SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2002
Commission file number 025566
______________________
ASML HOLDING N.V.
(Exact Name of Registrant as Specified in Its Charter)
THE NETHERLANDS
(Jurisdiction of Incorporation or Organization)
______________________
DE RUN 1110
5503 LA VELDHOVEN
THE NETHERLANDS
(Address of Principal Executive Offices)
______________________
Securities registered or to be registered pursuant
to Section 12(b) of the Act:
None
(Title of Class)
Securities registered or to be registered pursuant
to Section 12(g) of the Act:
Ordinary Shares
(nominal value Eur 0.02 per share)
(Title of Class)
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
None
(Title of Class)
______________________
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
482,182,485 Ordinary Shares (nominal value Eur 0.02 per share)
23,100 Priority Shares (nominal value Eur 0.02 per share)
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 |_|
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 |_| Item 18 |X|
Name and address of person authorized to receive notices and communications
from the Securities and Exchange Commission:
Richard A. Ely
Skadden, Arps, Slate, Meagher & Flom LLP
One Canada Square, Canary Wharf
London E14 5DS England
TABLE OF CONTENTS
PART I
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ITEM 1. Identity of Directors, Senior Management and Advisors..........................................1
ITEM 2. Offer Statistics and Expected Timetable........................................................1
ITEM 3. Key Information................................................................................1
ITEM 4. Information on the Company.....................................................................10
ITEM 5. Operating and Financial Review and Prospects...................................................17
ITEM 6. Directors, Senior Management and Employees.....................................................29
ITEM 7. Major Shareholders and Related Party Transactions..............................................33
ITEM 8. Financial Information..........................................................................34
ITEM 9. The Offer and Listing..........................................................................35
ITEM 10. Additional Information.........................................................................36
ITEM 11. Quantitative and Qualitative Disclosures About Market Risk.....................................42
ITEM 12. Description of Securities Other Than Equity Securities.........................................43
PART II
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ITEM 13. Defaults, Dividend Arrearages and Delinquencies................................................44
ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds...................44
ITEM 15. Controls and Procedures........................................................................44
ITEM 16. Reserved.......................................................................................44
PART III
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ITEM 17. Financial Statements...........................................................................45
ITEM 18. Financial Statements...........................................................................45
ITEM 19. Exhibits.......................................................................................45
i
Special Note Regarding Forward-Looking Statements
In addition to historical information, this annual report on Form
20-F contains and incorporates by reference statements relating to our future
business and/or results. These statements include certain projections and
business trends that are "forward-looking" within the meaning of the Private
Securities Litigation Reform Act of 1995. You can generally identify these
statements by the use of words like "may", "will", "could", "should",
"project", "believe", "anticipate", "expect", "plan", "estimate", "forecast",
"potential", "intend", "continue" and variations of these words or comparable
words. Forward-looking statements do not guarantee future performance and
involve risks and uncertainties. Actual results may differ materially from
projected results as a result of certain risks and uncertainties. These risks
and uncertainties include, without limitation, those described under Item 3.D.
--"Risk Factors" and those detailed from time to time in our other filings
with the Securities and Exchange Commission (the "Commission"). These
forward-looking statements are made only as of the date of this annual report
on Form 20-F. We do not undertake to update or revise the forward-looking
statements, whether as a result of new information, future events or
otherwise.
Presentation of Financial Information
In May 2001, we consummated our merger with Silicon Valley Group,
Inc. ("SVG"), now part of ASML US, Inc. ("ASML US"). The merger is
accounted for under the "pooling of interests" method. Therefore, the
Consolidated Financial Statements of ASML Holding N.V. ("ASML" or the
"Company") for each of the three years ended December 31, 2002, the Selected
Financial Information for each of the five years ended December 31, 2002 and
the financial and operational information presented in this annual report on
Form 20-F reflect the combination of financial statements for ASML's
historical operations with those of SVG. In conformity with accounting
principles generally accepted in the United States ("U.S. GAAP"), the
comparative figures for the twelve months ended December 31, 2001 and December
31, 2000 reflect the combined annual results of the fiscal years of ASML and
SVG. Because SVG's fiscal reporting period prior to the merger differed from
ASML's fiscal reporting period, comparative figures for fiscal year 2000
contain the results of ASML's historical operations for the twelve months
ended December 31, 2000 and the results of SVG's historical operations for the
twelve months ended September 30, 2000.
On December 18, 2002, ASML announced the proposed divestiture of its
Thermal business, including related customer support activities, and the
termination of its activities in the Track business. As a result of this
decision, our Consolidated Financial Statements for each of the three years
ended December 31, 2002, our Selected Financial Information for each of the
five years ended December 31, 2002 and the financial and operational
information presented in this annual report on Form 20-F have been
retroactively adjusted to present these businesses as discontinued operations,
instead of as a separate segment as they had previously been reported.
ITEM 1. Identity of Directors, Senior Management and Advisors
Not applicable
ITEM 2. Offer Statistics and Expected Timetable
Not applicable
ITEM 3. Key Information
A. Selected Consolidated Financial Data
The following consolidated financial data should be read in
conjunction with Item 5--"Operating and Financial Review and Prospects" and
Item 18--"Financial Statements".
Five-Year Financial Summary (1)
Years ended December 31 1998 1999 2000 2001 2002
(in thousands, except per share data) EUR EUR EUR EUR EUR
Consolidated statements of operations data
Net sales ........................................ 1,110,606 1,518,027 2,672,630 1,589,247 1,958,672
Cost of sales .................................... 706,606 1,028,221 1,571,816 1,558,234 1,491,068
------------------------------------------------------------------------------------------------------------------
Gross profit on sales 404,000 489,806 1,100,814 31,013 467,604
Research and development costs ................... 181,560 234,378 327,015 347,333 324,419
Research and development credits ................. (29,964) (38,815) (24,983) (16,223) (26,015)
Selling, general and administrative expenses..... 142,032 186,638 256,513 245,962 263,243
Restructuring and merger and acquisition costs ... 1,563 (283) 0 44,559 0
------------------------------------------------------------------------------------------------------------------
Operating income (loss) 108,809 107,888 542,269 (590,618) (94,043)
Minority interest in net result from subsidiaries. (3,205) 3,606 0
Interest income (expense), net.................... 6,632 1,009 12,593 (7,207) (36,781)
------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes .............................. 115,441 108,897 551,657 (594,219) (130,824)
(Provision for) benefit from income taxes ........ (40,687) (34,526) (167,923) 179,017 42,779
Cumulative effect of accounting changes net of tax 0 0 (2,676) 0 0
------------------------------------------------------------------------------------------------------------------
Net income (loss) from continuing operations ..... 74,754 74,371 381,058 (415,202) (88,045)
Loss from discontinued operations
before income taxes .............................. (49,934) (25,270) (3,685) (103,001) (183,624)
Benefit from income taxes ........................ 24,969 8,087 674 39,211 63,846
------------------------------------------------------------------------------------------------------------------
Net loss from discontinued operations ............ (24,965) (17,183) (3,011) (63,790) (119,778)
------------------------------------------------------------------------------------------------------------------
Net income (loss) ................................ 49,789 57,188 378,047 (478,992) (207,823)
Basic net income (loss) from continuing operations
per ordinary share(2)............................. 0.16 0.16 0.83 (0.89) (0.18)
Basic net loss from discontinued operations
per ordinary share(2)............................. (0.05) (0.04) (0.01) (0.14) (0.26)
Basic net income (loss) per ordinary share(2)..... 0.11 0.12 0.82 (1.03) (0.44)
Diluted net income (loss) per ordinary share(2)... 0.11 0.12 0.78 (1.03) (0.44)
Number of ordinary shares used in computing
per share amounts (in thousands)
Basic ............................................ 456,216 458,542 461,887 465,866 476,866
Diluted........................................... 458,811 462,682 483,127 465,866(3) 476,866(3)
__________________
(1) The selected consolidated data has been retroactively adjusted to
reflect the effects of our decision in December 2002 to discontinue our
Track and Thermal businesses.
(2) All net income (loss) per ordinary share amounts have been retroactively
adjusted to reflect the two-for-one stock split in May 1998 and the
three-for-one stock split in April 2000, as well as the issuance of
47,139,000 shares in connection with the May 2001 merger with SVG, which
was accounted for as a pooling of interests.
(3) The calculation of the number of ordinary shares used in computing
diluted net income per ordinary share in 2001 and 2002 does not assume
conversion of ASML's outstanding 5.75 percent convertible subordinated
bonds due 2006 or 4.25 percent convertible subordinated bonds 1999 due
2004, and does not assume conversion of options issued under ASML's
stock compensation plans, as such conversions would have an anti-
dilutive effect.
2
As of December 31 1998 1999 2000 2001 2002
(in thousands) EUR EUR EUR EUR EUR
Consolidated balance sheet data
Working capital ...................................... 969,113 1,550,886 2,145,378 1,822,711 1,662,570
Total assets ......................................... 1,557,185 2,397,926 3,432,972 3,643,840 3,301,688
Long-term liabilities, less current portion........... 281,856 821,201 868,540 1,554,544 1,099,882
Total shareholders' equity ........................... 978,543 1,129,900 1,666,212 1,226,287 1,315,516
Years ended December 31 1998 1999 2000 2001 2002
(in thousands, except per share data) EUR EUR EUR EUR EUR
Consolidated statements of cash flows data
Purchases of property, plant and equipment............ (155,052) (126,057) (181,007) (312,857) (138,587)
Depreciation, amortization and impairment............. 56,366 77,773 111,133 138,959 186,686
Net cash provided by (used in) operating activities... (26,542) 28,198 250,744 (199,615) (54,151)
Net cash used in investing activities ................ (117,456) (150,269) (151,886) (326,095) (79,852)
Net cash provided by financing activities ............ 275,355 553,154 34,198 664,290 21,427
Net cash used in discontinued operations ............. (18,969) (40,566) (45,048) (69,815) (127,473)
Net increase (decrease) in cash and cash equivalents . 109,124 430,511 248,812 (73,522) (241,918)
Ratios and other data
Increase (decrease) in net sales from
continuing operations (in percent) .............. (0.1) 36.7 76.1 (40.5) 23.2
Gross profit from continuing operations
as a percentage of net sales .................... 36.4 32.3 41.2 2.0 23.9
Operating income (loss) from continuing
operations as a percentage of net sales ......... 9.8 7.1 20.3 (37.2) (4.8)
Net income (loss) from continuing operations
as a percentage of net sales .................... 6.7 4.9 14.3 (26.1) (4.5)
Shareholders' equity as a percentage of total assets . 62.8 47.1 48.5 33.7 39.8
Backlog of systems (in units) at year-end
for continuing operations ....................... 85 206 365 117 103
Sales of systems from continuing operations
(in units) ...................................... 223 267 455 197 205
Number of employees at year-end
for continuing operations ....................... 4,259 4,889 6,628 6,039 5,971
Stock price ASML at year end ......................... 8.62 36.76 24.19 19.52 7.96
Volatility % ASML stock (260 days)(4)................. 98.5% 99.7% 80.0% 71.0% 89.0%
____________________
(4) Volatility represents the variability in our share price on the Official
Segment of the stock market of Euronext Amsterdam, N.V. during the
respective years, as measured over the last 260 business days of the
year. (Source: Bloomberg)
Exchange Rate Information
We publish our consolidated financial statements in euro. The
comparative balances reported in euro depict the same trends as would have
been presented if we had continued to present balances in Dutch Guilders.
Balances for periods prior to January 1, 1999 have been restated based on the
fixed exchange rate set by the Council of the European Union (EUR 1.00 to NLG
2.20371). These are not comparable to the balances of other companies that
report in euro having restated amounts from a currency other than Dutch
Guilders.
In this Annual Report, references to "EUR" or "euro" are to euro
and references to "$", "dollars", "U.S. dollars" or "USD" are to United
States dollars. Solely for the convenience of the reader, certain euro amounts
presented as of and for the year ended December 31, 2002 have been translated
into United States dollars using the exchange rate in effect on December 31,
2002 of USD 1.00 = EUR 0.9536. These translations should not be construed as
representations that the euro amounts could be converted into U.S. dollars at
that rate.
Historically, a significant portion of our revenues and expenses has
been denominated in currencies other than the euro or the Guilder equivalent.
For a discussion of the impact of exchange rate fluctuations on our financial
condition and results of operations, see Item 5--"Operating and Financial
Review and Prospects--Foreign exchange management" and Note 1 to our
Consolidated Financial Statements.
3
The following are the noon buying rates certified by the Federal
Reserve Bank of New York for customs purposes (the "Noon Buying Rate")
expressed in euro per U.S. dollar.
Calendar Period Period End Average(1) High Low
--------------- ---------- ---------- ---- ---
1998(2)........................... 0.85 0.90 0.95 0.83
1999.............................. 0.99 0.94 1.00 0.85
2000.............................. 1.07 1.09 1.21 0.97
2001 ............................. 1.12 1.12 1.19 1.05
2002 ............................. 0.95 1.05 1.16 0.95
2003 (through March 7)............ 0.91 0.93 0.97 0.91
________________________
(1) The average of the Noon Buying Rates on the last business day of each
month during the relevant period.
(2) Beginning on January 4, 1999, the Federal Reserve Bank of New York began
reporting the euro/dollar exchange rate in place of the individual
currencies of the European Union member states participating in the
euro. Prior year data have been restated based on the fixed exchange
rate of EUR 1.00 to NLG 2.20371.
Monthly high and low euro per U.S. dollar exchange rates High Low
----------------------------------------------------------- ---- ---
September 2002.............................................. 1.03 1.00
October 2002................................................ 1.03 1.01
November 2002............................................... 1.01 0.99
December 2002............................................... 1.01 0.95
January 2003................................................ 0.96 0.92
February 2003............................................... 0.94 0.92
March 2003 (through March 7)................................ 0.92 0.91
B. Capitalization and Indebtedness
Not applicable
C. Reasons for the Offer and Use of Proceeds
Not applicable
D. Risk Factors
In conducting our business, we face many risks that may interfere
with our business objectives. Some of those risks relate to our operational
processes while others relate to our business environment. It is important to
understand the nature of these risks and the impact they may have on our
business and results of operations. Some of the more relevant risks are
described below.
Risks Related to the Semiconductor Industry
The Semiconductor Industry is Currently Experiencing a Period of
Contraction, the Length and Extent of Which Cannot Be Forecast
Adverse conditions in the semiconductor market have caused a number
of semiconductor manufacturers to reduce their capital expenditures or delay
expansion or construction of manufacturing facilities. This has resulted in
decreased demand for our products, unanticipated rescheduling of ordered
products and cancellation of previously placed orders. The performance of the
semiconductor market in the short-term is difficult to predict, but continued
difficult market conditions would likely have a material adverse effect on our
business, financial condition and results of operations.
4
The Semiconductor Industry is Highly Cyclical and We May Be Adversely
Affected by Any Future Downturns
Our business and operating results have been materially adversely
affected by the current downturn and could be similarly affected by any future
downturns in the semiconductor industry and by related fluctuations in the
demand for capital equipment. Sales of our photolithography systems depend in
large part upon the level of capital expenditures by semiconductor
manufacturers. These capital expenditures depend upon a range of competitive
and market factors, including:
o the current and anticipated market demand for semiconductors and
for products utilizing semiconductors;
o semiconductor prices;
o semiconductor production costs; and
o general economic conditions.
Historically, the semiconductor market has been highly cyclical and
has experienced recurring periods of oversupply, resulting in significantly
reduced demand for capital equipment, including advanced photolithography
projection systems such as the wafer steppers and Step & Scan systems we
produce. Despite this cyclicality, we must maintain significant levels of
research and development expenditures in order to maintain our competitive
position. We do not intend to reduce this level of spending in response to the
short- to medium-term cyclical nature of the semiconductor industry.
We expect that the semiconductor industry will experience future
downturns. We cannot predict the timing, duration or severity of any future
downturn or the corresponding adverse effect on our business, financial
condition or results of operations.
Our Business Will Suffer if We Do Not Respond Rapidly to the Commercial
and Technological Changes in the Semiconductor Industry
The semiconductor manufacturing industry is subject to:
o rapid technological change;
o frequent new product introductions and enhancements;
o evolving industry standards;
o changes in customer requirements; and
o continued shortening of product life cycles.
