-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WEEwy/VFo9zvTnyx31zdkeffjv+rVYhJqT+RMwe9lKqLgl1uBXdiI5+5KKUILOFU xv23hf42IUraNppqUyzblg== 0000893877-98-000682.txt : 19981201 0000893877-98-000682.hdr.sgml : 19981201 ACCESSION NUMBER: 0000893877-98-000682 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980927 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEI CO CENTRAL INDEX KEY: 0000914329 STANDARD INDUSTRIAL CLASSIFICATION: 3559 IRS NUMBER: 930621989 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22780 FILM NUMBER: 98745901 BUSINESS ADDRESS: STREET 1: 7451 NE EVERGREEN PWY CITY: HILLSBORO STATE: OR ZIP: 97124-5830 BUSINESS PHONE: 5036901500 MAIL ADDRESS: STREET 1: 7451 NE EVERGREEN PARKWAY CITY: HILLSBORO STATE: OR ZIP: 97124 10-Q 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 27, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File No. 0-22780 FEI COMPANY (Exact name of registrant as specified in its charter) Oregon 93-0621989 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 7451 NW Evergreen Parkway Hillsboro, Oregon 97124-5830 (Address of principal executive offices) (Zip Code) (503) 640-7500 (Registrant's telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ The number of shares of Common Stock outstanding as of November 6, 1998 was 18,160,808. INDEX TO FORM 10-Q Page ---- Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 27, 1998 (unaudited) and December 31, 1997...................................... 1 Condensed Consolidated Statements of Operations (unaudited) Thirteen Weeks Ended September 27, 1998 and September 28, 1997 and Thirty-Nine Weeks Ended September 27, 1998 and September 28, 1997 ..... 2 Condensed Consolidated Statements of Cash Flows (unaudited) - Thirty-Nine Weeks Ended September 27, 1998 and September 28, 1997.......3 Notes to Condensed Consolidated Financial Statements (unaudited)......... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 8 Part II - Other Information Item 2. Changes in Securities..............................................12 Item 5. Other Information..................................................12 Item 6. Exhibits and Reports on Form 8-K...................................12 Signatures.................................................................13 i PART I - Financial Information Item 1. Financial Statements
FEI Company and Subsidiaries Condensed Consolidated Balance Sheets (In thousands, except share data) December 31, September 27, 1997 1998 ------------ ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 16,394 $ 21,783 Receivables 56,168 48,137 Inventories (Note 3) 39,207 45,640 Deferred income taxes 2,484 6,718 Other 2,497 912 ---------- ---------- Total current assets 116,750 123,190 EQUIPMENT 19,246 21,732 LEASE AND NOTE RECEIVABLES 946 632 OTHER ASSETS (Note 4) 46,080 39,471 ---------- ---------- TOTAL $ $ 183,022 $ 185,025 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 15,984 $ 12,239 Current accounts with Philips (Note 5) 9,074 21,090 Accrued payroll liabilities 3,248 3,182 Accrued expenses and deferred income (Note 6) 18,206 22,868 Accrued restructuring costs (Note 9) - 4,218 Other current liabilities 5,742 8,742 ---------- ---------- Total current liabilities 52,254 72,339 LINE OF CREDIT (Note 7) 17,844 9,723 OTHER LIABILITIES (Note 6) 491 3,009 DEFERRED INCOME TAXES 7,544 5,088 SHAREHOLDERS' EQUITY: Preferred stock - 500,000 shares authorized; None issued and outstanding - - Common stock - 30,000,000 shares authorized; 18,077,793 and 18,160,808 shares issued and outstanding at December 31, 1997 and September 27, 1998, respectively 149,149 149,581 Accumulated deficit (36,602) (48,550) Cumulative foreign currency translation adjustment (7,658) (6,165) ---------- ---------- Total shareholders' equity 104,889 94,866 ---------- ---------- TOTAL $ 183,022 $ 185,025 ========== ========== See notes to consolidated financial statements.
