SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 0-22780
FEI COMPANY
(Exact name of registrant as specified in its charter)
Oregon 93-0621989
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
7451 NW Evergreen Parkway
Hillsboro, Oregon 97124-5830
(Address of principal executive offices) (Zip Code)
(503) 640-7500
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock outstanding as of August 10, 1998 was
18,081,464.
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INDEX TO FORM 10-Q
Page
----
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 28, 1998 (unaudited)
and December 31, 1997................................................ 1
Condensed Consolidated Statements of Operations (unaudited)
Thirteen Weeks Ended June 28, 1998 and June 29, 1997 and
Twenty-Six Weeks Ended June 28, 1998 and June 29, 1997 .............. 2
Condensed Consolidated Statements of Cash Flows (unaudited) -
Twenty-Six Weeks Ended June 28, 1998 and June 29, 1997............... 3
Notes to Consolidated Financial Statements (unaudited)................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 7
Part II - Other Information
Item 2. Changes in Securities........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders............. 12
Item 5. Other Information............................................... 14
Item 6. Exhibits and Reports on Form 8-K................................ 14
Signatures............................................................... 15
i
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PART I - Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
FEI Company and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
December 31, June 28,
1997 1998
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 16,394 $ 8,600
Receivables 56,168 52,261
Inventories (Note 3) 37,807 45,346
Deferred income taxes 2,484 2,902
Other 2,497 881
--------------- ---------------
Total current assets 115,350 109,990
EQUIPMENT 19,246 21,823
LEASE AND NOTE RECEIVABLES 946 777
OTHER ASSETS 47,480 45,482
--------------- ---------------
TOTAL $ 183,022 $ 178,072
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,984 $ 13,259
Current accounts with Philips (Note 4) 9,074 7,629
Accrued payroll liabilities 3,248 1,938
Accrued expenses and deferred income 18,206 19,740
Other current liabilities 5,742 7,046
--------------- ---------------
Total current liabilities 52,254 49,612
LINE OF CREDIT 17,844 12,922
OTHER LIABILITIES 491 844
DEFERRED INCOME TAXES 7,544 8,133
SHAREHOLDERS' EQUITY:
Preferred stock - 500,000 shares authorized;
None issued and outstanding - -
Common stock - 30,000,000 shares authorized; 18,077,793
and 18,079,683 shares issued and outstanding at December 31,
1997 and June 28, 1998, respectively 149,149 149,159
Accumulated deficit (36,602) (34,983)
Cumulative foreign currency translation adjustment (7,658) (7,615)
--------------- ---------------
Total shareholders' equity 104,889 106,561
--------------- ---------------
TOTAL
$ 183,022 $ 178,072
=============== ===============
See notes to consolidated financial statements.
</TABLE>
1
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<TABLE>
<CAPTION>
FEI Company and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands except per share data)
(Unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------------- ----------------------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
NET SALES $ 43,958 $ 44,922 $ 76,025 $ 80,876
COST OF SALES 25,909 27,850 49,176 49,708
------------ ------------ ------------- ------------
Gross profit 18,049 17,072 26,849 31,168
OPERATING EXPENSES:
Research and development costs 4,260 3,452 8,643 6,911
Selling, general and administrative costs 9,300 10,912 19,698 19,771
Amortization of intangibles 681 624 937 1,258
Purchased in-process research and development
(Note 2) - - 38,046 -
Restructuring and reorganization costs (Note 5) - - 2,478 -
------------ ------------ ------------- ------------
Total operating expenses 14,241 14,988 69,802 27,940
OPERATING INCOME (LOSS) 3,808 2,084 (42,953) 3,228
OTHER EXPENSE, NET 83 521 280 737
------------ ------------ ------------- ------------
INCOME (LOSS) BEFORE TAXES 3,725 1,563 (43,233) 2,491
TAX EXPENSE (BENEFIT) 1,490 546 (337) 872
------------ ------------ ------------- ------------
NET INCOME (LOSS) $ 2,235 $ 1,017 $ (42,896) $ 1,619
============ ============ ============= ============
PER SHARE DATA:
Net income (loss) per share, basic $ 0.13 $ 0.06 $ (2.79) $ 0.09
============ ============ ============= ============
Net income (loss) per share, diluted $ 0.12 $ 0.06 $ (2.79) $ 0.09
============ ============ ============= ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 17,704 18,079 15,371 18,078
============ ============ ============= ============
Diluted 18,372 18,345 15,371 18,383
============ ============ ============= ============
See notes to consolidated financial statements.
</TABLE>
2
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<TABLE>
<CAPTION>
FEI Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Twenty-Six Weeks Ended
----------------------------------
June 29, June 28,
1997 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (42,896) $ 1,619
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,462 3,474
Purchased in-process research and development 38,046 -
Other 17,749 (14)
--------------- ---------------
Net cash provided by operating activities 15,361 5,079
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment (4,411) (4,659)
Investment in software development (893) (796)
Net change in leases receivable (350) 169
--------------- ---------------
Net cash used in financing activities (5,654) (5,286)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 3,852 (4,922)
Proceeds from exercise of stock options 71 10
Net cash received from Philips 8,000 -
Repayment of note to Philips - (2,718)
--------------- ---------------
Net cash provided by (used in) financing activities 11,923 (7,630)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (4,474) 43
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 17,156 (7,794)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 16,394
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,156 $ 8,600
=============== ===============
See notes to consolidated financial statements.
</TABLE>
3
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FEI COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - FEI Company and its wholly owned subsidiaries (the
"Company") design, manufacture, market and service focused ion beam ("FIB")
workstations, transmission electron microscopes ("TEMs"), scanning electron
microscopes ("SEMs") and components of these products. The Company has
manufacturing operations in Hillsboro, Oregon; Eindhoven, The Netherlands; and
Brno, Czech Republic. Sales and service operations are conducted in the United
States and eight other countries, constituting a majority of the worldwide
market for the Company's products. In addition, the Company's products are sold
through distribution agreements with affiliates of Philips Electronics N.V.
("Philips") located in approximately 20 additional countries.
The Company's FIB workstations are sold primarily to semiconductor manufacturers
and are used in the design, manufacture and testing of integrated circuits. The
Company's electron microscope products are sold primarily to life science and
materials science research institutes, universities and industrial customers, as
well as to semiconductor manufacturers.
Basis of Presentation - On February 21, 1997, FEI Company ("Pre-Combination
FEI") acquired substantially all of the assets and liabilities of the electron
optics business (the "PEO Operations") of Philips Industrial Electronics
International B.V. ("PIE"), a wholly owned subsidiary of Philips (the
"Combination"). The financial statements for periods prior to the Combination
are presented as if the PEO Operations had existed as an entity separate from
Philips during the periods presented and include the historical assets,
liabilities, sales and expenses that are directly related to the PEO Operations.
Because the PEO Operations transferred were historically part of the Philips
group, certain allocations of liabilities and expenses have been included in the
financial statements. These liabilities and expenses were allocated using
various methods depending upon the nature of the liability or expense. In the
opinion of management, the methods used to allocate these liabilities and
expenses to the PEO Operations are reasonable. The financial statements for the
periods prior to the Combination are not necessarily indicative of the financial
position and results of operations that would have occurred had the PEO
Operations been a separate entity.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Article 2 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for fair presentation have been included. In addition to the
adjustments for normal recurring accruals, the Company recorded charges in the
first quarter of 1997 of $38,046 associated with the purchase of in-process
research and development, as a result of the Company's combination with PEO
Operations. The Company also recorded a $2,478 restructuring and reorganization
charge primarily associated with the relocation of the Company's Wilmington,
Massachusetts manufacturing operations.
4
<PAGE>
2. THE COMBINATION
On February 21, 1997, Pre-Combination FEI acquired substantially all of the
assets and liabilities of the PEO Operations in exchange for 9,728,807 newly
issued shares of the Company's Common Stock, which constituted, when issued to
PIE, 55% of the shares of Common Stock then outstanding. Because PIE acquired
control of the Company by acquiring 55% of the outstanding voting securities of
the Company, the Combination was treated as a "reverse acquisition" for
accounting and financial reporting purposes whereby purchase accounting was
applied to the financial statements of Pre-Combination FEI. The 1997 results of
operations reflect the results of the PEO operations through February 21, 1997,
and the combined results of the Company from February 22, 1997 and thereafter.
