<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25395
----------------
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware 77-0501994
(State or Other Jurisdiction (IRS Employer Identification Number)
of Incorporation or Organization)
35 Dory Road, Gloucester, 01930
Massachusetts (Zip Code)
(Address of principal executive
offices)
(978) 282-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
The number of shares of the registrant's common stock outstanding as of May
1, 2000 was 31,711,821 shares of $0.01 par value common stock.
An index of exhibits filed with this Form 10-Q is located on page 21.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Three Months Ended Fiscal Six Months Ended
------------------------- -----------------------
March 31, April 2, March 31, April 2,
2000 1999 2000 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenue
Product revenue.......... $ 141,590 $ 42,186 $ 238,605 $ 78,763
Service revenue.......... 12,509 10,123 24,477 19,854
Royalties................ 2,114 896 2,924 1,943
------------ ------------ ----------- -----------
Total revenue.......... 156,213 53,205 266,006 100,560
------------ ------------ ----------- -----------
Operating Costs and
Expenses
Cost of product and
service revenue......... 96,109 49,431 165,875 84,626
Research and
development............. 10,818 10,492 21,986 18,209
Marketing, general and
administrative.......... 24,030 18,191 45,511 32,969
Restructuring costs...... -- 2,688 -- 2,688
------------ ------------ ----------- -----------
Total operating costs
and expenses.......... 130,957 80,802 233,372 138,492
------------ ------------ ----------- -----------
Operating earnings (loss).. 25,256 (27,597) 32,634 (37,932)
Other income............. 2,700 -- 2,700 --
Interest income.......... 789 -- 1,562 --
------------ ------------ ----------- -----------
Earnings (loss) before
taxes..................... 28,745 (27,597) 36,896 (37,932)
Income tax provision
(benefit) on earnings
(loss).................. 10,060 (8,382) 12,913 (12,020)
------------ ------------ ----------- -----------
Net earnings (loss)........ $ 18,685 $ (19,215) $ 23,983 $ (25,912)
============ ============ =========== ===========
Weighted average shares
outstanding--basic...... 31,066 30,423 30,810 30,423
============ ============ =========== ===========
Weighted average shares
outstanding--diluted.... 33,730 30,423 33,298 30,423
============ ============ =========== ===========
Net earnings (loss) per
share--basic............ $ 0.60 $ (0.63) $ 0.78 $ (0.85)
============ ============ =========== ===========
Net earnings (loss) per
share--diluted.......... $ 0.55 $ (0.63) $ 0.72 $ (0.85)
============ ============ =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
March 31, 2000 October 1, 1999
-------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents...................... $ 96,756 $ 65,968
Restricted cash................................ -- 1,000
Accounts receivable, net....................... 114,224 100,497
Inventories, net............................... 101,868 70,437
Deferred taxes................................. 33,515 32,536
Other current assets........................... 4,739 2,887
-------- --------
Total Current Assets......................... 351,102 273,325
-------- --------
Property, plant and equipment.................. 95,110 92,364
Accumulated depreciation and amortization...... (56,417) (54,066)
-------- --------
Net property, plant and equipment.............. 38,693 38,298
Other assets................................... 19,783 22,521
-------- --------
Total Assets................................. $409,578 $334,144
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable.................................. $ 5,580 $ 5,523
Accounts payable............................... 49,606 30,709
Accrued expenses............................... 88,979 76,455
Product warranty............................... 18,643 15,899
Advance payments from customers................ 6,450 4,212
-------- --------
Total Current Liabilities.................... 169,258 132,798
Long-term accrued expenses..................... 7,376 7,176
Deferred taxes................................. 1,216 985
-------- --------
Total Liabilities............................ 177,850 140,959
-------- --------
Contingencies (Note 10)
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
31,596,567 at March 31, 2000 and 30,474,492 at
October 1, 1999............................... 316 305
Capital in excess of par value................. 194,724 180,175
Retained earnings.............................. 36,688 12,705
-------- --------
Total Stockholders' Equity................... 231,728 193,185
-------- --------
Total Liabilities and Stockholders' Equity... $409,578 $334,144
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Six Months Ended
-----------------------
March 31, April 2,
2000 1999
------------ -----------
<S> <C> <C>
Operating Activities
Net cash provided by (used in) operating activities.. $ 24,366 $ (12,634)
----------- -----------
Investing Activities
Purchase of property, plant and equipment............ (8,352) (1,421)
Proceeds from disposal of fixed assets............... 1,308 --
----------- -----------
Net cash used in investing activities................ (7,044) (1,421)
----------- -----------
Financing Activities
Net transfers from Varian Associates, Inc............ -- 114,344
Proceeds from issue of common stock.................. 13,868 --
Proceeds from issue of notes payable................. 117 --
Restricted cash...................................... 1,000 (5,500)
----------- -----------
Net cash provided by financing activities............ 14,985 108,844
----------- -----------
Effects of exchange rate changes on cash............. (1,519) (832)
----------- -----------
Net increase in cash and cash equivalents............ 30,788 93,957
Cash and cash equivalents at beginning of period..... 65,968 --
----------- -----------
Cash and cash equivalents at end of period........... $ 96,756 $ 93,957
=========== ===========
Detail of net cash provided by (used in) Operating
Activities:
Net earnings (loss)................................ $ 23,983 $ (25,912)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 6,220 5,544
Provision for doubtful accounts.................. 326 --
Compensatory stock option expense................ 692 --
Deferred taxes................................... (754) (8,774)
Changes in assets and liabilities:
Accounts receivable.............................. (11,885) 9,015
Inventories...................................... (29,655) 7,507
Other current assets............................. (1,852) 161
Accounts payable................................. 18,869 2,860
Accrued expenses................................. 12,332 (512)
Product warranty................................. 2,523 (6,328)
Advance payments from customers.................. 1,970 1,200
Long term accrued expenses....................... 200 1,100
Other............................................ 1,397 1,505
----------- -----------
Net cash provided by (used in) Operating Activities.. $ 24,366 $ (12,634)
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Interim Condensed Consolidated Financial Statements
These condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read
in conjunction with the financial statements and the notes thereto included in
the report on Form 10-K filed by Varian Semiconductor Equipment Associates,
Inc. ("VSEA" or the "Company") with the Securities and Exchange Commission for
the fiscal year ended October 1, 1999. In the opinion of the Company, the
condensed consolidated financial statements include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
statement of the results for the interim periods. The results of operations
for the three and six months ended March 31, 2000 are not necessarily
indicative of the results to be expected for a full year or for any other
period.
