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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 28, 2001
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
Common Stock, $0.01 par value
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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 17, 2001 was $1,210,484,000.
The number of shares of the registrants' common stock outstanding as of
December 17, 2000 was 32,751,182 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:
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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 2001
TABLE OF CONTENTS
PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 10
Item 3. Legal Proceedings............................................. 10
Item 4. Submission of Matters to a Vote of Security Holders........... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................... 12
Item 6. Selected Financial Data....................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... 28
Item 8. Financial Statements and Supplementary Data................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 29
PART III
Item 10. Directors and Executive Officers of the Registrant............ 30
Item 11. Executive Compensation........................................ 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 30
Item 13. Certain Relationships and Related Transactions................ 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 31
PART I
Item 1. Business.
Overview
Varian Semiconductor Equipment Associates, Inc. ("Varian Semiconductor")
designs, manufactures, markets and services semiconductor processing equipment
used in the fabrication of integrated circuits. As a leading supplier of ion
implantation systems, Varian Semiconductor has shipped over 3,000 systems
worldwide.
In fiscal year 1998, Varian Semiconductor introduced its next generation
VIISta(TM) product line. This technology leverages single wafer processing,
pioneered on the successful E200 and E500 lines of mid-current implanters, to
the entire spectrum of energies and implant applications. Single wafer
technology 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.
Varian Semiconductor provides customers with world-class support, training, and
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. Varian Semiconductor
achieved the number one ranking for the fifth consecutive year in VLSI Research
Inc.'s Year 2001 customer satisfaction survey of semiconductor manufacturers
worldwide.
Varian Semiconductor's business is cyclical and 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 fiscal year 1999, and Varian Semiconductor benefited from
strong demand for its products throughout fiscal year 2000. This resulted in
increased sales in every quarter of fiscal year 2000 and a year-end order
backlog of $360.0 million, almost double the fiscal year 1999 backlog of $181.0
million. In fiscal year 2001, semiconductor equipment manufacturers experienced
a significant contraction in the demand for products. As a result, Varian
Semiconductor's quarterly revenue declined sequentially beginning in the second
quarter of fiscal year 2001. The decline in customer order rates has reduced
backlog to $160.0 million at the end of fiscal year 2001, a $200.0 million or
56% decline from backlog reported at the end of fiscal year 2000.
Prior to the spin-off of Varian Semiconductor from Varian Associates, Inc.
("VAI") on April 2, 1999, Varian Semiconductor's business was operated as the
Semiconductor Equipment Business ("SEB") of VAI. Where this Current Report on
Form 10-K refers to periods prior to April 2, 1999, and to fiscal years prior
to fiscal year 1999, such reference are with regard to the SEB prior to the
spin-off.
The Industry
The semiconductor industry has experienced significant growth in recent years
due to the continued increase 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.
Historically, the semiconductor industry has been very cyclical in nature, as a
result of under-supply or over-supply of integrated circuits. It is expected
that the industry will remain highly cyclical in the foreseeable future.
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 wafer manufacturing factory costs over a billion dollars, and as the
market moves toward 100nm devices and larger wafer sizes (300mm) costs are
likely to increase. 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.
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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 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 wafer manufacturing factories, especially
those designed to process 300mm wafers, are projected to increase in cost
substantially over previous generation facilities, 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 semiconductor manufacturing equipment, thereby reducing the effective cost
of ownership of such systems.
Products
Varian Semiconductor 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 between 10 and 100 billion transistors
of uniform characteristics on a 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
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further categorized as 200mm compatible and 200mm or 300mm compatible. Varian
Semiconductor supplies the following products:
Application Medium Current High Current High Energy
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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 or 300 mm
compatible VIISta(TM) 810 VIISta(TM) 80 VIISta(TM) 3000
VIISta(TM) 10 P/2/LAD
Varian Semiconductor started providing medium-current implanters in fiscal year
1971, introduced the single-wafer EHP-220 and EHP-500 in fiscal year 1992 and
the current EHPi-220 and EHPi-500 systems in fiscal year 1999 and has shipped
almost 800 of the EHP and EHPi machines to date.
Varian Semiconductor entered the high-current market in fiscal 1981,
introducing the current VIISion(TM) 80 LE and the VIISion(TM) 200 in fiscal
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 July 1998, Varian Semiconductor expanded its product
offering by entering the high-energy implant segment. This combination of a
strong product coupled with Varian Semidconductor's reputation and
infrastructure 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. VIISta(TM) allows customers to use the same platform for either 200mm
or 300mm wafer processing for all implant applications, reducing the risk of
transition for customers and reducing the customer's costs by having single
rather than multiple platforms. Consequently, Varian Semiconductor's
development, manufacturing, service, and training costs are all improved while
allowing customers to achieve greater operating efficiencies in their wafer
manufacturing facilities. In fiscal year 1998, Varian Semiconductor 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 P2LAD system introduced in July 2000 enables customers to
provide ultra low dopant energies to meet the needs of devices requiring ultra
shallow junction formation.
Varian Semiconductor began shipping the VIISta(TM) 3000 high-energy system in
fiscal year 2001. The VIISta(TM) 3000 high-energy system completes the
availability of 300mm advanced tools across medium-current, high-current, and
now high-energy applications.
Customer Support and Services
Varian Semiconductor 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 Varian Semiconductor's factories and research centers.
Varian Semiconductor's FabCare 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, Varian Semiconductor introduced "vCare", an electronic-
based combination of service and support offerings to
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enhance the utilization of manufacturers' implanter operations. In October
2000, one major component of "vCare" entitled "vShop" to become 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.
For parts management, Varian Semiconductor contracts with Federal Express to
strategically place "parts banks" throughout the world to provide carefully
managed inventory, delivery and logistics services. Varian Semiconductor 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 a CD-ROM format. Varian Semiconductor's
commitment to customer service extends to training and support. It operates
applications laboratories in the U.S, Europe and Asia-Pacific.
Remote Assist(TM) is a service tool that uses 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 video helmet for linking on-site
engineers with Varian Semiconductor's support offices and factories. In
addition to use by Varian Semiconductor 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
Varian Semiconductor sells, installs and services ion implantation systems
directly to semiconductor industry customers and has sold ion implantation
products to each of the 20 largest semiconductor manufacturers in the world.
Varian Semiconductor's sales objective is to work closely with customers to
secure purchase orders for multiple systems as customers expand existing
facilities and build new wafer manufacturing facilities. Varian Semiconductor
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 of fiscal years 2001, 2000, and 1999, Varian Semiconductor has sold at
least one-half of its systems to its top ten customers. Revenue from Varian
Semiconductor's ten largest customers in fiscal years 2001, 2000, and 1999
accounted for approximately 56%, 55%, and 51% of revenue, respectively. Varian
Semiconductor 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 years 2001 and 2000, no one customer
accounted for 10% or more of Varian Semiconductor's revenue. In fiscal year
1999, revenue from one customer accounted for 12% and another for 10% of Varian
Semiconductor's revenue.
None of Varian Semiconductor's customers has entered into a long-term agreement
requiring it to purchase Varian Semiconductor's products. Varian Semiconductor
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 Varian Semiconductor's largest
customers have varied from year to year, the loss of a significant customer or
any reduction in orders from any significant customer, including reductions due
to market, economic or competitive conditions in the semiconductor industry or
in the industries that manufacture products utilizing integrated circuits,
could adversely affect Varian Semiconductor's business, financial condition and
results of operations. In addition, sales of Varian Semiconductor's systems
depend, in significant part, upon the decision of a prospective customer to
increase manufacturing capacity in an existing
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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, Varian Semiconductor's systems
typically have a lengthy sales cycle during which Varian Semiconductor may
expend substantial funds and management effort.
Varian Semiconductor's ability to respond with prompt and effective field
support is critical to Varian Semiconductor's sales efforts. The substantial
operational and financial commitments by customers who purchase ion
implantation systems require the assurance that the manufacturer can provide
the necessary installation and operational support. Varian Semiconductor's
strategy of supporting its installed base through both its customer support and
research and development groups has served to encourage use of Varian
Semiconductor's systems in production applications and has accelerated
penetration of certain key accounts. Varian Semiconductor 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.
Varian Semiconductor sells, distributes and services its products directly.
Varian Semiconductor has six sales and service offices located in the U.S.,
seven in Western Europe and nineteen in Asia for a total of thirty-two
worldwide. Varian Semiconductor's sales, marketing and service engineers are
linked through Varian Semiconductor's information technology systems, allowing
Varian Semiconductor 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 utilizing services provided by Federal Express, Varian
Semiconductor has developed an infrastructure of parts distribution and
warehousing around the world.
Varian Semiconductor completed its direct global sales and distribution
networks in fiscal years 1996 and 1998, respectively, as it transitioned from
its joint ventures in Japan and Korea to wholly-owned subsidiaries. Varian
Semiconductor'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,
Varian Semiconductor and TEL revised their relationship to enable Japanese
customers to have more direct access to Varian Semiconductor's products,
engineering and support organizations worldwide. Shortly thereafter, Varian
Semiconductor formed a wholly-owned subsidiary, Varian Japan, K. K., (now
called "Varian Semiconductor Equipment, KK") that today provides direct support
to Varian Semiconductor's Japanese customer base.
Using the original TEL joint venture relationship as a model, Varian
Semiconductor formed Varian Korea Ltd. ("VKL") in fiscal year 1985 with its
distributor in Korea. In January 1998, Varian Semiconductor purchased the
remaining 39% of the VKL joint venture held by the original joint venture
partner.
Varian Semiconductor'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 fiscal year 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. During fiscal year 2001, sales decreased in each
consecutive quarter, due to the excess capacity and declining demand for
integrated circuits resulting from a slowing global economy.
Backlog
Varian Semiconductor had backlog of $160.0 million, $360.0 million and $181.0
million at the end of fiscal years 2001, 2000, and 1999, respectively. The
significant fluctuations in backlog from year to year reflect the
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cyclical nature of the industry. A significant downturn in the industry began
in the second quarter of fiscal year 2001 and is evidenced by the sharp decline
in backlog from fiscal year 2000 to fiscal year 2001. Varian Semiconductor
includes in its backlog only those orders for which it has accepted purchase
orders and assigned system shipment dates within twelve months and unearned
revenue on systems previously shipped. 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, Varian
Semiconductor's backlog at any particular date is not necessarily an accurate
predictor of actual sales for any succeeding period.
Manufacturing
Varian Semiconductor manufactures its products at its production facilities in
Gloucester, Massachusetts and Newburyport, Massachusetts. Varian Semiconductor
benefits from the use of advanced manufacturing methods and technologies,
including just-in-time, demand flow technology, statistical process control and
solids modeling.
Varian Semiconductor concentrates on system design, an outsourcing strategy,
high-level assembly, and tests to reduce cycle time and improve its
responsiveness in an inherently cyclical capital equipment market. Varian
Semiconductor 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 Varian Semiconductor to
focus on product differentiation through system design and quality control.
Varian Semiconductor's manufacturing subsystems incorporate advanced
technologies in robotics, vacuum and microcomputers. Varian Semiconductor works
closely with its suppliers on achieving mutual cost reduction through joint
design efforts. Varian Semiconductor 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 clean-room
standards during shipment. Varian Semiconductor purchases material and
components that are either standard products or built to Varian Semiconductor
specifications.
Quality efforts at Varian Semiconductor begin with product development. Varian
Semiconductor uses 3D, computer-aided design, finite element analysis and other
computer-based modeling methods to prove new designs. Product design is tested
throughout all stages of development before the first production system is
built. Concurrent engineering programs help integrate new designs into
manufacturing quickly and successfully.
Competition
The semiconductor equipment manufacturing market is highly competitive and is
characterized by a small number of large players. This is evidenced by the fact
that the fifty largest companies in the market comprise approximately 93% of
worldwide revenue. The larger companies include Applied Materials, Lam
Research, Axcelis Technologies, Novellus, TEL, Nikon, Canon and ASML. Varian
Semiconductor faces significant competition in the ion implantation market.
Within this segment, as reported for calendar year 2000 by Dataquest, Varian
Semiconductor, Axcelis (including SEN), Applied Materials, Nissin and Ulvac has
42%, 34%, 15%, 6% and 3%, respectively, of the market unit share for ion
implantation equipment.
Significant competitive factors in the ion implantation market include
strategic relationships, price/cost of ownership, performance, customer
support, distribution and financial viability. In addition to these factors,
significant competitive factors in the semiconductor equipment market also
include flexibility, size of manufacturer, installed customer base and breadth
of product line. Varian Semiconductor believes it competes favorably in each of
these categories. Management believes that to remain competitive Varian
Semiconductor 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.
6
Research and Development
The semiconductor manufacturing industry is subject to rapid technological
change requiring new product introductions and enhancements. Varian
Semiconductor'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, Varian Semiconductor 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.
Varian Semiconductor's current research and development efforts are directed at
development of new systems and processes and improving existing system
capabilities. Varian Semiconductor is focusing its research and development
efforts on enhancement of its VIISta(TM) platform. The VIISta(TM) platform is
designed to cover the complete range of implants required for the next several
generations of integrated circuits and extend production capability to <100 nm
geometries. VIISta(TM) is a single wafer platform that allows customers to use
a single platform (with three beam lines) for all implant applications
including high-current, medium-current, and high-energy.
Worldwide expenditures by Varian Semiconductor (net of customer funding) for
research and development during fiscal years 2001, 2000, and 1999, were $49.8
million, $47.0 million, and $37.6 million, respectively. Varian Semiconductor
expects in future years that research and development expenditures will
continue to represent a substantial percentage of operating expenses.
Patent and Other Proprietary Rights
Varian Semiconductor has pursued a policy of seeking patent, copyright and
trade secret protection in the U. S. and other countries for developments,
improvements and inventions originating within its organization that are
incorporated in Varian Semiconductor's products or that fall within its fields
of interest. As of September 28, 2001, Varian Semiconductor owned approximately
140 patents in the U.S. and approximately 280 patents in other countries, and
had approximately 220 patent applications on file with various patent agencies
worldwide. Varian Semiconductor intends to file additional patent applications
as appropriate.
Varian Semiconductor relies on a combination of copyright, trade secret and
other laws, and contractual restrictions on disclosure, copying and
transferring title to protect its rights. Varian Semiconductor has trademarks,
both registered and unregistered, that are maintained and enforced to provide
customer recognition for its products in the marketplace. Varian Semiconductor
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 Varian Semiconductor's business. In
particular, the current royalty-bearing license agreements with Applied
Materials and Tokyo Electron Limited for gas-assisted heat transfer patents
produced approximately $15.3 million in royalties in fiscal year 2001, $10.1
million in fiscal year 2000, and $28.9 million in fiscal year 1999. The last of
the principal patents covered by these licenses will expire on July 9, 2007.
Varian Semiconductor'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. Legal Proceedings", Varian Semiconductor is
currently involved in such litigation and there can be no assurances as to the
results of such litigation. Varian Semiconductor or its licensors or suppliers
could be subject to additional claims of patent infringement, and any such
claim could require that Varian Semiconductor pay substantial damages or remove
certain features from its products or both.
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."
7
Company History
On April 2, 1999, VAI contributed the SEB to Varian Semiconductor, then
distributed to the holders of record of VAI common stock one share of common
stock of Varian Semiconductor for each share of VAI common stock owned.
The consolidated financial statements for periods ended on or before April 2,
1999 reflect SEB as operated by VAI. The consolidated financial statements
reflect the financial position, financial 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. Varian Semiconductor 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 Varian Semiconductor 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 SEB conducted by VAI prior to the
spin-off.
