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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 29, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-25395
Exact name of registrant as specified in its charter:
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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
State or other IRS Employer
jurisdiction of Identification No.:
Incorporation or 77-0501994
organization:
DELAWARE
Address and telephone number of principal executive offices:
35 Dory Road, Gloucester, Massachusetts 01930-2297
(978) 282-2000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which
Common Stock, $0.01 par registered
value ---------------- Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the registrant's common stock held by non-
affiliates as of December 12, 2000 was $862,734,000.
The number of shares of the registrants' common stock outstanding as of
December 12, 2000 was 32,101,735 shares of $0.01 par value common stock.
An index of exhibits filed with this Form 10-K is located on page 31.
Documents Incorporated by Reference:
Document Description Part of Form 10-K into which
Portions of the Registrant's incorporated
Proxy Statement with respect Part III
to the Annual Meeting of
Stockholders to be held on
February 7, 2001.
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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2000
TABLE OF CONTENTS
PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 12
Item 3. Legal Proceedings............................................. 12
Item 4. Submission of Matters to a Vote of Security Holders........... 13
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................... 14
Item 6. Selected Financial Data....................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... 27
Item 8. Financial Statements and Supplementary Data................... 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant............ 28
Item 11. Executive Compensation........................................ 28
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 28
Item 13. Certain Relationships and Related Transactions................ 28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 29
PART I
Item 1. Business.
Overview
Varian Semiconductor Equipment Associates, Inc. ("VSEA" or the "Company")
designs, manufactures, markets and services semiconductor processing equipment
used in the fabrication of integrated circuits. As a leading supplier of ion
implantation systems the Company has shipped over 2,900 systems worldwide.
The Company has introduced the next generation VIISta(TM) product line. This
technology leverages the single-wafer processing, pioneered on the successful
E200 and E500 line of mid-current implanters, to the entire spectrum of
energies and implant applications. This approach leads to a product that is
differentiated by its processing capabilities, higher throughput, and improved
process yields, allowing production of either 200mm or next generation 300mm
wafers on the same tool.
VSEA provides customers with world-class support, training, after-market
products and services that enable high utilization and productivity, reduce
operating costs, and extend capital productivity of customer investment through
multiple product generations. The Company achieved the number one ranking for
the fourth consecutive year in VLSI Research Inc.'s Year 2000 customer
satisfaction survey of semiconductor manufacturers worldwide, receiving the
highest overall point totals in all ten categories for the third consecutive
year.
The Company's business depends upon the capital expenditures of
semiconductor manufacturers, which in turn depend on the current and
anticipated market demand for integrated circuits and products utilizing
integrated circuits. The semiconductor industry began an upturn in the second
half of 1999, and VSEA benefitted from resurgent demand for its products
throughout 2000. This has resulted in increased sales in every quarter of
fiscal 2000 and a year-end order backlog of $360 million, almost double the
previous year backlog of $181 million.
The Industry
The semiconductor industry has experienced significant growth in recent
years due to the continued growth of personal computers, the expansion of
telecommunications, the emergence of new applications within consumer
electronics, wireless communication devices, and the increased semiconductor
content needed to drive and service the world wide web. Continued improvements
in device performance and reduced cost per function has fueled demand resulting
in a compound annual growth rate of over 15% for the last 30 years.
Semiconductor manufacturing is highly competitive with each customer looking
for an edge in either device performance (generally speed or low power
consumption) or cost advantage (memory), generally relying on their equipment
suppliers to develop processes and equipment to provide that edge. Today, a
typical fab (wafer manufacturing factory) costs over a billion dollars, and as
the market moves toward 100nm devices and larger wafer sizes (300mm) costs will
likely approach two billion in the near future. Consequently, semiconductor
equipment manufacturers compete aggressively for this business, each seeking
either a technical or cost advantage and to provide customers with uniformly
high levels of equipment performance.
Significant performance advantages and lower prices for integrated circuits
have contributed to the growth and expansion of the semiconductor industry. In
response to the growth in demand for integrated circuits, the semiconductor
industry has significantly increased its manufacturing capacity through the
expansion of existing facilities and construction of new facilities.
The fabrication of integrated circuits requires a number of complex and
repetitive processing steps, including deposition, photolithography, etch and
ion implantation. Deposition is a process in which a film of either
electrically insulating or electrically conductive material is deposited on the
surface of a wafer. Photolithography is used to transfer a device or circuit
pattern into a light-sensitive, resistant layer which, after
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development, can be used in turn to transfer the pattern onto the silicon
surface. The etch process completes the transfer of the pattern into the
various thin films used to make the integrated circuit. Finally, ion
implantation provides a means for introducing dopant material into the silicon
surface, typically into selected areas defined by the photolithographic
process. These selectively doped areas become the electrical components
(transistors) of the integrated circuits.
Semiconductor manufacturers generally measure the cost performance of their
production equipment in terms of "cost per wafer," which is determined by
factoring in the fixed costs for acquisition and installation of the system,
its variable operating costs and its net throughput rate. A system with higher
throughput allows the semiconductor manufacturer to recover the purchase price
of the system during its economic life over a greater number of wafers and
thereby reduce the cost of ownership of the system on a per wafer basis.
Throughput is most accurately measured on a net or overall basis, which takes
into account the processing speed of the system and any non-operational
downtime for cleaning, maintenance or other repairs. The increased costs of
larger and more complex semiconductor wafers have made high yields important in
selecting processing equipment. To achieve higher yields and better film
quality, implant systems must be capable of repeating the original process on a
consistent basis without a disqualifying level of defects. This characteristic,
known in the industry as "repeatability," is important in achieving
commercially acceptable yields. Repeatability is more easily achieved in those
systems that can operate at desired throughput rates without requiring the
system to approach its critical tolerance limits.
The continuing evolution of semiconductor devices to smaller geometries and
more complex multi-level circuitry has significantly increased the cost and
performance requirements of the capital equipment used to manufacture these
devices. As many of the advanced fabrication lines, especially those designed
to process 300 mm wafers, are projected to increase in cost substantially over
previous generation facilities to $1.5 to $2.0 billion each, depreciation costs
will become a much larger percentage of the aggregate production costs for
semiconductor manufacturers relative to labor, materials and other variable
manufacturing costs. As a result, there has been an increasing focus by the
semiconductor industry on obtaining increased productivity and higher returns
from its semiconductor manufacturing equipment, thereby reducing the effective
cost of ownership of such systems.
Products
The Company designs and manufactures ion implantation tools required to
build the transistors, or switches, that are at the heart of every integrated
circuit. Ion implanters are used because of their ability to implant selected
elements, called dopants, into the raw silicon wafers by bombarding them with a
precisely controlled beam of electrically charged ions of specific atomic
weight and energy. These ions are imbedded into the silicon crystal structure
at selected sites, changing the electrical properties of the silicon. The
precision of ion implantation permits customers to achieve the necessary
control of this doping process to create over 250 billion transistors of
uniform characteristics on a new generation 300mm wafer. Since these
transistors are the starting point of all subsequent process steps,
repeatability, uniformity, and yield are extremely important.
Ion implantation tools are categorized within the industry as medium-
current, high-current and high-energy based upon the characteristics of the
implant systems and their respective process applications. Implanters are
further categorized as 200 mm compatible and 200 mm and 300 mm compatible. The
Company supplies the following products:
List of Products
Application Medium Current High Current High Energy
----------- -------------- --------------------- ---------------
200 mm compatible EHP-220 VIISion(TM) 80 PLUS Kestrel II-650
EHP-500 VIISion(TM) 80 LE Kestrel II-750
EHPi-220 VIISion(TM) 200 PLUS
EHPi-500
200 mm and 300 mm
compatible VIISta(TM) 810 VIISta(TM) 80 VIISta(TM) 3000
VIISta(TM) 10 P/2/LAD
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The Company started providing medium-current implanters in 1971, introduced
the single-wafer EHP-220 and EHP-500 in 1992 and the current EHPi-220 and EHPi-
500 systems in 1999 and has shipped almost 700 of these machines machines to
date.
The Company entered the high-current market in 1981, introducing the current
VIISion(TM) 80 LE and the VIISion(TM) 200 in 1995 with a competitive batch
processing system that offers increased throughput, metallic and particle
contamination control, and high beam currents at all energies.
Through the acquisition of the high energy ion implantation product line of
Genus, Inc. ("Genus") in 1998, the Company expanded its product offering by
entering the high-energy implant segment. This combination of a strong product
coupled with the reputation and infrastructure of VSEA resulted in increases in
market share and the addition of increased manufacturing capability at the
previous Genus facility in Newburyport, Massachusetts.
The next generation of implanters, VIISta(TM), leverages the single-wafer
advantage demonstrated with the E-series products across a common platform
coupled with the use of broad beam and advanced wafer handling technologies to
high-current and high-energies, permitting customers to improve technical
capabilities while at the same time reducing the cost per wafer of the implant
process. Only VIISta(TM) allows customers to use the same platform for either
200 or 300mm wafer processing for all implant applications, reducing the risk
of transition for customers and reducing the Company's costs by having a single
rather than multiple platforms. Consequently, the Company's development,
manufacturing, service, and training costs are all improved while allowing
customers to achieve greater operating efficiencies in their fabs. In 1998, the
Company introduced the VIISta(TM) 810 and VIISta(TM) 80, providing customers
with the first systems for medium current and high current applications,
respectively, designed to be compatible for 200mm and 300mm wafer fabrication.
In addition, the VIISta(TM) 10 P/2/LAD system introduced in July 2000 enables
customers to provide ultra low dopant energies to meet the needs of devices
requiring ultra shallow junction formation.
The next generation VIISta(TM) 3000 high-energy system is being introduced
to the market in December, 2000, and is expected to begin contributing to
revenues in fiscal year 2001. The VIISta(TM) 3000 high-energy system completes
the availability of 300mm advanced tools across all medium-current, high-
current, and now high-energy applications.
Customer Support and Services
The Company provides a range of customer support products designed to
improve the productivity of its worldwide customers as well as to provide a
direct link to the Company's factories and research centers.
The Varian Introduction Support Teams ("VIST") and Varian Productivity
Transfer Teams ("VPTT") assist the customer in facilitating the initial
operation of implanters purchased from the Company, and in making them
productive as quickly as possible. These teams speed process qualification and
smooth integration into the production environment by using the same people who
built the machines to install them, reducing cycle time and improving the
relationship between the Company's manufacturing team and the Company's
customers.
The Company's FAB Care Plus(TM) program encourages customers to tailor an
overall support program that meets their specific needs--such as for a research
facility or an offshore production facility. FAB Care Plus(TM) solutions can be
implemented globally to provide consistent and reliable support. In July 2000,
the Company introduced "vCare", a superior electronic-based combination of
service and support offerings to enhance the utilization of manufacturers'
implanter operations. In October 2000, one major component of "vCare" entitled
"vShop" became operational. vShop adds online shopping to the portfolio of
customer care programs within FAB Care Plus(TM). vShop offers customers an
easier and faster way to obtain spare parts necessary for chip manufacturing,
providing personalized and easy to use on-line shopping, order placement and
order tracking.
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For parts management, the Company has partnered with Federal Express to
strategically place "Parts Banks" throughout the world to provide carefully
managed inventory, delivery and logistics services. The Company also offers a
comprehensive consumable parts program that can be tailored to individual
fabrication facilities.
Through VEDoc(TM), an electronic documentation system, customers can easily
access information about their implanters. All assembly drawings, schematics,
parts lists, maintenance and operation manuals and video-illustrated
maintenance procedures are available in this easy-to-follow CD-ROM format. The
Company's commitment to customer service extends to training and support. It
operates applications laboratories in the United States, Asia and Europe that
contain the latest equipment and technology.
Remote Assist(TM) is a service tool that leverages virtual reality
technology to provide a semiconductor equipment service capability that quickly
puts product experts "virtually" into customer fabrication facilities. This
offering uses advanced video conferencing capabilities and a new video helmet
for linking on-site engineers with the Company's support offices and factories.
In addition to use by VSEA customers, this service product is also being sold
to other equipment suppliers, including competitors, to deliver this
breakthrough support capability throughout the fabrication facility. By sending
real-time audio and video to the recipient, Remote Assist(TM) can speed system
diagnostics and problem resolution, potentially increasing uptime and
optimizing fabrication productivity.
Marketing and Sales
The Company sells, installs and services ion implantation systems directly
to semiconductor industry customers and has sold one or more ion implantation
products to each of the 20 largest semiconductor manufacturers in the world.
The Company's sales objective is to work closely with customers to secure
purchase orders for multiple systems as such customers expand existing
facilities and build next-generation wafer facilities. The Company seeks to
build customer loyalty and to achieve a high level of repeat business by
offering highly reliable products that give its customers a competitive edge,
comprehensive field support and a responsive parts replacement and service
program.
In each recent year, the Company has sold approximately one-half of its
systems to its top ten customers. Revenue from the Company's ten largest
customers in fiscal years 2000, 1999 and 1998 accounted for 55%, 51% and 47% of
revenue, respectively. The Company expects that sales of its products to
relatively few customers will continue to account for a high percentage of its
revenue in the foreseeable future. During fiscal year 2000, no one customer
accounted for 10% or more of the Company's revenue. In fiscal year 1999,
revenue from one customer accounted for 12% and another for 10% of the
Company's revenue. In fiscal year 1998, revenue from one customer accounted for
14% of the Company's revenue.
None of the Company's customers has entered into a long-term agreement
requiring it to purchase the Company's products. The Company believes that
sales to certain of its customers could decrease in the near future as those
customers complete current purchasing requirements for new or expanded
fabrication facilities. Although the composition of the group comprising the
Company's largest customers has varied from year to year, the loss of a
significant customer or any reduction in orders from any significant customer,
including reductions due to a customer varying from recent buying patterns,
market, economic or competitive conditions in the semiconductor industry or in
the industries that manufacture products utilizing integrated circuits, could
adversely affect the Company's business, financial condition and results of
operations. In addition, sales of the Company's systems depend, in significant
part, upon the decision of a prospective customer to increase manufacturing
capacity in an existing fabrication facility or to transfer a manufacturing
process to a new fabrication facility, both of which typically involve a
significant capital commitment. Due to these and other factors, the Company's
systems typically have a lengthy sales cycle during which the Company may
expend substantial funds and management effort.
The Company's ability to respond with prompt and effective field support is
critical to the Company's sales efforts. The substantial operational and
financial commitments by customers who purchase ion
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implantation systems require the assurance that the manufacturer can provide
the necessary installation and operational support. The Company's strategy of
supporting its installed base through both its customer support and research
and development groups has served to encourage use of the Company's systems in
production applications and has accelerated penetration of certain key
accounts. The Company believes that its marketing efforts are enhanced by the
technical expertise of its research and development personnel, who provide
customer process support and participate in a number of industry forums such as
conferences and technical publications.
The Company sells, distributes and services its products directly. The
Company has six sales and service offices located in the United States, six in
Western Europe and fourteen in Asia for a total of twenty-six worldwide. The
Company's sales, marketing and service engineers are linked through VSEA's
Knowledge Network(TM), Lotus Notes(R) and SAP(R) operating systems, allowing
the Company to globally review bookings and sales forecasts against detailed
account management plans, service and parts. By modeling parts usage by
equipment type, installed base distribution, freight, routes, and specific
customs regulations and partnering with Federal Express, the Company has
developed an infrastructure of parts distribution and warehousing around the
world.
The Company completed its direct global sales and distribution network in
1996 and 1998, respectively, as it transitioned from its joint ventures in
Japan and Korea to wholly-owned subsidiaries. The Company's equipment had been
sold and serviced in Japan by Tokyo Electron Ltd. ("TEL"). During much of the
18-year relationship, a joint venture, TEL-Varian Ltd., manufactured or
customized equipment in Japan. In December 1996, the Company and TEL revised
their relationship to enable Japanese customers to have more direct access to
the Company's products, engineering and support organizations worldwide.
Shortly thereafter, the Company formed a wholly-owned subsidiary, Varian Japan,
K. K., (now called "Varian Semiconductor Equipment, KK") that today provides
direct support to the Company's Japanese customer base.
Using the original TEL joint venture relationship as a model, the Company
formed Varian Korea Ltd. ("VKL") in 1985 with its distributor in Korea. What
started as a venture for handling sales and service of semiconductor equipment
and vacuum products in Korea was expanded to include manufacturing in 1989.
VKL's 63,000-square-foot factory in Songtan City includes a Class 10,000
manufacturing area. In January 1998, the Company purchased the remaining 39% of
the VKL joint venture held by the original joint venture partner.
Managing global operations and sites located throughout the world presents
challenges associated with cultural differences and organizational alignment.
Moreover, each region in the global semiconductor equipment market exhibits
characteristics that can cause capital equipment investment patterns to vary
significantly from period to period. Although international markets provide the
Company with significant growth opportunities, periodic economic downturns,
trade balance issues, political instability and fluctuations in interest and
foreign currency exchange rates are all risks that could affect global product
and service demand. VSEA has seen an upturn in fiscal 2000 in Pacific Rim
countries, which in 1999 had experienced a significant economic downturn and
banking and currency difficulties. Specifically, the decline in value of the
Korean currency, together with difficulties obtaining credit, had resulted in a
decline in the purchasing power of the Company's Korean customers. This in turn
had resulted in the cancellation or delay of orders for the Company's products
from Korean customers, thus adversely affected the Company's results of
operations in early fiscal 1999. VSEA has experienced considerable improvement
in fiscal 2000, particularly in Korea, where sales increased 244% to $73.6
million.
In 1999, Japan's economy began slowly emerging from a downturn. VSEA has
seen increasing order activity from Japan throughout fiscal 2000. However, if
the Japanese economy fails to sustain its recovery, investment by Japanese
customers may be negatively affected and it is possible that economic recovery
in other Pacific Rim Countries could be delayed.
The Company actively manages its exposure to changes in foreign currency
exchange rates, but there can be no assurance that future changes in foreign
currency exchange rates will not have a material adverse effect on its results
of operations or financial condition.
5
Non-U.S. revenue of the Company for the year ended September 29, 2000 was
approximately $504 million, or 73% of revenue. For fiscal years 1999 and 1998,
non-U.S. revenue of the Company was approximately $161 million and $239
million, or 59% and 70% of revenue, respectively.
