands; Brno, Czech Republic and
Wilmington, Massachusetts.
RESEARCH AND DEVELOPMENT COSTS. Research and development costs are expensed
as incurred. The PEO Operations has received grants from the government of The
Netherlands and the European Community for certain product development projects.
These grants are credited to the development expenses ratably over the periods
in which these expenses are incurred. The expenses include certain contract
development costs for services provided by Philips Research Laboratories and
third parties.
SELLING, GENERAL AND ADMINISTRATIVE COSTS. Selling, general and
administrative costs represent the costs of sales departments and customer
service departments (including time spent by service engineers). Also included
are the allocated costs of management and administration in the countries, the
costs of general management and administration at the production facilities and
the allocated portion of the Philips corporate costs.
INTEREST EXPENSE. There is no direct interest cost allocation to the PEO
Operations with respect to Philips intercompany borrowings, and accordingly, the
combined income statements do not include any allocated financing costs.
INCOME TAXES. The business of the PEO Operations is included in the
consolidated income tax return of Philips in each country in which the PEO
Operations conducts business. For the purposes of these statements, income tax
expense is calculated using the statutory rates on taxable income per country on
a calendar year basis, as if the PEO Operations activity had been an independent
entity.
INTERIM STATEMENTS. The interim combined financial statements at September
30, 1996 and for the nine months ended September 30, 1996 and 1995 and the
related notes thereto are unaudited and contain all adjustments consisting only
of normal recurring accruals which, in the opinion of management, are necessary
to present fairly the financial position and results of operations for the
interim period. Results for the nine-month period are not necessarily indicative
of results for the full year.
F-29
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER
(In thousands of US Dollars) 1994 1995 30, 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Trade accounts receivable..................... $ 19,345 $ 23,863 $ 18,013
Valuation adjustment.......................... (585) (826) (852)
--------- --------- -----------
Net trade accounts receivable................. $ 18,760 $ 23,037 $ 17,161
--------- --------- -----------
--------- --------- -----------
</TABLE>
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER
(In thousands of US Dollars) 1994 1995 30, 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials and assembled parts............. $ 6,788 $ 12,410 $ 12,038
Work in process............................... 4,999 6,737 12,929
Service....................................... 635 938 888
Finished goods................................ 7,339 8,619 15,249
--------- --------- -----------
Total gross inventories..................... 19,761 28,704 41,104
Valuation adjustment for obsolescence......... (3,039) (3,659) (5,189)
--------- --------- -----------
Total net inventories......................... $ 16,722 $ 25,045 $ 35,915
--------- --------- -----------
--------- --------- -----------
</TABLE>
A component of the increase in the valuation adjustment to inventories at
September 30, 1996 was $1.2 million resulting from an additional provision for
the planned obsolescence of a certain type of high-tension tank. In 1996 the PEO
Operations completed a development program for a new version of the high-tension
tank. Management expects the old version of the high-tension tank to be phased
out over a period of two to three years. The gross inventories of these
high-tension tanks were $2.2 million at September 30, 1996, less a cumulative
valuation adjustment of $1.7 million, for a net inventory value of $500,000 at
that date.
6. CURRENT ACCOUNTS WITH PHILIPS
Current accounts with Philips represent accounts receivable and accounts
payable between PEO Operations and other Philips units. Most of the current
account transactions relate to deliveries of goods.
Current accounts with Philips consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER
(In thousands of US Dollars) 1994 1995 30, 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current account receivable.................... $ 1,917 $ 2,729 $ 3,345
Current account payable....................... (1,040) (1,269) (2,052)
--------- --------- -----------
Total......................................... $ 877 $ 1,460 $ 1,293
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-30
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. OTHER ASSETS
Other assets relate to non-current service inventories and consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER
(In thousands of US Dollars) 1994 1995 30, 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Gross value................................... $ 6,062 $ 7,163 $ 7,718
Valuation adjustment for obsolescence......... (2,807) (3,159) (2,806)
--------- --------- -----------
Total Other Assets............................ $ 3,255 $ 4,004 $ 4,912
--------- --------- -----------
--------- --------- -----------
</TABLE>
8. TANGIBLE FIXED ASSETS
Tangible fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER
(In thousands of US Dollars) 1994 1995 30, 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
MACHINERY AND INSTALLATIONS:
Gross......................................... $ 5,417 $ 6,337 $ 6,430
Accumulated depreciation...................... (3,043) (3,669) (3,830)
--------- --------- -----------
Net book value................................ 2,374 2,668 2,600
OTHER FIXED ASSETS:
Gross......................................... 8,847 9,219 10,584
Accumulated depreciation...................... (6,032) (5,848) (5,781)
--------- --------- -----------
Net book value................................ 2,815 3,371 4,803
--------- --------- -----------
Total tangible fixed assets................... $ 5,189 $ 6,039 $ 7,403
--------- --------- -----------
--------- --------- -----------
</TABLE>
Included in other fixed assets is demonstration equipment in the amount of
$1,749,000, $2,092,000 and $2,654,000 as of December 31, 1994 and 1995 and
September 30, 1996, respectively.
Under the terms of the Combination Agreement, certain land and a
manufacturing and office building located at Eindhoven, The Netherlands, will be
retained by Philips and leased to FEI under an operating lease agreement.
Accordingly, the land and building have been excluded from the combined balance
sheets. The combined income statements for the years ended December 31, 1993,
1994 and 1995 and the nine-month periods ended September 30, 1995 and 1996
include $302,000, $310,000, $348,000, $261,000 and $251,000, respectively, of
depreciation expense related to such facilities, representing an assumed charge
to the PEO Operations from Philips for the use of the land and building.
FEI will pay rent at rates based on a fair market rental value, escalated
annually based on commercial practices in The Netherlands, except that for the
first year a reduced rental rate of $850,000 will apply.
9. INTANGIBLE FIXED ASSETS (UNAUDITED)
On February 6, 1996, the PEO Operations acquired Delmi S.r.o., now called
Philips Electron Optics Czech Republic S.r.o., at Brno, Czech Republic, for a
consideration of approximately $400,000. The
F-31
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. INTANGIBLE FIXED ASSETS (UNAUDITED) (CONTINUED)
acquisition did not result in the recording of any goodwill. The Delmi
operations have been consolidated with the PEO Operations for financial
reporting purposes since January 1, 1996.
On July 11, 1996 the PEO Operations acquired substantially all of the assets
of ElectroScan Corporation, a Massachusetts corporation, for $2.8 million,
resulting in $1,995,000 of goodwill. The goodwill will be amortized over 60
months. The ElectroScan operations have been consolidated with the PEO
Operations since July 1, 1996. Accumulated goodwill amortization in the period
ended September 30, 1996 was $98,000. Pursuant to the purchase agreement, the
PEO Operations will pay $25,000 of additional consideration to the former
ElectroScan Corporation for each eight-inch ESEM model XL50 sold by the PEO
Operations subsequent to closing of the ElectroScan acquisition until December
31, 2001, up to an aggregate of $4 million.
10. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER
(In thousands of US Dollars) 1994 1995 30, 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred revenue.............................. $ 5,255 $ 5,077 $ 5,728
Accrued expenses.............................. 4,746 5,276 6,231
--------- --------- -----------
$ 10,001 $ 10,353 $ 11,959
--------- --------- -----------
--------- --------- -----------
</TABLE>
11. SHORT TERM PROVISIONS
Short term provisions consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
(In thousands of US Dollars) 1994 1995 1996
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Provision for warranty and replacement.......... $ 1,530 $ 1,314 $ 1,052
Deferred taxes.................................. 1,070 1,634 1,551
Other product related provisions................ 537 713 496
Other provisions................................ 250 32 233
--------- --------- ------
Total short term provisions..................... $ 3,387 $ 3,693 $ 3,332
--------- --------- ------
--------- --------- ------
</TABLE>
Deferred taxes mainly relate to temporary differences on inventories in The
Netherlands.
F-32
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. LONG TERM PROVISIONS
Long term provisions consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
(In thousands of US Dollars) 1994 1995 1996
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Provision for pensions and termination indemnity................ $ 1,036 $ 1,083 $ 1,089
Provision for post-retirement benefits other than pensions...... 165 253 224
--------- --------- ------
Total long term provisions...................................... $ 1,201 $ 1,336 $ 1,313
--------- --------- ------
--------- --------- ------
</TABLE>
PROVISION FOR PENSIONS AND TERMINATION INDEMNITY
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 and North America are covered by
defined benefit plans. The benefits provided by these plans are based primarily
on years of service and employees' compensation near retirement. The funding
policy for the plans is consistent with local requirements in the countries of
establishment. The pension obligations have, in most cases, been transferred to
separate pension funds or to third parties, limiting any further obligations of
the company to the beneficiaries. Pension assets and liabilities resulting from
the accounting for pension costs in accordance with SFAS 87 are recorded by
Philips at the corporate level in the countries and therefore not shown in the
balance sheet of each unit.
The following table sets forth the funded status of the Philips corporate
defined benefits plans in the relevant countries (in thousands of US Dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
Present value of benefit obligations:
Vested....................................................... $ 13,250,000 $ 14,841,000
Non-vested................................................... 52,000 58,000
------------- -------------
Accumulated benefit obligation............................... 13,302,000 14,899,000
Salary increase assumption................................... 1,292,000 1,487,000
------------- -------------
Projected benefit obligation................................. 14,594,000 16,386,000
Plan assets at fair value.................................... 15,558,000 18,210,000
------------- -------------
Plan assets in excess of projected benefit obligation: 964,000 1,824,000
Unrecognized net (gain) loss................................. 103,000 (941,000)
Unrecognized prior service cost.............................. 117,000 183,000
Unrecognized net transition asset............................ (935,000) (870,000)
------------- -------------
Pension asset-net-recognized in the consolidated balance sheets
of Philips.................................................... 249,000 196,000
Assumptions used by Philips in the pension computation were:
Weighted average discount rate............................... 7.5% 7.0%
Compensation increase rate................................... 3.0-7.0% 3.0-8.0%
Expected asset return rate at January 1...................... 6.0-9.0% 6.0-9.0%
</TABLE>
F-33
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. LONG TERM PROVISIONS (CONTINUED)
The Projected Benefit Obligation for the PEO Operations employees at
December 31, 1995 is estimated at approximately $35 million. PEO Operations
employees represent less than 1% of the total active participants in these
plans. In view of the insignificance of PEO Operations' share in these plans,
PEO Operations does not account for its share of plan assets and obligations,
except for a plan in Germany. This plan is not funded with a separate pension
fund. The provision on PEO Operations' balance sheet covers the projected
benefit obligations for the employees who participate in this German plan as
well as certain supplementary payments to certain employees in France.
PROVISION FOR POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
In The Netherlands and the U.S., Philips provides certain post-retirement
benefits other than pensions. In accordance with SFAS 106, Philips began
accruing for this liability over 20 years at the corporate level. The accrual
commenced in 1993 for plans in the U.S. and in 1995 for plans in The
Netherlands. The portion of the corporate provision allocable to the PEO
Operations in the U.S. is allocated to the PEO Operations and is included in
long-term provisions. For The Netherlands, the provision is recorded at the
Philips corporate level. On the basis of the number of employees in the PEO
Operations in The Netherlands at December 31, 1995, an amount of approximately
$75,000 would have been allocated to the PEO Operations in The Netherlands. The
unrecognized part of the liabilities allocated on the same basis to the PEO
Operations amounts to approximately $700,000 at September 30, 1996.
The following table sets forth the unfunded post-retirement benefit
liability of Philips as of December 31, 1995 (in thousands of US Dollars).
<TABLE>
<S> <C>
Accumulated post-retirement benefit obligation:
Retirees......................................................... $ 273,000
Active plan participants......................................... 171,000
---------
Total obligation............................................... 444,000
Unrecognized net transition liability............................ (225,000)
Unrecognized net gain............................................ 22,000
---------
Accrued post-retirement benefit liability........................ $ 241,000
---------
---------
</TABLE>
The accumulated post-retirement benefit obligation was determined using an
average 7.0% discount rate.
F-34
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
13. DIVISION EQUITY
A summary of the account activity is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER
-------------------- 30,
(In thousands of US Dollars) 1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Balance January 1,......................... $ 14,991 $ 20,090 $ 32,551
Net income (loss).......................... 5,893 5,928 (1,819)
Translation difference..................... 2,106 1,664 (1,965)
Cash provided by Philips................... 80,184 110,533 89,573
Cash returned to Philips................... (83,084) (105,664) (77,205)
--------- --------- -----------
Closing balance............................ $ 20,090 $ 32,551 $ 41,135
--------- --------- -----------
--------- --------- -----------
</TABLE>
Division equity represents the financing of the PEO Operations through
Philips intercompany accounts. No separate equity or debt financing has existed
at the level of the PEO Operations.
The average level of Division Equity for the following periods is as follows
(in thousands of US Dollars):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Average level of Division
Equity...................... $ 16,000 $ 18,000 $ 28,000 $ 26,000 $ 37,000
</TABLE>
14. RESEARCH AND DEVELOPMENT COSTS
Research and development costs consist of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
(In thousands of US Dollars) 1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total expenses.................... $ 7,179 $ 8,563 $ 10,473 $ 7,706 $ 8,241
Grants received................... (2,047) (1,713) (1,386) (889) (794)
--------- --------- --------- --------- ---------
Research and development costs.... $ 5,132 $ 6,850 $ 9,087 $ 6,817 $ 7,447
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
15. OTHER INCOME
Other income in 1995 relates to a single transaction involving the sale of
technology licensing rights in the U.S.
F-35
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
16. TAX EXPENSE (BENEFIT)
Tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
(In thousands of US Dollars) 1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current taxes........................ $ 1,519 $ 2,713 $ 2,753 $ 1,822 $ (397)
Deferred taxes....................... -- 867 564 134 (83)
--------- --------- --------- --------- ---------
Tax expense (benefit)................ $ 1,519 $ 3,580 $ 3,317 $ 1,956 $ (480)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Income taxes have been calculated as if the PEO Operations had been a
separate entity in each of the countries in which it has operations.
The principal differences between taxes on income computed at The
Netherlands statutory tax rate of 35% and recorded income tax expense are as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
(In thousands of US Dollars) 1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected tax expense............... $ 1,381 $ 3,316 $ 3,235 $ 1,825 $ (805)
Different foreign tax rates........ (77) (15) 109 1 (350)
Increase (decrease) in valuation
allowance........................ 215 279 (27) 130 641
Non-deductible expenses............ -- -- -- -- 34
--------- --------- --------- --------- ---------
Tax expense (benefit).............. $ 1,519 $ 3,580 $ 3,317 $ 1,956 $ (480)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
As a result of recurring losses in Japan, no deferred tax benefits have been
assumed. The losses for which no tax benefits have been recognized amounted to
$968,000, $1,056,000 and $2,260,000 as of December 31, 1994 and 1995 and
September 30, 1996, respectively.
The components of income (loss) from operations before taxes are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
(In thousands of US Dollars) 1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
The Netherlands................... $ 1,748 $ 6,827 $ 3,942 $ 2,243 $ (1,712)
Foreign........................... 2,197 2,646 5,303 2,970 (587)
--------- --------- --------- --------- ---------
$ 3,945 $ 9,473 $ 9,245 $ 5,213 $ (2,299)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-36
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
16. TAX EXPENSE (BENEFIT) (CONTINUED)
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
(In thousands of US Dollars) 1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
The Netherlands:
current taxes..................... $ 612 $ 1,592 $ 937 $ 699 $ (520)
deferred taxes.................... -- 798 442 86 (79)
--------- --------- --------- --------- ---------
612 2,390 1,379 785 (599)
Foreign:
current taxes..................... 907 1,121 1,816 1,123 123
deferred taxes.................... -- 69 122 48 (4)
--------- --------- --------- --------- ---------
907 1,190 1,938 1,171 119
Total income taxes.................. $ 1,519 $ 3,580 $ 3,317 $ 1,956 $ (480)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The approximate tax effect of each type of temporary difference that gives
rise to a significant portion of deferred tax liability or deferred tax asset is
as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER
-------------------- 30,
(In thousands of US Dollars) 1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax asset:
Deferred tax asset in respect of loss
carryforwards............................... $ 499 $ 545 $ 1,166
Valuation allowances.......................... (499) (545) (1,166)
--------- --------- -----------
$ 0 $ 0 $ 0
--------- --------- -----------
--------- --------- -----------
Deferred tax liabilities:
Inventories................................. $ 1,040 $ 1,532 $ 1,450
Provision for pensions...................... 23 145 141
Other....................................... 7 (43) (40)
--------- --------- -----------
Total deferred tax liabilities................ $ 1,070 $ 1,634 $ 1,551
--------- --------- -----------
--------- --------- -----------
</TABLE>
17. RELATED PARTY TRANSACTIONS
CORPORATE ALLOCATIONS. Philips provides substantial services to the PEO
Operations, including general management, treasury, tax, financial audit,
financial reporting, insurance and legal services. Philips has historically
charged the PEO Operations for such services through corporate allocations
generally based on a percentage of sales. The amount of the charge was dependent
upon the total amount of anticipated allocable costs incurred by Philips, less
amounts charged as a direct cost or expense rather than by
F-37
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
17. RELATED PARTY TRANSACTIONS (CONTINUED)
allocation. Included in selling, general and administrative expenses are charges
of $796,000, $738,000 and $1,070,000 for the years ended December 31, 1993, 1994
and 1995, respectively, $586,000 for the nine months ended September 30, 1995
and $794,000 for the nine months ended September 30, 1996.
SALES TO PHILIPS.
(A) SALES TO PHILIPS ORGANIZATIONS NOT TO BE TRANSFERRED. A number of
existing Philips sales organizations are excluded from the operations to be
transferred to FEI; however, these units will continue to act as distributors
for PEO Operations' products in their respective countries. Sales for
distribution to these units amounted to approximately 12%, 9% and 8% of sales
during the years ended December 31, 1993, 1994 and 1995, respectively, and
approximately 11% of sales for the nine months ended September 30, 1996.
(B) SALES TO PHILIPS ORGANIZATIONS AS END USERS. In addition to the
above-mentioned sales for further distribution, some Philips units buy products
manufactured by the PEO Operations. Sales to these end-user Philips units
amounted to approximately 3.6%, 3.0% and 2.3% of sales during the years ended
December 31, 1993, 1994 and 1995, respectively, and approximately 3.9% of sales
for the nine months ended September 30, 1996.
PURCHASES THROUGH PHILIPS. From time to time, the PEO Operations purchases
material and supplies under collective purchase agreements and purchase
conditions negotiated by Philips for the benefit of its group companies. For
this service the PEO Operations has paid a fixed annual fee amounting to
approximately $43,000, which has been charged to cost of sales. The benefits for
the PEO Operations of these arrangements cannot be calculated precisely, but
management believes that such benefits are in excess of the amounts paid.
Management also believes that benefits relating to the arrangements between the
PEO Operations and the Philips group are immaterial to the PEO Operations'
operating results when compared to similar arrangements which could have been
entered into had the PEO Operations operated on a stand-alone basis.
DEPENDENCE ON PHILIPS SUPPLIERS. See Note 2.
INTERCOMPANY CURRENT ACCOUNTS. See Note 6.
OTHER SERVICES. In connection with the Combination Agreement, the PEO
Operations intends to enter into agreements with Philips affiliates for the
purpose of defining their ongoing relationship. It is expected that these
agreements will set forth certain rights and obligations of the PEO Operations,
Philips and their respective affiliates on a prospective basis, will afford the
PEO Operations continued access to the research and development resources of
Philips on a fee basis, will provide for the parties' respective rights to
intellectual property, and will provide a framework under which Philips
affiliates will continue to provide certain administrative and other services
that have been provided to the PEO Operations in the past. Management believes
that, had these agreements been in place on a historical basis, they would not
have resulted in any material change in the historical financial position or
results of operations of the PEO Operations.
18. SEGMENTATION AND SIGNIFICANT CUSTOMER INFORMATION
For the years ended December 31, 1993, 1994 and 1995, FEI accounted for
approximately 4%, 9% and 12% of combined sales, respectively. During the nine
months ended September 30, 1996, FEI accounted for approximately 18% of sales.
F-38
<PAGE>
PHILIPS' ELECTRON OPTICS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
18. SEGMENTATION AND SIGNIFICANT CUSTOMER INFORMATION (CONTINUED)
SERVICE ACTIVITIES. For the years ended December 31, 1993, 1994 and 1995,
customer service activities represented approximately 27%, 23% and 19%,
respectively, of combined sales. During the nine months ended September 30,
1996, customer service activities represented approximately 22% of combined
sales.
The following table summarizes sales, income from operations and
identifiable assets of PEO Operations in The Netherlands, U.S., Germany and
other countries.
<TABLE>
<CAPTION>
(In thousands of US dollars) NETHERLANDS U.S. GERMANY OTHER COMBINED
----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
1993:
Sales (1)........................... $ 25,106 $ 19,311 $ 11,032 $ 16,182 $ 71,631
Income from operations.............. 1,748 1,761 311 125 3,945
1994:
Sales............................... 30,736 19,570 14,226 19,637 84,169
Income from operations.............. 6,827 1,811 544 291 9,473
Identifiable assets................. 35,762 5,890 (416) 3,805 45,041
1995:
Sales............................... 43,275 23,239 14,393 23,210 109,117
Income from operations.............. 3,941 3,673 725 906 9,245
Identifiable assets................. 43,751 7,921 763 8,307 60,742
NINE MONTHS 1996:
Sales............................... 31,849 16,718 4,842 17,650 71,059
Income from operations.............. (1,713) (910) 94 230 (2,299)
Identifiable assets................. 52,377 9,679 445 8,151 70,652
</TABLE>
- - - - - - ------------------------
(1) Sales exclude intercompany deliveries within the PEO Operations, but include
sales to other Philips affiliates.
F-39
<PAGE>
APPENDIX A
- - - - - - --------------------------------------------------------------------------------
- - - - - - --------------------------------------------------------------------------------
COMBINATION AGREEMENT
BETWEEN
PHILIPS INDUSTRIAL ELECTRONICS INTERNATIONAL B.V.
AND
FEI COMPANY
DATED AS OF NOVEMBER 15, 1996,
AS AMENDED
- - - - - - --------------------------------------------------------------------------------
- - - - - - --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE I
DEFINITIONS AND TERMS
Section 1.1 Specific Definitions................................................................. 2
Section 1.2 Other Terms.......................................................................... 7
Section 1.3 Other Definitional Provisions........................................................ 7
ARTICLE II
PURCHASE OF COMMON STOCK
Section 2.1 Purchase and Sale of Common Stock.................................................... 8
Section 2.2 Closing; Delivery and Payment........................................................ 8
Section 2.3 Net Operating Capital................................................................ 8
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FEI
Section 3.1 Organization, Good Standing and Qualification........................................ 9
Section 3.2 Corporate Authority; Approval and Fairness........................................... 9
Section 3.3 Governmental Filings; No Violations.................................................. 10
Section 3.4 Capital Structure.................................................................... 10
Section 3.5 FEI Reports; Financial Statements.................................................... 11
Section 3.6 Employee Benefits.................................................................... 11
Section 3.7 Absence of Certain Changes........................................................... 12
Section 3.8 Litigation and Liabilities........................................................... 13
Section 3.9 Compliance with Laws; Permits........................................................ 13
Section 3.10 Environmental Matters................................................................ 13
Section 3.11 Labor Matters........................................................................ 14
Section 3.12 Insurance............................................................................ 14
Section 3.13 Takeover Statutes.................................................................... 14
Section 3.14 Taxes................................................................................ 14
Section 3.15 Intellectual Property................................................................ 15
Section 3.16 Contracts............................................................................ 16
Section 3.17 Brokers and Finders.................................................................. 16
Section 3.18 Customers and Suppliers.............................................................. 16
Section 3.19 Voting Agreement..................................................................... 16
Section 3.20 Press Releases....................................................................... 16
Section 3.21 Industrial Security Clearances....................................................... 16
Section 3.22 Other Information.................................................................... 16
Section 3.23 No Other Representations or Warranties............................................... 16
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PIE
Section 4.1 Organization, Good Standing and Qualification........................................ 17
Section 4.2 Corporate Authority and Approval..................................................... 17
Section 4.3 Governmental Filings; No Violations.................................................. 17
Section 4.4 Capital Stock........................................................................ 18
Section 4.5 PEO Financial Statements............................................................. 18
Section 4.6 Employee Benefits.................................................................... 18
Section 4.7 Absence of Certain Changes........................................................... 19
Section 4.8 Litigation and PEO Liabilities....................................................... 20
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
Section 4.9 Compliance with Laws; Permits........................................................ 20
Section 4.10 Environmental Matters................................................................ 20
Section 4.11 Labor Matters........................................................................ 20
Section 4.12 Insurance............................................................................ 21
Section 4.13 Takeover Statutes.................................................................... 21
Section 4.14 Taxes................................................................................ 21
Section 4.15 Intellectual Property................................................................ 21
Section 4.16 Contracts............................................................................ 22
Section 4.17 Brokers and Finders.................................................................. 22
Section 4.18 Customers and Suppliers.............................................................. 22
Section 4.19 PEO Assets and PEO Liabilities....................................................... 22
Section 4.20 Shared Assets; Title to and Condition of Property.................................... 23
Section 4.21 Securities Act....................................................................... 24
Section 4.22 Press Releases....................................................................... 24
Section 4.23 Industrial Security Clearances....................................................... 24
Section 4.24 Other Information.................................................................... 24
Section 4.25 No Other Representations or Warranties............................................... 24
ARTICLE V
COVENANTS
Section 5.1 Interim Operations................................................................... 24
Section 5.2 Acquisition Proposals................................................................ 25
Section 5.3 Information Supplied................................................................. 26
Section 5.4 Shareholders Meeting................................................................. 27
Section 5.5 Filings; Other Actions; Notification................................................. 27
Section 5.6 Access............................................................................... 28
Section 5.7 Publicity............................................................................ 28
Section 5.8 U.S. Transferred Employees........................................................... 28
Section 5.9 Other Employees...................................................................... 29
Section 5.10 Expenses............................................................................. 30
Section 5.11 Takeover Statute..................................................................... 30
Section 5.12 Insurance of PEO Business............................................................ 30
Section 5.13 Distribution and Other Agreements.................................................... 31
Section 5.14 Secondary Offering................................................................... 31
Section 5.15 Acht Property........................................................................ 31
Section 5.16 Intellectual Property................................................................ 32
Section 5.17 Right to Maintain Percentage Interest................................................ 34
Section 5.18 Issuance of Additional Shares........................................................ 34
Section 5.19 Independent Directors................................................................ 34
Section 5.20 List of PEO Assets................................................................... 34
Section 5.21 Notice of Deconsolidation............................................................ 34
Section 5.22 Limitation on Equity Position........................................................ 35
ARTICLE VI
CONDITIONS TO CLOSING
Section 6.1 Conditions to the Obligations of FEI and PIE......................................... 35
Section 6.2 Conditions to the Obligations of PIE................................................. 36
Section 6.3 Conditions to the Obligations of FEI................................................. 36
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE VII
SURVIVAL; INDEMNIFICATION
Section 7.1 Survival............................................................................. 37
Section 7.2 Indemnification by PIE............................................................... 37
Section 7.3 Indemnification by FEI............................................................... 37
Section 7.4 Indemnification Procedures........................................................... 38
Section 7.5 Indemnification Net of Taxes......................................................... 39
ARTICLE VIII
TERMINATION
Section 8.1 Termination.......................................................................... 39
Section 8.2 Effect of Termination................................................................ 40
ARTICLE IX
MISCELLANEOUS
Section 9.1 Notices.............................................................................. 40
Section 9.2 Amendment; Waiver.................................................................... 41
Section 9.3 Assignment........................................................................... 41
Section 9.4 Entire Agreement..................................................................... 41
Section 9.5 Fulfillment of Obligations........................................................... 41
Section 9.6 Parties in Interest.................................................................. 41
Section 9.7 Public Disclosure.................................................................... 41
Section 9.8 Expenses............................................................................. 42
Section 9.9 Disclosure Schedules................................................................. 42
Section 9.10 Governing Law; Mediation and Arbitration............................................. 42
Section 9.11 Counterparts......................................................................... 42
Section 9.12 Headings............................................................................. 42
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
ANNEXES
Annex 1.1a --Knowledge of FEI
Annex 1.1b --Knowledge of PIE
Annex 3.19(a) --Certain Shareholders of FEI
Annex 3.19(b) --Form of Voting Agreement
Annex 5.2 --Confidentiality Agreement
Annex 5.13(a) --Form of Distribution Agreement
Annex 5.13(d) --Form of Services Agreement
Annex 5.14 --Selling Shareholders
Annex 6.2(c) --Opinion of Stoel Rives LLP
Annex
6.2(f)(i) --Directors of FEI
Annex
6.2(f)(ii) --Officers of FEI
Annex 6.3(c) --Opinions of PIE's Counsel
Annex 6.3(e) --Form of Employment Agreement
</TABLE>
iv
<PAGE>
COMBINATION AGREEMENT, dated as of November 15, 1996, between FEI COMPANY,
an Oregon corporation ("FEI") and PHILIPS INDUSTRIAL ELECTRONICS INTERNATIONAL
B.V., a Netherlands corporation ("PIE").
W I T N E S S E T H :
WHEREAS, PIE desires to acquire common stock (the "Common Stock"), of FEI,
constituting 55% of the Outstanding Common Stock (as defined herein), upon the
terms and conditions set forth herein;
WHEREAS, FEI desires that PIE transfer to FEI in payment for such Common
Stock, among other things, 100% of the issued and outstanding capital stock of
PEO Holdings (as defined herein) and PEO-US (as defined herein);
WHEREAS, Philips, the parent corporation of PIE, is willing to make certain
representations and warranties and to agree to certain covenants for the benefit
of FEI;
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
contained herein, and subject to and on the terms and conditions herein set
forth, the parties hereto agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS AND TERMS
Section 1.1 SPECIFIC DEFINITIONS. As used in this Agreement, the following
terms shall have the meanings set forth or as referenced below:
"ACHT PROPERTY" shall mean the real estate in Acht used by the PEO
Business, located at Achtseweg Noord 5, 5651GG Eindhoven, The Netherlands
and the improvements thereon, known as building AAE and registered in the
register of the municipality of Eindhoven under the entry "Woensel, Sectie
A, nummer 4106 gedeeltelijk".
