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 July 4, 1999
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 2, 1999 was
18,371,329.
<PAGE>
INDEX TO FORM 10-Q
Page
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - July 4, 1999
(unaudited) and December 31, 1998..................................... 1
Condensed Consolidated Statements of Operations
(unaudited) Thirteen Weeks Ended July 4, 1999 and
June 28, 1998 and Twenty-Six Weeks Ended July 4, 1999
and June 28, 1998 .................................................... 2
Condensed Consolidated Statements of Comprehensive Income
(unaudited) - Thirteen Weeks Ended July 4, 1999 and
June 28, 1998 and Twenty-Six Weeks Ended July 4, 1999
and June 28, 1998 .................................................... 3
Condensed Consolidated Statements of Cash Flows
(unaudited) - Twenty-Six Weeks Ended July 4, 1999 and
June 28, 1998......................................................... 4
Notes to Condensed Consolidated Financial Statements (unaudited)........ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................10
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders..............16
Item 6. Exhibits and Reports on Form 8-K.................................17
Signatures................................................................18
i
<PAGE>
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, July 4,
ASSETS 1998 1999
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,198 $ 12,560
Receivables 56,046 46,142
Current accounts with Philips (Note 5) - 1,200
Inventories (Note 3) 43,518 44,934
Deferred income taxes 9,926 7,974
Other 1,872 2,664
---------- ----------
Total current assets 126,560 115,474
EQUIPMENT 23,845 23,394
OTHER ASSETS (Note 4) 40,733 40,931
---------- ----------
TOTAL $ 191,138 $ 179,799
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,607 $ 17,319
Current accounts with Philips (Note 5) 5,043 -
Accrued payroll liabilities 3,908 4,947
Accrued warranty reserves 6,186 6,165
Deferred revenue 15,744 16,201
Income taxes payable 952 2,357
Accrued restructuring costs (Note 2) 3,055 2,215
Other current liabilities 10,715 11,292
---------- ----------
Total current liabilities 56,210 60,496
LINE OF CREDIT BORROWINGS (Note 6) 7,250 461
LONG-TERM ACCOUNT WITH PHILIPS (Note 6) 19,099 12,033
DEFERRED INCOME TAXES 7,861 6,050
OTHER LIABILITIES 3,091 2,418
SHAREHOLDERS' EQUITY:
Preferred stock - 500,000 shares authorized;
none issued and outstanding - -
Common stock - 30,000,000 shares authorized;
18,167,475 and 18,371,329 shares issued and
outstanding at December 31, 1998 and
July 4, 1999 149,635 150,207
Accumulated deficit (45,510) (43,830)
Accumulated other comprehensive loss (6,498) (8,036)
---------- ----------
Total shareholders' equity 97,627 98,341
---------- ----------
TOTAL $ 191,138 $ 179,799
========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
1
<PAGE>
<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 28, July 4, June 28, July 4,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
NET SALES $ 44,922 $ 45,722 $ 80,876 $ 91,130
COST OF SALES 27,850 27,552 49,708 55,635
-------- -------- -------- --------
Gross profit 17,072 18,170 31,168 35,495
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 4,310 4,537 9,148 9,776
Selling, general and administrative 10,912 11,045 19,771 21,690
Amortization of purchased intangibles 624 629 1,258 1,258
Restructuring and reorganization costs (Note 2) - 131 - 131
-------- -------- -------- --------
Total operating expenses 15,846 16,342 30,177 32,855
-------- -------- -------- --------
OPERATING INCOME 1,226 1,828 991 2,640
OTHER INCOME (EXPENSE), NET (521) (166) (737) 160
-------- -------- -------- --------
INCOME BEFORE TAXES 705 1,662 254 2,800
TAX EXPENSE 247 688 89 1,120
-------- -------- -------- --------
NET INCOME $ 458 $ 974 $ 165 $ 1,680
======== ======== ======== ========
PER SHARE DATA:
Net income per share-basic $ 0.03 $ 0.05 $ 0.01 $ 0.09
======== ======== ======== ========
Net income per share-diluted $ 0.02 $ 0.05 $ 0.01 $ 0.09
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 18,079 18,319 18,078 18,290
======== ======== ======== ========
Diluted 18,345 19,314 18,383 19,287
======== ======== ======== ========
See notes to condensed consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
FEI Company and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
Thirteen Weeks Ended Twenty-Six Weeds Ended
--------------------- ----------------------
June 28, July 4, June 28, July 4,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
NET INCOME $ 458 $ 974 $ 165 $ 1,680
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment,
zero taxes provided 47 (460) 43 (1,538)
------- ------- ------- -------
COMPREHENSIVE INCOME $ 505 $ 514 $ 208 $ 142
======= ======= ======= =======
See notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FEI Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Twenty-Six Weeks Ended
-----------------------
June 28, July 4,
1998 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 165 $ 1,680
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,082 3,826
Amortization 1,392 1,976
Other 5,062 498
Decrease (increase) in assets:
Receivables 3,907 9,904
Inventories (7,539) (1,416)
Other assets 584 (1,811)
Increase (decrease) in liabilities:
Accounts payable (2,725) 6,712
Current accounts with Philips 792 (6,243)
Accrued payroll liabilities (1,310) 1,039
Accrued warranty reserves (468) (21)
Deferred revenue 2,119 457
Accrued restructuring - (840)
Other liabilities 1,187 1,309
-------- --------
Net cash provided by operating activities 5,248 17,070
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment (4,659) (3,732)
Investment in software development (796) (1,155)
-------- --------
Net cash used in investing activities (5,455) (4,887)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of line of credit (4,922) (6,789)
Proceeds from exercise of stock options and
employee stock purchases 10 572
Repayment of note to Philips (2,718) -
Reduction in long-term borrowings from Philips - (7,066)
-------- --------
Net cash used in financing activities (7,630) (13,283)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 43 (1,538)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,794) (2,638)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,394 15,198
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,600 $ 12,560
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - FEI Company and its wholly owned subsidiaries (the
"Company") design, manufacture, market and service products based on focused
charged particle beam technology. The Company operates in three business
segments. The Components segment manufactures and sells components for focused
charged particle beam instruments including emitters and focusing columns. The
Company's component products are sold as replacement parts and to OEM's for use
in the manufacture of focused charged particle beam systems. The
MicroElectronics segment manufactures, sells and services focused ion-beam
systems ("FIBs") and products that incorporate an electron beam and an ion beam
into a single system ("DualBeams"). The Company's MicroElectronics products are
sold primarily to semiconductor manufacturers and to thin film head
manufacturers in the data storage industry, and are used in the design,
manufacture and testing of integrated circuits and thin film heads. The Electron
Optics segment manufactures, sells and services transmission electron microscope
systems ("TEMs") and scanning electron microscope systems ("SEMs"). The
Company's Electron Optics products are sold primarily to life science and
materials science research institutes, universities and industrial customers, as
well as to semiconductor and thin film head manufacturers. FEI also manufactures
SEMs designed for wafer scanning in the semiconductor industry ("Wafer SEMs"),
which are sold and serviced through the MicroElectronics segment.