The Company's business is not seasonal in nature, but it is cyclical based
on the capital equipment investment expenditures of major semiconductor
manufacturers. These expenditure patterns are based on many factors, including
anticipated market demand for integrated circuits, the development of new
technologies and global economic conditions. The cyclicality in the
semiconductor equipment market over the last several years resulted in a
decline in annual sales from 1996, through fiscal year 1999. This situation was
the combined result of an oversupply in memory chips, a decline in PC demand
and the rippling of the Asian financial crises through the Korean, Taiwanese
and Japanese markets. In fiscal year 2000, sales increased in each quarter,
continuing the pattern of increasing sales in each successive quarter of fiscal
year 1999.
Backlog
As of September 29, 2000, the Company's backlog was $360 million, almost
double the backlog of $181 million at October 1, 1999. The Company includes in
its backlog only those orders for which it has accepted purchase orders and
assigned system shipment dates within twelve months. All orders are subject to
cancellation or rescheduling by customers. Due to possible changes in system
delivery schedules, cancellations of orders and delays in systems shipments,
the Company's backlog at any particular date is not necessarily an accurate
predictor of actual sales for any succeeding period.
Manufacturing
The Company manufactures its products at its production facilities in
Gloucester, Massachusetts; Newburyport, Massachusetts; and Songtan, Korea. The
Company benefits from the use of advanced manufacturing methods and
technologies, including just-in-time, demand flow technology, statistical
process control and solids modeling.
The Company utilizes an outsourcing strategy and concentrates on system
design, high-level assembly, and tests to reduce cycle time and improve its
responsiveness in an inherently cyclical capital equipment market. The Company
believes that outsourcing enables it to minimize its fixed costs and capital
expenditures while also providing the flexibility to increase or decrease
production capacity. This strategy also allows the Company to focus on product
differentiation through system design and quality control. The Company's
manufacturing subsystems incorporate advanced technologies in robotics, vacuum
and microcomputers. The Company works closely with its suppliers on achieving
mutual cost reduction through joint design efforts. The Company manufactures
its systems in clean-room environments which are similar to the clean rooms
used by semiconductor manufacturers for wafer fabrication. This procedure is
intended to reduce installation and production qualification times and the
amount of particulates and other contaminants in the assembled system, which in
turn improves yield and reduces downtime for the customer. Following
disassembly, the tested system is packaged in multiple layers of plastic
shrink-wrap to maintain cleanroom standards during shipment. The Company uses
outsourcing to take advantage of economies of scale at outside manufacturing
facilities and to alleviate internal manufacturing bottlenecks. The Company
purchases material and components that are either standard products or built to
VSEA specifications.
Some of the components and subassemblies included in the Company's products
are obtained from a limited group of suppliers. Although the Company seeks to
reduce its dependence on these limited sources, disruption or termination of
certain of these sources could occur and such disruptions could have at least a
temporary adverse effect on the Company's operations. Moreover, a prolonged
inability to obtain certain components could have a material adverse effect on
the Company's business, financial condition and results of operations and could
result in damage to customer relationships.
Quality efforts at the Company begin with product development. The Company
uses 3D, computer-aided design, finite element analysis and other computer-
based modeling methods to prove new designs. Product design is thoroughly
tested and proven throughout all stages of development before the first
production system
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is built. Concurrent engineering programs ensure that new designs are quickly
and successfully integrated into manufacturing.
Competition
The semiconductor equipment manufacturing market is highly competitive and
is characterized by a small number of large players and over 250 small domestic
and foreign participants. The larger companies include Applied Materials, Lam
Research, Axcelis Technologies, Novellus, TEL, Nikon, Canon and ASML. The
Company faces significant competitive factors in the ion implantation market.
Within this segment, as reported for calendar 1999 in the VLSI Research 2000
Survey, the Company, Axcelis (including SEN), Applied Materials, Nissin and
Ulvac had 37%, 37%, 18%, 5% and 1%, respectively, of the market share for ion
implantation equipment.
Significant competitive factors in the ion implantation market include
relationships, price/cost of ownership, technological performance, customer
support, distribution and financial viability. Other significant competitive
factors in the semiconductor equipment market include system performance and
flexibility, cost, the size of each manufacturer, its installed customer base
and breadth of product line. The Company believes it competes favorably in each
of these categories. For example, its transition from joint ventures and
distributor agreements to direct selling and service has given the Company the
ability to serve customers on a global basis through the management of
information critical to consistent, timely delivery of services and products.
Management believes that to remain competitive the Company will require
significant financial resources in order to offer a broad range of products, to
maintain customer service and support centers worldwide and to invest in
product and process research and development.
Some of the Company's existing and potential competitors have substantially
greater financial resources and more extensive engineering, manufacturing,
marketing, customer service and support organizations. The Company expects its
competitors to continue to improve the design and performance of their current
products and processes and to introduce new products and processes with
enhanced price and performance characteristics. If the Company's competitors
enter into strategic relationships with leading semiconductor manufacturers
covering ion implantation products similar to those sold by the Company, its
ability to sell its products to those manufacturers could be adversely
affected.
In addition, a substantial investment is required by customers to install
and integrate capital equipment into a semiconductor production line. As a
result, once a semiconductor manufacturer has selected a particular vendor's
capital equipment, the Company believes that the manufacturer will generally be
reliant upon that equipment for the specific production line application.
Accordingly, the Company may experience difficulty in selling a product line to
a particular customer for a significant period of time if that customer selects
a competitor's product. Increased competitive pressure could lead to lower
prices for the Company's products, thereby materially and adversely affecting
the Company's business, financial condition and results of operations. There
can be no assurance that the Company will be able to compete successfully in
the future.
Research and Development
The semiconductor manufacturing industry is subject to rapid technological
change requiring new product introductions and enhancements. The Company's
ability to remain competitive in this market will depend in part upon its
ability to develop new and enhanced systems and to introduce these systems at
competitive prices and on a timely and cost-effective basis. Accordingly, the
Company devotes a significant portion of its personnel and financial resources
to research and development programs and seeks to maintain close relationships
with its customers to remain responsive to their product needs.
The Company's current research and development efforts are directed at
development of new systems and processes and improving existing system
capabilities. The Company is focusing its research and development efforts on
enhancement of its VIISta(TM) platform, the new generation of single wafer ion
implant systems. The VIISta(TM) platform is designed to cover the complete
range of implants required for the next several generations
7
of integrated circuits and extend production capability to <100 nanometer
geometries. VIISta(TM) is a single wafer platform that allows customers to use
a single tool (with three beam lines) for all implant applications including
high-current, medium-current, and high-energy.
Worldwide expenditures by the Company (net of customer funding) for research
and development during fiscal years 2000, 1999, and 1998 were $47 million, $38
million and $37 million, respectively, or approximately 7%, 14% and 11% of
revenue, respectively. Research and development spending in fiscal 2000
represented an increase of 25% above fiscal 1999. The percentage of revenue was
lower due to the increase in total revenue of 153%. The Company expects in
future years that research and development expenditures will continue to
represent a substantial percentage of revenue.
The success of the Company in developing, introducing and selling new and
enhanced systems depends upon a variety of factors, including new product
selection, timely and efficient completion of product design and development,
timely and efficient implementation of manufacturing and assembly processes,
product performance in the field and effective sales and marketing. There can
be no assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new products or in enhancing its existing products.
The Company's inability to complete the development or meet the technical
specifications of any of its new systems or enhancements or to manufacture and
ship these systems or enhancements in volume in a timely manner would
materially and adversely affect the Company's business, financial condition and
results of operations.
Patent and Other Proprietary Rights
Over its 50-year history as part of Varian Associates, Inc., and now as an
independent semiconductor equipment company, the Company has pursued a policy
of seeking patent, copyright and trade secret protection in the United States
and other countries for developments, improvements and inventions originating
within its organization that are incorporated in the Company's products or that
fall within its fields of interest. As of September 29, 2000, the Company owned
approximately 130 patents in the United States and approximately 300 patents in
other countries, and had approximately 135 patent applications on file with
various patent agencies worldwide. The Company intends to file additional
patent applications as appropriate.
The Company relies on a combination of copyright, trade secret and other
laws, and contractual restrictions on disclosure, copying and transferring
title to protect its rights. The Company has trademarks, both registered and
unregistered, that are maintained and enforced to provide customer recognition
for its products in the marketplace. The Company also has agreements with third
parties that provide for licensing of patented or proprietary technology. These
agreements include royalty-bearing licenses and technology cross-licenses. The
termination of certain of such licenses could have a material adverse effect on
the Company's business. In particular, the current royalty-bearing license
agreements with Applied Materials and TEL for gas-assisted heat transfer
patents produced approximately $10 million in royalties in fiscal year 2000,
$28 million in fiscal year 1999 and over $77 million in royalties since 1992.
The last of the principal patents covered by these licenses will expire on July
9, 2007.
The Company's competitors, like companies in many high-technology
businesses, routinely review the products of others for possible conflict with
their own patent rights. There has also been substantial litigation regarding
patent and other intellectual property rights in semiconductor-related
industries. As set forth in Item 3 below --"Legal Proceedings", the Company is
currently involved in such litigation and there can be no assurances as to the
results of such litigation. There can be no assurance that the Company or its
licensors or suppliers will not be subject to additional claims of patent
infringement or that any claim will not require that the Company pay
substantial damages or delete certain features from its products or both.
Sale of Business
Effective as of June 13, 1997, the Semiconductor Equipment Business (See
"Company History") completed the sale of its Thin Film Systems business
("TFS"). Total proceeds received from the sale were $145.5 million in cash. A
$51.5 million reserve was recorded to cover, among other items, purchase price
8
disputes, retained liabilities, transaction costs, employee terminations,
facilities separation costs, indemnification obligations, litigation expenses
and other contingencies. (See "Legal Proceedings").
Environmental Matters
For a discussion of environmental matters, see Item 7 below--"Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Environmental Matters."
Company History
Until April 2, 1999, the Company's business was operated as part of Varian
Associates, Inc. ("VAI"). On April 2, 1999, VAI contributed its Semiconductor
Equipment Business ("SEB") to the Company, then distributed to the holders of
record of VAI common stock one share of common stock of the Company for each
share of VAI common stock owned on March 24, 1999 (the "Distribution"). At the
same time, VAI contributed its Instruments Business ("IB") to Varian, Inc. and
distributed to the holders of record of VAI common stock one share of common
stock of IB for each share of VAI common stock owned on March 24, 1999. VAI
retained its Health Care Systems business and changed its name to Varian
Medical Systems, Inc. ("VMS") effective as of April 2, 1999. These transactions
were accomplished under the terms of a Distribution Agreement by and among the
Company, VAI and IB (the "Distribution Agreement"). For purposes of providing
an orderly transition and to define certain ongoing relationships between and
among the Company, VMS and IB after the Distribution, the Company, VMS and IB
also entered into certain other agreements which include an Employee Benefits
Allocation Agreement, an Intellectual Property Agreement, a Tax Sharing
Agreement and a Transition Services Agreement (collectively, the "Distribution
Related Agreements").
The consolidated financial statements for periods ended on or before April
2, 1999 reflect SEB as operated by VAI. The consolidated financial statements
generally reflect the financial position, operating results and cash flows of
SEB as if it were a separate entity for all periods presented. Where it was
practicable to identify specific VAI corporate amounts with the SEB activities,
such amounts have been included in the accounts reflected in the consolidated
financial statements. The consolidated financial statements also include
allocations of certain VAI corporate assets (including pension assets),
liabilities (including profit sharing and pension benefits), and expenses
(including legal, accounting, employee benefits, insurance services,
information technology services, treasury, and other VAI corporate overhead) to
SEB. These amounts have been allocated to SEB on the basis that is considered
by management to reflect most fairly or reasonably the utilization of the
services provided to or the benefit obtained by SEB. Typical measures and
activity indicators used for allocation purposes include headcount, sales
revenue, and payroll expense. The Company believes that the methods used to
allocate these amounts are reasonable. However, these allocations are not
necessarily indicative of the amounts that would have been or that will be
recorded by the Company on a stand-alone basis. References in this Annual
Report on Form 10-K to the "Semiconductor Equipment Business" refer to the
historical business and operations of the Semiconductor Equipment Business
("SEB") conducted by VAI prior to the Distribution.
VSEA's role in the semiconductor manufacturing market can be traced to VAI's
pioneering work in ultra-high vacuum technology. In the 1960s, this technology
was applied to many physics and space research projects requiring ultra-high
vacuum environments. This technology proved critical in the semiconductor
manufacturing process. SEB was successful in developing methods for controlling
electron beams and ions in ultra-high vacuum environments and in depositing
materials onto silicon wafers to create switching devices.
SEB entered the ion implantation business in 1975 through the acquisition of
Extrion Corporation, in Gloucester, Massachusetts. Since then, the Company has
developed a complete line of medium and high current implanters and added the
high energy product line in 1998. These systems introduce precise quantities of
dopant materials into silicon wafers, creating desired electrical
characteristics. In June 1997, the Company sold its TFS business, which made
physical vapor deposition equipment, also known as sputtering systems, to
Novellus Systems, Inc. ("Novellus"). In July 1998, SEB acquired the high-energy
ion implantation equipment product line of Genus.
9
Employees
As of September 29, 2000, the Company had 1,896 full-time and temporary
employees worldwide--1,503 in North America, 297 in Asia and 96 in Western
Europe. None of the Company's employees based in the United States is subject
to collective bargaining agreements and the Company has never experienced a
work stoppage, slowdown, or strike. The Company's employees based in certain
foreign countries may, from time to time, be subject to collective bargaining
agreements. The Company currently considers its employee relations to be good.
The Company's success depends to a significant extent upon a limited number
of key employees and other members of senior management of the Company. The
loss of the services of one or more of these key employees could have a
material adverse effect on the Company. The success of the Company's future
operations depends in large part on the Company's ability to recruit and retain
engineers and technicians, as well as marketing, sales, service and other key
personnel, who are in competitive demand and limited supply because of the
unique skills required. The Company's inability to attract and retain the
personnel it requires could have a material adverse effect on the Company's
business and results of operations.
10
Executive Officers
The Executive Officers of the Company as of September 29, 2000, were as
follows:
Name and Title Age Business Experience
-------------- --- -------------------
Richard A. Aurelio...... 56 Mr. Aurelio has served as the Company's President
President and Chief and Chief Executive Officer since April 1999.
Executive Officer Prior to April 1999, he was the Executive Vice
President of VAI responsible for the
Semiconductor Equipment Business. Mr. Aurelio
joined VAI in 1991 from a position as Executive
Vice President of ASM Lithography, a European
based company, where he was also President of its
U.S. affiliate. Mr. Aurelio was hired as
President of Semiconductor Equipment Business in
1991 and was elevated to Executive Vice President
of VAI in 1992.
Ernest L. Godshalk, 55 Mr. Godshalk has served as the Company's Vice
III.................... President and Chief Financial Officer since April
Vice President and 1999. Prior to April 1999, he was Vice President,
Chief Financial Officer Finance of the Semiconductor Equipment Business
of VAI, a position he had held since joining VAI
in November 1998. Prior to joining VAI, he was
Managing Director of Elgin Management Group (an
investment company), a position he held from 1993
to 1996 and again in 1998. Mr. Godshalk was Chief
Financial Officer and Secretary of Prodigy
Communications Corporation (an internet company)
from 1996 to 1998.
Walter F. Sullivan...... 49 Mr. Sullivan has served as the Company's Vice
Vice President, President, Customer Operations and Chief
Customer Operations and Information Officer since April 1999. Prior to
Chief Information April 1999, he was Vice President, Customer
Officer Support, of the Semiconductor Equipment Business,
a position he had held since 1995. Prior to
joining VAI in 1995, he was Group Director,
Worldwide Customer Support Operations for
PictureTel Corporation (a telecommunications
equipment company), a position he held from 1993
to 1995.
Gary L. Loser........... 50 Mr. Loser has served as Vice President, General
Vice President, General Counsel and Secretary of the Company since April
Counsel and Secretary 1999. Prior to joining the Company, Mr. Loser was
Senior Business Counsel and Senior Intellectual
Property Counsel for the GE Plastics operating
component of General Electric Company, positions
he held since 1992. Mr. Loser held various other
positions in GE's Legal Department during his 17
years with GE.
Ralph E. Knupp.......... 50 Mr. Knupp has served as the Company's Vice
Vice President, Human President, Human Resources and Communications
Resources and since April 1999. Prior to joining the Company,
Communications Mr. Knupp was Vice President, Human Resources of
Reed Elsevier, Inc., a position he held from 1995
to 1999. Mr. Knupp was Vice President, Human
Resources of Reed Publishing USA, Inc. from 1985
to 1995.
Seth H. Bagshaw......... 40 Mr. Bagshaw has served as Vice President and
Vice President, Corporate Controller of the Company since
Corporate Controller November 1999. Prior to joining the Company, Mr.
Bagshaw was Vice President and Chief Financial
Officer for Palo Alto Products International,
Pte., Ltd (a product development service
provider). Previously, Mr. Bagshaw had held
positions as Vice President of Finance and
Administration for the Asia-Pacific Region and
formerly Corporate Controller for Waters
Corporation (an analytical instruments
manufacturer) from 1994 to 1998.
11
Item 2. Properties.
The Company has six sales and service offices located in the United States
and twenty located outside of the United States, including offices in the
United Kingdom, France, Germany (2), Ireland, Netherlands, Japan (7), Korea
(3), Taiwan, Hong Kong, Singapore, and Shanghai (PRC). The Company has one
manufacturing facility located in Massachusetts and one in Korea, in addition
to its headquarters facility in Gloucester, Massachusetts. These offices and
facilities aggregate more than 573,000 square feet of which 252,000 square feet
is leased. Since 1994, the manufacturing facilities have been registered to the
internationally recognized ISO 9001 quality standard. Field support operations
in the United States, Korea, France and Taiwan have been registered to the ISO
9002 standard.
The Company's management does not believe there is any material, long-term,
excess capacity in the Company's facilities, although utilization is subject to
change based on customer demand. Furthermore, the Company's management believes
that the Company's facilities and equipment generally are well-maintained, in
good operating condition, suitable for the Company's purposes, and adequate for
its present operations.
Item 3. Legal Proceedings.
In June 1997, Applied Materials filed a civil action against VAI in the U.S.