"ACQUISITION PROPOSAL" shall have the meaning set forth in Section 5.2.
"ADDITIONAL SHARES" shall have the meaning set forth in Section 2.1.
"AFFILIATE" shall mean, with respect to any Person, any Person directly
or indirectly controlling, controlled by, or under common control with, such
other Person at any time during the period for which the determination of
affiliation is being made.
"AGREEMENT" shall mean this Agreement, as the same may be amended or
supplemented from time to time in accordance with the terms hereof.
"AUDIT DATE" shall have the meaning set forth in Section 3.5.
"BOARD OF DIRECTORS" shall mean any board of directors or other body of
persons, including all committees thereof, performing functions equivalent
or similar to those performed by a board of directors of a corporation
incorporated in one of the states of the United States of America.
"BOOKS AND RECORDS" shall mean all books, ledgers, files, reports, plans
and operating records of, or maintained by, the PEO Business (it being
understood that, pursuant to the Restructuring, originals of certain of such
items maintained by, but not primarily related to, the PEO Business may not
be transferred to PEO Holdings, in which case, Books and Records shall refer
to copies of such items).
"CLAIM" shall have the meaning set forth in Section 7.4.
"CLAIM NOTICE" shall have the meaning set forth in Section 7.4.
"CLOSING" shall mean the closing of the transactions contemplated by
this Agreement.
"CLOSING DATE" shall have the meaning set forth in Section 2.2(a).
"CLOSING NET OPERATING CAPITAL" shall have the meaning set forth in
Section 2.3(a).
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMMON STOCK" shall have the meaning set forth in the recitals.
"COMPENSATION AND BENEFIT PLANS" shall have the meaning set forth in
Section 3.6(a).
"COMPETITION LAWS" shall mean statutes, rules, regulations, orders,
decrees, administrative and judicial doctrines, and other laws that are
designed or intended to prohibit, restrict or regulate actions having the
purpose or effect of monopolization or restraint of trade.
"CONFIDENTIALITY AGREEMENT" shall mean the Confidentiality Agreement,
dated April 5, 1996, between FEI and Philips International B.V.
"CONTINUATION COVERAGE" shall have the meaning set forth in Section
5.8(b).
"CONTRACTS" shall mean any agreements, contracts, mortgages, bonds,
notes, indentures, leases, purchase orders, arrangements, commitments and
licenses, whether written or oral.
2
<PAGE>
"CONTROL" with respect to any Person shall mean ownership (directly or
indirectly) of a majority of total voting power of such Person's voting
securities or interests.
"CPA FIRM" shall have the meaning set forth in Section 2.3(a).
"DEFINITE SHARES" shall have the meaning set forth in Section 2.1.
"DISCLOSURE SCHEDULE" shall mean the disclosure schedule accompanying
this Agreement. The Disclosure Schedule shall be deemed to include the FEI
Reports filed prior to the date hereof, which are hereby incorporated
therein by reference.
"ELECTRO-SCAN PURCHASE AGREEMENT" shall mean the Asset Purchase
Agreement, dated May 3, 1996, by and between Electro-Scan Corporation and
PENAC and all related agreements executed in connection with or contemplated
by such Asset Purchase Agreement.
"EMPLOYEES" shall mean all current employees employed in the PEO
Business and all former employees of PIE, its predecessors and their
respective subsidiaries who, immediately prior to the time they ceased to be
employees of any such entity, were employed in the PEO Business.
"ENCUMBRANCES" shall mean liens (including any liens for Taxes),
charges, encumbrances, security interests, options, or any other
restrictions or third party rights.
"ENVIRONMENTAL LAW" shall mean any applicable law, statute, ordinance,
rule, regulation, code, order, judgment, decree or injunction (other than
any Tax Laws) relating to the protection of the environment (including,
without limitation, air, water vapor, surface water, groundwater, drinking
water supply, surface or subsurface land), or the exposure to, or the use,
storage, recycling, treatment, generation, transportation, processing,
handling, labelling, protection, release or disposal of, radioactive
materials or hazardous or toxic substances or wastes.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"ERISA AFFILIATE" shall have the meaning set forth in Section 3.6(c).
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"EXCLUDED BUSINESS" shall mean (i) the sales and service organizations
related to the PEO Business in countries other than the United States,
Canada, Japan, The Netherlands, Germany, France, Italy and the United
Kingdom as listed on Section 5.13(a) of the Disclosure Schedule, (ii) the
Acht Property, (iii) the cash reserve of NLG 400,000 and any corresponding
liability relating to the Zeiss Claim and (iv) the accounts receivable
payable to PIE from the Ministry of Finance of Russia or any successor
Governmental Entity thereto, and any associated financial accrual related
thereto.
"EXON-FLORIO AMENDMENT" shall mean the Exon-Florio Amendment to the 1988
Omnibus Trade and Competitiveness Act, 50 USCA Section2170.
"FEI" shall have the meaning set forth in the recitals.
"FEI COMPENSATION AND BENEFIT PLANS" shall have the meaning set forth in
Section 3.6(a).
"FEI INDEMNIFIED PARTIES" shall have the meaning set forth in Section
7.2.(a)
"FEI INTELLECTUAL PROPERTY" shall have the meaning set forth in Section
3.15(b).
"FEI MATERIAL ADVERSE EFFECT" means a material adverse effect on the
financial condition, properties, prospects, business or results of
operations of FEI and its Subsidiaries, taken as a whole.
"FEI OPTION" shall have the meaning set forth in Section 3.4.
"FEI REPORTS" shall have the meaning set forth in Section 3.5.
"FEI REQUISITE VOTE" shall have the meaning set forth in Section 3.2(a).
3
<PAGE>
"FEI'S BUSINESS" shall mean the business of FEI as conducted or
contemplated to be conducted as of the date hereof.
"FEI'S OBJECTION" shall have the meaning set forth in Section 2.3(a).
"GAAP" shall have the meaning set forth in Section 3.5.
"GOVERNMENTAL AUTHORIZATIONS" shall mean all licenses, permits,
certificates and other authorizations and approvals required to carry on the
PEO Business or, with respect to PIE, to perform its obligations under this
Agreement, as the case may be, under the applicable laws, ordinances or
regulations of any Governmental Entity.
"GOVERNMENTAL ENTITY" shall have the meaning set forth in Section
3.3(a).
"HAZARDOUS SUBSTANCE" means any substance that is listed, classified or
regulated as such pursuant to any Environmental Law.
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"INDEMNIFIED PARTIES" shall have the meaning set forth in Section
7.3(a).
"INDEMNIFYING PARTY" shall have the meaning set forth in Section 7.4.
"INTELLECTUAL PROPERTY" shall mean trademarks, service marks, brand
names, certification marks, trade dress, assumed names, trade names and
other indications of origin, the goodwill associated with the foregoing and
registrations in any jurisdiction of, and applications in any jurisdiction
to register, the foregoing, including any extension, modification or renewal
of any such registration or application; inventions, discoveries and ideas,
whether patentable or not in any jurisdiction; patents, applications for
patents (including, without limitation, divisions, continuations,
continuations in-part and renewal applications), and any renewals,
extensions or reissues thereof, or supplementary patent certificates derived
therefrom, in any jurisdiction; model and design rights; non-public
information, trade secrets and confidential information and rights in any
jurisdiction to limit the use or disclosure thereof by any Person;
copyrights and writings and other works, whether copyrightable or not in any
jurisdiction; registrations or applications for registration of copyrights
in any jurisdiction, and any renewals or extensions thereof; maskworks; any
similar intellectual property or proprietary rights.
"ISRA" shall mean the Industrial Site Recovery Act of New Jersey, NJSA
13:1K-6 et seq.
"KNOWLEDGE OF FEI" or any similar phrase means the actual or
constructive knowledge of the individuals listed on Annex 1.1(a) hereto. A
person is deemed to have constructive knowledge for the purpose of this
definition only if he or she would have actual knowledge by reason of a
reasonable investigation within the scope of his or her employment.
"KNOWLEDGE OF PHILIPS" shall mean the Knowledge of PIE plus the actual
or constructive knowledge of the senior management of Philips' Corporate
Patents and Trademarks department. A person is deemed to have constructive
knowledge for the purpose of this definition only if he or she would have
actual knowledge by reason of a reasonable investigation within the scope of
his or her employment.
"KNOWLEDGE OF PIE" or any similar phrase means the actual or
constructive knowledge of the individuals listed on Annex 1.1(b) hereto. A
person is deemed to have constructive knowledge for the purpose of this
definition only if he or she would have actual knowledge by reason of a
reasonable investigation within the scope of his or her employment.
"LAWS" shall have the meaning set forth in Section 3.9.
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"LEASED REAL PROPERTY" shall mean all real property used in the PEO
Business leased by PIE or any of its Affiliates, including any buildings,
facilities, fixed assets, structures and improvements thereon or
appurtenances thereto.
"LETTER OF INTENT" shall mean the letter of intent, dated September 4,
1996, between FEI and PIE.
"LOSSES" shall have the meaning set forth in Section 7.2(a).
"NASDAQ" shall mean the National Association of Securities Dealers
Automated Quotation System.
"NET OPERATING CAPITAL" shall mean the net operating capital of the PEO
Business as of the Closing Date calculated, in accordance with Philips
internal accounting principles, by adding (a) fixed assets, (b) net
inventories, (c) trade accounts receivable, and (d) other assets and
subtracting (e) non-interest bearing liabilities.
"NON-U.S. EMPLOYEES" shall have the meaning set forth in Section 5.9(a).
"NOTICE PERIOD" shall have the meaning set forth in Section 7.4.
"OUTSTANDING COMMON STOCK" shall mean at any time the sum of (i) the
number of shares of Common Stock issued and outstanding immediately prior to
the Closing, (ii) any shares of Common Stock obtained by any Person upon
exercise or conversion of any options, warrants, convertible securities or
other rights to acquire shares of Common Stock, outstanding at Closing or
issuable without further action of FEI's board of directors subsequent to
the Closing ("RIGHTS OUTSTANDING AT CLOSING") and (iii) the Shares (as such
number is increased from time to time due the increase of Additional Shares
due to any conversions or exercise pursuant to (ii) above).
"PENAC" shall mean Philips Electronics North America Corporation.
"PENSION PLAN" shall have the meaning set forth in Section 3.6(b).
"PEO ASSETS" shall have the meaning set forth in Section 4.19.
"PEO BUSINESS" shall mean the worldwide activities (including the
intellectual property rights (subject to Section 5.16) and the related
personnel) related to the electron optics business conducted or contemplated
to be conducted by PIE and its Affiliates as of the date hereof, other than
the Excluded Business.
"PEO COMPENSATION AND BENEFIT PLANS" shall have the meaning set forth in
Section 4.6(a).
"PEO FINANCIAL STATEMENTS" shall have the meaning set forth in Section
4.5.
"PEO GROUP" shall mean PEO-US, PEO Holdings and all of their
Subsidiaries.
"PEO HOLDINGS" shall mean Philips Electron Optics International B.V., a
Netherlands corporation.
"PEO INTELLECTUAL PROPERTY" shall have the meaning set forth in Section
4.15(b)(ii).
"PEO LIABILITIES" shall have the meaning set forth in Section 4.19.
PEO MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on the
financial condition, properties, prospects, business or results of
operations of the PEO Business, taken as a whole.
"PEO STOCK" shall have the meaning set forth in Section 2.2(b).
"PEO-US" shall mean Philips Electron Optics, Inc., a Delaware
corporation, which holds the PEO Assets located in the United States.
"PEO-US CERTIFICATES" shall have the meaning set forth in Section
2.2(b).
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"PERMITTED ENCUMBRANCES" shall have the meaning set forth in Section
4.20(b).
"PERSON" shall mean an individual, a corporation, a partnership, an
association, a trust or other entity or organization.
"PHILIPS" shall mean Philips Electronics N.V.
"PHILIPS GROUP" shall mean Philips and all of its Affiliates, whether
consolidated or not.
"PIE" shall have the meaning set forth in the recitals.
"PIE INDEMNIFIED PARTIES" shall have the meaning set forth in Section
7.3(a).
"PIE INFORMATION" shall have the meaning set forth in Section 5.3(b).
"PIE LOAN" shall mean the current account agreement, dated January 1,
1996, between Philips Electron Optics B.V. and Nederlandse Philips Bedrijven
B.V. in such amount as shall be outstanding thereunder as of January 1,
1997.
"PROCEEDINGS" shall have the meaning set forth in Section 3.8.
"PROXY STATEMENT" shall have the meaning set forth in Section 5.3(a).
"REPRESENTATIVES" shall have the meaning set forth in Section 5.6.
"REQUIRED APPROVALS" shall mean all authorizations, consents, orders or
approvals of, permits or licenses from, or declarations or filings with any
Governmental Entity, and all third party consents, in each case necessary to
effect the transactions contemplated by this Agreement in all material
respects and to conduct the PEO Business as previously conducted in all
material respects.
"RESTRUCTURING" shall mean the process whereby the PEO Assets and PEO
Liabilities are transferred, to the extent necessary, from certain Persons
in the Philips Group into the PEO Group and by which the assets and
liabilities of any corporation in the PEO Group that are not PEO Assets and
PEO Liabilities, respectively, are transferred out of the PEO Group prior to
Closing.
"RIGHTS OUTSTANDING AT CLOSING" shall have the meaning set forth in the
definition of Outstanding Common Stock.
"SEC" shall mean the Securities and Exchange Commission, including any
successor Governmental Entity thereto.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SELLING SHAREHOLDERS" shall have the meaning set forth in Section 5.14.
"SHAREHOLDERS MEETING" shall have the meaning set forth in Section 5.4.
"SHARES" shall have the meaning set forth in Section 2.1.
"STOCK OPTION PLAN" shall mean the 1984 Stock Incentive Plan, the 1995
Stock Incentive Plan and the 1995 Supplemental Stock Incentive Plan of FEI.
"STOCK RIGHT" means any options, warrants, convertible securities or
other rights to acquire shares of Common Stock, including without limitation
any options issued under the Stock Option Plan.
"SUBSIDIARY" means any entity, whether incorporated or unincorporated,
of which at least a majority of the securities or ownership interests having
by their terms ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions is directly or
indirectly owned or controlled by such party or by one or more of its
respective Subsidiaries or by such party and any one or more of its
respective Subsidiaries, and, with respect to FEI, includes, without
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limitation, FEI Asia, Inc., FEI Europe, Ltd., a United Kingdom corporation,
FEI Europe GmbH, a German limited liability company, and FEI FSC, Ltd., a
United States Virgin Islands corporation.
"SUPERIOR PROPOSAL" shall have the meaning set forth in Section 5.2.
"TAKEOVER STATUTE" shall have the meaning set forth in Section 3.13.
"TAXES" shall mean all U.S. federal, state or local, or foreign, taxes,
charges, fees, imports and levies including, but not limited to, income,
gross receipts, capital stock, inventory, windfall profits, alternative
minimum, ad valorem, value added, severance, property, production, sales,
use, license, excise, stamp, occupation, franchise, payroll, social
security, employment, withholding or similar taxes, and estimated taxes,
customs duties, fees, assessments and charges of any kind whatsoever
together with any interest, additions or penalties with respect thereto and
any interest in respect of such additions or penalties.
"TAX LAW" shall mean any Law relating to Taxes.
"TAX RETURNS" includes all returns and reports (including elections,
declarations, disclosures, schedules, estimates and information returns)
required to be supplied to a Tax authority relating to Taxes.
"THIRD-PARTY INTELLECTUAL PROPERTY" shall have the meaning set forth in
Section 3.15(b)(i).
"TRANSACTION" shall mean the issuance of the Definite Shares and
Additional Shares by FEI to PIE in exchange for 100% of the outstanding
capital stock of PEO Holdings and PEO-US and the assignment to FEI of the
rights currently held by Nederlandse Philips Bedrijven B.V. under the PIE
Loan upon the terms and conditions set forth herein.
"TRANSITIONAL SERVICES" shall have the meaning set forth in Section
5.13(d).
"U.S. PEO COMPENSATION AND BENEFIT PLANS" shall have the meaning set
forth in Section 4.6(c).
"U.S. TRANSFERRED EMPLOYEES" shall have the meaning set forth in Section
5.8(a).
"VOTING DEBT" shall have the meaning set forth in Section 3.4.
"WARN" shall mean the Worker Adjustment and Retraining Notification Act.
"WELFARE PLANS" shall have the meaning set forth in Section 5.8(b).
"ZEISS CLAIM" shall mean any present or future claims asserted by Carl
Zeiss GmbH of Oberkochen, Germany against the PEO Business relating to the
alleged infringement of U.S. Patent Number 4,713,543, European Patent Number
0180723B1 and Japanese Patent Number JP-A-49,364/86.
Section 1.2 OTHER TERMS. Other terms may be defined elsewhere in the text
of this Agreement and, unless otherwise indicated, shall have such meaning
throughout this Agreement.
Section 1.3 OTHER DEFINITIONAL PROVISIONS.
(a) The words "HEREOF", "HEREIN", and "HEREUNDER" and words of similar
import, when used in this Agreement, shall refer to this Agreement as a whole
and not to any particular provision of this Agreement.
(b) The terms defined in the singular shall have a comparable meaning when
used in the plural, and vice versa.
(c) The terms "DOLLARS" and "$" shall mean United States dollars.
(d) The terms "GUILDERS" and "NLG" shall mean the lawful currency of The
Netherlands.
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ARTICLE II
PURCHASE OF COMMON STOCK
Section 2.1 PURCHASE AND SALE OF COMMON STOCK. On the terms and subject to
the conditions set forth herein, (i) at the Closing, FEI agrees to issue to PIE
such number of shares of Common Stock (the "DEFINITE SHARES") as shall
constitute, when issued, 55% of the then issued and outstanding shares of FEI's
Common Stock and (ii) FEI agrees to issue to PIE from time to time such number
of additional shares of Common Stock (the total number of such shares issued as
at any time being herein referred to as "ADDITIONAL SHARES", and together with
the Definite Shares, the "SHARES") such that the Shares shall at all times
constitute, when issued, 55% of the Outstanding Common Stock. In consideration
therefor, at the Closing and on the terms and subject to the conditions set
forth herein (A) PIE agrees to transfer to FEI 100% of the outstanding capital
stock of PEO Holdings and to assign to FEI the rights currently held by
Nederlandse Philips Bedrijven B.V. under the PIE Loan and (B) PIE shall transfer
to FEI 100% of the outstanding capital stock of PEO-US.
Section 2.2 CLOSING; DELIVERY AND PAYMENT.
(a) The Closing shall take place at the offices of Sullivan & Cromwell, 125
Broad Street, New York, New York 10004 at 10:00 A.M. New York City time, no
later than two business days after all of the conditions precedent specified in
Article VI have been satisfied or waived (or at such other time and place as the
parties hereto may mutually agree). The date on which the Closing occurs is
referred to herein as the "CLOSING DATE".
(b) On the Closing Date, (i) FEI shall deliver to PIE certificates
representing the Definite Shares duly issued to PIE and registered in the name
of PIE or its designee, (ii) PIE shall deliver to FEI a duly executed instrument
assigning to FEI the rights currently held by Nederlandse Philips Bedrijven B.V.
under the PIE Loan, (iii) PIE shall convey to FEI all right, title and interest
in and to the shares of common stock (the "PEO STOCK") representing 100% of the
outstanding capital stock of PEO Holdings and such conveyance shall be
accomplished by the due execution of a notarial deed of transfer in accordance
with Netherlands law and (iv) PIE shall deliver or have delivered to FEI
certificates representing 100% of the outstanding capital stock of PEO-US (the
"PEO-US CERTIFICATES"), duly endorsed and in form for transfer to FEI.
Section 2.3 NET OPERATING CAPITAL.
(a) Within 30 days following the Closing Date, KPMG Accountants shall
determine the Net Operating Capital and provide to FEI and its accountants the
calculations and supporting evidence for such calculation of Net Operating
Capital. FEI's accountants shall have 30 days to review and respond to KPMG
Accountants' calculation. If FEI's accountants do not agree with KPMG's
calculation then FEI shall inform PIE in writing ("FEI'S OBJECTION") setting
forth a description in reasonable detail of the basis for such disagreement and
the adjustments FEI believes should be made to the Net Operating Capital, on or
before the last day of such 30-day period. PIE shall then have 30 days to review
and respond to FEI's Objection and PIE shall not be limited to addressing FEI's
Objection, but shall have the right to raise any aspects of the Net Operating
Capital calculation that PIE believes are relevant to understanding such
calculation. If FEI and PIE are unable to resolve all of their disagreements
with respect to FEI's Objection within 10 days following the completion of PIE's
review of FEI's Objection, they shall refer their remaining differences to a
"Big Six" or other internationally recognized firm of independent public
accountants as to which FEI and PIE mutually agree (the "CPA FIRM"), who shall
determine, only by resolving the remaining differences so submitted, including
any aspects of the Net Operating Capital calculation raised by PIE in response
to FEI's Objection, the Net Operating Capital. FEI and PIE shall instruct the
CPA Firm to deliver its written determination to FEI and PIE no later than the
twentieth day after the remaining differences underlying FEI's Objection are
referred to the CPA Firm. The CPA Firm's determination shall be conclusive and
binding upon FEI and PIE. The fees and disbursements of the CPA Firm shall be
shared equally by FEI and PIE. PIE agrees to make available to the CPA Firm all
relevant Books and Records and
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any work papers (including those of KPMG Accountants) relating to the Net
Operating Capital and all other items reasonably requested by the CPA Firm. The
"CLOSING NET OPERATING CAPITAL" shall be (i) the Net Operating Capital, as
calculated by KPMG Accountants, in the event that (x) no FEI's Objection is
delivered to PIE during the 30-day period specified above, or (y) FEI and PIE so
agree, (ii) the Net Operating Capital, as calculated by KPMG Accountants,
adjusted in accordance with the FEI's Objection in the event that PIE does not
respond to FEI's Objection within the 30-day period following receipt by PIE of
FEI's Objection or agrees with FEI's Objection, or (iii) the Net Operating
Capital, as calculated by KPMG Accountants, as adjusted by either (x) the
agreement of FEI and PIE or (y) the CPA Firm.
(b) If the Closing Net Operating Capital less NLG 78.1 million is greater
than zero but less than NLG 3 million, PEO Holdings shall, promptly after
determination of the Closing Net Operating Capital, execute a note, in form
acceptable to PIE, dated as of the Closing Date, payable to PIE, for a principal
amount equal to such difference which will bear simple interest at the rate of 7
3/8%, payable monthly in arrears. The full principal amount specified in the
note and all outstanding interest thereon shall be due and payable one year from
the Closing Date.
(c) If the Closing Net Operating Capital less NLG 78.1 million is greater
than NLG 3 million, PEO Holdings shall, promptly after determination of the
Closing Net Operating Capital, execute two notes, each in form acceptable to
PIE, each dated as of the Closing Date, with the full principal amount specified
in each note and all outstanding interest thereon to be due and payable to PIE
one year from the Closing Date. The first note shall be in the principal amount
of NLG 3 million and shall bear simple interest at the rate of 7 3/8%, payable
monthly in arrears. The second note shall be for a principal amount equal to the
difference between the Closing Net Operating Capital and NLG 81.1 million and
shall bear simple interest at the rate of 4%, payable monthly in arrears;
PROVIDED, HOWEVER, that the principal amount of such second note shall be no
greater than NLG 3 million.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FEI
FEI hereby represents and warrants that:
Section 3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Each of FEI
and its Subsidiaries is a corporation duly organized, validly existing and
in good standing, to the extent such concept or analogous concepts exist in
the applicable jurisdiction, under the laws of its respective jurisdiction
of organization and has all requisite corporate or similar power and
authority to own and operate its properties and assets and to carry on its
business as presently conducted and is qualified to do business and is in
good standing as a foreign corporation in each jurisdiction where the
ownership or operation of its properties or conduct of its business requires
such qualification, except where the failure to be so qualified or in good
standing, when taken together with all other such failures, is not
reasonably likely to have an FEI Material Adverse Effect. FEI has made
available to PIE a complete and correct copy of FEI's and its Subsidiaries'
certificates of incorporation and by-laws, each as amended to date. FEI's
and its Subsidiaries' certificates of incorporation and by-laws so delivered
are in full force and effect. Section 3.1 of the Disclosure Schedule
contains a correct and complete list of each jurisdiction where FEI and each
of its Subsidiaries is organized and qualified to do business.
Section 3.2 CORPORATE AUTHORITY; APPROVAL AND FAIRNESS.
(a) FEI has all requisite corporate power and authority and has taken
all corporate action necessary in order to execute, deliver and perform its
obligations under this Agreement and, subject only to approval of this
Agreement by the holders of the outstanding shares of FEI (the "FEI
REQUISITE VOTE"), to consummate the Transaction. This Agreement is a valid
and legally binding obligation of FEI enforceable against FEI in accordance
with its terms.
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(b) The board of directors of FEI (i) has duly approved this Agreement
and the Transaction contemplated hereby and (ii) has received the opinion of
its financial advisors, Needham & Company, Inc., to the effect that the
Transaction is fair to FEI and its shareholders from a financial standpoint.
Section 3.3 GOVERNMENTAL FILINGS; NO VIOLATIONS.
(a) Other than the filings and/or notices (i) under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
ACT"), (ii) the proxy solicitation requirements of the Exchange Act, and
(iii) to comply with state securities or "blue-sky" laws, no notices,
reports or other filings are required to be made by FEI with, nor are any
consents, registrations, approvals, permits or authorizations required to be
obtained by FEI from, any governmental or regulatory authority, agency,
commission, body or other governmental entity of any federal, state or
foreign government ("GOVERNMENTAL ENTITY"), in connection with the execution
and delivery of this Agreement by FEI and the consummation by FEI of the
Transaction contemplated hereby, except those that the failure to make or
obtain are not, individually or in the aggregate, reasonably likely to have
an FEI Material Adverse Effect or prevent, materially delay or materially
impair the ability of FEI to consummate the Transaction contemplated by this
Agreement.
(b) The execution, delivery and performance of this Agreement by FEI do
not, and the consummation by FEI of the Transaction contemplated hereby will
not, constitute or result in (i) a breach or violation of, or a default
under, the certificate of incorporation or by-laws of FEI or the comparable
governing instruments of any of its Subsidiaries, (ii) a breach or violation
of, or a default under, the acceleration of any obligations or the creation
of any Encumbrance on the assets of FEI or any of its Subsidiaries (with or
without notice, lapse of time or both) pursuant to, any Contracts binding
upon FEI or any of its Subsidiaries or any Laws or governmental or
non-governmental permit or license to which FEI or any of its Subsidiaries
is subject or (iii) any change in the rights or obligations of any party
under any Contracts binding upon FEI or any of its Subsidiaries, except, in
the case of clause (ii) or (iii) above, for any breach, violation, default,
acceleration, creation or change that, individually or in the aggregate, is
not reasonably likely to have a FEI Material Adverse Effect or prevent,
materially delay or materially impair the ability of FEI to consummate the
Transaction contemplated by this Agreement. Section 3.3(b) of the Disclosure
Schedule sets forth a correct and complete list of Contracts of FEI and its
Subsidiaries pursuant to which consents or waivers are or may be required
prior to consummation of the transactions contemplated by this Agreement.
Section 3.4 CAPITAL STRUCTURE. The authorized capital stock of FEI
consists of 500,000 shares of preferred stock, none of which have been
issued at any time, and 15,000,000 shares of Common Stock, of which
7,956,933 shares were outstanding as of the close of business on October 31,
1996. All of the outstanding Common Stock has been duly authorized and is
validly issued, fully paid and nonassessable. Prior to the Closing Date,
upon obtaining the shareholder approval contemplated by Section 5.4 hereof,
the Definite Shares and Additional Shares will be duly authorized and, when
issued, will be validly issued, fully paid and non-assessable. Prior to the
Closing Date, FEI will have duly authorized and reserved for issuance at
least 1,580,492 shares of Common Stock, sufficient for the issuance of the
maximum number of Additional Shares issuable to PIE pursuant to this
Agreement. Other than 1,293,130 shares reserved for issuance for the
conversion or exercise of any Stock Right, and the 1,580,492 shares to be
reserved prior to the Closing for the issuance of Additional Shares, FEI has
no shares of Common Stock reserved for issuance. The Disclosure Schedule
contains a correct and complete list of each outstanding right to acquire
shares of Common Stock pursuant to any Stock Right (each an "FEI OPTION"),
including the holder, date of grant, exercise price and period and number of
shares of Common Stock subject thereto and no additional Stock Rights are
issuable by FEI without approval of FEI's board of directors. Each of the
outstanding shares of capital stock or other securities of each of FEI's
Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and owned by FEI or by a direct or indirect wholly-owned
subsidiary of FEI, free and clear of all Encumbrances. Except as set forth
above, there are no preemptive or other outstanding
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rights, options, warrants, conversion rights, stock appreciation rights,
redemption rights, repurchase rights, agreements, arrangements or
commitments to issue or sell any shares of capital stock or other securities
of FEI or any of its Subsidiaries or any securities or obligations
convertible or exchangeable into or exercisable for, or giving any Person a
right to subscribe for or acquire, any securities of FEI or any of its
Subsidiaries, and no securities or obligations evidencing such rights are
authorized, issued or outstanding. FEI does not have outstanding any bonds,
debentures, notes or other obligations the holders of which have the right
to vote (or convertible into or exercisable for securities having the right
to vote) with the shareholders of FEI on any matter ("VOTING DEBT"). Neither
the Transaction or any other transaction contemplated by this Agreement
shall result in any adjustment, either as a result of the exercise of the
discretion of FEI's board of directors or otherwise, to the number of shares
of Common Stock issuable pursuant to any Stock Right, including without
limitation, pursuant to Section 10 of the 1984 Stock Incentive Plan, Section
13 of the 1995 Stock Incentive Plan and Section 8 of the 1995 Supplemental
Stock Incentive Plan.