Our products could become obsolete sooner than anticipated because of
a faster than anticipated change in one or more of the technologies related to
our products or in market demand for products based on a particular
technology. Our success in developing new products and in enhancing our
existing products depends on a variety of factors, including the successful
management of our research and development programs and timely completion of
product development and design relative to competitors. If we do not develop
and introduce new and enhanced systems at competitive prices on a timely
basis, our customers will not integrate the systems into the planning and
design of new fabrication facilities and upgrades of existing facilities.
Our development and initial production and installation of systems
and enhancements thereof generally are accompanied by design and production
delays and related costs of a nature typically associated with the
introduction and full-scale production of very complex capital equipment.
While we expect and plan for a corresponding learning curve effect in the
product development cycle, the time and expense required to overcome these
initial problems cannot be predicted with precision.
5
We Face Intense Competition
The semiconductor equipment industry is highly competitive. The
principal elements of competition in our markets are the technical performance
characteristics of a photolithography system and the value of ownership of
that system based on its purchase price, maintenance costs, productivity and
customer service and support. In addition, we believe that an increasingly
important factor affecting our ability to compete is the strength and breadth
of our portfolio of patents and other intellectual property rights relative to
those of our competitors. This is due, in part, to the significant decline in
the overall size of the market for photolithography systems that has occurred
since the beginning of 2001. We believe this decline has resulted in increased
competition for market share through the aggressive prosecution of patents to
prevent competitors from using and developing their technology. Our
competitiveness will increasingly depend upon our ability to protect and
defend our patents, as well as our ability to develop new and enhanced
semiconductor equipment that is competitively priced and introduced on a
timely basis. See Item 4.B. -- "Business Overview -- Intellectual Property"
and Note 14 (Legal Contingencies) to our Consolidated Financial Statements.
The cost to develop new systems, in particular photolithography
systems, is extremely high. The photolithography equipment industry is
characterized by the dominance of a few suppliers. ASML's primary competitors
are Nikon Corporation ("Nikon") and Canon Kabushika Kaisha ("Canon"). Nikon
and Canon are the dominant suppliers in the Japanese market, which accounts
for a significant proportion of worldwide semiconductor production. This
market historically has been difficult for non-Japanese companies to
penetrate, and ASML has sold a relatively limited number of systems to
Japanese customers.
Both Nikon and Canon have substantial financial resources and broad
patent portfolios. Each has stated that it will introduce new products with
improved price and performance characteristics that will compete directly with
our products, which may cause a decline in our sales or loss of market
acceptance for our photolithography systems. In addition, adverse market
conditions, industry overcapacity or a decrease in the value of the Japanese
yen in relation to the euro or the U.S. dollar could lead to intensified
price-based competition in those markets that account for the majority of our
sales, resulting in lower prices and margins and a negative impact on our
business, financial condition and results of operations.
Risks Related to ASML
The Number of Systems We Can Produce is Limited by Our Dependence on a
Limited Number of Suppliers of Key Components
We rely on outside vendors for the components and subassemblies used
in our systems, each of which is obtained from a single supplier or a limited
number of suppliers. Our reliance on a limited group of suppliers involves
several risks, including a potential inability to obtain an adequate supply of
required components and the risk of untimely delivery of these subassemblies
and components.
The number of photolithography systems we have been able to produce
has occasionally been limited by the production capacity of Carl Zeiss SMT AG
("Zeiss"). Zeiss is our sole supplier of lenses and other critical optical
components and is capable of producing these lenses only in limited numbers.
The failure of Zeiss to maintain and increase production levels or our
inability to maintain our business relationship with Zeiss in the future could
result in our inability to fulfill orders, which could damage relationships
with current and prospective customers and have an adverse effect on our
business, financial condition and results of operations. If Zeiss were to
terminate its relationship with us or if Zeiss were unable to maintain
production of lenses over a prolonged period, we would effectively cease to be
able to conduct much of our business.
In addition to Zeiss' current position as our sole supplier of
lenses, the excimer laser illumination systems that provide the ultraviolet
light source, referred to as "deep UV", used in our high resolution steppers
and Step & Scan systems, are available from only a limited number of
suppliers.
Although the timeliness, yield and quality of deliveries to date from
our remaining subcontractors generally have been satisfactory, manufacturing
certain of these components and subassemblies is an extremely complex process
and delays caused by suppliers may occur in the future. A prolonged inability
to obtain adequate deliveries, or any other circumstance that requires us to
seek alternative sources of supply, could significantly hinder our ability to
ship our products in a timely fashion, which could damage relationships with
current and prospective customers and have a material adverse effect on our
business, financial condition and operating results.
6
A High Percentage of Net Sales is Derived from a Few Customers
Historically, we have sold a substantial number of lithographic
systems to a limited number of customers. In 2002, sales to one customer
accounted for EUR 377 million, or 19 percent of net sales, compared to EUR 202
million, or 12.7 percent of net sales, in 2001. While the composition of our
largest customers may vary from year to year, we expect sales to remain
concentrated among relatively few customers in any particular year and foresee
further concentration of customers in future periods. The loss of any
significant customer or any reduction in orders by a significant customer may
have an adverse effect on our business, financial condition, results of
operations and the market price of our shares.
As a result of the limited number of customers, credit risk on
receivables is concentrated. Our three largest customers accounted for 42.2
percent of accounts receivable in 2002, compared to 35.1 percent in 2001.
Current market conditions have increased the risk of business failure for our
customers. Business failure of one of our main customers may result in adverse
effects on our financial condition and results of operations.
The Pace of Introduction of Our New Products is Accelerating and is
Accompanied by Potential Design and Production Delays and by Significant Costs
The development and initial production, installation and enhancement
of the systems we produce are accompanied by design and production delays and
related costs of a nature typically associated with the introduction and
transition to full-scale manufacture of complex capital equipment. While we
expect and plan for a corresponding learning curve effect in our product
development cycle, we cannot precisely predict the time and expense required
to overcome these initial problems and to ensure reliability and performance
to specifications. There is a risk that we may not be able to introduce or
bring to full-scale production new products quickly enough to offset declines
in demand for our older products. Moreover, the accelerating pace of
technological change and shorter product life cycles are resulting in
increases in our expenditures, including greater capital expenditure and
working capital requirements, as well as increases in indirect overhead
expenses. This, in turn, has made it necessary for us to increase our sales
volumes in order to maintain operating margins.
We Derive Most of Our Revenues from the Sale of a Relatively Small Number
of Products
We derive most of our revenues from the sale of a relatively small
number of lithographic equipment systems (205 units in 2002 and 197 units in
2001), with an average selling price of EUR 9.1 million in the second half of
2002. As a result, the timing of recognition of revenue from a small number of
transactions may have a significant impact on our net sales and operating
results for a particular reporting period. Specifically, the failure to
receive anticipated orders, or delays in shipments near the end of a
particular reporting period, due, for example, to:
o unanticipated shipment rescheduling;
o cancellation by customers;
o unexpected manufacturing difficulties; and
o delays in deliveries by suppliers
may cause net sales in a particular reporting period to fall significantly
below our expectations, which would, in turn, adversely affect our operating
results for that period.
Quarterly Reporting May Increase the Volatility of Our Earnings Figures
We have announced our intention to publish financial results on a
quarterly basis, commencing with the first quarter of 2003. In light of our
dependence on the sale of a relatively small number of products, described in
the preceding risk factor, our commencement of quarterly earnings
announcements may increase the apparent volatility of our earnings figures as
compared to our historical practice of semi-annual earnings announcements.
7
Failure to Adequately Protect the Intellectual Property Rights upon Which
We Depend Could Harm Our Business
We rely on patents, copyrights, trade secrets and other measures to
protect our proprietary technology. However, there is no assurance that such
measures will be adequate. We face risks that:
o competitors may be able to develop similar technology
independently;
o our pending patent applications may not be issued as expected;
o the steps we take to prevent misappropriation or infringement of
our intellectual property may not be successful; and
o intellectual property laws may not sufficiently protect our
proprietary rights or may adversely change in the future.
In addition, litigation may be necessary in order to enforce our
intellectual property rights, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement. Any
such litigation may result in substantial costs and diversion of resources,
and, if decided unfavorably to us, could have a material adverse effect on our
business or results of operations. We also may incur substantial acquisition
or settlement costs where doing so would strengthen or expand our intellectual
property rights or limit our exposure to intellectual property claims of third
parties.
Defending Against Intellectual Property Claims by Others Could Harm Our
Business
In the course of our business, we are subject to claims by third
parties alleging that our products or processes infringe upon their
intellectual property rights. In particular, in May 2000, Ultratech Stepper,
Inc. filed a lawsuit in the United States District Court in the Eastern
District of Virginia against us and our competitor, Canon. Ultratech Stepper
alleges that ASML and Canon are infringing upon Ultratech Stepper's rights
under a United States patent through the commercialization in the United
States of advanced photolithography projection systems embodying technology
that, in particular, is used in Step & Scan systems. We do not expect that
this litigation will have a material adverse effect on our future operating
results or financial position.
In addition, some of our customers have received notices of
infringement from third parties, alleging that our equipment used by such
customers in the manufacture of semiconductor products and/or the methods
relating to the use of our equipment infringe one or more patents issued to
such parties. We have been advised that, if claims were successful, we could
be required to indemnify such customers for some or all of any losses incurred
or damages assessed against them as a result of such infringement. We may also
incur substantial licensing or settlement costs where doing so would
strengthen or expand our intellectual property rights or limit our
exposure to intellectual property claims by others.
As more fully described in Item 4.B. -- "Business Overview --
Intellectual Property" and Note 14 (Legal Contingencies) to our Consolidated
Financial Statements, we are currently party to a series of litigation and
administrative proceedings in the United States, Japan and Korea in which
Nikon alleges our infringement of Nikon patents relating to photolithography.
A final non-appealable adverse decision in any of these proceedings could
substantially restrict or prohibit our ability to conduct sales in or from the
United States, Korea or Japan, which, in turn, could have a material adverse
effect on our financial position or results of operations.
We believe that the Nikon litigation is an example of a growing trend
in the lithography industry of competing for market share by means of
aggressive prosecution of intellectual property rights with the purpose of
preventing or limiting a competitor's ability to utilize and develop
technology. While we believe we have sufficient intellectual property rights
to successfully conduct our business, there is a continuing risk that we will
be subject to claims alleging the infringement of others' patents or
intellectual property rights. If successful, these claims could limit or
prohibit us from developing our technology and producing our products, which
would have a material adverse effect on our financial position and results of
operations. In addition, we anticipate that the costs associated with the
maintenance, protection, through litigation or otherwise, and expansion of our
intellectual property portfolio in coming years will increase significantly.
8
Furthermore, we rely on a number of patents owned by Royal Philips
Electronics, our former parent company. While Philips has granted us, without
charge, a worldwide, irrevocable, non-exclusive license under those patents,
they remain subject to the same risks regarding validity, scope and
enforceability that relate to our patents. Philips has no obligation to us to
defend or enforce its patents against third parties.
Disruption in Taiwan's Political Environment Could Seriously Harm Our
Business and the Market Price of Our Shares
Approximately 27% of our 2002 revenues and approximately 14% of our
2001 revenues derived from customers in Taiwan. Accordingly, our business
and financial condition and the market price of our shares may be affected by
changes in Taiwanese government policies or political, economic or social
instability.
Taiwan has unique international political status. The People's
Republic of China asserts sovereignty over Taiwan and does not recognize the
legitimacy of the Taiwan government. Relations between Taiwan and the People's
Republic of China and other factors affecting Taiwan's political environment
could affect our business and the market price of our ordinary shares.
We Are Dependent on the Continued Operation of a Limited Number of
Manufacturing Facilities
All of our manufacturing activities, including subassembly, final
assembly and system testing, take place in two separate clean room facilities
located in Veldhoven, the Netherlands, and one clean room facility in Wilton,
Connecticut. A major catastrophe, such as a natural disaster, at any one of
these locations could result in significant interruption of our business and
potential loss of customers and sales.
We Are Dependent on the Attraction and Retention of Key Personnel and
Highly Qualified Professionals
Our future operating results depend in significant part upon the
continued contributions of our officers and key employees, including a number
of systems development specialists with advanced qualifications in
engineering, optics and computing. In addition, our future operating results
depend in part on our ability to attract, train and retain other qualified
management, technical, sales and support personnel for our operations. There
is significant competition for these people in the semiconductor industry. In
addition, due to the accelerating pace of technological change, it has become
increasingly difficult to train new personnel in time to meet product
development and sales growth requirements. The loss of key employees or our
inability to attract, retain and motivate qualified personnel could have a
material adverse effect on our business, financial condition and results of
operations.
We May Have Significant Exposure to Fluctuations in Foreign Exchange
Rates, Which Could Harm Our Financial Condition
The euro is the reporting currency we use in our Consolidated
Financial Statements. A substantial portion of our assets, liabilities and
operating results, however, are denominated in U.S. dollars. Consequently,
fluctuations in the exchange rate of the U.S. dollar against the euro can
affect our financial results.
See Item 5--"Operating and Financial Review and Prospects--Operating
Results--Foreign exchange management" and Note 5 to our Consolidated Financial
Statements.
Our Ability to Realize Our Deferred Tax Assets is Uncertain
We incur tax losses, which are the basis for deferred tax assets,
predominantly in the United States and the Netherlands. Tax losses incurred by
our subsidiaries in the Netherlands can in general be offset for an indefinite
period against future profits. Tax losses incurred by our subsidiaries in the
United States can in general be offset against future profits realized within
twenty years following the year in which the losses are incurred. As
realization of these assets is contingent on our future profits in the
respective jurisdictions, the extent and the timing by which such assets can
be realized is uncertain. If we are unable to fully use our operating loss
carry forwards, it could have a material adverse effect on our financial
condition and net results. See Note 17 to our Consolidated Financial
Statements.
9
Risks Related to Our Ordinary Shares
The Price of Our Ordinary Shares is Very Volatile
The current market price of our ordinary shares may not be indicative
of prices that will prevail in the trading market in the future. In
particular, since our March 1995 initial public offering, the market price of
our ordinary shares has experienced significant appreciation and, more
recently, significant depreciation, as have price levels for equity securities
generally and price levels for equity securities of companies associated with
the semiconductor industry and other high-technology fields. In addition,
since our initial public offering, the market price of our ordinary shares has
experienced significant fluctuation, including fluctuation that is unrelated
to our performance. We expect that this fluctuation will continue in the
future.
Restrictions on Shareholder Rights May Dilute Voting Power
Our Articles of Association reflect that we are subject to the
provisions of Netherlands law applicable to large corporations, called
structuurregime. These provisions have the effect of concentrating control
over significant corporate decisions and transactions in the hands of our
Supervisory Board, which has the power to appoint its own members. In
addition, the provisions in our Articles of Association relating to our
Priority Shares have the effect of taking control over certain significant
corporate decisions away from holders of ordinary shares. As a result, holders
of ordinary shares may have more difficulty in protecting their interests in
the face of actions by management or members of our Supervisory Board than if
we were incorporated in the United States.
We also have a class of protective Cumulative Preference Shares and
have granted to Stichting Preferente Aandelen ASML, a Netherlands foundation
(the "Preference Share Foundation"), an option to acquire from us, at their
nominal value of EUR 0.02 per share, a number of preference shares equal to
the number of ordinary shares outstanding at the time of option exercise. This
effectively would dilute by one-half the voting power of the outstanding
ordinary shares. The potential issuance of preference shares may discourage or
significantly impede a third party from acquiring a majority of our voting
shares.
ITEM 4. Information on the Company
A. History and Development of the Company
We commenced business operations in 1984. ASM Lithography Holding
N.V. was incorporated in the Netherlands on October 3, 1994 to serve as the
holding company for our worldwide operations, which include operating
subsidiaries in the Netherlands, the United States, Hong Kong, Taiwan, Italy,
France, Germany, the United Kingdom and the Republic of Korea. In June 2001,
we changed our name from ASM Lithography Holding N.V. to ASML Holding N.V. Our
registered office is located at DeRun 1110, 5503 LA Veldhoven, the
Netherlands.
In May 2001, we merged with SVG (now part of ASML US), a
company active in the Lithography, Track and Thermal businesses. The merger is
accounted for under the "pooling of interests" method.
Following the industry's prolonged downturn, in December 2002, we
announced measures to contain costs, including the proposed divestiture of our
Thermal business, including related customer support activities, and the
termination of our activities in the Track business, except for certain
ongoing customer support obligations.