Varian Semiconductor'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 fiscal year 1975 through the
acquisition of Extrion Corporation, in Gloucester, Massachusetts. Since then,
Varian Semiconductor has developed a complete line of medium and high-current
implanters and added the high-energy product line in fiscal year 1998. These
systems introduce precise quantities of dopant materials into silicon wafers,
creating desired electrical characteristics. In June 1997, Varian Semiconductor
sold its Thin Film Systems 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.
Employees
As of September 28, 2001, Varian Semiconductor had 1,645 full-time employees
worldwide--1,229 in North America, 301 in Asia and 115 in Western Europe. None
of Varian Semiconductor's employees based in the U.S. is subject to collective
bargaining agreements and Varian Semiconductor has never experienced a work
stoppage, slowdown, or strike. None of Varian Semiconductor's employees is
represented by a labor union and Varian Semiconductor considers its employee
relations to be good.
During October 2001, Varian Semiconductor implemented a reduction in force,
primarily in the U.S., in which Varian Semiconductor's worldwide workforce was
reduced by approximately 200 employees or 12%. The reduction in force was in
response to the downturn in the industry. See "Item 7.--Management's Discussion
and Analysis of Financial Condition and Results of Operations" for more detail.
8
Executive Officers
The executive officers of Varian Semiconductor are:
Name and Title Age Business Experience
-------------- --- -------------------
Richard A. Aurelio...... 57 Mr. Aurelio has served as Varian Semiconductor's
Chairman and Chief Chairman and Chief Executive Officer since
Executive Officer February 2001. From April 1999 to February 2001,
he served as Varian Semiconductor's President and
Chief 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 United States'
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, 56 Mr. Godshalk has served as Varian Semiconductor's
III.................... President, Chief Operating Officer, and director
President and Chief of Varian Semidconductor since February 2001.
Operating Officer From April 1999 through February 2001, Mr.
Godshalk served as Varian Semiconductor's Vice
President and Chief Financial Officer. Prior to
April 1999, he was Vice President, 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 of Prodigy Communications
Corporation, an Internet service provider, from
1996 to 1998.
Robert J. Halliday...... 47 Mr. Halliday has served as Varian Semiconductor's
Vice President and Vice President and Chief Financial Officer since
Chief Financial Officer March 2001. Prior to joining Varian
Semiconductor, Mr. Halliday was Vice President
and Chief Financial Officer of Unica Corporation,
a software company. Previously, Mr. Halliday had
held the positions of Chief Operating Officer and
Chief Financial Officer in 2000 and Chief
Financial Officer from 1990 to 2000 of the
Consumer Water Group of Ionics, Inc., a
manufacturer of water treatment capital
equipment.
Seth H. Bagshaw......... 41 Mr. Bagshaw has served as Vice President and
Vice President, Corporate Controller of Varian Semiconductor
Corporate Controller since November 1999. Prior to joining Varian
Semiconductor, 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.
Ralph E. Knupp.......... 51 Mr. Knupp has served as Varian Semiconductor's
Vice President, Human Vice President, Human Resources and
Resources and Communications since April 1999. Prior to joining
Communications the Company, 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.
Gary L. Loser........... 51 Mr. Loser has served as Vice President, General
Vice President, General Counsel and Secretary of Varian Semiconductor
Counsel and Secretary since April 1999. Prior to joining Varian
Semiconductor, 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
General Electric's legal department during his
seventeen years with General Electric.
Walter F. Sullivan...... 50 Mr. Sullivan has served as Varian Semiconductor's
Vice President, Vice 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.
9
Item 2. Properties.
Varian Semiconductor's headquarters facility is located in Gloucester,
Massachusetts. The Gloucester facility is also utilized for manufacturing,
along with one other location in Massachusetts. In addition, Varian
Semiconductor has six sales and service offices located in the U.S. and twenty-
six located outside of the U.S., including offices in the United Kingdom,
France, Ireland, Germany (three), Netherlands, Japan (ten), Korea (four),
Taiwan (two), Singapore, Malaysia, and China. These offices and facilities
aggregate more than 591,000 square feet, of which 268,000 square feet is
leased. Since fiscal year 1994, the manufacturing facilities have been
registered to the internationally recognized ISO 9001 quality standard. Field
support operations in the U.S., Europe, Korea, Singapore and Taiwan have been
registered to the ISO 9002 standard.
Varian Semiconductor's management does not believe there is any material, long-
term, excess capacity in Varian Semiconductor's facilities, although
utilization is subject to change based on customer demand. Furthermore, Varian
Semiconductor's management believes that Varian Semiconductor's facilities and
equipment generally are well maintained, in good operating condition, suitable
for Varian Semiconductor's purposes, and adequate for its present operations.
The following table reflects Varian Semiconductor's locations by geographic
segment.
Property
Interest Approximate Square
Location Footage of Floor Space
-------- -------- ----------------------
North America............................... Own 259,000
North America............................... Lease 184,000
Korea....................................... Own 64,000
Korea....................................... Lease 4,000
Japan....................................... Lease 38,000
Europe...................................... Lease 19,000
Taiwan...................................... Lease 17,000
Other....................................... Lease 6,000
-------
Total....................................... 591,000
=======
Item 3. Legal Proceedings.
On December 19, 2001, Varian Semiconductor and Lam Research Corporation ("Lam")
resolved the patent infringement litigation between the two parties that was
originally filed in October 1993 and Varian Semiconductor granted Lam a license
under certain patents. Additionally, all claims and counterclaims have been
dismissed in accordance with the agreement. The lawsuit involved Varian
Semiconductor's assertion that Lam infringed on three Varian patents that
related to the use of low pressure gas to assist in the heating and cooling of
semiconductor wafers during various manufacturing processes, and Lam's denial
that the patents are valid or infringed. Under the agreement, Varian
Semiconductor has granted a license to Lam under the patents in return for the
payment of $20.0 million with $5.0 million paid immediately in exchange for
prior use of the patents and the remaining $15.0 million paid in 12 quarterly
installments through fiscal year 2005 in exchange for future use of the
patents. As further payment for past royalties, Lam issued to Varian
Semiconductor a warrant to purchase 2,000,000 shares of Lam common stock for
$21.30 per share, exercisable at any time prior to December 31, 2005.
In connection with the spin-off, Varian Semiconductor entered into certain
other agreements with Varian Medical Systems, Inc. (formerly the Health Care
Systems Business of VAI) ("VMS") and VAI, including an Employee Benefits
Allocation Agreement, an Intellectual Property Agreement, a Tax Sharing
Agreement and a Transition Services Agreement. These agreements require Varian
Semiconductor to indemnify VMS and VAI for any costs, liabilities or expenses
relating to Varian Semiconductor's legal proceedings. Varian Semiconductor 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.
10
From time to time, Varian Semiconductor 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 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 Varian Semiconductor.
Item 4. Submission of Matters to a Vote of Securityholders.
No matters were submitted to a vote of securityholders of Varian Semiconductor,
through solicitation of proxies or otherwise, during the last quarter of fiscal
year 2001.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Since April 2, 1999, Varian Semiconductor'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 Varian Semiconductor's common
stock.
The following table sets forth the high and low sale prices per share of the
common stock during each of the quarters for the two most recent fiscal years.
Fiscal 2000 High Low
----------- -------- --------
First Quarter .......................................... $35.4375 $19.0000
Second Quarter.......................................... $73.2500 $30.3125
Third Quarter........................................... $71.7500 $39.3750
Fourth Quarter.......................................... $64.2500 $33.1250
Fiscal 2001 High Low
----------- -------- --------
First Quarter........................................... $39.6250 $16.9375
Second Quarter.......................................... $35.7500 $21.0000
Third Quarter........................................... $50.0400 $26.3125
Fourth Quarter.......................................... $42.4000 $22.9100
The reported closing price of the common stock on The Nasdaq National Market on
December 17, 2001 was $36.96 per share. The number of stockholders of record on
December 17, 2001 was 3,716.
Varian Semiconductor has never declared or paid cash dividends on its capital
stock, and Varian Semiconductor 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 Varian
Semiconductor subsequent to the spin-off, and of SEB prior to April 2, 1999.
The historical financial information may not be indicative of the future
performance of Varian Semiconductor 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
information included in the table reflects selected consolidated summary
financial data for each of the last five fiscal years. This data should be read
in conjunction with the consolidated financial statements and notes thereto,
and with "Item 7.--Management Discussion and Analysis of Results of Operations
and Financial Condition".
The computation of net income (loss) per share before April 2, 1999 is based on
the weighted average number of shares of VAI common stock outstanding during
the respective periods, reflecting the ratio of one share of Varian
Semiconductor common stock for each share of VAI, Inc., common stock
outstanding at the time of the spin-off.
12
Fiscal Years Ended
--------------------------------------------------------
2001/1/ 2000 1999 1998 1997/3/
------- ----------- ----------- ----------- -----------
Restated/2/ Restated/2/ Restated/2/ Restated/2/
----------- ----------- ----------- -----------
(in millions, except per share amounts)
Consolidated Statements
of Operations Data:
Revenue................. $632.0 $687.7 $271.9 $342.9 $448.3
Gross profit............ 233.2 270.7 92.2 115.4 184.4
Income (loss) before
cumulative effect of
change in accounting
principle.............. 64.6 99.9 (11.4) 9.9 70.8
Cumulative effect of
change in accounting
principle, net of tax
of $15.7............... (27.0) -- -- -- --
Net income (loss)....... $37.6 $99.9 $(11.4) $9.9 $70.8
Weighted average shares
outstanding--basic..... 32,275 31,375 30,428 30,423 30,423
Weighted average shares
outstanding--diluted... 34,009 33,681 30,428 30,508 30,508
Income (loss) per share
before cumulative
effect of change in
accounting principle--
basic.................. $2.00 $3.18 $(0.37) $0.33 $2.33
Income (loss) per share
before cumulative
effect of change in
accounting principle--
diluted................ $1.90 $2.97 $(0.37) $0.32 $2.32
Cumulative effect of
change in accounting
principle--basic....... $(0.84) -- -- -- --
Cumulative effect of
change in accounting
principle--diluted..... $(0.80) -- -- -- --
Net income (loss) per
share--basic........... $1.16 $3.18 $(0.37) $0.33 $2.33
Net income (loss) per
share--diluted......... $1.10 $2.97 $(0.37) $0.32 $2.32
Cash dividend........... -- -- -- -- --
Consolidated Balance
Sheets Data:
Total assets............ $588.1 $533.7 $347.3 $236.0 $246.1
Working capital......... 344.8 294.1 153.7 60.9 73.8
Capital lease
obligations............ 1.6 1.0 0.9 -- --
- --------
1Varian Semiconductor recorded a non-cash charge of $42.7 million ($27.0 after
tax or $0.80 per diluted share) to reflect the cumulative effect of the
accounting change as of the first quarter of fiscal year 2001 related to the
adoption of Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements." Proforma amounts for the periods beginning before
September 30, 2000 have not been presented as the effect of the change in
accounting principle could not be reasonably determined. (See Note 2 of the
notes to the consolidated financial statements.)
/2/During the first quarter of fiscal year 2001, Varian Semiconductor changed
its method of valuing domestic inventories from the last-in, first out
("LIFO") method to the first-in, first-out ("FIFO") method. Varian
Semiconductor has restated its financial statements to reflect the change to
FIFO for all periods presented.
Fiscal year 2000 results included non-recurring pre-tax gains of $18.7 million
($12.6 million after tax or $0.37 per diluted share) relating to litigation
settlements (See Note 15 to the Notes to the Consolidated Financial
Statements.)
/3/Fiscal year 1997 results include a $51.0 million pre-tax gain ($33.2 million
after tax or $1.09 per diluted 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.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K."
13
Selected Quarterly Results of Operations
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, including the
timing of revenue recognition for sales that involve contractual customer
acceptance provisions and installation of the product if these events occur
after shipment and transfer of title and risk of loss. Varian Semiconductor
implemented the provisions of SAB 101 in the fourth quarter of fiscal year
2001, retroactive to the first quarter of fiscal year 2001 (see "Item 7.--
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for more detail). The following information demonstrates the effect
on the first quarter of fiscal year 2001 through the third quarter of fiscal
year 2001, as if the provisions of SAB 101 had been applied as of the beginning
of fiscal year 2001.
QUARTERLY FINANCIAL DATA APPLYING SAB 101 (unaudited)
(In thousands, except per share data)
March
December 29, 30, June 29, September 28,
2000 2001 2001 2001
------------ -------- -------- -------------
Product revenue
Product revenue as previously
reported (quarters 1 - 3)........ $211,821 $157,303 $110,720 $55,250
Effect of change in accounting
principle........................ $(16,244) $3,452 $12,149 --
-------- -------- -------- -------
As restated in first three
quarters and reported in fourth
quarter.......................... $195,577 $160,755 $122,869 $55,250
Service revenue
Service revenue as previously
reported (quarters 1 - 3)........ $11,072 $11,390 $12,072 $12,687
Effect of change in accounting
principle........................ $14,419 $12,233 $8,318 --
-------- -------- -------- -------
As restated in first three
quarters and reported in fourth
quarter.......................... $25,491 $23,623 $20,390 $12,687
Product cost of revenue
Product cost of revenue as
previously reported (quarters 1 -
3)............................... $122,594 $99,359 $80,854 $43,749
Effect of change in accounting
principle........................ $(9,868) $515 $8,578 --
-------- -------- -------- -------
As restated in first three
quarters and reported in fourth
quarter.......................... $112,726 $99,874 $89,432 $43,749
Service cost of revenue
Service cost of revenue as
previously reported (quarters 1 -
3)............................... $8,731 $9,024 $7,864 $9,496
Effect of change in accounting
principle........................ $7,411 $6,661 $3,839 --
-------- -------- -------- -------
As restated in first three
quarters and reported in fourth
quarter.......................... $16,142 $15,685 $11,703 $9,496
Income (loss)
Net income as previously reported
(quarters 1 - 3)................. $40,078 $17,998 $2,776 $(7,687)
Effect of change in accounting
principle........................ $423 $5,700 $5,394 --
-------- -------- -------- -------
As restated in first three
quarters and reported in fourth
quarter.......................... $40,501 $23,698 $8,170 $(7,687)
Cumulative effect of change in
accounting principle, net of
$15,724 of tax benefit........... $(27,038) -- -- --
-------- -------- -------- -------
As restated in first three
quarters and reported in fourth
quarter.......................... $13,463 $23,698 $8,170 $(7,687)
Income (loss) per share--basic
As previously reported (quarters 1
- 3)............................. $1.25 $0.56 $0.09 $(0.24)
Effect of change in accounting
principle........................ $(0.83) $0.18 $0.16 --
-------- -------- -------- -------
As restated in first three
quarters and reported in fourth
quarter.......................... $0.42 $0.74 $0.25 $(0.24)
Net income (loss) per share--
diluted
As previously reported (quarters 1
- 3)............................. $1.20 $0.53 $0.08 $(0.24)
Effect of change in accounting
principle........................ $(0.80) $0.17 $0.16 --
-------- -------- -------- -------
As restated in first three
quarters and reported in fourth
quarter.......................... $0.40 $0.70 $0.24 $(0.24)
14
The following tables set forth unaudited quarterly consolidated statements of
operations data for each of the eight fiscal quarters ended September 28, 2001.
