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 October 3, 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 November 12, 1999
was 27,410,393.
<PAGE>
INDEX TO FORM 10-Q
Page
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - October 3, 1999
(unaudited) and December 31, 1998.................................... 1
Condensed Consolidated Statements of Operations (unaudited)
Thirteen Weeks Ended October 3, 1999 and September 27,
1998 and Thirty-Nine Weeks Ended October 3, 1999 and
September 27, 1998................................................... 2
Condensed Consolidated Statements of Comprehensive Loss
(unaudited) - Thirteen Weeks Ended October 3, 1999 and
September 27, 1998 and Thirty-Nine Weeks Ended October 3,
1999 and September 27, 1998.......................................... 3
Condensed Consolidated Statements of Cash Flows (unaudited) -
Thirty-Nine Weeks Ended October 3, 1999 and September 27, 1998....... 4
Notes to Condensed Consolidated Financial Statements (unaudited)....... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................12
Part II - Other Information
Item 1. Legal Proceedings...............................................20
Item 2. Changes in Securities and Use of Proceeds.......................20
Item 6. Exhibits and Reports on Form 8-K................................20
Signatures...............................................................21
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, October 3,
ASSETS 1998 1999
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,198 $ 11,442
Receivables 56,046 64,472
Current accounts with Philips (Note 7) - 2,607
Inventories (Note 5) 43,518 59,491
Income tax receivable - 5,887
Deferred income taxes 9,926 12,171
Other 1,872 1,137
----------- -----------
Total current assets 126,560 157,207
EQUIPMENT 23,845 29,673
OTHER ASSETS (Note 6) 40,733 93,749
----------- -----------
TOTAL $ 191,138 $ 280,629
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,607 $ 20,437
Current accounts with Philips (Note 7) 5,043 -
Accrued payroll liabilities 3,908 5,518
Accrued warranty reserves 6,186 8,325
Deferred revenue 15,744 19,170
Income taxes payable 952 -
Accrued restructuring costs (Note 3) 3,055 1,886
Other current liabilities 10,715 19,296
----------- -----------
Total current liabilities 56,210 74,632
LINE OF CREDIT BORROWINGS (Note 8) 7,250 912
LONG-TERM ACCOUNT WITH PHILIPS (Note 8) 19,099 29,552
DEFERRED INCOME TAXES 7,861 18,193
OTHER LIABILITIES 3,091 2,413
SHAREHOLDERS' EQUITY: (Note 9)
Preferred stock - 500,000 shares authorized; none issued and outstanding - -
Common stock - 30,000,000 shares authorized; 18,167,475 and 27,409,179
shares issued and outstanding at December 31, 1998 and October 3, 1999 149,635 216,976
Accumulated deficit (45,510) (54,875)
Accumulated other comprehensive loss (6,498) (7,174)
----------- -----------
Total shareholders' equity 97,627 154,927
----------- -----------
TOTAL $ 191,138 $ 280,629
=========== ===========
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 Thirty-Nine Weeks Ended
--------------------------- ---------------------------
September 27, October 3, September 27, October 3,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
NET SALES $ 42,440 $ 52,044 $ 123,316 $ 143,174
COST OF SALES (Note 4) 36,564 32,017 86,272 87,652
--------- --------- --------- ---------
Gross profit 5,876 20,027 37,044 55,522
--------- --------- --------- ---------
OPERATING EXPENSES:
Research and development 5,838 6,262 14,986 16,038
Selling, general and administrative 9,579 10,628 29,350 32,318
Amortization of purchased intangibles 629 1,029 1,887 2,287
Purchased in-process research and development
(Note 2) - 12,000 - 12,000
Restructuring and reorganization costs (Note 3) 4,957 - 4,957 131
--------- --------- --------- ---------
Total operating expenses 21,003 29,919 51,180 62,774
--------- --------- --------- ---------
OPERATING LOSS (15,127) (9,892) (14,136) (7,252)
OTHER EXPENSE:
Valuation adjustment (Note 6) (3,267) - (3,267) -
Other, net (242) (286) (979) (126)
--------- --------- --------- ---------
Total other expense, net (3,509) (286) (4,246) (126)
--------- --------- --------- ---------
LOSS BEFORE TAXES (18,636) (10,178) (18,382) (7,378)
TAX EXPENSE (BENEFIT) (6,523) 867 (6,434) 1,987
--------- --------- --------- ---------
NET LOSS $ (12,113) $ (11,045) $ (11,948) $ (9,365)
========= ========= ========= =========
PER SHARE DATA:
Net loss per share-basic and diluted $ (0.67) $ (0.48) $ (0.66) $ (0.47)
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted 18,105 23,017 18,087 19,818
========= ========= ========= =========
See notes to condensed consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
FEI Company and Subsidiaries
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeds Ended
---------------------------- ----------------------------
September 27, October 3, September 27, October 3,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
NET LOSS $ (12,113) $ (11,045) $ (11,948) $ (9,365)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment, no deferred
tax benefit recognized 1,871 862 1,493 (676)
----------- ----------- ----------- -----------
COMPREHENSIVE LOSS $ (10,242) $ (10,183) $ (10,455) $ (10,041)
=========== =========== =========== ===========
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)
Thirty-Nine Weeks Ended
----------------------------
September 27, October 3,
1998 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (11,948) $ (9,365)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 3,740 6,056
Amortization 2,213 3,403
Purchased in-process research and development - 12,000
Other 6,898 3,693
Decrease (increase) in assets:
Receivables 8,031 2,150
Inventories (6,433) 1,645
Other current assets 1,585 (4,437)
Increase (decrease) in liabilities:
Accounts payable (3,745) 6,607
Current accounts with Philips 12,016 (7,650)
Accrued payroll liabilities (66) 971
Accrued warranty reserves 4,667 862
Deferred revenue 2,841 1,001
Accrued restructuring 4,218 (1,169)
Other current liabilities (1,893) 201
---------- ----------
Net cash provided by operating activities 22,124 15,968
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment (6,611) (7,174)
Investment in unconsolidated affiliate (Note 6) - (3,000)
Purchase of Micrion, net of cash acquired (Note 2) - (33,129)
Investment in software development (1,210) (1,807)
---------- ----------
Net cash used in investing activities (7,821) (45,110)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of line of credit (8,121) (6,338)
Proceeds from exercise of stock options and employee stock purchases 432 903
Proceeds from sale of stock to Philips (Note 2) - 31,384
Repayment of note to Philips (2,718) -
Repayment of Micrion notes to bank - (10,340)
Increase in long-term borrowings from Philips - 10,453
---------- ----------
Net cash provided by (used in) financing activities (10,407) 26,062
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,493 (676)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,389 (3,756)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,394 15,198
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,783 $ 11,442
========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars, 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 Components Products are sold as replacement parts and to OEMs 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 MicroElectronics segment includes the
results of Micrion Corporation ("Micrion"), which was acquired by the Company on
August 13, 1999. 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 demand and
market forces for these products differ significantly among the segments.
