SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File No. 0-22780
FEI COMPANY
(Exact name of registrant as specified in its charter)
Oregon 93-0621989
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
7451 NW Evergreen Parkway
Hillsboro, Oregon 97124-5830
(Address of principal executive offices) (Zip Code)
(503) 640-7500
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock outstanding as of August 10, 1998 was
18,081,464.
<PAGE>
INDEX TO FORM 10-Q/A
Page
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 28, 1998
(restated) and December 31, 1997 ..................................1
Condensed Consolidated Statements of Operations
Thirteen Weeks Ended June 28, 1998 (restated) and
June 29, 1997 and Twenty-Six Weeks Ended June 28, 1998
(restated) and June 29, 1997 ......................................3
Condensed Consolidated Statements of Cash Flows -
Twenty-Six Weeks Ended June 28, 1998 (restated) and
June 29, 1997 .....................................................4
Notes to Condensed Consolidated Financial Statements .................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................10
Part II - Other Information
Item 2. Changes in Securities ...........................................15
Item 6. Exhibits and Reports on Form 8-K ................................16
Signatures ..............................................................17
i
<PAGE>
<TABLE>
<CAPTION>
PART I - Financial Information
Item 1. Financial Statements
FEI Company and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
December 31, June 28,
1997 1998
------------- -------------
(As Restated,
see Note 8)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 16,394 $ 8,600
Receivables 56,168 52,261
Inventories (Note 3) 37,807 45,346
Deferred income taxes 2,484 3,685
Other 2,497 881
------------- -------------
Total current assets 115,350 110,773
EQUIPMENT 19,246 21,823
LEASE AND NOTE RECEIVABLES 946 777
OTHER ASSETS 47,480 45,482
------------- -------------
TOTAL $ 183,022 $ 178,855
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,984 $ 13,259
Current accounts with Philips (Note 4) 9,074 9,866
Accrued payroll liabilities 3,248 1,938
Accrued expenses and deferred income 18,206 19,740
Other current liabilities 5,742 7,046
------------- -------------
Total current liabilities 52,254 51,849
LINE OF CREDIT 17,844 12,922
OTHER LIABILITIES 491 844
DEFERRED INCOME TAXES 7,544 8,133
SHAREHOLDERS' EQUITY:
Preferred stock - 500,000 shares authorized;
None issued and outstanding - -
2
<PAGE>
December 31, June 28,
1997 1998
------------- -------------
(As Restated,
see Note 8)
<S> <C> <C>
Common stock - 30,000,000 shares authorized; 18,077,793
and 18,079,683 shares issued and outstanding at
December 31, 1997 and June 28, 1998, respectively 149,149 149,159
Accumulated deficit (36,602) (36,437)
Accumulated other comprehensive loss (7,658) (7,615)
------------- -------------
Total shareholders' equity 104,889 105,107
------------- -------------
TOTAL $ 183,022 $ 178,855
============= =============
See notes to condensed consolidated financial statements.