The Company obtained an appraisal of the fair market value of the assets
acquired to serve as a basis for allocation of the total purchase price of
$122,872 to the various classes of assets. To determine the value of each of
Pre-Combination FEI's product lines, projected product revenues, net of
provision for operating expenses, income taxes and returns on requisite assets,
were discounted to a present value. This approach was applied to existing
technology as well as to research and development projects which had not been
proven technologically feasible and which had not generated revenue as of the
date of the Combination. As a result of this valuation, the fair values of
existing technology and in-process research and development of Pre-Combination
FEI were determined to be $16,490 and $38,046, respectively.
The amortization periods for existing technology and goodwill have been
established at 12 years and 15 years, respectively. It is possible that
estimates of anticipated future gross revenues, the remaining estimated economic
life of products or technologies, or both, may be reduced due to competitive
pressures or other factors.
In accordance with the Company's policy to expense research and development
costs as incurred, a one-time charge of $38,046 for the write-off of acquired
in-process research and development was recorded immediately subsequent to the
closing of the Combination.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31, June 28,
1997 1998
----------------- ----------------
<S> <C> <C>
Raw materials and assembled parts $ 24,987 $ 26,370
Work in process 12,123 13,019
Finished goods 5,998 11,593
----------------- ----------------
Total inventories 43,108 50,982
Reserve for obsolete inventory (5,301) (5,636)
----------------- ----------------
Net inventories $ 37,807 $ 45,346
================= ================
</TABLE>
5
<PAGE>
4. CURRENT ACCOUNTS WITH PHILIPS
Current accounts with Philips represent accounts receivable and accounts payable
between the Company and other Philips units. Most of the current account
transactions relate to deliveries of goods.
Current accounts with Philips consisted of the following:
<TABLE>
<CAPTION>
December 31, June 28,
1997 1998
----------------- ----------------
<S> <C> <C>
Current accounts payable $ 7,678 $ 8,137
Current accounts payable (16,752) (15,766)
----------------- ----------------
Net current accounts with Philips $ (9,074) $ (7,629)
================= ================
</TABLE>
5. ELECTROSCAN RESTRUCTURING AND REORGANIZATION
In March 1997, the Company transferred its ElectroScan manufacturing activities
to its manufacturing facility in Eindhoven, The Netherlands, and abandoned the
majority of the technology acquired. Consequently, $1.5 million of goodwill
attributable to the acquisition of the assets of ElectroScan Corporation was
written off and charged to income in the first quarter of 1997, along with
estimated severance costs for 11 ElectroScan employees, and other related costs.
6. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, Reporting Comprehensive Income, in the first
quarter of 1998. The primary component of comprehensive income not included in
net income (loss) for the Company is the effect of foreign currency translation
for the Company's foreign subsidiaries. Comprehensive income consisted of the
following:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------------- -------------------------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
---------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) as reported $ 2,235 $ 1,017 $ (42,896) $ 1,619
Effect of foreign currency translation (847) 47 (4,474) 43
---------------- -------------- --------------- -------------
Comprehensive income (loss) $ 1,388 $ 1,064 $ (47,370) $ 1,662
================ ============== =============== =============
</TABLE>
7. SUBSEQUENT EVENT
On July 29, 1998 the Company announced that it would take a charge in the third
quarter of 1998 of approximately $6.4 million for restructuring. The
restructuring charge is being taken to consolidate operations, reduce operating
expenses, and provide for outsourcing of certain manufacturing activities. The
Company anticipates that the restructuring will eliminate approximately 160
positions worldwide, or about 15% of its work force, beginning in August 1998
and extending through 1999. The charge
6
<PAGE>
primarily represents the cost of providing severance, outplacement assistance,
and associated benefits to affected employees, as well as transitional costs for
outsourcing certain activities.
On July 29, 1998 the Company also announced that it would take charges in the
third quarter of 1998 totaling approximately $8.0 million for asset valuation
and reserve adjustments. These charges primarily relate to management decisions,
taken in light of recent market conditions, to eliminate unproductive assets,
redirect a portion of the Company's research and development efforts, and
reconfigure certain products resulting in increased inventory reserves for
obsolescence.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The following table sets forth certain unaudited financial data for the periods
indicated as a percentage of net sales.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------------- -------------------------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
--------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales........................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................... 58.9% 62.0% 64.7% 61.5%
--------------- -------------- -------------- -------------
Gross profit.................................. 41.1% 38.0% 35.3% 38.5%
Research and development costs................... 9.7% 7.7% 11.4% 8.5%
Selling, general and administrative costs........ 21.2% 24.3% 25.9% 24.4%
Amortization of intangibles...................... 1.5% 1.4% 1.2% 1.6%
Purchased in-process research and development
(Note 2) - - 50.0% -
Restructuring and reorganization costs (Note 5).. - - 3.3% -
--------------- -------------- -------------- -------------
Operating income (loss)....................... 8.7% 4.6% (56.5%) 4.0%
Other expense, net............................... 0.2 1.2% 0.4% 0.9%
--------------- -------------- -------------- -------------
Income (loss) before taxes....................... 8.5% 3.5% (56.9%) 3.1%
Tax expense (benefit)............................ 3.4% 1.2% (0.4%) 1.1%
--------------- -------------- -------------- -------------
Net income (loss)................................ 5.1% 2.3% (56.4%) 2.0%
=============== ============== ============== =============
</TABLE>
Net sales. Net sales for the thirteen weeks ended June 28, 1998 increased
$964,000 (2.2%) and for the twenty-six weeks ended June 28, 1998 increased $4.9
million (6.4%) compared to the corresponding periods in 1997. The increase in
sales for the comparable thirteen-week periods is primarily the result of
increases in sales of components. The increase in sales for the twenty-six week
period was primarily attributable to the fact that the 1998 period includes net
sales of the combined company, while the 1997 period includes net sales of the
PEO Operations only through February 21, 1997 and net sales of the combined
company thereafter.
Sales outside the United States accounted for 53% of sales for the twenty-six
weeks ended June 28, 1998 and 62% of sales for the twenty-six weeks ended June
29, 1997. The Company expects that sales outside the United States will continue
to represent a significant percentage of its net sales. Sales to European
customers represented approximately 30% of net sales, while sales to the Asia
Pacific Region ("APR")
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represented approximately 18% of net sales for the first half of 1998. Recent
economic events in Asia may have a negative impact on the Company's sales to APR
during the second half of 1998.
In addition, the Company sells a significant portion of its products to
semiconductor manufacturers. The semiconductor manufacturing industry is
currently experiencing a world-wide downturn, including manufacturing
over-capacity. Several leading companies in this industry have announced plans
to slow down or cancel planned equipment purchases, which may have a negative
impact on the Company's sales to this market sector during the second half of
1998.
Gross profit. Gross profit for the thirteen weeks ended June 28, 1998 decreased
$977,000 (5.4%) and for the twenty-six weeks ended June 28, 1998 increased $4.3
million (16.1%) compared to the corresponding periods in 1997. The changes in
gross profit as a percentage of sales are primarily the result of shifts in
product mix. In addition, gross profit as a percentage of sales for the
twenty-six weeks ended June 29, 1997 was lower due to the write-up of
Pre-Combination FEI's inventory from cost to fair market value and the resulting
increase in cost of goods sold. This write-up of Pre-Combination FEI's assets
was a result of the reverse acquisition accounting applied to the Combination.
Research and development costs. Research and development costs for the thirteen
weeks ended June 28, 1998 decreased $808,000 (19.0%) and for the twenty-six
weeks ended June 28, 1998 decreased $1.7 million (20.0%) compared to the
corresponding periods in 1997. As a percentage of sales, research and
development costs were 7.7% for the thirteen weeks ended June 28, 1998 and 8.5%
for the twenty-six weeks ended June 28, 1998 compared to 9.7% and 11.4% for the
corresponding periods in 1997. The 1997 expense includes the write-off of $1.6
million of previously capitalized software development costs. Excluding the
effect of the 1997 capitalized software write-off, research and development
costs were generally comparable for the twenty-six week periods.