The Company has manufacturing operations in Hillsboro, Oregon; Acht, The
Netherlands; and Brno, Czech Republic. Sales and service operations are
conducted in the United States and eight other countries, constituting a
majority of the worldwide market for the Company's products. In addition, the
Company's products are sold through distribution agreements with affiliates of
Koninklijke Philips Electronics N.V. ("Philips") located in approximately 20
additional countries, and through independent representatives in certain
countries.
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 of Philips Business Electronics International B.V. ("Philips
Business Electronics"), a wholly owned subsidiary of Philips in a transaction
accounted for as a reverse acquisition (the "PEO Combination"). Accordingly,
purchase accounting was applied to the assets and liabilities of Pre-Combination
FEI.
The accompanying condensed consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and Article 10 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, consisting of normal
recurring accruals, considered necessary for fair presentation have been
included.
Net income (loss) per share - The difference between basic and diluted net
income (loss) per share is a result of the dilutive effect of stock options,
which are considered potential common shares.
Reclassifications - Certain reclassifications have been made to the 1998
financial statements to conform to the current year presentation.
Recently Issued Accounting Pronouncements - During 1998, the Financial
Accounting Standards Board issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which has not yet been adopted by the
Company but is required to be adopted on January 1, 2001. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of the Company.
5
<PAGE>
2. RESTRUCTURING AND REORGANIZATION
On July 29, 1998 the Company announced a restructuring and reorganization
program to consolidate operations, eliminate redundant facilities, reduce
operating expenses, and provide for outsourcing of certain manufacturing
activities. The Company's plan calls for the elimination of 173 positions
worldwide, or about 16% of its work force as of July 29, 1998. The positions
affected include manufacturing, marketing, administrative, field service, sales,
and manufacturing personnel. During the third quarter of 1998, all affected
employees were informed of the planned terminations and the related severance
benefits they would be entitled to receive. Of the 173 positions targeted for
elimination, 85 positions remain to be eliminated as of July 4, 1999. The
majority of the positions remaining at July 4, 1999 are located in the Company's
facilities in Acht, The Netherlands where a significant number of positions are
expected to be eliminated following the outsourcing of certain manufacturing
operations. The Company has finalized its outsourcing arrangements for Acht and
expects to complete the transition in the third quarter of 1999.
The various components of restructuring and reorganization charges were as
follows:
<TABLE>
<CAPTION>
Accrued Twenty-Six Weeks Ended Accrued
Liability July 4, 1999 Liability
as of -------------------------- as of
December 31, Charged to Reduction of July 4,
1998 Expense Liability (1) 1999
<S> <C> <C> <C> <C>
Severance, outplacement and related
benefits for terminated employees $ 2,701 $ - $ (769) $ 1,932
Lease abandonment costs for vacated
facilities 354 - (71) 283
Relocation and moving expenses - 131 (131) -
--------- ---------- ------------ ---------
$ 3,055 $ 131 $ (971) $ 2,215
========= ========== ============ =========
(1) Includes cash payments and net effect of currency exchange rate
fluctuations on accrued liability balance.
</TABLE>
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31, July 4,
1998 1999
<S> <C> <C>
Raw materials and assembled parts $ 25,667 $ 24,661
Work in process 11,853 15,224
Finished goods 10,439 9,397
----------- -----------
Total inventories 47,959 49,282
Reserve for obsolete inventory (4,441) (4,348)
----------- -----------
Net inventories $ 43,518 $ 44,934
=========== ===========
</TABLE>
6
<PAGE>
4. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
December 31, July 4,
1998 1999
<S> <C> <C>
Service inventories, noncurrent, net of obsolescence
reserves of $6,810 and $5,888, respectively $ 7,037 $ 7,590
Capitalized software development costs, net of
amortization of $478 and $1,089, respectively 3,469 4,013
Goodwill, net of amortization of $2,093 and $2,702,
respectively 15,029 14,420
Existing technology, net of amortization of $2,519
and $3,206, respectively 13,971 13,284
Patents, net of amortization of $39 and $50,
respectively 282 271
Deposits and other 945 1,353
-------- --------
Total other assets $ 40,733 $ 40,931
======== ========
</TABLE>
Software development costs capitalized during the twenty-six weeks ended June
28, 1998 and July 4, 1999 were $796 and $1,155, respectively. Amortization of
software development costs was $134 and $611 for the twenty-six weeks ended June
28, 1998 and July 4, 1999, respectively.