</TABLE>
2
<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 29, June 28, June 29, June 28,
1997 1998 1997 1998
------------ ------------ ------------ ------------
(As Restated, (As Restated,
see Note 8) see Note 8)
<S> <C> <C> <C> <C>
NET SALES $ 43,958 $ 44,922 $ 76,025 $ 80,876
COST OF SALES 25,909 27,850 49,176 49,708
------------ ------------ ------------ ------------
Gross profit 18,049 17,072 26,849 31,168
OPERATING EXPENSES:
Research and development costs 4,260 4,310 8,643 9,148
Selling, general and administrative costs 9,300 10,912 19,698 19,771
Amortization of intangibles 681 624 937 1,258
Purchased in-process research and development
(Note 2) - - 38,046 -
Restructuring and reorganization costs (Note 5) - - 2,478 -
------------ ------------ ------------ ------------
Total operating expenses 14,241 15,846 69,802 30,177
OPERATING INCOME (LOSS) 3,808 1,226 (42,953) 991
OTHER EXPENSE, NET (83) (521) (280) (737)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE TAXES 3,725 705 (43,233) 254
TAX EXPENSE (BENEFIT) 1,490 247 (337) 89
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 2,235 $ 458 $ (42,896) $ 165
============ ============ ============ ============
PER SHARE DATA:
Net income (loss) per share, basic $ 0.13 $ 0.03 $ (2.79) $ 0.01
============ ============ ============ ============
Net income (loss) per share, diluted $ 0.12 $ 0.02 $ (2.79) $ 0.01
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 17,704 18,079 15,371 18,078
============ ============ ============ ============
Diluted 18,372 18,345 15,371 18,383
============ ============ ============ ============
See notes to 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 29, June 28,
1997 1998
--------------- ---------------
(As Restated,
see Note 8)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (42,896) $ 165
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,462 3,474
Purchased in-process research and development 38,046 -
Other 17,749 1,440
--------------- ---------------
Net cash provided by operating activities 15,361 5,079
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment (4,411) (4,659)
Investment in software development (893) (796)
Net change in leases receivable (350) 169
--------------- ---------------
Net cash used in financing activities (5,654) (5,286)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 3,852 (4,922)
Proceeds from exercise of stock options 71 10
Net cash received from Philips 8,000 -
Repayment of note to Philips - (2,718)
--------------- ---------------
Net cash provided by (used in) financing activities 11,923 (7,630)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (4,474) 43
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
17,156 (7,794)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 16,394
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,156 $ 8,600
=============== ===============
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - FEI Company and its wholly owned subsidiaries (the
"Company") design, manufacture, market and service focused ion beam ("FIB")
workstations, transmission electron microscopes ("TEMs"), scanning electron
microscopes ("SEMs") and components of these products. The Company has
manufacturing operations in Hillsboro, Oregon; Eindhoven, The Netherlands; and
Brno, Czech Republic. Sales and service operations are conducted in the United
States and eight other countries, constituting a majority of the worldwide
market for the Company's products. In addition, the Company's products are sold
through distribution agreements with affiliates of Philips Electronics N.V.
("Philips") located in approximately 20 additional countries.
The Company's FIB workstations are sold primarily to semiconductor manufacturers
and are used in the design, manufacture and testing of integrated circuits. The
Company's electron microscope products are sold primarily to life science and
materials science research institutes, universities and industrial customers, as
well as to semiconductor manufacturers.
Basis of Presentation - On February 21, 1997, FEI Company ("Pre-Combination
FEI") acquired substantially all of the assets and liabilities of the electron
optics business (the "PEO Operations") of Philips Business Electronics
International B.V. ("PBE"), a wholly owned subsidiary of Philips (the
"Combination"). The financial statements for periods prior to the Combination
are presented as if the PEO Operations had existed as an entity separate from
Philips during the periods presented and include the historical assets,
liabilities, sales and expenses that are directly related to the PEO Operations.
Because the PEO Operations transferred were historically part of the Philips
group, certain allocations of liabilities and expenses have been included in the
financial statements. These liabilities and expenses were allocated using
various methods depending upon the nature of the liability or expense. In the
opinion of management, the methods used to allocate these liabilities and
expenses to the PEO Operations are reasonable. The financial statements for the
periods prior to the Combination are not necessarily indicative of the financial
position and results of operations that would have occurred had the PEO
Operations been a separate entity.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Article 2 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all
5
<PAGE>
adjustments considered necessary for fair presentation have been included. In
addition to the adjustments for normal recurring accruals, the Company recorded
charges in the first quarter of 1997 of $38,046 associated with the purchase of
in-process research and development, as a result of the Company's combination
with PEO Operations. The Company also recorded a $2,478 restructuring and
reorganization charge primarily associated with the relocation of the Company's
Wilmington, Massachusetts manufacturing operations.
