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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended DECEMBER 31, 1999 or
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 0-22780
FEI COMPANY
(Exact name of Company as specified in its charter)
Oregon 93-0621989
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7451 NW Evergreen Parkway
Hillsboro, Oregon 97124
(Address of principal executive offices) (Zip Code)
Company's telephone number,
including area code: (503) 640-7500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the Company (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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Company's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
Aggregate market value of Common Stock held by nonaffiliates of the Company at
March 14, 2000: $393,446,675. For purposes of this calculation, officers and
directors are considered affiliates.
Number of shares of Common Stock outstanding at March 14, 2000: 27,871,134.
DOCUMENTS INCORPORATED BY REFERENCE
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PART OF FORM 10-K INTO
DOCUMENT WHICH INCORPORATED
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Proxy Statement for 2000 Annual
Meeting of Shareholders Part III
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TABLE OF CONTENTS
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ITEM OF FORM 10-KA PAGE
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PART I
Item 1 - Business................................................................................. 1
Item 2 - Properties............................................................................... 14
Item 3 - Legal Proceedings........................................................................ 14
Item 4 - Submission of Matters to a Vote of Security Holders...................................... 15
Item 4(a) - Executive Officers of the Company........................................................ 16
PART II
Item 5 - Market for the Company's Common
Equity and Related Stockholder Matters................................................... 19
Item 6 - Selected Financial Data.................................................................. 20
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................... 21
Item 7A - Quantitative and Qualitative Disclosures About Market Risk............................... 28
Item 8 - Financial Statements and Supplementary Data.............................................. 29
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................................................... 47
PART III
Item 10 - Directors and Executive Officers of
the Company.............................................................................. 48
Item 11 - Executive Compensation................................................................... 48
Item 12 - Security Ownership of Certain Beneficial
Owners and Management.................................................................... 48
Item 13 - Certain Relationships and Related Transactions........................................... 48
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PART IV
Item 14 - Exhibits, Financial Statement Schedules
and Reports on Form 8-K.................................................................. 49
SIGNATURES................................................................................................... 53
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PART I
ITEM 1. BUSINESS
INTRODUCTION
BACKGROUND
COMPANY HISTORY. FEI Company ("FEI" or the "Company") was founded in 1971
to manufacture charged particle emitters (ion and electron sources) and began
manufacturing and selling ion and electron focusing columns in the early 1980s.
In 1997, FEI completed a reverse-acquisition combination transaction (the "PEO
Combination") of the electron optics business ("PEO Operations") of Philips
Business Electronics International B.V. ("Philips Business Electronics"), a
wholly owned subsidiary of Koninklijke Philips Electronics N.V. ("Philips"). In
the PEO Combination, Philips Business Electronics became the owner of 55 percent
of FEI's outstanding common stock. In 1999, the Company acquired Micrion
Corporation ("Micrion"), a company engaged in the design, manufacture, sale and
service of focused particle beam instruments.
STRUCTURAL PROCESS MANAGEMENT. The Company is a leader in the design,
manufacture, sale and service of products based on focused charged particle beam
technology. By combining a focused ion beam and an electron microscope, the
Company has developed a dual beam ("DualBeam") system that allows the Company's
equipment to provide three-dimensional imaging. The DualBeam and other Company
products deliver a range of structural process management applications for the
Semiconductor integrated circuits ("Semiconductor" or "IC"), Data Storage and
Industry and Institute markets. Structural process management applications
enable customers to obtain critical information about structural processes,
which the Company believes is increasingly valuable as demand grows for greater
information about ever-smaller structures.
CORE TECHNOLOGIES
The Company utilizes four core technologies to deliver a range of customer
solutions. The core technologies are: focused ion beams; electron beams; beam
gas chemistry and system automation. The Company combines and configures these
core technologies in various ways to create multiple products and applications.
These products and applications allow customers in the Company's markets to
better understand and manipulate the processes utilized to make certain
structures--whether those structures are integrated circuits, magnetic
electronic data storage heads, or sophisticated industrial materials. By helping
customers better understand and manipulate structures, the Company helps improve
product time to market, yield management, process management and device
fabrication.
PARTICLE BEAM TECHNOLOGIES--FOCUSED ION BEAMS AND ELECTRON BEAMS.
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The emission of ions (positively or negatively charged atoms) or
electrons from a source material is fundamental to each of the Company's
products. Particle beams are focused on a sample. The fundamental
properties of ion and electron beams permit them to perform various
functions. The relatively low mass subatomic electrons interact with the
sample and release secondary electrons. When collected, these secondary
electrons provide high quality images at near atomic level resolution. The
much greater mass ions dislodge surface particles, also resulting in
displacement of secondary ions and electrons. Thus through focused ion beam
systems ("FIBS") the surface can be modified or milled with submicron
precision by direct action of the ion beam in combination with gases (as
decribed below). Secondary electrons and ions may also be collected for
imaging and compositional analysis. The Company's ion beams and electron
beam technologies, when coupled with the Company's other core
technologies--beam gas chemistries and automation, provide unique product
capabilities and applications.
BEAM GAS CHEMISTRIES.
Beam chemistry plays an important role in enabling FEI systems that
incorporate FIBs to successfully perform many tasks. Beam chemistry
involves the interaction of the primary ion beam with an injected gas near
the surface of the sample. This interaction results in either the
deposition of material or enhanced removal of material from the sample.
Both of these processes are critical to optimizing the applications of FIB
technology. The Semiconductor and Data Storage markets have expanding needs
for gas chemistry technologies, and the Company has aimed to align its
development strategy with the roadmaps of these industries to improve its
gas chemistry development.
- Deposition: Deposition of materials on the sample surface enables
a FIB system to electrically connect or isolate features on an
integrated circuit. A deposited layer of metal also can be used
prior to FIB milling to protect surface features for more
accurate cross sectioning or sample preparation.
- Etch: The removal of material is the most important function of
FIB systems. The Company's FIBs have the ability to mill specific
types of material faster than other types. This process is called
selective etching and is a core technology that FEI has been
refining for years.
SYSTEMS AUTOMATION.
A fourth core technology for the Company is system automation. Drawing on
its knowledge of industry needs and utilizing robotics and image recognition
software, the Company has developed automation capabilities that allow it to
increase system performance, speed and consistency. These capabilities have been
especially important to the Company's development efforts for in-line products
and applications in the Data Storage and Semiconductor markets. Two important
areas where the Company has developed significant automation technologies are
transmission electron microscope ("TEM") sample preparation and
three-dimensional process
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control. TEMs are widely used in the Semiconductor and Data Storage markets to
obtain valuable high-resolution images of very small structures. TEM sample
preparation has traditionally been a slow and difficult manual process. FEI has
automated this process, dramatically improving the sample consistency and
overall throughput. Similarly, by automating three-dimensional process control
applications, FEI allows customers to acquire previously unobtainable
sub-surface process metrics directly from within the production line, improving
process management.
PRODUCTS
FEI manufactures base-line products and platforms using the Company's
core technologies. The Company's products include TEMs and scanning electron
microscope systems ("SEMs"). TEMs and certain SEMs collectively compose the
Company's Electron Optics Products ("Electron Optics Products"). FEI also
manufactures SEMs designed for wafer scanning in the IC industry ("Wafer
SEMs"). FIBs, DualBeam products, that incorporate an electron beam and an ion
beam into a single system, and Wafer SEMs collectively compose the Company `s
"Microelectronic Products".
When configured with the Company's core automation and beam gas chemistry
technologies, the Company's base-line products perform a range of structural
process management functions. More specifically, the Company' s SEM products
have applications for structural examination and are sold into the Company's
Industry and Institute market. The Company's TEMs have structural examination
applications in the Industry and Institute market and in structural metrology in
the Semiconductor and Data Storage markets. The Company's Wafer SEMs allow for
defect review in the Semiconductor and Data Storage markets. FIBs are used for
TEM sample preparation for all of FEI's served markets as well as for design
edit in the Semiconductor market and pole trimming in the Data Storage market.
FEI's DualBeam systems have structural process management applications in the
Semiconductor and Data Storage sectors.
Depending on the specific application, Electron Optics Products and
Microelectronic Products aid research, product development, acceleration of
product introduction, control and modification of manufacturing processes and
yield management. As microelectronic features become smaller and more complex to
accommodate demand for smaller structure sizes and increased functionality,
fewer tools are capable of viewing, modifying and analyzing these features,
which are approaching the 0.25 micron level. As features have become as small as
the wavelength of the illumination sources used in optical lithography, charged
particle tools are replacing optical and laser tools, which cannot detect such
small features and defects on microelectronic structures. Optical and laser
tools also subject microelectronic structures to a greater risk of contamination
than beam technologies and thus lower production yields. By offering monitoring
functions and defect review and failure analysis of particles as small as 0.05
microns in diameter, charged particle beam techniques can address the
fabrication requirements of Semiconductor and Data Storage manufacturers.
FEI's systems components business consists of the manufacture of focusing
columns and emitters ("Component Products"). The Company's Component Products
are manufactured with a variety of technical features to meet the Company's
internal needs for its Electron Optics Products
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and Microelectronic Products. In addition, certain components not used in the
Company's products are sold to outside customers.
MANUFACTURING, SALES AND SERVICE
The Company has manufacturing operations in Hillsboro, Oregon; Eindhoven,
The Netherlands; Peabody, Massachusetts and Brno, Czech Republic. Direct sales
and service operations are conducted in the United States and 23 other countries
through three region-based divisions--the North American, European and
Asia-Pacific Region sales and service divisions. These sales and service
divisions also manage product sales through independent representatives in
certain countries. In December 1999, the Company acquired product sales and
service channels in approximately 20 countries that had previously been operated
by Philips. In three countries, distribution was transferred to independent
representatives following the acquisition. These acquisitions permitted the
Company to obtain more direct control over product sales and support. See Item
13 - "Certain Relationships and Related Transactions."
FORWARD-LOOKING STATEMENTS
From time to time the Company may issue forward-looking statements that are
subject to a number of risks and uncertainties. Any statements in this report
concerning increased investment in the Company's service and support activities
for products, the portions of the Company's sales consisting of international
sales and sales of certain products, expected product shipments and capital
requirements constitute forward-looking statements that are subject to risks and
uncertainties. Factors that could materially decrease the Company's investment
in its service and support activities for its Electron Optics Products and
Microelectronics Products business include, but are not limited to, downturns in
the IC manufacturing market, lower than expected customer orders for these
products, 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, exchange
rate fluctuations and business conditions and growth in the electronics industry
and general economies, both domestic and foreign. Factors that could materially
reduce the portion of the Company's sales consisting of Electron Optics Products
and Microelectronic Products include, but are not limited to, the competitive
factors mentioned above and changes in product sales mix. Factors that could
adversely affect expected product shipments include, but are not limited to,
technological difficulties and resource constraints in developing new products,
the availability of parts and supplies at reasonable prices, product shipment
interruptions due to manufacturing difficulties and order cancellations. 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.
Additional factors that may cause actual results to vary materially from those
set forth in such forward-looking statements are described: below in Summary -
"Philips Services;" in Item 1 - "Business" under the captions "Sales, Marketing
and Service," and "Competition" and "Patents and Intellectual Property;" in Item
3 - "Legal Proceedings" and in Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" under the caption "Quarterly
Results of Operations."
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PHILIPS SERVICES
The Company obtains a range of services world-wide through Philips and its
affiliates. These services include:
- Human Resources--services related to personnel and personnel
management systems; payroll services; access to Philips' collective
bargaining arrangements; access to Philips' rate for social charges in
selected countries.
- Letters of Credit--arrangements for export sales.
- Guarantees--relating to customer prepayments.
- Philips Research Laboratories--contract research with the central
Philips research laboratory.
- Corporate Purchasing--access to certain products and discounts; access
to standardized purchasing coding; central electronic payment system;
purchasing information and training; negotiation of new purchasing
arrangements.
- Central Finance and Administration--fixed asset registration, VAT,
customs and import duty services.
- Legal Services--local support outside the U.S., and corporate and
commercial support in The Netherlands.
- Philips Corporate Bureau on Environment and Energy--support and review
on environmental matters and energy costs.
- Insurance--participation in the Philips insurance program.
- Information Technologies--access to proprietary databases; use of
global network.
In the event that Philips ceases to be a majority shareholder of the Company,
some or all of these arrangements could terminate. It is unclear that in the
event of terminations the Company would be able to find replacement services at
a similar or lower price. In addition, there may be other indirect costs
associated with obtaining new vendors, including diversion of management time
and resources. This could have a material adverse affect on the Company's
results of operations.
PRODUCTS
ELECTRON OPTICS PRODUCTS
The Company's SEMs and TEMs that make up its EOP product offerings provide
a range of structure analysis functionality for a variety of industrial and
research purposes. Customers include Industry and Institute clients--research
institutions, universities and materials manufacturers, as well as Semiconductor
and Data Storage manufacturers. Specific applications include analysis of
advanced materials such as ceramics and metals and defect review and measurement
for the Semiconductor and Data Storage industries. The Company's Electron Optics
Products are adaptable and user-friendly--current products run on the Windows-NT
operating systems. In addition, modular hardware and software packages enable a
basic instrument to be configured to specific requirements
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and easily reconfigured if requirements change. In general, FEI's SEMs allow for
effective and non-destructive large specimen review, and its current models
incorporate a new electron column that provides extremely high image resolution
at low voltages. Recent innovations in FEI's environmental SEMs ("ESEMs") permit
superior resolution at low vacuum pressure and allow for water vapor to be used
to allow 100% relative humidity to be maintained around a hydrated specimen,
making these ESEMs particularly well suited for life science and materials
research. FEI's TEMs allow for advanced materials analysis, atomic-level image
resolution and controlled electron diffraction. Moreover, the Company has
recently developed 200 kV and 300kV TEMs, which can provide atomic resolution
imaging for materials science applications, as well as 100kV TEMs with
integrated atomic element mapping for life sciences applications.
Sales of Electron Optics Products accounted for approximately 51% of the
Company's net sales in 1999.
MICROELECTRONIC PRODUCTS
The Company is a world leader in the design, manufacture and sale of
Microelectronic Products. The Company's Microelectronic Products include Wafer
SEMs, FIBs and DualBeam Systems. These products and applications serve customers
in all of the Company's markets. Microelectronic Products are used in the
Semiconductor industry for defect review and process monitoring, as well as
critical yield improvement and process development tasks for Semiconductor fabs
and supporting failure analysis laboratories. Applications include inspection
and evaluation of lithography and etch, monitoring metal step coverage, review
of defects located by optical detection tools, measuring overlay in cross
section and conduction grain size analysis. Included in the Microelectronic
Product offerings are systems that enable users to image, mill, cut, modify and
analyze the features of samples within submicron tolerances. By precisely
focusing a high current density ion beam, FIBs enable users to remove material
and expose defects, deposit new conducting paths or insulating layers, analyze
the chemical composition of a sample and view the area being modified, all to
submicron tolerances. Other important applications include bit fail map
navigation to memory cell arrays and on-wafer TEM sample preparation. The
Company believes its Microelectronic Products significantly speed and improve
the functions of design edit, failure analysis and process monitoring performed
by IC manufacturers, thereby shortening time to market for new generations of
ICs and increasing the yield of fabrication lines. The Company's Microelectronic
Products can be used in other submicron, micromachining applications, including
the manufacture of thin-film heads for the Data Storage industry. The Company
believes charged particle technology is emerging as a viable alternative to
traditional disk drive manufacturing techniques by extending trimming
capabilities below those required for the most advanced head configurations.
Sales of Microelectronic Products accounted for approximately 43% of the
Company's net sales in 1999.
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COMPONENT PRODUCTS
The Company's Component Products, electron and ion emitters and focusing
columns, are manufactured with a variety of technical features to meet the
Company's internal needs for its EOP and Microelectronic products. In addition,
certain components not used in the Company' s products are sold to outside
customers. The Company sells its electron emitters primarily to manufacturers of
electron beam equipment and scientific research facilities. Ion emitters are
sold mainly to research and scientific facilities. The Company sells electron
beam columns primarily to SEM manufacturers and sells ion beam columns primarily
to manufacturers of surface analysis systems and other ion beam systems, as well
as to research and scientific facilities. The Company also manufactures single
crystal electron source rods and wire, which it sells to researchers and to
emitter manufacturers for use in electron emitter fabrication and other research
applications.
Sales of Component Products to third party customers for 1999 were
approximately 5% of net sales.
RESEARCH AND DEVELOPMENT
The Company's research and development staff at December 31, 1999 consisted
of 264 employees, including scientists, engineers, designer draftsmen and
technicians, as well as software developers. The Company also contracts with
Philips Research Laboratories ("PRL") for basic research applicable to the
Company's core focused ion beam and electron beam technologies. In 1999, the
Company paid PRL $950,000 under these research contracts. See Item 13 - "Certain
Relationships and Related Transactions."
The Company believes its knowledge of field emission technology and
products incorporating focused ion beams is critical to its past and future
performance in the focused charged particle beam business. In developing new
field-emission based products, the Company has been able to combine its own
experience with a number of outside resources. Drawing on these resources, the
Company has developed a number of product innovations, including the enhanced
etch process to remove metals, insulators and carbon-based materials quickly and
accurately during ion milling and to heighten surface contrast for electron
imaging; SIMSmap for visual display of chemical and elemental analysis; a rigid
stacked disk focusing column for greater beam control; a process for deposition
of insulating layers in IC modification; and enhanced processes for wafer
mapping and coordination between FIB tools and CAD navigational software.
From time to time the Company engages in joint research and development
projects with certain of its customers and other parties. Electron microscope
development is conducted in collaboration with universities and research
institutions, often supported by European Union research and development
programs. In 1999 the Company received public funds under Dutch government and
European Union-funded research and development programs, the most significant of
which is the Micro-Electronics Development for European Applications ("MEDEA")
program, which was established in 1997. The Company also maintains other
informal collaborative relationships with universities and other research
institutions and the Company works with several of its customers for evaluation
of new products. For 1999, net of amounts received from MEDEA, the Company
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expended approximately $2.8 million on Company-sponsored research and
development projects by third parties. In 1999, the Company did not engage in a
program of customer-sponsored research and development. The Company also engages
in research and development programs with certain U.S. governmental agencies.
Under these contracts the Company must undertake mandated hiring practices and
other obligations required of entities contracting with the U.S. government and
failure to satisfy these obligations could result in the loss of these
contracts.
The Semiconductor and Data Storage manufacturing markets, as well as the
Industry and Institute market into which the Company sells its principal
products, are subject to rapid technological development, product innovation
and competitive pressures. Consequently, the Company has expended substantial
amounts on research and development. The Company generally intends to
continue at or above its present level of research and development
expenditures and believes that continued investment will be important to its
continued ability to address the needs of its customers. Research and
development efforts continue to be directed toward beam gas chemistry;
specifically, gas-selective etching and further refining gas chemistry
processes to enhance the elimination and deposition of insulating and
conducting materials. FEI is also expending efforts on gas chemistry
compatible with copper-etching. In addition to beam chemistry, a significant
development effort has been undertaken to develop a platform for handling 300
mm IC wafers in a DualBeam configuration. Also, the Company recently
developed important system automation for a new TEM platform that was
recently introduced into the market. These are areas that the Company
believes hold promise of yielding significant product enhancements. Research
and development efforts are subject to change due to product evolution and
changing market needs. Often, such changes cannot be predicted. Research and
development expenses for 1997, 1998 and 1999 were $15.4 million, $19.5
million and $21.9 million, respectively.
MANUFACTURING
The Company has manufacturing operations located in Hillsboro, Oregon;
Eindhoven, The Netherlands; Peabody, Massachusetts and Brno, Czech Republic. The
Company's Microelectronic Product manufacturing operations consist of
fabricating components, testing components and subassemblies from Eindhoven and
assembling and testing finished products. In 1999, the Company out-sourced
electronics subassembly manufacturing in Eindhoven to RIPA Holding B.V.
("RIPA"). The Company's Electron Optics Products manufacturing operations
consist primarily of the assembly of electronic and mechanical modules and final
assembly and testing of systems to meet customer specifications. Orders are
executed using an integrated logistics automation system that controls the flow
of goods. The Company also fabricates electron and ion source materials and
manufactures Component Products at its facilities in Oregon.
The Company's production schedule for its products is generally based on a
combination of sales forecasts and the receipt of specific customer orders. All
components, subassemblies and finished products are inspected for compliance
with Company and customer specifications. Following assembly, all products are
shipped in custom protective packaging to prevent damage during shipment.
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Although many of the components and subassemblies included in the Company's
system products are standard products, a significant portion of the mechanical
parts and subassemblies are custom made by one or two suppliers, including
Philips Machinefabrieken Nederland B.V. ("Philips Machine Factory"). In addition
to the Philips Machine Factory, the Company obtains a significant portion of its
component parts from a second supplier, Turk Manufacturing Co. RIPA is currently
a sole source for electronic subassemblies that were, until recently,
manufactured at the Company's facilities in Eindhoven. The Company believes some
of the components supplied to it are available to the suppliers only from single
sources. Those parts subject to single or limited source supply are monitored by
the Company to ensure that adequate sources are available to maintain
manufacturing schedules. Although the Company believes it would be able to
develop alternate sources for any of the components used in its products,
significant delays or interruptions in the delivery of components from suppliers
or difficulties or delays in shifting manufacturing capacity to new suppliers
could have a material adverse effect on the Company. In the ordinary course, the
Company continually evaluates its existing suppliers and potential different or
additional suppliers to determine whether changes in suppliers may be
appropriate.
SALES, MARKETING AND SERVICE
The Company's sales and marketing staff at December 31, 1999 consisted of
approximately 212 employees, including direct salespersons, product marketing
engineers, applications specialists and technical writers. Applications
specialists identify and develop new applications for the Company's products,
whose efforts the Company believes will further expand its Microelectronic
Products and Electron Optics Products markets. The Company's sales force and
marketing efforts are not segmented by product market, but are organized through
three geographic sales and services divisions--for North America, Europe and the
Asia Pacific Region.
The Company requires sales representatives to have the technical expertise
and understanding of the businesses of the Company's principal and potential
customers to meet effectively the demanding requirements for selling the
Company's products. Normally, a sales representative will have the requisite
knowledge of, and experience with, the Company's products at the time the sales
representative is hired. If additional training is needed, the Company's
applications scientists familiarize the sales representative with the Company's
products. The Company's marketing efforts include presentations at trade shows
and publication of a semi-annual technical newsletter. In addition, Company
employees publish articles in scientific journals and make presentations at
scientific conferences.
In a typical sale, a potential customer is provided with information about
the Company's products, including specifications and performance data, by a
Company salesperson. A presentation then is made at the Company's facilities.
The customer participates in a product demonstration by the applications team,
using samples provided by the customer. The period of time between the initial
provision of product information to the customer of product information and the
receipt of a purchase order is typically six to nine months.
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FEI's North American, European and Asia-Pacific Region sales and service
divisions sell products in the United States and 23 other countries, including
the United Kingdom, France, Germany, Italy, Japan, South Korea , The
Netherlands. In December 1999, the Company acquired sales and service channels
in approximately 20 countries that had previously been operated by affiliates of
Philips, thereby obtaining direct control of channels in these markets. See Item
13 - "Certain Relationships and Related Transactions."
The Company's Microelectronic Products, Electron Optics Products and
Component Products are sold generally with a 12-month warranty, and warranty
periods have typically been shorter for used systems. Customers of FEI's
Microelectronic Products and Electron Optics Products may purchase service
contracts of one year or more in duration after expiration of any warranty.
Warranty and service obligations are carried out under the direction of the
Company's North American, European and Asia Pacific sales and service divisions.
The Company employs service engineers in each of these regions. The Company also
contracts with independent service representatives for Microelectronic Products
service in Japan, Israel, South Korea, Taiwan and Singapore, and expects to add
additional service engineers in other locations as needed. Due to a shift in
sales towards the Semiconductor manufacturing market, which generally has higher
demands for responsiveness and 24-hour support, the Company anticipates further
increasing its investment in service and support activities for Electron Optics
Products and Microelectronic Products sold to this industry.
Sales outside North America were 56% of net product and service sales in
1999. International sales are expected to continue to represent a significant
percentage of net sales for the Company.
Certain risks are inherent in international operations, including changes
in demand resulting from fluctuations in interest and exchange rates, the risk
of government-financed competition, changes in trade policies, tariff
regulations and difficulties in obtaining export licenses. In addition, a
substantial portion of the Company's international sales are denominated in
currencies other than U.S. dollars. Consequently, a change in the value of a
relevant foreign currency in relation to the U.S. dollar occurring after
agreement on price and before receipt of payment could have an adverse impact on
results of operations. The impact of future exchange rate fluctuations on the
results of operations of the Company cannot be accurately predicted. FEI has
used hedging strategies on specific sales but has no overall hedging program for
foreign currency exposure. It is currently developing policies and practices to
more carefully measure and manage its exposure to foreign currency fluctuations.
To the extent the Company does not use hedging strategies there remains an
exchange rate risk, and to the extent that it employs hedging techniques, there
is no assurance such techniques will eliminate the effects of currency
fluctuations. See Item 7A -- "Quantitative and Qualitative Disclosures About
Market Risk."
MICRION ACQUISITION
In August 1999, FEI Company completed its merger with Micrion. Under the
terms of the Merger Agreement, Micrion became a wholly owned subsidiary of the
Company. Holders of
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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.
In connection with the Micrion merger, Philips Business Electronics, the
Company's majority shareholder, pursuant to a stock purchase agreement with the
Company, financed the cash portion of the merger consideration through the
purchase from the Company of additional newly issued shares of common stock,
amounting to 3,913,299 shares at $8.02 for a total of $31,385,000. See Item 13 -
"Certain Relationships and Related Transactions."
COMPETITION
The markets for sale of Microelectronic Products, Electron Optics Products
and Component Products, are highly competitive. A number of the Company's
competitors and potential competitors may have greater financial, marketing and
production resources than the Company. Additionally, markets for the Company's
products are subject to constant change, in part due to evolving customer needs.
As the Company endeavors to respond to this change, the elements of competition
as well as specific competitors may alter. Moreover, one or more of the
Company's competitors might achieve a technological advance that would put the
Company at a competitive disadvantage.
The Company's competitors for the sale of Electron Optics Products include
JEOL, Ltd., Hitachi, Ltd., KLA-Tencor Corporation and LEO Electron Microscopy,
Inc. The principal elements of competition in the Electron Optics Products
market are the performance characteristics of the system and the cost of
ownership of the system, based on purchase price and maintenance costs. The
Company believes it is competitive with respect to each of these factors. FEI's
ability to remain competitive will depend in part upon its success in developing
new and enhanced systems and introducing these systems at competitive prices on
a timely basis.
FEI's principal competitors for the sale of Microelectronic Products
include Applied Materials Inc., Seiko Instruments Inc., Schlumberger
Technologies (ATE Division), JEOL USA, Inc., Hitachi, Ltd., KLA-Tencor
Corporation, Orsay Physics S.A. and NanoFab, Inc. The Company believes the key
competitive factors in the Microelectronic Products market are performance,
range of features, reliability and price. The Company believes it is competitive
with respect to each of these factors. The Company has experienced price
competition in the sale of its Microelectronic Products and believes price may
continue to be an important factor in the sale of most models. Intense price
competition in the sale of Microelectronic Products to strategic customers has
in the past adversely affected the Company's profit margins.
Competitors for the Component Products consist of such firms as DENKA,
Orsay Physics S.A., Ion Optika, Eiko Corp., Topcon Corporation, VG Scientific
and Elionix Inc. Existing competitors of the Company in the Electron Optics
Products and Microelectronic Products that manufacture components for their own
use are also potential competitors for the Company's Component Products. The
Company believes its component products have features that allow it to compete
favorably with others in this segment of its business.
11
<PAGE>
In each of the Company's markets, there are few barriers to entry. Given
the fact that these markets are in the developmental stage, there is no
assurance that other companies, including but not limited to certain of the
Company's customers, will not enter one or more of these markets in the future.
PATENTS AND INTELLECTUAL PROPERTY
The Company relies on a combination of trade secret protection,
nondisclosure agreements and patents to establish and protect its proprietary
rights. There is no assurance, however, that any of these intellectual property
rights will have commercial value or will be sufficiently broad to protect the
aspect of the Company's technology to which they relate or that competitors will
not design around the patents. FEI owns, solely or jointly, 25 U.S. patents,
including patents acquired in the Micrion merger. The Company also owns foreign
patents corresponding to many of these U.S. patents. Further, the Company has an
exclusive license for one patent. These patents expire over a period of time
beginning in the year 2000 through the year 2015.
All of the patents used by the Company relating to its Electron Optics
Products and certain Microelectronics Products are licensed from Philips and its
affiliates. As part of the PEO Combination, the Company acquired perpetual
rights to certain patents owned by Philips used in the Company's products. In
addition, the Company has access to technology through cross-licenses between
Philips affiliates and a large number of manufacturers in the electronics
industry worldwide, and the Company's patents are also subject to such
cross-licenses. Some of these cross-licenses provide the Company with the right
to use intellectual property that relate to its core technologies. In general
these cross licenses are subject to continued majority ownership of the Company
by Philips, and if that ownership ceased, the Company would lose these rights.
Loss of these cross-licenses could result in the Company being unable to
practice the previously cross-licensed technology, the Company having to
undertake licensing arrangements and pay royalties or the Company being
subjected patent infringement actions. Some of the potential implications of
patent infringement claims are described below.
Several of the Company's competitors hold patents covering a variety of
focused ion beam products and applications and methods of use of focused ion and
electron beam products. Some of the Company's customers may use the Company's
Microelectronic Products for applications that are similar to those covered by
these patents. From time to time the Company and its customers have received
correspondence from competitors of the Company claiming that certain of the
Company's products, as used by its customers, may be infringing one or more of
these patents. None of these allegations has resulted in litigation.
There is no assurance that competitors or others will not assert
infringement claims against the Company or its customers in the future with
respect to current or future products or uses or that any such assertion may not
result in costly litigation or require the Company to obtain a license to
intellectual property rights of others. There is no assurance that such licenses
will be available on satisfactory terms or at all. If claims of infringement are
asserted against customers of the Company,
12
<PAGE>
those customers may seek indemnification from the Company for damages or
expenses they incur. As the number and sophistication of focused ion and
electron beam products in the industry increase through the continued
introduction of new products by the Company and others, and the functionality of
these products further overlaps, manufacturers and users of ion and electron
beam products may become increasingly subject to infringement claims.
The Company claims trade marks on a number of its products and has obtained
registration for some of these marks; however, use of the registered and
unregistered marks may be subject to challenge with the consequence that the
Company would have to cease using marks or pay fees for their use. In addition,
under the PEO Combination agreement, the Company has the right to use of the
Philips trade marks and word marks. If Philips ceased holding a majority of the
outstanding common stock, the Company would be required, over a period of time,
to discontinue using the Philips marks. This could have an adverse effect on
product sales in certain of the Company's markets.
The Company's automation software incorporates software from third party
suppliers, which is licensed to end-users along with the Company's proprietary
software. The Company depends on these outside software suppliers to continue to
develop automation capacities, and the failure of these suppliers to continue to
offer and develop software consistent with the Company's automation efforts
could undermine the Company's ability to deliver present or anticipated product
applications.
Policing unauthorized use of the Company's technology and other
intellectual property is difficult, and there is no assurance that measures
taken by the Company to protect its intellectual property will be successful.
Although the Company's competitive position may be affected by its ability to
protect its proprietary information, the Company believes that other factors,
such as the Company's experience in the development of charged particle emission
technology, its technical expertise, its name recognition and its continuing
product support and enhancement, are also significant in maintaining the
Company's competitive position in its principal markets.