In connection with the purchase accounting for the PEO Combination, the Company
identified four significant projects under development at the date of the
combination and estimated the fair value of the related purchased in-process
research and development. The development of three of those four projects was
completed in 1997 and 1998, with revenue recognized in late 1997 and during 1998
for the related products. The fourth project continues under development. Based
on current management estimates, the fourth project is expected to generate
revenue beginning in late 1999.
5. CURRENT ACCOUNTS WITH PHILIPS
Current accounts with Philips represent accounts receivable and accounts payable
between the Company and other Philips units. The current account transactions
relate to intercompany purchases of goods and services.
Current accounts with Philips consisted of the following (see Note 6):
<TABLE>
<CAPTION>
December 31, July 4,
1998 1999
----------- -----------
<S> <C> <C>
Current accounts receivable $ 5,689 $ 14,213
Current accounts payable (10,732) (13,013)
----------- -----------
Net current accounts with Philips $ (5,043) $ 1,200
=========== ===========
</TABLE>
6. CREDIT FACILITY BORROWINGS
At December 31, 1998, the Company maintained a $25,000 bank line of credit,
available on revolving advances at prime (8.5% at December 31, 1998) or on 30,
60, 90, or 180-day draw periods at LIBOR plus 1.65%. A total of $6,693 was
outstanding under this bank line of credit at December 31, 1998. Borrowings
under this line of credit were secured by receivables, inventories and
equipment. Under the terms of the line of credit, the Company was required to
meet certain financial covenants.
On February 25, 1999, the Company consummated a new credit facility with Philips
and terminated its existing bank line of credit. The entire outstanding balance
under the existing bank line of credit was paid off with proceeds drawn under
7
<PAGE>
the new credit facility. The new credit facility provides borrowing capacity of
up to $50,000, with advances bearing interest at LIBOR plus 0.75%. Advances may
be made in US Dollars, Euros, or Japanese Yen. As of July 4, 1999, the principal
balance outstanding under this credit facility was $12,033 and the weighted
average interest rate was 2.26%. Advances up to $10,000 may be made on a
revolving current account basis, with additional advances made in terms of one
month, three months or six months. The credit facility is unsecured, matures on
February 26, 2002 and requires that the Company meet certain financial
covenants.
Based on management's intent, the borrowings outstanding under the credit
facility are classified as long-term. Also based on management's intent, the
amount outstanding as of December 31, 1998, under the Company's bank line of
credit, which was refinanced on February 25, 1999, was classified as long-term.
A large portion of the current account with Philips outstanding as of December
31, 1998 was also classified as long-term in anticipation of refinancing at the
initiation of the new credit facility.
The Company also maintains a $5,000 unsecured and uncommitted bank borrowing
facility in the US and certain limited facilities in selected foreign countries.
At July 4, 1999, the Company had outstanding standby letters of credit totaling
approximately $3,140 to secure customer advance deposits. These standby letters
of credit reduce the amount available to borrow under the Company's $5,000
uncommitted facility.
7. SEGMENT INFORMATION
The following table summarizes various financial amounts for each of the
Company's segments (see Note 1):
<TABLE>
<CAPTION>
Corporate
Micro- Electron and
Twenty-Six Weeks Ended Components electronics Optics Eliminations Total
<S> <C> <C> <C> <C> <C>
June 28, 1998:
Product sales to customers $ 8,217 $ 24,132 $ 34,719 $ - $ 67,068
Service sales to customers - 2,760 11,048 - 13,808
Inter-segment sales 2,897 - 3,386 (6,283) -
-------- -------- -------- -------- --------
Total sales 11,114 26,892 49,153 (6,283) 80,876
Operating income (loss) 3,254 815 499 (3,577) 991
July 4, 1999:
Product sales to customers 4,681 35,341 35,583 - 75,605
Service sales to customers - 3,296 12,229 - 15,525
Inter-segment sales 2,325 - 2,709 (5,034) -
-------- -------- -------- -------- --------
Total sales 7,006 38,637 50,521 (5,034) 91,130
Operating income (loss) 999 3,043 2,172 (3,574) 2,640
</TABLE>
Inter-segment sales are shown at cost, with no markup for gross profit within
the selling segment, and are eliminated in consolidation. Corporate
administration expenses, amortization of purchased intangibles, and
restructuring and reorganization costs are not allocated to the Company's
operating segments.
8
<PAGE>
8. MERGERS AND ACQUISITIONS
Micrion Corporation Merger
On December 3, 1998, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Micrion Corporation ("Micrion"), a Massachusetts
corporation engaged in the design, manufacture, sale and service of focused
particle beam instruments. The proposed merger has been subject to regulatory
approval and approval by the shareholders of both Micrion and the Company. On
June 10, 1999, shareholders of both companies approved the merger. On July 29,
1999, the Company received antitrust clearance for the merger from the Federal
Trade Commission. Under terms of the Merger Agreement, Micrion would become a
wholly owned subsidiary of the Company. Holders of Micrion common stock are
expected to receive one share of the Company's common stock and $6.00 in cash in
exchange for each share of Micrion common stock. The cash portion may be reduced
if Micrion's indebtedness at closing of the merger exceeds certain levels set
forth in the Merger Agreement. In conjunction with the proposed merger, the
Company has incurred and deferred $1,804 of acquisition costs as of July 4,
1999. The estimated total purchase price is approximately $67,500.
In connection with the proposed merger, Philips Business Electronics entered
into a stock purchase agreement with the Company pursuant to which Philips
Business Electronics has agreed to finance the cash portion of the merger
consideration through the purchase from the Company of additional newly issued
shares of common stock. Philips Business Electronics also has the option to
purchase additional newly issued shares of common stock to maintain the same
percentage ownership of the Company as it had prior to the issuance of shares to
Micrion's stockholders.