2. THE COMBINATION
On February 21, 1997, Pre-Combination FEI acquired substantially all of the
assets and liabilities of the PEO Operations in exchange for 9,728,807 newly
issued shares of the Company's Common Stock, which constituted, when issued to
PBE, 55% of the shares of Common Stock then outstanding. Because PBE acquired
control of the Company by acquiring 55% of the outstanding voting securities of
the Company, the Combination was treated as a "reverse acquisition" for
accounting and financial reporting purposes whereby purchase accounting was
applied to the financial statements of Pre-Combination FEI. The 1997 results of
operations reflect the results of the PEO operations through February 21, 1997,
and the combined results of the Company from February 22, 1997 and thereafter.
Management estimated the fair market value of the assets acquired in order to
allocate the total purchase price of $122,872 to the various assets. To
determine the value of each of Pre-Combination FEI's product lines, management
projected product revenues, gross margins (projected at 37% to 44%, depending on
the product and the stage in its life cycle), operating expenses, income taxes
and returns on requisite assets. The resulting operating income projections for
each product line were discounted to a net present value using discount rates
ranging from 18 percent to 21 percent. This approach was applied to existing
technology as well as to research and development projects which had not been
proven technologically feasible and which had not generated revenue as of the
date of the Combination. As a result of this valuation, the fair values of
in-process research and development, existing technology and goodwill of
Pre-Combination FEI were determined to be $38,046, $16,490 and $17,122,
respectively.
In determining the value of acquired in-process research and development,
management identified four specific research and development projects--a thin
film head FIB for the data storage industry, in-line systems for semiconductor
manufacturers, a laser-aligned stage and the Company's next generation platform.
The thin film head FIB and in-line systems have both been shipped to customers.
The laser-aligned stage and the Company's next generation platform are currently
under development. The laser-aligned stage is expected to be shipped to
customers in 1998. The Company entered into a development agreement with Philips
Machinefabrieken Nederland B.V. ("Philips Machine Shop"), a related party, to
develop the stage assembly for its next generation platform. As of June 28,
1998, the Company has recognized $2,237 in research and development costs in
connection with such agreement. The Company expects to spend approximately
$7,900 to complete the development of its next
6
<PAGE>
generation platform. The Company expects to begin shipping its next generation
platform in 1999. However, there remains the risk that a technological hurdle
may be encountered that may delay or prevent the successful development of the
Company's next generation platform. Although the Company believes any hurdles
could eventually be overcome, the Company's competitive position could be harmed
if its competitors are successful first in developing a competing technology.
The amortization periods for existing technology and goodwill have been
established at 12 years and 15 years, respectively. It is possible that
estimates of anticipated future gross revenues, the remaining estimated economic
life of products or technologies, or both, may be reduced due to competitive
pressures or other factors.
In accordance with the Company's policy to expense research and development
costs as incurred, a one-time charge of $38,046 for the write-off of acquired
in-process research and development was recorded immediately subsequent to the
closing of the Combination.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31, June 28,
1997 1998
--------------- ---------------
<S> <C> <C>
Raw materials and assembled parts .......................... $ 24,987 $ 26,370
Work in process ............................................ 12,123 13,019
Finished goods ............................................. 5,998 11,593
--------------- ---------------
Total inventories ................................. 43,108 50,982
Reserve for obsolete inventory ............................. (5,301) (5,636)
--------------- ---------------
Net inventories ................................... $ 37,807 $ 45,346
=============== ===============
</TABLE>
4. CURRENT ACCOUNTS WITH PHILIPS
Current accounts with Philips represent accounts receivable and accounts payable
between the Company and other Philips units. Most of the current account
transactions relate to deliveries of goods.
Current accounts with Philips consisted of the following:
<TABLE>
<CAPTION>
December 31, June 28,
1997 1998
--------------- ---------------
<S> <C> <C>
Current accounts payable $ 7,678 $ 8,137
Current accounts payable (16,752) (18,003)
--------------- ---------------
Net current accounts with Philips $ (9,074) $ (9,866)
=============== ===============
</TABLE>
7
<PAGE>
5. ELECTROSCAN RESTRUCTURING AND REORGANIZATION
In March 1997, the Company implemented a restructuring and reorganization plan
for its ElectroScan operation in Massachusetts. The plan involved the transfer
of the ElectroScan manufacturing activities to the Company's manufacturing
facility in Acht, The Netherlands and termination of 11 employees. The Company
informed all affected employees of the planned terminations and the related
severance benefits that they would receive. The Company also discontinued the
principal product produced by ElectroScan. Consequently, $1,699 of intangible
assets attributable to the acquisition of the assets of ElectroScan was written
off and charged to expense in the first quarter of 1997, based on projections of
future losses and cash flows. In addition, the estimated severance costs for 11
ElectroScan manufacturing and development employees, and other related costs of
the plan were charged to expense.