District Court for the Northern District of California alleging infringement of
four patents relating to sputter coating systems. Applied Materials contended
that its patents were infringed by the M2i, MB/2/(TM) and Inova(TM) systems
that were manufactured and sold by TFS prior to VAI's sale of TFS to Novellus
in June 1997. The complaint requested unspecified money damages and an
injunction prohibiting further infringement and requested that any damages
awarded be increased up to three-fold for VAI's and Novellus' alleged willful
infringement. Novellus was subsequently added as a defendant in this action
and, as part of the sale of TFS, VAI agreed to indemnify Novellus for certain
damages it may suffer as a result of such litigation and to reimburse Novellus
for up to $7.5 million of its litigation expenses. VAI's answer denied
infringement and asserted that the Applied Materials patents were invalid and
that one of the asserted patents was unenforceable. VAI also filed a separate
suit seeking damages and injunctive relief against Applied Materials contending
that certain of Applied Materials' business practices violated antitrust laws.
Novellus filed a complaint against Applied Materials which included a claim
that Applied Materials had infringed three of the patents acquired by Novellus
from the Company.
In September, 2000, the Company and Applied Materials settled their patent
infringement and antitrust litigation. After recording a payment to Applied
Materials and legal expenses, the Company recorded in Other Income, a gain of
$16.0 million ($10.8 million after taxes) in the fourth quarter relating to
this litigation settlement. The Company maintained a reserve of $3.0 million to
cover any residual obligations described above.
The Company has agreed to indemnify VMS and IB for any costs, liabilities or
expenses relating to the Company's legal proceedings, including the Applied
Materials matters. Under the Distribution Related Agreements, the Company has
agreed to reimburse VMS for one-third of the costs, liabilities, and expenses,
adjusted for any related tax benefits recognized or realized by VMS, with
respect to certain legal proceedings relating to discontinued operations of
VMS.
In fiscal year 1999 the Company settled with Novellus, through arbitration,
a dispute regarding the valuation of assets of TFS. The Company recorded Other
Income of $2.0 million relating to the difference between the actual settlement
amount of $4.8 million and the estimated accrual.
Also, from time to time, the Company may become involved in a number of
legal actions and could incur an uninsured liability in one or more of them.
Accordingly, while the ultimate outcome of all of the above legal matters is
not determinable, management believes the resolution of these matters will not
have a material adverse effect on the financial condition or results of
operations of the Company.
12
Item 4. Submission of Matters to a Vote of Securityholders.
No matters were submitted to a vote of securityholders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
year ended September 29, 2000.
13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Since April 2, 1999, the Company's Common Stock has traded on the Nasdaq
National Market under the symbol "VSEA." Prior to April 2, 1999, there was no
established public trading market for the Company's Common Stock.
The following table sets forth for the periods indicated the high and low
closing prices per share of the Common Stock during each of the quarters set
forth below as reported on the Nasdaq National Market since April 2, 1999.
Fiscal 1999 High Low
----------- -------- --------
Third Quarter (from April 2, 1999)..................... $17.0000 $ 9.5000
Fourth Quarter......................................... $24.8125 $16.3750
Fiscal 2000
-----------
First Quarter ......................................... $34.9375 $19.1250
Second Quarter......................................... $72.0000 $30.5000
Third Quarter.......................................... $69.0000 $41.8125
Fourth Quarter......................................... $62.6875 $34.0000
The reported closing price of the Common Stock on the Nasdaq National Market
on December 12, 2000 was $26.875 per share. The number of stockholders of
record on December 12, 2000 was 4,442.
The Company has never declared or paid cash dividends on its capital stock,
and the Company does not expect to pay any cash dividends on its Common Stock
in the foreseeable future.
Item 6. Selected Financial Data.
The following table presents selected historical financial data of the
Company subsequent to the Distribution, and SEB prior to April 2, 1999. The
historical financial information may not be indicative of the future
performance of the Company and does not necessarily reflect what the financial
position and results of operations of SEB would have been had SEB operated as a
separate stand-alone entity during the periods presented.
The computation of net earnings (loss) per share is based on the weighted
average number of VAI Common Stock outstanding during the respective periods,
reflecting the ratio of one share of the Company Common Stock for each share of
VAI, Inc., Common Stock outstanding at the time of the Distribution.
Fiscal Years
-------------------------------------
2000/1/ 1999 1998 1997/2/ 1996
------- ------ ------ ------- ------
(Dollars in million except per share
amounts)
Summary of Operations:
Revenues.................................. $687.7 $271.9 $342.9 $448.3 $667.2
------ ------ ------ ------ ------
Operating earnings (loss) before taxes.... $147.4 $(17.5) $ 16.3 $105.9 $122.3
Income tax provision (benefit) on
earnings (loss)........................ 48.5 (4.3) 4.9 34.9 43.0
------ ------ ------ ------ ------
Net earnings (loss)....................... $ 98.9 $(13.2) $ 11.4 $ 71.0 $ 79.3
====== ====== ====== ====== ======
Net earnings (loss) per share--basic...... $ 3.15 $(0.43) $ 0.37 $ 2.33 $ 2.61
====== ====== ====== ====== ======
Net earnings (loss) per share--diluted.... $ 2.94 $(0.43) $ 0.37 $ 2.33 $ 2.60
====== ====== ====== ====== ======
Financial Position at Year End:
Total assets.............................. $519.5 $334.1 $224.6 $233.3 $312.1
Capital lease obligations................. $ 1.0 $ 0.9 -- -- --
14
Notes:
/1/Fiscal year 2000 results include a non-recurring pre-tax gain of $16.0
million ($10.8 million after tax or $0.32 per share) relating to a
litigation settlement.
/2/Fiscal year 1997 results include a $51.0 million pre-tax gain ($33.2
million after tax or $1.09 per share) on the sale of the Thin Film Systems
business.
This selected financial data should be read in conjunction with the related
consolidated financial statements and notes thereto included in Item 14.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Fiscal 2000 was the first full year as an independent entity for Varian
Semiconductor Equipment Associates, Inc., following the spin-off from Varian
Associates, Inc. ("VAI") in April 1999. Until April 2, 1999, the Company's
business was operated as part of VAI. On April 2, 1999, VAI contributed its
Semiconductor Equipment Business ("SEB") to the Company, then distributed to
the holders of record of VAI common stock one share of common stock of the
Company for each share of VAI common stock owned on March 24, 1999 (the
"Distribution"). At the same time, VAI contributed its Instruments Business
("IB") to Varian, Inc. and distributed to the holders of record of VAI common
stock one share of common stock of IB for each share of VAI common stock owned
on March 24, 1999. VAI retained its Health Care Systems business and changed
its name to Varian Medical Systems, Inc. ("VMS") effective as of April 2, 1999.
These transactions were accomplished under the terms of a Distribution
Agreement by and among the Company, VAI and IB (the "Distribution Agreement").
For purposes of providing an orderly transition and to define certain ongoing
relationships between and among the Company, VMS and IB after the Distribution,
the Company, VMS and IB also entered into certain other agreements which
include an Employee Benefits Allocation Agreement, an Intellectual Property
Agreement, a Tax Sharing Agreement and a Transition Services Agreement
(collectively, the "Distribution Related Agreements").
The consolidated financial statements for periods ended on or before April
2, 1999 reflect SEB as operated by VAI. The consolidated financial statements
generally reflect the financial position, operating results and cash flows of
SEB as if it were a separate entity for all periods presented. Where it was
practicable to identify specific VAI corporate amounts with the SEB activities,
such amounts have been included in the accounts reflected in the consolidated
financial statements. The consolidated financial statements also include
allocations of certain VAI corporate assets (including pension assets),
liabilities (including profit sharing and pension benefits), and expenses
(including legal, accounting, employee benefits, insurance services,
information technology services, treasury, and other VAI corporate overhead) to
SEB. These amounts have been allocated to SEB on the basis that is considered
by management to reflect most fairly or reasonably the utilization of the
services provided to or the benefit obtained by SEB. Typical measures and
activity indicators used for allocation purposes include headcount, sales
revenue, and payroll expense. The Company believes that the methods used to
allocate these amounts are reasonable. However, these allocations are not
necessarily indicative of the amounts that would have been or that will be
recorded by the Company on a stand-alone basis.
Fiscal Year
The Company's fiscal years reported are the 52- or 53-week periods which
ended on the Friday nearest September 30. Fiscal year 2000 comprises the 52-
week period ended on September 29, 2000. Fiscal year 1999 comprises the 52-week
period ended on October 1, 1999. Fiscal year 1998 comprises the 53-week period
ended October 2, 1998.
Fiscal Year 2000 Compared to Fiscal Year 1999
Revenue. The Company's revenues of $687.7 million in fiscal year 2000
increased by 153% above the $271.9 million in fiscal year 1999 due mainly to
the increased demand for the semiconductor devices since the industry
turnaround that began in the second half of fiscal year 1999. Fourth quarter
revenues in fiscal year 1999 included approximately $22.2 million of non-
recurring royalty revenue primarily related to a licensing agreement with Tokyo
Electron Ltd. Over the course of fiscal year 2000, revenues increased steadily
in each consecutive quarter, from $109.8 million in the first quarter to $156.2
million in the second quarter, to $192.8 million in the third quarter, and to
$228.9 million in the fourth quarter.
Royalty revenue for fiscal year 2000 was $10.1 million compared with $28.9
million in fiscal year 1999, primarily due to the aforementioned licensing
agreement with Tokyo Electron Ltd.
16
Non-U.S. revenues in fiscal year 2000 were $504.2 million compared to $160.8
million in fiscal year 1999. Sales to customers in the Far East were $368.6
million in fiscal 2000 as compared to $106.4 million in fiscal 1999. Sales to
customers in Europe were $135.6 million and $54.4 million in fiscal year 2000
and fiscal year 1999, respectively.
Gross Profit on Product and Service Revenue. Gross profit on product and
service revenue (excluding royalty revenue) of $259.1 million for fiscal year
2000 was 38% of product and service revenues compared with $60.4 million for
fiscal year 1999, representing 25% of product and service revenues. The
increase in gross profit as a percentage of its sales from fiscal year 1999 to
fiscal year 2000 was due mainly to the improved capacity utilization and
efficiencies in management of costs in a time of rapid expansion.
Research and Development. Research and development expenses in fiscal year
2000 increased by 25% from $37.6 million in fiscal 1999 to $47.0 million in
fiscal year 2000. Research and development expenses were higher largely due to
expansion of efforts in both product and services developments, reflected in
the introduction of the VIISta series products for 300mm applications,
including the new high energy VIISta 3000. Research and development costs in
fiscal 1999 included incremental costs incurred pursuant to the discontinuance
of a parallel product development research contract, following the acquisition
of the high-energy ion implantation equipment product line of Genus.
Marketing, General and Administrative. Marketing, general and administrative
expenses of $98.1 million, were 14% of total revenue in fiscal year 2000,
compared to $70.3 million, or 26% of total revenue in fiscal year 1999.
Marketing, general and administrative expenses in fiscal year 1999 were higher
as a percentage of revenues largely because of the additional administrative
expenses in 1999 associated with the transition to operating as an independent
company.
Restructuring Costs. During the second quarter of fiscal year 1999, the
company recognized pre-tax restructuring charges of $2.7 million, largely due
to the downturn in the industry. The charges included $1.4 million resulting
from the cancellation of plans for the expansion of manufacturing in the United
States and Japan, and $1.3 million to cover termination costs for a reduction
in workforce of 69 employees (approximately 5% of worldwide VSEA employment).
There were no restructuring costs in fiscal year 2000. See also Note 14 to the
Consolidated Financial Statements.
Interest Income and Other Income, Net. In fiscal year 2000, the Company
recognized interest income of $4.6 million compared to $1.8 million in fiscal
year 1999. In fiscal year 2000, the Company recorded other income of $18.7
million before tax, upon settlement of litigation. After recording a payment to
Applied Materials, and legal expenses, the Company recorded a gain of $16.0
million in the fourth quarter of fiscal 2000 relating to the difference between
the actual settlement amount and the estimated accrual upon settlement of their
patent infringement and antitrust litigation, and in the second quarter the
Company recorded a gain of $2.7 million upon receipt of a payment in settlement
of a dispute relating to the acquisition of a product line which occurred in a
prior fiscal year. In fiscal year 1999, the Company recorded other income of
$2.0 million relating to the difference between the actual settlement amount of
a purchase price dispute relating to the sale of TFS and the estimated accrual.
Earnings (Loss) before Taxes. In fiscal year 2000, the Company had a pretax
income of $147.4 million, compared to a pretax loss of $17.5 million in fiscal
year 1999.
Taxes on Earnings. VSEA's effective income tax rate was 33% in fiscal year
2000, compared to 24% effective income tax benefit rate in fiscal year 1999.
These rates are lower than the U.S. federal statutory rate principally due to
the tax benefits arising from the use of a foreign sales corporation and tax
credits and for fiscal year 1999, unbenefited tax losses incurred prior to the
Distribution. Future tax rates may vary from the historic rates depending on
the worldwide allocations of earnings and tax planning strategies.
Net Earnings. As a result of the foregoing factors, in fiscal year 2000 the
Company recorded net earnings of $98.9 million compared with a net loss of
$13.2 million in fiscal year 1999. The net earnings per diluted share for
fiscal year 2000 was $2.94 compared with a net loss in fiscal year 1999 of
$0.43 per share.
17
Fiscal Year 1999 Compared to Fiscal Year 1998
Revenue. The Company's revenues of $271.9 million in fiscal year 1999 were
21% below fiscal year 1998 revenues of $342.9 million, due mainly to the effect
of the semiconductor industry slowdown that began in the second half of fiscal
year 1998 and continued through the first half of fiscal year 1999. Fourth
quarter revenues in fiscal year 1999 totaled $107.5 million, up 157% from $41.8
million in the fourth quarter of fiscal year 1998. Included in fourth quarter
revenues in fiscal year 1999 were approximately $22.2 million of non-recurring
royalty revenue primarily related to a licensing agreement with Tokyo Electron
Ltd. Over the course of fiscal year 1999, revenues increased steadily in each
consecutive quarter, from $47.4 million in the first quarter to $53.2 million
in the second quarter, to $63.8 million in the third quarter, and approximately
$85.3 million in the fourth quarter excluding the non-recurring royalty income.
Royalty revenue for fiscal year 1999 was $28.9 million compared with $10.8
million in fiscal year 1998, primarily due to the aforementioned licensing
agreement with Tokyo Electron Ltd.
Non-U.S. revenues in fiscal year 1999 were $160.8 million compared to $239.3
million in fiscal year 1998. Sales to customers in the Far East were $106.4
million in fiscal 1999 as compared to $172.6 million in fiscal 1998. Sales to
customers in Europe were $54.4 million and $66.8 million in fiscal year 1999
and fiscal year 1998, respectively. Starting in the first half of fiscal year
1998, the semiconductor industry began to experience a significant worldwide
slowdown in equipment demand, brought about by depressed device pricing, excess
capacity and the Asian financial crisis. The slowdown in product demand and
extreme volatility in computer industry product pricing caused the
semiconductor industry to reduce significantly or delay purchases of
semiconductor manufacturing equipment and construction of new fabrication
facilities. This slowdown and volatility continued well into fiscal year 1999.
These conditions adversely affected the Company's results of operations for
most of fiscal year 1999.
Gross Profit on Product and Service Revenue. Gross profit on product and
service revenue (excluding royalty revenue) of $60.4 million for fiscal year
1999 was 25% of revenues compared with gross profit in fiscal year 1998 of
$106.9 million, representing 32% of sales. The decrease in gross profit as a
percentage of its sales from fiscal year 1998 to fiscal year 1999 was partly
attributable to costs associated with excess capacity, and costs related to
increased staffing and training to respond to the increasing demand from
customers.
Research and Development. Research and development expenses in fiscal year
1999 were $37.6 million, an increase of $0.7 million from the research and
development expenditures of $36.9 million in fiscal year 1998. Research and
development expenses were higher largely due to incremental costs incurred
pursuant to the discontinuance of a parallel product development research
contract, following the acquisition of the high-energy ion implantation
equipment product line of Genus.
Marketing, General and Administrative. Marketing, general and administrative
expenses of $70.3 million were 26% of revenue in fiscal year 1999, compared to
$64.5 million, or 19% of revenue, in fiscal year 1998. Marketing, general and
administrative expenses in fiscal year 1999 were higher largely because of the
additional administrative expenses associated with the transition to operating
as an independent company.
Restructuring Costs. During the second quarter of fiscal year 1999, the
company recognized pre-tax restructuring charges of $2.7 million, largely due
to the downturn in the industry. The charges included $1.4 million resulting
from the cancellation of plans for the expansion of manufacturing in the United
States and Japan, and $1.3 million to cover termination costs for a reduction
in workforce of 69 employees (approximately 5% of worldwide VSEA employment).
See also Note 14 to the Consolidated Financial Statements.
Interest Income and Other Income, Net. In fiscal year 1999, the Company
recognized interest income of $1.8 million and recorded other income of $2.0
million relating to the difference between the actual settlement amount of a
purchase price dispute relating to the sale of TFS and the estimated accrual.
18
Earnings (Loss) before Taxes. In fiscal year 1999, the Company had a pretax
loss of $17.5 million, compared to $16.3 million of earnings before taxes in
fiscal year 1998.
Taxes on Earnings. VSEA's effective income tax benefit rate was 24% in
fiscal year 1999, compared to 30% effective income tax expense rate in fiscal
year 1998. These rates were lower than the U.S. federal statutory rate
principally due to the tax benefits arising from the use of a foreign sales
corporation and tax credits and for fiscal year 1999, unbenefited tax losses
incurred prior to the Distribution.
Net Earnings. As a result of the foregoing factors, in fiscal year 1999, the
Company incurred a net loss of $13.2 million compared with net earnings of
$11.4 million in fiscal year 1998. The net loss per share for fiscal year 1999
was $0.43 compared with net earnings in fiscal year 1998 of $0.37 per share.