1
FEI Company and Subsidiaries Condensed Consolidated Statements of Operations (In thousands, except share data) (Unaudited) Thirteen Weeks Ended Thirty-Nine Weeks Ended ---------------------- ----------------------- Sept. 28, Sept. 27, Sept. 28, Sept. 27, 1997 1998 1997 1998 --------- --------- --------- ---------- NET SALES $ 39,036 $ 42,440 $ 115,061 $ 123,316 COST OF SALES (Notes 3, 4 and 6) 22,412 36,564 71,588 86,272 --------- --------- --------- --------- Gross profit 16,624 5,876 43,473 37,044 OPERATING EXPENSES: Research and development costs (Note 8) 3,370 8,075 12,013 14,986 Selling, general and administrative costs 8,872 9,579 28,570 29,350 Amortization of intangibles 530 629 1,467 1,887 Purchased in-process research and development (Note 2) - - 38,046 - Restructuring and reorganization costs (Note 9) - 4,957 2,478 4,957 --------- --------- --------- --------- Total operating expenses 12,772 23,240 82,574 51,180 OPERATING INCOME (LOSS) 3,852 (17,364) (39,101) (14,136) OTHER INCOME (EXPENSE): Valuation adjustment (Note 4) - (3,267) - (3,267) Other 231 (242) (49) (979) --------- --------- --------- ---------- Total other income (expense) 231 (3,509) (49) (4,246) INCOME (LOSS) BEFORE TAXES 4,083 (20,873) (39,150) (18,382) TAX EXPENSE (BENEFIT) 1,634 (7,306) 1,297 (6,434) --------- --------- --------- --------- NET INCOME (LOSS) $ 2,449 $ (13,567) $ 40,447) $ (11,948) ========= ========= ========= ========= PER SHARE DATA: Net income (loss) per share, basic $ 0.14 $ (0.75) $ (2.50) $ (0.66) ========= ========= ========= ========= Net income (loss) per share, diluted $ 0.13 $ (0.75) $ (2.50) $ (0.66) ========= ========= ========= ========= WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 17,890 18,105 16,177 18,087 ========= ========= ========= ========= Diluted 19,586 18,105 16,177 18,087 ========= ========= ========= ========= See notes to consolidated financial statements.
2
FEI Company and Subsidiaries Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Thirty-Nine Weeks Ended ----------------------- September 28, September 27, 1997 1998 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (40,447) $ (11,948) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 4,185 5,953 Purchased in-process research and development 38,046 - Other 8,797 27,805 ----------- ----------- Net cash provided by operating activities 10,581 21,810 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of equipment (9,728) (6,611) Investment in software development (1,215) (1,210) Net change in leases receivable (278) 314 ----------- ----------- Net cash used in investing activities (11,221) (7,507) CASH FLOWS FROM FINANCING ACTIVITIES: Net payments on line of credit (247) (8,121) Proceeds from exercise of stock options 1,700 432 Net cash received from Philips 8,000 - Repayment of note to Philips - (2,718) ----------- ----------- Net cash provided by (used in) financing activities 9,453 (10,407) FOREIGN CURRENCY TRANSLATION ADJUSTMENT (5,272) 1,493 ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 3,541 5,389 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 16,394 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,541 $ 21,783 =========== =========== See notes to consolidated financial statements.
