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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 October 1, 1999
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
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Exact name of registrant as specified in its charter:
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
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State or other jurisdiction of IRS Employer
Incorporation or organization: Identification No.:
DELAWARE 77-0501994
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Address and telephone number of principal executive offices:
35 Dory Road, Gloucester, Massachusetts 01930-2297
(978) 282-2000
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Securities registered pursuant to Section 12(b)of the Act:
None
Securities registered pursuant to Section 12(g)of the Act:
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Title of each class Name of each exchange on which registered
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Common Stock, $0.01 par value Nasdaq National Market
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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 incoporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's common stock held by non-
affiliates as of December 10, 1999 was $796,177,000
The number of shares of the registrants's common stock outstanding as of
December 10, 1999 was 30,622,174 shares of $0.01 par value common stock.
An index of exhibits filed with this Form 10-K is located on page 35.
DOCUMENTS INCORPORATED BY REFERENCE:
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Document Description Part of Form 10-K into which incorporated
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Portions of the Registrant's Proxy Statement Part III
with respect to the Annual Meeting of
Stockholders to be held on February 16, 2000
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EXPLANATORY NOTE
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This amendment to Varian Semiconductor Equipment Associates, Inc.'s Annual
Report on Form 10-K is filed solely to include this signature page to the Form
10-K which was inadvertently omitted from the original filing.
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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 1, 1999
TABLE OF CONTENTS
PART I
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Item 1. Business....................................................... 1
Item 2. Properties..................................................... 11
Item 3. Legal Proceedings.............................................. 12
Item 4. Submission of Matters to a Vote of Security Holders............ 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................ 13
Item 6. Selected Financial Data........................................ 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..... 30
Item 8. Financial Statements and Supplementary Data.................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant............. 32
Item 11. Executive Compensation......................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 32
Item 13. Certain Relationships and Related Transactions................. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K....................................................... 33
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PART I
Item 1. Business.
Overview
Varian Semiconductor Equipment Associates, Inc. ("VSEA" or the "Company")
designs, manufactures, markets and services semiconductor processing equipment
used in the fabrication of integrated circuits. As a leading supplier of ion
implantation systems the Company has shipped over 2,600 systems worldwide, more
than those of all other competitors combined and to virtually every major
semiconductor manufacturer in the world.
Recently, the Company has introduced the next generation VIISta(TM) product
line. This leading-edge technology leverages the single-wafer processing,
pioneered on successful E200 and E500 line of mid-current implanters, to the
entire spectrum of energies and implant applications. This approach leads to a
product that is highly differentiated by its unique processing capabilities,
higher throughput, and improved process yields, uniquely allowing production of
either 200mm or next generation 300mm wafers on the same tool.
VSEA provides customers with world-class support, training, after-market
products and services that insure higher utilization and productivity, reduced
operating costs, and extended capital productivity of customer investment
through multiple product generations. The Company recently achieved the number
one ranking for the third consecutive year in VLSI Research Inc.'s 1999
customer satisfaction survey of semiconductor manufacturers worldwide,
receiving the highest overall point totals ever achieved by a large equipment
supplier.
The Company's business depends upon the capital expenditures of
semiconductor manufacturers, which in turn depend on the current and
anticipated market demand for integrated circuits and products utilizing
integrated circuits. The semiconductor industry experienced a slowdown in 1998
that continued into the first half of 1999. This caused semiconductor
manufacturers to reduce their capital equipment expenditures, in some cases
either rescheduling or canceling purchases. During the second half of 1999, the
industry has experienced a significant upturn and VSEA has seen a resurgent
demand for its products. This has resulted in increased sales every quarter of
fiscal 1999 and a year-end order backlog more than double that of the previous
year.
The Industry
The semiconductor industry has experienced significant growth in recent
years due to the continued growth of personal computers, the expansion of
telecommunications, the emergence of new applications within consumer
electronics, wireless communication devices, and the increased semiconductor
content needed to drive and service the world wide web. Continued improvements
in device performance and reduced cost per function (Moore's law) has fueled
this accelerating demand resulting in a compound annual growth rate of over 15%
for the last 30 years, with no end in sight as we continue to drive from the
current state-of-the-art 180nm devices towards 100nm (a nanometer, "nm", is
one-billionth of a meter) over the next five years.
Semiconductor manufacturing is highly competitive with each customer looking
for an edge in either device performance (generally speed or low power
consumption) or cost advantage (memory) and universally rely heavily on their
equipment suppliers to develop processes and equipment to provide that edge.
Today, a typical fab (wafer manufacturing factory) costs over a billion dollars
and as the market moves toward 100nm devices and larger wafer sizes (300mm)
costs will double to two billion. Consequently, semiconductor equipment
manufacturers compete aggressively for this business, each seeking either a
unique technical or cost advantage, but all overwhelmingly influenced by the
need to uniformly support this equipment to high levels of performance within
the global matrix of customers.
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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 of the integrated circuits.
Semiconductor manufacturers generally measure the cost performance of their
production equipment in terms of "cost per wafer," which is determined by
factoring in the fixed costs for acquisition and installation of the system,
its variable operating costs and its net throughput rate. A system with higher
throughput allows the semiconductor manufacturer to recover the purchase price
of the system during its economic life over a greater number of wafers and
thereby reduce the cost of ownership of the system on a per wafer basis.
Throughput is most accurately measured on a net or overall basis, which takes
into account the processing speed of the system and any non-operational
downtime for cleaning, maintenance or other repairs. The increased costs of
larger and more complex semiconductor wafers have made high yields important in
selecting processing equipment. To achieve higher yields and better film
quality, implant systems must be capable of repeating the original process on a
consistent basis without a disqualifying level of defects. This characteristic,
known in the industry as "repeatability," is important in achieving
commercially acceptable yields. Repeatability is more easily achieved in those
systems that can operate at desired throughput rates without requiring the
system to approach its critical tolerance limits.
The continuing evolution of semiconductor devices to smaller geometries and
more complex multi-level circuitry has significantly increased the cost and
performance requirements of the capital equipment used to manufacture these
devices. As many of the advanced fabrication lines, especially those designed
to process 300 mm wafers, are projected to cost from $1.5 to $2.0 billion each,
a substantial increase over the costs of prior generation fabrication
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 its semiconductor manufacturing equipment,
thereby reducing the effective cost of ownership of such systems.
Products
The Company designs and manufactures the complete range of ion implant tools
required to build the transistors, or switches, that are at the heart of every
integrated circuit. Ion implanters are used because of their unique ability to
implant dopants into the raw silicon wafers by bombarding them with a high-
velocity 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 from an insulator to a
semiconductor. The precision of ion implantation permits customers to achieve
the necessary control of this doping process to create over 250 billion
transistors of uniform characteristics on a new generation 300mm wafer. Since
these transistors are the starting point of all subsequent process steps,
repeatability, uniformity, and yield, are extremely important.
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The Company's implant 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.
List of Products
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High
Application Medium Current High Current Energy
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200 mm compatible EHP-220 VIISion(TM) 80 Kestrel II
EHP-500 VIISion(TM) 80 LE
EHPi-220 VIISion(TM) 200
EHPi-500
200mm and 300 mm compatible VIISta(TM) 810 VIISta(TM) 80
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The Company started providing medium-current implanters in 1971 and
introduced the current EHP-220 and EHP-500 in 1992, shipping over 600 machines
to date, clearly establishing the advantage of single wafer processing.
The Company entered the high-current market in 1981, introducing the current
VIISion(TM) 80 LE and the VIISion(TM) 200 in 1995 with a competitive batch
processing system that offered increased throughput, world class in reduced
metals and particle contaminants performance, and high beam currents at all
energies.
Through the acquisition of the high energy ion implantation product line of
Genus, Inc. ("Genus") in 1998, the Company completed its product offering
entering the high-energy segment. This combination of a strong product coupled
with the reputation and infrastructure of VSEA resulted in immediate market
share gains and the addition of increased manufacturing capability at the
previous Genus facility in Newburyport, Massachusetts.
The next generation of implanters, VIISta(TM), leverage the single-wafer
advantage across a common platform and the use of broad beam and advanced wafer
handling technologies to high-current and high-energies, permitting customers
to achieve unique technical capabilities while at the same time reducing the
cost per wafer of the implant process. Only VIISta(TM) allows customers to use
the same platform for either 200 or 300mm wafer processing, reducing the risk
of transition for our customers and reducing our costs by having a single
rather than multiple platforms. Consequently, our development, manufacturing,
service, and training costs are all improved while allowing our customers to
achieve greater operating efficiencies in their fabs.
Customer Support and Services
The Company provides a range of innovative customer support products
designed to improve the productivity of its worldwide customers as well as to
provide a direct link to the Company's factories and research centers.
The Varian Introduction Support Teams ("VIST") and Varian Productivity
Transfer Teams ("VPTT") assist the customer in establishing the initial
operation of Company implanters, and in making them productive as quickly as
possible. These teams speed process qualification and smooth integration into
the production environment by using the same people who built the machines to
install them, reducing cycle time and improving the factory direct linkage with
our customers.
FAB Care Plus(TM) is a unique program which 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 around the world to provide consistent and
reliable support.
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For parts management, the Company has partnered with Federal Express to
strategically place Parts Banks throughout the world to provide carefully
managed inventory, delivery and logistics services. The Company also offers a
comprehensive consumable parts program that can be tailored to individual
fabrication facilities.
Through VEDoc(TM), an electronic documentation system, customers can easily
access information about their implanters. All assembly drawings, schematics,
parts lists, maintenance and operation manuals and video-illustrated
maintenance procedures are available in this easy-to-follow CD-ROM format. The
Company's commitment to customer service extends to training and support. It
operates applications laboratories in the United States, Asia and Europe that
contain the latest equipment and technology.
Remote Assist(TM) is a completely new semiconductor equipment service
capability that quickly puts product experts "virtually" into customer
fabrication facilities. This offering uses advanced video conferencing
capabilities and a new video helmet for linking on-site engineers with the
Company's support offices and factories.
Marketing and Sales
The Company sells, installs and services ion implantation systems directly
to semiconductor industry customers and has sold one or more ion implantation
product to each of the 20 largest semiconductor manufacturers in the world. The
Company's sales objective is to work closely with customers to secure purchase
orders for multiple systems as such customers expand existing facilities and
build next-generation, wafer facilities. The Company seeks to build customer
loyalty and to achieve a high level of repeat business by offering highly
reliable products that give its customers a competitive edge, comprehensive
field support and a responsive parts replacement and service program.
In each recent year, the Company has sold approximately one-half of its
systems to its top ten customers. Revenue from the Company's ten largest
customers in fiscal years 1999, 1998 and 1997 accounted for 51%, 47% and 46% of
revenue, respectively. The Company expects that sales of its products to
relatively few customers will continue to account for a high percentage of its
revenue in the foreseeable future. During fiscal year 1999, one customer
accounted for 12% of VSEA's revenue and another for 10%. No other customers
accounted for 10% or more of the Company's revenue during that period. In
fiscal year 1998, revenue from one customer accounted for 14% of the Company's
revenue. In fiscal year 1997, no one customer had accounted for more than 10%
of the Company's revenue.
None of the Company's customers has entered into a long-term agreement
requiring it to purchase the Company's products. The Company believes that
sales to certain of its customers could decrease in the near future as those
customers complete current purchasing requirements for new or expanded
fabrication facilities. Although the composition of the group comprising the
Company's largest customers has varied from year to year, the loss of a
significant customer or any reduction in orders from any significant customer,
including reductions due to a customer varying from recent buying patterns,
market, economic or competitive conditions in the semiconductor industry or in
the industries that manufacture products utilizing integrated circuits, could
adversely affect the Company's business, financial condition and results of
operations. In addition, sales of the Company's systems depend, in significant
part, upon the decision of a prospective customer to increase manufacturing
capacity in an existing fabrication facility or to transfer a manufacturing
process to a new fabrication facility, both of which typically involve a
significant capital commitment. In addition, the Company has from time to time
experienced delays in finalizing system sales following initial system
qualification. Due to these and other factors, the Company's systems typically
have a lengthy sales cycle during which the Company may expend substantial
funds and management effort.
The Company's ability to respond with prompt and effective field support is
critical to the Company's sales efforts. The substantial operational and
financial commitments by customers who purchase ion implantation systems
require the assurance that the manufacturer can provide the necessary
installation and operational support. The Company's strategy of supporting its
installed base through both its customer support and research and development
groups has served to encourage use of the Company's systems in production
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applications and has accelerated penetration of certain key accounts. The
Company believes that its marketing efforts are enhanced by the technical
expertise of its research and development personnel, who provide customer
process support and participate in a number of industry forums such as
conferences and technical publications.
The Company sells, distributes and services its products directly. The
Company has 6 sales and service offices located in the United States, 6 in
Western Europe and 14 in Asia for a total of 26 worldwide. The Company has a
global infrastructure of sales, marketing and service engineers linked through
VSEA's Knowledge Network(TM), Lotus Notes(R) and SAP(R) operating systems,
allowing the Company to globally review bookings and sales forecasts against
detailed account management plans, service and parts. The Company's spare parts
distribution capability leads the industry. By modeling parts usage by
equipment type, installed base distribution, freight, routes, and specific
customs regulations and partnering with Federal Express, the Company has
developed an infrastructure of parts distribution and warehousing around the
world.
The Company completed its direct global sales and distribution network in
1996 and 1998, respectively, as it transitioned from its joint ventures in
Japan and Korea to wholly-owned subsidiaries. The Company's equipment had been
sold and serviced in Japan by Tokyo Electron Ltd. ("TEL"). During much of the
18-year relationship, a joint venture, TEL-Varian Ltd., manufactured or
customized equipment in Japan. In December 1996, the Company and TEL revised
their relationship to enable Japanese customers to have more direct access to
the Company's products, engineering and support organizations worldwide.
Shortly thereafter, VAI formed a wholly-owned subsidiary, Varian Japan, K. K.,
(now called "VSEKK") that today provides direct support to the Company's
growing Japanese customer base.
Using the original TEL joint venture relationship as a model, the Company
formed Varian Korea Ltd. ("VKL") in 1985 with its distributor in Korea. What
started as a venture for handling sales and service of semiconductor equipment
and vacuum products in Korea was expanded to include manufacturing in 1989. Its
63,000-square-foot factory in Songtan City includes a Class 10,000
manufacturing area. In January 1998, the Company purchased the remaining 39% of
the VKL joint venture held by the original joint venture partner.
Managing global operations and sites located throughout the world presents
challenges associated with cultural diversities and organizational alignment.
Moreover, each region in the global semiconductor equipment market exhibits
unique characteristics that can cause capital equipment investment patterns to
vary significantly from period to period. Although international markets
provide the Company with significant growth opportunities, periodic economic
downturns, trade balance issues, political instability and fluctuations in
interest and foreign currency exchange rates are all risks that could affect
global product and service demand. Many Pacific Rim countries had been
experiencing a significant economic downturn and further banking and currency
difficulties that could lead to deepening of the economic recession in those
countries. Specifically, the decline in value of the Korean currency, together
with difficulties obtaining credit, have resulted in a decline in the
purchasing power of the Company's Korean customers. This in turn had resulted
in the cancellation or delay of orders for the Company's products from Korean
customers, thus adversely affected the Company's results of operations in early
fiscal 1999. In addition, if Japan's economy fails to sustain its recovery,
investment by Japanese customers may be negatively affected and it is possible
that economic recovery in other Pacific Rim Countries could be delayed. The
Company actively manages its exposure to changes in foreign currency exchange
rates, but there can be no assurance that future changes in foreign currency
exchange rates will not have a material adverse effect on its results of
operations or financial condition.
International revenue of the Company for the year ended October 1, 1999 was
approximately $161 million, or 59% of revenue. For fiscal years 1998 and 1997,
international revenue of the Company was approximately $239 million and $245
million, or 70% and 55% of revenue, respectively.
The Company's business is not seasonal in nature, but it is cyclical based
on the capital equipment investment expenditures of major semiconductor
manufacturers. These expenditure patterns are based on many factors, including
anticipated market demand for integrated circuits, the development of new
technologies and
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global economic conditions. The cyclicality in the semiconductor equipment
market over the last several years has resulted in a decline in sales from
1996, through fiscal year 1999. This situation was the combined result of an
oversupply in memory chips, a decline in PC demand and the rippling of the
Asian financial crises through the Korean, Taiwanese and Japanese markets. In
fiscal year 1999, sales increased in each quarter as the semiconductor industry
began a recovery. While increasing, sales were still at depressed levels in the
first half of fiscal 1999 compared with fiscal 1998.
Backlog
As of October 1, 1999, the Company's backlog was $181 million, as compared
to a backlog of $80 million at October 2, 1998. The Company includes in its
backlog only those orders for which it has accepted purchase orders and
assigned shipment dates within twelve months. All orders are subject to
cancellation or rescheduling by customers. Due to possible changes in system
delivery schedules, cancellations of orders and delays in systems shipments,
the Company's backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period.
Manufacturing
The Company manufactures its products at its production facilities in
Gloucester, Massachusetts; Newburyport, Massachusetts; and Songtan, Korea. The
Company benefits from the use of advanced manufacturing methods and
technologies, including just-in-time, demand flow technology, statistical
process control and solids modeling.
The Company utilizes an outsourcing strategy and concentrates on system
design, high-level assembly, and tests to reduce cycle time and improve its
responsiveness in an inherently cyclical capital equipment market. The Company
believes that outsourcing enables it to minimize its fixed costs and capital
expenditures while also providing the flexibility to increase or decrease
production capacity. This strategy also allows the Company to focus on product
differentiation through system design and quality control. The Company's
manufacturing subsystems incorporate advanced technologies in robotics, vacuum
and microcomputers. The Company works closely with its suppliers on achieving
mutual cost reduction through joint design efforts. The Company manufactures
its systems in clean-room environments which are similar to the clean rooms
used by semiconductor manufacturers for wafer fabrication. This procedure is
intended to reduce installation and production qualification times and the
amount of particulates and other contaminants in the assembled system, which in
turn improves yield and reduces downtime for the customer. Following
disassembly, the tested system is packaged in multiple layers of plastic
shrink-wrap to maintain cleanroom standards during shipment. The Company uses
outsourcing to take advantage of economies of scale at outside manufacturing
facilities and to alleviate internal manufacturing bottlenecks. The Company
purchases material and components that are either standard products or built to
VSEA specifications.
Some of the components and subassemblies included in the Company's products
are obtained from a limited group of suppliers. Although the Company seeks to
reduce its dependence on these limited sources, disruption or termination of
certain of these sources could occur and such disruptions could have at least a
temporary adverse effect on the Company's operations. Moreover, a prolonged
inability to obtain certain components could have a material adverse effect on
the Company's business, financial condition and results of operations and could
result in damage to customer relationships.
Quality efforts at the Company begin with product development. The Company
uses 3D, computer-aided design, finite element analysis and other computer-
based modeling methods to prove new designs. Product design is thoroughly
tested and proven throughout all stages of development before the first
production system is built. Concurrent engineering programs ensure that new
designs are quickly and successfully integrated into manufacturing.
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Competition
The semiconductor manufacturing equipment market is highly competitive and
is characterized by a small number of large players and over 250 small domestic
and foreign participants. The larger companies include Applied Materials, Lam
Research, Eaton, Novellus, TEL, Nikon, Canon and ASML. The Company faces
significant competitive factors in the ion implantation market. Within this
segment, as reported for calendar 1998 in the Dataquest 1999 survey, the
Company (including Genus), Eaton, Applied Materials, Nissin and Ulvac had 38%,
37%, 17%, 4% and 4%, respectively, of the market share for ion implantation
equipment.