EMPLOYEES
At December 31, 1999, the Company had approximately 1310 full-time
employees worldwide, including approximately 369 in manufacturing, approximately
264 in research and development, and approximately 331 in customer service,
marketing and sales and finance and administration. Some of the approximately
699 employees of the Company employed outside the U.S. are covered by national,
industry-wide agreements, or national work regulations that govern certain
aspects of employment conditions and compensation. None of the Company's U.S.
employees are subject to collective bargaining agreements, and the Company has
never experienced a work stoppage, slowdown or strike. The Company believes it
maintains good employee relations. Through the majority shareholdings of
Philips, the Company has the benefit of certain collective bargaining
arrangements and the Philips rate for social charges in The Netherlands and
other countries. If Philips were to no longer be the majority shareholder, the
Company would have to negotiate new collective bargaining arrangements and could
be subject to higher social charge rates, both of which could result in
increased labor costs for the Company.
13
<PAGE>
ITEM 2. PROPERTIES
The Company's corporate headquarters and one of its manufacturing and
research and development facilities are located in four adjacent buildings
located in Hillsboro, Oregon. The leased space amounts to an aggregate of
approximately 115,715 square feet, and is used for a range of manufacturing,
research and development and administrative activities. The leases for the four
facilities expire from March 31, 2003 through January 31, 2004. Present lease
payments for the space in the four buildings total approximately $90,000 per
month. The Company recently voluntarily relocated out of approximately 10,000
square feet of space in one of these four buildings and is attempting to
sublease this space.
The Company also maintains an administrative, development and manufacturing
facility in Eindhoven, The Netherlands, consisting of approximately 183,000
square feet of space leased by the Company for a ten-year term commencing
February 1997. Present lease payments amount to approximately $104,000 per
month, assuming a constant currency exchange rate of NLG2.1 per U.S. dollar. The
Company maintains leased manufacturing facilities in Brno, Czech Republic. The
Company leases approximately 91,000 square feet for its administrative,
development and manufacturing operations in Peabody, Massachusetts at a cost of
$70,000 per month.
The Company operates principal sales and service offices located in leased
facilities in Canada, France, Germany, Italy, Japan, South Korea, The
Netherlands, the United Kingdom and the United States, as well as other smaller
offices in the 14 other countries where the Company has direct sales and service
operations. In some of these locations, the Company leases space directly and in
others obtains space through service agreements with affiliates of Philips.
The Company expects that its facilities arrangements will be adequate to
meet its needs for the foreseeable future. Overall, the Company believes it can
meet increased demand for facilities that may be required to meet increased
demand for its products. In addition, the Company believes that if product
demand increases, it can use out-sourced manufacturing of spare parts as a means
of adding capacity without increasing its direct investment in additional
facilities. In connection with the recently out-sourced subassembly manufacture
in Eindhoven to RIPA, the Company has provided RIPA with space to undertake its
manufacturing operations. Under the outsourcing arrangement, RIPA will move
these operations to its own facilities in the near term, which could leave the
Company with certain unutilized space in Eindhoven.
ITEM 3. 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 other
former officers of Micrion. On September 9, 1996, another action was filed in
the same court against Micrion, Dr. Economou and these former officers as well
as Billy W. Ward, who at the time was also an officer of Micrion. Mr. Ward is
presently an employee of the Company. On December 6, 1996, the plaintiffs in
both actions filed an
14
<PAGE>
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, which was heard on November 22, 1999. On
December 6, 1999, the Court granted defendants renewed summary judgement motion.
On December 22, 1999, the plaintiffs filed notice of appeal of the decision with
the U.S. Court of Appeals for the First Circuit. The Company expects that it
will be several months before the appeal is briefed, argued and decided. The
Company continues to believe the consolidated complaint to be without merit and
intends to carry on 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
15
<PAGE>
ITEM 4(a). EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
executive officers of the Company as of March 1, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Dr. Lynwood W. Swanson................................... 65 Chairman of the Board of Directors and
Chief Scientist
Vahe A. Sarkissian....................................... 57 President, Chief Executive Officer and
Director
Dr. Nicholas P. Economou................................. 51 Chief Operating Officer and Director
Dr. Karel D. van der Mast................................ 51 Executive Vice President and General
Manager, Microelectronics Product Division
William P. Mooney........................................ 49 Executive Vice President and Chief
Financial Officer
Nico Vrijenhoek.......................................... 59 Senior Vice President and General Manager,
Electron Optics Product Division
Bradley J. Thies......................................... 39 General Counsel and Secretary
Mark V. Allred........................................... 41 Controller and Assistant Treasurer
</TABLE>
LYNWOOD W. SWANSON co-founded the Company in 1971 and has served as a
director since that time. He served as President of the Company until October
1994, at which time he was elected Chairman of the Board. Dr. Swanson was
appointed Chief Scientist in May 1990 and served as Chief Executive Officer of
the Company from May 1988 to February 1997. Dr. Swanson has been a member of the
board of trustees of the Murdock Charitable Trust since 1987 and is an Adjunct
Professor of Applied Physics at the Oregon Graduate Institute. Dr. Swanson holds
B.S. degrees in physics and chemistry from University of the Pacific and a Ph.D.
degree in physical chemistry from University of California at Davis.
VAHE A. SARKISSIAN joined the Company as President, Chief Executive Officer
and director in May 1998. From 1994 to 1995, he was President and Chief
Executive of Metrologix Inc., an electron beam metrology company. Mr. Sarkissian
was with Silicon Valley Group ("SVG") from 1989 to 1993, as President and Chief
Operating Officer and prior to that, as President and Chief Executive Officer of
SVG Lithography Systems, a subsidiary of SVG. Prior to SVG he was a Vice
President of Data General Corp. He has also held several technical and
management positions
16
<PAGE>
with Semiconductor companies, including Advanced Micro Devices, Inc. Further, he
served on the board of several technology companies. Mr. Sarkissian holds a
B.S.E.E. from Northrop University and an M.S.E.E. from the University of Santa
Clara.
NICHOLAS P. ECONOMOU. Dr. Economou has served as a director and Chief
Operating Officer of FEI since August 1999. Dr. Economou joined Micrion
Corporation in 1984 as Vice President of Engineering and served most recently as
its Chief Executive Officer and Chairman of the Board of Directors since August
1993. Dr. Economou holds a B.A. in physics from Dartmouth College and an M.A.
and Ph.D. in physics from Harvard University.
WILLIAM P. MOONEY joined the Company as Executive Vice President and Chief
Financial Officer in February 1999. From April 1998 to February 1999 he was
Senior Vice President and Chief Financial Officer of Calgon Carbon Corporation,
an international supplier of specialty products and engineered systems for
chemical purification, concentration, and separation. He served as Chief
Financial Officer of Sylvan Inc., a global producer of fungal products for
agricultural and industrial markets from November 1990 to April 1998. Prior to
that he served as Chief Executive Officer and Chief Financial Officer of
business information services providers. Mr. Mooney holds a B.A. degree in
economics from the University of California, Berkeley, and an MBA from the
University of Southern California.
KAREL D. VAN DER MAST joined the Company as Executive Vice President
Marketing, Technical Officer and director in February 1997. Dr. van der Mast
served as Business Manager and Strategic Marketing Manager of Philips Electron
Optics B.V. from October 1995 to February 1997. In 1988 he joined Philips
Electron Optics B.V. as Research and Development Manager. From 1983 to 1988, Dr.
van der Mast was Professor of Physics at the Technical University of Delft,
leading research in fast electron beam lithography systems. He first joined
Philips in 1978 as TEM Development Manager. Dr. van der Mast holds an Engineers
degree and a Ph.D. degree in physics from the Technical University of Delft and
has published articles in the fields of physics and electron microscopy.
NICO VRIJENHOEK was named Senior Vice President and General Manager of the
Company's Electron Optics Product Division in 1998. From 1994 to 1998, Mr.
Vrijenhoek was Chief Executive Officer of Panta Electronics, a provider of
advance power supplies to the telecommunications industry.
BRADLEY J. THIES became General Counsel to the Company in February 1999 and
Secretary to the Company in June 1999. From March 1998 through February 1999,
Mr. Thies was General Counsel and Secretary of DataWorks Corporation, an
enterprise resource planning software company. From January 1994 until December
1996, Mr. Thies was General Counsel and Assistant to the Chairman of HomeTown
Buffet, Inc., a restaurant company. Prior to that time Mr. Thies was in private
practice with Stoel Rives LLP. Mr. Thies holds a B.A. in political science and
history from Willamette University and a J.D. from Columbia Law School.
MARK V. ALLRED joined the Company as Controller in December 1997. From
November 1996 to November 1997, Mr. Allred was Controller for Epitope, Inc., a
biotechnology company. From
17
<PAGE>
May 1982 to November 1996, Mr. Allred was employed by Deloitte & Touche LLP,
most recently as Senior Audit Manager. Mr. Allred holds a B.S. degree in
accounting from Portland State University and an M.B.A. degree from the
University of Minnesota. Mr. Allred is a certified public accountant.
18
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "FEIC." The following table sets forth, for the periods indicated, the
high and low bid prices for the Common Stock, as reported by the Nasdaq Stock
Market's National Market.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1998
First Quarter $15 1/18 $ 8
Second Quarter 12 5/8 6 1/2
Third Quarter 9 3/4 5 3/16
Fourth Quarter 10 5 3/8
1999
First Quarter 12 1/4 7 7/16
Second Quarter 8 7/8 6 1/2
Third Quarter 9 3/4 6 3/4
Fourth Quarter 15 15/16 6 3/4
</TABLE>
As of March 14, 2000 there were approximately 151 holders of record of the
Company's Common Stock. The Company believes the number of beneficial owners is
substantially greater than the number of record holders because a large portion
of the Company's outstanding Common Stock is held of record in broker "street
names" for the benefit of individual investors.
The Company has never declared or paid a dividend and does not anticipate
doing so in the foreseeable future. The Company expects to retain earnings to
finance the expansion and development of its business.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
The selected consolidated statement of operations data presented below for
each of the years in the three-year period ended December 31, 1999 and the
selected consolidated balance sheet data presented below as of December 31,
1998 and 1999 have been derived from the audited consolidated financial
statements of the Company included elsewhere in this report. The selected
consolidated statement of operations data for the years ended December 31,
1995 and 1996 and the selected consolidated balance sheet data as of
December 31, 1995, 1996 and 1997 have been derived from audited financial
statements of the Company not included herein. The selected consolidated
financial data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and notes thereto included elsewhere in
this report.
The selected consolidated financial data as of and for the years ended
December 31, 1995 and 1996 reflect the PEO Operations on a stand-alone basis.
The selected consolidated financial data as of and for the year ended
December 31, 1997 reflect the PEO Operations from January 1, 1997 to
February 20, 1997 and the combined FEI and PEO Operations from February 21,
1997 to December 31, 1997. The selected consolidated financial data as of and
for the years ended December 31, 1998 and 1999 reflect the combined FEI and
PEO Operations.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) PEO OPERATIONS COMBINED COMPANY
- ------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995 1996 1997 1998 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 109,117 $ 112,384 $ 168,796 $ 178,771 $ 216,152
Cost of sales 72,686 79,065 106,629 119,579 131,143
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit 36,431 33,319 62,167 59,192 85,009
Total operating expenses (1) 28,886 32,632 95,040 68,768 87,524
- ------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 7,545 687 (32,873) (9,576) (2,515)
Other income (expense), net 1,700 -- (622) (4,129) (65)
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 9,245 687 (33,495) (13,705) (2,580)
Tax expense (benefit) 3,317 740 3,107 (4,797) 4,800
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5,928 $ (53) $ (36,602) $ (8,908) $ (7,380)
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share, basic
and assuming dilution $ 0.61 $ (0.01) $ (2.19) $ (0.49) $ (0.34)
- ------------------------------------------------------------------------------------------------------------------------------
Shares used in per share calculation,
basic and assuming dilution (2) 9,728,807 9,728,807 16,677,336 18,105,808 21,745,065
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) PEO OPERATIONS COMBINED COMPANY
- --------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ -- $ -- $ 16,394 $ 15,198 $ 11,124
Working capital 23,844 31,113 64,496 70,350 84,957
Equipment 6,039 5,570 19,246 23,845 28,768
Total assets 60,742 71,824 183,022 191,138 288,100
Long-term interest bearing debt -- -- 17,844 26,349 36,012
Shareholders' equity 32,551 43,070 104,889 97,627 152,577
</TABLE>
(1) Total operating expenses include nonrecurring expenses in 1997, 1998 and
1999. Included in 1997 total operating expenses is a charge of $38.0
million to write-off acquired in-process research and development in
connection with the PEO Combination and a restructuring charge of $2.5
million. Included in 1998 total operating expenses is a restructuring
charge of $5.3 million. Included in 1999 total operating expenses is a
charge of $14.1 million to write-off acquired in-process research and
development in connection with the Micrion acquisition and a
restructuring charge of $0.1 million. See Notes 2 and 3 of Notes to
Consolidated Financial Statements.
(2) Earnings per share have been calculated assuming the shares of the
Company issued to Philips Business Electronics in the PEO Combination
were outstanding for the PEO Operations and the combined company for all
periods presented and assuming the shares of the company outstanding
prior to the PEO Combination were issued as of the closing date of the
PEO Combination. See Notes 2 and 13 of Notes to Consolidated Financial
Statements.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain unaudited financial data for the periods
indicated as a percentage of net sales.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 63.2 66.9 60.7
- --------------------------------------------------------------------------------
Gross profit 36.8 33.1 39.3
Research and
development 9.1 10.9 10.1
Selling, general
and administrative 21.9 23.2 22.0
Amortization of
purchased goodwill
and technology 1.2 1.4 1.7
Purchased in-process
research
and development 22.6 0.0 6.5
Restructuring and
reorganization costs 1.5 3.0 0.1
- --------------------------------------------------------------------------------
Operating loss (19.4) (5.4) (1.2)
Other expense, net (0.4) (2.3) 0.0
- --------------------------------------------------------------------------------
Loss before taxes (19.8) (7.7) (1.2)
Tax expense (benefit) 1.8 (2.7) 2.2
- --------------------------------------------------------------------------------
Net loss (21.7)% (5.0)% (3.4)%
- --------------------------------------------------------------------------------
</TABLE>
NET SALES. Net sales for the year ended December 31, 1999 increased $37.4
million (21%) compared to the year ended December 31, 1998. The acquisition
of Micrion, completed in August 1999, contributed $12.8 million to 1999 net
sales. Net sales for the year ended December 31, 1998 increased $10.0 million
(6%) compared to the corresponding period in 1997. The 1998 period included
net sales of the combined company, while the 1997 period included net sales
of the PEO Operations only through February 20, 1997 and net sales of the
combined company thereafter.
Microelectronics segment product sales increased $29.5 million (54%) in
1999 compared to 1998. Of this increase, $9.3 million was attributable to the
Micrion product division. Microelectronics segment service sales increased
$4.6 million (90%) in 1999 compared to 1998, with Micrion contributing $3.5
million of the increase. Industry conditions in both the
semiconductor-manufacturing sector and the data storage sector were generally
stronger in 1999 than in 1998. In addition, the development of new
applications for the Microelectronics segment products contributed to
increased demand. Unit volume in the segment increased by 17% from 1998 to
1999 and average selling price also increased by 17%. The increase in average
selling price is partially due to increased prices, and partially due to
changes in product mix towards higher value systems. From 1997 to 1998,
Microelectronics segment product sales increased $5.8 million (12%), while
service revenues for this segment increased $0.3 million (5%). Unit volume in
the segment increased by 5% from 1998 to 1999 and average selling price
increased by 5%.
Electron Optics segment product sales increased $3.3 million (4%) in
1999 compared to 1998. Electron Optics segment service sales increased $3.8
million (16%) in 1999 compared to 1998. The Company introduced a new series
of TEM products in late 1998 and strong demand for these products contributed
to the sales increase in 1999. Sales of the Company's SEM products decreased
from 1998 to 1999, primarily due to increased competition. Growth in 1999
segment service revenues was due to the Company's increasing installed base
of systems and the acquisition of additional sales and service businesses
from Philips in late 1999, which contributed $0.5 million in 1999 service
revenues. From 1997 to 1998, Electron Optics segment product sales decreased
$4.3 million (5%), primarily due to increased competition and softness in the
materials and life sciences market sectors, while service revenues for this
segment increased $3.9 million (20%) from 1997 to 1998. Growth in 1998
segment service revenues was due to the Company's increasing installed base.
Product sales in the Components segment decreased $3.8 million (24%) in
1999 compared to 1998. The demand for Components segment products was weak in
the first half of 1999, due to customers' utilization of on-hand inventories.
From 1997 to 1998, Components segment product sales increased $4.2 million
(37%) due to strong demand from OEM manufacturers.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales by Geographic Region:
North America 42% 42% 44%
Europe 31 34 29
Asia Pacific 25 22 25
Rest of World 2 2 2
- --------------------------------------------------------------------------------
100% 100% 100%
- --------------------------------------------------------------------------------
</TABLE>
Year over year sales increased from 1998 to 1999 in each of the three major
geographic regions in which the Company sells; North America, Europe, and
Asia Pacific. In North America, sales increased by $19.7 million (27%) from
1998 to 1999 due to increased demand in the semiconductor industry in that
region. In Europe, sales increased by $2.2 million (4%) from
21
<PAGE>
1998 to 1999 largely due to increased service revenue resulting from the
increase in the Company's installed base of systems and also the acquisition
of additional sales and service businesses from Philips in late 1999. In the
Asia Pacific region, sales increased by $13.7 million (35%) from 1998 to 1999
due to increased demand in the data storage industry in that region. From
1997 to 1998, sales in North America increased $2.9 million (4%), sales in
Europe increased $9.5 million (19%) and sales in the Asia Pacific region
decreased $3.5 million (8%). The increase in 1998 sales in Europe was
primarily due to the increase in Electron Optics service sales. Sales
declined in the Asia Pacific region in 1998 largely due to the depressed
general economic condition of the region.
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 the underlying European
currencies) and British Pound and weaker in relation to the Japanese Yen
during 1999 as compared to 1998. Accordingly, the translation of sales
denominated in European currencies resulted in lower reported sales in U.S.
Dollars in 1999 as compared to 1998. The translation of sales denominated in
Japanese Yen resulted in higher reported sales in U.S. Dollars in 1999 as
compared with 1998. In 1998, the U.S. Dollar was generally stronger in
relation to European currencies and weaker in relation to the Japanese Yen as
compared to 1997.
GROSS PROFIT. Gross profit as a percentage of sales ("gross margin") was
36.8%, 33.1% and 39.3% for each of the years ended December 31, 1997, 1998
and 1999, respectively. The 1999 gross profit was negatively impacted by $1.0
million of non-cash inventory step-up adjustments related to the Micrion
acquisition. Without these purchase accounting effects, the gross margin
would have been 39.8%. During the third quarter of 1998, the Company
recognized charges totaling $9.5 million in cost of sales for inventory
write-offs, obsolescence reserves, reserves for product upgrades, and
increased warranty reserves. Excluding the effect of these charges, the gross
margin would have been 38.4% for the year ended December 31, 1998. In
addition, the write-up of Pre- combination FEI's inventory from cost to fair
market value and the resulting increase in cost of goods sold had a negative
impact on gross profit as a percentage of sales for the year ended December
31, 1997. This write-up of Pre-combination FEI's assets was a result of the
reverse acquisition accounting applied to the PEO Combination.
The improvement in the Company's gross margin over the last three years
was primarily due to changes in product mix, partially off-set by a higher
percentage of total sales attributed to the service business, on which the
Company earns a lower gross margin than on product sales. The gross margin
also benefited from the purchase of the additional sales and distribution
businesses from Philips in late 1999, which resulted in a higher proportion
of direct sales versus distributor sales. In general, distributor sales carry
a lower gross margin but require lower levels of selling, general and
administrative costs. In late 1999 the Company expanded its distributor
arrangements in the Asia Pacific region and anticipates that increased
distributor sales in Asia Pacific will off-set the increased direct sales in
Europe. Other margin improvement contributions resulted from outsourcing
activities which occurred in 1998 and 1999 for several mechanical and
electrical subassemblies. In addition, the Company's service business is not
expected to grow as rapidly as the anticipated growth in product sales over
the near term.
RESEARCH AND DEVELOPMENT COSTS. Research and development ("R&D") costs for
1999 increased $2.4 million (12%) compared to 1998 and increased $4.1 million
(27%) in 1998 compared to 1997. As a percentage of sales, R&D costs were
9.1%, 10.9% and 10.1% for 1997, 1998 and 1999, respectively. Micrion
accounted for $2.3 million of additional R&D expenses in 1999. R&D expense is
reported net of subsidies and capitalized software development costs. These
off-sets to 1999 R&D expense increased by $1.9 million from 1998 to 1999.
Excluding the effects of these increased off-sets and the effect of the
Micrion acquisition, 1999 R&D expense increased $2.1 million (9%) from 1998
to 1999. The 1998 increase reflects increased efforts to develop certain
technologies for new products. Expenditures for these efforts represented
$3.6 million of the 1998 increase over 1997 expenditures. The 1997 expense
includes the write-off of $1.6 million of previously capitalized software
development costs in the first quarter. The 1997 costs do not include
Pre-combination FEI prior to the PEO Combination date of February 21, 1997.
SELLING, GENERAL AND ADMINISTRATIVE COSTS. Selling, general and
administrative ("SG&A") costs for 1999 increased $6.2 million (15%) compared
to 1998, and increased $4.4 million (12%) in 1998 compared to 1997. As a
percentage of sales, SG&A costs were 21.9%, 23.2% and 22.0% in 1997, 1998 and
1999, respectively. The increase in SG&A costs in 1999 was primarily
attributable to the acquisition of Micrion in August 1999, which added $4.5
million in 1999
22
<PAGE>
expenses, as well as the acquisition of the additional sales and service
businesses from Philips, which added $0.6 million to the 1999 expense. The
increase in SG&A costs for 1998 was primarily attributable to increased
salary and related personnel costs of $5.0 million. A portion of the increase
stems from the comparison of the 1998 twelve-month period of the combined
company with approximately ten-months for the combined company in the 1997
period. The first quarter of 1997 also included $1.1 million in bad debt
expenses.
AMORTIZATION OF PURCHASED GOODWILL AND TECHNOLOGY. 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. Purchase accounting for the Micrion
acquisition as of August 13, 1999 resulted in the recognition of intangible
assets in the amount of $16.3 million for existing technology that is being
amortized over a 10-year period, and goodwill of $24.1 million that is being
amortized over a 12-year period. Amortization of purchased goodwill and
technology increased by $1.2 million (48%) in 1999 compared with 1998 as a
result of the Micrion acquisition. Amortization of purchased goodwill and
technology for 1998 increased $0.4 million (20.0%) compared to 1997,
reflecting 12 months amortization from the PEO Combination compared to
approximately ten months amortization in 1997. Amortization of purchased
goodwill and technology is expected to increase to approximately $6.1 million
in 2000 from the effects of a full year of amortization of the Micrion
acquisition intangibles.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. Purchase accounting for the
PEO Combination in 1997 resulted in the recognition of an intangible asset in
the amount of $38.0 million representing the estimated fair value of
in-process research and development of Pre-combination FEI. Purchase
accounting for the Micrion acquisition in 1999 resulted in the recognition of
an intangible asset in the amount of $14.1 million representing the estimated
fair value of in-process research and development of Micrion at the date of
acquisition. In keeping with the Company's policy to expense research and
development costs as they are incurred, these intangible assets were written
off with a charge to earnings immediately following the acquisitions.
In connection with the purchase accounting for the PEO Combination, the
Company identified four significant projects under development. The
development of three of those four projects was completed in 1997 and 1998,
with revenue recognized in late 1997, 1998 and 1999. The fourth project was
still under development at the end of 1999 and is expected to begin to
generate revenue in 2000. The Company's long-term expectations for its
markets and, accordingly, for these projects, have not changed significantly.
In connection with the purchase accounting for the Micrion acquisition, the
Company identified four significant projects under development at the date of
the acquisition. 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 lithography photo 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 2000. 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. For
additional information see Note 2 of the Notes to Consolidated Financial
Statements.
RESTRUCTURING AND REORGANIZATION COSTS. In March 1997, the Company
transferred its ElectroScan manufacturing activities to its manufacturing
facility in Eindhoven, The Netherlands, and abandoned the majority of the
technology acquired. Consequently, a charge to earnings of $2.5 million was
recognized. The charge included $1.5 million of goodwill attributable to the
acquisition of the assets of ElectroScan, along with estimated severance
costs for 11 ElectroScan employees and other related costs. In 1998 the
Company implemented a restructuring and reorganization program to consolidate
operations, eliminate redundant facilities, reduce operating expenses, and
provide for outsourcing of certain manufacturing activities. The program was
to eliminate approximately 173 positions worldwide, or about 16% of its work
force as of July 1998. The charge of $5.3 million recognized in 1998
represented the cost of providing severance, outplacement assistance, and
associated benefits to affected employees, as well as moving and lease
abandonment costs associated with closing duplicate facilities. The charge of
$0.1 million recognized in 1999 represents the cost of relocating certain
office facilities. Of this charge, $1.7 million remains as a liability at
December 31, 1999. This liability will be discharged in 2000 as the Company's
long-term employment termination obligations are
23
<PAGE>
paid and as the abandoned facility leases expire. The following table
summarizes the December 31, status of the restructuring and reorganization
costs.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Restructuring and Reorganization Costs
Charged to expense:
ElectroScan operation $2,478
Worldwide restructuring
and reorganization $5,320 $ 131
Less settled amounts 779 2,012 1,499
Less non-cash write downs 1,699 253 --
- --------------------------------------------------------------------------------
Remaining cash requirements
at year end $ -- $3,055 $1,687
- --------------------------------------------------------------------------------
</TABLE>
OTHER INCOME (EXPENSE), NET. Interest income for 1997, 1998 and 1999
represents interest earned on the short-term temporary investment of excess
cash. The increase in interest income in 1999 compared to 1998 is primarily
the result of increased principal invested. Interest expense for the same
periods represents interest incurred on borrowings under the Company's bank
line of credit facilities and on borrowings from Philips. 1999 interest
expense generally reflects higher levels of borrowing off-set by lower
interest rates under the Philips credit facility, as compared to the
Company's previous borrowings. The increase in interest expense in 1998
compared to 1997 primarily reflects higher levels of borrowing.
In September 1998, management reduced to zero the carrying value of its
cost-method investment in Norsam Technologies, Inc. ("Norsam") and,
accordingly, recorded a $3.3 million valuation adjustment. Management revised
its projections of future cash flows that it expected to receive from this
investment based on Norsam's operating results and its divestiture of certain
operating assets.
INCOME TAX EXPENSE. The effective income tax rate was (186)% for the year
ended December 31, 1999, 35% for the year ended December 31, 1998 and (9)%
for the year ended December 31, 1997. The Company's effective tax rate
differs from the U.S. federal statutory tax rate primarily as a result of the
amortization and immediate write-off of intangible assets not deductible for
income tax purposes. The effective tax rate also differs from the U.S.
federal statutory rate due to state and foreign taxes and the favorable tax
effect of the Company's use of a foreign sales corporation for exports from
the U.S., among other factors.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations increased to $16.2 million, 474% higher than
1998, and 140% higher than 1997, primarily due to improved operating results.
Increased sales lead to a $25.8 million increase in gross profit for 1999.
This increase was offset by a $8.7 million increase in R&D and selling,
general and administrative costs. For 1998, cash received from customers
increased $32.6 million over 1997. However, this increase was more than
offset by increases in cash paid to suppliers and employees, which increased
approximately $36.5 million due to increases in inventories as well as
reductions in amounts owed to those parties. For 1998, non-cash expenses for
depreciation and amortization were $ 8.6 million combined, 37% lower than
1999. Accounts receivable increased $24.0 million from 1998 to 1999. The
increase was due to third and fourth quarter business combinations and higher
year-end shipping volumes. Similarly in 1997, receivable levels increased
significantly ($15.4 million) in conjunction with the business combination
with Philips. The 1999 business combinations also contributed to an increase
in other assets, principally spare parts inventory which is not expected to
be utilized within a twelve month period.
Management assesses liquidity needs by evaluating cash balances on
hand, available borrowings under its credit lines, working capital trends,
and expected cash flows from operating activities versus its investment
needs. The Company has invested both through research expenditures and
through investments in business combinations to expand its position in the
Microelectronics business segment. During 1999 the Microelectronics segment
increased its operating income to $8.4 million following a loss in 1998.
Management believes that this segment will continue to increase in sales and
operating profits and provide sufficient cash flows to warrant continued
investment.
The Company operates sales and service operations on a worldwide basis
and transacts in numerous foreign currencies whose value in relation to the
US dollar fluctuates daily. Its principal raw materials, labor, and other
manufacturing costs are primarily denominated in US dollars, Dutch guilders,
and Euros. The Company attempts to mitigate its currency translation and
transaction exposures by using forward exchange contracts and by borrowing in
multiple currencies. It also negotiates the selling currency with its
customers. The mandate of the conversion to the Euro in many European
countries affords an opportunity to reduce the number of cross currency
transactions.
24
<PAGE>
The Company entered into a $50 million unsecured revolving credit
agreement on February 25, 1999 with Philips, its majority shareholder. The
agreement matures on February 26, 2002. It provides the Company with
increased borrowing capacity, replacing the $25 million facility, which was
in place during 1997 and 1998. The funds may be drawn either in the U. S. or
offshore in a choice of three currencies. Under terms of the agreement, the
Company must comply with customary banking terms and conditions including
financial covenants which require specific minimum equity levels and minimum
cash flow to interest expense ratios. As of December 31,1999, the Company was
in compliance with the covenants in the agreement. Interest on the
outstanding balance is based on an applicable LIBOR rate for one, three, or
six months at the Company's option plus .75%. As of December 31, 1999,
borrowings under the credit facility were $34.8 million, providing unused
credit capacity of $15.2 million. The Company also maintains a $5 million
uncommitted line of credit with a U. S. Bank, which is utilized to support
standby letters of credit, as well as certain limited credit facilities in
foreign countries.
In August 1999, in connection with the business combination with
Micrion, the Company sold 3,913,299 shares to Philips in a private
transaction providing $31.4 million in net proceeds. The Company also issues
shares to fund its Employee Stock Purchase Plan which enables employees to
purchase Company shares at a 15% discount to market price at fixed points in
time. The Company also grants options to purchase Company shares to many of
its employees and Directors as part of incentive and other compensation
programs. During 1999, 1,161,565 shares were sold or granted under these
programs as compared to 1,790,818 shares sold or granted in 1998, and 187,104
shares sold in 1997.
During 1999 the Company made several business investments in addition
to ongoing investments in equipment and product development. The largest of
these investments was the August 1999 purchase of Micrion Corporation.
Purchase consideration for this transaction, including transaction costs,
consisted of cash and Company shares totaling $69.4 million. In September
1999, the Company invested $3.0 million to acquire a 9.5 % interest in a
"start-up" company, which is introducing an atomic force microscopy tool for
the semiconductor industry. In conjunction with the investment, the Company
entered into a distribution agreement through which it will market, sell, and
service the equipment. The Company also obtained an option to purchase
additional equity at a predetermined price and may make a follow-on
investment in the future. During the fourth quarter of 1999, the Company
acquired sales and service capabilities in a number of smaller market areas.
Purchase consideration included a preliminary cash payment of $3.3 million.
The Company expects to continue to utilize acquisition and investment
opportunities to augment its growth and market position.