Selling, general and administrative costs. Selling, general and administrative
costs for the thirteen weeks ended June 28, 1998 increased $1.6 million (17.3%)
and for the twenty-six weeks ended June 28, 1998 increased $73,000 (0.4%)
compared to the corresponding periods in 1997. As a percentage of sales,
selling, general and administrative costs were 24.3% for the thirteen weeks
ended June 28, 1998 and 24.4% for the twenty-six weeks ended June 28, 1998
compared to 21.2% and 25.9% for the corresponding periods in 1997. The increase
in the thirteen-week period of 1998 is primarily attributable to higher sales
commissions recognized on instruments sold through distributors. Selling,
general and administrative costs for the 1998 and 1997 twenty-six week periods
were, however, comparable, although the 1997 period includes the expenses of the
PEO Operations only through February 21, 1997 and of the combined company
thereafter. The first quarter of 1997 includes $1.1 million in bad debt
expenses.
Amortization of intangibles. Amortization of intangibles for the twenty-six
weeks ended June 28, 1998 increased $321,000 (34.3%) compared to the
corresponding period in 1997. This increase reflects amortization of the
intangibles resulting from the Combination for twenty-six weeks in 1998 as
compared to amortization for only eighteen weeks in 1997.
Income tax expense. The effective income tax rate was 35% for the thirteen weeks
and twenty-six weeks ended June 28, 1998. The 1998 rate differs from the U.S.
federal statutory tax rate of 34% primarily as a result of state and foreign
taxes, the amortization of intangible assets not deductible for income tax
purposes, and the favorable tax effect of the Company's use of a foreign sales
corporation for exports from the U.S. The tax benefit recognized in the
twenty-six weeks ended June 29, 1997 is attributable to
8
<PAGE>
pretax operating losses in certain tax jurisdictions, offset by the
nondeductible write-off of purchased in process research and development.
Subsequent event. On July 29, 1998 the Company announced that it would take a
charge in the third quarter of 1998 of approximately $6.4 million for
restructuring. The restructuring charge is being taken to consolidate
operations, reduce operating expenses, and provide for outsourcing of certain
manufacturing activities. The Company anticipates that the restructuring will
eliminate approximately 160 positions worldwide, or about 15% of its work force,
beginning in August 1998 and extending through 1999. The charge primarily
represents the cost of providing severance, outplacement assistance, and
associated benefits to affected employees, as well as transitional costs for
outsourcing certain activities.
On July 29, 1998 the Company also announced that it would take charges in the
third quarter of 1998 totaling approximately $8.0 million for asset valuation
and reserve adjustments. These charges primarily relate to management decisions,
taken in light of recent market conditions, to eliminate unproductive assets,
redirect a portion of the Company's research and development efforts, and
reconfigure certain products resulting in increased inventory reserves for
obsolescence.
LIQUIDITY AND CAPITAL RESOURCES
At June 28, 1998, the Company had total cash and cash equivalents of $8.6
million compared to $16.4 million at December 31, 1997. Cash provided by
operating activities for the twenty-six weeks ended June 28, 1998 was $5.1
million compared to $15.4 million for the twenty-six weeks ended June 29, 1997.
The primary reasons for the decrease in cash flows from operating activities
during the 1998 twenty-six week period compared to the 1997 period were
fluctuations in receivables, inventories, accounts payable, and other working
capital components.
Investing activities used $5.3 million during the twenty-six weeks ended June
28, 1998 and $5.7 million during the twenty-six weeks ended June 29, 1997,
primarily due to acquisitions of equipment and investment in software
development. The Company expects to continue to invest in plant and equipment
and technology needed for future business requirements, as well as to invest in
internally developed software for its products.
Financing activities used $7.6 million for the twenty-six weeks ended June 28,
1998. These cash uses were primarily for net repayments under the Company's bank
line of credit in the amount of $4.9 million as well as repayment of $2.7
million to Philips under an obligation incurred in conjunction with the
Combination. During the comparable 1997 period, financing activities provided
$11.9 million primarily resulting from net borrowings under the line of credit
and cash advanced from Philips as part of the Combination.
The Company expects to continue to use cash to fund the growth of its
operations. While the Company believes its cash and cash equivalents and
borrowings available under its $25 million line of credit will be sufficient to
fund operations during the near term, the Company intends to seek an increase in
its borrowing capacity available under its line of credit agreement.
9
<PAGE>
BACKLOG
The Company's backlog consists of purchase orders it has received for products
it expects to ship within the next 12 months. The Company's backlog at June 28,
1998 was approximately $51 million. A substantial portion of the Company's
backlog relates to orders for a relatively small number of products. As a
result, the timing of the receipt of orders could have a significant impact on
the Company's backlog at any date. For this and other reasons, the amount of
backlog at any date is not necessarily determinative of revenue in future
periods.
YEAR 2000 COMPUTER SYSTEM IMPACT
The Company has completed (i) an inventory of Year 2000 issues related to its
business, (ii) an analysis of the business impact of those issues, other than
Year 2000 compliance by each of its suppliers and (iii) defined a strategy for
resolving Year 2000 problems expected to affect the Company. In the second half
of 1998 the Company will solicit information from its suppliers on their Year
2000 readiness and work on execution of the Company's Year 2000 strategy. In
1999 the Company expects to complete plans for risk management and any
contingency plans determined to be necessary.
The Company has assessed the Year 2000 compliance of each of the products
currently manufactured and sold by the Company. The Company believes each of
those products and their component parts is Year 2000 compliant except certain
workstation models which use a Windows 3.11 operating system. The date
recognition deficiencies of this system can be remedied with a patch available
from Microsoft Corporation and, in any event, do not effect the core functions
of those products.
The Company has also analyzed its internal manufacturing control, accounting and
information management systems and determined that those systems have no
material Year 2000 compliance deficiencies. In this analysis, the Company has
assumed that basic public utilities such as gas, electric and telephone services
will continue to be available for operations of the Company on and after January
1, 2000 in the U.S., The Netherlands and the Czech Republic. If this assumption
proves incorrect, the operations of the affected manufacturing location would be
materially adversely affected for the duration of the utility interruption.
In the third and fourth quarters of 1998 the Company will require each of its
suppliers of parts and services to provide information to the Company about that
entity's anticipated Year 2000 compliance. Until that information is received,
the Company cannot complete that phase of the Company's Year 2000 assessment. To
date, the Company has not received notice of or become aware of a material Year
2000 deficiency by a supplier.
At this time, the Company believes costs incurred in responding to other
parties' Year 2000 computer system deficiencies, together with the cost of any
required modifications to the Company's ancillary systems, will not have a
material impact on the Company's results of operations or financial condition.
This analysis may be modified as the Company receives responses from its parts
and services suppliers.
10
<PAGE>
FORWARD-LOOKING STATEMENTS
From time to time the Company may issue forward-looking statements that are
subject to a number of risks and uncertainties. The statements in this report
concerning increased investment in plant and equipment and software development,
the portions of the Company's sales consisting of international sales, expected
capital requirements, and year 2000 compliance by the Company and its customers
and suppliers constitute forward-looking statements that are subject to risks
and uncertainties. Factors that could materially decrease the Company's
investment in plant and equipment and software development include, but are not
limited to, downturns in the IC manufacturing market, lower than expected
customer orders and changes in product sales mix. Factors that could materially
reduce the portion of the Company's sales consisting of international sales
include, but are not limited to, competitive factors, including increased
international competition, new product offerings by competitors and price
pressures, fluctuations in interest and exchange rates (including changes in
relevant foreign currency exchange rates between time of sale and time of
payment), changes in trade policies, tariff regulations and business conditions
and growth in the electronics industry and general economies, both domestic and
foreign. Factors that could materially increase the Company's capital
requirements include, but are not limited to, receipt of a significant portion
of customer orders and product shipments near the end of a quarter and the other
factors listed above.