Capital Expenditures
Our principal capital expenditures within continued operations over
the past three years, principally relating to machinery and equipment,
amounted to approximately EUR 138.6 million for 2002, EUR 312.8 million for
2001 and EUR 181.0 million for 2000. Divestitures within continued operations,
also principally comprising machinery and equipment, amounted to EUR 58.7
million for 2002, EUR 21.7 million for 2001 and EUR 3.0 million for 2000. See
Note 10 to our Consolidated Financial Statements.
10
Our current capital expenditures consist of leasehold improvements to
our headquarters in Veldhoven and equipment (prototypes, demonstration systems
and training models) and information technology investments. Our Veldhoven
headquarters are financed through a special purpose vehicle that is a variable
interest entity. See Note 1 to our Consolidated Financial Statements. All
other current capital expenditures are financed internally.
B. Business Overview
We are one of the world's leading providers of advanced technology
systems for the semiconductor industry, based on market share (revenues). We
offer an integrated portfolio of lithography systems mainly for manufacturing
complex integrated circuits. We supply systems to integrated circuit
("semiconductors" or "ICs") manufacturers throughout the United States, Asia
and Western Europe and also provide our customers with a full range of support
from advanced process and product applications knowledge to complete
round-the-clock service support.
Market and Technology Overview
The worldwide electronics and computer industries have experienced
dramatic growth since the commercialization of ICs in the 1960s, largely due
to the continual reduction in the cost per function performed by ICs.
Improvement in the design and manufacture of ICs with higher circuit or
"packing" densities has resulted in smaller, lower cost ICs capable of
performing a greater number of functions at higher speeds and with lower power
consumption. We believe that these long-term trends will continue for the
foreseeable future and will be accompanied by a growing demand, subject to
ongoing cyclical variations, for production equipment that can accurately
produce advanced ICs in high volumes at the lowest possible cost.
Photolithography is used to imprint complex circuit patterns onto the wafers
that are the primary raw material for ICs and is one of the most critical and
expensive steps in their fabrication. It is therefore a significant focus of
the IC industry's demand for cost-efficient enhancements to production
technology.
We primarily design, manufacture, market and service semiconductor
processing equipment used in the fabrication of integrated circuits. Our
photolithography equipment includes Step & Scan systems, which combine stepper
technology with a photoscanning method.
Our newest product platform, TWINSCAN(TM), was introduced in July
2000 and leverages the production-proven elements from our PAS 5500 product
family to address the industry shift toward larger (300 mm) wafers. We shipped
the first systems during 2001 and in 2002. Our PAS 5500 product family
comprises advanced wafer steppers and Step & Scan systems suitable for i-line
and deep UV processing of wafers up to 200mm in diameter.
In December 2002, we announced measures to contain costs including
our intention to concentrate on our core lithography business. As a result, we
plan to divest our Thermal business and have terminated our activities in the
Track business. We are currently in the process of selling our Thermal
business. As the process is still in its early stages, the effect of the
divestiture on our future results of operations and financial position cannot
be estimated.
The termination of our Track business has resulted in an exit plan,
which includes workforce reductions, fixed asset impairments and inventory
write-offs due to discontinued product lines. The exit plan contemplates the
disposal of remaining assets of our Track business. We will continue to serve
our existing customers for which we have warranty or other service
obligations. As such, customer support related to our Track business will not
be part of discontinued operations. Further details with respect to our
discontinued operations are incorporated herein by reference to Note 2 to our
Consolidated Financial Statements.
In addition to the discontinuance of our Thermal and Track
businesses, we also plan to reduce our lithography activity through worldwide
workforce reductions of approximately 700 employees. Further details with
respect to cost containing measures are incorporated herein by reference to
Note 3 to our Consolidated Financial Statements.
11
Products
Our product development strategy focuses on the development of
product families based on a modular, upgradeable design. Our PAS 5500 product
family comprises advanced wafer steppers and Step & Scan systems suitable for
i-line and deep UV processing of wafers up to 200mm in diameter. In mid-1997,
we introduced the PAS 5500 Step & Scan systems with improved resolution and
overlay. Since then, we have further developed and expanded this Step & Scan
family. This modular upgradeable design philosophy has been further refined
and applied in the design of our most advanced product family, the Twinscan(TM)
platform, which is the basis for our current and next generation Step & Scan
systems, producing wafers up to 300 mm in diameter and capable of extending
shrink technology beyond 100 nanometers.
The older PAS 2500 and PAS 5000 families are suitable for g-line and
i-line processing of wafers up to 150 mm in diameter and are employed in
manufacturing environments and in special applications for which design
resolutions no more precise than 0.5 microns are required.
In April 2002, ASML booked its first order for an Extreme Ultraviolet
("EUV") beta tool with Intel Corporation (Intel). EUV lithography is a
breakthrough technology that extends optical lithography techniques into EUV
wavelengths. EUV uses light with a wavelength of 13.5 nanometer (more than 10
times shorter than current lithography technology) to image critical layers
with feature sizes below 45 nanometer.
In November 2002, ASML introduced the TWINSCAN(TM) AT:1200B, a high
numerical aperture (0.85) dual stage ArF (193 nanometer) lithography system
for 300 millimeter as well as 200 millimeter wafer processing. It is the
industry's first high productivity tool for volume applications at 80 nanometer
linewidth.
In February 2003, we announced productivity performance enhancements
for our TWINSCAN(TM) family of lithography systems. Called TWINSCAN(TM) C, the
new enhancements increase throughput by approximately 15 percent, depending on
product model. The productivity enhancements in TWINSCAN(TM) C increase wafer
output to over 110 wafers per hour for 300 mm wafers at real production
conditions (109 exposures per wafer). The increased stage speeds in the
TWINSCAN(TM) platform allow for these productivity improvements while
maintaining imaging, alignment and leveling accuracy.
The TWINSCAN(TM) C product family will be available on both I-line,
deep UV (248nm) and deep UV (193nm) systems. The new systems are slated to begin
shipping in the first quarter of 2003.
In 2002, Micronic and ASML completed the first steps in their joint
development of the maskless scanner market: a preliminary system design has
been concluded and an initial study has demonstrated the market opportunity
for products based on ASML's TWINSCAN(TM) platform and Micronic's
SLM-technology.
We also continually develop and sell a range of product options and
enhancements designed to increase productivity and to optimize value of
ownership over the entire life of our systems.
CURRENT ASML LITHOGRAPHY PRODUCT PORTFOLIO(1)
----------------------------------------------------------------------------------------------------------------------
Feature Size Wavelength of Light Note:
----------------------------------------------------------------------------------------------------------------------
Feature size = Wavelength = length of light going through projection lens; 1000 nanometer = 1 micron
Resolution = the shorter the wavelength, the smaller the line width (u) = 0.001 mm = one
Size of line width in and the finer the pattern on the IC millionth of a meter
Nanometer
------------------------ ---------------- ---------------- --------------------------- ---------------------------
365 nm (i-line) 248 nm (KrF) 193 nm (ArF) ASML steppers and Step &
Scan systems
------------------------ ---------------- ---------------- --------------------------- ---------------------------
700 PAS 5500/25 PAS 5500/150/250/300 =
300 PAS 5500/250 Stepper system and wafer
280 PAS 5500/400 size is 200 mm
and AT:400
------------------------ ---------------- -------------------------------------------- ---------------------------
180 PAS 5500/350 PAS 5500/400 and up =
130 PAS 5500/750 and AT:750 Step & Scan system and
120 PAS 5500/800 wafer size is 200 mm
110 PAS 5500/850 and AT:850
------------------------ ---------------- --------------- ---------------------------- ---------------------------
100 PAS 5500/1100 and AT:1100 AT = TWINSCAN(TM)system
90 PAS 5500/1150 and AT:1150 and wafer size is 200 and
80 AT:1200B 300 mm
------------------------------------------------------------------------------------------------------------------
(1) This table does not include products sold on the PAS 2500 and PAS 5000 platforms.
12
Sales and Customer Support
We market and sell our products in the United States and Europe
principally through our direct sales organization. In Asia, we sell our
products primarily through independent sales agents, supported by our own
direct sales staff.
We support our customers with applications, service and technical
support. Our field engineers and applications, service and technical support
specialists are based throughout the United States, Western Europe and Asia.
Our customer support employees in Asia typically work out of the offices of
local outside sales agents, some of whom also provide service support to our
customers.
Customers and Geographic Markets
In 2002, we shipped 205 systems (not including discontinued
operations) to a limited number of customers. We expect that sales to
relatively few customers will continue to account for a high percentage of our
net sales in any particular year for the foreseeable future. We market and
sell our products in the United States and Europe principally through our
direct sales organization and in Asia by means of independent sales agents. We
make all our sales into the United States through our U.S. operations and
sales into Asia through our Hong Kong operation. See Note 18 to our
Consolidated Financial Statements for a breakdown of our sales by geographic
segment.
Manufacturing, Logistics and Suppliers
Our business model is based on outsourcing a significant part of the
components and modules that comprise ASML's lithography systems, working in
partnership with suppliers from all over the world. We jointly operate a
formal strategy with suppliers known as Value Sourcing that is based on
quality, logistics, technology and total cost. We aim to have appropriate
licensing in place with respect to our jointly developed technology or,
alternatively, to obtain ownership rights on know-how and designs of critical
components.
The ASML value proposition known as Value of Ownership consists of the
following:
o offering ongoing improvements in productivity and value, by
introducing advanced technology based on modular platforms for
upgrades;
o providing customer services that ensure rapid, efficient
installation and superior on-site support and training to
optimize manufacturing processes and improve productivity;
o maintaining appropriate levels of research and development to
offer the most advanced technology suitable for high-throughput,
low-cost volume production at the earliest possible date;
o reducing the cycle time between customer order of a system and
the use of that system in volume production on-site; and
o expanding operational flexibility in research and manufacturing
by reinforcing strategic alliances with world-class partners.
Our manufacturing activities consist of the assembly into a finished
system of components and subassemblies that are manufactured to our
specifications by third parties and the testing of those components,
subassemblies and finished systems. All of our manufacturing activities
(subassembly, final assembly and system testing) are performed in two separate
clean room facilities located in Veldhoven, the Netherlands, and one clean
room facility in Wilton, Connecticut.
We procure stepper and Step & Scan system components and
subassemblies from a single supplier or a limited group of suppliers in order
to ensure overall quality and timeliness of delivery. Reliance on a limited
group of suppliers involves several risks, including a potential inability to
obtain an adequate supply of required components and the risk of untimely
delivery of these subassemblies and components. Disruption or termination of
certain of our supply arrangements, in particular our arrangements with Zeiss,
described below, could have an adverse effect on our business, financial
condition and results of operations. We attempt to identify and qualify
alternative suppliers capable of manufacturing to our specifications. A
prolonged inability to obtain certain components and subassemblies could
damage relationships with current and prospective customers.
13
Zeiss is our sole external supplier of lenses and other critical
optical components, which account for between 20 percent and 50 percent of our
cost of goods sold, varying by product type, and which collectively accounted
for 41 percent of our aggregate cost of goods sold in 2002. Our relationship
with Zeiss is structured as an exclusive strategic alliance pursuant to an
agreement that sets forth a framework for cooperation in the areas of product
research, design, planning and manufacturing and pricing, as well as customer
support and warranty service. Dr. Ing. Peter H. Grassmann, the former Chief
Executive Officer of Zeiss, is a member of ASML's Supervisory Board. See Item 6
--"Directors, Senior Management and Employees".
From time to time, the number of systems we have been able to produce
has been limited by the capacity of Zeiss to provide us with lenses and
optical components. Zeiss currently is capable of manufacturing only a limited
number of lenses and optical components for our wafer steppers and Step & Scan
systems and is highly dependent on Zeiss' manufacturing and testing facility
in Oberkochen, Germany. Given our current level of sales, we are not currently
constrained by the number of lenses that Zeiss can produce. However, as our
sales increase, the failure of Zeiss to maintain and increase production
levels could result in us being unable to fulfill orders for our systems,
which could damage relationships with current and prospective customers and
have an adverse effect on our business, financial condition and results of
operations. See Item 3.D.--"Risk Factors--The Number of Systems We Can
Produce is Limited by our Dependence on a Limited Number of Suppliers of Key
Components."
We have agreed with Zeiss to continue our strategic alliance on an
exclusive basis until either party provides at least three years' notice of
its intent to terminate. Although we believe such an outcome is unlikely, if
Zeiss were to terminate its relationship with us, or if Zeiss were unable to
maintain production over a prolonged period (such as because of a catastrophe
affecting Zeiss' Oberkochen facility), we would effectively cease to be able
to conduct our business.
Research and Development
The semiconductor manufacturing industry is subject to rapid
technological changes and new product introductions and enhancements. We
believe that continued and timely development and introduction of new and
enhanced systems are essential for us to maintain our competitive position. To
meet this ongoing requirement, we have established sophisticated development
centers in the Netherlands and the United States.
We have historically devoted a significant portion of our financial
resources to research and development programs and we expect to continue to
allocate significant resources to these efforts. We also apply for subsidy
payments in connection with specific development projects under programs
sponsored by the Netherlands government, the European Community and other
sources. Amounts received under these programs generally are not required to
be repaid, except for technical development credits (Technische
Ontwikkelingskredieten, or "TOK") received from the Netherlands Ministry of
Economic Affairs, which are repayable contingent upon actual sales of products,
the development of which is funded by the respective credits. See Item 5
--"Operating and Financial Review and Prospects--Operating Results--Research
and Development", and Notes 1 and 16 to our Consolidated Financial Statements.
We invested EUR 324 million on research and development in continuing
operations in 2002, a 6.6 percent decrease compared to the previous year. We
are also involved in joint research and development programs with both public
and private partnerships and consortiums, involving leading chip
manufacturers, as well as Netherlands government and European Union programs
like EUREKA and ESPRIT. We aim to own or license our jointly developed
technology and designs of critical components.
In 2002, our research and development resources propelled development
of the TWINSCAN(TM) platform along with several leading edge technologies,
such as 248nm, 193 nm, 157nm and EUV. Furthermore, productivity enhancements
for existing product families are developed, including the recently announced
TWINSCAN(TM) C features.
Intellectual Property
We rely on patents, copyrights, trade secrets and other measures to
protect our proprietary technology. However, there is no assurance that such
measures will be adequate. Competitors may be able to develop similar
technology independently. Our pending patent applications may not be issued as
intended, and intellectual property laws may not sufficiently support our
proprietary rights. In addition, litigation may be necessary in order to
enforce our intellectual property rights, to determine the validity and scope
of the proprietary rights of
14
others or to defend against claims of infringement. Any such litigation may
result in substantial costs and diversion of resources, and, if decided
unfavorably to us, could have a material adverse effect on our business or
results of operations. We also may incur substantial acquisition or settlement
costs where doing so would strengthen or expand our intellectual property
rights or limit our exposure to intellectual property claims of third parties.
On occasion, certain of our customers have received notices of
infringement from third parties, alleging the ASML equipment used by such
customers in the manufacture of semiconductor products and/or the methods
relating to the use of ASML equipment infringe one or more patents issued to
such parties. We have also been advised that, if claims were successful, we
could be required to indemnify such customers for some or all of any losses
incurred or damages assessed against them as a result of that infringement. We
may also incur substantial licensing or settlement costs where doing so would
strengthen or expand our intellectual property rights or limit our exposure to
intellectual property claims by others.
Patent litigation with Nikon
Since late 2001, we have been a party to a series of litigation and
administrative proceedings in which Nikon alleges ASML's infringement of Nikon
patents relating to photolithography. ASML in turn filed claims against Nikon.
These proceedings are summarized below, and more detail is presented in Note
14 to our Consolidated Financial Statements. The proceedings are at various
stages of advancement, and their ultimate outcome is therefore uncertain. In
each case, however, we believe we have meritorious defenses to Nikon's claims,
including that Nikon's patents are both not infringed and are invalid, as well
as valid counterclaims.
We intend to vigorously pursue these defenses and counterclaims. If a
final non-appealable decision that was adverse to ASML were to be rendered in
any of these proceedings, however, our ability to conduct sales in one or more
significant markets could be substantially restricted or prohibited, which in
turn could have a material adverse effect on our financial position or results
of operations.
Proceedings in the United States
In December 2001, Nikon filed a complaint with the U.S. International
Trade Commission ("ITC") alleging that ASML's photolithography machines
infringe seven patents held by Nikon and seeking to exclude ASML from
importing into the United States any infringing products. A trial before an
administrative law judge was completed in November 2002 and, in late January
2003, the court initially determined that ASML had not committed any
violation. Both ASML and Nikon have stated that they intend to seek review by
the full Commission of this initial determination. In addition, Nikon may
pursue further appeals.