The Company also made capital expenditures for acquisition of equipment
of $8.3 million in 1999, 30 % lower than the $11.9 million invested in 1998
and 11% lower than the $9.4 million expended in 1997. These expenditures are
primarily for application laboratory and demonstration systems, which exhibit
the capabilities of the Company's equipment to its customers and potential
customers. The lower capital spending level was in anticipation of the
business combination with Micrion, which added both domestic and offshore
application laboratory and demonstration equipment. Capital expenditures in
2000 are expected to increase to the $12 million to $16 million range for
this type of equipment as well as equipment used for research and
development. The Company also invests in internally developed software, which
controls its equipment and provides information from the equipment for use by
customers. In 1999, capitalized amounts for internally developed software
increased to $2.9 million from the 1998 investment of $2.3 million and the
1997 investment of $1.4 million. These expenditures are expected to continue
to increase as the Company introduces new products and adds new applications
to its existing products.
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 December 31, 1999 the Company's product backlog was $89 million
and its field service backlog was $13 million for a total backlog of $102
million. For 1999, the Company's consolidated book-to-bill ratio for both
products and service was 1.2 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. The Company expects to ship all products
representing this backlog in 2000, although there is no assurance that the
Company will be able to do so. A substantial portion of the Company's backlog
relates to orders for products with a relatively high average selling price.
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.
25
<PAGE>
YEAR 2000 DISCLOSURE
In 1998 the Company began working to address Year 2000 issues. The Company
focused its efforts on testing and addressing deficiencies in the following
areas: (i) products; (ii) hardware and software of the Company's
manufacturing control, accounting and other information technology systems;
(iii) identification and assessment of other third suppliers' products; and
(iv) communications with the customer base concerning Year 2000 readiness of
the Company's products. The Company completed its efforts in these areas in
the fourth quarter of 1999. With the passing of January 1, 2000, the Company
reports that no significant Year 2000 problems arose. The Company did not
specifically track expenditures related to its Year 2000 preparedness effort;
any such costs were expensed as incurred. No further significant expenditures
related to the Year 2000 issue are expected.
FORWARD-LOOKING STATEMENTS
From time to time the Company may issue forward-looking statements that are
subject to a number of risks and uncertainties. The statements in this report
concerning increased investment in plant and equipment and software
development, the portions of the Company's sales consisting of international
sales, expected capital requirements, and Year 2000 compliance by the Company
and its customers and suppliers constitute forward-looking statements that
are subject to risks and uncertainties. Factors that could materially
decrease the Company's investment in plant and equipment and software
development include, but are not limited to, downturns in the IC
manufacturing market, lower than expected customer orders and changes in
product sales mix. Factors that could materially reduce the portion of the
Company's sales consisting of international sales include, but are not
limited to, competitive factors, including increased international
competition, new product offerings by competitors and price pressures,
fluctuations in interest and exchange rates (including changes in relevant
foreign currency exchange rates between time of sale and time of payment),
changes in trade policies, tariff regulations and business conditions and
growth in the electronics industry and general economies, both domestic and
foreign. Factors that could materially increase the Company's capital
requirements include, but are not limited to, receipt of a significant
portion of customer orders and product shipments near the end of a quarter
and the other factors listed above.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited financial data for each of the
eight quarters in 1998 and 1999. In the opinion of management, this
information has been prepared on the same basis as the audited consolidated
financial information appearing elsewhere in this Report and includes all
adjustments, consisting only of normal recurring adjustments (except for the
adjustments described in the following paragraphs), necessary for a fair
presentation of the financial position and results of operations for these
periods. The operating results for any quarter are not necessarily indicative
of results for any future period.
The results for the three months ended September 27, 1998 include the
following non-recurring adjustments: (i) restructuring and reorganization
costs totaling $5.0 million in connection with the Company's reduction in
force and consolidation of duplicate facilities; (ii) valuation adjustment
related to the Company's $3.3 million investment in Norsam; (iii) inventory
write-offs and obsolescence reserves totaling $4.2 million primarily related
to the consolidation of U.S. field service operations; (iv) increased
warranty reserves of $2.0 million reflecting the increased cost of warranty
for in-line FIBs; and (v) $3.2 million of product upgrade reserves reflecting
the decision to replace certain third party components within the installed
base of one of the Company's products. The results for the three months ended
December 31, 1998 include restructuring and reorganization charges totaling
$0.4 million.
The results for the three months ended April 4, 1999 include
restructuring and reorganization charges of $0.1 million. The results for the
three months ended October 3, 1999 include a charge of $12.0 million for
estimated purchased in-process research and development associated with the
acquisition of Micrion. The results for the three months ended December 31,
1999 include a charge of $2.1 million for the final purchased in-process
research and development associated with the acquisition of Micrion.
26
<PAGE>
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1999
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 29 JUNE 28 SEPT. 27 DEC. 31 APRIL 4 JULY 4 OCT. 3 DEC. 31
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 35,954 $ 44,922 $ 42,440 $ 55,455 $ 45,408 $ 45,722 $ 52,044 $ 72,978
Cost of sales 21,858 27,850 36,564 33,307 28,083 27,552 32,017 43,491
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 14,096 17,072 5,876 22,148 17,325 18,170 20,027 29,487
Total operating expenses 14,331 15,846 21,003 17,588 16,513 16,342 29,919 24,750
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (235) 1,226 (15,127) 4,560 812 1,828 (9,892) 4,737
Other income (expense), net (216) (521) (3,509) 117 326 (166) (286) 61
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes (451) 705 (18,636) 4,677 1,138 1,662 (10,178) 4,798
Tax expense (benefit) (158) 247 (6,523) 1,637 432 688 867 2,813
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (293) $ 458 $(12,113) $ 3,040 $ 706 $ 974 $(11,045) $ 1,985
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share;
basic $ (0.02) $ 0.03 $ (0.67) $ 0.17 $ 0.04 $ 0.05 $ (0.48) $ 0.07
diluted $ (0.02) $ 0.02 $ (0.67) $ 0.16 $ 0.04 $ 0.05 $ (0.48) $ 0.07
Shares used in per share calculation;
basic 18,078 18,079 18,105 18,161 18,205 18,319 23,017 27,417
diluted 18,078 18,345 18,105 19,075 19,260 19,314 23,017 28,510
</TABLE>
The Company's operating results have fluctuated in the past and may
fluctuate significantly in the future. Fluctuations in operating results may
be caused by a variety of factors, including the relatively high unit cost of
the Company's Microelectronic Products and Electron Optics Products,
competitive pricing pressures, conditions in the company's principal markets,
the timing of orders from major customers and new product introductions,
customer cancellation or delay of shipments, long sales cycles, changes in
the mix of products sold and the proportion of domestic and international
sales, specific feature requests by customers, product delays and currency
exchange rate fluctuations. The Company will continue to derive a substantial
portion of its revenues from the sale of a relatively small number of
Microelectronic Products and Electron Optics Products. As a result, the
timing of revenue recognition from a single order could have a significant
impact on the Company's net sales and operating results for a reporting
period.
A substantial portion of the Company's net sales have generally been
realized near the end of each quarter and sales of Electron Optics Products
to government-funded customers have generally been significantly higher in
the fourth quarter. Accordingly, delays in shipments near the end of a
quarter could have a substantial negative effect on operating results for
that quarter. Announcements by the Company or its competitors of new products
and technologies could cause customers to defer purchases of the Company's
existing systems, which could also have a material adverse effect on the
Company's business, financial condition and results of operations. The impact
of these and other factors on the Company's sales and operating results in
any future period cannot be forecast with certainty.
27
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A large portion of the Company's business is conducted outside of the United
States through a number of foreign subsidiaries. Each of the foreign
subsidiaries keeps its accounting records in its respective local currency.
These local currency denominated accounting records are translated at
exchange rates which fluctuate up or down from period to period and
consequently affect the consolidated results. The major foreign currencies in
which the Company faces periodic fluctuations are the Euro (and the
underlying European currencies), the British pound sterling, and the Japanese
yen. Although for each of the last three years more than 57% of the Company's
sales occurred outside of the United States, a large proportion of these
sales were denominated in U.S. dollars and Dutch guilders (the Euro in 1999).
As a result, despite an overall strengthening of the U.S. dollar against
European currencies in 1999, net sales were not materially affected since the
impact of the strengthening of the U.S. dollar against European currencies
was fully offset by the impact of the dollar weakening against the Japanese
yen. Assets and liabilities of foreign subsidiaries are translated using the
exchange rates in effect at the balance sheet date. The resulting translation
adjustments reduced shareholders' equity and comprehensive income for 1999 by
$2.0 million, net of tax benefit.
The Company's primary exposure to changes in foreign currency exchange
rates results from intercompany loans made between the U.S. and Dutch
subsidiaries and its other foreign subsidiaries. The Company hedges its
investment in a Japanese subsidiary but does not otherwise actively hedge
this exposure. The Company does not enter into derivative financial
instruments for speculative purposes. The Company does from time to time
enter into forward sale or purchase contracts for foreign currencies to hedge
specific sales transactions. As of December 31, 1999, the aggregate notional
amount of these contracts was $2.8 million. Holding other variables constant,
if the U.S. dollar weakened by 10%, the market value of foreign currency
contracts outstanding as of December 31, 1999 would decrease by approximately
$0.3 million. The decrease in value would be substantially offset from the
revaluation of the underlying hedged transactions.
INTEREST RATE SENSITIVITY. The Company borrows funds under variable rate
borrowing arrangements. As of December 31, 1999 and during the entirety of
1999, the Company did not hedge its exposure to interest rate risk. The
Company would not experience a material impact on its income before taxes as
the result of a 1% increase in the short-term interest rates which are used
to calculate its interest expense.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1999
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 15,198 $ 11,124
Receivables (Note 4) 53,645 77,628
Current account with Philips (Note 15) -- 95
Inventories (Note 5) 43,518 59,517
Deferred income taxes (Note 11) 9,926 16,699
Other 4,273 6,796
- ---------------------------------------------------------------------------------------------------
Total current assets 126,560 171,859
Equipment (Note 6) 23,845 28,768
Purchased Goodwill And Technology (Note 2) 29,000 65,586
Other Assets (Note 7) 11,733 21,887
- ---------------------------------------------------------------------------------------------------
Total $ 191,138 $ 288,100
- ---------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 10,607 $ 21,362
Current account with Philips (Note 15) 5,043 --
Accrued payroll liabilities 3,908 6,795
Accrued warranty reserves 6,186 8,779
Deferred revenue 15,744 20,627
Income taxes payable 952 6,105
Accrued restructuring costs (Note 3) 3,055 426
Other current liabilities (Note 8) 10,715 22,808
- ---------------------------------------------------------------------------------------------------
Total current liabilities 56,210 86,902
Bank Line Of Credit Borrowings (Note 9) 7,250 1,192
Credit Facility With Philips (Note 9) 19,099 34,820
Deferred Income Taxes (Note 11) 7,861 10,637
Other Liabilities 3,091 1,972
Commitments And Contingencies (Notes 10 and 17) -- --
Shareholders' Equity (Note 12):
Preferred stock - 500,000 shares authorized; none issued and outstanding -- --
Common stock - 30,000,000 shares authorized; 18,318,095 issued and
outstanding as of December 31, 1998. 45,000,000 shares authorized;
27,544,280 issued and outstanding as of December 31, 1999 150,751 218,406
Note receivable from shareholder (1,116) (1,116)
Accumulated deficit (45,510) (56,185)
Accumulated other comprehensive loss (6,498) (8,528)
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity 97,627 152,577
- ---------------------------------------------------------------------------------------------------
Total $ 191,138 $ 288,100
- ---------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 168,796 $ 178,771 $ 216,152
Cost Of Sales (Note 8) 106,629 119,579 131,143
- -----------------------------------------------------------------------------------------------------------
Gross profit 62,167 59,192 85,009
- -----------------------------------------------------------------------------------------------------------
Operating Expenses:
Research and development (Note 15) 15,396 19,506 21,937
Selling, general and administrative 37,024 41,426 47,650
Amortization of purchased goodwill and technology (Note 2) 2,096 2,516 3,717
Purchased in-process research and development (Note 2) 38,046 -- 14,089
Restructuring and reorganization costs (Note 3) 2,478 5,320 131
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 95,040 68,768 87,524
- -----------------------------------------------------------------------------------------------------------
Operating Loss (32,873) (9,576) (2,515)
- -----------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 255 360 715
Interest expense (846) (1,164) (1,162)
Valuation adjustment (Note 7) -- (3,267) --
Other (31) (58) 382
- -----------------------------------------------------------------------------------------------------------
Total other expense, net (622) (4,129) (65)
Loss Before Taxes (33,495) (13,705) (2,580)
Tax Expense (Benefit) (Note 11) 3,107 (4,797) 4,800
- -----------------------------------------------------------------------------------------------------------
Net Loss $ (36,602) $ (8,908) $ (7,380)
- -----------------------------------------------------------------------------------------------------------
Net Loss Per Share (Note 13):
Basic and assuming dilution $ (2.19) $ (0.49) $ (0.34)
- -----------------------------------------------------------------------------------------------------------
Weighted Average Shares Outstanding (Note 13):
Basic and assuming dilution 16,677,336 18,105,808 21,745,065
- -----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 1997 1998 1999
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Loss $(36,602) $(8,908) $(7,380)
Other Comprehensive Income (Loss):
Foreign currency translation adjustment, zero taxes provided in
1997 and 1998, $1,136 taxes provided in 1999 (7,658) 1,160 (2,030)
- -------------------------------------------------------------------------------------------------
Comprehensive Loss $(44,260) $(7,748) $(9,410)
- -------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTE ACCUMULATED
RECEIVABLE OTHER
YEARS ENDED DECEMBER 31, COMMON STOCK FROM ACCUMULATED DIVISION COMPREHENSIVE
1997, 1998 AND 1999 SHARES AMOUNT SHAREHOLDER DEFICIT EQUITY LOSS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 -- $ -- $ -- $ -- $ 43,070 $ --
Cash contributed by Philips,
net of liabilities assumed -- 5,134 -- -- -- --
FEI shares outstanding on
date of PEO combination
(Note 2) 7,959,933 99,209 -- -- -- --
Shares issued to Philips
Business Electronics at the
PEO Combination (Note 2) 9,728,807 43,070 -- -- (43,070) --
Net loss -- -- -- (36,602) -- --
Stock options exercised (Note 12) 389,053 1,736 -- -- -- --
Translation adjustment -- -- -- -- -- (7,658)
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 18,077,793 149,149 -- (36,602) -- (7,658)
Net loss -- -- -- (8,908) -- --
Employee purchases of common
stock through employee stock
purchase plan (Note 12) 79,344 422 -- -- -- --
Stock options exercised (Note 12) 10,338 64 -- -- -- --
Restricted stock purchase
(Note 12) 150,620 1,116 (1,116) -- -- --
Translation adjustment -- -- -- -- -- 1,160
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 18,318,095 150,751 (1,116) (45,510) -- (6,498)
Net loss -- -- -- (7,380) -- --
Sale of stock to Philips (Note 2) 3,913,299 31,385 -- -- -- --
Shares issued to Micrion
shareholders on date of
Micrion merger (Note 2) 5,064,150 34,684 -- -- -- --
Employee purchases of common
stock through employee stock
purchase plan (Note 12) 141,815 764 -- -- -- --
Stock options exercised
(Note 12) 56,921 452 -- -- -- --
Dividend paid to Philips (Note 2) -- -- -- (3,295) --
Restricted stock award (Note 12) 50,000 370 -- -- -- --
Translation adjustment -- -- -- -- -- (2,030)
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 27,544,280 $218,406 $(1,116) $(56,185) $ -- $(8,528)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(36,602) $ (8,908) $ (7,380)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation 3,963 5,621 8,513
Amortization 2,207 3,004 5,198
Retirement of fixed assets and demonstration systems 817 1,101 1,355
Purchased in-process research and development 38,046 -- 14,089
Deferred taxes on income (2,861) (7,125) (1,190)
Write-off of intangible assets 3,152 -- --
Valuation adjustment -- 3,267 --
Restricted stock award -- -- 370
Decrease (increase) in assets:
Receivables (15,379) 1,524 (11,172)
Inventories 5,180 (3,940) 7,015
Other assets (288) 1,474 (7,450)
Increase (decrease) in liabilities:
Accounts payable 1,749 (3,055) 7,226
Current accounts with Philips 7,917 (4,031) (6,307)
Accrued payroll liabilities 485 390 2,000
Accrued warranty reserves 1,208 1,947 (3,778)
Deferred revenue (1,164) 4,508 (3,129)
Accrued restructuring 89 2,966 (2,629)
Other liabilities (1,744) 4,084 13,496
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,775 2,827 16,227
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Acquisition of equipment (9,412) (11,883) (8,335)
Investment in software development (1,409) (2,291) (2,866)
Cash acquired in the PEO Combination (Note 2) 1,420 -- --
Investment in unconsolidated affiliate (Note 7) -- -- (3,000)
Purchase of Micrion, net of cash acquired (Note 2) -- -- (32,869)
Purchase of sales and service organizations, net of cash acquired (Note 2) -- -- 170
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,401) (14,174) (46,900)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net proceeds from (repayments of) bank lines of credit (Note 9) 8,708 (10,594) (16,398)
Proceeds from exercise of stock options and employee stock purchases 1,736 486 1,216
Borrowings under credit facility with Philips (Note 9) -- 19,099 15,721
Proceeds from sale of stock to Philips (Note 2) -- -- 31,385
Dividend paid to Philips (Note 2) -- -- (3,295)
Net cash provided by Philips 8,000 -- --
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 18,444 8,991 28,629
- -----------------------------------------------------------------------------------------------------------------
Effect Of Exchange Rate Changes On Cash 576 1,160 (2,030)
- -----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash And Cash Equivalents 16,394 (1,196) (4,074)
Cash And Cash Equivalents, Beginning Of Year -- 16,394 15,198
- -----------------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents, End Of Year $ 16,394 $ 15,198 $ 11,124
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
33
<PAGE>
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's products include transmission electron
microscopes ("TEMs"), scanning electron microscopes ("SEMs"), focused ion-beam
systems ("FIBs") and products that incorporate an electron beam and an ion beam
into a single system ("DualBeam Systems"). The Company also sells some of the
components of electron microscopes and FIBs to other manufacturers. The Company
has manufacturing operations in Hillsboro, Oregon; Peabody, Massachusetts;
Eindhoven, The Netherlands; and Brno, Czech Republic. Sales and service
operations are conducted in the United States and 23 other countries,
constituting a majority of the worldwide market for the Company's products.
Prior to December 1999, the Company's products were sold through distribution
agreements with affiliates of Koninklijke Philips Electronics N.V. ("Philips")
located in approximately 20 countries. The Company also sells its products
through independent representatives in certain countries. The Company's FIBs and
DualBeam Systems 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
Company's SEMs and TEMs are sold to life science and materials science research
institutes, universities and industrial customers, as well as to semiconductor
and thin film head manufacturers.
BASIS OF PRESENTATION The consolidated financial statements include the accounts
of FEI Company and all of its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
On February 21, 1997, FEI Company ("Pre-Combination FEI") acquired
substantially all of the assets and liabilities of the electron optics business
of Philips Business Electronics International B.V. ("Philips Business
Electronics"), a wholly-owned subsidiary of Philips, in a transaction accounted
for as a reverse acquisition (the "PEO Combination"). Accordingly, purchase
accounting was applied to the assets and liabilities of Pre-Combination FEI. The
1997 results of operations reflect only the acquired business through February
21, 1997 and the results of the combined company from February 22, 1997 and
thereafter (see Note 2).
On August 13, 1999, FEI Company acquired Micrion Corporation ("Micrion"),
a Massachusetts corporation engaged in the design, manufacture, sale and service
of focused charged particle beam systems. 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).
DEPENDENCE ON SUPPLIERS Though many of the components and subassemblies included
in the Company's system products are standard products, a significant portion of
the mechanical parts and subassemblies are custom made by one or two suppliers,
including Philips Machinefabrieken Nederland B.V. ("Philips Machine Factory").
In addition to Philips Machine Factory, the Company obtains a significant
portion of its component parts from a second supplier, Turk Manufacturing Co. A
third supplier, RIPA Holding B.V., is currently a sole source for electronic
sub-assemblies that were, until recently, manufactured at the Company's
facilities in Eindhoven. The Company believes some of the components supplied to
it are available to the suppliers only from single sources. Those parts subject
to single or limited source supply are monitored by the Company to ensure that
adequate sources are available to maintain manufacturing schedules. Although the
Company believes it would be able to develop alternate sources for any of the
components used in its products, significant delays or interruptions in the
delivery of components from suppliers or difficulties or delays in shifting
manufacturing capacity to new suppliers could have a material adverse effect on
the Company. In the ordinary course, the Company continually evaluates its
existing suppliers and potential different or additional suppliers to determine
whether changes in suppliers may be appropriate.
USE OF ESTIMATES IN FINANCIAL REPORTING The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. Actual results could
differ from estimates.
FOREIGN CURRENCY TRANSLATION Assets and liabilities denominated in a foreign
currency are translated to U.S. dollars at the exchange rate in effect on the
respective balance sheet date. Translation adjustments are shown separately in
shareholders' equity. Revenues,
34
<PAGE>
costs and expenses are translated using an average rate of exchange for the
period. Realized and unrealized foreign currency transaction gains and losses
are included in the consolidated statements of operations.
FORWARD EXCHANGE CONTRACTS Most of the Company's subsidiaries transact business
in their functional currencies as well as currencies other than their functional
currencies. As a result, changes in foreign currency exchange rates may have an
impact on the Company's operating results. Forward exchange contracts are used
to hedge a portion of the risk of foreign currency fluctuations. Realized and
unrealized gains on such contracts are deferred and recognized in the
consolidated statements of operations concurrent with the hedged transaction.
ASSET IMPAIRMENT The Company evaluates the remaining life and recoverability of
equipment and other assets, including intangible assets, whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. If impairment is indicated, the Company adjusts the carrying
amount of the asset to the lower of its carrying value or its fair value.
CASH AND CASH EQUIVALENTS Money market funds and other highly liquid instruments
with maturities of three months or less at the date of acquisition are
considered to be cash equivalents.
INVENTORIES are stated at lower of cost or market with cost determined by
standard cost methods which approximate the first-in, first-out method.
Inventory costs include material, labor and manufacturing overhead. Service
inventories, which exceed the estimated requirements for 12 months based on
recent usage levels, are reported as noncurrent assets. Management has
established inventory reserves based on estimates of excess and/or obsolete
current and noncurrent inventory.
EQUIPMENT, including systems used in research and development activities,
production and in demonstration laboratories, is stated at cost and depreciated
over the estimated useful life of approximately three to seven years using the
straight-line method. Leasehold improvements are amortized over the shorter of
their economic lives or the lease term. Maintenance and repairs are expensed as
incurred.
PURCHASED GOODWILL AND TECHNOLOGY Purchased goodwill, which represents the
excess of cost over the fair value of net assets acquired, is amortized on a
straight-line basis over the estimated economic life. Existing technology
intangible assets purchased in a business combination, which represent the
estimated value of products utilizing technology existing as of the combination
date discounted to their net present value, are amortized on a straight-line
basis over the estimated useful life of the technology. The value of purchased
in-process research and development in a business combination, which represents
the net present value of products under development as of the combination date,
is expensed immediately following the date of business combination. Changes in
technology could impact the Company's estimate of the useful lives of such
assets. See Note 2.
OTHER ASSETS Certain computer software development costs are capitalized. These
costs are amortized over three to five years, the estimated economic life of the
software, using the straight-line method. Changes in technology could impact the
Company's estimate of the useful life of such assets. See Note 7.
PRODUCT WARRANTY COSTS The Company's products generally carry a one-year
warranty. A reserve is established at the time of sale to cover estimated
warranty costs and certain commitments for product upgrades. The Company's
estimate of warranty cost is based on its history of warranty repairs. While
most new products are extensions of existing technology, the estimate could
change if new products require a significantly different level of repair than
similar products have required in the past.
REVENUE RECOGNITION Revenue is recognized when it is realized or realizable and
earned, the price is fixed or determinable, and collectibility is reasonably
assured. Product sales are recorded at the time of delivery and ownership
transfer to the buyer. Where a service contract exists, service revenues are
recognized ratably over the service contract period. For time and materials
service arrangements, service revenues are recognized when the services are
provided.
RESEARCH AND DEVELOPMENT costs are expensed as incurred.
TAXES AND TAX CREDITS Deferred taxes are provided for temporary differences
between the amounts of assets and liabilities for financial and tax reporting
purposes.
STOCK-BASED COMPENSATION The Company continues to measure compensation expense
for its stock-based employee compensation plans using the method prescribed by
APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company
provides pro forma disclosures of net income and earnings per share as if the
method prescribed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, had
been applied in measuring compensation expense. See Note 12.
SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest totaled $770, $1,226
and $1,121 for the years ended December 31, 1997, 1998 and 1999, respectively.
Cash paid for income taxes totaled $1,230, $4,107 and $336 for the years ended
December 31, 1997, 1998 and 1999, respectively.
RECLASSIFICATION Certain reclassifications have been made to the prior year
financial statements to conform to the current year presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS During 1998, the Financial Accounting
Standards Board issued
35
<PAGE>
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
which has not yet been adopted by the Company, but is required to be adopted on
January 1, 2001. Because of the Company's minimal use of derivatives, management
does not anticipate that the adoption of the new Statement will have a
significant effect on earnings or the financial position of the Company.
In December, 1999, the Securities and exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which
the Company is required to adopt in the second quarter of 2000. The Company has
not yet completed the analyses required to determine the impact, if any, on
earnings or the financial position of the Company upon adoption.
2. MERGERS AND ACQUISITIONS
PHILIPS ELECTRON OPTICS
On February 21, 1997, Pre-Combination FEI acquired from Philips Business
Electronics its electron optics manufacturing operations and most of its
electron optics sales and service operations (the "PEO Operations").
Pre-Combination FEI acquired the PEO Operations in exchange for 9,728,807 newly
issued shares of the Company's common stock, which constituted, when issued to
Philips Business Electronics, 55% of the shares of common stock then
outstanding. The PEO 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.
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 such as sales volume, number of employees,
number of computer terminals, square footage occupied, etc. 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. See Note 15.
The Company obtained an independent appraisal of the fair market value of
the intangible assets, inventory, and equipment acquired in order to assist
management in allocating the total purchase price of $122,872 to the assets
acquired and liabilities assumed. To determine the value of each of
Pre-Combination FEI'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 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 yet generated revenue
as of the date of the PEO 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 by management to be $38,046, $16,490 and
$17,122, respectively.
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 PEO Combination. The amortization periods for existing
technology and goodwill recognized in the PEO Combination were 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.
Pro forma combined statement of operations data, presented as if the PEO
Combination had occurred on January 1, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997*
- --------------------------------------------------------------------------------
<S> <C>
Net sales $ 172,214
Net loss $ (37,656)
- --------------------------------------------------------------------------------
Pro forma per share data:
Net loss per share, basic and
assuming dilution $ (2.11)
- --------------------------------------------------------------------------------
Pro forma weighted average
shares outstanding:
Basic and assuming dilution 17,840,000
- --------------------------------------------------------------------------------
</TABLE>
* PRO FORMA RESULTS FOR 1997 INCLUDE THE $38,046 CHARGE FOR IN-PROCESS RESEARCH
AND DEVELOPMENT RESULTING FROM THE PEO COMBINATION.
MICRION CORPORATION
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,
accordingly, purchase accounting was applied to the assets and liabilities of
Micrion. The total purchase price of $69,355 consisted of the fair value of the
Company's newly issued shares of Common Stock, the cash paid to Micrion
shareholders, and transaction costs of $4,286 including investment banking fees
and legal fees associated with required regulatory processes.
The Company obtained independent appraisals of the fair market value of
the intangible assets, inventory, and equipment acquired in order to assist
management in allocating the total purchase price to the assets acquired and
liabilities assumed. 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
36
<PAGE>
projections for each product line were discounted to a net present value. 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 yet generated revenue at the date of the acquisition. For existing
technology product lines, the discount rate used was 15 percent representing
management's estimate of the equity cost of capital for Micrion. For products
which had not yet been proven technologically feasible, the discount rates
applied ranged from 21 to 23 percent, reflecting the estimated equity cost of
capital plus a premium for the risk and uncertainty associated with successful
completion and market acceptance for such unproven products.
Management allocated the Micrion purchase price to the assets acquired and
liabilities assumed as follows:
<TABLE>
<S> <C>
Current assets, including cash of $1,801 $ 32,683
Equipment 6,342
Existing technology intangible asset 16,277
Goodwill 24,091
In-process research and development 14,089
Deferred income taxes 2,807
Liabilities assumed (26,934)
- --------------------------------------------------------------------------------
Total purchase price $ 69,355
- --------------------------------------------------------------------------------
</TABLE>
In estimating the value of purchased in-process research and development, the
Company identified four significant categories of projects under development at
the date of the acquisition. 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
lithography photo 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 2000. In accordance with the Company's policy to expense research and
development costs as they are incurred, a one-time charge of $14,089 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.
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. The product lines associated with
the existing technology are expected to continue to generate revenues for an
extended period of time. The Company's major product lines consist of basic
platform systems, which are modified and enhanced over time as new features and
capabilities are added to the platform. 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. Management periodically evaluates the remaining economic
useful lives and amortization periods for these intangible assets.
Pro forma combined statements of operations data, presented as if the
merger had occurred on January 1 of each year are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1999*
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 224,194 $ 235,890
- --------------------------------------------------------------------------------
Net loss $ (17,845) $ (17,480)
- --------------------------------------------------------------------------------
Pro forma net loss per share $ (0.66) $ (0.64)
- --------------------------------------------------------------------------------
Pro forma weighted average
shares outstanding 27,083 27,356
- --------------------------------------------------------------------------------
</TABLE>
*PRO FORMA RESULTS FOR 1999 INCLUDE THE $14,089 CHARGE FOR IN-PROCESS RESEARCH
AND DEVELOPMENT RESULTING FROM THE MICRION ACQUISITION.
Concurrent with the merger, Philips Business Electronics purchased from the
Company 3,913,299 newly issued shares of common stock for $31,385 in cash.
ADDITIONAL PHILIPS SALES AND SERVICE ORGANIZATIONS
During 1999, the Company acquired from Philips Business Electronics, its
electron optics sales distribution and service operations located in 19
countries. The purchase price for these businesses was their Net Operating
Capital ("NOC") at the time of acquisition, plus $3,295. The final purchase
price is subject to adjustment based on a review of NOC at each of the acquired
businesses. The preliminary purchase price totaled $3,125, consisting of
preliminary NOC of $(170), plus $3,295. Because the transaction was conducted
among parties under common control, the assets acquired and liabilities assumed
were recorded at net book value and the $3,295 additional payment to
37
<PAGE>
Philips was treated as a dividend. During 1999, the Company transferred such
businesses in three countries to independent representatives and intends to
transfer additional such businesses to independent representatives in certain
smaller market countries during 2000.
PURCHASED GOODWILL AND TECHNOLOGY
Purchased goodwill and technology consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Existing technology from PEO
Combination, net of
amortization of $2,519
and $3,893, respectively $13,971 $12,597
Existing technology from
Micrion acquisition, net
of amortization of $543 -- 15,734
Goodwill from PEO
Combination, net of
amortization of $2,093
and $3,330, respectively 15,029 13,822
Goodwill from Micrion
acquisition, net of
amortization of $658 -- 23,433
- --------------------------------------------------------------------------------
Purchased goodwill
and technology, net $29,000 $65,586
- --------------------------------------------------------------------------------
</TABLE>
3. RESTRUCTURING AND REORGANIZATION
1997 RESTRUCTURING AND REORGANIZATION
In March 1997, the Company implemented a restructuring and reorganization plan
for its SEM manufacturing and research and development operation in
Massachusetts. The plan involved the transfer of 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 in March
1997. The Company also discontinued the principal product produced at that
location. Consequently, $1,699 of intangible assets attributable to the 1996
acquisition of this business was written off and charged to income in the first
quarter of 1997, based on projections of future losses and negative cash flows.