The data for the four quarterly periods for fiscal year 2000 are on the
historical shipment method of recognizing revenue, and the data for the four
quarterly periods for fiscal year 2001 are under SAB 101. (See Note 2 of the
notes to the consolidated financial statements.) During the first quarter of
fiscal year 2001, Varian Semiconductor changed it method of valuing domestic
inventories from the last-in, first-out ("LIFO") method to the first-in, first-
out ("FIFO") method. Varian Semiconductor has restated its quarterly fiscal
2000 financial statements to reflect the change to FIFO. In management's
opinion, this information has been prepared substantially on the same basis as
the audited consolidated financial statements appearing elsewhere in this
document, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present a fair
statement of unaudited quarterly results. The quarterly data should be read in
conjunction with the consolidated financial statements and related notes
appearing elsewhere in this Annual Report on Form 10-K.
QUARTERLY FINANCIAL DATA (Unaudited)
2001
----------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
(Dollars in millions except per share
amounts)
Revenue................................ $226.4 $188.6 $147.2 $69.8 $632.0
Cost of revenue........................ 128.9 115.5 101.1 53.3 398.8
------ ------ ------ ------ ------
Gross profit........................... 97.5 73.1 46.1 16.5 233.2
Operating expenses..................... 39.1 39.7 36.1 30.0 144.9
------ ------ ------ ------ ------
Operating income (loss)................ 58.4 33.4 10.0 (13.5) 88.3
Other income (loss).................... 2.0 2.0 2.3 1.9 8.2
------ ------ ------ ------ ------
Income (loss) before taxes and
cumulative effect of change
in accounting principle............... 60.4 35.4 12.3 (11.6) 96.5
Provision for (benefit provided by)
income taxes.......................... 19.9 11.7 4.1 (3.8) 31.9
------ ------ ------ ------ ------
Income (loss) before cumulative effect
of change in
accounting principle.................. 40.5 23.7 8.2 (7.8) 64.6
Cumulative effect of change in
accounting principle,
net of tax............................ (27.0) -- -- -- (27.0)
------ ------ ------ ------ ------
Net income (loss)...................... $13.5 $23.7 $8.2 $(7.8) $37.6
====== ====== ====== ====== ======
Income (loss) per share--
Weighted average shares outstanding--
basic................................ 32,092 32,123 32,340 32,550 32,275
Weighted average shares outstanding--
diluted.............................. 33,480 33,797 34,457 32,550 34,009
Income (loss) per share before
cumulative effect of change
in accounting principle--basic....... $1.26 $0.74 $0.25 $(0.24) $2.00
Income (loss) per share before
cumulative effect of change
in accounting principle--diluted..... $1.21 $0.70 $0.24 $(0.24) $1.90
Cumulative effect of change in
accounting principle-- basic......... $(0.84) -- -- -- $(0.84)
Cumulative effect of change in
accounting principle--diluted........ $(0.80) -- -- -- $(0.80)
Net income (loss) per share--basic.... $0.42 $0.74 $0.25 $(0.24) $1.16
Net income (loss) per share--diluted.. $0.40 $0.70 $0.24 $(0.24) $1.10
15
2000 (Restated)
--------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
(Dollars in millions except per share
amounts)
Revenue................................. $109.8 $156.2 $192.8 $228.9 $687.7
Cost of revenue......................... 69.8 93.0 115.8 138.4 417.0
------ ------ ------ ------ ------
Gross profit............................ 40.0 63.2 77.0 90.5 270.7
Operating expenses...................... 32.7 34.9 36.8 40.7 145.1
------ ------ ------ ------ ------
Operating income........................ 7.3 28.3 40.2 49.8 125.6
Other income............................ 0.8 3.5 1.5 17.5 23.3
------ ------ ------ ------ ------
Income before taxes..................... 8.1 31.8 41.7 67.3 148.9
Provision for income taxes.............. 2.8 11.2 13.5 21.5 49.0
------ ------ ------ ------ ------
Net income.............................. $5.3 $20.6 $28.2 $45.8 $99.9
====== ====== ====== ====== ======
Income per share--
Weighted average shares outstanding--
basic................................. 30,555 31,066 31,812 32,066 31,375
Weighted average shares outstanding--
diluted............................... 32,472 33,730 34,245 34,275 33,681
Net income per share--basic............ $0.17 $0.66 $0.89 $1.43 $3.18
Net income per share--diluted.......... $0.16 $0.61 $0.82 $1.34 $2.97
Varian's Semiconductor's business is cyclical based on the capital equipment
investment expenditures of major semiconductor manufacturers. See "Item 1.
Business" for more detail.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 Varian Semiconductor'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 Varian Semiconductor's
financial results to differ are under the heading "Risk Factors" below.
Results of Operations
Revenue Recognition
Product revenue includes established products, new products and spare parts.
Varian Semiconductor recognizes revenue from product sales upon shipment
provided title and risk of loss has passed to the customer, evidence of an
arrangement exists, fees are fixed or determinable, collectability is
reasonably assured and there are no uncertainties regarding customer
acceptance.
For some of Varian Semiconductor's sales transactions, a portion of the total
purchase price is not due until installation occurs and the customer accepts
the product. For established products, the lesser of the amount allocated to
the equipment or the contractual amount billable upon delivery is recorded as
product revenue upon delivery. The amount deferred is recognized as revenue
upon customer acceptance. For new products, revenue allocated to the equipment
is recognized upon customer acceptance. Revenue related to spare parts sales is
recognized upon delivery. Varian Semiconductor accrues warranty costs upon
recognition of product revenue.
Service revenue includes maintenance and service contracts, paid service and
installation services. Revenue related to maintenance and service contracts is
recognized ratably over the duration of the contracts. Revenue related to paid
service is recorded when earned and the revenue related to installation is
recorded upon fulfillment of the service obligation.
Royalty revenue is recognized when contractual obligations are met, evidence of
an arrangement exists, fees are fixed or determinable and collection is
reasonably assured.
16
Varian Semiconductor's transactions frequently include the sale of systems and
services under multiple element arrangements. Revenue under these arrangements
is allocated to all elements except systems based upon the fair value of those
elements. The amount allocated to installation is based upon hourly rates at
the estimated time to complete the service. The fair value of all other
elements are based upon the price charged when these amounts are sold
separately and unaccompanied by other elements. The amount of revenue allocated
to systems is done on a residual method basis. Under this method, the total
value of the arrangement is allocated first to undelivered elements based on
their fair values, with the remainder being allocated to systems revenue.
Installation is not essential to the functionality of the system, as these
services do not alter the equipment's capabilities.
Change in Revenue Accounting Principle
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, including the
timing of revenue recognition for sales that involve contractual customer
acceptance provisions and installation of the product if these events occur
after shipment and transfer of title and risk of loss. In October 2000, the SEC
issued Staff Accounting Bulletin No. 101: Revenue Recognition in Financial
Statements--Frequently Asked Questions and Answers ("SAB 101 FAQ"). The SAB 101
FAQ was issued to clarify many of the implementation questions surrounding SAB
101. Varian Semiconductor implemented the provisions of SAB 101 in the fourth
quarter of fiscal year 2001, retroactive to the first quarter of fiscal year
2001.
Varian Semiconductor's previous revenue recognition policy was to recognize
product revenue at the time the customer took title to the product, generally
at the time of shipment. At that time, Varian Semiconductor also accrued the
costs to install the product. For some transactions, a portion of the purchase
price is not due until installation is complete and the product is accepted by
the customer. Under SAB 101 and the new accounting method adopted retroactive
to the first quarter of fiscal year 2001, installation is considered a separate
earnings process, revenue related to new products is recognized upon customer
acceptance and revenue related to established products is accounted for as
multiple element arrangements as described above.
As a result of this change, Varian Semiconductor reported a change in
accounting principle in accordance with APB Opinion No. 20 "Accounting
Changes", by a cumulative effect adjustment. Varian Semiconductor recorded a
non-cash charge of $27.0 million (after reduction for income taxes of $15.7
million), or ($0.80) per diluted share, to reflect the cumulative effect of the
accounting change as of the beginning of fiscal year 2001. For fiscal year
2001, Varian Semiconductor recognized $74.8 million in revenue which is
included in the cumulative effect adjustment recorded during the first quarter
of fiscal year 2001. The effect of that revenue was to increase income by $20.6
million (net of $12.0 million of tax) for fiscal year 2001.
Proforma amounts for the periods beginning before the first quarter of fiscal
year 2001 have not been presented, as the effect of the change in accounting
principle could not be reasonably determined.
Deferred Revenue
Deferred revenue includes customer advances and amounts that have been billed
per the contractual terms but have not been recognized as revenue.
Change In Inventory Accounting Principle
During the first quarter of fiscal year 2001, Varian Semiconductor changed its
method of valuing domestic inventories from the last-in, first-out ("LIFO")
method to the first-in, first-out ("FIFO") method.
Prior to the spin-off to shareholders on April 2, 1999, Varian Semiconductor
had operated as a division of Varian Associates, Inc., and had been required to
conform to the parent company's LIFO method of valuing domestic inventory.
Varian Semiconductor experienced declining materials costs and anticipated
lower material unit costs in the foreseeable future through value engineering.
Therefore, Varian Semiconductor believed the FIFO method was preferable since
it would more appropriately match revenues and expenses. Additionally, the
17
adoption of the FIFO method by Varian Semiconductor allows more readily
comparable financial results with its principal competitors and other companies
in the broader semiconductor industry segment that all use the FIFO method.
Varian Semiconductor applied this change retroactively by restating the
financial statements as required by Accounting Principles Board Opinion No. 20,
"Accounting Changes", which resulted in an increase to net income per diluted
share for fiscal year 2000 of $0.03, an increase in retained earnings of $14.2
million, an increase in inventory of $22.5 million and a decrease in deferred
taxes of $8.3 million at September 29, 2000.
Fiscal Year
Varian Semiconductor's fiscal year is the 51- to 53-week period that ends on
the Friday nearest September 30. Fiscal year 2001 comprises the 52-week period
ended on September 28, 2001. 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 2001 Compared to Fiscal Year 2000
Revenue. Revenue for the fiscal year ended September 28, 2001 was $632.0
million, as compared to $687.7 for fiscal year 2000, a decrease of $55.7
million or 8%. Had SAB 101 not been adopted, a year over year comparison of
revenue would have shown a decrease in revenue of $88.2 million or 13%. The
significant decrease in revenue was a result of the decline in demand for
semiconductor devices beginning in the second quarter of the current fiscal
year. Over the course of fiscal year 2001, revenues decreased in each
consecutive quarter, from $226.4 million in the first quarter to $188.6 million
in the second quarter, to $147.2 million in the third quarter, and to $69.8
million in the fourth quarter. The decline in revenue, year over year, is
expected to continue into the next fiscal year.
Total revenue was comprised of product revenue of $534.5 million, service
revenue of $82.2 million, and royalty revenue of $15.3 million. Both product
and service revenue decreased from the prior fiscal year due to the downturn in
the industry. However, royalty revenue increased over the prior fiscal year
despite the industry downturn primarily due to timing, as revenue recognized
from royalties normally lags the sale of the product to the customer.
The industry decline was felt globally, as sales to both the Asia-Pacific
region and Europe decreased from the prior year. International revenues in
fiscal year 2001 were $449.4 million compared to $504.2 million in fiscal year
2000. Sales to customers in the Asia-Pacific region were $314.5 million in
fiscal year 2001 as compared to $368.6 million in fiscal year 2000. Sales to
customers in Europe were $130.2 million and $135.6 million in fiscal year 2001
and fiscal year 2000, respectively.
Cost of Revenue. Cost of product revenue was $345.8 million and gross margin on
product revenue was 35% for the current fiscal year. Cost of service revenue
was $53.0 million and gross margin on service revenue was 35% during the
current fiscal year. For comparative purposes, total gross margin for fiscal
year 2001 of 36% (on a pre-SAB 101 basis) declined from fiscal year 2000 by 3%.
The decrease in both cost of revenue and margin during the current fiscal year,
as compared to the prior fiscal year was primarily a result of the decrease in
the volume of product shipments.
Research and Development. Research and development expenses in fiscal year 2001
were $49.8 million, an increase of $2.8 million or 6% from fiscal year 2000
expenses of $47.0 million. Research and development expenses were higher
largely due to expansion of efforts in both product and services developments,
reflected in the VIISta series products for 300mm applications, including the
new high energy VIISta 3000.
Marketing, General and Administrative. Marketing, general and administrative
expenses in fiscal year 2001 were $93.2 million, a decrease of $4.9 million or
5% from fiscal year 2000 expenses of $98.1 million. Marketing, general and
administrative expenses decreased from the prior year mainly due to efforts to
reduce spending in response to the industry downturn.
18
Restructuring costs. Varian Semiconductor recognized $1.9 million in
restructuring costs for fiscal year 2001, of which $.9 million was recognized
in the second quarter and $1.0 million was recognized in the third quarter. The
restructuring charges primarily reflect the termination costs for a total
reduction in force of 530 employees
(approximately 28% of worldwide employment) . The restructuring charges were
done in connection with the cost reduction initiatives implemented during the
fiscal year in response to the industry downturn.
Interest Income and Other Income, Net. Interest income was $8.2 million in
fiscal year 2001 as compared to $4.6 million in fiscal year 2000. The increase
of $3.6 million was primarily due to higher average cash balances, as compared
to the prior fiscal year. In fiscal year 2000, Varian Semiconductor recorded
other income of $18.7 million upon settlement of litigation. After recording a
payment to Applied Materials, and legal expenses, Varian Semiconductor recorded
a gain of $16.0 million in the fourth quarter of fiscal year 2000 relating to
the difference between the actual settlement amount and the estimated accrual
upon settlement of their patent infringement and antitrust litigation. In the
second quarter of fiscal year 2000, Varian Semiconductor 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.
Provision for Income Taxes. Varian Semiconductor's effective income tax rate
was 33% in fiscal years 2001 and 2000. The rate is lower than the U.S. federal
statutory rate principally due to the tax benefits arising from the use of a
foreign sales corporation, the extraterritorial income exclusion and tax
credits. Future tax rates may vary from the historic rates depending on the
worldwide allocation of earnings and the continuing availability of the
extraterritorial income exclusion.
Cumulative Effect of Change in Accounting Principle, Net of Tax. Varian
Semiconductor reported a change in accounting principle for the adoption of SAB
101 in accordance with APB Opinion No. 20, "Accounting Changes," by a
cumulative effect adjustment. Varian Semiconductor recorded a non-cash charge
of $27.0 million (after reduction for income taxes of $15.7 million), or
($0.80) per diluted share, to reflect the cumulative effect of the accounting
change as of the beginning of the fiscal year.
Net Income. As a result of the foregoing factors, in fiscal year 2001 the
Company recorded net income of $37.6 million, compared with net income of $99.9
million for fiscal year 2000. The net income per diluted share was $1.10 for
fiscal year 2001 as compared to $2.97 per diluted share for fiscal year 2000.
Fiscal Year 2000 Compared to Fiscal Year 1999
Revenue. Varian Semiconductor'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 semiconductor devices that began in the second half of
fiscal year 1999. Product revenue and service revenue of $626.2 million and
$51.4 million, both increased over the prior year amounts of $206.4 million and
$36.6 million, respectively. 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 licensing agreement with
Tokyo Electron Ltd. referenced above.
International revenues in fiscal year 2000 were $504.2 million compared to
$160.8 million in fiscal year 1999. Sales to customers in the Asia-Pacific
region were $368.6 million in fiscal year 2000 as compared to $106.4 million in
fiscal year 1999. Sales to customers in Europe were $135.6 million and $54.4
million in fiscal year 2000 and fiscal year 1999, respectively.