The components of this charge were as follows:
<TABLE>
<CAPTION>
Thirteen Weeks
Ended March 30,
1997
--------------
<S> <C>
Severance, outplacement, transition bonuses and related benefits
for terminated employees $ 621
Remaining rent on vacated facilities 158
Valuation adjustment on intangible assets related to abandoned
technology 1,699
--------------
$ 2,478
==============
</TABLE>
6. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, Reporting Comprehensive Income, in the first
quarter of 1998. The primary component of comprehensive income (loss) not
included in net income (loss) for the Company is the effect of foreign currency
translation for the Company's foreign subsidiaries. Comprehensive income (loss)
consisted of the following:
<TABLE>
<CAPTION>
Thirteen Weeks Twenty-Six Weeks
Ended Ended
-------------------------- --------------------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) as reported $ 2,235 $ 458 $ (42,896) $ 165
Effect of foreign currency translation (847) 47 (4,474) 43
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 1,388 $ 505 $ (47,370) $ 208
============ ============ ============ ============
</TABLE>
7. SUBSEQUENT EVENT
On July 29, 1998 the Company announced that it would take a charge in the third
quarter of 1998 of approximately $6.4 million for restructuring. The
restructuring charge is being taken
8
<PAGE>
to consolidate operations, reduce operating expenses, and provide for
outsourcing of certain manufacturing activities. The Company anticipates that
the restructuring will eliminate approximately 160 positions worldwide, or about
15% of its work force, beginning in August 1998 and extending through 1999. The
charge primarily represents the cost of providing severance, outplacement
assistance, and associated benefits to affected employees, as well as
transitional costs for outsourcing certain activities.
On July 29, 1998 the Company also announced that it would take charges in the
third quarter of 1998 totaling approximately $8.0 million for asset valuation
and reserve adjustments. These charges primarily relate to management decisions,
taken in light of recent market conditions, to eliminate unproductive assets,
redirect a portion of the Company's research and development efforts, and
reconfigure certain products resulting in increased inventory reserves for
obsolescence.
8. RESTATEMENT
Subsequent to the issuance of the Company's Quarterly Report of Form 10-Q for
the twenty-six weeks ended June 28, 1998, management determined that research
and development expense should have been recognized by the Company in connection
with a research and development agreement with Philips Machine Shop, in the
periods that Philips Machine Shop incurred the related expenses. The Company had
accounted for the research and development arrangement with Philips Machine Shop
in accordance with the terms of the agreement, whereby the Company would only
pay for successful research and development efforts. Under generally accepted
accounting principles, such accounting is appropriate in related party
transactions when the presumption that payments also will be made for
unsuccessful development efforts is overcome. In September 1998, the Company
terminated the research and development agreement before its completion and
agreed to settle obligations to Philips Machine Shop, primarily for
reimbursement of expenses, resulting in a $3,581 charge to research and
development expense. As a result, the Company has determined that the
presumption that payments also will be made for unsuccessful research and
development efforts was not overcome in the first, second and third quarters of
1998. Accordingly, the Company has restated its results for the thirteen and
twenty-six weeks ended June 28, 1998 to recognize $858 and $2,237, respectively,
of research and development expense in the period such expenses were incurred by
Philips Machine Shop. The following is a summary of the significant effects of
the restatement:
9
<PAGE>
<TABLE>
<CAPTION>
As As
Previously Previously
Reported As Restated Reported As Restated
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
As of June 28, 1998:
Deferred income taxes $ 2,902 $ 3,685
Current accounts with Philips (7,629) (9,866)
Accumulated deficit (34,983) (36,437)
For the thirteen and twenty-six weeks ended June 28, 1998:
Research and development costs $ 3,452 $ 4,310 $ 6,911 $ 9,148
Income before income taxes 1,563 705 2,491 254
Net income 1,017 458 1,619 165
Net income per share - basic 0.06 0.03 0.09 0.01
Net income per share - diluted 0.06 0.02 0.09 0.01
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
As discussed in Note 8 to the condensed consolidated financial statements, the
Company restated its June 28, 1998 financial statements to recognize costs
incurred in connection with a research and development agreement with Philips
Machine Shop in the period Philips Machine Shop incurred the related expenses.