In December 2001, Nikon also filed a separate patent infringement
action in the U.S. District Court for the Northern District of California. In
that proceeding, Nikon alleges infringement of five Nikon patents and seeks
injunctive relief and damages. In April 2002, ASML filed a counterclaim in the
ITC action, alleging that Nikon's photolithography machines sold in the United
States infringe five ASML patents. This counterclaim was subsequently
transferred to the U.S. District Court for the Northern District of
California. Subsequently, Nikon filed a second patent infringement action in
that court alleging infringement of six out of the seven patents from the ITC
action and two additional patents. Discovery in the California litigation is
currently ongoing, with trial expected to commence in 2004.
Proceedings in Japan
In August 2002, ASML filed a patent infringement complaint against
Nikon in Japan, seeking to enjoin Nikon from the manufacture and sale of
lithography devices that infringe ASML's patents, as well as damages of
approximately EUR 97 million. In October 2002, Nikon filed a
counter-complaint, alleging that ASML lithography devices infringe twelve
Japanese patents held by Nikon and seeking injunctive relief and damages of
approximately EUR 12.3 million. In January 2003, ASML filed a second patent
infringement complaint against Nikon in Japan, seeking to enjoin Nikon from
the manufacture and sale of lithography devices that infringe another of
ASML's patents. A final decision on the Japanese proceedings is not expected
before 2005.
Proceedings in Korea
In October 2002, Nikon filed a separate patent infringement action
against ASML and its Korean subsidiary, alleging that ASML's photolithography
machines infringe five of Nikon's patents, four of which are related to
Nikon's patents asserted in its U.S. litigation. The complaint seeks to
prohibit ASML from the
15
manufacture, use, sale, import or export of infringing products, and seeks
destruction of the manufacturing facilities for these products and damages. In
January 2003, ASML filed a patent infringement complaint against Nikon and its
Korean subsidiary, seeking to enjoin Nikon from the manufacture and sale of
lithography devices that infringe another of ASML's patents. A final decision
on the Korean proceedings is not expected before 2006.
Competition
The semiconductor equipment industry is highly competitive. The
principal elements of competition in our markets are the technical performance
characteristics of a photolithography system and the value of ownership of
that system based on its purchase price, maintenance costs, productivity and
customer service and support. In addition, we believe that an increasingly
important factor affecting our ability to compete is the strength and breadth
of our portfolio of patent and other intellectual property rights relative to
those of our competitors. This is due, in part, to the significant decline in
the overall size of the market for photolithography systems that has occurred
since the beginning of 2001 and which continued in 2002. We believe this
decline has resulted in increased competition for market share through the
aggressive prosecution of patents to prevent competitors from using and
developing their technology. Our competitiveness will increasingly depend upon
our ability to protect and defend our patents, as well as our ability to develop
new and enhanced semiconductor equipment that is competitively priced and
introduced on a timely basis. See Item 3.D.--"Risk Factors--We Face Intense
Competition" and Item 4.B.--"Information on the Company--Business Overview"
and Note 14 (Legal Contingencies) to our Consolidated Financial Statements.
C. Organizational Structure
ASML is a holding company which operates through its subsidiaries.
Our material subsidiaries, each of which is a direct wholly-owned subsidiary
of ours, are as follows:
---------------------
ASML Holding N.V.
(The Netherlands)
---------------------
|
|
--------------------------------------------------------------
| | |
| | |
--------------------- ------------------------ -----------------
ASML Netherlands B.V. ASML Hong Kong, Limited ASML US, Inc.
(The Netherlands) (Hong Kong) (United States)
--------------------- ------------------------ -----------------
D. Property, Plants and Equipment
We own several facilities, including office facilities, in the
Netherlands and the United States. The book value of the buildings used in our
continued operations and owned by ASML amounted to EUR 106 million as of
December 31, 2002. The book value of buildings used in our discontinued
operations was EUR 19 million as of December 31, 2002. We lease our
headquarters, applications laboratory and research and development facilities,
manufacturing (assembly and testing) premises and some of our office
facilities in Veldhoven, the Netherlands. The operational leases of all major
facilities are long term and contain purchase options.
In 2002, we further enhanced our research and development facilities
and office facilities in Veldhoven. We also own and have regional sales and
service offices and manufacturing facilities located worldwide near customers'
premises.
We expect to further enhance our facilities during 2003. See Item 4.A.
--"Information on the Company--History and Development of the
Company--Capital Expenditures". We expect, from total budgeted capital
expenditure in 2003 of approximately EUR 110 million, approximately EUR 4.2
million to be allocated to the further expansion of our research and
development, manufacturing and office facilities in the Netherlands and the
United States. Furthermore, we expect to spend approximately EUR 8 million of
our total budgeted capital expenditure on leasehold improvements in the
Netherlands and the United States.
16
Major other categories for capital expenditures are prototypes,
demonstration systems and training models. See also Item 5--"Operating and
Financial Review and Prospects--Liquidity and Capital Resources" and Item
4--"Information on the Company--History and Development of the
Company--Capital Expenditures" and Note 10 to our Consolidated Financial
Statements.
We rent certain of our facilities and office space through long
term lease contracts with leasing companies. Recently issued interpretations
under U.S. GAAP might result in a requirement to consolidate the assets and
liabilities in such leasing companies if certain criteria with respect to
bearing risks of loss or being the primary beneficiary to such agreements are
met. Our initial assessment is described in Note 1 to our Consolidated
Financial Statements which is included herein by reference.
While we anticipate continuing capital expenditures for the purpose
of upgrading and, where appropriate, incrementally expanding our facilities,
we believe that our existing facilities are sufficient to accommodate the
likely range of production volumes that we might experience in any upturn in
the market for semiconductor manufacturing equipment.
ITEM 5. Operating and Financial Review and Prospects
A. Operating Results
Critical accounting policies
Our discussion and analysis of our financial condition and results of
operations are based upon our Consolidated Financial Statements, which have
been prepared in accordance with U.S. GAAP. The preparation of these financial
statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to customer programs and
incentives, product returns, bad debts, inventories, investments, intangible
assets, income taxes, financing operations, warranty and installation
obligations, excess component order cancellation costs, restructuring,
long-term service contracts, pensions and other post-retirement benefits, and
contingencies and litigation. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. We have identified the policies below as
critical to our business operations and the understanding of our results of
operations.
Recognition of revenues, income and expenses
We distinguish between revenues from "new" and "proven" technology
systems. Revenues from "proven technology" systems are recognized upon
shipment, since title passes to the customer at that moment, and the customer
has unconditionally accepted the system during a factory test prior to
shipment. Revenues from "new technology" systems are deferred until
installation and acceptance at the customer's premises are completed. As soon
as a track record has been established regarding the successful and timely
installation and acceptance of equipment previously identified as "new
technology," ASML considers the equipment to be "proven technology". At that
time, ASML changes the timing of revenue recognition to the shipment date in
accordance with its revenue policy for "proven technology" and recognizes
previously deferred revenue. In the second half of 2002, the TWINSCAN(TM)
technology, which was previously identified as "new technology," met the
criteria for "proven technology." We assess our new technologies based on
installation times, full technical compliance with contract specifications and
customer site sign-off for approval. The assessment requires management to
exercise considerable judgment, and a different outcome would have resulted in
the deferral of a significant amount of revenues from uninstalled TWINSCAN(TM)
systems in 2002, for which the revenue was recognized upon shipment during the
year.
The fair value of installation services provided to the customers is
initially deferred and is recognized when the installation is completed. Sales
from service contracts are recognized when performed. Revenue from prepaid
service contracts is recognized over the life of the contract.
17
We provide warranty coverage on our systems for twelve months,
providing labor and parts necessary to repair systems during the warranty
period. The estimated warranty costs are accounted for by accruing the
estimated warranty cost for each system upon recognition of the system sale.
The estimated warranty cost is based on historical product performance and
field expenses. Utilizing historical service records, we calculate the average
service hours and parts expense per system and apply the actual overhead rates
to determine the estimated warranty charge. We update these estimated charges
periodically. The actual product performance and/or field expense profiles may
differ, and in those cases we adjust our warranty reserves accordingly. The
difference between the estimated and actual warranty costs tends to be larger
for new product introductions, for which there is limited or no historical
product performance on which to base the estimated warranty expense. Future
warranty expenses may exceed management estimates, which could lead to a
significant increase in our cost of sales.
Evaluation of long-lived assets for impairment
We evaluate our long-lived assets, including intellectual property,
for impairment whenever events or changes in circumstances indicate that the
carrying amount of those assets may not be recoverable. If impairment is
warranted, we assess whether the undiscounted cash flows expected to be
generated by our long-lived assets will exceed their carrying value. If this
assessment indicates that the long-lived assets are impaired, the assets are
written down to their fair value. These assessments are based on our
management's judgment, which includes the estimate of future cash flows from
long-lived assets and the estimate of the fair value of an asset if it is
impaired. We initiated impairment assessments in 2002 based on the following
events:
o the intended sale of the Thermal business: management concluded
that proceeds from the sale of this business will likely exceed
the carrying value and that we would therefore not recognize an
impairment on these assets;
o the termination of the Track business;
o idle capacity within continuing operations, including building
space; and
o assessment of recoverability of acquired intangible assets, which
is mainly comprised of intellectual property rights on Optimal
Proximity Software. Management concluded that expected cash
flows from the commercial use of this software will likely
exceed its carrying value and that therefore no impairment
should be recognized on these assets.
Since management estimates of future cash flows are subject to
considerable judgment and changes in circumstances, actual cash flows may be
higher or lower. Although management believes these to be the known events
that might indicate asset impairment, other assets may be subject to loss in
valuation due to uncertain market circumstances.
Income tax
We use the asset and liability method in accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for
operating loss and tax credit carry forwards and for the future tax
consequences attributable to differences between the balance sheet carrying
amounts of existing assets and liabilities and their respective tax bases. If
it is more likely than not that the carrying amounts of deferred tax assets
will not be realized, a valuation allowance will be recorded to reduce the
carrying amounts of such assets.
In 2002, we performed an extended assessment with respect to the
realizability of our deferred tax assets on net operating loss carry forwards
in the United States. In this analysis, we fully incorporated the effective
application of an Advanced Pricing Agreement ("APA") that is under negotiation
with the tax authorities involved. This APA would result in future taxable
income that would recover net operating losses in the respective jurisdictions
before these net operating losses expire. Management believes that it is more
likely than not that the APA will take effect in future years and therefore we
did not record a valuation allowance on the deferred tax asset. However, if
this assessment is incorrect, a significant portion of the deferred tax assets
recorded on our balance sheet would have to be written down.
18
Business strategy
Our strategic process, with the participation of the Board of
Management and senior managers from all parts of the worldwide organization,
involves operational improvements by identifying immediate issues and actions
to implement corporate strategy better, faster and more efficiently. Our
strategy continues to be one of focusing on our core competence, lithography.
To that end, we addressed our loss-making operations by announcing, in
December 2002, our intention to divest our Thermal business in 2003 and by
discontinuing our Track operations as of December 31, 2002.
Our current initiatives to broaden the markets we serve include
measures to improve our capabilities to address, among others, markets in
China and Japan. Several new product market opportunities will be carefully
considered during 2003, each one evaluated on its ability to build on our core
competences. The criteria by which we evaluate these additional opportunities
will be consistent with our existing strategy.
In addition, we improved organizational efficiency and reduced costs
in 2002 without impacting the effectiveness of our research and development
programs or customer support initiatives. During 2002, we sharpened our
strategic focus and established cross-functional process improvement teams in
support of our ambition to strive for operational excellence. This allows us
to reduce our breakeven point even further. By these methods, ASML expects to
achieve its objectives of delivering world-class leading-edge imaging
solutions, make market gains, improve our working capital and generate cash.
ASML vision, mission, goal and strategy
Vision - offer the right technologies at the right time combined with
superior value of ownership measured by customers' return on investment.
Mission - provide leading-edge imaging solutions to continuously
improve our customers' global competitiveness.
Goal - attain sustainable and profitable market leadership through
customer satisfaction.
Strategy - achieve leadership by providing high value drivers for
customers, with operational excellence and top financial performance.
Financial criteria for ASML
Having evaluated different scenarios and plans, we have identified
criteria consistent with our pursuit of top financial performance. First, we
should strive to maintain annual revenue growth at a rate that is higher than
industry peers. Second, we should seek positive cash flow. This means, for
instance, that we should improve our cash, working capital and inventory
management. We will strive to provide attractive return on capital invested by
our shareholders, and at the same time will focus closely on our performance
as compared to industry peers.
Strategic challenges
Our sales growth is expected to be less than in the past due to the
maturing lithography market. Therefore, we require higher margins than in the
past for our lithography systems to increase returns to shareholders. This can
be achieved by reducing cost of goods sold while increasing average selling
price.
In a market characterized by cycles in demand and consolidation among
customers, we must raise our performance standards. This means a lower
breakeven point for the number of lithography systems sold, more flexibility
in the number of systems that can be made, faster time-to-market and better
quality when new products are introduced.
During 2002, we strengthened our market-driven, technology-based
lithography organization. Global in scope and delivery, the people of ASML are
determined to meet the ongoing needs of customers.
19
Results of Operations
The following discussion and analysis of results of operations should
be viewed in the context of the risks affecting our business strategy,
described in Item 3.D.--"Risk Factors". Our 2001 merger with SVG has been
accounted for under the "pooling of interests" method. Therefore, our
Consolidated Financial Statements for each year in the three-year period ended
December 31, 2002 reflect the combination of financial statements for our
historical operations with those of SVG. The five year financial summary
presented in Item 3.A. --"Selected Financial Data" also reflects the combined
figures of ASML's and SVG's respective historical operations. Because SVG's
fiscal reporting period prior to the merger differed from our fiscal reporting
period, comparative figures for 2000 contain the results of our historical
operations for the twelve months ended December 31, 2000 and the results of
SVG's historical operations for the twelve months ended September 30, 2000.
Our decision to sell our Thermal business and to terminate our Track
business has resulted in separate disclosure for continuing and discontinued
operations. Comparative figures have been retroactively reclassified in order
to reflect the impact of this decision in the 2002 financial statements. The
elements within discontinued operations were previously reported in the Track
and Thermal segment. As a result of the discontinuance of the major components
within this segment, the remaining business within this segment (customer
support on existing Track contracts) has become insignificant to our
operating results and financial position in quantitative terms and has been
presented as part of continuing operations (i.e., Lithography and related
customer support). A separate condensed analysis of discontinued operations is
provided below instead of the segmental information on Track and Thermal
versus Lithography that was provided in previous years.
We have historically experienced higher sales in the second and
fourth quarters of the year. See Item 3.D.--"Risk Factors--Quarterly
Reporting May Increase the Volatility of Our Earnings Figures."
Set forth below are our consolidated statements of operations from
continuing operations data for the three years ended December 31, 2002,
expressed as a percentage of total net sales:
Years ended December 31 2000 2001 2002
------------------------------------------------------------- ------- ------- -------
Total net sales............................................. 100.0% 100.0% 100.0%
Cost of sales............................................... 58.8 98.0(1) 76.1
Gross profit on sales....................................... 41.2 2.0 23.9
Research and development costs.............................. 12.2 21.9 16.6
Research and development credits............................ (0.9) (1.0) (1.3)
Selling, general and administrative costs................... 9.6 15.5 13.4
Restructuring and merger and acquisition related charges.... N/A 2.8 N/A
Operating income (loss) from continuing operations.......... 20.3 (37.2) (4.8)
Interest income (expense), net.............................. 0.5 (0.5) (1.9)
Income (loss) from continuing operations before
income taxes................................................ 20.6 (37.4) (6.7)
Provision for income taxes.................................. 6.3 (11.3) (2.2)
Net income (loss) from continuing operations................ 14.3 (26.1) (4.5)
Sales of systems from continuing operations (in units)...... 455 197 205
_________________
(1) Includes restructuring charges of EUR 400 million.
Results of operations from continuing operations 2002 compared with 2001
The semiconductor industry downturn which began in 2001 showed, in
the first half of 2002, a modest recovery in equipment demand for order intake
for delivery in 2002/2003. The second half of 2002, however, showed a further
deepening of the downturn. Although modest signs of recovery are apparent in
some business segments within the semiconductor industry, we still see no
clear indication of when an upturn will occur. Our technological leadership
in 2002 nevertheless resulted in market gains in 2002, despite the overall
decline. With ASML offering 193 nanometer tools for both 200 millimeter and
300 millimeter wafer fabrication, we believe we are very well positioned to
sustain our position in the market when a market upturn occurs.