3 FEI COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share data) (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business - FEI Company and its wholly owned subsidiaries (the "Company") design, manufacture, market and service focused ion beam ("FIB") imaging workstations, transmission electron microscopes ("TEMs"), scanning electron microscopes ("SEMs"), "DualBeam" systems using these technologies in combination, and components of these products. The Company has manufacturing operations in Hillsboro, Oregon; Eindhoven, The Netherlands; and Brno, Czech Republic. Sales and service operations are conducted in the United States and eight other countries, constituting a majority of the worldwide market for the Company's products. In addition, the Company's products are sold through distribution agreements with affiliates of Philips Electronics N.V. ("Philips") located in approximately 20 additional countries. The Company also sells its products through independent representatives in certain countries. The Company's FIB workstations 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 electron microscope products are sold primarily to life science and materials science research institutes, universities and industrial customers, as well as to semiconductor and thin film head manufacturers. Basis of Presentation - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. In addition to the adjustments for normal recurring accruals and changes in estimates, the Company recorded pre-tax charges totaling $21,871 for restructuring and reorganization, as well as various valuation and reserve adjustments, in the third quarter of 1998. In addition, the Company recorded charges in the first quarter of 1997 of $38,046 associated with the purchase of in-process research and development, as a result of the Company's combination with PEO Operations. The Company also recorded a $2,478 restructuring and reorganization charge in the first quarter of 1997 primarily associated with the relocation of the Company's Wilmington, Massachusetts manufacturing operations. See Note 9. Reclassifications - Certain reclassifications have been made to the 1997 financial statements to conform to the current year presentation. 2. THE COMBINATION On February 21, 1997, FEI Company ("Pre-Combination FEI") acquired substantially all of the assets and liabilities of the electron optics business (the "PEO Operations") of Philips Business Electronics International B. V. ("PBE"), a wholly owned subsidiary of Philips (the "Combination"). 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 PBE, 55% of the shares of Common Stock then outstanding. Because PBE acquired control of the Company by acquiring 55% of the outstanding voting securities of the Company, the Combination was treated as a "reverse acquisition" for accounting and financial reporting purposes whereby purchase accounting was applied to the financial statements of Pre-Combination FEI. The 1997 results of operations reflect the results of the PEO operations through February 21, 1997, and the combined results of the Company from February 22, 1997 and thereafter. 4 The Company obtained an appraisal of the fair market value of the assets acquired to serve as a basis for allocation of the total purchase price of $122,872 to the various classes of assets. To determine the value of each of Pre-Combination FEI's product lines, projected product revenues, net of provision for operating expenses, income taxes and returns on requisite assets, were discounted to a present value. This approach was applied to existing technology as well as to research and development projects which had not been proven technologically feasible and which had not generated revenue as of the date of the Combination. As a result of this valuation, the fair values of existing technology and in process research and development of Pre-Combination FEI were determined to be $16,490 and $38,046, respectively. The amortization periods for existing technology and goodwill have been established at 12 years and 15 years, respectively. It is possible that estimates of anticipated future gross revenues, the remaining estimated economic life of products or technologies, or both, may be reduced due to competitive pressures or other factors. In accordance with the Company's policy to expense research and development costs as incurred, a one-time charge of $38,046 for the write-off of acquired in-process research and development was recorded immediately subsequent to the closing of the Combination. 3. INVENTORIES Inventories consisted of the following:
December 31, September 27, 1997 1998 ------------ ------------- Raw materials and assembled parts $ 24,987 $ 22,704 Work in process 12,123 15,699 Finished goods 5,998 11,742 ------------ ------------- Total inventories 43,108 50,145 Reserve for obsolete inventory (3,901) (4,505) ------------ ------------- Net inventories $ 39,207 $ 45,640 ============ =============
During the thirteen weeks ended September 27, 1998 the Company recognized charges in cost of sales totaling $1,286 for inventory write-offs and obsolescence reserves. These charges related primarily to planned product upgrades and are reflected in the reserve for obsolete inventory as of September 27, 1998. 4. OTHER ASSETS Other assets consisted of the following:
December 31, September 27, 1997 1998 ------------ ------------- Non-current service inventories, net of obsolescence reserves of $3,862 and $6,410, respectively $ 8,635 $ 6,497 Capitalized software development costs, net of amortization of $111 and $421, respectively 2,059 2,679 Goodwill, net of amortization of $951 and $1,807 respectively 16,171 15,273 Existing technology, net of amortization of $1,145 and $2,176, respectively 15,345 14,314 Patents, net of amortization of $18 and $34, respectively 303 287 Investment in Norsam 3,267 - Deposits and other 300 421 ------------ ------------- Net other assets $ 46,080 $ 39,471 ============ =============