The Company has manufacturing operations in Hillsboro, Oregon; Peabody,
Massachusetts; Acht, The Netherlands; and Brno, Czech Republic. Sales and
service operations are conducted in the United States and nine 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 24
additional countries, and through independent representatives in several
additional 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.
On August 13, 1999, FEI Company acquired all of the assets and liabilities of
Micrion, a Massachusetts corporation engaged in the design, manufacture, sale
and service of focused charged particle beam instruments. Accordingly, purchase
accounting was applied to the assets and liabilities of Micrion. Micrion's
results of operations have been included in the consolidated financial
statements for the period subsequent to August 13, 1999 (see Note 2).
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 as well as preliminary purchase accounting adjustments for
the acquisition of Micrion, considered necessary for fair presentation have been
included.
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 Statement of Financial Accounting Standards
("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 no
later than 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 on the financial position of the Company.
5
<PAGE>
2. MERGERS AND ACQUISITIONS
Micrion Corporation Merger
On August 13, 1999, the Company acquired all of the outstanding common stock of
Micrion in exchange for 5,064,150 newly issued shares of the Company's Common
Stock plus $30,385 in cash. The merger was accounted for as a purchase, and
preliminary purchase accounting has been applied to the financial statements of
Micrion. Micrion's results of operations have been included in the consolidated
financial statements for the period subsequent to August 13, 1999.
The Company obtained a preliminary appraisal of the fair market value of the
intangible assets acquired to serve as a basis for preliminary allocation of the
purchase price to the various classes of assets. The Company expects to adjust
the preliminary purchase price allocation when the appraisals and estimates are
completed. The Company allocated the total purchase price of $69,614 to the
assets acquired and liabilities assumed on a preliminary basis as follows:
Current assets, including cash of $1,801 $ 30,710
Equipment 5,078
Existing technology intangible asset 17,000
Goodwill 28,376
In-process research and development 12,000
Deferred income taxes 1,857
Liabilities assumed (25,407)
--------
Total purchase price $ 69,614
========
To determine the value of each of Micrion's product lines, management projected
product revenues, gross margins, operating expenses, future research and
development costs, income taxes and returns on requisite assets. The resulting
operating income projections for each product line were discounted to a net
present value using discount rates ranging from 15 to 23 percent. This approach
was applied to existing technology as well as to research and development
projects which have not yet been proven technologically feasible and which had
not generated revenue at the date of the acquisition.
In estimating the value of purchased in-process research and development, the
Company identified four significant projects under development at the date of
the combination. Two of those categories represent enhancements to the
resolution and automation of existing products designed primarily for the
semiconductor industry. Micrion, which has become a division of the Company, is
also enhancing the automation of its products for the data storage industry.
Finally, the Micrion division is continuing to develop its products for the mask
repair market. None of the projects in these categories had been proven
technologically feasible or had generated revenue as of the date of the
evaluation; however, these projects are expected to begin generating revenue in
late 1999 or 2000. In accordance with the Company's policy to expense research
and development costs as they are incurred, a one-time charge of $12,000
associated with the write-off of acquired in-process research and development
was recorded immediately subsequent to the closing of the merger. Because of the
nature of these projects, there is always the risk that a technological hurdle
may be encountered that may delay, prevent or increase the cost of development
of these projects.
The Company also estimated the value of the existing technology utilized in
Micrion's current product lines. In estimating the value of existing technology
acquired, five existing product categories were identified. Three of those
product categories are designed primarily for the semiconductor industry, one of
those product categories is designed primarily for the data storage industry,
and another of those product categories is designed for the mask repair market.
All of the above product categories are currently generating revenue for the
Company.
The amortization periods for existing technology and goodwill have been
established at 10 and 12 years, respectively. Management will evaluate these
amortization periods from time to time. In accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of as well as Accounting Principles Board Opinion No. 17, Intangible
Assets, the Company will periodically assess the carrying value and remaining
useful lives of these intangible assets.
6
<PAGE>
Unaudited pro forma combined statement of operations data, presented as if the
merger had occurred on January 1, 1998, are as follows:
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
---------------------------
September 27, October 3,
1998 1999
<S> <C> <C>
Net sales $ 158,911 $ 162,912
========== ==========
Net loss $ (19,497) $ (7,291)
========== ==========
Pro forma net loss per share $ (0.72) $ (0.26)
========== ==========
</TABLE>
In connection with the merger, Philips Business Electronics purchased from the
Company 3,913,299 newly issued shares of common stock for $31,384.