Cost of Revenue. Cost of product revenue was $379.8 million or 61% of product
revenue, as compared to $153.4 million or 74% of product revenue for the prior
fiscal year. Cost of service revenue was $37.2 million or 72% of service
revenue, as compared to $26.3 million or 72% of service revenue for the prior
fiscal year.
19
The increase in cost of revenue for the current fiscal year, as compared to the
prior fiscal year, was due to the increase in revenue related to the upturn in
the industry.
Research and Development. Research and development expenses in fiscal year 2000
increased by 25% from $37.6 million in fiscal year 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 high energy VIISta 3000. Research and development costs in fiscal
year 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 revenue largely because of the additional administrative
expenses in fiscal year 1999 associated with the transition to operating as an
independent company.
Restructuring Costs. During the second quarter of fiscal year 1999, Varian
Semiconductor recognized pre-tax restructuring charges of $2.7 million. The
charges included $1.4 million resulting from the cancellation of plans for the
expansion of manufacturing in the U. S. and Japan, and $1.3 million to cover
termination costs for a reduction in workforce of 69 employees (approximately
5% of Varian Semiconductor's worldwide employment). There were no restructuring
costs in fiscal year 2000. See also Note 16 to the Consolidated Financial
Statements.
Settlement of Litigation and Arbitration. In September 2000, Varian
Semiconductor and Applied Materials settled their patent infringement and
antitrust litigation. After recording a payment to Applied Materials and legal
expenses, Varian Semiconductor recorded in Other Income, a gain of $16.0
million ($10.8 million after taxes) in the fourth quarter relating to this
litigation settlement. Varian Semiconductor maintains a provision to cover any
residual indemnification obligations described above. Included in current
liabilities and classified as an estimated loss contingency was $2.7 million,
as of September 28, 2001.
During the second quarter of fiscal year 2000, Varian Semiconductor recorded
other income of $2.7 million, (equivalent to $1.8 million after tax or $0.05
per diluted share) resulting from payment to resolve a dispute relating to the
acquisition of a product line which occurred in a prior fiscal year.
In fiscal year 1999 Varian Semiconductor settled with Novellus, through
arbitration, a dispute regarding the valuation of assets of TFS. Varian
Semiconductor recorded Other Income of $2.0 million relating to the difference
between the actual settlement amount of $4.8 million and the estimated accrual.
Interest Income and Other Income, Net. In fiscal year 2000, Varian
Semiconductor recognized interest income of $4.6 million compared to $1.8
million in fiscal year 1999. In fiscal year 2000, Varian Semiconductor recorded
other income of $18.7 million upon settlement of litigation. After recording a
payment to Applied Materials, and legal expenses, Varian Semiconductor recorded
a gain of $16.0 million in the fourth quarter of fiscal year 2000 relating to
the difference between the actual settlement amount and the estimated accrual
upon settlement of their patent infringement and antitrust litigation. In the
second quarter of fiscal year 2000 Varian Semiconductor 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, Varian Semiconductor 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.
Provision for Income Taxes. Varian Semiconductor's effective income tax rate
was 33% in fiscal year 2000, compared to 22% 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
20
tax credits and for fiscal year 1999, unbenefited tax losses incurred prior to
the spin-off. Future tax rates may vary from the historical rates depending on
the worldwide allocations of earnings and tax planning strategies.
Net Income. As a result of the foregoing factors, in fiscal year 2000 the
Company recorded net income of $99.9 million compared with a net loss of $11.4
million for fiscal year 1999. The net income per diluted share was $2.97 for
fiscal year 2000 as compared to a net loss of $0.37 per diluted share for
fiscal year 1999.
Liquidity and Capital Resources
Varian Semiconductor generated $153.4 million of cash from operations during
fiscal year 2001, as compared to $51.6 million during fiscal year 2000. In
fiscal year 2001, cash provided by operations was primarily a result of
decreases in accounts receivable of $91.9 million and inventory of $65.4
million, in addition to net income of $37.6 million, after adjusting for the
non-cash charge of $27.0 million arising from a cumulative effect of a change
in accounting principle. The increases to cash during fiscal year 2001 were
partially offset by a decrease in accounts payable of $44.0 million and
deferred revenue of $26.4 million. Cash provided by operations in fiscal year
2000 came primarily from net income of $99.9 million, increases in accounts
payable of $32.6 million, and the tax benefit from exercise of stock options of
$21.9 million. The increase in cash was partially offset by increases in
accounts receivable of $82.1 million and $54.1 million in inventories, due to
the substantial increase in revenue.
During fiscal year 2001, $14.5 million of cash was used in investing
activities, primarily for the purchase of property, plant, and equipment.
During fiscal year 2000, Varian Semiconductor used $18.2 million for investing
activities, mainly for the purchase of property, plant and equipment of $20.4
million, offset by disposals and restricted cash received.
During fiscal year 2001, $18.3 million of cash was generated from financing
activities, primarily as result of short-term borrowings of $11.3 million and
$7.0 million from the issuance of stock upon the exercise of stock options.
Varian Semiconductor generated $20.2 million of cash from financing activities
in fiscal year 2000, due to the issuance of common stock upon the exercise of
stock options.
During the first quarter of fiscal year 2001, Varian Semiconductor's Board of
Directors authorized the repurchase of up to 2,000,000 shares of Varian
Semiconductor's common stock from time to time on the open market or in
privately negotiated transactions. Varian Semiconductor has not repurchased any
stock to date.
Varian Semiconductor'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 Varian Semiconductor's cash
requirements will fluctuate based on the timing and extent of these factors,
Varian Semiconductor's management believes that cash generated from operations,
together with available cash of $278.6 million at September 28, 2001 will be
sufficient to satisfy commitments for capital expenditures and other cash
requirements for the foreseeable future.
Fiscal 2002 Restructuring. During October 2001, Varian Semiconductor
implemented a reduction in force, primarily in the U.S., in which Varian
Semiconductor's worldwide workforce was reduced by approximately 200 employees
or 12%. The reduction in force was in response to the downturn in the industry.
As a result, Varian Semiconductor will recognize approximately $2.3 million in
restructuring costs during the first quarter of fiscal year 2002.
Settlement and License Agreement. On December 19, 2001, Varian Semiconductor
and Lam Research Corporation ("Lam") resolved the patent infringement
litigation between the two parties that was originally filed in October 1993
and Varian Semiconductor granted Lam a license under certain patents.
Additionally, all claims and counterclaims have been dismissed in accordance
with the agreement. The lawsuit involved Varian Semiconductor's assertion that
Lam infringed on three Varian patents that relate to the use of low pressure
gas
21
to assist in the heating and cooling of semiconductor wafers during various
manufacturing processes, and Lam's denial that the patents are valid or
infringed. Under the agreement, Varian Semiconductor has granted a license to
Lam under the patents in return for the payment of $20.0 million with $5.0
million paid immediately in exchange for prior use of the patents and the
remaining $15.0 million paid in 12 quarterly installments through fiscal year
2005 in exchange for future use of the patents. As further payment for past
royalties, Lam issued to Varian Semiconductor a warrant to purchase 2,000,000
shares of Lam common stock for $21.30 per share, exercisable at any time prior
to December 31, 2005.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and
Other Intangible Assets", which will be effective for Varian Semiconductor in
fiscal year 2003. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization and includes provisions for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, and reclassification of certain
intangibles out of previously reported goodwill. The revised standards include
transition rules and requirements for identification, valuation and recognition
of a much broader list of intangibles as part of business combinations than
prior practice, most of which will continue to be amortized.
In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." The objectives of SFAS 144 are to address significant issues relating
to the implementation of FASB Statement No. 121 ("SFAS 121"), Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, and to develop a single accounting model, based on the framework
established in SFAS 121, for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. SFAS 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and, generally, its provisions are to be applied prospectively.
Varian Semiconductor does not expect the adoption of the above mentioned
pronouncements to have a material impact on Varian Semiconductor's consolidated
financial statements.
Risk Factors
Varian Semiconductor 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 Varian Semiconductor's
business as one of its divisions. As a result, Varian Semiconductor has only a
limited operating history as an independent company on which its business and
prospects can be evaluated. Varian Semiconductor's ability to satisfy its
obligations and maintain profitability will depend on its future performance,
and Varian Semiconductor has limited experience in addressing various business
challenges without the support of its corporate parent. Varian Semiconductor
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, Varian Semiconductor is a smaller and less diversified
company than VAI was prior to the spin-off which may make Varian Semiconductor
more susceptible to economic downturns in the semiconductor industry. If Varian
Semiconductor 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 Varian
Semiconductor'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 is currently experiencing extreme
volatility in product pricing and a slowdown in product demand. Volatility and
slowdowns have resulted in significant reductions and delays in the purchase of
semiconductor
22
manufacturing equipment and the construction of new fabrication facilities
which has significantly harmed Varian Semiconductor's financial results. Even
though Varian Semiconductor's revenues are declining, in order to remain
competitive, Varian Semiconductor continues to invest in research and
development and to maintain its worldwide customer service and support
capability. These developments have adversely affected Varian Semiconductor's
financial results and could continue to adversely affect financial results. If
the downturn in the semiconductor industry continues, the decrease in demand
for Varian Semiconductor's products will continue to adversely affect its
financial results.
Varian Semiconductor 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.
Varian Semiconductor 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 Varian Semiconductor's competitors have substantially
greater financial resources and more extensive engineering, manufacturing,
marketing, service and support than Varian Semiconductor does. With fewer
resources, Varian Semiconductor may not be able to match the product offerings
or customer service and technical support offered by its competitors. In
addition, some smaller equipment manufacturers provide innovative technology
which may have performance advantages over Varian Semiconductor'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 Varian Semiconductor's products may suffer.
Varian Semiconductor 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.
As described in "Item 1. Business," Varian Semiconductor has historically sold
at least half of its systems in any particular period to its ten largest
customers. In addition, Varian Semiconductor may have difficulty attracting
additional large customers because its sales depend, in large 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. 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, Varian Semiconductor may experience difficulty in
selling to a prospective customer if that customer initially selects a
competitor's capital equipment.
Varian Semiconductor's quarterly results of operations are likely to fluctuate,
and as a result, Varian Semiconductor may fail to meet the expectations of its
investors and securities analysts, which may cause the price of its common
stock to decline.
Varian Semiconductor has experienced and expects to continue to experience
significant fluctuations in its quarterly financial results. From time to time,
customers may reschedule or cancel shipments, production difficulties could
delay shipments, or techincal difficulties may delay installation of the
product. A delay in shipment or customer acceptance of the product upon
installation 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 Varian Semiconductor's common stock to decline. Varian Semiconductor's
financial 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 Varian Semiconductor's quarterly financial results,
including the following:
.unexpected procurement or manufacturing difficulties;
23
.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 Varian Semiconductor's operating expenses are based on anticipated
capacity levels, and a high percentage of Varian Semiconductor'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 financial results
to vary significantly from quarter to quarter.
Varian Semiconductor's future business depends, in part, on its ability to
successfully introduce and manage the transition to new products, and Varian
Semiconductor may not succeed in accomplishing these goals.
Varian Semiconductor 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. Varian Semiconductor derives virtually
all of its revenue from sales and servicing of ion implantation systems and
related products and services. If Varian Semiconductor's VIISta ion implant
platform, which relies on single wafer processing, does not gain market
acceptance, future financial results will suffer.
Varian Semiconductor must accurately forecast the demand for new products while
managing the transition from older products, or it may otherwise mismanage
inventory levels. In addition, Varian Semiconductor 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, Varian
Semiconductor has experienced some delays in manufacturing and shipping systems
and enhancements as well as problems with the reliability and quality of such
systems and enhancements. If any of Varian's Semiconductor's 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-Pacific markets could cause sales of Varian
Semiconductor's products to decline.
International sales accounted for 71%, 73%, and 59% of Varian Semiconductor's
revenues in fiscal years 2001, 2000, and 1999, respectively, and specifically,
sales to the Asia-Pacific region have accounted for a substantial portion of
these revenues. Sales to the Asia-Pacific region accounted for 50%, 53%, and
39% of revenues in fiscal years 2001, 2000, and 1999, respectively. Because
Varian Semiconductor relies on sales to customers in the Asia-Pacific region
for a substantial portion of its revenues, its business is very likely to be
adversely impacted by economic downturns and instability in that region. In
fiscal year 1999, Varian Semiconductor's business was harmed by banking and
currency problems in some Asia-Pacific 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 Varian
Semiconductor's Korean customers. This resulted in the cancellation or delay of
orders for Varian Semiconductor's products from Korean customers which
adversely affected financial results in fiscal year 1999. Varian Semiconductor
recorded revenues of $314.5 million to the Asia-Pacific region during fiscal
year 2001. The decrease from prior year was due mainly due a decline in demand
for semiconductor devices. In fiscal year 2000, Varian Semiconductor recorded
revenues of $368.6 million in the Asia-Pacific region, compared with $106.4
million in fiscal year 1999, due mainly to increased demand for semiconductor
devices. Varian Semiconductor's business in the Asia-Pacific region is affected
by demand in each country.
24
In fiscal year 1999, Japan's economy began slowly emerging from a downturn.
Varian Semiconductor has seen increasing order activity from Japan throughout
fiscal year 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 Asia-Pacific Countries could be
delayed.
If Varian Semiconductor is unable to protect its proprietary rights adequately,
it may lose its ability to compete effectively in the semiconductor equipment
industry.
Varian Semiconductor 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. Varian Semiconductor intends to continue to file applications as
appropriate for patents covering new products and manufacturing processes.
However, Varian Semiconductor cannot provide assurance of the following:
. that patents will issue from any pending or future patent applications
owned by, or licensed to, Varian Semiconductor;
. that the claims allowed under any issued patents will be sufficiently
broad to protect Varian Semiconductor's technology position against
competitors;
. that any issued patents owned by or licensed to Varian Semiconductor
will not be challenged, invalidated or circumvented; and
. that the rights granted under Varian Semiconductor's patents will
provide it with competitive advantages.
Varian Semiconductor also has agreements with third parties for licensing of
patented or proprietary technology. These agreements include royalty bearing
licenses and technology cross-licenses. Varian Semiconductor's loss of
licensing agreements with Applied Materials and Tokyo Electron Limited could
have a material adverse effect on its business.
In addition, Varian Semiconductor 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. Varian Semiconductor
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, Varian
Semiconductor may not have adequate remedies for any such breaches. Varian
Semiconductor 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 Varian Semiconductor's resources and the attention of
management.
Varian Semiconductor 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 Varian Semiconductor, its business may be harmed. Varian
Semiconductor may not be aware of pending or issued patents held by third
parties that relate to its products or technologies. In the event that a claim
is asserted against Varian Semiconductor, it may need to acquire a license to
or contest the validity of a competitor's patent. Varian Semiconductor 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, Varian Semiconductor 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 Varian Semiconductor 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.
25
It is difficult for Varian Semiconductor to predict the quarter in which it
will be recognizing revenue from large product orders.
During a quarter, Varian Semiconductor customarily sells a relatively small
number of ion implantation systems that typically sell for prices ranging from
approximately $1.6 million to $4.0 million. Consequently, Varian
Semiconductor's revenue and financial 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 and customer acceptance of the installation
during that quarter. Varian Semiconductor recognizes all or a portion of the
revenue from a product shipment at the time the product is installed and meets
predetermined customer specifications. As a result, it is often difficult to
determine both the timing of a product shipment and the completion of the
installation of the product at the customer's location. In addition, Varian
Semiconductor's product order backlog at the beginning of each quarter may not
include all systems needed to achieve expected revenues for that quarter.