The Micrion Corporation merger and the sale of additional shares to Philips
Business Electronics are expected to close in the third quarter of 1999.
9. COMMITMENTS AND CONTINGENCIES
The Company is a party to litigation arising in the ordinary course of business.
In the opinion of management, these actions will not have a material adverse
effect on the Company's financial position, results of operations, or liquidity.
9
<PAGE>
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 28, July 4, June 28, July 4,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 62.0 60.3 61.5 61.1
------- ------- ------- -------
Gross profit 38.0 39.7 38.5 38.9
Research and development costs 9.6 9.9 11.3 10.7
Selling, general and administrative costs 24.3 24.2 24.4 23.8
Amortization of intangibles 1.4 1.4 1.6 1.4
Restructuring and reorganization costs 0.0 0.3 0.0 0.1
------- ------- ------- -------
Operating income 2.7 4.0 1.2 2.9
Other income (expense), net (1.2) (0.4) (0.9) 0.2
------- ------- ------- -------
Income before taxes 1.5 3.6 0.3 3.1
Tax expense 0.5 1.5 0.1 1.2
------- ------- ------- -------
Net income 1.0% 2.1% 0.2% 1.8%
======= ======= ======= =======
</TABLE>
Net sales. Net sales for the thirteen weeks ended July 4, 1999 increased $0.8
million (2%) and for the twenty-six weeks ended July 4, 1999 increased $10.3
million (13%) compared to the corresponding periods in 1998. Microelectronics
segment product sales increased $5.5 million (50%) for the thirteen weeks and
$11.2 million (46%) for the twenty-six weeks compared to the same periods in
1998. Electron Optics segment product sales decreased $3.4 million (15%) for the
thirteen weeks and increased $0.9 million (3%) for the twenty-six weeks ended
July 4, 1999. Product sales in the Components segment decreased $2.1 million
(47%) for the thirteen weeks and $3.5 million (43%) for the twenty-six weeks
ended July 4, 1999 compared to the same periods in 1998. Service sales increased
by $0.7 million (10%) in the thirteen weeks and $1.7 million (12%) in the
twenty-six weeks ended July 4, 1999 compared with the same periods of 1998.
Industry conditions in both the semiconductor-manufacturing sector and the data
storage sector were generally weak during 1998 but showed improvement in the
first half of 1999. These industry sectors represent the principal markets for
the Company's Components and Microelectronics segments. Electron Optics segment
sales have benefited from the Company's new product introductions in the second
half of 1998 but have been slowed by softness in the material and life sciences
market sectors. The Company believes that Components segment sales have been
weak in 1999 following record 1998 levels due to customers' utilization of on
hand inventories.
Year to date sales increased from 1998 to 1999 in each of the three major
geographic regions the Company sells to, with the largest increase occurring in
the Asia Pacific Region. Sales in Europe represented 31% of sales for both the
twenty-six weeks ended July 4, 1999 and June 28, 1998. Sales in the Asia Pacific
Region represented 21% of sales for the twenty-six weeks ended July 4, 1999
compared with 17% of sales for the same period in 1998. Sales in North America
represented 45% of sales for the twenty-six weeks ended July 4, 1999 compared
with 48% of sales for the same period in 1998. Sales in other geographic regions
represented 3% of sales for both the twenty-six weeks ended July 4, 1999 and
June 28, 1998.
The Company conducts its business in multiple currencies. In general, the US
Dollar was weaker in relation to these other currencies in the first quarter of
1999 compared with the first quarter of 1998, and was stronger in the second
quarter of 1999 compared to the same period in 1998. Accordingly, the
translation of sales denominated in foreign currencies resulted in slightly
higher reported sales in US Dollars in the first quarter of 1999 and slightly
lower reported sales in US Dollars in the second quarter of 1999 as compared
with 1998.
10
<PAGE>
Gross profit. Gross profit for the thirteen weeks ended July 4, 1999 increased
$1.1 million (6%) and for the twenty-six weeks ended July 4, 1999 increased $4.3
million (14%) compared to the same periods in 1998. Gross profit as a percentage
of sales was 38.0% and 39.7% for the thirteen weeks ended June 28, 1998 and July
4, 1999 and 38.5% and 38.9% for the twenty-six weeks ended June 28, 1998 and
July 4, 1999. The improvement in gross margin as a percentage of sales in the
second quarter of 1999 as compared with the second quarter of 1998 is primarily
due to changes in product mix.
Research and development costs. Research and development costs for the thirteen
weeks ended July 4, 1999 increased $0.2 million (5%) and for the twenty-six
weeks ended July 4, 1999 increased $0.6 million (7%) compared to the same
periods in 1998. As a percentage of sales, research and development costs were
9.9% and 9.6% for the thirteen weeks and 10.7% and 11.3% for the twenty-six
weeks ended July 4, 1999 and June 28, 1998, respectively. Research and
development expenses are reported net of certain subsidies the Company receives
for expenditures on selected projects. The subsidies increased by $0.3 million
in the twenty-six weeks ended July 4, 1999 compared to the same period in 1998.