11
<PAGE>
Part II - Other Information
Item 2. Changes in Securities
On February 21, 1997 (the "Combination Closing"), the Company combined with the
electron optics business of Philips Electronics N.V. pursuant to a Combination
Agreement dated November 15, 1996. At the Combination Closing, the Company
issued 9,728,807 shares of its Common Stock to Philips Industrial Electronics
International B.V., a Netherlands corporation ("PIE"), as consideration for all
of the outstanding shares of Philips Electron Optics International B.V., a
Netherlands corporation, and Philips Electron Optics, Inc., a Delaware
corporation, both wholly owned subsidiaries of PIE immediately prior to the
Combination Closing.
The Combination Agreement provides in relevant part that at the time of issuance
by the Company of any shares of Common Stock upon the exercise of a stock option
outstanding on the date of the Combination Closing, the Company is required to
issue to PIE a number of additional shares of Common Stock such that the shares
of Common Stock issued to PIE continue to represent 55% of the Outstanding
Common Stock of the Company, as defined in the Combination Agreement. During the
twenty-six weeks ended June 28, 1998 the Company issued 595 shares of its Common
Stock to PIE pursuant to this provision of the Combination Agreement.
The shares issued were not registered under the Securities Act of 1933, and the
issuance was made in reliance on Section 4(2) of the Securities Act as a
transaction not involving a public offering. The consideration received by the
Company for the shares issued, together with the shares issued to PIE at the
Combination Closing, was the outstanding shares of Philips Electron Optics
International B.V. and Philips Electron Optics, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
On May 21, 1998 at the Company's Annual Meeting of shareholders, the
holders of the Company's outstanding Common Stock took the actions described
below. As of the record date for the Annual Meeting, 18,078,614 shares of Common
Stock were issued and outstanding.
1. The shareholders elected each of Alfred B. Bok, William E. Curran,
William G. Langley, Theo J.H.J. Sonnemans, Lynwood W. Swanson, Lloyd R. Swenson,
Karel D. van der Mast, Donald R. VanLuvanee and William A. Whitward by the votes
indicated below, to serve on the Company's Board of Directors for the ensuing
year:
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Alfred B. Bok
-------------
16,727,934 shares in favor
42,087 shares against or withheld
William E. Curran
-----------------
16,728,534 shares in favor
41,487 shares against or withheld
William G. Langley
------------------
16,729,234 shares in favor
40,787 shares against or withheld
Theo J.H.J.Sonnemans
--------------------
16,727,834 shares in favor
42,187 shares against or withheld
Dr. Lynwood W. Swanson
----------------------
16,730,334 shares in favor
39,687 shares against or withheld
Lloyd R. Swenson
----------------
16,730,334 shares in favor
39,687 shares against or withheld
Karel D. van der Mast
---------------------
16,728,634 shares in favor
41,387 shares against or withheld
Donald R. VanLuvanee
--------------------
16,728,334 shares in favor
41,687 shares against or withheld
William A. Whitward
-------------------
16,729,234 shares in favor
40,787 shares against or withheld.
2. The shareholders voted to amend the Company's 1995 Stock Incentive Plan
(i) to increase the total number of shares of Common Stock of the Company
reserved for issuance under the Plan from 1,300,000 to 1,600,000, (ii) to
increase the automatic annual grant of stock options to each "independent
director" from 1,000 in each calendar year to 3,000, and (iii) to reapprove the
per-employee limits on grants of options and stock appreciation rights under the
Plan, by the votes indicated below:
16,266,258 shares in favor
477,641 shares against or withheld
26,122 abstain.
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3 The shareholders voted to approve the Company's Employee Share Purchase
Plan, by the votes indicated below:
16,685,854 shares in favor
69,282 shares against or withheld
14,885 abstain.
Item 5. Other Information
In accordance with amendments adopted on May 21, 1998 to Rule 14a-4 under the
Securities Exchange Act of 1934, if notice of a shareholder proposal to be
raised at the annual meeting of shareholders is received at the principal
executive offices of the Company after March 10, 1999 (45 days prior to the
month and date in 1999 corresponding to the date on which the Company mailed its
proxy materials for the 1998 annual meeting), proxy voting on that proposal when
and if raised at the 1999 annual meeting will be subject to the discretionary
voting authority of the designated proxy holders. Any shareholder proposal to be
considered for inclusion in proxy materials for the Company's 1999 annual
meeting must be received at the principal executive offices of the Company no
later than December 24, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.2 1995 Stock Incentive Plan, as amended
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FEI COMPANY
Dated: August 12, 1998 /s/ WILLIAM G. LANGLEY
-----------------------------------------
William G. Langley
Executive Vice President, Chief Financial
Officer and Secretary (Principal
Financial Officer)
/s/ MARK V. ALLRED
-----------------------------------------
Mark V. Allred
Controller (Principal Accounting Officer)
15
FEI COMPANY
1995 STOCK INCENTIVE PLAN
As amended May 21, 1998
1. Purpose. The purpose of this Stock Incentive Plan (the "Plan") is to
enable FEI Company (the "Company") to attract and retain the services of (1)
selected employees, officers and directors of the Company or of any subsidiary
of the Company and (2) selected nonemployee agents, consultants, advisors,
persons involved in the sale or distribution of the Company's products and
independent contractors of the Company or any subsidiary.
2. Shares Subject to the Plan. Subject to adjustment as provided below and
in paragraph 13, the shares to be offered under the Plan shall consist of Common
Stock of the Company, and the total number of shares of Common Stock that may be
issued under the Plan shall not exceed 1,600,000 shares. The shares issued under
the Plan may be authorized and unissued shares or reacquired shares. If an
option, stock appreciation right or performance unit granted under the Plan
expires, terminates or is canceled, the unissued shares subject to such option,
stock appreciation right or performance unit shall again be available under the
Plan. If shares sold or awarded as a bonus under the Plan are forfeited to the
Company or repurchased by the Company, the number of shares forfeited or
repurchased shall again be available under the Plan.
3. Effective Date and Duration of Plan.
(a) Effective Date. The Plan shall become effective as of April 21,
1995. No option, stock appreciation right or performance unit granted under the
Plan shall become exercisable, however, until the Plan is approved by the
affirmative vote of the holders of a majority of the shares of Common Stock
represented at a shareholders meeting at which a quorum is present and any such
awards under the Plan prior to such approval shall be conditioned on and subject
to such approval. Subject to this limitation, options, stock appreciation rights
and performance units may be granted and shares may be awarded as bonuses or
sold under the Plan at any time after the effective date and before termination
of the Plan.
(b) Duration. The Plan shall continue in effect until all shares
available for issuance under the Plan have been issued and all restrictions on
such shares have lapsed. The Board of Directors may suspend or terminate the
Plan at any time except with respect to options, performance units and shares
subject to restrictions then outstanding under the Plan. Termination shall not
affect any outstanding options, any right of the Company to repurchase shares or
the forfeitability of shares issued under the Plan.
<PAGE>
4. Administration.
(a) Board of Directors. The Plan shall be administered by the Board of
Directors of the Company, which shall determine and designate from time to time
the individuals to whom awards shall be made, the amount of the awards and the
other terms and conditions of the awards. Subject to the provisions of the Plan,
the Board of Directors may from time to time adopt and amend rules and
regulations relating to administration of the Plan, advance the lapse of any
waiting period, accelerate any exercise date, waive or modify any restriction
applicable to shares (except those restrictions imposed by law) and make all
other determinations in the judgment of the Board of Directors necessary or
desirable for the administration of the Plan. The interpretation and
construction of the provisions of the Plan and related agreements by the Board
of Directors shall be final and conclusive. The Board of Directors may correct
any defect or supply any omission or reconcile any inconsistency in the Plan or
in any related agreement in the manner and to the extent it shall deem expedient
to carry the Plan into effect, and it shall be the sole and final judge of such
expediency.
(b) Committee. The Board of Directors may delegate to a committee of
the Board of Directors or specified officers of the Company, or both (the
"Committee") any or all authority for administration of the Plan. If authority
is delegated to a Committee, all references to the Board of Directors in the
Plan shall mean and relate to the Committee except (i) as otherwise provided by
the Board of Directors, (ii) that only the Board of Directors may amend or
terminate the Plan as provided in paragraphs 3 and 15 and (iii) that a Committee
including officers of the Company shall not be permitted to grant options to
persons who are officers of the Company.