In addition, the estimated severance costs for 11 manufacturing and development
employees, and other related costs of the plan were charged to income.
As of December 31, 1998, all of the affected employees were terminated and
there were no remaining liabilities from this activity reflected in the
Company's balance sheets.
The components of this 1997 restructuring and reorganization charge were
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<S> <C>
Severance, outplacement, transition bonuses and
related benefits for terminated employees $ 621
Remaining lease obligation on vacated facilities 158
Valuation adjustment on intangible assets
related to abandoned technology 1,699
- --------------------------------------------------------------------------------
1997 restructuring and reorganization charge $2,478
- --------------------------------------------------------------------------------
</TABLE>
1998 RESTRUCTURING AND REORGANIZATION
On July 29, 1998, the Company implemented a restructuring and reorganization
plan to consolidate operations, eliminate redundant facilities, reduce operating
expenses, and provide for outsourcing of certain manufacturing activities. The
plan included the elimination of 173 positions worldwide, or about 16% of the
Company's work force as of July 29, 1998. The positions affected include
manufacturing, marketing, administrative, field service and sales 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, 76 employees were
terminated in 1998, 88 were terminated in 1999, and 9 employees remain to be
terminated in 2000. The positions remaining to be terminated as of December 31,
1999 are primarily located in The Netherlands and Canada. For certain of the
terminated employees in foreign countries, the Company is required to make
continuing payments for a period of time after employment ends under existing
employment laws and regulations.
During the third quarter of 1998, the Company reorganized and consolidated
its US field service function. The majority of the Company's operations in
Mahwah, New Jersey were moved to Hillsboro, Oregon and consolidated with the US
field service operations located there. The cost of this US field service
reorganization included $87 in employee severance, outplacement and related
benefits for terminated employees, and $189 in relocation and moving expenses
for certain transferred employees and the assets formerly located in Mahwah. The
charge also included $336 for lease abandonment costs of vacating leased
premises in Mahwah. These charges are included in the table of restructuring
charges shown below. Associated with this move and consolidation of US field
service operations were inventory write-offs and additional obsolescence
reserves for field service inventory, which totaled $3,278. This amount was
charged to cost of sales in 1998.
In the third quarter of 1998, the Company also undertook a plan to close
its Massachusetts office and relocate a portion of the employees. Lease
abandonment costs of $108 are included in the table below for the estimated
lease termination costs associated with this relocation. Also in the third
quarter of 1998, the Company implemented a plan to consolidate its duplicate
facilities in each of the UK and Germany. $129 was
38
<PAGE>
incurred in 1998 and $131 was incurred in 1999 for the cost of consolidating
these facilities.
The various components of this charge were as follows:
<TABLE>
<CAPTION>
YEAR BEGINNING CHARGED ENDING
ENDED ACCRUED TO ACCRUED
DECEMBER 31, 1998: LIABILITY EXPENSE SETTLED (1) LIABILITY
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Severance, outplacement
and related benefits for
terminated employees $-- $4,137 $1,436 $2,701
Lease abandonment
costs for vacated
facilities -- 444 90 354
Relocation and moving
expenses for employees
and facilities -- 318 318 --
Cost related to
transferring property
to vendors -- 168 168 --
Abandonment of
leasehold improvements
and fixed assets in
location vacated;
non-cash charge -- 253 253 --
- --------------------------------------------------------------------------------
1998 Totals $- $5,320 $2,265 $3,055
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999:
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Severance, outplacement
and related benefits
for terminated
employees $2,701 $ -- $1,036 $1,665
Lease abandonment costs
for vacated facilities 354 -- 332 22
Relocation and moving
expenses for employees
and facilities -- 131 131 --
- --------------------------------------------------------------------------------
1999 Totals $3,055 $131 $1,499 $1,687
- --------------------------------------------------------------------------------
</TABLE>
(1) Represents cash payments as well as effects of changes in currency
translation on recorded liabilities.
These amounts are reported in the consolidated balance sheets as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Accrued restructuring costs $3,055 $ 426
Accrued payroll liabilities -- 1,261
- --------------------------------------------------------------------------------
Total $3,055 $1,687
- --------------------------------------------------------------------------------
</TABLE>
4. RECEIVABLES
Receivables consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Trade accounts receivable $ 55,587 $ 80,680
Allowance for
doubtful accounts (1,942) (3,052)
- --------------------------------------------------------------------------------
Total receivables $ 53,645 $ 77,628
- --------------------------------------------------------------------------------
</TABLE>
5. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and
assembled parts $ 20,574 $ 29,148
Service inventories;
current requirements 5,093 6,540
Work in process 11,853 20,896
Finished goods 10,439 17,824
- --------------------------------------------------------------------------------
47,959 74,408
Reserve for obsolete inventory (4,441) (14,891)
- --------------------------------------------------------------------------------
Total inventories $ 43,518 $ 59,517
- --------------------------------------------------------------------------------
</TABLE>
6. EQUIPMENT
Equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Leasehold improvements $ 2,157 $ 2,962
Machinery and equipment 13,226 16,874
Demonstration systems 15,439 17,976
Other fixed assets 8,824 10,693
- --------------------------------------------------------------------------------
39,646 48,505
Accumulated depreciation (15,801) (19,737)
- --------------------------------------------------------------------------------
Total equipment $ 23,845 $ 28,768
- --------------------------------------------------------------------------------
</TABLE>
7. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Service inventories, noncurrent,
net of obsolescence reserves
of $6,810 and $8,537,
respectively $ 7,037 $11,716
Capitalized software
development costs, net of
amortization of $478 and
$1,938, respectively 3,469 4,821
Patents, net of amortization
of $39 and $60, respectively 282 261
Investment in
unconsolidated affiliates -- 3,000
Deposits and other 945 2,089
- --------------------------------------------------------------------------------
Total other assets $11,733 $21,887
- --------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
Software development costs capitalized during the years ended December 31, 1997,
1998 and 1999 were $1,409, $2,291 and $2,866, respectively. During 1997, the
Company determined that changes in development plans for certain products had
reduced the future utility of some of the Company's software projects.
Accordingly, previously capitalized software development costs of $1,627 were
charged to research and development expense in 1997. Amortization of software
development costs was $111, $459 and $1,562 for the years ended December 31,
1997, 1998 and 1999.
The Company owns 500,000 shares of Norsam Technologies, Inc. ("Norsam")
Series A Preferred Stock. In September 1998 the Company reevaluated the carrying
value of this cost-method investment. Management revised its projections of
future cash flows that it expected to receive from this investment based on
Norsam's operating results and its divestiture of certain operating assets.
Accordingly, management determined that the carrying value of its investment was
permanently impaired and recorded a valuation adjustment of $3,267 and reduced
the carrying value of this investment to zero.
On September 28, 1999 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 exclusivity arrangement of the distribution
agreement does not include mask repair applications.
8. PRODUCT UPGRADE PROGRAM
During 1998 the Company re-evaluated an upgrade program undertaken to replace
certain third party manufactured parts within the installed base of a TEM
product series. In 1998 management concluded that continuing to repair the
defective parts was not a viable solution, and that substantially all of the
installed base would have to be upgraded with replacement parts. A charge to
cost of sales of $3,751 was recognized in 1998 to reflect the decision to
proceed with these replacements. $1,349 and $846, representing the estimated
cost of the program over the next twelve months, were included in other current
liabilities as of December 31, 1998 and 1999, respectively. $2,148 and $1,144,
representing the non-current portion of the estimated program cost, was included
in other liabilities as of December 31, 1998 and 1999, respectively.
9. BANK LINES OF CREDIT AND CREDIT FACILITY
WITH PHILIPS
At December 31, 1997 and 1998, the Company maintained a $25,000 bank line of
credit, available on revolving advances at prime (8.5% at December 31, 1997 and
1998) or on 30, 60, 90, or 180-day draw periods at LIBOR plus 1.65%. A total of
$6,693 was outstanding under the bank line of credit at December 31, 1998.
Borrowings under the line of credit were secured by eligible 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 entered into 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. The Philips credit
facility provides borrowing capacity of up to $50,000, interest at LIBOR plus
0.75%, and matures on February 26, 2002. The line provides up to $10,000 in
revolving advances and fixed borrowing periods of one, three or six months. The
line of credit is unsecured, allows borrowing in three different currencies, and
requires that the Company meet certain financial covenants. As of December 31,
1999, the Company was in compliance with all of the covenants of the agreement.
As of December 31, 1999 the weighted average interest rate on outstanding
borrowings was 5.02%.
Based on management's intent, borrowings outstanding under the Philips
line of credit are classified as long-term. Borrowings outstanding as of
December 31, 1998, under the Company's bank line of credit, which were
refinanced on February 25, 1999, were also classified as long-term based on
management's intent. A large portion of the account payable to Philips as of
December 31, 1998 was also classified as long-term in anticipation of
refinancing at the initiation of the new credit facility.
The Company also maintains a $5,000 unsecured and uncommitted bank
borrowing facility in the US and certain limited facilities in selected foreign
countries. At December 31, 1999, the Company had outstanding standby letters of
credit totaling approximately $876, which reduce the amount available under the
$5,000 bank borrowing facility.
40
<PAGE>
10. LEASE OBLIGATIONS
Operations are conducted in manufacturing and administrative facilities under
operating leases that extend through 2006, including the Company's facilities in
Acht, The Netherlands. The lease agreements generally provide for payment of
base rental amounts plus the Company's share of property taxes and common area
costs. The leases generally provide renewal options at current market rates.
Rent expense is recognized on a straight-line basis over the term of the
lease. Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $2,850, $3,792 and $3,876, respectively.
The approximate future minimum rental payments due under these agreements
as of December 31, 1999 are $5,227, $4,694, $3,520, $3,226, and $2,346 for the
years ending December 31, 2000 through 2004, respectively, and $2,005
thereafter.
11. INCOME TAXES
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 1,043 $ 2,200 $ 1,415
State 236 404 (11)
Foreign 2,682 (276) 4,586
- --------------------------------------------------------------------------------
Subtotal 3,961 2,328 5,990
Deferred benefit (854) (7,125) (1,190)
- --------------------------------------------------------------------------------
Total tax expense (benefit) $ 3,107 $(4,797) $ 4,800
- --------------------------------------------------------------------------------
</TABLE>
The effective income tax rate varies from the US federal statutory rate due to
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax benefit at
statutory rates $(11,723) $(4,611) $ (858)
Increase (reduction) in income
taxes resulting from:
Foreign taxes 529 7 (73)
Purchased in-process research
and development 13,316 -- 4,931
State income taxes 153 (478) (5)
Goodwill amortization 333 524 676
Other 499 (239) 129
- --------------------------------------------------------------------------------
Total tax expense (benefit) $ 3,107 $(4,797) $ 4,800
- --------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities $ 2,205 $ 2,716
Warranty reserves 1,685 2,768
Inventory reserves 3,478 8,319
Allowance for bad debts 696 779
Basis differences in investments 1,346 2,069
Net operating loss carryforwards -- 2,194
Research and development tax
credit carryforwards -- 632
Other assets 1,147 1,265
- --------------------------------------------------------------------------------
Total deferred tax assets 10,557 20,742
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Capitalized software
development costs (1,024) (1,574)
Existing technology and
other intangibles (5,757) (11,786)
Basis difference in equipment (697) (971)
Other liabilities (1,014) (349)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (8,492) (14,680)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 2,065 $ 6,062
- --------------------------------------------------------------------------------
</TABLE>
These deferred tax components are reflected in the consolidated balance sheet as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax:
Current asset $ 9,926 $ 16,699
Long-term liability (7,861) (10,637)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 2,065 $ 6,062
- --------------------------------------------------------------------------------
</TABLE>
The net operating loss carryforwards will expire in varying amounts in the years
2004 through 2019, if not utilized by the Company. The research and development
tax credit carryforwards will expire in varying amounts in the years 2002
through 2007, if not utilized by the Company.
12. SHAREHOLDERS' EQUITY
CAPITAL STOCK As of December 31, 1999, 2,333,492 shares of common stock were
reserved for stock incentive plans.
As part of the PEO Combination, the Company agreed to issue to Philips
Business Electronics, from time to time, that number of additional shares of
common stock of the Company necessary to maintain Philips Business Electronics'
ownership percentage (without regard to other possible share transactions) at
not less than 55% after exercise of options and warrants to purchase common
stock of the Company, if those options and warrants were outstanding, or
issuable
41
<PAGE>
without further action by the Company's Board of Directors, as of February 21,
1997. As of December 31, 1999, 184,739 shares of the Company's common stock are
reserved for issuance as a result of this agreement.
Stock Incentive Plans The Company maintains stock incentive plans for selected
directors, officers, employees, and certain other parties which allow the Board
of Directors to grant options (incentive and nonqualified), stock and cash
bonuses, stock appreciation rights, and to sell restricted stock.
The 1995 Stock Incentive Plan ("1995 Plan") allows for issuance of a
maximum of 2,000,000 shares. The 1995 Supplemental Stock Incentive Plan ("1995
Supplemental Plan") allows for issuance of a maximum of 500,000 shares. The
Board of Directors' ability to grant options under either the 1995 Plan or the
1995 Supplemental Plan will terminate, if the plans are not amended, when all
shares reserved for issuance have been issued and all restrictions on such
shares have lapsed or earlier, at the option of the Board of Directors.
Options are granted under various vesting arrangements, up to a maximum of
five years. Options expire after a maximum of ten years. Options outstanding are
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1996 -- --
Options outstanding at date
of Combination 1,253,223 $11.63
Options granted 187,104 12.18
Options exercised (177,224) 9.80
Options expired (65,788) 10.83
- --------------------------------------------------------------------------------
Balance, December 31, 1997 1,197,315 12.03
Options granted 1,711,474 7.87
Options exercised (8,550) 7.50
Options expired or cancelled (1,406,709) 11.92
- --------------------------------------------------------------------------------
Balance, December 31, 1998 1,493,530 $ 7.39
- --------------------------------------------------------------------------------
Options granted 1,019,750 8.24
Options exercised (56,921) 7.93
Options expired or cancelled (170,566) 8.54
- --------------------------------------------------------------------------------
Balance, December 31, 1999 2,285,793 $ 7.66
- --------------------------------------------------------------------------------
</TABLE>
During 1998, employees and directors of the Company with outstanding option
grants were given the option of returning stock options granted prior to
September 10, 1998 for cancellation and receiving replacement options with new
terms. In response to this program, employees and directors of the Company
surrendered existing options and received new options covering a total of
1,181,348 shares. The new options were granted on September 18, 1998 at an
exercise price of $6.625 and vest 20 percent six months from grant date, 20
percent one year from grant date and 20 percent per year thereafter.
Additional information regarding options outstanding as of December 31,
1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -----------------------------------------------------------------------------------
OUTSTANDING WEIGHTED AVG. WEIGHTED EXERCISABLE WEIGHTED
AS OF REMAINING AVERAGE AS OF AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1999 LIFE (YRS) PRICE 1999 PRICE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.55 to
$7.40 1,621,477 8.9 $6.84 477,122 $6.63
$7.40 to
$9.25 362,516 8.1 8.17 102,705 8.43
$9.25 to
$11.10 222,280 8.4 10.77 22,280 9.81
$12.95 to
$14.80 69,520 1.0 13.25 68,620 13.25
$14.80 to
$16.65 10,000 6.3 15.00 8,000 15.00
- -----------------------------------------------------------------------------------
2,285,793 8.5 $7.66 678,727 $7.78
- -----------------------------------------------------------------------------------
</TABLE>
The weighted average fair value of options granted was $9.00, $5.95 and $5.56
for the years ended December 31, 1997, 1998 and 1999, respectively.
EMPLOYEE STOCK PURCHASE PLAN During 1998 the Company implemented an Employee
Stock Purchase Plan ("ESPP"). Under the ESPP, employees may elect to have
compensation withheld and placed in a designated stock subscription account for
purchase of common stock of the Company. The purchase price is set at a 15
percent discount from market price at the beginning or end of each six-month
purchase period, whichever is lower. The ESPP allows a maximum purchase of 1,000
shares by each employee during any 12-month purchase period. During 1998,
employees purchased 79,344 shares at an average purchase price of $5.32. During
1999, employees purchased 141,815 shares at an average purchase price of $5.39.
At December 31, 1999, 128,841 shares of common stock were reserved for issuance
under the ESPP. The weighted average fair value of ESPP shares purchased was
$5.47 and $2.42 for the years ended December 31, 1998 and 1999, respectively.
RESTRICTED STOCK AWARD AND PURCHASE On June 25, 1998, in connection with the
commencement of his employment with FEI, Mr. Vahe Sarkissian, President and
Chief Executive Officer, was granted a stock bonus of 50,000 shares of common
stock of FEI. The stock was valued at $7.40625 per share, or $370, the fair
market value on the date of grant. 25,000 shares of the stock bonus were subject
to forfeiture if Mr. Sarkissian's employment as Chief Executive Officer of FEI
had terminated before June 25, 1999.
Also on June 25, 1998, in connection with his commencement of employment
with FEI as Chief Executive Officer, FEI sold to Mr. Sarkissian 150,620 shares
of common stock of FEI subject to specified restrictions. The purchase price for
the shares was $7.40625, or $1,116, the fair market value on the date of
purchase. The restricted shares purchased by Mr. Sarkissian vested 20% on June
25, 1998 and will
42
<PAGE>
vest an additional 20% annually thereafter through the year 2002. Effective June
25, 1998 FEI loaned Mr. Sarkissian the amount of $1,116 for the purchase of the
restricted shares.
DISCLOSURE OF STOCK BASED COMPENSATION COSTS No compensation cost has been
recognized for stock options granted or ESPP shares issued at fair value on the
date of grant or issuance. Had compensation cost for the Company's stock option
and ESPP plans been determined based on the estimated fair value of the options
or shares at the date of grant, the Company's net loss and loss per share would
have been reduced to the pro forma amounts shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss:
As reported $ (36,602) $ (8,908) $ (7,380)
Pro forma (37,034) (10,036) (10,550)
Net loss per share, basic and assuming dilution:
As reported $ (2.19) $ (0.49) $ (0.34)
Pro forma (2.22) (0.55) (0.49)
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 0.0% 0.0% 0.0%
Expected volatility
(based on historical
volatility) 64.4% 77.6% 72.3%
Weighted average
risk-free
interest rate 6.3% 5.3% 5.7%
Weighted average
expected term 7.9 years 7.2 years 5.7 years
</TABLE>
The fair value of ESPP shares was estimated at the start of each purchase period
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Dividend yield 0.0% 0.0%
Expected volatility
(based on historical
volatility) 77.6% 72.3%
Weighted average
risk-free
interest rate 4.5% 5.1%
Weighted average
expected term 0.5 years 0.5 years
</TABLE>
13. EARNINGS PER SHARE
Earnings per share have been calculated assuming the shares of the Company
issued to Philips Business Electronics in the PEO Combination were outstanding
prior to the PEO Combination and assuming the shares of the Company outstanding
prior to the PEO Combination were issued as of the closing date of the PEO
Combination. See Note 2. Effective at the closing of the PEO Combination,
division equity of the PEO Operations was reclassified to paid-in capital of the
Company.
Potentially dilutive securities outstanding during 1997, 1998 and 1999
have been excluded from the calculation for those years because their effect
would reduce the net loss per share. Accordingly, the diluted loss per share is
equivalent to the basic loss per share for all periods presented.
14. EMPLOYEE BENEFIT PLANS
Employee pension plans have been established in many countries in accordance
with the legal requirements, customs and the local situation in the countries
involved. The majority of employees in Europe, Japan and Canada are covered by
defined benefit pension plans sponsored by Philips. Employees in the US are not
covered by defined benefit pension plans. The benefits provided by these plans
are based primarily on years of service and employees' compensation near
retirement. The funding policy for the plans is consistent with local
requirements in the countries of establishment. Contributions to the plans are
determined by Philips and charged to the Company. The Company's allocated
pension cost (benefit) under such plans was $468, $240 and ($81) for the years
ended December 31, 1997, 1998 and 1999, respectively.
As the Company's employees represent less than 1% of the total active
participants in these plans, and as separate pension records are not maintained
for each participating company, the Company does not account for its share of
plan assets and obligations within the Philips sponsored plans. The Company also
maintains limited pension plans for selected employees in certain European
countries. These supplemental pension plans are not funded. A liability for the
projected benefit obligations of these supplemental plans of $827 is included in
other non-current liabilities as of December 31, 1999.
PROVISION FOR POST-EMPLOYMENT BENEFITS OTHER THAN PENSIONS The Company's
employees in The Netherlands are generally covered by Philips sponsored plans
providing post-employment benefits other than pensions. In accordance with SFAS
No. 106, Philips began accruing for the related transition obligation over a 20
year period at the corporate level, commencing in 1993. The portion of the
corporate provision allocable to the Company's operations is charged to the
Company. On the basis of the number of the Company's employees located in The
Netherlands, an amount of approximately $75 each year was allocated
43
<PAGE>
to the Company. The unrecognized part of the liabilities allocated on the same
basis to the Company amounts to approximately $700 at both December 31, 1998 and
1999, respectively.
PROFIT SHARE INCENTIVE PLAN The Company's employee incentive plan ("EIP") is
based on achieving certain targeted levels of operating income determined by the
Board of Directors on a year-to-year basis. There was no EIP payment for the
year ended December 31, 1997. For the years ended December 31, 1998 and 1999,
the Company paid $118 and $695, respectively, under this plan.
PROFIT SHARING 401(K) PLAN The Company has a profit sharing 401(k) plan that
covers substantially all United States employees. Employees may defer a portion
of their compensation, and the Company may contribute an amount approved by the
Board of Directors. The Company matches 100 percent of employee contributions to
the 401(k) plan, up to three percent of each employee's salary. For the years
ended December 31, 1997, 1998 and 1999 the Company contributed $504, $559 and
$676 to the plan.
15. RELATED-PARTY TRANSACTIONS
SALES TO PHILIPS ORGANIZATIONS A number of Philips sales organizations acted as
distributors for the Company's products through November 1999 in their
respective countries (see Note 2). In addition, certain Philips business units
purchase the Company's products for internal use. Sales to Philips amounted to
$13,600, $16,684 and $17,763 during the years ended December 31, 1997, 1998, and
1999, respectively.
MATERIALS PURCHASES FROM PHILIPS See Note 1. A substantial portion of the
subassemblies included in the Company's FIBs, TEMs and SEMs are purchased from
Philips Machine Factory. Materials purchases from Philips and other
Philips-owned entities amounted to approximately $12,100, $14,450 and $18,600
for the years ended December 31, 1997, 1998 and 1999, respectively.
PURCHASES UNDER PHILIPS ARRANGEMENTS From time to time, the Company purchases
materials, supplies and services under collective purchase agreements and
purchase conditions negotiated by Philips for the benefit of its group of
companies. For this service, the Company has paid a fixed annual fee amounting
to approximately $50, $67 and $186 for the years ended December 31, 1997, 1998,
and 1999, respectively. The Company also participates in certain business
insurance programs under terms arranged by Philips. The benefits to the Company
of these arrangements cannot be calculated precisely, but management believes
that the costs of procuring these goods and services on a stand alone basis
would be higher than the cost under the Philips arrangements.
Through the majority shareholdings of Philips, the Company has the benefit
of certain collective bargaining arrangements and the Philips rate for social
charges in The Netherlands and other countries. If Philips were to no longer be
the majority shareholder, the Company would have to negotiate new collective
bargaining arrangements and there would be a new social charge rate applied to
the Company, both of which could result in increased labor costs for the
Company.
LEASED FACILITIES FROM PHILIPS In conjunction with the PEO Combination, the
Company entered into a 10-year operating lease agreement for its manufacturing
and administrative facilities in Acht, The Netherlands, with Philips Business
Electronics. During 1997, Philips Business Electronics sold the property and
assigned the lease with the Company to an unrelated third party. The Company
paid $850 to Philips Business Electronics in 1997 under this lease arrangement.
The Company also leases sales, service and administrative facilities from
Philips in certain countries under various services agreements (see "Other
Services Provided by Philips" below).
DEVELOPMENT SERVICES PROVIDED BY PHILIPS During 1998, the Company entered into a
research and development contract with the Philips Machine Factory for the
development of the stage assembly for the Company's next generation of
instruments. In September 1998, the contract was terminated before completion
and the Company agreed to settle its obligations to Philips Machine Factory for
design and development services rendered under the contract for $3,581. This
amount is included in research and development expense in the year ended
December 31, 1998.
The Company also purchases research and development services from Philips
central research facility. During the years ended December 31, 1997, 1998 and
1999, the Company paid $125, $300 and $950, respectively, for such services.
All of the patents used by the Company relating to its Electron Optics
business segment and certain Microelectronics business segment products are
licensed from Philips and its affiliates. As part of the PEO Combination, the
Company acquired perpetual rights to certain patents owned by Philips. In
addition, the Company has access to technology through cross-licenses between
Philips affiliates and a large number of manufacturers in the electronics
industry worldwide, and the Company's patents are also subject to such
cross-licenses. Some of these cross-licenses provide the Company with the right
to use intellectual property that relates to its core technologies. In general
these cross licenses are subject to continued majority ownership of the Company
by Philips and if that ownership ceased the Company might lose these rights.
This could result in increased royalty costs, or patent infringement actions and
the costs associated with such claims, including direct costs as well as the
diversion of management and technical resources.
44
<PAGE>
OTHER SERVICES PROVIDED BY PHILIPS In connection with the PEO Combination, the
Company entered into various services agreements with Philips affiliates for the
purpose of defining their ongoing relationship. These agreements set forth
certain rights and obligations of the Company, Philips and their respective
affiliates on a prospective basis. The agreements afford the Company continued
access to the research and development resources of Philips on a fee basis (see
above), and provide for the parties' respective rights to intellectual property.
These service agreements also provide for Philips affiliates to continue to
provide certain administrative, accounting, customs, export, human resources,
import, information technology, logistics, occupancy, and other services that
have been provided to the Company in the past. During the years ended December
31, 1997, 1998 and 1999, the Company paid Philips approximately $3,600, $3,250
and $2,750 for these administrative and other services.
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, after reclassification of a portion of the
balance from December 31, 1998 to long term liabilities (see Note 9), consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
Current accounts receivable $ 5,689 $ 4,921
Current accounts payable (10,732) (4,826)
- --------------------------------------------------------------------------------
Total $ (5,043) $ 95
- --------------------------------------------------------------------------------
</TABLE>
OTHER RELATED PARTY TRANSACTIONS During the years ended December 31, 1998 and
1999, the Company made equipment sales of $1,721 and $372, respectively, to a
customer in which the Company's Chief Executive Officer has an ownership
interest. As of December 31, 1999, the Company also had outstanding $492 in
lease guarantees for this customer (see Note 17).
In September 1999 the Company made an investment of $3,000 in an
unconsolidated affiliate in which the Company's Chief Executive Officer has an
ownership interest (see Note 2).
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes the carrying amounts of cash and cash equivalents,
receivables, current account with Philips, accounts payable and other current
liabilities are a reasonable approximation of the fair value of those financial
instruments because of the nature of the underlying transactions and the
short-term maturities involved. Management believes that the carrying amounts of
bank line of credit borrowings and the credit facility with Philips are a
reasonable approximation of the fair value of those financial instruments
because they bear interest at revolving market rates and because of the
short-term maturities involved. The fair value of the Company's investment in
unconsolidated affiliates is not readily determinable as the securities are not
actively traded.
International operations give rise to market risks from changes in foreign
currency exchange rates. Forward exchange contracts are utilized to hedge a
portion of the risk of foreign currency fluctuations. It is the Company's
practice generally to hold such hedge contracts to maturity. The fair value of
such contracts is not material. The counter-parties to such transactions are
major financial institutions. Accordingly, no provision for counter-party
non-performance has been made. As of December 31, 1999, the notional amount of
forward exchange contracts outstanding totaled approximately $2,819 maturing at
various dates through January 2000. The difference between the contracted rate
and the spot rate at December 31, 1999 amounted to an unrealized loss of $22.
17. COMMITMENTS AND CONTINGENT LIABILITIES
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, if any, on the Company's financial position, results of operations, or
cash flows.
In conjunction with the acquisition of Micrion in August 1998, the Company
assumed potential liability in connection with a 1996 class action securities
suit brought against Micrion. In December 1999, the Court granted the Company's
renewed summary judgement motion. In January, 2000, the plaintiffs appealed the
decision to the US Court of Appeals for the First Circuit. The Company expects
that it will be several months before the appeal is briefed, argued and decided.
The Company continues to believe the complaint to be without merit and intends
to continue its vigorous defense of the claims.
The Company is self-insured for certain aspects of its property and
liability insurance program for a medical plan covering former employees of
Micrion and is responsible for deductible amounts under certain policies. The
deductible amounts generally range from $10 to $250 per claim.
The Company participates in third party equipment lease financing programs
with US financial institutions for a small portion of products sold. Under these
arrangements, the financial institutions have limited recourse with the Company
a portion of the outstanding lease portfolio. Under certain circumstances, the
Company is obligated to exercise best efforts to re-market instruments which are
reacquired by the financial institutions. As of December 31, 1999, the Company
had guarantees outstanding under these lease financing programs, which totaled
$1,330, related to transactions from 1996 through 1998.
45
<PAGE>
18. SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION
The Company operates in three business segments. The Components segment
manufactures and markets electron and ion emitters, focusing columns, and
components thereof. These components are used in the Company's FIB, SEM and TEM
systems, and are also sold to other electron microscope manufacturers. The
Microelectronics segment manufactures, markets, and services FIB workstations
and DualBeam systems that combine a FIB column with a SEM column onto a single
instrument. Microelectronics segment products are sold primarily to the
semiconductor and data storage industries. The Electron Optics segment
manufactures, markets and services SEMs and TEMs. Electron Optics products are
sold in the materials and life sciences markets as well as in the semiconductor
and data storage markets. The demand and market forces for these products differ
significantly among the segments. See Note 1.
The following table summarizes various financial amounts for each of the
Company's business segments:
<TABLE>
<CAPTION>
CORPORATE
MICRO- ELECTRON AND
COMPONENTS ELECTRONICS OPTICS ELIMINATIONS TOTAL
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997:
Product sales to customers 11,308 48,764 84,181 -- 144,253
Service sales to customers -- 4,874 19,669 -- 24,543
Inter-segment sales 4,120 -- 7,334 (11,454) --
- ------------------------------------------------------------------------------------
Total sales 15,428 53,638 111,184 (11,454) 168,796
Gross profit 5,916 25,401 33,286 (2,436) 62,167
Depreciation & amortization 480 2,551 1,043 2,096 6,170
Operating income (loss) 2,603 7,311 2,066 (44,853) (32,873)
Total assets 10,175 60,662 87,669 24,516 183,022
- ------------------------------------------------------------------------------------
1998:
Product sales to customers 15,528 54,596 79,906 -- 150,030
Service sales to customers -- 5,141 23,600 -- 28,741
Inter-segment sales 4,215 -- 7,660 (11,875) --
- ------------------------------------------------------------------------------------
Total sales 19,743 59,737 111,166 (11,875) 178,771
Gross profit 8,364 16,122 34,974 (268) 59,192
Depreciation & amortization 750 3,207 2,152 2,516 8,625
Operating income (loss) 4,831 (7,019) 814 (8,202) (9,576)
Total assets 6,904 64,763 97,691 21,780 191,138
- ------------------------------------------------------------------------------------
1999:
Product sales to customers 11,733 84,061 83,159 -- 178,953
Service sales to customers -- 9,769 27,430 -- 37,199
Inter-segment sales 4,274 -- 10,169 (14,443) --
- ------------------------------------------------------------------------------------
Total sales 16,007 93,830 120,758 (14,443) 216,152
Gross profit 5,339 41,050 39,597 (977) 85,009
Depreciation & amortization 1,027 4,799 3,899 3,986 13,711
Operating income (loss) 2,615 8,389 9,662 (23,181) (2,515)
Total assets 5,925 122,230 95,308 64,637 288,100
</TABLE>
46
<PAGE>
The Microelectronics segment includes the activity of Micrion from August 14,
1999 and thereafter, including 1999 sales of $12,779. The 1998 gross profit and
operating income (loss) reflect nonrecurring charges of $3,083 in the
Microelectronics segment and $6,443 in the Electron Optics Segment.