5 During the thirteen weeks ended September 27, 1998 the Company recognized charges in cost of sales totaling $3,106 for non-current service inventory write-offs and obsolescence reserves related to the Company's U.S. service business. These charges reflect the consolidation of the U.S. service operations in Hillsboro, Oregon and the related closure of the Company's former U.S. TEM and SEM service headquarters in Mahwah, New Jersey. The Company owns 500,000 shares of Norsam Technologies, Inc. ("Norsam") Series A Preferred Stock it initially received in exchange for three FIB workstations sold to Norsam by Pre-Combination FEI in 1996. In September 1998, management determined that the carrying value of its cost-method investment in Norsam was impaired, and, accordingly, recorded a valuation adjustment of $3,267 during the third quarter of 1998. 5. CURRENT ACCOUNTS WITH PHILIPS Current accounts with Philips represent accounts receivable and accounts payable between the Company and other Philips units. The current account transactions relate to intercompany purchases of goods and services. Current accounts with Philips consisted of the following:
December 31, September 28, 1997 1998 ------------ ------------- Current accounts receivable $ 7,678 $ 3,257 Current accounts payable (16,752) (24,347) ------------ ------------- Net current accounts with Philips $ (9,074) $ (21,090) ============ =============
6. ACCRUED EXPENSES AND DEFERRED INCOME During the thirteen weeks ended September 27, 1998 the Company re-evaluated an upgrade program undertaken primarily to replace certain third party manufactured components within the installed base in a TEM product series. In addition, certain upgrades are planned for selected FIB products. A charge to cost of sales of $3,751 was recognized to reflect the decision to proceed with these upgrade programs. As of September 27, 1998, $1,614, representing the estimated cost of the programs over the next twelve months, is included in accrued expenses and deferred income. The $2,137 non-current portion of the estimated cost is included in other liabilities. During 1998 the Company has sold an increasing number of in-line FIB and DualBeam systems used in the manufacturing process, which necessitate a higher level of warranty support than do systems used in laboratories. During the third quarter of 1998 the Company evaluated its reserve for estimated warranty costs and recorded an additional charge to cost of sales and increase in warranty reserves of $1,383. 7. LINE OF CREDIT Under terms of the line of credit agreement, the Company must maintain certain financial ratios and covenants. As of September 27, 1998, the Company was in violation of certain of these covenants. The Company's bank has waived these covenant violations and in November 1998 the Company executed an amendment to its loan agreement. 6 8. RESEARCH AND DEVELOPMENT COSTS During the thirteen weeks ended September 27, 1998 the Company's development program for its next generation platform technology reached the working prototype stage. This technology was developed by an affiliate of Philips under a successful efforts development contract. The $3,581 cost of this program was charged to research and development costs in the thirteen weeks ended September 27, 1998 when the prototypes were completed and the obligation was incurred. 9. RESTRUCTURING AND REORGANIZATION On July 29, 1998 the Company announced a restructuring and reorganization program to consolidate operations, reduce operating expenses, and provide for outsourcing of certain manufacturing activities. The Company plans to eliminate approximately 160 positions worldwide, or about 15% of its work force as of July 29, 1998. The charge of $4,957 recognized in the thirteen weeks ended September 27, 1998 primarily represents the cost of providing severance, outplacement assistance, and associated benefits to affected employees. Of this charge, $4,218 remains as a liability at September 27, 1998. Additional charges totaling approximately $1,500 are expected to be recorded as they are incurred through June 1999 for transitional costs of consolidating operations and outsourcing certain activities. In March 1997, the Company transferred its ElectroScan manufacturing activities to its manufacturing facility in Eindhoven, The Netherlands, and abandoned the majority of the technology acquired. Consequently, $1.5 million of goodwill attributable to the acquisition of the assets of ElectroScan Corporation was written off and charged to income in the first quarter of 1997, along with estimated severance costs for 11 ElectroScan employees, and other related costs. There are no remaining liabilities from this March 1997 activity reflected in the Company's balance sheets at December 31, 1997 or September 27, 1998. 10. COMPREHENSIVE INCOME The Company adopted SFAS No. 130, Reporting Comprehensive Income, in the first quarter of 1998. The primary component of comprehensive income not included in net income (loss) for the Company is the effect of foreign currency translation for the Company's foreign subsidiaries. Comprehensive income consisted of the following:
Thirteen Weeks Ended Thirty-Nine Weeks Ended ---------------------- ----------------------- Sept. 28, Sept. 27, Sept. 28, Sept. 27, 1997 1998 1997 1998 --------- --------- ---------- ---------- Net income (loss) as reported $ 2,449 $ (13,567) $ (40,447) $ (11,948) Effect of foreign currency translation (519) 943 (3,427) 970 --------- --------- --------- ---------- Comprehensive income (loss) $ 1,930 $ (12,624) $ (43,874) $ (10,978) ========= ========= ========= ==========
7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS The following table sets forth certain unaudited financial data for the periods indicated as a percentage of net sales.