Liquidity and Capital Resources
During fiscal year 2000, the Company generated $51.6 million of cash from
operations, compared to consuming $31.3 million in cash in operations in fiscal
year 1999, and cash provided by operations of $40.2 million in the fiscal year
1998. Cash provided by operations in fiscal year 2000 came primarily from net
earnings of $98.9 million, increases in accounts payable of $32.6 million,
warranty provisions of $11.9 million, and from depreciation and amortization of
$13.3 million and tax benefit from exercise of stock options of $21.9 million,
offset by increases in accounts receivable of $82.1 million and $52.5 million
in increased inventories, due to the substantial increase in sales. The Company
consumed $31.3 million in cash in fiscal year 1999 due primarily to increased
accounts receivables of $41.8 million, an increase in inventories of $8.0
million and a net loss of $13.2 million, offset by an increase in accounts
payable of $20.4 million and depreciation and amortization of $12.3 million. In
fiscal year 1998 cash provided by operations came primarily from net earnings
of $11.4 million, the reduction in accounts receivable of $37.9 million and
depreciation and amortization of $8.7 million offset by increases in accrued
expenses of $15.7 million and accounts payable of $10.0 million.
During fiscal year 2000, the Company used $18.2 million for investing
activities, mainly from the purchase of property, plant and equipment of $20.4
million, offset by disposals and restricted cash received. In fiscal year 1999,
the Company used $7.0 million for investing activities due to a $4.0 million
decrease in restricted cash offset by purchases of property, plant and
equipment of $10.9 million. In fiscal year 1998, the Company used $31.0 million
of cash to acquire the high-energy ion implantation equipment product line of
Genus, Inc., and $7.2 million for purchases of property, plant and equipment.
The Company generated $20.2 million of cash from financing activities in
fiscal year 2000, primarily due to the issuance of common stock. In fiscal year
1999, $102.7 million of cash was generated from financing activities in fiscal
year 1999 primarily due to the Distribution of cash transfers from VAI. In
fiscal year 1998 the Company made cash transfers to VAI of $2.9 million. The
cash transfers of fiscal year 1999 and fiscal year 1998 reflect the former
operations under VAI. VAI historically used a centralized cash management
system to finance its operations. Cash deposits from most of the businesses
were transferred to VAI on a daily basis, and VAI funded its required
disbursements. As a result, the Company reported no cash or cash equivalents at
October 2, 1998. Pursuant to the Distribution Agreement, as of April 2, 1999,
the Company received a cash contribution from VAI such that VSEA's cash and
cash equivalents equaled $94.5 million, restricted cash which totaled $5.5
million and consolidated debt, which consisted of notes payable of $5.0
million.
In May, 2000, the Company closed on a $75 million unsecured three-year
Revolving Credit Facility, comprised of a $15 million, 364-Day facility and a
$60 million, 3-year facility. The purpose of this facility is to provide funds
for working capital and for general corporate purposes. Borrowings are limited
to the lesser of $75 million or the sum of a percentage of certain eligible
receivables and inventory, and bear interest at LIBOR or a defined bank rate
approximating prime, plus an applicable margin. There are no borrowings
currently outstanding. The facility contains certain financial and other
restrictive covenants, including maintaining a
19
leverage ratio, fixed charge ratio and quick ratio within defined limits,
capital expenditures within defined ranges, and maintaining profitable
operations.
The Company's liquidity is affected by many factors, some based on the
normal operations of the business and others related to the uncertainties of
the industry and global economies. Although the Company's cash requirements
will fluctuate based on the timing and extent of these factors, the Company's
management believes that cash generated from operations, together with
available cash of $121.7 million at September 29, 2000, and the Company's
available borrowing capability, will be sufficient to satisfy commitments for
capital expenditures and other cash requirements for the foreseeable future.
Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires derivatives to be
measured at fair value and to be recorded as assets or liabilities on the
balance sheet. The accounting for gains or losses resulting from changes in the
fair values of those derivatives would be dependent upon the use of the
derivative and whether it qualifies for hedge accounting. SFAS 133 is effective
for the Company's fiscal year 2001. The Company does not expect the application
of SFAS 133 to have a material impact on the Company's financial position or
results of operations.
In June 2000, the Financial Accounting Standards Board issued SFAS No. 138
"Accounting for Certain Derivative Instruments -- an Amendment of SFAS 133"
("Accounting for Derivative Instruments and Hedging Activities"). This
statement amends the accounting and reporting standards for certain derivative
instruments and hedging activities. The Company will adopt SFAS 138 in 2001, in
accordance with SFAS 137, which deferred the effective date of SFAS 133. The
adoption of this standard in 2001 is not expected to have a material impact on
the Company's consolidated financial statements.
Revenue Recognition in Financial Statements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes the staff's view in applying
generally accepted accounting principles to selected revenue recognition
issues. The adoption of SAB 101 will be required in the Company's fourth
quarter of fiscal year 2001. The Company is in the process of determining the
impact of the implementation on the Company's consolidated financial
statements.
Certain Factors That May Affect Future Results
This 10-K report contains certain forward-looking statements. For purposes
of the safe harbor provisions under The Private Securities Litigation Reform
Act of 1995, any statements using the terms "believes", "anticipates",
"expects", "plans" or similar expressions, are forward-looking statements. The
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those projected. There are a number of
important factors that could cause the Company's actual results to differ
materially from those indicated by forward-looking statements made in this
report and presented by management from time to time. Some of the important
risks and uncertainties that may cause the Company's operating results to
differ are discussed below.
The Company has a limited operating history as an independent company which may
make it difficult to assess its financial performance and its ability to
address the risks associated with its industry.
Until April 2, 1999, Varian Associates, Inc. conducted the Company's
business as one of its divisions. As a result, the Company has only a limited
operating history as an independent company on which its business
20
and prospects can be evaluated. The Company's ability to satisfy its
obligations and maintain profitability will depend on its future performance,
and the Company has limited experience in addressing various business
challenges without the support of its corporate parent. The Company will not be
able to rely on the capital resources and cash flow of VAI and will need to
generate its own revenues and secure sources of financing when necessary. In
addition, the Company is a smaller and less diversified company than VAI was
prior to the Distribution which may make the Company more susceptible to
economic downturns in the semiconductor industry. If the Company is unable to
confront the challenges facing stand-alone companies in its market, its
business will suffer.
The semiconductor industry is cyclical, and a slowdown in demand for the
Company's semiconductor manufacturing equipment will negatively impact its
financial results.
The semiconductor industry has been cyclical in nature and has historically
experienced periodic downturns. The industry experienced extreme volatility in
product pricing and a slowdown in product demand during 1998 and 1999. If
volatility and slowdowns occur in the future, the semiconductor industry may
reduce significantly or delay purchases of semiconductor manufacturing
equipment and the construction of new fabrication facilities which would harm
the Company's operating results. Even during prior periods in which the
Company's revenues declined, in order to remain competitive, the Company
continued to invest in research and development and maintained extensive
ongoing worldwide customer service and support capability, which adversely
affected its financial results. If the upturn in the semiconductor industry is
not maintained, the decrease in demand for the Company's products could
adversely affect its financial results.
The Company faces intense competition in the semiconductor equipment industry.
Significant competitive factors in semiconductor equipment manufacturing
include the strength of customer relationships, pricing, technological
performance and timing, distribution capabilities and financial viability. The
Company believes that in order to remain competitive in this industry, it will
need to devote significant financial resources to product and process research
and development, to offering and marketing a broad range of products, and to
maintaining and enhancing customer service and support centers worldwide. The
semiconductor equipment industry is becoming increasingly dominated by large
manufacturers who have resources to support customers worldwide, and some of
the Company's competitors have substantially greater financial resources and
more extensive engineering, manufacturing, marketing, service and support than
the Company does. With fewer resources, the Company may not be able to match
product offerings or customer service and technical support of its competitors.
In addition, some smaller equipment manufacturers provide innovative technology
which may have performance advantages over the Company's systems. If these
manufacturers continue to improve their product performance and pricing or
enter into strategic relationships with other large equipment manufacturers,
sales of the Company's products may suffer.
The Company derives a substantial portion of its annual revenues from a small
number of customers, and its business may be harmed by the loss of any one
significant customer.
Historically, the Company has sold close to half of its systems in any
particular period to its ten largest customers. Sales to its ten largest
customers in fiscal years 2000, 1999 and 1998 accounted for approximately 55%,
51% and 47% of revenue, respectively. During fiscal 2000, no one customer
accounted for 10% or more of revenue. During fiscal year 1999, one customer
accounted for 12% and another for 10% of revenue, and during fiscal 1998, one
customer accounted for 14% of revenue. Although the composition of the group
comprising the Company's largest customers has varied from year to year, the
loss of a significant customer or any reduction in orders from a significant
customer could adversely affect revenues. The Company expects that sales to
relatively few customers will continue to account for a high percentage of
total revenue in the foreseeable future.
In addition, the Company may have difficulty in attracting additional large
customers because its sales depend, in large part, upon the decision of a
prospective customer to increase manufacturing capacity in an
21
existing fabrication facility or to transfer a manufacturing process to a new
fabrication facility, both of which typically involve a significant capital
commitment. Once a semiconductor manufacturer has selected a particular
supplier's capital equipment, the manufacturer generally relies upon that
equipment for the specific production line application and frequently will
attempt to consolidate its other capital equipment requirements with the same
supplier. Consequently, the Company may experience difficulty in selling to a
prospective customer if that customer initially selects a competitor's capital
equipment.
The Company's quarterly results of operations are likely to fluctuate, and as a
result, the Company may fail to meet the expectations of its investors and
securities analysts, which may cause the price of its common stock to decline.
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly operating results. From time to time,
customers may reschedule or cancel shipments, or production difficulties could
delay shipments. A delay in shipments in any quarter due to these factors may
cause revenues in such quarters to fall significantly below expectations, which
could cause the market price of the Company's common stock to decline. The
Company's operating results also fluctuate based on gross profits realized on
sales. Gross profit as a percentage of revenue may vary based on a variety of
factors, including the mix and average selling prices of products sold and
costs to manufacture upgrades and customize systems. In addition, a number of
other factors could impact the Company's quarterly operating results, including
the following:
. unexpected procurement or manufacturing difficulties;
. pricing of key components;
. fluctuations in foreign exchange rates;
. adverse weather conditions at its manufacturing facilities; and
. general conditions in the semiconductor equipment industry.
Because the Company's operating expenses are based on anticipated capacity
levels, and a high percentage of the Company's expenses are relatively fixed, a
variation in the timing of recognition of revenue and the level of gross profit
from a single transaction could cause operating results to vary significantly
from quarter to quarter.
The Company's future business depends, in part, on its ability to successfully
introduce and manage the transition to new products, and the Company may not
succeed in accomplishing these goals.
The Company believes that its future success will depend on its ability to
develop, manufacture and successfully introduce new systems and product lines
with improved capabilities and to continue enhancing existing products, in
particular products that respond to the trend toward single-wafer processing
and 300mm wafer processing. The Company derives virtually all of its revenue
from sales and servicing of ion implantation systems and related products and
services. If the Company's next generation VIISta ion implant platform, which
relies on single-wafer processing, does not gain market acceptance, future
operating results will suffer. The Company must accurately forecast the demand
for new products while managing the transition from older products, or it may
otherwise mismanage inventory levels. In addition, the Company may be unable to
complete the development or meet the technical specifications of new systems or
enhancements or to manufacture and ship these systems or enhancements in volume
and on time, which may harm its reputation and business. In the past, the
Company has experienced some delays in manufacturing and shipping systems and
enhancements as well as problems with their reliability and quality. If any of
its new products have reliability or quality problems, it may incur additional
warranty and service expenses, experience a decline in product orders or incur
higher manufacturing costs to correct such problems, all of which could
adversely affect financial results.
Economic problems in Asian markets could cause sales of the Company's products
to decline.
International sales accounted for 73%, 59% and 70% of the Company's revenues
in fiscal years 2000, 1999 and 1998, respectively, and specifically, sales to
Asia have accounted for a substantial portion of these
22
revenues. Sales to Asia accounted for 53%, 39% and 51% of revenues in fiscal
years 2000, 1999 and 1998, respectively. Because the Company relies on sales to
customers in Asia for a substantial portion of its revenues, its business is
very likely to be adversely impacted by economic downturns and instability in
this area. In 1999 and 1998, the Company's business was harmed by banking and
currency problems in some Asian countries. Specifically, the decline in the
value of the Korean won, together with Korean customers' difficulties in
obtaining credit resulted in a decline in the purchasing power of the Company's
Korean customers. This resulted in a cancellation or delay of orders for the
Company's products from Korean customers which adversely affected operating
results in 1998 and 1999. In fiscal year 2000, the Company recorded revenues of
$368.6 million in Asia, compared with $106.4 million in fiscal year 1999, due
mainly to increased demand for semiconductor devices. The Company's business in
Asia is affected by demand in each country. If the recovery in Japan's economy
in 2000 is not sustained, economic conditions in other Pacific Rim countries
such as Taiwan may deteriorate or recovery may be delayed, and future sales of
the Company's equipment to Asia may decline. In addition, some of the Company's
products are assembled in Korea, so the Company is subject to risks associated
with locating operations abroad, including currency exchange rate and transfer
risks, restrictive measures by foreign governments and general economic and
political destabilization.
If the Company is unable to protect its proprietary rights adequately, it may
lose its ability to compete effectively in the semiconductor equipment
industry.
The Company relies on obtaining and maintaining patent, copyright and trade
secret protection for significant new technologies, products and processes and
obtaining key licenses because of the length of time and expense associated
with bringing new products through the development process to market. The
Company intends to continue to file applications as appropriate for patents
covering new products and manufacturing processes. However, the Company cannot
provide assurance of the following:
. that patents will issue from any pending or future patent applications
owned by, or licensed to, the Company;
. that the claims allowed under any issued patents will be sufficiently
broad to protect the Company's technology position against competitors;
. that any issued patents owned by or licensed to the Company will not be
challenged, invalidated or circumvented; and
. that the rights granted under the Company's patents will provide it with
competitive advantages.
The Company also has agreements with third parties for licensing of patented
or proprietary technology. These agreements include royalty bearing licenses
and technology cross-licenses. The Company's loss of licensing agreements with
Applied Materials and Tokyo Electron Limited could have a material adverse
effect on its business.
In addition, the Company maintains and enforces its trademarks to increase
customer recognition of its products. If its trademarks are used by
unauthorized third parties, its business may be harmed. The Company also relies
on contractual restrictions on disclosure, copying and transferring title,
including confidentiality agreements with vendors, strategic partners, co-
developers, employees, consultants and other third parties to protect its
proprietary rights. If these contractual agreements are breached, the Company
may not have adequate remedies for any such breaches. The Company also cannot
provide assurance that its trade secrets will not otherwise become known to or
be independently developed by others.
Patent claims may be expensive to pursue, defend or settle and may
substantially divert the Company's resources and the attention of management.
The Company could incur substantial costs and diversion of management
resources in defending patent suits brought against it or in asserting its
patent rights against others. If the outcome of any such litigation is
unfavorable to the Company, its business may be harmed. The Company may not be
aware of pending or
23
issued patents held by third parties that relate to its products or
technologies. In the event that a claim is asserted against the Company, it may
need to acquire a license to or contest the validity of a competitor's patent.
The Company cannot be certain that it could acquire such a license on
commercially acceptable terms, if at all, or that it would prevail in such a
proceeding. From time to time, the Company has received notices from and has
issued notices to such third parties alleging infringement of patent and other
intellectual property rights relating to its products. If the Company is
subject to future claims of patent infringement, it may be required to make
substantial settlement or damages payments and may have to devote substantial
resources to reengineering its products.
It is difficult for the Company to predict the quarter in which it will be
recognizing revenue from large product orders.
During a quarter, the Company customarily sells a relatively small number of
ion implantation systems that typically sell for prices ranging from
approximately $1.8 million to $5.5 million. Consequently, the Company's revenue
and operating results could be negatively impacted for a particular quarter if
anticipated orders from even a few customers are not received in time to permit
shipment during that quarter. In addition, the Company's product order backlog
at the beginning of each quarter may not include all systems needed to achieve
expected revenues for that quarter. Because the Company may build systems
according to forecast, the absence of a significant backlog for an extended
period of time could adversely affect operating results.
The Company depends on limited groups of suppliers or single source suppliers,
the loss of which could impair its ability to manufacture products and systems.
The Company obtains some of its components and subassemblies included in its
products from a limited group of suppliers, or in some cases a single-source
supplier, including magnets and high voltage power supplies and accelerators.
The loss of any supplier, including any single source supplier, would require
obtaining one or more replacement suppliers and may also require devoting
significant resources to product development to incorporate new parts from
other sources into its products. The need to change suppliers or to alternate
between suppliers might cause delays in delivery or significantly increase the
Company's costs. Although the Company has limited insurance to protect against
loss due to business interruption from these and other sources, the Company
cannot provide assurance that such coverage will be adequate or that it will
remain available on commercially acceptable terms. Although the Company seeks
to reduce its dependence on these limited source suppliers, disruption or loss
of these sources could negatively impact its business and damage customer
relationships.
Failure to comply with present or future environmental regulations could
subject the Company to penalties and environmental remediation costs.
The Company is subject to a variety of foreign, federal, state and local
laws regulating the discharge of materials into the environment and the
protection of the environment. These regulations include discharges into the
soil, water and air and the generation, handling, storage and transportation
and disposal of waste and hazardous substances. These laws increase the costs
and potential liabilities associated with the conduct of the Company's
operations.
VAI has been named by the U.S. Environmental Protection Agency or third
parties as a potentially responsible party under the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended
("CERCLA"), at eight sites where VAI is alleged to have shipped manufacturing
waste for recycling or disposal. VAI is also in various stages of environmental
investigation and or remediation under the direction of, or in consultation
with foreign, federal, state and local agencies at certain current or former
VAI facilities (including facilities disposed of in connection with VAI's sale
of its Electron Devices business during
24
fiscal year 1995, and the sale of its TFS business during fiscal year 1997).
Expenditures by VMS (as successor to VAI) for environmental investigation and
remediation amounted to $5.9 million in fiscal year 2000, compared with $2.7
million in fiscal year 1999, and $4.9 million in fiscal year 1998.
For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. VMS has accrued $8 million in estimated environmental investigation
and remediation costs for these sites and facilites as of September 29, 2000.
The amount accrued has not been discounted to present value. As to other sites
and facilities, VMS has gained sufficient knowledge to be able to better
estimate the scope and costs of future environmental activities. VMS has
accrued $30 million, which represents its best estimate of the future costs
discounted at 7%, net of inflation, to cover these costs. This reserve is in
addition to the $8 million previously described. The Distribution Agreement
provides that each of VMS, VSEA and IB will indemnify the others for one-third
of these environmental investigation and remediation costs, as adjusted for any
insurance proceeds and tax benefits expected to be realized upon payment of
these costs.