3. 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, 72 positions remain to be eliminated as of October 3, 1999. The
positions remaining at October 3, 1999 are located in the Company's facilities
in Acht, The Netherlands. On November 5, 1999 the Company entered into an
outsourcing agreement with an independent third party to manufacture certain
subassemblies on the Company's behalf. The agreement establishes a long-term
supply and purchase arrangement and requires the third party contract
manufacturer to hire certain of the Company's employees currently engaged in
these manufacturing operations. The agreement also requires the Company to pay
the difference in cost between certain aspects of the Company's employee benefit
program and the third party contract manufacturer's employee benefit program for
those employees that transfer their employment.
The various components of restructuring and reorganization charges were as
follows:
<TABLE>
<CAPTION>
Accrued Thirty-Nine Weeks Accrued
Liability Ended October 3, 1999 Liability
as of ---------------------------- as of
December 31, Charged to Reduction of October 3,
1998 Expense Liability (1) 1999
<S> <C> <C> <C> <C>
Severance, outplacement and related
benefits for terminated employees $ 2,701 $ - $ (860) $ 1,841
Lease abandonment costs for vacated
facilities 354 - (309) 45
Relocation and moving expenses - 131 (131) -
--------- --------- --------- ---------
$ 3,055 $ 131 $ (1,300) $ 1,886
========= ========= ========= =========
(1) Includes cash payments and net effect of currency exchange rate
fluctuations on accrued liability balance.
</TABLE>
7
<PAGE>
4. COST OF SALES
During the thirteen weeks ended September 27, 1998 the Company re-evaluated an
upgrade program undertaken primarily to replace certain third party manufactured
components within the installed base in a TEM product series. In addition,
certain upgrades were planned for selected FIB products. A charge to cost of
sales of $4,865 was recognized to reflect the decision to proceed with these two
upgrade programs.
During the thirteen weeks ended September 27, 1998 the Company recognized
charges in cost of sales totaling $3,278 for non-current service inventory
write-offs and obsolescence reserves related to the Company's U.S. service
business. These charges reflect the consolidation of the U.S. service operations
in Hillsboro, Oregon and the related closure of the Company's former U.S.
Electron Optics service headquarters in Mahwah, New Jersey.
During 1998 the Company sold an increasing number of in-line FIB and DualBeam
systems used in the manufacturing process, which necessitate a higher level of
warranty support than do systems used in laboratories. During the thirteen weeks
ended September 27, 1998 the Company evaluated its reserve for estimated
warranty costs and recorded an additional charge to cost of sales and increase
in warranty reserves of $1,383.
5. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31, October 3,
1998 1999
<S> <C> <C>
Raw materials, assembled parts and field service stock 25,667 36,279
Work in process 11,853 27,151
Finished goods 10,439 9,528
--------- ---------
Total inventories 47,959 72,958
Reserve for obsolete inventory (4,441) (13,467)
--------- ---------
Net inventories $ 43,518 $ 59,491
========= =========
</TABLE>
6. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
December 31, October 3,
1998 1999
<S> <C> <C>
Service inventories, noncurrent, net of obsolescence reserves
of $6,810 and $8,150, respectively $ 7,037 $ 12,127
Capitalized software development costs, net of amortization
of $478 and $1,552, respectively 3,469 4,202
Existing technology, net of amortization of $2,519 and $3,705,
respectively 13,971 29,785
Goodwill, net of amortization of $2,093 and $3,290, respectively 15,029 42,248
Patents, net of amortization of $39 and $55, respectively 282 266
Investment in unconsolidated affiliates - 3,000
Deposits and other 945 2,121
--------- ---------
Total other assets $ 40,733 $ 93,749
========= =========
</TABLE>
Software development costs capitalized during the thirty-nine weeks ended
September 27, 1998 and October 3, 1999 were $1,210 and $1,807, respectively.
Amortization of software development costs was $310 and $1,100 for the
thirty-nine weeks ended September 27, 1998 and October 3, 1999, respectively.
8
<PAGE>
On September 28, 1999 the Company entered into a Stock Purchase Agreement
whereby the Company purchased a 10 percent interest in Surface/Interface, Inc.
("Surface/Interface") for $3,000 in cash. Surface/Interface is a semiconductor
capital equipment company. The Company also received a warrant to purchase an
additional 9.5 percent interest in Surface/Interface. The Company also entered
into a distribution agreement with Surface/Interface whereby the Company
obtained exclusive rights to distribute and service Surface/Interface's
stylus-based atomic force microscopy tool in Europe and North America. The
agreement excludes mask repair applications from the exclusivity arrangement.
The Company owns 500,000 shares of Norsam Technologies, Inc. ("Norsam") Series A
Preferred Stock. In September 1998, management determined that the carrying
value of its cost-method investment in Norsam was impaired, and, accordingly,
recorded a valuation adjustment of $3,267 during the thirteen weeks ended
September 27, 1998.
7. 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, October 3,
1998 1999
<S> <C> <C>
Current accounts receivable $ 5,689 $ 11,768
Current accounts payable (10,732) (9,161)
--------- ---------
Net current account with Philips $ (5,043) $ 2,607
========= =========
</TABLE>
8. 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
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 U.S. Dollars, Euros, or Japanese Yen. As of October 3, 1999, the
principal balance outstanding under this credit facility was $29,552 and the
weighted average interest rate was 4.25%. 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 U.S. and certain limited facilities in selected foreign
countries. At October 3, 1999, the Company had outstanding standby letters of
credit totaling approximately $820 to secure customer advance deposits. These
standby letters of credit reduce the amount available to borrow under the
Company's $5,000 uncommitted facility.