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 goodwill and technology,
charges for in-process research and development, and restructuring and
reorganization costs are not allocated to the Company's business segments.
Assets that cannot be assigned to a specific segment are shown as corporate
assets, including purchased goodwill and technology. The Company's long-lived
assets were geographically located as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1999
---------------------------------------------------------
<S> <C> <C>
US $ 53,459 $ 102,093
The Netherlands 7,668 8,714
Other 3,451 5,434
---------------------------------------------------------
Total $ 64,578 $ 116,241
=========================================================
</TABLE>
The following table summarizes sales by geographic region:
<TABLE>
<CAPTION>
NORTH ASIA
AMERICA EUROPE PACIFIC OTHER TOTAL
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997:
Total sales $ 71,522 $ 51,510 $ 42,949 $ 2,815 $168,796
- -------------------------------------------------------------------------------
1998:
Product sales to customers $ 58,933 $ 48,881 $ 38,370 $ 3,846 $150,030
Service sales to customers 15,468 12,178 1,095 -- 28,741
- -------------------------------------------------------------------------------
Total sales $ 74,401 $ 61,059 $ 39,465 $ 3,846 $178,771
- -------------------------------------------------------------------------------
1999:
Product sales to customers $ 74,093 $ 49,402 $ 50,052 $ 5,406 $178,953
Service sales to customers 20,036 13,818 3,148 197 37,199
- -------------------------------------------------------------------------------
Total sales $ 94,129 $ 63,220 $ 53,200 $ 5,603 $216,152
- -------------------------------------------------------------------------------
</TABLE>
Sales to customers in the US were $67,821, $73,190 and $92,590 for the years
ended December 31, 1997, 1998 and 1999, respectively. Sales to no other country
represented 10 percent or more of total sales in 1997, 1998 or 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
47
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Incorporated into this document by reference to the sections captioned
"Number and Election of Directors" "Certain Information Regarding the Board
of Directors of the Company," and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Proxy Statement for the Annual
Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended December 31,
1999. For information concerning executive officers, see Item 4(a) of this
Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated into this document by reference to the section captioned
"Compensation of Executive Officers" in the Proxy Statement for the Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days of the close of the fiscal year ended December 31, 1999;
provided, however that the subsection captioned "Compensation Committee Report
on Executive Compensation" is not incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated into this document by reference to the section captioned
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement for the Annual Meeting of Shareholders to be filed with the Securities
and Exchange Commission within 120 days of the close of the fiscal year ended
December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated into this document by reference to the section captioned
"Certain Relationships and Related Transactions" in the Proxy Statement for the
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended December 31,
1999.
48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a)(1) FINANCIAL STATEMENTS PAGE IN THIS REPORT
-------------------
Consolidated Balance Sheets at December 31, 1998
and December 31, 1999 29
Consolidated Statements of Operations
each of the three years ended December 31, 1997,
1998 and 1999 30
Consolidated Statements of Stockholders' Equity
each of the three years ended December 31, 1997,
1998 and 1999 31
Consolidated Statements of Cash Flows for
each of the three years ended December 31, 1997,
1998 and 1999 32
Notes to Consolidated Financial Statements 34
Independent Auditors Report of Deloitte & Touche LLP 52
(a)(2) FINANCIAL STATEMENT SCHEDULES**
Independent Auditors Report S-1
Valuation and Qualifying Accounts for the Years S-2
Ended December 31, 1997, 1998 and 1999.
</TABLE>
** All other schedules have been omitted because they are inapplicable or not
required or because the information is given in the consolidated financial
statements or the notes thereto. This supplemental schedule should be read in
conjunction with the Consolidated Financial Statements and notes thereto
incorporated into this document by reference to the Company's 1999 Annual
Report.
(a)(3) EXHIBITS
(General List)
49
<PAGE>
(a)(3) EXHIBITS
2.1(4) Combination Agreement, dated November 15, 1996, as amended, between
the Company and Philips Business Electronics International B.V.
2.2(7) Agreement and Plan of Merger, dated December 3, 1998, among the
Company, Micrion Corporation and MC Acquisition Corporation.
3.1(4) Second Amended and Restated Articles of Incorporation, as amended
3.2(4) Restated Bylaws
4.1 See Articles III and IV of Exhibit 3.1 and Articles I and VI of
Exhibit 3.2
10.1(1)+ 1984 Stock Incentive Plan
10.2(4)+ 1995 Stock Incentive Plan, as amended
10.3(2)+ 1995 Supplemental Stock Incentive Plan
10.4(1)+ Form of Incentive Stock Option Agreement
10.5(1)+ Form of Nonstatutory Stock Option Agreement
10.6(1) Lease, dated as of November 20, 1992, between the Company and Capital
Consultants, Inc. as agent for United Association Union Local 290,
Plumber, Steamfitter and Shipfitter Industry Pension Fund
10.7(4) Lease, dated January 11, 1996, between the Company and Pacific Realty
Associates, L.P.
10.8(4) Lease, dated June 6, 1996, between the Company and Pacific Realty
Associates, L.P.
10.9(1)# Agreement, dated February 9, 1994, between the Company and Philips
Electron Optics B.V.
10.10(6) Lease, dated November 25, 1997, between the Company and Pacific Realty
Associates, L.P.
10.11(5) Lease Agreement, dated October 27, 1997, between Philips Business
Electronics International B.V., as lessor, and Philips Electron Optics
B.V., a wholly owned indirect subsidiary of the Company, as lessee,
including a guarantee by the Company of the lessee's obligations
thereunder.
50
<PAGE>
10.12 Credit Agreement dated February 25, 1999 between the Company and
Koninklijke Philips Electronics N.V.
10.13(5) Employment Agreement, dated August 1, 1997, between the Company and
Karel D. van der Mast
10.14 Master Divestment Agreement between the Company and Koninklijke
Philips Electronics B.V. dated October 28, 1999
10.15 Employment Agreement dated August 12, 1999, between the Company and
Nicholas P. Economou
10.16 Offer Letter between the Company and Vahe A. Sarkissian dated May 14,
1998.
10.17(7)+ Stock Bonus Agreement, dated as of June 25, 1998, between the Company
and Vahe A. Sarkissian
10.18(7)+ Restricted Stock Purchase Agreement, dated as of June 25, 1998,
between the Company and Vahe A. Sarkissian
10.20(8) Stock Purchase Agreement, dated as of December 3, 1998, between
Philips Business Electronics International B.V. and the Company
13 Annual Report to Securities Holders, or the Fiscal year ended
December 31, 1999.
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
- ----------------
(1) Incorporated by reference to Exhibits to the Company's Registration
Statement on Form S-1, as amended, effective May 31, 1995 (Commission
Registration No. 33-71146)
(2) Incorporated by reference to Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995
(3) Incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K, dated November 22, 1996
(4) Incorporated by reference to Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996
51
<PAGE>
(5) Incorporated by reference to Exhibits to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 28, 1997
(6) Incorporated by reference to Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997
(7) Incorporated by reference to Exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1998
(8) Incorporated by reference to Exhibits to Company's Current Report on
Form 8-K, dated December 9, 1998
+ This exhibit constitutes a management contract or compensatory plan or
arrangement.
# Confidential treatment has been granted by the Commission for certain
portions of this agreement.
(b) REPORTS ON FORM 8-K
None.
ANNUAL REPORT AND PROXY STATEMENT
With the exception of the matters specifically incorporated herein by
reference to the Company's 1999 Annual Report to Shareholders or to the
Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on May 18, 2000, no other provisions of the 1998 Annual Report to
Shareholders or Proxy Statement are deemed to be filed as part of this
Annual Report on Form 10-K.
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
FEI Company
Hillsboro, Oregon
We have audited the consolidated financial statements of FEI Company and
subsidiaries as of December 31, 1999 and 1998, and for each of the three years
in the period ended December 31, 1999, and have issued our report thereon dated
February 8, 2000; such consolidated financial statements and report are included
in your 1999 Annual Report to Stockholders and are incorporated herein by
reference. Our audits also included the financial statement schedule of FEI
Company and subsidiaries, listed in Item 14. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
DELOITTE & TOUCHE LLP
Portland, Oregon
February 8, 2000
S-1
<PAGE>
SCHEDULE II
FEI COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Additions
-------------------
Balance at Charged to (1) Balance at
Beginning of Costs and Other End
Period Expenses Additions Deductions Period
------ -------- --------- ---------- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Reserve for obsolete inventory $ 4,441 $ 1,330 $11,351 $(2,231) $14,891
Reserve for obsolete service inventory 6,810 1,128 2,328 (1,729) 8,537
Allowance for doubtful accounts 1,942 1,753 197 (840) 3,052
------------------------------------------------
Total $13,193 $ 4,211 $13,876 $(4,800) $26,480
------------------------------------------------
------------------------------------------------
Year ended December 31, 1998:
Reserve for obsolete inventory $ 3,901 $ 2,056 $ -- $(1,516) $ 4,441
Reserve for obsolete service inventory 3,862 3,760 -- (812) 6,810
Allowance for doubtful accounts 1,788 379 -- (225) 1,942
------------------------------------------------
Total $ 9,551 $ 6,195 $ -- $(2,553) $13,193
------------------------------------------------
------------------------------------------------
Year ended December 31, 1997:
Reserve for obsolete inventory $ 2,324 $ 1,806 $ 426 $ (655) $ 3,901
Reserve for obsolete service inventory 2,661 926 1,067 (792) 3,862
Allowance for doubtful accounts 603 1,623 450 (888) 1,788
------------------------------------------------
Total $ 5,588 $ 4,355 $ 1,943 $(2,335) $ 9,551
------------------------------------------------
------------------------------------------------
</TABLE>
(1) Amounts for 1997 represent the balance of Pre-Combination FEI at the date
of the merger. Amounts for 1999 represent the balances at the dates of
acquisition of Micrion and the Philips sales and service organizations.
S-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
FEI Company
Hillsboro, Oregon
We have audited the accompanying consolidated balance sheets of FEI Company and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, comprehensive loss, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of FEI Company and subsidiaries as of
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
February 8, 2000
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, hereunto duly authorized.
FEI COMPANY
By: /s/ Vahe A. Sarkissian
-------------------------------
Vahe A. Sarkissian
President and
Chief Executive Officer
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the following capacities on March 29, 2000.
SIGNATURE TITLE
--------- -----
/s/ Lynwood W. Swanson
- ---------------------------------- Chairman of the Board and Director
Lynwood W. Swanson
/s/ Vahe A. Sarkissian
- ---------------------------------- President, Chief Executive Officer
Vahe A. Sarkissian and Director
(Principal Executive Officer
- ---------------------------------- Chief Operating Officer and Director
Nicholas P. Economou
/s/ Karel D. van der Mast
- ---------------------------------- Executive Vice President and
Karel D. van der Mast General Manager,
Microelectronics Product Division
53
<PAGE>
SIGNATURE TITLE
--------- -----
/s/ William P. Mooney
- ---------------------------------- Executive Vice President and Chief
William P. Mooney Financial Officer
(Principal Financial Officer)
/s/ Mark V. Allred
- ---------------------------------- Corporate Controller and Assistant
Mark V. Allred Treasurer
(Principal Accounting Officer)
- ---------------------------------- Director
Michael J. Attardo
/s/ William E. Curran
- ---------------------------------- Director
William E. Curran
- ---------------------------------- Director
Eric Goeld
/s/ William W. Lattin
- ---------------------------------- Director
William W. Lattin
/s/ Jan C. Lobbezoo
- ---------------------------------- Director
Jan C. Lobbezoo
/s/ Donald R. VanLuvanee
- ---------------------------------- Director
Donald R. VanLuvanee
54
<PAGE>
EXHIBIT 10.12
CREDIT FACILITY AGREEMENT
THIS AGREEMENT is made this February 25, 1999
between:
1. FEI COMPANY, having its registered seat at 7451 N.W. Evergreen Parkway,
Hillsboro, Oregon, United States of America, 97124-5830,
2. PHILIPS ELECTRON OPTICS INTERNATIONAL B.V., having its registered seat at
Achtse Weg Noord 5, 5651 GG, Eindhoven, the Netherlands,
(the "Borrowers")
and
3. KONINKLIJKE PHILIPS ELECTRONICS N.V., having its registered seat at
Groenewoudseweg 1, 5621 BA Eindhoven, the Netherlands (Lender")
WHEREAS
The Borrowers desire to obtain from the Lender and the Lender has agreed to
grant to the Borrowers, a credit facility of 50 million US-Dollars (or its
equivalent from time to time in Optional Currencies).
NOW, THEREFORE, IT IS AGREED AS FOLLOWS:
1. DEFINITIONS
Words and expressions used in this Agreement shall have the following meaning
unless the context otherwise requires:
"AGREEMENT" means the present agreement entered into by the Borrowers and the
Lender, including the Schedule attached thereto, and any amendment thereto;
"AVAILABLE FACILITY" means the Facility minus the Outstanding Amounts;
"AVAILABLE REVOLVING CREDIT FACILITY" means the Revolving Credit Facility minus
the Outstanding Amounts;
"BORROWERS" means either FEI or PEOI, or FEI and PEOI jointly;
"BUSINESS DAY" means a day on which banks are open for business of the nature
contemplated in this Agreement in Amsterdam and in the financial center of the
relevant currency (the relevant financial center for EUR is deemed to be
London);
<PAGE>
EXHIBIT 10.12
"CURRENT ACCOUNT" means the current account (also within the Philips
organization referred to as "Intercompany Bank Account" or "IBA") of PEOI
denominated in EUR with the Lender;
"DOLLAR AMOUNT" means in relation to a Revolving Advance: (i) if the request for
a Revolving Amount is denominated in US-Dollars, the amount specified in that
request; or (ii) if such request is denominated in an Optional Currency, the
US-Dollars equivalent (at the time the Lender receives such request) of the
amount specified in the request;
"DRAWDOWN DATE" means, in respect of a Revolving Advance, the date of the making
thereof as (deemed) specified in the relevant request;
"EUR" means the lawful currency of countries participating in the third stage of
the Economic and Monetary Union;
"EVENT OF DEFAULT" means any of the events set out in Clause 14 hereunder;
"FACILITY" means the US-Dollars credit facility set out in Clause 2.2 hereunder;
"FEI" means FEI Company;
"FEI GROUP" means FEI and its subsidiaries;
"FINAL MATURITY DATE" means the third anniversary of this Agreement (February
26, 2002);
"INTEREST DETERMINATION DATE" means, in respect of an Interest Period, the day
which is two Business Days prior to the first day of such Interest Period;
"INTEREST PAYMENT DATE" means, in relation to any Revolving Advance, the last
day of an Interest Period relative thereto;
"INTEREST PERIOD" means, in relation to any Revolving Advance, a period as
selected or deemed to have been selected by the Borrowers in accordance with
Clause 5.1 hereunder;
"JPY" means the lawful currency of Japan;
"LENDER" means Koninklijke Philips Electronics N.V.;
"NLG" means the lawful legal tender of the Netherlands;
"NOTICE" means a notice of drawdown of a Revolving Advance or a notice
requesting a next Interest Period substantially in the form as set out in
Schedule A hereto;
"MAXIMUM AMOUNT" means the maximum amount of the Facility as specified in Clause
2.1 hereunder and as may be amended in accordance with Clause 15.1 hereof;
<PAGE>
EXHIBIT 10.12
"OPTIONAL CURRENCIES" means Dutch Guilders (NLG), Euro (EUR) or Japanese Yen
(JPY);
"OUTSTANDING ACCOUNTS" the sum of all Revolving Advances outstanding, the debit
balance on the Current Account and the interest due
"PEOP" means Philips Electron Optics International BV;
"REQUIRED AMOUNT" means (i) in the case of US-Dollars drawn under the Revolving
Credit Facility, a minimum of 10,000 US-Dollars and a higher whole multiple of
US-Dollars 10,000, and (ii) in case of an Optional Currency, such amount as is
agreed between the Borrowers and the Lender, or failing agreement, the
equivalent of the Required Amounts relevant to the Revolving Credit Facility for
US-Dollars;
"REVOLVING ADVANCE" means any revolving advance made or to be made available by
the Lender to the Borrowers in any one currency in accordance with the
provisions of this Agreement and for the time being outstanding under the
Revolving Credit Facility,
"REVOLVING CREDIT FACILITY" means the credit facility as specified in Clause 2.2
hereof;
"TERM" means in relation to a Revolving Advance, the period for which it is to
be borrowed, being one, three or six months, ending not later than the Final
Maturity Date;
"US-DOLLAR" AND "USD" mean the lawful currency of the United States of America.
2. THE FACILITY
2.1 AMOUNT
The Lender grants to the Borrowers a total credit facility of 50 million
US-Dollars (or its equivalent from time to time in Optional Currencies). This
amount may be reduced by FEI in accordance with Clause 15 hereof (partial
cancellation).
2.2 REVOLVING CREDIT FACILITY AND CURRENT ACCOUNT
The Facility consists of a revolving credit facility for the Maximum Amount (or
its equivalent from time to time in Optional Currencies) (the "Revolving Credit
Facility") including a credit facility on the Current Account for the maximum of
10 million US-Dollars. If there is a debit balance on the Current Account, the
Available Revolving Credit Facility will be reduced accordingly. The Outstanding
Amounts will at no time exceed the Maximum Amount.
PEOI has entered into an agreement with the Lender specifying the terms and
conditions applicable to the Current Account.
<PAGE>
EXHIBIT 10.12
2.3 PROCEEDS
The proceeds of the Facility will be used for general corporate business
purposes of the FEI Group only and not for the purpose of acquisitions or
take-overs.
2.4 COMMITMENT FEE
FEI will pay to Lender a commitment fee of 0.25 per cent (25 basis points) per
annum. from day to day during the period starting February 25, 1999 and ending
on the Final Maturity Date on the amount to be calculated as follows: the
Maximum Facility minus US-Dollars 10 million minus the sum of the Revolving
Advances outstanding. If the aggregate of the Revolving Advances outstanding
exceeds or equals the Maximum Amount minus 10 million US-Dollars, no commitment
fee has to be paid. The commitment fee will be paid to the bank account of the
Lender at the end of each period of six (6) months, for the first time in July
1999 (so the first commitment fee will be paid over a period of six months less
55 days) within 5 Business Days upon the written request of the Lender. Such
request will contain a specification of the fee to be paid.
3. CONDITIONS PRECEDENT
The several obligations of the Lender under this Facility shall be expressly
subject to the Lender having received, in form and substance satisfactory to the
Lender, not later than the date set out in Clause 4.1 on which the Borrower
gives a Notice for the drawdown hereunder, evidence of authority of those
persons authorized to execute, deliver and perform this Agreement and any
notices required hereunder on behalf of the Borrowers.
4. DRAWDOWN OF REVOLVING ADVANCES
4.1 NOTICE
Revolving Advances will be made by the Lender to FEI or PEOI at the request of
the Borrowers (or any one of them), if the following additional conditions are
fulfilled:
I. The Lender has received from the relevant Borrower not later than 10:00
a.m. (Amsterdam time) on the third Business Day before the Drawdown Date of
the Revolving Advance, a written notice specifying:
(a) the Drawdown Date of the Revolving Advance, which must be a Business
Day ultimately one month before the Final Maturity Date;
(b) its amount, which may not result in a breach of Clause 2.2 and so that
(i) its Dollar Amount must be equal to or less than the Available
Revolving Credit Facility and (ii) if its Dollar Amount is less than
the Available Revolving Credit Facility, the amount of that Revolving
Advance must be the Required Amount;
<PAGE>
EXHIBIT 10.12
(c) its currency (in US-Dollars or one of the Optional currencies);
(d) its Term, which must be in accordance with clause 4.2;
(e) the name of the borrower (either FEI or PEOI);
(f) details of the bank and account to which FEI wishes the proceeds of
that Revolving Advance to be made available.
II. All representations and warranties in this Agreement have been complied
with in all material respects as at the date of the request of the
Revolving Advance, and would be correct in all material respects if
repeated on the Drawdown Date of that Revolving Advance, by reference to
the circumstances then existing.
III. No Event of Default has occurred on or before the Drawdown Date of that
Revolving Advance and is continuing or will occur as a result of making
that Revolving Advance.
IV. The request is duly signed by an authorized person or persons as specified
in Schedule B hereto.
Borrowers shall notify the Lender in writing of any change in or withdrawal of
the authorization of any person mentioned on Schedule B, notwithstanding their
entry in public registers, in default of which notification such change or
withdrawal cannot be invoked against the Lender.
4.2 TERM
The Term of a Revolving Advance shall begin on the Drawdown Date of that
Revolving Advance and shall have a duration of one, three or six months, or a
period of less than six months ending on the Final Maturity Date, as selected by
the relevant Borrower in the notice requesting that Revolving Advance, except
that the Borrowers may not select a Term ending after the Final Maturity Date.
4.3 SUBSTITUTION OF BALANCE ON CURRENT ACCOUNT INTO REVOLVING ADVANCE
Revolving Advances will be deemed requested by PEOI and deemed made by the
Lender to PEOI if the debit balance on the Current Account is exceeding the
equivalent of US-Dollars 10 million for more than 5 consecutive Business Days
under the following conditions:
I.
(a) the Drawdown Date of the Revolving Advance, being a Business Day
before the Final Maturity Date, is the day on which the balance on the
Current Account is exceeding the equivalent of US-Dollars 10 million
for 5 consecutive Business Days (the "Overdrawn Date");
<PAGE>
EXHIBIT 10.12
(b) the amount of such Revolving Advance will be a minimum of EUR 10,000,
or such higher whole multiple of EUR 10,000 that the amount of the
Revolving Advance will not exceed the debit balance on the Current
Account on the Overdrawn Date minus the equivalent of US-Dollars 10
million,
(c) its Term will be one month; provided that such Revolving Advance does
not result in a breach of Clause 2.2;
II. All representations and warranties in this Agreement have been complied
with in all material respects as at the date of the request of the
Revolving Advance, and would be correct in all material respects if
repeated on the Drawdown Date of that Revolving Advance, by reference to
the circumstances then existing.
III. No Event of Default has occurred on or before the Drawdown Date of that
Revolving Advance and is continuing or will occur as a result of making
that Revolving Advance.
If a Revolving Advance is made in accordance with this Clause, the Current
Account will be credited on the Overdrawn Date for the amount of such Revolving
Advance deemed made.
5. INTEREST
5.1 INTEREST PERIODS REVOLVING ADVANCES
Each Revolving Advance shall bear interest calculated by reference to the
successive Term of that Revolving Advance.
FEI shall notify its selection as to the duration of each Interest Period, in
the Notice relative to the Revolving Advance (in case of the first Interest
period of the Revolving Advance) and subsequently by Notice in writing to the
Lender to be received by it not later than 10:00 am. (Amsterdam time) on the
third Business Day prior to the first day of each subsequent Interest Period,
provided that if FEI fails to give notice of its selection in relation to the
duration of an Interest Period, such duration shall be of one month and further
provided that:
(a) the first Interest Period in respect of each Revolving Advance shall
commence on the Drawdown Date referred to in Clause 4.1 sub I and shall end
upon the expiry of the period selected or otherwise determined in
accordance with this sub-Clause;
(b) each subsequent Interest Period shall commence on the last day of the
preceding Interest Period,
(c) if any Interest Period would otherwise end on a day which is not a Business
Day, that Interest Period shall be extended to the next succeeding Business
Day, unless such succeeding Business Day falls in another calendar month
in which event that Interest Period shall end upon the immediately
preceding Business Day;
<PAGE>
EXHIBIT 10.12
(d) if an Interest Period is extended or shortened by application of the
preceding paragraph, the following Interest Period shall end on the day on
which it would have ended if the preceding Interest Period had not been so
extended or shortened;
(e) any Interest Period which commences on a day of a calendar month (whether
the last day or another day) for which there is no numerically
corresponding day in the month in which the relevant Interest Period should
end shall, subject to paragraph (_), end on the last Business Day of such
month; and
(f) no Interest Period shall extend beyond the Final Maturity Date.
5.2 INTEREST REVOLVING ADVANCES
The rate of interest applicable to each Revolving Advance for each Interest
Period relative thereto shall be the aggregate of the rate per annum which
appears on the Interest Determination Date in London on the relevant page of the
Telerate Service designated for the display of London Interbank Offered Rate for
that Term in the currency in which the Revolving Advance to which that Term
relates is to be denominated plus 0.75% (75 basis points).
Interest in relation to a Revolving Advance shall be payable on each Interest
Payment Date relative thereto.
Interest shall accrue from day to day and shall be computed on the basis of a
year of 360 days.
5.3 INTEREST CURRENT ACCOUNT
The rate of debit interest applicable to the Current Account shall be the
aggregate of the rate per annum. which appears on the relevant page of the
Telerate Service designated for the display of London Interbank Offered Rate for
a period of one week in the currency in which the Current Account is
denominated plus 0.75% (75 basis points).
The rate of credit interest on a day to day basis applicable to the Current
Account shall be the "LIBID" rate for a period of one week in the currency in
which the Current Account is denominated (approximately London Interbank Offered
Rate minus 0.125% (12.5 basis points).
Interest in relation to the Current Account shall be automatically debited or
credited as the case may be from or to the Current Account at the end of each
month (a month in this respect win be a month as determined by the 'Philips
Concern Calendar', attached as Schedule F). On the request of the Borrowers, the
Lender will inform them timely of such periods not covered by Schedule F. The
Lender will give a specification of the interest (to be) paid.
Interest shall accrue from day to day and shall be computed on the basis of a
year of 365 days.
<PAGE>
EXHIBIT 10.12
5.4 DETERMINATION OF INTEREST
Each determination of the rate of interest by the Lender hereunder shall be in
writing and shall in the absence of manifest error be conclusive and binding
upon the Borrowers.
5.5 DEFAULT INTEREST
The rate of interest on a day to day basis applicable to a Revolving Advance not
paid when (declared) due hereunder shall be the aggregate of the interest rate
applicable to such Revolving Advance plus one percent (100 basis points).
The rate of interest on a day to day basis applicable to any other amount not
paid when (declared) due hereunder shall be the aggregate of the interest rate
specified in Clause 5.3 plus one percent (100 basis points).
6. REPAYMENT
6.1 NORMAL REPAYMENT
The Facility shall be repaid in the respective currencies of the Revolving
Advances in full on the Final Maturity Date, unless it is prepaid earlier in
accordance with the provisions of this Agreement.
6.2 PREPAYMENT
(a) The Borrowers may prepay any part of all of the outstanding Revolving
Advances in the several currencies at any one time, without premium or
penalty at any time, if they give to the Lender not less than 5 Business
Days written notice of the Revolving Advance(s) to be prepaid and the date
and amount of the prepayment. Any such prepayment must be accompanied by
accrued interest on the amount prepaid and by any other sum then due
pursuant to this Agreement.
(b) Any notice of intention to make a prepayment shall be irrevocable and shall
oblige the Borrowers to make such prepayment on the relevant Interest
Prepayment Date.
(c) As the Credit Facility is revolving, any amount prepaid before the Final
Termination Date will remain available for reborrowing on the terms and
conditions of this Agreement.
7. PAYMENTS
All payments to be made hereunder by the Borrowers or the Lender shall be. made
in the relevant currency to the relevant account on the date upon which the
RELEVANT PAYMENT is due by credit to the account numbers as specified in
Schedule C HERETO, OR, as the case may be, such other accounts and/or banks as
the parties may from time to time agree upon.
<PAGE>
EXHIBIT 10.12
8. TAXES
Subject as hereinafter provided, all payments to be made by the Borrowers
hereunder (whether of principal, interest or otherwise) shall be made FREE AND
clear of and without any deductions or withholdings whatsoever, save and to the
extent required by applicable law.
If the Borrowers are compelled by law to make any such deduction or withholding,
they shall ENSURE THAT such deduction or withholding does not exceed the minimum
liability therefor and shall promptly pay to the Lender such additional amount
as is necessary to ensure that the net amount received and retained by the
Lender is equal to the amount payable by the Borrowers had there been no
deduction or withholding.
9. ILLEGALITY
Notwithstanding any other provision herein, if any change in law, regulation or
treaty or in the official interpretation or application thereof by any competent
authority or any competent court shall make it unlawful for the Lender to make
or to fund or continue to fund a Revolving Advance or part THEREOF, THEN the
Lender shall be entitled by written notice thereof to the Borrowers, to declare
that its participation in the relevant Revolving Advance shall be terminated
forthwith or upon expiry of any legally admissible delay, whereupon the
Borrowers shall prepay such Revolving Advance TOGETHER WITH accrued interest
thereon, whereupon the Facility shall be reduced to the then outstanding
Revolving Advances.
Notwithstanding the provisions of the Dutch law in this respect, the Lender will
make its best efforts in the occurrence of any of the events mentioned in this
Clause 9 to secure, in agreement with the Borrowers, a satisfactory solution
which would make the reduction of the Facility unnecessary.
10. REPRESENTATIONS AND WARRANTIES
The Borrowers hereby REPRESENT AND warrant to and for the benefit of the Lender
that:
10.1 FEI is a legal entity duly incorporated in the State of Oregon and validly
organized under the laws of the State of Oregon and has the corporate power
to carry on its business as it is now being conducted;
10.2 PECII is a limited liability body duly incorporated in the Netherlands and
validly existing under the laws of the Netherlands and has the corporate
power to carry on its business as it is now being conducted;
<PAGE>
EXHIBIT 10.12
10.3 each of the Borrowers has the corporate power and authority to enter into
and perform its obligations under this Agreement and has taken all
necessary action to authorize the making of the drawdown upon the terms and
conditions of this Agreement and to authorize the execution and performance
of this Agreement in accordance with its respective terms;
10.4 this Agreement constitutes legal, valid and binding obligations of the
Borrowers fully enforceable against them in accordance with its respective
terms and the terms thereof have been (or will be where applicable)
complied with by the Borrowers in all material respects, the same will
constitute legal, valid and binding obligations of the Borrowers
enforceable in accordance with its terms subject to the laws of bankruptcy
and other laws affecting the rights of creditors generally,
10.5 the execution, delivery and performance by the Borrowers of this Agreement
do not and will not violate in any respect any provision of the articles of
incorporation of FEI and/or PEOI;
10.6 no litigation, arbitration or administrative proceedings are at present
current or pending or, to the knowledge of the Borrowers, threatened which
would have a material adverse effect on their ability to perform and comply
with their respective obligations under this Agreement;
10.7 no Event of Default and no other event which, with the giving of notice or
lapse of time or both, might constitute an Event of Default has occurred
and is continuing.
11. DEFINITIONS WITH RESPECT TO FINANCIAL RATIOS
The following expressions used in this Clause II and Clause 13 shall be
construed in accordance with US Generally Accepted Accounting Principles but so
that:
"INTEREST EXPENSE" in relation to any fiscal year of FEI Group, means the
consolidated interest expense under US Generally Accepted Accounting Principles
as shown or determined from the Financial Statements for such fiscal year, and
in relation to the 12 month period ending at the end of each quarter means the
consolidated interest expense under US Generally Accepted Accounting Principles
as shown or determined from the Financial Statements for such period.