Year over year research and development costs increased in the Microelectronics
segment primarily due to increased expenditures in the development of its next
generation platform technology. Research and development costs for the first
half of 1999 were lower than 1998 first half levels in the Electron Optics
segment, because the 1998 costs included increased costs related to development
of the Company's new TEM platform. The Company is also continuing through its
Microelectronics division to invest in the development of a next generation
platform technology, as well as product upgrades, new software systems and
products to broaden the product line offerings of its various business segments.
The Company expects to increase its research and development expenditures in
1999 compared to the expenditure levels of 1998.
Selling, general and administrative costs. Selling, general and administrative
costs for the thirteen weeks ended July 4, 1999 increased $0.1 million (1%) and
for the twenty-six weeks ended July 4, 1999 increased $1.9 million (10%)
compared to the same periods in 1998. As a percentage of sales, selling, general
and administrative costs were 24.2% and 24.3% for the thirteen weeks and 23.8%
and 24.4% for the twenty-six weeks ended July 4, 1999 and June 28, 1998,
respectively. The first half of 1999 was affected by increased legal expenses,
employee relocation costs and incentive compensation accruals. The first quarter
of 1998 was not indicative of the full calendar year 1998 expense level because
of the addition of new senior management and the implementation of incentive
compensation plans subsequent to the first quarter of 1998.
Amortization of purchased intangibles. The Company separately reports the
expense associated with amortization of intangibles arising from merger and
acquisition activities on the statement of operations. The expense associated
with the amortization of other intangibles is charged to cost of sales or other
operating expenses. Purchase accounting for the PEO Combination as of February
21, 1997 resulted in the recognition of intangible assets in the amount of $16.5
million for existing technology that is being amortized over a 12-year period,
and goodwill of $17.1 million that is being amortized over a 15-year period.
Restructuring and reorganization costs. On July 29, 1998 the Company announced a
restructuring and reorganization program to consolidate operations, eliminate
redundant facilities, reduce operating expenses, and provide for outsourcing of
certain manufacturing activities. The program is intended to eliminate
approximately 173 positions worldwide, or about 16% of the Company's work force
as of July 29, 1998. A charge of $5.3 million was recognized in the year ended
December 31, 1998 primarily representing the cost of providing severance,
outplacement assistance, and associated benefits to affected employees. Of this
charge, $2.2 million remains as a liability as of July 4, 1999. This liability
will continue to be discharged during 1999 as the Company's outsourcing plan
continues to be implemented. Of the 173 positions targeted for elimination, 85
positions remain to be eliminated as of July 4, 1999. The remaining positions
are primarily related to the Company's manufacturing operations in Acht, The
Netherlands. In July 1999 the Company reached an agreement in principle to
outsource certain manufacturing operations of its facility in Acht. The charge
of $0.1 million recognized in the second quarter of 1999 represents costs of
consolidating the Company's UK operations. Additional charges may be recorded as
they are incurred during 1999 for transitional costs of consolidating operations
and outsourcing certain activities.
Other income (expense), net. Other income (expense), net was expense of $0.2
million for the thirteen weeks ended July 4, 1999 compared with expense of $0.5
million for the same period in 1998. For the twenty-six weeks ended July
11
<PAGE>
4, 1999 other income (expense), net was income of $0.2 million compared with
expense of $0.7 million for the corresponding period in 1998. The twenty-six
weeks ended July 4, 1999 included currency transaction gains of $0.4 million
compared with currency transaction losses of $0.4 million in the comparable 1998
period. These 1999 currency gains were due to non-recurring transactions.
Income tax expense. The effective income tax rate was 41% and 35% for the
thirteen weeks ended July 4, 1999 and June 28, 1998, respectively, and 40% and
35% for the twenty-six weeks ended July 4, 1999 and June 28, 1998. The Company's
tax rates differ from the U.S. federal statutory tax rate primarily as a result
of state and foreign taxes, the amortization of intangible assets not deductible
for income tax purposes and the favorable tax effect of the Company's use of a
foreign sales corporation for exports from the U.S.
LIQUIDITY AND CAPITAL RESOURCES
At July 4, 1999, the Company had total cash and cash equivalents of $12.6
million compared to $15.2 million at December 31, 1998. Cash provided by
operating activities for the twenty-six weeks ended July 4, 1999 was $17.1
million compared to $5.2 million for the twenty-six weeks ended June 28, 1998.
Cash provided by operating activities before the effect of working capital
changes was $8.0 million for the twenty-six weeks ended July 4, 1999 and $8.7
million for the twenty-six weeks ended June 28, 1998. In February 1999, the
Company consummated a new credit facility with Philips whereby a substantial
portion of the Company's current account payable to Philips was converted to
long-term borrowings (see below).
Investing activities used cash of $4.9 million during the twenty-six weeks ended
July 4, 1999 compared with $5.5 million during the same period in 1998. The 1999
decrease is primarily due to lower levels of capital expenditures for equipment,
partially offset by higher expenditures for software development. The majority
of equipment expenditures in both 1998 and 1999 have been for demonstration
systems, application lab systems and development and manufacturing equipment.
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 cash of $13.3 million in the twenty-six weeks ended
July 4, 1999 and $7.6 million of cash in the twenty-six weeks ended June 28,
1998. The 1999 financing activities are principally comprised of a net reduction
in long-term borrowings from Philips and the repayment and termination of the
prior bank line of credit agreement. The 1998 financing activities reflect net
repayments under the prior bank line of credit agreement as well as repayment of
a $2.7 million note payable to Philips, which arose from the PEO Combination in
February 1997. In February 1999 the Company consummated a new credit agreement
and obtained commitment on a three year $50 million revolving credit facility
from Philips. The facility allows the Company, subject to certain financial
covenants, to borrow in multiple currencies for its general corporate needs,
excluding acquisitions. During the first half of 1999 the Company utilized the
multiple currency capability to finance its Asian working capital needs by
borrowing in Japanese yen. Borrowings under the agreement bear interest at a
variable LIBOR rate from 30 to 180 days, at the Company's designation, plus a
0.75% incremental rate. See Note 6 of Notes to Condensed Consolidated Financial
Statements for additional information. With this new $50 million revolving line
of credit, the Company refinanced and replaced its previous $25 million
revolving line of credit with a U.S. bank.