Thirteen Weeks Ended Thirty-Nine Weeks Ended ---------------------- ----------------------- Sept. 28, Sept. 27, Sept. 28, Sept. 27, 1997 1998 1997 1998 --------- --------- --------- ---------- Net sales................................. 100.0% 100.0% 100.0% 100.0% Cost of sales............................. 57.4% 86.2% 62.2% 70.0% ------ ------ ------ ------ Gross profit........................... 42.6% 13.8% 37.8% 30.0% Research and development costs............ 8.6% 19.0% 10.4% 12.2% Selling, general and administrative costs. 22.7% 22.6% 24.8% 23.8% Amortization of intangibles............... 1.4% 1.5% 1.3% 1.5% Purchased in-process research and development............................ - - 33.1% - Restructuring and reorganization costs.... - 11.7% 2.2% 4.0% ------ ------ ------ ------ Operating income (loss)................ 9.9% (40.9%) 34.0%) (11.5%) Total other income (expense).............. 0.6% (8.3%) 0.0% (3.4%) ------ ------ ------ ------ Income (loss) before taxes................ 10.5% (49.2%) (34.0%) (14.9%) Tax expense (benefit)..................... 4.2% (17.2%) 1.1% (5.2%) ------ ------ ------ ------ Net income (loss)......................... 6.3% (32.0%) (35.2%) (9.7%) ====== ====== ====== ======
Net sales. Net sales for the thirteen weeks ended September 27, 1998 increased $3.4 million (8.7%) and for the thirty-nine weeks ended September 27, 1998 increased $8.3 million (7.2%) compared to the corresponding periods in 1997. The increase in sales for the comparable thirteen week periods is primarily the result of increases in sales of FIB, TEM and SEM systems. The increase in sales for the thirty-nine week period was affected by the fact that the 1998 period includes net sales of the combined company, while the 1997 period includes net sales of the PEO Operations only through February 21, 1997 and net sales of the combined company thereafter. Sales of components and FIB systems increased while sales of TEM and SEM products decreased during the thirty-nine week period of 1998 compared to the same period in 1997. Sales outside the United States accounted for 53% of sales for the thirty-nine weeks ended September 27, 1998 and 65% of sales for the thirty-nine weeks ended September 28, 1997. The Company expects that sales outside the United States will continue to represent a significant percentage of its net sales. Sales to European customers represented approximately 29% of net sales, while sales to the Asia Pacific Region ("APR") represented approximately 20% of net sales for the first three quarters of 1998. If the recent negative economic events in Asia persist or worsen, they could have a negative impact on the Company's sales to APR during 1999. In addition, the Company sells a significant portion of its products to semiconductor manufacturers. The semiconductor manufacturing industry is currently experiencing a worldwide downturn, including manufacturing over-capacity. Several leading companies in this industry have announced plans to slow down or cancel planned equipment purchases, which may have a negative impact on the Company's sales to this market sector during 1999. Gross profit. Gross profit for the thirteen weeks ended September 27, 1998 decreased $10.7 million (64.7%) and for the thirty-nine weeks ended September 27, 1998 decreased $6.4 million (14.8%) compared to the corresponding periods in 1997. During the thirteen weeks ended September 27, 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 profit as a percentage of sales would have been 36.3% for the thirteen weeks ended September 27, 1998. 8 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 thirty-nine weeks ended September 28, 1997. This write-up of Pre-Combination FEI's assets was a result of the reverse acquisition accounting applied to the Combination. Research and development costs. Research and development costs for the thirteen weeks ended September 27, 1998 increased $4.7 million (139.6%) and for the thirty-nine weeks ended September 27, 1998 increased $3.0 million (24.7%) compared to the corresponding periods in 1997. As a percentage of sales, research and development costs were 19.0% for the thirteen weeks ended September 27, 1998 and 12.2% for the thirty-nine weeks ended September 27, 1998 compared to 8.6% and 10.4% for the corresponding periods in 1997. The thirteen weeks ended September 27, 1998 included a charge to research and development costs of $3.6 million for a contract development project that reached the working prototype stage of development during the quarter. The 1997 expense includes the write-off of $1.6 million of previously capitalized software development costs in the first quarter. Selling, general and administrative costs. Selling, general and administrative costs for