Because Varian Semiconductor may build systems according to forecast, the
absence of a significant backlog for an extended period of time could adversely
affect financial results.
Varian Semiconductor depends on limited groups of suppliers or single source
suppliers, the loss of which could impair its ability to manufacture products
and systems.
Varian Semiconductor 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 Varian Semiconductor's costs. Although Varian Semiconductor has
limited insurance to protect against loss due to business interruption from
these and other sources, Varian Semiconductor cannot provide assurance that
such coverage will be adequate or that it will remain available on commercially
acceptable terms. Although Varian Semiconductor 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 Varian Semiconductor to penalties and environmental remediation costs.
Varian Semiconductor 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 Varian Semiconductor'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 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 $4.1 million
in fiscal year 2001, $5.9 million in fiscal year 2000, and $2.7 million in
fiscal year 1999.
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 $8.3 million in estimated environmental
investigation and remediation costs for these sites and facilites as of
September 28, 2001. As to other sites and facilities, VMS has gained sufficient
knowledge to
26
be able to better estimate the scope and costs of future environmental
activities. VMS has accrued $27.4 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 $8.3 million previously described. The
Distribution Agreement provides that each of VMS, Varian Semiconductor 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, Varian Semiconductor may need to make additional
payments to cover its indemnification obligations that would exceed current
estimates. In addition, Varian Semiconductor'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. Varian Semiconductor 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 Varian
Semiconductor cannot now predict.
If Varian Semiconductor loses key employees or is unable to attract and retain
key employees, it may be unable to pursue business opportunities.
Varian Semiconductor'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 Varian Semiconductor's facilities in Massachusetts. The available pool
of qualified candidates is limited, and Varian Semiconductor 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 Varian Semiconductor's inability to hire,
train or retrain qualified personnel could harm Varian Semiconductor's business
and results of operations.
Varian Semiconductor's indemnification obligations under the Distribution
Agreement could be substantial, and Varian Semiconductor 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 Varian
Semiconductor has agreed to indemnify the other parties (and certain related
persons) from and after the spin-off 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.
Varian Semiconductor has anti-takeover defenses that could delay or prevent an
acquisition and could adversely affect the price of its common stock.
Provisions of Varian Semiconductor's certificate of incorporation, and by-laws
and of Delaware law could delay, defer or prevent an acquisition or change in
control of Varian Semiconductor or otherwise adversely affect the price of its
common stock. For example, Varian Semiconductor's Board of Directors is
classified into three classes, and stockholders do not have the right to call
special meetings of stockholders. Varian Semiconductor's certificate of
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. Varian Semiconductor has also adopted a stockholders
rights plan which may significantly dilute the equity interests of a person
seeking to acquire control of Varian Semiconductor without the approval of the
Board of Directors.
27
Varian Semiconductor does not anticipate paying dividends on its common stock
in the future.
Varian Semiconductor has not paid and does not anticipate paying dividends on
its common stock. Varian Semiconductor'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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Exchange Risk
As a multinational company, Varian Semiconductor faces exposure to adverse
movements in foreign currency exchange rates. This exposure may change over
time as Varian Semiconductor's business practices evolve and could have a
material adverse impact on Varian Semiconductor's financial results.
Historically, Varian Semiconductor's primary exposures have resulted from non-
U.S. dollar denominated sales and purchases in Europe and the Asia-Pacific
region.
Varian Semiconductor hedges currency exposures that are associated with certain
of its assets and liabilities denominated in various non-U.S. dollar
denominated currencies. Varian Semiconductor does not enter into forward
exchange contracts for trading purposes. Varian Semiconductor'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 28, 2001 are summarized
as follows (dollars in thousands):
Notional Contract Fair
Value Rate Value
-------- -------- -------
Foreign currency purchase contracts:
Euro................................................ $7,297 1.1025 $7,424
Korean Won.......................................... $1,378 1,283.30 $1,355
New Taiwan Dollar................................... $187 34.51 $187
British Pound....................................... $116 0.6906 $118
------- -------
Total foreign currency purchase contracts......... $8,978 $9,084
Foreign currency sell contracts:
Japanese Yen........................................ $3,427 118.76 $3,459
Euro................................................ $1,338 1.0811 $1,334
Korean Won.......................................... $1,055 1,293.91 $1,046
Israeli Shekel...................................... $782 4.2730 $766
New Taiwan Dollar................................... $198 34.98 $201
------- -------
Total foreign currency sell contracts............. $6,800 $6,806
Total contracts................................... $15,778 $15,890
======= =======
There were no significant unrealized gains or losses for these forward
contracts as of September 28, 2001. The fair value of forward exchange
contracts generally reflects the estimated amounts that Varian Semiconductor
would receive or pay to terminate the contracts at the reporting date. The
notional amounts of forward exchange contracts are not a measure of Varian
Semiconductor's exposure.
Interest Rate Risk
Although payments under certain of Varian Semiconductor's operating leases for
facilities are tied to market indices, Varian Semiconductor is not exposed to
material interest rate risk associated with its operating leases.
28
Similarly, although payments under certain of Varian Semiconductor's overseas
borrowing facilities are tied to market indices, Varian Semiconductor is not
exposed to material interest rate risk associated with these borrowing
facilities.
Commodity Price Risk
Varian Semiconductor is not exposed to material commodity price risk.
Item 8. Financial Statements and Supplementary Data.
The response to this item is submitted as a separate section to this report.
See "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-
K."
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
29
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 Varian
Semiconductor's Proxy Statement for the Annual Meeting of Stockholders to be
held on February 26, 2002 (the "2002 Proxy Statement") under the caption
"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 2002 Proxy Statement under the
caption "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 2002 Proxy Statement under the
caption "Principal Stockholders," which section is incorporated herein by this
reference.
Item 13. Certain Relationships and Related Transactions.
The response to this item is contained in the 2002 Proxy Statement under the
caption "Election of Directors," which section is incorporated herein by this
reference.
30
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 Accountants
. Consolidated Balance Sheets as of September 28, 2001 and
September 29, 2000
. Consolidated Statements of Operations for fiscal years ended
September 28, 2001, September 29, 2000, and October 1, 1999
. Consolidated Statements of Cash Flows for fiscal years ended
September 28, 2001, September 29, 2000, and October 1, 1999
. Consolidated Statements of Stockholders' Equity for fiscal years
ended September 28, 2001, September 29, 2000, and October 1, 1999
. 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 2001, 2000 and 1999 is 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 II--Valuation of 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.
(3) 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 fiscal year 2001.
31
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/ Robert J. Halliday
By: _________________________________
Robert J. Halliday
Vice President and Chief Financial
Officer
Date: December 20, 2001
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 Chairman of the Board and Chief December 18, 2001
___________________________________ Executive Officer (Principal
Richard A. Aurelio Executive Officer)
/s/ Ernest L. Godshalk, iii President, Chief Operating Officer December 18, 2001
___________________________________ and Director
Ernest L. Godshalk, III
/s/ Robert J. Halliday Vice President and Chief Financial December 18, 2001
___________________________________ Officer (Principal Financial
Robert J. Halliday Officer)
/s/ Seth H. Bagshaw Vice President and Corporate December 18, 2001
___________________________________ Controller (Principal Accounting
Seth H. Bagshaw Officer)
/s/ George W. Chamillard Director December 18, 2001
___________________________________
George W. Chamillard
/s/ Robert W. Dutton Director December 18, 2001
___________________________________
Robert W. Dutton
/s/ Angus A. MacNaughton Director December 18, 2001
___________________________________
Angus A. MacNaughton
/s/ Elizabeth E. Tallett Director December 18, 2001
___________________________________
Elizabeth E. Tallett
32
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 Lease of 4 Mulliken Way, Newburyport, Massachusetts, dated as of
October 30, 1995, between Berkshire-Newbury Limited Partnership and
Registrant, assigned to the Registrant by Genus, Inc. on April 12,
1999.
10.11 Varian Semiconductor Equipment Associates, Inc. Employee Stock
Purchase Plan
10.12 Amendment to the Rights Agreement between First Chicago Trust Company
of New York and Registrant, dated February 19, 1999, to appoint
EquiServe Trust Company, N.A.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
- --------
* Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form 10 (File No. 000-25395).
33
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 Balance Sheets as of September 28, 2001 and September 29,
2000.................................................................... F-3
Consolidated Statements of Operations for fiscal years ended September
28, 2001, September 29, 2000, and October 1, 1999....................... F-4
Consolidated Statements of Cash Flows for fiscal years ended September
28, 2001, September 29, 2000, and October 1, 1999....................... F-5
Consolidated Statements of Stockholders' Equity for fiscal years ended
September 28, 2001, September 29, 2000, and October 1, 1999............. F-6
Notes to the Consolidated Financial Statements........................... F-7
The following financial statement schedule of the Registrant and its
subsidiaries for fiscal years 2001, 2000, and 1999, should be read in
conjunction with the Consolidated Financial Statements of the Registrant and
its subsidiaries:
Financial Statement Schedule
Page
----
Schedule II--Valuation and Qualifying Accounts and Reserves.............. S-1
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 consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of the Company and its subsidiaries at September 28, 2001
and September 29, 2000, and the results of their operations and their cash
flows for each of the three fiscal years in the period ended September 28,
2001, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)(2) presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule 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, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 2 to these financial statements, in fiscal year 2001, the
Company changed its method of accounting for revenue recognition in accordance
with guidance provided in SEC Staff Accounting Bulletin No. 101 ("SAB 101"), "
Revenue Recognition in Financial Statements" and changed its method of
valuation of inventories.
/s/ PricewaterhouseCoopers LLP
By: _________________________________
PricewaterhouseCoopers LLP
Boston, Massachusetts
October 24, 2001, except for Note 20,
as to which the date is December 19, 2001
F-2
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
September 28, September 29,
2001 2000
------------- -------------
Restated/1/
(Amounts in thousands,
except share data)
ASSETS
Current assets
Cash and cash equivalents.......................... $278,641 $121,692
Accounts receivable, net........................... 85,455 182,396
Inventories, net................................... 115,689 148,234
Deferred income taxes.............................. 34,899 9,865
Other current assets............................... 9,626 7,884
-------- --------
Total current assets............................. 524,310 470,071
Property, plant and equipment, net................. 46,288 43,755
Other assets....................................... 17,459 19,869
-------- --------
Total assets................................... $588,057 $533,695
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and other short-term borrowings...... $15,900 $5,541
Accounts payable................................... 19,271 63,392
Accrued expenses................................... 43,149 55,869
Product warranty................................... 20,075 28,190
Deferred revenue................................... 81,137 23,006
-------- --------
Total current liabilities........................ 179,532 175,998
Long-term accrued expenses......................... 7,292 6,792
Deferred income taxes.............................. 1,788 1,546
-------- --------
Total liabilities................................ 188,612 184,336
Commitments and contingencies (Notes 14 and 15)
Stockholders' equity
Preferred stock, par value $0.01; 5,000,000 shares
authorized, none issued
Common stock, par value $0.01; 150,000,000 shares
authorized, 32,628,192 issued and outstanding at
September 28, 2001, and 32,081,167 issued and
outstanding at September 29, 2000................. 326 321
Capital in excess of par value..................... 235,700 223,263
Retained earnings.................................. 163,419 125,775
-------- --------
Total stockholders' equity....................... 399,445 349,359
-------- --------
Total liabilities and stockholders' equity..... $588,057 $533,695
======== ========
See accompanying notes to the consolidated financial statements.
- --------
/1/Varian Semiconductor changed its method of valuing domestic inventories.
Refer to Note 2. "Summary of Significant Accounting Policies" for further
details.
F-3
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended
---------------------------------------
September 28, September 29, October 1,
2001 2000 1999
------------- ------------- -----------
Restated/1/ Restated/1/
(Amounts in thousands, except per share
data)
Revenue
Product revenue....................... $534,451 $626,219 $206,419
Service revenue....................... 82,191 51,432 36,614
Royalty revenue....................... 15,337 10,068 28,852
-------- -------- --------
Total revenue....................... 631,979 687,719 271,885
Cost of Revenue
Cost of product revenue............... 345,781 379,777 153,388
Cost of service revenue............... 53,026 37,212 26,290
-------- -------- --------
Total cost of revenue............... 398,807 416,989 179,678
Gross profit.......................... 233,172 270,730 92,207
Operating Costs and Expenses
Research and development.............. 49,817 47,025 37,582
Marketing, general and
administrative....................... 93,176 98,063 70,310
Restructuring costs................... 1,875 -- 2,688
-------- -------- --------
Total operating expenses............ 144,868 145,088 110,580
-------- -------- --------
Operating income (loss)............. 88,304 125,642 (18,373)
Interest income, net.................. 8,237 4,597 1,821
Other income, net..................... -- 18,700 2,009
-------- -------- --------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle................. 96,541 148,939 (14,543)
Provision (benefit) for income
taxes................................ 31,859 49,072 (3,186)
-------- -------- --------
Income (loss) before cumulative
effect of change in accounting
principle.......................... 64,682 99,867 (11,357)
-------- -------- --------
Cumulative effect of change in
accounting principle, net of tax
of $15,724........................... (27,038) -- --
-------- -------- --------
Net income (loss)..................... $37,644 $99,867 $(11,357)
======== ======== ========
Weighted average shares outstanding--
basic................................ 32,275 31,375 30,428
Weighted average shares outstanding--
diluted.............................. 34,009 33,681 30,428
Income (loss) per share before
cumulative effect of change in
accounting principle--basic.......... $2.00 $3.18 $(0.37)
Income (loss) per share before
cumulative effect of change in
accounting principle--diluted........ $1.90 $2.97 $(0.37)
Cumulative effect of change in
accounting principle--basic.......... $(0.84) -- --
Cumulative effect of change in
accounting principle--diluted........ $(0.80) -- --
Net income (loss) per share--
basic.............................. $1.16 $3.18 $(0.37)
Net income (loss) per share--
diluted............................ $1.10 $2.97 $(0.37)
See accompanying notes to the consolidated financial statements.
- --------
/1/Varian Semiconductor changed its method of valuing domestic inventories.
Refer to Note 2. "Summary of Significant Accounting Policies" for further
details.
F-4
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
---------------------------------------
September 28, September 29, October 1,
2001 2000 1999
------------- ------------- -----------
Restated/1/ Restated/1/
(Amounts in thousands)
Cash flows from operating activities
Net income (loss).................... $37,644 $99,867 $(11,357)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities
Cumulative effect of change in
accounting principle, net of tax.. 27,038 -- --
Depreciation and amortization...... 13,947 13,264 12,347
Provision for doubtful accounts.... 3,940 473 2,212
Loss on disposal of fixed assets... 85 352 --
Compensatory stock option expense.. -- 1,047 --
Tax benefit from exercise of stock
options........................... 5,398 21,880 --
Deferred income taxes.............. (9,068) 15,644 1,802
Changes in assets and liabilities
Accounts receivable................ 91,882 (82,095) (41,780)
Inventories........................ 65,407 (54,072) (10,887)
Other current assets............... (1,742) (4,997) 1,638
Accounts payable................... (43,991) 32,550 20,378
Accrued expenses................... (6,250) (16,272) (1,796)
Product warranty................... (4,747) 11,862 (5,477)
Deferred revenue................... (26,447) 12,664 1,769
Long term accrued expenses......... 500 (384) 380
Other.............................. (206) (175) (496)
-------- -------- --------
Net cash provided by (used in)
operating activities.................. 153,390 51,608 (31,267)
Cash flows from investing activities
Purchase of property, plant and
equipment........................... (14,833) (20,375) (10,977)
Proceeds from disposal of property,
plant and equipment................. 354 1,175 --
Restricted cash paid................. -- -- (1,000)
Restricted cash received............. -- 1,000 5,000
-------- -------- --------
Net cash used in investing activities.. (14,479) (18,200) (6,977)
Cash flows from financing activities
Proceeds from the issuance of common
stock to settle stock option
exercises........................... 7,044 20,177 193
Notes payable and short-term
borrowing........................... 11,302 -- --
Other................................ -- -- (214)
Net transfers from Varian Associates,
Inc................................. -- -- 102,712
-------- -------- --------
Net cash provided by financing
activities............................ 18,346 20,177 102,691
-------- -------- --------
Effects of exchange rate changes on
cash.................................. (308) 2,139 1,521
-------- -------- --------
Net increase in cash and cash
equivalents........................... 156,949 55,724 65,968
Cash and cash equivalents at beginning
of period............................. 121,692 65,968 --
-------- -------- --------
Cash and cash equivalents at end of
period................................ $278,641 $121,692 $65,968
======== ======== ========
Supplemental information to the cash
flow:
Cash payments for income taxes......... $41,831 $23,887 $700
======== ======== ========
Cash payments for interest............. $255 $158 --
======== ======== ========
See accompanying notes to the consolidated financial statements.