The accompanying discussion and analysis of financial condition and results of
operations are on a restated basis. The following table sets forth certain
unaudited financial data for the periods indicated as a percentage of net sales.
<TABLE>
<CAPTION>
Thirteen Weeks Twenty-Six Weeks
Ended Ended
-------------------------- --------------------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 58.9% 62.0% 64.7% 61.5%
------------ ------------ ------------ ------------
Gross profit 41.1% 38.0% 35.3% 38.5%
Research and development costs 9.7% 9.6% 11.4% 11.3%
Selling, general and administrative costs 21.2% 24.3% 25.9% 24.4%
Amortization of intangibles 1.5% 1.4% 1.2% 1.6%
Purchased in-process research and development
(Note 2) - - 50.0% -
Restructuring and reorganization costs (Note 5) - - 3.3% -
------------ ------------ ------------ ------------
Operating income (loss) 8.7% 2.7% (56.5%) 1.2%
Other expense, net 0.2% 1.2% 0.4% 0.9%
------------ ------------ ------------ ------------
Income (loss) before taxes 8.5% 1.5% (56.9%) 0.3%
Tax expense (benefit) 3.4% 0.5% (0.4%) 0.1%
------------ ------------ ------------ ------------
Net income (loss) 5.1% 1.0% (56.4%) 0.2%
============ ============ ============ ============
</TABLE>
10
<PAGE>
Net sales. Net sales for the thirteen weeks ended June 28, 1998 increased
$964,000 (2.2%) and for the twenty-six weeks ended June 28, 1998 increased $4.9
million (6.4%) compared to the corresponding periods in 1997. The increase in
sales for the comparable thirteen-week periods is primarily the result of
increases in sales of components. The increase in sales for the twenty-six week
period was primarily attributable to the fact that the 1998 period includes net
sales of the combined company, while the 1997 period includes net sales of the
PEO Operations only through February 21, 1997 and net sales of the combined
company thereafter.
Sales outside the United States accounted for 53% of sales for the twenty-six
weeks ended June 28, 1998 and 62% of sales for the twenty-six weeks ended June
29, 1997. The Company expects that sales outside the United States will continue
to represent a significant percentage of its net sales. Sales to European
customers represented approximately 30% of net sales, while sales to the Asia
Pacific Region ("APR") represented approximately 18% of net sales for the first
half of 1998. Recent economic events in Asia may have a negative impact on the
Company's sales to APR during the second half of 1998.
In addition, the Company sells a significant portion of its products to
semiconductor manufacturers. The semiconductor manufacturing industry is
currently experiencing a world-wide downturn, including manufacturing
over-capacity. Several leading companies in this industry have announced plans
to slow down or cancel planned equipment purchases, which may have a negative
impact on the Company's sales to this market sector during the second half of
1998.
Gross profit. Gross profit for the thirteen weeks ended June 28, 1998 decreased
$977,000 (5.4%) and for the twenty-six weeks ended June 28, 1998 increased $4.3
million (16.1%) compared to the corresponding periods in 1997. The changes in
gross profit as a percentage of sales are primarily the result of shifts in
product mix. In addition, gross profit as a percentage of sales for the
twenty-six weeks ended June 29, 1997 was lower due to the write-up of
Pre-Combination FEI's inventory from cost to fair market value and the resulting
increase in cost of goods sold. This write-up of Pre-Combination FEI's assets
was a result of the reverse acquisition accounting applied to the Combination.