9
<PAGE>
9. SHAREHOLDERS' EQUITY
The following table summarizes the activity in shareholders' equity for the
thirty-nine weeks ended October 3, 1999:
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
--------------------------- Accumulated Comprehensive
Shares Amount Deficit Loss Total
---------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1998 18,167,475 $ 149,635 $ (45,510) $ (6,498) $ 97,627
Net loss (9,365) (9,365)
Employee purchases of stock
through stock purchase plan 141,815 765 765
Exercise of stock options 12,192 138 138
Restricted stock award 50,000 370 370
Restricted stock purchase 60,248 - -
Shares purchased by Philips (Note 2) 3,913,299 31,384 31,384
Shares issued in Micrion merger
(Note 2) 5,064,150 34,684 34,684
Translation adjustment - - - (676) (676)
---------- ---------- --------- --------- ---------
October 3, 1999 27,409,179 $ 216,976 $ (54,875) $ (7,174) $ 154,927
=========== ========== ========= ========= =========
</TABLE>
10. SEGMENT INFORMATION
The Company operates in three business segments (Note 1). The following table
summarizes financial results for each of the Company's segments:
<TABLE>
<CAPTION>
Corporate
Micro- Electron and
Thirty-Nine Weeks Ended Components electronics Optics Eliminations Total
<S> <C> <C> <C> <C> <C>
September 27, 1998:
Product sales to customers $ 12,312 $ 39,482 $ 50,477 $ - $ 102,271
Service sales to customers - 3,930 17,115 - 21,045
Inter-segment sales 4,740 - 5,540 (10,280) -
--------- --------- --------- --------- ---------
Total sales 17,052 43,412 73,132 (10,280) 123,316
Operating income (loss) 3,696 (1,144) (6,521) (10,167) (14,136)
October 3, 1999:
Product sales to customers 7,686 57,025 53,900 - 118,611
Service sales to customers - 5,752 18,811 - 24,563
Inter-segment sales 3,493 - 4,231 (7,724) -
--------- --------- --------- --------- ---------
Total sales 11,179 62,777 76,942 (7,724) 143,174
Operating income (loss) 1,617 4,546 4,021 (17,436) (7,252)
</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, in-process
research and development, and restructuring and reorganization costs are not
allocated to the Company's operating segments.
10
<PAGE>
11. 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.
The Company's acquisition of the outstanding shares of Micrion resulted in the
assumption of certain commitments and contingencies. Specifically the Company
assumed contingent liabilities under a self-insured medical plan, future
payments due on operating leases, and potential liability in connection with a
1996 class action securities suit brought against Micrion.
12. SUBSEQUENT EVENT
On October 28, 1999 the Company signed a master agreement to purchase the
service and distribution businesses for the Company's Electron Optics segment
from Philips Business Electronics in approximately 20 foreign countries. The
purchase price was $3,219, plus the net assets of the businesses acquired. The
final purchase price is subject to adjustment based on the net assets of the
businesses acquired as of the closing dates, which is not expected to be a
significant amount and could under certain circumstances reduce the purchase
price. The Company intends subsequently to reconfigure these businesses into
independent distributors for some of these locations and will operate the
businesses in a reduced number of countries. The businesses will be acquired in
two groups, with closing of the first group of businesses on October 31, 1999
and closing of the second group of businesses on November 28, 1999. These
businesses were previously operating under a distribution agreement between the
Company and Philips Business Electronics. The agreement was entered into in
February 1997 and had an initial term, which ends on January 1, 2000, unless
extended.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LIQUIDITY AND CAPITAL RESOURCES
During the thirteen weeks ended October 3, 1999 the Company entered into several
transactions that affected or will affect its capital resources.
On August 13, 1999 the Company acquired Micrion Corporation ("Micrion"), a
Massachusetts corporation engaged in the design, manufacture, sale and service
of focused particle beam instruments. Micrion became a wholly owned subsidiary
of the Company and holders of Micrion common stock received one share of the
Company's common stock and $6.00 in cash in exchange for each share of Micrion
common stock. The total number of Company shares exchanged was 5,064,150. The
Company has begun the process of integration of the Micrion operations and
facilities into its existing operations and facilities and expects to complete
this integration plan over the latter part of 1999 and the early part of 2000.
The transaction has been accounted for as a purchase, and a preliminary purchase
price allocation was applied to the Micrion balance sheet. The activity of
Micrion from August 13, 1999 through October 3, 1999 is included in the
Company's consolidated results of operations. The Company is in the process of
obtaining appraisals of the various Micrion Assets acquired, as well as
completing analyses of the effects of its integration plans. The preliminary
purchase price allocation is expected to be adjusted after the appraisals and
analyses are finalized.
Concurrent with the merger, on August 13, 1999 Philips Business Electronics
purchased 3,913,299 newly issued shares of common stock from the Company for
aggregate consideration of $31.4 million.
Preliminary purchase accounting for the Micrion merger as of August 13, 1999
resulted in the recognition of an intangible asset in the amount of $12.0
million representing the estimated fair value of in-process research and
development of Micrion. The intangible asset was written off with a charge to
earnings immediately following the Micrion merger in keeping with the Company's
policy to expense research and development costs as they are incurred. In
connection with purchase accounting for the Micrion merger, the Company
identified four significant projects under development. These projects are still
under development and have not yet generated revenue. Based on current
management estimates, these projects are expected to generate revenue beginning
in late 1999 or early 2000.