Consolidated sales
Consolidated net sales were EUR 1,959 million in 2002 compared to EUR
1,589 million in 2001. Currently, approximately 70 percent of the global top
20 IC manufacturers are ASML customers. In 2002, sales to one customer
accounted for EUR 377 million, or 19 percent of net sales. In 2001, sales to
one customer accounted for EUR 202 million, or 12.7 percent of net sales.
20
Sales and gross profit
The following table shows a summary of sales and gross profit on a
semi-annual basis for the years ended December 31, 2002 and 2001:
Year ended December 31 2001 2002
--------------------------------------------------- -------------------------- --------------------------
First half Second half First half Second half
year year year year
---------- ----------- ---------- -----------
Total units recognized.............................. 120 77 78 127
Net sales from continuing operations (EUR million).. 831 759 788 1,171
Gross profit on sales of new systems from continuing
operations (% of sales)............................. 30.4 (42.7) 30.1 20.6
Overall gross profit from continuing operations
(% of sales)........................................... 29.7 (28.4) 29.6 20.0
Average unit sales price for new systems
(EUR million).................................... 5.9 8.1 8.6 9.1
Net sales from continuing operations consist of revenue from sales of
wafer steppers, Step & Scan systems, sales of equipment and options, and
revenue from service. Equipment and options may be sold in conjunction with
the initial sale of a system or after its installation.
Total net sales increased from EUR 1,589 million in 2001 to EUR 1,959
million in 2002, an increase of EUR 370 million or 23.3 percent. The increase
in sales was caused by a small increase in the number of shipments, from 197
units in 2001 to 205 in 2002, and a relatively strong increase in the average
selling price ("ASP") for new systems. The increase in the ASP reflects a
shift (e.g., from 200 millimeter to 300 millimeter and/or 248 nanometer to 193
nanometer) in our product portfolio toward an increased share of the latest
technology equipment, which accounted for 29.8 percent of total shipment
volume in 2002, compared to 4.1 percent in 2001. This technology includes
products such as the leading edge, high numerical aperture lens products for
the 193 nanometer technology node, as well as those for 300 millimeter
TWINSCAN(TM) systems.
Our sales level in 2002 was influenced by the accounting treatment of
machines previously designated as "new technology systems" (see "--Critical
Accounting Policies"). With the installed base of such systems at 70 units as
of December 31, 2002, ASML has established a track record of successful
installations and decreased time spans between shipment and full installation
at customer sites, enabling these systems to be designated as "proven
technology." This changes the timing of revenue recognition from customer sign
off (full acceptance) to system shipment. Accordingly, EUR 138 million (13
systems) of revenues were recognized in 2002 that were deferred as of December
31, 2001. If the current accounting treatment on these systems had been
applied in 2001, this would have resulted in EUR 138 million of additional
sales in 2001 and EUR 138 million lower sales in 2002.
Service sales showed a 14 percent decrease from EUR 254 million in
2001 to EUR 218 million in 2002. This decrease is mainly due to an increase in
the number of customers that opted for in-house servicing instead of external
servicing. The decrease in service sales was partly offset by the expiration
of warranties relating to the high number of systems shipped in 2000 and 2001.
Service sales include revenues from the continuing service agreements within
our former Track operations as we have chosen to continue to serve existing
customers for which we have warranty or other service obligations.
For 2003, we cannot give a forecast of our expected level of sales
due to an uncertain semiconductor investment climate and an increasingly
volatile order backlog.
Total net sales for 2001 and 2002 include EUR 19 million in both
years relating to the sale of 17 and 22 pre-owned systems, respectively. These
systems were reacquired from existing customers and then resold to other
customers utilizing these systems in areas requiring the less critical
resolution capabilities provided by these machines. We plan to engage in
similar repurchase and resale transactions in the future; however, we do not
anticipate that the impact of those transactions will be significant. The
increase in the number of pre-owned systems sold was primarily due to our
expanding market share in China.
Gross profit as a percentage of net sales increased from 2.0 percent
in 2001 to 23.9 percent in 2002. Excluding restructuring costs, the overall
lithography gross profit percentage in 2001 was 30.6 percent. Net of
21
restructuring costs, therefore, total gross profit as a percentage of sales
decreased by 6.7 percent. This decrease was mainly caused by provisions for
slow moving inventory of EUR 78.5 million in the second half of 2002.
Excluding these provisions, the margin decline would have been 5.0 percent.
This decrease is attributable to technical development credits (see Notes 1
and 16 to our Consolidated Financial Statements) that have to be repaid in 2003
to Netherlands granting authorities (2.0 percent negative impact on our
margin). Furthermore, gross margin was also negatively affected (5.0 percent)
by lower profit margin generated by new technologies at the beginning of their
product life cycle. We shipped significantly more of these systems in 2002
compared with 2001. ASML also suffered from price pressure, mainly on 200
millimeter systems, that negatively affected margin by 2.0 percent. Finally,
the margin was affected positively by 3.0 percent by lower purchase prices for
parts and components, of which 0.5 percent partly was attributable to currency
effects relating to the strengthening of the euro versus the U.S. dollar. In
comparison with 2001, the utilization in the factory increased, resulting in a
one percent margin increase.
Additionally, the gross profit on service sales decreased to 7.3
percent in 2002 from 17.4 percent in 2001. Excluding additional provisions for
obsolete service parts and training system write-downs of EUR 28 million, the
margin would have been 20.2 percent, an increase of 2.8 percent. The margin
increased as spare parts volume was flat year-to-year, because labor costs
(which contribute less to margins) constituted a lower portion of revenue
during 2002.
Lithography order backlog
In 2002, we started the year with an order backlog of 117 systems and
orders for delivery of 255 systems were received in 2002. Combined with 205
system sales and 64 order cancellations or push-outs beyond twelve months,
this resulted in an order backlog of 103 systems as of December 31, 2002.
Systems sales in 2002 include 13 systems delivered in 2001 for which revenue
was recognized in 2002. The total value of the backlog as of December 31, 2002
amounts to EUR 1.08 billion, compared with backlog of approximately EUR 1.16
billion as of December 31, 2001.
Research and development
Research and development costs. Research and development costs
decreased from EUR 347 million (21.9 percent of total net sales) in 2001 to
EUR 324 million (16.6 percent of total net sales) in 2002 as a result of more
cost-efficient programs, mainly resulting from the 2001 restructuring. The
level of research and development expenditures reflects our continuing effort
to introduce several leading edge lithography products for 193 nanometer
applications and the newest versions of the TWINSCAN(TM) platform, combined
with continued investments in next generation 157 nanometer lithography
solutions and EUV and the 850, 248 nanometer high numerical aperture (NA)
program.
We intend to maintain our research and development expenditure level
relative to sales despite the industry's continuing downturn and we foresee
further long-term growth in research and development, staffing and other
costs. For 2003, we expect a decrease in research and development expenditures
as a result of our recently effectuated business restructuring plan.
Research and development credits. Research and development credits
increased from EUR 16 million in 2001 to EUR 26 million in 2002 due to the
increased volume for research and development expenditures that qualified for
credits. Included in the 2002 credits is a postponed credit (EUR 3.5 million)
on 2001 expenditures that was subject to certain criteria that were only
achieved in 2002. We expect the level of credits in 2003 to be less than in
2002, although the precise amount remains subject to further negotiation with
the relevant granting authorities.
Selling, general and administrative costs
Selling, general and administrative costs increased by 7.0 percent
from EUR 246 million in 2001 to EUR 263 million in 2002, mainly as a result of
increased legal fees associated with patent infringement cases. Excluding
these legal costs, ASML would have recorded a decrease in selling, general and
administrative costs of approximately EUR 18 million. This decrease is due to
cost reduction programs during 2002, as well the positive effects of the 2001
restructuring. Selling, general and administrative costs decreased as a
percentage of net sales from 15.5 percent in 2001 to 13.4 percent in 2002.
22
Net interest expense
During 2001, net interest expense was (0.5) percent of net sales,
compared with (1.9) percent of net sales in 2002, due to interest payments on
our 5.75 percent Convertible Subordinated Notes due 2006 issued in October
2001, offset by a lower balance of cash and cash equivalents and lower average
short-term interest rates.
Income taxes
Income taxes represented 30.1 and 32.7 percent of income before taxes
in 2001 and 2002, respectively. This increase results from a change in
distribution of pre-tax loss between geographical areas. See Note 17 to our
Consolidated Financial Statements.
Discontinued operations
Results from discontinued operations comprise the results of our
Thermal business, which we plan to sell, and our Track business that we
discontinued in December 2002. Our decision to discontinue these businesses
was the result of the continued downturn in the semiconductor market, which
has led to significant losses in these businesses. Substantial future
investments in these businesses would have been required to achieve a positive
contribution to our future financial results.
Our Thermal business incurred a net loss of EUR 61 million in 2002
compared to a net loss of EUR 43 million in 2001, mainly due to the industry's
severe downturn. We are currently negotiating the sale of this business with
potential buyers. We are not in a position to estimate potential sales price
of the Thermal business, any additional charges associated with the
disposition, or the impact of the sale on our future financial results and
financial position, but we do not expect that a loss will be incurred as a
result of that sale.
Our Track business incurred a net loss of EUR 59 million in 2002
compared to a net loss of EUR 21 million in 2001, including total estimated
exit costs of EUR 47 million. These exit costs include asset impairments,
inventory write-downs, purchase and other commitment settlements and employee
termination costs. The number of employees to be laid off under the plan to
discontinue our Track business is expected to be 214 (including temporary
employees).
Results of operations from continuing operations in 2001 compared with 2000
During 2001, the semiconductor industry faced the start of the worst
downturn in its history. Our results of operations for 2001 were significantly
affected by a decrease in sales and charges we incurred in connection with our
restructuring plan, as described below.
Restructuring
In October 2001, ASML implemented a restructuring plan including
workforce reductions, fixed asset write-offs and building closure costs, as
well as inventory write-offs due to discontinued product lines. The
restructuring costs amounted to EUR 403 million, of which EUR 400 million was
included in cost of sales. The number of employees laid off pursuant to the
restructuring plan as of December 31, 2002, was approximately 900 (including
temporary employees). Furthermore, ASML incurred additional merger related
expenses and other additional charges of:
o EUR 41 million for merger and acquisition expenses; and
o EUR 56 million for additional reserves for obsolete inventory.
Consolidated sales
Consolidated net sales were EUR 1,589 million in 2001 compared to EUR
2,673 million in 2000. More than 50 percent of the top 20 IC manufacturers
were ASML customers as of December 31, 2001. In 2001, sales to one customer
accounted for EUR 202 million, or 12.7 percent of net sales. In 2000, sales to
two customers accounted for EUR 483 million and EUR 415 million or 18.1 and
15.5 percent of net sales, respectively.
23
Sales and gross profit
The following table shows a summary of sales and gross profit on a
semi-annual basis for the years ended December 31, 2001 and 2000:
Year ended December 31 2000 2002
--------------------------------------------------- -------------------------- --------------------------
First half Second half First half Second half
year year year year
---------- ----------- ---------- -----------
Total units recognized.............................. 207 248 120 77
Net sales from continuing operations (EUR million).. 1,181 1,492 831 759
Gross profit on sales of new systems from
continuing operations (% of sales)............... 41.5 43.6 30.4 (42.7)
Overall gross profit (% of sales) from continuing
operations....................................... 39.9 42.2 29.7 (28.4)
Average unit sales price for new systems
(EUR million).................................... 5.7 5.9 5.9 8.1
Net sales from continuing operations consist of revenue from sales of
wafer steppers and Step & Scan systems, sales of equipment and options, and
revenue from service. Sales of equipment and options may occur in conjunction
with the initial sale of a system or after its installation.
Total net sales for lithography equipment decreased from EUR 2,673
million in 2000 to EUR 1,589 million in 2001, a decrease of EUR 1,084 million
or 40.6 percent. The decrease in sales was caused by a decrease in shipments
from 455 units in 2000 to 197 units in 2001. This decrease was partly offset
by an increase (17.9 percent) in the average unit sales price for new systems.
The 56.7 percent decrease in the number of systems shipped was a result of the
worst year-on-year decline in sales in the history of the semiconductor
industry. The 17.9 percent increase in the average unit sales price of new
systems reflected the introduction and shipment of ASML's most advanced
technology products in 2001. These products include the leading edge, high
numerical aperture lens products for the 248-nanometer and 193-nanometer
technology node, as well as those for 300 millimeter systems.
The decrease in total net sales in 2001 includes an increase in net
service sales of 21.0 percent from EUR 210 million in 2000 to EUR 254 million
in 2001, reflecting the continued increase in the size of the installed base
of ASML's lithography tools at customer production facilities. Total net sales
for 2000 and 2001 include EUR 67 million and EUR 19 million, respectively,
relating to the sale of 53 and 17 pre-owned systems. These systems were
reacquired from existing customers and then resold to other customers
utilizing these systems in areas requiring the less critical resolution
capabilities provided by these machines.
Gross profit as a percentage of net sales decreased from 41.2
percent in 2000 to 2.0 percent in 2001. Excluding the gross profit service
sales, gross profit on system sales, including field upgrades, decreased from
42.9 percent to (1.0) percent. The decrease in gross profit as a percentage of
net sales was principally the result of costs associated with the
restructuring plan, under-utilization of production facilities and pressure on
discount levels. Excluding the restructuring costs for inventory write-offs,
costs for factory closure and severance payments, the overall lithography
gross profit as a percentage of net sales was 30.6 percent in 2001, compared
to 41.2 percent in 2000.
Gross profit as a percentage of service sales decreased to 17.4
percent in 2001 from 20.8 percent in 2000, due to provisions for excess and
obsolete spare parts.
Research and development
Research and development costs. Research and development costs
increased from EUR 327 million (12.2 percent of total net sales) in 2000 to
EUR 347 million (21.9 percent of total net sales) in 2001. The increase in
research and development costs reflected our continuing effort to introduce
several leading edge lithography products for 248 nanometer and 193 nanometer
applications and the newest versions of the TWINSCAN(TM) platform, combined
with continued investments in next generation 157 nanometer lithography
solutions and EUV.
24
Research and development credits. Research and development credits
decreased from EUR 25 million in 2000 to EUR 16 million in 2001, as a result
of decreased research and development efforts qualifying for credits.
Selling, general and administrative costs
Selling, general and administrative costs decreased by 4.1 percent
from EUR 257 million in 2000 to EUR 246 million in 2001 as a result of
accelerated cost reduction measures, including workforce reduction activities.
Because net sales decreased by 40.5 percent, selling, general and
administrative costs increased as a percentage of net sales from 9.6 percent
in 2000 to 15.5 percent in 2001.
Net Interest Expense
During 2001, net interest expense decreased from 0.5 percent of net
sales in 2000 to (0.5) percent of net sales in 2001, primarily due to a lower
average balance of cash and cash equivalents and lower average short term
interest rates. In combination with the issuance of the 5.75 percent
Convertible Subordinated Notes due 2006 in October 2001, this resulted in a
net interest expense in 2001.
Income taxes
Income taxes represented 30.4 percent and 30.1 percent of income
before taxes in 2000 and 2001, respectively. See Note 17 to our Consolidated
Financial Statements.
Discontinued operations
Results from discontinued operations comprise the results of the
Thermal business, which we plan to sell, and the Track business that we
discontinued in December 2002.
Our Thermal business incurred a net loss of EUR 43 million in 2001,
compared to a net loss of EUR 1 million for 2000. The net loss in 2001
includes non-recurring charges related to the integration between SVG and ASML
and the 2001 restructuring program. Thermal sales amounted to EUR 204 million,
including EUR 52 million for service activities, falling from EUR 302 million
in 2000. The decrease in sales was primarily caused by a decrease in system
shipments from 249 systems in 2000 to 111 systems in 2001.
Our Track business incurred a net loss of EUR 21 million for 2001,
compared to EUR 2 million for 2000. The 2001 results include non-recurring
charges related to the integration between SVG and ASML and the 2001
restructuring program of EUR 7 million.
Foreign exchange management
We use the euro as our reporting currency in our Consolidated
Financial Statements. We are involved in transactions in currencies that
differ from our reporting currency. We have invested in foreign entities, and
as such have translation exposure on the valuation of our foreign currency
denominated investments. We actively manage our exposure to foreign exchange
risks. Further details on our foreign exchange management are disclosed in
Note 5 to our Consolidated Financial Statements. See also Item 3.D.--"Risk
Factors."