5. Types of Awards; Eligibility. The Board of Directors may, from time to
time, take the following action, separately or in combination, under the Plan:
(i) grant Incentive Stock Options, as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), as provided in paragraphs 6(a)
and 6(b); (ii) grant options other than Incentive Stock Options ("Non-Statutory
Stock Options") as provided in paragraphs 6(a) and 6(c); (iii) award stock
bonuses as provided in paragraph 7; (iv) sell shares subject to restrictions as
provided in paragraph 8; (v) grant stock appreciation rights as provided in
paragraph 9; (vi) grant cash bonus rights as provided in paragraph 10; (vii)
grant performance units as provided in paragraph 11 and (viii) grant foreign
qualified awards as provided in paragraph 12. Any such awards may be made to
employees, including employees who are officers or directors, and to other
individuals described in paragraph 1 who the Board of Directors believes have
made or will make an important contribution to the Company or any subsidiary of
the Company; provided, however, that only employees of the Company shall be
eligible to receive Incentive Stock Options under the Plan. The Board of
Directors shall select the individuals to whom awards shall be made and shall
specify the action taken with respect to each individual to whom an award is
made. At the discretion of the Board of Directors, an individual may be given an
election to surrender an award in exchange for the grant of a new award. No
employee may be
2
<PAGE>
granted options or stock appreciation rights under the Plan for more than an
aggregate of 200,000 shares of Common Stock in connection with the hiring of the
employee or 50,000 shares of Common Stock in any calendar year otherwise.
6. Option Grants.
(a) General Rules Relating to Options.
(i) Terms of Grant. The Board of Directors may grant options
under the Plan. With respect to each option grant, the Board of Directors
shall determine the number of shares subject to the option, the option
price, the period of the option, the time or times at which the option may
be exercised and whether the option is an Incentive Stock Option or a
Non-Statutory Stock Option. At the time of the grant of an option or at any
time thereafter, the Board of Directors may provide that an optionee who
exercised an option with Common Stock of the Company shall automatically
receive a new option to purchase additional shares equal to the number of
shares surrendered and may specify the terms and conditions of such new
options.
(ii) Exercise of Options. Except as provided in paragraph
6(a)(iv) or as determined by the Board of Directors, no option granted
under the Plan may be exercised unless at the time of such exercise the
optionee is employed by or in the service of the Company or any subsidiary
of the Company and shall have been so employed or provided such service
continuously since the date such option was granted. Absence on leave or on
account of illness or disability under rules established by the Board of
Directors shall not, however, be deemed an interruption of employment or
service for this purpose. Unless otherwise determined by the Board of
Directors, vesting of options shall not continue during an absence on leave
(including an extended illness) or on account of disability. Except as
provided in paragraphs 6(a)(iv) and 13, options granted under the Plan may
be exercised from time to time over the period stated in each option in
such amounts and at such times as shall be prescribed by the Board of
Directors, provided that options shall not be exercised for fractional
shares. Unless otherwise determined by the Board of Directors, if the
optionee does not exercise an option in any one year with respect to the
full number of shares to which the optionee is entitled in that year, the
optionee's rights shall be cumulative and the optionee may purchase those
shares in any subsequent year during the term of the option.
(iii) Nontransferability. Each Incentive Stock Option and, unless
otherwise determined by the Board of Directors, each other option granted
under the Plan by its terms shall be nonassignable and nontransferable by
the optionee, either voluntarily or by operation of law, except by will or
by the laws of descent and distribution of the state or country of the
optionee's domicile at the time of death.
3
<PAGE>
(iv) Termination of Employment or Service.
(A) General Rule. Unless otherwise determined by the Board
of Directors, in the event the employment or service of the optionee
with the Company or a subsidiary terminates for any reason other than
because of physical disability or death as provided in subparagraphs
6(a)(iv)(B) and (C), the option may be exercised at any time prior to
the expiration date of the option or the expiration of 30 days after
the date of such termination, whichever is the shorter period, but
only if and to the extent the optionee was entitled to exercise the
option at the date of such termination.
(B) Termination Because of Total Disability. Unless
otherwise determined by the Board of Directors, in the event of the
termination of employment or service because of total disability, the
option may be exercised at any time prior to the expiration date of
the option or the expiration of 12 months after the date of such
termination, whichever is the shorter period, but only if and to the
extent the optionee was entitled to exercise the option at the date of
such termination. The term "total disability" means a medically
determinable mental or physical impairment which is expected to result
in death or which has lasted or is expected to last for a continuous
period of 12 months or more and which causes the optionee to be
unable, in the opinion of the Company and two independent physicians,
to perform his or her duties as an employee, director, officer or
consultant of the Company and to be engaged in any substantial gainful
activity. Total disability shall be deemed to have occurred on the
first day after the Company and the two independent physicians have
furnished their opinion of total disability to the Company.
(C) Termination Because of Death. Unless otherwise
determined by the Board of Directors, in the event of the death of an
optionee while employed by or providing service to the Company or a
subsidiary, the option may be exercised at any time prior to the
expiration date of the option or the expiration of 12 months after the
date of death, whichever is the shorter period, but only if and to the
extent the optionee was entitled to exercise the option at the date of
death and only by the person or persons to whom such optionee's rights
under the option shall pass by the optionee's will or by the laws of
descent and distribution of the state or country of domicile at the
time of death.
(D) Amendment of Exercise Period Applicable to Termination.
The Board of Directors, at the time of grant or, with respect to an
option that is not an Incentive Stock Option, at any time thereafter,
may extend the 30-day and 12-month exercise periods any length of time
4
<PAGE>
not longer than the original expiration date of the option, and may
increase the portion of an option that is exercisable, subject to such
terms and conditions as the Board of Directors may determine.
(E) Failure to Exercise Option. To the extent that the
option of any deceased optionee or of any optionee whose employment or
service terminates is not exercised within the applicable period, all
further rights to purchase shares pursuant to such option shall cease
and terminate.
(v) Purchase of Shares. Unless the Board of Directors determines
otherwise, shares may be acquired pursuant to an option granted under the
Plan only upon receipt by the Company of notice in writing from the
optionee of the optionee's intention to exercise, specifying the number of
shares as to which the optionee desires to exercise the option and the date
on which the optionee desires to complete the transaction, and if required
in order to comply with the Securities Act of 1933, as amended, containing
a representation that it is the optionee's present intention to acquire the
shares for investment and not with a view to distribution. Unless the Board
of Directors determines otherwise, on or before the date specified for
completion of the purchase of shares pursuant to an option, the optionee
must have paid the Company the full purchase price of such shares in cash
(including, with the consent of the Board of Directors, cash that may be
the proceeds of a loan from the Company (provided that, with respect to an
Incentive Stock Option, such loan is approved at the time of option grant))
or, with the consent of the Board of Directors, in whole or in part, in
Common Stock of the Company valued at fair market value, restricted stock,
performance units or other contingent awards denominated in either stock or
cash, promissory notes and other forms of consideration. The fair market
value of Common Stock provided in payment of the purchase price shall be
determined by the Board of Directors. If the Common Stock of the Company is
not publicly traded on the date the option is exercised, the Board of
Directors may consider any valuation methods it deems appropriate and may,
but is not required to, obtain one or more independent appraisals of the
Company. If the Common Stock of the Company is publicly traded on the date
the option is exercised, the fair market value of Common Stock provided in
payment of the purchase price shall be the closing price of the Common
Stock as reported in The Wall Street Journal on the last trading day
preceding the date the option is exercised, or such other reported value of
the Common Stock as shall be specified by the Board of Directors. No shares
shall be issued until full payment for the shares has been made. With the
consent of the Board of Directors (which, in the case of an Incentive Stock
Option, shall be given only at the time of option grant), an optionee may
request the Company to apply automatically the shares to be received upon
the exercise of a portion of a stock option (even though stock certificates
have not yet been issued) to satisfy the purchase price for additional
portions of the option. Each optionee who has exercised an option shall
immediately upon notification of the amount due, if any, pay to the Company
in cash amounts necessary to satisfy any applicable federal,
5
<PAGE>
state and local tax withholding requirements. If additional withholding is
or becomes required beyond any amount deposited before delivery of the
certificates, the optionee shall pay such amount to the Company on demand.