On September 28, 1999 the Company entered into a Stock Purchase agreement
whereby the Company purchased a 10 percent interest in Surface/Interface, Inc.
("Surface/Interface") for $3.0 million in cash. The Company also received a
warrant to purchase an additional 9.5 percent interest in Surface/Interface.
Surface/Interface is a semiconductor capital equipment company. The Company also
entered into a distribution agreement with Surface/Interface whereby the Company
obtained exclusive rights to distribute and service Surface/Interface's
stylus-based atomic force microscopy tool in Europe and North America. The
agreement excludes mask repair applications from the exclusivity arrangement.
On October 28, 1999 the Company signed a master agreement to purchase the
service and distribution businesses for the Company's Electron Optics segment
from Philips Business Electronics in approximately 20 foreign countries. The
purchase price was $3.2 million, plus the net assets of the businesses acquired.
The final purchase price is subject to adjustment based on the net assets of the
businesses acquired as of the closing dates, which is not expected to be a
significant amount and could under certain circumstances reduce the purchase
price. The Company intends subsequently to reconfigure these businesses into
independent distributors for some of these locations and will operate the
businesses in a reduced number of countries. The businesses will be acquired in
two groups, with closing of the first group of businesses on October 31, 1999
and closing of the second group of businesses on November 28, 1999. These
businesses were previously operating under a distribution agreement between the
Company and Philips Business Electronics. The agreement was entered into in
February 1997 and had an initial term which ends on January 1, 2000, unless
extended.
At October 3, 1999 the Company had total cash and cash equivalents of $11.4
million compared to $15.2 million at December 31, 1998. Cash provided by
operating activities for the thirty-nine weeks ended October 3, 1999 was $16.0
million compared to $22.1 million for the thirty-nine weeks ended September 27,
1998. Cash provided by operating activities before the effect of working capital
changes was $15.8 million for the thirty-nine weeks ended October 3, 1999 and
$0.9 million for the thirty-nine weeks ended September 27, 1998. The acquisition
of Micrion on August 13, 1999 resulted in an increase in the Company's working
capital of $12.9 million. 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).
12
<PAGE>
Investing activities used cash of $45.1 million during the thirty-nine weeks
ended October 3, 1999 compared with $7.8 million used during the same period in
1998. The 1999 increase is primarily due to the merger with Micrion and the
investment in an unconsolidated affiliate, as well as higher capital
expenditures for equipment and 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 provided cash of $26.1 million in the thirty-nine weeks
ended October 4, 1999 and used $10.4 million of cash in the thirty-nine weeks
ended September 27, 1998. The 1999 financing activities are principally
comprised of $31.4 million in proceeds from the sale of stock to Philips to
finance the cash portion of the Micrion purchase price and transaction costs ,
borrowings from Philips, the payoff of Micrion bank borrowings subsequent to the
merger, 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 three quarters of 1999 the Company utilized the
multiple currency capability to finance its Asian working capital needs by
borrowing in Japanese yen and its European working capital needs by borrowing in
Euros. 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. 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.
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 October 3,
1999 the Company had forward purchase and sale contracts of foreign currency
totaling $4.4 million, which, if settled at the spot exchange rate as of October
3, 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 below. The remaining 1998 restructuring
and reorganization charges, which will be settled in 1999, total $1.9 million as
of October 3, 1999.
The Company believes that its cash and cash equivalents, cash flows from
operating activities and existing credit facilities are adequate to meet the
Company's cash requirements over the next 12 to 18 months.
13
<PAGE>
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 Thirty-Nine Weeks Ended
---------------------------- ----------------------------
September 27, October 3, September 27, October 3,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 86.2 61.5 70.0 61.2
------- ------- ------- -------
Gross profit 13.8 38.5 30.0 38.8
Research and development 13.8 12.0 12.2 11.2
Selling, general and administrative 22.6 20.4 23.8 22.6
Amortization of purchased intangibles 1.5 2.0 1.5 1.6
Purchased in-process research and development 0.0 23.1 0.0 8.4
Restructuring and reorganization costs 11.7 0.0 4.0 0.1
------- ------- ------- -------
Operating loss (35.6) (19.0) (11.5) (5.1)
Total other expense, net (8.3) (0.6) (3.4) (0.1)
------- ------- ------- -------
Loss before taxes (43.9) (19.6) (14.9) (5.2)
Tax expense (benefit) (15.4) 1.7 (5.2) 1.4
------- ------- ------- -------
Net loss (28.5)% (21.2)% (9.7)% (6.5)%
======= ======= ======= =======
Totals may not calculate due to rounding.
</TABLE>
Merger with Micrion Corporation. On August 13, 1999 the Company acquired
Micrion. The transaction has been accounted for as a purchase, and a preliminary
purchase price allocation was applied to the Micrion balance sheet. The activity
of Micrion from August 13, 1999 through October 3, 1999 is included in the
Company's consolidated results of operations as part of the MicroElectronics
segment.
Net sales. Net sales for the thirteen and thirty-nine weeks ended October 3,
1999 increased $9.6 million (23%) and $19.9 million (16%) compared to the
corresponding periods in 1998. MicroElectronics segment product sales increased
$6.3 million (41%) for the thirteen weeks and $17.5 million (44%) for the
thirty-nine weeks compared to the same periods in 1998. Of this increase, $5.3
million for both the thirteen and thirty-nine weeks ended October 3, 1999 was
attributable to the Micrion product division. Electron Optics segment product
sales increased $2.6 million (16%) for the thirteen weeks and $3.4 million (7%)
for the thirty-nine weeks ended October 3, 1999 compared to the same periods in
1998. Product sales in the Components segment decreased $1.1 million (27%) for
the thirteen weeks and $4.6 million (38%) for the thirty-nine weeks ended
October 3, 1999 compared to the same periods in 1998. Service revenues increased
by $1.8 million (25%) in the thirteen weeks and $3.5 million (17%) in the
thirty-nine weeks ended October 3, 1999 compared with the same periods of 1998.