Section 3.5 FEI REPORTS; FINANCIAL STATEMENTS. FEI has delivered to
PIE each registration statement, report, proxy statement or information
statement prepared by it since December 31, 1995 (the "AUDIT DATE"),
including, without limitation, (i) FEI's Annual Report on Form 10-K for the
year ended December 31, 1995, (ii) FEI's Quarterly Reports on Form 10-Q for
the periods ended March 31, 1996, June 30, 1996 and September 30, 1996, each
in the form (including exhibits, annexes and any amendments thereto) filed
with the Securities and Exchange Commission (the "SEC") (collectively,
including any reports filed with the SEC subsequent to the date hereof and
prior to the Closing Date, the "FEI REPORTS"). As of their respective dates,
the FEI Reports did not, and any FEI Reports filed with the SEC subsequent
to the date hereof and prior to the Closing Date will not, contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made
therein, in light of the circumstances in which they were made, not
misleading. Each of the consolidated balance sheets included in or
incorporated by reference into the FEI Reports (including the related notes
and schedules) fairly presents, or will fairly present, the consolidated
financial position of FEI and its Subsidiaries as of its date and each of
the consolidated statements of operations, cash flows and stockholders'
equity included in or incorporated by reference into the FEI Reports
(including any related notes and schedules) fairly presents, or will fairly
present, the results of operations, changes in cash flows and stockholders'
equity as the case may be, of FEI and its Subsidiaries for the periods set
forth therein (subject, in the case of unaudited statements, to notes and
normal year-end audit adjustments that will not be material in amount or
effect), in each case in accordance with United States generally accepted
accounting principles and all related SEC rules and regulations ("GAAP")
consistently applied during the periods involved, except as may be noted
therein.
Section 3.6 EMPLOYEE BENEFITS.
(a) A copy of each bonus, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus,
stock purchase, restricted stock, stock option, employment, termination,
severance, compensation, medical, health or other plan, agreement, policy or
arrangement ("COMPENSATION AND BENEFIT PLANS") that covers employees,
directors, former employees or former directors of FEI and its Subsidiaries
(the "FEI COMPENSATION AND BENEFIT PLANS") and
any trust agreement or insurance contract forming a part of the FEI
Compensation and Benefit Plans has been made available to PIE prior to the
date hereof. FEI Compensation and Benefit Plans are listed in Section 3.6(a)
of the Disclosure Schedule and any "change of control" or similar provisions
therein are specifically identified in Section 3.6(a) of the Disclosure
Schedule.
(b) All FEI Compensation and Benefit Plans are in substantial compliance
with all applicable law, including the Code and ERISA. Each FEI Compensation
and Benefit Plan that is an "employee pension benefit plan" within the
meaning of Section 3(2) of ERISA (a "PENSION PLAN") and that is intended to
be qualified under Section 401(a) of the Code has received a favorable
determination
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letter from the Internal Revenue Service, and to the Knowledge of FEI, there
are no circumstances likely to result in revocation of any such favorable
determination letter. As of the date hereof, there is no pending or, to the
Knowledge of FEI, threatened material litigation relating to the FEI
Compensation and Benefit Plans. Neither FEI nor any Subsidiary has engaged
in a transaction with respect to any FEI Compensation and Benefit Plan that,
assuming the taxable period of such transaction expired as of the date
hereof, would subject FEI or any of its Subsidiaries to a material tax or
penalty imposed by either Section 4975 of the Code or Section 502 of ERISA.
(c) Neither FEI nor any entity which is considered one employer with FEI
under Section 4001 of ERISA or Section 414 of the Code (an "ERISA
AFFILIATE") has adopted, maintains or contributes to any "single employer"
plan within the meaning of Section 4001(a)(15) of ERISA or a "multiemployer
plan" within the meaning of Section 4001(a)(13) of ERISA or adopted,
maintained or contributed to any such plan within the last five years.
(d) All contributions required to be made under the terms of any FEI
Compensation and Benefit Plan as of the date hereof have been timely made or
have been reflected on the most recent consolidated balance sheet filed or
incorporated by reference in the FEI Reports prior to the date hereof.
(e) Neither FEI nor its Subsidiaries have any obligations for retiree
health and life benefits under any FEI Compensation and Benefit Plan, except
as set forth in the Disclosure Schedule. FEI or its Subsidiaries may amend
or terminate any such plan under the terms of such plan at any time without
incurring any material liability thereunder.
(f) The consummation of the Transaction contemplated by this Agreement
will not (i) entitle any employees of FEI or its Subsidiaries to severance
pay, (ii) accelerate the time of payment or vesting or trigger any payment
of compensation or benefits under, increase the amount payable or trigger
any other material obligation pursuant to, any of the FEI Compensation or
Benefit Plans as in effect as of the date hereof, except as contemplated by
Section 5.8(a) hereof, or (iii) result in any breach or violation of, or a
default under, any of the FEI Compensation and Benefit Plans.
(g) All FEI Compensation and Benefit Plans covering current or former
non-U.S. employees or former employees of FEI and its Subsidiaries comply in
all material respects with applicable local law. FEI and its Subsidiaries
have no material unfunded liabilities with respect to any Pension Plan that
covers such non-U.S. employees.
Section 3.7 ABSENCE OF CERTAIN CHANGES. Except as disclosed in Section
3.7 of the Disclosure Schedule, since the Audit Date FEI and its
Subsidiaries have conducted their respective businesses only in, and have
not engaged in any material transaction other than according to, the
ordinary and usual course of such businesses and there has not been (a) any
change in the financial condition, properties, prospects, business or
results of operations of FEI and its Subsidiaries or any development or
combination of developments affecting FEI, to the Knowledge of FEI, except
those changes, developments or combinations of developments that,
individually or in the aggregate, are not reasonably likely to have an FEI
Material Adverse Effect and other than changes resulting from the public
announcement on September 5, 1996 of the signing of the Letter of Intent
with respect to this Transaction; (b) any material damage, destruction or
other casualty loss with respect to any material asset or property owned,
leased or otherwise used by FEI or any of its Subsidiaries, whether or not
covered by insurance; (c) any declaration, setting aside or payment of any
dividend or other distribution in respect of the capital stock of FEI,
except for dividends or other distributions on its capital stock publicly
announced prior to the date hereof; or (d) any change by FEI in accounting
principles, practices or methods. Since the Audit Date, except as provided
for herein or as disclosed in Section 3.7 of the Disclosure Schedule, (i)
there has not been any increase in the compensation payable or that could
become payable by FEI or any of its Subsidiaries to officers or key
employees or
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any amendment of any of the FEI Compensation and Benefit Plans other than
increases or amendments in the ordinary course in accordance with
established past practice and (ii) no employment agreements with any
employees or officers of FEI or its Subsidiaries have been entered into by
FEI or its Subsidiaries.
Section 3.8 LITIGATION AND LIABILITIES. Except as disclosed in Section
3.8 of the Disclosure Schedule, there are no (a) civil, criminal or
administrative actions, suits, claims, hearings, investigations or
proceedings (collectively "PROCEEDINGS") pending or, to the Knowledge of
FEI, threatened against or affecting FEI or any of its Affiliates or (b)
obligations or liabilities, whether or not accrued, contingent or otherwise
and whether or not required to be disclosed, including those relating to
matters involving any Environmental Law, environmental and occupational
safety and health matters, or any other facts or circumstances, to the
Knowledge of FEI, that could result in any claims against, or obligations or
liabilities of, FEI or any of its Affiliates, except for those that are not,
individually or in the aggregate, reasonably likely to have an FEI Material
Adverse Effect or prevent or materially burden or materially impair the
ability of FEI to consummate the Transaction contemplated by this Agreement.
Section 3.9 COMPLIANCE WITH LAWS; PERMITS. Except as disclosed in
Section 3.9 of the Disclosure Schedule, the businesses of each of FEI and
its Subsidiaries have not been, and are not being, conducted in violation of
any applicable law, ordinance, regulation, judgment, order, decree,
arbitration award, license or permit of any Governmental Entity
(collectively, "LAWS") except for any such violations which have not had and
are not reasonably likely, individually or in the aggregate, to have an FEI
Material Adverse Effect. Except as set forth in the FEI Reports filed prior
to the date hereof, no investigation or review by any Governmental Entity
with respect to FEI or any of its Subsidiaries is pending or, to the
Knowledge of FEI, threatened, nor has any Governmental Entity indicated an
intention to conduct the same. To the Knowledge of FEI, no material change
is required in FEI's or any of its Subsidiaries' processes, properties or
procedures in connection with any such Laws, and FEI has not received any
notice or communication of any material noncompliance with any such Laws
that has not been cured as of the date hereof. FEI and its Subsidiaries each
has all material permits, licenses, trademarks, service marks, franchises,
variances, exemptions, orders and other governmental authorizations,
consents and approvals necessary to conduct its business as currently
conducted.
Section 3.10 ENVIRONMENTAL MATTERS. Except as disclosed in Section
3.10 of the Disclosure Schedule and except for such matters that, alone or
in the aggregate, are not reasonably likely to have an FEI Material Adverse
Effect and except with respect to any portion of the FEI Business conducted
on properties owned by Philips or its Affiliates, excluding FEI and its
Subsidiaries: (i) to the Knowledge of FEI, FEI and its Subsidiaries have
complied with all applicable Environmental Laws; (ii) to the Knowledge of
FEI, the properties currently owned or operated by FEI (including soils,
groundwater, surface water, buildings or other structures) are not
contaminated with any Hazardous Substances requiring remediation under
applicable Environmental Laws; (iii) to the Knowledge of FEI, the properties
formerly owned or operated by FEI or any of its Subsidiaries (or former
subsidiaries) were not contaminated with Hazardous Substances by FEI during
the period of ownership or operation by FEI or any of its Subsidiaries (or
former subsidiaries) requiring remediation under applicable Environmental
Laws; (iv) to the Knowledge of FEI, neither FEI nor its Subsidiaries are
subject to liability for any Hazardous Substance disposal or contamination
on any third party property; (v) neither FEI nor any of its Subsidiaries has
received any notice, demand, letter, claim or request for information
alleging that FEI or any of its Subsidiaries may be in violation of or
liable under any Environmental Law; (vi) neither FEI nor any of its
Subsidiaries is subject to any orders, decrees, injunctions or other
arrangements with any Governmental Entity relating to liability under any
Environmental Law or relating to Hazardous Substances; and (vii) to the
Knowledge of FEI, there are no circumstances or conditions involving FEI or
any of its Subsidiaries that could reasonably
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be expected to result in any claims, liability, investigations, costs or
restrictions on the ownership, use, or transfer of any property of FEI
pursuant to any Environmental Law.
Section 3.11 LABOR MATTERS. Neither FEI nor any of its Subsidiaries is
a party to or otherwise bound by any collective bargaining agreement,
contract or other agreement or understanding with a labor union or labor
organization, nor, as of the date hereof, is FEI or any of its Subsidiaries
the subject of any material proceeding asserting that FEI or any of its
Subsidiaries has committed an unfair labor practice or is seeking to compel
it to bargain with any labor union or labor organization nor is there
pending or, to the Knowledge of FEI, threatened, nor has there been for the
past five years, any labor strike, dispute, walkout, work stoppage,
slow-down or lockout involving FEI or any of its Subsidiaries.
Section 3.12 INSURANCE. All material fire and casualty, general
liability, business interruption, product liability, and sprinkler and water
damage insurance policies maintained by FEI or any of its Subsidiaries are
with reputable insurance carriers and provide a reasonable amount of
coverage in light of the normal risks incident to the business of FEI and
its Subsidiaries and their respective properties and assets.
Section 3.13 TAKEOVER STATUTES. No "fair price," "moratorium,"
"control share acquisition" or other similar anti-takeover statute or
regulation (including Sections 60.801 to 60.816 of the Oregon Business
Corporation Act) (each a "TAKEOVER STATUTE") or any applicable anti-takeover
provision in FEI's certificate of incorporation and by-laws is, or at the
Closing will be, applicable to the Transaction contemplated by this
Agreement.
Section 3.14 TAXES. FEI and each of its Subsidiaries (i) have prepared
in good faith and duly and timely filed (taking into account any extension
of time within which to file) all Tax Returns required to be filed by any of
them and all such filed Tax Returns are complete and accurate in all
material respects; (ii) have paid all Taxes that are required to be paid, or
that FEI or any of its Subsidiaries are obligated to withhold from amounts
owing to any employee, creditor or third party, except with respect to
matters contested in good faith; and (iii) have not waived any statute of
limitations with respect to Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency. As of the date hereof, there are
not pending or, to the Knowledge of FEI threatened in writing, any audits,
examinations, investigations or other proceedings in respect of Taxes or Tax
matters. There are not, to the Knowledge of FEI, any unresolved questions or
claims concerning a material Tax liability of FEI or any of its
Subsidiaries. FEI has made available to PIE true and correct copies of the
United States federal income Tax Return filed by FEI and its Subsidiaries
for each of the fiscal years ended December 31, 1993, 1994 and 1995,
together with any examination reports or statements of deficiency issued
with respect to any Tax Returns of FEI or any Subsidiary since October 15,
1992. Neither FEI nor any of its Subsidiaries has any liability with respect
to income, franchise or similar Taxes that accrued on or before September
30, 1996 in excess of the amounts accrued in respect thereto that are
reflected in the financial statements included in the FEI Reports filed on
or prior to the date hereof. The most recent consolidated financial
statements contained in the FEI Reports reflect an adequate reserve for all
taxes payable by FEI and its Subsidiaries for all taxable periods and
portions thereof through the date of such financial statements. None of FEI
or any of its Subsidiaries is a party to or is bound by any tax sharing
agreement, tax indemnity obligation or similar agreement, arrangement or
practice with respect to Taxes (including any advance pricing agreement,
closing agreement or other agreement relating to Taxes with any taxing
authority). There is no employment, severance or termination agreement,
other compensation arrangement or Compensation and Benefit Plan currently in
effect which provides for the payment of any amount (whether in cash or
property or the vesting of property) as a result of any of the transactions
contemplated by this Agreement to any employee, officer or director of FEI
or any of its affiliates who is a "disqualified individual" (as such term is
defined in Section 280G(c) of the Code), that would be characterized as an
"excess parachute payment" (as such term is defined in Section 280G(b)(1) of
the Code). FEI and
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each of its Subsidiaries are not currently, have not been within the last
five years, and do not anticipate becoming a "United States real property
holding company" within the meaning of Section 897(c) of the Code. None of
the assets of FEI or any Subsidiary are subject to any Encumbrances that
arose in connection with any failure or alleged failure to pay any Tax.
Except as disclosed in Section 3.14 of the Disclosure Schedule, no claim has
ever been made by an authority in a jurisdiction where FEI or any Subsidiary
does not file Tax Returns that FEI or the relevant Subsidiary is or may be
subject to taxation by that jurisdiction.
Section 3.15 INTELLECTUAL PROPERTY.
(a) To the Knowledge of FEI, FEI and/or each of its Subsidiaries owns,
or is licensed or otherwise possesses legally enforceable rights to use all
Intellectual Property and tangible or intangible proprietary information or
materials that are used in the business of FEI and its subsidiaries as
currently conducted, except for any such failures to own, be licensed or
possess that, individually or in the aggregate, are not reasonably likely to
have an FEI Material Adverse Effect. Section 3.15(a) of the Disclosure
Schedule sets forth a list of all current patents, patent applications,
registered trademarks, registered service marks, readily identifiable common
law trademarks, trademark or service mark applications, of FEI.
(b) Except as disclosed in Section 3.15(b) of the Disclosure Schedule or
as is not reasonably likely to have an FEI Material Adverse Effect:
(i) to the Knowledge of FEI, FEI is not, nor will it be as a result
of the execution and delivery of this Agreement or the performance of its
obligations hereunder, in violation of any licenses, sublicenses and
other agreements as to which FEI is a party and pursuant to which FEI is
authorized to use any Intellectual Property of any third party
("THIRD-PARTY INTELLECTUAL PROPERTY");
(ii) no claims with respect to any Intellectual Property owned by
FEI or any of its Subsidiaries (the "FEI INTELLECTUAL PROPERTY"), any
trade secret material to FEI, or Third-Party Intellectual Property to the
extent arising out of any use, reproduction, or distribution of such
Third-Party Intellectual Property by or through FEI or any of its
Subsidiaries, are currently pending or, to the Knowledge of FEI, are
overtly threatened by any person;
(iii) to the Knowledge of FEI, there are no valid grounds for any
bona fide claims (A) to the effect that the manufacture, sale, licensing
or use of any product as now used, sold or licensed or proposed for use,
sale or license by FEI or any of its Subsidiaries, infringes on any
copyright, patent, trademark, service mark, or trade secret; (B) against
the use by FEI or any of its Subsidiaries, of any trademarks, trade
names, trade secrets, copyrights, patents, technology, know-how, or
computer software programs and applications used in the business of FEI
or any of its Subsidiaries as currently conducted or as proposed to be
conducted; (C) challenging the ownership, validity, or effectiveness of
any of the FEI Intellectual Property or other trade secret material to
FEI; or (D) challenging the license or legally enforceable right to use
of the Third-Party Intellectual Property by FEI or any of its
Subsidiaries;
(iv) to the Knowledge of FEI, all patents, registered trademarks and
service marks, and copyrights held by FEI are valid, enforceable and
subsisting; and
(v) to the Knowledge of FEI, there is no material unauthorized use,
infringement or misappropriation of any of FEI Intellectual Property by
any third party, including any employee or former employee of FEI or any
of its Subsidiaries.
(iv) FEI is not a party to any agreement that would, as a result of
the Closing, obligate Philips or any of its Affiliates to cross license
to any third party any of Philips' or any of such Affiliates'
Intellectual Property.
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Section 3.16 CONTRACTS. Section 3.16 of the Disclosure Schedule sets
forth a list, as of the date hereof, of each written Contract of FEI or its
Subsidiaries (other than (i) purchase orders in the ordinary and usual
course of business involving less than $1,000,000, (ii) sales orders in the
ordinary and usual course of business involving less than $2,000,000, (iii)
any Contract involving the payment of less than $500,000 in the aggregate or
that is terminable by FEI without penalty or other expense on 60 days'
notice or less, (iv) confidentiality agreements entered into in the usual
course of business, (v) employment agreements covering non-U.S. Employees
(other than contracts with key non-U.S. Employees), (vi) trademark
agreements and (vii) service maintenance agreements in the ordinary and
usual course of business). Section 3.16 of the Disclosure Schedule does not
omit any Contract (written or oral) that is material to FEI's Business.
Except as set forth in Section 3.16(ii) of the Disclosure Schedule, each
Contract that is material to FEI's Business as currently conducted is a
valid and binding agreement of FEI or its Subsidiaries and is in full force
and effect. To the Knowledge of FEI, there is no material default by the
other party to or any event, occurrence or circumstance which, upon the
passage of time or the giving of notice or both, would result in a material
default under any Contract that is material to FEI's Business, which default
or potential default has not been cured or waived.
Section 3.17 BROKERS AND FINDERS. Neither FEI nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders, fees in connection
with the Transaction or the other transactions contemplated in this
Agreement except that FEI has employed Needham & Company, Inc. as its
financial advisor, the arrangements with which have been disclosed to PIE
prior to the date hereof.
Section 3.18 CUSTOMERS AND SUPPLIERS. To the Knowledge of FEI, no
material customer or supplier of FEI's Business will cease or substantially
reduce the business conducted with FEI after, or as a result of, the
consummation of the Transaction contemplated hereby.
Section 3.19 VOTING AGREEMENT. The shareholders of FEI listed on Annex
3.19(a) have duly executed voting agreements in substantially the form
attached hereto as Annex 3.19(b), pursuant to which such shareholders have
agreed to vote their shares at the Shareholders Meeting to approve and adopt
this Agreement, including the Transaction and the issuance of Shares
contemplated hereby, and to approve an increase in the number of shares of
Common Stock authorized for issuance from 15 million to 21.5 million.
Section 3.20 PRESS RELEASES. FEI has provided to PIE a copy of each
press release distributed by FEI or its Subsidiaries since the Audit Date.
Section 3.21 INDUSTRIAL SECURITY CLEARANCES. Neither FEI, its
Subsidiaries nor any of its employees has or is required to have any
industrial security clearance relating to classified information and none is
needed for purposes of any Contract with any United States government
department, agency or instrumentality or, any subcontract under such a
Contract.
Section 3.22 OTHER INFORMATION. The information furnished by FEI in
this Agreement, the Annexes hereto, the Disclosure Schedule and in any
certificate executed or delivered pursuant hereto by or on behalf of FEI is
not materially false or misleading and does not contain a misstatement of a
material fact or omit to state any material fact required to be stated in
order to make the statements herein and therein not misleading.
Section 3.23 NO OTHER REPRESENTATIONS OR WARRANTIES. Except for the
representations and warranties contained in this Article III, neither FEI
nor any other Person makes any other express or implied representation or
warranty on behalf of FEI.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PIE
PIE hereby represents and warrants, and Philips hereby represents and
warrants with respect to Sections 4.1, 4.2, 4.3, 4.6 and 4.15 only, that:
Section 4.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Each of
Philips and PIE, and the PEO Group is or, with regard to the PEO Group, will
be at Closing, a corporation duly organized, validly existing and in good
standing, to the extent such concept or analogous concepts exist in the
applicable jurisdiction, under the laws of its respective jurisdiction of
organization and has, or will have at Closing, all requisite corporate or
similar power and authority to own and operate its properties and assets and
to carry on its business as presently conducted and is, or will be at
Closing, qualified to do business and in good standing as a foreign
corporation in each jurisdiction where the ownership or operation of its
properties or conduct of its business requires such qualification, except
where the failure to be so qualified or in good standing, when taken
together with all other such failures, is not reasonably likely to have a
PEO Material Adverse Effect. PIE has made available to FEI a complete and
correct copy of PIE's Articles of Association, as amended to date. Prior to
the Closing, PIE will have made available to FEI a complete and correct copy
of the Certificate of Incorporation of PEO-US, the Articles of Association
of PEO Holdings and, with respect to its Subsidiaries, their equivalents,
and such Articles of Association and such equivalents, so delivered are in
full force and effect. Section 4.1 of the Disclosure Schedule contains a
correct and complete list of each jurisdiction where any corporation in the
PEO Group is organized. At Closing, PEO-US and PEO Holdings, to the extent a
concept equivalent to due qualification exists in jurisdictions in which it
operates, will be duly qualified to transact business in each jurisdiction
in which failure to so qualify would result in a PEO Material Adverse
Effect.
Section 4.2 CORPORATE AUTHORITY AND APPROVAL.
(a) Philips and PIE have all requisite corporate power and authority and
have taken all corporate action necessary in order to execute, deliver and
perform their obligations under this Agreement and to consummate the
Transaction. The obligations of Philips and PIE contained in this Agreement
are valid and legally binding obligations of Philips and PIE enforceable
against Philips and PIE, respectively, in accordance with its terms.
(b) The board of management of PIE has duly approved this Agreement and
the Transaction and the board of management of Philips has duly approved the
Restructuring and Transaction.
Section 4.3 GOVERNMENTAL FILINGS; NO VIOLATIONS.
(a) Except as set forth on Schedule 4.3 and other than the filings
and/or notices (i) under the HSR Act, (ii) pursuant to the Exon-Florio
Amendment, (iii) pursuant to ISRA, and (iv) any filings, consents,
registrations, approvals, permits or authorizations required in connection
with the Restructuring all of which have been or will be timely made or
obtained, no notices, reports or other filings are required to be made by
Philips or PIE with, nor are any consents, registrations, approvals, permits
or authorizations required to be obtained by Philips or PIE from any
Governmental Entity, in connection with the execution and delivery of this
Agreement by Philips and PIE and the consummation by Philips and PIE of the
Transaction contemplated hereby, except those that the failure to make or
obtain are not, individually or in the aggregate, reasonably likely to have
a PEO Material Adverse Effect or prevent, materially delay or materially
impair the ability of Philips or PIE to consummate the Transaction or the
Restructuring contemplated by this Agreement.
(b) The execution, delivery and performance of this Agreement by Philips
and PIE do not, and the consummation by Philips and PIE of the Restructuring
and the Transaction contemplated hereby will not, constitute or result in
(i) a breach or violation of, or a default under, the Certificate of
Incorporation of PEO-US or Articles of Association of Philips, PIE or PEO
Holdings or their
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equivalents in the case of PEO Holdings' Subsidiaries or (ii) a breach or
violation of, or a default under, the acceleration of any obligations or the
creation of any Encumbrance on any of the assets used in the PEO Business of
PIE, or the PEO Group (with or without notice, lapse of time or both)
pursuant to, any Contracts binding upon PIE or any corporation in the PEO
Group or any Law or governmental or non-governmental permit or license to
which PIE or any corporation in the PEO Group is subject except, in the case
of clause (ii) above, for any breach, violation, default, acceleration,
creation or change that, individually or in the aggregate, is not reasonably
likely to prevent, materially delay or materially impair the ability of PIE
to consummate the Restructuring and the Transaction contemplated by this
Agreement.
Section 4.4 CAPITAL STOCK. Prior to Closing, PIE will directly own all
of the outstanding capital stock of PEO Holdings and PEO-US, in each case,
free and clear of all Encumbrances. There are no preemptive or other
outstanding rights, options, warrants, conversion rights or agreements or
commitments to issue or sell any shares of capital stock or other equity
interest of any such entity or any securities or obligations convertible
into or exchangeable for, or giving any Person a right to subscribe for or
acquire, any shares of capital stock or other equity interest of PEO
Holdings or PEO-US, and no securities or obligations evidencing such rights
are outstanding. Prior to Closing each of the outstanding shares of capital
stock or other securities of each of PEO Holdings' Subsidiaries and of
PEO-US will be duly authorized, validly issued, fully paid and nonassessable
and all of the securities of PEO Holdings' Subsidiaries are owned, directly
or indirectly, by PEO Holdings, free and clear of all Encumbrances.
Section 4.5 PEO FINANCIAL STATEMENTS. Each of the PEO financial
statements for the PEO Business for the years ended December 31, 1993, 1994
and 1995 and the nine months ended September 30, 1996 (including the related
notes and schedules) (the "PEO FINANCIAL STATEMENTS"), other than any
financial statements for the nine months ended September 30, 1995 which are
unaudited, was audited by KPMG Accountants and each of the consolidated
balance sheets included in or incorporated by reference into the PEO
Financial Statements fairly presents the consolidated financial position of
the PEO Business as of its date and each of the consolidated statements of
operations, cash flows and stockholders' equity included in or incorporated
by reference into the PEO Financial Statements fairly presents the results
of operations, changes in cash flows and stockholders' equity, as the case
may be, of the PEO Business for the periods set forth therein (subject, in
the case of unaudited statements, to notes and normal year-end audit
adjustments that will not be material in amount or effect), in each case in
accordance with GAAP consistently applied during the periods involved,
except as may be noted therein. The PEO Financial Statements were made
available to FEI prior to the date hereof.
Section 4.6 EMPLOYEE BENEFITS.
(a) COMPENSATION AND BENEFIT PLANS. A copy of each Compensation and
Benefit Plan that covers Employees (the "PEO COMPENSATION AND BENEFIT
PLANS") and any trust agreement or insurance contract forming a part of the
PEO Compensation and Benefit Plans has been made available for inspection
locally by FEI prior to the date hereof. All pension arrangements Philips
and PIE have in place covering current or former Non-U.S. Employees are set
forth in Section 4.6(a) of the Disclosure Schedule. Philips and PIE have
complied with the terms and conditions of these arrangements.
(b) ACCELERATION AND VESTING. Except as set forth in Section 4.6(b) of
the Disclosure Schedule, the consummation of the Transaction contemplated by
this Agreement will not (i) entitle any Employees to severance pay, (ii)
accelerate the time of payment or vesting or trigger any payment of
compensation or benefits under, increase the amount payable or trigger any
other material obligation pursuant to, any of PEO Compensation or Benefit
Plans as in effect as of the date hereof or (iii) result in any breach or
violation of, or a default under, any of the PEO Compensation and Benefit
Plans.
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(c) U.S. EMPLOYEE BENEFITS. (i) All PEO Compensation and Benefit Plans
covering U.S. Transferred Employees ("U.S. PEO COMPENSATION AND BENEFIT
PLANS") are in substantial compliance with all applicable law, including the
Code and ERISA. Each U.S. PEO Compensation and Benefit Plan that is a
Pension Plan and that is intended to be qualified under Section 401(a) of
the Code has received a favorable determination letter from the Internal
Revenue Service, and to the Knowledge of PEO, there are no circumstances
likely to result in revocation of any such favorable determination letter.
(ii) As of the date hereof, no liability under Subtitle C or D of Title
IV of ERISA has been or is expected to be incurred by the PEO Business or
any corporation in the PEO Group with respect to any U.S. PEO Compensation
and Benefit Plan which is an ongoing, frozen or terminated "single-employer
plan", within the meaning of Section 4001(a)(15) of ERISA, currently or
formerly maintained by any of them, or the single-employer plan of an ERISA
Affiliate. No corporation in the PEO Group has incurred and none expect to
incur any withdrawal liability under Subtitle E to Title IV of ERISA with
respect to a multiemployer plan contributed to by them or by an ERISA
Affiliate. No notice of a "reportable event", within the meaning of Section
4043 of ERISA for which the 30-day reporting requirement has not been
waived, has been required to be filed for any U.S. PEO Compensation and
Benefits Plan which is a Pension Plan within the 12-month period ending on
the date hereof or will be required to be filed in connection with the
transaction contemplated by this Agreement.
(iii) Except as set forth in Section 4.6(c)(iii) of the Disclosure
Schedule, all contributions required to be made under the terms of any U.S.
PEO Compensation and Benefit Plan as of the date hereof have been timely
made or have been reflected on the PEO Financial Statements. No U.S. PEO
Compensation and Benefit Plan which is a Pension Plan has an "accumulated
funding deficiency" (whether or not waived) with respect to the PEO Business
within the meaning of Section 412 of the Code or Section 302 of ERISA. No
member of the Philips Group has provided, or is required to provide
security, in respect of the U.S. PEO Compensation and Benefit Plans pursuant
to Section 401(a)(29) of the Code.