Significant competitive factors in the ion implantation market include
relationships, price/cost of ownership, technological performance, customer
support, distribution and financial viability. Other significant competitive
factors in the semiconductor equipment market include system performance and
flexibility, cost, the size of each manufacturer, its installed customer base
and breadth of product line. The Company believes it competes favorably in each
of these categories. For example, its transition from joint ventures and
distributor agreements to direct selling and service has given the Company the
ability to serve customers on a global basis through the management of
information critical to consistent, timely delivery of services and products.
Management believes that to remain competitive it will require significant
financial resources 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.
Certain of the Company's existing and potential competitors have
substantially greater financial resources and more extensive engineering,
manufacturing, marketing, customer service and support organizations.
The Company expects its competitors to continue to improve the design and
performance of their current products and processes and to introduce new
products and processes with enhanced price and performance characteristics. If
the Company's competitors enter into strategic relationships with leading
semiconductor manufacturers covering ion implantation products similar to those
sold by the Company, its ability to sell its products to those manufacturers
could be adversely affected.
In addition, a substantial investment is required by customers to install
and integrate capital equipment into a semiconductor production line. As a
result, once a semiconductor manufacturer has selected a particular vendor's
capital equipment, the Company believes that the manufacturer will generally be
reliant upon that equipment for the specific production line application.
Accordingly, the Company may experience difficulty in selling a product line to
a particular customer for a significant period of time if that customer selects
a competitor's product. Increased competitive pressure could lead to lower
prices for the Company's products, thereby materially and adversely affecting
the Company's business, financial condition and results of operations. There
can be no assurance that the Company will be able to compete successfully in
the future.
Research and Development
The semiconductor manufacturing industry is subject to rapid technological
change requiring new product introductions and enhancements. The Company's
ability to remain competitive in this market will depend in part upon its
ability to develop new and enhanced systems and to introduce these systems at
competitive prices and on a timely and cost-effective basis. Accordingly, the
Company devotes a significant portion of its personnel and financial resources
to research and development programs and seeks to maintain close relationships
with its customers to remain responsive to their product needs.
The Company's current research and development efforts are directed at
development of new systems and processes and improving existing system
capabilities. The Company is focusing its research and development efforts on
the completion of the VIISta(TM) platform, the next generation of single wafer
ion implant system. VIISta(TM) is designed to cover the complete range of
implants required for the next several generations of integrated circuits and
extend production capability to 10 nanometers geometries. VIISta(TM) is a
single wafer platform allowing customers to use a single tool (with three beam
lines) for all implant applications including high-current, medium-current, and
high-energy.
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Worldwide expenditures by the Company (net of customer funding) for research
and development during fiscal years 1999, 1998 and 1997 were $38 million, $37
million and $47 million, respectively, or approximately 14%, 11% and 11% of
revenue, respectively. The Company expects in future years that research and
development expenditures will continue to represent a substantial percentage of
revenue.
The success of the Company in developing, introducing and selling new and
enhanced systems depends upon a variety of factors, including new product
selection, timely and efficient completion of product design and development,
timely and efficient implementation of manufacturing and assembly processes,
product performance in the field and effective sales and marketing. There can
be no assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new products or in enhancing its existing products.
The Company's inability to complete the development or meet the technical
specifications of any of its new systems or enhancements or to manufacture and
ship these systems or enhancements in volume in a timely manner would
materially and adversely affect the Company's business, financial condition and
results of operations.
Patent and Other Proprietary Rights
As a result of its 50-year history as part of Varian Associates, Inc., and
now as an independent semiconductor equipment company, the Company has pursued
a policy of seeking patent, copyright, trademark and trade secret protection in
the United States and other countries for developments, improvements and
inventions originating within its organization that are incorporated in the
Company's products or that fall within its fields of interest. As of October 1,
1999, the Company owned approximately 120 patents in the United States and
approximately 250 patents throughout the world, and had approximately 100
patent applications on file with various patent agencies worldwide. The Company
intends to file additional patent applications as appropriate.
The Company relies on a combination of copyright, trade secret and other
laws, and contractual restrictions on disclosure, copying and transferring
title to protect its rights. The Company has trademarks, both registered and
unregistered, that are maintained and enforced to provide customer recognition
for its products in the marketplace. The Company also has agreements with third
parties that provide for licensing of patented or proprietary technology. These
agreements include royalty-bearing licenses and technology cross-licenses. The
termination of certain of such licenses could have a material adverse effect on
the Company's business. In particular, the current royalty-bearing license
agreements with Applied Materials and TEL for gas-assisted wafer heat transfer
patents produced approximately $28 million in royalties in fiscal year 1999 and
over $67 million in royalties since 1992. The last of the principal patents
covered by these licenses will expire on July 9, 2007.
The Company's competitors, like companies in many high-technology
businesses, routinely review the products of others for possible conflict with
their own patent rights. There has also been substantial litigation regarding
patent and other intellectual property rights in semiconductor-related
industries. As set forth in Item 3--"Legal Proceedings" below, the Company is
currently involved in such litigation and there can be no assurances as to the
results of such litigation. There can be no assurance that the Company or its
licensors or suppliers will not be subject to additional claims of patent
infringement or that any claim will not require that the Company pay
substantial damages or delete certain features from its products or both.
Sale of Business
Effective as of June 13, 1997, the Semiconductor Equipment Business
completed the sale of its Thin Film Systems business ("TFS"). Total proceeds
received from the sale were $145.5 million in cash. A $51.5 million reserve was
recorded to cover, among other items, purchase price disputes, retained
liabilities, transaction costs, employee terminations, facilities separation
costs, indemnification obligations, litigation expense and other contingencies.
The gain on the sale was $33.2 million (net of income taxes of $17.8 million).
8
<PAGE>
Environmental Matters
For a discussion of environmental matters, see Item 7--"Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Environmental Matters."
Company History
Until April 2, 1999, the Company's business was operated as part of Varian
Associates, Inc. ("VAI"). On April 2, 1999, VAI contributed its Semiconductor
Equipment Business ("SEB") to the Company, then distributed to the holders of
record of VAI common stock one share of common stock of the Company for each
share of VAI common stock owned on March 24, 1999 (the "Distribution"). At the
same time, VAI contributed its Instruments Business ("IB") to Varian, Inc. and
distributed to the holders of record of VAI common stock one share of common
stock of IB for each share of VAI common stock owned on March 24, 1999. VAI
retained its Health Care Systems business and changed its name to Varian
Medical Systems, Inc. ("VMS") effective as of April 2, 1999. These transactions
were accomplished under the terms of a Distribution Agreement by and among the
Company, VAI and IB (the "Distribution Agreement"). For purposes of providing
an orderly transition and to define certain ongoing relationships between and
among the Company, VMS and IB after the Distribution, the Company, VMS and IB
also entered into certain other agreements which include an Employee Benefits
Allocation Agreement, an Intellectual Property Agreement, a Tax Sharing
Agreement and a Transition Services Agreement (collectively, the "Distribution
Related Agreements").
The consolidated financial statements for periods ended on or before April
2, 1999 reflect SEB as operated by VAI. The consolidated financial statements
generally reflect the financial position, operating results and cash flows of
SEB as if it were a separate entity for all periods presented. Where it was
practicable to identify specific VAI corporate amounts with the SEB activities,
such amounts have been included in the accounts reflected in the consolidated
financial statements. The consolidated financial statements also include
allocations of certain VAI corporate assets (including pension assets),
liabilities (including profit sharing and pension benefits), and expenses
(including legal, accounting, employee benefits, insurance services,
information technology services, treasury, and other VAI corporate overhead) to
SEB. These amounts have been allocated to SEB on the basis that is considered
by management to reflect most fairly or reasonably the utilization of the
services provided to or the benefit obtained by SEB. Typical measures and
activity indicators used for allocation purposes include headcount, sales
revenue, and payroll expense. The Company believes that the methods used to
allocate these amounts are reasonable. However, these allocations are not
necessarily indicative of the amounts that would have been or that will be
recorded by the Company on a stand-alone basis. References in this Annual
Report on Form 10-K to the "Semiconductor Equipment Business" refer to the
historical business and operations of the Semiconductor Equipment Business
("SEB") conducted by VAI prior to the Distribution.
VSEA's role in the semiconductor manufacturing market can be traced to VAI's
pioneering work in ultra-high vacuum technology. In the 1960s, this technology
was applied to many physics and space research projects requiring ultra-high
vacuum environments. This technology proved critical in the semiconductor
manufacturing process. SEB was successful in developing methods for controlling
electron beams and ions in ultra-high vacuum environments and in depositing
materials onto silicon wafers to create switching devices.
SEB entered the ion implantation business in 1975 through the acquisition of
Extrion Corporation, in Gloucester, Massachusetts. Since then, the Company has
developed a complete line of medium and high current implanters and added the
high energy product line in 1998. These systems introduce precise quantities of
dopant materials into the wafers, creating desired electrical characteristics.
In June 1997, the Company sold its TFS business, which made physical vapor
deposition equipment, also known as sputtering systems, to Novellus Systems,
Inc. ("Novellus"). In July 1998, SEB acquired the high-energy ion implantation
equipment product line of Genus, Inc. ("Genus").
9
<PAGE>
Employees
At October 1, 1999, the Company had 1,470 full-time and temporary employees
worldwide--1,142 in North America, 243 in Asia and 85 in Western Europe. None
of the Company's employees based in the United States is subject to collective
bargaining agreements and the Company has never experienced a work stoppage,
slowdown, or strike. The Company's employees based in certain foreign countries
may, from time to time, be subject to collective bargaining agreements. The
Company currently considers its employee relations to be good.
The Company's success depends to a significant extent upon a limited number
of key employees and other members of senior management of the Company. The
loss of the services of one or more of these key employees could have a
material adverse effect on the Company. The success of the Company's future
operations depends in large part on the Company's ability to recruit and retain
engineers and technicians, as well as marketing, sales, service and other key
personnel, who are in competitive demand and limited supply because of the
unique skills required. The Company's inability to attract and retain the
personnel it requires could have a material adverse effect on the Company's
business and results of operations.
10
<PAGE>
Executive Officers
The Executive Officers of the Company as of October 1, 1999, were as
follows:
<TABLE>
<CAPTION>
Name and Title Age Business Experience
-------------- --- -------------------
<C> <C> <S>
Richard A. Aurelio...... 55 Mr. Aurelio has served as the Company's President
President and and Chief Executive Officer since April 1999.
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 Holland's ASM Lithography,
where he was President of its U.S. affiliate. Mr.
Aurelio was hired as President of Semiconductor
Equipment Business in 1991 and was elevated to
Executive Vice President of VAI in 1992.
Charles M. McKenna...... 54 Dr. McKenna has served as the Company's Chief
Chief Operating and Operating and Technology Officer since April
Technology Officer 1999. Prior to April 1999, he was Vice President
and General Manager of VAI's Ion Implant Systems
business, positions he had held since 1989. Dr.
McKenna has held various other positions in the
Semiconductor Equipment Business during his 15
years with VAI.
Ernest L. Godshalk, 54 Mr. Godshalk has served as the Company's Vice
III.................... President and Chief Financial Officer since April
Vice President and 1999. Prior to April 1999, he was Vice President,
Chief Financial Officer Finance of the Semiconductor Equipment Business,
a position he had held since joining VAI in
November 1998. Prior to joining VAI, he was
Managing Director of Elgin Management Group (an
investment company), a position he held from 1993
to 1996 and again in 1998. Mr. Godshalk was Chief
Financial Officer and Secretary of Prodigy, Inc.
(an internet company) from 1996 to 1998.
Walter F. Sullivan...... 48 Mr. Sullivan has served as the Company's Vice
Vice President, President, Customer Operations and Chief
Customer Operations Information Officer since April 1999. Prior to
and 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). Previously, he held various
operations and marketing positions during his 17
years with Wang Laboratories.
Gary L. Loser........... 49 Mr. Loser has served as Vice President, General
Vice President, Counsel and Secretary of the Company since April
General Counsel and 1999. Prior to joining the Company, Mr. Loser was
Secretary Senior Business Counsel and Senior Intellectual
Property Counsel for the GE Plastics operating
component of General Electric Company, positions
he held since 1992. Mr. Loser held various other
positions in GE's Legal Department during his
17 years with GE.
Ralph E. Knupp.......... 49 Mr. Knupp has served as the Company's Vice
Vice President, President, Human Resources and Communications
Human Resources and since April 1999. Prior to joining the Company,
Communications Mr. Knupp was Vice President, Human Resources of
Reed Elsevier, Inc., a position he held from 1995
to 1999. Mr. Knupp was Vice President, Human
Resources of Reed Publishing USA, Inc. from 1985
to 1995.
</TABLE>
Item 2. Properties.
The Company has 6 sales and service offices located in the United States and
20 located outside of the United States, including offices in the United
Kingdom, France, Germany (2), Ireland, Netherlands, Japan (7), Korea (3),
Taiwan, Hong Kong, Singapore, and Shanghai (PRC). The Company has two
manufacturing
11
<PAGE>
facilities located in Massachusetts and one in Korea, in addition to its
headquarters facility in Gloucester, Massachusetts. These offices and
facilities aggregate more than 562,000 square feet of which 209,000 square feet
is leased. Since 1994, the manufacturing facilities have been registered to the
internationally recognized ISO 9001 quality standard. Field support operations
in the U.S., Korea, France and Taiwan have been registered to the ISO 9002
standard.
The Company's management does not believe there is any material, long-term,
excess capacity in the Company's facilities, although utilization is subject to
change based on customer demand. Furthermore, the Company's management believes
that the Company's facilities and equipment generally are well-maintained, in
good operating condition, suitable for the Company's purposes, and adequate for
its present operations.
Item 3. Legal Proceedings.
In June 1997, Applied Materials filed a civil action against VAI in the U.S.
District Court for the Northern District of California alleging infringement of
four patents relating to sputter coating systems. Applied Materials contends
that its patents are infringed by the M2i, MB/2/((TM)) and Inova ((TM)) systems
that were manufactured and sold by TFS prior to VAI's sale of TFS to Novellus
in June 1997. The complaint requests unspecified money damages and an
injunction preventing further infringement and requests 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 are invalid and
that one of the asserted patents is unenforceable. VAI also filed a separate
suit seeking damages and injunctive relief against Applied Materials contending
that certain of Applied Materials' business practices violate antitrust laws.
That action has been procedurally related to the infringement case and is
pending before the same judge. Novellus has filed a complaint against Applied
Materials which includes a claim that Applied Materials has infringed three of
the patents acquired by Novellus from the Company. Discovery has begun, but no
date has been set for completion of discovery.
In the event of an outcome unfavorable to the Company, the Company may be
liable for damages for past sales through the June 1997 closing date of the
sale of TFS to Novellus and may be liable to Novellus under the indemnification
obligations described above.
The Company has agreed to indemnify VMS and IB for any costs, liabilities or
expenses relating to the Company's legal proceedings, including the Applied
Materials matters. Under the Distribution Related Agreements, the Company has
agreed to reimburse VMS for one-third of the costs, liabilities, and expenses,
adjusted for any related tax benefits recognized or realized by VMS, with
respect to certain legal proceedings relating to discontinued operations of
VMS.
The Company settled with Novellus, through arbitration, a dispute regarding
the valuation of assets of TFS. The Company recorded Other Income of $2.0
million relating to the difference between the actual settlement amount of $4.8
million and the estimated accrual.
Also, from time to time, the Company may become involved in a number of
legal actions and could incur an uninsured liability in one or more of them.
Accordingly, while the ultimate outcome of all of the above legal matters is
not determinable, management believes the resolution of these matters will not
have a material adverse effect on the financial condition or results of
operations of the Company.
Item 4. Submission of Matters to a Vote of Securityholders.
No matters were submitted to a vote of securityholders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
year ended October 1, 1999.
12
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Since April 2, 1999, the Company's Common Stock has traded on the Nasdaq
National Market under the symbol "VSEA." Prior to April 2, 1999, there was no
established public trading market for the Company's Common Stock.
The following table sets forth for the periods indicated the high and low
closing prices per share of the Common Stock during each of the quarters set
forth below as reported on the Nasdaq National Market since April 2, 1999.
<TABLE>
<CAPTION>
Fiscal 1999 High Low
----------- -------- -------
<S> <C> <C>
Third Quarter (from April 2, 1999)...................... $ 17.00 $ 9.50
Fourth Quarter.......................................... $24.8125 $16.375
</TABLE>
The reported closing price of the Common Stock on the Nasdaq National Market
on December 10, 1999 was $26.00 per share. The number of stockholders of record
on December 10, 1999 was 5,138.
The Company has never declared or paid cash dividends on its capital stock,
and the Company does not expect to pay any cash dividends on its Common Stock
in the foreseeable future.
Item 6. Selected Financial Data.
The following table presents selected historical financial data of the
Company subsequent to the Distribution, and SEB prior to April 2, 1999. The
historical financial information may not be indicative of the future
performance of the Company and does not necessarily reflect what the financial
position and results of operations of SEB would have been had SEB operated as a
separate stand-alone entity during the periods presented.
The computation of net earnings (loss) per share is based on the weighted
average number of VAI Common Stock outstanding during the respective periods,
reflecting the ratio of one share of the Company Common Stock for each share of
VAI, Inc., Common Stock outstanding at the time of the Distribution.
<TABLE>
<CAPTION>
Fiscal Years
-----------------------------------
1999 1998 1997* 1996 1995
------ ------ ------ ------ ------
(Dollars in million except per
share amounts)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Revenue..................................... $271.9 $342.9 $448.3 $667.2 $660.7
------ ------ ------ ------ ------
Operating earnings (loss) before taxes...... $(17.5) $ 16.3 $105.9 $122.3 $ 92.5
Income tax provision (benefit) on earnings
(loss)................................... (4.3) 4.9 34.9 43.0 33.8
------ ------ ------ ------ ------
Net earnings (loss)......................... $(13.2) $ 11.4 $ 71.0 $ 79.3 $ 58.7
Net earnings (loss) per share--basic........ $(0.43) $ 0.37 $ 2.33 $ 2.61 $ 1.93
====== ====== ====== ====== ======
Net earnings (loss) per share--diluted...... $(0.43) $ 0.37 $ 2.33 $ 2.60 $ 1.92
====== ====== ====== ====== ======
Financial Position at Year End:
Total assets................................ $334.1 $224.6 $233.3 $312.1 $275.8
Capital lease obligations .................. $ 0.9 -- -- -- --
</TABLE>
- --------
* Fiscal year 1997 results include a $51.0 million pre-tax gain ($33.2 million
after tax or $1.09 per share) on the sale of the Thin Film Systems business.
This selected financial data should be read in conjunction with the related
consolidated financial statements and notes thereto included in Item 14.