- --------
/1/Varian Semiconductor changed its method of valuing domestic inventories.
Refer to Note 2. "Summary of Significant Accounting Policies" for further
details.
F-5
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital in
Common Excess of Retained Divisional
Stock Par Value Earnings Equity Total
------ ---------- -------- ---------- --------
(Amounts in thousands)
Balance at October 2, 1998..... -- -- -- $103,249 $103,249
Adjustment for the cumulative
effect on prior years of
applying retroactively the
valuation of inventory on a
first-in, first-out basis..... -- -- $11,353 -- 11,353
---- -------- -------- -------- --------
Balance at October 2, 1998
(Restated/1/)................. -- -- 11,353 103,249 114,602
Net loss prior to
Distribution................ -- -- -- (25,912) (25,912)
Net income subsequent to
Distribution................ -- -- 14,555 -- 14,555
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
(Restated1)................... $305 $180,175 $25,908 -- $206,388
---- -------- -------- -------- --------
Net income for the year...... -- -- 99,867 -- 99,867
Compensatory stock option
expense..................... -- 1,047 -- -- 1,047
Issuance of stock under
omnibus stock and stock
option plans, including
income tax benefit
of $21,880.................. 16 42,041 -- -- 42,057
---- -------- -------- -------- --------
Balance at September 29, 2000
(Restated/1/)................. $321 $223,263 $125,775 -- $349,359
Net income for the year...... -- -- 37,644 -- 37,644
Issuance of stock under
omnibus stock and stock
option plans, including
income tax benefit
of $5,398................... 5 12,437 -- -- 12,442
---- -------- -------- -------- --------
Balance at September 28, 2001.. $326 $235,700 $163,419 -- $399,445
==== ======== ======== ======== ========
See accompanying notes to the consolidated financial statements.
- --------
/1/Varian Semiconductor changed its method of valuing domestic inventories.
Refer to Note 2. "Summary of Significant Accounting Policies" for further
details.
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. ("Varian Semiconductor")
designs, manufactures, markets and services semiconductor processing equipment
used in the fabrication of integrated circuits to customers located both in the
U. S. and in international markets. Varian Semiconductor 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 Varian Semiconductor reflect the
financial position, results of operations and cash flows of Varian
Semiconductor as of and for the years ended September 28, 2001 and September
29, 2000. 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 Varian Semiconductor, then distributed to the
holders of record of VAI common stock one share of common stock of Varian
Semiconductor for each share of VAI common stock owned on March 24, 1999. 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
Varian Semiconductor, VAI, hereafter referred to as VMS for periods following
the spin-off and IB (the "Distribution Agreement"). For purposes of providing
an orderly transition and to define certain ongoing relationships between and
among Varian Semiconductor, VMS and IB after the spin-off Varian Semiconductor,
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. Varian Semiconductor 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 Varian Semiconductor on a stand-alone basis.
Under the terms of the Distribution Agreement, net assets transferred to Varian
Semiconductor as of April 2, 1999 were based on estimates and are subject to
adjustment. In the fourth quarter of fiscal year 1999, Varian Semiconductor
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 spin-off. 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
Varian Semiconductor's fiscal year is the 51- to 53-week period that ends on
the Friday nearest September 30. Fiscal year 2001 comprises the 52-week period
ended on September 28, 2001. 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.
Principles of Consolidation
The consolidated financial statements include those of Varian Semiconductor and
its subsidiaries. Significant intercompany balances and transactions have been
eliminated in consolidation.
Revenue Recognition
Product revenue includes established products, new products and spare parts.
Varian Semiconductor recognizes revenue from product sales upon shipment
provided title and risk of loss has passed to the customer, evidence of an
arrangement exists, fees are fixed or determinable, collectability is
reasonably assured and there are no uncertainties regarding customer
acceptance.
For some of Varian Semiconductor's sales transactions, a portion of the total
purchase price is not due until installation occurs and the customer accepts
the product. For established products, the lesser of the amount allocated to
the equipment or the contractual amount billable upon delivery is recorded as
product revenue upon delivery. The amount deferred is recognized as revenue
upon customer acceptance. For new products, revenue allocated to the equipment
is recognized upon customer acceptance. Revenue related to spare parts sales is
recognized upon delivery. Varian Semiconductor accrues warranty costs upon
recognition of product revenue.
Service Revenue includes maintenance and service contracts, paid service and
installation services. Revenue related to maintenance and service contracts is
recognized ratably over the duration of the contracts. Revenue related to paid
service is recorded when earned and the revenue related to installation is
recorded upon fulfillment of the service obligation.
Royalty revenue is recognized when contractual obligations are met, evidence of
an arrangement exists, fees are fixed or determinable and collection is
reasonably assured.
Varian Semiconductor's transactions frequently include the sale of systems and
services under multiple element arrangements. Revenue under these arrangements
is allocated to all elements except systems based upon the fair value of those
elements. The amount allocated to installation is based upon hourly rates at
the estimated time to complete the service. The fair value of all other
elements are based upon the price charged when these amounts are sold
separately and unaccompanied by other elements. The amount of revenue allocated
to systems is done on a residual method basis. Under this method, the total
value of the arrangement is allocated first to undelivered elements based on
their fair values, with the remainder being allocated to systems revenue.
Installation is not essential to the functionality of the system, as these
services do not alter the equipment's capabilities.
F-8
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Change in Revenue Accounting Principle
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, including the
timing of revenue recognition for sales that involve contractual customer
acceptance provisions and installation of the product if these events occur
after shipment and transfer of title and risk of loss. In October 2000, the SEC
issued Staff Accounting Bulletin No. 101: Revenue Recognition in Financial
Statements--Frequently Asked Questions and Answers ("SAB 101 FAQ"). The SAB 101
FAQ was issued to clarify many of the implementation questions surrounding SAB
101. Varian Semiconductor implemented the provisions of SAB 101 in the fourth
quarter of fiscal year 2001, retroactive to the first quarter of fiscal year
2001.
Varian Semiconductor's previous revenue recognition policy was to recognize
product revenue at the time the customer took title to the product, generally
at the time of shipment. At that time, Varian Semiconductor also accrued the
costs to install the product. For some transactions, a portion of the purchase
price is not due until installation is complete and the product is accepted by
the customer. Under SAB 101 and the new accounting method adopted retroactive
to the first quarter of fiscal year 2001, installation is considered a separate
earnings process, revenue related to new products is recognized upon customer
acceptance and revenue related to established products is accounted for as
multiple element arrangements as described above.
As a result of this change, Varian Semiconductor reported a change in
accounting principle in accordance with APB Opinion No. 20, "Accounting
Changes," by a cumulative effect adjustment. Varian Semiconductor recorded a
non-cash charge of $27.0 million (after reduction for income taxes of $15.7
million), or ($0.80) per diluted share, to reflect the cumulative effect of the
accounting change as of the beginning of the fiscal year. For fiscal year 2001,
Varian Semiconductor recognized $74.8 million in revenue which is included in
the cumulative effect adjustment as of the first quarter of fiscal year 2001.
The effect of that revenue was to increase income by $20.6 million (net of
$12.0 million of tax) for fiscal year 2001.
Proforma amounts for the periods beginning before the first quarter of fiscal
year 2001 have not been presented, as the effect of the change in accounting
principle could not be reasonably determined.
Deferred Revenue
Deferred revenue includes customer advances and amounts that have been billed
per the contractual terms but have not been recognized as revenue.
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
Varian Semiconductor accrues estimated amounts for legal fees expected to be
incurred in connection with loss contingencies which are both probable and
estimatable.
F-9
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign Currency Translation
In fiscal year 2000, Varian Semiconductor adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards ("SFAS") No. 138,
"Accounting for Certain Derivative Instruments--an amendment of SFAS 133"
("Accounting for Derivative Instruments and Hedging Activities"). This
statement amended the accounting and reporting standards for certain derivative
instruments and hedging activities. The adoption of SFAS 138 in fiscal year
2001, in accordance with SFAS 137, which deferred the effective date of SFAS
133, had no material impact on Varian Semiconductor's consolidated financial
statements.
For international 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. During 2001, an aggregate
exchange loss of $0.8 million was included in marketing, general and
administrative expenses. The aggregate exchange gain included in marketing,
general and administrative expenses for fiscal years ended 2000 and 1999 was
$0.7 million and $1.0 million, respectively.
Varian Semiconductor's foreign subsidiaries operate and sell Varian
Semiconductor's products in various global markets. As a result, Varian
Semiconductor is exposed to changes in foreign currency exchange rates. Varian
Semiconductor utilizes foreign currency forward exchange contracts to hedge
against currency exposures that are associated with certain of its assets and
liabilities denominated in various non-U.S. dollar denominated currencies.
Varian Semiconductor attempts to match the forward contracts with the
underlying items being hedged in terms of currency, amount, and maturity.
Varian Semiconductor does not use derivative financial instruments for
speculative or trading purposes. Since the impact of movements in currency
exchange rates on forward contracts offsets most of the related impact on the
exposures hedged, these financial instruments generally do not subject Varian
Semiconductor to speculative risk that would otherwise result from changes in
currency exchange rates. The derivatives are not SFAS 133 designated hedges.
They are carried at fair value on the balance sheet, with changes in its fair
value recognized in current period earnings.
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
Varian Semiconductor by VAI, amounts due to affiliates related to purchases,
amounts due to/from VAI for services and other charges, and predistribution
earnings (losses) of Varian Semiconductor.
Cash and Cash Equivalents
Varian Semiconductor 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.
Concentration of Risk
Financial instruments that potentially expose Varian Semiconductor to
concentrations of credit risk consist principally of trade accounts receivable,
cash investments and forward exchange contracts. As Varian Semiconductor has
sold over half of its systems to its ten largest customers in recent fiscal
years, its trade accounts receivable is primarily comprised of these respective
customers. However, the concentration of credit risk is limited due to the fact
that the customer base is dispersed among many geographic regions and is
comprised of mainly larger multi-national companies. Varian Semiconductor
performs ongoing credit
F-10
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
evaluations of its customers and generally does not require collateral from its
customers. One customer had amounts owed to Varian Semiconductor amounting to
15% and 14% of the total accounts receivable balance as of September 28, 2001
and September 29, 2000, respectively.
During fiscal years 2001 and 2000, no one customer accounted for 10% or more of
Varian Semiconductor's revenue. In fiscal year 1999, revenue from two customers
accounted for 12% and 10% of Varian Semiconductor's revenue.
International sales accounted for 71%, 73%, and 59% of Varian Semiconductor's
revenues in fiscal years 2001, 2000, and 1999, respectively, and specifically,
sales to the Asia-Pacific region have accounted for a substantial portion of
these revenues. Sales to the Asia-Pacific region accounted for 50%, 53%, and
39% of revenues in fiscal years 2001, 2000, and 1999, respectively. Because
Varian Semiconductor relies on sales to customers in the Asia-Pacific region
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,
Varian Semiconductor's business was harmed by banking and currency problems in
some Asian countries.
Varian Semiconductor 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 financial institutions.
Approximately 95% of cash and cash equivalents are invested with six financial
institutions. Varian Semiconductor also places forward, foreign exchange
contracts with investment grade financial institutions in order to minimize
currency risk exposure.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out ("FIFO") method (see "Change in Accounting Principle"
immediately below).
Change In Inventory Accounting Principle
During the first quarter of fiscal year 2001, Varian Semiconductor changed its
method of valuing domestic inventories from the last-in, first-out ("LIFO")
method to the first-in, first-out ("FIFO") method. Prior to the spin-off to
shareholders on April 2, 1999, Varian Semiconductor had operated as a division
of Varian Associates, Inc., and had been required to conform to the parent
company's LIFO method of valuing domestic inventory. Varian Semiconductor
experienced declining materials costs and anticipated lower material unit costs
in the foreseeable future through value engineering. Therefore, Varian
Semiconductor believed the FIFO method was preferable since it would more
appropriately match revenues and expenses. Additionally, the adoption of the
FIFO method by Varian Semiconductor allows more readily comparable financial
results with its principal competitors and other companies in the broader
semiconductor industry segment that all use the FIFO method. Varian
Semiconductor applied this change retroactively by restating the financial
statements as required by Accounting Principles Board Opinion No. 20,
"Accounting Changes", which resulted in an increase to net income per diluted
share for fiscal year 2000 of $0.03, an increase in retained earnings of $14.2
million, an increase in inventory of $22.5 million and a decrease in deferred
taxes of $8.3 million at September 29, 2000.
Varian Semiconductor's inventories include high technology parts and components
that may be specialized in nature or subject to rapid technological
obsolescence. While Varian Semiconductor 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 in the period the cost
is incurred. Plant and equipment are depreciated over their estimated
F-11
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 income from continuing
operations.
Goodwill and Other Long-Lived Assets
Included in other assets at September 28, 2001 and September 29, 2000 is
goodwill of $13.9 million and $15.7 million, respectively (net of accumulated
amortization of $5.4 million and $3.8 million, respectively). Also included in
other assets at September 29, 2000 is other intangible assets of $0.2 million
(net of accumulated amortization of $19.5 million). As of September 28, 2001,
all other intangible assets were fully amortized.
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, Varian Semiconductor 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, Varian Semiconductor 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 Varian
Semiconductor's commitment to a formal plan of action. In situations where the
various uncertainties make it difficult to assess the likelihood and scope of
further investigation or remediation activities or to estimate then future
costs, the lower limit of an estimated range is accrued on a non-discounted
basis. All other liabilities which are generally where, Varian Semiconductor
has general sufficient knowledge to be able to better estimate the scope of
costs and future activities are accrued on a discounted basis.
Taxes on Income
Varian Semiconductor 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. Varian
Semiconductor has not provided for possible U.S. taxes on the undistributed
income of foreign subsidiaries that is considered to be reinvested
indefinitely. At September 28, 2001 and September 29, 2000, such undistributed
foreign income was approximately $10.4 million and $7.7 million, respectively.
Accounting for Stock-Based Compensation
Varian Semiconductor applies the pro forma disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation." Accordingly, Varian Semiconductor
applies APB Opinion 25 and related interpretations in
F-12
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Recent Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective
for Varian Semiconductor in fiscal year 2003. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization and includes provisions for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles, and
reclassification of certain intangibles out of previously reported goodwill.