On December 3, 1998, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Micrion Corporation ("Micrion"), a Massachusetts
corporation engaged in the design, manufacture, sale and service of focused
particle beam instruments. The proposed merger has been subject to regulatory
approval and approval by the shareholders of both Micrion and the Company. On
June 10, 1999, shareholders of both companies approved the merger. On July 29,
1999, the Company received antitrust clearance for the merger from the Federal
Trade Commission. Under terms of the Merger Agreement, Micrion would become a
wholly owned subsidiary of the Company. Holders of Micrion common stock are
expected to receive one share of the Company's common stock and $6.00 in cash in
exchange for each share of Micrion common stock. The cash portion may be reduced
if Micrion's indebtedness at closing of the merger exceeds certain levels set
forth in the Merger Agreement. In conjunction with the proposed merger, the
Company has incurred and deferred $1,804 of acquisition costs as of July 4,
1999.
12
<PAGE>
In connection with the proposed merger, Philips Business Electronics entered
into a stock purchase agreement with the Company pursuant to which Philips
Business Electronics has agreed to finance the cash portion of the merger
consideration through the purchase from the Company of additional newly issued
shares of common stock. Philips Business Electronics also has the option to
purchase additional newly issued shares of common stock to maintain the same
percentage ownership of the Company as it had prior to the issuance of shares to
Micrion's stockholders.
The Micrion Corporation merger and the sale of additional shares to Philips
Business Electronics are expected to close in the third quarter of 1999.
The Company is evaluating service and distribution businesses in approximately
20 international locations. These businesses are currently operating under a
distribution agreement between the Company and a Philips affiliate. The
agreement was entered into in February 1997 and had an initial term which ends
on January 1, 2000, unless extended. The Company is evaluating purchasing some
of these businesses or obtaining alternate distributors in some locations.
Depending on a number of variables, some of which have not been quantified, the
Company may make additional investment in its service and distribution network.
The Company's global sales activities and related service and support activities
result in complex foreign currency exposures. The Company does not have a formal
hedging program in place; however, it does enter into forward contracts to sell
or purchase foreign currencies to hedge specific transactions. As of July 4,
1999, the Company had forward purchase and sale contracts of foreign currency
totaling $4.0 million, which if settled at the spot exchange rate as of July 4,
1999 would have resulted in a loss of less than $0.1 million.
The introduction of the Euro also provides the Company with an opportunity to
reduce its exposure to the foreign currency translation fluctuations of the
various European Monetary Union ("EMU") countries in which it reports results by
adopting the Euro as its reporting currency for those operations. These
countries include France, Germany, Italy and The Netherlands. The Company began
conducting the majority of its business transactions in Euros for these EMU
countries on January 1, 1999. The Company is in the process of converting its
relevant operations to use of the Euro as functional and reporting currency. The
Company's automated transaction and reporting systems are capable of reporting
in either local currency or Euros without extensive modification.
The Company's working capital is subject to fluctuation due to the timing of its
shipments. Since the Company's products typically have a large sales value per
unit, the timing of specific units in a reporting period can affect the relative
levels of inventory and accounts receivable without a corresponding change in
liabilities. The Company's restructuring and reorganization programs also
affected working capital as discussed previously. The remaining 1998
restructuring and reorganization charges, which will be settled in 1999, total
$2.2 million as of July 4, 1999.
Purchase accounting for the PEO Combination as of February 21, 1997, resulted in
the recognition of an intangible asset in the amount of $38.0 million
representing the estimated fair value of in-process research and development of
Pre-Combination FEI. The intangible asset was written off with a charge to
earnings immediately following the PEO Combination in keeping with the Company's
policy to expense research and development costs as they are incurred. In
connection with the purchase accounting for the PEO Combination, the Company
identified four significant projects under development. The development of three
of those four projects was completed in 1997 and 1998, with revenue recognized
in late 1997 and during 1998 and 1999. The fourth project, the Company's next
generation platform, is still under development. Based on current management
estimates, the fourth project is expected to generate revenue beginning in late
1999. There remains the risk that a technological hurdle may be encountered that
may delay or prevent the successful development of this product and the Company
cannot predict with certainty the market demand for this product. Although the
Company believes any hurdles could eventually be overcome, the Company's
competitive position could be harmed if a significant market for the product
develops and its competitors are successful first in developing a competing
technology. While the semiconductor manufacturing sector and the data storage
sector were generally weak during 1998, the Company's long-term expectations for
those markets and, accordingly, for this project, have not changed
significantly.
The Company believes that its cash and cash equivalents, cash flows from
operating activities, existing credit facilities and proceeds from the expected
sale of additional shares to Philips Business Electronics are adequate to meet
the Company's cash requirements over the next 12 to 18 months.
13
<PAGE>
BACKLOG
The Company's backlog consists of purchase orders it has received for products
and services it expects to ship and deliver within the next 12 months. At July
4, 1999, the Company's product backlog was $57 million and its field service
backlog was $11 million for a total backlog of $68 million. At December 31,
1998, the Company's product backlog was $64 million and its field service
backlog was $9 million for a total backlog of $73 million. 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 or the shipment of
products could have a significant impact on the Company's backlog at any date.