Of this increase, $1.0 million for both the thirteen and thirty-nine weeks ended
October 3, 1999 was attributable to Micrion. Industry conditions in both the
semiconductor-manufacturing sector and the data storage sector were generally
weak during the first half of 1998 compared to 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 made in the second half of 1998 but have
been slowed by softness in the materials 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 in which the Company sells, with the largest increases
occurring in the Asia Pacific Region (27%) and Europe (24%). Sales in Europe
represented 32% of total sales for the thirty-nine weeks ended October 3, 1999
and 29% for the thirty-nine weeks ended September 27, 1998. Sales in the Asia
Pacific Region represented 22% of sales for the thirty-nine weeks ended October
3, 1999 compared with 20% of sales for the same period in 1998. Sales in North
America represented 43% of sales for the thirty-nine weeks ended October 3, 1999
compared to 47% of sales for the same period in 1998. Sales in the rest of the
world represented 3% of sales for the thirty-nine weeks ended October 3, 1999
and 2% for the thirty-nine weeks ended September 27, 1998.
14
<PAGE>
In addition to the U.S. Dollar, the Company conducts significant business in
Euros, British Pounds, and Japanese Yen. In general, the U.S. Dollar was
stronger in relation to the Euro and British Pound and weaker in relation to the
Japanese Yen during the thirty-nine weeks ended October 3, 1999 as compared to
the corresponding period of 1998. Accordingly, the translation of sales
denominated in European currencies resulted in slightly higher reported sales in
U.S. Dollars in 1999 as compared to 1998. The translation of sales denominated
in Japanese Yen resulted in slightly lower reported sales in U.S. Dollars in
1999 as compared with 1998.
Gross profit. Gross profit for the thirteen weeks ended October 3, 1999
increased $14.2 million (241%) and for the thirty-nine weeks ended October 3,
1999 increased $18.5 million (50%) compared to the same periods in 1998. Gross
profit as a percentage of sales was 38.5% and 13.8% for the thirteen weeks ended
October 3, 1999 and September 27, 1998, respectively, and 38.8% and 30.0% for
the thirty-nine weeks ended October 3, 1999 and September 27, 1998,
respectively. The 1998 third quarter and year-to-date gross margin percentages
were negatively impacted by $9.5 million of charges recorded for product upgrade
programs, inventory obsolescence reserves, and increased warranty reserves.
Excluding these charges, the gross margin would have been 36.3% in the thirteen
weeks ended September 27, 1998 and 37.8% in the thirty-nine weeks ended
September 27, 1998. The improvement in comparable gross margin percentage for
1999 is attributable to changes in product mix, higher sales and production
volumes which resulted in increased leverage on manufacturing overhead, and
improved results from the North American service business.
Research and development costs. Research and development costs for the thirteen
and thirty-nine weeks ended October 3, 1999 increased $0.4 million (7%) and $1.1
million (7%) compared to the same periods in 1998. As a percentage of sales,
research and development costs were 12.0% and 13.8% for the thirteen weeks and
11.2% and 12.2% for the thirty-nine weeks ended October 3, 1999 and September
27, 1998, respectively. Research and development expenses are reported net of
certain subsidies the Company receives for expenditures on selected projects.
The subsidies increased by $0.4 million in the thirty-nine weeks ended October
3, 1999 compared to the same period in 1998. Included in research and
development costs for both the thirteen weeks and the thirty-nine weeks ended
October 3, 1999 is $0.8 million attributable to Micrion. 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, as well as increased expenditures on new products and product
enhancements and the expenditures of Micrion. Research and development costs
year to date in 1999 were lower than the year-to-date 1998 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 expects to
increase its research and development expenditures in 1999 and 2000 compared to
the expenditure levels of 1998.
Selling, general and administrative costs. Selling, general and administrative
costs for the thirteen weeks ended October 3, 1999 increased $1.0 million (11%)
and for the thirty-nine weeks ended October 3, 1999 increased $3.0 million (10%)
compared to the same periods in 1998. As a percentage of sales, selling, general
and administrative costs were 20.4% and 22.6% for the thirteen weeks and 22.6%
and 23.8% for the thirty-nine weeks ended October 3, 1999 and September 27,
1998, respectively. $1.5 million of the increase in both the thirteen and
thirty-nine weeks ended October 3, 1999 is attributable to Micrion. The 1998
year-to-date expense level 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 in the statement of operations. The expense associated
with the amortization of other intangibles such as capitalized software
development costs and patents 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.
Preliminary purchase accounting for the Micrion merger as of August 13, 1999
resulted in the recognition of intangible assets in the amount of $17.0 million
for existing technology that is being amortized over a 10-year period, and
goodwill of $28.4 million that is being amortized over a 12-year period.
Approximately $0.4 million of amortization expense was recognized in the
thirteen and thirty-nine weeks ended October 3, 1999 related to the Micrion
intangibles. The recorded amounts for the intangible assets arising from the
Micrion merger will be adjusted following completion of the appraisal of Micrion
assets and the finalization of the preliminary purchase price allocation.
15
<PAGE>
Purchased in-process research and development. In accordance with the Company's
policy to expense research and development costs as they are incurred, a
one-time charge of $12.0 million associated with the write-off of acquired
in-process research and development was recorded immediately subsequent to the
closing of the Micrion merger. The $12.0 million charge was determined as part
of the preliminary purchase accounting for the merger based on a preliminary
appraisal of the related assets acquired.