(iv) Except as set forth in Section 4.6(c)(iv) of the Disclosure
Schedule, no corporation in the PEO Group will have at Closing any
obligations for retiree health and life benefits under any U.S. PEO
Compensation and Benefit Plan in respect of the Employees that would be
material to the PEO Business.
(d) NON-U.S. EMPLOYEE BENEFITS. (i) All PEO Compensation and Benefit
Plans covering current or former Non-U.S. Employees comply in all material
respects with applicable local law.
(ii) Neither Philips nor PIE have ever received any letter or other
communication from an industry wide pension fund claiming compulsory
participation of current or former Non-U.S. Employees in any of its pension
arrangements, and Philips and PIE each represent and warrant that each of
them have no reason to believe that either of them will receive such a
letter, communication or claim as a result of the Restructuring or the
Transaction.
Section 4.7 ABSENCE OF CERTAIN CHANGES. Except as reflected in the
financial statements of the PEO Business for the nine months ended September
30, 1996 and as set forth in Section 4.7 of the Disclosure Schedule and
other than as has been or shall be required or contemplated in connection
with the Restructuring, since December 31, 1995 the PEO Business has been
conducted in, and no material transaction has been engaged in other than
according to, the ordinary and usual course of such business and there has
not been (i) any change in the financial condition, properties, prospects,
business or results of operations of the PEO Business or any development or
combination of developments affecting the PEO Business to the Knowledge of
PIE, except those changes, developments or combinations of developments
that, individually or in the aggregate, are not reasonably likely to have a
PEO Material Adverse Effect or (ii) any material damage, destruction or
other casualty loss
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with respect to any material asset or property owned, leased or otherwise
used by the PEO Business, whether or not covered by insurance.
Section 4.8 LITIGATION AND PEO LIABILITIES. Except as disclosed in
Section 4.8 of the Disclosure Schedule, there are no (i) Proceedings pending
or, to the Knowledge of PIE, threatened against or affecting the PEO
Business or any corporation in the PEO Group or (ii) obligations or
liabilities, whether or not accrued, contingent or otherwise and whether or
not required to be disclosed, including those relating to matters involving
any Environmental Law environmental and occupational safety and health
matters, or any other facts or circumstances to the Knowledge of PIE that
could result in any claims against, or obligations or liabilities of, the
PEO Business, the PEO Assets, or any corporation in the PEO Group, except
for those that are not, individually or in the aggregate, reasonably likely
to have a PEO Material Adverse Effect.
Section 4.9 COMPLIANCE WITH LAWS; PERMITS. Except as disclosed in
Section 4.9(a) of the Disclosure Schedule, the PEO Business has not been,
and is not being, conducted in violation of any applicable Laws except for
any such violations which have not had or are not reasonably likely,
individually or in the aggregate, to have a PEO Material Adverse Effect. No
investigation or review by any Governmental Entity with respect to the PEO
Business, or any corporation in the PEO Group is pending or, to the
Knowledge of PIE, threatened, nor has any Governmental Entity indicated an
intention to conduct the same other than routine investigations occurring in
the ordinary course of business. To the Knowledge of PIE, no material change
is required in the processes, properties or procedures of the PEO Business
or any corporation in the PEO Group in connection with any such Laws, and
PIE has not received any notice or communication of any material
noncompliance with any such Laws that has not been cured as of the date
hereof. Except as set forth in Section 4.9(b) of the Disclosure Schedule,
the PEO Business has, and, prior to Closing, the PEO Group will have, all
material permits, licenses, trademarks, service marks, franchises,
variances, exemptions, orders and other Governmental Authorizations,
consents and approvals necessary to conduct its business as currently
conducted.
Section 4.10 ENVIRONMENTAL MATTERS. Except as disclosed in the Section
4.10 of the Disclosure Schedule and except for such matters that, alone or
in the aggregate, are not reasonably likely to have a PEO Material Adverse
Effect: (i) to the Knowledge of PIE, the PEO Business and the PEO Group have
complied with all applicable Environmental Laws; (ii) to the Knowledge of
PIE, the properties currently owned by or operated for the PEO Business and
the PEO Group (including soils, groundwater, surface water, buildings or
other structures) are not contaminated with any Hazardous Substances
requiring remediation under applicable Environmental Laws; (iii) to the
Knowledge of PIE, the properties formerly owned or operated for the PEO
Business were not contaminated by the PEO Business with Hazardous Substances
during the period of ownership or operation by the PEO Business requiring
remediation under applicable Environmental Laws; (iv) to the Knowledge of
PIE, the PEO Group is not subject to liability for any Hazardous Substance
disposal or contamination on any third party property; (v) the PEO Business
and the PEO Group have not received any notice, demand, letter, claim or
request for information alleging that the PEO Business or the PEO Group may
be in violation of or liable under any Environmental Law; (vi) the PEO
Business and the PEO Group are not subject to any orders, decrees,
injunctions or other arrangements with any Governmental Entity relating to
liability under any Environmental Law or relating to Hazardous Substances;
and (vii) to the Knowledge of PIE, there are no circumstances or conditions
involving the PEO Business, the PEO Assets or the PEO Group that could
reasonably be expected to result in any claims, liability, investigations,
costs or restrictions on the ownership, use, or transfer of any property
used in the PEO Business or by the PEO Group.
Section 4.11 LABOR MATTERS. All material collective bargaining
agreements, contracts, and other agreements and understandings with a labor
union or organization are set forth in Section 4.11 of the Disclosure
Schedule. As of the date hereof neither the PEO Business nor any corporation
in
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the PEO Group is the subject of any material proceeding asserting that
either the PEO Business or any corporation in the PEO Group has committed an
unfair labor practice nor is there pending or, to the Knowledge of PIE,
threatened, nor has there been for the past five years, any labor strike,
dispute, walkout, work stoppage, slow-down or lockout involving the PEO
Business and the PEO Group.
Section 4.12 INSURANCE. All material fire and casualty, general
liability, business interruption, product liability, and sprinkler and water
damage insurance policies maintained for the PEO Business and the PEO Group
are with reputable insurance carriers and provide reasonable coverage for
all normal risks incident to the PEO Business and the PEO Group and their
respective properties and assets and will continue in effect at and
subsequent to Closing at FEI's cost.
Section 4.13 TAKEOVER STATUTES. No Takeover Statute is, or at the
Closing will be, applicable to PEO Holdings or PEO-US.
Section 4.14 TAXES. No corporation in the PEO Group will have at
Closing any liability with respect to income or similar Taxes or, in the
case of the PEO Business in the U.S., franchise Taxes that accrued on or
before December 31, 1995 in excess of the amounts accrued in respect thereto
that are reflected in the PEO Financial Statements. The PEO Financial
Statements reflect an adequate reserve for all taxes payable by the PEO
Group for all taxable periods and portions thereof through the date of such
financial statements. No corporation in the PEO Group will have at Closing
or thereafter any income tax liability resulting from the Restructuring. No
corporation in the PEO Group will be at Closing a party to or be bound by
any tax sharing agreement, tax indemnity obligation or similar agreement,
arrangement or practice with respect to Taxes (including any advance pricing
agreement, closing agreement or other agreement relating to Taxes with any
taxing authority). No corporation in the PEO Group will have any legal
liability for any Tax imposed on any entity not in the PEO Group, except for
customs duties and value added taxes incurred in the ordinary course of
business by the PEO Business and paid for their account by Nederlandse
Philips Bedrijven B.V. None of the assets of the PEO Group are subject to
any Encumbrances that arose in connection with any failure or alleged
failure to pay any Tax.
Section 4.15 INTELLECTUAL PROPERTY.
(a) To the Knowledge of Philips, the Philips Group owns, or is licensed
or otherwise possesses legally enforceable rights to use all Intellectual
Property and tangible or intangible proprietary information or materials
that are used in the PEO Business as currently conducted, except for any
such failures to own, be licensed or possess that, individually or in the
aggregate, are not reasonably likely to have a PEO Material Adverse Effect,
all of which, upon closing of the Transaction, may be used and exploited in
the PEO Business. Section 4.15(a) of the Disclosure Schedule sets forth a
list of all current patents, patent applications, registered trademarks,
registered service marks, readily identifiable common law trademarks,
trademark or service mark applications, originated in and having their
principal commercial use within the PEO Business.
(b) Except as disclosed in Section 4.15(b) of the Disclosure Schedule or
as is not reasonably likely to have a PEO Material Adverse Effect:
(i) to the Knowledge of Philips, the PEO Business and the PEO Group
are not, nor will be as a result of the execution and delivery of this
Agreement or the performance of its obligations hereunder, in violation
of any licenses, sublicenses and other agreements as to which the PEO
Business or any corporation in the PEO Group is a party and pursuant to
which the PEO Business or any corporation in the PEO Group is authorized
to use any Third-Party Intellectual Property;
(ii) no claims with respect to any Intellectual Property used by the
PEO Business or any corporation in the PEO Group (the "PEO INTELLECTUAL
PROPERTY"), any trade secret material to the PEO Business or any
corporation in the PEO Group, or Third-Party Intellectual Property to the
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extent arising out of any use, reproduction, or distribution of such
Third-Party Intellectual Property by or through the PEO Business or the
PEO Group, are currently pending or, to the Knowledge of Philips, are
overtly threatened by any person;
(iii) to the Knowledge of Philips there are no valid grounds for any
bona fide claims (A) to the effect that the manufacture, sale, licensing
or use of any product as now used, sold or licensed or proposed for use,
sale or license by the PEO Business or the PEO Group, infringes on any
copyright, patent, trademark, service mark, or trade secret; (B) against
the use by the PEO Business or the PEO Group of any trademarks, trade
names, trade secrets, copyrights, patents, technology, know-how, or
computer software programs and applications used in the PEO Business or
the PEO Group as currently conducted or as proposed to be conducted; (C)
challenging the ownership, validity, or effectiveness of any of the PEO
Intellectual Property or other trade secret material to the PEO Business;
or (D) challenging the license or legally enforceable right to use of the
Third-Party Intellectual Property by the PEO Business or the PEO Group;
(iv) to the Knowledge of Philips, all patents, registered trademarks
and service marks, and copyrights originated in and having their
principal commercial use within the PEO Business, are valid, enforceable
and subsisting; and
(v) to the Knowledge of Philips, there is no material unauthorized
use, infringement or misappropriation of any of the PEO Intellectual
Property by any third party, including any employee or former employee of
the PEO Business.
Section 4.16 CONTRACTS. Section 4.16 of the Disclosure Schedule sets
forth a list, as of the date hereof, of each written Contract that, to the
Knowledge of PIE, is related to the PEO Business (other than (i) purchase
orders in the ordinary and usual course of business involving less than
$1,000,000, (ii) sales orders in the ordinary and usual course of business
involving less than $2,000,000, (iii) any Contract involving the payment of
less than $500,000 in the aggregate or that is terminable by the PEO
Business without penalty or other expense on 60 days' notice or less, (iv)
confidentiality agreements entered into in the usual course of business, (v)
employment agreements covering Non-U.S. Employees (other than contracts with
key Non-U.S. Employees), (vi) trademark agreements and (vii) service
maintenance agreements in the ordinary and usual course of business). Except
for patent licenses, Section 4.16 of the Disclosure Schedule does not omit
any Contract (written or oral) that is material to the PEO Business. Except
as set forth in Section 4.16(ii) of the Disclosure Schedule, each Contract
that is material to the PEO Business as currently conducted is a valid and
binding agreement of the Philips Affiliate which is a party thereto and is
in full force and effect. To the Knowledge of PIE, there is no material
default by the other party to or any event, occurrence or circumstance
which, upon the passage of time or the giving of notice or both, would
result in a material default under any Contract that is material to the PEO
Business as currently conducted, which default or potential default has not
been cured or waived.
Section 4.17 BROKERS AND FINDERS. Neither PIE nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders fees in connection
with the Transaction or the other transactions contemplated in this
Agreement.
Section 4.18 CUSTOMERS AND SUPPLIERS. To the Knowledge of PIE, no
material customer or supplier of the PEO Business will cease or
substantially reduce the business conducted with the PEO Business after, or
as a result of, the consummation of the Transaction contemplated hereby.
Section 4.19 PEO ASSETS AND PEO LIABILITIES.
(a) Except as set forth in Section 4.19(a) of the Disclosure Schedule,
PIE will duly transfer to the PEO Group, and as of the Closing Date, the PEO
Group will own, directly or indirectly, all right,
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title and interest in and to all of the assets (the "PEO ASSETS") and will
assume all of the liabilities of the PEO Business (the "PEO LIABILITIES")
prior to the Closing Date.
(b) Except for the Excluded Business and as set forth in Section 4.19(a)
of the Disclosure Schedule, the PEO Assets, together with any Transitional
Services contemplated hereby, comprise all of the assets necessary to
conduct the PEO Business as currently conducted and at Closing will include,
without limitation, all of the assets purchased pursuant to the Electro-Scan
Purchase Agreement. Section 4.19(b) of the Disclosure Schedule contains a
list of substantially all of the Employees to be transferred pursuant to
this Agreement.
Section 4.20 SHARED ASSETS; TITLE TO AND CONDITION OF PROPERTY.
(a) Section 4.20(a) of the Disclosure Schedule sets forth a list of (i)
shared facilities that are used in connection with the PEO Business and with
other operations of PIE or PIE's other Affiliates or (ii) services provided
to the PEO Business by PIE or any of PIE's other Affiliates.
(b) Section 4.20(b) of the Disclosure Schedule sets forth a list of the
Leased Real Property as of the date hereof. PIE or its Affiliates have, and
at Closing PEO Holdings will have, good title to, or with respect to the
Leased Real Property a valid and binding leasehold interest in, the property
used in the PEO Business, free and clear of all Encumbrances, except (i) as
set forth in Section 4.20(b) of the Disclosure Schedule, (ii) liens for
Taxes, assessments and other governmental charges not yet due and payable or
due but not delinquent or being contested in good faith by appropriate
proceedings, (iii) original purchase price conditional sales contracts and
equipment leases with third parties entered into in the ordinary course of
business, (iv) other liens incurred in the ordinary course of business
which, individually or in the aggregate, do not secure liabilities of
$250,000 or more, (v) with respect to real property, easements,
quasi-easements, licenses, covenants, rights-of-way, zoning, building and
other similar restrictions that are not material to the PEO Business or to
the operations or condition of the property so encumbered (all items
included in (i) through (v), together with any matter set forth in Section
4.20(b) of the Disclosure Schedule, are referred to collectively herein as
the "PERMITTED ENCUMBRANCES").
(c) The leases described on Section 4.20(b) of the Disclosure Schedule
constitute all of the leases under which PIE or its Affiliates holds a
leasehold interest in real estate that is used in the PEO Business. Except
as set forth on Section 4.20(b) of the Disclosure Schedule, the leases
described thereon are in full force and effect. PIE has made available for
inspection locally by FEI complete and accurate copies of each of the leases
described on Section 4.20(b) of the Disclosure Schedule and none of such
leases has been modified in any material respect, except to the extent that
such modifications are disclosed by the copies made available to FEI.
(d) Except as set forth on Section 4.20(d) of the Disclosure Schedule,
the uses for which the Leased Real Property are zoned do not restrict, or in
any manner impair, the use thereof for purposes of the PEO Business, as
currently conducted, other than restrictions which, individually or in the
aggregate, would not materially impair the use of the Leased Real Property
in the PEO Business as currently conducted.
(e) All of the material machinery, equipment and other tangible personal
property and assets at or upon any Leased Real Property are in satisfactory
condition for use in the ordinary course of the PEO Business consistent with
the past practice of the PEO Business, and PIE or its Affiliates have
performed regular maintenance on such machinery, equipment and other
tangible personal property in accordance with their past practice (giving
due account to the age and length of use of the same, ordinary wear and tear
excepted).
(f) PIE and its Affiliates have not received any notice of any violation
of any applicable zoning, building code or subdivision ordinance or other
Laws, or requirements relating to the operation of the Leased Real Property
or any of the other PEO Assets (including, without limitation, applicable
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occupational health and safety laws and regulations) or any condemnation,
eminent domain or any other Proceedings with respect to or any of the PEO
Assets, other than violations or requirements which, individually or in the
aggregate, would not have a PEO Material Adverse Effect.
Section 4.21 SECURITIES ACT. PIE is acquiring the Shares for its own
account and not with a view
to their distribution within the meaning of Section 2(11) of the Securities
Act in any manner that would be in violation of the Securities Act. PIE
understands each certificate representing the Shares shall bear legends in
the following form:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR
OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED."
Section 4.22 PRESS RELEASES. PIE has provided to FEI a copy of each
press release with respect to the PEO Business distributed by PIE or its
Affiliates since December 31, 1995.
Section 4.23 INDUSTRIAL SECURITY CLEARANCES. The PEO Business is not
required to have, and does not have, and at Closing the PEO Group will not
be required to have, any industrial security clearance relating to
classified information and none is needed for purposes of any Contract with
any United States government department, agency or instrumentality or, any
subcontract under such a Contract.
Section 4.24 OTHER INFORMATION. The information furnished by PIE in
this Agreement, the Annexes hereto, the Disclosure Schedule and in any
certificate executed or delivered pursuant hereto by or on behalf of PIE is
not materially false or misleading and does not contain a misstatement of a
material fact or omit to state any material fact required to be stated in
order to make the statements herein and therein not misleading.
Section 4.25 NO OTHER REPRESENTATIONS OR WARRANTIES. Except for the
representations and warranties contained in this Article IV, none of
Philips, PIE, any corporation in the PEO Group nor any other Person makes
any other express or implied representation or warranty on behalf of PIE or
any corporation in the Philips Group or the PEO Group.
ARTICLE V
COVENANTS
Section 5.1 INTERIM OPERATIONS. FEI covenants and agrees as to itself and
its Subsidiaries, and PIE covenants and agrees as to the PEO Group and the PEO
Business that after the date hereof and prior to the Closing (unless the other
party shall otherwise approve in writing, which approval shall not be
unreasonably withheld or delayed), except as otherwise expressly contemplated by
this Agreement or in connection with the Restructuring:
(a) its business and that of its Subsidiaries shall be conducted in the
ordinary and usual course and they and their Subsidiaries shall use their
respective best efforts to preserve their business organizations intact and
maintain their existing relations and goodwill with customers, suppliers,
distributors, creditors, lessors, employees and business associates;
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(b) they shall not (i) issue, sell, pledge, dispose of or encumber any
capital stock owned by them in any of their Subsidiaries; (ii) amend their
Articles of Association, certificate of incorporation or by-laws; (iii)
split, combine or reclassify their outstanding shares of capital stock; (iv)
declare, set aside or pay any dividend or make any distribution payable in
cash, stock or property in respect of any capital stock other than dividends
from its direct or indirect wholly-owned Subsidiaries; or (v) repurchase,
redeem or otherwise acquire, or permit any of their Subsidiaries to purchase
or otherwise acquire, any shares of their capital stock or any securities
convertible into or exchangeable or exercisable for any shares of its
capital stock;
(c) neither they nor any of their Subsidiaries shall (i) issue, sell,
pledge, dispose of or encumber any shares of, or securities convertible into
or exchangeable or exercisable for, or options, warrants, calls, commitments
or rights of any kind to acquire, any shares of their capital stock of any
class or any Voting Debt or any other property or assets (other than, in the
case of FEI, shares of Common Stock issuable without further action of FEI's
board of directors pursuant to options outstanding on the date hereof under
the Stock Option Plan); (ii) other than in the ordinary and usual course of
business, transfer, lease, license, guarantee, sell, mortgage, pledge,
dispose of or encumber any other property or assets (including capital stock
of any of their Subsidiaries) or incur or modify any material indebtedness
or other liability; (iii) except as disclosed in budgets provided to the
other party hereto prior to the date hereof, make any commitments for, make
or authorize any capital expenditures other than in the ordinary and usual
course of business and in amounts less than $50,000 individually and
$250,000 in the aggregate or, by any means, make any acquisition of, or
investment in, assets or stock of any other Person or entity; or (iv) enter
into any joint venture, merger or other similar agreement with any Person;
(d) except for grants of options, consistent with FEI's past practice,
pursuant to its Stock Option Plan to purchase no greater than 5,000 shares
of Common Stock, neither they nor any of their Subsidiaries shall terminate,
establish, adopt, enter into, make any new grants or awards under, amend or
otherwise modify, any Compensation and Benefit Plans, or increase the
salary, wage, bonus or other compensation of any employees except increases
occurring in the ordinary and usual course of business in accordance with
established past practice (which shall include normal periodic performance
reviews and related compensation and benefit increases);
(e) neither they nor any of their Subsidiaries shall settle or
compromise any material claims or litigation or, except in the ordinary and
usual course of business modify, amend or terminate any of their material
Contracts or waive, release or assign any material rights or claims;
(f) neither they nor any of their Subsidiaries shall make any Tax
election or permit any insurance policy naming it as a beneficiary or
loss-payable payee to be cancelled or terminated except in the ordinary and
usual course of business;
(g) neither they nor any of their Subsidiaries will authorize or enter
into an agreement to do any of the foregoing.
Section 5.2 ACQUISITION PROPOSALS. Each of FEI and PIE agrees that
neither it nor any of its Affiliates nor any of the officers and directors
of it or its Affiliates shall, and that it shall direct and use its best
efforts to cause its and its Affiliates' employees, agents and
representatives (including any investment banker, attorney or accountant
retained by it or any of its Subsidiaries) with knowledge of the
transactions contemplated hereby not to, directly or indirectly, initiate,
solicit, encourage or otherwise facilitate any inquiries or the making of
any proposal or offer with respect to a merger, reorganization, share
exchange, consolidation or similar transaction involving, or any purchase of
all or any significant portion of the assets or any equity securities of, it
or any of its Subsidiaries that are the subject of this Transaction (any
such proposal or offer being hereinafter referred to as an "ACQUISITION
PROPOSAL"). FEI and PIE each further agrees that neither it nor any of its
Affiliates nor any of the officers and directors of it or its Affiliates
shall, and that it shall direct and use its best
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efforts to cause its and its Affiliates' employees, agents and
representatives (including any investment banker, attorney or accountant
retained by it or any of its Affiliates) not to, directly or indirectly,
engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any Person relating to
an Acquisition Proposal, or otherwise facilitate any effort or attempt to
make or implement an Acquisition Proposal; PROVIDED, HOWEVER, that nothing
contained in this Agreement shall prevent either FEI or PIE or their
respective boards of directors from, as applicable, (A) complying with Rule
14e-2 promulgated under the Exchange Act with regard to an Acquisition
Proposal; (B) providing information in response to a request therefor by a
Person who has made an unsolicited bona fide written Acquisition Proposal if
the board of directors receives from the Person so requesting such
information an executed confidentiality agreement on terms no less
protective of the confidential information of FEI or the PEO Business than
those contained in the Confidentiality Agreement (attached as Annex 5.2);
(C) engaging in any negotiations or discussions with any Person who has made
an unsolicited bona fide written Acquisition Proposal; or (D) in the case of
FEI, recommending such an Acquisition Proposal to the shareholders of FEI or
in the case of PIE, entering into an agreement with respect to such an
Acquisition Proposal if and only to the extent that, in each such case
referred to in clause (B), (C) or (D) above, (i) the board of directors of
FEI or PIE, as the case may be, determines in good faith after consultation
with outside legal counsel that such action is necessary in order for its
directors to comply with their respective fiduciary duties under applicable
law and (ii) in each case referred to in clause (C) or (D) above, the board
of directors of FEI or PIE, as the case may be, believes in good faith
(after consultation with its financial advisor) that such Acquisition
Proposal is reasonably likely to be consummated, taking into account all
legal, financial and regulatory aspects of the proposal and the Person
making the proposal and would, if consummated, result in a transaction more
favorable to FEI's shareholders or to PIE and, as applicable, its Affiliates
from a financial point of view than the Transaction contemplated by this
Agreement (any such more favorable Acquisition Proposal being referred to in
this Agreement as a "SUPERIOR PROPOSAL"). FEI and PIE each agrees that it
will immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with
respect to any of the foregoing. FEI and PIE each agrees that it will take
the necessary steps to promptly inform the individuals or entities referred
to in the first sentence of this Section 5.2 of the obligations undertaken
in this Section 5.2. FEI and PIE each agrees that it will notify the other
immediately if any such inquiries, proposals or offers are received by, any
such information is requested from, or any such negotiations or discussions
are sought to be initiated or continued with, any of its representatives
indicating, in connection with such notice, the name of such Person and the
material terms and conditions of any proposals or offers and thereafter
shall keep PIE or FEI, as the case may be, informed, on a current basis, on
the status and terms of any such proposals or offers and the status of any
such negotiations or discussions. FEI and PIE each also agrees that it will
promptly request each Person that has heretofore executed a confidentiality
agreement in connection with such Person's consideration of acquiring it or
any of its Subsidiaries that are the subject of this Transaction to return
all confidential information heretofore furnished to such Person by or on
behalf of FEI or PIE, as the case may be, or any Subsidiaries of either of
them that are the subject of this Transaction.
Section 5.3 INFORMATION SUPPLIED.
(a) FEI agrees, as to itself and its Subsidiaries that (i) none of the
information, except for such information to be provided by PIE pursuant to
Section 5.3(b) below, to be included or incorporated by reference in the
proxy statement (including any amendments or supplements thereto, the "PROXY
STATEMENT") used in connection with the Shareholder's Meeting will, at the
time the Proxy Statement is published and mailed to FEI's Shareholders,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, and (ii) the Proxy Statement will not, at the date of
mailing to shareholders and at the times of the Shareholders Meeting,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein
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or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the
extent any such untrue statement is provided by PIE pursuant to Section
5.3(b) below or such omission is directly caused by PIE's breach of its
covenant in Section 5.3(b) below.
(b) PIE agrees to provide to FEI in writing all material information
required by Law to be included in the Proxy Statement that cannot reasonably
be provided by FEI or its Subsidiaries because such information is
exclusively within the control and Knowledge of PIE or its Affiliates (such
information, the "PIE INFORMATION"). PIE agrees, as to itself and its
Affiliates, that none of the PIE Information supplied by it for inclusion in
the Proxy Statement will, at the time the Proxy Statement is published and
mailed to FEI's shareholders, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. PIE further agrees to supply
such additional PIE Information to FEI for inclusion in the Proxy Statement
if, in light of circumstances occurring subsequent to the time the Proxy
Statement is published and mailed, such additional PIE Information is
necessary in order that the PIE Information in the Proxy Statement will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
Section 5.4 SHAREHOLDERS MEETING. Subject to fiduciary obligations
under applicable law, FEI will take, in accordance with applicable law and
its certificate and by-laws, all action necessary to convene a meeting of
holders of its Common Stock (the "SHAREHOLDERS MEETING") as promptly as
practicable to consider and vote upon the approval and adoption of this
Agreement, including the Transaction and the issuance of Shares contemplated
thereby and to approve an increase in the number of shares of Common Stock
authorized for issuance from 15 million to 21.5 million. Subject to
fiduciary obligations under applicable law, FEI's board of directors shall
recommend such approval and shall take all lawful action to solicit such
approval.
Section 5.5 FILINGS; OTHER ACTIONS; NOTIFICATION.
(a) FEI shall promptly prepare and file with the SEC the Proxy
Statement, shall promptly respond to any SEC comments thereon and shall, as
soon as practicable thereafter, mail the Proxy Statement to the shareholders
of FEI. Subsequent to mailing the Proxy Statement, FEI shall promptly amend
or supplement the Proxy Statement, if the information in it is required by
law to be amended or supplemented or if such an amendment or supplement is
otherwise necessary, proper or advisable in light of the terms hereof. FEI
shall use its reasonable efforts to obtain all necessary state securities
law or "blue sky" permits and approvals required in connection with the
Transaction contemplated by this Agreement and will pay all expenses
incident thereto. FEI shall also use its best efforts to comply with all
NASDAQ rules applicable to the Transaction and shall use its best efforts to
obtain the approvals necessary for the Shares to be quoted on the NASDAQ
National Market System.
(b) FEI and PIE shall cooperate with each other and use (and shall cause
their respective Affiliates to use) their respective reasonable efforts to
take or cause to be taken all actions, and do or cause to be done all
things, necessary, proper or advisable under this Agreement and applicable
Laws to consummate and make effective the Restructuring and the Transaction
contemplated by this Agreement as soon as practicable, including preparing
and filing as promptly as practicable all documentation to effect all
necessary applications, notices, petitions, filings and other documents and
to obtain as promptly as practicable all permits, consents, approvals and
authorizations necessary or advisable to be obtained from any third party
and/or any Governmental Entity in order to consummate the Restructuring and
the Transaction as contemplated by this Agreement. Subject to applicable
laws relating to the exchange of information, FEI and PIE shall have the
right to review in advance all the information relating to PIE or FEI, as
the case may be, and any of their respective Affiliates, that appear in any
filing made with, or written materials submitted to, any third party and/or
any
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Governmental Entity in connection with the Transaction and the other
transactions contemplated by this Agreement. In exercising the foregoing
right, each of FEI and PIE shall act reasonably and as promptly as
practicable.
(c) FEI and PIE each shall, upon request by the other, furnish the other
with all information concerning itself and as applicable, its Affiliates,
directors, officers and, shareholders and such other matters as may be
reasonably necessary or advisable in connection with the Proxy Statement or
any other statement, filing, notice or application made by or on behalf of
PIE, FEI or any of their respective Subsidiaries to any third party and/or
any Governmental Entity in connection with the Transaction and the
transactions contemplated by this Agreement.
(d) FEI and PIE each shall keep the other apprised of the status of
matters relating to completion of the transactions contemplated hereby,
including promptly furnishing the other with copies of notices or other
communications received by PIE or FEI, as the case may be, or any of its
Subsidiaries, from any third party and/or any Governmental Entity with
respect to the Transaction contemplated by this Agreement. FEI and PIE each
shall give prompt notice to the other of any change that is reasonably
likely to result in an FEI Material Adverse Effect or PEO Material Adverse
Effect, respectively.