For this and other reasons, the amount of backlog at any date is not necessarily
determinative of revenue in future periods.
YEAR 2000 DISCLOSURE
State of Readiness. In January 1998, the Company formed a Year 2000 Team
composed of representatives of various aspects of the Company's operations that
may be significantly affected by Year 2000 readiness issues, including hardware
and software related to the Company's manufacturing control, accounting and
other information technology systems, product software and hardware, supplier
products and post-sales support. The Year 2000 Team developed a multi-part plan
to measure and address the Company's Year 2000 readiness, consisting of: (i)
product testing using test criteria developed by SEMATECH, a semiconductor
industry trade association; (ii) testing information technologies hardware and
software for the Company's manufacturing control, accounting and other systems
and addressing deficiencies; (iii) identifying and assessing non-information
technologies third-party suppliers' products raising Year 2000 compliance
issues, making inquiry of such vendors concerning their state of readiness and
resolving issues; (iv) communicating with the customer base concerning Year
2000readiness of the Company's products; and (v) evaluating the need for and, as
appropriate, developing a contingency plan.
The Company has analyzed and partially tested its information technology systems
and determined that, to the extent tested, those systems have no material Year
2000 compliance deficiencies. Testing and evaluation of the Company's internal
information technology systems was largely completed by the end of the 1999
second quarter. The Company is upgrading certain internal systems as a result of
this testing. Also, with regard to readiness, the Company has assumed that basic
public utilities such as gas, electric and telephone services will continue to
be available for operations of the Company on and after January 1, 2000 in the
U.S., The Netherlands and the Czech Republic. If this assumption proves
incorrect, the operations of the affected manufacturing location would be
materially adversely affected for the duration of the utility interruption.
The Company has completed the testing of products under service contract and has
communicated with customers concerning Year 2000 readiness of its products and
certain third party products sold with the Company's systems. However, the
Company is not certain that it has determined the Year 2000 status of all past
products, product configurations or the status of all third-party products sold
with its products. The Company has established a web page describing the state
of its product readiness and continues to address inquiries from customers
concerning product issues. The Company expects to continue to make direct
contact with customers concerning product readiness, to respond to customer
questions and to update its web-site as appropriate. The Company has also
instructed certain of its post-sales field service representatives to address
Year 2000 issues with customers during service calls.
The Company has solicited information concerning Year 2000 readiness from a
large number of identified critical suppliers. Based on communications to date,
the Company does not believe a material Year 2000 deficiency by any information
technologies or non-information technologies supplier exists. However, the
Company has not yet completed its assessment and planning for all identified
critical suppliers and vendors and further inquiry and evaluation may identify
Year 2000 deficiencies.
Costs. At this time, the Company believes costs incurred in responding to other
parties' Year 2000 computer system deficiencies, together with the cost of any
required modifications to the Company's systems, will not have a material impact
on the Company's results of operations or financial condition. In the ordinary
course the Company has improved its Year 2000 readiness through recent systems
upgrades as part of its usual capital improvement efforts. The Company
14
<PAGE>
has devoted management, sales and technical resources to address Year 2000
matters and expects to continue to do so. The Company has made plans to increase
inventories of certain components prior to January 2000 but has not made
specific allocations for this increase. Overall, the Company expects to fund any
future costs through operating cash flows. Cost estimates for systems
improvements are based on the Company's estimates, which make numerous
assumptions about future events. There is no assurance that these estimates will
be correct and actual costs could differ materially from these estimates.
Most Reasonably Likely Worst Case Scenarios for the Company. Although the
Company will continue to devote resources to address its Year 2000 issues, there
is no assurance that these efforts will be effective in reducing or eliminating
risks associated with Year 2000 deficiencies. Moreover, there is no assurance
that the Company's products do not contain undetected Year 2000 problems or that
third-party products do not contain such problems. In addition, there is no
assurance that the Company's assessment of third-party suppliers and vendors
will be accurate or that the Company has made inquiry of the appropriate
vendors. Year 2000 problems could result in system failures, data corruption,
the generation of erroneous information and other significant disruptions of
business activities. Beyond risks related to product and vendor non-compliance,
it is possible that the Company will suffer supply chain disruptions and
transport problems due to hoarding and changes in buying and shipping patterns
caused by other parties' efforts to address Year 2000 problems. Furthermore, it
has been widely reported that a significant amount of litigation surrounding
business interruptions may arise out of Year 2000 issues. It is uncertain
whether, or to what extent, the Company may be affected by any such litigation.
The Company's Contingency Plan. The Company has developed certain contingency
measures but has not adopted a comprehensive contingency plan. The Company
continues to evaluate the need for additional measures and expects to finish the
evaluation by the end of the 1999 third quarter. The Company has secured
additional transport capacity for December 1999, has identified a crisis
management team, and is taking measures to increase certain of its inventory of
some component parts and supplies. Additional contingency measures may be taken
in the second half of 1999.
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, Year 2000 compliance by the Company and its customers and
suppliers and the expected closing of the Micrion merger 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 downturns in the semiconductor manufacturing
market, lower than expected customer orders and changes in product sales mix.
Factors that could materially reduce the Company's international sales include
competitive factors such as increased international competition, new product
offerings by competitors and price pressures, fluctuations in interest and
exchange rates (including changes in foreign currency exchange rates between
time of sale and payment), changes in trade policies, tariff regulations and
business conditions and growth in the electronics industry and in domestic and
foreign economies. Factors that could materially increase the Company's capital
requirements include receipt of a significant portion of customer orders and
product shipments near the end of a quarter and the other factors listed above.
