ITEM
1. BUSINESS
Overview
We are a leading supplier
of equipment and solutions to the high growth segments of the semiconductor,
data storage and industry and institute markets. Our solutions are based on a combination of patented and
proprietary technologies that produce highly focused electron and ion
beams. These solutions enable our
customers to view and analyze structures in three dimensions and to measure,
analyze, diagnose and modify deep sub-micron and atomic structures below the
surface in semiconductor wafers and devices, data storage components and
biological and industrial materials.
This enables our customers to develop products faster, control
manufacturing processes better and improve production yields.
We refer to our
comprehensive suite of products for three dimensional structural process
measurement and analysis as Structural Process Management
solutions. These solutions include
focused ion beam, or FIB, equipment, scanning electron microscopes, or SEMs, transmission
electron microscopes, or TEMs, and DualBeam systems, which combine a FIB and
SEM on a single platform. The
development of these solutions has been driven by our strong technology base
that includes 146 patents and the technical expertise and knowledge base
of approximately 355 research and development personnel in the United States
and Europe.
By offering monitoring
functions, defect review, failure analysis and modification of features as
small as 0.05 microns in diameter, our solutions address the increasingly
complex fabrication requirements of semiconductor manufacturers. Our three dimensional metrology allows
manufacturers to view device features below the surface, and thus permits
manufacturers to obtain more data and achieve greater control of the
manufacturing process. Taken together,
these advanced solutions enable our customers to measure, analyze, diagnose and
modify integrated circuits, shorten product development cycles, control
development costs and increase yields in their manufacturing processes.
Our products for trimming
GMR heads, which are used to write data to disks, allow data storage
manufacturers to produce next-generation products with greater precision and
without incurring the costs of retooling their fabrication lines. Our products are also used by GMR head
manufacturers for three dimensional metrology to better control the
manufacturing process and increase yields.
Our advanced
TEMs permit biologists and research scientists to observe and map the
natural state of biological cells and their components required for the
development of new pharmaceutical products and for other applications that
require near atomic level resolution.
We sell our products to a
geographically diverse base of customers in the semiconductor, data storage and
industry and institute markets. To date
we have a total worldwide installed base of approximately 5,700 systems, which
we believe provides a strong foundation for future business.
Core technologies
We use four core
technologies to deliver a range of value-added customer solutions. Our core technologies include:
• focused
ion beams, which allow modification of structures in sub-micron geometries,
• focused
electron beams, which allow imaging, analysis and measurement of structures at
sub-micron and even atomic levels,
• beam
gas chemistry, which increases the effectiveness of ion and electron beams and
also allows deposition of materials on structures at sub-micron levels and
• system
automation, which provides faster access to data and improves ease of use for
operators of our systems.
Particle beam technologies-focused ion beams and electron
beams. The emission
of ions, which are positively or negatively charged atoms, or electrons from a
source material is fundamental to each of our 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. Through FIBs the surface can be modified or
milled with sub-micron precision by direct action of the ion beam in
combination with gases. Secondary electrons
and ions may also be collected for imaging and compositional analysis. Our ion and electron beam technologies
provide advanced capabilities and applications when coupled with our other core
technologies.
Beam gas chemistries. Beam gas chemistry plays an important role
in enabling our FIBs to perform many tasks successfully. Beam gas 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 the enhanced removal of material from the
sample. Both of these processes are
critical to optimizing and expanding FIB applications. The semiconductor and data storage markets
have growing needs for gas chemistry technologies, and we have aligned our
development strategy with the requirements of these industries.
• Deposition: Deposition of materials enables our FIBs to
connect or isolate features electrically on an integrated circuit. A deposited
layer of metal also can be used before FIB milling to protect surface features
for more accurate cross-sectioning or sample preparation.
• Etching: The fast, clean and selective removal of
material is the most important function of our FIBs. Our FIBs have the ability to mill specific types of material
faster than other surrounding material.
This process is called selective etching.
System automation. Drawing on our knowledge of industry needs
and using robotics and image recognition software, we have developed automation
capabilities that allow us to increase system performance, speed and precision. These capabilities have been especially
important to our development efforts for in-line products and applications in
the data storage and semiconductor markets.
Two important areas where we have developed significant automation
technologies are TEM sample preparation and three-dimensional process
control. TEMs are widely used in
the semiconductor and data storage markets to obtain valuable high-resolution
images of extremely small, even atomic- level, structures. TEM sample preparation has traditionally
been a slow and difficult manual process.
We have automated this process, significantly improving the sample
consistency and overall throughput.
Similarly, by automating three-dimensional process control
applications, we allow customers to acquire previously unobtainable subsurface
process metrics directly from within the production line, improving process
management. As a result of our
automation capabilities, our solutions are now moving from “lab to fab.”
Products
We employ our core
technologies in a wide array of products, including TEMs and
SEMs that collectively comprise our electron optics products. FIBs and DualBeam products, which incorporate a SEM
and FIB into a single system, collectively comprise our microelectronics
products.
When configured with our
core automation and beam gas chemistry technologies, our baseline products
perform a wide range of Structural Process Management functions:
• Our
DualBeam
systems deliver Structural Process Management applications for the
semiconductor and data storage markets to measure, analyze, diagnose and modify
sub-micron structures.
• TEMs have
structural examination applications in the industry and institute market and
structural metrology applications in the semiconductor and data storage
markets.
• FIBs
are used for TEM sample preparation for all of our served markets, as well as
for design edit and photolithographic mask modification and repair in the
semiconductor market and pole trimming in the data storage market.
• SEM
products have applications for structural examination and are sold into the
industry and institute market and also in the semiconductor market.
Microelectronics
products
Our microelectronics
products include wafer SEMs, FIBs and DualBeam systems. These products and applications serve
customers in all of our markets. Microelectronics products are used in
the semiconductor industry for defect review and process monitoring, as well as
yield improvement and process development tasks for semiconductor fabrication
lines and supporting failure analysis laboratories. Applications include inspecting and evaluating lithography and
etch, monitoring metal step coverage, reviewing defects located by optical
detection tools, measuring overlay in cross section and conducting grain size
analysis. Microelectronics products are
also used to modify and repair photolithography masks used in the manufacture
of semiconductors. Included in our
microelectronics product offerings are systems that enable users to image, mill,
cut, modify and analyze the features of samples within sub-micron 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 sub-micron tolerances. Other important applications include bit
fail map navigation to memory cell arrays and on-wafer TEM sample preparation. We believe our microelectronics products
significantly speed and improve the functions of design edit, photolithography
mask modification and repair, failure analysis and process monitoring performed
by integrated circuit manufacturers, thereby shortening time to market for new
generations of integrated circuits and increasing the yield of fabrication
lines.
Our microelectronics
products can be used in other sub-micron, micromachining applications,
including the manufacture of thin-film heads for the data storage
industry. We believe 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. These products are also used for TEM sample preparation in the
industry and institute market.
Our microelectronics
products are described below.
Structural Nano-Fabrication
AutoTrim Series
Trimming
for thin-film head manufacturing
Sales of microelectronics
products accounted for approximately 45% of our net sales in 2001.
Electron optics
products
Our SEMs and TEMs,
which comprise our electron optics products, provide a range of solutions for
industrial and research purposes, including structural research, structural
biology, structural diagnostics and structural process control. Customers include industry and institute
clients, consisting of 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. Our electron optics products are adaptable
and user-friendly because our current products run on Windows NT® operating
systems. In addition, modular hardware
and software packages permit a basic instrument to be configured to specific
requirements and easily reconfigured if requirements change.
In general, our
SEMs allow for effective and nondestructive large specimen review, and our
current models incorporate advanced electron columns that provide very high
image resolution at low voltages.
Recent innovations in our environmental SEMs, or 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. Our TEMs allow for
advanced materials analysis, atomic-level image resolution and controlled
electron diffraction. Moreover, our
200kV and 300kV TEMs provide atomic resolution imaging for materials
science applications, and our 100kV TEMs provide integrated atomic element
mapping for life sciences applications.
Sales of electron optics
products accounted for approximately 36% of our net sales in 2001.
Component products
Our component products,
which consist of electron and ion emitters and focusing columns, are
manufactured with a variety of technical features to meet our needs and those
of our customers. We sell our electron
emitters primarily to manufacturers of electron beam equipment and scientific
research facilities. Ion emitters are
sold mainly to research and scientific facilities. We sell electron beam columns primarily to SEM manufacturers, and
we sell ion beam columns primarily to manufacturers of surface analysis systems
and other ion beam systems, as well as to research and scientific
facilities. We also manufacture single
crystal electron source rods and wire, which we sell to researchers and emitter
manufacturers for use in electron emitter fabrication and other research
applications.
Sales of component
products to third party customers accounted for approximately 4% of our net
sales in 2001.
Service business
Our systems are sold with
installation and scheduled warranty included.
Standard warranty on products is 12 months. Occasionally, an extended warranty period is provided. Once the warranty period expires, we offer
our customers the opportunity to purchase a service contract to cover planned maintenance
and repair of the system while in their facilities. Historically, approximately 80% of our customers purchase a
service contract after the warranty period expires. These service contracts are most often for a one-year period, but
multiple year service contracts are also occasionally sold. We also provide service on our systems under
time and materials billing arrangements.
We provide this field service capability through our subsidiaries
located in 22 countries around the world.
Service revenues
accounted for approximately 15% of our net sales in 2001.
Research and
development
Our research and
development staff at December 31, 2001 consisted of 355 employees,
including scientists, engineers, designer draftsmen and technicians, as well as
software developers. We also contract
with Philips Research
Laboratories for basic research applicable to our core focused ion beam
and electron beam technologies. In
2001, we paid Philips Research Laboratories approximately $3.2 million under
these research contracts. For more
information on Philips research arrangements, you should read the section of
our proxy statement for the 2002 annual meeting of shareholders entitled
“Certain Relationships and Related Transactions-Transactions and Relationships
between FEI and Philips.” For more
information you can also read Note 12 to the consolidated financial statements
contained elsewhere in this report.
We believe our knowledge
of field emission technology and products incorporating focused ion beams is
critical to our past and future performance in the focused charged particle
beam business. In developing new field-emission
based products, we have been able to combine our experience with a number of
outside resources. Drawing on these
resources, we have 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,
• secondary
ion mass spectrometry, or SIMS, map for visual display of chemical and
elemental analysis of materials,
• a
rigid stacked disk focusing column for greater beam control,
• a
process for deposition of insulating layers in integrated circuit modification
and
• enhanced
processes for wafer mapping and coordination between FIB tools and computer
assisted design, or CAD, navigational software.
From time to time we
engage in joint research and development projects with some of our 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. We have periodically 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, or MEDEA, program, which was established
in 1997. We also maintain other
informal collaborative relationships with universities and other research
institutions, and we work with several of our customers to evaluate new
products. We also engage in research
and development programs with various U.S. governmental agencies. Under these contracts we must undertake
mandated hiring practices and other obligations required of entities
contracting with the U.S. government.
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 markets
into which we sell our principal products, are subject to rapid technological
development, product innovation and competitive pressures. Consequently, we have expended substantial
amounts on research and development. We
generally intend to continue at or above our present level of research and
development expenditures and believe that continued investment will be
important to our continued ability to address the needs of our 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. We are also expending efforts on gas chemistry compatible with
copper-etching. In addition to
beam chemistry, we have undertaken a significant development effort to develop
an automated platform for handling 300 mm integrated circuit wafers in a DualBeam
configuration. Also, we developed
important system automation for a new TEM platform that was recently introduced
into the market. We believe these areas
hold promise of yielding significant product enhancements. Research and development efforts are subject
to change due to product evolution and changing market needs. Often, these changes cannot be
predicted. Research and development
expenses were $21.9 million in 1999, $31.6 million in 2000 and $41.5
million in 2001.
Manufacturing
We have manufacturing
operations located in Hillsboro, Oregon; Eindhoven, The Netherlands; Peabody,
Massachusetts; and Brno, Czech Republic.
Our microelectronics product manufacturing operations consist of
fabricating
components, testing components and subassemblies from Eindhoven and
assembling and testing finished products.
Our 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. We execute orders using an integrated logistics automation system
that controls the flow of goods. We
also fabricate electron and ion source materials and manufacture component
products at our facilities in Oregon.
Our production schedule
is generally based on a combination of sales forecasts and the receipt of
specific customer orders. We inspect
all components, subassemblies and finished products for compliance with FEI and
customer specifications. Following
assembly, we ship all products in custom protective packaging to prevent damage
during shipment.
Although many of the
components and subassemblies included in our system products are standard
products, a significant portion of the mechanical parts and subassemblies are
custom made by one or two suppliers, including Philips Enabling Technologies
Group, B.V., or ETG. In addition to
ETG, we obtain a significant portion of our component parts from a limited
number of suppliers. RIPA Holding B.V.,
or RIPA, is a sole source for electronic subassemblies that were, until
recently, manufactured at our facilities in Eindhoven. We believe some of the components supplied
to us are available to the suppliers only from single sources. We monitor those parts subject to single or
a limited source supply to ensure that adequate sources are available to
maintain manufacturing schedules.
Although we believe we would be able to develop alternate sources for
any of the components used in our 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 us. In the ordinary course,
we continually evaluate our existing suppliers and potential different or
additional suppliers to determine whether changes in suppliers may be
appropriate.
Sales, marketing and service
Our sales and marketing
staff at December 31, 2001 consisted of approximately 220 employees,
including account managers, direct salespersons, sales support management,
administration, demo lab personnel, marketing support, product managers,
product marketing engineers, applications specialists and technical
writers. Applications specialists
identify and develop new applications for our products, whose efforts we
believe will further expand our microelectronics products and electron optics
products markets. Our 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.
We require sales
representatives to have the technical expertise and understanding of the
businesses of our principal and potential customers to meet effectively the
demanding requirements for selling our products. Normally, a sales representative will have the requisite
knowledge of, and experience with, our products at the time the sales
representative is hired. If additional
training is needed, our applications scientists familiarize the sales
representative with our products. Our
marketing efforts include presentations at trade shows and publication of a
semi-annual technical newsletter. In
addition, our employees publish articles in scientific journals and make
presentations at scientific conferences.
In a typical sale, a
potential customer is provided with information about our products, including
specifications and performance data, by one of our salespersons. We then make a presentation at our facilities. The customer participates in a product
demonstration by the applications team, using samples provided by the
customer. The sales cycle for our
systems typically ranges from three to 12 months and can be longer when
our customers are evaluating new applications of our technology.
Our microelectronics
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 may purchase service
contracts for our microelectronics products and electron optics products of one
year or more in duration after expiration of any warranty. We employ service engineers in each of the
three regions in which we have sales and service divisions. We also contract with independent service
representatives for microelectronics products service in Israel, South Korea,
Taiwan and Singapore. Effective the
beginning of 2002, we are providing our Taiwan and Singapore service customers
with our own service engineers rather than independent service representatives,
and we expect to add service engineers in other locations as needed. Due to a shift in sales toward the
semiconductor manufacturing market, which generally has
higher demands for responsiveness and 24-hour support, we anticipate
further increasing our investment in service and support activities for
electron optics products and microelectronics products sold into this market.
Sales outside North
America accounted for 57% of our net product and service sales in 2001. We expect international sales to continue to
represent a significant percentage of our net sales. For more information read Note 15 to the consolidated
financial statements contained elsewhere in this report.
Competition
The markets for sale of
microelectronics products, electron optics products and component products are
highly competitive. A number of our
competitors and potential competitors have greater financial, marketing and
production resources than we do.
Additionally, markets for our products are subject to constant change,
in part due to evolving customer needs.
As we respond to this change, the elements of competition as well as
specific competitors may change.
Moreover, one or more of our competitors might achieve a technological
advance that would put us at a competitive disadvantage.