Section 5.6 ACCESS. Upon reasonable notice, and except as may
otherwise be required by applicable law, each of FEI and PIE shall (and
shall cause its Affiliates to) afford the other's officers, employees,
counsel, accountants and other authorized representatives
("REPRESENTATIVES") access, during normal business hours throughout the
period prior to the Closing, to the properties, books, contracts and records
of FEI and of the PEO Business and the PEO Group, respectively, and, during
such period, each shall (and shall cause its Affiliates to) furnish promptly
to the other all information concerning the business, properties and
personnel of FEI and the PEO Business, respectively, as may reasonably be
requested, PROVIDED that no investigation pursuant to this Section shall
affect or be deemed to modify any representation or warranty made by FEI,
PIE or the PEO Group, and PROVIDED, FURTHER, that the foregoing shall not
require FEI or PIE to permit any inspection, or to disclose any information,
that in the reasonable judgment of FEI or PIE, as the case may be, would
result in the disclosure of any trade secrets of third parties or violate
any of its obligations with respect to confidentiality if FEI or PIE, as the
case may be, shall have used reasonable efforts to obtain the consent of
such third party to such inspection or disclosure. All requests for
information made pursuant to this Section shall be directed to a designated
officer of FEI or PIE, as the case may be, or such Person as may be
designated by such officer. All such information shall be governed by the
terms of the Confidentiality Agreement.
Section 5.7 PUBLICITY. FEI and PIE shall consult with each other prior
to issuing any press releases or otherwise making public announcements with
respect to the Transaction contemplated by this Agreement and prior to
making any filings with any third party and/or any Governmental Entity
(including any interdealer quotation service) with respect thereto, except
as may be required by law or by obligations pursuant to any listing
agreement with or rules of any interdealer quotation service.
Section 5.8 U.S. TRANSFERRED EMPLOYEES.
(a) Effective as of the Closing Date, FEI shall, or shall cause PEO-US
to, continue to employ all employees of the PEO Business on the U.S.
payroll, excluding expatriate employees (the "U.S. TRANSFERRED EMPLOYEES"),
in comparable positions, and as of the Closing Date, FEI shall provide the
U.S. Transferred Employees with the same Compensation and Benefit Plans,
programs and policies and fringe benefits (including post-employment welfare
benefits) provided from time to time by FEI to its similarly situated
employees, IT BEING UNDERSTOOD, that notwithstanding the foregoing, FEI will
maintain a severance plan for the U.S. Transferred Employees that is no less
favorable than the severance plan provided to the employees of the PEO
Business immediately prior to the Closing Date. U.S. Transferred Employees
shall be given credit for all service with the PEO Business (or service
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credited by PENAC, PIE or its Subsidiaries) under (i) all employee benefit
plans, programs and policies, and fringe benefits of FEI or its Subsidiaries
in which they become participants for purposes of eligibility, vesting,
waiting periods and benefit accrual and (ii) severance plans and vacation
plans for purposes of calculating the amount of each U.S. Transferred
Employee's severance benefits or vacation entitlement.
(b) Effective as of the Closing Date, all U.S. Transferred Employees
shall cease to be covered by the employee welfare benefit plans covering
them prior to Closing, including plans, programs, policies and arrangements
which provide medical and dental coverage, life and accident insurance,
disability coverage, and vacation and severance pay (collectively, "WELFARE
PLANS") except to the extent otherwise provided by the applicable Welfare
Plan. PIE or its Affiliates, excluding FEI and its Subsidiaries, shall
retain responsibility for providing employees of the PEO Business in the
U.S., who terminated employment prior to the Closing Date, and who elected
group health coverage required by Section 4980B of the Code ("CONTINUATION
COVERAGE") under the terms of the health plan covering such employees with
such Continuation Coverage. Effective as of the Closing Date, FEI shall
perform the duties required of a successor employer with respect to
Continuation Coverage, including, but not limited to, making such coverage
available to the U.S. Transferred Employees on and after the Closing Date
upon their termination of employment subsequent to the Closing Date to the
extent required by law.
(c) PIE or its Affiliates, excluding FEI and its Subsidiaries, shall
retain responsibility for all Welfare Plan claims incurred by U.S.
Transferred Employees prior to the Closing Date (i) under any medical,
dental or health plans for treatment or service rendered prior to the
Closing Date; (ii) under any life insurance plans with respect to deaths
occurring prior to the Closing Date; and (iii) for any other payments or
benefits owing prior to the Closing Date under any other Welfare Plans. For
purposes of this paragraph, a claim shall be deemed to have been incurred on
the date on which medical or other treatment or service was rendered and not
the date of the inception of the related illness to injury or the date of
submission of a claim related thereto.
(d) FEI shall include the U.S. Transferred Employees and their
dependents and beneficiaries in FEI's medical, dental or health plans as of
the Closing Date and FEI shall use its best efforts to cause such plans to
waive any preexisting condition limitations and to honor any deductible and
out-of-pocket expenses incurred by such U.S. Transferred Employees and their
dependents and beneficiaries under PIE's or its Affiliates' medical, dental
or health plans during the portion of the calendar year preceding the
Closing Date, such deductible and out-of-pocket expenses to be credited by
FEI as though such amounts had been paid under FEI Compensation and Benefit
Plans, as soon as practicable following the Closing Date.
(e) FEI and PIE agree to consult with each other in order to comply with
any applicable notice requirements under WARN or other similar Law of any
jurisdiction relating to any plant closing or mass layoffs or as otherwise
required by any such Law.
Section 5.9 OTHER EMPLOYEES.
(a) Philips shall as of Closing, to the extent permitted under country
or local law and regulations, provide for, at the expense of FEI, the
continued coverage of all employees of the PEO Business other than the U.S.
Transferred Employees (the "NON-U.S. EMPLOYEES") under the applicable
Compensation and Benefit Plans of the Philips Group subsequent to Closing;
PROVIDED, HOWEVER, it is expressly understood that (a) such local law and
regulations, including any laws and regulations directly governing any PEO
Compensation and Benefit Plans may change from time to time, (b) the PEO
Compensation and Benefit Plans, including the funding requirements and
funding structure thereof and the eligibility requirements for participation
therein, may change or be changed by Philips from time to time without prior
consultation with, or consent of, the participating corporations in the
Philips Group, FEI or the PEO Group (IT BEING UNDERSTOOD that no such change
shall be made by
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Philips which would have an adverse effect solely with respect to the
Non-U.S. Employees) and (c) no representation is made that any such changes
will not occur or that any such change will not require FEI to establish
alternative Compensation and Benefit Plans to cover the Non-U.S. Employees.
FEI may discontinue participation in the PEO Compensation and Benefit Plans,
at any time, to the extent allowable under local law and regulations. If any
Non-U.S. Employees should cease to be covered by the Pension Plan within the
PEO Compensation and Benefit Plans, then the pension reserves required for
the accrued pension rights of the Employees concerned, calculated in
accordance with the then applicable valuation formulas for such purposes for
the plans concerned, will be transferred by the Philips pension fund to the
pension fund or insurance company indicated by FEI, provided that all then
applicable approvals have been obtained. Unless otherwise agreed in writing,
Non-U.S. Employees will not be eligible to continue their affiliation with
the PEO Compensation and Benefit Plans after Philips ceases to Control FEI.
(b) FEI and PIE agree that PIE's only obligation with regard to Pension
Plans covering Non-U.S. Employees is that PIE shall fund, in accordance with
the valuation rules for such purposes for the plans concerned, at such
times, prior to or after the Closing Date, and in such amounts as are
required in respect of such employees' employment prior to the Closing Date.
FEI and PIE agree that FEI shall, prior to Closing, have reasonable access
to the actuarial assumptions (including relevant historical assumptions and
contribution information) used to determine the funded status of the Pension
Plans within the PEO Compensation and Benefit Plans.
(c) FEI and PIE agree that FEI's employees shall continue as employees
of FEI following the Closing Date with Compensation and Benefit Plans in the
aggregate that are not materially less favorable than FEI Compensation and
Benefit Plans in effect on the date hereof and that FEI's employees and
employees of PEO Holdings, its Subsidiaries and PEO-US, including in all
cases management employees, will, upon Closing, be eligible to participate
in the Stock Option Plan or an equivalent incentive compensation plan of FEI
in accordance with the terms of any such plan.
(d) FEI and PIE agree that all employees of the PEO Business in Japan
shall remain employees of the Philips entity that currently employs such
employees and, upon Closing and thereafter, shall be seconded by contract to
FEI.
Section 5.10 EXPENSES. FEI shall pay all charges and expenses incurred
by it, and PIE shall pay all charges and expenses incurred by it or its
Affiliates, in connection with the Transaction and any other transactions
contemplated by this Agreement, including without limitation the
establishment of PEO Holdings and the Restructuring.
Section 5.11 TAKEOVER STATUTE. If any Takeover Statute is or may
become applicable to the Transaction or the other transactions contemplated
by this Agreement, each of FEI and PIE and its board of directors shall
grant such approvals and take such actions as are necessary so that such
transactions may be consummated as promptly as practicable on the terms
contemplated by this Agreement and otherwise act to eliminate the effects of
such statute or regulation on such transactions.
Section 5.12 INSURANCE OF PEO BUSINESS. To the extent that insurance
policies of the PEO Business will not survive the Closing, FEI and PIE shall
cooperate to procure effective upon the Closing, insurance policies with
respect to all material risks of the PEO Business, including, without
limitation, fire and casualty, general liability, business interruption,
product liability, and sprinkler and water damage insurance policies. Such
insurance policies shall be from reputable insurance carriers, shall provide
full and adequate coverage for all normal risks incident to the PEO Business
and the properties and assets used thereby, and shall be in character and
amount at least equivalent to that carried by Persons engaged in similar
businesses and subject to the same or similar perils or hazards.
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Section 5.13 DISTRIBUTION AND OTHER AGREEMENTS.
(a) FEI and PIE agree that any distribution/agency agreements between
the PEO Business and Affiliates of PIE that are a part of the Excluded
Business shall be reduced to writing and entered into substantially in the
form of the Distribution Agreement attached as Annex 5.13(a) hereto. Section
5.13(a) of the Disclosure Schedule contains a complete list of all countries
where distribution agreements will need to be entered into with respect to
the Excluded Business.
(b) In any case where both the PEO Business and FEI are represented by
separate third party distributor/agents in the same country and it is
legally impossible to continue with those separate distributor/agents after
the Closing Date because of exclusivity obligations existing as of September
4, 1996 or a non-cancelable agreement is in place, FEI and PIE agree to work
out a practical solution prior to the Closing Date.
(c) Immediately after the date of this Agreement, FEI and PIE will
approach all of the customers and distributors/agents whose contracts will
be assigned to FEI and other third parties who are party to an agreement
with the PEO Business, and whom FEI and PIE deem it appropriate to so
approach, in order to, where applicable, secure their consent to assignment
of their agreements insofar as they relate to the PEO Business. Should one
or more of those customers, distributors, agents or other third parties
disagree with such assignment or should they continue to hold any company
belonging to the Philips Group liable for the performance of such
agreements, then FEI and PIE will enter into specific arrangements for each
particular case pursuant to which the performance of such agreements after
the Closing Date shall be for the risk and account of FEI.
(d) FEI and PIE agree that Affiliates of Philips shall enter into
agreements, on customary terms, with the PEO Group to provide for the
provision of services necessary to the PEO Business, whether previously
provided by such Affiliates to the PEO Business or otherwise deemed
necessary or desirable by each of the parties hereto ("TRANSITIONAL
SERVICES"). Section 5.13(d)(i) of the Disclosure Schedule sets forth a
representative list of the Transitional Services. FEI and PIE agree that
they shall enter into agreements substantially in the form attached as Annex
5.13(d) hereto prior to Closing for those Transitional Services listed in
Section 5.13(d)(i) of the Disclosure Schedule that FEI wishes to continue.
Section 5.14 SECONDARY OFFERING. FEI and PIE hereby agree that within
six months after the Closing FEI and PIE shall cooperate with the
shareholders of FEI listed in Annex 5.14 (the "SELLING SHAREHOLDERS") in
their sale to third parties of up to 1 million shares of Common Stock in
such a manner as will effectively result in such Selling Shareholders
receiving a reasonable price for the shares sold without undue market
discount. If, on the basis of information from or presentations by the
Selling Stockholders, the Board of Directors of FEI is satisfied that
registration under the Securities Act of the shares to be sold is necessary
or will meaningfully improve the marketability of the shares, FEI will use
all reasonable efforts to effect such registration in a timely manner. In
connection with any such secondary offering (i) the Selling Shareholders
shall pay their counsel fees and expenses and all underwriting commissions
and discounts for such secondary offering, (ii) the Selling Shareholders
(pro rata in proportion to the number of shares sold) and FEI shall split
equally any other out-of-pocket expenses of the secondary offering, (iii) no
more than two of FEI's officers shall be involved in any road show and
related preparations and each such officer need only participate in such
road show and related preparations for one week or less, and (iv) neither
FEI nor the Selling Shareholders shall request any form of indemnification
from FEI, PIE or any member of the Philips Group in connection with such
secondary offering.
Section 5.15 ACHT PROPERTY.
(a) Prior to Closing, FEI and PIE or, as appropriate, one of its
Affiliates, shall enter into a 10 year lease agreement with respect to the
Acht Property on terms (i) substantially equivalent to those reflected in
the general conditions of the model lease agreement approved by the Council
of Real
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Property of the real estate brokers association of The Netherlands or in any
other form agreed to by FEI and (ii) including the specific terms set forth
in Section 5.15(a) of the Disclosure Schedule.
(b) FEI and PIE hereby agree that prior to the Closing Date, FEI shall
have the right to conduct a Phase I environmental audit of the Acht Property
to update the most recent environmental survey concerning the Acht Property,
PROVIDED, HOWEVER, such environmental audit shall not include any soil
sampling or other invasive procedures.
(c) FEI and PIE hereby agree that subsequent to Closing PIE shall use
reasonable efforts to assist FEI to obtain in FEI's name, or the name of any
corporation in the PEO Group, any use permits required for the operation of
the PEO Business on the Acht Property.
Section 5.16 INTELLECTUAL PROPERTY. FEI and PIE hereby agree to enter
into, or to cause their respective Affiliates to enter into, the following
arrangements with respect to Intellectual Property:
(a) PATENTS. (i) In respect of patents and patent applications
owned or controlled by Philips, Philips shall grant, subject to all prior
commitments, including those set forth in Section 5.16(a)(i) of the
Disclosure Schedule, to FEI, PEO-US, PEO Holdings and their then
respective direct or indirect wholly owned Subsidiaries a paid-up,
royalty-free, non-exclusive, non-transferable right and license, for so
long as Philips shall Control FEI, to make, have made, use, sell or
otherwise dispose of any products now or hereafter manufactured by or for
FEI within the scope of the PEO Business or FEI's Business; PROVIDED,
HOWEVER, that the licenses granted in this Section 5.16(a)(i) to any
Subsidiaries of FEI shall terminate when such Subsidiary shall cease to
be a wholly owned Subsidiary of FEI.
(ii) Upon termination of Philips' Control of FEI, the patents
and patent applications owned and controlled by Philips and
originated from and having, within the Philips Group, their principal
commercial use in the PEO Business, which are set forth in Section
5.16(a)(ii) of the Disclosure Schedule, shall be transferred by or at
the direction of Philips to FEI at FEI's expense subject to (a) prior
commitments, and (b) ordinary patent and patent application
management from the date hereof to the date of such transfer (which
may include withdrawal, cancellation or modification of patents and
patent applications) and (c) the Philips Group retaining a free right
and license, including the right to sublicense not within the scope
of FEI's Business or the PEO Business, to make, have made, use, sell
or otherwise dispose of any products not in the scope of FEI's
Business or the PEO Business. Upon such termination, the Philips
Group will, subject to all prior commitments, also grant to FEI,
PEO-US, PEO Holdings and their then respective direct or indirect
wholly owned Subsidiaries, on commercially reasonable terms, a
non-exclusive non-transferable license without right to sublicense,
under all other patents owned or controlled by Philips to make, have
made, use, sell or otherwise dispose of any products manufactured at
the date of termination, or for which a serious development is going
on at the date of termination, by or for FEI or by or for the PEO
Group within the scope of FEI's Business or the PEO Business;
PROVIDED, HOWEVER, that the licenses granted in this Section
5.16(a)(ii) to any Subsidiaries of FEI shall terminate when such
Subsidiary shall cease to be a wholly owned Subsidiary of FEI.
(iii) Philips and PIE shall not make and shall cause their
Affiliates not to make any commitments nor take any other action
after the Closing Date that would prevent Philips from fully
performing the undertakings described in clause (ii) above insofar as
they relate to transfers or licensing of or under patents or patent
applications originated from and having within the Philips Group
their principal commercial use in the PEO Business.
(b) WORDMARKS AND TRADENAMES. (i) In respect of the wordmark
"Philips" and the Philips shield emblem, it is agreed between the parties
that for as long as Philips shall Control FEI, FEI
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shall be entitled to apply such wordmark and emblem on its products and
in any advertising of such products, but not in combination with any
other trademark. 60 days after FEI gains knowledge that Philips no longer
Controls or will Control FEI, FEI shall cease applying such wordmark and
emblem to any products and in any advertising and 120 days after FEI
gains knowledge that Philips no longer Controls or will Control FEI, FEI
shall not sell any products or distribute any advertising that utilizes
such wordmark and emblem; PROVIDED, HOWEVER, that if within 60 days after
FEI gains knowledge that Philips no longer Controls or will Control FEI,
FEI demonstrates to PIE that ceasing to sell any products and distribute
any advertising that utilize such wordmark and emblem within the 120 days
described above will cause significant financial detriment to FEI, then
FEI and PIE shall agree upon a reasonable extension of such 120 day
period taking into account such financial detriment and Philips'
corporate policy with respect to such wordmark and emblem. For these
purposes trademark license agreements shall be entered into at Closing
with FEI and each of the legal entities applying the trademarks to the
products. Should at any time Philips not Control the entity operating
under any such license, then such license agreement shall forthwith
terminate with respect to such entity.
(ii) Other trademarks and tradenames owned by Philips, insofar as
only used for products within the PEO Business, shall be transferred
to the PEO Group with the PEO Business, subject to prior commitments
listed on Section 5.16(b)(ii) of the Disclosure Schedule.
(c) KNOW-HOW. Subject to all prior commitments, which will not
materially affect the PEO Business as it is now conducted, the PEO Group
shall have full rights to all know-how generated within the PEO Business.
The PEO Group shall have the same rights as previously held by the PEO
Business with respect to all know-how generated by Philips or any of its
Affiliates under written contract expressly for the benefit of the PEO
Business. The Philips Group will also have the free right to continue to
use all such know-how for its purposes, to the extent such know-how is
available within the Philips Group at the Closing Date of the
Transaction. For know-how utilized within the PEO Business but generated
within other parts of the Philips Group, FEI shall be granted, subject to
all prior commitments, a paid up royalty free non-exclusive
non-transferable license to use such know-how within the scope of FEI's
Business and the PEO Business.
(d) SOFTWARE. In cases where the PEO Business uses software either
itself or as product to be distributed (whether or not embedded in such
product), and such software is owned or co-owned by any company within
the Philips Group, other than any company transferred to PEO Holdings as
part of the PEO Business, Philips will grant to FEI a license in order to
enable it to continue to use such software. The license will be paid-up
for the current use of the software in its current release to the extent
the PEO Business is not already paying a license fee (by way of royalty
or otherwise) for such use.
(e) CROSS LICENSING. After the Closing Date, FEI shall not be
required, without the approval of FEI's board of directors, to
participate in any specific cross licensing, pooling or other patent
sharing or licensing agreement or arrangement entered into by Philips
covering patents and patent applications generated in FEI's Business
before the Closing Date or by FEI thereafter which includes in the field
of use to which such agreement or arrangement relates FEI's Business or
the PEO Business; PROVIDED, HOWEVER, that FEI hereby agrees to
participate in broad scope cross license agreements, which are license
agreements that apply to several fields of activity of the parties
thereto, of which FEI's Business and the PEO Business are beneficiaries
without requiring that any field of use exclusion be included with
respect to FEI's Business and the PEO Business. FEI and PIE hereby agree
that FEI's patents and patent applications will be subject to the
existing cross licensing, pooling and other patent sharing or licensing
agreements or arrangements of Philips which by their terms would apply to
FEI and that in respect of all of its and PEO Group's patents and patent
applications FEI will on the Closing Date and thereafter grant to
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Philips a fully paid up, royalty free non-exclusive right and license,
with right to sublicense not within the scope of FEI's Business or the
PEO Business, to make, have made, use, sell or otherwise dispose of any
product not in the scope of FEI's Business or the PEO Business; PROVIDED,
HOWEVER, that with respect to broad scope license agreements of which
FEI's Business and the PEO Business are beneficiaries, Philips' right to
sublicense shall not be limited to fields of use outside the scope of
FEI's Business or the PEO Business.
(f) ZEISS CLAIM. FEI and PIE hereby agree that PIE shall not enter
into any agreement in respect of the Zeiss Claim that would prevent in
any material way FEI or any corporation in the PEO Group from engaging in
FEI's Business or the PEO Business.
Section 5.17 RIGHT TO MAINTAIN PERCENTAGE INTEREST. FEI and PIE hereby
agree that PIE shall have the right to maintain its percentage interest of
the voting securities of FEI in accordance with the terms of this Section
5.17. Until the first instance when Philips' ownership, whether direct or
indirect, of the outstanding voting securities of FEI drops below 40%,
whenever FEI offers, or has cumulatively offered since the last offer to PIE
pursuant to this Section 5.17, more than 0.5% of the then outstanding voting
securities to any Person, FEI shall also offer PIE a reasonable opportunity
to purchase from FEI at the then market price such number of such voting
securities as would enable Philips to maintain its percentage of FEI's
voting securities at up to 55% or such lower percentage as is calculated by
subtracting from 55 the product of (x) 100 and (y) the number determined by
dividing (a) the number of shares of FEI common stock sold by PIE subsequent
to the date hereof (less such number of shares of FEI common stock bought
subsequent to the date hereof other than pursuant to this Section 5.17) by
(b) the outstanding shares of FEI on the date of any sale of shares by FEI
that triggers Philips' right under this Section 5.17.
Section 5.18 ISSUANCE OF ADDITIONAL SHARES.
(a) FEI and PIE hereby agree that, subject to Section 5.18(b) below,
upon the issuance of any shares of Common Stock upon the exercise or
conversion of any Right Outstanding at Closing, FEI shall promptly issue to
PIE such additional shares of Common Stock (constituting Additional Shares)
such that the Shares constitute 55% of the Outstanding Common Stock.
(b) FEI and PIE agree that FEI shall not be obligated to issue
fractional shares of Common Stock pursuant to Section 5.18(a) above. Any
fractional shares of Common Stock required to be issued under Section
5.18(a), without regard to this Section 5.18(b), shall be added to all other
fractional shares of Common Stock previously not issued to PIE due to this
Section 5.18(b) until the sum of such fractional shares equals at least one
share of Common Stock, at which time such share of Common Stock shall be
issued to PIE.
Section 5.19 INDEPENDENT DIRECTORS. For a period ending two years
after the date of this Agreement, PIE shall, in any election of directors of
FEI, vote all shares of voting stock of FEI as to which PIE has voting
discretion so as to cause, to the extent possible, FEI's board of directors
to have not less than two directors who qualify as "Independent Directors"
as that term is defined by Section 6(a) of Part III to Schedule D of the
By-laws of the National Association of Securities Dealers, Inc. and PIE
hereby agrees that it shall, in the election of directors to occur at the
annual meeting of FEI shareholders in April 1997, vote all shares of voting
stock of FEI as to which PIE has voting discretion so as to cause, to the
extent possible, two persons who shall not be present or prior employees of
any Affiliate of Philips other than FEI to be elected directors of FEI.
Section 5.20 LIST OF PEO ASSETS. FEI and PIE hereby agree that prior
to Closing, PIE shall provide FEI with the asset ledgers of the PEO
Business, referred to by the PEO Business as the "MAVA lists", as of a date
no less recent than September 30, 1996.
Section 5.21 NOTICE OF DECONSOLIDATION. FEI and PIE hereby agree that
if PIE should ever cease to have the benefit of the financial guarantee
issued by Philips to PIE pursuant to Section 403 of
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Book 2 of the Dutch Civil Code, PIE shall promptly provide FEI notice of
such event and, if PIE ceases to have the benefit of such financial
guarantee within 18 months following the Closing Date, Philips shall take
such action to provide a substitute financial guarantee to the reasonable
satisfaction of FEI, including, without limitation, by assigning PIE's
obligations under this Agreement to an Affiliate of Philips that is a
beneficiary of such financial guarantee pursuant to Section 403 of Book 2.
Section 5.22 LIMITATION ON EQUITY POSITION. For one year following the
Closing, PIE agrees not to own, together with other members of the Philips
Group, more than 70% of the outstanding Common Stock, except with the
consent of FEI as approved by a majority of the directors of FEI who are not
affiliates of Philips, or as results from actions by FEI approved by such a
majority.
ARTICLE VI
CONDITIONS TO CLOSING
Section 6.1 CONDITIONS TO THE OBLIGATIONS OF FEI AND PIE. The obligations
of the parties hereto to effect the Closing are subject to the satisfaction (or
waiver) prior to the Closing of the following conditions:
(a) SHAREHOLDERS APPROVAL. At the Shareholders Meeting, the
shareholders of FEI shall have voted to approve and adopt this Agreement,
including the Transaction and the issuance of Shares contemplated hereby and
to approve an increase in the number of shares of Common Stock authorized
for issuance from 15 million to 21.5 million;
(b) HSR AND OTHER ANTITRUST LAWS. All required filings under the HSR
Act and other applicable Competition Laws shall have been made, all
necessary approvals have been obtained and any required waiting period under
the laws applicable to the transactions contemplated hereby shall have
expired or been earlier terminated. In the case of each country or territory
(including, for this purpose the Member States of the European Union) in
which FEI or any of its Affiliates or PIE or any of its Affiliates carries
on business and in which the implementation of the transactions contemplated
by this Agreement will or might give rise to any investigation or other
proceeding under the Competition Laws of that country or territory, neither
this Agreement nor any of the material transactions contemplated hereby nor
any actual or potential consequences thereof shall have been referred to any
Governmental Entity having jurisdiction under the Competition Laws of that
country or territory for investigation or review pursuant to those
Competition Laws and no proceedings with respect thereto shall have been
initiated before any such Governmental Entity and be continuing;
(c) NO INJUNCTIONS. There shall not (i) be in effect any statute,
regulation, order, decree or judgment of any Governmental Entity which makes
illegal or which enjoins, prevents in any material respect or imposes any
burdensome condition or restriction as a consequence of the consummation of
the transactions contemplated by this Agreement or (ii) have been commenced
or threatened in writing, and shall be continuing, any action or proceeding
by any Governmental Entity which seeks to prevent, enjoin in any material
respect or imposes any burdensome condition or restriction as a consequence
of the transactions contemplated by this Agreement;
(d) CONSENTS AND APPROVALS. All Required Approvals shall have been
made or obtained and shall not have expired or been rescinded;
(e) WORKERS COUNCIL. All required employee consultation procedures
shall have been pursued to the extent that they can no longer lead to a
substantial change or delay in the transactions contemplated hereby;
(f) NASDAQ LISTING. The Shares shall have been approved for quotation
on the NASDAQ National Market System; and
(g) AGREEMENTS. Agreements covering the Transitional Services listed
in Section 5.13(d)(i) of the Disclosure Schedule that FEI wishes to continue
shall have been executed and delivered by the parties thereto.
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Section 6.2 CONDITIONS TO THE OBLIGATIONS OF PIE. The obligation of PIE to
effect the Closing is subject to the satisfaction (or waiver by PIE) prior to
the Closing, of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of FEI contained herein that is qualified by materiality shall be
true and correct, and each of the representations and warranties of FEI that
is not so qualified shall be true and correct in all material respects, in
each case as if made as of the Closing (except that representations and
warranties that are made as of a specific date need be true or true in all
material respects, as the case may be, only as of such date), and PIE shall
have received a certificate to such effect dated the Closing Date and
executed by a duly authorized officer of FEI;
(b) COVENANTS. The covenants and agreements of FEI to be performed on
or prior to the Closing shall have been duly performed in all material
respects, and PIE shall have received a certificate to such effect dated the
Closing Date and executed by a duly authorized officer of FEI;
(c) LEGAL OPINIONS. PIE shall have received the opinion of Stoel Rives
L.L.P., dated as of the Closing Date, addressed to PIE substantially to the
effect set forth in Annex 6.2(c) hereto;
(d) NO MATERIAL ADVERSE EFFECT. Since December 31, 1995, FEI shall not
have suffered an FEI Material Adverse Effect and PIE shall have received a
certificate to such effect dated the Closing Date and executed by a duly
authorized officer of FEI;
(e) DULY EXECUTED PROXY AND REQUIRED APPROVAL. FEI shall have duly
obtained the necessary shareholder approval under the relevant Laws;
(f) FEI'S BOARD OF DIRECTORS AND OFFICERS. FEI shall have taken such
actions so that upon Closing, FEI's board of directors shall be composed of
the nine persons listed on Annex 6.2(f)(i) and the officer positions at FEI
shall be held by the persons listed opposite such positions on Annex
6.2(f)(ii); and
(g) RECEIPT OF SHARES. PIE shall have received from FEI a certificate
evidencing the Definite Shares.