The revised standards include transition rules and requirements for
identification, valuation and recognition of a much broader list of intangibles
as part of business combinations than prior practice, most of which will
continue to be amortized.
In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." The objectives of SFAS 144 are to address significant issues relating
to the implementation of FASB Statement No. 121 ("SFAS 121"), Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, and to develop a single accounting model, based on the framework
established in SFAS 121, for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. SFAS 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and, generally, its provisions are to be applied prospectively.
Varian Semiconductor does not expect the adoption of the above mentioned
pronouncements to have a material impact on Varian Semiconductor's consolidated
financial statements.
Note 3. Computation of Net Income (Loss) Per Share
Varian Semiconductor calculates income (loss) per share in accordance with SFAS
128, "Earnings per Share." Basic income (loss) per share is calculated based on
net income (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 spin-off. Diluted income per share
includes additional dilution from stock issuable pursuant to the exercise of
stock options outstanding. For purposes of the diluted income 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 spin-off.
F-13
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the numerator and denominator used in the income (loss) per
share calculations is presented as follows:
Fiscal Year
--------------------------
2001 2000 1999
------- -------- --------
Restated Restated
(Dollars in thousands,
except per
share data)
Numerator:
Income (loss) before cumulative effect of change
in accounting principle.......................... $64,682 $99,867 $(11,357)
Cumulative effect of change in accounting
principle, net of tax............................ (27,038) -- --
------- ------- --------
Net income (loss)................................. $37,644 $99,867 $(11,357)
======= ======= ========
Denominator:
Denominator for basic income (loss) per share--
Weighted average shares outstanding............... 32,275 31,375 30,428
Effect of dilutive securities:
Stock options..................................... 1,734 2,306 --
------- ------- --------
Denominator for diluted income (loss) per share... 34,009 33,681 30,428
======= ======= ========
Income (loss) per share before cumulative effect
of change in accounting principle--basic......... $2.00 $3.18 $(0.37)
Income (loss) per share before cumulative effect
of change in accounting principle--diluted....... $1.90 $2.97 $(0.37)
Cumulative effect of change in accounting
principle--basic................................. $(0.84) -- --
Cumulative effect of change in accounting
principle--diluted............................... $(0.80) -- --
Net income (loss) per share--basic................ $1.16 $3.18 $(0.37)
Net income (loss) per share--diluted.............. $1.10 $2.97 $(0.37)
For fiscal year 2001, options to purchase 0.7 million common shares at a
weighted average exercise price of $51.85 (an exercise price that exceeded the
market value of the underling common stock) were excluded from the computation
of diluted earnings per share. For fiscal year 2000, options to purchase 0.5
million common shares at a weighted average exercise price of $53.29 (an
exercise price that exceeded the market value of the underling common stock)
were excluded from the computation of diluted earnings per share. As Varian
Semiconductor 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.
Note 4. Accounts Receivable
Accounts receivable consist of the following:
September 28, September 29,
2001 2000
------------- -------------
(Dollars in thousands)
Billed receivables............................... $92,348 $185,352
Allowance for doubtful accounts.................. (6,893) (2,956)
------- --------
Accounts receivable, net......................... $85,455 $182,396
======= ========
F-14
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5. Inventories
The components of inventories are as follows:
2001 2000
-------- --------
Restated
(Dollars in
thousands)
Raw materials and parts................................... $32,002 $75,197
Work in process........................................... 13,775 46,702
Finished goods............................................ 69,912 26,335
-------- --------
Total inventories....................................... $115,689 $148,234
======== ========
Note 6. Property, Plant and Equipment
The components of property, plant, and equipment are as follows:
Useful
Life 2001 2000
------ -------- --------
(Dollars in
thousands)
Land and land improvement......................... -- $2,470 $2,470
Building.......................................... 20-40 33,187 32,025
Machinery and equipment........................... 2-7 76,605 68,553
Construction in progress.......................... -- 1,375 1,476
-------- --------
Property, plant, and equipment, gross............. $113,637 $104,524
Accumulated depreciation.......................... (67,349) (60,769)
-------- --------
Property, plant and equipment, net................ $46,288 $43,755
======== ========
Depreciation expense was $11.9 million, $10.5 million, and $9.7 million for
fiscal years 2001, 2000, and 1999, respectively. The cost and accumulated
depreciation for machinery and equipment held under capital leases were $2.9
million and $1.2 million, respectively as of September 28, 2001. The cost and
accumulated depreciation for machinery and equipment held under capital leases
were $2.5 million and $1.4 million, respectively, as of September 29, 2000.
Assets acquired under capital leases were $0.6 million in fiscal year 2001,
$0.9 million in fiscal year 2000, and $0.9 million in fiscal 1999.
Note 7. Loans Payable
As of September 28, 2001, Varian Semiconductor's subsidiary in Japan had three
loans outstanding with three different financial institutions. Maximum
available borrowings on each of the three loans were as follows:
(Yen) 590,000,000 ($5.0 million at September 28, 2001), (Yen) 500,000,000 ($4.2
million at September 28, 2001), and (Yen) 700,000,000 ($6.0 million at
September 28, 2001). The loans are unsecured and contain no restrictive
covenants, although each loan is guaranteed by Varian Semiconductor. Interest
rates range from the short-term prime rate to the Tokyo interbank offered rate
+ 1.75% (approximately 1.38% to 1.83% at September 28, 2001). The loans mature
every 30 to 90 days and are normally rolled over into new 30 to 90 day loans
upon maturity. Total outstanding borrowings at September 28, 2001 were (Yen)
1,790,000,000, or $15.2 million.
Varian Semiconductor also has borrowing capacity in Europe and Taiwan. In
February 2001, Varian Semiconductor's subsidiary in the Netherlands closed a
one year credit facility which includes a $5.5 million note and Euro 2.5
million of overdraft protection. Interest accrues at LIBOR + 1.5% on the note
and at Euro base rate + 1.5% on the overdraft portion. In July 2001, Varian
Semiconductor's subsidiary in Taiwan closed a
F-15
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$1.0 million note. The note accrues interest at the local base rate + 1.3% and
is payable on demand. Both credit facilities, in the Netherlands and Taiwan,
are unsecured and contain no restrictive covenants, although each loan is
guaranteed by Varian Semiconductor. There were no outstanding borrowings as of
September 28, 2001 on either loan.
As of September 29, 2000, Varian Semiconductor had one 90 day loan outstanding,
with a balance of (Yen)590,000,000 ($5.5 million at September 29, 2000). The
loan was unsecured, and contained no restrictive covenants, although it was
guaranteed by Varian Semiconductor. The interest rate was 2.15% per year as of
September 29, 2000.
In May, 2000, Varian Semiconductor closed on a $75.0 million unsecured three-
year Revolving Credit Facility (the "Credit Facility"), comprised of a $15.0
million, 364-day facility and a $60.0 million, 3-year facility. The purpose of
this facility was to provide funds for working capital and for general
corporate purposes. Borrowings were limited to the lesser of $75.0 million or
the sum of a percentage of certain eligible receivables and inventory, and bore
interest at LIBOR or a defined bank rate approximating prime, plus an
applicable margin. The facility contained 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. During October 2001, the
Credit Facility was terminated by Varian Semiconductor in that the Credit
Facility was never utilized and that borrowings were not anticipated in the
foreseeable future. Varian Semiconductor determined that fees associated with
maintaining the Credit Facility were unnecessary considering the current
economic downturn and Varian Semiconductor's current cash position.
Note 8. Accrued Expenses
The components of accrued expenses are as follows:
2001 2000
----------- -----------
(Dollars in thousands)
Payroll and employee benefits....................... $22,513 $19,520
Income taxes payable................................ 2,900 3,403
Estimated loss contingencies........................ 8,234 10,196
Other............................................... 9,502 22,750
----------- -----------
Total accrued expenses.............................. $43,149 $55,869
=========== ===========
Note 9. 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 10. Forward Exchange Contracts
As a multinational company, Varian Semiconductor faces exposure to adverse
movements in foreign currency exchange rates. This exposure may change over
time as Varian Semiconductor's business practices evolve and could have a
material adverse impact on Varian Semiconductor's financial results.
Historically, Varian Semiconductor's primary exposures have resulted from non-
U.S. dollar denominated sales and purchases in Europe and the Asia-Pacific
region.
F-16
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At the present time, Varian Semiconductor hedges currency exposures that are
associated with certain of its assets and liabilities denominated in various
non-U.S. dollar denominated currencies. Varian Semiconductor does not enter
into forward exchange contracts for trading purposes. Varian Semiconductor'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 28, 2001 are summarized
as follows (dollars in thousands):
Notional Contract Fair
Value Rate Value
-------- -------- -------
Foreign currency purchase contracts:
Euro............................................ $7,297 1.1025 $7,424
Korean Won...................................... 1,378 1,283.30 1,355
New Taiwan Dollar............................... 187 34.51 187
British Pound................................... 116 0.6906 118
------- -------
Total foreign currency purchase contracts..... 8,978 9,084
Foreign currency sell contracts:
Japanese Yen.................................... $3,427 118.76 $3,459
Euro............................................ 1,338 1.0811 1,334
Korean Won...................................... 1,055 1,293.91 1,046
Israeli Shekel.................................. 782 4.2730 766
New Taiwan Dollar............................... 198 34.98 201
------- -------
Total foreign currency sell contracts......... 6,800 6,806
------- -------
Total contracts............................... $15,778 $15,890
======= =======
There were no significant unrealized gains or losses for these forward
contracts as of September 28, 2001. The fair value of forward exchange
contracts generally reflects the estimated amounts that Varian Semiconductor
would receive or pay to terminate the contracts at the reporting date. The
notional amounts of forward exchange contracts are not a measure of Varian
Semiconductor's exposure.
Note 11. Stockholders' Equity and Employee Stock Plans
Varian Semiconductor's authorized capital stock consist of 150,000,000 shares
of common stock of which 30,422,792 were issued upon the spin-off 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 Varian Semiconductor include shares of
preferred stock, none of which is currently issued or outstanding. Varian
Semiconductor'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
F-17
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$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 Varian Semiconductor and (ii) ten
business days (or such later date as the Board of Directors may 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, Varian Semiconductor 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
Varian Semiconductor 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 Varian Semiconductor'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, Varian Semiconductor 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, Varian Semiconductor
recorded $1.0 million of compensation expense.
In connection with the spin-off, certain holders of options to purchase shares
of VAI common stock received replacement options from Varian Semiconductor to
purchase shares of Varian Semiconductor's common stock. Effective April 2,
1999, Varian Semiconductor 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.
During the first quarter of fiscal year 2001, Varian Semiconductor's Board of
Directors authorized the repurchase of up to 2,000,000 shares of Varian
Semiconductor's common stock from time to time on the open market or in
privately negotiated transactions. Varian Semiconductor has not repurchased any
stock to date.
F-18
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At September 28, 2001, options with respect to 6,419,099 shares were
outstanding.
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
------ ------
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
------ ------
Granted............................................. 1,817 $25.76
Exercised........................................... (547) $13.14
Cancelled or expired................................ (231) $30.34
------ ------
Outstanding at September 28, 2001................... 6,419 $20.78
------ ------
Shares exercisable at September 28, 2001............ 3,597 $16.67
====== ======
The following tables summarize information concerning outstanding and
exercisable options under the Plan at the end of fiscal year 2001:
Options Outstanding Options Exercisable
--------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of (in thousands) Life (in years) Price (in thousands) Price
Exercise Prices -------------- --------------- -------- -------------- --------
$5.03--$10.80........... 122.0 2.6 $10.19 122.0 $10.19
$10.84--$11.74.......... 2,341.2 7.5 $11.72 1,644.5 $11.72
$12.08--$14.59.......... 764.9 4.7 $14.37 729.9 $14.48
$15.64--$35.00.......... 2,536.0 8.5 $23.39 847.2 $18.21
$36.49--$69.00.......... 655.0 8.6 $52.48 253.3 $53.02
------- -------
Total................. 6,419.1 7.6 $20.78 3,596.9 $16.67
======= =======
F-19
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
If Varian Semiconductor 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 income and net income per diluted share for fiscal years ended
September 28, 2001 and September 29, 2000 would have been reduced, and the net
loss and net loss per share for fiscal year ended October 1, 1999 would have
been increased to the pro forma amounts shown below:
2001 2000 1999
------- -------- --------
Restated Restated
(In thousands except
per share amounts)
Net income (loss)................................ $21,690 $95,234 $(11,162)
Net income (loss) per share:
Basic.......................................... $0.67 $3.04 $(0.37)
Diluted........................................ $0.64 $2.83 $(0.37)
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:
2001 2000 1999
---- ---- ----
Expected life (in years)................................... 6.0 6.0 6.0
Expected volatility........................................ 100% 80% 60%
Risk-free interest rate.................................... 5.1% 6.5% 5.5%
Expected dividend yield.................................... 0.0% 0.0% 0.0%
The weighted average estimated fair value of stock options granted during the
fiscal years ended September 28, 2001 and September 29, 2000, and for the six
month period ended October 1, 1999, was $21.42 per share, $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.
Note 12. Retirement Plans
Varian Semiconductor has a defined contribution retirement plan covering
substantially all of its U.S. employees. Varian Semiconductor'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 Varian Semiconductor's foreign
subsidiaries have defined contribution and defined benefit retirement plans for
eligible employees. In fiscal years ended 2001, 2000 and 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 Varian Semiconductor administered plan, totaling $4.6 million,
$3.2 million and $2.8 million, respectively.
Effective April 2, 1999, Varian Semiconductor assumed responsibility for all of
the retirement plans for active employees of Varian Semiconductor; the
responsibility for all others, principally retirees of VAI, remained with VAI
and subsequently VMS. An allocation of assets and liabilities for foreign
pension, post-employment, and post-retirement benefits, which are not material
to Varian Semiconductor's financial statements, has been included in these
combined financial statements.