Note 2. Basis of Presentation
The interim condensed 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 three and six months fiscal periods ending
March 31, 2000. The interim condensed consolidated financial statements as of
and for the three and six months fiscal periods ending April 2, 1999, reflect
operations when the Company's business was operated as the Semiconductor
Equipment Business ("SEB"), a part of the former Varian Associates, Inc.
("VAI").
On April 2, 1999, VAI contributed its Semiconductor Equipment Business
("SEB") to the Company, then distributed to the holders of record of VAI
common stock one share of common stock of the Company for each share of VAI
common stock owned on March 24, 1999 (the "Distribution"). At the same time,
VAI contributed its Instruments Business ("IB") to Varian, Inc. and
distributed to the holders of record of VAI common stock one share of common
stock of IB for each share of VAI common stock owned on March 24, 1999. VAI
retained its Health Care Systems business and changed its name to Varian
Medical Systems, Inc. ("VMS") effective as of April 2, 1999. These
transactions were accomplished under the terms of a Distribution Agreement by
and among the Company, VAI, hereafter referred to as VMS for periods following
the Distribution, and IB (the "Distribution Agreement"). For purposes of
providing an orderly transition and to define certain ongoing relationships
between and among the Company, VMS and IB after the Distribution, the Company,
VMS and IB also entered into certain other agreements which include an
Employee Benefits Allocation Agreement, an Intellectual Property Agreement, a
Tax Sharing Agreement and a Transition Services Agreement (collectively, the
"Distribution Related Agreements").
The condensed consolidated financial statements for periods ended on or
before April 2, 1999 reflect SEB as operated by VAI. For periods prior to
April 3, 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 condensed consolidated financial statements. The
condensed 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.
Certain items have been reclassified from prior year items to conform to
current year presentation.
4
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 3. 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 for the three and
six month periods ended March 31, 2000 was 31,065,519 and 30,810,469,
respectively. 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 (loss) per
share is calculated based on net earnings (loss) and the sum of the weighted-
average number of shares outstanding during the reporting period and the
number of potential common shares (when dilutive). For purposes of the diluted
earnings (loss) 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 Fiscal
Three Months Ended Six Months Ended
--------------------- ------------------
March 31, April 2, March 31, April 2,
2000 1999 2000 1999
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
Numerator (in thousands of
dollars):
Net earnings (loss)............. $ 18,685 $ (19,215) $23,983 $(25,912)
Denominator (in thousands):
Denominator for basic earnings
(loss) per share--
Weighted average shares
outstanding.................. 31,066 30,423 30,810 30,423
Effect of dilutive securities:
Stock options................... 2,664 -- 2,488 --
--------- ---------- ------- --------
Denominator for diluted earnings
(loss) per share............... 33,730 30,423 33,298 30,423
========= ========== ======= ========
Basic earnings (loss) per
share.......................... $ 0.60 $ (0.63) $ 0.78 $ (0.85)
========= ========== ======= ========
Diluted earnings (loss) per
share.......................... $ 0.55 $ (0.63) $ 0.72 $ (0.85)
========= ========== ======= ========
</TABLE>
All potential common shares were excluded from the computation of diluted
loss per share for the three and six month periods ending April 2, 1999 as
their effect was anti-dilutive. For the three and six month periods ending
March 31, 2000, options to purchase 596,885 common shares at a weighted
average exercise price of $52.63 were excluded from the computation due to
their exercise price exceeding the market value of the underlying common
stock.
Note 4. Inventories
The components of inventories are as follows (in millions):
<TABLE>
<CAPTION>
March 31, October 1,
2000 1999
--------- ----------
<S> <C> <C>
Raw materials and parts................................ $ 54.5 $36.7
Work in process........................................ 37.0 23.1
Finished goods......................................... 10.4 10.6
------ -----
Total Inventories.................................... $101.9 $70.4
====== =====
</TABLE>
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 $23.9 million at March 31, 2000 and $20.9 million at October 1,
1999.
5
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 5. Notes Payable
On October 1, 1999, the Company had a 90-day revolving note payable in
Japanese Yen amounting to an equivalent of $5.5 million U.S. Dollars at an
interest rate of 1.85% per year. In November, 1999, the Company renewed this
borrowing for an amount in Japanese Yen equivalent to $5.6 million as of March
31, 2000, for an additional six months at an interest rate of 2.02% per year.
The note is unsecured and carries no restrictive covenants. The Company plans
to renew this note upon maturity.
Note 6. Stockholders' Equity
For the six month period ending March 31, 2000, the Company issued 1,122,075
shares of common stock upon the exercise of stock options for an aggregate
exercise price of $13.9 million. In addition, the Company recorded $0.7
million of compensation expense for modifications to certain existing stock
options.