Section 6.3 CONDITIONS TO THE OBLIGATIONS OF FEI. The obligation of FEI to
effect the Closing is subject to the satisfaction (or waiver) prior to the
Closing of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of PIE contained herein that is qualified by materiality shall be
true and correct, and each of the representations and warranties of PIE that
is not so qualified shall be true and correct in all material respects, in
each case as if made as of the Closing (except that representations and
warranties that are made as of a specific date need be true or true in all
material respects, as the case may be, only as of such date), and FEI shall
have received a certificate to such effect dated the Closing Date and
executed by a duly authorized officer of PIE;
(b) COVENANTS. The covenants and agreements of PIE to be performed on
or prior to the Closing shall have been duly performed in all material
respects, and FEI shall have received a certificate to such effect dated the
Closing Date and executed by a duly authorized officer of PIE;
(c) LEGAL OPINIONS. FEI shall have received the opinion, dated as of
the Closing Date, of each of a member of the law department of Philips and,
as to the binding and enforceable nature of this Agreement, of Sullivan &
Cromwell, addressed to FEI substantially to the effect set forth in Annex
6.3(c) hereto;
(d) NO MATERIAL ADVERSE EFFECT. Since December 31, 1995, the PEO
Business shall not have suffered a PEO Material Adverse Effect and FEI shall
have received a certificate to such effect dated the Closing Date and
executed by a duly authorized officer of PIE;
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(e) EMPLOYMENT AGREEMENTS. Employment agreements in substantially the
form attached hereto as Annex 6.3(e) shall have been entered into with up to
seven key employees and management representatives of FEI;
(f) CASH CONTRIBUTION TO THE PEO ASSETS. The PEO Assets shall include
a total of $8,000,000 in cash; and
(g) PEO STOCK. FEI shall have received from PIE or its Affiliates the
conveyance of all right, title and interest in and to the PEO Stock by the
due execution of a notarial deed of transfer in accordance with Netherlands
law and shall have received the PEO-US Certificates.
ARTICLE VII
SURVIVAL; INDEMNIFICATION
Section 7.1 SURVIVAL. All of the representations and warranties of FEI and
PIE contained in this Agreement and all claims and causes of action with respect
thereto shall survive the Closing and shall terminate upon expiration of 18
months after the Closing Date, except that (i) the representations and
warranties of FEI and PIE contained in sections 3.10 and 4.10 of this Agreement
and all claims and causes of action with respect thereto shall survive the
Closing and terminate upon the expiration of five years after the Closing Date
and (ii) the representations and warranties of FEI and PIE contained in sections
3.14 and 4.14 of this Agreement and all claims and causes of action with respect
thereto shall survive the Closing and terminate upon the expiration of the
applicable statute of limitations, including any extensions or waivers thereof.
Section 7.2 INDEMNIFICATION BY PIE.
(a) PIE and Philips (only to the extent it expressly makes any
representations and warranties or covenants) hereby agrees that it shall
indemnify, defend and hold harmless FEI, its Affiliates, and, if applicable,
their respective directors, officers, shareholders, partners, attorneys,
accountants, agents and employees and their heirs, successors and assigns (the
"FEI INDEMNIFIED PARTIES") from, against and in respect of any damages, claims,
losses, charges, actions, suits, Proceedings, deficiencies, Taxes, interest,
penalties, and reasonable costs and expenses (including without limitation
reasonable attorneys' fees, removal costs, remediation costs, closure costs,
fines, penalties and expenses of investigation and ongoing monitoring)
(collectively, the "LOSSES") imposed on, sustained, incurred or suffered by or
asserted against any of FEI Indemnified Parties, directly or indirectly relating
to or arising out of (i) subject to Section 7.2(b), any breach of any
representation or warranty made by PIE or Philips contained in this Agreement
and (ii) the breach of any covenant or agreement of PIE or Philips contained in
this Agreement.
(b) Except for any Losses with regard to the Excluded Business, PIE and
Philips shall not be liable to FEI Indemnified Parties for any Losses with
respect to the matters contained in Section 7.2(a)(i) except to the extent (and
then only to the extent) the Losses therefrom exceed $1 million.
Section 7.3 INDEMNIFICATION BY FEI.
(a) FEI hereby agrees that it shall indemnify, defend and hold harmless PIE,
its Affiliates and, if applicable, their respective directors, officers,
shareholders, partners, attorneys, accountants, agents and employees and their
heirs, successors and assigns (the "PIE INDEMNIFIED PARTIES" and, collectively
with FEI Indemnified Parties, the "INDEMNIFIED PARTIES") from, against and in
respect of any Losses imposed on, sustained, incurred or suffered by or asserted
against any of the PIE Indemnified Parties, directly or indirectly relating to
or arising out of (i) subject to Section 7.3(b), any breach of any
representation or warranty made by FEI contained in this Agreement and (ii) the
breach of any covenant or agreement of FEI contained in this Agreement.
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(b) FEI shall not be liable to the PIE Indemnified Parties for any Losses
with respect to the matters contained in Section 7.3(a)(i) except to the extent
(and then only to the extent) the Losses therefrom exceed $1 million.
Section 7.4 INDEMNIFICATION PROCEDURES. With respect to third party
claims, all claims for indemnification by any Indemnified Party hereunder shall
be asserted and resolved as set forth in this Section 7.4. In the event that any
claim or demand ("CLAIM") for which FEI, PIE or Philips as the case may be (each
an "INDEMNIFYING PARTY"), may be liable to any Indemnified Party hereunder is
asserted against or sought to be collected from any Indemnified Party by a third
party, such Indemnified Party shall promptly, but in no event more than 30 days
following such Indemnified Party's receipt of written notice of such Claim,
notify the Indemnifying Party in writing of such Claim and the amount or the
estimated amount thereof to the extent then feasible (which estimate shall not
be conclusive of the final amount of such Claim) (the "CLAIM NOTICE"). The
failure on the part of the Indemnified Party to give any such Claim Notice
within such 30 day period shall not relieve the Indemnifying Party of any
indemnification obligation hereunder unless, and only to the extent that, the
Indemnifying Party is materially prejudiced thereby. The Indemnifying Party
shall have 60 days from the personal delivery or mailing of the Claim Notice
(the "NOTICE PERIOD") to notify the Indemnified Party (a) whether or not the
Indemnifying Party disputes the liability of the Indemnifying Party to the
Indemnified Party hereunder with respect to such Claim and (b) whether or not it
desires to defend the Indemnified Party against such Claim. Except as
hereinafter provided, in the event that the Indemnifying Party notifies the
Indemnified Party within the Notice Period that it desires to defend the
Indemnified Party against such Claim, the Indemnifying Party shall, at its sole
cost and expense, have the right to defend the Indemnified Party by appropriate
proceedings and shall have the sole power to direct and control such defense;
provided, that the Indemnifying Party shall not take any action which would
result in the creation, and shall promptly seek the removal, of any Encumbrance
on the property or assets of the Indemnified Party resulting from such Claim or
the litigation thereof. If any Indemnified Party desires to participate in any
such defense it may do so at its sole cost and expense. The Indemnified Party
shall not settle a Claim for which it is indemnified by the Indemnifying Party
without the written consent of the Indemnifying Party unless the Indemnifying
Party elects not to defend the Indemnified Party against such Claim. The
Indemnifying Party may, with the consent of the Indemnified Party (which consent
shall not be unreasonably withheld), settle or compromise any action or consent
to the entry of any judgment which (i) includes as a term thereof the delivery
by the claimant or plaintiff to the Indemnified Party of a duly executed written
unconditional release of the Indemnified Party from all liability in respect of
such action, which release shall be reasonably satisfactory in form and
substance to counsel for the Indemnified Party and (ii) would not adversely
affect the right of the Indemnified Party and its Affiliates to own, hold and
use their respective assets or operate businesses. Notwithstanding the
foregoing, (i) the Indemnified Party shall have the sole right to defend, settle
or compromise any Claim with respect to which it has waived its right to
indemnification pursuant to this Agreement and (ii) the Indemnified Party,
during the period the Indemnifying Party is determining whether to elect to
assume the defense of a matter covered by this section, may take such reasonable
actions as it deems necessary to preserve any and all rights with respect to the
matter, without such actions being construed as a waiver of the Indemnified
Party's rights to defense and indemnification pursuant to this Agreement. If the
Indemnifying Party elects not to defend the Indemnified Party against such
Claim, whether by not giving the Indemnified Party timely notice as provided
above or otherwise, then the amount of any such Claim, or, if the same be
contested by the Indemnified Party, then that portion thereof as to which such
defense is unsuccessful (and the reasonable costs and expenses pertaining to
such defense) shall be the liability of the Indemnifying Party hereunder,
subject to the limitations set forth in Section 7.2(b) or 7.3(b) hereof. To the
extent the Indemnifying Party shall direct, control or participate in the
defense or settlement of any third party claim or demand, the Indemnified Party
will give the Indemnifying Party and its counsel access to, during normal
business hours, the relevant business records and other documents, and shall
permit them to consult with the employees and counsel of the Indemnified Party.
The Indemnified Party shall use its reasonable efforts in the defense of all
such claims.
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Section 7.5 INDEMNIFICATION NET OF TAXES.
(a) If the Indemnified Party realizes during any year a reduction in Taxes
which is attributable to any Loss having occurred and the Indemnified Party
shall have been indemnified for such Loss, the Indemnified Party shall pay to
the Indemnifying Party the actual amount of such aggregate reduction in Taxes.
Any payment due to the Indemnifying Party pursuant to this Section 7.5(a) shall
be paid within 30 days after the earlier of the filing of any tax return or the
making of any tax payment reflecting the utilization by the Indemnified Party of
a tax deduction or other tax benefit attributable to any Loss.
(b) The amount of each Loss being indemnified for shall be increased by any
net Tax costs actually incurred by the Indemnified Party as a result of the
receipt of such amount, so that the Indemnifying Party shall pay to the
Indemnified Party, in addition to the amounts due with respect to such Loss, (i)
an amount equal to the net Taxes payable by the Indemnified Party as a
consequence of the receipt or accrual of the amount payable pursuant to Section
7.2 or 7.3 and (ii) an amount that reflects the net Tax consequences of the
receipt of the amount payable under Section 7.5(b)(i) and 7.5(b)(ii).
ARTICLE VIII
TERMINATION
Section 8.1 TERMINATION. This Agreement may be terminated at any time
prior to the Closing:
(a) by agreement of FEI and PIE;
(b) by either FEI or PIE, by giving written notice of such termination to
the other party, if Closing shall not have occurred on or prior to March 31,
1997 (unless the failure to consummate the Closing by such date shall be due to
the failure of the party seeking to terminate this Agreement to have fulfilled
any of its obligations under this Agreement);
(c) by either FEI or PIE in writing, if there shall have occurred any
failure of any condition precedent to the obligations of the terminating party
and such failure is either not capable of being cured prior to the Closing or if
such failure is capable of being cured, is not cured within a reasonable amount
of time; PROVIDED, HOWEVER, that the right to terminate this Agreement pursuant
to this Section 8.1(c) shall not be available to any party that has failed to
fully comply with its obligations hereunder in any manner that shall have
proximately caused such failure to satisfy any condition precedent;
(d) by PIE if FEI has materially breached any representation, warranty,
covenant or agreement contained in this Agreement and such breach is either not
capable of being cured prior to the Closing or if such breach is capable of
being cured, is not so cured within a reasonable amount of time; PROVIDED,
HOWEVER, that termination pursuant to this Section 8.1(d) shall not relieve FEI
of liability for such breach or otherwise;
(e) by FEI if PIE or Philips has materially breached any representation,
warranty, covenant or agreement made by it in this Agreement and such breach is
either not capable of being cured prior to the Closing or if such breach is
capable of being cured, is not so cured within a reasonable amount of time;
PROVIDED, HOWEVER, that termination pursuant to this Section 8.1(e) shall not
relieve PIE or Philips of liability for such breach or otherwise;
(f) by PIE if FEI's Common Stock is no longer quoted on the NASDAQ National
Market System;
(g) (i) by FEI or PIE if the board of directors of FEI shall have
recommended to the shareholders of FEI, or agreed to enter into, a Superior
Proposal or (ii) by FEI or PIE if the board of management of PIE shall have
agreed to enter into a Superior Proposal;
(h) by FEI or PIE if the other party or any of the other Persons described
in Section 5.2 as affiliates, representatives or agents of the other party shall
take any of the actions that would be proscribed by Section 5.2 but for the
proviso therein allowing certain actions to be taken pursuant to clause (B), (C)
or (D) of the proviso under the conditions set forth therein.
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(i) by PIE if the board of directors of FEI shall have withdrawn or
adversely modified its approval or recommendation of this Agreement or failed to
reconfirm its recommendation of this Agreement within five business days after a
written request by PIE to do so.
Section 8.2 EFFECT OF TERMINATION.
(a) Except as set forth in paragraph (b) below, in the event of the
termination of this Agreement in accordance with Section 8.1 hereof, this
Agreement shall thereafter become void and have no effect, and no party hereto
shall have any liability to the other party hereto or their respective
Affiliates, directors, officers or employees, except for the obligations of the
parties hereto contained in this Section 8.2 and in Sections 9.1, 9.7, 9.8, 9.9
and 9.11 hereof, the obligations contained in the Confidentiality Agreement and
except that nothing herein will relieve any party from liability for any breach
of this Agreement prior to such termination.
(b) In the event this Agreement is terminated by FEI or PIE pursuant to
Section 8.1(g)(i), FEI shall promptly pay to PIE all of the expenses of the
Philips Group incurred in connection with this Agreement, the Transaction, the
Restructuring (other than the contemplated sale and leaseback expenses
associated with the Acht Property) and any other transactions contemplated by
this Agreement. In the event this Agreement is terminated by FEI or PIE pursuant
to Section 8.1(g)(ii), PIE shall promptly pay to FEI all of the expenses of FEI
incurred in connection with this Agreement, the Transaction and any other
transactions contemplated by this Agreement.
ARTICLE IX
MISCELLANEOUS
Section 9.1 NOTICES. All notices or other communications hereunder shall
be deemed to have been duly given and made if in writing and if served by
personal delivery upon the party for whom it is intended, if delivered by
registered or certified mail, return receipt requested, or by a national courier
service, or if sent by telecopier, PROVIDED that the telecopy is promptly
confirmed by telephone confirmation thereof, to the person at the address set
forth below, or such other address as may be designated in writing hereafter, in
the same manner, by such person:
To PIE:
PHILIPS INTERNATIONAL B.V.
Building VP-1, P.O. Box 218
5600 MD Eindhoven
The Netherlands
Telephone: 31-40-2784375
Telecopy: 31-40-2784357
Attn: Guido Dierick
With a copy to:
SULLIVAN & CROMWELL
125 Broad Street
New York, New York 10004
Telephone: 212-558-3706
Telecopy: 212-558-3359
Attn: W. Loeber Landau
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To FEI:
FEI COMPANY
7451 N.E. Evergreen Parkway
Hillsboro, Oregon 97124-5830
Telephone: 503-640-7500
Telecopy: 503-540-7509
Attn: Chief Executive Officer
With a copy to:
STOEL RIVES LLP
900 S.W. Fifth Avenue, Suite 2300
Portland, Oregon 97204-1268
Telephone: 503-224-3380
Telecopy: 503-220-2480
Attn: Stephen E. Babson
Section 9.2 AMENDMENT; WAIVER. Any provision of this Agreement may be
amended or waived if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by FEI and PIE, or in the case of a waiver,
by the party against whom the waiver is to be effective. No failure or delay by
any party in exercising any right, power or privilege hereunder shall operate as
a waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein provided shall be cumulative and,
except as otherwise provided herein, shall not be exclusive of any rights or
remedies provided by law.
Section 9.3 ASSIGNMENT. (a) No party to this Agreement may assign any of
its rights or obligations under this Agreement without the prior written consent
of the other party hereto but PIE may assign all or any portion of its rights
and obligations pursuant to this Agreement to any other Person in the Philips
Group; PROVIDED, HOWEVER, that from the date hereof until 18 months after the
Closing Date PIE shall not assign its rights and obligations hereunder to any
Person within the Philips Group that does not have a financial guarantee by
Philips pursuant to Netherlands law.
Section 9.4 ENTIRE AGREEMENT. This Agreement (including the Disclosure
Schedule and all Annexes hereto) contains the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral or written, with respect to such
matters, including the Letter of Intent, but excepting the Confidentiality
Agreement which will remain in full force and effect for the term provided for
therein and other than any written agreement of the parties that expressly
provides that it is not superseded by this Agreement.
Section 9.5 FULFILLMENT OF OBLIGATIONS. Any obligation of any party to any
other party under this Agreement, which obligation is performed, satisfied or
fulfilled by an Affiliate of such party, shall be deemed to have been performed,
satisfied or fulfilled by such party.
Section 9.6 PARTIES IN INTEREST. This Agreement shall inure to the benefit
of and be binding upon the parties hereto and their respective successors and
permitted assigns. Nothing in this Agreement, express or implied, is intended to
confer upon any Person other than Philips, PIE, FEI, or their successors or
permitted assigns, any rights or remedies under or by reason of this Agreement.
Section 9.7 PUBLIC DISCLOSURE. Notwithstanding anything herein to the
contrary, each of the parties to this Agreement hereby agrees with the other
party hereto that, except as may be required to comply with the requirements of
any applicable Laws, and the rules and regulations of each stock exchange or
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interdealer quotation system upon which the securities of one of the parties or
an Affiliate thereof is listed or quoted, no press release or similar public
announcement or communication shall, if prior to the Closing, be made or caused
to be made concerning the execution or performance of this Agreement unless the
parties shall have consulted in advance with respect thereto.
Section 9.8 EXPENSES. Except as otherwise expressly provided in this
Agreement, whether or not the transactions contemplated by this Agreement are
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby by FEI and its Subsidiaries and by PIE
and its Affiliates and Subsidiaries shall be borne by FEI and PIE, respectively.
Section 9.9 DISCLOSURE SCHEDULES. The disclosure of any matter in the
Disclosure Schedule, including any FEI Reports incorporated by reference
therein, pursuant to this Agreement shall be deemed to be a disclosure for all
purposes of this Agreement to which such matter could reasonably be expected to
be pertinent, but shall expressly not be deemed to constitute an admission by
FEI or PIE, or to otherwise imply, that any such matter is material for the
purposes of this Agreement.
Section 9.10 GOVERNING LAW; MEDIATION AND ARBITRATION.
(a) The Agreement shall be governed by the laws of the state of New York,
without giving effect to principles of conflicts of laws thereof.
(b) If a dispute arises out or relates to this contract, or the breach
thereof, and if that dispute cannot be settled through direct discussions, the
parties agree to first endeavor to settle the dispute in an amicable manner by
mediation administered by the American Arbitration Association under its
Commercial Mediation Rules, before resorting to arbitration. Thereafter, any
unresolved controversy or claim arising out of or relating to this contract, or
breach thereof, shall be settled by arbitration administered by the American
Arbitration Association in accordance with its International Arbitration Rules
and Title 9 of the U.S. Code and Philips hereby consents to the jurisdiction of
such arbitration to the extent required. Judgment on the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
(c) The number of arbitrators shall be three, one of whom shall be appointed
by each of Philips and FEI and the third of whom shall be selected by mutual
agreement, if possible, within 30 days of the selection of the second arbitrator
and thereafter by the administering authority and the place of arbitration shall
be New York, New York. The language of the arbitration shall be English, but
documents or testimony may be submitted in Dutch if a translation is provided.
(d) The arbitrators will have no authority to award punitive damages or any
other damages not measured by the prevailing party's actual damages, and may
not, in any event, make any ruling, finding or award that does not conform to
the terms and conditions of the Agreement.
(e) Either party may make an application to the arbitrators seeking
injunctive relief to maintain the status quo until such time as the arbitration
award is rendered or the controversy is otherwise resolved. Either party may
apply to any court having jurisdiction hereof and seek injunctive relief in
order to maintain the status quo until such time as the arbitration award is
rendered or the controversy is otherwise resolved.
Section 9.11 COUNTERPARTS. This Agreement may be executed by the parties
on separate counterparts which, when taken together with counterparts signed by
each of the other parties, shall constitute a single fully executed Agreement
which shall be as fully binding and effective as if each party had executed a
single signature page.
Section 9.12 HEADINGS. The heading references herein and the table of
contents hereto are for convenience purposes only, do not constitute a part of
this Agreement and shall not be deemed to limit or affect any of the provisions
hereof.
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IN WITNESS WHEREOF, the parties have executed or caused this Agreement to be
executed as of the date first written above.
<TABLE>
<S> <C> <C>
PHILIPS INDUSTRIAL ELECTRONICS
INTERNATIONAL B.V.
By: /s/ ALFRED B. BOK
------------------------------------------
Name: Alfred B. Bok
Title:
By: /s/ THEO SONNEMANNS
------------------------------------------
Name: Theo Sonnemanns
Title:
FEI COMPANY
By: /s/ WILLIAM G. LANGLEY
------------------------------------------
Name: William G. Langley
Title:
For purposes of Sections 4.1, 4.2, 4.3,
4.6(d)(ii), 4.15, 5.8(b), 5.8(c), 5.9(a),
5.13(a), 5.13(d), 5.16, 7.2 and 9.10 only:
PHILIPS ELECTRONICS N.V.
By: /s/ ARIE WESTERLAKEN
------------------------------------------
Name: Arie Westerlaken
Title:
</TABLE>
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ANNEX 3.19(B)
FORM OF VOTING AGREEMENT
FORM OF
SHAREHOLDER VOTING AGREEMENT
THIS SHAREHOLDER VOTING AGREEMENT (the "Agreement") is entered into as of
November , 1996, between the undersigned , a
shareholder (the "Shareholder") of FEI Company, an Oregon corporation (the
"Company"), and PHILIPS INDUSTRIAL ELECTRONICS INTERNATIONAL B.V., a Netherlands
corporation ("PIE").
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, PIE and the Company are entering into a Combination Agreement, dated
as of the date hereof (the "Combination Agreement"), by which PIE will acquire
common stock (the "COMMON STOCK") of FEI, constituting 55% of the Outstanding
Common Stock (as defined in the Combination Agreement), upon the terms and
conditions set forth therein;
WHEREAS, the Shareholder desires that PIE transfer to FEI in payment for
such Common Stock 100% of the issued and outstanding capital stock of PEO
Holdings (as defined in the Combination Agreement) and PEO-US (as defined in the
Combination Agreement) (the issuance of the Common Stock to PIE and the transfer
of such outstanding capital stock to FEI being referred to herein collectively
as the "Transaction");
NOW, THEREFORE, for good and valuable consideration, the receipt,
sufficiency and adequacy of which is hereby acknowledged, the parties hereto
agree as follows:
1. REPRESENTATIONS OF SHAREHOLDERS. The Shareholder represents that he
(a) is the holder of [ ] shares of the Common Stock (the
Shareholder's "Shares"), (b) does not beneficially own (as such term is
defined in the Securities Exchange Act of 1934, as amended (the "1934 Act"))
any shares of the Common Stock other than his Shares, but excluding any
shares of the Common Stock which he has the right to obtain upon the
exercise of stock options outstanding on the date hereof, and (c) has full
power and authority to make, enter into and carry out the terms of this
Agreement.
2. AGREEMENT TO VOTE SHARES. The Shareholder agrees to vote his Shares
and any New Shares (as defined in Section 6 hereof), and shall cause any
holder of record of his Shares or New Shares to vote (a) to approve and
adopt the Combination Agreement, including the issuance of Shares by the
Company contemplated thereby, and to approve an amendment to the Second
Amended and Restated Articles of Incorporation to increase in the number of
shares of Common Stock authorized for issuance from 15 million to
million and (b) against any proposal that would compete with or serve to
interfere or inhibit the timely consummation of the Transaction. The
Shareholder agrees to deliver to Lynwood W. Swanson, Chairman of the Board
and Chief Executive Officer of the Company, immediately upon request
therefor a proxy substantially in the form attached hereto as Exhibit A,
which proxy shall be irrevocable to the extent permitted by law, with the
total number of his Shares and any New Shares correctly indicated thereon.
3. NO VOTING TRUSTS. After the date hereof, the Shareholder agrees
that he will not, nor will he permit any entity under his control to,
deposit any of his Shares in a voting trust or subject any of his Shares to
any arrangement with respect to the voting of such Shares other than
agreements entered into with PIE.
4. NO PROXY SOLICITATIONS. The Shareholder agrees that he will not,
nor will he permit any entity under his control to, (a) solicit proxies or
become a "participant" in a "solicitation" (as such terms are defined in
Regulation 14A under the 1934 Act) in opposition to or competition with the
consummation of the Transaction or otherwise encourage or assist any party
in taking or planning any action which would compete with or otherwise serve
to interfere with or inhibit the timely consummation of the Transaction in
accordance with the terms of the Combination Agreement, (b) directly or
indirectly encourage, initiate or cooperate in a shareholders' vote or
action by consent of the Company's
<PAGE>
shareholders in opposition to or in competition with the consummation of the
Transaction, or (c) become a member of a "group" (as such term is used in
Section 13(d) of the 1934 Act) with respect to any voting securities of the
Company for the purpose of opposing or competing with the consummation of
the Transaction.
5. TRANSFER AND ENCUMBRANCE. Except for gifts given without
consideration where the recipient thereof agrees to execute a voting
agreement in form and substance similar to this Agreement, on or after the
date hereof, the Shareholder agrees not to voluntarily transfer, sell,
offer, pledge or otherwise dispose of or encumber any of his Shares or New
Shares prior to the earlier of (a) the effective date of the Transaction or
(b) the date this Agreement shall be terminated in accordance with its
terms; PROVIDED, HOWEVER, that the Shareholder shall have the right to
transfer his Shares to charitable organizations meeting the requirements of
Section 501(c)(3) of the Internal Revenue Code of 1986 without obtaining a
voting agreement from such charitable organization.
6. ADDITIONAL PURCHASES. The Shareholder agrees that he will not
purchase or otherwise acquire beneficial ownership of any shares of the
Common Stock after the execution of this Agreement ("New Shares"), nor will
he voluntarily acquire the right to vote or share in the voting of any
shares of the Common Stock other than the Shares, unless he agrees to
deliver to PIE immediately after such purchase or acquisition an irrevocable
proxy substantially in the form attached hereto as Exhibit A with respect to
such New Shares. The Shareholder also agrees that any New Shares acquired or
purchased by him shall be subject to the terms of this Agreement to the same
extent as if they constituted Shares.
7. SPECIFIC PERFORMANCE. Each party hereto severally acknowledges that
it will be impossible to measure in money the damage to the other party if a
party hereto fails to comply with any of the obligations imposed by this
Agreement, that every such obligation is material and that, in the event of
any such failure, the other party will not have an adequate remedy at law or
damages. Accordingly, each party hereto severally agrees that injunctive
relief or other equitable remedy, in addition to remedies at law or damages,
is the appropriate remedy for any such failure and will not oppose the
granting of such relief on the basis that the other party has an adequate
remedy at law. Each party hereto severally agrees that it will not seek, and
agrees to waive any requirement for, the securing or posting of a bond in
connection with any other party's seeking or obtaining such equitable
relief.
8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors
and assigns and shall not be assignable without the written consent of all
other parties hereto.
9. ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties hereto with respect to the subject matter hereof, and
this Agreement supersedes all prior agreements, written or oral, between the
parties hereto with respect to the subject matter hereof. This Agreement may
not be amended, supplemented or modified, and no provisions hereof may be
modified or waived, except by an instrument in writing signed by all the
parties hereto. No waiver of any provisions hereof by any party shall be
deemed a waiver of any other provisions hereof by any such party, nor shall
any such waiver be deemed a continuing waiver of any provision hereof by
such party.
10. MISCELLANEOUS.
(a) This Agreement shall be deemed a contract made under, and for all
purposes shall be construed in accordance with, the laws of the State of New
York.
(b) If any provision of this Agreement or the application of such
provision to any person or circumstances shall be held invalid by a court of
competent jurisdiction, the remainder of the provision held invalid and the
application of such provision to persons or circumstances, other than the
party as to which it is held invalid, shall not be affected.
2
<PAGE>
(c) This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
(d) This Agreement shall terminate upon the earliest to occur of (i) the
consummation of the Transaction or (ii) termination of the Combination
Agreement.
(e) All Section headings herein are for convenience of reference only
and are not part of this Agreement, and no construction or reference shall
be derived therefrom.
(f) The obligations of the Shareholder set forth in this Agreement shall
not be effective or binding upon him until after such time as the
Combination Agreement is executed and delivered by the Company and PIE. The
parties agree that there is not and has not been any other agreement,
arrangement or understanding between the parties hereto with respect to the
matters set forth herein.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
PHILIPS INDUSTRIAL ELECTRONICS
INTERNATIONAL B.V.
By:
------------------------------------------
Name:
Title:
SHAREHOLDER:
By:
------------------------------------------
Name:
3
<PAGE>
ANNEX 5.13(A)
FORM OF DISTRIBUTION AGREEMENT
FORM OF
DISTRIBUTION AGREEMENT
This Agreement is entered into as of , 1996 by and between:
PHILIPS , a corporation with
offices at , hereinafter referred to as "Distributor";
and
PHILIPS ELECTRON OPTICS B.V., a Netherlands corporation, having its office
in , , hereinafter referred to
as "PEO",
WHEREAS FEI Company ("FEI") and Philips Industrial Electronics International
B.V. have entered into an agreement for the transfer of such number of newly
issued shares of FEI as will constitute, when issued, 55% of the stock of FEI in
exchange for 100% of the stock of each of Philips Electron Optics International
B.V. and Philips Electron Optics, Inc. (referred to as the "Combination
Agreement");
WHEREAS, in connection with said transfer, Distributor is willing and able
to distribute or intermediate to enable PEO to distribute the PEO products as
defined hereinafter, all as of January 1, 1997; and
WHEREAS, PEO desires to appoint Distributor as its exclusive distributor and
sales intermediary subject to the conditions set out below,
NOW, THEREFORE, the parties hereto agree as follows:
1. PEO hereby appoints Distributor as its exclusive distributor and
sales intermediary for the products and territory defined hereinafter and
Distributor hereby accepts said appointment, and hereby agrees that
Distributor shall act exclusively for PEO in respect of the Products to the
exclusion of any products that compete therewith, all subject to the terms
and conditions set out below.
The territory in respect of which the Distributor will act as PEO's
exclusive distributor and, as the case may be, PEO's sales intermediary is
(hereinafter referred to as the "Territory").