Our principal competitors
for the sale of microelectronics products include Applied Materials Inc.,
Seiko Instruments Inc., Schlumberger Technologies (ATE Division), JEOL
USA, Inc., Hitachi, Ltd., KLA-Tencor Corporation, LEO Electron
Microscopy, Inc. and Orsay Physics S.A.
We believe the key competitive factors in the microelectronics products
market are performance, range of features, reliability and price. We believe we are competitive with respect
to each of these factors. We have
experienced price competition in the sale of our microelectronics products and believe
price may continue to be an important factor in the sale of most models. Intense price competition in the sale of
microelectronics products to strategic customers has in the past adversely
affected our profit margins.
Our competitors for the
sale of electron optics products include JEOL USA, Inc.,
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.
We believe we are competitive with respect to each of these
factors. Our ability to remain
competitive will depend in part upon our success in developing new and enhanced
systems and introducing these systems at competitive prices on a timely basis.
Competitors for our
component products include DENKA Denki Kaguku Kogyo Kabushiki Kaisha, Orsay
Physics S.A., Eiko Corp., Topcon Corporation, VG Scientific/NG Microtech,
Ionoptika Ltd. and Elionix Inc.
Our existing competitors for electron optics products and
microelectronics products that manufacture components for their own use are
also potential competitors for our component products. We believe our component products have
features that allow us to compete favorably with others in this segment of our
business.
Our service business
faces little significant competition.
Because of the highly specialized nature of our products and technology,
and because of the critical mass necessary to support a worldwide field service
capability, few competitors have emerged to provide service to our installed
base of systems. Some of our older,
less sophisticated equipment, particularly in the industry and institute
market, is serviced by independent field service engineers who compete directly
with us. We believe we will continue to
provide the majority of field service for our products.
Patents and intellectual property
We rely on a combination
of trade secret protection, nondisclosure agreements and patents to establish
and protect our proprietary rights. We do
not assure you, however, that any of these intellectual property rights will
have commercial value or will be sufficiently broad to protect the aspect of
our technology to which they relate or that competitors will not design around
the patents. We own, solely or jointly,
approximately 83 U.S. patents, including patents we acquired from
Koninklijke Philips Electronics N.V., or Philips, under an agreement with
Philips effective December 31, 2000.
For more information about transactions resulting from the Philips
agreement, see Note 12 to the consolidated financial statements included
elsewhere in this report, and you should also read the section of our proxy
statement for the 2002 annual meeting of shareholders entitled “Certain
Relationships and Related Transactions-Transactions and Relationships between
FEI and Philips.” We also own foreign
patents corresponding to many of these
U.S. patents. Further, we have
licenses for two additional patents. These
patents will expire over a period of time through the year 2015.
Several of our
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 our customers may use our
microelectronics products for applications that are similar to those covered by
these patents. From time to time we and
our customers have received correspondence from competitors claiming that some
of our products, as used by our customers, may be infringing one or more of
these patents. None of these
allegations has resulted in litigation.
We do not assure you that competitors or others will not assert infringement
claims against us or our 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 us to obtain a license to intellectual property rights of
others. We do not assure you that
licenses will be available on satisfactory terms or at all. If claims of infringement are asserted
against our customers, those customers may seek indemnification from us 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 us 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.
We claim trademarks on a
number of our products and have registered some of these marks; however, use of
the registered and unregistered marks may be subject to challenge with the
consequence that we would have to cease using marks or pay fees for their use.
Our automation software
incorporates software from third-party suppliers, which is licensed to
end users along with our proprietary software.
We depend 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 our automation efforts could undermine our
ability to deliver present or anticipated product applications.
Policing unauthorized use
of our technology and other intellectual property is difficult, and we do not
assure you that the measures we take to protect our intellectual property will
be successful. Although our competitive
position may be affected by our ability to protect our proprietary information,
we believe that other factors, such as our experience in the development of
charged particle emission technology, our technical expertise, our name
recognition and our continuing product support and enhancement, are also
significant in maintaining our competitive position in our principal markets.
Employees
At December 31,
2001, we had approximately 1,550 full-time, permanent employees and 80
temporary employees worldwide. The
employees and temporary employees included approximately 455 in manufacturing,
approximately 355 in research and development and approximately 820 in customer
service, marketing and sales and general administration. Some of our approximately 945 employees
employed outside the United States are covered by national, industrywide
agreements or national work regulations that govern various aspects of
employment conditions and compensation.
None of our U.S. employees are subject to collective bargaining
agreements, and we have never experienced a work stoppage, slowdown or strike. We believe we maintain good employee
relations.
Cautionary factors that may affect
future results
Our disclosure and
analysis in this report and in our 2001 annual report to shareholders contain
some forward-looking statements.
Forward-looking statements give our current expectations or forecasts of
future events. You can identify these
statements by the fact that they do not relate strictly to historical or
current facts. They use words such as
“anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and
other words and terms of similar meaning.
From time to time, we also may provide oral or written forward-looking
statements in other materials we release to the public.
We undertake no
obligation to publicly update forward-looking statements, whether as a
result of new information, future events or otherwise. You are advised, however, to consult any
further disclosures we make on related subjects in our 10-Q and 8-K reports to
the SEC. You should also read the
section titled “Use of Estimates in Financial
Reporting” included in Note 1 to the consolidated financial
statements included elsewhere in this report.
Also note that we provide the following cautionary discussion of risks,
uncertainties and possibly inaccurate assumptions relevant to our
businesses. These are factors that we
believe could cause our actual results to differ materially from expected and
historical results. Other factors could
also adversely affect us.
The semiconductor industry is one of our primary markets for growth
and is highly volatile and unpredictable. The semiconductor manufacturing equipment industry is strongly
affected by the supply and demand cycles of the semiconductor industry. For 2001, sales of our products to the
semiconductor industry accounted for approximately 45% of our net product
sales, and we expect sales to the semiconductor industry to be a significant
contributing factor to future growth in our total net sales. The semiconductor industry, however, has
historically been volatile because of sudden and often unpredictable changes in
supply and demand for semiconductors.
In addition, though semiconductors are used in many different products
in different markets, these markets are interrelated to various degrees. As a result, the timing, length and severity
of these cycles are difficult to predict.
The semiconductor industry is experiencing a significant downturn that
began in the second half of 2001, and estimates vary from industry analysts
about how long it will last.
Any significant downturn
in general economic conditions in the U.S. or in the markets for our customers’
products could result in a reduction in demand for our products, and during
these downturns we may not be able to maintain or exceed our current level of sales. As a capital equipment provider, our
revenues are driven by the spending patterns of our customers, who often delay
expenditures or cancel orders in reaction to variations in their businesses or
general economic conditions. Because a
high proportion of our costs are fixed, we are limited in our ability to reduce
expenses quickly in response to revenue short-falls. In an economic downturn, we may not be able
to reduce our significant fixed costs, such as continued investment in research
and development and capital equipment requirements. During a recession, we may experience delays in collecting
receivables, which may impose constraints on our working capital.
We operate in highly competitive industries characterized by
increasingly rapid technological changes and competitors that may have greater
financial and technical resources. The markets for the sale of microelectronics products, electron
optics products and component products are highly competitive. A number of our existing domestic and international
competitors, as well as potential competitors that may enter our market in the
future, have greater financial, marketing and production resources than we
do. We believe that some of the
technical solutions we provide our customers, including three-dimensional
measurement and analysis of structures, are not provided by our
competitors. If some of our competitors
or potential competitors develop similar or equivalent solutions and products,
their potentially greater resources could allow them to provide these products
for a lower cost to customers, which could result in a material adverse effect
on our business, financial condition and results of operations.
Additionally, the markets
for our products are subject to constant change, in part due to evolving
customer needs. As we respond to this
change, the elements of competition, as well as the identities of our specific
competitors, may alter. Moreover, one
or more of our competitors or potential competitors might achieve a
technological advance that would put us at a competitive disadvantage,
resulting in a material adverse effect on our business, financial condition and
results of operations.
Delays in shipment of our products could substantially
decrease our reported sales for a period. We will continue to derive a substantial
portion of our revenues from the sale of a relatively small number of products
with high average selling prices, some with list prices as high as
$4.2 million per unit. As a result,
the timing of revenue recognition from a single order could have a significant
impact on our net sales and operating results for a reporting period. In addition, a substantial portion of our
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, and
delays in shipments of electron optics products during our fourth quarter could
have a substantial negative effect on our operating results for that fiscal
year. We cannot forecast with certainty
the impact of the factors discussed above on our sales and operating results in
any future period. These factors,
however, may result in material adverse fluctuations in our future operating
results on a quarterly or annual basis.
Our results of operations in any period, therefore, should not be
considered indicative of the results to be expected for any future period.
Failure of critical suppliers of parts, components and
manufacturing equipment to deliver sufficient quantities to us in a timely and
cost-effective manner could negatively affect our business. We use numerous vendors to supply parts,
components and subassemblies for the manufacture and support of our
products. Some key parts may be
obtained only from a single supplier or a limited group of suppliers. In particular, we rely on ETG, a wholly
owned subsidiary of Philips, and Frencken Group B.V., a third party supplier,
for our supply of mechanical parts and subassemblies, Turk Manufacturing Co. as
a supplier of component parts and RIPA Holding B.V. as a sole source for some
of our electronic subassemblies. As a
result of this concentration of key suppliers, our results of operations may be
materially and adversely affected if, in the future, we do not timely and cost-effectively
receive a sufficient quantity of parts to meet our production requirements or
if we are required to find alternative suppliers for these supplies. We are now seeking to expand our supplier
group and to reduce our dependence on single suppliers.
We also rely on a limited
number of equipment manufacturers to develop and supply the equipment we use to
manufacture our products. The failure
of these manufacturers to develop or deliver equipment on a timely basis could
have a material adverse effect on our business and results of operations. In addition, as a result of the small number
of equipment suppliers, we may be more exposed to future cost increases for
this equipment.
The data storage industry is a relatively new and developing
market for us and may not develop as much as we expect. For 2001, sales of our products to the data
storage industry accounted for approximately 13% of our net product sales, and
we expect sales to this industry to be an important contributing factor to
future growth in our total sales. The
data storage industry is a newer market for our products than the other markets
that we serve and, as a result, involves greater uncertainties. These uncertainties could result in material
adverse effects on our business, financial condition and results of operations.
For example, although we view the data
storage market as a growth market, the market may never fully develop as we
expect, or alternative technologies or tools may be introduced. In addition, the data storage market
recently has experienced a significant amount of consolidation. As a result, our customers in the data
storage industry are becoming greater in size and fewer in number, so that the
loss of any single customer would have a greater adverse impact upon our
results of operations.
We are subject to increased operational costs and other
risks because Philips Business Electronics B.V., a subsidiary of Philips, no
longer owns a majority of our common stock. Before
our most recent public offering of common stock in May 2001, Philips Business
Electronics’s ownership interest in FEI fluctuated within a few percentage
points of 50% of our outstanding shares.
At December 31, 2001, Philips Business Electronics beneficially
owned approximately 25% of our common stock.
Because Philips Business Electronics is no longer our majority
shareholder, some of the tangible and intangible benefits and arrangements
previously provided by Philips have terminated and some of these are in the
process of being terminated. Although
many of these arrangements have already been addressed, we have not completed
the replacement of all of our arrangements with Philips, and in some of these
areas we may not be able to find replacement services at a comparable
cost. Even if these services are
available at a similar cost, indirect costs are associated with obtaining new
vendors, including diversion of management time and resources. We estimate these changes will collectively
result in increased operational costs of approximately $5 million per
year, but these increased operational costs could be higher or lower. These costs, which include increased labor
and employee costs, will be partially offset by payments to us from Philips
totaling up to $6 million over a three year period pursuant to our
agreement with Philips. During 2001, we
recognized $1.4 million of these payments as a reduction to operating
expenses and recognized increased operating expenses of approximately the same
amount. These payments would terminate
on a change of control of FEI, as defined in our agreement with Philips.
The
specific types of increased costs we may incur in the future include the
following areas:
• Intellectual
Property. We now have access to
some forms of technology through cross-licenses between Philips affiliates and
several manufacturers in the electronics industry, and some of our patents are
also subject to these cross-licenses.
Some of these cross-licenses provide us with the right to use
intellectual property that relates to our core technologies. In general, these cross-licenses are subject
to majority ownership of us by Philips Business Electronics, and, because we
are no longer majority owned by Philips Business Electronics, we believe that
our business is no longer subject to most of these cross-licenses. Loss of these cross-licenses could result in
our inability to use the previously licensed technology, the necessity of
undertaking new licensing arrangements and paying royalties of an undetermined
amount, or being subject to patent infringement actions. Our estimate of increased operational costs
does not include potentially required future royalty payments or possible
litigation expenses.
• Credit
Facility. In July 2001 we
terminated a $75 million credit facility with Philips and we intend to
obtain a replacement credit facility in the approximate amount of
$100 million in the first half of 2002.
We may not be able to obtain a replacement credit facility on terms as
favorable as the Philips facility.
• Labor
Costs. Because Philips Business
Electronics no longer owns more than 40% of our capital stock, some of our
non-U.S. employees have been required to become part of new collective
bargaining units, and pension funds of our employees that were held within
Philips’ pension fund have been transferred to new pension funds. For several years prior to the reduction in
Philips’ ownership interest in our shares, Philips’ pension fund was in an
overfunded position because the value of its pension assets exceeded the
pension benefit obligations. During
that time Philips and its majority-owned subsidiaries, including FEI, benefited from reduced pension contribution
obligations. We expect our pension
costs in The Netherlands will increase by approximately $3.5 million per year compared
to 2000 costs, due to the loss by us of the benefit of the overfunding and the
terms of the new collective bargaining arrangements.
• Other
Costs. We also had a variety of
other arrangements with Philips, such as use of the Philips intranet system for
various functions, participation in purchasing programs and use of various
administrative services. Most of these
arrangements have changed because Philips Business Electronics no longer owns
more than 40% of our capital stock, and some of these changes will result in
additional increased costs to our business.
We must continually improve our technology to remain
competitive, and our results of operations may be adversely affected if we fail
to react to changes in our customers’ technology requirements. Technology changes rapidly in the
semiconductor manufacturing and data storage industries, which are important
markets for our products. As a result,
our ability to compete will depend, in part, on our ability to upgrade our
existing systems, as well as develop and introduce more advanced systems at
competitive prices and on a cost-effective basis to enable our customers to
integrate them into their operations either before or as they begin volume product
manufacturing. For example, we have
invested significant resources in the development of 300 mm semiconductor wafer
manufacturing technology. If 300 mm
fabrication is not widely accepted or we fail to develop 300 mm products that
are accepted by the marketplace, our long-term growth could be diminished. If we are unable to develop these new types
of products, our sales could decline and our existing products could lose
market acceptance.
We may not obtain sufficient affordable capital to fund our
future needs for manufacturing capacity and research and development. We will need to continue to make significant
capital expenditures to expand our operations and to enhance our manufacturing
capability to keep pace with rapidly changing technologies. In the future, we may not be able to obtain
the additional capital required to fund our operations on reasonable terms, or
at all, and this lack of capital may have a material adverse effect on our
business and results of operations.
ITEM
2.
ITEM
2. PROPERTIES
Our corporate
headquarters is located in Hillsboro, Oregon, where three other adjacent
buildings also house manufacturing and research and development
facilities. We also lease space in two
nearby buildings in Hillsboro that house administrative and development personnel. The leased space totals approximately
143,000 square feet and is used for a range of manufacturing, research and
development and administrative activities.
The leases for the six facilities expire between January 31, 2003
and January 31, 2004. Present
lease payments for the six buildings total approximately $148,000 per
month. The Company voluntarily
relocated out of approximately 10,000 square feet of space in one of these four
buildings and is subleasing this space.
We also maintain an
administrative, development and manufacturing facility in Eindhoven, The
Netherlands, consisting of approximately 231,000 square feet of space leased
for a ten-year term commencing February 1997.