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, $1.9 million remains as a liability as of October 3, 1999. This
liability will continue to be discharged for the remainder of 1999 as the
Company's outsourcing plan continues to be implemented. Of the 173 positions
targeted for elimination, 72 positions remain to be eliminated as of October 3,
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 represented 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 expense, net. Other expense, net was $0.3 million for the thirteen weeks
ended October 3, 1999 compared with $3.5 million for the same period in 1998.
For the thirty-nine weeks ended October 3, 1999 other expense, net was $0.1
million compared to $4.2 million for the corresponding period in 1998. In
September 1998, management determined that the carrying value of a cost-method
investment was impaired, and, accordingly, recorded a $3.3 million valuation
adjustment. The thirty-nine weeks ended October 3, 1999 included currency
transaction gains of $0.2 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 (9)% and 35% for the
thirteen weeks ended October 3, 1999 and September 27, 1998, respectively, and
(27)% and 35% for the thirty-nine weeks ended October 3, 1999 and September 27,
1998, respectively. The Company's tax rate differs from the U.S. federal
statutory tax rate primarily as a result of the write-off and amortization of
intangible assets not deductible for income tax purposes, state and foreign
taxes, and the tax effect of the Company's use of a foreign sales corporation
for exports from the U.S. The Company did not recognize a tax benefit for the
thirteen weeks and thirty-nine weeks ended October 3, 1999, primarily because
the $12.0 million of purchased in-process research and development costs written
off immediately subsequent to the Micrion merger is non-deductible for income
tax purposes.
BOOKINGS AND BACKLOG
The Company's backlog consists of purchase orders it has received for products
and services it expects to ship and deliver within the next 12 months. At
October 3, 1999 the Company's product backlog was $75 million and its field
service backlog was $10 million for a total backlog of $85 million. Over the
thirty-nine weeks ended October 3, 1999, the Company's consolidated book-to-bill
ratio was 1.03 to 1. At December 31, 1998 the Company's product backlog was $64
million and its field service backlog was $9 million for a total backlog of $73
million. 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 indicative of revenue in future periods.
16
<PAGE>
YEAR 2000 DISCLOSURE
State of Readiness
Background. 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 2000
readiness of the Company's products; and (v) evaluating the need for and, as
appropriate, developing a contingency plan.
Internal Information Technology Systems. Testing and evaluation of the Company's
internal information technology systems was largely completed by the end of the
1999 second quarter and did not reveal substantial Year 2000 compliance
deficiencies, although the Company is upgrading certain internal systems as a
result of this testing. Testing of what remains is expected to be completed by
November 1999. 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.
Products. 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 and product configurations. The Company has not
investigated the Year 2000 readiness of all third-party products sold or used
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 web page has been updated from time-to-time to
provide additional and amended information. The Company's service
representatives are, as a matter of course, responding to customer requests for
the installation of additional hardware and software to address identified Year
2000 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 service representatives to address Year 2000 issues with customers during
routine service calls.
External, Non-Information Technology Suppliers. 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 may not complete all assessments and planning prior to January 1,
2000. As inquiries continue, Year 2000 deficiencies may arise and failure to
complete inquiries and planning may result in disruptions in the Company's
supply chain and operations. In addition, the Company may not have properly
identified all critical suppliers and to the extent that it has failed to do so,
this could also disrupt the Company's operations.
Revenues at Risk. Some of the Company's customers may institute policies to
refuse product orders and/or shipments in December 1999 and January 2000, or due
to operational failures, may be unable to accept orders or product shipments.
The Company has made limited inquiry of certain key customers on these matters.
To date, it has not identified a significant customer who is not accepting, or
will not be able to accept, orders and/or shipments. Additional inquiry,
however, may reveal such problems with customers. To the extent customers are
unwilling or unable to accept orders or products in late 1999 and early 2000,
this could have a material adverse effect on the Company's revenues and results
of operations.
Micrion Merger. The Company acquired Micrion in the third quarter of 1999.
Micrion made certain representations and warranties about its Year 2000
readiness in its merger agreement with the Company. The Company continues its
assessment of Micrion's Year 2000 readiness and the accuracy of the
representations and warranties. At present the Company does not believe that
there are significant risks or costs to the enterprise associated with Micrion's
Year 2000 state of readiness, but it
17
<PAGE>
cannot be certain of this unless and until it completes its analysis of the
Micrion operations.
Disruptive Local Events. The Company has not undertaken an evaluation of the
non-supplier specific risks related to the local geographic areas where it
operates manufacturing, sales and service facilities, and to the extent there
are disruptive events in local areas caused by insufficient Year 2000
preparedness, the Company's results of operations could suffer.
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 of business, the Company has improved its Year 2000 readiness through
recent systems upgrades as part of its usual capital improvement efforts. The
Company has devoted management, sales and technical resources to address Year
2000 matters and expects to continue to do so. The Company will increase
inventories of certain product 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. As more fully described above, there may be problems with
customers making or accepting product orders or shipments at the end of 1999 or
in early 2000, which could adversely affect revenues. 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 problems with critical
suppliers generally, due to hoarding and changes in buying and shipping patterns
caused by other parties' efforts to address Year 2000 problems. Failure to
obtain critical supplies could result in disruptions in manufacture and shipping
of product and could adversely affect revenue. Local events, unrelated to the
Company's external supply chain, internal information technology systems, direct
operations or products could also result in disruption of operations or loss of
business. Further, the Company's failure to address Year 2000 problems could
result in litigation. 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 has
secured additional transport capacity for December 1999, has identified
resources for customers at the end of 1999 and in early 2000, has identified a
crisis management team, and has taken measures to increase certain of its
inventory of some component parts and supplies.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
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 the Company's sales by
business segment and geographical region, expected completion of the Company's
outsourcing and restructuring program, expected investment in plant and
equipment and software development, expected capital requirements, expected
purchase accounting treatment of the Micrion merger (as preliminary treatment is
finalized),Year 2000 readiness by the Company and its customers and suppliers,
completion of the integration of the Micrion operations and facilities as more
fully described below., and the expected purchase of service and distribution
businesses from Philips, 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
sales worldwide, include competitive factors such as increased worldwide
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.