Research and development costs. Research and development costs increased $50,000
(1.2%) and $505,000 (5.8%) for the thirteen and twenty-six weeks ended June 28,
1998, respectively, compared to the corresponding periods in 1997. As a
percentage of sales, research and development costs were 9.6% for the thirteen
weeks ended June 28, 1998 and 113% for the twenty-six weeks ended June 28, 1998
compared to 9.7% and 11.4% for the corresponding periods in 1997. The 1997
expense includes the write-off of $1.6 million of previously capitalized
software development costs. Excluding the effect of the 1997 capitalized
software write-off, research and development costs increased from 9.2% of sales
in 1997 to 11.3% of sales in 1998. Such increase is primarily due to $2.2
million of research and
11
<PAGE>
development costs incurred in connection with the termination of an agreement
with Philips Machine Shop, to develop the Company's next generation platform.
Selling, general and administrative costs. Selling, general and administrative
costs for the thirteen weeks ended June 28, 1998 increased $1.6 million (17.3%)
and for the twenty-six weeks ended June 28, 1998 increased $73,000 (0.4%)
compared to the corresponding periods in 1997. As a percentage of sales,
selling, general and administrative costs were 24.3% for the thirteen weeks
ended June 28, 1998 and 24.4% for the twenty-six weeks ended June 28, 1998
compared to 21.2% and 25.9% for the corresponding periods in 1997. The increase
in the thirteen-week period of 1998 is primarily attributable to higher sales
commissions recognized on instruments sold through distributors. Selling,
general and administrative costs for the 1998 and 1997 twenty-six week periods
were, however, comparable, although the 1997 period includes the expenses of the
PEO Operations only through February 21, 1997 and of the combined company
thereafter. The first quarter of 1997 includes $1.1 million in bad debt
expenses.
Amortization of intangibles. Amortization of intangibles for the twenty-six
weeks ended June 28, 1998 increased $321,000 (34.3%) compared to the
corresponding period in 1997. This increase reflects amortization of the
intangibles resulting from the Combination for twenty-six weeks in 1998 as
compared to amortization for only eighteen weeks in 1997.
Income tax expense. The effective income tax rate was 35% for the thirteen weeks
and twenty-six weeks ended June 28, 1998. The 1998 rate differs from the U.S.
federal statutory tax rate of 34% primarily as a result of state and foreign
taxes, the amortization of intangible assets not deductible for income tax
purposes, and the favorable tax effect of the Company's use of a foreign sales
corporation for exports from the U.S. The tax benefit recognized in the
twenty-six weeks ended June 29, 1997 is attributable to pretax operating losses
in certain tax jurisdictions, offset by the nondeductible write-off of purchased
in process research and development.
Subsequent event. On July 29, 1998 the Company announced that it would take a
charge in the third quarter of 1998 of approximately $6.4 million for
restructuring. The restructuring charge is being taken to consolidate
operations, reduce operating expenses, and provide for outsourcing of certain
manufacturing activities. The Company anticipates that the restructuring will
eliminate approximately 160 positions worldwide, or about 15% of its work force,
beginning in August 1998 and extending through 1999. The charge primarily
represents the cost of providing severance, outplacement assistance, and
associated benefits to affected employees, as well as transitional costs for
outsourcing certain activities.
On July 29, 1998 the Company also announced that it would take charges in the
third quarter of 1998 totaling approximately $8.0 million for asset valuation
and reserve adjustments. These charges primarily relate to management decisions,
taken in light of recent market conditions, to eliminate unproductive assets,
redirect a portion of the Company's research and development
12
<PAGE>
efforts, and reconfigure certain products resulting in increased inventory
reserves for obsolescence.
LIQUIDITY AND CAPITAL RESOURCES
At June 28, 1998, the Company had total cash and cash equivalents of $8.6
million compared to $16.4 million at December 31, 1997. Cash provided by
operating activities for the twenty-six weeks ended June 28, 1998 was $5.1
million compared to $15.4 million for the twenty-six weeks ended June 29, 1997.