B. Liquidity and Capital Resources
Financial Condition, Liquidity and Capital Resources
The following discussion and analysis of financial condition should
also be viewed in the context of the risks affecting our business strategy,
described in Item 3.D.--"Risk Factors."
ASML's balance of cash and cash equivalents amounted to EUR 911
million and EUR 669 million as of December 31, 2001 and 2002, respectively.
Net cash flows used by operating activities were EUR 54 million in 2002
compared to EUR 200 million in 2001. The use of cash in operating activities
during 2002 mainly reflects our net operating loss.
Net operating cash flows in 2002 include approximately EUR 36 million
of cash expenditure with respect to the restructuring program initiated in
2001 (see Note 3 to our Consolidated Financial Statements). We expect to pay
the remaining liability of EUR 12 million in 2003.
25
The increase in net accounts receivable of EUR 46 million during 2002
from EUR 511 million to EUR 557 million reflects increased sales levels and
especially the increased number of systems shipped in the fourth quarter of
2002, with higher ASPs. ASML's ratio of average accounts receivable to total
net sales was 41.2 percent and 27.2 percent in 2001 and 2002, respectively.
This decrease reflects our continuing efforts on collections. The 2001 ratio
furthermore included the effects of high sales volumes in 2000, which still
affected the balance of accounts receivable balance during 2001.
We generally ship our systems on payment terms requiring 90 to 100
percent of the sales price to be paid within 30 days after shipment. The
remainder of the purchase price for our systems is due within 90 days after
shipment or within 30 days after completion of the installation process and
subsequent customer testing.
Gross inventories decreased by EUR 263 million from December 31, 2002
to December 31, 2001 as a result of scrapping of inventories for discontinued
product lines (mainly spare parts) partly offset by an increase in finished
products. While showing a net in use of cash in gross inventories in 2002, the
second half of the year resulted in cash proceeds as a result of our improved
working capital management program launched in the second half of 2002. We
intend to further strengthen our inventory control in 2003.
The provision for obsolescence decreased from EUR 500 million to EUR
285 million, principally reflecting scrapping and disposal of inventories
related to discontinued product lines, partially offset by an additional
provision relating to obsolete systems that was recognized in light of the
prolonged industry downturn.
In 2001 and 2002, ASML paid EUR 74 million and EUR 4 million in
taxes, respectively. As of December 31, 2002, ASML had current tax assets of
EUR 179 million. These primarily consisted of Netherlands tax assets.
Net cash used in investing activities was EUR 326 million in 2001 and
EUR 80 million in 2002. The 2001 figure reflected the further expansion of
production facilities during that year as well as significant expenditure in
own use equipment (e.g., prototypes, training systems, and demonstration
systems), to support sales, manufacturing and demonstration capabilities
relating to new 300 millimeter product lines. This effort in 2001, in
combination with cost reduction programs in 2002, led to significantly lower
investing activities in 2002.
Proceeds from financing activities in 2002 amounted to EUR 21
million. The 2002 amount primarily reflects EUR 27 million in proceeds from
the exercise of stock options and EUR 5 million repayment of long term debts.
In 2001, net cash provided by financing amounted to EUR 664 million mainly
reflecting the issuance of USD 575 million (EUR 638 million) of 5.75 percent
Convertible Subordinated Notes due 2006.
On December 31, 2002, our principal sources of liquidity consisted of
EUR 669 million of cash and cash equivalents, and EUR 288 million of available
credit facilities. For further details regarding our credit facilities, see
Note 12 to our Consolidated Financial Statements. In addition to cash and
available credit facilities, we may from time to time raise additional capital
in debt and equity markets.
We believe that our operating cash flows and working capital,
together with existing cash balances, the availability of existing credit
facilities, and improved working capital management will be sufficient to
finance our scheduled capital expenditures and to fund our working capital for
2003.
In November 2004, we have repayment obligations on our 4.25 percent
Convertible Subordinated Notes due 2004, amounting to USD 520 million,
assuming no conversions occur. We have additional repayment obligations in
2006, amounting to USD 575 million, on our 5.75 percent Convertible
Subordinated Notes due 2006 issued in October 2001, assuming no conversions
occur. We intend to primarily fund our future repayment obligations with cash
generated through operations. In this respect, we launched a working capital
improvement program in 2002, focused on inventory control, early collection of
receivables and effective management of payments, in order to strengthen our
cash position. The description of our long-term debt, lines of credit and
borrowing arrangements is provided in Note 12 to our Consolidated Financial
Statements. See also Item 3.D.--"Risk Factors."
Our contractual obligations and commercial commitments are disclosed
in further detail in Note 12 to our Consolidated Financial Statements.
A discussion of our funding, treasury policies and currencies in
which cash and cash equivalents are held is included by reference to Note 5 to
our Consolidated Financial Statements.
26
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Intangible
Assets."
SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. The adoption of this standard did not
impact our financial position, results of operations or cash flows.
SFAS No. 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the
accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 provides that intangible assets with finite useful
lives be amortized and that goodwill and intangible assets with indefinite
lives not be amortized, but instead tested at least annually for impairment.
The adoption of SFAS No. 142 as of January 1, 2002, did not have an impact on
our financial position, results of operations or cash flows, since we did not
have any goodwill or intangible assets with indefinite lives.
In August 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses the
impairment or disposal of long-lived assets and supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," and Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations, for a disposal of a segment of a business." SFAS
144 is effective for fiscal years beginning after December 15, 2001, with
earlier application encouraged. ASML adopted SFAS 144 as of January 1, 2002.
We performed an assessment of our long-lived assets within the Track and
Thermal businesses and recorded impairment losses of EUR 11 million for 2002,
which are included in discontinued operations. Furthermore, ASML assessed the
valuation of fixed assets for continuing operations, which lead to an
impairment charge of EUR 20 million for 2002 that has been recognized in cost
of sales of continuing operations.
Under SFAS 144, a component of a business is reported in discontinued
operations if its operations and cash flows will be, or have been, eliminated
from a company's ongoing operations and the company will not have any
significant continuing involvement in such operations. Accordingly, we have
reported our Thermal and Track businesses as discontinued operations, details
of which are provided in Note 2 to our Consolidated Financial Statements.
In June 2001, FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 establishes accounting standards for the recognition
and measurement of legal obligations associated with the retirement of
tangible long-lived assets and requires recognition of a liability for an
asset retirement obligation in the period in which it is incurred. This
statement is effective for fiscal years beginning after June 15, 2002. We do
not anticipate that the adoption of SFAS 143 will have a material impact on
our financial statements.
In April, 2002, the FASB issued SFAS 145, "Rescission of SFAS No. 4,
44, 64, Amendment of SFAS 13, and Technical Corrections." SFAS 145 applies to
fiscal years beginning after May 15, 2002 and certain transactions entered into
after May 15, 2002. We did not enter into transactions that are within the
scope of SFAS 145 after May 15, 2002 and do not expect the adoption of SFAS
145 to have a material impact on our financial statements.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement defines the
accounting and reporting for costs associated with exit or disposal activities
and is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. SFAS 146 supersedes
Emerging Issues Task Force (EITF) issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity." We
will adopt SFAS 146 as of January 1, 2003, and we do not expect the adoption
of the statement to have a significant impact on our financial position and
results of operations.
In December 2002, the FASB Issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure and Amendment of FASB
Statement No. 123," ("SFAS 148"). SFAS 148 amends FASB Statement No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123") and provides
alternative methods for accounting for a change by registrants to the fair
value method of accounting for stock-based compensation. Additionally, SFAS
148 amends the disclosure requirements of SFAS 123. The statement is effective
for fiscal years beginning after December 15, 2002, and disclosures are
effective for the first fiscal
27
quarter beginning after December 15, 2002. We have not yet determined the
impact of the adoption of SFAS 148 on our results of operations or financial
position.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." The disclosure
provisions of FIN 45 are effective for financial statements of interim or
annual periods that end after December 15, 2002. The provisions for initial
recognition and measurement are effective on a prospective basis for
guarantees that are issued or modified after December 31, 2002, irrespective
of a guarantor's year-end. We have not yet determined the impact of the
adoption of FIN 45 on our results of operations or financial position.
In November 2002, the EITF 00-21 "Revenue Arrangements with Multiple
Deliverables" was released. The provisions of EITF Issue No. 00-21 will apply
to revenue arrangements entered into in fiscal periods beginning after June
15, 2003. We are currently evaluating the effect that the adoption of EITF
Issue No. 00-21 will have on our results of operations and financial
condition.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46") addressing
consolidation by business enterprises of variable interest entities, which
include various special purpose vehicles and off-balance sheet structures.
FIN 46 requires consolidation where there is a controlling financial interest
in a variable interest entity or where the variable interest entity does not
have sufficient equity at risk to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies to variable
interest entities created after January 31, 2003, and applies in the first
year or interim period beginning after June 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. It is reasonably possible that upon adoption of FIN
46, certain variable interest entities could be required to be included in our
financial statements.
We assessed and will continue to evaluate the impact of this
interpretation on our financial condition and results of operations. Our
preliminary assessment has indicated that we are party to a transaction
involving a variable interest entity relating to the lessor of the Veldhoven
headquarters building that is under construction, together with adjacent
office space.
We have a commitment to fund the lessor with a subordinated loan of
EUR 5.4 million at the inception of the lease of our headquarters building,
expected mid-2003. The lease of the adjacent office space commenced July 1,
2002. Both leases will expire in 2018. We have an option to purchase the
property, according to a predetermined price scheme, throughout the term of
the lease. Total assets of the lessor, upon completion of the headquarters
building, will amount to approximately EUR 54 million and are funded through
third party equity, third party loans and the subordinated loan provided by
ASML. We estimate that our maximum exposure to loss is the amount of the
subordinated loan issued to the lessor of EUR 5.4 million.
We are currently in the process of analyzing whether ASML is the
primary beneficiary in the lessor entity and may as such be required to
consolidate the specific assets and liabilities of the lessor in ASML's third
quarter 2003 quarterly balance sheet.
In 2002, Netherlands legislation was adopted that requires full
disclosure of individual management remuneration. The legislation became
effective for financial years starting on or after January 1, 2002. We have
included the required disclosures in Note 19 to our Consolidated Financial
Statements.
C. Research and Development, Patents and Licenses etc.
Research and Development
See Item 4.B.--"Information on the Company--Business
Overview--Research and Development" and Item 5.A.--"Operating and Financial
Review and Prospects--Operating Results".
Intellectual Property Matters
See Item 3.D.--"Risk Factors--Defending Against Intellectual Property
Claims by Others Could Harm Our Business" and Item 4.B.--"Information on the
Company--Business Overview--Intellectual Property".
28
D. Trend Information
In December 2002, we announced measures to contain costs, including
the concentration on our lithography business. As a result, we plan to divest
our Thermal business and we terminated our activities in the Track business.
We are currently in the process of selling our Thermal business. As
the process is still in its early stages, the effect of the eventual
transaction on our future income and financial position cannot be estimated.
The termination of our Track business has resulted in an exit plan,
which includes workforce reduction, fixed asset impairments and inventory
write-offs due to discontinued product lines. The exit plan contemplates the
disposal of remaining assets of the Track business. We will continue to serve
our existing customers for which we have warranty or other service
obligations. As such, customer support related to our Track business will not
be part of discontinued operations.
In addition to the discontinuance of the Thermal and Track
businesses, our lithography activity will also be downsized through worldwide
workforce reductions.
We expect average selling price of our units to increase in the
future as our sales include an increasing percentage of latest technology
products. However, we expect the average selling price to increase at a lower
rate than in previous years.
See Item 5.A.--"Operating and Financial Review and
Prospects--Lithography order backlog" for a discussion of our backlog as of
December 31, 2002.
ITEM 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The members of our Supervisory Board and our senior management (members of our
Board of Management) are as follows:
Name Title Date of Birth Member Since Term Expires
---- ----- ------------- ------------ ------------
Henk Bodt Chairman of the Supervisory Board April 30, 1938 January 1995 2004
and Member of the Audit and
Remuneration Committees
Jan A. Dekker Member of the Supervisory Board and May 10, 1939 April 1997 2003
Member of the Audit Committee
Peter H. Grassmann Member of the Supervisory Board November 21, 1939 April 1996 2003
Syb Bergsma Member of the Supervisory Board and October 6, 1936 April 1998 2004
Member of the Audit and
Remuneration Committees
J.W.B. Westerburgen Member of the Supervisory Board and June 24, 1942 March 2002 2005
Member of the Remuneration Committee
Michael J. Attardo Member of the Supervisory Board and April 12, 1941 May 2001 2004
Member of the Remuneration Committee
Doug J. Dunn President and Chief Executive May 5, 1944 April 1999 n.a.*
Officer and Chairman of the Board
of Management
29
Stuart K. McIntosh Executive Vice President August 31, 1944 April 2001 n.a.*
Operations, President of
Lithography and Member of the Board
of Management
Peter T.F.M. Wennink Executive Vice President, Chief May 30, 1957 July 1999 n.a.*
Financial Officer and Member of
the Board of Management
Martin A. van den Brink Executive Vice President Marketing May 21, 1957 July 1999 n.a.*
& Technology and Member of the
Board of Management
David P. Chavoustie Executive Vice President Sales and May 17, 1943 April 2000 n.a.*
Member of the Board of Management
______________
* There are no specified terms for members of the Board of Management.
Director and Officer Biographies
Henk Bodt. Mr. Bodt was appointed as Chairman of our Supervisory
Board in 1995. Mr. Bodt is a former Executive Vice President of Philips. In
addition to other positions, including Chairman and Chief Executive Officer of
the Consumer Electronics Division, he also served on the Board of Management
of Philips and on the Group Management Committee of Philips. He currently
serves on the Supervisory Boards of DSM N.V., Delft Instruments N.V. and
Neo-Post SA.
Jan A. Dekker. Mr. Dekker has served on our Supervisory Board since
1997. Mr. Dekker also serves currently as the Chief Executive Officer of TNO
and on the Supervisory Boards of Gamma Holding N.V. and Koninklijke BAM-NBM
N.V.
Peter H. Grassmann. Mr. Grassmann has served on our Supervisory Board
since 1996. Mr. Grassmann is a former President and Chief Executive Officer of
Zeiss. He currently serves on the Supervisory Boards of Gambro B.V., Aradex
AG, Febit AG, GAP AG, and Genescan AG. He is a member of the Senate of the Max
Planck Society.
Syb Bergsma. Mr. Bergsma has served as a member of our Supervisory
Board since 1998. Mr. Bergsma is a former Executive Vice President Financial
Affairs of Akzo Nobel N.V. Mr. Bergsma serves currently as the Chairman of the
Supervisory Boards of UPM Holding B.V., Generali Verzekeringsgroep N.V., and
Van der Moolen Holding N.V. Mr. Bersgma also serves on the Supervisory Boards
of European Assets Trust N.V. In addition, Mr. Bergsma serves on the Board of
External Advisors of Ernst & Young.
J.W.B. Westerburgen. Mr. Westerburgen was appointed to our
Supervisory Board in March 2002. Mr. Westerburgen has extensive experience in
the field of corporate law and tax. Mr. Westerburgen currently serves as a
member of the Supervisory Boards of Gamma Holding N.V. and Unilever Nederland
B.V., and is also a member of the Association Aegon. In addition, Mr.
Westerburgen is former Company Secretary and Head of Tax of Unilever, and a
former member of the Committee on Corporate Governance in the Netherlands.
Michael J. Attardo. Mr. Attardo was appointed to our Supervisory
Board during 2001. He is the former President and CEO of IBM Microelectronics.
Doug J. Dunn. Mr. Dunn was appointed to our Board of Management in
1999 and has served as our President, Chief Executive Officer and Chairman of
the Board of Management since January 2000. Prior to joining the Board of
Management, Mr. Dunn served as Vice-Chairman of our Supervisory Board.
Previously, Mr. Dunn also served on the Board of Management of Philips as CEO
of the Consumer Electronics Division, as a member of the Group Management
Committee of Philips and as a Chairman and CEO of the Management Committee of
the Philips Semiconductors Division and, from 1969 to 1980, held numerous
positions at
30
Motorola and the General Electric Company. Mr. Dunn is currently
on the board of ARM Holdings PLC and Sendo Holdings PLC and on the Supervisory
Board of STMicroelectronics N.V.