Present lease payments amount to about $143,000 per month. We lease approximately 91,000 square feet in
Peabody, Massachusetts for administrative, development and manufacturing
operations, at a cost of about $91,000 per month. We lease approximately 16,000 square feet in Sunnyvale,
California for development operations, at a cost of about $40,500 per
month. We lease approximately 29,000
square feet in Brno, Czech Republic for manufacturing and development
operations, at a cost of about $20,000 per month. We intend to move our Brno facilities into a
much larger facility of approximately 94,000 square feet and to terminate the
existing lease. We expect the cost of
the leased facilities in Brno to increase by approximately $49,000 per month
after we complete this move in January 2003.
We operate principal sales
and service offices in leased facilities in Canada, France, Germany, Italy,
Japan, The Netherlands, the United Kingdom and the U.S., as well as other
smaller offices in the 14 other countries where we have direct sales and
service operations. In some of these
locations, we lease space directly and in others obtain space through service
agreements with affiliates of Philips.
We expect that our facilities arrangements will be adequate to meet our
needs for the foreseeable future and, overall, believe we can meet increased
demand for facilities that may be required to meet increased demand for our
products. In addition, we believe that
if product demand increases, we can use out-sourced manufacturing of spare parts
as a means of adding capacity without increasing our direct investment in
additional facilities.
ITEM
3.
ITEM
3. LEGAL PROCEEDINGS
We are party to
litigation arising in the ordinary course of business. These actions have not had a material
adverse effect on our financial position, results of operations or cash flows.
ITEM
4.
ITEM
4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
Not applicable.
ITEM
4(a). EXECUTIVE OFFICERS OF THE COMPANY
The following table sets
forth certain information with respect to our executive officers as of
March 1, 2002.
Vahé A. Sarkissian joined us as President,
Chief Executive Officer and director in May 1998. He was named Chairman of the Board of
Directors in December 2001. 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, or 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 serving at SVG he was a
Vice President with Data General Corp.
He has also held several technical and management positions with
semiconductor companies, including Advanced Micro Devices, Inc., and has
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.
John A. Doherty became Senior Vice President
of Worldwide Sales in October 2001.
Mr. Doherty joined us in August 1999 as Vice President and General
Manager for the Asia Pacific Region Sales and Service Division. From 1984 to August 1999, Mr. Doherty
was a founder and Senior Vice President of Sales and Marketing for Micrion
Corporation, a manufacturer of equipment used in the semiconductor
manufacturing and processing business that merged with FEI in August 1999. Mr. Doherty holds a B.S. and an M.S. in
electrical engineering from Rensselaer Polytechnic Institute.
Rob H. J. Fastenau became Senior Vice
President and General Manager of FEI’s Electron Optics Product Division in
January 2001. He joined Philips
Electron Optics Division, which was subsequently acquired by FEI, in October
1995 as Director of Research and Development.
From 1981 to 1995, he served in various positions in Philips Research
laboratories in The Netherlands and the United States. Mr. Fastenau holds M.S. and Ph.D. degrees
in material science from Delft University.
Jim D. Higgs joined us as Senior Vice
President of Human Resources in November 1997.
Prior to joining FEI, Mr. Higgs was the Oregon Site Management
Director of Synopsys, Inc. and, prior to its merger into Synopsys, the Vice
President of Human Resources for Logic Modeling. From 1989 to 1990 Mr. Higgs was the Vice President of Human
Resources for BiiN, a joint venture between Intel Corporation and Siemens Inc. Mr. Higgs holds B.S. degrees in business,
psychology and physics from the University of Oregon.
John M. Lindquist became Senior Vice
President and General Manager, Microelectronics Product Group in May 2000. Mr. Lindquist joined us in 1989 as an
applications scientist. He has held several
positions in the management of marketing and product development, and most
recently held the position of Vice President of Marketing from 1998 to
2000. Prior to joining FEI Company, Mr.
Lindquist served as a senior member of the technical staff and Program Manager
at Aeroject ElectroSystems Corporation, an engineering and manufacturing
company in the defense industry. Mr. Lindquist received his Ph.D. degree
in chemistry from the University of California , and a B.Sc. in chemistry from
the University of Puget Sound.
Stephen F. Loughlin joined FEI as
Controller and Vice President of Corporate Finance in July 2001 and was named
acting Chief Financial Officer in December 2001. From April 1999 through June 2001, he served as Vice President of
Finance and Chief Financial Officer for RadiSys Corporation, a leading provider
of building blocks enabling next-generation Internet and communications
systems. He spent the previous nine
years at Sequent Computer Systems, Inc., a manufacturer and provider of
information technology solutions, as Vice President and Controller. Before that, he was with Wang Laboratories,
Inc. as Director of Finance for logistics/manufacturing and system
manufacturing/distribution.
Mr. Loughlin holds a B.S. in accounting from Boston College.
Bradley J. Thies rejoined FEI as Vice
President, General Counsel and Secretary in May 2001. He had previously served as our General Counsel and Secretary
from February 1999 to April 2000. From
April 2000 to May 2001, Mr. Thies was General Counsel of WebTrends Corporation,
an enterprise software company that developed, marketed and sold website
monitoring and analytics software.
WebTrends merged with NetIQ Corporation in March 2001. From February 1998 through February 1999,
Mr. Thies was General Counsel of DataWorks Corporation, a company that
developed, marketed and sold enterprise resource planning software to medium
sized businesses. DataWorks merged with
Platinum Software Corporation in December 1998. Prior to that time, Mr. Thies was General Counsel of HomeTown
Buffet, Inc., a restaurant company, and was in private practice. Mr. Thies holds a B.A. in political science
and history from Willamette University and a J.D. from Columbia Law School.
PART II
ITEM
5.
ITEM
5. MARKET FOR THE COMPANY’S
COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our
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 our common stock, as reported by The Nasdaq Stock Market’s
National Market:
As
of March 18, 2002 there were approximately 117 holders of record of our
common stock. We believe the number of
beneficial owners is substantially greater than the number of record holders
because a large portion of our outstanding common stock is held of record in
broker “street names” for the benefit of individual investors.
In
February 1997 we combined with the electron optics business of Koninklijke
Philips Electronics N.V., or Philips, pursuant to a combination agreement
between FEI and a subsidiary of Philips.
As part of the combination, we agreed to issue to Philips additional
shares of our common stock when stock options that were outstanding on the date
of the closing of the combination (February 21, 1997) are exercised. Any such additional shares are issued at a
rate of approximately 1.22 shares to Philips for each share issued on
exercise of these options. During
fiscal years 2000 and 2001, we issued 383,823 and 22,317 shares of our common
stock to Philips in connection with this 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 of 1933 as a transaction not involving a public offering. The consideration we received for the shares
issued, together with the shares issued to Philips at the combination closing,
was the outstanding shares of Philips Electron Optics International B.V. and
Philips Electron Optics, Inc. As
of December 31, 2001, 463,158 shares of our common stock remain issuable
under this agreement.
In
connection with our December 1999 acquisition from Philips of sales,
distribution and service operations in 19 countries, we paid cash consideration
of approximately $3.3 million, which was treated as a dividend to Philips
for financial accounting purposes because the transaction was among parties
under common control. Other than the
payment of this acquisition consideration to Philips, we have never declared or
paid cash dividends on our common stock.
We intend to retain any earnings for use in our business and, therefore,
do not anticipate paying any cash dividends in the foreseeable future.
ITEM
6.
ITEM
6. SELECTED CONSOLIDATED
FINANCIAL DATA
The selected consolidated financial data below
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.
(1) Included
in 1997 operating expenses is a charge of $38.0 million to write off in-process
research and development in connection with the acquisition of the Philips
electron optics business and a restructuring charge of $2.5 million incurred in
connection with consolidating our Massachusetts operations. Included in 1998 operating expenses is a
restructuring charge of $5.3 million undertaken to consolidate operations,
eliminate redundant facilities, reduce operating expenses and provide for
outsourcing of certain manufacturing activities. Included in 1999 operating expenses is a charge of $14.1 million
to write off acquired in-process research and development in connection with
the acquisition of Micrion Corporation in August 1999 and a restructuring
charge of $0.1 million. Included in
2001 operating expenses is a charge of $3.4 million to write off acquired
in-process research and development in connection with acquisitions.
(2) Included
in 1998 other expense, net is a valuation charge of $3.3 million taken to
reduce the carrying value of a cost method investment. Included in 2001 other
expense, net is a valuation charge of $3.7 million to adjust the carrying value
of our cost method investment in Surface/Interface to reflect the price we paid
to acquire the rest of Surface/Interface in 2001.
(3) Income
(loss) before cumulative effect of change in accounting principle per share has
been calculated assuming that the shares of our common stock issued to Philips
in the acquisition of the Philips electron optics business were outstanding for
all periods presented and assuming the shares of our common stock outstanding
before the acquisition of the Philips electron optics business were issued as
of the closing date of the acquisition of the Philips electron optics business.
ITEM 7.
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading supplier
of equipment and solutions to the high growth segments of the semiconductor,
data storage and industry and institute
markets. Our solutions are based on a
combination of patented and proprietary technologies that produce highly
focused electron and ion beams. These
solutions enable our customers to view and analyze structures in three
dimensions and to measure, analyze, diagnose and modify deep sub-micron and
atomic structures below the surface in semiconductor wafers and devices, data
storage components and biological and industrial materials. This enables our customers to develop
products faster, control manufacturing processes better and improve production
yields.
We refer to our
comprehensive suite of products for three dimensional structural process
measurement and analysis as Structural Process Management solutions. These solutions include focused ion beam, or
FIB, equipment, scanning electron microscopes, or SEMs, transmission electron
microscopes, or TEMs, and DualBeam systems, which combine a FIB
column and a SEM column on a single platform.
Our customers include leading semiconductor and data storage
manufacturers, as well as educational and research institutions and industrial
companies located throughout the world.
We also design, manufacture and sell components of electron microscopes
and FIB systems to a limited number of original equipment manufacturer, or OEM,
customers. We have research,
development and manufacturing operations located in Hillsboro, Oregon; Peabody,
Massachusetts; Sunnyvale, California; Eindhoven, The Netherlands; and Brno,
Czech Republic. We have sales and
service subsidiaries in 21 countries located throughout North America, Europe
and the Asia Pacific region. We also
use independent agents to sell some of our products in various countries,
particularly in the Asia Pacific region.
FEI was founded in 1971
to design and manufacture charged particle emitters (ion and electron
sources). We began manufacturing and
selling ion and electron focusing columns in the early 1980’s and began
manufacturing FIB workstations in 1989.
In 1993 we manufactured and sold our first DualBeam systems. In 1997 we acquired substantially all of the
assets and liabilities of Philips’ electron optics business, a manufacturer of
electron microscopes headquartered in Eindhoven, The Netherlands, in exchange
for 55% of our common stock outstanding after issuance. This transaction was accounted for as a
reverse acquisition and, as a result, we became a majority owned subsidiary of
Philips. The combination with Philips
gave us expanded research and development capabilities, increased manufacturing
capacity, a worldwide sales and service organization and additional financial
resources. In 1999 we acquired Micrion
Corporation, a manufacturer of single beam FIB systems headquartered in
Peabody, Massachusetts. The acquisition
of Micrion broadened our product lines, added research and development strength
and expanded our sales and service capabilities in the U.S., Japan and
Taiwan. We expect to continue to expand
our business in the future through internal growth and strategic acquisitions
and partnerships.
From 1998 through 2000,
we experienced growth across all business segments and geographic territories
and target end-markets. For 2001, we
grew 17% in total revenues over 2000 driven by the industry and institute and
data storage markets, but our components business segment decreased in revenues
and we did not grow in the semiconductor end-market or in the Asia Pacific
geographic region. Growth drivers for
our business in the semiconductor industry have included shrinking feature
geometries, the transition to copper and new dielectrics, the transition to 300
mm size wafers and shortening product life cycles. In the second half of 2001 our sales were negatively affected in
this end-market by the worldwide semiconductor downturn. In the data storage market, our growth is
being driven by the need to measure, analyze and modify increasingly smaller
sub-surface features and by the need to trim smaller size pole tips for writing
data to the disk surface. In the
industry and institute markets, our growth is being driven by the growing need
for ultra high resolution and expanding research into biological structures and
materials. Notwithstanding these
factors, a downturn in general economic conditions or in the markets for our
customers’ products could result in a reduction in demand for our products. We make no assurances that we will be able
to maintain or exceed our current level of sales in any downturn.
Our standard billing
terms usually include a holdback of 10 to 20 percent of the total selling price
until completion of the installation and final acceptance of our equipment at
the customer’s site. Effective
January 1, 2000, we changed our revenue recognition policy to defer the
portion of revenue related to installation and final acceptance until
the installation and final acceptance are completed. This change was made in accordance with the
implementation of U.S. Securities and Exchange Commission Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements
or SAB 101. Previously, we had
recognized 100 percent of revenue for products when title passed to the
customer. The effect of this change,
net of income taxes, is reported as the cumulative effect of a change in
accounting principle in the results of operations for 2000. This net effect reflects the deferral as of
January 1, 2000 of $8.4 million of revenue previously recognized. We recognized all of this $8.4 million in
revenue during the year ended December 31, 2000. The net effect on our reported revenues under SAB 101 compared
with our prior revenue recognition policy was a negative $7.9 million for 2000
and a negative $2.8 million for 2001.
We expect to continue to experience volatility in our reported revenues
in the near future due to the timing of revenue recognition under SAB 101. We also receive revenue from services provided
to our customers. Revenue from time and
materials based service arrangements is recognized as the service is
performed. Revenue from service
contracts is recognized ratably over the term of the service contracts.
The sales cycle for our
systems typically ranges from 3 to 12 months, and can be longer when our
customers are evaluating new applications of our technology. Due to the length of these cycles, we invest
heavily in research and development and in sales and marketing in advance of
generating revenue related to these investments. Additionally, we sometimes loan equipment to customers for their
use in evaluating our products. We have
also engaged in joint application development arrangements with some of our
customers. We make no assurances that
these efforts will result in the sale of our equipment to these customers. We expect to continue these practices in the
future.
Our customer base is
diverse, but we have historically derived a significant portion of our revenue
from sales to a few key customers, and we expect that trend to continue. Sales to our top 10 customers accounted for
29% of our total net sales in 1999, 31% of our total net sales in 2000 and 29%
of our total net sales in 2001, however, no one customer exceeded 10% of our net
sales for 1999, 2000 or 2001.
Many
of our microelectronics and electron optics products carry high sales
values. Our systems range in list price
from about $0.1 million to $4.2 million. We have derived a substantial portion of our revenue from the sale
of a relatively small number of units, and we expect that trend to
continue. As a result, the timing of
revenue recognition from a single order could have a significant impact on our
net sales and operating results in a given reporting period. A substantial portion of our net sales has
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 of the calendar year. Accordingly, delays in shipments near the
end of a quarter could have a substantial negative effect on operating results
for that quarter. Announcements by our
competitors or us of new products and technologies could cause customers to
defer purchases of our existing systems, which could also have a material
adverse effect on our business, financial condition and results of operations.
A significant portion of
our revenue has been derived from customers outside of the U.S., and we expect
that trend to continue. Total net sales outside the U.S. were 57% in 1999, 58%
in 2000 and 57% in 2001.
In
addition to the U.S. dollar, we conduct significant business in euros, Japanese
yen, British pounds and Czech korunas.