As of March 31, 2000, the Company had outstanding options to purchase an
aggregate of 5,792,061 shares of its common stock at a weighted average price
of $17.51. Of these options, options to purchase an aggregate of 2,406,824
shares at a weighted average price of $14.20 were fully vested and
exercisable.
Note 7. 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 items. The
adoption of SAB 101 will be required in the Company's first quarter of the
fiscal year 2001. The effects of applying SAB 101 will be reported as a
cumulative effect adjustment resulting from a change in accounting principle.
The Company has not yet determined the impact of its implementation on the
Company's consolidated financial statements.
Accounting for Certain Transactions Involving Stock Compensation--an
interpretation of APB Opinion No. 25
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events that occurred after
either December 15, 1998 or January 12, 2000. The Company does not expect the
application of FIN 44 to have a material impact on the Company's financial
position or results of operations.
6
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 8. Operating Segments and Geographic Information
The Company adopted SFAS 131, "Disclosures About Segments of an Enterprise
and Related Information," during the fourth quarter of fiscal year 1999. SFAS
131 established standards on reporting information about operating segments in
annual financial statements and also requires interim reporting of segment
information. It also established standards for related disclosures about
products and services.
The Company operates in five principal operating segments, which are
research and development, services, semiconductor equipment manufacturing and
product sales for Japan, Korea and Rest of World. These operating segments
were determined based upon the nature of products and services provided as
well as the geographic areas served and the Company's management structure.
The Company has three reportable segments; Product Segment, Services Segment,
and Research and Development Segment, which includes royalties on licensing of
intellectual property. The accounting policies of the business segments are
the same as those in all parts of the Company.
Operating Segments
(Dollars in millions)
For the three months ended March 31, 2000 and April 2, 1999:
<TABLE>
<CAPTION>
Research and
Product Services Development Corporate and
Segment Segment Segment Unallocated Total
------------- ------------- ------------- -------------- -------------
FY2000 FY1999 FY2000 FY1999 FY2000 FY1999 FY2000 FY1999 FY2000 FY1999
Qtr 2 Qtr 2 Qtr 2 Qtr 2 Qtr 2 Qtr 2 Qtr 2 Qtr 2 Qtr 2 Qtr 2
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $141.6 $42.2 $12.5 $10.1 $2.1 $0.9 $ -- $ -- $156.2 $53.2
Gross profit............ 77.0 18.6 2.6 3.9 2.1 0.9 (21.6) (19.6) 60.1 3.8
</TABLE>
For the six months ended March 31, 2000 and April 2, 1999:
<TABLE>
<CAPTION>
Research and
Product Services Development Corporate and
Segment Segment Segment Unallocated Total
------------- ------------- ------------- -------------- -------------
FY2000 FY1999 FY2000 FY1999 FY2000 FY1999 FY2000 FY1999 FY2000 FY1999
YTD YTD YTD YTD YTD YTD YTD YTD YTD YTD
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $238.6 $78.8 $24.5 $19.9 $2.9 $1.9 $ -- $ -- $266.0 $100.6
Gross profit............ 128.6 36.1 6.9 6.8 2.9 1.9 (38.3) (28.9) 100.1 15.9
</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 $1.0 million for the second
quarter and $2.0 million for the first six months of fiscal year 2000 and $1.0
million for the second quarter and $2.1 million for the first six months of
fiscal year 1999, 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.
7
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Geographic Information
(Dollars in millions)
Sales to Unaffiliated Customers (by location of the operation)
<TABLE>
<CAPTION>
Fiscal Three Months Ended Fiscal Six Months Ended
---------------------------- ----------------------------
March 31, 2000 April 2, 1999 March 31, 2000 April 2, 1999
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
United States........... $158.2 $50.3 $255.4 $ 91.3
International........... 57.8 20.5 111.5 40.1
Eliminations & Other.... (59.8) (17.6) (100.9) (30.8)
------ ----- ------ ------
Total................. $156.2 $53.2 $266.0 $100.6
====== ===== ====== ======
</TABLE>
Total sales is based on the location of the operation furnishing goods and
services. 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%.
International sales based on final destination of products sold was $110.9
million, or 71% of total revenue, in the second quarter of fiscal year 2000,
compared to $34.5 million, or 65% of total revenue, in the second quarter of
fiscal year 1999. For the year to date, international revenue increased to
$201.7 million from $60.8 million in the first six months of fiscal year 1999.
For the second quarter of fiscal year 2000, revenue of the Company from
customers in the United States, Europe and Asia were approximately 29%, 25%
and 46%, respectively. For the second quarter of fiscal year 1999, revenue
from customers in the United States, Europe and Asia were approximately 35%,
23% and 42%, respectively, of the Company's total revenue.
For the six months period ending March 31, 2000, revenue of the Company from
customers in the United States, Europe and Asia were approximately 24%, 26%
and 50%, respectively. For the six months period ending April 2, 1999, revenue
from customers in the United States, Europe and Asia were approximately 40%,
21% and 39%, respectively, of the Company's total revenues.
No one customer accounted for revenue in excess of 10% of total revenue in
either the second quarter or the first six months of fiscal year 2000 or
fiscal year 1999.
Note 9. Contingencies
Environmental Remediation
In the Distribution Agreement, the Company has agreed to indemnify VMS and
IB for one-third of environmental investigation and remediation costs (after
adjustment for any insurance proceeds and tax benefits expected to be realized
upon the payment of such costs), as further described below.
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 waste for
recycling or disposal. VAI is also involved in environmental investigations
and/or remediation work pursuant to environmental laws, generally under the
direction of, or in consultation with, federal, state, and/or local agencies
at certain current or former VAI facilities. VMS (formerly VAI) expenditures
for environmental investigations and remediation work amounted to $1.2 million
in the second quarter of fiscal year 2000 and $2.1 million for the first six
months of fiscal 2000.