If the optionee fails to pay the amount demanded, the Company may withhold
that amount from other amounts payable by the Company to the optionee,
including salary, subject to applicable law. With the consent of the Board
of Directors an optionee may satisfy this obligation, in whole or in part,
by having the Company withhold from the shares to be issued upon the
exercise that number of shares that would satisfy the withholding amount
due or by delivering to the Company Common Stock to satisfy the withholding
amount. Upon the exercise of an option, the number of shares reserved for
issuance under the Plan shall be reduced by the number of shares issued
upon exercise of the option.
(b) Incentive Stock Options. Incentive Stock Options shall be subject
to the following additional terms and conditions:
(i) Limitation on Amount of Grants. No employee may be granted
Incentive Stock Options under the Plan if the aggregate fair market value,
on the date of grant, of the Common Stock with respect to which Incentive
Stock Options are exercisable for the first time by that employee during
any calendar year under the Plan and under all incentive stock option plans
(within the meaning of Section 422 of the Code) of the Company or any
parent or subsidiary of the Company exceeds $100,000.
(ii) Limitations on Grants to 10 Percent Shareholders. An
Incentive Stock Option may be granted under the Plan to an employee
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of any parent or subsidiary of the
Company only if the option price is at least 110 percent of the fair market
value, as described in paragraph 6(b)(iv), of the Common Stock subject to
the option on the date it is granted and the option by its terms is not
exercisable after the expiration of five years from the date it is granted.
(iii) Duration of Options. Subject to paragraphs 6(a)(ii) and
6(b)(ii), Incentive Stock Options granted under the Plan shall continue in
effect for the period fixed by the Board of Directors, except that no
Incentive Stock Option shall be exercisable after the expiration of 10
years from the date it is granted.
(iv) Option Price. The option price per share shall be determined
by the Board of Directors at the time of grant. Except as provided in
paragraph 6(b)(ii), the option price shall not be less than 100 percent of
the fair market value of the Common Stock covered by the Incentive Stock
Option at the date the option is granted. The fair market value shall be
determined by the Board of Directors. If the Common Stock of the Company is
not publicly traded on the date the option is granted, the Board of
Directors may consider any valuation
6
<PAGE>
methods it deems appropriate and may, but is not required to, obtain one or
more independent appraisals of the Company. If the Common Stock of the
Company is publicly traded on the date the option is exercised, the fair
market value shall be deemed to be the closing price of the Common Stock as
reported in The Wall Street Journal on the day preceding the date the
option is granted, or, if there has been no sale on that date, on the last
preceding date on which a sale occurred or such other value of the Common
Stock as shall be specified by the Board of Directors.
(v) Limitation on Time of Grant. No Incentive Stock Option shall
be granted on or after the tenth anniversary of the effective date of the
Plan.
(vi) Conversion of Incentive Stock Options. The Board of
Directors may at any time without the consent of the optionee convert an
Incentive Stock Option to a Non-Statutory Stock Option.
(c) Non-Statutory Stock Options. Non-Statutory Stock Options shall be
subject to the following terms and conditions in addition to those set forth in
Section 6(a) above:
(i) Option Price. The option price for Non-Statutory Stock
Options shall be determined by the Board of Directors at the time of grant
and may be any amount determined by the Board of Directors.
(ii) Duration of Options. Non-Statutory Stock Options granted
under the Plan shall continue in effect for the period fixed by the Board
of Directors.
7. Stock Bonuses. The Board of Directors may award shares under the Plan as
stock bonuses. Shares awarded as a bonus shall be subject to the terms,
conditions, and restrictions determined by the Board of Directors. The
restrictions may include restrictions concerning transferability and forfeiture
of the shares awarded, together with such other restrictions as may be
determined by the Board of Directors. If shares are subject to forfeiture, all
dividends or other distributions paid by the Company with respect to the shares
shall be retained by the Company until the shares are no longer subject to
forfeiture, at which time all accumulated amounts shall be paid to the
recipient. The Board of Directors may require the recipient to sign an agreement
as a condition of the award, but may not require the recipient to pay any
monetary consideration other than amounts necessary to satisfy tax withholding
requirements. The agreement may contain any terms, conditions, restrictions,
representations and warranties required by the Board of Directors. The
certificates representing the shares awarded shall bear any legends required by
the Board of Directors. The Company may require any recipient of a stock bonus
to pay to the Company in cash upon demand amounts necessary to satisfy any
applicable federal, state or local tax withholding requirements. If the
recipient fails to pay the amount demanded, the Company may withhold that amount
from other amounts
7
<PAGE>
payable by the Company to the recipient, including salary or fees for services,
subject to applicable law. With the consent of the Board of Directors, a
recipient may deliver Common Stock to the Company to satisfy this withholding
obligation. Upon the issuance of a stock bonus, the number of shares reserved
for issuance under the Plan shall be reduced by the number of shares issued.
8. Restricted Stock. The Board of Directors may issue shares under the Plan
for such consideration (including promissory notes and services) as determined
by the Board of Directors. Shares issued under the Plan shall be subject to the
terms, conditions and restrictions determined by the Board of Directors. The
restrictions may include restrictions concerning transferability, repurchase by
the Company and forfeiture of the shares issued, together with such other
restrictions as may be determined by the Board of Directors. If shares are
subject to forfeiture or repurchase by the Company, all dividends or other
distributions paid by the Company with respect to the shares shall be retained
by the Company until the shares are no longer subject to forfeiture or
repurchase, at which time all accumulated amounts shall be paid to the
recipient. All Common Stock issued pursuant to this paragraph 8 shall be subject
to a purchase agreement, which shall be executed by the Company and the
prospective recipient of the shares prior to the delivery of certificates
representing such shares to the recipient. The purchase agreement may contain
any terms, conditions, restrictions, representations and warranties required by
the Board of Directors. The certificates representing the shares shall bear any
legends required by the Board of Directors. The Company may require any
purchaser of restricted stock to pay to the Company in cash upon demand amounts
necessary to satisfy any applicable federal, state or local tax withholding
requirements. If the purchaser fails to pay the amount demanded, the Company may
withhold that amount from other amounts payable by the Company to the purchaser,
including salary, subject to applicable law. With the consent of the Board of
Directors, a purchaser may deliver Common Stock to the Company to satisfy this
withholding obligation. Upon the issuance of restricted stock, the number of
shares reserved for issuance under the Plan shall be reduced by the number of
shares issued.
9. Stock Appreciation Rights.
(a) Grant. Stock appreciation rights may be granted under the Plan by
the Board of Directors, subject to such rules, terms, and conditions as the
Board of Directors prescribes.
(b) Exercise.
(i) Each stock appreciation right shall entitle the holder, upon
exercise, to receive from the Company in exchange therefor an amount equal
in value to the excess of the fair market value on the date of exercise of
one share of Common Stock of the Company over its fair market value on the
date of grant (or, in the case of a stock appreciation right granted in
connection with an option, the excess of the fair market value of one share
of Common Stock of the Company
8
<PAGE>
over the option price per share under the option to which the stock
appreciation right relates), multiplied by the number of shares covered by
the stock appreciation right or the option, or portion thereof, that is
surrendered. No stock appreciation right shall be exercisable at a time
that the amount determined under this subparagraph is negative. Payment by
the Company upon exercise of a stock appreciation right may be made in
Common Stock valued at fair market value, in cash, or partly in Common
Stock and partly in cash, all as determined by the Board of Directors.
(ii) A stock appreciation right shall be exercisable only at the
time or times established by the Board of Directors. If a stock
appreciation right is granted in connection with an option, the following
rules shall apply: (1) the stock appreciation right shall be exercisable
only to the extent and on the same conditions that the related option could
be exercised; (2) the stock appreciation rights shall be exercisable only
when the fair market value of the stock exceeds the option price of the
related option; (3) the stock appreciation right shall be for no more than
100 percent of the excess of the fair market value of the stock at the time
of exercise over the option price; (4) upon exercise of the stock
appreciation right, the option or portion thereof to which the stock
appreciation right relates terminates; and (5) upon exercise of the option,
the related stock appreciation right or portion thereof terminates.