the thirteen weeks ended September 27, 1998 increased $0.7 million (8.0%) and for the thirty-nine weeks ended September 27, 1998 increased $0.8 million (2.7%) compared to the corresponding periods in 1997. As a percentage of sales, selling, general and administrative costs were 22.6% for the thirteen weeks ended September 27, 1998 and 23.8% for the thirty-nine weeks ended September 27, 1998 compared to 22.7% and 24.8% for the corresponding periods in 1997. The thirteen-week period of 1998 includes charges totaling $0.2 million related to the closure of the Company's Mahwah, New Jersey facility and the consolidation of U.S. service operations in Hillsboro, Oregon. The increase in selling, general and administrative costs for the 1998 thirty-nine week period was primarily attributable to the fact that the 1998 period includes the expenses of the combined company, while the 1997 period included the expenses of the PEO Operations only through February 21, 1997 and of the combined company thereafter. The first quarter of 1997 also included $1.1 million in bad debt expenses. Amortization of intangibles. Amortization of intangibles for the thirty-nine weeks ended September 27, 1998 increased $0.4 million (28.6%) compared to the corresponding period in 1997. This increase reflects amortization of the intangibles resulting from the Combination for thirty-nine weeks in 1998 as compared to amortization for only thirty-one weeks in 1997. Restructuring and reorganization costs. On July 29, 1998 the Company announced a restructuring and reorganization program to consolidate operations, reduce operating expenses, and provide for outsourcing of certain manufacturing activities. The Company plans to eliminate approximately 160 positions worldwide, or about 15% of its work force as of July 29, 1998. The charge of $5.0 million recognized in the thirteen weeks ended September 27, 1998 primarily represents the cost of providing severance, outplacement assistance, and associated benefits to affected employees. Of this charge, $4.2 million remains as a liability at September 27, 1998. Additional charges totaling $1.5 million are expected to be recorded as they are incurred through June 1999 for transitional costs of consolidating operations and outsourcing certain activities. In March 1997, the Company transferred its ElectroScan manufacturing activities to its manufacturing facility in Eindhoven, The Netherlands, and abandoned the majority of the technology acquired. Consequently, $1.5 million of goodwill attributable to the acquisition of the assets of ElectroScan Corporation was written off and charged to income in the first quarter of 1997, along with estimated severance costs for 11 ElectroScan employees, and other related costs. Other income (expense). In September 1998, management determined that the carrying value of its cost-method investment in Norsam was impaired, and, accordingly, recorded a $3.3 million valuation adjustment. 9 Income tax expense. The effective income tax rate was 35% for the thirteen weeks and thirty-nine weeks ended September 27, 1998. The 1998 rate differs from the U.S. federal statutory tax rate of 34% primarily as a result of state and foreign taxes, the amortization of intangible assets not deductible for income tax purposes, and the favorable tax effect of the Company's use of a foreign sales corporation for exports from the U.S. The tax expense recognized in the thirty-nine weeks ended September 28, 1997 is attributable to pretax operating losses in certain tax jurisdictions, offset by the nondeductible write-off of purchased in process research and development. LIQUIDITY AND CAPITAL RESOURCES At September 27, 1998, the Company had total cash and cash equivalents of $21.8 million compared to $16.4 million at December 31, 1997. Cash provided by operating activities for the thirty-nine weeks ended September 27, 1998 was $21.8 million compared to $10.6 million for the thirty-nine weeks ended September 28, 1997. The primary reasons for the increase in cash flows from operating activities during the 1998 thirty-nine week period compared to the 1997 period were fluctuations in receivables, inventories, accounts payable, current accounts with Philips, and other working capital components. Investing activities used $7.5 million during the thirty-nine weeks ended September 27, 1998 and $11.2 million during the thirty-nine weeks ended September 28, 1997, primarily due to acquisitions of equipment and investment in software development. The Company expects to continue to invest in plant and equipment and technology needed for future business requirements, as well as to invest in internally developed software for its products. Financing activities used $10.4 million for the thirty-nine