8
<PAGE>
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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 probable future costs of such
activities. As of March 31, 2000, VMS estimated that the future exposure for
environmental related investigation and remediation costs for these sites
ranged in the aggregate from $19.8 million to $49.4 million. The time frame
over which VMS expects to incur these costs varies at each site and facility,
ranging up to approximately 30 years as of March 31, 2000. VMS management
believes that no amount in the foregoing range of estimated future costs is
more likely to be incurred than any other amount in such range, and therefore,
VMS has accrued $19.8 million in estimated environmental costs as of March 31,
2000. This amount accrued by VMS has not been discounted to present value.
VMS has gained sufficient knowledge to better estimate the scope and costs
of future environmental activities at other sites and facilities. As of March
31, 2000, VMS estimated that its aggregate future exposure for environmental-
related investigation and remediation costs for these sites ranged from $38.3
million to $65.7 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 March 31, 2000. As to each of these sites and facilities,
management of VMS has determined: (i) that a particular amount within the
range of estimated costs better estimates the future environmental liability
than any other amount within the range; and (ii) that it may reasonably
determine the timing of those future costs. Together, these amounts totaled
$39.4 million at March 31, 2000. Accordingly, VMS has accrued $19.6 million,
which represents management's best estimate of the future costs discounted at
7%, net of inflation. This accrual is in addition to the $19.8 million
described above.
As of March 31, 2000, the Company's reserve for its portion of environmental
liabilities, based upon future environmental related costs estimated by VMS
and the Company as of that date and included in long-term and current accrued
expenses, is calculated as follows:
<TABLE>
<CAPTION>
Total Anticipated
Recurring Non-recurring Future
Fiscal Year Costs Costs Costs
----------- --------- ------------- -----------
(Dollars in millions)
<S> <C> <C> <C>
2000.................................. $ 0.3 $0.3 $ 0.6
2001.................................. 0.5 0.4 0.9
2002.................................. 0.5 -- 0.5
2003.................................. 0.5 -- 0.5
2004.................................. 0.5 -- 0.5
Thereafter............................ 9.6 0.5 10.1
----- ---- -----
Total costs......................... $11.9 $1.2 $13.1
===== ====
Imputed interest...................... (4.5)
-----
Total reserve....................... $ 8.6
=====
</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 and facilities where VMS is undertaking such investigation and
remediation activities. VMS anticipates 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
9
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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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 an 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 consolidated financial statements of the Company.
VMS evaluates its liability for environmental investigation and remediation
in light of the liability and financial resources of potentially responsible
parties and insurance companies against which VMS believes that it has rights
of 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 other parties, including
various insurance companies. 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. VAI has also reached an agreement with
another insurance company under which the insurance company has agreed to pay
a portion of VAI's past and future environmental related expenditures. The
Company's share of this receivable is $1.3 million at March 31, 2000. The
Company believes that this receivable is recoverable because it is based on a
binding, written settlement agreement with a solvent and financially viable
insurance company. Although the Company intends to aggressively pursue
additional insurance and other recoveries, the Company has not reduced any
estimate of its liability in anticipation of a recovery with respect to claims
made against third parties.
Sale of Business
In June 1997, VAI completed the sale of its Thin Film Systems ("TFS")
operations to Novellus Systems, Inc. ("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. As of April
2, 1999 the remaining reserve of $37.6 million was recorded by the Company as
a current liability and classifed as an estimated loss contingency. This
reserve, which stands at $24.5 million at March 31, 2000, relates to remaining
costs associated with pending litigation and indemnity obligations relating to
certain patent infringment claims by Applied Materials, Inc. ("Applied
Materials"). Purchase price disputes with Novellus arising out of the sale of
TFS were resolved in fiscal year 1999 which resulted in an adjustment to the
estimated loss contingency of $2.0 million, which was recorded as Other Income
in fiscal year 1999.
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 alleged 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.
10
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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
VAI's answer denied infringement and asserted that the Applied Materials
patents that are subject to the claims are invalid and that one of the
asserted patents is unenforceable. In January, 2000, Applied Materials
withdrew its allegation that one of the patents was infringed. In March, 2000,
the court declared two of the three asserted claims of another patent to be
invalid. The Company believes the court will eventually rule that the third
claim is also invalid as a matter of law. VAI also filed a separate suit
seeking damages and injunctive relief against Applied Materials contending
that certain of Applied Material's business practices violated antitrust laws.
That action 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 and Novellus 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 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.
Note 10. Subsequent Event
The Company closed on a $75 million unsecured Revolving Credit Facility on
May 15, 2000. The facility comprises a $15 million 364-Day Facility and a $60
million 3-year Facility. The purpose of this facility is to provide funds for
working capital and for general corporate purposes. Borrowings are limited to
the lesser of $75 million or the sum of a percentage of certain eligible
receivables and inventory, and bear interest at LIBOR or a defined bank rate
approximating prime, plus an applicable margin. There are no borrowings
currently outstanding.
The facility contains certain financial and other restrictive covenants,
including maintaining a leverage ratio, fixed charge ratio and quick ratio
within defined limits, capital expenditures within defined ranges, and
maintaining profitable operations.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The condensed consolidated interim financial statements of Varian
Semiconductor Equipment Associates, Inc., ("VSEA" or the "Company") are
unaudited and generally reflect the results of operations, financial position
and cash flows of the Company for the three and six month periods ending March
31, 2000.