These accrued amounts are only estimates of anticipated future environmental
related costs, and the amounts actually spent may be greater than such
estimates. Accordingly, the Company may need to make additional payments to
cover its indemnification obligations that would exceed current estimates. In
addition, the Company's present and past facilities have been in operation for
many years, and over that time in the course of those operations, such
facilities have used substances which are or might be considered hazardous. The
Company also may have generated and disposed of wastes which are or might be
considered hazardous. Therefore, it is possible that additional environmental
issues may arise in the future that the Company cannot now predict.
If the Company loses key employees or is unable to attract and retain key
employees, it may be unable to pursue business opportunities.
The Company's future success depends to a significant extent on the
continued service of key managerial, technical and engineering personnel.
Competition for such personnel is intense, particularly in the labor markets
around the Company's facilities in Massachusetts. The available pool of
qualified candidates is limited, and the Company may not be able to retain its
key personnel or to attract, train, assimilate or retain other highly qualified
engineers and technical and managerial personnel in the future. The loss of
these persons or the Company's inability to hire, train or retrain qualified
personnel could harm the Company's business and results of operations.
The Company's indemnification obligations under the Distribution Agreement
could be substantial, and the Company may not be fully indemnified in
accordance with this agreement for the expenses it incurs.
Under the terms of the Distribution Agreement, each of VMS, IB and the
Company has agreed to indemnify the other parties (and certain related persons)
from and after consummation of the Distribution with respect to certain
indebtedness, liabilities and obligations which could be significant. The
availability of such indemnities will depend upon the future financial strength
of the companies. There is a risk that one or more of these companies will not
be able to satisfy their indemnification obligations. In addition, the
Distribution Agreement generally provides that if a court prohibits a company
from satisfying its indemnification obligations, then such obligations will be
shared equally by the other companies.
The Company has anti-takeover defenses that could delay or prevent an
acquisition and could adversely affect the price of its common stock.
Provisions of the Company's certificate of incorporation, its by-laws and
Delaware law could delay, defer or prevent an acquisition or change in control
of the Company or otherwise adversely affect the price of its common stock. For
example, the Company's Board of Directors is classified into three classes, and
stockholders do not have the right to call special meetings of stockholders.
The Company's certificate of
25
incorporation also permits its board to issue shares of preferred stock without
stockholder approval. In addition to delaying or preventing an acquisition, the
issuance of a substantial number of preferred shares could adversely affect the
price of the common stock. The Company has also adopted a stockholders rights
plan which may significantly dilute the equity interests of persons seeking to
acquire control of the Company without the approval of the Board of Directors.
The Company does not anticipate paying dividends on its common stock in the
future.
The Company has not paid and does not anticipate paying dividends on its
common stock. The Company's Board of Directors will have discretion to make
decisions to pay dividends to common stockholders in the future which decision
will depend on a number of factors, including results of operations, financial
conditions and contractual restrictions, that the Board, in its opinion, deems
relevant.
26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Exchange Risk
As a multinational firm, the Company faces exposure to adverse movements in
foreign currency exchange rates. This exposure may change over time as the
Company's business practices evolve and could have a material adverse impact on
the Company's financial results. Historically, the Company's primary exposures
have resulted from non-U.S. dollar denominated sales and purchases in Asia and
Europe.
The Company hedges currency exposures that are associated with certain of
its assets and liabilities denominated in various non-U.S. dollar denominated
currencies and with anticipated foreign currency cash flows. The Company does
not enter into forward exchange contracts for trading purposes. The Company's
forward exchange contracts generally range from one to two months in original
maturity. No forward exchange contract has an original maturity greater than
one year.
Forward exchange contracts outstanding as of September 29, 2000 are
summarized as follows:
Notional Contract
Value Rate Fair Value
----------- -------- -----------
Foreign Currency Purchase Contracts:
Euro........................................ $ 5,495,700 0.9008 $ 5,330,304
British Pound............................... 365,595 1.46238 362,319
Japanese Yen................................ 6,103,430 107.32 6,077,758
Korean Won.................................. 582,960 1115.00 577,265
New Taiwan Dollar........................... 571,885 31.30 572,068
----------- -----------
Total Foreign Currency Purchase
Contracts................................ 13,119,570 12,919,714
Foreign Currency Sell Contracts:
Japanese Yen ............................... 28,954,403 105.42 28,393,802
New Taiwan Dollar........................... 76,577 31.08 76,063
Korean Won.................................. 993,677 1107.00 976,909
Israeli Shekel.............................. 968,102 4.0285 962,963
----------- -----------
Total Foreign Currency Sell Contracts..... 30,992,759 30,409,737
----------- -----------
Total Contracts........................... $44,112,329 $43,329,451
=========== ===========
There were no significant unrealized gains or losses for these forward
contracts as of September 29, 2000. The fair value of forward exchange
contracts generally reflects the estimated amounts that the Company would
receive or pay to terminate the contracts at the reporting date. The notional
amounts of forward exchange contracts are not a measure of the Company's
exposure.
Interest Rate Risk
Although payments under certain of the Company's operating leases for
facilities are tied to market indices, the Company is not exposed to material
interest rate risk associated with its operating leases.
Item 8. Financial Statements and Supplementary Data.
The response to this item is submitted as a separate section to this report.
See Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
27
PART III
Item 10. Directors and Executive Officers of the Registrant.
The response to this item is contained in part under the caption "Executive
Officers" in Part I of this Annual Report on Form 10-K and in part in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
February 7, 2001 (the "2001 Proxy Statement") under the caption "Proposal 1--
Election of Directors," which section is incorporated herein by this reference.
Officers are elected on an annual basis and serve at the discretion of the
Board of Directors.
Item 11. Executive Compensation.
The response to this item is contained in the 2001 Proxy Statement under the
caption "Proposal 1--Election of Directors," which section is incorporated
herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The response to this item is contained in the 2001 Proxy Statement under the
caption "Stock Ownership of Certain Beneficial Owners and Management," which
section is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions.
The response to this item is contained in the 2001 Proxy Statement under the
caption "Proposal 1--Election of Directors," which section is incorporated
herein by this reference.
28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) Consolidated Financial Statements: (see index on page F-1 of this
report)
. Report of Independent Public Accountants
. Consolidated Balance Sheets
. Consolidated Statements of Operations
. Consolidated Statements of Cash Flows
. Consolidated Statements of Stockholders' Equity
. Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedule: (see index on page F-1
of this report)
The following financial statement schedule of the Registrant and its
subsidiaries for fiscal years 2000, 1999 and 1998, and the related
Report of Independent Accountants are filed as a part of this Report
and should be read in conjunction with the Consolidated Financial
Statements of the Registrant and its subsidiaries.
Schedule
--------
-- Report of Independent Accountants on Financial Statements Schedule
II Valuation and Qualifying Accounts
All other required schedules are omitted because of the absence of
conditions under which they are required or because the required information is
given in the financial statements or the notes thereto.
(b) The list of Exhibits filed as a part of this Annual Report on Form 10-K
are set forth on the Exhibit Index immediately preceding such Exhibits, and is
incorporated herein by this reference.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the Company's fiscal year ended September 29, 2000.
On October 10, 2000, the Company filed a report on Form 8-K, as amended on
October 11, 2000, recording the settlement of patent infringement and anti-
trust litigation with Applied Materials. After payments to Applied Materials
and legal expenses, the Company recorded a gain of $16.0 million ($10.8 million
after tax) for fiscal year 2000.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Varian Semiconductor Equipment Associates, Inc.
/s/ Ernest L. Godshalk, III
By: _________________________________
Ernest L. Godshalk, III
Vice President and Chief Financial
Officer
Date: December 18, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Richard A. Aurelio President and Chief Executive December 13, 2000
___________________________________ Officer and Director (Principal
Richard A. Aurelio Executive Officer)
/s/ Ernest L. Godshalk, iii Vice President and Chief Financial December 13, 2000
___________________________________ Officer (Principal Financial
Ernest L. Godshalk, III Officer)
/s/ Seth H. Bagshaw Vice President and Corporate December 13, 2000
___________________________________ Controller (Principal Accounting
Seth H. Bagshaw Officer)
/s/ Robert W. Dutton Director December 13, 2000
___________________________________
Robert W. Dutton
/s/ Angus A. MacNaughton Director December 13, 2000
___________________________________
Angus A. MacNaughton
/s/ George W. Chamillard Director December 13, 2000
___________________________________
George W. Chamillard
/s/ J. Tracy O'Rourke Chairman of the Board December 13, 2000
___________________________________
J. Tracy O'Rourke
30
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
2.1* Distribution Agreement among Varian Associates, Inc., Varian
Semiconductor Equipment Associates, Inc. and Varian, Inc. dated as of
January 14, 1999.
3.1* Restated Certificate of Incorporation of Varian Semiconductor
Equipment Associates, Inc.
3.2* By-Laws of Varian Semiconductor Equipment Associates, Inc.
4.1* Specimen Common Stock Certificate.
4.2* Rights Agreement.
10.1* Employee Benefits Allocation Agreement among Varian Associates, Inc.,
Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.
10.2* Intellectual Property Agreement among Varian Associates, Inc., Varian
Semiconductor Equipment Associates, Inc., and Varian, Inc.
10.3* Tax Sharing Agreement among Varian Associates, Inc., Varian
Semiconductor Equipment Associates, Inc. and Varian, Inc.
10.4* Transition Services Agreement among Varian Associates, Inc., Varian
Semiconductor Equipment Associates, Inc. and Varian, Inc.
10.5* Form of Change in Control Agreement for CEO and Senior Executives.
10.6* Form of Indemnity Agreement with Directors and Executive Officers.
10.7* Varian Semiconductor Equipment Associates, Inc. Omnibus Stock Plan.
10.8* Varian Semiconductor Equipment Associates, Inc. Management Incentive
Plan.
10.9* Agreement, dated as of July 24, 1998, between Varian Associates, Inc.
and High Voltage Engineering Europa B.V.
10.10 Revolving Credit Agreement between Varian Semiconductor Equipment
Associates, Inc., and ABN AMRO Bank N.V., Fleet National Bank, Bank
of America, N.A., The Chase Manhattan Bank, Citizens Bank of
Massachusetts and The Fuji Bank, Limited dated May 16, 2000.
21* Subsidiaries of the Registrant.
27 Financial Data Schedule.
- --------
* Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form 10 (File No. 000-25395).
31
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
The following financial statements of the registrant and its subsidiaries
are required to be included in Item 8:
Page
----
Report of PricewaterhouseCoopers LLP, Independent Accountants............ F-2
Consolidated Statements of Operations for fiscal years ended September
29, 2000, October 1,1999, and October 2, 1998........................... F-3
Consolidated Balance Sheets as of September 29, 2000 and October 1,
1999.................................................................... F-4
Consolidated Statements of Cash Flows for fiscal years ended September
29, 2000, October 1, 1999, and October 2, 1998.......................... F-5
Consolidated Statements of Stockholders' Equity for fiscal years ended
September 29, 2000, October 1, 1999, and October 2, 1998................ F-6
Notes to the Consolidated Financial Statements........................... F-7
The following financial statement schedule of the Registrant and its
subsidiaries for fiscal years 2000, 1999, and 1998, and the related Report of
Independent Accountants are filed as a part of this Report as required to be
included in Item 14(a) and should be read in conjunction with the Consolidated
Financial Statements of the Registrant and its subsidiaries:
Financial Statement Schedules
Page
----
Report of Independent Accountants on Financial Statements Schedule....... S-1
Schedule II--Valuation and Qualifying Accounts and Reserves.............. S-2
All other required schedules are omitted because of the absence of
conditions under which they are required or because the required information is
given in the financial statements or the notes thereto.
F-1
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Varian Semiconductor Equipment Associates, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Varian
Semiconductor Equipment Associates, Inc. and its subsidiaries at September 29,
2000 and October 1, 1999, and the results of their operations and their cash
flows for each of the three fiscal years in the period ended September 29,
2000, in conformity with accounting principles generally accepted in the United
States of America. 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 of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
By: _________________________________
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 26, 2000,
except Note 16, which
is December 1, 2000.
F-2
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Year Ended
--------------------------------
September 29, October October
2000 1, 1999 2, 1998
------------- -------- --------
(Amounts in thousands, except
per share data)
Revenue
Product revenue.............................. $626,219 $206,419 $303,492
Service revenue.............................. 51,432 36,614 28,685
Royalties.................................... 10,068 28,852 10,767
-------- -------- --------
Total revenue.............................. 687,719 271,885 342,944
-------- -------- --------
Operating Costs and Expenses
Cost of product and service revenue.......... 418,573 182,604 225,237
Research and development..................... 47,025 37,582 36,897
Marketing, general and administrative........ 98,063 70,310 64,500
Restructuring costs.......................... -- 2,688 --
-------- -------- --------
Total operating costs and expenses......... 563,661 293,184 326,634
-------- -------- --------
Operating earnings (loss).................... 124,058 (21,299) 16,310
Interest income, net......................... 4,597 1,821 --
Other income, net............................ 18,700 2,009 --
-------- -------- --------
Earnings (loss) before taxes................. 147,355 (17,469) 16,310
Income tax provision (benefit) on earnings
(loss)...................................... 48,490 (4,262) 4,913
-------- -------- --------
Net earnings (loss).......................... $ 98,865 $(13,207) $ 11,397
======== ======== ========
Weighted average shares outstanding--basic... 31,375 30,428 30,423
======== ======== ========
Weighted average shares outstanding--
diluted..................................... 33,681 30,428 30,508
======== ======== ========
Net earnings (loss) per share--basic....... $ 3.15 $ (0.43) $ 0.37
======== ======== ========
Net earnings (loss) per share--diluted..... $ 2.94 $ (0.43) $ 0.37
======== ======== ========
See accompanying Notes to the Consolidated Financial Statements.
F-3
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
September 29, October
2000 1, 1999
------------- --------
(Amounts in thousands,
except share data)
ASSETS
Current Assets
Cash and cash equivalents.............................. $121,692 $ 65,968
Restricted cash........................................ -- 1,000
Accounts receivable, net............................... 182,396 100,497
Inventories, net....................................... 125,766 70,437
Deferred taxes......................................... 18,128 32,536
Other current assets................................... 7,884 2,887
-------- --------
Total Current Assets................................. 455,866 273,325
-------- --------
Property, plant and equipment.......................... 104,525 92,364
Accumulated depreciation and amortization.............. (60,770) (54,066)
-------- --------
Net property, plant and equipment...................... 43,755 38,298
Other assets........................................... 19,869 22,521
-------- --------
Total Assets....................................... $519,490 $334,144
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable.......................................... $ 5,541 $ 5,523
Accounts payable....................................... 63,392 30,709
Accrued expenses....................................... 74,309 76,455
Product warranty....................................... 28,190 15,899
Advance payments from customers........................ 4,566 4,212
-------- --------
Total Current Liabilities............................ 175,998 132,798
Long-term accrued expenses............................. 6,792 7,176
Deferred taxes......................................... 1,546 985
-------- --------
Total Liabilities.................................... 184,336 140,959
-------- --------
Stockholders' Equity
Preferred stock, par value $.01; authorized 5,000,000
shares, issued none
Common stock, par value $.01; authorized 150,000,000
shares, issued and outstanding 32,103,167 at September
29, 2000, and 30,474,492 at October 1, 1999........... 321 305
Capital in Excess of Par Value......................... 223,263 180,175
Retained Earnings...................................... 111,570 12,705
-------- --------
Total Stockholders' Equity........................... 335,154 193,185
-------- --------
Total Liabilities and Stockholders' Equity......... $519,490 $334,144
======== ========
See accompanying Notes to the Consolidated Financial Statements.
F-4
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Year Ended
-----------------------------------
September 29, October October 2,
2000 1, 1999 1998
------------- --------- ----------
(Amounts in thousands)
Operating Activities
Net cash provided by (used in) Operating
Activities.............................. $ 51,608 $ (31,267) $ 40,219
-------- --------- --------
Investing Activities
Purchase of property, plant and
equipment............................... (20,375) (10,977) (7,191)
Proceeds from disposal of property, plant
and equipment........................... 1,175 -- --
Purchase of business, net of cash
acquired................................ -- -- (31,014)
Restricted cash paid..................... -- (1,000) --
Restricted cash received................. 1,000 5,000 --
-------- --------- --------
Net cash provided by (used in) Investing
Activities................................ (18,200) (6,977) (38,205)
======== ========= ========
Financing Activities
Proceeds from the issuance of common
stock to settle stock option exercises
(excluding tax benefit of $21,880)...... 20,177 193 --
Other.................................... -- (214) --
Net transfers (to) from Varian
Associates, Inc. ....................... -- 102,712 (2,885)
-------- --------- --------
Net cash provided by (used in) Financing
Activities................................ 20,177 102,691 (2,885)
-------- --------- --------
Effects of exchange rate changes on cash... 2,139 1,521 871
-------- --------- --------
Net increase (decrease) in cash and cash
equivalents............................... 55,724 65,968 --
Cash and cash equivalents at beginning of
period.................................... 65,968 -- --
-------- --------- --------
Cash and cash equivalents at end of
period.................................... $121,692 $ 65,968 $ --
======== ========= ========
Detail of net cash provided by (used in)
Operating Activities
Net earnings (loss)...................... $ 98,865 $ (13,207) $ 11,397
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities....................
Depreciation and amortization.......... 13,264 12,347 8,715
Provision for doubtful accounts........ 473 2,212 243
Loss on disposal of fixed assets....... 352 -- --
Compensatory stock option expense...... 1,047 -- --
Tax benefit from exercise of stock
options............................... 21,880 -- --
Deferred taxes......................... 15,061 726 4,500
Changes in assets and liabilities, net of
business acquired
Accounts receivable.................... (82,095) (41,780) 37,942
Inventories............................ (52,487) (7,961) 3,676
Other current assets................... (4,997) 1,638 (2,480)
Accounts payable....................... 32,550 20,378 (10,047)
Accrued expenses....................... (3,550) (463) (15,697)
Product warranty....................... 11,862 (5,477) (1,821)
Advance payments from customers........ (58) 436 1,605
Long term accrued expenses............. (384) 380 549
Other.................................. (175) (496) 1,637
-------- --------- --------
Net cash provided by (used in) Operating
Activities................................ $ 51,608 $ (31,267) $ 40,219
======== ========= ========
Supplemental information to the cash flow:
Cash payments for income taxes............. $ 23,887 $ 700 $ --
======== ========= ========
Cash payments for interest................. $ 158 $ -- $ --
======== ========= ========
See accompanying Notes to the Consolidated Financial Statements.