weeks ended September 27, 1998. These cash uses were primarily for net repayments under the Company's bank line of credit in the amount of $8.1 million as well as repayment of $2.7 million to Philips under an obligation incurred in conjunction with the Combination. During the comparable 1997 period, financing activities provided $9.5 million, primarily resulting from cash advanced by Philips as part of the Combination, as well as from cash received from the exercise of stock options. The Company recorded pre-tax charges totaling $21.9 million for restructuring and reorganization, as well as various valuation and reserve adjustments, in the third quarter of 1998. Of this total, $7.7 million represented non-cash valuation adjustments, $1.3 million was paid out in cash in the third quarter of 1998, and $12.9 million is expected to be paid out in cash through the end of 1999. The Company expects to continue to use cash to fund the growth of its operations. While the Company believes its cash and cash equivalents, cash flows from operating activities, and borrowings available under its $25 million line of credit will be sufficient to fund operations during the near term, the Company intends to seek an increase in its borrowing capacity. BACKLOG The Company's backlog consists of purchase orders it has received for products it expects to ship within the next 12 months. The Company's backlog at September 27, 1998 was approximately $62 million. A substantial portion of the Company's backlog relates to orders for a relatively small number of products. As a result, the timing of the receipt of orders could have a significant impact on the Company's backlog at any date. For this and other reasons, the amount of backlog at any date is not necessarily determinative of revenue in future periods. 10 YEAR 2000 COMPUTER SYSTEM IMPACT The Company has completed (i) an inventory of Year 2000 issues related to its business, (ii) an analysis of the business impact of those issues, other than Year 2000 compliance by each of its suppliers and (iii) defined a strategy for resolving Year 2000 problems expected to affect the Company. During the second half of 1998 the Company began to solicit information from its suppliers on their Year 2000 readiness and work on execution of the Company's Year 2000 strategy. In 1999 the Company expects to complete plans for risk management and any contingency plans determined to be necessary. The Company has assessed the Year 2000 compliance of each of the products currently manufactured and sold by the Company. Currently, the SEMATECH test standard is being applied against all new products and those prepared to ship. The Company believes each of those products and their component parts is Year 2000 compliant except certain workstation models that use a Windows 3.11 operating system. The date recognition deficiencies of this system can be remedied with a patch available from Microsoft Corporation and, in any event, do not affect the core functions of those products. The Company has also analyzed its internal manufacturing control, accounting and information management systems and determined that those systems have no material Year 2000 compliance deficiencies. In this analysis, the Company has assumed that basic public utilities such as gas, electric and telephone services will continue to be available for operations of the Company on and after January 1, 2000 in the U.S., The Netherlands and the Czech Republic. If this assumption proves incorrect, the operations of the affected manufacturing location would be materially adversely affected for the duration of the utility interruption. In the fourth quarter of 1998 the Company plans to distribute a letter requiring each of its suppliers of parts and services to provide information to the Company about that entity's anticipated Year 2000 compliance. Until that information is received, the Company cannot complete that phase of the Company's Year 2000 assessment. To date, the Company has not received notice of or become aware of a material Year 2000 deficiency by a supplier. At this time, the Company believes costs incurred in responding to other parties' Year 2000 computer system deficiencies, together with the cost of any required modifications to the Company's ancillary systems, will not have a material impact on the Company's results of operations or financial condition. This analysis may be modified as the Company receives responses from its parts and services suppliers. FORWARD-LOOKING STATEMENTS From time to time the Company may issue forward-looking statements that are subject to a number of risks and uncertainties. The statements in this report concerning increased investment in plant and equipment and software