Prior to April 2, 1999, the Company's business had been part of the former
Varian Associates, Inc. ("VAI"). On April 2, 1999, VAI reorganized into three
independent publicly-traded companies by spinning off two of its businesses to
stockholders in a tax-free distribution (the "Distribution"). VAI retained its
Health Care Systems business and changed its name to Varian Medical Systems,
Inc. ("VMS"). VAI transferred its Instruments Business ("IB") to Varian, Inc.,
the stock in which was distributed to VAI's stockholders as part of the
Distribution. VAI transferred its Semiconductor Equipment Business ("SEB") to
the Company, the stock in which was also distributed to VAI's stockholders as
part of the Distribution. SEB included VAI's business unit that designs,
manufactures, markets and services semiconductor processing equipment used in
the fabrication of integrated circuits.
The condensed consolidated financial statements of the Company reflect the
results of operations, financial position and cash flows of the SEB operations
which were transferred in connection with the Distribution. Accordingly, the
Company's condensed consolidated financial statements for all periods up to
April 2, 1999, have been part of the consolidated financial statements of VAI
using the historical results of operations and historical basis of the assets
and liabilities of SEB. For the periods up to April 2, 1999, the condensed
consolidated financial statements of the Company 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 using the
allocation methodology described in Note 2 of the Notes to the Condensed
Consolidated Financial Statements.
The following information should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in Item 1 of this
quarterly report and the audited combined financial statements and notes
thereto and management's discussion and analysis of financial condition and
results of operations in the Company's report on Form 10-K filed with the
Securities and Exchange Commission on December 30, 1999 and the Company's
report on Form 10 filed on February 12, 1999, as amended on March 8, 1999.
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended April 2,
1999.
Revenue. The Company's strong revenue growth continued into the second
quarter of fiscal year 2000. Total revenue increased by 194% from $53.2
million to $156.2 million for the quarter ended March 31, 2000 compared to the
quarter ended April 2, 1999. This increase in revenue was primarily due to
continuing strong demand for the Company's products, as the semiconductor
industry recovery that started in the second half of fiscal year 1999
continued into fiscal year 2000. The trend has shown revenue increasing
consistently, quarter after quarter, since the fourth quarter of fiscal year
1998. At $156.2 million, revenue for the second quarter of fiscal year 2000,
increased 42% above revenue for the first quarter of fiscal year 2000.
Service revenue in the second quarter of fiscal year 2000 was $12.5 million,
24% higher than service revenue of $10.1 million in the second quarter of
fiscal year 1999. The increase was primarily due to an increase in demand for
semiconductor devices, which increased the demand for services to enhance the
utilization of existing ion implant systems, as well as new service contracts
for more recent systems sales.
Royalty revenue of $2.1 million in the second quarter of fiscal year 2000
increased 133% compared to royalty revenue of $0.9 million in the second
quarter of fiscal year 1999. Royalties received in the second quarter of
fiscal year 2000 included the first quarterly payment under the licensing
agreement with Tokyo Electron Ltd., announced in October, 1999.
12
<PAGE>
International revenue was $110.9 million, or 71% of total revenue, in the
second quarter of fiscal year 2000, compared to $34.5 million, or 65% of total
revenue, in the second quarter of fiscal year 1999. The Company's North
American revenue increased by $26.6 million to $45.3 million in the second
quarter of fiscal year 2000, from $18.7 million in the second quarter of
fiscal year 1999. European region revenue increased by $26.4 million, from
$12.3 million for the second quarter of fiscal year 1999 to $38.7 million in
the second quarter of fiscal year 2000.
In the second quarter of fiscal year 2000, aggregate revenue of $72.2
million from Taiwan, Japan, Korea and the Pacific Rim, represented 46% of
total revenue in the second quarter of fiscal year 2000, compared to aggregate
revenue of $22.2 million in the second quarter of fiscal year 1999, which
represented 42% of total revenue. Taiwan sales continued to be particularly
strong. Taiwan sales of $39.0 million represented 25% of total revenue in the
second quarter of fiscal year 2000, compared to approximately 13% of total
revenue in the second quarter of fiscal year 1999.
Gross Profit. The Company's gross profit of $60.1 million in the second
quarter of fiscal year 2000 increased compared with gross profit of $3.8
million for the second quarter of fiscal year 1999, after recording non-
recurring charges of $5.9 million in the second quarter of fiscal year 1999,
resulting from the realignment of product offerings, including writing down
inventory of associated with a discontinued product line. The cost of revenue
for the second quarter of fiscal year 2000 was $96.1 million, resulting in a
gross margin of 38.5% on revenues of $156.2 million, compared with cost of
revenue of $43.5 million for the second quarter of the fiscal year 1999,
(excluding the $5.9 million of non-recurring charges) for a gross margin of
18.2% on revenues of $53.2 million. Margins in the second quarter of fiscal
year 2000 at 38.5% continued to show further improvement from 36.5% for the
first quarter of fiscal year 2000. The improvement was mainly due to improved
capacity utilization due to increased manufacturing activity, offset by the
costs of initial training and other product and volume-driven costs to respond
to the increased demand for the Company's products.
Research and development. Research and development expenses were $10.8
million for the second quarter of fiscal year 2000, equivalent to 6.9% of
total revenue, and were 21% above the research and development expenses of
$8.9 million (excluding $1.6 million of one time charges), equivalent to 17%
of total revenue for the second quarter of fiscal year 1999. Research and
development expense in the second quarter of fiscal year 1999 included $1.6
million in charges associated with the discontinuance of a parallel product
development research contract following the acquisition in July 1998 of the
high-energy ion implantation equipment product line. Research and development
expenses as a percentage of revenue decreased because of the large increase in
total revenue over the comparable periods. The Company continues to invest in
new product development.