F-5
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital
in
Excess
Common of Par Retained Divisional
Stock Value Earnings Equity Total
------ -------- -------- ---------- --------
(Amounts in thousands)
Balance at September 26, 1997... $-- $ -- $ -- $ 94,737 $ 94,737
Net earnings for the year..... -- -- -- 11,397 11,397
Net transfers to Varian
Associates, Inc.............. -- -- -- (2,885) (2,885)
---- -------- -------- -------- --------
Balance at October 2, 1998...... -- -- -- 103,249 103,249
Net loss prior to
Distribution................. -- -- -- (25,912) (25,912)
Net income subsequent to
Distribution................. -- -- 12,705 -- 12,705
Net transfers to Varian
Associates, Inc.............. -- -- -- (77,337) (77,337)
Distribution to shareholders.. 304 186,341 -- -- 186,645
Distribution Agreement
adjustments.................. -- (6,596) -- -- (6,596)
Issuance of stock under
omnibus stock, stock option,
and employee stock purchase
plans........................ 1 430 -- -- 431
---- -------- -------- -------- --------
Balance at October 1, 1999...... $305 $180,175 $ 12,705 $ -- $193,185
==== ======== ======== ======== ========
Net income for the year....... -- -- 98,865 -- 98,865
Compensatory stock option
expense...................... -- 1,047 -- -- 1,047
Issuance of stock under
omnibus stock and stock
option plans, including tax
benefit of $21,880........... 16 42,041 -- -- 42,057
---- -------- -------- -------- --------
Balance at September 29, 2000... $321 $223,263 $111,570 $ -- $335,154
==== ======== ======== ======== ========
See accompanying Notes to the Consolidated Financial Statements.
F-6
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Company and Basis of Presentation
Varian Semiconductor Equipment Associates, Inc. ("VSEA" or "Company")
designs, manufactures, markets and services (including maintenance, spare parts
and product enhancements) semiconductor processing equipment used in the
fabrication of integrated circuits to customers located both in the United
States and in international markets. The Company faces risk factors similar to
all companies in the semiconductor manufacturing equipment market including,
but not limited to, competition, market downturn, technological change,
international operations and related foreign currency risks and ability to
recruit and retain key employees.
The consolidated financial statements of the Company generally reflect the
financial position, results of operations and cash flows of the Company as of
and for the year ended September 29, 2000, together with the year ended October
1, 1999. Operations prior to April 2, 1999, had been part of the former Varian
Associates, Inc. ("VAI"). On April 2, 1999, VAI contributed its Semiconductor
Equipment Business ("SEB") to the Company, then distributed to the holders of
record of VAI common stock one share of common stock of the Company for each
share of VAI common stock owned on March 24, 1999 (the "Distribution"). At the
same time, VAI contributed its Instruments Business ("IB") to Varian, Inc. and
distributed to the holders of record of VAI common stock one share of common
stock of IB for each share of VAI common stock owned on March 24, 1999. VAI
retained its Health Care Systems business and changed its name to Varian
Medical Systems, Inc. ("VMS") effective as of April 2, 1999. These transactions
were accomplished under the terms of a Distribution Agreement by and among the
Company, VAI, hereafter referred to as VMS for periods following the
Distribution, and IB (the "Distribution Agreement"). For purposes of providing
an orderly transition and to define certain ongoing relationships between and
among the Company, VMS and IB after the Distribution, the Company, VMS and IB
also entered into certain other agreements which include an Employee Benefits
Allocation Agreement, an Intellectual Property Agreement, a Tax Sharing
Agreement and a Transition Services Agreement (collectively, the "Distribution
Related Agreements").
The consolidated financial statements for periods ended on or before April
2, 1999 reflect SEB as operated by VAI. For periods prior to April 2, 1999,
where it was practicable to identify specific VAI corporate amounts within the
SEB activities, such amounts have been included in the accounts reflected in
the consolidated financial statements. The consolidated financial statements
also include allocations of certain VAI corporate assets (including pension
assets), liabilities (including profit sharing and pension benefits), and
expenses (including legal, accounting, employee benefits, insurance services,
information technology services, treasury, and other VAI corporate overhead) to
SEB through April 2, 1999. These amounts have been allocated to SEB on the
basis that is considered by management to reflect most fairly or reasonably the
utilization of the services provided to or the benefit obtained by SEB. Typical
measures and activity indicators used for allocation purposes include
headcount, sales revenue, and payroll expense. The Company believes that the
methods used to allocate these amounts are reasonable. However, these
allocations are not necessarily indicative of the amounts that would have been
or that will be recorded by the Company on a stand-alone basis.
Under the terms of the Distribution Agreement, net assets transferred to the
Company as of April 2, 1999 were based on estimates and are subject to
adjustment. In the fourth quarter of fiscal 1999, the company recorded a $6.6
million dollar adjustment to Stockholders' Equity to reflect a $1.1 million
refund of cash received in excess of the terms of the Distribution Agreement
and a $5.5 million adjustment to estimated deferred tax assets received in the
Distribution. Any other items or adjustments that may occur in the future would
also result in an adjustment to Stockholders' Equity.
F-7
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2. Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal years reported are the 52- or 53-week periods which
ended on the Friday nearest September 30. Fiscal year 2000 comprises the 52-
week period ended on September 29, 2000. Fiscal year 1999 comprises the 52-week
period ended on October 1, 1999. Fiscal year 1998 comprises the 53-week period
ended October 2, 1998.
Principles of Consolidation
The consolidated financial statements include those of the Company and its
subsidiaries. Significant intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that 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 amounts of revenues and expenses during the
reporting period. The significant estimates and assumptions in these financial
statements include estimated loss contingencies, estimated future costs of
installation, warranty, income taxes payable and allowance for doubtful
accounts. Actual results could differ from these estimates.
Legal Expenses
The Company accrues estimated amounts for legal fees expected to be incurred
in connection with loss contingencies which are both probable and estimatable.
Foreign Currency Translation
For non-U.S. operations, the U.S. dollar is the functional currency.
Monetary assets and liabilities of foreign subsidiaries are translated into
U.S. dollars at current exchange rates. Nonmonetary assets such as inventories
and property, plant, and equipment are translated at historical rates. Income
and expense items are translated at effective rates of exchange prevailing
during each year, except that inventories and depreciation charged to
operations are translated at historical rates. The aggregate exchange gain
included in general and administrative expenses for fiscal year 2000 was $0.7
million. In fiscal year 1999 the aggregate exchange gain was $1.0 million, and
in fiscal year 1998, the aggregate exchange loss was $0.9 million.
Divisional Equity
Divisional equity includes the historical investments and advances from VAI,
including net transfers to/from VAI, third party liabilities paid on behalf of
the Company by VAI, amounts due to affiliates related to purchases, amounts due
to/from VAI for services and other charges, and predistribution earnings
(losses) of the Company.
Revenue Recognition
Product and service revenue are generally recognized upon delivery of
products or services subject to contract terms and conditions. The Company's
products are generally subject to installation and warranty, and the Company
provides for the estimated future costs of installation and warranty in cost of
sales when sales are
F-8
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recognized. Service revenue is recognized ratably over the period of the
related contract. Royalty revenue is recognized when contractual obligations
are met and revenue is earned.
Cash and Cash Equivalents
The Company considers currency on hand, demand deposits, and all highly
liquid investments with an original purchase maturity of three months or less
to be cash and cash equivalents. The carrying amounts of cash and cash
equivalents approximate estimated fair value because of the short maturities of
those financial instruments. As of October 1, 1999 the company also had
restricted cash pursuant to the purchase of Genus, Inc. (see Note 13) and to
foreign trade laws. The restrictions on these amounts were released in fiscal
year 2000.
Accounts Receivable
Accounts receivable consist of the following (in thousands) :
September 29, October
2000 1, 1999
------------- --------
Billed receivables................................... $185,352 $103,176
Allowance for doubtful accounts...................... (2,956) (2,679)
-------- --------
Accounts receivable, net............................. $182,396 $100,497
======== ========
Concentration of Risk
Financial instruments that potentially expose the Company to concentrations
of credit risk consist principally of trade accounts receivable, cash
investments and forward exchange contracts. Concentrations of credit risk with
respect to trade accounts receivable are limited due to the large number of
customers comprising the Company's customer base and their dispersion across
many different geographies. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral from its customers. As
of September 29, 2000, one customer had amounts owed to the Company amounting
to 14% of the total accounts receivable balance. As of October 1, 1999, no one
customer had amounts owing to the Company amounting to 10% of the total
accounts receivable balance.
During fiscal year 2000, no one customer accounted for 10% or more of the
Company's revenue. In fiscal year 1999, revenue from two customers each
accounted for 12% and 10% of the Company's revenue. In fiscal year 1998,
revenue for one customer accounted for 14% of total revenue. Except for the
one-time royalty payment in fiscal year 1999, the concentration of customers is
primarily within the products and services segments of the Company.
International sales accounted for 73%, 59% and 70% of the Company's revenues
in fiscal years 2000, 1999 and 1998, respectively, and specifically, sales to
Asia have accounted for a substantial portion of these revenues. Sales to Asia
accounted for 53%, 39% and 51% of revenues in fiscal years 2000, 1999 and 1998,
respectively. Because the Company relies on sales to customers in Asia for a
substantial portion of its revenues, its business is very likely to be
adversely impacted by economic downturns and instability in this area. In 1999
and 1998, the Company's business was harmed by banking and currency problems in
some Asian countries.
The Company maintains cash investments primarily in U.S. Treasury,
government agency securities, and investment quality municipal securities as
well as short-term time deposits with investment grade rated financial
institutions. Approximately 92% of cash and cash equivalents are invested with
four financial institutions. The Company also places forward foreign exchange
contracts with investment grade rated financial institutions in order to
minimize currency risk exposure.
F-9
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories
Inventories are valued at the lower of cost or market (realizable value)
using last-in, first-out (LIFO) cost for the U.S. inventories amounting to
$104.3 million and $62.5 million at fiscal 2000 and 1999, respectively. All
other inventories are valued principally at average cost. If the first-in,
first-out (FIFO) method had been used for those operations valuing inventories
on a LIFO basis, inventories would have been higher than reported by $22.5
million in fiscal year 2000, $20.9 million in fiscal 1999, and $18.0 million in
fiscal 1998. The main components of inventories are as follows:
2000 1999
------ -----
(Dollars in
millions)
Raw materials and parts........................................ 61.4 36.7
Work in process................................................ 45.5 10.6
Finished goods................................................. 18.9 23.1
------ -----
Total Inventories.............................................. $125.8 $70.4
====== =====
The Company's inventories include high technology parts and components that
may be specialized in nature or subject to rapid technological obsolescence.
While the Company has programs to minimize the required inventories on hand and
considers technological obsolescence in estimating the required allowance to
reduce recorded amounts to net realizable values, such estimates could change
in the future.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Major improvements are
capitalized, while maintenance and repairs are expensed currently. Plant and
equipment are depreciated over their estimated useful lives using the straight-
line method for financial reporting purposes. Leasehold improvements are
amortized using the straight-line method over their estimated useful lives, or
the remaining term of the lease, whichever is less. When assets are retired or
otherwise disposed of, the assets and related accumulated depreciation are
removed from the accounts. Gains or losses resulting from retirements or
disposals are included in earnings from continuing operations.
Useful Life 2000 1999
----------- ------ -----
(Dollars in
millions)
Land and land improvement.......................... -- $ 2.5 $ 2.5
Building........................................... 20-40 32.0 27.8
Machinery and equipment............................ 2-7 68.5 58.7
Construction in progress........................... -- 1.5 3.4
------ -----
Total Property, Plant, and Equipment............... $104.5 $92.4
====== =====
Depreciation expenses amounted to $10.5 million, $9.7 million, and $7.3
million, for the fiscal years 2000, 1999 and 1998, respectively. The cost and
accumulated depreciation and amortization for machinery and equipment held
under capital leases were $2.5 million and $1.4 million, respectively as of
September 29, 2000. The cost and accumulated depreciation and amortization for
machinery and equipment held under capital leases were $1.6 million and $0.7
million, respectively, as of October 1, 1999. Assets acquired under capital
leases were $0.9 million in fiscal year 2000 and $0.9 million in fiscal year
1999. There were no capital leases in fiscal year 1998.
Goodwill and Other Long-Lived Assets
Goodwill, which is the excess of the cost of acquired businesses over the
sum of the amounts assigned to identifiable assets acquired less liabilities
assumed, is amortized on a straight-line basis over periods ranging from
F-10
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10 to 40 years. Included in other assets at September 29, 2000 and October 1,
1999 is goodwill of $15.7 million and $17.4 million, respectively (net of
accumulated amortization of $3.8 million and $2.0 million, respectively).
Also included in other assets at September 29, 2000 and October 1, 1999 is
other intangible assets of $0.2 million and $1.2 million (net of accumulated
amortization of $19.5 million and $18.5 million, respectively) which are being
amortized on a straight-line basis over 3-17 years.
Whenever events or changes in circumstances indicate that the carrying
amounts of long-lived assets and goodwill related to those assets may not be
recoverable, the Company estimates the future cash flows, undiscounted and
without interest charges, expected to result from the use of those assets and
their eventual disposition. If the sum of the future cash flows is less than
the carrying amount of those assets, the Company recognizes an impairment loss
based on the excess of the carrying amount over the fair value of the assets.
Reclassifications
Certain amounts from prior year financial statements have been reclassified
to conform to current year presentation.
Environmental Liabilities
Liabilities are recorded when environmental assessments and/or remedial
efforts are probable, and the costs can be reasonably estimated. Generally, the
timing of these accruals coincides with completion of a feasibility study or
the Company's commitment to a formal plan of action.
Taxes on Earnings
The Company uses the asset and liability method of accounting for deferred
income taxes. The provision for income taxes includes income taxes currently
payable and those deferred because of temporary differences between the
financial statement and tax bases of assets and liabilities. The Company has
not provided for possible U.S. taxes on the undistributed earnings of foreign
subsidiaries that are considered to be reinvested indefinitely. At September
29, 2000 and October 1, 1999, such undistributed foreign earnings were
approximately $7.7 million and $6.3 million, respectively.
Research and Development
Company-sponsored research and development costs related to both present and
future products are expensed currently. Total expenditures on research and
development for fiscal 2000, 1999, and 1998, were $47.0 million, $37.6 million,
and $36.9 million, respectively.
Computation of Net Earnings (Loss) Per Share (Shares in thousands)
The Company calculates earnings (loss) per share in accordance with SFAS
128, "Earnings per Share." Basic earnings (loss) per share is calculated based
on net earnings (loss) and the weighted-average number of shares outstanding
during the reporting period. The weighted-average number of shares outstanding
on and before April 2, 1999 was assumed to be the number of shares outstanding
on April 2, 1999, immediately following the Distribution. Diluted earnings per
share includes additional dilution from stock issuable pursuant to the exercise
of stock options outstanding. For purposes of the diluted earnings per share
calculation, the additional shares issuable upon exercise of stock options were
determined using the treasury stock method based on the number of replacement
options issuable immediately following the Distribution.
F-11
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the numerator and denominator used in the earnings
(loss) per share calculations is presented as follows:
Fiscal Year
-------------------------
2000 1999 1998
------- -------- -------
(Dollars in thousands
except per share data)
Numerator:
Net earningas (loss)................................. $98,865 $(13,207) $11,397
Denominator:
Denominator for basic earnings (loss) per share--
Weighted average shares outstanding.................. 31,375 30,428 30,423
Effect of dilutive securities:
Stock options........................................ 2,306 -- 85
------- -------- -------
Denominator for diluted earnings (loss) per share.... 33,681 30,428 30,508
------- -------- -------
Basic earnings (loss) per share...................... $ 3.15 $ (0.43) $ 0.37
======= ======== =======
Diluted earnings (loss) per share.................... $ 2.94 $ (0.43) $ 0.37
======= ======== =======
For fiscal year 2000, options to purchase 0.5 million common shares at a
weighted average exercise price of $53.29 whose exercise price exceeded the
market value of the underling common stock, were excluded from the computation
of diluted earnings per share. For fiscal year 1999, there were options to
purchase 2.9 million common shares at a weighted average exercise price of
$15.62 whose exercise price exceeded the market value of the underlying common
stock. As the Company was in a net loss position, potential common shares in
the form of stock options were excluded from the computation of diluted loss
per share for the year ended October 1, 1999 as their effect was anti-dilutive.
For fiscal year 1998, options to purchase 1.8 million common shares at a
weighted average exercise price of $15.96 were excluded from the computation as
their effect was anti-dilutive due to their exercise price exceeding the market
value of the underlying common stock.
Note 3. Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires derivatives to be
measured at fair value and to be recorded as assets or liabilities on the
balance sheet. The accounting for gains or losses resulting from changes in the
fair values of those derivatives would be dependent upon the use of the
derivative and whether it qualifies for hedge accounting. SFAS 133 is effective
for the Company's fiscal year 2001. The Company does not expect the application
of SFAS 133 to have a material impact on the Company's financial position or
results of operations.
In June 2000, the Financial Accounting Standards Board issued SFAS No. 138
"Accounting for Certain Derivative Instruments -- an Amendment of SFAS 133"
("Accounting for Derivative Instruments and Hedging Activities"). This
statement amends the accounting and reporting standards for certain derivative
instruments and hedging activities. The Company will adopt SFAS 138 in 2001, in
accordance with SFAS 137, which deferred the effective date of SFAS 133. The
adoption of this standard in 2001 is not expected to have a material impact on
the Company's consolidated financial statements.
Revenue Recognition in Financial Statements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes the staff's view
F-12
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in applying generally accepted accounting principles to selected revenue
recognition issues. The adoption of SAB 101 will be required in the Company's
fourth quarter of fiscal year 2001. The Company is in the process of
determining the impact of the implementation on the Company's consolidated
financial statements.