(iii) The Board of Directors may withdraw any stock appreciation
right granted under the Plan at any time and may impose any conditions upon
the exercise of a stock appreciation right or adopt rules and regulations
from time to time affecting the rights of holders of stock appreciation
rights. Such rules and regulations may govern the right to exercise stock
appreciation rights granted prior to adoption or amendment of such rules
and regulations as well as stock appreciation rights granted thereafter.
(iv) For purposes of this paragraph 9, the fair market value of
the Common Stock shall be determined as of the date the stock appreciation
right is exercised, under the methods set forth in paragraph 6(b)(iv).
(v) No fractional shares shall be issued upon exercise of a stock
appreciation right. In lieu thereof, cash may be paid in an amount equal to
the value of the fraction or, if the Board of Directors shall determine,
the number of shares may be rounded downward to the next whole share.
(vi) Each stock appreciation right granted in connection with an
Incentive Stock Option, and unless otherwise determined by the Board of
Directors, each other stock appreciation right granted under the Plan by
its terms shall be nonassignable and nontransferable by the holder, either
voluntarily or by operation of law, except by will or by the laws of
descent and distribution of the state or country of the holder's domicile
at the time of death, and each stock
9
<PAGE>
appreciation right by its terms shall be exercisable during the holder's
lifetime only by the holder.
(vii) Each participant who has exercised a stock appreciation
right shall, upon notification of the amount due, pay to the Company in
cash amounts necessary to satisfy any applicable federal, state and local
tax withholding requirements. If the participant fails to pay the amount
demanded, the Company may withhold that amount from other amounts payable
by the Company to the participant including salary, subject to applicable
law. With the consent of the Board of Directors a participant may satisfy
this obligation, in whole or in part, by having the Company withhold from
any shares to be issued upon the exercise that number of shares that would
satisfy the withholding amount due or by delivering Common Stock to the
Company to satisfy the withholding amount.
(viii) Upon the exercise of a stock appreciation right for
shares, the number of shares reserved for issuance under the Plan shall be
reduced by the number of shares issued. Cash payments of stock appreciation
rights shall not reduce the number of shares of Common Stock reserved for
issuance under the Plan.
10. Cash Bonus Rights.
(a) Grant. The Board of Directors may grant cash bonus rights under
the Plan in connection with (i) options granted or previously granted, (ii)
stock appreciation rights granted or previously granted, (iii) stock bonuses
awarded or previously awarded and (iv) shares sold or previously sold under the
Plan. Cash bonus rights will be subject to rules, terms and conditions as the
Board of Directors may prescribe. Unless otherwise determined by the Board of
Directors, each cash bonus right granted under the Plan by its terms shall be
nonassignable and nontransferable by the holder, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution of
the state or country of the holder's domicile at the time of death. The payment
of a cash bonus shall not reduce the number of shares of Common Stock reserved
for issuance under the Plan.
(b) Cash Bonus Rights in Connection With Options. A cash bonus right
granted in connection with an option will entitle an optionee to a cash bonus
when the related option is exercised (or terminates in connection with the
exercise of a stock appreciation right related to the option) in whole or in
part if, in the sole discretion of the Board of Directors, the bonus right will
result in a tax deduction that the Company has sufficient taxable income to use.
If an optionee purchases shares upon exercise of an option and does not exercise
a related stock appreciation right, the amount of the bonus, if any, shall be
determined by multiplying the excess of the total fair market value of the
shares to be acquired upon the exercise over the total option price for the
shares by the applicable bonus percentage. If the optionee exercises a related
stock appreciation right in connection with the termination of an option, the
amount of the bonus, if any, shall be determined by multiplying the total fair
market value of the shares and cash received
10
<PAGE>
pursuant to the exercise of the stock appreciation right by the applicable bonus
percentage. The bonus percentage applicable to a bonus right, including a
previously granted bonus right, may be changed from time to time at the sole
discretion of the Board of Directors but shall in no event exceed 75 percent.
(c) Cash Bonus Rights in Connection With Stock Bonus. A cash bonus
right granted in connection with a stock bonus will entitle the recipient to a
cash bonus payable when the stock bonus is awarded or restrictions, if any, to
which the stock is subject lapse. If bonus stock awarded is subject to
restrictions and is repurchased by the Company or forfeited by the holder, the
cash bonus right granted in connection with the stock bonus shall terminate and
may not be exercised. The amount and timing of payment of a cash bonus shall be
determined by the Board of Directors.
(d) Cash Bonus Rights in Connection With Stock Purchases. A cash bonus
right granted in connection with the purchase of stock pursuant to paragraph 8
will entitle the recipient to a cash bonus when the shares are purchased or
restrictions, if any, to which the stock is subject lapse. Any cash bonus right
granted in connection with shares purchased pursuant to paragraph 8 shall
terminate and may not be exercised in the event the shares are repurchased by
the Company or forfeited by the holder pursuant to applicable restrictions. The
amount of any cash bonus to be awarded and timing of payment of a cash bonus
shall be determined by the Board of Directors.
(e) Taxes. The Company shall withhold from any cash bonus paid
pursuant to paragraph 10 the amount necessary to satisfy any applicable federal,
state and local withholding requirements.
11. Performance Units. The Board of Directors may grant performance units
consisting of monetary units which may be earned in whole or in part if the
Company achieves certain goals established by the Board of Directors over a
designated period of time, but not in any event more than 10 years. The goals
established by the Board of Directors may include earnings per share, return on
shareholders' equity, return on invested capital, and such other goals as may be
established by the Board of Directors. In the event that the minimum performance
goal established by the Board of Directors is not achieved at the conclusion of
a period, no payment shall be made to the participants. In the event the maximum
corporate goal is achieved, 100 percent of the monetary value of the performance
units shall be paid to or vested in the participants. Partial achievement of the
maximum goal may result in a payment or vesting corresponding to the degree of
achievement as determined by the Board of Directors. Payment of an award earned
may be in cash or in Common Stock or in a combination of both, and may be made
when earned, or vested and deferred, as the Board of Directors determines.
Deferred awards shall earn interest on the terms and at a rate determined by the
Board of Directors. Unless otherwise determined by the Board of Directors, each
performance unit granted under the Plan by its terms shall be nonassignable and
nontransferable by the holder, either voluntarily or by operation of law, except
by will or by the laws of descent and distribution of the state or country of
the holder's domicile at the time of death. Each
11
<PAGE>
participant who has been awarded a performance unit shall, upon notification of
the amount due, pay to the Company in cash amounts necessary to satisfy any
applicable federal, state and local tax withholding requirements. If the
participant fails to pay the amount demanded, the Company may withhold that
amount from other amounts payable by the Company to the participant, including
salary or fees for services, subject to applicable law. With the consent of the
Board of Directors a participant may satisfy this obligation, in whole or in
part, by having the Company withhold from any shares to be issued that number of
shares that would satisfy the withholding amount due or by delivering Common
Stock to the Company to satisfy the withholding amount. The payment of a
performance unit in cash shall not reduce the number of shares of Common Stock
reserved for issuance under the Plan. The number of shares reserved for issuance
under the Plan shall be reduced by the number of shares issued upon payment of
an award.
12. Foreign Qualified Grants. Awards under the Plan may be granted to such
officers and employees of the Company and its subsidiaries and such other
persons described in paragraph 1 residing in foreign jurisdictions as the Board
of Directors may determine from time to time. The Board of Directors may adopt
such supplements to the Plan as may be necessary to comply with the applicable
laws of such foreign jurisdictions and to afford participants favorable
treatment under such laws; provided, however, that no award shall be granted
under any such supplement with terms which are more beneficial to the
participants than the terms permitted by the Plan.