The primary reasons for the decrease in cash flows from operating activities
during the 1998 twenty-six week period compared to the 1997 period were
fluctuations in receivables, inventories, accounts payable, and other working
capital components.
Investing activities used $5.3 million during the twenty-six weeks ended June
28, 1998 and $5.7 million during the twenty-six weeks ended June 29, 1997,
primarily due to acquisitions of equipment and investment in software
development. The Company expects to continue to invest in plant and equipment
and technology needed for future business requirements, as well as to invest in
internally developed software for its products.
Financing activities used $7.6 million for the twenty-six weeks ended June 28,
1998. These cash uses were primarily for net repayments under the Company's bank
line of credit in the amount of $4.9 million as well as repayment of $2.7
million to Philips under an obligation incurred in conjunction with the
Combination. During the comparable 1997 period, financing activities provided
$11.9 million primarily resulting from net borrowings under the line of credit
and cash advanced from Philips as part of the Combination.
The Company expects to continue to use cash to fund the growth of its
operations. While the Company believes its cash and cash equivalents and
borrowings available under its $25 million line of credit will be sufficient to
fund operations during the near term, the Company intends to seek an increase in
its borrowing capacity available under its line of credit agreement.
BACKLOG
The Company's backlog consists of purchase orders it has received for products
it expects to ship within the next 12 months. The Company's backlog at June 28,
1998 was approximately $51 million. A substantial portion of the Company's
backlog relates to orders for a relatively small number of products. As a
result, the timing of the receipt of orders could have a significant impact on
the Company's backlog at any date. For this and other reasons, the amount of
backlog at any date is not necessarily determinative of revenue in future
periods.
13
<PAGE>
YEAR 2000 COMPUTER SYSTEM IMPACT
The Company has completed (i) an inventory of Year 2000 issues related to its
business, (ii) an analysis of the business impact of those issues, other than
Year 2000 compliance by each of its suppliers and (iii) defined a strategy for
resolving Year 2000 problems expected to affect the Company. In the second half
of 1998 the Company will solicit information from its suppliers on their Year
2000 readiness and work on execution of the Company's Year 2000 strategy. In
1999 the Company expects to complete plans for risk management and any
contingency plans determined to be necessary.
The Company has assessed the Year 2000 compliance of each of the products
currently manufactured and sold by the Company. The Company believes each of
those products and their component parts is Year 2000 compliant except certain
workstation models which use a Windows 3.11 operating system. The date
recognition deficiencies of this system can be remedied with a patch available
from Microsoft Corporation and, in any event, do not effect the core functions
of those products.
The Company has also analyzed its internal manufacturing control, accounting and
information management systems and determined that those systems have no
material Year 2000 compliance deficiencies. In this analysis, the Company has
assumed that basic public utilities such as gas, electric and telephone services
will continue to be available for operations of the Company on and after January
1, 2000 in the U.S., The Netherlands and the Czech Republic. If this assumption
proves incorrect, the operations of the affected manufacturing location would be
materially adversely affected for the duration of the utility interruption.
In the third and fourth quarters of 1998 the Company will require each of its
suppliers of parts and services to provide information to the Company about that
entity's anticipated Year 2000 compliance. Until that information is received,
the Company cannot complete that phase of the Company's Year 2000 assessment. To
date, the Company has not received notice of or become aware of a material Year
2000 deficiency by a supplier.
At this time, the Company believes costs incurred in responding to other
parties' Year 2000 computer system deficiencies, together with the cost of any
required modifications to the Company's ancillary systems, will not have a
material impact on the Company's results of operations or financial condition.
This analysis may be modified as the Company receives responses from its parts
and services suppliers.