"INCOME FROM OPERATIONS" in relation to any fiscal year of FEI Group, means
income (loss) Before Taxes plus or minus the sum of the amounts for such fiscal
year included in determining such income (loss) Before Taxes of (A) consolidated
interest expense, (B) amortization of intangibles arising from the merger of
PEOI with FEI and the acquisition of Micrion by FEI Group for that fiscal year
and (C) unusual and non-recurring items for that fiscal year including (a)
write-off of in-process research and development, (b) other non cash costs of
mergers and acquisitions activity relating to the merger of PEOI with FEI and
the acquisition of Micrion (c) restructuring and reorganization costs (d) other
non-recurring non-cash losses/gains and charges
<PAGE>
EXHIBIT 10.12
(e) extraordinary items (i) cumulative effects of a change in accounting
principles, all as determined in accordance with US Generally Accepted
Accounting Principles, and in relation to the 12 month period ending at the end
of each quarter, means income (loss) Before Taxes plus or minus the sum of the
amounts for the previous four quarters included in determining such income
(loss) Before Taxes of (A) consolidated interest expense, (B)
amortization of intangibles arising from the merger of PEOI with
FEI and the acquisition of Micrion by FEI Group for the previous
four quarters and (C) unusual and non-recurring for the previous
four quarters items including (a) write-off of in-process research
and development, (b) other non cash costs of mergers and
acquisitions activity relating to the merger of PEOI with FEI and
the acquisition of Micrion (c) restructuring and reorganization
costs (d) other non-recurring non-cash losses/gains and charges (e)
extraordinary items (ii) cumulative effects of a change in
accounting principles, all as determined in accordance with US
Generally Accepted Accounting Principles, all as shown in or
determined from the Financial Statements for the relevant period.
"STOCKHOLDERS' EQUITY" at any time means the aggregate (expressed in US-Dollars)
at such time of the total shareholders' equity as shown in or determined by the
Financial Statements for the relevant period.
"TOTAL CAPITALIZATION" at anytime means the aggregate at such time of Total
Debt and Stockholders' Equity as shown in or determined by the Financial
Statements for the relevant period.
"TOTAL DEBT" at any time means the aggregate (expressed in US-Dollars) of (i)
all long term liabilities expressed as being due after one or more years from
the relevant balance sheet date, excluding for this purpose all such liabilities
classified as "other liabilities (non-interest-bearing)" or "deferred income
taxes" plus (ii) all current liabilities but excluding for this purpose all such
liabilities classified as "non-interest-bearing debt"; all as shown in or
determined from the Financial Statements for the relevant period.
"AUDITORS' CERTIFICATE" means a certificate by the auditors of FEI as to the
amount of Interest Expense, Income from Operations, Stockholders' Equity, and
Total Debt at any date and shall be final and conclusive except for manifest
error.
"FINANCIAL STATEMENTS" mean the annual audited consolidated financial statements
of FEI Group or the quarterly unaudited consolidated financial statements of FEI
Group as filed at the SEC (form "10 Q" or "10K"), all expressed in US-Dollars
and prepared in accordance with US Generally Accepted Accounting Principles.
<PAGE>
EXHIBIT 10.12
12. COVENANTS
12.1 FEI hereby covenants and agrees, so long as any amounts remain outstanding
hereunder or, in the event that there are no such amounts outstanding, so
long as this Agreement remains in effect that:
(a) as soon as available but not later than 50 days after the end of each
quarter (beginning with the current one) and with the exception of
each fourth quarter of the year, FEI will deliver to the Lender the
Financial Statements as at the end of and for that quarter together
with copies of the related SEC report "10 Q";
(b) as soon as available but not later than 95 days after the end of each
fiscal year (beginning with the current one), FEI will deliver to the
Lender its Financial Statements (and one copy of its annual report) as
at the end of and for that financial year together with copies of the
related SEC reports "10 K" and the related auditors' report.
12.2 Borrowers hereby covenant and agree, so long as any amounts remain
outstanding hereunder or, in the event that there are no such amounts
outstanding, so long as this Agreement remains in effect that:
(a) each of the Borrowers shall duly perform and observe all its
obligations under this Agreement and promptly inform the Lender of any
circumstance having or which could have a material adverse effect on
its ability to perform its obligations hereunder,
(b) the Borrowers shall notify the Lender in writing of any Event of
Default and of the steps being taken to remedy such Event of Default
forthwith upon becoming aware of the occurrence thereof.
13. GUARANTEE AND OTHER CONDITIONS
The Borrowers acknowledge that the Lender has agreed to make the Facility
available to the Borrowers in reliance on the following guarantee and covenants:
13.1 the Borrowers hereby jointly and severally unconditionally and irrevocably
guarantee to the Lender due and punctual payment of the principal of and
interest on the Revolving Advances and the Current Account and all other
sums due under this Agreement when and as the same shall become due and
payable, whether a Revolving Advance is drawn by FEI or PEOI.
<PAGE>
EXHIBIT 10.12
13.2 FEI shall be subrogated to all rights of the Lender against PEOI in respect
of any amounts paid by FEI pursuant to the provisions of this guarantee,
provided, however, that FEI shall not be entitled to enforce or to receive
any payments arising out of, or based upon, such rights of subrogation.
until all the principal of and interest on the Revolving Advances and the
Current Account shall have been paid in full or duly provided for.
13.3 the Borrowers jointly and severally undertake that, so long as any sum
remains to be payable by it under this Agreement:
(a) their payment obligations under this Agreement rank and will at all times
rank at least equally and ratable in all respects (Pari passu) with all
their other unsecured and unsubordinated indebtedness for borrowed money
except for such indebtedness preferred only by mandatory provisions of law.
(b) they will not create or have outstanding any security for their
indebtedness for borrowed money on or over the Borrowers' assets except
for: (i) the securities listed in Schedule D hereto (ii) any security
existing on or over assets acquired by the Borrowers from a Subsidiary not
created in contemplation of or in connection with the acquisition of those
assets by the Borrowers, (iii) to the extent that any off-balance sheet
financing of itself constitutes security over any assets of the Borrowers,
that security over such assets, (iv) to the extent that any discounting,
factoring or other disposal of any book debts or receivables of themselves
constitutes security over such book debts or receivables, that security
over such book debts or receivables, (v) securities directly relating to
advance payments, received with a maximum of USD 3 million at any time,
(vi) any other security created or outstanding with the prior consent of
the Lender, (vii) any rights of set-off arising by operation of law only or
in the ordinary course of banking other than rights of set-off arising
pursuant to an agreement relating to indebtedness for borrowed money having
an initial maturity of more than 1 year entered into after the date of this
Agreement.
(c) FEI will with each set of the Financial Statements delivered under Clause
12 sub 1 deliver to the Lender an Auditors' Certificate confirming
compliance with Clause 13.4 as at the end of a fiscal year or a certificate
signed by the Chief Executive Officer or Chief Financial Officer of FEI
confirming compliance with Clause 13.4. Each such certificate will set out
in reasonable detail and in a form reasonably satisfactory to the Lender
the computations necessary to demonstrate such compliance. A draft of such
certificate is attached as Schedule E.
<PAGE>
EXHIBIT 10.12
13.4 The Borrowers will jointly and severally ensure that, based on the
Financial Statements and per the date to which they relate, as any sum
remains to be lent to or remains payable under this Agreement:
(a) the Stockholders' Equity will in the year 1999 not be less than
US-Dollars 92 million;
(b) the Stockholders' Equity will in the year 2000 and 2001 not be less
than US Dollars 100 million;
(c) the ratio of Stockholders Equity to Total Capitalization will be more
than 1 to 2;
(d) the ratio of Income from Operations to Interest Expense will not in
respect of any financial year of the FEI Group, or any 12 month period
ending on the last day of a quarter, be less than 4 for the first and
second quarter of 1999 and thereafter not less than 6.
If FEI Group acquires assets for an amount exceeding 25% of its
Stockholders' Equity according to its latest Financial Statements before
such acquisition, the Borrowers may request the Lender to adjust the
minimum ratios mentioned under 13.4 sub (d) to reflect such acquisition.
13.5 FEI will not dispose and will procure that none of its subsidiaries
(including PEO) will, except with the consent of the Lender (disregarding
disposals in the ordinary course of business and any sale, lease, transfer
or other disposal of any of its revenues or its assets on an arm's length
basis for fair market value and the payment of lawful dividends) sell,
lease, transfer, lend (other than the lending of cash to any of its
subsidiaries) or otherwise dispose of, by one or more transactions or
series of transactions (whether related or not), the whole or any material
part of its respective business, revenues or assets ("material" in this
context means a sale, lease, transfer, loan or disposal of any part of its
business, assets or revenues which, by itself (in the case of a single
transaction) or which aggregated (in the case of a number of related
transactions), is more than 10 percent of the revenues or assets of the FEI
Group taken as a whole or, in any case, the disposal of which (alone or so
aggregated) would have a material adverse effect on any Borrower's ability
to perform or comply with its obligations under this Agreement).
13.6 FEI will ensure that there is no material change in the nature of the
business of the FEI Group taken as a whole (whether by a single transaction
or a number of related or unrelated transactions, whether at one time or
over a period of time and whether by disposal, acquisition or otherwise)
which has or could have a material adverse effect on any Borrower's ability
to perform and comply with its obligations under this Agreement.
<PAGE>
EXHIBIT 10.12
14. EVENTS OF DEFAULT
The following are Events of Default:
(a) Non-payment: The Borrowers do not pay in the manner provided in this
Agreement (i) any principal payable under it when due, unless the Borrowers
satisfy the Lender that non-payment is due solely to administrative error
(whether by the Borrowers or a bank involved in transferring funds to the
Lender) and payment is made within 5 Business Days after written notice of
that non-payment has been given to it by the Lender or (ii) any other sum
payable under it within 10 Business Days after written notice of that
non-payment has been given to it by the Lender.
(b) Breach of Representation or Warranty: Any representation or warranty by the
Borrowers pursuant to Clause 10 is not complied with in any material
respect or is or proves to have been incorrect, in any material respect,
when made.
(c) Breach of Other Obligation: The Borrowers do not perform or comply in any
material respect with any one or more of their other obligations under this
Agreement and, if that default is capable of remedy, it is not remedied
within 30 days after written notice of that default has been given to it by
the Lender.
(d) Cross Default: Any other indebtedness of the Borrowers in respect of
borrowed money and forming part of its Total Debt (i) is payable (whether
automatically under the provisions of any agreement relating to that
indebtedness or as a result of any declaration or the Eke made under any
such agreement) before its normal maturity by reason of any actual default
or event of default, however described, and is not paid on becoming so
payable or within any applicable grace period unless it is being contested
in good faith by appropriate means or (ii) is not paid by reason of the
actual default of the Borrowers when due nor within any applicable grace
period in any agreement relating to that indebtedness unless it is being
contested in good faith by appropriate means, except in any such case where
the Borrowers is prevented, directly or indirectly, by any government or
other authority from fulfilling the relevant obligation. However, no Event
of Default will occur under this Clause 14 (d) unless the amount of the
indebtedness for borrowed money in respect of which any event mentioned in
this Clause 14 (d) has occurred equals or exceeds US-Dollars 5 million or
its equivalent in other currencies (as reasonably determined by the
Lender).
<PAGE>
EXHIBIT 10.12
(e) INSOLVENCY: FEI or PEOI is (or is deemed by law or a court to be) insolvent
(including a faillissement (within the meaning of the Netherlands'
bankruptcy act) or unable to pay its debts or one of the Borrowers stops,
suspends or threatens to stop or suspend payment of all or a material part
of its indebtedness (including a surse'ance van betaling, within the
meaning of the Netherlands' bankruptcy act), begins negotiations or takes
any other step with a view to the deferral, rescheduling or other
readjustment of all of its indebtedness (or of any material part which it
will or might otherwise be unable to pay when due), proposes or makes a
general assignment or an arrangement or composition with or for the benefit
of the relevant creditors or a moratorium is agreed or declared in respect
of or affecting all or a material part of the indebtedness of the
Borrowers.
(f) WINDING-UP: An order is made or an effective resolution is passed for the
winding-up of one of the Borrowers.
(g) ANALOGOUS EVENTS: Any event occurs which, under the law of any relevant
jurisdiction, has an analogous or equivalent effect to any event mentioned
in Clause 14 (e).
(h) CHANGE OF CONTROL: The Lender has given written notice to FEI that it
ceases to own directly or indirectly more than 50 per cent of the issued
equity share capital of FEI. However, no Event of Default will occur under
this clause 14 (h) unless 120 days have elapsed since the Lender ceased to
own directly or indirectly more than 50 per cent of the issued equity share
capital of FEI, or since the relevant written notice, whichever is latest.
(i) CHANGE IN RELATIONSHIP BORROWERS: FEI ceases to own directly or indirectly
100 per cent of the issued equity share capital of PEOI, unless such
reduction is approved beforehand in writing by the Lender.
If at any time and for any reason (and whether within or beyond the control of
any party to this Agreement) any Event of Default has occurred then at any time
thereafter, the Lender shall by written notice to the Borrowers declare all
Outstanding Amounts, all unpaid accrued interest or fees and any other sum then
payable under this Agreement to be immediately due and payable, whereupon they
shall become so due and payable, unless the event which constitutes the Event of
Default is remedied before the Lender has sent the aforementioned notice and the
Lender is informed of such remedy by the Borrowers in writing before the Lender
sent such notice.
<PAGE>
EXHIBIT 10.12
However, if the Event of Default as referred to under Clause 14 (e) or 14 (g) is
capable of being cured, the Outstanding Amounts, all unpaid accrued interest or
fees and any other sum then payable under this Agreement, shall become due and
payable 5 days after the notice to declare all such amounts due and payable has
been sent by the Lender, unless the Lender explicitly mentions a different
period in such notice, and unless FEI Group did not meet the ratios mentioned in
Clause 13.4, based on latest monthly management report as FEI submits to the
Lender each month, in which case all amounts outstanding as referred to win
become due and payable immediately. If an Event of Default as referred to under
Clause 14 (e) or 14 (g) has
occurred, no Revolving Advances or draw downs form the Current Account will be
possible till such Event of Default is cured, unless approved by the Lender
beforehand.
At any time after such occurrence the Lender may, by notice in writing to the
Borrowers, declare that the Facility is cancelled and that all amounts
outstanding thereunder, if any, are immediately due and payable, together with
interest thereon and any other costs, charges and expenses. Such declaration
shall be effective forthwith.
The Borrowers jointly and severally under-take to indemnify the Lender against
any reasonable direct loss or expenses which any of them may sustain or incur as
a consequence of the occurrence of any Event of Default hereunder.
15. CANCELLATION BY BORROWERS
15.1 NOTICE OF CANCELLATION
FEI may declare on behalf of the Borrowers in writing that the Facility is
cancelled in full or in part. If the Facility is cancelled in part, such
notice shall state the new Maximum Amount (in US-Dollars). The cancellation
will be effective on the date mentioned in the notice ("Cancellation
date"). The Cancellation Date should be at least five (5) Business Days
after receipt by the Lender of such notice.
15.2 PARTIAL CANCELLATION
A partial cancellation will only become effective if on the Cancellation
Date the Outstanding Amounts are less than the proposed amended Maximum
Amount.
15.3 CANCELLATION IS IRREVOCABLE
Any cancellation in accordance with this article 15 will be irrevocable.
Any reduction of the Maximum Amount made in accordance with this Clause 15,
will not be available for reborrowing.
<PAGE>
EXHIBIT 10.12
16 MISCELLANEOUS
16.1 Expenses
The Borrowers and the Lender will pay their own costs and expenses (including
taxes thereon and legal fees) incurred in connection with the preparation,
negotiation or entry into this Agreement and/or any amendment of, supplement to
or waiver in respect of this Agreement.
Where any repayment of principal by the Borrowers is made on a day which is not
an Interest Payment Date, the Borrowers shall pay all such amounts as shall be
necessary to compensate the Lender for any direct loss or expenses incurred by
it for the remainder (if any) of the then current Interest Period(s) as a result
of such prepayment unless such prepayment is made in compliance with Clause 6.2
sub (a) and the certificate of the Lender as to such amounts shall be conclusive
and binding on the Borrowers save for manifest error.
16.2 LAW AND JURISDICTION
This Agreement shall be governed by and construed in all respects in accordance
with the laws of The Netherlands. The Borrowers hereby irrevocably submit, in
respect of any suit, action or proceeding arising out of this Agreement, to the
non-exclusive jurisdiction of the Courts of the Netherlands.
16.3 REMEDIES AND OTHER WAIVERS
Save as otherwise provided in this Agreement no failure to exercise nor any
delay in exercising on the part of any Lender any right, power or privilege
hereunder shall operate as a waiver thereof nor shall any single or partial
exercise of any right, power or privilege preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided are cumulative and not exclusive of any rights or
remedies provided by law.
16.4 ENTIRE AGREEMENT AND SCHEDULES
This Agreement constitutes the entire Agreement between the parties with respect
to the subject matter hereof as of the date of this Agreement and supersedes all
prior agreements, negotiations, representations and proposals whether written or
oral with respect to the credit facility contemplated herein. The Appendices to
this Agreement are incorporated in full in this Agreement and form part thereof.
<PAGE>
EXHIBIT 10.12
16.5 COMMUNICATIONS
All notices (including Notices), requests, demands or other communications to or
upon the parties hereto shall be in writing and deemed to have been duly given
or made when delivered (in the case of personal delivery or letter) and when
dispatched to the party to which the same is required or permitted to be Oven
under this Agreement, addressed as follows:
<TABLE>
<S> <C>
IF TO THE LENDER:
Koninklijke Philips Electronics N.V. as well as to: Koninkfijke Philips Electronics N.V.
Corporate Treasury Department Corporate Treasury Department
Attn: Mr. Jan Maarten Ingen Housz Attn: Mrs Laura Munisteri
Building HRT-28 Building HRT-28
Rembrandt Tower, Amstelplein 1 Rembrandt Tower, Amstelplein 1
P.O. Box 77900 P.O. Box 77900
1070 MX Amsterdam 1070 MX Amsterdam
The Netherlands The Netherlands
Tel: 3120 59 77 350 Tel: 3120 59 77 363
Fax: 3120 59 77 357 Fax: 3120 59 77 370
IF TO THE BORROWERS:
FEI Company as well as to: FEI Company
Attn: Mr. Mark V. Allred Attn: Mr. Derek Garrett
7451 N.W. Evergreen Parkway, 7451 N.W. Evergreen Parkway,
Hillsboro, Oregon, 97124-5830, Hillsboro, Oregon, 97124-5830,
United States of America United States of America
Tel: 1503 844 2666 Tel: 1503 844 2699
Fax: 1503 726 2720 Fax: 1503 726 2720
As well as to:
Philips Electron Optics International B.V. and Philips Electron Optics International B.V.
Attn: Mr. Michel G. van Woesik Attn: Mr. Nico. H.W. Vrijenhoek
Achtseweg Noord 5 Achtseweg Noord 5
P.O. Box 218 P.O. Box 218
5600 NID Eindhoven 5600INID Eindhoven
The Netherlands The Netherlands
Tel: 3140 276 63 47 Tel: 3140 276 60 34
Fax: 3140 276 6164 Fax: 3140 276 6164
Building AAE Philips Electron Optics International B.V.
</TABLE>
17. NOVATION
17.1 This Agreement shall benefit and bind the parties, their assignees and
their respective successors. Any reference in this Agreement to any party
shall be construed accordingly.
<PAGE>
EXHIBIT 10.12
17.2 The Borrowers may not novate or assign its rights or obligations under this
Agreement without the prior written approval of the Lender.
17.2 The Lender may novate or assign its rights or obligations under this
Agreement to a group company of the Lender (in the sense of article 2:24b
of the Dutch Civil Code), unless such novation or assignment will have any
adverse effects with respect to (one of) the Borrowers. In the event of an
allowed novation or assignment the Borrowers will co-operate to effect such
novation or assignment.
<PAGE>
EXHIBIT 10.12
IN WITNESS WHEREOF the parties hereto have executed this Agreement as per
February 17th, 1999.
FEI COMPANY
__________________________________ ____________________________________
V. Sarkissian Mr. Mark V. Allred
Title: Chief Executive Officer Title: Corporate Controller
Date: Date:
PHILIPS ELECTRON OPTICS INTERNATIONAL B.V.
__________________________________ ____________________________________
Mr. Nico H. W. Vrijenhoek Mr. Michel G. van Woesik
Title: General Manager Title: Treasurer
Date: Date:
KONINKLIJKE PHILIPS ELECTRONICS N.V.
__________________________________
Mr. J.M.L.M. Ingen Housz
Title: Director Philips Corporate Treasury
Date:
<PAGE>
EXHIBIT 10.14
CONFIDENTIAL
MASTER DIVESTMENT AGREEMENT
This master divestment agreement is made the 28th day of October, 1999
BY AND BETWEEN
FEI Company, having its registered office at 7451 NW Evergreen Parkway,
Hillsboro, Oregon, 97124-5830, USA ("FEI"), on the one hand,
and
Koninklijke Philips Electronics NV, having its registered office at
Groenewoudseweg 2, Eindhoven, The Netherlands, acting also to the benefit of its
worldwide subsidiaries ("Philips"), on the other hand.
WHEREAS in October 1996 Philips Electron Optics BV ("PEO") and Philips
Industrial Electronics International BV ("PIE") entered into a Heads of
Agreement for the future distribution by PIE of PEO's products; subsequently FEI
and Philips entered into various agreements on the basis of which (i) FEI
acquired certain electron optics business from Philips and (ii) ultimately
Philips Industrial Electronics International BV acquired the majority of shares
in FEI;
WHEREAS subsequently PIE changed its corporate name into Philips Business
Electronics International B.V. (PBE).
WHEREAS FEI acquired the sales and service activities in certain countries but
the parties agreed that in certain other countries, other companies within the
Philips group of companies ("Philips Group") would continue to act as
distributor for FEI's product range;
WHEREAS the parties hereto have now agreed to transfer all sales and service
activities carried on by the Philips Group at the date of this Agreement in all
remaining countries to FEI and terminate any and all Philips distributorships
and sell such sales and service activities as a going concern on the terms and
conditions set out in this Agreement.
NOW IT IS AGREED
ARTICLE 1
DEFINITIONS
In this Agreement the following expressions have the following meanings:
<PAGE>
2
1.01 "AGREED FORM": a document in a form agreed between the parties prior
to the entering into of this Agreement, the list of such documents
being set forth in Article 4.02;
1.02 "AGREEMENT": the contract made herein between the parties including
the Schedules and the Agreed Form documents;
1.03 "ASSETS": all assets and associated liabilities directly belonging to
the Business, including trade accounts receivable, Books, Fixed
Assets, Inventories, Contracts and Assigned IP;
1.04 "ASSIGNED IP": the technical information and commercial know-how which
is used at the date hereof in the Business and which, for the
avoidance of doubt, excludes any patents or patent applications and
trademarks but includes all customers' lists, vendor lists, telephone
numbers, technical know how, trade secrets, tradenames and copyrights
in relation to the Business together with the exclusive right for FEI
and any assignee to represent itself as carrying on the Business in
succession to Philips;
1.05 "BOOKS": the books, records, documents of title, Employee Records and
other documents which Philips uses exclusively in the Business as at
the date hereof;
1.06 "BUSINESS": the marketing, sale and servicing of FEI products, as
carried out at the date of this Agreement by various Local Philips
Companies on the basis of distribution agreements;
1.07 "CLOSING": the completion of the transactions contemplated hereunder,
as described in Article 4 on the respective Closing Dates;
1.08 "CLOSING ACCOUNTS" the accounts of the Business for the accounting
reference period beginning on April 4, 1999 and ending on the
respective Closing Date (comprising a NOC statement);
1.09 "CLOSING AMOUNT": the amount indicated in Article 3.02 to be paid by
FEI to Philips on the respective Closing Date, in accordance with
Article 4;
1.10 "CLOSING DATE": 5.00 p.m. on the date on which the respective Closing
takes place;
1.11 "CONSISTENTLY APPLIED" means the consistent application of Philips
Accounting Policies by the individual business organizations within
the Business in the national sales organizations ("NSO's"). Such
application shall be measured on the basis of the application of
Philips Accounting Policies by such individual business organizations
in their financial statements for the financial year 1998, as
consolidated in the audited financial statements of Koninklijke
Philips Electronics N.V. for the financial year 1998. Should any of
such individual business organizations have applied different methods
for the same item, but both such methods are acceptable under Philips
<PAGE>
3
Accounting Policies, then the only criterion for measuring whether or
not Philips Accounting Policies have been consistently applied shall
be whether each of the individual business organizations in question
has applied those accounting policies consistently with those used in
its own financial figures which were consolidated in the Annual Report
1998 of Philips.
1.12 "CONTRACTS": all contracts (except employment agreements) to which a
Local Philips Company is a party relating solely to the Business;
1.13 "COUNTRY AGREEMENT": the respective contract to be entered into prior
to the Closing Date for the agreed upon transfer of the Local
Activities from the Local Philips Company to the Local FEI Company,
substantially in the form set forth in Schedule 1.13;
1.14 "CREDITORS": amounts owed by the Philips Group as at Closing solely in
relation to the Business;
1.15 "DEBTORS": amounts owed to the Philips Group as at Closing solely in
relation to the Business;
1.16 "DISCLOSURE LETTER": the letter (together with any schedules thereto)
of even date making certain disclosures against the Warranties
addressed by Philips to FEI for the purposes of Article 13.02;
1.18 "EMPLOYEES": those persons employed in each of the Local Philips
Companies as per October 25, 1999 and listed on Schedule 1.18 who
devote at least 50% of their working hours to the Business;
1.19 "EMPLOYEE RECORDS": all records in respect of the Employees;
1.20 "FIXED ASSETS": all service tools, furniture and other equipment used
exclusively by the Philips Group for the purposes of the Business as
at Closing (as the same are listed at Schedule 1.20);
1.21 "IFO" income from operation, excluding interest, taxation and
extraordinary items as defined in the 1998 Annual Report of Philips;
1.22 "INVENTORIES": all inventories of materials and work-in-progress,
packaging, consumables, service parts and other stock-in-trade held by
the Philips Group for the purposes of the Business as at Closing;
1.23 "LIABILITIES": all liabilities solely relating to the Business
including the Contracts but excluding real property leases and any
tort liability arising from the actions of the Philips Group prior to
or after the Closing and any breach of contract claim arising out of
the actions of the Philips Group (unless due to the products purchased
from
<PAGE>
4
the FEI Group) or a third party claiming damages solely because
the Local Philips Company is selling the Business;
1.24 "LOCAL ACTIVITIES": the Assets, Business and Liabilities in a
particular country which are to be transferred by a Local Philips
Company to the respective Local FEI Company;
1.25 "LOCAL FEI COMPANY": a legal entity indicated by FEI in the respective
country to which all Local Activities are to be transferred (whether
it be a FEI subsidiary or a third party);
1.26 "LOCAL PHILIPS COMPANY": a (direct or indirect) subsidiary of Philips
which has entered into a distributor/agency agreement with FEI or a
subsidiary thereof, and which is to terminate such distributorship and
to transfer the Local Activities on the basis of this Agreement (a
list of countries is attached as Schedule 2.03);
1.27 "NOC" shall have the meaning in accordance with the definition as
mentioned in the 1998 Annual Report of Philips: (in)tangible fixed
assets, provisions, current assets (excluding cash and cash
equivalents), current liabilities (excluding deferred tax positions,
pension liabilities and interest bearing debt).
1.28 "PENSIONS SCHEDULE": the agreement relating to the pensions of those
Employees who are members of a Pension Scheme at Closing;
1.29 "PENSION SCHEME": a local Philips pension fund arrangement, if any,
for the benefit of Employees of the respective Philips entities.
1.30 "PHILIPS ACCOUNTING POLICIES" as set out in the Annual Report 1998 of
Philips, and as applied by the Local Philips Companies;
1.31 "PRINCIPAL CLOSING AMOUNT" means the amount to be paid for the
Businesses to be transferred on the Principal Closing Date;
1.32 "PRINCIPAL CLOSING DATE" means the date referenced in Article 4.01;
1.33 "PURCHASE PRICE": the total purchase price for the Business, being the
Principal Closing Amount and the Second Closing Amount, as may be
adjusted pursuant to Article 5.1;
1.34 "REFERENCE ACCOUNTS" the unaudited accounts of the Business for the
accounting reference period which ended on the April 4, 1999
(comprising a NOC statement), annexed hereto as Schedule 1.34;
1.35 "SECOND CLOSING AMOUNT" means the amount to be paid for the Businesses
to be transferred on the Second Closing Date;
<PAGE>
5
1.36 "SECOND CLOSING DATE" means November 26, 1999;
1.37 "SIGNING DATE": means the date on which this Agreement is signed.
1.38 "SITE AND OTHER SERVICES AGREEMENT": the agreement relating to the
provision of site and other services by a Local Philips Company to a
Local FEI Company;
1.39 "WARRANTIES": the warranties and representations contained in Schedule
1.39.
In this Agreement words importing the singular include the plural and vice versa
and words importing gender include any other gender.
The headings of Articles are for ease of reference and shall not affect the
construction of this Agreement.
References in this Agreement to Articles or Schedules are references to clauses
of or schedules to this Agreement. The Schedules form part of this Agreement and
shall have the same force and effect as if expressly set out in the body of this
Agreement.
ARTICLE 2
AGREEMENT FOR SALE AND TRANSFER
2.01 On the terms and subject to the conditions of this Agreement, Philips
hereby sells and FEI hereby purchases and assumes the Business as a
going concern and comprising the Assets and Liabilities.
2.02 Each acquisition of any Local Activity shall be made on substantially
the terms set out in the form of the model Country Agreement, subject
to such modifications and amendments as may be necessary in the case
of the respective countries, including any which may be necessary to
take account of any legal requirements in a country in which the
respective Business is conducted. Philips and FEI agree and warrant to
procure
2.02.1 (in the case of the Philips Group) that its respective Local
Philips Companies owning the respective Businesses will
comply with the respective Country Agreement and become a
signatory to such agreement prior to or on the respective
Closing Date;
2.02.2 (in the case of FEI) that its respective Local FEI Companies
or appointed third parties through which FEI will acquire
the respective Businesses will comply with the respective
Country Agreement and become a signatory to such agreement
prior to or on the respective Closing Date.
<PAGE>
6
2.03 The list of countries to be transferred on the Principal Closing Date
and the Second Closing Date respectively is attached hereto as
Schedule 2.03. The Local Philips Companies in these 27 countries will
abstain from distributing electron miscroscopes in their respective
territory for a period of three years as from the respective Closing
Date.
ARTICLE 3
PURCHASE PRICE
3.01 In consideration for the purchase of the Business, FEI shall pay to
Philips the Purchase Price.
3.02 On the Principal Closing Date , no payment shall take place and on the
Second Closing Date, FEI shall pay the sum of the Principal Closing
Amount (being EUR -142,000; minus one hundred and forty two thousand,
excluding VAT) and the Second Closing Amount (being EUR 1,764,000; one
million, seven hundred and sixty four thousand EURO's; excluding VAT;
totalling 1,622,000 EURO) to Philips by electronic funds transfer in
immediately available funds, to the credit of such account of Philips
with a Dutch clearing bank as Philips shall notify in writing to FEI
not less than five business days prior to each Closing. The allocation
of the Purchase Price to the respective Local Activities is defined in
Schedule 3.02.
ARTICLE 4
CLOSING AND COVENANTS TO CLOSING DATE
4.01 The parties undertake commercial best endeavours to sign all Country
Agreements by the end of business on October 28 and have the Principal
Closing occur by no later than October 31, 1999 and the Second Closing
by November 26, 1999. In case of a delay in a either South Africa or
Brasil, Philips will continue as FEI's distributor in these countries
through December 31, 1999. In case a Country Agreement for South
Africa or Brasil is not signed as per December 31, 1999, the
pertaining Local Activities will be terminated at the sole risk and
expense of FEI and the Business will be deemed transferred as from
December 31, 1999. In case of a delay in the other countries after the
agreed Closing Date, Philips will continue to act for the sole risk
and account of FEI, under sole managerial decision-making of FEI
appointed personnel; Philips will cause such Business to continue
operation in a normal, business like fashion in accordance with past
practice and will not cause or permit its Businesses to enter into any
transaction outside the ordinary course of business. However, in case
within five working days from November 26 next, in any country a
Closing can still take place, Philips will waive its rights as regards
acting for the sole risk and
<PAGE>
7
account of FEI and the Closing will take place (with retroactive
effect) as of November 26. In case a certain Country Agreement is not
signed as per December 31, 1999, the pertaining Local Activities will
be terminated at the sole risk and expense of FEI and the Business
will be deemed transferred as from the respective Closing Date.