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Until April 2, 1999, the Company's business was operated as part of Varian
Associates, Inc. ("VAI"). On April 2, 1999, VAI contributed its Semiconductor
Equipment Business ("SEB") to the Company, then distributed to the holders of
record of VAI common stock one share of common stock of the Company for each
share of VAI common stock owned on March 24, 1999 (the "Distribution"). At the
same time, VAI contributed its Instruments Business ("IB") to Varian, Inc. and
distributed to the holders of record of VAI common stock one share of common
stock of IB for each share of VAI common stock owned on March 24, 1999. VAI
retained its Health Care Systems business and changed its name to Varian
Medical Systems, Inc. ("VMS") effective as of April 2, 1999. These transactions
were accomplished under the terms of a Distribution Agreement by and among the
Company, VAI and IB (the "Distribution Agreement"). For purposes of providing
an orderly transition and to define certain ongoing relationships between and
among the Company, VMS and IB after the Distribution, the Company, VMS and IB
also entered into certain other agreements which include an Employee Benefits
Allocation Agreement, an Intellectual Property Agreement, a Tax Sharing
Agreement and a Transition Services Agreement (collectively, the "Distribution
Related Agreements").
The consolidated financial statements for periods ended on or before April
2, 1999 reflect SEB as operated by VAI. The consolidated financial statements
generally reflect the financial position, operating results and cash flows of
SEB as if it were a separate entity for all periods presented. Where it was
practicable to identify specific VAI corporate amounts with the SEB activities,
such amounts have been included in the accounts reflected in the consolidated
financial statements. The consolidated financial statements also include
allocations of certain VAI corporate assets (including pension assets),
liabilities (including profit sharing and pension benefits), and expenses
(including legal, accounting, employee benefits, insurance services,
information technology services, treasury, and other VAI corporate overhead) to
SEB. These amounts have been allocated to SEB on the basis that is considered
by management to reflect most fairly or reasonably the utilization of the
services provided to or the benefit obtained by SEB. Typical measures and
activity indicators used for allocation purposes include headcount, sales
revenue, and payroll expense. The Company believes that the methods used to
allocate these amounts are reasonable. However, these allocations are not
necessarily indicative of the amounts that would have been or that will be
recorded by the Company on a stand-alone basis.
Fiscal Year
The Company's fiscal years reported are the 52- or 53-week periods which
ended on the Friday nearest September 30. Fiscal year 1999 comprises the 52-
week period ended on October 1, 1999. Fiscal year 1998 comprises the 53-week
period ended October 2, 1998. Fiscal year 1997 comprises the 52-week period
ended on September 26, 1997.
Fiscal Year 1999 Compared to Fiscal Year 1998
Revenue. The Company's revenues of $271.9 million in fiscal year 1999 were
21% below fiscal year 1998 revenues of $342.9 million, due mainly to the effect
of the semiconductor industry slowdown that began in the second half of fiscal
year 1998 and continued through the first half of fiscal year 1999. Fourth
quarter revenues in fiscal year 1999 totaled $107.5 million, up 157% from $41.8
million in the fourth quarter of fiscal year 1998. Included in fourth quarter
revenues in fiscal year 1999 were approximately $22.2 million of non-recurring
royalty revenue primarily related to a licensing agreement with Tokyo Electron
Ltd. Excluding this non-recurring royalty revenue, revenues for the fourth
quarter of fiscal year 1999 increased approximately 104% as compared to
revenues for the fourth quarter of fiscal year 1998. Over the course of fiscal
year 1999, revenues have increased steadily with each consecutive quarter, from
$47.4 million in the first quarter to $53.2 million in the second quarter, to
$63.8 million in the third quarter, and approximately $85.3 million in the
fourth quarter excluding the non-recurring royalty income.
14
<PAGE>
Royalty revenue for fiscal year 1999 was $28.9 million compared with $10.8
million in fiscal year 1998, primarily due to the aforementioned licensing
agreement with Tokyo Electron Ltd.
International revenues in fiscal year 1999 were $160.8 million compared to
$239.3 million in fiscal year 1998. Sales to customers in the Far East were
$106.4 million in fiscal 1999 as compared to $172.6 million in fiscal 1998.
Sales to customers in Europe were $54.4 million and $66.8 million in fiscal
year 1999 and fiscal year 1998, respectively. Starting in the first half of
fiscal year 1998, the semiconductor industry began to experience a significant
worldwide slowdown in equipment demand, brought about by depressed device
pricing, excess capacity and the Asian financial crisis. The slowdown in
product demand and extreme volatility in computer industry product pricing has
caused the semiconductor industry to reduce significantly or delay purchases of
semiconductor manufacturing equipment and construction of new fabrication
facilities. This slowdown and volatility continued well into fiscal year 1999.
These conditions have adversely affected the Company's results of operations
for most of fiscal year 1999.
Gross Profit on Product and Service Revenue. Gross profit on product and
service revenue (excluding royalty revenue) of $60.4 million for fiscal year
1999 was 25% of revenues compared with gross profit in fiscal year 1998 of
$106.9 million, representing 32% of sales. The decrease in gross profit as a
percentage of its sales from fiscal year 1998 to fiscal year 1999 was partly
attributable to costs associated with excess capacity, and costs related to
increased staffing and training to respond to the increasing demand from
customers.
Research and Development. Research and development expenses in fiscal year
1999 were $37.6 million, an increase of $0.7 million from the research and
development expenditures of $36.9 million in fiscal year 1998. Research and
development expenses were higher largely due to incremental costs incurred
pursuant to the discontinuance of a parallel product development research
contract, following the acquisition of the high-energy ion implantation
equipment product line of Genus, Inc., ("Genus").
Marketing. Marketing expenses of $34.8 million in fiscal year 1999, were the
same as in fiscal year 1998, but represented 13% of revenue in fiscal year 1999
and 10% in fiscal year 1998, largely because of the lower sales volume.
General and Administrative. General and administrative expenses of $35.5
million were 13% of revenue in fiscal year 1999, compared to $29.7 million, or
9% of revenue, in fiscal year 1998. General and administrative expenses in
fiscal year 1999 were higher largely because of the additional administrative
expenses associated with the transition to operating as an independent company.
Restructuring Costs. During the second quarter of fiscal year 1999, the
company recognized pre-tax restructuring charges of $2.7 million, largely due
to the downturn in the industry. The charges included $1.4 million resulting
from the cancellation of plans for the expansion of manufacturing in the United
States and Japan, and $1.3 million to cover termination costs for a reduction
in workforce of 69 employees (approximately 5% of worldwide VSEA employment).
See also Note 14 to the Consolidated Financial Statements.
Interest Income and Other Income, Net. In fiscal year 1999, the Company
recognized interest income of $1.8 million and recorded other income of $2.0
million relating to the difference between the actual settlement amount of a
purchase price dispute relating to the sale of TFS and the estimated accrual.
Earnings (Loss) before Taxes. In fiscal year 1999, the Company had a pretax
loss of $17.5 million, compared to $16.3 million of earnings before taxes in
fiscal year 1998.
Taxes on Earnings. VSEA's effective income tax benefit rate was 24% in
fiscal year 1999, compared to 30% effective income tax expense rate in fiscal
year 1998. These rates are lower than the U.S. federal statutory rate
principally due to the tax benefits arising from the use of a foreign sales
corporation and tax credits and for fiscal year 1999, unbenefited tax losses
incurred prior to the Distribution. Future tax rates may vary from the historic
rates depending on the worldwide allocations of earnings and tax planning
strategies.
15
<PAGE>
Net Earnings. As a result of the foregoing factors, in fiscal year 1999, the
Company incurred a net loss of $13.2 million compared with net earnings of
$11.4 million in fiscal year 1998. The net loss per share for fiscal year 1999
was $0.43 compared with net earnings in fiscal year 1998 of $0.37 per share.
Fiscal Year 1998 Compared to Fiscal Year 1997
Revenue. VSEA's revenue of $342.9 million in fiscal year 1998 was 24% lower
than its revenue of $448.3 million in fiscal year 1997. Adjusted for revenue
attributable to the former TFS business sold in June 1997, VSEA's revenue was
10% lower in fiscal year 1998 than in fiscal year 1997. Starting in the first
half of fiscal year 1998, the semiconductor industry began to experience a
significant worldwide slowdown in equipment demand, brought about by depressed
device pricing, excess capacity in the semiconductor manufacturing industry and
the Asian financial crisis, all of which contributed to the lower revenue.
Fourth quarter revenue of $42 million in fiscal year 1998 was 63% lower than
the $115 million of fourth quarter revenue in fiscal year 1997.
International revenue was $239.3 million, or 70% of VSEA's revenue, in
fiscal year 1998, compared to $245.0 million, or 55% of revenue, in fiscal year
1997. When adjusted for revenue attributable to the TFS business, international
revenue was $208.1 million, or 55% of revenue, in fiscal year 1997. VSEA's
North American (primarily U.S.) revenue dropped from 45% of revenue in fiscal
year 1997 to 30% of revenue in fiscal year 1998, while its Europe region
revenue rose from 10% of revenue in fiscal year 1997 to 19% of revenue in
fiscal year 1998. The aggregate of Taiwan, Japan and Korea revenue increased as
a percentage of revenue, representing 41% of revenue in fiscal year 1997 and
45% of revenue in fiscal year 1998, with Taiwan accounting for most of the
percentage increase in revenue. Fiscal year 1998 revenues reflect the slowdown
of product demand and extreme volatility in product pricing in the
semiconductor industry. This slowdown and volatility have caused the
semiconductor industry to reduce significantly or delay purchases of
semiconductor manufacturing equipment and construction of new fabrication
facilities.
Royalty income decreased by $20 million or 65% in fiscal year 1998, compared
to fiscal year 1997. Royalty income in fiscal year 1998 was primarily
attributable to royalty bearing license agreements with Applied Materials and
TEL for gas-assisted wafer heat transfer patents, and a royalty bearing license
agreement with TEL for the use of MB/2/(TM) technology, co-developed by Varian
and TEL. The decrease in royalty income between 1997 and 1998 resulted
primarily from the cessation of contractual obligations for TEL to pay
royalties in connection with termination of a distribution agreement between
TEL and Varian in the first quarter of fiscal year 1998, with the effect that
royalties therefrom amounted to $3 million in fiscal year 1998 compared to $19
million in fiscal year 1997.
Gross Profit on Product and Service Revenue. VSEA's gross profit on product
and service revenue (excluding royalty revenue) of $106.9 million in fiscal
year 1998 was 32% of revenue, compared to $153.6 million, or 37% of revenue, in
fiscal year 1997. Adjusted for the gross profit attributable to the TFS
business, VSEA's gross profit in fiscal year 1997 was 41% of TFS-adjusted
revenue. The decrease in gross profit as a percentage of revenue from fiscal
year 1997 to fiscal year 1998 was primarily attributable to competitive pricing
pressures encountered during the industry slowdown in the second half of fiscal
year 1998, costs associated with excess capacity and the 65% decrease in
royalty income.
Research and Development. Research and development expenses of $36.9 million
in fiscal year 1998 were 11% of revenue compared to $47.2 million, or 11% of
revenue, in fiscal year 1997. After adjusting for research and development
expenses attributable to the TFS business in fiscal year 1997, research and
development expenses were $30 million, or 8% of TFS-adjusted revenue, in fiscal
year 1997. The increase in research and development expense, on a TFS-adjusted
basis, reflects VSEA's increasing commitment to the development of new systems
and processes and improving existing system capabilities.
Marketing. Marketing expenses of $35 million in fiscal year 1998, down from
$51 million in fiscal year 1997, were 10% of revenue in fiscal year 1998 and
11% in fiscal year 1997. Adjusted for marketing expenses
16
<PAGE>
attributable to the TFS business, VSEA's marketing expenses were $40 million or
11% of TFS-adjusted revenue in fiscal year 1997. The balance of the decrease
was attributable to decreased volume-related expenses.
General and Administrative. General and administrative expenses of $29.7
million were 9% of revenue in fiscal year 1998, compared to $32 million, or 7%
of revenue, in fiscal year 1997. Adjusted for general and administrative
expenses attributable to the TFS business, VSEA's general and administrative
expenses were $25 million, or 7% of TFS-adjusted revenue in fiscal year 1997.
Sale of Business. In June 1997, VSEA completed the sale of its TFS business.
Total proceeds received from the sale of the TFS business were $145.5 million
in cash. The gain on the sale was $33.2 million, net of income taxes of $17.8
million. A $51.5 million reserve was recorded to cover, among other items,
purchase price disputes, retained liabilities, transaction costs, employee
terminations, facilities separation costs, indemnification obligations,
litigation expense and other contingencies (See Note 14 of the Notes to the
Consolidated Financial Statements). During the remainder of fiscal year 1997,
$10.3 million of this reserve was used (primarily for the cash settlement of
transaction and legal indemnification and defense costs). During fiscal year
1998, an additional $7.2 million of this reserve was used (primarily for the
cash settlement of transaction, employee termination, facilities separation and
legal indemnification and defense costs). The reserve as of October 2, 1998 was
$34 million and related to costs associated with pending litigation and
indemnity obligations relating to certain patent infringement claims by Applied
Materials as well as purchase price disputes with Novellus arising out of the
sale of the TFS business.
Other Charges. In the fourth quarter of fiscal year 1998, VSEA recorded a
charge of approximately $6 million, relating primarily to inventory write-downs
of approximately $4 million and to termination benefits of approximately $2
million for approximately 240 employees at its Massachusetts facilities.
Inventory write-downs were charged to cost of revenue. At October 2, 1998, VSEA
had paid approximately $1 million of these termination benefits. The remaining
$1.0 million in termination benefits were paid in fiscal year 1999.
Earnings (Loss) Before Taxes. As a result of the foregoing factors, in
fiscal year 1998, the company had $16.3 million of earnings before taxes, as
compared to $105.9 million in fiscal year 1997.
Taxes on Earnings. VSEA's effective income tax rate was 30% in fiscal year
1998, compared to 33% in fiscal year 1997. 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, tax credits and joint venture income. The
fiscal year 1998 rate was less than the fiscal year 1997 rate as the tax
credits in 1998 produced a higher tax benefit. Future tax rates may vary from
the historic rates depending on the worldwide allocations of earnings and tax
planning strategies.
Net Earnings. Net earnings were $11.4 million ($0.37 per share) or 3% of
revenue in fiscal year 1998. This represented an 84% reduction from the $71.0
million of net earnings ($2.33 per share) or 16% of revenue in fiscal year
1997. The decrease in net earnings primarily reflects the sale of the TFS
business, which provided an after-tax gain of $33 million ($1.09 per share) in
fiscal year 1997, and the other factors described above.
Liquidity and Capital Resources
VAI historically used a centralized cash management system to finance its
operations. Cash deposits from most of the businesses were transferrred to VAI
on a daily basis, and VAI funded its required disbursements. As a result, the
Company reported no cash or cash equivalents at October 2, 1998. Pursuant to
the Distribution Agreement, as of April 2, 1999, the Company received a cash
contribution from VAI such that VSEA's cash and cash equivalents equaled $94.5
million, restricted cash totaling $5.5 million and its consolidated debt,
consisting of notes payable, was $5.0 million. Such cash and cash equivalents
are expected to represent the Company's principal source of liquidity for the
foreseeable future. VSEA does not rely on the earnings, assets or cash flows of
VMS or IB following the the Distribution on April 2, 1999, nor, however, are
VSEA's earnings, assets or cash flows used to contribute to the capital
requirements of those entities.
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During the fiscal year 1999, the Company consumed $31.3 million of cash in
operations, compared to the cash provided by operations of $40.2 million in the
fiscal year 1998 and cash used by operations of $2.7 million in fiscal year
1997. Cash requirements in fiscal year 1999 were primarily due to increased
accounts receivables of $41.8 million, an increase in inventories of $8.0
million and a net loss of $13.2 million offset by an increase in accounts
payable of $20.4 million and depreciation and amortization of $12.3 million. In
fiscal year 1998 cash provided by operations came primarily from net earnings
of $11.4 million, the reduction in accounts receivable of $37.9 million and
depreciation and amortization of $8.7 million offset by increases in accrued
expenses of $15.7 million and accounts payable of $10.0 million. In fiscal year
1997, cash used in operating activities was primarily due to net earnings (net
of Gain on Sale of Thin Film Systems Business) of $20 million, depreciation and
amortization of $12.2 million offset by increases in accrued expenses of
$23.7 million.
During the fiscal year 1999, the Company used $7.0 million for investing
activities due to a $4.0 million decrease in restricted cash offset by
purchases of property, plant and equipment of $10.9 million. In fiscal year
1998, the Company used $31.0 million of cash to acquire the high-energy ion
implantation equipment product line of Genus, Inc., and $7.2 million for
purchases of property, plant and equipment. In fiscal year 1997, the Company
generated $141.0 million of cash from investing activities primarily due to the
sale of Thin Film Systems.
The Company provided $102.7 million of cash from financing activities in
fiscal year 1999 primarily due to the issuance of common stock attributable to
the Distribution net of cash transfers to VAI. In fiscal years 1998 and 1997,
the Company made cash transfers to VAI of $2.9 million and $139.6 million,
respectively.
The Company's liquidity is affected by many factors, some based on the
normal operations of the business and others related to the uncertainties of
the industry and global economies. Although the Company's cash requirements
will fluctuate based on the timing and extent of these factors, the Company's
management believes that cash generated from operations, together with
available cash at October 1, 1999, comprising $66.0 million and $1.0 million of
restricted cash, and the Company's borrowing capability, will be sufficient to
satisfy commitments for capital expenditures and other cash requirements for
the foreseeable future.
Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting and Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
requires derivatives to be measured at fair value and to be recorded as assets
or liabilities on the balance sheet. The accounting for gains or losses
resulting from changes in the fair values of those derivatives would be
dependent upon the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 is effective for the Company's fiscal year 2001. The
Company has not yet determined the impact of its implementation on the
Company's consolidated financial statements.
Revenue Recognition in Financial Statements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes the SEC's view in applying generally
accepted accounting principles to selected revenue recognition issues. The
application of the guidance in SAB 101 will be required in the Company's first
quarter of the fiscal year 2001. The effects of applying this guidance, if any,
will be reported as a cumulative effect adjustment resulting from a change in
accounting principle. The Company does not expect the adoption of SAB 101 to
have a material effect on their financial statements, however the final
evaluation of SAB 101 is not yet complete.
Forward Looking Information
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-
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looking statements involve risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
include: product demand and market acceptance risks; the effect of general
economic conditions and foreign currency fluctuations; the impact of
competitive products and pricing; new product development and
commercialization; the ability to increase operating margins on higher sales;
the ability of suppliers to be responsive to increasing demand for parts; the
impact of economic conditions in Japan, Korea and other Asian markets on sales
in those areas; the timing of renewed growth in worldwide semiconductor
equipment demand; successful implementation by the Company and certain third
parties of corrective action to address the impact of the Year 2000; and other
risks detailed from time to time in the Company's filings with the Securities
and Exchange Commission.
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual results to
differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-K and presented elsewhere by management from time
to time.
Lack of Recent Operating History as a Separate Entity
Prior to the Distribution in April 1999, the Company's business was operated
as part of VAI. See Item 1 --"Business--Company History." The Company is a
smaller and less diversified company than VAI was prior to the Distribution.
The ability of the Company to satisfy its obligations and maintain
profitability will be solely dependent upon its own future performance, and the
Company will not be able to rely on the capital resources and cash flow of VAI.
The future performance and cash flows of the Company will be subject to
prevailing economic conditions and to financial, business and other factors
affecting its business operations, including factors beyond its control.
Potential Responsibility for Liabilities Not Expressly Assumed
The Distribution Agreement allocates among VMS, IB and the Company
responsibility for various indebtedness, liabilities and obligations. It is
possible that a court would disregard this contractual allocation of
indebtedness, liabilities and obligations among the parties and require VMS, IB
or the Company or their respective subsidiaries to assume responsibility for
obligations allocated to another party, particularly if such other party were
to refuse or was unable to pay or perform any of its allocated obligations.