13. Changes in Capital Structure.
(a) Stock Splits; Stock Dividends. If the outstanding Common Stock of
the Company is hereafter increased or decreased or changed into or exchanged for
a different number or kind of shares or other securities of the Company by
reason of any stock split, combination of shares or dividend payable in shares,
recapitalization or reclassification appropriate adjustment shall be made by the
Board of Directors in the number and kind of shares available for grants under
the Plan. In addition, the Board of Directors shall make appropriate adjustment
in the number and kind of shares as to which outstanding options, or portions
thereof then unexercised, shall be exercisable, so that the optionee's
proportionate interest before and after the occurrence of the event is
maintained. Notwithstanding the foregoing, the Board of Directors shall have no
obligation to effect any adjustment that would or might result in the issuance
of fractional shares, and any fractional shares resulting from any adjustment
may be disregarded or provided for in any manner determined by the Board of
Directors. Any such adjustments made by the Board of Directors shall be
conclusive.
(b) Mergers, Reorganizations, Etc. In the event of a merger,
consolidation, plan of exchange, acquisition of property or stock, separation,
reorganization or liquidation to which the Company or a subsidiary is a party or
a sale of all or substantially all of the Company's assets (each, a
"Transaction"), the Board of Directors shall, in its sole discretion and to the
extent possible under the structure of the
12
<PAGE>
Transaction, select one of the following alternatives for treating outstanding
options under the Plan:
(i) Outstanding options shall remain in effect in accordance with
their terms.
(ii) Outstanding options shall be converted into options to
purchase stock in the corporation that is the surviving or acquiring
corporation in the Transaction. The amount, type of securities subject
thereto and exercise price of the converted options shall be determined by
the Board of Directors of the Company, taking into account the relative
values of the companies involved in the Transaction and the exchange rate,
if any, used in determining shares of the surviving corporation to be
issued to holders of shares of the Company. Unless otherwise determined by
the Board of Directors, the converted options shall be vested only to the
extent that the vesting requirements relating to options granted hereunder
have been satisfied.
(iii) The Board of Directors shall provide a 30-day period prior
to the consummation of the Transaction during which outstanding options may
be exercised to the extent then exercisable, and upon the expiration of
such 30-day period, all unexercised options shall immediately terminate.
The Board of Directors may, in its sole discretion, accelerate the
exercisability of options so that they are exercisable in full during such
30-day period.
(c) Dissolution of the Company. In the event of the dissolution of the
Company, options shall be treated in accordance with paragraph 13(b)(iii).
(d) Rights Issued by Another Corporation. The Board of Directors may
also grant options, stock appreciation rights, performance units, stock bonuses
and cash bonuses and issue restricted stock under the Plan having terms,
conditions and provisions that vary from those specified in this Plan provided
that any such awards are granted in substitution for, or in connection with the
assumption of, existing options, stock appreciation rights, stock bonuses, cash
bonuses, restricted stock and performance units granted, awarded or issued by
another corporation and assumed or otherwise agreed to be provided for by the
Company pursuant to or by reason of a Transaction.
14. Amendment of Plan. The Board of Directors may at any time, and from
time to time, modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for any
other reason. Except as provided in paragraphs 6(a)(iv), 9, 10 and 13, however,
no change in an award already granted shall be made without the written consent
of the holder of such award.
15. Approvals. The obligations of the Company under the Plan are subject to
the approval of state and federal authorities or agencies with jurisdiction in
the matter. The Company will use its best efforts to take steps required by
state or federal law or
13
<PAGE>
applicable regulations, including rules and regulations of the Securities and
Exchange Commission and any stock exchange on which the Company's shares may
then be listed, in connection with the grants under the Plan. The foregoing
notwithstanding, the Company shall not be obligated to issue or deliver Common
Stock under the Plan if such issuance or delivery would violate applicable state
or federal securities laws.
16. Employment and Service Rights. Nothing in the Plan or any award
pursuant to the Plan shall (i) confer upon any employee any right to be
continued in the employment of the Company or any subsidiary or interfere in any
way with the right of the Company or any subsidiary by whom such employee is
employed to terminate such employee's employment at any time, for any reason,
with or without cause, or to decrease such employee's compensation or benefits,
or (ii) confer upon any person engaged by the Company any right to be retained
or employed by the Company or to the continuation, extension, renewal, or
modification of any compensation, contract, or arrangement with or by the
Company.
17. Rights as a Shareholder. The recipient of any award under the Plan
shall have no rights as a shareholder with respect to any Common Stock until the
date of issue to the recipient of a stock certificate for such shares. Except as
otherwise expressly provided in the Plan, no adjustment shall be made for
dividends or other rights for which the record date occurs prior to the date
such stock certificate is issued.
18. Option Grants to Independent Directors.
(a) Initial Board Grants. Each person who is an Independent Director
when the Plan is adopted or who becomes an Independent Director thereafter shall
be automatically granted an option to purchase 5,000 shares of Common Stock on
the date the Plan is approved by the shareholders of the Company or when he or
she becomes an Independent Director. An "Independent Director" is a director who
is not an officer or employee of the Company or any of its subsidiaries and who
does not have a relationship which, in the opinion of the Board of Directors of
the Company, would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director.
(b) Additional Grants. Each Independent Director shall be
automatically granted an option to purchase additional shares of Common Stock in
each calendar year subsequent to the year in which such Independent Director was
granted an option pursuant to paragraph 18(a), such option to be granted as of
the date of the Company's annual meeting of shareholders held in such calendar
year, provided that the Independent Director continues to serve in such capacity
as of such date. The number of shares subject to each additional grant shall be
3,000 shares for each Independent Director.
(c) Exercise Price. The exercise price of options for 5,000 shares
granted pursuant to paragraph 18(a) as of the date the Plan is approved by the
Shareholders of the Company shall be equal to the price per share to the public
in the Company's initial public offering, unless otherwise determined by the
Board. The
14
<PAGE>
exercise price of all other options granted pursuant to this paragraph 18 shall
be equal to 100 percent of the fair market value of the Common Stock determined
pursuant to paragraph 6(b)(iv).
(d) Term of Option. The term of each option granted pursuant to this
paragraph 18 shall be 10 years from the date of grant.
(e) Exercisability. Until an option expires or is terminated and
except as provided in paragraphs 18(f) and 13, an option granted under this
paragraph 18 shall be exercisable according to the following schedule: 2.78% for
each complete month of continuous service after the date of grant, rounded up to
the next full share, until fully vested.
For purposes of this paragraph 18(e), a complete month shall be deemed
to be the period which starts on the day of grant and ends on the same day of
the following calendar month, so that each successive "complete month" ends on
the same day of each successive calendar month (or, in respect of any calendar
month which does not include such a day, that "complete month" shall end on the
first day of the next following calendar month).
(f) Termination As a Director. If an optionee ceases to be a director
of the Company for any reason, including death, the option may be exercised at
any time prior to the expiration date of the option or the expiration of 30 days
(or 12 months in the event of death) after the last day the optionee served as a
director, whichever is the shorter period, but only if and to the extent the
optionee was entitled to exercise the option as of the last day the optionee
served as a director.
(g) Nontransferability. Each option by its terms shall be
nonassignable and nontransferable by the optionee, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution of
the state or country of the optionee's domicile at the time of death, and each
option by its terms shall be exercisable during the optionee's lifetime only by
the optionee.
(h) Exercise of Options. Options may be exercised upon payment of cash
or shares of Common Stock of the Company in accordance with paragraph 6(a)(v).
Adopted: April 21, 1995
Amended: May 5, 1995
May 15, 1996
May 15, 1997
May 21, 1998
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-28-1998
<CASH> 8,600
<SECURITIES> 0
<RECEIVABLES> 53,954
<ALLOWANCES> (1,693)
<INVENTORY> 45,346
<CURRENT-ASSETS> 109,990
<PP&E> 35,680
<DEPRECIATION> (13,857)
<TOTAL-ASSETS> 178,072
<CURRENT-LIABILITIES> 49,612
<BONDS> 0
0
0
<COMMON> 149,159
<OTHER-SE> (42,598)
<TOTAL-LIABILITY-AND-EQUITY> 178,072
<SALES> 80,876
<TOTAL-REVENUES> 80,876
<CGS> 49,708
<TOTAL-COSTS> 27,940
<OTHER-EXPENSES> 136
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 601
<INCOME-PRETAX> 2,491
<INCOME-TAX> 872
<INCOME-CONTINUING> 1,619
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,619
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