4.02 On Closing, each party shall cause to be delivered to the other the
following documents in the Agreed Form (with changes agreed to by the
parties):
*all applicable signed Country Agreements (facsimile copies thereof).
*the list of Employees and if applicable, a Pensions Schedule
*such other documents as are material to the Business and necessary to
effect the transactions contemplated under this Agreement and each
Country Agreement.
4.03 Philips hereby agrees and declares that it will execute and deliver
and procure the execution and delivery of any other documents and take
any other steps as shall reasonably be required by FEI to vest the
Local Activities in FEI or the Local FEI Company and transfer the
Assigned IP. FEI hereby agrees and declares that it will execute and
deliver and procure the execution and delivery of any other documents
and take any other steps as shall reasonably be required by Philips to
vest the Local Activities in FEI or the Local FEI Company. If and to
the extent the Local Philips Company has provided its customers with a
prepayment/ bankguarantee, then the Local FEI Company shall undertake
to replace same by a similar prepayment/bankguarantee acceptable to
the customer, or, in case customer refuses, provide same as a
guarantee to the Local Philips Company.
4.04 This agreement becomes effective and binding upon the parties as from
the Signing Date. The Parties agree as follows with respect to the
period between the Signing Date and the respective Closing Date:
a. Each Party will file (and each Party will cause its Group Companies
to file) any notification and report forms and related material that
each Party or its Group Company may be required to file with any
governmental authority, will use its best commercial efforts to obtain
the expiration or early termination of the applicable waiting period
(or any extension thereof) for any required pre-acquisition or
pre-merger notice to such authority, and will make any further
filings, including the submission of any additional information or
documentary material, pursuant thereto that may be necessary.
b. Philips will cause its Businesses to continue operation in a
normal, business like fashion in accordance with past practice and
will not cause or permit its Businesses to enter into any transaction
outside the ordinary course of business.
ARTICLE 5
REFERENCE ACCOUNTS AND CLOSING ACCOUNTS
5.01 REFERENCE ACCOUNTS
<PAGE>
8
Philips has delivered to FEI the Reference Accounts of the Business as
of April 4, 1999, attached hereto as Schedule 1.32. The financial
statements referred in this Article 5.1 have been prepared by Philips.
Since the Business has not been accounted for separately within
Philips, FEI understands that these financial statements have required
allocations in which Philips utilized its reasonable judgement.
Philips represents that the Reference Accounts have been prepared in
accordance with the Philips Accounting Policies Consistently Applied.
5.02 CLOSING ACCOUNTS
Philips shall prepare the Closing Accounts using the Philips
Accounting Policies Consistently Applied. Such Closing Accounts shall
be delivered to FEI by Philips as soon as possible and in any event no
later than sixty (60) days after the respective Closing Date.
FEI shall be entitled to review the Closing Accounts in order to
establish that the agreed accounting policies (the Philips Accounting
Policies) have indeed been Consistently Applied.
In case of such audit, FEI shall provide a copy of its full report to
Philips within 60 days after receipt by FEI of the Closing Accounts.
Unless FEI within twenty (20) days after delivery of said report,
notifies Philips in writing that it disputes the Closing Accounts or
any portion thereof and specifies the basis for its dispute, the
Closing Accounts shall become final and binding on the parties for the
purpose of determining the corrective payment as referred to in
Article 5.3 hereof.
5.03 PROCEDURE FOR DISPUTE AND THE CLOSING ACCOUNTS
In the event FEI notifies Philips in accordance with Article 5.2, that
a dispute does exist in respect of the Closing Accounts and if FEI and
Philips are unable to resolve such dispute within thirty (30) business
days after any such notification has been given, the dispute shall be
submitted to a jointly appointed independent auditor, ("Arbitrator")
or in case of disagreement a request for the appointment shall be
submitted to the President of the Dutch Accounting Federation. Should
FEI notify Philips that a dispute does exist in respect of the Closing
Accounts, then Philips shall be entitled to bring into the dispute any
other items whether or not those items have been valued. A final
settlement shall fully take these positions into account in
determining the amount of the settlement or the award, as the case may
be. Philips and FEI shall provide full cooperation to the Arbitrator
and the Arbitrator shall be asked to make a final and binding
determination as to the matter or matters in dispute within sixty (60)
days after the dispute is presented to him (unless the Arbitrator and
both parties agree that a longer period is appropriate) after its
appointment. The Arbitrator shall use the Philips Accounting Policies,
Consistently Applied as the basis for its determination, unless same
have been explicitly deviated from in the main body of this Agreement.
<PAGE>
9
The Arbitrator shall confine himself only to unresolved adjustments.
The Arbitrator, in reaching a decision, shall provide a written
explanation of his conclusions to each Party, and his determination
shall be conclusive and binding upon the Parties. The Arbitrator will
allocate between claimant and defendant his fees and expenses.
5.04 CLOSING ACCOUNTS AND SETTLEMENT FOR THE PERIOD BETWEEN APRIL 4, 1999
AND CLOSING DATE
FEI shall be entitled to all of the Assets and shall assume all of the
Liabilities pertaining to each of the respective Business as of the
respective Closing Date. In addition, the Parties will settle the NOC;
the respective settlement shall be determined on the basis of the
Reference Accounts and the Closing Accounts as set forth hereinafter.
5.05 Once the respective Closing Accounts have been determined in
accordance with the above, any differences in the NOC resulting from a
comparison of the Reference Accounts and the respective Closing
Accounts will give rise to an adjustment, pursuant to which:
(i) Philips shall pay the difference to FEI in the event the NOC in
the Closing Accounts is lower than the NOC in the Reference Accounts,
such payment on an after tax basis only if Philips is obliged to pay
the related taxes and the payment is not tax deductible;
(ii) FEI shall pay the difference to Philips in the event the NOC in
the Closing Accounts is higher than the NOC in the Reference Accounts,
such payment on an after tax basis if Philips is obliged to pay the
related taxes and the payment is not tax deductible.
Any payment to be made hereunder is subject to an interest charge at
EURIBOR (3 months rate at Closing) + 2% calculated as from the Closing
Date until the day payment is actually received.
ARTICLE 6
CONTRACTS
6.01 As further consideration for the sale and purchase hereunder and
subject as hereinafter mentioned, FEI undertakes with Philips:
6.01.1 that it will with effect from the Closing Date carry out,
perform and complete all obligations and liabilities created
by or arising under the Contracts; and
6.01.2 that it will indemnify Philips and any other member of the
Philips Group fully at all times from and against any and
all actions,
<PAGE>
10
proceedings, costs, claims, demands, expenses and
liabilities which may be suffered or incurred by them as a
result of (a) any failure by FEI so to do, (b) any tort or
breach of contract claim due to the acts or omissions of the
Local FEI Company, including but not limited to any breach
of any representation, warranty or covenant set out herein.
And Philips undertakes with FEI:
6.01.3 that it will indemnify FEI and any other member of the FEI
Group fully at all times from and against any and all
actions, proceedings, costs, claims, demands, expenses and
liabilities which may be suffered or incurred by them as a
result of any tort or breach of contract claim due to
Philips or the Local Philips Company including but not
limited to any breach of any representation, warranty or
covenant set out herein.
6.02 If any claim shall be made by any third party (i) against Philips (or
a Philips Company) in respect of which Philips (for the purpose of
this Article deemed to include a Philips Company, as the case may be)
seeks to be indemnified under Article 6.01 or (ii) against FEI (or an
FEI Company) in respect of which FEI (for the purpose of this Article
deemed to include an FEI Company, as the case may be) seeks to be
indemnified under Article 6.01 (hereinafter the party seeking to be
indemnified being "the Indemnitee", and the party requested to
indemnify "the Indemnitor"), then the Indemnitee shall promptly inform
the Indemnitor and:
6.02.1 the Indemnitor shall have the right upon written notice to
the Indemnitee to have the conduct of all litigation or
other proceedings ("proceedings") in respect thereof and in
that connection the Indemnitee shall give or cause to be
given to the Indemnitor all such assistance as the
Indemnitor may reasonably require in disputing any such
claim and conducting proceedings and shall instruct such
solicitors or other professional advisers as the Indemnitor
may nominate (and to whom the Indemnitee shall have no
reasonable objection) to act on behalf of the Indemnitee but
in accordance with the instructions of the Indemnitor;
6.02.2 the Indemnitor shall keep the Indemnitee fully and promptly
informed of the conduct of any proceedings of which it has
conduct, shall consult the Indemnitee on any matter which is
or is likely to be material in relation thereto and shall
take account of all reasonable requirements of the
Indemnitee in relation thereto;
6.02.3 neither the Indemnitee (where the Indemnitee is responsible
for the conduct of any proceedings) nor the Indemnitor
(where such proceedings are delegated to it in accordance
with 6.02.1 above) shall
<PAGE>
11
make any settlement or compromise of the claim which is the
subject of proceedings nor agree to any matter in the
conduct of proceedings which may affect the amount of the
liability in connection with such claim without the prior
approval of the Indemnitor or, as the case may be, the
Indemnitee , such approval not to be unreasonably withheld
or delayed;
6.02.4 where the Indemnitor takes over the conduct of any
proceedings pursuant to the provisions of 6.02.1 above, the
Indemnitor shall indemnify and keep the Indemnitee
indemnified in respect of all liabilities and out-of-pocket
costs, charges and expenses properly incurred by the
Indemnitee as a consequence of such proceedings, save to the
extent that such costs, charges or expenses are recovered
from another party to the proceedings.
6.03 Insofar as the benefit or burden of any Contracts or the benefit of
any other Asset, or component of Liability cannot effectively be
assigned by Philips to FEI or assumed by FEI except by an agreement of
novation with the agreement or consent of any other party thereto or
of any third party and, even though the Local FEI Company has
requested the Local Philips Company to procure same, such novation,
agreement or consent shall not have taken place or have been obtained
prior to Closing (each be a "Nonassigned Right"):
6.03.1 Philips shall use all reasonable endeavours in assisting FEI
to procure that agreement or consent as aforesaid is
obtained, wherever FEI requests same;
6.03.2 unless and until the said Nonassigned Rights shall be
novated or assigned as aforesaid Philips shall:
6.03.2.1 hold the same in trust for FEI and FEI shall (if
sub-contracting is permissible and lawful under
the Contract(s) in question) perform all the
obligations of Philips thereunder as Philips'
sub-contractor; and
6.03.2.2 (so far as it lawfully may) give to FEI the
benefit and burden to the same extent as if the
same had been novated, act under the reasonable
direction of FEI and account to and be indemnified
by FEI accordingly;
6.03.3 if any of the Nonassigned Rights does not permit
sub-contracting the parties will make such other
arrangements between themselves as may be permissible to
implement as far as possible the effective transfer of the
benefits and obligations of such Nonassigned Right to FEI;
and
<PAGE>
12
6.03.4 unless and until the Nonassigned Rights shall be novated or
assigned Philips will (so far as it lawfully may) give all
reasonable assistance to FEI to enable FEI to enforce
Philips' rights thereunder.
6.04 As from the Closing Date, each party will afford the other and their
affiliates with all reasonable assistance in connection with the
administration of and collection of sums owing (subject to
reimbursement of all out-of-pocket expenses but otherwise free of
charge) to the other party. Provided, further, that the assisting
party shall give to the claiming party an accounting of all amounts
but in no event shall the assisting party assume any liability for any
outstanding obligation owed, except to the extent it does not comply
with the provisions of this section. This section will not be
construed as obligating the Local FEI Company to continue any Business
or Local Activity for any period subsequent to the Closing.
6.05 All notices, correspondence, information, orders or inquiries relating
to the Contracts or Business which are received by Philips or a Local
Philips Company on or after Closing shall (to the extent to which they
relate to the Business) promptly be passed to FEI or the respective
Local FEI Company.
6.06 For a short period and on conditions set forth in Schedule 6.06, the
Local FEI Companies (those remaining part of the FEI Group of
Companies) are authorized to continue using the Local Philips
Company's name and letterhead in order to execute a smooth and
efficient transition to the new company.
ARTICLE 7
EMPLOYEES
7.01 It is the intention of the parties that the Businesses are transferred
on a `going concern' basis and henceforth that the Employees are
transferred to the Local FEI Company by means of the Country
Agreements. If and to the extent such transfer can not take place by
means of executing a Country Agreement, FEI undertakes that it and/or
the Local FEI Company will timely offer all the Employees employment.
It is understood that said Employees shall no longer have resort under
any individual employment agreement and any Philips' Collective Labor
Agreements or similar agreements after the respective Closing Date,
unless agreed otherwise. Accordingly, the Local Philips Company's
rights, powers, duties, liabilities and obligations in respect of any
contract of employment with the Employees in force immediately before
Closing shall be automatically transferred to the Local FEI Company by
operation of law (wherever possible).
It is agreed that salary rights (including bonus, accrued vacation
rights, etc) accrued by the Employees until the Closing Date shall
automatically transfer to the Local FEI Company, unless and to the
extent same exceed the Local Philips Company's policies at Closing
<PAGE>
13
7.02 FEI shall be responsible for and shall at all times from the Closing
Date indemnify and hold Philips fully and effectively indemnified from
and against all costs, claims, demands, proceedings and expenses
incurred or suffered in connection with claims by all or any of the
Employees in respect of any period of employment from and after the
Closing Date or the termination of the employment of all or any of the
Employees by FEI or the Local FEI Company other than (a) as a result
of a tort, any negligent act or omission of Philips prior to Closing,
or (b) as set forth in Schedule 4.6 to a Country Agreement in case it
pertains to a `shared' Employee listed therein. Philips shall at all
times hereafter indemnify and hold FEI fully and effectively
indemnified from and against all costs, claims, demands, proceedings
and expenses incurred or suffered in connection with claims by all or
any of the Employees in respect of any period of employment up to the
Closing Date.
7.03 The parties anticipate that certain Local Companies will wish to
ensure the continuation of the services of (a) certain Philips
employees who will not be transferred and (b) certain Employees who
should continue to serve Philips Analytical.
In such cases, the Country Agreement will contain a consultancy or
local services agreement arranging for such continuation of service
provision to the other, which shall be substantially in the form as
the model attached hereto as Schedule 7.03.
ARTICLE 8
PENSIONS
8.01 Entitlements to pension benefits, termination benefits, severance
indemnities and retiree medical benefits as accrued with occupational
plans of Philips by the employees concerned up to the Closing Date are
as to their funding either funded with a company pension fund,
insured, book reserved plan or financed otherwise. Depending on the
funding made the following will apply:
A) FUNDING EFFECTUATED BY WAY OF A PENSION SCHEME:
With respect to the pensionable service of the employees concerned up
to the Closing Date the employees participating in the Philips'
Pension Scheme will become entitled to a deferred pension (also known
as a paid-up policy) in accordance with the rules and regulations of
the particular Pension Scheme. If requested by FEI, Philips will make
reasonable endeavours to have the liabilities (and associated assets)
transferred by such Pension Scheme to a funding vehicle to be
indicated by FEI, subject to the necessary approvals being obtained,
and in accordance with the rules and regulations of the relevant
Pension Scheme.
B) FUNDING EFFECTUATED BY WAY OF AN INSURANCE:
<PAGE>
14
In case the entitlements have been insured Philips will make
reasonable efforts, if requested by FEI, to have the liabilities
accrued up to the Closing Date transferred to a funding vehicle to be
indicated by FEI, subject to the necessary approvals being obtained
and in accordance with applicable legislation.
C) FUNDING EFFECTUATED BY WAY OF A BOOK RESERVE WITH PHILIPS:
In those cases where entitlements have been taken care of by way of a
book reserve Philips shall include a provision in the Reference
Accounts of the local Business which is equal to the actuarial present
value of rights accrued up to Closing Date as calculated by Philips
under the relevant local book reserve system.
D) FUNDING OTHERWISE:
If entitlements have not been funded according to A, B or C above, a
comparison will be made between the liability value of the rights as
accrued up to the Closing Date and the present value of the accrued
amounts included in the Reference Accounts; the difference between the
two will be taken into consideration as a price adjustment.
8.02 In principle the Parties hereto will undertake all reasonable
commercial endeavours to try to obtain the necessary approvals in
order to support a temporary continuation of the affiliation to the
plans as indicated under A and B (note: under C and D, is excluded),
subject to local (statutory and Pension Scheme) rules and regulations.
ARTICLE 9
INTELLECTUAL PROPERTY RIGHTS
9.01 All Assigned IP shall transfer at Closing. Except for Assigned IP, no
other intellectual property rights are transferred or licensed by
means of this Agreement.
ARTICLE 10
SITE AND OTHER SERVICES
10.01 A Local Philips Company may provide to the Local FEI Company such site
and other services, if any, in accordance with the provisions of the
respective Local Agreement.
ARTICLE 11
DISCONTINUATION OF DISTRIBUTORSHIPS
11.01 By signing a Country Agreement, each existing distribution or agency
agreement between the Local Philips Company and FEI or any of its
affiliates is terminated as from the respective Closing Date.
<PAGE>
15
ARTICLE 12
TAXATION
12.01 The Country Agreements will contain one of the clauses set forth below
(depending on whether they are located within or outside the European
Union):
{{FOR THE EU COUNTRIES:}}
Parties agree that the transaction as set forth herein in principle
qualifies as a totality of assets as mentioned in article 6 - 8 of the
Sixth Directive. This implies that in principle no VAT is due. If
however article 6-8 of the Sixth Directive is not applicable or the
tax authorities would at any moment judge that article 6-8 is not
applicable, Philips will be allowed to charge VAT to the Local FEI
Company, which will as then immediately be paid by the Local FEI
Company to Philips.
{{FOR THE NON EU COUNTRIES:}}
All prices are excluding any VAT, sales tax, import tax, customs duty
or any other kind of similar tax (hereinafter referred to as "Turnover
Tax").
If any payment to be made by Local FEI Company to Philips is
subject to a Turnover Tax, Philips will invoice this Turnover Tax to
Local FEI Company on the original invoice. If to the contrary any
invoice by Philips to Local FEI Company has been made in error without
any such Turnover Tax, Philips shall promptly notify Local FEI Company
of such event and may at any time issue a separate invoice for such
Turnover Tax which invoice shall be paid by Local FEI Company.
12.02 FEI will indemnify and hold harmless a Local Philips Company on an
after tax basis if and to the extent such Local Philips Company is
obliged by local tax authorities to make payments directly related to
FEI's transfer pricing practiced prior to the Closing Date.
ARTICLE 13
WARRANTIES
13.01 This Agreement has been entered into by FEI in reliance upon the
Warranties to the intent that each of the Warranties shall be
construed as a separate and independent Warranty so that FEI shall
have a separate claim and right of action in respect of every breach
of each Warranty.
13.02 No claim shall be made by FEI for breach of any of the Warranties or
other provisions of this Agreement if the fact, omission, circumstance
or occurrence giving rise to or forming the basis of the claim has
been fairly disclosed to FEI in the Disclosure Letter delivered at
least five days prior to Closing (but updated by Philips prior to
Closing) or was otherwise known prior to the date hereof.
<PAGE>
16
13.03 No claim shall be made by FEI for breach: (i) of the covenants in
Section 5.02 that the Closing Accounts will be prepared in accordance
with Philips Accounting Policies Consistently Applied (the "NOC
Financial Covenant"), unless such claim is in repsect of one single
matter and it is for an amount in excess of 5% of the asset component
of the applicable NOC for the Local Activity transferred and (ii) of
any of the other Warranties or other provisions of this Agreement
unless such claim is in respect of one single matter and it is for an
amount in excess of EUR 25,000.
13.04 No claim shall be made by FEI for breach of any of the Warranties or
other provisions of this Agreement unless the aggregate loss or damage
(in respect of one or more matters) exceeds EUR 125,000 in which event
a claim in respect of the excess over EUR 25,000 may be made;
provided, however that this limitation shall not apply to breaches of
the NOC Financial Covenant.
13.05 The liability of Philips in respect of the aggregate of all the claims
made by FEI for breach of any of the Warranties or other provisions of
this Agreement shall not exceed the Purchase Price.
13.06 No claim may be brought by FEI for breach of any of the Warranties or
other provisions of this Agreement unless written notice thereof shall
have been given to Philips accompanied by reasonable particulars of
the claim including the amount of the claim within 15 months of the
Principal Closing Date.
13.07 No claim shall be made by FEI for breach of any of the Warranties or
other provisions of this Agreement in respect of any matter to the
extent that the subject matter of the claim shall be tax deductible,
and/or can be recovered in whole or in part by FEI under a policy of
insurance
13.08 If any claim for breach of any of the Warranties is based upon a
liability of FEI which is contingent only, Philips shall not be liable
hereunder to make any payment to FEI unless and until such contingent
liability becomes an actual liability and is discharged.
13.09 Where any claim is made by a third party against FEI in relation to
which it appears that Philips is or may be liable hereunder and FEI
claims indemnification from Philips under this Article 13, FEI shall
as soon as practicable give notice thereof to Philips and transfer to
Philips' sole control the defense of such claim and FEI shall take
such action as Philips may reasonably require to avoid, dispute,
resist, appeal against, compromise or defend the claim and any
adjudication in respect thereof and FEI shall render to Philips all
such assistance as it may reasonably request in relation to such claim
including instructing such professional advisers as Philips may
nominate to the intent that the conduct of such claim shall be
delegated to Philips entirely.
13.10 Where any third party is liable to FEI in relation to any matter which
has given rise to a liability on the part of Philips hereunder, FEI
shall procure that all reasonable
<PAGE>
17
endeavours are used to recover any amounts due from any such third
party and shall forthwith upon such recovery reimburse Philips an
amount equal to any sum paid by it in respect of such liability
subject to a deduction of the net (i.e. out of pocket) expenses
incurred by FEI.
13.11 Any sum recovered from Philips pursuant to any claim under the
Warranties will be deemed to be a reduction of the Purchase Price and
shall be deemed to reduce the amount apportioned to the Asset(s) to
which it most closely relates.
13.12 Philips shall not be liable hereunder and no claim or claims shall be
made against it in relation to any breach or non-fulfillment of any of
the Warranties which occurs as a result of or is otherwise
attributable to:
- any matter provided for under the terms of this Agreement or
carried out in the implementation hereof;
- any voluntary act of FEI carried out after the date hereof;
- any act, matter or thing done or omitted to be done by or at
the written request or with the written approval of FEI; or
- any legislation not in force at the date hereof or any
change of law or administrative practice which takes effect
retroactively.
ARTICLE 14
ACCESS TO INFORMATION
14.01 Each Party shall give the other access to (and the opportunity to make
copies of) all data and information, including all updates and
amendments thereof existing at the Closing Date, which form part of or
relate to any item, matter or part thereof transferred pursuant to
this Agreement and will provide all reasonable assistance to the other
to enable it to execute financial reporting and finalize tax returns
for all periods prior to the Closing Date.
ARTICLE 15
CONFIDENTIALITY
15.01 The parties agree that the contents of this Agreement and all
information disclosed by either party to the other relating to the
business of either party (including the Business) shall remain
confidential and, save as required by any applicable rules of any Stock
Exchange or other government department or similar authority or court
or tribunal of competent jurisdiction (in which event the party
required to make a disclosure shall give prior written notice to the
other of such required disclosure),
<PAGE>
18
shall not be used or communicated to any other person whatsoever
except professional advisers in confidence without the prior written
agreement of the parties and then only to such extent as may be
reasonably necessary to enable the parties to carry out their
obligations or enforce their rights under this Agreement. Save as
aforesaid, no announcement or publicity relating thereto shall be made
or issued at any time by either party without the prior written
consent of the other. The parties further agree that the obligations
in this Article shall survive Closing of this Agreement for so long as
such information is not (otherwise than by breach of any obligation of
confidentiality) in the public domain.
ARTICLE 16
COSTS
16.01 Save as otherwise agreed all expenses incurred by or on behalf of the
parties, including all fees of agents, solicitors, accountants and
actuaries employed by either of the parties in connection with the
negotiation, preparation and execution of this Agreement and related
agreements shall be borne solely by the party which incurred them.
ARTICLE 17
NOTICES
17.01 All notices, requests and other communications hereunder shall be in
writing and shall be deemed to have been duly given if addressed, and
delivered by hand, with recorded delivery, or sent by registered mail,
with postage pre-paid, or sent by facsimile and confirmed by
registered mail, with postage pre-paid, to the addresses set forth in
Article 17.03 (or to such other address as may be given by written
notice).
17.02 Any such communication shall be deemed to have been made to the other
party two days from the date of posting (if by letter) and if by
facsimile transmission on the day of such transmission.
17.03 If to Philips, addressed to:
Koninklijke Philips Electronics NV
Groenewoudseweg 1
5621 BA Eindhoven
The Netherlands
marked for the attention of Corp. Legal Dept.
If to FEI, addressed to:
FEI Company
<PAGE>
19
7451 NW Evergreen Parkway,
Hillsboro, Oregon, 97124-5830
USA
marked for the attention of the General Counsel
ARTICLE 18
CONDITIONS TO CLOSING
18.01 CONDITIONS TO THE OBLIGATIONS OF PHILIPS AND FEI
The obligations of the parties hereto to effect the Closing are
subject to the satisfaction (or waiver) prior to the respective
Closing of the following conditions:
(a) BOARD APPROVALS. At the Board Meeting of FEI, the Board Members of
FEI shall have voted to approve (i) the Agreement and the intended
transaction, and (ii) any further actions necessary to consummate the
transaction. At the Board of Management Meeting of Philips, the Board
Members shall have voted to approve (i) the Agreement and the intended
transaction and (ii) any further actions necessary to consummate the
transaction.
(b) NO INJUNCTIONS. There shall not (i) be in effect any statute,
regulation, order, decree or judgment of any governmental entity which
makes illegal or which enjoins, prevents in any material respect or
imposes any burdensome condition or restriction as a consequence of
the consummation of the transactions contemplated by this Agreement or
(ii) have been commenced or threatened in writing, and shall be
continuing, any action or proceeding by any governmental entity which
seeks to prevent, enjoin in any material respect or imposes any
burdensome condition or restriction as a consequence of the
transactions contemplated by this Agreement;
(c) WORKERS COUNCIL. All required employee consultation procedures
shall have been pursued to the extent that they can no longer lead to
a substantial change or delay in the transactions contemplated hereby.
18.02 CONDITIONS TO THE OBLIGATIONS OF FEI
The obligation of FEI to effect the Closing is subject to the
satisfaction (or waiver by FEI) prior to the respective Closing, of
the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of Philips contained herein that is qualified by
materiality shall be true and correct, and each of the representations
and warranties of Philips that is not so qualified shall be true and
correct in all material respects, in each case as if made as of the
Closing (except that representations and warranties that are made as
of a specific date need be true or true in all material respects, as
the case may be, only as of such date), and FEI shall have received a
certificate to such effect dated the Closing Date and executed by a
duly authorized officer of Philips;
(b) COVENANTS. The covenants and agreements of Philips to be performed
on or prior to the Closing shall have been duly performed in all
material respects, and FEI shall have received a certificate to such
effect dated the Closing Date and executed by a duly authorized
officer of Philips;
<PAGE>
20
18.03 CONDITIONS TO THE OBLIGATIONS OF PHILIPS
The obligation of Philips to effect the Closing is subject to the
satisfaction (or waiver) prior to the respective Closing of the
following conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of FEI contained herein that is qualified by materiality
shall be true and correct, and each of the representations and
warranties of FEI that is not so qualified shall be true and correct
in all material respects, in each case as if made as of the Closing
(except that representations and warranties that are made as of a
specific date need be true or true in all material respects, as the
case may be, only as of such date), and Philips shall have received a
certificate to such effect dated the Closing Date and executed by a
duly authorized officer of FEI;
(b) COVENANTS. The covenants and agreements of FEI to be performed on
or prior to the Closing shall have been duly performed in all material
respects, and Philips shall have received a certificate to such effect
dated the Closing Date and executed by a duly authorized officer of
FEI.
ARTICLE 19
MISCELLANEOUS
19.01 Failure by either party to exercise or enforce any right conferred by
this Agreement shall not be deemed to be a waiver of any such right
nor operate so as to bar the exercise or enforcement thereof or of any
other right on any other occasion.
19.02 This Agreement represents the entire understanding between the parties
in relation to the subject matter hereof and supersedes all agreements
and representations made by either party, whether oral or written and
this Agreement may only be modified if such modification is in writing
and signed by a duly authorized representative of each party. This
Agreement shall prevail over any inconsistent terms and conditions in
any other agreement between the parties or referred to in
correspondence or elsewhere (including Country Agreements) and any
conditions or stipulations to the contrary are hereby excluded and
extinguished.
19.03 The parties shall, and shall use all reasonable endeavours
respectively to procure that any necessary third party shall, do
execute and perform all such further deeds, documents, assurances,
acts and things as either party hereto may reasonably require by
notice in writing to the other party to carry the provision of this
Agreement into full force and effect.
19.04 This Agreement shall be governed by and construed and interpreted in
accordance with the law of THE NETHERLANDS, and the parties hereby
agree that all matters arising out of or in connection with this
Agreement shall be subject to UNCITRAL Arbitration which shall take
place in Amsterdam.
<PAGE>
21
IN WITNESS WHEREOF the parties or their authorized representatives have set
their hands the day and year first above written.
KONINKLIJKE PHILIPS ELECTRONICS FEI COMPANY
N.V.
______________________________________ _________________________
Name: Name:
Title: Title:
<PAGE>
22
<TABLE>
<CAPTION>
LIST OF SCHEDULES:
<S> <C>
Schedule 1.13: Model Country Agreement
Schedule 1.18: List of Employees as per October 25, 1999
Schedule 1.20: List of all Fixed Assets
Schedule 1.34: Reference Accounts
Schedule 1.39: Warranties and Representations
Schedule 2.03: List of countries for Principal and Second Closing respectively
Schedule 3.02: The allocation of the Purchase Price to the respective Local Activities
Schedule 6.06: Terms and Conditions for using the Local Philips Company name
Schedule 7.03: Employee continuation arrangements
</TABLE>
<PAGE>
23
SCHEDULE 7.03 (TO THE MASTER AGREEMENT)
ADDITIONAL (OPTIONAL) LOCAL ARRANGEMENT ON SHARED EMPLOYEES
The general ruling applicable within Philips also applies here: an employee will
be on the payroll of a party which makes use of 50% or more of the time of the
employee involved ("Hiring Party"). No cherry picking.
In most countries such Local Arrangements are required between the Local FEI
Company and the local Philips Analytical organisation for the services of
identified Sales and Customer Support employees to be provided to the other
party ("Receiving Party").
The Local Arrangement will be made for a period of one year (the first ending
December 31, 2000) and is automatically annually extended; termination is only
possible by giving a six (6) months' written notice prior to the expiration date
(so each year before July 1).
The Local Arrangement will be based on a fixed percentage of the time and cost
of the identified employees as estimated per year. It is assumed that this
percentage also applies for each month. The sharing ratio may vary from year to
year only by plus or minus 20%, unless otherwise agreed (e.g. in case of a
`60-40' sharing in year one, a `68-32' in year two is allowed, an `80-20'
sharing not).