Potential Indemnification Liabilities
Under the terms of the Distribution Agreement, each of VMS, IB and the
Company has agreed to indemnify the other parties (and certain related persons)
from and after consummation of the Distribution with respect to certain
indebtedness, liabilities and obligations, which indemnification obligations
could be significant. The availability of such indemnities will depend upon the
future financial strength of the companies. No assurance can be given that the
relevant company will be in a position to fund such indemnities. In addition,
the Distribution Agreement generally provides that if a court prohibits a
company from satisfying its indemnification obligations, then such
indemnification obligations will be shared equally between the two other
companies.
No Dividends Anticipated
The Company does not anticipate paying dividends on its Company Common
Stock. Any determination to pay cash dividends in the future will be at the
discretion of the Board of Directors of the Company and will be dependent upon
the Company's results of operations, financial condition, contractual
restrictions and other factors deemed relevant at that time by the Company's
Board of Directors.
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Certain Anti-takeover Features
The Certificate of Incorporation and By-Laws of the Company will contain
several provisions that may make the acquisition of control of the Company more
difficult or expensive. The Certificate of Incorporation and By-Laws, among
other things, (i) classify the Board of Directors into three classes, with
directors of each class serving for a staggered three-year period, (ii) provide
that directors may be removed only for cause and only upon the affirmative vote
of the holders of at least a majority of the outstanding shares of VSEA Common
Stock entitled to vote for such directors, (iii) permit the remaining directors
(but not the Company's stockholders) to fill vacancies and newly created
directorships on the Board, (iv) eliminate the ability of stockholders to act
by written consent and (v) require the vote of stockholders holding at least 66
2/3% of the outstanding shares of VSEA Common Stock to amend, alter or repeal
the By-Laws and certain provisions of the Certificate of Incorporation,
including the provisions described in the foregoing clauses (i) through (iv)
and this clause (v). Such provisions would make the removal of incumbent
directors more difficult and time-consuming and may have the effect of
discouraging a tender offer or other takeover attempt not previously approved
by the Board of Directors. Under the Certificate of Incorporation, the Board of
Directors of the Company also has the authority to issue shares of preferred
stock in one or more series and to fix the powers, preferences and rights of
any such series without stockholder approval. The Board of Directors of the
Company could, therefore, issue, without stockholder approval, preferred stock
with voting and other rights that could adversely affect the voting power of
the holders of VSEA Common Stock and could make it more difficult for a third
party to gain control of the Company. In addition, the Company has adopted a
stockholder rights plan, which, under certain circumstances, would
significantly dilute the equity interest in the Company of persons seeking to
acquire control of the Company without the prior approval of the Company's
Board of Directors.
Volatility in the Semiconductor Equipment Industry
The Company's business depends on the capital equipment 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 has been cyclical in nature and has historically
experienced periodic downturns. The semiconductor industry had been
experiencing a slowdown of product demand and extreme volatility in product
pricing during 1998. This slowdown and volatility had caused the semiconductor
industry to reduce significantly or delay purchases of semiconductor
manufacturing equipment and construction of new fabrication facilities. This
slowdown and volatility continued into 1999 and adversely affected the
Company's results of operations. As the semiconductor industry began to recover
during 1999, the Company recorded increasing sales each quarter of fiscal 1999.
Even during periods of reduced revenues, in order to remain competitive, the
Company continued to invest in research and development and to maintain
extensive ongoing worldwide customer service and support capability, which
adversely affected its financial results. If the upturn in the semiconductor
industry is not sustained, the softening of demand could adversely affect the
Company's financial results.
Variability of Operating Results
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly operating results. The timing and
amount of revenues are subject to a number of factors that make estimation of
revenues and operating results prior to the end of any quarter very uncertain.
During each quarter, the Company customarily sells a relatively small number of
ion implantation systems that typically sell for prices ranging from
approximately $1.8 million to $4 million. The Company's backlog at the
beginning of each quarter may not include all systems needed to achieve
expected revenue for that quarter. Consequently, the Company will often be
dependent on obtaining orders for shipment in the same quarter that the order
is shipped. Because the Company may build its systems according to forecast,
the absence of significant backlog for an extended period of time could hinder
the Company's ability to plan production and inventory levels, which could
adversely affect operating results. The Company's revenue and operating results
could also be adversely affected for a particular quarter if anticipated orders
from even a few customers are not received in
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time to permit shipment during that quarter. Moreover, customers may reschedule
or cancel shipments or production difficulties could delay shipments. A delay
in a shipment in any quarter due, for example, to an unanticipated shipment
rescheduling, to cancellations by customers or to unexpected procurement or
manufacturing difficulties or adverse weather experienced by the Company, may
cause revenue in such quarter to fall significantly below the Company's
expectations and may have a material adverse effect on the Company's operating
results for such quarter.
The timing of new product announcements and releases by the Company may also
contribute to fluctuations in quarterly operating results, particularly in
cases where new product offerings cause customers to defer ordering products
from the Company's existing product lines. The Company's results of operations
also could be affected by new product announcements and releases by the
Company's competitors, the volume, mix and timing of orders received during a
period, availability and pricing of key components, fluctuations in foreign
exchange rates and conditions in the semiconductor equipment industry. The
Company's operating results also fluctuate based on gross profits realized on
sales. Gross profit as a percentage of revenue may vary based on a variety of
factors, including the mix and average selling prices of products sold and
costs to manufacture upgrades and to customize systems. Because the Company's
operating expenses are based on anticipated capacity levels, and a high
percentage of the Company's expenses are relatively fixed, a variation in the
timing of recognition of revenue and the level of gross profit from a single
transaction can cause material variations in operating results from quarter to
quarter.
Technological Change and Dependence on New Products
Rapid technological changes in semiconductor manufacturing processes subject
the semiconductor equipment industry to increased pressure to maintain
technological parity with deep submicron process technology. The Company
believes that its future success will depend in part upon its ability to
develop, manufacture and successfully introduce new systems and product lines
with improved capabilities and to continue to enhance existing products, in
particular, products that respond to the trend toward single wafer processing
and 300mm wafer processing. The success of the Company in developing,
introducing and selling new and enhanced systems depends upon a variety of
factors, including new product selection, timely and efficient completion of
product design and development, timely and efficient implementation of
manufacturing and assembly processes, product performance in the field and
effective sales and marketing. There can be no assurance that the Company will
be successful in selecting, developing, manufacturing and marketing new
products or enhancing its existing products. Due to the risks inherent in
transitioning to new products, the Company will be required to accurately
forecast demand for new products while managing the transition from older
products. The Company's inability to complete the development or meet the
technical specifications of any of its new systems or enhancements or to
manufacture and ship these systems or enhancements in volume in a timely manner
could materially and adversely affect the Company's business, financial
condition and results of operations. If new products have reliability or
quality problems reduced orders, higher manufacturing costs, delays in
acceptance of and payment for new products, and additional service and warranty
expenses may result. In the past, the Company has experienced some delays as
well as reliability and quality problems in connection with product
introductions, resulting in some of these consequences. There can be no
assurance that the Company will successfully develop and manufacture new
products, or that any products introduced by it will be accepted in the
marketplace. If the Company does not successfully introduce new products, the
Company's results of operations will be materially adversely affected.
The Company expects to continue to make significant investments in research
and development. The Company must manage product transitions successfully, as
introduction of new products could adversely affect sales of existing products.
There can be no assurance that future technologies, processes or product
developments (in particular, alternative doping methods) will not render the
Company's current product offerings obsolete or that the Company will be able
to develop and introduce new products or enhancements to existing products
which satisfy customer needs in a timely manner or achieve market acceptance.
The failure to do so could adversely affect the Company's business. In
particular, the inability of the Company's next generation VIISta(TM) ion
implant platform, which relies on single wafer processing to achieve market
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acceptance, could have an adverse effect on the Company's financial results. If
the Company is not successful in the marketing and selling of advanced
processes or equipment to customers with whom it has formed long-term
relationships, sales of its products to those customers could be adversely
affected. In addition, in connection with the development of the Company's new
products, the Company will invest in high levels of pre-production inventory,
and the failure to complete development and commercialization of these new
products in a timely manner or changes in design could result in inventory
obsolescence, which could have an adverse effect on its financial results.
Product Concentration
The Company derives virtually all of its revenue from sales and servicing of
its ion implantation systems and related products and services, and such
systems and services are expected to continue to account for a substantial
percentage of the Company's revenues. Continued market acceptance of its
systems is therefore critical to the future success of the Company. Any decline
in demand for, or failure to achieve continued market acceptance of, such
systems or any new version of these systems, if any, as a result of
competition, technological change, failure of the Company to release new
versions of these products on time or otherwise, could have a material adverse
effect on the business, operating results, financial condition and cash flows
of the Company.
Customer Concentration and Lengthy Sales Cycles
Historically, the Company has sold close to half of its systems in any
particular period to its ten largest customers. Sales to the Company's ten
largest customers in fiscal years 1999, 1998 and 1997 accounted for
approximately 51%, 47% and 46% of revenue, respectively. The Company expects
that sales to relatively few customers will continue to account for a high
percentage of its revenue in the foreseeable future. During fiscal year 1999,
one customer accounted for 12% and another for 10%, respectively, of the
Company's revenue. In fiscal year 1998, revenue from one customer accounted for
14% of the Company's revenue, and it was the only customer that accounted for
10% or more of the Company's revenue during that period. In fiscal year 1997,
no one customer had revenue in excess of 10% of the Company's revenue.
None of the Company's customers has entered into a long-term agreement
requiring it to purchase the Company's equipment and other services. Although
the composition of the group comprising the Company's largest customers has
varied from year to year, the loss of a significant customer or any reduction
in orders from any significant customer, including reductions due to customer
departures from recent buying patterns, market, economic or competitive
conditions in the semiconductor industry or in the industries that manufacture
products utilizing integrated circuits, could adversely affect the Company's
business, financial condition and results of operations. The ongoing
consolidation of semiconductor manufacturers may increase the adverse affect of
losing a significant customer.
Sales of the Company's systems depend, in significant part, upon the
decision of a prospective customer to increase manufacturing capacity in an
existing fabrication facility or to transfer a manufacturing process to a new
fabrication facility, both of which typically involve a significant capital
commitment. In addition, the Company has from time to time experienced delays
in finalizing system sales following the initial system's qualifications. Due
to these and other factors, the Company's systems typically have a lengthy
sales cycle during which the Company may expend substantial funds and
management effort. The Company believes that as a result, 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. Accordingly, the Company would
expect to experience difficulty in selling to a given customer if that customer
had initially selected or selects a competitor's capital equipment. The Company
believes that to remain competitive, significant financial resources are
required 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.
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Competition
The semiconductor equipment manufacturing market is highly competitive.
Significant competitive factors in the ion implantation equipment market
include customer relationships, pricing, technological performance and timing,
distribution capabilities and financial viability. The Company's management
believes that, to remain competitive, the Company will require significant
financial resources in order to offer a broad range of products, to maintain
customer service and support centers worldwide and to invest in product and
process research and development. The semiconductor equipment industry is
becoming increasingly dominated by large manufacturers who have the resources
to support customers on a worldwide basis, and certain of the Company's
competitors have substantially greater financial resources arid more extensive
engineering, manufacturing, marketing and customer service and support. In
addition, there are smaller, emerging semiconductor equipment companies that
provide innovative technology which may have performance advantages over
systems offered by the Company. Competitors are expected to continue to improve
the design and performance of their current products and processes and to
introduce new products and processes with improved price and performance
characteristics. If competitors enter into strategic relationships with leading
semiconductor manufacturers covering products similar to those sold or being
developed by the Company, its ability to sell products to those adversely
affected. There can be no assurance that the Company will continue to compete
successfully with its existing competitors or that it will be able to compete
successfully with new competitors.
International Operations and Investments
International sales accounted for 59%, 70% and 55%, respectively, of VSEA's
revenue in fiscal years 1999, 1998 and 1997. Historically, sales to Asia have
accounted for a substantial portion of sales. Sales to Asia accounted for 39%,
51% and 44%, respectively, of VSEA's revenue in fiscal years 1999, 1998 and
1997. Banking and currency problems in certain Asian countries in recent years
have had a significant adverse impact on VSEA's revenues and operations.
Specifically, the decline in value of the Korean won, together with Korean
customers' difficulties obtaining credit, resulted in a decline in the
purchasing power of the Company's Korean customers. This in turn resulted in
the cancellation or delay of orders for the Company's products from Korean
customers, further adversely affecting the Company's results of operations in
1998 and 1999. In addition, if the recovery in Japan's economy is not
sustained, investments by Japanese customers may be negatively affected, and it
is possible that economic conditions in certain Pacific Rim countries, such as
Taiwan, may deteriorate and economic recovery in other Pacific Rim countries
could be delayed.
A portion of the Company's products may be assembled in Korea. This foreign
operation is subject to the usual risks inherent in situating operations
abroad, including risks with respect to currency exchange rates and transfers,
economic and political destabilization, restrictive actions by foreign
governments, nationalizations, the laws and policies of the United States
affecting trade, foreign investment and loans and foreign tax laws.
The impact of these and other factors on the Company's revenues and
operating results in any future period is difficult to forecast. There can be
no assurance that these and other factors relating to international sales and
operations by the Company will not have a material adverse effect on future
business and financial results, or affect future business and financial results
in ways not readily foreseeable.
On January 1, 1999, the Euro was adopted as the national currency of certain
members of the European Monetary Union. The existing national currencies of the
participating countries will continue to be acceptable until January 1, 2002,
after which the Euro, will be the sole legal tender for the participating
countries. Because the Company sells its products in Europe, the Euro
conversion raises several economic and operational issues, such as the
modification of information systems to accommodate Euro-denominated
transactions, the recalculation of currency risk, the competitive impact of
cross-border price transparency, the continuity of material contracts and
potential tax and accounting consequences. The Company has made changes in its
information systems to be able to conduct Euro-denominated transactions.
Although there can be no assurance that these and other factors affecting the
Company's sales transactions in Europe will not have a material adverse effect
on future business and financial results, the Company does not expect any
change in currency
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risk due to its existing hedging practices. The Company does not expect any
significant competitive impact of price transparency with respect to its
systems, due to the fact that most of those systems are sold in customized
configurations. Based on its evaluation to date, the Company does not expect
the Euro conversion to have a material adverse effect on its business, results
of operations or financial condition.
Foreign Currency Risks
The Company enters into forward exchange contracts and options to mitigate
the effects of operational (sales orders and purchase commitments) and balance
sheet exposures to fluctuations in foreign currency exchange rates. The
Company's forward exchange contracts and options generally range from one to
three months in original maturity, and no forward exchange contract has an
original maturity greater than one year. At October 1. 1999, the Company had
forward exchange contracts to sell foreign currencies totaling $28.6 million
and to buy foreign currencies totaling $6.3 million. See Item 7A--"Quantitative
and Qualitative Disclosures About Market Risk."
Uncertain Protection of Patent and Other Proprietary Rights
The Company places considerable importance on obtaining and maintaining
patent, copyright and trade secret protection for significant new technologies,
products and processes because of the length of time and expense associated
with bringing new products through the development process and to the
marketplace.
The Company intends to continue to file applications as appropriate for
patents covering new products and manufacturing processes. No assurance can be
given that patents now owned or that will issue from any pending or future
patent applications owned by, or licensed to, the Company or that the claims
allowed under any issued patents will be sufficiently broad to protect its
technology position against competitors. In addition, no assurance can be given
that any issued patents owned by, or licensed to, the Company will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide competitive advantages to it. The Company could incur substantial
costs and diversion of management resources in defending itself in suits
brought against it or in suits in which it may assert its patent rights against
others. If the outcome of any such litigation is unfavorable to the Company,
its business and results of operations could be materially adversely affected.
In addition, the laws of some foreign countries do not protect proprietary
rights to the same extent as do the laws of the United States.
There may also be pending or issued patents of which the Company is not
aware held by parties not affiliated with the Company that relate to its
products or technologies. In the event that a claim relating to proprietary
technology or information is asserted against the Company, it may need to
acquire licenses to, or contest the validity of, a competitor's proprietary
technology. There can be no assurance that any license required under any such
competitor's proprietary technology would be made available on acceptable terms
or that the Company would prevail in any such contest. If the outcome of any
such contest is unfavorable to the Company, its business and results of
operations could be materially adversely affected. From time to time, the
Company has received notices from, and has issued notices to, third parties
alleging infringement of patent or other intellectual property rights relating
to its products. Such claims are often, but not always, settled by mutual
agreement on a satisfactory basis without litigation. In June of 1997, Applied
Materials filed suit against VAI alleging that several products from its former
TFS business infringed upon four of Applied Materials' patents. See Item 3--
"Legal Proceedings." There can be no assurance that the Company will not be
subject to additional claims of patent infringement or that any such claims
will not require that the Company pay substantial damages or delete certain
features from its products or both.
The Company relies on a combination of copyright, trade secret and other
laws, and contractual restrictions on disclosure, copying and transferring
title, including confidentiality agreements with its vendors, strategic
partners, co-developers, employees, consultants and other third parties, to
protect its proprietary rights. There can be no assurance that such protections
will prove adequate and that contractual agreements will not be breached, that
the Company will have adequate remedies for any such breaches, or that its
trade secrets will not
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otherwise become known to or independently developed by others. The Company has
trademarks, both registered and unregistered, that are maintained and enforced
to provide customer recognition for its products in the marketplace. There can
be no assurance that the Company's trademarks will not be used by unauthorized
third parties. The Company also have agreements with third parties that provide
for licensing of patented or proprietary technology. These agreements include
royalty-bearing licenses and technology cross-licenses. The loss by the Company
of its license agreements with Applied Materials and Tokyo Electron Limited
("TEL") could have a material adverse effect on the Company's business.
Environmental Liabilities
The Company's operations are subject to various foreign, federal, state
and/or local laws regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. This includes
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 such 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 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 VAI for environmental investigation and remediation amounted to $3 million
in fiscal year 1999, compared with $5 million in fiscal year 1998 and $2
million in fiscal year 1997.
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 October 1, 1999, VAI nonetheless estimated that the future
exposure for environmental investigation and remediation costs for these sites
and facilities ranged in the aggregate from $21 million to $51 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 October 1, 1999.
Management of VAI 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 VAI has accrued $21 million in estimated environmental
costs as of October 1, 1999. The amount accrued has not been discounted to
present value.
As to other sites and facilities, VAI has gained sufficient knowledge to be
able to better estimate the scope and costs of future environmental activities.
As of October 1, 1999, VAI estimated that the future exposure for environmental
investigation and remediation costs for these sites and facilities ranged in
the aggregate from $39 million to $66 million. The time frame over which VAI
expects to incur these costs varies with each site and facility, ranging up to
approximately 30 years as of October 1, 1999. As to each of these sites and
facilities, management of VAI 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 $46 million at October 1, 1999. VAI accordingly accrued $20
million, which represents its best estimate of the future costs discounted at
7%, net of inflation. This reserve is in addition to the $21 million described
in the preceding paragraph.
The Distribution Agreement provides that each of VMS, the Company 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.
The foregoing amounts are only estimates of anticipated future environmental
related costs, and the amounts actually spent may be greater or less than such
estimates. The aggregate range of cost estimates
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reflects various uncertainties inherent in many environmental investigation and
remediation activities and the large number of sites and facilities involved.