development, the portions of the Company's sales consisting of international sales, expected capital requirements, and year 2000 compliance by the Company and its customers and suppliers constitute forward-looking statements that are subject to risks and uncertainties. Factors that could materially decrease the Company's investment in plant and equipment and software development include, but are not limited to, downturns in the IC manufacturing market, lower than expected customer orders and changes in product sales mix. Factors that could materially reduce the portion of the Company's sales consisting of international sales include, but are not limited to, competitive factors, including increased international competition, new product offerings by competitors and price pressures, fluctuations in interest and exchange rates (including changes in relevant foreign currency exchange rates between time of sale and time of payment), changes in trade policies, tariff regulations and business conditions and growth in the electronics industry and general economies, both domestic and foreign. Factors that could materially increase the Company's capital requirements include, but are not limited to, receipt of a significant portion of customer orders and product shipments near the end of a quarter and the other factors listed above. 11 Part II - Other Information Item 2. Changes in Securities On February 21, 1997 (the "Combination Closing"), the Company combined with the electron optics business of Philips Electronics N.V. pursuant to a Combination Agreement dated November 15, 1996. At the Combination Closing, the Company issued 9,728,807 shares of its Common Stock to Philips Business Electronics International B.V., a Netherlands corporation ("PBE"), as consideration for all of the outstanding shares of Philips Electron Optics International B.V., a Netherlands corporation, and Philips Electron Optics, Inc., a Delaware corporation, both wholly owned subsidiaries of PBE immediately prior to the Combination Closing. The Combination Agreement provides in relevant part that at the time of issuance by the Company of any shares of Common Stock upon the exercise of a stock option outstanding on the date of the Combination Closing, the Company is required to issue to PBE a number of additional shares of Common Stock such that the shares of Common Stock issued to PBE continue to represent 55% of the Outstanding Common Stock of the Company, as defined in the Combination Agreement. During the thirty-nine weeks ended September 27, 1998 the Company issued 1,788 shares of its Common Stock to PBE pursuant to this provision of the Combination Agreement. The shares issued were not registered under the Securities Act of 1933, and the issuance was made in reliance on Section 4(2) of the Securities Act as a transaction not involving a public offering. The consideration received by the Company for the shares issued, together with the shares issued to PBE at the Combination Closing, was the outstanding shares of Philips Electron Optics International B.V. and Philips Electron Optics, Inc. Item 5. Other Information In accordance with amendments adopted on May 21, 1998 to Rule 14a-4 under the Securities Exchange Act of 1934, if notice of a shareholder proposal to be raised at the annual meeting of shareholders is received at the principal executive offices of the Company after March 10, 1999 (45 days prior to the month and date in 1999 corresponding to the date on which the Company mailed its proxy materials for the 1998 annual meeting), proxy voting on that proposal when and if raised at the 1999 annual meeting will be subject to the discretionary voting authority of the designated proxy holders. Any shareholder proposal to be considered for inclusion in proxy materials for the Company's 1999 annual meeting must be received at the principal executive offices of the Company no later than December 24, 1998. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K None. 12 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FEI COMPANY Dated: November 11, 1998 /s/ VAHE A. SARKISSIAN ---------------------------------------- Vahe A. Sarkissian Chief Executive Officer /s/ MARK V. ALLRED ---------------------------------------- Mark V. Allred Controller (Principal Accounting Officer) and Acting Chief Financial Officer (Principal Financial Officer) 13 EX-27 2 FDS
5 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. 1,000 OTHER DEC-31-1998 SEP-27-1998 21,783 0 50,183 (2,046) 45,640 123,190 37,179 (15,447) 185,025 72,339 0 0 0 149,581 (54,715) 185,025 123,316 123,316 86,272 137,452 0 0 790 (18,382) (6,434) (11,948) 0 0 0 (11,948) (0.66) (0.66) The reporting period is 39 weeks.
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