2. The products in respect of which Distributor will act are those
products and related materials and spare parts made available by PEO for
marketing in the Territory under the trademark "Philips", "FEI" and/or
possibly other trademarks, as specified in Annex I hereto (hereinafter
referred to as "the Products").
The product range of ANNEX I may be altered or extended by mutual
agreement between the parties, it being understood that PEO shall be
entitled to withdraw products in the event of the discontinuation of their
manufacture or their marketing in the Territory. Distributor will be
informed, at the latest, 6 months prior to the withdrawal of any products.
PEO and Distributor hereby agree that Distributor shall, if requested, meet
with FEI, for the purposes of discussing the terms of a mutually agreeable
distribution agreement for FEI's products.
3. Distributor will buy and sell the Products for its own account and
its own risk in accordance with the orders placed by Distributor and
accepted by PEO. PEO shall supply the Products to Distributor at prices and
conditions, determined in accordance with Annex II, it being understood that
PEO's General Conditions of Sale and Software License as attached hereto
(ANNEX III) will be applicable to such supplies.
In lieu of article 11 or the General Conditions of Sale and Software
License, PEO shall supply the Products without any installation and warranty
obligation while Distributor shall provide reasonable installation and
warranty conditions to its customers in accordance with customary practice
in the Territory.
<PAGE>
Such Products will be resold by Distributor at prices determined in
accordance with Annex II.
It is further understood that Distributor shall not incur any
expenditure on PEO's behalf or name without PEO's express written
authorization and that Distributor shall not make any payment or gift or
promise or offering to any officer of the government in the Territory or any
instrument thereof for purposes of influencing any act or decision by such
officer or by any governmental department or instrument thereof.
PEO will provide Distributor's purchase orders for products with similar
priority as orders for products to be supplied to entities belonging to the
PEO business.
4. In addition to the business done as described under 3, above,
Distributor shall act as independent intermediary between PEO and potential
customers in the Territory for the direct supply of the Products by PEO to
such customers on the terms and conditions as agreed between PEO and the
customer. Unless agreed otherwise in writing, PEO's General Conditions of
Sale and Software License as attached hereto (ANNEX III) will be applicable
to such direct supplies.
It is further agreed that Distributor shall, if so requested by PEO,
also take over the installation and warranty obligations of Products that
have been sold without the mediation of the Distributor but that are
destined for use in the Territory.
For such direct supplies by PEO, Distributor will be entitled to a
commission calculated in accordance with Annex II hereto. Any such
commission will only become due and payable pro rata, as and when PEO shall
receive irrevocable payment(s) from the customer of the invoiced value of
the relevant Products.
Distributor's commission shall be deemed to cover all expenses he may
incur and any commitments he may enter into. If a customer's order is not
accepted by PEO, or no contract is concluded or comes into force between PEO
and such customer, for whatever reason, Distributor shall have no right to
reimbursement of any expenses incurred by it nor to any remuneration
whatsoever in connection with such order. PEO shall not be bound to sign any
contract with any customer if the terms and conditions of such contract are
not satisfactory to PEO.
5. No order for Products will be deemed accepted unless duly confirmed
by PEO in writing. Distributor shall not enter into any contract or
commitments in the name of or on behalf of PEO or otherwise bind PEO in any
respect.
6. Distributor will have available adequate service and installation
facilities for the Products sold in the Territory and, to that end, at
Distributor's reasonable discretion, Distributor will maintain an adequate
stock of service and replacement parts, as well as a proper and efficient
service organization staffed with capable technicians that, except as is
provided in this Agreement with respect to Product know-how, will be trained
at Distributor's own expense so as to be able to give adequate service for
the installation as well as for ongoing service and maintenance of the
Products sold in the Territory.
7. PEO will further undertake to:
a. supply to Distributor free of charge publicity materials, such as
leaflets in such quantities as PEO may consider adequate;
b. cooperate with Distributor and give all reasonably necessary
information with respect to the Products;
c. provide necessary technical and sales training; and
d. assist Distributor in organizing meetings, symposia, exhibitions
and other commercial activities which shall generally be for
Distributor's account.
2
<PAGE>
With respect to technical and sales training, the number of trainees,
timing, duration, language, costs and other details are to be determined
between the parties. Generally, the costs of tutoring, full board and
lodging shall be for the account of PEO, and all other costs shall be for
the account of the Distributor.
For initial training for the service staff for new Products, the number
of service staff, the time and exact place of training shall be agreed upon
between the parties. Generally, PEO shall bear all costs for the service
seminar, full board and lodging, if such costs do not exceed PEO's standard
rates. Distributor shall pay for the travel costs and shall arrange for the
necessary travel documents for said service staff that are travelling
abroad. In case of illness during the training period, PEO will provide
medical care, the costs of which are to be reimbursed to PEO by Distributor.
If new Products are added to ANNEX I hereof that need on site
installation by a trained service engineer, and that are supplied to the
Territory for the first time, PEO shall provide, free of charge, the
necessary support during the installation of such Product in the form of
field training.
The number of staff eligible for sales training and the cost sharing
will depend, among other things, on changes in the Products, changes in
sales policy, achieved sales figures in the preceding year and sales
projections.
8. Distributor further agrees:
a. to actively promote the sale of the Products in the Territory to
the best of Distributor's ability in accordance with PEO's directives
including to sell the products only in accordance with applicable U.S.
export controls and regulations and in no way to act against PEO's
interests. To that end, Distributor will maintain a proper and efficient
organization staffed with capable engineers.
b. not to actively promote and/or sell the Products outside or for
use outside the Territory and not to actively support sales by third
parties outside the Territory; however, if so requested by PEO, the
Distributor shall, against payment of the special fee as set forth in
ANNEX II, generally, be prepared to assist PEO in commercial and/or
technical matters outside the Territory. The Philips guidelines for cross
border sales and customer support dated December 1, 1995, (nr. DT-21022)
as set forth in ANNEX IV shall apply.
c. to treat with utmost confidence during and after this Agreement
all knowledge obtained in connection with Distributor's relations with
PEO.
d. to send to PEO from time to time, but at least twice a year, full
information of Distributor's sales of the Products, as well as regular
market reports containing as many particulars as possible with regard to
the market situation in respect to the Products, including but not
limited to sales forecasts as follows:
(1) unit based order income forecasting;
(2) lost/gained order analysis; and
(3) installation feedback.
e. to keep a list of services performed ("Service Reports") on the
Products during and after the warranty term. To this end, upon request,
these Service Reports and possible suggestions concerning improvement of
the quality of the service shall be sent to PEO.
f. to enable PEO to visit Distributor's service workshop and to give
PEO all relevant information concerning the service with the aim to
contribute to the improvement of the service activities.
3
<PAGE>
9. Distributor shall immediately after receipt of the Products
delivered by PEO, install and test the Products at each customer's site in
accordance with the Specifications and any special written Specifications
that may have been mutually agreed upon by the parties. Within thirty (30)
days after the date of invoice, Distributor shall inform PEO in writing of
the results of such test.
Distributor will provide PEO with all reports of Product failures made
known to Distributor by its customers who purchased any of the Products.
10. PEO warrants that each Product delivered under this Agreement, upon
delivery and up to the date of the acceptance test, shall conform to PEO's
written specifications for such Products (including any special additional
specifications mutually agreed upon by the parties) and shall be free from
defects in materials or workmanship under normal use and service.
If the result of the acceptance test is negative, PEO will act in the
following way:
a. Any Product or part found to be defective will be repaired or
replaced without charge for service or materials if Distributor returns
the unit or part, freight prepaid, to the factory or service centre
designated by PEO.
b. PEO will not be required to ship replacement units until it has
confirmed through its examination that the unit is in fact defective or
not conforming, but such determination is subject to good faith
negotiation. A handling charge will be billed to Distributor for any
items which it returns under this warranty found by PEO to be functioning
normally or out of warranty. PEO will reimburse Distributor for freight
charges prepaid by it on any device which PEO finds to be defective, and
it shall also pay freight costs for any replacement units shipped to
Distributor under this warranty. By mutual agreement however, PEO may
perform warranty service at customer sites.
c. This warranty shall not apply to any Product or part which PEO
determines:
(1) has failed as a result of a modification not introduced or
approved in writing by PEO.
(2) has failed as a result of damage after PEO's delivery to
Distributor due to shipment, handling, storage, operation or
maintenance in a manner which does not conform to PEO's published
instructions or specifications in effect at the time of delivery.
(3) has failed as a result of the Product, unit or part having
been subjected by Distributor or another party to (i) operating
and/or environmental conditions in excess of the maximum values
stated in the applicable specifications; (ii) damage, misuse or
neglect; or (iii) improper installation, repair or alteration. This
warranty also excludes expendable items such as filaments, lamps,
fuses or other parts which fail from normal usage.
d. All of the Distributor's expenses relating to epidemic failures
or other extraordinary product defects shall be reimbursed by PEO.
11. Prior to the 1st of November of each calendar year the parties shall
mutually establish a sales quota for the next calendar year for the Products
based upon forecasts prepared by Distributor taking into consideration
reasonable expectations in the Territory for the year in question.
12. This Agreement supersedes any oral and/or written agreements between
the parties that may exist with respect to the subject matter hereof.
13. The effective date of this Agreement shall be January 1, 1997. The
initial term of this Agreement shall be the period from the effective date
to the third anniversary thereof and the term shall automatically be
extended year to year for one year periods, unless Distributor gives notice
at least 180 days prior to the end of the initial three year period or any
such one year period that it is
4
<PAGE>
terminating this Agreement or PEO gives 180 days notice of termination at
any time after the date hereof.
14. In the event that this Agreement is terminated by PEO pursuant to
Paragraph 13 above and provided Distributor is not in material breach of
this Agreement, PEO shall acquire the part of Distributor's business that is
principally used in connection with the distribution of PEO's Products,
including, without limitation, the total installed capacity for sales and
service of the Products, at a price to be agreed upon reflecting the fair
market value of the business, and PEO shall either (A) provide continuing
employment in comparable positions for all of Distributor's employees who,
prior to termination of this Agreement, were more than 50% of their business
time engaged in the sale and or service of the Products or (B) compensate
Distributor for all costs and expenses, including any payments required to
be made upon termination of any such employee's employment, incurred in
connection with either the termination of such employee's employment by
Distributor or the transfer of such employees to comparable positions in
Distributor or an affiliate of Distributor. In the event PEO decides not to
provide continuing employment for all of such employees, Distributor agrees
to use reasonable efforts to provide for the transfer of such employees to
comparable positions in Distributor or an affiliate of Distributor in an
effort to mitigate any costs and expenses to be paid by PEO pursuant to the
foregoing sentence.
15. PEO and Distributor each agree that any claim or dispute between
them arising out of or in connection with this Agreement or any alleged
breach of this Agreement (a "Claim") shall be submitted promptly to an
executive of each of PEO and Distributor who shall have authority to settle
the Claim, and who shall meet in the first above mentioned registered office
of PEO, within 30 days of such submission to seek in good faith an amicable
settlement. In seeking an amicable settlement, the Parties may consult with
a neutral third party mediator if both agree in writing. Unless the Parties
agree to the contrary in writing, any advice or decision of the mediator
shall not be binding. Each Party agrees any Claim not settled by the Parties
within 60 days after notice of the Claim is first given by either party to
the other shall be finally settled by arbitration conducted in the
Netherlands under the rules of arbitration of the Netherlands Arbitration
Institute in Rotterdam (the "Rules"), and judgment upon the award rendered
by the arbitrators may be entered in any court having jurisdiction over it.
The proceedings shall be conducted in the English language.
The Parties will continue to perform obligations required hereunder
pending the resolution of any dispute between the Parties. The Parties will
also continue to make payments which are due and payable pursuant hereunder
pending the resolution of any such dispute except regarding performance of
obligations specifically in dispute between the Parties, but only to the
extent such obligations are in dispute.
This Agreement shall be governed by the laws of The Netherlands with the
exclusion of the United Nations Convention on Contracts for the
International Sale of Goods and the United Nations Convention on Statutory
Limitation.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
PHILIPS NO PHILIPS ELECTRON OPTICS B.V.
By By
- - - - - - ---------------------------------------- --------------------------------------
Title Title
- - - - - - -------------------------------------- --------------------------------------
5
<PAGE>
ANNEX 5.13(D)
FORM OF SERVICES AGREEMENT
FORM OF
SERVICES AGREEMENT
This Agreement is entered into as of __________ _________, 1996 by and
between the following entities (each a "Party" or collectively, the "Parties"):
PHILIPS __________ ________, a __________ _____ corporation with offices at
__________ ________, hereinafter referred to as "PHILIPS NO";
and
PHILIPS ELECTRON OPTICS ____, a __________ corporation, having its office in
__________ ___, __________ _____, hereinafter referred to as "PEO",
WHEREAS FEI Company ("FEI") and Philips Industrial Electronics International
B.V. ("PIE") have entered into a Combination Agreement dated __________, 1996
(the "Combination Agreement") for the transfer of such number of newly issued
shares of FEI as will constitute, when issued, 55% of the stock of FEI in
exchange for 100% of the stock of each of Philips Electron Optics International
B.V. and Philips Electron Optics, Inc.;
WHEREAS, the PEO Group (as defined in the Combination Agreement) will become
wholly owned by FEI but will continue, so long as PIE holds a controlling
interest in FEI, as a PIE entity in close cooperation with PIE and its
affiliates;
WHEREAS, under the Combination Agreement, PIE has agreed to provide, or
cause its affiliates to provide, certain services that will be essential to the
continuing operations of the PEO Group; and
WHEREAS, PHILIPS NO is willing to provide or cause others to provide certain
services to assist PEO in the conduct of its business and operations as is PEO
willing, if applicable, to provide certain services to PHILIPS NO; and
WHEREAS, the Parties have agreed separately to continue the (sub-)lease of
the facility used by PEO as defined hereinafter;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.01 "SERVICES" means the services, listed in APPENDIX A hereto (as
amended from time to time in accordance with Section 2.01 below), to be provided
by PHILIPS NO to PEO, and the services, listed in APPENDIX B (as amended from
time to time in accordance with Section 2.01 below), to be provided by PEO to
PHILIPS NO.
1.02 "LEASE AGREEMENT" shall mean the (sub-)lease agreement with respect
to the facilities at __________, where the PEO business is operated, as the
Lease Agreement is entered into by the Parties on this date.
ARTICLE 2
SERVICES, PRICE AND PAYMENT
2.01 The Parties agree to render and take the Services as provided for
herein. The Services and prices, rates and fees to be paid for such Services as
well as their validity term and service provider are set forth in APPENDICES A
AND B. Appendix A and Appendix B may be amended from time to time (a) upon the
mutual written agreement of the Parties to add one or more services to either or
both; or (b) by either Party upon written notice to the other to delete one or
more services from either or both, subject to the notice period requirement
specified in Appendix A or Appendix B, as the case may be, applicable to the
<PAGE>
Service to be terminated, except that no such termination shall be effective
before December 31, 1998 unless the related Service is dependent upon, and
unique to, the facility covered by the Lease Agreement, in which case the
provision of such Service shall terminate simultaneously with the termination of
the Lease Agreement.
2.02 With respect to any amounts identified in APPENDICES A OR B as
estimated, this charge is a reasonable estimate of the costs of the Services
which would be charged to PEO, based upon PHILIPS NO 1997 budgeted expenses for
such services and the assumptions relating to sales volume contained therein.
The parties agree that the charges for Services under this Agreement shall
be arm's-length charges. Unless a comparable service is provided by the Party
rendering a particular Service to an entity unrelated to either Party, or unless
the provision of Services under this Agreement is a principal activity of either
Party, an arm's-length charge shall be determined based on the costs or
deductions, including indirect costs or deductions (but not including interest
expenses of the service provider, costs of issuance of stock or expenses of
compliance with governmental regulations not directly related to the service in
question) incurred with respect to such Services by the Party rendering such
Services, allocated consistently with historic budgeting practices of the
Philips group, taking into account all relevant factors including total
expenses, asset size, sales, and payroll, of the beneficiary or beneficiaries of
each activity, and the space utilized and time spent in providing the Service.
Notwithstanding any provision of the foregoing paragraph to the contrary, in
those instances where the amount for a Service is based on a rate per activity,
an hourly rate or the like, rather than a fixed amount, the rates for 1997 and
1998 shall not in any event exceed the actual 1996 rate for such Service, except
to reflect changes due to inflation or significant changes in circumstances.
2.03 Subject to the provisions of Article 4.02, all Services shall be
provided at quality levels not lower than the quality levels of the Services
supplied during the year 1996. All Services shall be provided in a timely
manner.
2.04 PHILIPS NO shall charge PEO for Services monthly, no later than the
end of the month following the month during which such Services were provided,
unless specified otherwise in APPENDIX A. PEO shall pay invoices within thirty
days of receipt thereof.
2.05 PEO shall charge PHILIPS NO for Services monthly, no later than the
end of the month following the month during which such Services were provided,
unless specified otherwise in APPENDIX B. PHILIPS NO shall pay invoices within
thirty days of receipt thereof.
2.06 In the event of extension of any Service beyond the initial Term of
this Agreement, as may be subject to Article 4.01, the prices, rates and fees of
the current year shall be deemed applicable for the calendar year to follow
unless prior to October 1st of any calendar year one Party notifies the other
Party in writing of any price, rate or fee changes following which Parties shall
in good faith negotiate new prices, rates or fees (whichever is applicable).
ARTICLE 3
SECRECY
3.01 Any information disclosed hereunder by a Party hereto and identified
herein or at the time of disclosure in writing to be of a confidential nature,
shall be presumed to be confidential and proprietary to the disclosing party
("Discloser").
3.02 The receiving party ("Recipient") shall use any confidential
information disclosed or provided by Discloser, whether orally, or in writing,
by demonstration, in models or otherwise, only as permitted under this Agreement
and shall maintain such information in confidence and not disclose or divulge
such information to any third party or to any of its own personnel not having a
need to know, for a period of
2
<PAGE>
three (3) years from the receipt thereof, provided that Recipient shall not be
obliged to maintain in confidence that information which:
(a) Discloser makes freely available to third parties without imposing
conditions of confidentiality;
(b) was already in Recipient's possession, provided that such
information is not known by Recipient to be subject to another
confidentiality agreement with or other obligation of secrecy to Discloser;
(c) becomes generally available to the public other than as a result of
a disclosure by Recipient or its directors, officer, employees, agents or
advisors;
(d) becomes available to Recipient on a non-confidential basis from a
source other than Discloser or its advisors, provided that such source is
not known by Recipient to be bound by a confidentiality agreement with or
other obligation of secrecy to Discloser; or
(e) as may be required in connection with compliance with any applicable
law, regulation or order.
3.03 Recipient shall ensure that suitable undertakings of secrecy are
imposed, with respect to such information provided to it by Discloser, upon its
present employees, as well as upon its future employees.
3.04 The Parties acknowledge that FEI may be required to disclose the
material terms of this agreement and similar agreements entered into by FEI or
any of its subsidiaries pursuant to the requirements of U.S. securities laws.
ARTICLE 4
TERM AND TERMINATION
4.01 This Agreement shall become effective on the date first above written
and shall remain in effect until December 31, 1998 unless terminated sooner in
accordance with Sections 4.02 and 4.03 below or later as referred to in Section
4.05. Prior to October 1, 1998 Parties shall in good faith negotiate the
extension of this Agreement and Services then specified.
4.02 Notwithstanding the provision of Section 4.01 hereof, unless otherwise
provided in APPENDIX A OR B whichever is applicable, a Party may prior to
December 1st, 1998 terminate the provision of particular Services by providing
the other party three (3) months' prior written notice.
4.03 Notwithstanding the provisions of Sections 4.01 and 4.02 hereof, this
Agreement may be terminated (also prior to December 31, 1998), as follows:
(a) by either Party hereto with immediate effect upon written or
telegraphic notice to the other Party in the event of the other Party being
in material breach of or in material default of this Agreement, and such
breach or default not being remedied within thirty (30) days after receipt
of a written notice from the first Party specifying the nature of the breach
or default.
(b) by either Party forthwith upon written or telegraphic notice to the
other Party in the event the other Party should become insolvent or make an
assignment for the benefit of its creditors or voluntarily file for or be
placed in voluntary bankruptcy or take any other action which would indicate
insolvency on its part.
4.04 Article 3 shall survive the termination of this Agreement as will any
particular Service referred in APPENDIX A OR B with a validity term exceeding
beyond the termination date of this Agreement.
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ARTICLE 5
ADMINISTRATIVE AND ACCOUNTING SERVICES
5.01 The administrative and accounting services set out in APPENDIX A will
be rendered according to the instructions and requirements of FEI, applicable
principles of accounting and applicable law. PHILIPS NO will ensure that the way
the books are kept meets all requirements under applicable tax regulations and
other governmental regulations.
5.02 With respect to these administrative and accounting services PHILIPS
NO shall maintain in a (separate) accounting system such records of the PEO
business that it will be possible for PEO at any time to have all the
information and data it needs at its disposal within a reasonable period of
time.
5.03 At PEO's request copies will be made and information and data relating
to PEO business will be provided on hard copy, in case such information is
needed by PEO or its advisors.
5.04 At the termination of this Agreement all administrative data of the
PEO business shall be provided to PEO on hard copy and on such other medium as
may be reasonably made available.
5.05 Each Party rendering Services under this Agreement shall keep adequate
books and records to permit verification of costs or deductions incurred in
rendering such Services and the basis of the charges for such Services under
this Agreement, and shall make such information available at the request of
taxing authorities of any jurisdiction.
ARTICLE 6
FORCE MAJEURE
6.01 The expression "Force Majeure" shall mean and include a happening or
event beyond a Party's reasonable control in consequence of which it cannot
execute or cannot reasonably be required to execute its obligations. Such
circumstances include but are not limited to: acts of God, war, civil war,
insurrection, fire, flood, strikes, lock-outs, epidemics, governmental law or
regulations and freight embargoes.
6.02 The party affected by Force Majeure shall inform the other Party
promptly in writing specifying the Force Majeure as well as its expected
duration. The Party so affected shall be excused from performance hereunder to
the extent of the prevention, but shall use its best efforts to limit the period
of prevention or delay as much as possible.
ARTICLE 7
DISPUTE RESOLUTION AND LAW
7.01 PEO and PHILIPS NO each agree that any claim or dispute between them
arising out of or in connection with this Agreement or any alleged breach of
this Agreement (a "CLAIM") shall be submitted promptly to an executive of each
of PEO and PHILIPS NO who shall have authority to settle the Claim, and who
shall meet in the first above mentioned office of PEO, within 30 days of such
submission to seek in good faith an amicable settlement. In seeking an amicable
settlement, the Parties may consult with a neutral third Party mediator if both
agree in writing. Unless the Parties agree to the contrary in writing, any
advice or decision of the mediator shall not be binding.
7.02 Each Party agrees any Claim not settled by the Parties within 60 days
after notice of the Claim is first given by either Party to the other shall be
finally settled by arbitration conducted in the Netherlands under the rules of
arbitration of the Netherlands Arbitration Institute in Rotterdam (the "RULES"),
and judgment upon the award rendered by the arbitrators may be entered in any
court having jurisdiction over such arbitration. The proceedings shall be
conducted in the English language.
7.03 The Parties will continue to provide all Services hereunder pending
the resolution of any dispute between the parties. The Parties will also
continue to make payment for all Services provided hereunder
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pending the resolution of any such dispute except for those Services
specifically in dispute between the parties, but only to the extent such
Services are in dispute.
7.04 This Agreement shall be governed by the laws of the jurisdiction where
PEO and PHILIPS NO are organized.
7.05 The dispute resolution procedures provided for herein shall be
mutually exclusive of the dispute resolution procedures set forth in Section
9.10(b) of the Combination Agreement, with the effect that any dispute within
the scope of both this paragraph and such Section 9.10(b) arising out of the
same facts and circumstances shall be resolved under Section 9.10(b).
ARTICLE 8
MISCELLANEOUS
8.01 This Agreement sets forth the entire agreement and understanding
between the parties as to the subject matter hereof and merges all prior
discussions and negotiations between them. No modification or amendment of this
Agreement shall be valid or binding unless made in writing and signed on behalf
of the Parties by their duly authorized officers or representatives.
8.02 Neither this Agreement nor any right or obligation hereunder is
assignable in whole or in part by any Party without the prior written consent of
the other Party.
8.03 If any one or more of the provisions contained in this Agreement or
any document executed in connection herewith shall be invalid, illegal, or
unenforceable in any respect under any applicable law, the validity, legality,
and enforceability of the remaining provisions contained herein shall not in any
way be affected or impaired; provided, that in such case the parties oblige
themselves to use their best efforts to achieve the purpose of the invalid
provision by a new legally valid stipulation.
8.04 Except as otherwise set forth herein, each Party shall pay its own
legal, accounting and other expenses incident to this Agreement and the
consummation of the transactions contemplated thereby.
8.05 Neither Party shall be liable to the other Party for any special,
indirect or consequential damages howsoever caused.
8.06 This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.07 The Parties hereto expressly agree that the provisions of this
Agreement shall be superseded by the provisions of any agreement entered into or
to be entered into by PHILIPS NO and PEO concerning particular Services.
8.08 The provisions of this Agreement shall enure to the benefit of and be
binding upon the successors and assigns of each of the Parties.
ARTICLE 9
NOTICES
Any notice or other communication to a Party required or permitted hereunder
shall be made in writing and shall be sent by registered mail, return receipt
requested, addressed to the address of such Party set forth below or to such
other address as such Party shall have communicated to the other.
If to PHILIPS NO to:
If to PEO to:
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Or such other address as may be communicated subsequently in writing by the
relevant Party to the other Party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
PHILIPS NO PHILIPS ELECTRON OPTICS B.V.
By By
- - - - - - ---------------------------------------- --------------------------------------
Title Title
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ANNEX 6.3(E)
FORM OF EMPLOYMENT AGREEMENT
FORM OF EMPLOYMENT AGREEMENT
AGREEMENT, effective as of [ ], 1996, by and between FEI Company,
an Oregon corporation ("Employer"), and , an individual
("Employee").
IN CONSIDERATION OF the mutual covenants herein contained, and other good
and valuable consideration, the parties hereto agree as follows:
1. EMPLOYMENT.
Employer hereby agrees to employ Employee, and Employee agrees to serve,
as an [executive] [officer] of Employer, during the Period of Employment as
defined in Section 2.
2. PERIOD OF EMPLOYMENT.
(a) DURATION UNDER NORMAL CIRCUMSTANCES.
The "Period of Employment" shall be the period commencing on the date
hereof and ending on [ ], 199 .
(b) TERMINATION EVENTS.
Notwithstanding anything in this Section 2 to the contrary, the Period
of Employment shall terminate upon the earliest to occur of the following:
(i) the retirement of Employee under the terms of Employer's 401(k)
plan; and
(ii) the Disability (as defined in Section 8) of Employee and the
expiration of the 30-day period referred to in the definition of
Disability without the actions referred to therein being taken by
Employee;
(iii) the death of Employee;
(iv) the 90th day after service of notice by Employee to Employer,
in accordance with the provisions of Section 11, that Employee elects to
terminate the Period of Employment (with or without Good Reason) (a
"voluntary termination by Employee"); and
(v) the 90th day after service of notice by Employer to Employee, in
accordance with the provisions of Section 11, that Employer elects to
terminate the Period of Employment (a
"voluntary termination by Employer"), other than a termination by
Employer with Cause; and
(vi) promptly upon service of notice by Employer to Employee, in
accordance with the provisions of Section 11, that Employer elects to
terminate the Period of Employment with Cause.
3. DUTIES DURING THE PERIOD OF EMPLOYMENT.
Employee shall devote his full business time, attention and best efforts
to the affairs of Employer and its subsidiaries during the Period of
Employment and shall have such duties, responsibilities and authority as
shall be assigned to him from time to time by the Chief Executive Officer or
the Board of Directors of Employer, which duties, responsibilities and
authority shall be commensurate in all material respects with those held,
exercised and assigned as of the date of this Agreement. It is expressly
acknowledged and agreed that Employee may be requested to assume the
position of president or senior officer of any subsidiary of Employer or any
position of corporate officer of Employer, provided that the
responsibilities and authority assigned to such position are commensurate in
all material respects with those assigned to, or held and exercised by,
Employee as of the date of this Agreement, and provided further that, in the
event of a transfer of Employee to the employ of
<PAGE>
a subsidiary of Employer, such subsidiary expressly assumes all of
Employer's obligations under this Agreement, MUTATIS MUTANDIS. Employee may
engage in other activities, such as activities involving charitable,
educational, religious and similar types of organizations (all of which are
deemed to benefit Employer), speaking engagements, and similar type
activities, and may serve on the board of directors of other corporations
approved by the Chief Executive Officer of Employer, in each case to the
extent that such other activities do not materially detract from or limit
the performance of his duties under this Agreement, or inhibit or conflict
in any material way with the business of Employer and its subsidiaries.
4. LOCATION OF EMPLOYMENT.
During the Period of Employment, Employer may only require Employee to
be based in or within 50 miles of Hillsboro, Oregon, except that Employer
may require Employee to be based more than 50 miles from Hillsboro, Oregon
in connection with the relocation of the executive office of Employer in
which Employee is employed; PROVIDED, HOWEVER, that Employer shall pay to,
or reimburse Employee for, on an after-tax basis, all reasonable expenses of
relocation of Employee and Employee's immediate family living with Employee
at the time of such relocation, incurred and substantiated by Employee in
connection with any such relocation.
5. CURRENT CASH COMPENSATION.
Employer will pay to Employee during the Period of Employment a base
annual salary of not less than $ (or such greater amount as may have
been approved by the Board of Directors in its sole discretion), payable in
substantially equal monthly installments during each calendar year, or
portion thereof, of the Period of Employment; provided, however, that
Employer agrees to review such base annual salary annually and in light of
such review may, in the sole discretion of the Board of Directors of
Employer, increase such salary, taking into account such factors as it deems
pertinent.
6. EMPLOYEE BENEFITS.
(a) VACATION AND SICK LEAVE.