The Company believes that most of these cost ranges will narrow as
investigation and remediation activities progress.
The Company's present and past facilities have been in operation for many
years, and over that time in the course of those operations, such facilities
have used substances which are or might be considered hazardous, and the
Company has generated and disposed of wastes which are or might be considered
hazardous. Therefore, it is possible that additional environmental issues may
arise in the future that the Company cannot now predict.
Reliance on Suppliers
Certain of the components and subassemblies included in the Company's
products are obtained from a limited group of suppliers, or in some cases a
single-source supplier, including magnets and high-voltage power
supplies/accelerators. The loss of any supplier, including any single-source
supplier, would require obtaining one or more replacement suppliers as well as
potentially requiring a significant level of product development to incorporate
new parts into the Company's products. The Company believes that alternative
sources for such components may generally be obtained when necessary, although
the need to change suppliers or to alternate between suppliers might cause
material delays in delivery or significantly increase its costs. Although the
Company has limited insurance to protect against loss due to business
interruption from these and other sources, there can be no assurance that such
coverage will be adequate or that such coverage will continue to remain
available on acceptable terms, if at all. Although the Company seeks to reduce
its dependence on these limited source suppliers, disruptions or loss of
certain of these sources, including the ones referenced above, could have a
material adverse effect on the Company's business and results of operations and
could result in damage to customer relationships.
Dependence on Key Personnel
The Company's future success depends to a significant extent on the
continued service of certain of its key managerial, technical and engineering
personnel, and its continuing ability to attract, train and retain highly
qualified engineering, technical and managerial personnel. Competition for such
personnel is intense, particularly in the labor markets around the Company's
facilities in Massachusetts. The available pool of qualified candidates is
limited and there can be no assurance that the Company can retain its key
engineering, technical and managerial personnel or that it can attract, train,
assimilate or retain other highly qualified engineering, technical and
managerial personnel in the future. The loss of any of the Company's key
personnel or the inability of the Company to hire, train or retain qualified
personnel could have a material adverse effect on the Company's business,
results of operations and financial condition.
Potential Impact of the Year 2000 Issue
Year 2000 Definition
The Company relies heavily on its existing application software and
operating systems. The Year 2000 computer problem refers to the potential for
system and processing failures of date-related data as a result of computer-
controlled systems using two digits rather than four to define the applicable
year. For example, computer programs that have time-sensitive software may
recognize a date represented as "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruption of operations.
The Company uses a significant number of computer software programs and
operating systems in internal operations, including applications used in
financial, product development, order management and manufacturing systems, as
well as in the products the Company manufactures and sells. Additionally, the
Company is dependent upon its critical suppliers, contract manufacturers, other
vendors, and customers to determine if their operations, products, services and
the payments they provide are Year 2000 ready.
26
<PAGE>
Project Overview
To address the Year 2000 issue, the Company assembled a task force to review
and assess internal software, data management, accounting, manufacturing and
operational systems to ensure that they do not malfunction as a result of the
Year 2000 date transition. The Company's Y2K project began in October 1998 with
a designated Y2K Project manager and a team of Y2K project coordinators. The
overall project comprises project planning and awareness, inventory assessment,
triage, resolution, test planning and execution, deployment and fallout and
contingency planning. The Company's planning and corrective measures are
proceeding in parallel with respect to (1) its internal systems, (2) its
products, and (3) significant third parties with which the Company does
business. These reviews and corrective measures are intended to encompass
significant categories of internal systems used by the Company, including data
management, accounting, manufacturing, sales, human resources and operational
software and systems.
Internal Systems
The Company has completed its assessment of potential Year 2000 problems in
its internal systems. These systems have been categorized as follows, in order
of importance: (a) enterprise information systems; (b) enterprise networking
and telecommunications; (c) factory-specific information systems; (d) non-IT
systems; (e) computers and packaged software; and (f) facilities systems.
With respect to enterprise information systems, in 1994 VAI initiated
replacement of its existing systems with a single company-wide system supplied
by SAP America, Inc., which has been designed and tested by SAP for Year 2000
capability. Installation of that system has been executed to replace first
those existing systems that are not Year 2000 capable. Installation of the new
SAP system modules is complete in all VSEA locations globally except Europe,
which has the SAP Finance modules integrated with a European distribution
system (IBS), which is Y2K compliant. Upgrade of networking and
telecommunications systems is complete; upgrade of factory information systems
is to be completed before December 31, 1999; and upgrade of non-IT systems,
computers and packaged software and facilities systems is complete.
Product Compliance
The Company has initiated an assessment of potential Year 2000 problems in
its current and previously sold products. With respect to current products, the
assessment and corrective actions are complete, and the Company believes that
all of its current products are Year 2000 capable; however, that conclusion is
based in part on Year 2000 assurances or warranties from suppliers of computer
programs and non-IT systems which are integrated into or sold with the
Company's current products.
With respect to compliance of the products the Company supplies to its
customers, the Company adheres to Year 2000 test case scenarios established by
SEMATECH, an industry group comprised of US semiconductor manufacturers. The
Company's compliance efforts, and review and identification of corrective
measures and contingency planning (where necessary), are complete. The Company
has over 2700 installed tools at its customers' sites. The Company's field
service engineers and product support specialists have surveyed and audited the
configuration of the tools determine what needs to be done to bring the
products to Year 2000 compliance. Readiness, upgrade requirements or "never
ready" status has been reviewed through a series of system audits and an
implementation plan put in place as required for each of the products.
Information regarding the readiness of the Company's products is made available
on the corporate web site at www.vsea.com. This program has covered several key
areas including date inspections, operating system investigations, runtime
tests, software inspections and third party software component verification.
The Company has completed the product assessment, which includes products,
information systems and networks. A substantial majority of the systems and
products can be upgraded with readily available externally utilized computers
and packaged software or with internally developed software. Where the Company
identifies previously sold products that are not Year 2000 capable, the Company
intends in some cases to develop and offer to sell upgrades or retrofits,
identify corrective measures which the customer could undertake, or identify
for the customer other suppliers of upgrades or retrofits.
27
<PAGE>
The Company has substantially completed these upgrade services to its
customers. There may be instances where the Company will be required to repair
and/or upgrade such products at the Company's expense.
Supply Chain
The second area of emphasis in the Year 2000 readiness program is to ensure
the Company's supply chain is Year 2000 prepared. The Company's Product and
Purchasing departments identified over 900 suppliers that needed to be
evaluated. These assessments identified and prioritized critical suppliers,
reviewed those suppliers' written assurances on their own assessments and
correction of Year 2000 problems, and developed appropriate contingency plans
for those suppliers which may not be adequately prepared for Year 2000
problems. In this respect, the Company is requiring its suppliers to complete a
questionnaire that was prepared and recommended by SEMATECH, an industry group
comprised of U.S. semiconductor manufacturers and designed to assess each
supplier's Year 2000 readiness. Additionally, officials of the Company have
visited and audited the Year 2000 compliance efforts of all sole source
suppliers, or those having software content in their products. Questionnaires
were sent to each of these suppliers, whose responses were reviewed and
classified. On-site audits or conference calls were performed at 40 critical
suppliers where readiness issues could be of serious consequence to the
Company's operations. The Company has completed the audit of all the critical
suppliers and all of these suppliers are considered as Year 2000 capable. Based
upon the survey, the Company was able to classify its key suppliers as Year
2000 compliant with respect to Year 2000 readiness, and the Company will
continue to monitor any addition of new suppliers to assure readiness is
maintained. However, because the Company's readiness is dependent on timely
Year 2000 readiness of third parties, there can be no assurances that its
efforts alone will resolve all Year 2000 issues applicable to the Company's
internal processes or products.
Third Party Assessment
In November 1999, the Company contracted an external consulting firm to
conduct a third-party assessment of the Company's project completeness. The
weeklong assessment process covered the aspects outlined in the Company's Y2K
project. The Company is considered to be overall compliant of Year 2000
readiness, as described in the consultant's assessment report.
Costs
As of October 1, 1999, the Company estimates that it had incurred costs of
less than $1 million to assess and correct Year 2000 problems, primarily during
fiscal year 1999. Although difficult to assess, based on its analysis to date,
the Company estimates that it will incur less than $1 million in additional
costs to assess and correct Year 2000 problems, which costs are expected to be
incurred throughout the first half of fiscal year 2000. All of these costs have
been and will continue to be expensed as incurred. However, the actual future
incremental spending may prove to be higher. Also, this estimate does not
include the costs that could be incurred if one or more of the significant
third party service providers fail to achieve Year 2000 readiness. The Company
has not separately identified the costs incurred for its Year 2000 readiness
program that are the result of use of internal resources and therefore, these
costs are not included in the above estimates.
This estimate of future costs has not been reduced by expected recoveries
from certain third parties, which are subject to indemnity, reimbursement or
warranty obligations for Year 2000 problems. In addition, the Company expects
that certain costs will be offset by revenue generated by the sale of upgrades
and retrofits and other customer support services relating to Year 2000
problems. However, there can be no assurance that the Company's actual costs to
assess and correct Year 2000 problems will not be higher than the foregoing
estimate.
Contingency Plans
The Company regards contingency planning for the Year 2000 compliance as one
of the most critical components of its Year 2000 project. The Company has
developed contingency plans to maintain operations under a number of
hypothetical scenarios. The Company had begun the development of a contingency
plan in
28
<PAGE>
mid 1999 and finalized all aspects of the contingency plan at the end of
November 1999. The contingency plan covers not only the issues specific to Year
2000 but also any natural disaster that may be of potential occurrence to the
Company. The Company also has developed contingency response management for the
"worst case scenarios", such as power outage, water and gas disruption, network
failure. The Company has implemented the necessary and appropriate actions for
these scenarios and with reasonable confidence that the contingency planning
will provide support to the successful transition of Year 2000.
The Company's spare inventory, distribution system and customer support
organization, as well as the contingency plans implemented by the Company, are
intended to ensure that temporary disruptions to regional and global
infrastructure systems will have no materially adverse effect on the Company's
operations and financial performance. However, extended disruptions in these
systems beyond the Company's control or ability to remedy, such as described
above, could impact the Company's ability to deliver product and services to
our customers on schedule and to maintain Company operations and provide
appropriate employee support (including payroll and benefits), and would,
thereby, potentially have a materially adverse effect on the Company's
operations and financial performance.
The Company believes that the Year 2000 will not have a material adverse
effect on the Company's financial condition or overall trends in the results of
operations. However, there can be no assurance that delays or problems,
including the failure to ensure Year 2000 compliance by systems or products
supplied to the Company by a third party, will not have an adverse effect on
the Company, its financial performance or the competitiveness or customer
acceptance of its products. Further, the Company's current understanding of
expected costs is subject to change as potential contingency planning proceeds
and does not include potential costs related to actual customer claims or the
cost of internal software and hardware replaced in the normal course of
business (whose installation otherwise in the normal course of business may be
accelerated to provide solutions to Year 2000 compliance issues).With respect
to the Company's enterprise information systems, the Company has a contingency
plan if the SAP system is not fully installed before December 31, 1999. That
plan primarily involves installation where necessary of a Year 2000 upgrade of
existing information systems pending complete installation of the SAP system.
This upgrade is currently in acceptance testing, and if functional will be held
for contingency purposes.
With respect to products and significant third parties, the Company has
developed contingency plans for key areas that may not have been corrected by
December 31, 1999. The Company believes it has identified critical systems
necessary to the Company's internal system operations and has asked suppliers
to provide assurances that such systems are Year 2000-compliant, or to identify
replacement or upgrade systems. With respect to Year 2000 compliance of its
suppliers' systems, the Company has completed the process of evaluating and
assessing the adequacy of responses from its various suppliers with the
assurance that all of its critical suppliers are Year 2000 compliant.
The Company believes the Company's existing internal systems encompassing
core manufacturing, service, sales, inventory and warranty operations are
currently Year 2000-compliant and can continue to support the Company's
significant operational systems, as needed. Some of the Company's payroll
operations are handled on an out-sourced basis, and the Company has received
written assurances from its providers that the systems providing these
outsource services are Year 2000-compliant. Although there may be, under normal
business circumstance, certain individual and group level systems which are not
be fully Y2K compliant, the Company believes that the cost to replace or
upgrade is not expected to be material.
Risks
Failure of the Company and its key suppliers to accurately assess and
correct Year 2000 problems would likely result in interruption of certain of
the Company's normal business operations, which could have a material adverse
effect on the Company's business, results of operations and financial
condition. If the Company does not adequately identify and correct Year 2000
problems in its information systems it could experience an interruption in its
operations, including manufacturing, order processing, receivables collection
29
<PAGE>
and accounting, which could cause delays in product shipments, lost data and a
consequential impact on revenues, expenditures and financial reporting. If the
Company does not adequately identify and correct Year 2000 problems in its non-
IT systems it could experience an interruption in its manufacturing and related
operations, such that there would be delays in product shipments and a
consequential impact on revenues. If the Company does not adequately identify
and correct Year 2000 problems in previously-sold products it could experience
warranty or product liability claims by users of products which do not function
correctly. If the Company does not adequately identify and correct Year 2000
problems of noted significant third parties it could experience an interruption
in the supply of key components or services from those parties, such that there
would be delays in product shipments or services and a consequential impact on
revenues.
Management believes that appropriate corrective actions have been or will be
accomplished within the cost and time estimates stated above. Although the
Company believes that it is Year 2000 compliant, it does not currently believe
that any Year 2000 non-compliance in the Company's information systems will
have a material adverse effect on the Company's business, results of operations
or financial condition. However, given the inherent complexity of the Year 2000
problem, there can be no assurance that actual costs will not be higher than
currently anticipated or that corrective actions will not take longer than
currently anticipated to complete. Risk factors which might result in higher
costs or delays include the ability to identify and correct these issues in a
timely fashion Year 2000 problems; regulatory or legal obligations to correct
Year 2000 problems in previously-sold products; ability to retain and hire
qualified personnel to perform assessments and corrective actions; the
willingness and ability of critical suppliers to assess and correct their own
Year 2000 problems, including the products they supply to the company; and the
additional complexity which will likely be caused by the undertaking during
fiscal year 1999 and fiscal year 2000 the separation of currently shared
enterprise information systems as a result of the Distribution.
Due to the uncertainties as to the extent of Year 2000 problems with the
Company's previously sold products and the extent of any legal obligation of
the Company to correct Year 2000 problems in those products, the company cannot
yet assess risks to the Company with respect to those products. The Company has
completed assessments of its critical suppliers and has concluded that the
failure of critical suppliers to assess and correct Year 2000 problems is not
reasonably likely, and therefore is not expected to have a material adverse
effect on the Company's results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Exchange Risk
As a multinational firm, the Company faces exposure to adverse movements in
foreign currency exchange rates. This exposure may change over time as the
Company's business practices evolve and could have a material adverse impact on
the Company's financial results. Historically, the Company's primary exposures
have resulted from non-U.S. dollar denominated sales and purchases in Asia and
Europe.
At the present time, the Company hedges currency exposures that are
associated with certain of its assets and liabilities denominated in various
non-functional currencies and with anticipated foreign currency cash flows. The
Company does not enter into forward exchange contracts for trading purposes.
The Company's forward exchange contracts generally range from one to two months
in original maturity. No forward exchange contract has an original maturity
greater than one year. During fiscal year 1999 the Company entered into foreign
currency option contracts, although none was outstanding as of the reporting
date.
30
<PAGE>
Forward exchange contracts outstanding as of October 1, 1999 are summarized
as follows:
<TABLE>
<CAPTION>
Notional Contract Fair
Value Rate Value
----------- -------- -----------
<S> <C> <C> <C>
Foreign Currency Purchase Contracts:
Singapore dollar............................ $ 578,330 1.683 $ 569,198
Japanese yen................................ 1,993,355 105.35 1,962,800
Euro........................................ 3,682,770 1.0374 3,736,730
----------- -----------
Total..................................... 6,254,455 6,268,728
Foreign Currency Sell Contracts:
Japanese yen................................ $ 4,550,000 105.35 $ 4,480,255
Euro........................................ 8,300,000 1.0374 8,421,612
New Taiwan dollar........................... 7,659,663 31.795 7,663,279
Korean won.................................. 8,158,759 1193.0 7,991,297
----------- -----------
Total..................................... 28,668,422 28,556,443
Total Contracts:.......................... $34,922,877 $34,825,171
=========== ===========
</TABLE>
There were no significant unrealized gains or losses for these forward
contracts as of October 1, 1999. The fair value of forward exchange contracts
generally reflects the estimated amounts that the Company would receive or pay
to terminate the contracts at the reporting date. The notional amounts of
forward exchange contracts are not a measure of the Company's exposure.
Interest Rate Risk
Although payments under certain of the Company's operating leases for
facilities are tied to market indices, the Company is not exposed to material
interest rate risk associated with its operating leases.
Item 8. Financial Statements and Supplementary Data.
The response to this item is submitted as a separate section to this report.
See Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
31
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The response to this item is contained in part under the caption "Executive
Officers" in Part I of this Annual Report on Form 10-K and in part in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
February 16, 2000 (the "2000 Proxy Statement") under the caption "Proposal 1--
Election of Directors," which section is incorporated herein by this reference.
Officers are elected on an annual basis and serve at the discretion of the
Board of Directors.
Item 11. Executive Compensation.
The response to this item is contained in the 2000 Proxy Statement under the
caption "Proposal 1--Election of Directors," which section is incorporated
herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The response to this item is contained in the 2000 Proxy Statement under the
caption "Stock Ownership of Certain Beneficial Owners and Management," which
section is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions.
The response to this item is contained in the 2000 Proxy Statement under the
caption "Proposal 1--Election of Directors," which section is incorporated
herein by this reference.
32
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) Consolidated Financial Statements: (see index on page F-1 of this
report)
. Report of Independent Public Accountants
. Consolidated Balance Sheets
. Consolidated Statements of Operations
. Consolidated Statements of Cash Flows
. Consolidated Statements of Stockholders' Equity
. Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedule: (see index on F-1 of
this report)
The following financial statement schedule of the Registrant and its
subsidiaries for fiscal years 1999, 1998, and 1997, and the related
Report of Independent Accountants are filed as a part of this Report
and should be read in conjunction with the Consolidated Financial
Statements of the Registrant and its subsidiaries.
<TABLE>
<CAPTION>
Schedule
--------
<C> <S>
-- Report of Independent Accountants on Financial Statements Schedule
II Valuation and Qualifying Accounts
</TABLE>
All other required schedules are omitted because of the absence of
conditions under which they are required or because the required information is
given in the financial statements or the notes thereto.
(b) The list of Exhibits filed as a part of this Annual Report on Form 10-K
are set forth on the Exhibit Index immediately preceding such Exhibits, and is
incorporated herein by this reference.
(c) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the Company's fiscal year ended October 1, 1999.
33
<PAGE>
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.