Because of our substantial research, development and manufacturing
operations in Europe, we incur a greater proportion of our costs in Europe than
the revenue we derive from that geographic region. Our raw materials, labor and other manufacturing costs are
primarily denominated in U.S. dollars, euros and Czech korunas. This situation has the effect of improving
our gross margins and results of operations when the dollar strengthens in
relation to the euro or koruna, as was the case in 1999, 2000 and 2001. A weakening of the dollar in relation to the
euro or Czech koruna would have an adverse effect on our reported results of
operations. Movement of Asian
currencies in relation to the dollar and euro can also affect our reported
sales and results of operations because we derive a greater proportion of
revenue from the Asia Pacific region than the costs we incur there. In addition, several of our competitors are
based in Japan and a weakening of the Japanese yen has the effect of lowering
their prices relative to ours. We
attempt to mitigate our currency translation and transaction exposures by using
forward exchange contracts. We also
negotiate the selling currency for our products with our customers to reduce
the impact of currency fluctuations.
In
the past, we have derived significant benefits from our relationship with
Philips. These benefits included access
to patents and intellectual property and research and development services,
participation in Philips’ collective bargaining agreements and pension plans,
participation in Philips’ insurance programs, the Philips credit facility,
access to Philips’ information technology systems and export and purchasing
services provided by Philips. Now that
Philips’ ownership of our
common stock has been reduced to approximately
25%, we have begun to incur additional labor and operating costs, which we
estimate will aggregate approximately $5 million per year. These costs will be partially offset by
payments to us from Philips totaling up to $6 million over a three-year
period pursuant to our agreement with Philips.
During 2001, we recognized $1.4 million of these payments as a reduction
to operating expenses and recognized increased operating expenses of
approximately the same amount.
Results of Operations
The following table sets
forth our statement of operations data as a percentage of net sales.
Totals may not foot due to rounding.
Net Sales
Net sales include sales
in our microelectronics, electron optics, components and service segments. Net sales in 2001 increased $55.7 million
(17%) compared to 2000. Net sales in
2000 increased $104.1 million (48%) compared to 1999.
The following table shows
our net sales by segment.
Microelectronics segment
sales increased $21.2 million (14%) in 2001 compared to 2000. Microelectronics segment sales increased
$63.2 million (75%) in 2000 compared to 1999.
Of the 2000 increase, $12.8 million was attributable to the acquisition
of Micrion, which was included in our results of operations for all of 2000
compared to
only five months in 1999. The broadening of our product lines, the
development of new applications for our products and increased acceptance and
penetration in the semiconductor, data storage and industry and institute
markets has contributed to increased sales volume for this segment. However, our sales in this segment decreased
in the second half of 2001 compared with the first half of 2001 due to the
worldwide downturn in the semiconductor industry.
Electron optics segment
product sales increased $28.7 million (27%) in 2001 compared to 2000. Continued market acceptance for our Tecnai
TEM products along with the introduction of a new smaller TEM product line
resulted in a 28% increase in TEM sales for 2001. Sales of our SEM products increased 25% from 2000 to 2001 due to
strong demand for our new Quanta SEM products and overall increased
demand and sales volume. Electron
optics segment sales increased $24.8 million (30%) in 2000 compared to
1999. Strong demand for our new Tecnai
TEM products resulted in a 53% increase in 2000 TEM sales. Sales of our SEM products increased 9% from
1999 to 2000.
Components segment sales
decreased $3.0 million (16%) in 2001 compared to 2000. Our component segment tends to follow the
cyclical pattern of the semiconductor equipment business, which has experienced
a significant downturn during 2001.
Components segment sales increased $6.5 million (56%) in 2000 compared
to 1999. Demand for our component
products by our OEM customers increased sharply in late 1999 and continued through
2000, as customers increased their production requirements.
Service sales increased
$8.8 million (19%) in 2001 compared to 2000. Service sales increased $9.5 million (26%) in 2000 compared to
1999. The increase in service segment
sales was primarily the result of an increase in the number of systems under
service contracts in our installed base.
In addition, we have increased penetration in the semiconductor and data
storage markets and the customers in these markets tend to have higher demands for
service response time. In general, our
service contracts carry higher prices as the guaranteed response time is
shortened.
Net
sales increased from 2000 to 2001 in both North America and Europe and
decreased in the Asia Pacific region. In
North America, sales increased by $25.5 million (18%) from 2000 to 2001 due to
increased demand in the data storage and industry and institute markets in that
region. In Europe, sales increased by
$31.2 million (36%) from 2000 to 2001.
The growth in 2001 sales in Europe was driven by increased demand in
both the semiconductor and industry and institute markets. In the Asia Pacific region, sales decreased
by $0.1 million (0%) from 2000 to 2001.
The decrease is due to reduced demand in both the semiconductor and data
storage sectors and the overall depressed economic conditions in that region of
the world during the second half of 2001.
Net sales increased from 1999 to 2000
in each of the three major geographic regions in which we sell. In North America, sales increased by
$43.6 million (46%) from 1999 to 2000 primarily due to increased demand
for our products in the semiconductor, data storage and industry and institute
markets in that region. In Europe,
sales increased by $24.6 million (39%) from 1999 to 2000 primarily due to
increased demand in the semiconductor industry and strong demand for our new Tecnai
TEM products. Service revenues also
increased in Europe due to the acquisition of the additional sales,
distribution and service operations from Philips in December 1999 as well as
the increased installed base of systems.
In the Asia Pacific region, sales increased by $40.8 million (77%)
from 1999 to 2000 primarily due to increased demand in the semiconductor and
data storage industries in that region.
Gross Profit
Cost of sales includes
manufacturing costs such as materials, labor (both direct and indirect) and
factory overhead, as well as all of the costs of our customer service function
such as labor, materials, travel and overhead.
Gross profit as a percentage of sales, or gross margin, was 39.3% in
1999, 42.8% in 2000 and 48.5% in 2001.
The 2000 gross margin was negatively affected by the change in our
revenue recognition policy in accordance with SAB 101. Without
this effect, the 2000 gross margin would have been 44.3%. The 1999 gross margin was negatively
affected 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% in
1999.
Our gross margin has
improved over the last three years due to several factors. The most significant factor has been the
change in our product mix. In general,
our microelectronics products carry higher gross margins than our electron
optics products and our service business, and microelectronics products have
increased from 38.9% of our net sales in 1999 to 44.8% of our net sales in
2001. Our gross margins have also
benefited from the favorable effect of exchange rate fluctuations discussed
above under the heading Overview in this section. In addition, our gross margins have been
positively affected by increased production volume, greater factory overhead
absorption and lower manufacturing costs from outsourcing certain subassemblies. Our service segment gross margins from 2000
to 2001 have been positively affected by improved economies of scale from an
increase in our installed base of systems.
Our service segment experienced a
decrease in gross margin from 1999 to 2000 primarily due to the impact of the
additional sales, distribution and service operations purchased from Philips in
December 1999, which have lower average service business gross margins
than our other larger and more established service operations, due to a lack of
economies of scale in these smaller markets.
Notwithstanding the positive factors discussed above, potential
pricing pressure from competitors that introduce new products into our markets
or who benefit from favorable currency exchange movements in their home
countries may adversely affect our gross margin in the future. In addition, unfavorable movements in
currency exchange rates may adversely affect our cost of sales or selling
prices and therefore our gross margins in the future. Our gross margins could also be adversely affected by increases
in our cost for component parts.
Research and Development Costs
Research and development,
or R&D, costs include labor, materials, overhead and payments to Philips
and other third parties incurred in research and development of new products
and new software or enhancements to existing products and software. R&D costs increased $9.9 million
(31%) in 2001 compared to 2000 and increased $9.7 million (44%) in 2000
compared to 1999. As a percentage of
sales, R&D costs were 10.1% for 1999, 9.9% for 2000 and 11.0% for
2001. R&D costs are reported net of
subsidies and capitalized software development costs. These offsets totaled $6.2 million in 1999,
$6.2 million in 2000 and $4.9 million in 2001. Excluding the effects of these offsets,
R&D costs increased $8.6 million (23%) in 2001 compared to 2000 and
increased $9.7 million (34%) in 2000 compared to 1999. The
increase in R&D costs in 2001 is attributable to increases in engineering
headcount, including employees added through two small acquisitions we made in
2001, plus a reduction in subsidy offsets from MEDEA, a European R&D
funding organization. We previously
participated in various MEDEA R&D funding programs under the umbrella of
Philips, but those ceased when Philips ownership decreased to below 45% in
2001. We have re-qualified for these
programs on a stand-alone basis and expect to continue to receive MEDEA
funding. Of the $9.7 million increase
in R&D from 1999 to 2000, $5.4 million is due to the acquisition of
Micrion. We are continuing to invest in
the development of product improvements and upgrades, new software systems and
new products to broaden the product line offerings of our business segments. We expect our R&D costs to continue to
increase over time.
Selling, General and Administrative Costs
Selling, general and
administrative, or SG&A, costs include labor, travel, outside services and
overhead incurred in our sales, marketing, management and administrative
support functions. SG&A costs
include sales commissions paid to our employees as well as to our agents. SG&A costs for 2001 increased $8.8
million (14%) compared to 2000, and increased $15.2 million (32%) in 2000
compared to 1999. As a percentage of
sales, SG&A costs were 22.0% in 1999, 19.6% in 2000 and 19.0% in 2001. The
increase in SG&A costs from 2000 to 2001 was a result of higher sales
volumes, increased marketing efforts, expansion of our product demonstration
capabilities, as well as increased costs for insurance and other services
following the separation from Philips.
In 2001 we also incurred shutdown costs of $0.3 million to convert our
subsidiary in Korea to an independent agent arrangement and severance costs of
$0.9 million as we eliminated some redundant positions. The increase in SG&A costs from
1999 to 2000 was partially due to the acquisition of Micrion and the additional
sales, distribution and service operations from Philips in 1999. SG&A costs also increased in dollar
amount from 1999 to 2000 and from 2000 to 2001 as a result of higher sales
volumes. Sales commissions paid to our
employees as well as to our agents increase in amount as our sales volume
increases. The decrease in SG&A
costs as a percentage of sales from 1999 to 2000 and from 2000 to 2001 is primarily
attributable to higher sales volumes and the fact that many SG&A costs are
fixed or semi-fixed rather than variable in nature.
Amortization of Purchased Goodwill and Technology
Purchase accounting for
the acquisition of Philips’ electron optics division in 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 was being amortized over a 15-year period. Purchase accounting for the Micrion
acquisition in August 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 was being amortized
over a 12-year period. Purchase
accounting for acquisitions in 2001 resulted in the recognition of intangible
assets in the amount of $9.1 million for existing technology that is being
amortized over a 5-year period, and goodwill of $1.4 million that is not being
amortized. In accordance with Statement
of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets,
which we adopted July 2, 2001, we will no longer amortize purchased goodwill
effective January 1, 2002. Under
SFAS No. 142, amortization has been replaced with a periodic impairment
test for goodwill. Amortization of such
goodwill totaled $3.1 million in 2001.
Read also Note 2 to the consolidated financial statements included
elsewhere in this report and the heading Recently Issued Accounting Pronouncements
below. Amortization of purchased
goodwill and technology for 2001 increased $0.6 million (10%) compared to 2000
due to the amortization of existing technology from acquisitions made during
2001. Amortization of purchased
goodwill and technology for 2000 increased $2.4 million (65%) compared to 1999,
reflecting 12 months’ amortization from the Micrion acquisition compared to
approximately four months’ amortization in 1999.
Purchased In-Process Research and Development
In 2001, purchase
accounting for acquisitions resulted in the recognition of intangible assets in
the amount of $3.4 million representing the estimated fair value of in-process
research and development. In accordance
with our policy to expense research and development costs as they are incurred,
these intangible assets were written off with a charge to earnings immediately
after the closing of these acquisitions.
In connection with the purchase accounting for these acquisitions, we
identified two significant projects under development at the date of
acquisition. Neither of these projects
had been proven technologically feasible or had generated revenue as of the
date of the acquisition, but both are expected to generate revenue beginning in
2002. 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.
During 1999, in
connection with the purchase accounting for the Micrion acquisition, we
identified four significant projects under development at the date of the
acquisition. Two of those projects
represented enhancements to the resolution and automation of existing products
designed primarily for the semiconductor industry. Enhancements from the first of these projects have been added to
our product line and such enhancements are currently generating revenues. The second project was discontinued as a
separate project following the acquisition by FEI, and the acquired technology
was incorporated into our similar product line, which is currently generating
revenues. The third project represented
enhancements to the automation of products for the data storage industry. This technology was incorporated into the
related FEI product line and is currently generating revenues. The fourth project represented development
efforts on products for the lithography photo mask repair market. This project was completed and we introduced
a new line of products for the lithography photo mask repair market in 2001,
and we are currently generating revenue from such products. None of the projects in these categories had
been proven technologically feasible or had generated revenue as of the date of
the acquisition. In accordance with our
policy to expense research and development costs as they are incurred, a charge
of $14.1 million associated with the write-off of acquired in-process research
and development was recorded immediately subsequent to the closing of the
merger. Read also Note 2 to the
consolidated financial statements included elsewhere in this report.
Other Income (Expense), Net
Interest income for 1999,
2000 and 2001 represents interest earned on the short-term temporary investment
of cash. The increase in interest
income in 2001 compared to 2000 is the result of increased cash balances
invested, partially offset by lower average interest rates. Interest rates decreased significantly
during the second half of 2001.
Completion of the common stock offering in May 2001 and the convertible
debt offering in August 2001 provided additional cash that has been invested in
short-term marketable debt securities.
The increase in interest income in 2000 compared to 1999 is primarily
the result of increased principal invested as well as higher average interest
rates. Interest expense for 2001
includes $4,361 for the convertible debt issued in August 2001. The remaining interest expense in 2001
represents interest incurred on borrowings under
our bank line of credit facilities and on borrowings from Philips under the
Philips credit facility. Excluding the
convertible debt interest, interest expense decreased in 2001 compared
with 2000 reflecting lower levels of borrowing and lower interest rates. Some of the proceeds from the common stock
offering in May 2001 were used to reduce borrowings. Interest expense for 1999 and 2000 represents interest incurred
on borrowings under our bank line of credit facilities and on borrowings from
Philips under the Philips credit facility.
Interest expense increased in 2000 compared with 1999, reflecting higher
levels of borrowing and higher average interest rates.
In July 2001, the Company
entered into a definitive agreement to purchase the assets of
Surface/Interface, and the acquisition closed in August 2001. As a result of this agreement, we adjusted
the carrying value of our existing investment in Surface/Interface to reflect
the purchase price in the definitive agreement and recorded a valuation charge
to earnings of $3.7 million in the third quarter of 2001.
Income Tax Expense
Our effective income tax
rate on pre-tax book income was negative 186% for 1999, 40% for 2000 and 41%
for 2001. Our effective tax rate
differs from the U.S. federal statutory tax rate primarily as a result of the
effects of state and foreign taxes and our use of a foreign sales corporation
for exports from the U.S., research and experimentation tax credits earned in
the U.S., the nondeductible write-off of purchased in-process research and
development costs, the amortization of goodwill that is not deductible for
income tax purposes as well as other factors.
The 1999 effective rate was adversely affected primarily by the charge
for in-process research and development associated with the Micrion
acquisition. The 2000 effective rate
was adversely affected primarily by goodwill amortization. The 2001 effective tax rate was adversely
affected primarily by state and foreign taxes, in-process research and
development on acquisitions and goodwill amortization and was positively
affected by tax credits for research and experimentation. Read also Note 8 to the consolidated
financial statements included elsewhere in this report.
In addition to the
factors mentioned above, our effective income tax rate on pre-tax book income
can be affected by changes in statutory tax rates in the U.S. and foreign
jurisdictions, our ability or inability to utilize various carry forward tax
items, changes in tax laws in the U.S. governing research and experimentation
credits and foreign sales corporations and other factors. The World Trade Organization recently ruled
against the U.S. tax policies covering U.S. exports and it is unclear what
action, if any, the U.S. government may take in response to this ruling. Therefore, we are not able to estimate the
future effective income tax rate we may incur.