Marketing, General and Administrative. Marketing, general and administrative
expenses of $24.0 million, or 15.4% of total revenue, in the second quarter of
fiscal year 2000 were 32% above the level of marketing, general and
administrative expenses of $18.2 million, or 34% of total revenue, in the
second quarter of fiscal year 1999. Marketing, general and administrative
expenses in the second quarter of fiscal year 1999 included $1.5 million in
one-time costs resulting from the consolidation and reorganization activities,
including office and employee relocations. The increase in expenses in the
second quarter of fiscal year 2000 was due in part to the increase in sales
and marketing activity and costs associated with operating as an independent
public company.
Restructuring. There were no restructuring costs recorded in the second
quarter of fiscal year 2000. In the second quarter of fiscal year 1999, the
Company recorded restructuring costs of $2.7 million, which 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 the termination costs for a reduction in workforce of 69 employees
(approximately 5% of worldwide VSEA employment, at that time).
Other Income. During the second quarter of fiscal year 2000, the Company
recorded other income of $2.7 million, (equivalent to $0.05 per diluted share)
resulting from payment to resolve a dispute relating to the acquisition of a
product line which occurred in a prior fiscal year. There was no other income
recorded in the second quarter of fiscal year 1999.
13
<PAGE>
Interest Income. During the second quarter of fiscal year 2000, the Company
earned $0.8 million in interest income. This income was earned primarily on
short term investments. Interest income did not accrue to the Company in the
second quarter of fiscal year 1999.
Net Earnings Before Taxes. During the second quarter of fiscal year 2000,
the Company recognized pretax earnings of $28.7 million, equivalent to 18.4%
of total revenue. For the second quarter of fiscal year 1999, the Company
incurred a pre-tax loss of $27.6 million.
Taxes on Earnings. The Company recorded a tax provision of $10.1 million on
earnings in the second quarter of fiscal year 2000 compared to a tax benefit
of $8.4 million in the second quarter of fiscal year 1999. The effective
income tax rate was 35.0% in the second quarter of fiscal year 2000, compared
to 30.4% income tax benefit in the second quarter of fiscal year 1999.
Net Earnings. Net earnings were $18.7 million, or $0.55 per diluted share,
for the second quarter of fiscal year 2000, compared to a net loss of $19.2
million, or $0.63 loss per share, during the second quarter of fiscal year
1999. The increase in net earnings primarily reflects the growth in revenues
in fiscal year 2000, and the other factors described above.
Six Months Ended March 31, 2000 Compared to Six Months Ended April 2, 1999.
Revenue. The Company's revenue for the first six months of fiscal year 2000
increased by 164% from $100.6 million to $266.0 million compared to the six
months ended April 2, 1999. This increase in revenue was primarily due to
increasingly strong demand for the Company's products, as the semiconductor
industry recovery that started in the second half of fiscal year 1999
continued into fiscal year 2000.
Service revenue in the first half of fiscal year 2000 was $24.5 million, 23%
higher than service revenue of $19.9 million in the first half of fiscal year
1999. The increase was primarily due to the underlying demand for
semiconductor devices, which increases the demand for services to enhance the
utilization of existing ion implant systems, as well as new service contracts
for more recent systems sales.
Royalty revenue of $2.9 million in the first half of fiscal year 2000 was
53% higher than royalty revenue of $1.9 million in the first first half of
fiscal year 1999. Royalties in the first half of fiscal year 2000, included
the first quarterly payment under the technology licensing agreement with
Tokyo Electron Ltd., as previously announced.
International revenue was $201.7 million, or 76% of total revenue, in the
first half of fiscal year 2000, an increase of 232% from international revenue
of $60.8 million, or 60% of total revenue, in the first half of fiscal year
1999. The Company's North American (primarily U.S.) revenue increased by 62%
to $64.3 million for the first half of fiscal year 2000 from $39.7 million for
the first half of fiscal year 1999. The European region revenue increased by
216% to $68.3 million for the first half of fiscal year 2000 from $21.6
million in the first half of fiscal year 1999.
The aggregate revenue of $133.4 million from Taiwan, Japan, Korea and the
Pacific Rim, which represented 50% of total revenue in the first half of
fiscal year 2000, increased by 240% from $39.2 million, or 39% of total
revenue in the first half of fiscal year 1999. Taiwan was particularly strong,
increasing by 507% from $11.6 million in the first half of fiscal year 1999 to
$70.4 million in the first half of fiscal year 2000, representing 26% of total
revenue, up from approximately 12% of total revenue in the first half of
fiscal year 1999.
Gross Profit. The Company's gross profit was $100.1 million in the first
half of fiscal year 2000 compared to gross profit of $21.8 million for the
first half of fiscal year 1999, before non-recurring charges in 1999 of
$5.9 million resulting from the realignment of product offerings, including
writing down inventory of associated with a discontinued product line. The
cost of revenue for the first half of fiscal year 2000 was $165.9 million,
14
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resulting in a gross margin of 37.6% on revenues of $266.0 million, compared
with cost of revenue of $78.7 million for the first half of fiscal year 1999,
(before the $5.9 million of non-recurring charges) for a gross margin of 21.7%
on revenues of $100.6 million. The increase in gross margin was mainly due to
improved capacity utilization due to increased manufacturing activity, offset
by the costs of initial training and other product and volume-driven costs to
respond to the increased demand for the Company's products.
Research and development. Research and development expenses were $22.0
million for the first half of fiscal year 2000, or 8.3% of total revenue, and
were 21% above the research and development expenses of $18.2 million, or 18%
of total revenue for the first half of fiscal year 1999. Research and
development expense in the first half of fiscal year 1999 included $1.6
million in charges associated with the discontinuance of a parallel product
development research contract following the acquisition in July 1998 of the
high-energy ion implantation equipment product line. Research and development
expenses as a percentage of revenue also decreased because of the large
increase in total revenue over the comparable periods. The Company continues
to invest in new product development.