By: /s/ Ernest L. Godshalk
----------------------------------
Ernest L. Godshalk
Vice President and Chief Financial
Officer
Date: December 30, 1999
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ Richard A. Aurelio President and Chief Executive December 22, 1999
----------------------------------- Officer and Director (Principal
Richard A. Aurelio Executive Officer)
/s/ Ernest L. Godshalk III Vice President and Chief Financial December 22, 1999
----------------------------------- Officer (Principal Financial
Ernest L. Godshalk III Officer)
/s/ Seth H. Bagshaw Vice President and Corporate December 22, 1999
----------------------------------- Controller (Principal Accounting
Seth H. Bagshaw Officer)
/s/ Ruth M. Davis Director December 22, 1999
-----------------------------------
Ruth M. Davis
/s/ Robert W. Dutton Director December 22, 1999
-----------------------------------
Robert W. Dutton
/s/ Angus A. MacNaughton Director December 24, 1999
-----------------------------------
Angus A. MacNaughton
/s/ J. Tracy O'Rourke Chairman of the Board December 23, 1999
-----------------------------------
J. Tracy O'Rourke
</TABLE>
34
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
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.
21* Subsidiaries of the Registrant.
27 Financial Data Schedule.
</TABLE>
- --------
* Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form 10 (File No. 000-25395).
35
<PAGE>
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:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent Accountants............ F-2
Consolidated Statements of Operations for fiscal years ended October
1,1999, October 2, 1998, and September 26, 1997 ........................ F-3
Consolidated Balance Sheets as of October 1, 1999 and October 2, 1998.... F-4
Consolidated Statements of Cash Flows for fiscal years ended October 1,
1999, October 2, 1998, and September 26, 1997........................... F-5
Consolidated Statements of Stockholders' Equity for fiscal years ended
October 1, 1999, October 2, 1998, and September 26, 1997................ F-6
Notes to the Consolidated Financial Statements........................... F-7
</TABLE>
The following financial statement schedule of the Registrant and its
subsidiaries for fiscal years 1999, 1998, and 1997, and the related Report of
Independent Accountants are filed as a part of this Report as required to be
included in Item 14(a) and should be read in conjunction with the Consolidated
Financial Statements of the Registrant and its subsidiaries:
Financial Statement Schedules
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants on Financial Statements Schedule......... S-1
Schedule II--Valuation and Qualifying Accounts and Reserves................ S-2
</TABLE>
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
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Varian Semiconductor Equipment Associates, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Varian
Semiconductor Equipment Associates, Inc. and its subsidiaries at October 1,
1999 and October 2, 1998, and the results of their operations and their cash
flows for each of the three fiscal years in the period ended October 1, 1999,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
By: _________________________________
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 1, 1999
F-2
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Fiscal Year Ended
---------------------------------------------------
October 1, October 2,
1999 1998 September 26, 1997
-------------- --------------- -------------------
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
Product revenue............ $ 206,419 $ 303,492 $ 386,810
Service revenue............ 36,614 28,685 30,421
Royalties.................. 28,852 10,767 31,091
-------------- --------------- ---------------
Total revenue............ 271,885 342,944 448,322
-------------- --------------- ---------------
Operating Costs and
Expenses
Cost of product and service
revenue................... 182,604 225,237 263,639
Research and development... 37,582 36,897 47,195
Marketing.................. 34,848 34,766 50,783
General and
administrative............ 35,462 29,734 31,893
Restructuring costs........ 2,688 -- --
-------------- --------------- ---------------
Total operating costs and
expenses................ 293,184 326,634 393,510
-------------- --------------- ---------------
Operating earnings (loss).. (21,299) 16,310 54,812
Interest income............ 1,821 -- --
Other income, net.......... 2,009 -- --
Gain on sale of Thin Film
Systems................... -- -- 51,039
-------------- --------------- ---------------
Earnings (loss) before
taxes..................... (17,469) 16,310 105,851
Income tax provision
(benefit) on earnings
(loss).................... (4,262) 4,913 34,855
-------------- --------------- ---------------
Net earnings (loss)........ $ (13,207) $ 11,397 $ 70,996
============== =============== ===============
Weighted average shares
outstanding--basic........ 30,428 30,423 30,423
============== =============== ===============
Weighted average shares
outstanding--diluted...... 30,428 30,508 30,508
============== =============== ===============
Net earnings (loss) per
share--basic............ $ (0.43) $ 0.37 $ 2.33
============== =============== ===============
Net earnings (loss) per
share--diluted.......... $ (0.43) $ 0.37 $ 2.33
============== =============== ===============
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-3
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 1, October 2,
1999 1998
---------- ----------
(Amounts in
thousands, except per
share data)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................... $ 65,968 $ --
Restricted cash ........................................ 1,000 --
Accounts receivable, net................................ 100,497 62,677
Inventories, net........................................ 70,437 60,692
Deferred taxes.......................................... 32,536 34,229
Other current assets.................................... 2,887 4,525
-------- --------
Total Current Assets.................................. 273,325 162,123
-------- --------
Property, plant and equipment........................... 92,364 84,128
Accumulated depreciation and amortization............... (54,066) (45,314)
-------- --------
Net property, plant and equipment....................... 38,298 38,814
Other assets............................................ 22,521 23,689
-------- --------
Total Assets........................................ $334,144 $224,626
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable........................................... $ 5,523 $ --
Accounts payable........................................ 30,709 10,513
Accrued expenses........................................ 76,455 77,050
Product warranty........................................ 15,899 21,435
Advance payments from customers......................... 4,212 3,631
-------- --------
Total Current Liabilities............................. 132,798 112,629
Long-term accrued expenses.............................. 7,176 6,796
Deferred taxes.......................................... 985 1,952
-------- --------
Total Liabilities..................................... 140,959 121,377
Commitments and Contingencies (Notes 11 and 12)
Stockholders' Equity
Preferred stock, par value $.01; authorized 5,000,000
shares, issued; none
Common stock, par value $.01; authorized 150,000,000
shares, issued and
outstanding; 30,474,492 at October 1, 1999.............. 305 --
Capital in excess of par value.......................... 180,175 --
Divisional equity....................................... -- 103,249
Retained earnings....................................... 12,705 --
-------- --------
Total Stockholders' Equity............................ 193,185 103,249
-------- --------
Total Liabilities and Stockholders' Equity.......... $334,144 $224,626
======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-4
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the Fiscal Year Ended
-----------------------------------
October 1, October 2, September 26,
1999 1998 1997
---------- ---------- -------------
(Amounts in thousands)
<S> <C> <C> <C>
Operating Activities
Net cash provided by (used in) Operating
Activities.............................. $(31,267) $40,219 $ (2,706)
-------- ------- --------
Investing Activities
Proceeds from Sale of Thin Film Systems.. -- -- 145,500
Purchase of property, plant and
equipment............................... (10,977) (7,191) (10,732)
Purchase of business, net of cash
acquired................................ -- (31,014) --
Other.................................... -- -- 6,535
Restricted cash paid .................... (1,000) -- --
Restricted cash received ................ 5,000 -- --
-------- ------- --------
Net cash provided by (used in) Investing
Activities................................ (6,977) (38,205) 141,303
======== ======= ========
Financing Activities
Other...................................... (214) -- --
Proceeds from the issuance of common stock
.......................................... 193 -- --
Net transfers (to) from Varian Associates,
Inc....................................... 102,712 (2,885) (139,565)
-------- ------- --------
Net cash provided by (used in) Financing
Activities................................ 102,691 (2,885) (139,565)
-------- ------- --------
Effects of exchange rate changes on cash... 1,521 871 968
-------- ------- --------
Net increase in cash and cash equivalents.. 65,968 -- --
Cash and cash equivalents at beginning of
period.................................... -- -- --
-------- ------- --------
Cash and cash equivalents at end of
period.................................... $ 65,968 $ -- $ --
======== ======= ========
Detail of net cash provided by (used in)
Operating Activities
Net earnings (loss)...................... $(13,207) $11,397 $ 70,996
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities
Depreciation and amortization.......... 12,347 8,715 12,183
Gain on sale of Thin Film Systems
business.............................. -- -- (51,039)
Provision for doubtful accounts........ 2,212 243 958
Deferred taxes......................... 726 4,500 (8,593)
Changes in assets and liabilities, net of
business acquired
Accounts receivable.................... (41,780) 37,942 (1,633)
Inventories............................ (7,961) 3,676 47
Other current assets................... 1,638 (2,480) 3,600
Accounts payable....................... 20,378 (10,047) (541)
Accrued expenses....................... (463) (15,697) (23,675)
Product warranty....................... (5,477) (1,821) (4,431)
Advance payments from customers........ 436 1,605 (5,086)
Long term accrued expenses............. 380 549 4,792
Other.................................. (496) 1,637 (284)
-------- ------- --------
Net cash provided by (used in) Operating
Activities................................ $(31,267) $40,219 $ (2,706)
======== ======= ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-5
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital in
Common Excess of Retained Divisional
Stock Par Value Earnings Equity Total
------ ---------- -------- ---------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Balance at September 27,
1996......................... $ -- $ -- $ -- $ 163,306 $ 163,306
Net earnings for the year... -- -- -- 70,996 70,996
Net transfers to Varian
Associates, Inc............ -- -- -- (139,565) (139,565)
----- -------- ------- --------- ---------
Balance at September 26,
1997......................... -- -- -- 94,737 94,737
Net earnings for the year... -- -- -- 11,397 11,397
Net transfers to Varian
Associates, Inc............ -- -- -- (2,885) (2,885)
----- -------- ------- --------- ---------
Balance at October 2, 1998.... -- -- -- 103,249 103,249
Net loss prior to
Distribution............... -- -- -- (25,912) (25,912)
Net income subsequent to
Distribution .............. -- -- 12,705 -- 12,705
Net transfers to Varian
Associates, Inc............ -- -- -- (77,337) (77,337)
Distribution to
shareholders............... 304 186,341 -- -- 186,645
Distribution Agreement
adjustments ............... -- (6,596) -- -- (6,596)
Issuance of stock under
omnibus stock, stock
option, and employee stock
purchase plans (including
tax benefit of $238)....... 1 430 -- -- 431
----- -------- ------- --------- ---------
Balance at October 1, 1999.... $ 305 $180,175 $12,705 $ -- $ 193,185
===== ======== ======= ========= =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-6
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Company and Basis of Presentation
Varian Semiconductor Equipment Associates, Inc. ("VSEA" or "Company")
designs, manufactures, markets and services (including maintenance, spare parts
and product enhancements) semiconductor processing equipment used in the
fabrication of integrated circuits to customers located both in the United
States and in international markets. The Company faces risk factors similar to
all companies in the semiconductor manufacturing equipment market including,
but not limited to, competition, market downturn, technological change,
international operations and related foreign currency risks and ability to
recruit and retain key employees.
The consolidated financial statements of the Company generally reflect the
financial position, results of operations and cash flows of the Company as of
and for the year ended October 1, 1999, together with operations prior to April
2, 1999, which had been part of the former Varian Associates, Inc. ("VAI").
Until April 2, 1999, the Company's business was operated as part of VAI. On
April 2, 1999, VAI contributed its Semiconductor Equipment Business ("SEB") to
the Company, then distributed to the holders of record of VAI common stock one
share of common stock of the Company for each share of VAI common stock owned
on March 24, 1999 (the "Distribution"). At the same time, VAI contributed its
Instruments Business ("IB") to Varian, Inc. and distributed to the holders of
record of VAI common stock one share of common stock of IB for each share of
VAI common stock owned on March 24, 1999. VAI retained its Health Care Systems
business and changed its name to Varian Medical Systems, Inc. ("VMS") effective
as of April 2, 1999. These transactions were accomplished under the terms of a
Distribution Agreement by and among the Company, VAI, hereafter referred to as
VMS for periods following the Distribution, and IB (the "Distribution
Agreement"). For purposes of providing an orderly transition and to define
certain ongoing relationships between and among the Company, VMS and IB after
the Distribution, the Company, VMS and IB also entered into certain other
agreements which include an Employee Benefits Allocation Agreement, an
Intellectual Property Agreement, a Tax Sharing Agreement and a Transition
Services Agreement (collectively, the "Distribution Related Agreements").
The consolidated financial statements for periods ended on or before April
2, 1999 reflect SEB as operated by VAI. For periods prior to April 2, 1999,
where it was practicable to identify specific VAI corporate amounts within the
SEB activities, such amounts have been included in the accounts reflected in
the consolidated financial statements. The consolidated financial statements
also include allocations of certain VAI corporate assets (including pension
assets), liabilities (including profit sharing and pension benefits), and
expenses (including legal, accounting, employee benefits, insurance services,
information technology services, treasury, and other VAI corporate overhead) to
SEB through April 2, 1999. These amounts have been allocated to SEB on the
basis that is considered by management to reflect most fairly or reasonably the
utilization of the services provided to or the benefit obtained by SEB. Typical
measures and activity indicators used for allocation purposes include
headcount, sales revenue, and payroll expense. The Company believes that the
methods used to allocate these amounts are reasonable. However, these
allocations are not necessarily indicative of the amounts that would have been
or that will be recorded by the Company on a stand-alone basis.
Under the terms of the Distribution Agreement, net assets transferred to the
Company as of April 2, 1999 were based on estimates and are subject to
adjustment. In the fourth quarter of fiscal 1999, the company recorded a $6.6
million dollar adjustment to Stockholders' Equity to reflect a $1.1 million
refund of cash received in excess of the terms of the Distribution Agreement
and a $5.5 million adjustment to estimated deferred tax assets received in the
Distribution. Any other items or adjustments that may occur in the future would
also result in an adjustment to Stockholders' Equity.
F-7
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2. Summary of Significant Accounting Policies
Fiscal Year
The Company's fiscal years reported are the 52- or 53-week periods which
ended on the Friday nearest September 30. Fiscal year 1999 comprises the 52-
week period ended on October 1, 1999. Fiscal year 1998 comprises the 53-week
period ended October 2, 1998. Fiscal year 1997 comprises the 52-week period
ended on September 26, 1997.
Principles of Consolidation
The consolidated financial statements include those of the Company and its
subsidiaries. Significant intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The significant estimates and assumptions in these financial
statements include estimated loss contingencies, estimated future costs of
installation, warranty, income taxes payable and allowance for doubtful
accounts. Actual results could differ from these estimates.
Legal Expenses
The Company accrues estimated amounts for legal fees expected to be incurred
in connection with loss contingencies which are both probable and estimatable.
Foreign Currency Translation
For non-U.S. operations, the U.S. dollar is the functional currency.
Monetary assets and liabilities of foreign subsidiaries are translated into
U.S. dollars at current exchange rates. Nonmonetary assets such as inventories
and property, plant, and equipment are translated at historical rates. Income
and expense items are translated at effective rates of exchange prevailing
during each year, except that inventories and depreciation charged to
operations are translated at historical rates. The aggregate exchange gain
included in general and administrative expenses for 1999 was $1.0 million. In
1998 and 1997, the aggregate exchange loss was $0.9 million and $1.1 million,
respectively.
Divisional Equity
Divisional equity includes the historical investments and advances from VAI,
including net transfers to/from VAI, third party liabilities paid on behalf of
the Company by VAI, amounts due to affiliates related to purchases, amounts due
to/from VAI for services and other charges, and predistribution earnings
(losses) of the Company.
Revenue Recognition
Product and service revenue are generally recognized upon delivery of
products or services. The Company's products are generally subject to
installation and warranty, and the Company provides for the estimated future
costs of installation and warranty in cost of sales when sales are recognized.
Service revenue is recognized ratably over the period of the related contract.
Royalty revenue is recognized when contractual obligations are met and revenue
is earned.
F-8
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
The Company considers currency on hand, demand deposits, and all highly
liquid investments with an original purchase maturity of three months or less
to be cash and cash equivalents. The carrying amounts of cash and cash
equivalents approximate estimated fair value because of the short maturities of
those financial instruments. The company also has restricted cash pursuant to
the purchase of Genus, Inc. (see Note 13) and to foreign trade laws. The
Company expects the restrictions on these amounts will be released in fiscal
year 2000.
Accounts Receivable
Accounts receivable consist of the following (in thousands):
<TABLE>
<CAPTION>
October 1, 1999 October 2, 1998
--------------- ---------------
<S> <C> <C>
Billed receivables........................... $103,176 $63,279
Allowance for doubtful accounts.............. (2,679) (602)
-------- -------
Accounts receivable, net..................... $100,497 $62,677
======== =======
</TABLE>
Concentration of Risk
Financial instruments that potentially expose the Company to concentrations
of credit risk consist principally of trade accounts receivable, cash
investments and forward exchange contracts. Concentrations of credit risk with
respect to trade accounts receivable are limited due to the large number of
customers comprising the Company's customer base and their dispersion across
many different geographies. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral from its customers. As
of October 1, 1999, no one customer has amounts owing the Company amounting to
10% of the total accounts receivable balance. During fiscal year 1999, revenue
from two customers each accounted for 12% and 10% of the Company's revenue. In
fiscal year 1998, revenue for one customer accounted for 14% of total revenue.
No customer accounted for revenue in excess of 10% in fiscal year 1997. Except
for the one-time royalty payment in fiscal year 1999, the concentration of
customers is primarily within the products and services segments of the
Company. The Company maintains cash investments primarily in U.S. Treasury,
government agency securities, and investment quality municipal securities as
well as short-term time deposits with investment grade rated financial
institutions. Approximately 79% of cash and cash equivalents are invested with
four of these institutions. The Company also places forward exchange contracts
with investment grade rated financial institutions in order to minimize credit
risk exposure.
Inventories
Inventories are valued at the lower of cost or market (realizable value)
using last-in, first-out (LIFO) cost for the U.S. inventories amounting to
$62.5 million and $47.2 million at fiscal 1999 and 1998, respectively. All
other inventories are valued principally at average cost. If the first-in,
first-out (FIFO) method had been used for those operations valuing inventories
on a LIFO basis, inventories would have been higher than reported by $20.9
million in fiscal 1999, $20.3 million in fiscal 1998 and $20.6 million in
fiscal 1997. The main components of inventories are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(Dollars in millions)
<S> <C> <C>
Raw materials and parts............................... 36.7 24.7
Work in process....................................... 10.6 22.5
Finished goods........................................ 23.1 13.5
---------- ----------
Total Inventories..................................... $ 70.4 $ 60.7
========== ==========
</TABLE>
The Company's inventories include high technology parts and components that
may be specialized in nature or subject to rapid technological obsolescence.
While the Company has programs to minimize the
F-9
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
required inventories on hand and considers technological obsolescence in
estimating the required allowance to reduce recorded amounts to net realizable
values, such estimates could change in the future.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Major improvements are
capitalized, while maintenance and repairs are expensed currently. Plant and
equipment are depreciated over their estimated useful lives using the straight-
line method for financial reporting purposes. Leasehold improvements are
amortized using the straight-line method over their estimated useful lives, or
the remaining term of the lease, whichever is less. When assets are retired or
otherwise disposed of, the assets and related accumulated depreciation are
removed from the accounts. Gains or losses resulting from retirements or
disposals are included in earnings from continuing operations.
<TABLE>
<CAPTION>
Useful Life 1999 1998
----------- ---------- ----------
(Dollars in millions)
<S> <C> <C> <C>
Land and land improvements................ -- $ 2.5 $ 2.4
Buildings................................. 20-40 27.8 30.1
Machinery and equipment................... 2-7 58.7 50.4
Construction in progress.................. -- 3.4 1.2
---------- ----------
Total Property, Plant, and Equipment...... $ 92.4 $ 84.1
========== ==========
</TABLE>
Depreciation expenses amounted to $9.7 million, $7.3 million, and $11.2
million, for the fiscal years 1999, 1998 and 1997, respectively. The cost and
accumulated depreciation and amortization for machinery and equipment held
under capital leases were $1.6 million and $0.7 million, respectively as of
October 1, 1999. Assets acquired under capital leases were $0.9 million in
fiscal year 1999. There were no capital leases in fiscal year 1998.