Factors that could materially affect the Company's results of operations and
liquidity and capital resources if the Micrion merger occurs include costs
involved in integrating the operations of Micrion, inability to successfully
coordinate research and development and sales and marketing efforts and
inability to retain key management personnel.
15
<PAGE>
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On June 10, 1999 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, 18,250,781 shares of Common Stock were
issued and outstanding.
1. The shareholders elected each of Michael J. Attardo, Alfred B. Bok,
William E. Curran, William W. Lattin, Vahe A. Sarkissian, Theo J.H.J. Sonnemans,
Lynwood W. Swanson, Karel D. van der Mast and Donald R. VanLuvanee by the votes
indicated below, to serve on the Company's Board of Directors for the ensuing
year:
Michael J. Attardo
- ------------------
16,460,818 shares in favor
526,821 shares against or withheld
Alfred B. Bok
- -------------
16,460,960 shares in favor
526,537 shares against or withheld
William E. Curran
- -----------------
16,460,918 shares in favor
526,621 shares against or withheld
William W. Lattin
- -----------------
16,461,018 shares in favor
526,421 shares against or withheld
Vahe' A. Sarkissian
- -------------------
16,458,589 shares in favor
531,279 shares against or withheld
Theo J.H.J. Sonnemans
- ---------------------
16,460,256 shares in favor
527,945 shares against or withheld
Dr. Lynwood W. Swanson
- ----------------------
16,461,260 shares in favor
525,937 shares against or withheld
Karel D. van der Mast
- ---------------------
16,459,843 shares in favor
528,771 shares against or withheld
Donald R. VanLuvanee
- --------------------
16,460,588 shares in favor
527,281 shares against or withheld.
16
<PAGE>
2. The shareholders voted to issue shares of the Company's Common Stock to
stockholders of Micrion Corporation under the terms of a merger agreement among
the Company, Micrion and MC Acquisition Corporation, a wholly owned subsidiary
of the Company, by the votes indicated below:
15,310,639 shares in favor
56,695 shares against or withheld
2,883,447 shares not voted.
3. The shareholders approved the issuance of the Company's Common Stock to
Philips Business Electronics International B.V. under the terms of a stock
purchase agreement between the Company and Philips Business Electronics, by the
votes indicated below:
15,309,808 shares in favor
57,526 shares against or withheld
2,883,447 shares not voted.
4. The shareholders voted to amend the Company's Second Amended and
Restated Articles of Incorporation to increase the total number of shares of
Common Stock which the Company is authorized to issue to from 30,000,000 to
45,000,000, by the votes indicated below:
15,527,332 shares in favor
1,459,270 shares against or withheld
1,264,179 shares not voted.
5. 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 1,600,000 to 2,000,000, and (ii) to
increase the per-employee limits on grants of options and stock appreciation
rights under the Plan to 100,000 shares solely for grants made in 1998, by the
votes indicated below:
14,646,500 shares in favor
720,834 shares against or withheld
2,883,447 shares not voted.
6. The shareholders voted to amend the Company's Employee Share Purchase
Plan to increase the total number of shares of Common Stock of the Company
reserved for issuance under the Employee Share Purchase Plan from 250,000 to
350,000 shares, by the votes indicated below:
15,296,336 shares in favor
70,998 shares against or withheld
2,883,447 shares not voted.
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.
17
<PAGE>
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 6, 1999 /s/ VAHE A. SARKISSIAN
-----------------------------------------
Vahe A. Sarkissian
President and
Chief Executive Officer
/s/ WILLIAM P. MOONEY
-----------------------------------------
William P. Mooney
Executive Vice President and
Chief Financial Officer
/s/ MARK V. ALLRED
-----------------------------------------
Mark V. Allred
Corporate Controller
18
FEI COMPANY
1995 STOCK INCENTIVE PLAN
As amended June 10, 1999
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 2,000,000 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
2
<PAGE>
award in exchange for the grant of a new award. No employee may be 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 100,000 shares of common stock in the 1998 calendar year and 50,000 shares of
Common Stock in any calendar year thereafter.
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
3
<PAGE>
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.
(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
4
<PAGE>
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 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.
5
<PAGE>
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, 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
6
<PAGE>
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 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
7
<PAGE>
Company may withhold that amount from other amounts 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 over
8
<PAGE>
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 appreciation
9
<PAGE>
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 pursuant to the
10
<PAGE>
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
11
<PAGE>
holder's domicile at the time of death. Each 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
12
<PAGE>
discretion and to the extent possible under the structure of the 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
13
<PAGE>
Company will use its best efforts to take steps required by state or federal law
or 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
14
<PAGE>
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
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 June 10, 1999
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> OTHER
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUL-04-1999
<CASH> 12,560
<SECURITIES> 0
<RECEIVABLES> 48,855
<ALLOWANCES> (2,713)
<INVENTORY> 44,934
<CURRENT-ASSETS> 115,474
<PP&E> 42,815
<DEPRECIATION> (19,421)
<TOTAL-ASSETS> 179,799
<CURRENT-LIABILITIES> 60,496
<BONDS> 0
0
0
<COMMON> 150,207
<OTHER-SE> (51,866)
<TOTAL-LIABILITY-AND-EQUITY> 179,799
<SALES> 91,130
<TOTAL-REVENUES> 91,130
<CGS> 55,635
<TOTAL-COSTS> 88,490
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (489)
<INCOME-PRETAX> 2,800
<INCOME-TAX> 1,120
<INCOME-CONTINUING> 1,680
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,680
<EPS-BASIC> .09
<EPS-DILUTED> .09
</TABLE>