Cumulative Effect of Change in Accounting Principle
Effective January 1,
2000, we changed our revenue recognition policy to defer the portion of the
billing related to installation and final acceptance at the customer site until
the installation and final acceptance are completed. This change was made in accordance with SAB 101. The effect of this change, net of income
taxes, is reported as the cumulative effect of a change in accounting principle
in the year ended December 31, 2000.
This net effect reflects the deferral as of January 1, 2000 of $8.4
million of revenue previously recognized.
All such revenue initially deferred on January 1, 2000 upon
adoption of SAB 101 was recognized during 2000.
Liquidity and Capital Resources
Cash and cash equivalents
increased by $152.8 million in 2001 to $176.9 million as of
December 31, 2001. The most
significant reasons for this increase in cash were the common stock offering in
May 2001, the convertible debt offering in August 2001 and positive cash flows
from operations of $62.2 million. In
2000, cash and cash equivalents increased by $12.9 million to $24.0 million as
of December 31, 2000, primarily as a result of positive cash flows from
operations. Excluding the effects of
changes in working capital components, operating activities generated $64.6
million of cash in 2001, $25.3 million in 2000, and $21.0 million of cash in
1999. The improved cash flow from
operations was primarily due to improved operating results over this three-year
period.
Short-term investments
were $118.8 million as of December 31, 2001. These investments represent marketable debt securities which had
maturities greater than 90 days when we purchased them. All such investments are scheduled to mature
in less than 12 months from the balance sheet date. We intend to hold these securities to their
maturity dates.
Accounts receivable
decreased $2.7 million from 2000 to 2001 and increased $6.1 million from 1999
to 2000. The decrease in receivables in
2001 was due to improved collections.
For 2000, the increase in receivables was due to increased sales
volume. Our days sales outstanding, or
DSO, calculated on a quarterly basis, improved from 80 days in the fourth
quarter of 2000 to 77 days in the fourth quarter of 2001. Inventories increased $16.7 million from 2000
to 2001 and $0.3 million from 1999 to 2000.
The increase in 2001 was primarily due to increased production materials on hand, which includes our 300 mm
product line, and an increase in loaner systems at key customer accounts where
we are jointly developing applications.
As a result of this increase in inventory, our inventory turnover rate,
calculated on a quarterly basis, went from 3.4 in the fourth quarter of 2000 to
2.7 in the fourth quarter of 2001.
Current liabilities increased $20.8 million from 2000 to 2001 and $23.1
million from 1999 to 2000. These
increases resulted from growth in our business.
We incurred capital
expenditures for acquisition of equipment of $22.1 million in 2001,
$13.9 million in 2000 and $8.3 million in 1999. These expenditures included application
laboratory and demonstration systems, which exhibit the capabilities of our
equipment to our customers and potential customers. We have expanded our demonstration capabilities over the last
three years. The lower capital spending
level in 1999 was in anticipation of the business combination with Micrion,
which added both domestic and offshore application laboratory and demonstration
equipment. We also invest in equipment
for development, manufacturing and testing purposes. We lease the real property used in our business. We expect to continue to invest in capital
expenditures to further expand our business, particularly for demonstration
equipment and loaner systems. We also
invest in internally developed software, which controls our equipment and
provides information from the equipment for use by customers. We capitalized software development costs of
$2.0 million in 2001, $2.4 million in 2000 and $2.9 million in
1999. We also expect to continue to
invest in software development as we develop new software for our existing
products and new products under development.
During 1999, 2000 and
2001 we 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. Purchase consideration for this transaction,
including transaction costs, consisted of cash and shares of our common stock
totaling $69.4 million. The cash
portion of the purchase price, paid to Micrion’s former shareholders, totaled
$32.9 million. In December 1999 we
acquired additional sales, distribution and service operations from Philips in
a number of smaller market areas.
Purchase consideration included a cash payment of $3.3 million to
Philips, which was recorded as a dividend because the transaction was between
entities under common control. In
September 1999 we invested $3.0 million to acquire a 9.5% interest in
Surface/Interface, Inc., a start-up company, which introduced an atomic force microscopy
tool for the semiconductor industry. In
conjunction with the investment, we entered into a distribution agreement
through which we marketed, sold and serviced the equipment. We also obtained an option to purchase
additional equity at a predetermined price.
In June 2000 we invested an additional $1.3 million in
Surface/Interface, bringing our ownership percentage to 12.6% as of
December 31, 2000. In August 2001
we purchased all of the assets and assumed certain liabilities of
Surface/Interface. The purchase price
of $12.4 million included $0.8 million cash, 131,880 shares of FEI common stock
valued at $5.0 million, the assumption of $4.1 million of Surface/Interface’s
liabilities and the adjusted value of our previous investment and advances to
Surface/Interface of $2.5 million. In
April 2001, we acquired all of the outstanding common stock of Deschutes
Corporation. The purchase price of $3.0
million included $0.7 million of cash, 50,628 shares of FEI common stock valued
at $1.3 million and $1.1 million of liabilities assumed. The
purchase price may be increased by an additional amount of up to $0.6 million
(consisting of 11,872 shares of FEI common stock valued at $0.3 million and
$0.3 million of cash) if certain milestones are met within 24 months after
closing. We expect to continue
to use acquisition and investment opportunities to augment our growth and
market position.
On February 25, 1999
we entered into a $50.0 million unsecured revolving credit agreement with
Philips, our majority shareholder at the time.
In August 2000 this Philips credit facility was amended, increasing
our borrowing capacity to $75.0 million.
As of December 31, 2000, borrowings under the credit facility were
$24.1 million. On July 30, 2001, we terminated the credit facility with Philips, and the outstanding balance was
repaid in full. We are currently
holding discussions with several banks about a replacement credit facility, and
we expect to implement such a facility in 2002. We expect that if we establish such a new bank credit facility,
the terms will carry a higher cost than the terms of our prior Philips credit
facility.
We also maintain a
$10.0 million unsecured and uncommitted bank borrowing facility in the
U.S. and various limited facilities in selected foreign countries. In addition, we maintain a $5.0 million
unsecured and uncommitted bank facility in the U.S. and a $4.4 million facility
in the Netherlands for the purpose of issuing standby letters of credit/bank
guarantees. At December 31, 2001,
we had outstanding standby letters of credit/bank guarantees totaling
approximately $9.3 million to secure customer advance deposits under these bank
facilities. We also had outstanding at
December 31, 2001 $5.1 million of foreign bank guarantees that are secured
by cash balances.
On August 3, 2001,
we issued $175 million of convertible subordinated notes, due August 15, 2008,
through a private offering. Our
proceeds, net of underwriting discounts, commissions and debt issuance
expenses, totaled $169.1 million. The
notes are redeemable at our option beginning in 2004, or earlier if the price
of our common stock exceeds specified levels.
The notes bear interest at 5.5%, payable semi-annually. The notes are convertible into our common
stock, at the note holder’s option, at a price of $49.52 per share at any time
up through their maturity. We are using
the proceeds of this note offering for working capital and general corporate
purposes.
Operations are conducted
in manufacturing and administrative facilities under operating leases that
extend through 2006. The lease
agreements generally provide for payment of base rental amounts plus our 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 was $3.9 million in 1999, $5.0 million in 2000 and
$6.3 million in 2001.
On May 22, 2001, we
completed a public offering of 3,066,666 shares of FEI common stock sold
by us and 6,133,334 shares of FEI common stock sold by Philips. Our proceeds, net of underwriting discounts,
commissions and offering expenses, totaled $88.0 million. We used $ 26.0 million of the proceeds from
this stock offering to pay off the Philips line of credit and are using the
remainder for working capital and general corporate purposes. With completion of the offering, Philips’
ownership of FEI common stock was reduced to approximately 8.1 million shares,
or 25.6% of the total FEI common shares outstanding, compared with 49.7%
ownership prior to the offering.
In August 1999, in
connection with the acquisition of Micrion, we sold 3,913,299 shares to Philips
Business Electronics in a private transaction providing $31.4 million in net
proceeds to us.
We also issue shares
under our employee stock purchase plan, which enables employees to purchase our
stock at a 15% discount to market price at fixed points in time. We also grant options to purchase our shares
to many of our 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
617,312 shares sold or granted in 2000 and 1,010,123 shares sold or granted in
2001. These programs generated cash of
$1.2 million in 1999, $4.7 million in 2000 and $3.6 million in 2001.
From time to time we have
repurchased our own common stock in the open market and retired the
shares. On September 18, 2001 we
announced a program to repurchase up to 2,000,000 shares of our common
stock. The program may be suspended at
any time or from time to time by our board of directors. During 2001, we repurchased and retired
50,000 shares of our common stock at a total cost of $1.0 million under this
program. In 2000 we repurchased and
retired 22,500 shares of our common stock at a total cost of $0.7 million.
We assess liquidity needs
by evaluating cash balances on hand, available borrowings under our credit
facilities, working capital trends and expected cash flows from operating
activities versus our investment needs.
In consideration of these factors, we believe that we have adequate
financial resources for at least the next 12 months.
The following table shows
our estimated contractual commitments.
(1) Holders
of this convertible note debt may require the Company to repurchase the notes
prior to maturity in the event of a change of control of the Company, as
further described in the note indenture.
(2) These non-cancelable operating lease and purchase
commitments are not reflected on the consolidated balance sheet under
accounting principles generally accepted in the U.S.
We issue standby letters of credit and bank guarantees
from time to time in the normal course of our business. The following table shows the expiration
periods for the standby letters of credit and bank guarantees we had
outstanding at December 31, 2001:
(1) These contingent obligations are not reflected on the
consolidated balance sheet under accounting principles generally accepted in
the U.S.
Related
Party Activity
Before
May 22, 2001, Philips owned a majority interest in FEI. As a consolidated affiliate of Philips, we
participated in certain Philips sponsored or administered programs. Following the sale of FEI stock by Philips,
we no longer participate in certain Philips sponsored or administered programs. We continue to purchase certain of these
services from Philips and certain other of these services are procured from
other suppliers. The cost to procure
these services from other suppliers and from Philips subsequent to May 22,
2001 exceeds the amounts previously paid to Philips. Under terms of a supplemental agreement effective
December 31, 2000, Philips will pay up to $6 million to the Company over a
three-year period to reduce the effect of these increased costs. These payments would terminate on a change
of control of FEI, as defined in the agreement. During 2001, we recognized $1.4 million of these payments as a
reduction to operating expenses and recognized increased operating expenses of
approximately the same amount.
A
number of Philips sales organizations acted as distributors for our products in
their respective countries until November 1999. In addition, certain Philips business units purchase our products
and services for internal use. Sales to
Philips amounted to $17.8 million, $9.5 million and $3.1 million during 1999,
2000 and 2001, respectively.
A
substantial portion of the subassemblies included in our FIBs, TEMs and SEMs
are purchased from Philips Enabling Technologies Group. Materials purchases from Philips and its
affiliates amounted to $18.6 million in 1999, $26.4 million in 2000 and $32.1
million in 2001. Additional discussion
of related party transactions is included in Note 12 to the consolidated
financial statements included elsewhere in this report.
Significant Accounting Policies
and Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. 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. Significant estimates
underlying the accompanying consolidated financial statements include the allowance
for doubtful accounts, reserves for excess or obsolete inventory, warranty
liabilities, income tax related contingencies, the lives and recoverability of
equipment and other long-lived assets such as existing technology intangibles
and goodwill, and the timing of revenue recognition. It is reasonably possible the estimates may change in the near
future.
The
allowance for doubtful accounts is estimated based on past collection problems,
known trends with current customers, and the need for a general overall reserve
against receivables to cover unknown future collection problems. The large number of entities comprising our
customer base and their dispersion across many different industries and
geographies somewhat mitigates our credit risk exposure and the magnitude of
our allowance for doubtful accounts.
Inventory
is 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. Reserves for
inventory obsolescence and excess quantities are established based on estimated
future use of quantities on hand, which is determined based on past usage,
planned changes to products, and known trends in markets and technology. Because of the long-lived nature of many of
our products, we maintain a substantial supply of parts for possible use in
future repairs and customer field service.
As these service parts become older, we apply a higher percentage of
reserve against the recorded balance, recognizing that the older the part, the
less likely it is to ultimately be used.
Purchased
goodwill, which represents the excess of cost over the fair value of net assets
acquired in a business combination, was amortized through December 31,
2001 on a straight-line basis over the estimated economic life for acquisitions
made before July 1, 2001. For
acquisitions made after June 30, 2001, purchased goodwill is not
amortized. Effective January 1,
2002, purchased goodwill will also not be amortized for acquisitions made
before July 1, 2001. We must
periodically evaluate the fair value of purchased goodwill and determine if
there has been any impairment in the recorded value. See also the heading Recently
Issued Accounting Pronouncements below.
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. We are currently using amortization periods
ranging from 5 years to 12 years for these assets. Changes in technology could affect our estimate of the useful
lives of such assets. Please also read
Note 2 of the consolidated financial statements included elsewhere in this
report.
We
capitalize certain software development costs for software expected to be sold
within our products. Such costs are
capitalized after the technological feasibility of the project is determined
and are reported on the balance sheet in other assets. Once we begin to include such software in
our products, these costs are amortized over the estimated economic life of the
software, which is usually 3 years.
Changes in technology could affect our estimate of the useful life of
such assets.
We
evaluate 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 there is an indication of impairment, we
prepare an estimate of future, undiscounted cash flows expected to result from
the use of the asset and its eventual disposition. If these cash flows are less than the carrying value of the
asset, we adjust the carrying amount of the asset to its estimated fair value.
Our
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. Our estimate of warranty cost is based primarily on our history
of warranty repairs and maintenance.
For our new products without a history of known warranty costs, we
estimate the expected costs based on our experience with similar product lines
and technology. While most new products
are extensions of existing technology, the estimate could change if new
products require a significantly different level of repair and maintenance than
similar products have required in the past.
For
products produced according to our published specifications, revenue is
recognized when the title to the product and the risks and rewards of ownership
pass to the customer. For products
produced according to a particular customer’s specifications, revenue is
recognized when the product meets the customer’s specifications and when the
title and the risks and rewards of ownership have passed to the customer. In each case, the portion of revenue
applicable to installation and customer acceptance is recognized upon meeting
specifications at the installation site.
For new applications of the Company’s products where performance cannot
be assured prior to meeting specifications at the installation site, no revenue
is recognized until such specifications are met.
Recently Issued Accounting
Pronouncements
On
January 1, 2001, we adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, which establishes accounting and reporting standards for derivative
instruments and hedging activities requiring that all derivatives be recognized
in the balance sheet and measured at fair value. The adoption of SFAS No. 133 did not have a material effect on
our financial position, results of operations or cash flows.
We
adopted SFAS No. 141, Business
Combinations, effective July 1, 2001. SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of
accounting. We have used the purchase
method of accounting for all acquisitions in our history.
In
June 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets. The statement requires discontinuing the
amortization of goodwill and other intangible assets with indefinite useful
lives. Instead, these assets are to be
tested periodically for impairment and written down to their fair market value
as necessary. SFAS No. 142 becomes
effective for our fiscal year beginning January 1, 2002. We are evaluating SFAS No. 142, and
other than the cessation of amortization of goodwill, we have not yet
determined the impact of adoption on our financial position or results of
operations. The amount of amortization
expense for goodwill was $3.1 million in 2001.
We expect to complete our evaluation of impairment under SFAS
No. 142 no later than June 30, 2002.
SFAS
No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, addresses accounting and reporting
for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS
No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and
APB Opinion No. 30, Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. SFAS No. 144 establishes a single
accounting model for long-lived assets to be disposed of by sale and expands on
the guidance provided by SFAS No. 121 with respect to cash flow
estimations. SFAS No. 144 becomes
effective for our fiscal year beginning January 1, 2002. We are evaluating SFAS No. 144 and have
not yet determined the impact of adoption on our financial position or results
of operations.