Marketing, General and Administrative. Marketing, general and administrative
expenses of $45.5 million, or 17.1% of total revenue, in the first half of
fiscal year 2000 and were 38% above the level of marketing, general and
administrative expenses of $33.0 million, or 33% of total revenue, in the
first half of fiscal year 1999. Marketing, general and administrative expenses
in the first half of fiscal year 1999 included $1.5 million in one-time costs
resulting from the consolidation and reorganization activities, including
office and employee relocations. The higher expense in the first half of
fiscal year 2000 was also due in part to the increase in sales and marketing
activity and costs associated with being an independent public company.
Restructuring. There were no restructuring costs recorded in the first half
of fiscal year 2000. In the first half of fiscal year 1999, the Company
recorded restructuring costs of $2.7 million, which 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 the
termination costs for a reduction in workforce of 69 employees (approximately
5% of worldwide VSEA employment at that time).
Other Income. During the first half of fiscal year 2000, the Company
recorded other income of $2.7 million, (equivalent to $0.05 per diluted share,
net of tax) resulting from payment to resolve a dispute relating to the
acquisition of a product line which occurred in a prior fiscal year. There was
no other income recorded in the first half of fiscal year 1999.
Interest Income. During the first half of fiscal year 2000, the Company
earned $1.6 million in interest income. This income was earned primarily on
short term investments. Interest income did not accrue to the Company in the
first half of fiscal year 1999.
Net Earnings Before Taxes. During the first half of fiscal year 2000 the
Company recognized pretax earnings of $36.9 million, equivalent to 13.9% of
total revenue. For the first half of fiscal year 1999 the Company incurred a
pre-tax loss of $37.9 million.
Taxes on Earnings. VSEA recorded a tax provision of $12.9 million on
earnings in the first half of fiscal year 2000 compared with a tax benefit of
$12.0 million in the first half of fiscal year 1999. The effective income tax
rate was 35.0% in the first half of fiscal year 2000, compared to 31.7% in the
first half of fiscal year 1999.
Net Earnings. Net earnings were $24.0 million, or $0.72 per diluted share,
for the first half of fiscal year 2000, compared with a net loss of $25.9
million, or $0.85 loss per share, during the first half of fiscal year 1999.
The increase in net earnings primarily reflects the growth in revenues in
fiscal year 2000, and the other factors described above.
15
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Liquidity and Capital Resources
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. The
Distribution Agreement provided for the Company to receive $100 million in
cash or cash equivalents as of April 2, 1999, and such cash and cash
equivalents were expected to represent the Company's principal source of
liquidity for the foreseeable future.
During the first six months of fiscal year 2000, the Company generated $24.4
million of cash from operations compared to using $12.6 million of cash in
operations during the first six months of fiscal year 1999. In addition to
earnings of $24.0 million, cash was provided during the first half of fiscal
year 2000 from increases in accounts payable and accrued expenses of $18.9
million and $12.3 million, respectively, offset by additions to inventory of
$29.7 million to respond to the increased demand for products, and $11.9
million in increased receivables from higher sales.
During the first six months of fiscal year 2000, the Company used $7.0
million in investing activities, primarily for purchase of property, plant and
equipment, and generated $15.0 million in financing activities, primarily from
stock options exercised.
On May 15, 2000, the Company closed on a $75 million unsecured three-year
Revolving Credit Facility. The facility comprises a $15 million 364-Day
Facility and a $60 million 3-year Facility. The purpose of this facility is to
provide funds for working capital and for general corporate purposes.
Borrowings are limited to the lesser of $75 million or the sum of a percentage
of certain eligible receivables and inventory, and bear interest at LIBOR or a
defined bank rate approximating prime, plus an applicable margin. There are no
borrowings currently outstanding.
The facility contains certain financial and other restrictive covenants,
including maintaining a leverage ratio, fixed charge ratio and quick ratio
within defined limits, capital expenditures within defined ranges, and
maintaining profitable operations.
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 March 31, 2000 and the Company's borrowing capability, will
be sufficient to satisfy commitments for capital expenditures and other cash
requirements for the business.
Environmental Matters
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.
In the Distribution Agreement, the Company has agreed to indemnify VMS and
IB for one-third of environmental investigation and remediation costs (after
adjustment for any insurance proceeds and tax benefits expected to be realized
upon the payment of such costs), as further described below.
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 waste for
recycling or disposal. VAI is also involved in environmental investigations
and/or remediation work pursuant to environmental laws, generally under the
direction of, or in consultation with, federal, state, and/or local agencies
at certain current or former VAI facilities. VMS (formerly VAI) expenditures
for environmental investigations and remediation work amounted to $1.2 million
in the second quarter and $2.1 million for the first six months of fiscal
2000.
16
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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 probable future costs of such
activities. As of March 31, 2000, VMS estimated that the future exposure for
environmental related investigation and remediation costs for these sites
ranged in the aggregate from $19.8 million to $49.4 million. The time frame
over which VMS expects to incur these costs varies at each site and facility,
ranging up to approximately 30 years as of March 31, 2000. VMS management
believes that no amount in the foregoing range of estimated future costs is
more likely to be incurred than any other amount in such range, and therefore,
VMS has accrued $19.8 million in estimated environmental costs as of March 31,
2000. This amount accrued by VMS has not been discounted to present value.
VMS has gained sufficient knowledge to better estimate the scope and costs
of future environmental activities at other sites and facilities. As of March
31, 2000, VMS estimated that its aggregate future exposure for environmental-
related investigation and remediation costs for these sites ranged from $38.3
million to $65.7 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 March 31, 2000. As to each of these sites and facilities,
management of VMS has determined: (i) that a particular amount within the
range of estimated costs better estimates the future environmental liability
than any other amount within the range; and (ii) that it may reasonably
determine the timing of those future costs. Together, these amounts totaled
$39.4 million at March 31, 2000. Accordingly, VMS has accrued $19.6 million,
which represents management's best estimate of the future costs discounted at
7%, net of inflation. This accrual is in addition to the $19.8 million
described above.