Goodwill and Other Long-Lived Assets
Goodwill, which is the excess of the cost of acquired businesses over the
sum of the amounts assigned to identifiable assets acquired less liabilities
assumed, is amortized on a straight-line basis over periods ranging from 10 to
40 years. Included in other assets at October 1, 1999 and October 2, 1998 is
goodwill of $17.4 million and $19.0 million, respectively (net of accumulated
amortization of $2.0 million and $0.4 million, respectively).
Also included in other assets at October 1, 1999 and October 2, 1998 is
other intangible assets of $1.2 million and $2.2 million (net of accumulated
amortization of $18.5 million and $17.5 million, respectively) which are being
amortized over 3-17 years.
Whenever events or changes in circumstances indicate that the carrying
amounts of long-lived assets and goodwill related to those assets may not be
recoverable, the Company estimates the future cash flows, undiscounted and
without interest charges, expected to result from the use of those assets and
their eventual disposition. If the sum of the future cash flows is less than
the carrying amount of those assets, the Company recognizes an impairment loss
based on the excess of the carrying amount over the fair value of the assets.
Reclassifications
Certain amounts from prior year financial statements have been reclassified
to conform to current year presentation.
F-10
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Environmental Liabilities
Liabilities are recorded when environmental assessments and/or remedial
efforts are probable, and the costs can be reasonably estimated. Generally, the
timing of these accruals coincides with completion of a feasibility study or
the Company's commitment to a formal plan of action.
Taxes on Earnings
The Company uses the asset and liability method of accounting for deferred
income taxes. The provision for income taxes includes income taxes currently
payable and those deferred because of temporary differences between the
financial statement and tax bases of assets and liabilities. The Company has
not provided for possible U.S. taxes on the undistributed earnings of foreign
subsidiaries that are considered to be reinvested indefinitely. At October 1,
1999, such undistributed foreign earnings were approximately $6.3 million.
Research and Development
Company-sponsored research and development costs related to both present and
future products are expensed currently. Total expenditures on research and
development for fiscal 1999, 1998, and 1997, were $37.6 million, $36.9 million,
and $47.2 million, respectively.
Computation of Net Earnings (Loss) Per Share (Shares in thousands)
The Company calculates earnings (loss) per share in accordance with SFAS
128, "Earnings per Share." Basic earnings (loss) per share is calculated based
on net earnings (loss) and the weighted-average number of shares outstanding
during the reporting period. The weighted-average number of shares outstanding
on and before April 2, 1999 was assumed to be the number of shares outstanding
on April 2, 1999, immediately following the Distribution. Diluted earnings per
share includes additional dilution from stock issuable pursuant
to the exercise of stock options outstanding. For purposes of the diluted
earnings per share calculation, the additional shares issuable upon exercise of
stock options were determined using the treasury stock method based on the
number of replacement options issuable immediately following the Distribution.
A reconciliation of the numerator and denominator used in the earnings
(loss) per share calculations is presented as follows:
<TABLE>
<CAPTION>
Fiscal Year
-------------------------
1999 1998 1997
-------- ------- -------
(Dollars in thousands
except per share data)
<S> <C> <C> <C>
Numerator:
Net (loss) earnings................................. $(13,207) $11,397 $70,996
Denominator:
Denominator for basic (loss) earnings per share--
Weighted average shares outstanding................ 30,428 30,423 30,423
Effect of dilutive securities:
Stock options....................................... -- 85 85
-------- ------- -------
Denominator for diluted (loss) earnings per Share... 30,428 30,508 30,508
Basic (loss) earnings per share..................... $ (0.43) $ 0.37 $ 2.33
Diluted (loss) earnings per share................... $ (0.43) $ 0.37 $ 2.33
======== ======= =======
</TABLE>
F-11
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As the Company was in a net loss position, potential common shares in the
form of stock options were excluded from the computation of diluted loss per
share for the year ended October 1, 1999 as their effect was anti-dilutive. For
fiscal year 1999, there were options to purchase 2.9 million common shares at a
weighted average exercise price of $15.62 whose exercise price exceeded the
market value of the underlying common stock. For fiscal year 1998, options to
purchase 1.8 million common shares at a weighted average exercise price of
$15.96 were excluded from the computation as their effect was anti-dilutive due
to their exercise price exceeding the market value of the underlying common
stock.
Note 3. Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting and Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
requires derivatives to be measured at fair value and to be recorded as assets
or liabilities on the balance sheet. The accounting for gains or losses
resulting from changes in the fair values of those derivatives would be
dependent upon the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 is effective for the Company's fiscal year 2001. The
Company has not yet determined the impact of its implementation on the
Company's consolidated financial statements.
Revenue Recognition in Financial Statements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements". SAB 101 summarizes the staff's view in applying
generally accepted accounting principles to selected revenue recognition
issues. The application of the guidance in SAB 101 will be required in the
Company's first quarter of the fiscal year 2001. The effects of applying this
guidance will be reported as a cumulative effect adjustment resulting from a
change in accounting principle. The Company does not expect the application to
have a material effect on their financial statements, however the final
evaluation of SAB 101 is not yet complete.
Note 4. Notes Payable
On April 2, 1999, the Company, pursuant to the Distribution, assumed a notes
payable in Japanese Yen amounting to $5.0 million equivalent U.S. Dollars. This
notes payable was collateralized by $5.0 million of restricted cash and accrued
interest at a rate of 1.85%. In September 1999, this notes payable was repaid
and related collateral released. The Company renegotiated a new 90 day
revolving notes payable with an interest rate of 1.85% (at October 1, 1999),
which approximates the effective interest rate of this borrowing. This note is
unsecured and carries no restrictive covenants. In November, 1999 the Company
renewed this borrowing for an additional six months at an interest rate of
2.02%.
Note 5. Accrued Expenses
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(Dollars in millions)
<S> <C> <C>
Payroll and employee benefits......................... $ 7.1 $ 13.6
Income taxes payable.................................. 17.2 10.3
Estimated loss contingencies.......................... 36.4 34.0
Deferred income....................................... 5.7 4.4
Other................................................. 10.1 14.8
---------- ----------
Total Accrued Expenses................................ $ 76.5 $ 77.1
========== ==========
</TABLE>
F-12
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Long-Term Accrued Expenses
Long-term accrued expenses are comprised of accruals for environmental costs
not expected to be expended within the next year. The current portion is
recorded within Accrued Expenses.
Note 7. Forward Exchange Contracts
As a multinational firm, the Company faces exposure to adverse movements in
foreign currency exchange rates. This exposure may change over time as the
Company's business practices evolve and could have a material adverse impact on
the Company's financial results. Historically, the Company's primary exposures
have resulted from non-U.S. dollar denominated sales and purchases in Asia and
Europe.
At the present time, the Company hedges currency exposures that are
associated with certain of its assets and liabilities denominated in various
non-functional currencies and with anticipated foreign currency cash flows. The
Company does not enter into forward exchange contracts for trading purposes.
The Company's forward exchange contracts generally range from one to two months
in original maturity. No forward exchange contract has an original maturity
greater than one year. During fiscal year 1999 the Company entered into foreign
currency option contracts, although none were outstanding as of the reporting
date.
Forward exchange contracts outstanding as of October 1, 1999 are summarized
as follows:
<TABLE>
<CAPTION>
Notional Contract
Value Rate Fair Value
----------- -------- -----------
<S> <C> <C> <C>
Foreign Currency Purchase Contracts:
Singapore dollar......................... $ 578,330 1.683 $ 569,198
Japanese yen............................. 1,993,355 105.35 1,962,800
Euro..................................... 3,682,770 1.0374 3,736,730
----------- -----------
Total.................................. 6,254,455 6,268,728
Foreign Currency Sell Contracts:
Japanese yen............................. $ 4,550,000 105.35 $ 4,480,255
Euro..................................... 8,300,000 1.0374 8,421,612
New Taiwan dollar........................ 7,659,663 31.795 7,663,279
Korean won............................... 8,158,759 1193.0 7,991,297
----------- -----------
Total.................................. 28,668,422 28,556,443
Total Contracts:....................... $34,922,877 $34,825,171
=========== ===========
</TABLE>
There were no significant unrealized gains or losses for these forward
contracts as of October 1, 1999. The fair value of forward exchange contracts
generally reflects the estimated amounts that the Company would receive or pay
to terminate the contracts at the reporting date. The notional amounts of
forward exchange contracts are not a measure of the Company's exposure.
Note 8. Stockholders' Equity and Employee Stock Plans
The Company's authorized capital stock consist of 150,000,000 shares of
common stock of which 30,422,792 were issued upon the Distribution and
5,000,000 shares of preferred stock none of which are 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.
F-13
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The authorized capital stock of the Company include shares of preferred
stock, none of which is currently issued or outstanding. The Company's Board of
Directors is authorized to divide the preferred stock into series and, with
respect to each series, to determine the preferences and rights and the
qualifications, limitations or restrictions thereof, including the dividend
rights, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, the number of shares constituting the series and the
designation of such series.
On April 2, 1999, each stockholder also received one Right for each share of
common stock distributed, entitling the stockholder to purchase one one-
thousandth of a share of Participating Preferred Stock, par value $0.001 per
share, for $120.00, subject to adjustment. The Rights will be exercisable on
the earlier to occur of (i) the first date of the public announcement (or such
earlier or later date that the Board of Directors may determine) that a person
or "group" has acquired beneficial ownership of 15% or more of the outstanding
common stock of the Company and (ii) ten business days (or such later date as
the Board of Directors may determine) following the commencement of a tender or
exchange offer, as defined. The Participating Preferred Stock is designed so
that each one one-thousandth of a share has economic and voting terms similar
to those of one share of common stock. Each share of Participating Preferred
Stock will be entitled to an aggregate dividend per share of 1,000 times the
dividend declared per share of common stock and a minimum per share liquidation
payment of $100. The Rights shall no longer be exercisable after April 2, 2009.
The Board of Directors has reserved 50,000 shares of preferred stock for
issuance upon exercise of this Right.
Effective April 2, 1999, the Company adopted the Omnibus Stock Plan (the
"Plan") under which shares of common stock can be issued to officers,
directors, consultants and key employees. The maximum number of shares of the
Company common stock available for awards under the plan is 6,000,000 plus such
number of shares as are granted in substitution for other options in connection
with the Distribution.
The Plan is administered by the Compensation Committee of the Company's
Board of Directors. The exercise price for stock options granted under the Plan
may 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.
In connection with the Distribution, certain holders of options to purchase
shares of VAI common stock received replacement options from the Company to
purchase shares of the Company's common stock. Effective April 2, 1999, the
Company granted such replacement options to purchase an aggregate of 3,537,216
shares of its common stock at a weighted average exercise price of $14.11 per
share. Of these options, options to purchase an aggregate of 2,587,697 shares
were fully vested and exercisable. The replacement stock options have the same
exercise price to fair market value ratio, vest over the same vesting periods,
typically three years, and have the same expiration dates as the original VAI
stock options.
At October 1, 1999, options with respect to 3,218,899 shares were available
to grant.
Option Activity Under the Plan:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ ----------------
(In thousands except
per share amounts)
<S> <C> <C>
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
----- -------
</TABLE>
F-14
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables summarize information concerning outstanding and
exercisable options under the Plan end of fiscal 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices (in thousands) Life (in years) Price (in thousands) Price
--------------- -------------- --------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 5.23--11.44 .......... 841 3.4 $ 9.91 703 $ 9.80
11.74--11.74 .......... 2,754 9.5 11.74 350 11.74
12.08--14.59 .......... 1,687 6.9 14.36 1,347 14.53
14.59--22.88 .......... 1,035 8.1 17.54 538 17.26
23.19--23.19 .......... 1 10.0 23.19 -- --
----- ---- ------ ----- ------
Total ................. 6,318 7.8 $13.15 2,938 $13.56
----- ---- ------ ----- ------
</TABLE>
The Company applies the pro forma disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation." Accordingly, the Company applies APB
Opinion 25 and related interpretations in accounting for its stock compensation
plans. Therefore no compensation expense is recorded for options granted to
employees in fixed amounts and with fixed exercise prices at least equal to the
fair market value of the underlying common stock at grant date. If the Company
had elected to recognize compensation cost based on the fair value of the
options granted at grant date for the period from April 2, 1999 through October
1, 1999, as prescribed by SFAS No 123, the net loss for the fiscal year ended
October 1, 1999 would have been increased to the pro forma amounts shown below:
<TABLE>
<CAPTION>
1999
--------------
(In thousands
except per
share amounts)
<S> <C>
Net loss...................................................... $(13,332)
Net loss per share:
Basic and diluted........................................... $ (0.44)
</TABLE>
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:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Expected life (in years)............................................... 6.0
Expected volatility.................................................... 60%
Risk-free interest rate................................................ 5.5%
Expected dividend yield................................................ 0.0%
</TABLE>
The weighted average estimated fair value of stock options granted during
the six month period ended October 1, 1999 was $7.29 per share.
Note 9. Retirement Plans
The Company has defined contribution retirement plans covering substantially
all of its United States and Canadian employees. The Company's major obligation
is to contribute an amount based on a percentage of each participant's base
pay. The Company also contributes 5% of its consolidated earnings from
continuing operations before taxes, as adjusted for discretionary items, as
retirement plan profit sharing. Participants are entitled, upon termination or
retirement, to their portion of the retirement fund assets, which are held by a
third-party custodian. In addition, a number of the Company's foreign
subsidiaries have defined benefit
F-15
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
retirement plans for regular full-time employees. Included in the accompanying
statements of earnings is an allocation of total pension expense for Company
employees under the VAI-sponsored defined contribution plan of $3.4 million and
$4.0 million for fiscal years 1998 and 1997, respectively. In fiscal 1999,
pension expense comprises an allocation in respect of Company employees under
the VAI-sponsored defined contribution plan as well as pension expense in
respect of Company employees of the VSEA administered plan, totalling $2.8
million.
Effective April 2, 1999, the Company assumed responsibility for all of the
retirement plans for active employees of the Company; the responsibility for
all others, principally retirees of VAI, remained with VAI and subsequently
VMS. An allocation of assets and liabilities for foreign defined benefit
pension, postemployment, and postretirement benefits, which are not material to
the Company's financial statements, has been included in these combined
financial statements.
Note 10. Income Taxes
Income Tax provision (benefit) on earnings (loss):
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- --------
(dollars in thousands)
<S> <C> <C> <C>
Current:
U.S. federal................................ $ (9,368) $(1,763) $ 38,197
State....................................... (515) 625 3,515
Foreign..................................... 4,895 1,501 1,736
-------- ------- --------
Total current............................. (4,988) 363 43,448
Deferred:
U.S. federal................................ 672 4,212 (7,954)
State....................................... 54 338 (639)
-------- ------- --------
Total deferred............................ 726 4,550 (8,593)
-------- ------- --------
Income tax provision (benefit) on earnings
(loss)....................................... $ (4,262) $ 4,913 $ 34,855
======== ======= ========
The total operating earnings including that item consists of the following:
<CAPTION>
1999 1998 1997
-------- ------- --------
(dollars in thousands)
<S> <C> <C> <C>
U.S........................................... $(30,483) $12,310 $106,068
Foreign....................................... 13,014 4,000 (217)
-------- ------- --------
Total..................................... $(17,469) $16,310 $105,851
======== ======= ========
</TABLE>
The effective tax rate on earnings (loss) before taxes differs from the U.S.
federal statutory tax rate as a result of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Tax at U.S. statutory rate............................. (35.0)% 35.0% 35.0%
State taxes, net....................................... (2.6) 2.6 2.1
Foreign sales corporation.............................. -- (3.0) (1.8)
Benefit of tax credits................................. (1.0) (1.1) (0.4)
Foreign tax rate differential and net U.S. tax on
foreign income........................................ 0.1 (1.7) 1.2
Pre Distribution unbenefitted losses................... 12.2 -- --
Joint venture equity income not tax effected .......... -- 0.5 (1.3)
Other items............................................ 1.9 (2.2) (1.9)
----- ---- ----
Effective tax rate--expense (benefit)................ (24.4)% 30.1% 32.9%
===== ==== ====
</TABLE>
F-16
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At fiscal year end, the components of the deferred tax assets and
liabilities were as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(dollars in
thousands)
<S> <C> <C>
Deferred tax assets:
Product warranty...................................... $ 4,404 $ 5,398
Special provisions.................................... 12,669 13,412
Inventory adjustments................................. 11,413 12,508
Deferred income....................................... 1,459 654
Accrued vacation and other compensation............... 1,430 464
Other items........................................... 1,978 2,050
------- -------
33,353 34,486
------- -------
Deferred tax liabilities:
Depreciable assets.................................... (1,802) (2,209)
------- -------
(1,802) (2,209)
------- -------
Net deferred tax asset.................................. $31,551 $32,277
======= =======
</TABLE>
For Fiscal Year 1999 income taxes paid were $0.7 million for the period
April 3, 1999 to October 1, 1999. For Fiscal Year 1998 and Fiscal Year 1997 the
Company's operating results historically have been included in VAI's
consolidated U.S. and state income tax returns and in tax returns of certain
VAI foreign subsidiaries. Except for the utilization of foreign tax credits,
the provision for income taxes in the Company's combined financial statements
has been determined on a separate-return basis, under which the Company's
provision for income taxes comprises its estimated tax liability and the change
in its deferred income taxes. Foreign tax credits are benefited to the extent
they were utilized in VAI's consolidated tax returns. Deferred tax assets and
liabilities are recognized for the expected tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported
amounts. Income taxes paid on behalf of the Company by VAI are included in
divisional equity for the six months of Fiscal Year 1999 ending on April 2,
1999, Fiscal Year 1998 and Fiscal Year 1997.
Note 11. Lease Commitments
The Company leases various types of warehouse and office facilities and
equipment, furniture and fixtures under noncancelable lease agreements which
expire at various dates. Future minimum lease payments under noncancelable
capital and operating leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Fiscal Year Leases Leases
----------- ------- ---------
(amounts in
millions)
<S> <C> <C>
2000 ................................................... $0.4 $ 2.4
2001 ................................................... 0.4 2.0
2002 ................................................... 0.2 1.6
2003 ................................................... -- 1.1
2004 ................................................... -- 1.1
Thereafter ............................................. -- 8.4
---- -----
Total minimum lease payments ........................... 1.0 $16.6
=====
Less: amounts representing interest .................... (0.1)
----
Present value of net minimum lease payments ............ $0.9
====
</TABLE>
Rental expense for fiscal years 1999, 1998 and 1997, in millions, was $2.3,
$3.3 and $2.4, respectively. The Company also has a standby letter of credit
outstanding for $2.8 million as a guarantee for a leased facility.
F-17
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12. Contingencies
The Company is currently a defendant in a number of legal actions and could
incur an uninsured liability in one or more of them. In the opinion of
management, the outcome of such litigation will not have a material adverse
effect on the consolidated financial position, results of operations or cash
flows of the Company.
Environmental Remediation
VAI has been named by the U.S. Environmental Protection Agency or third
parties as a potentially responsible party under the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended, at
eight sites where the Company 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, 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 1995, and the sale of
TFS during fiscal 1997). VAI's expenditures for environmental investigation and
remediation amounted to $2.7 million in fiscal 1999, compared with $4.9 million
in fiscal 1998 and $2.3 million in fiscal 1997.