Backlog
Our
backlog consists of purchase orders we have received for products and services
we expect to ship and deliver within the next 12 months, although there is
no assurance that we will be able to do so.
At December 31, 2001 our total backlog was $136 million. At December 31, 2000 our total backlog
was $166 million. Customers may cancel
or delay delivery on previously placed orders, although our standard terms and
conditions include penalties for cancellations made close to the scheduled
delivery date. A substantial portion of
our 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 our 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.
Quarterly Results of Operations - Unaudited
The
following table presents unaudited consolidated financial data for each of the
eight quarters in 2000 and 2001. In our
opinion, 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
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 July 1, 2001 include a charge of $3.7
million in other expense, net to adjust the carrying value of the investment in
Surface/Interface as a result of the acquisition. The results of the three months ended September 30, 2001
include a charge of $3.4 million in operating expenses for purchased in-process
research and development associated with 2001 acquisitions.
As
discussed in Note 1 to the consolidated financial statements included
elsewhere in this report, we changed our accounting method for revenue
recognition in the fourth quarter of 2000, effective January 1, 2000, in
accordance with the requirements of SAB 101. Accordingly, the results for the three months ended April 2,
2000, include the cumulative effect of implementing SAB 101.
Our
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 our microelectronics and electron optics products,
competitive pricing pressures, conditions in our principal markets, the timing
of orders from major customers, 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 supply chain difficulties and
currency exchange rate fluctuations. We
will continue to derive a substantial portion of our revenues from the sale of
a relatively small number of microelectronics and electron optics
products. As a result, the timing of
revenue recognition from a single order could have a significant impact on our
net sales and operating results for a reporting period. A substantial portion of our 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.
ITEM 7A.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A
large portion of our business is conducted outside of the U.S. 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 of operations and financial position.
The major foreign currencies in which we face periodic fluctuations are
the euro (and prior to 2001 the related underlying European currencies), the
Czech
koruna, the Japanese yen and the British pound
sterling. Although for each of the last
three years more than 55% of our sales occurred outside of the U.S., a large portion
of these foreign sales were denominated in U.S. dollars and euros. As a result of an overall strengthening of
the U.S. dollar against European currencies and Japanese yen in 2001, net sales
were negatively affected. Assets and
liabilities of foreign subsidiaries are translated using the exchange rates in
effect at the balance sheet date. The
resulting translation adjustments increased shareholders’ equity and
comprehensive income for 2001 by $1.1 million.
We do
not enter into derivative financial instruments for speculative purposes. From time to time we enter into forward sale
or purchase contracts for foreign currencies to hedge specific receivables or
payables positions. As of
December 31, 2001, the aggregate stated amount of these contracts was
$30.9 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, 2001 would decrease by
approximately $1.5 million. The
decrease in value would be substantially offset from the revaluation of the
underlying hedged transactions.
Interest
Rate Sensitivity
We
borrowed funds under variable rate borrowing arrangements through July
2001. We have not hedged our exposure
to interest rate risk. Since we have no
variable interest rate debt outstanding at December 31, 2001, we would not
experience a material impact on our income before taxes as the result of a 1%
increase in short-term interest rates.
We
maintain a short-term investment portfolio consisting primarily of fixed rate
commercial paper, corporate notes and bonds and other fixed rate securities,
with maturities less than one year. An
increase or decrease in interest rates of 10% would not have a material impact
on our results of operations, financial position or cash flows, as we have the
intent and ability to hold these fixed rate investments until maturity.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT
AUDITORS’ REPORT
To the Board of Directors and Shareholders of FEI
Company
Hillsboro, Oregon
We
have audited the accompanying consolidated balance sheets of FEI Company and
subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, comprehensive income (loss),
shareholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2001. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We
conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
As
discussed in Note 1 to the consolidated financial statements, the Company
implemented Securities and Exchange Commission Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements, effective
January 1, 2000.
DELOITTE & TOUCHE LLP
Portland, Oregon
January 28, 2002
FEI COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER
31, 2000 AND 2001
See notes to consolidated
financial statements.
FEI
COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS
ENDED DECEMBER 31, 1999, 2000 AND 2001
See notes to consolidated financial statements.
FEI
COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS
ENDED DECEMBER 31, 1999, 2000 AND 2001
See notes to consolidated financial statements.
FEI
COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS
ENDED DECEMBER 31, 1999, 2000 AND 2001
See notes to consolidated financial
statements.
FEI
COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 1999, 2000, AND 2001
See notes to consolidated financial statements.
FEI COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business - FEI Company and its wholly-owned
subsidiaries (“FEI” or 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 DualBeam systems that combine a FIB column
and a SEM column on a single platform.
The Company also designs, manufactures and sells some of the components
of electron microscopes and FIBs to other manufacturers. The Company has research, development and
manufacturing operations in Hillsboro, Oregon; Peabody, Massachusetts;
Sunnyvale, California; Eindhoven, The Netherlands; and Brno, Czech
Republic. Sales and service operations
are conducted in the United States of America (“U.S.”) and 21 countries located
throughout North America, Europe and the Asia Pacific Region. The
Company also sells its products through independent agents and representatives
in various countries. The Company’s
products are sold to semiconductor manufacturers, thin film head manufacturers
in the data storage industry and to industrial and institutional organizations
in the life sciences and material sciences industries.
Basis of Presentation-The
consolidated financial statements include the accounts of the Company and all
of its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Use
of Estimates in Financial Reporting - The preparation of financial
statements in conformity with accounting principles generally accepted in the
U.S. 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. Significant estimates underlying the accompanying consolidated
financial statements include the allowance for doubtful accounts, reserves for
excess or obsolete inventory, warranty liabilities, income tax related
contingencies, the lives and recoverability of equipment and other long-lived
assets such as existing technology intangibles and goodwill, and the timing of
revenue recognition. It is reasonably
possible the estimates may change in the near future.
Concentration
of Credit Risk - Instruments that potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents,
short-term investments and receivables.
The Company’s investment policy limits investments with any one issuer
to five percent or less of the total investment portfolio, with the exceptions
of money market funds which may comprise up to 25 percent of the total
investment portfolio and securities issued by the U.S. government or its
agencies which may comprise up to 100 percent of the total investment
portfolio. The Company’s exposure to
credit risk concentrations within its receivables balance is limited due to the
large number of entities comprising the Company’s customer base and their
dispersion across many different industries and geographies.
Dependence
on Key Suppliers - 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
Enabling Technologies Group B.V. (“Philips Enabling Technologies Group”). A second supplier, RIPA Holding B.V.,
is currently a sole source for electronic sub-assemblies that were previously
manufactured at the Company’s facilities in Eindhoven. In
addition, the Company obtains a significant portion of its component parts from
a limited number of suppliers.
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 of
business, the Company continually evaluates its existing suppliers and potential
different or additional suppliers to determine whether changes in suppliers may
be appropriate.
Foreign
Currency Translation - Assets and liabilities denominated in a foreign currency, where
the local currency is the functional currency, are translated to U.S. dollars
at the exchange rate in effect on the respective balance sheet date. Gains and losses resulting from the
translation of assets, liabilities and equity are included in accumulated other
comprehensive loss on the consolidated balance sheet. Transactions representing revenues, 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 as other income (expense), and aggregated $362 in 1999, $(267) in
2000 and $833 in 2001.
Forward Exchange Contracts
- Most of the Company’s subsidiaries transact some business in 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 offset a portion of the risk of
foreign currency fluctuations. The
Company does not hold or issue derivative financial instruments for trading
purposes. The purpose of the Company’s
hedging activities is to reduce risk that the eventual cash flows of the
underlying assets and liabilities will be adversely affected by changes in
exchange rates. The Company accounts
for such forward exchange contracts in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 133, Accounting
for Derivative Instruments and Hedging Activities. Accordingly, realized and unrealized gains and
losses on such contracts are recognized in the consolidated statements of
operations concurrent with the related transactions. The related assets and liabilities at December 31, 2001 are
not material.
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 there is an indication
of impairment, the Company prepares an estimate of future, undiscounted cash
flows expected to result from the use of the asset and its eventual
disposition. If these cash flows are
less than the carrying value of the asset, the Company adjusts the carrying
amount of the asset to its estimated fair value.
Cash
and Cash Equivalents - Include cash deposits in banks, money market funds and other
highly liquid marketable securities with original maturities of three months or
less at the date of acquisition.
Short-Term
Investments -
Marketable securities with maturities of greater than three months and less
than one year at the date of acquisition are considered short-term
investments. All such investments are
classified as held-to-maturity and, accordingly, are carried at amortized cost
on the consolidated balance sheet.
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 that exceed the estimated requirements for the next
12 months based on recent usage levels are reported as other assets. Management has established inventory
reserves based on estimates of excess and/or obsolete current and noncurrent
inventory.
Deferred
Income Taxes - Deferred income taxes are provided for temporary differences
between the amounts of assets and liabilities for financial and tax reporting
purposes. Deferred tax assets are
reduced by a valuation allowance when it is estimated to be more likely than
not that some portion of the deferred tax assets will not be realized.
Equipment,
including systems used in research and development activities, production and
in demonstration laboratories, is stated at cost and depreciated over estimated
useful lives 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, was amortized
through December 31, 2001 on a straight-line basis over the estimated
economic life for acquisitions made before July 1, 2001. For acquisitions made after June 30,
2001, purchased goodwill is not amortized.
See also Recently Issued Accounting
Pronouncements below.
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 affect the
Company’s estimate of the useful lives of such assets. See Note 2.
Software Development Costs -
The Company capitalizes certain software development costs for software
expected to be sold with the Company’s products. Such costs are capitalized after the technological feasibility of
the project is determined and are reported on the balance sheet in other
assets. Once the Company begins to
include such software in its products, these costs are amortized over the estimated
economic life of the software. Changes
in technology could affect the Company’s estimate of the useful life of such
assets. See Note 5.
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
and maintenance. While most new
products are extensions of existing technology, the estimate could change if
new products require a significantly different level of repair and maintenance
than similar products have required in the past.
Deferred
Revenue
represents customer deposits on equipment orders and pre-paid service
contract revenue.
Revenue
Recognition and Cumulative Effect of Change in Accounting Principle - For
products produced according to the Company’s published specifications, revenue
is recognized when the title to the product and the risks and rewards of ownership
pass to the customer. For products
produced according to a particular customer’s specifications, revenue is
recognized when the product meets the customer’s specifications and when the
title and the risks and rewards of ownership have passed to the customer. In each case, the portion of revenue
applicable to installation and customer acceptance is recognized upon meeting
specifications at the installation site.
For new applications of the Company’s products where performance cannot
be assured prior to meeting specifications at the installation site, no revenue
is recognized until such specifications are met.
The
Company also provides service for its products. Revenue from time and materials based service arrangements is
recognized as the service is performed.
Revenue from service contracts is recognized ratably over the term of
such service contracts.
The
Company’s billing terms on TEMs, SEMs, FIBs and DualBeam systems generally
include a hold-back of 10 to 20 percent on the total purchase price subject to
completion of the installation and final acceptance process at the customer
site. Effective January 1, 2000,
the Company changed its revenue recognition policy to defer the portion of
revenue related to installation and final acceptance until such installation
and final acceptance are completed.
This change was made in accordance with the implementation of U.S.
Securities and Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(“SAB 101”). Previously, the Company
had recognized 100 percent of revenue for products at such time as the
product specifications had been met and the title and risks and rewards of
ownership had transferred to the customer since the Company has historically
completed such installation services successfully and since such services have
required minimal costs to complete. The
effect of this change, net of income taxes, is reported as the cumulative
effect of a change in accounting principle for the year ended December 31,
2000. This net effect reflects the
deferral as of January 1, 2000 of $8,442 of revenue previously recognized
and the accrual of $3,462 in cost of sales previously deferred. The Company recognized the $8,442 in
deferred revenue included in the cumulative effect adjustment as of
January 1, 2000 during the year ended December 31, 2000.
Research
and Development costs are expensed as incurred,
except for capitalized software development costs (see above).
Advertising Costs are
expensed as incurred. The amount of
advertising expense was $2,509 in 1999, $2,716 in 2000 and $1,893 in 2001.
Stock-Based
Compensation - The Company measures compensation
expense for its stock-based employee compensation plans using the method
prescribed by Accounting Principles Board 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 9.
Supplemental
Cash Flow Information - Cash paid for interest totaled
$1,121 in 1999, $1,836 in 2000 and $1,234 in 2001. Cash paid for income taxes totaled $366 in 1999, $13,263 in 2000
and $14,673 in 2001. Issuance of common
stock for acquisition of businesses was $6,588 in the year ended
December 31, 2001. Assumption of
debt for acquisition of businesses was $5,174 in the year ended
December 31, 2001.
Reclassifications - Certain
reclassifications have been made to the prior year financial statements to
conform to the current year presentation.
Recently Issued Accounting Pronouncements - On January 1, 2001, the Company
adopted SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” as amended, which
establishes accounting and reporting standards for derivative instruments and
hedging activities requiring that all derivatives be recognized in the balance
sheet and measured at fair value. The
adoption of SFAS No. 133 did not have a material effect on the Company’s
financial position, results of operations or cash flows.
The
Company adopted SFAS No. 141, Business
Combinations, effective July 1, 2001. SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of
accounting.
In
June 2001, the Financial Accounting Standards Board issued SFAS No. 142, “Goodwill and Other Intangible Assets.” The statement requires discontinuing the amortization
of goodwill and other intangible assets with indefinite useful lives. Instead, these assets are to be tested
periodically for impairment and written down to their fair market value as
necessary. SFAS No. 142 becomes
effective for the Company’s fiscal year beginning January 1, 2002. The Company is evaluating SFAS No. 142, and
other than the cessation of amortization of goodwill, has not yet determined
the impact of adoption on its financial position or results of operations. The amount of amortization expense for
goodwill was $3,149 in 2001.
SFAS
No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, addresses accounting and reporting
for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of and APB Opinion No. 30, Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS No. 144
establishes a single accounting model for long-lived assets to be disposed of
by sale and expands on the guidance provided by SFAS No. 121 with respect to
cash flow estimations. SFAS No. 144
becomes effective for the Company’s fiscal year beginning January 1,
2002. The Company is evaluating SFAS
No. 144 and has not yet determined the impact of adoption on its financial
position or results of operations.
2. MERGERS AND ACQUISITIONS
Micrion Corporation - August 1999
On
August 13, 1999, the Company acquired all of the outstanding common stock
of Micrion Corporation (“Micrion”), a Massachusetts corporation engaged in the
design, manufacture, sale and service of focused charged particle beam systems,
in a transaction accounted for under the purchase method. Micrion’s results of operations are included
in the consolidated financial statements for the period subsequent to August
13, 1999. The total purchase price of
$69,355 consisted of the fair value of the Company’s 5,064,150 newly issued shares
of common stock valued at $34,684, $30,385 in 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 projections for each product line
were discounted to net present value.
This approach was applied to existing technology as well as to research
and development projects which had 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:
In
estimating the value of purchased in-process research and development, the
Company identified four significant projects under development at the date of
the acquisition. Two of those projects
represented enhancements to the resolution and automation of existing products
designed primarily for the semiconductor industry. Enhancements from the first of these projects have been added to
the Company’s product line and such enhancements are currently generating
revenues for the Company. The second
project was discontinued as a separate project following the acquisition by
FEI, and the acquired technology was incorporated into the Company’s similar
product line, which is currently generating revenues for the Company. The third project represented enhancements
to the automation of products for the data storage industry. This technology was incorporated into the
related FEI product line and is currently generating revenues for the
Company. The fourth project represented
development efforts on products for the lithography photo mask repair
market. This project was completed and
the Company introduced a new line of products for the lithography photo mask
repair market in 2001, and is currently generating revenue from such
products. None of the projects in these
categories had been proven technologically feasible or had generated revenue as
of the date of the acquisition. In
accordance with the Company’s policy to expense research and development costs
as they are incurred, a 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.