Employee shall be entitled to [INSERT 2, 3 OR 4 BASED ON CURRENT FEI
ENTITLEMENT] weeks paid annual vacation, all paid Employer holidays and
reasonable sick leave.
(b) REGULAR REIMBURSED BUSINESS EXPENSES.
Employer shall reimburse Employee for all expenses and disbursements
reasonably incurred at Employer's request or consistent with Employer's
policies, and susbstantiated by Employee, in the performance of his duties
during the Period of Employment.
(c) EMPLOYEE BENEFIT PLANS OR ARRANGEMENTS.
In addition to the cash compensation provided for in Section 5 hereof,
Employee, subject to meeting eligibility requirements and to the provisions
of this Agreement, shall be entitled to participate without discrimination
or duplication in all employee (including executive) benefit plans of
Employer, as presently in effect or as they may be modified or added to by
Employer from time to time, to the extent such plans are available to other
similarly situated executives or employees of Employer, including, without
limitation, plans providing retirement benefits, medical and other health
insurance, life insurance, disability insurance, and accidental death or
dismemberment insurance.
(d) EMPLOYER'S INCENTIVE COMPENSATION PLANS.
In addition to the cash compensation provided for in Section 5 hereof
and the employee benefits of Employer provided for in paragraph (c) of this
Section 6, Employee, subject to meeting eligibility requirements and to the
provisions of this Agreement, shall be entitled to participate in all
incentive
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compensation plans of Employer, as presently in effect or as they may be
modified or added to by Employer from time to time, to the extent such plans
are available to similarly situated executives or employees of Employer,
including, without limitation, the 1995 Stock Incentive Plan and the 1995
Supplemental Stock Incentive Plan (as the same may be modified, replaced, or
added to by Employer from time to time), and other performance share plans,
management incentive plans, deferred compensation plans, and supplemental
retirement plans.
7. TERMINATION.
(a) DEATH, OR RETIREMENT OR DISABILITY.
If the Period of Employment terminates pursuant to paragraph (b) of
Section 2 as a result of (1) the death of Employee, (2) the retirement of
Employee under the terms of Employer's 401(k) plan or (3) the Disability of
the Employee, Employee (or Employee's estate) will be entitled to receive
only:
(i) the base salary otherwise payable under Section 5 through the
end of the month in which Employee's employment is terminated, together
with salary, compensation or benefits which have been earned or become
payable as of the date of termination but which have not yet been paid to
Employee;
(ii) such other awards or bonuses as the Board of Directors may in
its sole discretion determine;
(iii) during the 12-month period following the termination of
Employee's employment as a result of the death of Employee, maintenance
in effect for the continued benefit of Employee's dependents of all
insured and self-insured employee medical and dental benefit plans in
which Employee was participating immediately prior to termination
provided that such continued participation is possible under the general
terms and conditions of such plans (and any applicable funding media) and
Employee's dependents continue to pay an amount equal to the Employee's
regular contribution for such participation; and
(iv) such other benefits, if any, as shall be determined to be
applicable in accordance with Employer's plans and practices as in effect
on the date of termination.
(b) VOLUNTARY TERMINATION BY EMPLOYEE WITHOUT GOOD REASON.
If the Period of Employment terminates pursuant to paragraph (b) of
Section 2 as a result of a voluntary termination by Employee without Good
Reason, Employee will be entitled to receive only:
(i) the base salary otherwise payable under Section 5 through the
day on which Employee's employment is terminated, together with salary,
compensation or benefits which have been earned or become payable as of
the date of termination but which have not yet been paid to Employee;
(ii) to the extent possible, the opportunity to convert group and
individual life and disability insurance policies of Employer then in
effect for Employee to individual policies of Employee upon the same
terms as similarly situated employees of Employer may apply for such
conversions; and
(iii) such other benefits, if any, as shall be determined to be
applicable in accordance with Employer's plans and practices in effect on
the date of termination.
(c) VOLUNTARY TERMINATION BY EMPLOYEE WITH GOOD REASON, OR BY EMPLOYER
WITHOUT CAUSE.
If the Period of Employment terminates pursuant to paragraph (b) of
Section 2 as a result of a voluntary termination by Employee with Good
Reason (as hereinafter defined), or a voluntary
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termination by Employer without Cause (as hereinafter defined), then
Employee will be entitled to receive:
(i) the base salary otherwise payable under Section 5 through the
end of the month in which Employee's employment is terminated, together
with salary, compensation or benefits which have been earned or become
payable as of the date of termination but which have not yet been paid to
the Employee;
(ii) a lump-sum severance payment in an amount equal to the product
of (A) the base annual salary at the rate in effect under Section 5 on
the date of termination, and (B) a multiplier equal to x/52, where "x"
equals the number of weeks remaining until the Final Day of Period of
Employment; provided that the payment made pursuant to this paragraph
(ii) shall be repaid by Employee in the event Employee violates in any
material respect the provisions of Section 9 hereof;
(iii) maintenance in effect for the continued benefit of Employee and
his spouse and his dependents for a period terminating on the earlier of
(A) the earlier of the Final Day of Period of Employment and the date on
which Employee retires under the terms of Employer's 401(k) plan, and (B)
the commencement of equivalent benefits from a new employer of:
(A) all insured and self-insured medical and dental benefit plan
in which Employee was participating immediately prior to termination,
provided that Employee's continued participation if possible under
the general terms and conditions of such plans (and any applicable
funding media) and Employee continues to pay an amount equal to
Employee's regular contribution for such participation; and
(B) the group and individual life and disability insurance
policies of Employer then in effect for Employee;
PROVIDED, HOWEVER, that if Employer so elects, or if such continued
participation is not possible under the general terms and conditions of such
plans or under such policies, Employer shall, in lieu of the foregoing,
arrange to have issued for the benefit of Employee and Employee's dependents
individual policies of insurance providing benefits substantially similar
(on an after-tax basis) to those described in this paragraph (iii), or, if
such insurance is not available at a reasonable cost to Employer, Employer
shall otherwise provide Employee and Employee's dependents equivalent
benefits (on an after-tax basis); provided further that, in no event shall
Employee be required to pay any premiums or other charges in an amount
greater than that which Employee would have paid in order to participate in
Employer's plans and policies.
(iv) for a period terminating on the earlier of the Final Day of
Period of Employment and the date on which Employee reaches age 65,
Employer shall provide Employee with benefits equivalent to the
additional benefits Employee would have received under the employee
pension and retirement benefit plans maintained by the Employer and
supplemental or excess executive retirement plans, or executive plans of
deferred compensation whether or not qualified for federal income tax
purposes in which Employee was participating immediately prior to
termination and assuming an annual rate of Salary equal to the rate
applicable to the Employee immediately prior to termination is in effect,
as if Employee had received credit under such plans for service with
Employer during such period following Employee's termination, with such
benefits payable by Employer at the same times and in the same manner as
such benefits would have been received by Employee under such plans.
(d) TERMINATION BY EMPLOYER WITH CAUSE.
If the Period of Employment terminates pursuant to paragraph (b) of
Section 2 as a result of a termination by Employer with Cause, Employee will
be entitled to receive only:
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(i) the base salary otherwise payable under Section 5 through the
day on which Employee's employment is terminated, together with salary,
compensation or benefits which have been earned or become payable as of
the date of termination but which have not yet been paid to Employee; and
(ii) such other benefits, if any, as shall be determined to be
applicable under the circumstances in accordance with Employer's plans
and practices in effect on the date of termination.
(e) DATE OF PAYMENT.
Except as otherwise provided herein, all cash payments and lump-sum
awards required to be made pursuant to the provisions of paragraphs (a)
through (e) of this Section 7 shall be made no later than the thirtieth day
following the date of Employee's termination.
(f) EXCLUSIVE REMEDY.
Employee shall have no claim for damages or other remedies, at law, in
equity or otherwise, by reason of any breach of this Agreement by Employer,
or of termination of this Agreement by reason thereof, other than as set
forth in this Section 7.
(g) RELEASE OF CLAIMS.
Employer shall have the right to require Employee to execute a limited
release with respect to claims that could be brought by Employee hereunder
as a condition to Employee's receipt of any payments pursuant to Section
7(c) hereof.
8. DEFINITIONS.
For purposes of this Agreement, the following capitalized terms shall
have the meanings set forth below:
"CAUSE" shall mean (i) the willful engaging by Employee in conduct
which is not authorized by the Board of Directors of Employer or within
the normal course of Employee's business decisions and is known by
Employee to be materially detrimental to the best interests of Employer
or any of its subsidiaries, (ii) the willful engaging by Employee in
conduct which Employee knows is, or has substantial reason to believe to
be, illegal to the extent of a felony violation, or the equivalent
seriousness under laws other than those of the United States, and which
has effects on Employer or Employee materially injurious to Employer,
(iii) the engaging by Employee in any willful and conscious act of
serious dishonesty, in each case which the Board of Directors of Employer
reasonably determines affects adversely, or could in the future affect
adversely, the value, reliability or performance of Employee to Employer
in a material manner; (iv) the willful and continued failure by Employee
to perform substantially his duties to Employer under this Agreement
(including any sustained and unexcused absence of Employee from the
performance of his duties under this Agreement, which absence has not
been certified in writing as due to physical or mental illness in
accordance with the procedures set forth in this Section 8 under
"Disability"), after a written demand for substantial performance has
been delivered to Employee by the Board of Directors specifically
identifying the manner in which Employee has failed to substantially
perform his duties and after such Employee has had a reasonable
opportunity to cease such failure to perform, or (v) the sustained and
unexcused absence of Employee from the performance of his duties under
this Agreement for a period of 180 days or more within any period of 365
consecutive days, regardless of the reason for such absence, unless
Employee demonstrates that such absence is due to Disability. For
purposes of this paragraph, no act, or failure to act, on Employee's part
shall be considered "willful" unless done, or omitted to be done, in bad
faith and without reasonable belief that such action or omission was in,
or not opposed to, the best interests of Employer. Any act, or failure to
act, based upon authority given
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pursuant to a resolution duly adopted by the Board of Directors of
Employer or based upon the advice of counsel for Employer shall be
conclusively presumed to be done, or omitted to be done, in good faith
and in the best interests of Employer. Notwithstanding the foregoing,
there shall not be deemed to be a termination by Employer with Cause
unless and until there shall have been delivered to Employee a copy of a
resolution duly adopted by the affirmative vote of a majority of the
entire membership of the Board of Directors of Employer at a meeting of
such Board held after reasonable notice to Employee and at which Employee
has an opportunity, together with his counsel, to be heard before such
Board, finding that, in the good faith opinion of such Board, Employee
was guilty of the conduct set forth above and specifying the particulars
thereof in detail.
"DISABILITY" shall mean the absence of Employee from his duties with
Employer on a full-time basis for one hundred eighty (180) days within
any period of three hundred and sixty-five (365) consecutive days as a
result of Employee's incapacity due to physical or mental illness as
certified in writing by a physician selected by Employee and reasonably
acceptable to Employer (it being understood that such physician shall be
deemed to be reasonably acceptable to Employer if, within a period of
fifteen (15) days after Employee notifies Employer of the name of such
physician, Employer does not object to the use of such physician), unless
within thirty (30) days after written notice to Employee by Employer, in
accordance with the provisions of Section 12, that Employee's employment
is being terminated by reason of such absence, Employee shall have
returned to the full performance of Employee's duties.
"FINAL DAY OF PERIOD OF EMPLOYMENT" shall mean the final day of the
Period of Employment under Section 2(a) as in effect on the date of
termination.
Voluntary termination by Employee with "GOOD REASON" shall mean a
voluntary termination by Employee resulting from the Employer (i)
reducing Employee's base annual salary as in effect immediately prior to
such reduction or reducing in a material respect Employee's opportunity
to earn incentive compensation as provided in Section 6(d) of this
Agreement; (ii) effecting a change in the position of Employee which does
not represent a promotion from Employee's position provided for herein;
(iii) assigning Employee duties or responsibilities which are materially
inconsistent with Employee's position provided for herein; (iv) removing
Employee from or failing to reappoint or reelect Employee to such
position, except in connection with a termination as a result of death,
Disability, voluntary termination by Employee, retirement by Employee or
termination by Employer with Cause; or (v) otherwise materially breaching
its obligations under this Agreement, in each case after notice in
writing from Employee to Employer and a period of 30 days after such
notice during which Employer fails to correct such conduct; PROVIDED,
HOWEVER, that it is expressly acknowledged and agreed that a transfer of
Employee (a) to the position of another corporate officer of Employer, or
to any subsidiary of Employer in the capacity of president or senior
officer of such subsidiary or (b) from the position of president or
senior officer of any subsidiary of Employer to a position of corporate
officer of Employer (in each case as contemplated by the second sentence
of Section 3 of this Agreement) shall not by itself constitute "Good
Reason" within the meaning of clauses (ii), (iii), (iv) or (v) of this
paragraph, provided that, in the case of any transfer to a subsidiary of
Employer, such subsidiary expressly assumes all of Employer's obligations
under this Agreement, MUTATIS MUTANDIS.
9. NON-COMPETITION AND NON-DISCLOSURE; EMPLOYEE COOPERATION.
(a) Without the consent in writing of the Board of Directors of
Employer, upon termination of Employee's employment for any reason, Employee
will not for a period of two years thereafter, acting alone or in
conjunction with others, directly or indirectly (i) engage (either as owner,
partner, stockholder, employer, employee, director, consultant or agent) in
any business in which he has been
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directly engaged, or has supervised as an executive, during the last two
years prior to such termination and which is directly in competition with a
business conducted by Employer or any of its subsidiaries; (ii) induce any
customers of Employer or any of its subsidiaries with whom Employee has had
contacts or relationships, directly or indirectly, during and within the
scope of his employment with Employer or any of its subsidiaries, to curtail
or cancel their business with such companies or any of them; (iii) solicit
or canvas business from any person who was a customer of Employer or any of
its subsidiaries at or during the two-year period immediately preceding
termination of Employee's employment; or (iv) induce, or attempt to
influence, any Employee of Employer or any of its subsidiaries to terminate
his employment; PROVIDED, HOWEVER, that the limitation of subparagraph (i)
shall not apply if Employee's employment is terminated as a result of a
voluntary termination by Employee with Good Reason or a termination by
Employer without Cause. The provisions of subparagraphs (i), (ii), (iii) and
(iv) above are separate and distinct commitments independent of each of the
other subparagraphs. It is agreed that the ownership of not more than 1/2 of
1% of the equity securities of any company having securities listed on an
exchange or regularly traded in the over-the-counter market shall not, of
itself, be deemed inconsistent with clause (i) of this paragraph (a).
(b) Employee shall not, at any time during the Period of Employment or
following Employee's termination of employment for any reason whatsoever,
disclose, use, transfer or sell, except in the course of employment with
Employer, any confidential or proprietary information of Employer and its
subsidiaries so long as such information has not otherwise been publicly
disclosed by Employer or is not otherwise in the public domain, except as
required by law or pursuant to legal process.
(c) Employee agrees to cooperate with Employer, by making himself
available to testify on behalf of Employer or any subsidiary or affiliate of
Employer, in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, and to assist Employer, or any subsidiary
or affiliate of Employer in any such action, suit or proceeding, by
providing information and meeting and consulting with the Board of Directors
of Employer or its representatives or counsel, or representatives or counsel
of Employer, or any subsidiary or affiliate of Employer, as requested by
such Board of Directors, representatives or counsel. Employer agrees to
reimburse the Employee, on an after-tax basis, for all expenses actually
incurred in connection with his provision of testimony or assistance.
10. GOVERNING LAW; MODIFICATION AND SEVERABILITY; DISPUTES; ARBITRATION.
(a) This Agreement is governed by and is to be construed and enforced in
accordance with the laws of the State of New York.
(b) If any portion of this Agreement is at any time deemed to be in
conflict with any applicable statute, rule, regulation, ordinance or
principle of law, such portion shall be deemed to be modified or altered to
the extent necessary to conform thereto or, if that is not possible, to be
omitted from this Agreement; and the invalidity of any such portion shall
not affect the force, effect and validity of the remaining portion hereof.
(c) Except as provided in this Section 10(c), any controversy or claim
arising out of or relating to this Agreement, or the breach thereof, shall
be settled by arbitration administered by the American Arbitration
Association in accordance with its Commercial Arbitration Rules, and
judgment on the award rendered by the arbitrators may be entered in any
court having jurisdiction thereof.
The arbitrators shall have the authority to award such remedies or
relief that a court of the State of New York could order or grant in an
action governed by New York law, including, without limitation, specific
performance of any obligation created under this Agreement, the issuance of
an injunction, or the imposition of sanctions for abuse or frustration of
the arbitration process, but shall not be empowered to award punitive
damages. The arbitration proceedings shall be conducted in Portland, Oregon
or, in the event that the executive office of Employer has been relocated,
in such other major city as is most proximate to such relocated executive
office.
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Notwithstanding the foregoing, any party may bring and pursue an action
in any Federal or State court in the city where the arbitration proceedings
shall be conducted pursuant to the foregoing sentence or in New York, New
York seeking provisional relief, including a temporary restraining order or
preliminary injunction, pending an arbitration proceeding. Any provisional
relief obtained shall be discontinued once the arbitrators have assumed
jurisdiction and ordered such discontinuance.
(d) Any amounts that have become payable pursuant to the terms of this
Agreement or any judgment by a court of law or a decision by arbitrators
pursuant to this Section 10 but which are not timely paid shall bear
interest at the prime rate in effect at the time such payment first becomes
payable, as quoted by the Morgan Guaranty Trust Company of New York.
11. NOTICES.
All notices or other communications hereunder shall be deemed to have
been duly given and made if in writing and if served by personal delivery
upon the party for whom it is intended, if delivered by registered or
certified mail, return receipt requested, or by a national courier service,
or if sent by telecopier, PROVIDED that the telecopy is promptly confirmed
by telephone confirmation thereof, to the person at the address set forth
below, or such other address as may be designated in writing hereafter, in
the same manner, by such person:
To Employee:
- - - - - - ----------------------------------------
- - - - - - ----------------------------------------
- - - - - - ----------------------------------------
- - - - - - ----------------------------------------
Telephone:
Telecopy:
- - - - - - ----------------------------------------
To Employer:
FEI Company
7451 N.E. Evergreen Parkway
Hillsboro, Oregon 97124-5830
Telephone: 503-640-7500
Telecopy: 503-540-7509
Attn: Chief Executive Officer
With a copy to:
STOEL RIVES LLP
900 S.W. Fifth Avenue, Suite 2300
Portland, Oregon 97204-1268
Telephone: 503-224-3380
Telecopy: 503-220-2480
Attn: Stephen E. Babson
8
<PAGE>
12. WITHHOLDING.
All payments to be made to Employee under this Agreement will be subject
to required withholding taxes and other deductions.
13. SUCCESSORS; BINDING AGREEMENT.
(a) Any Successor (as hereinafter defined) to Employer shall be bound by
this Agreement. Employer will seek to have any Successor assent to the
fulfillment by Employer of its obligations under this Agreement at
Employee's request. Failure of Employer to obtain such assent within thirty
(30) days after such request shall constitute Good Reason for termination by
Employee of Employee's employment and, upon a voluntary termination by
Employee pursuant to Section 2, shall entitle Employee to the benefits
provided in Section 7(c). For purposes of this Agreement, "Successor" shall
mean any person other than Philips Electronics N.V. and its affiliates that
succeeds to, or has the practical ability to control (either immediately or
with the passage of time), Employer's business directly, by merger or
consolidation, or indirectly, by purchase of the Employer's voting
securities, all or substantially all of its assets or otherwise.
(b) For purposes of this Agreement, "Employer" shall include any
corporation or other entity which is the surviving or continuing entity in
respect of any amalgamation, merger, consolidation, dissolution, asset
acquisition or other form of business combination.
14. MISCELLANEOUS.
(a) Except to the extent that the terms of this Agreement confer
benefits that are more favorable to Employee than are available under any
other employee benefit or executive compensation plan of Employer in which
Employee is a participant, Employee's rights under any such employee
(including executive) benefit plan or executive compensation plan shall be
determined in accordance with the terms of such plan (as it may be modified
or added to by Employer from time to time).
(b) This Agreement constitutes the entire understanding between Employer
and Employee relating to employment of Employee by Employer and its
subsidiaries and supersedes and cancels all prior agreements and
understandings with respect to the subject matter of this Agreement and such
other written agreements. Employee shall not be entitled to any payment or
benefit under this Agreement which duplicates a payment or benefit received
or receivable by Employee under such prior agreements and understandings.
(c) This Agreement may be amended but only by a subsequent written
agreement of the parties.
(d) This Agreement shall be binding upon and shall inure to the benefit
of Employee, his heirs, executors, administrators and beneficiaries, and
shall be binding upon and inure to the benefit of Employer and its
successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the year and day first above written.
FEI COMPANY
By:
------------------------------------------
(Authorized Officer)
----------------------------------------------
[Name of Employee]
9
<PAGE>
APPENDIX B
ARTICLES OF AMENDMENT
TO THE
SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
FEI COMPANY
Pursuant to the provisions of ORS 60.447, the undersigned corporation
executes the following Articles of Amendment to its Second Amended and Restated
Articles of Incorporation and all amendments thereto:
1. The name of the corporation is FEI Company.
2. The first paragraph of Article II.A. of the corporation's Second Amended
and Restated Articles of Incorporation is amended to read in its entirety as
follows:
"The aggregate number of shares which the Corporation shall
have authority to issue is 30,000,000 shares of common stock
("Common Stock") and 500,000 shares of preferred stock ("Preferred
Stock")".
3. The above amendment was adopted by the shareholders of the corporation
on _________ ____.
4. Shareholder action was required to adopt the above amendment. ______
shares of voting Common Stock were outstanding and entitled to vote on the
amendment.
5. ______ shares of voting Common Stock were voted in favor the amendment
set out in paragraph 2 above and ______ shares of voting Common Stock were voted
against the amendment set out in paragraph 2 above.
Dated: _____________________
FEI COMPANY
By:
------------------------------------------
<PAGE>
APPENDIX C
[Letterhead]
November 12, 1996
CONFIDENTIAL
Board of Directors
FEI Company
7451 NE Evergreen Parkway
Hillsboro, OR 97124
Gentlemen:
We understand that FEI Company ("FEI"), Philips Electronics N.V. ("Philips")
and Philips Industrial Electronics International B.V., a wholly-owned subsidiary
of Philips ("PIE"), propose to enter into as of the date hereof a Combination
Agreement (the "Combination Agreement") whereby (1) PIE will consolidate
substantially all of the assets and liabilities of its electron optics business
(the "PEO Operations") into two newly formed, wholly owned subsidiaries of PIE,
Philips Electron Optics International B.V. ("PEO Holdings") and Philips Electron
Optics, Inc. ("PEO-US"), and (2) PIE will transfer to FEI all of the issued and
outstanding capital stock of PEO Holdings and PEO-US in exchange for newly
issued shares of FEI's common stock (such actions in this clause (2) being
hereinafter referred to as the "Transaction"). The terms of the Transaction will
be set forth more fully in the Combination Agreement.
Pursuant to the Combination Agreement, we understand that FEI will issue in
the Transaction a number of shares of FEI's common stock equal to 55% of the
then outstanding shares of FEI common stock and will agree to issue such number
of additional shares of FEI common stock equal to 55% of the shares of FEI
common stock issued on exercise of options and warrants to purchase FEI common
stock outstanding as of the Closing.
You have asked us to advise you as to the fairness, from a financial point
of view, to the shareholders of FEI of the consideration to be paid by PIE to
FEI in the Transaction. Needham & Company, Inc. as part of its investment
banking business is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of securities, private placements and
valuations. We have acted as financial advisor to FEI in connection with the
Transaction, and will receive a fee for our services that is contingent upon the
consummation of the Transaction. In addition, FEI has agreed to indemnify us to
certain liabilities arising out of the rendering of this opinion.
For purposes of this opinion we have, among other things: (i) reviewed a
draft of the Combination Agreement dated November 7, 1996; (ii) reviewed certain
other documents relating to the Transaction; (iii) reviewed certain publicly
available information concerning the PEO Operations and FEI and certain other
relevant financial and operating data of the PEO Operations and FEI made
available from the internal records of the PEO Operations and FEI; (iv) visited
certain of the PEO Operations' and FEI's facilities; (v) held discussions with
member of senior management of the PEO Operations and FEI concerning their
current and future business prospects; (vi) reviewed certain financial forecasts
and projections prepared by the respective managements of the PEO Operations and
FEI; (vii) compared certain publicly available financial data of companies whose
securities are publicly traded, which we deemed generally comparable to the
business of the PEO Operations, to similar data for the PEO Operations; (viii)
reviewed the financial terms of certain other business combinations that we
deemed
<PAGE>
generally relevant; and (ix) performed and/or considered such other studies,
analyses, inquiries and investigations as we deemed appropriate.
In connection with our review and arriving at our opinion, we have not
assumed any responsibility to verify independently any of the foregoing
information, have relied on such information, and have assumed that (i) all such
information is complete and accurate in all material respects, (ii) shareholders
of FEI will not recognize any gain or loss for federal income tax purposes as a
result of the Transaction, (iii) the Transaction will be accounted for as a
"reverse purchase", and (iv) the terms set forth in the executed Combination
Agreement will not differ materially from the proposed terms provided to us in
the draft Combination Agreement dated November 7, 1996. With respect to the PEO
Operations and FEI's financial forecasts provided to us by their respective
managements, we have assumed for purposes of our opinion that such forecasts
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of such managements, at the time of preparation, of the
future operating and financial performance of the PEO Operations and FEI. We
have not assumed any responsibility for or made or obtained any independent
evaluation, appraisal or physical inspection of the assets or liabilities of FEI
or PEO Operations. Further, our opinion is based on economic, monetary and
market conditions existing as of the date hereof, and in rendering this opinion,
we have relied without independent verification on the accuracy, completeness
and fairness of all historical financial and other information which was either
publicly available or furnished to us by the PEO Operations and FEI. Our opinion
as expressed herein is limited to the fairness, from a financial point of view,
to the shareholders of FEI of the consideration to be paid to FEI by PIE in the
Transaction and does not address FEI's underlying business decision to engage in
the Transaction.
In the ordinary course of our business, we may actively trade the equity
securities of FEI for our own account or for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
This letter and the opinion expressed herein are provided at the request and
for the information of the Board of Directors of FEI and may not be quoted or
referred to or used for any purpose without our prior written consent, except
that this letter may be disclosed in connection with any registration statement
or proxy statement used in connection with the Transaction so long as this
letter is quoted in full in such registration statement or proxy statement.
Based upon and subject to the foregoing, it is our opinion that as of the
date hereof the consideration to be paid to FEI by PIE in the Transaction is
fair to the shareholders of FEI from a financial point of view.
Sincerely yours,
/s/ NEEDHAM & COMPANY, INC.
--------------------------------------
NEEDHAM & COMPANY, INC.
<PAGE>
PROXY
FEI COMPANY
SPECIAL MEETING, FEBRUARY 20, 1997
PROXY SOLICITED BY FEI COMPANY
PLEASE SIGN AND RETURN THIS PROXY
The undersigned hereby appoints Lynwood W. Swanson, Lloyd R. Swenson and
Donald R. VanLuvanee, and each of them, proxy holders with power of substitution
to vote on behalf of the undersigned all shares that the undersigned may be
entitled to vote at the special meeting of shareholders of FEI Company (the
"Company") on February 20, 1997 and any adjournments thereof, with all powers
that the undersigned would possess if personally present, with respect to the
following:
1. A proposal to approve and adopt the Combination Agreement dated as of
November 15, 1996, as amended, between the Company and Philips Industrial
Electronics International B.V. ("PIE") and the transactions contemplated
therein, including the issuance of shares of FEI Common Stock to PIE
pursuant to the terms and conditions of the Combination Agreement (the
"Combination").
/ / FOR / / AGAINST / / ABSTAIN
2. A proposal to approve the amendment to the Second Amended and Restated
Articles of Incorporation of the Company to increase the number of
authorized shares of Common Stock from 15,000,000 to 30,000,000 (the
"Amendment to the Articles").
/ / FOR / / AGAINST / / ABSTAIN
3. Transaction of any business that properly comes before the meeting or any
adjournments thereof.
(CONTINUED AND TO BE SIGNED ON THE OTHER SIDE.)
<PAGE>
The shares represented by this proxy will be voted as specified on the
reverse hereof, but if no specification is made, this proxy will be voted for
approval and adoption of the Combination Agreement, the Combination and the
Amendment to the Articles. The proxy holders may vote in their discretion as to
other matters that may come before this meeting.
P R O X Y
Shares:
Date: ____________________________________________________________________, 1997
________________________________________________________________________________
Signature or Signatures
Please date and sign as name is imprinted hereon, including designation as
executor, trustee, etc., if applicable. A corporation must sign its name by the
president or other authorized officer.
The Special Meeting of Shareholders of FEI Company will be held on February 20,
1997 at 9:00 a.m., Pacific Time, at the OSSHE Facility, Room 1026, 18640 NW
Walker Road, Beaverton, Oregon.
PLEASE NOTE: ANY SHARES OF STOCK OF THE COMPANY HELD IN THE NAME OF
FIDUCIARIES, CUSTODIANS OR BROKERAGE HOUSES FOR THE BENEFIT OF THEIR CLIENTS MAY
ONLY BE VOTED BY THE FIDUCIARY, CUSTODIAN OR BROKERAGE HOUSE ITSELF--THE
BENEFICIAL OWNER MAY NOT DIRECTLY VOTE OR APPOINT A PROXY HOLDER TO VOTE THE
SHARES AND MUST INSTRUCT THE PERSON OR ENTITY IN WHOSE NAME THE SHARES ARE HELD
HOW TO VOTE THE SHARES HELD FOR THE BENEFICIAL OWNER. THEREFORE, IF ANY SHARES
OF STOCK OF THE COMPANY ARE HELD IN "STREET NAME" BY A BROKERAGE HOUSE, ONLY THE
BROKERAGE HOUSE, AT THE INSTRUCTIONS OF ITS CLIENT, MAY VOTE OR APPOINT A PROXY
HOLDER TO VOTE THE SHARES.