The employees involved must register their time spending per business. This
register will be made available to both parties per month. By determining the
priority of time allocation per month beyond the contracted percentage of time,
the Hiring Party will decide on the priority after consultation with the
Receiving Party. Any time spent in addition to the contracted time will be
invoiced per quarterly period by the Hiring Party to the Receiving Party.
On termination of the Local Arrangement for whatsoever reason, the terminating
party will pay an equal percentage of the redundancy cost of the employee
involved as the allocation in time and cost, based on the average of the last 2
full years, provided (a) the person involved receives notice of termination
within 9 months as from receipt of the terminating party's intention to stop
using the respective person's services, and (b) the total amount spent by the
party incurring redundancy costs is above 200,000 euro (at which point the
amounts above said threshold are subject to this paragraph).
List of `shared' employees:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
NAME: BIRTHDATE: EMPLOYED BY: % ANA; %FEI
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
This Employment Agreement, effective as of August 12, 1999, by and between FEI
Company, an Oregon corporation ("Employer"), and Nicholas P. Economou, an
individual ("Employee"). IN CONSIDERATION OF the mutual covenants herein
contained, and other good and valuable consideration, the parties hereto agree
as follows:
1) EMPLOYMENT.
a) Employer hereby agrees to employ Employee, and Employee agrees to
serve, as Chief Operating Officer of Employer, during the Period of
Employment as defined in Section 2.
2) PERIOD OF EMPLOYMENT.
a) DURATION UNDER NORMAL CIRCUMSTANCES.
i) The "Period of Employment" shall be the period commencing on the
date hereof and ending on the second anniversary of the closing
of the merger transaction between the Employer and Micrion
Corporation ("Micrion").
b) TERMINATION EVENTS.
i) Notwithstanding anything in this Section 2 to the contrary, the
Period of Employment shall terminate upon the earliest to occur
of the following:
A. the retirement of Employee under the terms of Employer's
401(k) plan;
B. the Disability (as defined in Section 8) of Employee and the
expiration of the 30-day period referred to in the
definition of Disability without the actions referred to
therein being taken by Employee;
C. the death of Employee;
D. the 90th day after service of notice by Employee to
Employer, in accordance with the provisions of Section 11,
that Employee elects to terminate the Period of Employment
(with or without Good Reason) (a "voluntary termination by
Employee");
E. the 90th day after service of notice by Employer to
Employee, in accordance with the provisions of Section 11,
that Employer elects to terminate the Period of Employment
(a "voluntary termination by Employer"), other than a
termination by
<PAGE>
Employer with Cause; and
F. promptly upon service of notice by Employer to Employee, in
accordance with the provisions of Section 11, that Employer
elects to terminate the Period of Employment with Cause.
3) DUTIES DURING THE PERIOD OF EMPLOYMENT.
i) Employee shall devote his full business time, attention and best
efforts to the affairs of Employer and its subsidiaries during
the Period of Employment and shall have such duties,
responsibilities and authority as shall be assigned to him from
time to time by the Chief Executive Officer or the Board of
Directors of Employer, which duties, responsibilities and
authority shall be commensurate in all material respects with
those held, exercised and assigned as of the date of this
Agreement. It is expressly acknowledged and agreed that Employee
may be requested to assume the position of president or senior
officer of any subsidiary or division of Employer or any position
of corporate officer of Employer, provided that the
responsibilities and authority assigned to such position are
commensurate in all material respects with those assigned to, or
held and exercised by, Employee as of the date of this Agreement,
and provided further that, in the event of a transfer of Employee
to the employ of a subsidiary of Employer, such subsidiary
expressly assumes all of Employer's obligations under this
Agreement. Employee may engage in other activities, such as
activities involving charitable, educational, religious and
similar types of organizations (all of which are deemed to
benefit Employer), non-industry speaking engagements, and similar
type activities, and may serve on the board of directors of other
corporations approved by the Chief Executive Officer of Employer,
in each case to the extent that such other activities do not
materially detract from or limit the performance of his duties
under this Agreement, or inhibit or conflict in any material way
with the business of Employer and its subsidiaries.
4) LOCATION OF EMPLOYMENT.
i) During the Period of Employment, Employer may only require
Employee to be based in or within 50 miles of Peabody, MA except
that Employer may require Employee to be based more than 50 miles
from Peabody, MA in connection with the relocation of the
executive office of Employer in which Employee is employed;
PROVIDED, HOWEVER, that Employer shall pay to, or reimburse
Employee for, on an after-tax basis, all reasonable expenses of
relocation of Employee and Employee's immediate family living
with Employee at the time of such relocation, incurred and
substantiated by Employee in connection with any such relocation.
<PAGE>
5) CURRENT CASH COMPENSATION.
i) Employer will pay to Employee during the Period of Employment a
base annual salary of not less than Employee's salary at Micrion
as of January 1, 1999 (or such greater amount as may have been
approved by the Employer's Board of Directors in its sole
discretion), payable in substantially equal monthly installments
during each calendar year, or portion thereof, of the Period of
Employment; PROVIDED, HOWEVER, that Employer agrees to review
such base annual salary annually and in light of such review may,
in the sole discretion of the Board of Directors of Employer,
increase such salary, taking into account such factors as it
deems pertinent.
6) EMPLOYEE BENEFITS.
a) VACATION AND SICK LEAVE.
i) Employee shall be entitled to the usual number of days of paid
annual vacation, all paid Employer holidays and reasonable sick
leave consistent with Employer's existing policies and giving
full credit for the Employee's service with Micrion.
b) REGULAR REIMBURSED BUSINESS EXPENSES.
i) Employer shall reimburse Employee for all expenses and
disbursements reasonably incurred at Employer's request or
consistent with Employer's policies, and substantiated by
Employee, in the performance of his duties during the Period of
Employment.
c) EMPLOYEE BENEFIT PLANS OR ARRANGEMENTS.
i) In addition to the cash compensation provided for in Section 5
hereof, Employee, subject to meeting eligibility requirements and
to the provisions of this Agreement, shall be entitled to
participate without discrimination or duplication in all employee
(including executive) benefit plans of Employer, as presently in
effect or as they may be modified or added to by Employer from
time to time, to the extent such plans are available to other
similarly situated executives or employees of Employer,
including, without limitation, plans providing retirement
benefits, medical and other health insurance, life insurance,
disability insurance, and accidental death or dismemberment
insurance.
<PAGE>
d) EMPLOYER'S INCENTIVE COMPENSATION PLANS.
i) In addition to the cash compensation provided for in Section 5
hereof and the employee benefits of Employer provided for in
paragraph (c) of this Section 6, Employee, subject to meeting
eligibility requirements and to the provisions of this Agreement,
shall be entitled to participate in all incentive compensation
plans of Employer, as presently in effect or as they may be
modified or added to by Employer from time to time, to the extent
such plans are available to similarly situated executives or
employees of Employer, including, without limitation, the 1995
Stock Incentive Plan and the 1995 Supplemental Stock Incentive
Plan (as the same may be modified, replaced, or added to by
Employer from time to time), and other performance share plans,
management incentive plans, deferred compensation plans, and
supplemental retirement plans.
7) TERMINATION.
a) DEATH, OR RETIREMENT OR DISABILITY.
i) If the Period of Employment terminates pursuant to paragraph (b)
of Section 2 as a result of (1) the death of Employee, (2) the
retirement of Employee under the terms of Employer's 401(k) plan
or (3) the Disability of the Employee, Employee (or Employee's
estate) will be entitled to receive only:
(i) the base salary otherwise payable under Section 5 through
the end of the month in which Employee's employment is
terminated, together with salary, compensation or benefits
which have been earned or become payable as of the date of
termination but which have not yet been paid to Employee;
(ii) such other awards or bonuses as the Board of Directors may
in its sole discretion determine;
(iii) during the 12-month period following the termination of
Employee's employment as a result of the death of Employee,
maintenance in effect for the continued benefit of
Employee's dependents of all insured and self-insured
employee medical and dental benefit plans in which Employee
was participating immediately prior to termination provided
that such continued participation is possible under the
general terms and conditions of such plans (and any
applicable funding media) and Employee's dependents continue
to pay an amount equal to the Employee's regular
contribution for such participation; and
(iv) such other benefits, if any, as shall be determined to be
applicable in accordance with Employer's plans and practices
as in effect on the date of termination.
<PAGE>
b) VOLUNTARY TERMINATION BY EMPLOYEE WITHOUT GOOD REASON.
i) If the Period of Employment terminates pursuant to paragraph (b)
of Section 2 as a result of a voluntary termination by Employee
without Good Reason, Employee will be entitled to receive only:
A. the base salary otherwise payable under Section 5 through the
day on which Employee's employment is terminated, together with
salary, compensation or benefits payable to other similarly
situated employees (excluding any incentive compensation) which
have been earned or become payable as of the date of termination
but which have not yet been paid to Employee;
B. to the extent possible, the opportunity to convert group and
individual life and disability insurance policies of Employer
then in effect for Employee to individual policies of Employee
upon the same terms as similarly situated employees of Employer
may apply for such conversions; and
C. such other benefits, if any, as shall be determined to be
applicable in accordance with Employer's plans and practices for
similarly situated employees in effect on the date of
termination.
c) VOLUNTARY TERMINATION BY EMPLOYEE WITH GOOD REASON OR BY EMPLOYER
WITHOUT CAUSE.
i) If the Period of Employment terminates pursuant to paragraph (b)
of Section 2 as a result of a voluntary termination by Employee
with Good Reason (as hereinafter defined), or a voluntary
termination by Employer without Cause (as hereinafter defined),
then Employee will be entitled to receive:
A. the base salary otherwise payable under Section 5 through
the end of the month in which Employee's employment is
terminated, together with salary, compensation or benefits
which have been earned or become payable as of the date of
termination but which have not yet been paid to the
Employee;
B. a lump-sum severance payment in an amount equal to the
product of (A) the base annual salary at the rate in effect
under Section 5 on the date of termination, and (B) a
multiplier equal to x/52, where "x" equals the number of
weeks remaining until the Final Day of Period of Employment;
provided that the payment made pursuant to this paragraph
(ii) shall be repaid by Employee in the event Employee
violates in any material respect the provisions of Section 9
hereof;
C. maintenance in effect for the continued benefit of
Employee and his spouse and his dependents for a period
terminating on the earlier of (A) the earlier of
<PAGE>
the Final Day of Period of Employment and the date on which
Employee retires under the terms of Employer's 401(k) plan,
and (B) the commencement of equivalent benefits from a new
employer of: (I) all insured and self-insured medical and
dental benefit plan in which Employee was participating
immediately prior to termination, provided that Employee's
continued participation if possible under the general terms
and conditions of such plans (and any applicable funding
media) and Employee continues to pay an amount equal to
Employee's regular contribution for such participation; and
(II) the group and individual life and disability insurance
policies of Employer then in effect for Employee;
provided, however, that if Employer so elects, or if such
continued participation is not possible under the general
terms and conditions of such plans or under such policies,
Employer shall, in lieu of the foregoing, arrange to have
issued for the benefit of Employee and Employee's dependents
individual policies of insurance providing benefits
substantially similar (on an after-tax basis) to those
described in this paragraph, or, if such insurance is not
available at a reasonable cost to Employer, Employer shall
otherwise provide Employee and Employee's dependents
equivalent benefits (on an after-tax basis);
provided further that, in no event shall Employee be
required to pay any premiums or other charges in an amount
greater than that which Employee would have paid in order to
participate in Employer's plans and policies; and for a
period terminating on the earlier of the Final Day of Period
of Employment and the date on which Employee reaches age 65,
Employer shall provide Employee with benefits equivalent to
the additional benefits Employee would have received under
the employee pension and retirement benefit plans maintained
by the Employer and supplemental or excess executive
retirement plans, or executive plans of deferred
compensation whether or not qualified for federal income tax
purposes in which Employee was participating immediately
prior to termination and assuming an annual rate of Salary
equal to the rate applicable to the Employee immediately
prior to termination is in effect, as if Employee had
received credit under such plans for service with Employer
during such period following Employee's termination, with
such benefits payable by Employer at the same times and in
the same manner as such benefits would have been received by
Employee under such plans.
d) TERMINATION BY EMPLOYER WITH CAUSE.
i) If the Period of Employment terminates pursuant to paragraph (b)
of Section 2 as a result of a termination by Employer with Cause,
Employee will be entitled to receive only:
A. the base salary otherwise payable under Section 5 through the
day on which Employee's employment is terminated, together with
salary, compensation or
<PAGE>
benefits which have been earned or become payable as of the date
of termination but which have not yet been paid to Employee; and
B. such other benefits, if any, as shall be determined to be
applicable under the circumstances in accordance with Employer's
plans and practices in effect on the date of termination.
e) DATE OF PAYMENT.
i) Except as otherwise provided herein, all cash payments and
lump-sum awards required to be made pursuant to the provisions of
paragraphs (a) through (e) of this Section 7 shall be made no
later than the thirtieth day following the date of Employee's
termination.
f) EXCLUSIVE REMEDY.
i) Employee shall have no claim for damages or other remedies, at
law, in equity or otherwise, by reason of any breach of this
Agreement by Employer, or of termination of this Agreement by
reason thereof, other than as set forth in this Section 7.
8) DEFINITIONS.
i) For purposes of this Agreement, the following capitalized terms
shall have the meanings set forth below:
ii) "CAUSE" shall mean (i) the willful engaging by Employee in
conduct which is not authorized by the Board of Directors of
Employer or within the normal course of Employee's business
decisions and is known by Employee to be materially detrimental
to the best interests of Employer or any of its subsidiaries,
(ii) the willful engaging by Employee in conduct which Employee
knows is, or has substantial reason to believe to be, illegal to
the extent of a felony violation, or the equivalent seriousness
under laws other than those of the United States, and which has
effects on Employer or Employee materially injurious to Employer,
(iii) the engaging by Employee in any willful and conscious act
of serious dishonesty, in each case which the Board of Directors
of Employer reasonably determines affects adversely, or could in
the future affect adversely, the value, reliability or
performance of Employee to Employer in a material manner; (iv)
the willful and continued failure by Employee to perform
substantially his duties to Employer under this Agreement
(including any sustained and unexcused absence of Employee from
the performance of his duties under this Agreement, which absence
has not been certified in writing as due to physical or mental
illness in accordance with the procedures set forth in this
Section 8 under "Disability"), after a written demand for
substantial performance has been delivered to Employee by the
Board of Directors specifically identifying the manner in which
Employee has failed to
<PAGE>
substantially perform his duties and after such Employee has had
a reasonable opportunity to cease such failure to perform, or (v)
the sustained and unexcused absence of Employee from the
performance of his duties under this Agreement for a period of
180 days or more within any period of 365 consecutive days,
regardless of the reason for such absence, unless Employee
demonstrates that such absence is due to Disability. For purposes
of this paragraph, no act, or failure to act, on Employee's part
shall be considered "willful" unless done, or omitted to be done,
in bad faith and without reasonable belief that such action or
omission was in, or not opposed to, the best interests of
Employer. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the Board of Directors
of Employer or based upon the advice of counsel for Employer
shall be conclusively presumed to be done, or omitted to be done,
in good faith and in the best interests of Employer.
Notwithstanding the foregoing, there shall not be deemed to be a
termination by Employer with Cause unless and until there shall
have been delivered to Employee a copy of a resolution duly
adopted by the affirmative vote of a majority of the entire
membership of the Board of Directors of Employer at a meeting of
such Board held after reasonable notice to Employee and at which
Employee has an opportunity, together with his counsel, to be
heard before such Board, finding that, in the good faith opinion
of such Board, Employee was guilty of the conduct set forth above
and specifying the particulars thereof in detail.
iii) "DISABILITY" shall mean the absence of Employee from his duties
with Employer on a full-time basis for one hundred eighty (180)
days within any period of three hundred and sixty-five (365)
consecutive days as a result of Employee's incapacity due to
physical or mental illness as certified in writing by a physician
selected by Employee and reasonably acceptable to Employer (it
being understood that such physician shall be deemed to be
reasonably acceptable to Employer if, within a period of fifteen
(15) days after Employee notifies Employer of the name of such
physician, Employer does not object to the use of such
physician), unless within thirty (30) days after written notice
to Employee by Employer, in accordance with the provisions of
Section 12, that Employee's employment is being terminated by
reason of such absence, Employee shall have returned to the full
performance of Employee's duties.
iv) "FINAL DAY OF PERIOD OF EMPLOYMENT" shall mean the final day of
the Period of Employment under Section 2(a) as in effect on the
date of termination.
v) Voluntary termination by Employee with "GOOD REASON" shall mean a
voluntary termination by Employee resulting from the Employer (i)
reducing Employee's base annual salary as in effect immediately
prior to such reduction or reducing in a material respect
Employee's opportunity to earn incentive compensation as provided
in Section 6(d) of this Agreement; (ii) effecting a change in the
position of Employee which does not represent a promotion from
Employee's position provided for herein; (iii) assigning Employee
duties or responsibilities which are
<PAGE>
materially inconsistent with Employee's position provided for
herein or requiring Employee to be based in a location that is
outside 50 miles from the location specified in Section 4 of this
Agreement; (iv) removing Employee from or failing to reappoint or
reelect Employee to such position, except in connection with a
termination as a result of death, Disability, voluntary
termination by Employee, retirement by Employee or termination by
Employer with Cause; or (v) otherwise materially breaching its
obligations under this Agreement, in each case after notice in
writing from Employee to Employer and a period of 30 days after
such notice during which Employer fails to correct such conduct;
PROVIDED, HOWEVER, that it is expressly acknowledged and agreed
that a transfer of Employee (a) to the position of another
corporate officer of Employer, or to any subsidiary of Employer
in the capacity of president or senior officer of such subsidiary
or (b) from the position of president or senior officer of any
subsidiary of Employer to a position of corporate officer of
Employer (in each case as contemplated by the second sentence of
Section 3 of this Agreement) shall not by itself constitute "Good
Reason" within the meaning of clauses (ii), (iii), (iv) or (v) of
this paragraph, provided that, in the case of any transfer to a
subsidiary of Employer, such subsidiary expressly assumes all of
Employer's obligations under this Agreement.
9) NON-COMPETITION AND NON-DISCLOSURE; EMPLOYEE COOPERATION.
a) Without the consent in writing of the Board of Directors of Employer,
upon termination of Employee's employment for any reason, Employee
will not for a period of two years thereafter, acting alone or in
conjunction with others, directly or indirectly (i) engage (either as
owner, partner, stockholder, employer, employee, director, consultant
or agent) in any business in which he has been directly engaged, or
has supervised as an executive, during the last two years prior to
such termination and which is directly in competition with a business
conducted by Employer or any of its subsidiaries; (ii) induce any
customers of Employer or any of its subsidiaries with whom Employee
has had contacts or relationships, directly or indirectly, during and
within the scope of his employment with Employer or any of its
subsidiaries, to curtail or cancel their business with such companies
or any of them; (iii) solicit or canvas business from any person who
was a customer of Employer or any of its subsidiaries at or during the
two-year period immediately preceding termination of Employee's
employment; or (iv) induce, or attempt to influence, any Employee of
Employer or any of its subsidiaries to terminate his employment;
PROVIDED, HOWEVER, that the limitation of subparagraph (i) shall
not apply if Employee's employment is terminated as a result of a
voluntary termination by Employee with Good Reason or a termination
by Employer without Cause. The provisions of subparagraphs (i),
(ii), (iii) and (iv) above are separate and distinct commitments
independent of each of the other subparagraphs. It is agreed that
the ownership of not more than 1/2 of 1% of the equity securities
of any company having securities listed on an exchange or regularly
traded in the over-the-counter market shall not, of itself, be
deemed inconsistent with clause (i) of this paragraph (a).
<PAGE>
b) Employee shall not, at any time during the Period of Employment or
following Employee's termination of employment for any reason
whatsoever, disclose, use, transfer or sell, except in the course of
employment with Employer, any confidential or proprietary information
of Employer and its subsidiaries so long as such information has not
otherwise been publicly disclosed by Employer or is not otherwise in
the public domain, except as required by law or pursuant to legal
process.
c) Employee agrees to cooperate with Employer, by making himself
available to testify on behalf of Employer or any subsidiary or
affiliate of Employer, in any action, suit or proceeding, whether
civil, criminal, administrative or investigative, and to assist
Employer, or any subsidiary or affiliate of Employer in any such
action, suit or proceeding, by providing information and meeting and
consulting with the Board of Directors of Employer or its
representatives or counsel, or representatives or counsel of Employer,
or any subsidiary or affiliate of Employer, as requested by such Board
of Directors, representatives or counsel. Employer agrees to reimburse
the Employee, on an after-tax basis, for all expenses actually
incurred in connection with his provision of testimony or assistance.
10) GOVERNING LAW; MODIFICATION AND SEVERABILITY; DISPUTES; ARBITRATION.
a) This Agreement is governed by and is to be construed and enforced in
accordance with the laws of the State of Oregon.
b) If any portion of this Agreement is at any time deemed to be in
conflict with any applicable statute, rule, regulation, ordinance or
principle of law, such portion shall be deemed to be modified or
altered to the extent necessary to conform thereto or, if that is not
possible, to be omitted from this Agreement; and the invalidity of any
such portion shall not affect the force, effect and validity of the
remaining portion hereof.
c) Except as provided in this Section 10(c), any controversy or claim
arising out of or relating to this Agreement, or the breach thereof,
shall be settled by arbitration administered by the American
Arbitration Association in accordance with its Commercial Arbitration
Rules, and judgment on the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof.
i) The arbitrators shall have the authority to award such remedies
or relief that a court of the State of Oregon could order or
grant in an action governed by Oregon law, including, without
limitation, specific performance of any obligation created under
this Agreement, the issuance of an injunction, or the imposition
of sanctions for abuse or frustration of the arbitration process,
but shall not be empowered to award punitive damages. The
arbitration proceedings shall be conducted in Portland, Oregon
or, in the event that the executive office of Employer has been
relocated, in such other major city as is most proximate to such
relocated executive office.
ii) Notwithstanding the foregoing, any party may bring and pursue an
action in any
<PAGE>
Federal or State court in the city where the arbitration
proceedings shall be conducted pursuant to the foregoing sentence
seeking provisional relief, including a temporary restraining
order or preliminary injunction, pending an arbitration
proceeding. Any provisional relief obtained shall be discontinued
once the arbitrators have assumed jurisdiction and ordered such
discontinuance.
d) Any amounts that have become payable pursuant to the terms of this
Agreement or any judgment by a court of law or a decision by
arbitrators pursuant to this Section 10 but which are not timely paid
shall bear interest at the prime rate in effect at the time such
payment first becomes payable, as quoted by Key Bank of Oregon.
11) NOTICES.
i) All notices or other communications hereunder shall be deemed to
have been duly given and made if in writing and if served by
personal delivery upon the party for whom it is intended, if
delivered by registered or certified mail, return receipt
requested, or by a national courier service, or if sent by
telecopier, PROVIDED that the telecopy is promptly confirmed by
telephone confirmation thereof, to the person at the address set
forth below, or such other address as may be designated in
writing hereafter, in the same manner, by such person:
To Employee:
---------------------------
---------------------------
---------------------------
---------------------------
Telephone:
Telecopy:
---------------------------
To Employer:
FEI Company
7451 NW Evergreen Parkway
Hillsboro, OR 97124
Attn: Chief Executive Officer
<PAGE>
With a copy to:
STOEL RIVES LLP
900 SW Fifth Avenue, Suite 2600
Portland, Oregon 97204-1268
Telephone: 503-224-3380
Telecopy: 503-220-2480
Attn: Stephen E. Babson
12) WITHHOLDING.
i) All payments to be made to Employee under this Agreement will be
subject to required withholding taxes and other deductions.
13) SUCCESSORS; BINDING AGREEMENT.
a) Any Successor (as hereinafter defined) to Employer shall be bound by
this Agreement. Employer will seek to have any Successor assent to the
fulfillment by Employer of its obligations under this Agreement at
Employee's request. Failure of Employer to obtain such assent within
thirty (30) days after such request shall constitute Good Reason for
termination by Employee of Employee's employment and, upon a voluntary
termination by Employee pursuant to Section 2, shall entitle Employee
to the benefits provided in Section 7(c). For purposes of this
Agreement, "Successor" shall mean any person other than Philips
Electronics N.V. and its affiliates that succeeds to, or has the
practical ability to control (either immediately or with the passage
of time), Employer's business directly, by merger or consolidation, or
indirectly, by purchase of the Employer's voting securities, all or
substantially all of its assets or otherwise.
b) For purposes of this Agreement, "Employer" shall include any
corporation or other entity which is the surviving or continuing
entity in respect of any amalgamation, merger, consolidation,
dissolution, asset acquisition or other form of business combination.
14) MISCELLANEOUS.
a) Except to the extent that the terms of this Agreement confer benefits
that are more favorable to Employee than are available under any other
employee benefit or executive compensation plan of Employer in which
Employee is a participant, Employee's rights under any such employee
(including executive) benefit plan or executive compensation plan
shall be determined in accordance with the terms of such plan (as it
may be modified or added to by Employer from time to time).
b) This Agreement constitutes the entire understanding between Employer
and Employee relating to employment of Employee by Employer and its
subsidiaries and supersedes and cancels all prior agreements and
understandings with respect to the subject matter
<PAGE>
of this Agreement and such other written agreements. Employee shall
not be entitled to any payment or benefit under this Agreement which
duplicates a payment or benefit received or receivable by Employee
under such prior agreements and understandings.
c) This Agreement may be amended but only by a subsequent written
agreement of the parties.
d) This Agreement shall be binding upon and shall inure to the benefit of
Employee, his heirs, executors, administrators and beneficiaries, and
shall be binding upon and inure to the benefit of Employer and its
successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
year and day first above written.
FEI COMPANY
By:_______________________________
(Authorized Officer)
__________________________________
Nicholas P. Economou
<PAGE>
EXHIBIT 10.16
May 14, 1998
Mr. Vahe Sarkissian
22000 Rolling Hills Rd.
Saratoga, CA 95070
Subject: FEI Employment Terms
Dear Mr. Sarkissian:
On behalf of the search committee of the FEI Board of Directors this letter will
confirm our offer of employment to you as Chief Executive Officer for FEI
Company. The terms and conditions of employment are as follows:
REPORTING RELATIONSHIP: You will report to the FEI Board of Directors
RESPONSIBILITIES: You will lead and direct the Senior Management
Team (SMT) with primary accountability for
delivering value to the FEI stockholders through
the strategic planning, direction and delivery of
performance that will enhance shareholder value of
FEI Company. You will be a member of the Board of
Directors.
COMPENSATION: Your compensation will be subject to approval by
the Compensation Committee of the Board and will
be based upon the following four components:
1) A base salary at the annual rate of $310,000,
to be paid semi-monthly and reviewed annually
during the last week of December.
2) An annual bonus with a guarantee of $200,000
for the initial twelve (12) month period of
employment and thereafter paid on the basis of
two-thirds the annual salary based on achievement
of objectives.
<PAGE>
Mr. Vahe Sarkissian
May 14, 1998
Page Two
3) A grant of 50,000 shares of FEI common stock
with vesting of 25,000 shares immediately and
25,000 shares upon completing thirteen (13) months
of employment. A loan to cover the state and
federal taxes payable in connection with the stock
grant. The loan will be forgiven at 20 per cent
per year for five years. The balance of the loan
plus interest is due FEI should you terminate your
employment prior to five years.
4) Options of 200,000 shares of FEI common stock
to vest 20 per cent per year over five (5) years
from the date of issue. The option price will be
based on the market value of the stock at the date
of the grant or the date of employment whichever
is later. The exercise period is ten (10) years.
[Terms changed by mutual agreement to 49,380 ISO's
and 150,620 restricted stock purchase.]
5) As the CEO of FEI you will participate in stock
option grants made on an annual basis by the FEI
Board Compensation Committee and in such amounts
as are commensurate with your responsibilities.
The Committee currently considers annual grants in
the range of 40,000 to 50,000 shares to meet these
criteria in light of the capital structure of the
Company, the competitive environment and the
general outlines of the Company's existing stock
incentive plans. Future grants of options are
within the discretion of the Compensation
Committee and subject to the availability at the
time of grant of options under a
shareholder-approved plan. A portion of the option
grants or their vesting may be made contingent
upon company performance.
BENEFITS: You will be eligible to participate in the FEI
benefit and perquisite programs offered to other
Company Executives (see attached for list of
standard benefits). Your annual vacation will be
four (4) weeks.
SEVERANCE: Should FEI terminate you without cause during the
first three (3) years of employment, you will be
entitled to twelve (12) months of base salary as
<PAGE>
Mr. Vahe Sarkissian
May 14, 1998
Page Three
severance, your stock and options will be credited
with an additional twelve (12) months of vesting,
the loan described above will be forgiven and will
be entitled to CEO bonus or incentive compensation
for any period of service not covered by an
earlier payment
RELOCATION/TEMPORARY
HOUSING: You will be eligible for the Company's executive
relocation package and temporary housing cost
reimbursement.
OUTSIDE BUSINESS ACTIVITY: Your role in the existing four companies with
which you are associated will be diminished
operationally; however, you will still function as
a member of their respective boards. [You will
continue as Chairman of Surface Interface, Inc.]
I would appreciate your response to this offer letter no later than May 15, 1998
and would like to establish your official date of employment as May 15, 1998.
I look forward to your joining the FEI team and the future success we will
enjoy.
Sincerely yours,
Dr. Lynwood Swanson
Chairman
If you agree with the above, please sign on the below stated line and return one
copy to FEI and retain one copy for yourself.
- ---------------------------------
Vahe Sarkissian
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
- ---- ---------------
<S> <C>
FEI Company Oregon
Philips Electron Optics International B.V. The Netherlands
Micrion KK Japan
Micrion Corporation Oregon
FEI Deutschland GmbH Germany
FEI Company FSC Ltd. Barbados
FEI Asia Corporation Oregon
Asia FEI Company Korea
FEI Company N.V. Belgium
FEI Company GmbH Austria
FEI Company AS Norway
FEI Company Ltd. Hong Kong
FEI Company S.A. Spain
FEIC A.G. Switzerland
FEI Company A/S Denmark
FEI Company Sweden
FEI Company of USA (SE Asia) P.t.e. Ltd. Singapore
Philips Electron Optics Czech Republic SO Czech Republic
<PAGE>
Philips Electron Optics Canada, Ltd. Canada
Philips Electron Optics SRL Italy
Philips Electron Optics Nederland B.V. (Sales/Service) The Netherlands
Philips Electron Optics Japan Ltd. Japan
Philips Optique Electronique S.A.S. France
Philips Electron Optics B.V. The Netherlands
FEI UK Ltd. United Kingdom
FEI Europe Ltd. United Kingdom
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-08863, 333-32911, 333-57331, 333-92629, and 333-92631 of FEI Company on
Form S-8 of our reports dated February 8, 2000, appearing in the Annual
Report on Form 10-K of FEI Company for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Portland, Oregon
March 24, 2000
<TABLE> <S> <C>
<PAGE>
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,124
<SECURITIES> 0
<RECEIVABLES> 80,680
<ALLOWANCES> (3,052)
<INVENTORY> 59,517
<CURRENT-ASSETS> 171,859
<PP&E> 48,505
<DEPRECIATION> (19,737)
<TOTAL-ASSETS> 288,100
<CURRENT-LIABILITIES> 86,902
<BONDS> 0
0
0
<COMMON> 218,406
<OTHER-SE> (65,829)
<TOTAL-LIABILITY-AND-EQUITY> 288,100
<SALES> 216,152
<TOTAL-REVENUES> 216,152
<CGS> 131,143
<TOTAL-COSTS> 218,667
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,162
<INCOME-PRETAX> (2,580)
<INCOME-TAX> 4,800
<INCOME-CONTINUING> (7,380)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,380)
<EPS-BASIC> (.34)
<EPS-DILUTED> (.34)
</TABLE>