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 were established at
10 and 12 years, respectively. In
accordance with SFAS No. 142, the Company will cease amortization of the
goodwill effective January 1, 2002.
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, 1999 are as follows:
*
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, Koninklijke Philips Electronics NV (“Philips”) purchased from
the Company 3,913,299 newly issued shares of common stock for $31,385 in cash.
Additional Philips Sales and Service
Organizations - December 1999
In
December 1999, the Company acquired from Philips the 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 purchase price totaled
$2,879, consisting of NOC of $(416), 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 Philips was reported as a dividend.
2001 Acquisitions
On
April 24, 2001, the Company acquired all of the outstanding common stock
of Deschutes Corporation (“Deschutes”), a manufacturer of focused charged
particle beam systems, in a transaction accounted for under the purchase
method. Deschutes’ results of
operations are included in the consolidated financial statements for the period
subsequent to April 24, 2001. The
purchase price of $3,012 included $650 of cash, 50,628 shares of FEI common
stock valued at $1,279 and $1,083 of liabilities assumed. The
purchase price may be increased by an additional amount of up to $600
(consisting of 11,872 shares of the Company’s common stock, valued at $300, and
$300 of cash) if certain milestones are met.
On
August 13, 2001, the Company purchased all of the assets and assumed
certain liabilities of Surface/Interface, Inc. (“Surface/Interface”), a
supplier of stylus nanoprofilometry systems, in a transaction accounted for
under the purchase method. Activity of
the Surface/Interface business is included in the consolidated financial
statements for the period subsequent to August 13, 2001. The purchase price of $12,365 included $750
cash, 131,880 shares of FEI common stock valued at $5,009, the assumption of
$4,091 of Surface/Interface’s liabilities and the Company’s previous investment
and advances to Surface/Interface of $2,515.
The Company’s Chief Executive Officer and members of his family held an
ownership interest in Surface/Interface up to the date of the acquisition in
August 2001.
For
each of these acquisitions, management estimated the fair value of the
intangible assets, inventory, and equipment acquired in order to allocate the
total purchase price to the assets acquired and liabilities assumed. To determine the value of the technology and
product lines acquired, 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 were discounted to a net present
value. This approach was applied to
existing technology as well as to research and development projects which had
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 25 to
30 percent representing management’s estimate of the weighted average cost of
capital for the acquired businesses.
For research projects on products which had not yet been proven
technologically feasible, the
discount rate applied was 32 to 37 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.
The existing technology is being amortized over
its estimated useful life of five years.
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.
The
total purchase price of Deschutes was allocated $204 to current assets, $28 to
equipment, $2,185 to existing technology, $200 to goodwill and $395 to
in-process research and development. In
estimating the value of purchased in-process research and development, the
Company identified one significant project under development at the date of the
acquisition. This project represents
enhanced electronic components for FIB systems that may reduce manufacturing
costs in the future. This project had
not been proven technologically feasible nor had it generated cost savings as
of the date of the evaluation. However,
this project is expected to begin generating cost savings in 2002. In accordance with the Company’s policy to
expense research and development costs as they are incurred, a charge of $395
associated with the write-off of acquired in-process research and development
was recorded immediately subsequent to the closing of the acquisition. In estimating the value of existing
technology, one existing product line was identified primarily for the data
storage industry. This existing product
line is currently generating revenue for the Company.
The
total purchase price of Surface/Interface was allocated $327 to current assets,
$575 to equipment, $315 to other assets, $6,889 to existing technology, $1,216
to goodwill and $3,043 to in-process research and development. In estimating the value of purchased
in-process research and development, the Company identified one significant
project under development at the date of the acquisition. This project represents enhanced automation
to Surface/Interface’s existing product line.
This project had not been proven technologically feasible nor had it
generated revenue as of the date of the evaluation. However, this project is expected to begin generating revenue in
2002. In accordance with the Company’s
policy to expense research and development costs as they are incurred, a charge
of $3,043 associated with the write-off of acquired in-process research and
development was recorded immediately subsequent to the closing of the
acquisition. In estimating the value of
existing technology, two existing product lines were identified primarily for
the semiconductor metrology market. The
existing product lines are currently generating revenue for the Company.
Purchased Goodwill and Technology
Purchased
goodwill and technology consisted of the following:
* Amortization
will be discontinued effective January 1, 2002 in accordance with SFAS No. 142.
3. INVENTORIES
Inventories
consisted of the following:
4. EQUIPMENT
Equipment
consisted of the following:
5. OTHER
ASSETS
Other
assets consisted of the following:
Software
development costs capitalized during the years ended December 31, 1999,
2000 and 2001 were $2,866, $2,413 and $2,005, respectively. Amortization of software development costs
was $1,562 in 1999, $1,748 in 2000 and $2,016 in 2001.
In
September 1999, the Company purchased 1,231,982 shares of preferred stock in
Surface/Interface for $3,000 in cash.
In June 2000, the Company purchased an additional 513,326 shares of
preferred stock for $1,250 in cash. In
August 2001, the Company purchased all of the assets and assumed certain
liabilities of Surface/Interface. As a
result of
the 2001
acquisition, the Company adjusted the carrying value of its previous investment
in Surface/Interface to reflect the acquisition purchase price and recorded a
valuation charge to earnings of $3,718 in 2001.
6. CREDIT
FACILITIES
From
February 1999 through July 2001, the Company had a credit facility with Philips
that provided borrowing capacity of up to $75,000. Advances could be made in three currencies and bore interest at
LIBOR plus 0.75%. The weighted average
interest rate in effect was 4.44% at December 31, 2000. The Company terminated the credit facility
in July 2001, and all of the outstanding balance under the credit facility was
repaid in full at that time.
The
Company maintains a $10,000 unsecured and uncommitted bank borrowing facility
in the U.S. and certain limited bank facilities in selected foreign
countries. In addition, the Company
maintains a $5,000 unsecured and uncommitted bank facility in the U.S. and a
$4,389 unsecured and uncommitted bank facility in The Netherlands for the
purpose of issuing standby letters of credit and bank guarantees. At December 31, 2001, the Company had
outstanding standby letters of credit and bank guarantees totaling
approximately $9,314 to secure customer advance deposits under these bank
facilities. The Company also had
outstanding at December 31, 2001 $5,051 of foreign bank guarantees that
are secured by cash balances.
On August 3,
2001, the Company issued $175 million of convertible subordinated notes, due
August 15, 2008, through a private placement.
The notes are redeemable at the Company’s option beginning in 2004, or
earlier if the price of the Company’s common stock exceeds specified
levels. The notes bear interest at
5.5%, payable semi-annually. The notes
are convertible into common stock of the Company, at the note holder’s option,
at a price of $49.52 per share.
7. LEASE
OBLIGATIONS
Operations
are conducted in manufacturing and administrative facilities under operating
leases that extend through 2006. 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 was $3,876 in 1999, $4,998 in
2000 and $6,367 in 2001.
The
approximate future minimum rental payments due under these agreements as of
December 31, 2001 are $7,393, $6,539, $5,102, $3,218 and $1,986 for the
years ending December 31, 2002 through 2006, respectively, and $403
thereafter.
8. INCOME
TAXES
Income
tax expense on income before cumulative effect of change in accounting
principle consisted of the following:
The
effective income tax rate applied to income (loss) before cumulative effect of
change in accounting principle varies from the U.S. federal statutory rate due
to the following:
The tax effects of
temporary differences that give rise to significant portions of deferred tax
assets and deferred tax liabilities are as follows:
Net capital loss
carryforwards of $1,293 will expire in 2002 and $1,430 will expire in 2006 if
not utilized by the Company.
These deferred tax
components are reflected in the consolidated balance sheet as follows:
As of December 31,
2001, U.S. income taxes have not been provided for approximately $58,000 of
cumulative undistributed earnings of several non-U.S. subsidiaries because the
Company intends to reinvest these earnings indefinitely in operations outside
the U.S. Foreign tax provisions have
been provided for these cumulative undistributed earnings. Upon distribution of those earnings in the
form of dividends or otherwise, the Company would be subject to both U.S.
income taxes (subject to an adjustment for foreign tax credits) and withholding
taxes payable to the various foreign countries. Determination of the amount of the unrecognized deferred U.S.
income tax liability is not practicable because of the complexities associated
with its hypothetical calculation.
The U.S. Internal Revenue
Service (“IRS”) recently completed auditing the Company’s federal income tax
returns for the years 1997, 1998 and 1999.
The outcome of the IRS audit did not have a material effect on the Company’s
financial position, results of operations or cash flows.
9. SHAREHOLDERS’ EQUITY
Capital Stock
- As of December 31, 2001, 3,733,665 shares of common stock were reserved
for stock incentive plans.
On February 21, 1997, the
Company acquired substantially all of the assets and liabilities of the
electron optics business of Philips, in a transaction accounted for as a
reverse acquisition (the “PEO Combination”).
As part of the PEO Combination, the Company agreed to issue to Philips
additional shares of common stock of the Company whenever stock options that
were outstanding on the date of the closing of the PEO Combination are
exercised. Any such additional shares
are issued at a rate of approximately 1.22 shares to Philips for each share
issued on exercise of these options.
The Company receives no additional consideration for these shares issued
to Philips under this agreement. The
Company issued 383,823 shares in 2000 and 22,317 shares in 2001 to Philips
under this agreement. As of
December 31, 2001, 463,158 shares of the Company’s common stock are
potentially issuable and reserved for issuance as a result of this agreement.
On May 22, 2001, the
Company completed a public offering of 3,066,666 shares of FEI common
stock sold by the Company and 6,133,334 shares of FEI common stock sold by
Philips. Proceeds to the Company, net
of underwriting discounts, commissions and offering expenses, totaled
$87,994. At completion of the offering,
Philips’ ownership of FEI common stock was reduced to approximately 8.1 million
shares, or 25.6% of the total FEI common shares then outstanding, compared with
49.7% ownership prior to the offering.
On September 18,
2001 the Company announced a share repurchase program had been approved by the
Board of Directors. The program allows
the purchase of up to 2 million shares of the Company’s common stock over a
nine month period ending June 18, 2002.
During 2001, the Company repurchased and retired 50,000 shares at a
total cost of $1,009.
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 and stock appreciation rights and to sell
restricted stock. The 1995 Stock Incentive
Plan (“1995 Plan”) allows for issuance of a maximum of 4,000,000 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 discretion 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:
Additional information
regarding options outstanding as of December 31, 2001 is as follows:
The weighted average fair
value of options granted, as calculated under SFAS No. 123, was $5.56 in 1999,
$15.65 in 2000 and $18.50 in 2001.
Employee Stock
Purchase Plan - In 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 1999, employees purchased 141,815 shares at an average purchase
price of $5.39. During 2000, employees
purchased 189,062 shares at an average purchase price of $7.43. During 2001, employees purchased 120,173
shares at an average purchase price of $17.18.
At December 31, 2001, 451,050 shares of common stock were reserved
for issuance under the ESPP. The
weighted average fair value in excess of the purchase price for ESPP shares
purchased, as calculated under SFAS No. 123, was $2.42 in 1999, $3.55 in 2000
and $9.73 in 2001.
Restricted Stock
Award and Purchase - On June 25, 1998, in
connection with the commencement of his employment with FEI, Vahé Sarkissian,
Chairman, President and Chief Executive Officer, was granted a stock bonus of
50,000 shares of common stock of FEI.
The stock was valued at $7.41 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 terminated before June 25, 1999. Effective June 25, 1998, the Company
loaned Mr. Sarkissian an amount equal to his federal and state tax
liability for the stock bonus. This
loan is forgiven at the rate of 20% annually if Mr. Sarkissian remains
employed by the Company.
Also on June 25,
1998, in connection with his commencement of employment, FEI sold to
Mr. Sarkissian 150,620 shares of common stock of FEI subject to specified
restrictions. The purchase price for
the shares was $7.41, or $1,116, the fair market value on the date of
purchase. The restriction on these
shares is removed at a rate of 20% on June 25, 1998 and 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 these 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 income (loss)
and net income (loss) per share would have been reduced to the pro forma
amounts shown as follows:
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:
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:
10. EARNINGS
PER SHARE
The Company reports basic
and diluted net income (loss) per share in accordance with SFAS No. 128, Earnings per
Share. The difference
between basic and diluted net income (loss) per share is a result of the
dilutive effect of outstanding stock options, which are considered potential
common shares. The difference between
the number of shares used in the calculation of basic and diluted net income
(loss) per share is as follows:
All potentially dilutive
securities outstanding during 1999 have been excluded from the calculation for
that year because their effect would reduce the net loss per share and
therefore would be anti-dilutive.
During the years ended December 31, 2000 and 2001, 139,050 and
185,150 stock options have been excluded from the calculation of diluted
earnings per share because their effect would be anti-dilutive. In addition, $175,000 of convertible debt
issued in 2001 can be converted into 3,533,926 shares of the Company’s stock,
and these shares have been excluded from the calculation of diluted earnings
per share because their effect would be anti-dilutive in 2001.
11. EMPLOYEE
BENEFIT PLANS
Pension Plans - Employee pension plans
have been established in many foreign countries in accordance with the legal
requirements and customs in the countries involved. The majority of employees in Europe, Asia and Canada are covered
by defined benefit or defined contribution pension plans. Employees in the U.S. are not covered by
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.
Through August 31,
2001 certain of these pension plans were sponsored by Philips. The Company’s share of the cost or benefit
under these plans was determined by Philips and allocated to the Company. In certain countries the return on invested
assets exceeded the cost of the benefit under these Philips pension plans, and
the Company was allocated a portion of the rebate that Philips received. The Company’s net pension benefit under
these Philips sponsored pension plans was $(210) in 1999, ($1,576) in 2000 and
($1,421) in 2001. Because the Company’s
employees represented less than 1% of the total active participants in these
Philips plans, and because separate pension records are not maintained for each
participating company, the Company did not account for its share of plan assets
and obligations within the Philips sponsored plans.
Effective
September 1, 2001, employees who previously participated in the Philips
sponsored pension plans were transferred to other pension arrangements. Employees in The Netherlands began
participating with other companies in making collectively-bargained payments to
the Metal-Electro Industry pension fund.
Pension costs relating to this multi-employer plan were $1,142 for
2001. Employees in Europe outside The
Netherlands are now covered through a defined contribution plan. Contributions to this plan for 2001 totaled
$18.
In certain foreign
countries, employees are covered by pension plans under local legal
requirements. The total cost of these
additional pension plans was $189 in 1999, $437 in 2000 and $426 in 2001. These supplemental pension plans are not
funded. A liability for the projected
benefit obligations of these supplemental plans of $903 and $1,064 is included
in other non-current liabilities as of December 31, 2000 and 2001,
respectively.
Post-Employment
Benefits Other Than Pensions - Most of the
Company’s employees in The Netherlands are provided group health insurance
after retirement. Government based
programs in the Netherlands provide this benefit after the normal retirement
age of 65. For those employees that
elect early retirement at age 62, the Company continues to provide the
employer’s portion of the health insurance premium until the normal retirement
age of 65 is reached. Through August
31, 2001, these benefits in The Netherlands were generally provided under
Philips sponsored plans. 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 was charged to the Company by
Philips. Based on the number of the
Company’s employees located in The Netherlands, a charge of approximately $75
each year has been allocated to the Company by Philips. Effective September 1, 2001, the Company is
responsible for providing these same post-retirement benefits for certain
future early retirees of the Company
in The Netherlands. The Company
has not yet determined the transition benefit obligation or un-funded liability
from these programs. The Company does
not expect that the effect of accounting for these post-retirement benefits
will have a material effect on the Company’s financial position, results of
operations or cash flows.