Stuart K. McIntosh. Mr. McIntosh was appointed as Executive Vice
President Operations and President Lithography Division during 2000 and was
appointed as a member of our Board of Management effective April 1, 2001.
Prior to that he served as the Executive Vice President and Chief Operating
Officer of Philips Semiconductors. He also serves on the Advisory Board of
SEMI North America.
Peter T.F.M. Wennink. Mr. Wennink was appointed as Executive Vice
President and Chief Financial Officer of ASML in 1999. Mr. Wennink has an
extensive background in finance and accounting. Prior to his employment with
ASML, Mr. Wennink worked as a partner at Deloitte & Touche, specializing in
the high technology industry with an emphasis on the semiconductor equipment
industry. Mr. Wennink is a member of the Netherlands Institute of Registered
Accountants.
Martin A. van den Brink. Mr. Van den Brink was appointed as Executive
Vice President Marketing & Technology during 1999. Before then, he served as
Vice President Technology since 1995. Mr. Van den Brink was appointed as a
member of our Board of Management in April 1999.
David P. Chavoustie. Mr. Chavoustie has served as Executive Vice
President Sales since 1998. He was appointed as a member of our Board of
Management in April 2000. Before then, he served as Vice President Worldwide
Sales of Vantis Corporation and as Vice President/General Manager of the
Embedded Processes Division of Advanced Micro Devices.
B. Compensation
For details on compensation paid or accrued for our executive
officers, including the members of the Board of Management of ASML, and the
compensation for the members of the Supervisory Board, see Note 19 to our
Consolidated Financial Statements.
For details on options granted to, and pension benefits of, the
members of the Board of Management, see Note 19 to our Consolidated Financial
Statements.
Profit-sharing plan
For details on our profit sharing plans, see Note 13 to our
Consolidated Financial Statements.
C. Board Practices
We endorse the importance of good corporate governance, in which
independence, accountability and transparency are the most significant
elements. Within the framework of corporate governance, it is important that a
relationship of trust exists between the Board of Management and the
Supervisory Board on the one hand and shareholders on the other.
Apart from the exchange of ideas at the General Meeting of
Shareholders, other important forms of communication are the annual and
semi-annual financial results. In addition, we pursue a policy of active
communication between our Investor Relations department and our shareholders.
Starting in 2003, we will report financial results on a quarterly basis. Our
corporate governance structure is intended to:
o provide shareholders with regular, reliable and relevant
transparent information regarding our activities, structure,
financial condition, performance and other information,
including information on our social, ethical and environmental
records and policies;
o apply high quality standards for disclosure, accounting and
auditing; and
o apply stringent rules with regard to insider securities trading.
ASML is incorporated under Netherlands law and has a two-tier board
structure where independent, non-executive members serve on the Supervisory
Board, which in turn supervises and advises the members of the Board of
Management in performing their management tasks. Supervisory Board members are
prohibited from serving as officers or employees of ASML, and members of the
Board of Management cannot serve on the Supervisory Board.
31
Responsibility for the management of ASML lies with the Board of
Management. The Supervisory Board monitors the Board of Management and the
general course of corporate affairs. The Board of Management has a duty to
keep the Supervisory Board informed, consult with the Supervisory Board on
important matters and submit certain important decisions to the Supervisory
Board for its prior approval.
Members of the Board of Management are appointed by the Supervisory
Board, and serve until voluntary retirement, or suspension or dismissal by the
Supervisory Board, in the case of dismissal, after consultation with the
General Meeting of Shareholders. Appointments to the Supervisory Board are
made by the Supervisory Board itself, subject to certain rights of objection
retained by the General Meeting of Shareholders and the Works Council. Members
of the Supervisory Board generally serve for a term of four years from the
date of their appointment and may be re-appointed by, and serve at the
discretion of, the Supervisory Board. The Supervisory Board has a Remuneration
Committee and an Audit Committee.
Audit Committee
The Audit Committee is composed of three members of the Supervisory
Board. Our external auditor and our Chief Financial Officer may also attend
the meetings of the Audit Committee.
The Audit Committee verifies the independence of the external auditor
of our financial statements and determines whether to recommend to the
Supervisory Board to accept the audited financial statements. Prior approval
of the Audit Committee is required for any significant non-audit services to
be rendered by the audit firm. The Audit Committee reviews the audited annual
consolidated financial statements as well as the interim consolidated
financial statements. The current members of our Audit Committee are Henk
Bodt, Syb Bergsma (chairman) and Jan Dekker. The members of the Audit
Committee are all independent, non-executive members of the Supervisory Board.
Remuneration Committee
The Remuneration Committee recommends, reviews and authorizes
specific compensation and benefits levels for Board of Management members as
well as for ASML officers. Furthermore, the Remuneration Committee reviews and
authorizes the general compensation and benefits positioning and structures
for ASML. The current members of our Remuneration Committee are Henk Bodt
(chairman), Syb Bergsma, Jos Westerburgen and Michael Attardo.
Disclosure Committee
In 2002, we established a Disclosure Committee, designed to help
senior management, and the Chief Executive Officer and Chief Financial
Officer, in particular, in the maintenance and evaluation of disclosure
controls and procedures. The Disclosure Committee gathers all relevant
financial and non-financial information and assesses materiality, timeliness
and necessity for disclosure of such information. The Disclosure Committee
comprises the Chief Operations Officer, the Corporate Controller, the
Corporate Chief Accountant, the General Counsel, the Director of Investor
Relations, the Principal Risk Manager, the Intellectual Property Counsel and
the Vice President of Communications. Furthermore, members of the Disclosure
Committee are in close contact with our external legal counsel and our
external auditor.
The Disclosure Committee reports to the Board of Management, in
particular to our Chief Executive Officer and Chief Financial Officer. The
Board of Management has also re-emphasized the importance of internal controls
within ASML, pursuing continuous improvement of internal control procedures
and reporting.
We believe that the establishment of the Disclosure Committee and
additional actions taken for further improvement of disclosure and internal
controls comply with the requirements of the Sarbanes-Oxley Act of 2002 (the
"Act") and recent regulations promulgated by the Commission under the Act.
D. Employees
As of December 31, 2002, we had 5,971 employees in continued
operations, including temporary contract employees, employed primarily in
product development activities at our headquarters in Veldhoven. As of
December 31, 2000, and December 31, 2001, the total number of employees in
continued operations was
32
6,628 and 6,039, respectively. For a more detailed description of employee
information, see Note 13 and Note 20 to our Consolidated Financial Statements,
which are incorporated herein by reference. We rely on our ability to vary
the number of temporary employees on our roll to respond to fluctuating market
demand for our products.
Our future success will depend on our ability to attract, train,
retain and motivate highly qualified employees, who are in great demand. We
are particularly reliant for our continued success on the services of several
key employees, including a number of systems development specialists with
advanced university qualifications in engineering, optics and computing.
With the decision to discontinue our Track business and to sell our
Thermal business, we started reducing our work force at the end of 2002.
Furthermore, to manage the effects of the industry's most prolonged downturn
during 2002, we intend to reduce our lithography-related work force by
approximately 700 positions worldwide (11.7 percent). In combination with the
effects of discontinued operations, this will result in an expected total work
force of approximately 5,300 by the end of the first half of 2003.
See Note 20 to our Consolidated Financial Statements for a breakdown
of our employees by segment and function.
E. Share Ownership
Information with respect to our Ordinary Share Option Schemes is
included in Note 13 to our Consolidated Financial Statements, which are
incorporated herein by reference.
ITEM 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth the total number of ordinary shares
owned by each shareholder whose ownership of ordinary shares exceeds 5 percent
of the ordinary shares issued and outstanding, as well as the ordinary shares
owned by the members of the Supervisory Board and senior management (which
includes those persons specified in Item 6--"Directors, Senior Management and
Employees"), as a group, as of March 3, 2003:
Identity of Person or Group Amount Owned Percent of Class
--------------------------- ------------ ----------------
Capital Group International, Inc.(1)........................... 56,491,230 11.7%
FMR Corp.(2)................................................... 58,304,695 12.1%
Royal Philips Electronics N.V. ("Philips")(3).................. 27,250,000 5.7%
Members of ASML's Supervisory Board and senior
management, as a group (7 persons)(4).......................... 1,663,952 *
____________________________
* Less than 1 percent.
(1) Based solely on the Schedule 13-G/A jointly filed by Capital Group
International, Inc. and Capital Guardian Trust Company with the
Commission on February 14, 2003.
(2) Based solely on the Schedule 13-G/A filed by FMR Corp. with the
Commission on February 13, 2003.
(3) Based solely on the Schedule 13-G filed by Philips with the Commission
on February 10, 2003.
(4) Five members of our Board of Management own 1,614,260 options to
purchase ASML shares. See Note 19 to our Consolidated Financial
Statements for information on options held by members of our Board of
Management on an individual basis. Two members of the Supervisory Board
hold 37,722 of our outstanding shares or options on shares. None of the
other members of the Supervisory Board hold any of our outstanding
shares or options on shares.
33
Our major shareholders do not have voting rights different from other
shareholders.
Until our public offering in 1995, in which Philips' ownership was
reduced to approximately 56.6 percent, we were a wholly-owned subsidiary of
Philips. In public offerings in March 1996, February 1997 and June 2000,
Philips' ownership was further reduced to approximately 35.3 percent, 23.9
percent and 7.2 percent, respectively. Philips subsequently lowered its share
ownership to 5.7 percent.
Ordinary shares held in the United States are held primarily in the
form of registered shares ("New York Shares"), issued by Morgan Guaranty Trust
Company, ASML's New York transfer agent and registrar. As of February 20,
2003, approximately 23.3 percent of the total outstanding ordinary shares were
represented by New York Shares issued in the name of 590 holders of record.
Since certain ordinary shares are held by brokers and other nominees these
numbers may not be representative of the actual number of U.S. beneficial
holders or number of New York Shares beneficially held by U.S. persons.
We do not issue share certificates, except for registered New York
Shares. For more information see Item 10.B.--"Memorandum and Articles of
Association."
Obligations of Shareholders to Disclose Holdings under Netherlands Law
The Netherlands' Act on Disclosure of Holdings in Listed Companies
(the "Major Holdings Act") applies to any person or entity that, directly or
indirectly, acquires or disposes of an interest in the voting rights and/or
the capital of a public limited company incorporated under the laws of the
Netherlands that is officially listed on a stock exchange within the European
Union (the "EU"). Disclosure is required when, as a result of an acquisition
or disposal, the percentage of voting rights or capital interest acquired or
disposed of by a person or an entity reaches, exceeds or falls below 5, 10,
25, 50 or 66-2/3 percent. With respect to ASML, the Major Holdings Act would
require any person or entity whose interest in the voting rights and/or
capital of ASML reached, exceeded or fell below those percentage interests to
notify in writing both ASML and the Netherlands Authority for the Financial
Markets (Autoriteit Financiele Markten) immediately after the acquisition or
disposal of the triggering interest in ASML's share capital.
Upon receipt of the notification, ASML is required to disclose the
information, as notified, forthwith to the public by means of an advertisement
in a newspaper distributed throughout the Netherlands. Noncompliance with the
obligations of the Major Holdings Act can lead to criminal prosecution. In
addition, a civil court can issue orders against any person who fails to
notify or incorrectly notifies in accordance with the Major Holdings Act,
including suspension of the voting rights in respect of such person's ordinary
shares.
B. Related Party Transactions
There have been no material transactions during our most recent
fiscal year, nor are there presently any proposed material transactions to
which ASML or any of its subsidiaries was or is a party and in which any
director or officer or any relative or spouse thereof had or will have a
direct or indirect material interest. During our most recent fiscal year,
there has been no, and at present there is no, outstanding indebtedness to
ASML owed or owing by any director or officer of ASML or any association
thereof other than the virtual financing arrangement with respect to share
options described under Note 13 to our Consolidated Financial Statements.
C. Interests of Experts & Counsel
Not applicable
ITEM 8. Financial Information
A. Consolidated Statements and Other Financial Information
See Item 18--"Financial Statements".
34
B. Significant Changes
On December 18, 2002, we announced the proposed divestiture of our
Thermal business, including related customer support activities, and the
termination of our activities in the Track business, except for customer
service obligations under existing contracts. As a result of this decision,
the presentation of our Consolidated Financial Statements and the Notes
thereto have been retroactively adjusted to reflect the effects of the
decision to discontinue these operations. See Note 2 to our Consolidated
Financial Statements.
ITEM 9. The Offer and Listing
A. Listing Details
Our ordinary shares are listed for trading in the form of New York
Shares on the NASDAQ National Market ("NASDAQ") and in the form of registered
shares ("Amsterdam Shares") on the Official Segment of the stock market of
Euronext Amsterdam N.V. ("Euronext Amsterdam"). The principal trading market
of our ordinary shares is Euronext Amsterdam. For more information see Item
10--"Additional Information--B. Memorandum and Articles of Association."
Historical information relating to the ordinary shares contained in
this Annual Report has been adjusted to give retroactive effect to the
two-for-one stock split in 1998 and the three-for-one stock split in April
2000.
The following table contains high and low sales prices of the
ordinary shares on NASDAQ, as well as high and low prices of the ordinary
shares on Euronext Amsterdam.
Annual High and Low Prices of Shares
on NASDAQ and Euronext Amsterdam
NASDAQ(1) Euronext Amsterdam(1)
USD EUR(2)
High Low High Low
---- --- ---- ---
1998 16.35 4.31 15.35 3.33
1999 38.29 10.42 38.00 8.77
2000 50.25 17.63 52.00 22.20
2001 30.62 9.51 32.32 9.70
2002 25.80 4.95 29.79 5.13
2003 (through March 7) 9.75 6.37 9.38 5.69
____________________
(1) Source: Bloomberg L.P.
(2) Data for 1998 has been restated based on fixed euro / Guilder exchange rate
as of January 1, 1999 (EUR 1.00 to NLG 2.20371).
Quarterly High and Low Prices of Shares
on NASDAQ and Euronext Amsterdam
NASDAQ(1) Euronext Amsterdam(1)
USD EUR
High Low High Low
---- --- ---- ---
1st quarter 2001.................. 30.63 19.63 32.32 20.25
2nd quarter 2001.................. 28.05 18.94 32.26 20.80
3rd quarter 2001.................. 22.26 9.51 26.93 9.70
4th quarter 2001 ................. 20.29 10.75 22.80 11.53
1st quarter 2002.................. 25.61 17.14 29.18 18.90
2nd quarter 2002.................. 25.80 13.45 29.79 13.21
3rd quarter 2002.................. 16.18 5.35 16.36 5.25
4th quarter 2002 ................. 12.15 4.95 12.37 5.13
1st quarter 2003 (through March 7) 9.75 6.37 9.38 5.69
____________________
(1) Source: Bloomberg L.P.
35
Monthly High and Low Prices of Shares
on NASDAQ and Euronext Amsterdam
NASDAQ(1) Euronext Amsterdam(1)
USD EUR
High Low High Low
---- --- ---- ---
September 2002............. 10.09 5.35 10.58 5.25
October 2002............... 8.94 4.95 9.17 5.13
November 2002.............. 11.65 7.97 11.84 7.90
December 2002.............. 12.15 7.32 12.37 7.12
January 2003............... 9.75 7.30 9.38 6.60
February 2003.............. 8.11 6.85 7.57 6.60
March 2003 (through March 7) 7.39 6.37 6.92 5.69
____________________
(1) Source: Bloomberg L.P.
B. Plan of Distribution
Not applicable
C. Markets
See Item 9.A.--"Listing Details."
D. Selling Shareholder
Not applicable
E. Dilution
Not applicable
F. Expenses of the Issue
Not applicable
ITEM 10. Additional Information
A. Share Capital
Not applicable
B. Memorandum and Articles of Association
Incorporated by reference to ASML's Current Report on Form 6-K, filed
with the Commission on March 14, 2003.
Current Authorizations to Issue and Repurchase Ordinary Shares
Our Board of Management has the power to issue ordinary shares and
Preference Shares if and insofar as the Board of Management has been
authorized to do so by the General Meeting of Shareholders (whether by means
of an authorizing resolution or by an amendment to our Articles of
Association). The Board of Management requires the approval, however, of the
Supervisory Board and the Meeting of Priority Shareholders for such an issue.