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 October 1, 1999, VAI nonetheless estimated that the future
exposure for environmental related investigation and remediation costs for
these sites ranged in the aggregate from $21.2 million to $50.8 million. The
time frame over which these costs are expected to be incurred varies with each
site and facility, ranging up to approximately 30 years as of October 1, 1999.
VAI management 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, VAI has accrued $21.2 million in estimated environmental
costs as of October 1, 1999. This amount accrued by VAI has not been discounted
to present value.
As to other sites and facilities, VAI has gained sufficient knowledge to be
able to better estimate the scope and costs of future environmental activities.
As of October 1, 1999, VAI estimated that the future exposure for environmental
related investigation and remediation costs for these sites ranged in the
aggregate from $39.1 million to $66.4 million. The time frame over which these
costs are expected to be incurred varies with each site, ranging up to
approximately 30 years as of October 1, 1999. As to each of these sites and
facilities, VAI management has 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 $45.6 million at October 1, 1999. VAI accordingly has accrued $20.4
million, which represents this best estimate of the future costs discounted at
7%, net of inflation. This VAI reserve is in addition to the $21.2 million
described above.
F-18
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the Distribution Related Agreements, the Company has agreed to
indemnify VMS and VI for one-third of these environmental investigation and
remediation costs, as adjusted for insurance proceeds in respect of these
environmental costs and for the tax benefits expected to be realized by VAI
upon the payment of the Company's protection of these environmental costs. As
of October 1, 1999 the Company's reserve for its portion of environmental
liabilities, based upon future environmental related costs estimated by VAI as
of that date and included in long-term and current accrued expenses, is
calculated as follows:
<TABLE>
<CAPTION>
Total
Non-
Recurring recurring Total
Year Costs Costs Costs
---- --------- --------- -----
(dollars in millions)
<S> <C> <C> <C>
2000 .............................................. $ 0.4 $1.0 $1.4
2001 .............................................. 0.5 0.4 0.9
2002 .............................................. 0.5 0.0 0.5
2003 .............................................. 0.5 0.0 0.5
2004 .............................................. 0.5 0.0 0.5
Thereafter ........................................ 9.6 0.5 10.1
----- ---- ----
Total costs ....................................... $12.0 $1.9 13.9
===== ====
Imputed interest .................................. (5.2)
----
Total reserve ..................................... $8.7
====
</TABLE>
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 VAI is undertaking such investigation and remediation
activities. VAI believes that most of these cost ranges will narrow as
investigation and remediation activities progress. The Company believes that
its reserves are adequate, but as the scope of the obligations becomes more
clearly defined, these reserves may be modified and related charges against
earnings may be made.
Although any ultimate liability arising from environmental related matters
described herein could result in significant expenditures that, if aggregated
and assumed to occur within a single fiscal year, would be material to the
Company's financial statements, the likelihood of such occurrence is considered
remote. Based on information currently available to management and its best
assessment of the ultimate amount and timing of environmental related events,
the Company's management believes that the costs of these environmental related
matters are not reasonably likely to have a material adverse effect on the
combined financial statements of the Company.
The Company evaluates its liability for environmental related investigation
and remediation in light of the liability and financial wherewithal of
potentially responsible parties and insurance companies where the Company
believes that it has rights to contribution, indemnity and/or reimbursement.
Claims for recovery of environmental investigation and remediation costs
already incurred, and to be incurred in the future, have been asserted against
various insurance companies and other third parties. In 1992, VAI filed a
lawsuit against 36 insurance companies with respect to most of the above-
referenced sites and facilities. VAI received certain cash settlements during
fiscal years 1995, 1996, 1997 and 1998 from defendants in that lawsuit, and has
a $0.5 million receivable in Other Current Assets at October 1, 1999. VAI has
also reached an agreement with another insurance company under which the
insurance company has agreed to pay a portion of the Company's past and future
environmental related expenditures. The Company therefore has a receivable of
$1.3 million in Other
F-19
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Assets at October 1, 1999, as its portion of the insurance recoveries. Although
VAI intends to aggressively pursue additional insurance recoveries, the Company
has not reduced any liability in anticipation of recovery with respect to
claims made against third parties.
Sale of Business
In June 1997, VAI completed the sale of its TFS operations to Novellus. The
TFS operation was considered to be part of the SEB and therefore, a product
line of the Company. Total proceeds received from the sale of TFS were $145.5
million in cash. The gain on the sale was $33.2 million (net of income taxes of
$17.8 million).
In order to cover, among other items, indemnification obligations,
litigation expense, purchase price disputes, retained liabilities, transaction
costs, employee terminations, facilities separation costs, and other
contingencies, VMS originally recorded a reserve of $51.5 million. During the
remainder of fiscal 1997, $10.3 million of this reserve was utilized (primarily
for the cash settlement of transaction and legal indemnification and defense
costs). During fiscal 1998, an additional $7.2 million of this reserve was
utilized (primarily for the cash settlement of transaction, employee
termination, facilities separation, and legal indemnification and defense
costs). During fiscal 1999, additional cash payments were made for the cash
settlement of transaction and legal indemnification and defense costs. Purchase
price disputes with Novellus were resolved in fiscal year 1999 which resulted
in an adjustment to the estimated loss contingency of $2.0 million. This
adjustment was recorded in Other Income.
As of October 1, 1999 the remaining reserve of $27.5 million is included in
current liabilities and classified as an estimated loss contingency. This
reserve relates to remaining costs associated with pending litigation and
indemnity obligations relating to certain patent infringement claims by Applied
Materials, Inc. ("Applied Materials") arising out of the sale of TFS.
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 contends
that its patents are infringed by the M2i, MB2(TM) and Inova(TM) systems that
were manufactured and sold by TFS prior to VAI's sale of TFS to Novellus in
June 1997. The complaint requests unspecified money damages and an injunction
preventing further infringement and requests 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 are invalid and
that one of the asserted patents is unenforceable. VAI also filed a separate
suit seeking damages and injunctive relief against Applied Materials contending
that certain of Applied Material's business practices violate antitrust laws.
That action has been procedurally related to the infringement case and is
pending before the same judge. Novellus has filed a complaint against Applied
Materials which includes a claim that Applied Materials has infringed three of
the patents acquired by Novellus from the Company. Discovery has begun, but no
date has been set for completion of discovery.
In the event of an outcome unfavorable to the Company, the Company may be
liable for damages for past sales through the June 1997 closing date of the
sale of TFS to Novellus and may be liable to Novellus under the indemnification
obligations described above.
F-20
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has agreed to indemnify VMS and IB for any costs, liabilities or
expenses relating to the Company's legal proceedings, including the Applied
Materials matters. Under the Distribution Related Agreements, the Company has
agreed to reimburse VMS for one-third of the costs, liabilities, and expenses,
adjusted for any related tax benefits recognized or realized by VMS, with
respect to certain legal proceedings relating to discontinued operations of
VMS.
Also, from time to time, the Company is involved in a number of legal
actions and could incur an uninsured liability in one or more of them.
Accordingly, while the ultimate outcome of all of the above legal matters is
not certain, management believes the resolution of these matters will not have
a material adverse effect on the financial condition or results of operations
of the Company.
The Company's operations are subject to various foreign, federal, state
and/or local laws relating to the protection of the environment. These include
laws regarding discharges into soil, water and air, and the generation,
handling, storage, transportation and disposal of waste and hazardous
substances. In addition, several countries are reviewing proposed regulations
that would require manufacturers to dispose of their products at the end of a
product's useful life. These laws have the effect of increasing costs and
potential liabilities associated with the conduct of certain operations.
Note 13. Purchase Business Combinations
During fiscal year 1998 the Company acquired certain assets and liabilities
of Genus, Inc., and the portion of Varian Korea Ltd., previously not owned. The
consolidated financial statements include the operating results of each
acquired business from the date of acquisition. Pro forma results of operations
have not been presented, because the effects of these acquisitions were not
material on either an individual or an aggregated basis.
Amounts allocated to goodwill are amortized on a straight-line basis over
their estimated lives. Summary of purchase transactions (dollars in millions):
<TABLE>
<CAPTION>
Entity Name Life (years) Consideration Closing Date
----------- ------------ ------------- ------------
<S> <C> <C> <C>
Genus, Inc........................ 10 $24.2 July 1998
Varian Korea, Ltd................. 40 $ 7.8 January 1998
</TABLE>
Note 14. Restructuring
During the second quarter of fiscal year 1999, the Company recognized pretax
restructuring charges of $2.7 million from actions taken primarily in response
to the downturn in the semiconductor equipment industry.
The restructuring costs of $2.7 million included $1.4 million resulting from
the cancellation of plans for expansion of manufacturing facilities in the
United States and Japan and $1.3 million to cover termination costs for a
reduction in workforce of 69 employees (approximately 5% of worldwide VSEA
employment). As of October 1, 1999, $0.9 million of the termination costs had
been paid with a total accrual balance of $0.3 million remaining. This amount
is expected to be paid in fiscal year 2000. A summary of the related accrued
liability balance at October 1, 1999 is as follows:
<TABLE>
<CAPTION>
Total Non-
Restructuring Cash Cash Accrual
Charge Payments Items Balance
------------- -------- ----- -------
(Amounts in millions)
<S> <C> <C> <C> <C>
Lease abandonment and other exit
costs............................... $ 1.4 $ 1.4 $ -- $ --
Employee termination costs........... 1.3 0.9 0.1 0.3
----- ----- ---- ----
$ 2.7 $ 2.3 $0.1 $0.3
===== ===== ==== ====
</TABLE>
F-21
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15. Other Transactions with Affiliates
Purchases from IB for fiscal year 1999 for the period prior to the
Distribution was $1.9 million. Purchases from IB for fiscal years 1998 and 1997
totaled $8.2 million and $9.2 million, respectively.
Prior to the Distribution, VAI used a centralized cash management system to
finance its operations. Cash deposits from most of the Company's businesses
were transferred to VAI on a daily basis, and VAI funded the Company's required
disbursements. No interest had been charged or credited to the Company for
these transactions.
VAI also provided certain centralized services (Note 1) to the Company prior
to the Distribution. Cost allocations relating to these centralized services
were $7.7 million, $17.3 million, and $16.7 million in fiscal years 1999, 1998,
and 1997, respectively, and are included in operating costs in the combined
statements of earnings. Amounts due to VAI for these expenses are included in
Divisional Equity. Pursuant to the Distribution Related Agreements, the Company
receives services from VAI, principally information technology services, for a
defined period of time. For the period subsequent to the Distribution in fiscal
year 1999, the Company incurred expenses charged by VAI of $3.9 million for
these services.
Net transfers to or from VAI, included in Divisional Equity, include
advances and loans from affiliates, net cash transfers to or from VAI, third
party liabilities paid on behalf of the Company by VAI, amounts due to
affiliates related to purchases, amounts due to or from VAI for services and
other charges, and income taxes paid on behalf of the Company by VAI. The
weighted average balance due to VAI was $248 million, $162 million, and $149
million for fiscal years 1999, 1998, and 1997, respectively.
The activity in net transfers (to) from VAI for fiscal years 1999, 1998, and
1997 included in divisional equity in the combined statements of divisional
equity is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -------
(Dollars in millions)
<S> <C> <C> <C>
VAI services and other charges...................... $ 7.7 $ 17.3 $ 16.7
Cash transfers, net................................. 95.0 (20.2) (156.3)
------ ------ -------
Net transfers (to) from VAI......................... $102.7 $ (2.9) $(139.6)
====== ====== =======
</TABLE>
The Distribution Related Agreements provide that, from and after the
Distribution, VAI, IB, and the Company will indemnify each and their respective
subsidiaries, directors, officers, employees and agents against all losses
arising in connection with shared liabilities (including certain environmental
and legal liabilities). All shared liabilities will be managed and administered
by VAI and expenses and losses, net of proceeds and other receivables, will be
borne one-third each by VAI, IB, and the Company; the Distribution Related
Agreements also provide that the Company shall assume all Company liabilities,
other than shared liabilities (including accounts payable, accrued payroll, and
pension liabilities) in accordance with their terms.
Note 16. Operating Segments and Geographic Information
The Company adopted SFAS 131, "Disclosures About Segments of an Enterprise
and Related Information," during the fourth quarter of fiscal year 1999. SFAS
131 established standards on reporting information about operating segments in
annual financial statements and also requires interim reporting of segment
information. It also established standards for related disclosures about
products and services.
The Company operates in five principal operating segments, which are
research and development, services, semiconductor equipment manufacturing and
product sales for Japan, Korea and Rest of World. These operating segments were
determined based upon the nature of products and services provided as well as
the geographic
F-22
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
areas served and the Company's management structure. The Company has three
reportable segments; Product Segment, Services Segment, and Research and
Development Segment, which includes royalties on licensing of intellectual
property. The accounting policies of the business segments are the same as
those described in "Note 2. Summary of Significant Accounting Policies."
Operating Segments
<TABLE>
<CAPTION>
Research and
Product Services Development Corporate and
Segment Segment Segment Unallocated Total
-------------- -------------- -------------- ---------------- --------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $206 $303 $387 $37 $29 $30 $29 $11 $31 $ -- $ -- $ -- $272 $343 $448
Gross profit............ 104 145 191 10 7 6 29 11 31 (54) (45) (43) 89 118 185
</TABLE>
The Company primarily measures segment profitability based upon gross profit
excluding costs for warranty, installation and other unallocated costs of goods
sold. These unallocated costs are included in the "Corporate and Unallocated"
column above. Other than depreciation and amortization for the Research and
Development Segment, which was $4.1 million, $3.7 million and $2.7 million for
the fiscal years 1999, 1998 and 1997, respectively, the Company does not have
the other information about Profit or Loss and Assets that are included in the
measure of segment profit or loss or segment assets. These other disclosures
for reportable segments are impracticable to determine for each segment above.
Geographic Information
<TABLE>
<CAPTION>
Sales to Unaffiliated
Customers
-------------------------
1999 1998 1997
------- ------- -------
(dollars in millions)
<S> <C> <C> <C>
United States ............................... $ 255 $313 $428
International................................ 111 121 82
Eliminations & Other......................... (94) (91) (62)
------- ------- -------
Total....................................... $272 $343 $448
======= ======= =======
</TABLE>
Total sales is based on the location of the operation furnishing goods and
services. International sales based on final destination of products sold are
$161 million, $239 million, and $245 million, in 1999, 1998, and 1997,
respectively. Because a substantial portion of the Company's sales are derived
from the sales of products manufactured in the United States, long-lived assets
located outside the United States are less than 10%.
For fiscal 1999, revenue of the Company from customers in the United States,
Europe, Taiwan, Japan and Korea were approximately 41%, 20%, 14%, 12% and 8%,
respectively, of the Company's total revenue. For fiscal 1998, revenue of the
Company from customers in the United States, Europe, Taiwan, Japan and Korea
were approximately 30%, 19%, 24%, 11% and 10%, respectively, of the Company's
total revenue. For fiscal 1997, revenue of the Company from customers in the
United States, Europe, Taiwan, Japan and Korea were approximately 45%, 11%,
19%, 9% and 12%, respectively, of the Company's total revenue.
F-23
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following sets forth certain unaudited consolidated quarterly statements
of operations data for each of the Company's last eight quarters. In
management's opinion, this quarterly information reflects all adjustments
consisting only of normal recurring adjustments, necessary for a fair
presentation for the periods presented. Such quarterly results are not
necessarily indicative of future results of operations and should be read in
conjunction with the audited consolidated financial statements of the Company
and the notes thereto included elsewhere herein.
Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------------------------------------- ---------------------------------------
First Second Third Fourth Total First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------ ------- ------- ------- ------- ------
(Dollars in millions except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 47.4 $ 53.2 $ 63.8 $107.5 $271.9 $114.3 $105.1 $81.8 $ 41.7 $342.9
------ ------ ------ ------ ------ ------ ------ ----- ------ ------
Gross Profit............ 12.2 3.8 21.9 51.4 89.3 49.4 37.6 23.2 7.5 117.7
------ ------ ------ ------ ------ ------ ------ ----- ------ ------
Net Earnings (loss)..... (6.7) (19.2) (3.4) 16.1 (13.2) 14.9 10.5 0.9 (14.9) 11.4
====== ====== ====== ====== ====== ====== ====== ===== ====== ======
Net Earnings (loss)
Per Share--
Basic.................. $(0.22) $(0.63) $(0.11) $ 0.53 $(0.43) $ 0.49 $ 0.35 $0.03 $(0.49) $ 0.37
====== ====== ====== ====== ====== ====== ====== ===== ====== ======
Diluted................ $(0.22) $(0.63) $(0.11) $ 0.50 $(0.43) $ 0.49 $ 0.34 $0.03 $(0.49) $ 0.37
====== ====== ====== ====== ====== ====== ====== ===== ====== ======
</TABLE>
The four quarters for net earnings per share may not add for the year
because of the different number of shares outstanding during the year.
F-24
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Varian Semiconductor Equipment Associates, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated November 1, 1999 appearing on page F-2 of this Form 10-K also
included an audit of the Financial Statement Schedule listed in item 14 (a)(2)
of this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
By: _________________________________
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 1, 1999
S-1
<PAGE>
SCHEDULE II
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the fiscal years ended 1999, 1998 and 1997
<TABLE>
<CAPTION>
Deductions
--------------------------------------
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Description Amount Period
----------- ---------- ---------- ----------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Notes & Accounts
Receivable:
Fiscal Year Ended 1999.. $ 602 $ 2,212 Write-offs & Adjustments...... $ 135 $ 2,679
======= ======= ======= =======
Fiscal Year Ended 1998.. $ 556 $ 243 Write-offs & Adjustments...... $ 197 $ 602
======= ======= ======= =======
Fiscal Year Ended 1997.. $ 439 $ 958 Write-offs & Adjustments...... $ 841 $ 556
======= ======= ======= =======
Estimated Liability for
Product Warranty:
Fiscal Year Ended 1999.. $21,435 $13,268 Actual Warranty Expenditures.. $18,804 $15,899
======= ======= ======= =======
Fiscal Year Ended 1998.. $16,948 $31,813 Actual Warranty Expenditures.. $27,326 $21,435
======= ======= ======= =======
Fiscal Year Ended 1997.. $30,234 $17,883 Actual Warranty Expenditures.. $31,169(1) $16,948
======= ======= ======= =======
</TABLE>
- --------
(1) Includes a $5,226 deduction due to the sale of Thin Film Systems.
S-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-01-1999
<PERIOD-START> OCT-03-1998
<PERIOD-END> OCT-01-1999
<CASH> 12,683
<SECURITIES> 53,285
<RECEIVABLES> 103,176
<ALLOWANCES> 2,679
<INVENTORY> 70,437
<CURRENT-ASSETS> 273,325
<PP&E> 92,364
<DEPRECIATION> 54,066
<TOTAL-ASSETS> 334,144
<CURRENT-LIABILITIES> 132,798
<BONDS> 0
0
0
<COMMON> 305
<OTHER-SE> 192,880
<TOTAL-LIABILITY-AND-EQUITY> 334,144
<SALES> 206,419
<TOTAL-REVENUES> 271,885
<CGS> 182,604
<TOTAL-COSTS> 293,184
<OTHER-EXPENSES> (2,009)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,821)
<INCOME-PRETAX> (17,469)
<INCOME-TAX> (4,262)
<INCOME-CONTINUING> (13,207)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,207)
<EPS-BASIC> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