18
<PAGE>
Integration of Micrion. The Company is still in the process of integrating its
operations with those of Micrion, which may result in a number of difficulties,
costs and delays. These may include:
o Distracting management from the business of the Company
o Potential incompatibility of business cultures
o Perceived and potential adverse change in client service standards,
business focus or service offerings available to clients
o Potential inability to successfully coordinate the research and development
and sales and marketing efforts
o Costs and delays in implementing common systems and procedures, including
financial accounting systems
o Costs and inefficiencies in delivering services to the clients of the
Company
o Inability to retain key personnel
The failure to integrate successfully the Company and Micrion would have a
material adverse effect on the business, financial condition and results of
operations of the Company.
See the Company's Form 10-K/A for fiscal 1998 for a discussion of additional
factors that could affect the Company's future results.
19
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
The Company acquired Micrion in August 1999. On August 2, 1996, an action was
filed in the U.S. District Court for the District of Massachusetts against
Micrion, Nicholas P. Economou, who at the time was a director and officer of
Micrion and is presently an officer and director of the Company, and David M.
Hunter and Robert K. McMenamin, then officers of Micrion and presently employees
of the Company. On September 9, 1996, another action was filed in the same court
against Micrion, Dr. Economou, Messrs. Hunter and McMenamin and Billy W. Ward,
who at the time was an officer of Micrion. Mr. Ward is presently an employee of
the Company. On December 6, 1996, the plaintiffs in both actions filed an
amended consolidated complaint. The consolidated complaint does not contain a
claim against Mr. Ward. The consolidated complaint purports to be brought on
behalf of a class of purchasers of Micrion's common stock from April 26, 1996
through June 21, 1996. It asserts claims for violations under the federal
securities laws, alleging that Micrion made false and misleading statements to
the public concerning the nature of its sales agreement with a customer. Factual
discovery in the case has been completed. Micrion filed a motion for summary
judgment to dismiss the case, which was denied on September 24, 1998. At a
hearing on September 22, 1999, the Court invited the defendants to file a
renewed motion for summary judgment and set a briefing schedule for the motion.
The renewed defendant's motion for summary judgement was timely filed and is
scheduled for hearing on November 22, 1999. The Company believes the
consolidated complaint to be without merit and intends to continue its vigorous
defense of the claims. There is no assurance, however, that the Company will be
successful in defending this lawsuit or that money damages, if awarded, would
not have a material adverse effect on the Company.
Item 2. Changes in Securities and Use of Proceeds.
In connection with the Micrion merger, the Company entered into a Stock Purchase
Agreement with Philips Business Electronics International, B.V. ("Philips
Business Electronics"), the Company's majority shareholder, whereby Philips
Business Electronics agreed to finance the cash portion of the consideration
paid to Micrion shareholders and part of the merger transaction costs through
the unregistered purchase of Company common stock. Accordingly, on August 13,
1999, as part of the closing of the Micrion merger and pursuant to the terms of
the Stock Purchase Agreement, Philips Business Electronics purchased 3,913,299
newly issued unregistered shares of Company common stock (the "Shares") for
$8.02 a share. There were no underwriters of the Shares, and no underwriting
discount was paid. The Shares were sold pursuant to the exemption afforded by
Section 4(2) of the Securities Act of 1933. There was no general solicitation
for sale of the Shares.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On August 24, 1999 the Company filed a Form 8-K in conjunction with the
closing of its merger with Micrion Corporation in August 1999.
On November 1, 1999 the Company filed a Form 8-K/A providing audited
financial statements of Micrion Corporation and pro forma financial information
in conjunction with its merger with Micrion Corporation in August 1999.
20
<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: November 16, 1999 VAHE' A. SARKISSIAN
-----------------------------------------
Vahe A. Sarkissian
President and
Chief Executive Officer
(Authorized Officer)
WILLIAM P. MOONEY
-----------------------------------------
William P. Mooney
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
MARK V. ALLRED
-----------------------------------------
Mark V. Allred
Corporate Controller
(Principal Accounting Officer)
21
<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> OCT-03-1999
<CASH> 11,442
<SECURITIES> 0
<RECEIVABLES> 67,236
<ALLOWANCES> (2,764)
<INVENTORY> 59,491
<CURRENT-ASSETS> 157,207
<PP&E> 49,823
<DEPRECIATION> (20,150)
<TOTAL-ASSETS> 280,629
<CURRENT-LIABILITIES> 74,632
<BONDS> 0
0
0
<COMMON> 216,976
<OTHER-SE> (62,049)
<TOTAL-LIABILITY-AND-EQUITY> 280,629
<SALES> 143,174
<TOTAL-REVENUES> 143,174
<CGS> 87,652
<TOTAL-COSTS> 150,426
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (751)
<INCOME-PRETAX> (7,378)
<INCOME-TAX> 1,987
<INCOME-CONTINUING> (9,365)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,365)
<EPS-BASIC> (.47)
<EPS-DILUTED> (.47)
</TABLE>