F-20
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13. Income Taxes
Provision (benefit) for income taxes:
2001 2000 1999
------- -------- --------
Restated Restated
(Dollars in thousands)
Current
U.S. federal.................................. $33,460 $23,607 $(9,368)
State......................................... 1,169 1,811 (515)
Foreign....................................... 5,664 8,011 4,895
------- ------- -------
Total current............................... 40,293 33,429 (4,988)
Deferred
U.S. federal.................................. (8,570) 14,940 1,696
State......................................... (25) 1,354 106
Foreign....................................... 161 (651) --
------- ------- -------
Total deferred.............................. (8,434) 15,643 1,802
------- ------- -------
Provision (benefit) for income taxes............ $31,859 $49,072 $(3,186)
======= ======= =======
The total pre-tax operating income (loss) consists of the following:
2001 2000 1999
------- -------- --------
Restated Restated
(Dollars in thousands)
U.S. ............................................. $84,185 $129,363 $(27,557)
Foreign........................................... 12,356 19,576 13,014
------- -------- --------
Total........................................... $96,541 $148,939 $(14,543)
======= ======== ========
The effective tax (benefit) rate on income (loss) before taxes differs from the
U.S. federal statutory tax rate as a result of the following:
2001 2000 1999
------ -------- --------
Restated Restated
(Percentages)
Tax (benefit) at U.S. statutory rate............. 35.0 35.0 (35.0)
State taxes, net................................. 0.8 1.4 (2.6)
Foreign sales corporation........................ (2.6) (3.3) --
Benefit of tax credits........................... (1.8) (0.5) (1.0)
Foreign tax differential and net U.S. tax on
foreign income.................................. 1.4 (0.2) 0.1
Pre Distribution unbenefited losses.............. -- -- 12.2
Other items...................................... 0.2 0.5 4.4
------ ------ -------
Effective tax rate--expense (benefit).......... 33.0 32.9 (21.9)
====== ====== =======
F-21
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At the components of the deferred tax assets and liabilities were as follows:
2001 2000 1999
------- -------- --------
Restated Restated
(Dollars in thousands)
Deferred tax assets:
Inventory reserves............................ $19,840 $8,718 $3,734
Product warranty.............................. 5,501 7,676 4,404
Deferred income............................... 3,745 3,908 1,459
Accrued vacation and other compensation....... 3,789 3,312 1,430
Special provisions............................ 1,631 2,203 12,669
Bad debt reserve.............................. 2,321 970 2,321
Other items................................... 1,035 1,937 1,978
------- ------- -------
Total deferred tax assets................... 37,862 28,724 27,995
Deferred tax liabilities:
Deferred revenue.............................. (2,478) (18,010) --
Depreciable assets............................ (2,264) (2,167) (1,802)
Other items................................... (10) (228) --
------- ------- -------
Total deferred tax liabilities.............. (4,752) (20,405) (1,802)
------- ------- -------
Net deferred tax asset.......................... $33,110 $8,319 $26,193
======= ======= =======
Prior to April 2, 1999, Varian Semiconductor's financial results historically
were 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 Varian Semiconductor's combined financial statements had been
determined on a separate-return basis, under which Varian Semiconductor'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 Varian Semiconductor by VAI are
included in divisional equity for the six months of fiscal year 1999 ending on
April 2, 1999. In fiscals years 2001 and 2000, tax deductions associated with
certain exercises of stock options resulted in a tax benefit recorded to equity
of $5.4 million and $21.9 million, respectively.
F-22
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14. Lease Commitments
Varian Semiconductor 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 thousands)
2002............................................... $661 $3,748
2003............................................... 377 2,911
2004............................................... 313 1,934
2005............................................... 330 1,067
2006............................................... 28 1,065
Thereafter......................................... -- 5,797
---------- -----------
Total minimum lease payments....................... 1,709 $16,522
===========
Less: amounts representing interest................ (142)
----------
Present value of net minimum lease payments........ $1,567
==========
The short-term capital lease obligation of $.7 million is included under notes
payable and other short-term borrowings and the long-term obligation of $1.0
million is included under long-term accruals on the balance sheet. Rental
expense for fiscal years 2001, 2000, and 1999, in millions, was $3.4, $2.6, and
$2.3, respectively. As of September 28, 2001, Varian Semiconductor also has a
standby letter of credit outstanding for $2.8 million as a guarantee for a
leased facility.
Note 15. Contingencies
Varian Semiconductor 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 Varian Semiconductor.
Environmental Remediation
VAI has been named by the U.S. Environmental Protection Agency or third parties
as a potentially responsible party under 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 $4.1 million in fiscal
year 2001, $5.9 million in fiscal year 2000, and $2.7 million in fiscal year
1999.
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 28, 2001, VMS nonetheless estimated that the future
exposure for environmental investigation and remediation costs for these sites
and facilities ranged in the aggregate from $8.3 million to $23.4 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 28,
2001. 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 $8.3 million in estimated
environmental costs as of September 28, 2001.
F-23
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 28, 2001, VMS estimated that the future exposure for
environmental investigation and remediation costs for these sites and
facilities ranged in the aggregate from $34.7 million to $73.8 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 28, 2001. 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 $41.1 million at September 28, 2001. VMS
accordingly accrued $27.4 million, which represents its best estimate of the
future costs discounted at 7%, net of inflation. This reserve is in addition to
the $8.3 million described in the preceding paragraph.
Under the Distribution Related Agreements, Varian Semiconductor 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 Varian Semiconductor's protection of these environmental
costs.
As of September 28, 2001, Varian Semiconductor'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)
2002........................................... $0.6 $0.8 $1.4
2003........................................... 0.3 0.9 1.2
2004........................................... 0.3 0.1 0.4
2005........................................... 0.3 0.4 0.7
2006........................................... 0.3 0.0 0.3
Thereafter..................................... 5.1 1.2 6.3
---- ---- ----
Total costs.................................... $6.9 $3.4 10.3
Less imputed interest.......................... 2.8
----
Reserve amount................................. $7.5
====
The current portion of the reserve is $1.3 million. The long-term portion of
the reserve is $6.2 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. Varian Semiconductor 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 income 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 Varian
Semiconductor'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-24
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
environmental related events, Varian Semiconductor'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 Varian
Semiconductor.
Varian Semiconductor 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
Varian Semiconductor 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
with respect to these lawsuits in prior years. VMS has also reached an
agreement with an insurance company under which the insurance company agreed to
pay a portion of Varian Semiconductor's past and future environmental related
expenditures. Varian Semiconductor therefore has a receivable of $1.3 million
in other assets at September 28, 2001, as its portion of the insurance
recoveries. Although VMS intends to aggressively pursue additional insurance
recoveries, Varian Semiconductor has not reduced any liability in anticipation
of recovery with respect to claims made against third parties.
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, MB2TM and InovaTM 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 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 Varian Semiconductor.
In September 2000, Varian Semiconductor and Applied Materials settled their
patent infringement and antitrust litigation. After recording a payment to
Applied Materials and legal expenses, Varian Semiconductor recorded a gain of
$16.0 million ($10.8 million after taxes) relating to this litigation
settlement. Varian Semiconductor maintains a provision to cover any residual
indemnification obligations described above. Included in current liabilities
and classified as an estimated loss contingency was $2.7 million and $3.0
million, as of September 28, 2001 and September 29, 2000, respectively.
In fiscal year 1999 Varian Semiconductor settled with Novellus, through
arbitration, a dispute regarding the valuation of assets of TFS. Varian
Semiconductor recorded other income of $2.0 million relating to the difference
between the actual settlement amount of $4.8 million and the estimated accrual.
During the second quarter of fiscal year 2000, Varian Semiconductor recorded
other income of $2.7 million, (equivalent to $1.8 million after tax or $0.05
per diluted share) resulting from payment to resolve a dispute relating to the
acquisition of a product line which occurred in a prior fiscal year.
F-25
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Varian Semiconductor has agreed to indemnify VMS and IB for any costs,
liabilities or expenses relating to Varian Semiconductor's legal proceedings,
including the Applied Materials matters. Under the Distribution Related
Agreements, Varian Semiconductor 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 October 1993, VAI, on behalf of the SEB, filed a patent infringement
complaint against Lam Research Corporation ("Lam") relating to certain product
technologies developed by Varian Semiconductor. While Varian Semiconductor
believes that there are significant license fees owed by Lam for the alleged
use of Varian Semiconductor's intellectual property; there is no assurance that
Varian Semiconductor will prevail in this matter. Management intends to
aggressively defend its intellectual property rights.
Varian Semiconductor'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 16. Restructuring
Varian Semiconductor recognized $1.9 million in restructuring costs for fiscal
year 2001, of which $0.9 million was recognized in the second quarter and $1.0
million was recognized in the third quarter. The restructuring charges
primarily reflect the termination costs for a total reduction in force of 530
employees (approximately 28% of worldwide employment). All termination costs
associated with the restructuring were paid during 2001.
During the second quarter of fiscal year 1999, Varian Semiconductor 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 U.S. and Japan and $1.3 million to cover
termination costs for a reduction in workforce of 69 employees (approximately
5% of Varian Semiconductor's worldwide employment). All termination costs
associated with the restructuring were paid during 2000 and 1999.
Note 17. Other Transactions with Affiliates
Purchases from IB for fiscal year 1999 for the period prior to the spin-off
were $1.9 million.
Prior to the spin-off, VAI used a centralized cash management system to finance
its operations. Cash deposits from most of Varian Semiconductor's businesses
were transferred to VAI on a daily basis, and VAI funded Varian Semiconductor's
required disbursements. No interest had been charged or credited to Varian
Semiconductor for these transactions.
VAI also provided certain centralized services (Note 1) to Varian Semiconductor
prior to the spin-off. Cost allocations relating to these centralized services
were $7.7 million in fiscal year 1999 and are included in operating expenses in
the consolidated statements of operations. Pursuant to the Distribution Related
Agreements, Varian Semiconductor received services from VMS (as successor to
VAI), principally information technology services, for a defined period of
time. For the periods subsequent to the spin-off, in fiscal years 2001, 2000
and 1999, Varian Semiconductor incurred expenses charged by VMS of $3.0
million, $2.4 million and $3.9 million, respectively, for these services.
F-26
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Varian Semiconductor 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 Varian Semiconductor by VAI.
The activity in net transfers from VAI for fiscal year 1999 included in
divisional equity in the combined statements of divisional equity is summarized
as follows:
1999
---------------------
(Dollars in millions)
VAI services and other charges........................ $7.7
Cash transfers, net................................... 95.0
------
Net transfers from VAI................................ $102.7
======
The Distribution Related Agreements provide that, from and after the spin-off,
VAI, IB, and Varian Semiconductor 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 Varian Semiconductor; the Distribution
Related Agreements also provide that Varian Semiconductor shall assume all of
its liabilities, other than shared liabilities (including accounts payable,
accrued payroll, and pension liabilities) in accordance with their terms.
Note 18. Related Party Transaction
Varian Semiconductor's Chairman and Chief Executive Officer ("Officer") has a
$0.5 million promissory note with Varian Semiconductor in connection with his
recruitment and related relocation upon joining Varian Semiconductor in fiscal
year 1991. The note was issued in order for the Officer to purchase a principal
residence ("Property") and bears interest based upon the Property's
appreciation, as computed, or 8.5% per annum, whichever is less. The principal
and related interest is due upon the earlier of three years after the Officer's
termination or retirement or 2021. Varian Semiconductor has not accrued any
interest to date as the amount is undeterminable due to the Property
appreciation limitation.
Note 19. Operating Segments and Geographic Information
Varian Semiconductor 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.
Varian Semiconductor operates in five geographic segments and three operating
segments. The reportable segments were determined based upon the nature of
products and services provided, the geographic areas served and Varian
Semiconductor's management structure. Varian Semiconductor has three reportable
operating segments; Product Segment, Services Segment, and Research and
Development Segment, which includes royalties on licensing of intellectual
property. Varian Semiconductor has five reportable geographic segments, which
include North America, Japan, Korea, Taiwan and the rest of the world. The
accounting policies of the segments are the same as those described in "Note 2.
Summary of Significant Accounting Policies." Varian Semiconductor primarily
measures segment profitability based upon gross profit. Varian Semiconductor
does not have the net income and asset information for the operating segments
listed below. These other disclosures for reportable segments are impracticable
to determine for each segment above.
F-27
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Operating Segments
Research and
Product Segment Services Segment Development Segment Total
---------------------- ---------------------- ---------------------- ----------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999 2001 2000 1999
---- -------- -------- ---- -------- -------- ---- -------- -------- ---- -------- --------
Restated Restated Restated Restated Restated Restated Restated Restated
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in millions)
Revenues................ $535 $626 $206 $82 $52 $37 $15 $10 $29 $632 $688 $272
Gross profit............ 189 246 53 29 15 10 15 10 29 233 271 92
Geographic Information
Sales to Unaffiliated
Customers
-----------------------
2001 2000 1999
---- -------- --------
Restated Restated
-------- --------
(Dollars in millions)
United States........................................ $623 $680 $255
International........................................ 272 244 111
Eliminations & Other................................. (263) (236) (94)
---- ---- ----
Total.............................................. $632 $688 $272
==== ==== ====
Total sales is based on the location of the operation furnishing goods and
services. International sales based on final destination of products sold are
$449.4 million, $504.2 million, and $161.0 million, in 2001, 2000, and 1999,
respectively.
The following tables summarizes revenue, depreciation and amortization and
total assets by reportable geographic segment.
North
America Europe Japan Taiwan Korea Other Consolidated
-------- -------- ------- -------- ------- ------- ------------
2001
Revenue................. $187,352 $130,174 $88,179 $ 82,300 $75,104 $68,870 $631,979
Depreciation and
amortization........... 12,928 291 244 92 367 25 13,947
Total assets............ 481,901 32,713 51,371 3,576 15,559 2,937 588,057
2000
Revenue (Restated)...... $183,697 $135,541 $60,831 $160,823 $73,622 $73,205 $687,719
Depreciation and
amortization........... 11,760 267 798 82 350 7 13,264
Total assets............ 392,165 59,111 55,711 5,006 18,587 3,115 533,695
1999
Revenue (Restated)...... $111,111 $ 54,374 $31,756 $ 36,879 $21,422 $16,343 $271,885
Depreciation and
amortization........... 11,110 128 218 52 825 14 12,347
Total assets............ 238,737 34,403 38,361 7,633 23,536 4,679 347,348
Note 20. Subsequent Events
Reduction in Force
During October 2001, Varian Semiconductor implemented a reduction in force,
primarily in the U.S., in which Varian Semiconductor's worldwide workforce was
reduced by approximately 200 employees or 12%. The reduction in force was in
response to the downturn in the industry. As a result, Varian Semiconductor
will recognize approximately $2.3 million in restructuring costs during the
first quarter of fiscal year 2002.
F-28
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Settlement and License Agreement
On December 19, 2001, Varian Semiconductor and Lam Research Corporation ("Lam")
resolved the patent infringement litigation between the two parties that was
originally filed in October 1993 and Varian Semiconductor granted Lam a license
under certain patents. Additionally, all claims and counterclaims have been
dismissed in accordance with the agreement. The lawsuit involved Varian
Semiconductor's assertion that Lam infringed on three Varian patents that
relate to the use of low pressure gas to assist in the heating and cooling of
semiconductor wafers during various manufacturing processes, and Lam's denial
that the patents are valid or infringed. Under the agreement, Varian
Semiconductor has granted a license to Lam under the patents in return for the
payment of $20.0 million with $5.0 million paid immediately in exchange for
prior use of the patents and the remaining $15.0 million paid in 12 quarterly
installments through fiscal year 2005 in exchange for future use of the
patents. As further payment for past royalties, Lam issued to Varian
Semiconductor a warrant to purchase 2,000,000 shares of Lam common stock for
$21.30 per share, exercisable at any time prior to December 31, 2005.
F-29
SCHEDULE II
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the fiscal years ended 2001, 2000, and 1999
(Dollars in Thousands)
Deductions
--------------------------------
Balance at Charged to Balance of
Beginning Costs and End of
Description of Period Expenses Description Amount Period
- ----------- ---------- ---------- ------------------------ ------- ----------
Allowance for Doubtful
Notes & Accounts
Receivable:
Fiscal Year Ended 2001.. $2,956 $3,940 Write-offs & Adjustments $3 $6,893
======= ======= ======================== ======= =======
Fiscal Year Ended 2000.. $2,679 $473 Write-offs & Adjustments $196 $2,956
======= ======= ======================== ======= =======
Fiscal Year Ended 1999.. $602 $2,212 Write-offs & Adjustments $135 $2,679
======= ======= ======================== ======= =======
Estimated Liability for
Product Warranty:
Fiscal Year Ended 2001.. $28,190 $19,837 Warranty Expenditures $27,952 $20,075
======= ======= ======================== ======= =======
Fiscal Year Ended 2000.. $15,899 $30,301 Warranty Expenditures $18,010 $28,190
======= ======= ======================== ======= =======
Fiscal Year Ended 1999.. $21,435 $13,268 Warranty Expenditures $18,804 $15,899
======= ======= ======================== ======= =======
S-1