Note 4. Notes Payable
On April 2, 1999, the Company, pursuant to the Distribution, assumed a note
payable in Japanese Yen amounting to $5.0 million equivalent U.S. Dollars. This
note payable was collateralized by $5.0 million of restricted cash and accrued
interest at a rate of 1.85%. In September 1999, this note payable was repaid
and related collateral released. The Company renegotiated a new 90 day
revolving note payable with an interest rate of 1.85% (at October 1, 1999),
which approximates the effective interest rate of this borrowing. This note is
unsecured and carries no restrictive covenants. During fiscal 2000, the Company
renewed this note payable. As of September 29, 2000, the note payable in
Japanese Yen, outstanding and payable in November, 2000, accrues interest at a
rate of 2.15% per year. The Company expects to renew this note upon maturity.
In May, 2000, the Company closed on a $75 million unsecured three-year
Revolving Credit Facility, comprised of a $15 million, 364-Day facility and a
$60 million, 3-year facility. The purpose of this facility is to provide funds
for working capital and for general corporate purposes. Borrowings are limited
to the lesser of $75 million or the sum of a percentage of certain eligible
receivables and inventory, and bear interest at LIBOR or a defined bank rate
approximating prime, plus an applicable margin. There are no borrowings
currently outstanding. The facility contains certain financial and other
restrictive covenants, including maintaining a leverage ratio, fixed charge
ratio and quick ratio within defined limits, capital expenditures within
defined ranges, and maintaining profitable operations.
Note 5. Accrued Expenses
2000 1999
----- -----
(Dollars in
millions)
Payroll and employee benefits................................... $17.6 $ 7.1
Income taxes payable............................................ 3.4 17.2
Estimated loss contingencies.................................... 10.2 36.4
Deferred income................................................. 18.4 5.7
Other........................................................... 24.7 10.1
----- -----
Total Accrued Expenses.......................................... $74.3 $76.5
===== =====
Note 6. Long-Term Accrued Expenses
Long-term accrued expenses are comprised of accruals for environmental costs
not expected to be expended within the next year. The current portion is
recorded within Accrued Expenses.
Note 7. Forward Exchange Contracts
As a multinational firm, the Company faces exposure to adverse movements in
foreign currency exchange rates. This exposure may change over time as the
Company's business practices evolve and could have a material adverse impact on
the Company's financial results. Historically, the Company's primary exposures
have resulted from non-U.S. dollar denominated sales and purchases in Asia and
Europe.
At the present time, the Company hedges currency exposures that are
associated with certain of its assets and liabilities denominated in various
non-U.S. dollar denominated currencies and with anticipated foreign
F-13
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
currency cash flows. The Company does not enter into forward exchange contracts
for trading purposes. The Company's forward exchange contracts generally range
from one to two months in original maturity. No forward exchange contract has
an original maturity greater than one year.
Forward exchange contracts outstanding as of September 29, 2000 are
summarized as follows:
Notional Contract
Value Rate Fair Value
----------- -------- -----------
Foreign Currency Purchase Contracts:
Euro........................................ $ 5,495,700 0.9008 $ 5,330,304
British Pound............................... 365,595 1.46238 362,319
Japanese Yen................................ 6,103,430 107.32 6,077,758
Korean Won.................................. 582,960 1115.00 577,265
New Taiwan Dollar........................... 571,885 31.30 572,068
----------- -----------
Total Foreign Currency Purchase
Contracts................................ 13,119,570 12,919,714
Foreign Currency Sell Contracts:
Japanese Yen................................ 28,954,403 105.42 28,393,802
New Taiwan Dollar........................... 76,577 31.08 76,063
Korean Won.................................. 993,677 1107.00 976,909
Israeli Shekel.............................. 968,102 4.0285 962,963
----------- -----------
Total Foreign Currency Sell Contracts..... 30,992,759 30,409,737
----------- -----------
Total Contracts........................... $44,112,329 $43,329,451
=========== ===========
There were no significant unrealized gains or losses for these forward
contracts as of September 29, 2000. The fair value of forward exchange
contracts generally reflects the estimated amounts that the Company would
receive or pay to terminate the contracts at the reporting date. The notional
amounts of forward exchange contracts are not a measure of the Company's
exposure.
Note 8. Stockholders' Equity and Employee Stock Plans
The Company's authorized capital stock consist of 150,000,000 shares of
common stock of which 30,422,792 were issued upon the Distribution and
5,000,000 shares of preferred stock, none of which is outstanding. Each holder
of common stock is entitled to one vote for each share owned of record on all
matters submitted to a vote of stockholders. There are no cumulative voting
rights. Subject to the preferential rights of any outstanding series of
preferred stock, the holders of common stock will be entitled to such dividends
as may be declared by the Board of Directors.
The authorized capital stock of the Company include shares of preferred
stock, none of which is currently issued or outstanding. The Company's Board of
Directors is authorized to divide the preferred stock into series and, with
respect to each series, to determine the preferences and rights and the
qualifications, limitations or restrictions thereof, including the dividend
rights, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, the number of shares constituting the series and the
designation of such series.
On April 2, 1999, each stockholder also received one Right for each share of
common stock distributed, entitling the stockholder to purchase one one-
thousandth of a share of Participating Preferred Stock, par value $0.001 per
share, for $120.00, subject to adjustment. The Rights will be exercisable on
the earlier to occur of (i) the first date of the public announcement (or such
earlier or later date that the Board of Directors may determine) that a person
or "group" has acquired beneficial ownership of 15% or more of the outstanding
common stock of the Company and (ii) ten business days (or such later date as
the Board of Directors may
F-14
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
determine) following the commencement of a tender or exchange offer, as
defined. The Participating Preferred Stock is designed so that each one one-
thousandth of a share has economic and voting terms similar to those of one
share of common stock. Each share of Participating Preferred Stock will be
entitled to an aggregate dividend per share of 1,000 times the dividend
declared per share of common stock and a minimum per share liquidation payment
of $100. The Rights shall no longer be exercisable after April 2, 2009. The
Board of Directors has reserved 50,000 shares of preferred stock for issuance
upon exercise of this Right.
Effective April 2, 1999, the Company adopted the Omnibus Stock Plan (the
"Plan") under which shares of common stock can be issued to officers,
directors, consultants and key employees. The maximum number of shares of the
Company common stock available for awards under the plan is 6,000,000 plus such
number of shares as are granted in substitution for other options in connection
with the Distribution.
The Compensation Committee of the Company's Board of Directors administers
the Plan. The exercise price for stock options granted under the Plan typically
will not be less than 100% of the fair market value on the date of the grant.
Options granted are exercisable at the times and on the terms established by
the Compensation Committee, but not later than 10 years after the date of the
grant. Options granted are generally exercisable in cumulative installments of
one-third each year commencing one year following the date of the grant. When
certain non-qualified stock options are exercised by domestic employees and
Directors, the Company generally receives a tax deduction to the extent that
the fair market value of the stock option upon exercise exceeds the option
price. In fiscal year 2000 the Company recorded $1.0 million of compensation
expense for issues and modifications to stock options.
In connection with the Distribution, certain holders of options to purchase
shares of VAI common stock received replacement options from the Company to
purchase shares of the Company's common stock. Effective April 2, 1999, the
Company granted such replacement options to purchase an aggregate of 3,537,216
shares of its common stock at a weighted average exercise price of $14.11 per
share. Of these options, options to purchase an aggregate of 2,587,697 shares
were fully vested and exercisable. The replacement stock options have the same
exercise price to fair market value ratio, vest over the same vesting periods,
typically three years, and have the same expiration dates as the original VAI
stock options.
At September 29, 2000, options with respect to 2,498,593 shares were
available to grant.
Option Activity Under the Plan:
Weighted Average
Shares Exercise Price
------ ----------------
(In thousands except
per share amounts)
Outstanding as at April 2, 1999........................ 3,537 $14.11
Granted................................................ 3,088 $11.95
Exercised.............................................. 52 $12.38
Cancelled or expired................................... (255) $12.05
------ ------
Outstanding at October 1, 1999......................... 6,318 $13.15
------ ------
Shares exercisable at October 1, 1999.................. 2,938 $13.56
------ ------
Outstanding at October 1, 1999......................... 6,318 $13.15
------ ------
Granted................................................ 828 $49.65
Exercised.............................................. (1,606) $13.01
Cancelled or expired................................... (160) $16.26
------ ------
Outstanding at September 29, 2000...................... 5,380 $18.68
------ ------
Shares exercisable at September 29, 2000............... 2,801 $13.70
------ ------
F-15
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables summarize information concerning outstanding and
exercisable options under the Plan end of fiscal 2000:
Options Outstanding Options Exercisable
--------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices (in thousands) Life (in years) Price (in thousands) Price
- --------------- -------------- --------------- -------- -------------- --------
$5.03--10.80... 276.6 2.6 $10.24 258.1 $10.27
10.84--11.74... 2,506.0 8.5 11.72 1,059.1 11.72
12.08--14.59... 995.9 5.9 14.33 908.4 14.52
15.19--34.00... 901.0 7.4 18.69 575.3 17.57
38.75--65.00... 700.5 9.5 53.06 0.0 0.00
69.00--69.00... 0.2 9.6 69.00 0.0 0.00
------- --- ------ ------- ------
Total........ 5,380.2 7.7 $18.68 2,800.9 $13.70
======= === ====== ======= ======
The Company applies the pro forma disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation." Accordingly, the Company applies APB
Opinion 25 and related interpretations in accounting for its stock compensation
plans. Therefore, no compensation expense is recorded for options granted to
employees in fixed amounts and with fixed exercise prices at least equal to the
fair market value of the underlying common stock at grant date. If the Company
had elected to recognize compensation cost based on the fair value of the
options granted at grant date as prescribed by SFAS No 123, the net earnings
and net earnings per diluted share for the fiscal year ended September 29, 2000
would have been reduced, and the net loss and net loss per share for the fiscal
year ended October 1, 1999 would have been increased to the pro forma amounts
shown below:
2000 1999
------- --------
(In thousands
except per share
amounts.)
Net earnings (loss)....................................... $94,232 $(13,402)
Net earnings (loss) per share:
Basic................................................... $ 3.00 $ (0.44)
Diluted................................................. $ 2.80 $ (0.44)
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes Option Pricing model with the following weighted
average assumptions:
2000 1999
---- ----
Expected life (in years)......................................... 6.0 6.0
Expected volatility.............................................. 80% 60%
Risk-free interest rate.......................................... 6.5% 5.5%
Expected dividend yield.......................................... 0.0% 0.0%
The weighted average estimated fair value of stock options granted during
the year ended September 29, 2000, and for the six month period ended October
1, 1999, was $38.35 per share and $7.29 per share, respectively. The
presentation of proforma net earnings and net earnings per share does not
include the effects of options granted prior to April 2, 1999, and accordingly,
is not representative of future pro forma calculations.
F-16
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9. Retirement Plans
The Company has a defined contribution retirement plan covering
substantially all of its United States employees. The Company's major
obligation is to contribute an amount based on a percentage of each
participant's base pay. Participants are entitled, upon termination or
retirement, to their portion of the retirement fund assets, which are held by a
third-party custodian. In addition, a number of the Company's foreign
subsidiaries have defined contribution and defined benefit retirement plans for
eligible employees. Included in the accompanying statements of earnings is an
allocation of total pension expense for Company employees under the VAI-
sponsored defined contribution plan of $3.4 million for fiscal year 1998. In
fiscal 2000 and fiscal 1999, pension expense comprises an allocation in respect
of Company employees under the VAI-sponsored defined contribution plan as well
as pension expense in respect of Company employees of the VSEA administered
plan, totalling $3.2 million and $2.8 million respectively.
Effective April 2, 1999, the Company assumed responsibility for all of the
retirement plans for active employees of the Company; the responsibility for
all others, principally retirees of VAI, remained with VAI and subsequently
VMS. An allocation of assets and liabilities for foreign pension,
postemployment, and postretirement benefits, which are not material to the
Company's financial statements, has been included in these combined financial
statements.
Note 10. Income Taxes
Income Tax provision (benefit) on earnings (loss):
2000 1999 1998
-------- -------- -------
(Dollars in thousands)
Current
U.S. federal................................ $ 23,607 $ (9,368) $(1,763)
State....................................... 1,811 (515) 625
Foreign..................................... 8,011 4,895 1,501
-------- -------- -------
Total current............................. 33,429 (4,988) 363
Deferred
U.S. federal................................ 14,386 672 4,212
State....................................... 1,326 54 338
Foreign..................................... (651) -- --
-------- -------- -------
Total deferred............................ 15,061 726 4,550
-------- -------- -------
Income tax provision (benefit) on earnings
(loss)....................................... $ 48,490 $ (4,262) $ 4,913
======== ======== =======
The total pre-tax operating earnings (loss) consists of the following:
2000 1999 1998
-------- -------- -------
(Dollars in thousands)
U.S........................................... $127,779 $(30,483) $12,310
Foreign....................................... 19,576 13,014 4,000
-------- -------- -------
Total....................................... $147,355 $(17,469) $16,310
======== ======== =======
F-17
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The effective tax rate on earnings (loss) before taxes differs from the U.S.
federal statutory tax rate as a result of the following:
2000 1999 1998
------- ------- --------
(Percentages)
Tax at U.S. statutory rate..................... 35.0 (35.0) 35.0
State taxes, net............................... 1.4 (2.6) 2.6
Foreign sales corporation...................... (3.3) -- (3.0)
Benefit of tax credits......................... (0.5) (1.0) (1.1)
Foreign tax differential and net U.S. tax on
foreign income................................ (0.2) 0.1 (1.7)
Pre Distribution unbenefitted losses........... -- 12.2 --
Joint venture equity income not tax effected... -- -- 0.5
Other items.................................... 0.5 1.9 (1.9)
------- ------- --------
Effective tax rate--expense (benefit)........ 32.9 (24.4) 30.1
======= ======= ========
At September 29, 2000, the components of the deferred tax assets and
liabilities were as follows:
2000 1999 1998
------- ------- --------
(Dollars in thousands)
Deferred tax assets:
Inventory adjustments........................ $16,979 $11,413 $ 12,508
Product warranty............................. 7,676 4,404 5,398
Deferred income.............................. 3,908 1,459 654
Accrued vacation and other compensation...... 3,312 1,430 464
Special provisions........................... 2,203 12,669 13,412
Other items.................................. 2,909 1,978 2,050
------- ------- --------
Total deferred tax assets.................. 36,987 33,353 34,486
Deferred tax liabilities:
Deferred revenue............................. (18,010) 0 0
Depreciable assets........................... (2,167) (1,802) (2,209)
Other items.................................. (228) 0 0
------- ------- --------
Total deferred tax liabilities............. (20,405) (1,802) (2,209)
------- ------- --------
Net deferred tax asset......................... $16,582 $31,551 $ 32,277
======= ======= ========
For fiscal year 2000 income taxes paid were $23.9 million. For fiscal year
1999, income taxes paid were $0.7 million for the period April 3, 1999 to
October 1, 1999. For fiscal year 1998 and fiscal year 1999 up to April 2, 1999,
the Company's operating results historically have been included in VAI's
consolidated U.S. and state income tax returns and in tax returns of certain
VAI foreign subsidiaries. During those pre-spin periods, except for the
utilization of foreign tax credits, the provision for income taxes in the
Company's combined financial statements had been determined on a separate-
return basis, under which the Company's provision for income taxes comprised
its estimated tax liability and the change in its deferred income taxes.
Foreign tax credits were benefited to the extent they were utilized in VAI's
consolidated tax returns. Deferred tax assets and liabilities are recognized
for the expected tax consequences of temporary differences between the tax
bases of assets and liabilities and their reported amounts. Income taxes paid
on behalf of the Company by VAI are included in divisional equity for the six
months of fiscal year 1999 ending on April 2, 1999, and fiscal year 1998. In
fiscal year 2000, tax deductions associated with certain exercises of stock
options resulted in a tax benefit recorded to equity of $21.9 million.
F-18
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11. Lease Commitments
The Company leases various types of warehouse and office facilities and
equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
Capital Operating
Fiscal Year Leases Leases
----------- ---------- -----------
(Amounts in millions)
2001............................................... $ 0.5 $ 3.4
2002............................................... 0.4 2.6
2003............................................... 0.2 1.7
2004............................................... -- 1.2
2005............................................... -- 1.2
Thereafter......................................... -- 6.7
---------- ----------
Total minimum lease payments....................... 1.1 $16.8
==========
Less: amounts representing interest................ (0.1)
----------
Present value of net minimum lease payments........ $ 1.0
==========
Rental expense for fiscal years 2000, 1999 and 1998, in millions, was $2.6,
$2.3 and $3.3, respectively. The Company also has a standby letter of credit
outstanding for $2.8 million as a guarantee for a leased facility.
Note 12. Contingencies
The Company is currently a defendant in a number of legal actions and could
incur an uninsured liability in one or more of them. In the opinion of
management, the outcome of such litigation will not have a material adverse
effect on the consolidated financial position, results of operations or cash
flows of the Company.
Environmental Remediation
VAI has been named by the U.S. Environmental Protection Agency or third
parties as a potentially responsible party under the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended
("CERCLA"), at eight sites where VAI is alleged to have shipped manufacturing
waste for recycling or disposal. VAI is also involved in various stages of
environmental investigation and/or remediation under the direction of, or in
consultation with, foreign, federal, state and/or local agencies at certain
current or former VAI facilities (including facilities disposed of in
connection with VAI's sale of its Electron Devices business during fiscal year
1995, and the sale of its TFS business during fiscal year 1997). Expenditures
by VMS (as successor to VAI) for environmental investigation and remediation
amounted to $5.9 million in fiscal year 2000, compared with $2.7 million in
fiscal year 1999, and $4.9 million in fiscal year 1998.
For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of September 29, 2000, VMS nonetheless estimated that the future
exposure for environmental investigation and remediation costs for these sites
and facilities ranged in the aggregate from $8 million to $25 million. The time
frame over which these costs are expected to be incurred varies with each site
or facility, ranging up to approximately 30 years as of September 29, 2000.
Management of VMS believes that no amount in the foregoing range of estimated
future costs is more probable of being incurred than any other amount in such
range and therefore VMS has accrued $8 million in estimated environmental costs
as of September 29, 2000. The amount accrued has not been discounted to present
value.
F-19
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As to other sites and facilities, VMS has gained sufficient knowledge to be
able to better estimate the scope and costs of future environmental activities.
As of September 29, 2000, VMS estimated that the future exposure for
environmental investigation and remediation costs for these sites and
facilities ranged in the aggregate from $39 million to $89 million. The time
frame over which VMS expects to incur these costs varies with each site and
facility, ranging up to approximately 30 years as of September 29, 2000. As to
each of these sites and facilities, management of VMS determined that a
particular amount within the range of estimated costs was a better estimate of
the future environmental liability than any other amount within the range, and
that the amount and timing of these future costs were reliably determinable.