The Company recorded $8.6 million as its portion of the foregoing estimated
future costs for environmental liability of VMS as of March, 2000. 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 reflects various
uncertainties inherent in many environmental investigation and remediation
activities and the large number of sites and facilities involved. VMS
anticipates 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 its
obligation 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 an occurrence is considered remote. Based on
information currently available to the Company's management and its best
assessment of the ultimate amount and timing of environmental related events,
management believes that the costs of these environmental related matters are
not reasonably likely to have a material adverse effect on the consolidated
financial statements of the Company.
VMS evaluates its liability for environmental investigation and remediation
in light of the liability and financial resources of potentially responsible
parties and insurance companies against which VMS believes that it has rights
of 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 other parties, including
various insurance companies. 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. VAI has also reached an agreement with
another insurance company under which the insurance company has agreed to pay
a portion of VAI's past and future environmental-related expenditures. The
Company's share of this receivable is $1.2 million at March 31, 1999. The
Company believes that this receivable is recoverable because it is based on a
binding, written settlement agreement with a solvent and financially viable
insurance company. Although the Company intends to aggressively pursue
additional insurance and other recoveries, the Company has not reduced any
estimate of its liability in anticipation of a recovery with respect to claims
made against third parties.
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Year 2000
Transition to the Year 2000
The Company has not experienced any material problems with its internal
information, networking and telecommunications systems, its software and
computer systems or its critical suppliers resulting from the inability of
computer-controlled systems to recognize the Year 2000 date change. Although
the transition from 1999 to 2000 has passed and the Company believes that all
of the products it currently sells are Year 2000 capable, this 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. Where the Company had identified previously sold
products that are not Year 2000 capable, the Company has substantially
completed developing upgrades or retrofits, identifying corrective measures
which its customers could undertake, or identifying for its customers other
suppliers of upgrades or retrofits. Total costs incurred and expected to be
incurred are not significant.
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 items. The
adoption of SAB 101 will be required in the Company's first quarter of the
fiscal year 2001. The effects of applying SAB 101 will be reported as a
cumulative effect adjustment resulting from a change in accounting principle.
The Company has not yet determined the impact of its implementation on the
Company's consolidated financial statements.
Accounting for Certain Transactions Involving Stock Compensation--an
interpretation of APB Opinion No. 25
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events that occurred after
either December 15, 1998 or January 12, 2000. The Company does not expect the
application of FIN 44 to have a material impact on the Company's Financial
position or results of operations.
Forward Looking Information
This Management's Discussion and Analysis contains certain forward-looking
statements. For purposes of the safe harbor provisions under The Private
Securities Litigation Reform Act of 1995, any statements using the terms
"believes", "anticipates", "expects", "plans" or similar expressions, are
forward-looking statements. The forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those
projected. 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; and other risks detailed from
time to time in the Company's filings with the Securities and Exchange
Commission.
18
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Although payments under certain of the operating leases for VSEA's
facilities are tied to market indices, VSEA is not exposed to material
interest rate risk associated with its operating leases.
There have been no material changes in information reported under "Market
Risk" in the Company's report on Form 10-K filed with the Securities and
Exchange Commission on December 30, 1999.
Concentration of Risk
During the second quarter and first half of fiscal year 2000, no one
customer accounted for 10% or more of total revenue. No one customer accounted
for 10% of revenue in the second quarter or first half of fiscal year 1999.
As of March 31, 2000, three customers each accounted for 11% of the total
accounts receivable. At the end of the second quarter of fiscal year 1999, one
customer, at 17.5%, exceeded 10% of the total accounts receivable.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information required by this Item is provided in Note 9 ("Contingencies") to
the Condensed Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the quarter ended March 31, 2000.
20
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Registrant
By: /s/ Ernest L. Godshalk, III
--------------------------------------
Ernest L. Godshalk, III
Vice President and Chief Financial
Officer
(Principal Financial Officer)
Date: May 15, 2000
By: /s/ Seth H. Bagshaw
--------------------------------------
Seth H. Bagshaw
Vice President and Corporate
Controller
(Principal Accounting Officer)
Date: May 15, 2000
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS AND CONDENSED CONSOLIDATED BALANCE SHEETS
FOR VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-29-2000
<PERIOD-START> OCT-02-1999
<PERIOD-END> MAR-31-2000
<CASH> 13,053
<SECURITIES> 83,703
<RECEIVABLES> 117,229
<ALLOWANCES> 3,005
<INVENTORY> 101,868
<CURRENT-ASSETS> 351,102
<PP&E> 95,110
<DEPRECIATION> 56,417
<TOTAL-ASSETS> 409,578
<CURRENT-LIABILITIES> 169,258
<BONDS> 0
0
0
<COMMON> 316
<OTHER-SE> 231,412
<TOTAL-LIABILITY-AND-EQUITY> 409,578
<SALES> 238,605
<TOTAL-REVENUES> 266,006
<CGS> 165,875
<TOTAL-COSTS> 233,372
<OTHER-EXPENSES> (2,700)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,562)
<INCOME-PRETAX> 36,896
<INCOME-TAX> 12,913
<INCOME-CONTINUING> 23,983
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,983
<EPS-BASIC> 0.78
<EPS-DILUTED> 0.72
</TABLE>