FORWARD-LOOKING STATEMENTS
From time to time the Company may issue forward-looking statements that are
subject to a number of risks and uncertainties. The statements in this report
concerning increased investment in plant and equipment and software development,
the portions of the Company's sales consisting of international sales, expected
capital requirements, and year 2000 compliance
14
<PAGE>
by the Company and its customers and suppliers constitute forward-looking
statements that are subject to risks and uncertainties. Factors that could
materially decrease the Company's investment in plant and equipment and software
development include, but are not limited to, downturns in the IC manufacturing
market, lower than expected customer orders and changes in product sales mix.
Factors that could materially reduce the portion of the Company's sales
consisting of international sales include, but are not limited to, competitive
factors, including increased international competition, new product offerings by
competitors and price pressures, fluctuations in interest and exchange rates
(including changes in relevant foreign currency exchange rates between time of
sale and time of payment), changes in trade policies, tariff regulations and
business conditions and growth in the electronics industry and general
economies, both domestic and foreign. Factors that could materially increase the
Company's capital requirements include, but are not limited to, receipt of a
significant portion of customer orders and product shipments near the end of a
quarter and the other factors listed above.
Part II - Other Information
Item 2. Changes in Securities
On February 21, 1997 (the "Combination Closing"), the Company combined with the
electron optics business of Philips Electronics N.V. pursuant to a Combination
Agreement dated November 15, 1996. At the Combination Closing, the Company
issued 9,728,807 shares of its Common Stock to Philips Business Electronics
International B.V., a Netherlands corporation ("PBE"), as consideration for all
of the outstanding shares of Philips Electron Optics International B.V., a
Netherlands corporation, and Philips Electron Optics, Inc., a Delaware
corporation, both wholly owned subsidiaries of PBE immediately prior to the
Combination Closing.
The Combination Agreement provides in relevant part that at the time of issuance
by the Company of any shares of Common Stock upon the exercise of a stock option
outstanding on the date of the Combination Closing, the Company is required to
issue to PBE a number of additional shares of Common Stock such that the shares
of Common Stock issued to PBE continue to represent 55% of the outstanding
Common Stock of the Company, as defined in the Combination Agreement. During the
twenty-six weeks ended June 28, 1998 the Company issued 595 shares of its Common
Stock to PBE pursuant to this provision of the Combination Agreement.
The shares issued were not registered under the Securities Act of 1933, and the
issuance was made in reliance on Section 4(2) of the Securities Act as a
transaction not involving a public offering. The consideration received by the
Company for the shares issued, together with the shares issued to PBE at the
Combination Closing, was the outstanding shares of Philips Electron Optics
International B.V. and Philips Electron Optics, Inc.
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.2 1995 Stock Incentive Plan, as amended (filed previously with
Registrant's Form 10-Q for the quarter ended June 28, 1998)
27.1 Financial Data Schedule
16
<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: April 29, 1999 WILLIAM P. MOONEY
-----------------------------------------
William P. Mooney
Executive Vice President and Chief
Financial Officer (Principal Financial
Officer)
MARK V. ALLRED
-----------------------------------------
Mark V. Allred
Controller and Assistant Treasurer
(Principal Accounting Officer)
17
<PAGE>
Exhibit Index
Exhibit
No. Description
- ------- -----------
10.2 1995 Stock Incentive Plan, as amended (filed previously with
Registrant's Form 10-Q for the quarter ended June 28, 1998)
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-28-1998
<CASH> 8,600
<SECURITIES> 0
<RECEIVABLES> 53,954
<ALLOWANCES> (1,693)
<INVENTORY> 45,346
<CURRENT-ASSETS> 110,773
<PP&E> 35,680
<DEPRECIATION> (13,857)
<TOTAL-ASSETS> 178,855
<CURRENT-LIABILITIES> 51,849
<BONDS> 0
0
0
<COMMON> 149,159
<OTHER-SE> (44,052)
<TOTAL-LIABILITY-AND-EQUITY> 178,855
<SALES> 80,876
<TOTAL-REVENUES> 80,876
<CGS> 49,708
<TOTAL-COSTS> 79,855
<OTHER-EXPENSES> 136
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 601
<INCOME-PRETAX> 254
<INCOME-TAX> 89
<INCOME-CONTINUING> 165
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 165
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