Together, these amounts totaled $38 million at September 29, 2000. VMS
accordingly accrued $30 million, which represents its best estimate of the
future costs discounted at 7%, net of inflation. This reserve is in addition to
the $8 million described in the preceding paragraph.
Under the Distribution Related Agreements, the Company has agreed to
indemnify VMS and VI for one-third of these environmental investigation and
remediation costs, as adjusted for insurance proceeds in respect of these
environmental costs and for the tax benefits expected to be realized by VMS
upon the payment of the Company's protection of these environmental costs.
As of September 29, 2000, the Company's reserve for its portion of
environmental liabilities, based upon future environmental related costs
estimated by VMS as of that date and included in long-term and current accrued
expenses, is calculated as follows:
Non- Total
Recurring Recurring Anticipated
Year Costs Costs Future Costs
- ---- --------- --------- ------------
(Dollars in millions)
2001........................................... $ 0.5 $0.6 $ 1.1
2002........................................... 0.4 0.9 1.3
2003........................................... 0.4 0.2 0.6
2004........................................... 0.4 -- 0.4
2005........................................... 0.4 -- 0.4
Thereafter..................................... 10.5 0.6 11.1
----- ---- -----
Total costs.................................... $12.6 $2.3 14.9
Less imputed interest.......................... (6.8)
-----
Reserve amount................................. $ 8.1
=====
The current portion of the reserve is $1.3 million. The long term portion of
the reserve is $6.8 million, which is included in other liabilities.
The amounts set forth in the foregoing table are only estimates of
anticipated future environmental related costs, and the amounts actually spent
in the years indicated may be greater or less than such estimates. The
aggregate range of cost estimates reflects various uncertainties inherent in
many environmental investigation and remediation activities and the large
number of sites where VMS is undertaking such investigation and remediation
activities. VMS believes that most of these cost ranges will narrow as
investigation and remediation activities progress. The Company believes that
its reserves are adequate, but as the scope of the obligations becomes more
clearly defined, these reserves may be modified and related charges against
earnings may be made.
Although any ultimate liability arising from environmental related matters
described herein could result in significant expenditures that, if aggregated
and assumed to occur within a single fiscal year, would be material to the
Company's financial statements, the likelihood of such occurrence is considered
remote. Based on information currently available to management and its best
assessment of the ultimate amount and timing of
F-20
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
environmental related events, the Company's management believes that the costs
of these environmental related matters are not reasonably likely to have a
material adverse effect on the combined financial statements of the Company.
The Company evaluates its liability for environmental related investigation
and remediation in light of the liability and financial wherewithal of
potentially responsible parties and insurance companies where the Company
believes that it has rights to contribution, indemnity and/or reimbursement.
Claims for recovery of environmental investigation and remediation costs
already incurred, and to be incurred in the future, have been asserted against
various insurance companies and other third parties. In 1992, VAI filed a
lawsuit against 36 insurance companies with respect to most of the above-
referenced sites and facilities. VAI received certain cash settlements during
fiscal years 1995, 1996, 1997 and 1998 from defendants in that lawsuit, and has
a $0.5 million receivable in Other Current Assets at September 29, 2000. VMS
also reached an agreement with another insurance company under which the
insurance company agreed to pay a portion of the Company's past and future
environmental related expenditures. The Company therefore has a receivable of
$1.3 million in Other Assets at September 29, 2000, as its portion of the
insurance recoveries. Although VMS intends to aggressively pursue additional
insurance recoveries, the Company has not reduced any liability in anticipation
of recovery with respect to claims made against third parties.
Sale of Business
In June 1997, VAI completed the sale of its TFS operations to Novellus. The
TFS operation was considered to be part of the SEB and therefore, a product
line of the Company. Total proceeds received from the sale of TFS were $145.5
million in cash. The gain on the sale was $33.2 million (net of income taxes of
$17.8 million).
In order to cover, among other items, indemnification obligations,
litigation expense, purchase price disputes, retained liabilities, transaction
costs, employee terminations, facilities separation costs, and other
contingencies, VMS originally recorded a reserve of $51.5 million. During the
remainder of fiscal 1997, $10.3 million of this reserve was utilized (primarily
for the cash settlement of transaction and legal indemnification and defense
costs). During fiscal 1998, an additional $7.2 million of this reserve was
utilized (primarily for the cash settlement of transaction, employee
termination, facilities separation, and legal indemnification and defense
costs). During fiscal 1999, additional cash payments were made for the cash
settlement of transaction and legal indemnification and defense costs. Purchase
price disputes with Novellus were resolved in fiscal year 1999 which resulted
in an adjustment to the estimated loss contingency of $2.0 million, and which
was recorded in Other Income.
In September, 2000, the Company and Applied Materials settled their patent
infringement and antitrust litigation arising out of the sale of TFS (See
"Legal Proceedings"). After recording a payment to Applied Materials and legal
expenses, the Company recorded in Other Income, a gain of $16.0 million ($10.8
million after taxes) in the fourth quarter relating to this litigation
settlement. The Company maintained a provision to cover any residual
indemnification obligations described above. As of September 29, 2000 the
remaining reserve of $3.0 million is included in current liabilities and
classified as an estimated loss contingency.
Legal Proceedings
In June 1997, Applied Materials filed a civil action against VAI in the U.S.
District Court for the Northern District of California alleging infringement of
four patents relating to sputter coating systems. Applied Materials contended
that its patents were infringed by the M2i, MB2(TM) and Inova(TM) systems that
were manufactured and sold by TFS prior to VAI's sale of TFS to Novellus in
June 1997. The complaint requested unspecified money damages and an injunction
prohibiting further infringement and requested that any damages
F-21
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
awarded be increased up to three-fold for VAI's and Novellus' alleged willful
infringement. Novellus was subsequently added as a defendant in this action
and, as part of the sale of TFS, VAI agreed to indemnify Novellus for certain
damages it may suffer as a result of such litigation and to reimburse Novellus
for up to $7.5 million of its litigation expenses. VAI's answer denied
infringement and asserted that the Applied Materials patents were invalid and
that one of the asserted patents was unenforceable. VAI also filed a separate
suit seeking damages and injunctive relief against Applied Materials contending
that certain of Applied Material's business practices violated antitrust laws.
That action was procedurally related to the infringement case and was pending
before the same judge. Novellus filed a complaint against Applied Materials
which included a claim that Applied Materials had infringed three of the
patents acquired by Novellus from the Company.
In September, 2000, the Company and Applied Materials settled their patent
infringement and antitrust litigation. After recording a payment to Applied
Materials and legal expenses, the Company recorded a gain of $16.0 million
($10.8 million after taxes) relating to this litigation settlement. The Company
maintained a reserve of $3.0 million to cover any residual obligations to
Novellus as described above.
The Company has agreed to indemnify VMS and IB for any costs, liabilities or
expenses relating to the Company's legal proceedings, including the Applied
Materials matters. Under the Distribution Related Agreements, the Company has
agreed to reimburse VMS for one-third of the costs, liabilities, and expenses,
adjusted for any related tax benefits recognized or realized by VMS, with
respect to certain legal proceedings relating to discontinued operations of
VMS.
Also, from time to time, the Company is involved in a number of legal
actions and could incur an uninsured liability in one or more of them.
Accordingly, while the ultimate outcome of all of the above legal matters is
not certain, management believes the resolution of these matters will not have
a material adverse effect on the financial condition or results of operations
of the Company.
The Company's operations are subject to various foreign, federal, state
and/or local laws relating to the protection of the environment. These include
laws regarding discharges into soil, water and air, and the generation,
handling, storage, transportation and disposal of waste and hazardous
substances. In addition, several countries are reviewing proposed regulations
that would require manufacturers to dispose of their products at the end of a
product's useful life. These laws have the effect of increasing costs and
potential liabilities associated with the conduct of certain operations.
Note 13. Purchase Business Combinations
During fiscal year 1998 the Company acquired certain assets and liabilities
of Genus, Inc., and the portion of Varian Korea Ltd., previously not owned. The
consolidated financial statements include the operating results of each
acquired business from the date of acquisition. Pro forma results of operations
have not been presented, because the effects of these acquisitions were not
material on either an individual or an aggregated basis.
Amounts allocated to goodwill are amortized on a straight-line basis over
their estimated lives. Summary of purchase transactions (dollars in millions):
Entity Name Life (years) Consideration Closing Date
----------- ------------ ------------- ------------
Genus, Inc........................... 10 $24.2 July 1998
Varian Korea, Ltd.................... 40 $ 7.8 January 1998
F-22
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14. Restructuring
During the second quarter of fiscal year 1999, the Company recognized pretax
restructuring charges of $2.7 million from actions taken primarily in response
to the downturn in the semiconductor equipment industry.
The restructuring costs of $2.7 million included $1.4 million of lease
abandonment and other exit costs resulting from the cancellation of plans for
expansion of manufacturing facilities in the United States and Japan and $1.3
million to cover termination costs for a reduction in workforce of 69 employees
(approximately 5% of worldwide VSEA employment). As of September 29, 2000, all
termination costs associated with the restructuring had been paid.
Note 15. Other Transactions with Affiliates
Purchases from IB for fiscal year 1999 for the period prior to the
Distribution was $1.9 million. Purchases from IB for fiscal year 1998 totaled
$8.2 million.
Prior to the Distribution, VAI used a centralized cash management system to
finance its operations. Cash deposits from most of the Company's businesses
were transferred to VAI on a daily basis, and VAI funded the Company's required
disbursements. No interest had been charged or credited to the Company for
these transactions.
VAI also provided certain centralized services (Note 1) to the Company prior
to the Distribution. Cost allocations relating to these centralized services
were $7.7 million and $17.3 million in fiscal years 1999 and 1998,
respectively, and are included in operating costs in the consolidated
statements of operations. Pursuant to the Distribution Related Agreements, the
Company received services from VMS (as successor to VAI), principally
information technology services, for a defined period of time. For the periods
subsequent to the Distribution, in fiscal year 2000 and fiscal year 1999, the
Company incurred expenses charged by VMS of $2.4 million and $3.9 million,
respectively, for these services.
Net transfers to or from VAI, included in Divisional Equity, include
advances and loans from affiliates, net cash transfers to or from VAI, third
party liabilities paid on behalf of the Company by VAI, amounts due to
affiliates related to purchases, amounts due to or from VAI for services and
other charges, and income taxes paid on behalf of the Company by VAI. The
weighted average balance due to VAI was $248 million and $162 million for
fiscal years 1999 and 1998, respectively.
The activity in net transfers (to) from VAI for fiscal years 1999 and 1998,
included in divisional equity in the combined statements of divisional equity
is summarized as follows:
1999 1998
------ ------
(Dollars in
millions)
VAI services and other charges............................... $ 7.7 $ 17.3
Cash transfers, net.......................................... 95.0 (20.2)
------ ------
Net transfers (to) from VAI.................................. $102.7 $ (2.9)
====== ======
The Distribution Related Agreements provide that, from and after the
Distribution, VAI, IB, and the Company will indemnify each and their respective
subsidiaries, directors, officers, employees and agents against all losses
arising in connection with shared liabilities (including certain environmental
and legal liabilities). All shared liabilities will be managed and administered
by VAI and expenses and losses, net of proceeds and other receivables, will be
borne one-third each by VAI, IB, and the Company; the Distribution Related
Agreements also provide that the Company shall assume all Company liabilities,
other than shared liabilities (including accounts payable, accrued payroll, and
pension liabilities) in accordance with their terms.
F-23
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 16. Subsequent Events
On November 17, 2000 the Board of Directors authorized the repurchase of up
to 2,000,000 shares of the company's common stock from time to time on the open
market or in privately negotiated transactions.
On December 1, 2000 the Company's banks approved the First Amendment to the
Revolving Credit Facility which allows the Company to guarantee the local bank
debts of its subsidiaries, and increases from $10 million to $50 million the
amount that may be utilized to repurchase shares of the Company's common stock.
Note 17. Operating Segments and Geographic Information
The Company adopted SFAS 131, "Disclosures About Segments of an Enterprise
and Related Information," during the fourth quarter of fiscal year 1999. SFAS
131 established standards on reporting information about operating segments in
annual financial statements and also requires interim reporting of segment
information. It also established standards for related disclosures about
products and services.
The Company operates in five principal operating segments, which are
research and development, services, semiconductor equipment manufacturing and
product sales for Japan, Korea and Rest of World. These operating segments were
determined based upon the nature of products and services provided as well as
the geographic areas served and the Company's management structure. The Company
has three reportable segments; Product Segment, Services Segment, and Research
and Development Segment, which includes royalties on licensing of intellectual
property. The accounting policies of the business segments are the same as
those described in "Note 2. Summary of Significant Accounting Policies."
Operating Segments
Research and
Product Services Development Corporate and
Segment Segment Segment Unallocated Total
-------------- -------------- -------------- ---------------- ----------------
2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----- ----- ----
(Dollars in millions)
Revenues................ $626 $206 $303 $52 $37 $29 $10 $29 $11 $-- $-- $-- $ 688 $ 272 $343
Gross Profit............ 333 104 145 14 10 7 10 29 11 (88) (54) (45) 269 89 118
The Company primarily measures segment profitability based upon gross profit
excluding costs for warranty, installation and other unallocated costs of goods
sold. These unallocated costs are included in the "Corporate and Unallocated"
column above. Other than depreciation and amortization for the Research and
Development Segment, which was $4.3 million, $4.1 million and $3.7 million for
the fiscal years 2000, 1999 and 1998, respectively, the Company does not have
the other information about Profit or Loss and Assets that are included in the
measure of segment profit or loss or segment assets. These other disclosures
for reportable segments are impracticable to determine for each segment above.
Geographic Information
Sales to
Unaffiliated
Customers
-----------------
2000 1999 1998
----- ---- ----
(Dollars in
millions)
United States............................................. $ 680 $255 $313
International............................................. 244 111 121
Eliminations & Other...................................... (236) (94) (91)
----- ---- ----
Total................................................... $ 688 $272 $343
===== ==== ====
Total sales is based on the location of the operation furnishing goods and
services. International sales based on final destination of products sold are
$504 million, $161 million, and $239 million, in 2000, 1999, and 1998,
respectively.
F-24
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-lived
Assets
--------------
2000 1999 1998
---- ---- ----
(Dollars in
millions)
United States................................................. $ 37 $32 $32
International................................................. 7 6 7
---- --- ---
Total long-lived assets..................................... $ 44 $38 $39
==== === ===
For fiscal 2000, revenue of the Company from customers in the United States,
Taiwan, Europe, Korea, Japan and the rest of the world were approximately 27%,
23%, 20%, 11%, 9% and 10%, respectively, of the Company's total revenue.
For fiscal 1999, revenue of the Company from customers in the United States,
Taiwan, Europe, Korea, Japan and the rest of the world were approximately 41%,
14%, 20%, 8%, 12% and 5%, respectively, of the Company's total revenue.
For fiscal 1998, revenue of the Company from customers in the United States,
Taiwan, Europe, Korea, Japan and the rest of the world were approximately 30%,
24%, 19%, 10%, 11% and 6%, respectively, of the Company's total revenue.
The following sets forth certain unaudited consolidated quarterly statements
of operations data for each of the Company's last eight quarters. In
management's opinion, this quarterly information reflects all adjustments
consisting only of normal recurring adjustments, necessary for a fair
presentation for the periods presented. Such quarterly results are not
necessarily indicative of future results of operations and should be read in
conjunction with the audited consolidated financial statements of the Company
and the notes thereto included elsewhere herein.
Quarterly Financial Data (Unaudited)
2000 1999
-------------------------------------- -----------------------------------------
First Second Third Fourth Total First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------ ------- ------- ------- ------- ------
(Dollars in millions except per share amounts)
Revenue................. $ 109.8 $ 156.2 $ 192.8 $228.9 $687.7 $ 47.4 $ 53.2 $ 63.8 $107.5 $271.9
Gross profit............ 40.0 60.1 76.2 92.8 269.1 12.2 3.8 21.9 51.4 89.3
Net earnings (loss)..... 5.3 18.7 27.7 47.2 98.9 (6.7) (19.2) (3.4) 16.1 (13.2)
Net earnings (loss) per
share--
Basic.................. $ 0.17 $ 0.60 $ 0.87 $ 1.47 $ 3.15 $(0.22) $(0.63) $(0.11) $ 0.53 $(0.43)
Diluted................ $ 0.16 $ 0.55 $ 0.81 $ 1.38 $ 2.94 $(0.22) $(0.63) $(0.11) $ 0.50 $(0.43)
The four quarters for net earnings per share may not add for the year
because of the different number of shares outstanding during the year.
F-25
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Varian Semiconductor Equipment Associates, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated October 26, 2000, and December 1, 2000 appearing on page F-2 of
this Form 10-K also included an audit of the Financial Statement Schedule
listed in item 14 (a)(2) of this Form 10-K. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/ PricewaterhouseCoopers LLP
By: _________________________________
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 26, 2000
S-1
SCHEDULE II
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the fiscal years ended 2000, 1999, and 1998
(Dollars in Thousands)
Deductions
------------------------------
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Description Amount Period
----------- ---------- ---------- ----------- ------- ----------
Allowance for Doubtful
Notes & Accounts
Receivable:
Write-offs &
Fiscal Year Ended 2000.. $ 2,679 $ 473 Adjustments.......... $ 196 $ 2,956
======= ======= ======= =======
Write-offs &
Fiscal Year Ended 1999.. $ 602 $ 2,212 Adjustments.......... $ 135 $ 2,679
======= ======= ======= =======
Write-offs &
Fiscal Year Ended 1998.. $ 556 $ 243 Adjustments.......... $ 197 $ 602
======= ======= ======= =======
Estimated Liability for
Product Warranty:
Warranty
Fiscal Year Ended 2000.. $15,899 $30,301 Expenditures......... $18,010 $28,190
======= ======= ======= =======
Warranty
Fiscal Year Ended 1999.. $21,435 $13,268 Expenditures......... $18,804 $15,899
======= ======= ======= =======
Warranty
Fiscal Year Ended 1998.. $16,948 $31,813 Expenditures......... $27,326 $21,435
======= ======= ======= =======
S-2