Profit Share Plan
- In 2000 the Company implemented a Profit Share Plan (“PSP”) covering
substantially all employees of the Company who are not already covered by an
incentive compensation plan. The PSP
pays employees a share of company profits on a semi-annual basis, subject to
approval by the Company’s Board of Directors.
For 2000 and 2001, the total cost of the PSP was $2,155 and $3,037,
respectively. During 1999, the Company
maintained an Employee Incentive Plan (“EIP”) for employees in the U.S. that
was based on achieving certain targeted levels of operating income determined
by the Board of Directors on a year-to-year basis. For 1999, the total cost of the EIP was $695.
Profit Sharing
401(k) Plan - The Company maintains a profit
sharing 401(k) plan that covers substantially all U.S. employees. Employees may elect to 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 one and one half
percent of each employee’s eligible compensation. In addition, a supplemental match may be approved by the Board of
Directors, based on company performance, up to a maximum of an additional three
percent of eligible compensation.
Employees must meet certain requirements to be eligible for the Company
matching contribution. The Company
contributed $676 in 1999, $1,312 in 2000 and $1,553 in 2001 to this plan. The Company’s 401 (k) plan does not allow
for the investment in shares of stock of FEI.
12. RELATED-PARTY
ACTIVITY
Relationship with
Philips - On February 21, 1997 FEI acquired
substantially all of the assets and liabilities of the electron optics business
of Philips in a transaction accounted for as a reverse acquisition. Philips received 55 percent of the then
outstanding common stock of the Company in the exchange. Philips maintained majority control of FEI
until May 22, 2001, when its ownership was reduced through a secondary
public stock offering (see Note 9). The
following paragraphs describe various business transactions and relationships
between the Company and Philips.
Agreement with
Philips Effective as of December 31, 2000 - During
2001, the Company and Philips entered into an agreement effective as of
December 31, 2000 (the “Supplemental Agreement”) that clarifies certain
relationships and transactions between the parties. Certain terms of the agreement became effective May 22, 2001, or
120 days after May 22, 2001, the day Philips’ ownership fell below 45% of
the Company’s outstanding common stock.
The agreement addresses, among other things, patents and intellectual
property, research and development services, use of the Philips name and
trademark, participation in Philips’ insurance programs and the Philips credit
facility. Under the agreement, the
Company no longer participates in certain Philips sponsored or administered
programs. The Company continues to
purchase certain of these services from Philips and certain other of these
services are procured from other suppliers.
The cost to procure these services from other suppliers and from Philips
subsequent to May 22, 2001 is in excess of the amounts previously paid to
Philips. Under terms of the
Supplemental Agreement Philips will pay up to $6,000 to the Company over a
three-year period to reduce the effect of these increased costs. These payments would terminate on a change
of control of FEI, as defined in the agreement. During 2001, the Company recognized $1,351 of these payments as a
reduction to operating expenses, and recognized increased operating expenses of
approximately the same amount.
The Supplemental
Agreement resolved a number of issues and transactions between the parties in
anticipation of the reduction in Philips’ ownership interest in the Company
below 45%. In connection with the
resolution of these issues, the Company reduced current accounts with Philips
and common stock by $5,000 to adjust the amount of division equity of the
Philips electron optics business recorded at the original date of the PEO
Combination. This division equity was originally
recorded as common stock of FEI in the reverse acquisition accounting treatment
of the PEO Combination.
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 and services for internal use. Sales to Philips amounted to $17,763 in 1999, $9,518 in 2000 and
$3,078 in 2001.
Materials
Purchased from Philips - See Note 1. A substantial portion of the subassemblies
included in the Company’s FIBs, TEMs and SEMs are purchased from Philips
Enabling Technologies Group. Materials
purchases from Philips and its affiliates amounted to $18,600 in 1999, $26,398
in 2000 and $32,080 in 2001.
Purchases Under
Philips Arrangements and Terms - From time to
time, the Company purchased 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 $186 in
1999, $127 in 2000 and $111 in 2001.
These arrangements generally end after December 31, 2001. The Company also participated in certain
business insurance programs under terms arranged by Philips through May 22,
2001. Effective May 23, 2001, the
Company obtained its own independent business insurance. 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 are higher
than the cost under the Philips arrangements.
Employment Related Arrangements -
Through the majority shareholdings of Philips, the Company had the benefit of
certain collective bargaining arrangements and the Philips rate for social
charges in The Netherlands and other countries. Effective May 22, 2001, when Philips was no longer the majority
shareholder, the Company negotiated new collective bargaining arrangements and
a new social charge rate was applied to the Company, which resulted in
increased labor costs for the Company.
See also Note 12.
Facilities Leased
from Philips - The Company leases sales, service
and administrative facilities from Philips in certain countries. The Company paid Philips approximately
$1,355 in 1999, $1,537 in 2000 and $1,392 in 2001 for rent of these facilities.
Development
Services Provided by Philips - The Company
purchases research and development services from Philips central research
facility. The Company paid $950 in
1999, $1,668 in 2000 and $3,208 in 2001 for such services. The Supplemental Agreement provided for no
rate increase for these services through the end of 2001. The cost per hour of these services is
expected to increase in 2002 by 40%.
Intellectual Property - Prior to
May 22, 2001, most of the patents used by the Company relating to its
Electron Optics business segment products and certain Microelectronics business
segment products were licensed from Philips and its affiliates. As part of the PEO Combination, the Company
acquired perpetual rights to certain patents owned by Philips. The Supplemental Agreement provides for the
transfer of ownership of most of these patents to the Company. The Supplemental Agreement specified certain
other patents that are jointly owned and may be jointly used by Philips and
FEI, and also provided for the license by FEI of certain patents owned by
Philips. In addition, the Company had
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 were 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 were subject to continued majority ownership of the Company by
Philips. The reduction below majority
ownership by Philips, which occurred on May 22, 2001, 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.
Other Services
Provided by Philips - In connection with the PEO
Combination, the Company entered into various services agreements with Philips
affiliates to continue to provide to FEI certain administrative, accounting,
customs, export, human resources, import, information technology, logistics and
other services that had been provided to the Company since February 1997. The Company paid Philips approximately
$5,979 in 1999, $5,942 in 2000 and $4,504 in 2001 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, materials and
services.
Current accounts with
Philips consist of the following:
Accurel
- The Company’s Chief Executive Officer owns a 50 percent interest in Accurel
Systems International Corp. (“Accurel”), a provider of metrology services to
the semiconductor and data storage markets.
The Company has sold equipment and services to Accurel, and has provided
certain other services to Accurel.
These transactions are summarized as follows:
In the fourth quarter of
2001, the Company accepted an order from Accurel for $1,991 for delivery of a
system in the first quarter of 2002. As
of December 31, 2001, the Company had outstanding $492 in lease guarantees
for Accurel (see Note 14).
Norsam - The Company owns 500,000
shares of convertible preferred stock in Norsam Technologies, Inc.
(“Norsam”). Transactions with Norsam
are summarized as follows:
13. FAIR
VALUE OF FINANCIAL INSTRUMENTS
Management believes the
carrying amounts of cash and cash equivalents, receivables, current accounts
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 classifies all
short-term investments as “held to maturity” and therefore carries these
financial instruments at amortized cost and not current fair value. The fair value of short-term investments at
December 31, 2001 was $119,120.
Based on the closing bid price, the fair market value of the convertible
debt was $172,156 as of December 31, 2001.
Management believes that the carrying amounts of bank line of credit
borrowings and the credit facility with Philips as of December 31, 2000 were a
reasonable approximation of the fair value of those financial instruments
because they bore interest at revolving market rates and because of the
short-term maturities that were involved.
The fair values of the Company’s investments in unconsolidated
affiliates are 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 used to hedge
a portion of the risk of foreign currency fluctuations. The Company’s practice generally is to hold
such hedge contracts to maturity.
Because of the short-term maturities of these hedge contracts,
management believes that 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, 2000 and 2001, the
stated amount of forward exchange contracts outstanding totaled approximately
$2,458 and $30,866, respectively, maturing at various dates through March
2002. The difference between the
contracted rate and the spot rate at December 31, 2001 amounted to an
unrealized loss of $1.
14. 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 1999, the Company assumed potential liability in connection with a 1996
class action securities suit brought against Micrion. In December 1999, the U.S. District Court for the District of
Massachusetts granted the Company’s renewed summary judgment motion. In January 2000, the plaintiffs appealed the
decision to the U.S. Court of Appeals for the First Circuit. On May 10, 2001, the First Circuit Court of
Appeals issued its decision affirming the District Court’s order. Plaintiffs sought no further review and,
accordingly, final judgment was entered dismissing the action.
The Company is self-insured for certain aspects of its
property and liability insurance programs and is responsible for deductible
amounts under most policies. The
deductible amounts generally range from $10 to $250 per claim.
The Company participates in third party equipment
lease financing programs with U.S. financial institutions for a small portion
of products sold. In these
circumstances, the financial institution purchases the Company’s equipment,
then leases it to a third party. Under
these arrangements, the financial institutions have limited recourse against
the Company on a portion of the outstanding lease portfolio if the lessee
defaults on the lease. Under certain
circumstances, the Company is obligated to exercise best efforts to re-market
the equipment, should it be reacquired by the financial institutions. As of December 31, 2001, the Company
had guarantees outstanding under these lease financing programs, which totaled
$998, related to lease transactions entered into from 1996 through 1999.
See discussion of bank guarantees in Note 6.
15. SEGMENT AND
SIGNIFICANT CUSTOMER INFORMATION
The Company operates in four business segments. The Microelectronics segment manufactures
and markets FIBs and DualBeam systems.
Microelectronics segment products are sold primarily to the
semiconductor and data storage markets, with additional sales to the industry
and institute market. The Electron
Optics segment manufactures and markets SEMs and TEMs. Electron Optics products are sold in the
industry and institute market to materials and life sciences customers, as well
as in the semiconductor and data storage markets. The Components segment manufactures and markets electron and ion
emitters, focusing columns and components thereof. These components are used in the Company’s FIB, DualBeam, SEM and
TEM systems and are also sold to other electron microscope and FIB manufacturers. The Customer Service segment services the
Company’s worldwide installed base of products, generally under service
contracts. See also Note 1.
The following table summarizes various financial amounts for each of
the Company’s business segments:
The Microelectronics segment includes the activity of
Micrion from August 14, 1999 and thereafter, including 1999 sales of
$12,779. 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:
The following table summarizes sales by geographic region:
Sales to customers in the U.S. were $92,590 in 1999,
$135,054 in 2000 and $160,114 in 2001.
Sales to customers in Japan were $39,287 in 2000 and $46,499 in
2001. Sales to no other country
represented 10% or more of total sales in 1999, 2000 or 2001.
* * * * * *
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE COMPANY
This information is incorporated into this document by
reference to the sections captioned “Election of Directors” and “Section 16(a)
Beneficial Ownership Reporting Compliance,” contained in the Proxy Statement
for the 2002 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission, or SEC, within 120 days of the close of the fiscal
year ended December 31, 2001. For
information concerning executive officers, see Item 4(a) of this Annual Report
on Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE
COMPENSATION
This information is incorporated into this document by
reference to the section captioned “FEI Executive Compensation” contained in
the Proxy Statement for the 2002 Annual Meeting of Shareholders to be filed
with the SEC within 120 days of the close of the fiscal year ended December 31,
2001; provided, however, that the subsection captioned “FEI Compensation
Committee Report on Executive Compensation” is not incorporated by reference.
ITEM 12.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated into this document by
reference to the section captioned “Security Ownership of Certain Beneficial
Owners and Management” contained in the Proxy Statement for the 2002 Annual
Meeting of Shareholders to be filed with the SEC within 120 days of the
close of the fiscal year ended December 31, 2001.
ITEM 13.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated into this document by
reference to the section captioned “Certain Relationships and Related
Transactions” contained in the Proxy Statement for the 2002 Annual Meeting of
Shareholders to be filed with the SEC within 120 days of the close of the
fiscal year ended December 31, 2001.
PART IV
ITEM 14.
ITEM 14. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1)
Financial
Statements
Independent Auditors’
Report
Consolidated Balance Sheets
at December 31, 2000 and 2001
Consolidated
Statements of Operations for the Years Ended December 31, 1999, 2000 and 2001
Consolidated
Statements of Comprehensive Income (Loss) for the Years Ended December 31,
1999, 2000 and 2001
Consolidated
Statements of Shareholders’ Equity for the Years Ended December 31, 1999,
2000 and 2001
Consolidated
Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001
Notes to
Consolidated Financial Statements
(a)(2)
Financial
Statement Schedules*
Independent Auditors’
Report
Valuation and Qualifying
Accounts for the Years Ended December 31, 1999, 2000 and 2001.
* 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 included in this report.
(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(1)
See
Articles III & IV of Exhibit 3.1 and Articles I and VI of Exhibit 3.2
4.2(10)
Indenture
dated August 3, 2001 between FEI Company and BNY Western Trust Company
4.3(10)
Registration
Rights Agreement dated August 3, 2001 between FEI and Credit Suisse First
Boston
4.4(10)
Form
of Note
10.1(1)+
Stock Incentive Plan
10.2(4)+
Stock Incentive Plan, as amended
10.3(2)+
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
10.12(9)
Credit
Agreement dated February 25, 1999 between the Company and Koninklijke Philips
Electronics N.V.
10.13(9)
Master
Divestment Agreement between the Company and Koninklijke Philips Electronics
B.V. dated October 28, 1999
10.14(9)
Offer
Letter between the Company and Vahé A. Sarkissian dated May 14, 1998.
10.15(7)+
Stock
Bonus Agreement, dated as of June 25, 1998, between the Company and Vahé A.
Sarkissian
10.16(7)+
Restricted
Stock Purchase Agreement, dated as of June 25, 1998, between the Company and
Vahé A. Sarkissian
10.17(8)
Stock
Purchase Agreement, dated as of December 3, 1998, between Philips Business
Electronics International B.V. and the Company
10.18(6)
Agreement
Among the Company, Koninklijke Philips Electronics N.V. and Philips Business
Electronics International B.V. effective as of December 31, 2000
10.19(6)
Amendment
to the Credit Facility Agreement dated February 25, 1999 between the Company
and Koninklijke Philips Electronics N.V.
10.20+
Executive
Severance Agreement dated February 1, 2002 between the Company and its
Chief Executive Officer, Vahé Sarkissian
10.21+
Form
of Executive Severance Agreement between the Company and its other named
officers
21.1
Subsidiaries
of the Company
23.1
Consent
and Report on Schedule of Deloitte & Touche LLP
(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
(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
(9) Incorporated
by reference to Exhibits to Company’s Annual Report on Form 10-K for the year
ended December 31, 1999.
(10) Incorporated
by reference to Exhibits to the Company’s Registration Form S-3, as amended,
effective November 7, 2001
+ 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.
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, 2001 and 2000, and for each of the
three years in the period ended December 31, 2001, and have issued our
report thereon dated January 28, 2002; such consolidated financial
statements and report are included in your 2001 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
January 28, 2002
SCHEDULE II
FEI COMPANY AND SUBSIDIARIES
VALUATION AND
QUALIFYING ACCOUNTS
(In thousands)
(1) Amounts
for 2001 represent the balances at the date of acquisition of
Surface/Interface, Inc. Amounts for
1999 represent the balances at the dates of acquisition of Micrion and the Philips
sales and service organizations.
S-1
ANNUAL REPORT AND PROXY STATEMENT
With the exception of the matters specifically
incorporated herein by reference to the Company’s Proxy Statement for the 2002 Annual
Meeting of Shareholders to be held on May 16, 2002, no other provisions of the
Proxy Statement for the 2002 Annual Meeting of Shareholders are deemed to be
filed as part of this Annual Report on Form 10-K.
S-2
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.
Date: March 28, 2002
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 28, 2002.
S-3