The Board of Management, subject to these approvals, is currently authorized
to issue ordinary shares and/or rights thereto through September 21, 2003, up
to a maximum of 10% of our issued share capital as of March 21, 2002 plus an
additional 10% of our issued share capital as of March 21, 2002 in connection
with mergers and acquisitions. At our annual General Meeting of Shareholders
to be held on March 25, 2003, our shareholders will be asked to extend this
authority through September 25, 2004.
Holders of ordinary shares have a pro rata preemptive right of
subscription to any issuance of ordinary shares for cash, which right may be
limited or eliminated. Such shareholders have no pro rata preemptive
subscription right with respect to any ordinary shares issued for
consideration other than cash or in the case of ordinary shares issued to
employees. If authorized for this purpose by the General Meeting of
Shareholders (whether by means of an authorizing resolution or by an amendment
to our Articles of Association), the Board of Management has the power, on
approval by the Supervisory Board and the Meeting of Priority Shareholders, to
limit or eliminate the preemptive rights of holders of ordinary shares. The
Board of Management is currently authorized, subject to these approvals, to
limit or eliminate preemptive rights of holders of ordinary shares through
September 21, 2003. A further designation may be effective for up to five
years and may be renewed. At our annual General Meeting of Shareholders to be
held on March 25, 2003, our shareholders will be asked to extend this
authority through September 25, 2004.
We may repurchase ordinary shares at any time, subject to compliance
with the requirements of Netherlands law (and provided the aggregate nominal
value of the ordinary shares held by ASML or a subsidiary at any one time
amounts to no more than one-tenth of our issued share capital). Any such
purchases are subject to the approval of the Supervisory Board and the
authorization (whether by means of an authorizing resolution or by an
amendment to our Articles of Association) of shareholders at our General
Meeting of Shareholders, which authorization may not be for more than 18
months. The Board of Management is currently authorized, subject to
Supervisory Board approval, to repurchase up to 10% of our issued share
capital through September 21, 2003 at a price between the nominal value of the
ordinary shares purchased and 110% of the market price of these securities on
Euronext Amsterdam or Nasdaq. At our annual General Meeting of Shareholders to
be held on March 25, 2003, our shareholders will be asked to extend this
authority through September 25, 2004.
36
C. Material Contracts
Paying Agent, Conversion Agent, Conversion Calculation Agent and Registrar
Agreement between ASML Holding N.V. and The Bank of New York relating to
$575,000,000 5.75 percent Convertible Subordinated Notes due 2006
On October 23, 2001, we entered into an agreement with The Bank of
New York which contained the terms and conditions of our 5.75 percent
Convertible Subordinated Notes due October 2006 (the "5.75 percent Notes"). In
October 2001, we issued $575,000,000 of 5.75 percent Notes in an offering that
included an offering outside the United States pursuant to Regulation S under
the Securities Act of 1933 (the "Securities Act") and an offering in the
United States pursuant to Rule 144A under the Securities Act. The 5.75 percent
Notes pay interest at an annual rate of 5.75 percent with interest payable
semi-annually on April 15 and October 15 of each year, commencing on April 15,
2002, and are convertible into an aggregate of 30,814,576 of our ordinary
shares at a conversion price of $18.66 per share, subject to adjustment, at
any time prior to maturity. At any time on or after October 22, 2004 the 5.75
percent Notes are redeemable at our option, in whole or in part at the
redemption price of 100% of their principal amount together with accrued
interest.
Registration Rights Agreement dated as of October 23, 2001, between ASML and
Morgan Stanley and Co. International Limited
On October 23, 2001, we entered into a Registration Rights Agreement
in respect of the ordinary shares issuable upon conversion of the 5.75 percent
Notes. Pursuant to the terms of the Registration Rights Agreement, we are
obligated to keep effective, until October 26, 2003, a Shelf Registration
Statement registering sale of the ordinary shares issuable upon conversion of
the 5.75 percent Notes under the Securities Act of 1933.
D. Exchange Controls
There are currently no limitations, either under the laws of the
Netherlands or in the Articles of Association of ASML, to the rights of
non-residents to hold or vote ordinary shares. Cash distributions, if any,
payable in euro on Veldhoven registered shares and Amsterdam Shares may be
officially transferred from the Netherlands and converted into any other
currency without being subject to any Netherlands legal restrictions. However,
for statistical purposes, such payments and transactions must be reported by
ASML to the Netherlands Central Bank. Furthermore, no payments, including
dividend payments, may be made to jurisdictions subject to certain sanctions,
adopted by the government of the Netherlands, implementing resolutions of the
Security Council of the United Nations. Cash distributions, if any, on New
York Shares shall be paid in U.S. dollars, converted at the rate of exchange
on Euronext Amsterdam at the close of business on the date fixed for that
purpose by the Board of Management in accordance with the Articles of
Association. ASML has no current intention to pay dividends on its ordinary
shares. For more information see Item 10.B.--"Memorandum and Articles of
Association."
E. Taxation
Netherlands Taxation
The statements below represent a summary of current Netherlands tax
laws. The description is limited to the material tax implications for a holder
of ordinary shares who is not, or is not deemed to be, a resident of the
Netherlands for Netherlands tax purposes (a "Non-resident Holder"). This
description does not address special rules that may apply to special classes
of holders of ordinary shares and should not be read as extending by
implication to matters not specifically referred to herein. As to individual
tax consequences, each investor in ordinary shares should consult his or her
tax counsel.
General
37
The acquisition of ordinary shares by a non-resident of the
Netherlands should not be treated as a taxable event for Netherlands tax
purposes. The income consequences in connection with owning and disposing of
our ordinary shares are discussed below.
Substantial Interest
A person that, directly or indirectly, owns 5% or more of our share
capital, or holds options to purchase 5% or more of our share capital, has a
substantial interest in our shares or our options, as applicable. A deemed
substantial interest is present if (part of) a substantial interest has been
disposed of, or is deemed to be disposed of, in a transaction where no tax is
recognized. Special attribution rules exist in determining the presence of a
substantial interest.
Income Tax Consequences for Non-Resident Holders on Owning and Disposing
of the Ordinary Shares
Individual income tax for individual Non-resident Holders
An individual who is a Non-resident Holder will not be subject to
Netherlands income tax on received income in respect of our ordinary shares or
capital gains derived from the sale, exchange or other disposition of our
ordinary shares, provided that such holder:
o does not carry on and has not carried on a business in the
Netherlands through a permanent establishment or a permanent
representative to which the ordinary shares are attributable;
o does not hold and has not held a substantial interest in ASML's
share capital or, in the event the Non-resident Holder holds or
has held a substantial interest in the Company's share capital,
such interest is or was a business asset in the hands of the
holder;
o does not share and has not shared directly (not through the
beneficial ownership of ordinary shares or similar securities)
in the profits of an enterprise managed and controlled in the
Netherlands which owned or was deemed to have owned ASML's
ordinary shares;
o does not carry out and has not carried out any activities which
generate taxable profit or taxable wages (belastbaar resultaat
uit overige werkzaamheden) to which the holding of ASML's
ordinary shares was connected;
o does not carry out and has not carried out employment activities
in the Netherlands, does not serve and has not served as a
director or board member of any entity resident in the
Netherlands, and does not serve and has not served as a civil
servant of a Netherlands public entity with which the holding of
ASML's ordinary shares is or was connected; and
o is not an individual that has opted to be taxed as a resident of
the Netherlands.
Corporate income tax for corporate Non-resident Holders
Income derived from ordinary shares or capital gains derived from the
sale, exchange or disposition of ordinary shares by a Non-resident Holder
which is a corporation is taxable if:
o the holder carries on a business in the Netherlands through a
permanent establishment or a permanent agent in the Netherlands
(Netherlands enterprise) and the ordinary shares are
attributable to this permanent establishment or permanent agent,
unless the participation exemption (discussed below) applies; or
o the holder has a substantial interest in ASML, which is not
allocable to his enterprise; or
o certain assets of the holder are deemed to be treated as a
Netherlands enterprise by under Netherlands tax law and the
ordinary shares are attributable to this Netherlands enterprise.
To qualify for the Netherlands participation exemption, the Holder
must generally hold at least 5% of the nominal paid-in capital of ASML and
meet other requirements.
Under most Netherlands tax treaties the right to tax capital gains
realized by a Non-resident Holder from the sale, exchange or other disposition
of ordinary shares is allocated to the holder's country of residence and not
the Netherlands.
38
Dividend Withholding Tax
In general, a dividend distributed by us in respect of our ordinary
shares will be subject to a withholding tax imposed by the Netherlands at a
statutory rate of 25%.
Dividends include:
o dividends in cash or in kind;
o deemed and constructive dividends;
o consideration for the repurchase of ordinary shares (including a
repurchase by a direct or indirect subsidiary) in excess of the
recognized average paid-in capital unless such repurchase is for
temporary investment or exempt;
o proceeds from the redemption of ordinary shares in excess of
recognized paid-in capital;
o stock dividends equal to their nominal value (unless distributed
out of recognized paid-in share premium);
o repayment of paid-in capital not recognized as capital for
Netherlands dividend withholding tax purposes; and
o liquidation proceeds in excess of average paid-in capital
recognized as capital for Netherlands dividend withholding tax
purposes.
A reduction of Netherlands dividend withholding tax can be obtained if:
o the participation exemption applies and the ordinary shares are
attributable to a business carried out in the Netherlands;
o the dividends are distributed to a qualifying EU corporate
holder satisfying the conditions of the EU Parent-Subsidiary
Directive; or
o the rate is reduced by treaty; or
o surtax was due on the dividend distribution and the recipient is
a resident of the Netherlands Antilles or Aruba, a Member State
of the EU or a country with which the Netherlands has concluded
a treaty for the avoidance of double taxation.
A Non-resident Holder of ordinary shares can be eligible for a
partial or complete exemption or refund of all or a portion of the above
withholding tax under a tax treaty that is in effect between the Netherlands
and the Non-resident Holder's country of residence. The Netherlands has
concluded such treaties with the United States, Canada, Switzerland, Japan,
all European Union member states, and other countries.
Under the Treaty between the United States of America and the Kingdom
of the Netherlands for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income (the "Tax Treaty"), dividends
paid by us to a Non-resident Holder that is a resident of the United States as
defined in the Tax Treaty (other than an exempt organization or exempt pension
trust, as discussed below) are generally eligible for a reduction of the 25%
Netherlands withholding tax to 15% or, in the case of certain U.S. corporate
shareholders owning at least 10% of our voting power, to 5%, provided that the
shareholder does not have an enterprise or an interest in an enterprise that
is, in whole or in part, carried on through a permanent establishment or
permanent representative in the Netherlands to which the dividends are
attributable. The Tax Treaty provides for a complete exemption from tax on
dividends received by exempt pension trusts and exempt organizations, as
defined therein. Except in the case of exempt organizations, the reduced
dividend withholding rate (or exemption from withholding) can be applied at
the source upon payment of the dividends, provided that the proper forms have
been filed in advance of the payment. Exempt organizations remain subject to
the statutory withholding rate of 25% and are required to file for a refund of
such withholding.
A Non-resident Holder may not claim the benefits of the Tax Treaty
unless (i) it is a resident of the United States as defined therein and (ii)
its entitlement to those benefits is not limited by the provisions of article
26 (limitation on benefits) of the Tax Treaty.
39
Dividend Stripping Rules
Under Netherlands tax legislation regarding anti-dividend stripping,
no exemption from, or refund of, Netherlands dividend withholding tax is
granted if the recipient of dividends paid by ASML is not considered the
beneficial owner of such dividends.
Surtax
As a result of Netherlands tax reform effective from January 1, 2001,
ASML will be subject to a 20% corporate income tax, or Surtax, on 'excessive'
(evaluated based on certain criteria, including previous dividend distributions)
dividends ASML distributes during the period from January 1, 2001 to, and
including, December 31, 2005.
Gift or Inheritance Taxes
Netherlands gift or inheritance taxes will not be levied on the
transfer of ordinary shares by way of gift, or upon the death of a
Non-resident Holder, unless:
(1) the transfer is construed as an inheritance or as a gift
made by or on behalf of a person who, at the time of the
gift or death, is deemed to be, resident of the
Netherlands; or
(2) the ordinary shares are attributable to an enterprise or
part thereof that is carried on through a permanent
establishment or a permanent representative in the Netherlands.
For purposes of Netherlands gift and inheritance tax, an individual
of Netherlands nationality is deemed to be a resident of the Netherlands if he
has been a resident thereof at any time during the ten years preceding the
time of the gift or death. For purposes of Netherlands gift tax, a person not
possessing Netherlands nationality is deemed to be a resident of the
Netherlands if he has resided therein at any time in the twelve months
preceding the time of the gift.
Value Added Tax
No Netherlands value added tax is imposed on dividends in respect of
ASML's shares or on the transfer of ASML's ordinary shares.
Residence
A Non-resident Holder will not become resident, or be deemed to be
resident, in the Netherlands solely as a result of holding ASML's ordinary
shares or of the execution, performance, delivery and/or enforcement of rights
in respect of ASML's ordinary shares.
United States Taxation
The following is a discussion of the material U.S. federal income tax
consequences relating to the acquisition, ownership and disposition of
ordinary shares by a U.S. Holder (as defined below). This discussion deals
only with ordinary shares held as capital assets and does not deal with the
tax consequences applicable to all categories of investors, some of which
(such as tax-exempt entities, banks, broker-dealers, investors owning
directly, indirectly or constructively 10% or more of our outstanding voting
shares, investors who hold ordinary shares as part of hedging or conversion
transactions and investors whose functional currency is not the U.S. dollar)
may be subject to special rules. In addition, the discussion does not address
any alternative minimum tax or any state, local or non-United States tax
consequences. The following discussion is based on U.S. tax laws, and judicial
and administrative interpretations thereof as in effect on the date hereof,
all of which are subject to change, potentially retroactively. Prospective
purchasers of ordinary shares are advised to consult their tax advisers with
respect to their particular circumstances and with respect to the effects of
U.S. federal, state, local or non-U.S. tax laws to which they may be subject.
40
As used herein, the term "U.S. Holder" means a beneficial owner of
ordinary shares that for U.S. federal income tax purposes is:
(1) an individual citizen or resident of the United States,
(2) a corporation or other entity treated as a corporation for U.S.
federal income tax purposes created or organized in or under the
laws of the United States or of any political subdivision
thereof,
(3) an estate the income of which is subject to U.S. federal income
taxation regardless of its source or
(4) a trust whose administration is subject to the primary
supervision of a court within the United States and which has
one or more U.S. persons who have the authority to control all
of its substantial decisions.
If an entity treated as a partnership for U.S. federal income tax
purposes owns ordinary shares, the U.S. federal income tax treatment of a
partner in such partnership will generally depend upon the status of the
partner and the activities of the partnership. A partnership that owns
ordinary shares and the partners in such partnership should consult their tax
advisors about the U.S. federal income tax consequences of holding and
disposing of the ordinary shares.
Taxation of Dividends
U.S. Holders will include in gross income as foreign-source dividend
income the gross amount of any distribution (before reduction for Netherlands
withholding taxes) ASML makes out of its current or accumulated earnings and
profits (as determined for United States federal income tax purposes) when the
distribution is actually or constructively received by the U.S. Holder.
Distributions will not be eligible for the dividends-received deduction
generally allowed to United States corporations in respect of dividends
received from other United States corporations. The amount of the dividend
distribution includible in income of a U.S. Holder should be the U.S. dollar
value of the foreign currency (e.g. euro) paid, determined by the spot rate
of exchange on the date of the distribution, regardless of whether the payment
is in fact converted into U.S. dollars. Generally, any gain or loss resulting
from currency exchange fluctuations during the period from the date the
dividend payment is includible in income to the date such payment is converted
into U.S. dollars will be treated as ordinary income or loss. Such gain or
loss will generally be income from sources within the United States for U.S.
foreign tax credit purposes. Distributions in excess of current and
accumulated earnings and profits, as determined for United States federal
income tax purposes, will be treated as a non-taxable return of capital to the
extent of the U.S. Holder's basis in the ordinary shares and thereafter as
taxable capital gain. ASML does not maintain calculations of its earnings and
profits under United States federal income tax principles.
Subject to limitations provided in the U.S. Internal Revenue Code, a
U.S. Holder may generally deduct from its United States federal taxable
income, or credit against its United States federal income tax liability, the
amount of any Netherlands withholding taxes. However, Netherlands withholding
tax may be deducted only if the U.S. Holder does not claim a credit for any
Netherlands or other non-U.S. taxes paid or accrued in that year. In addition,
Netherlands dividend withholding taxes will likely not be creditable against
the U.S. Holder's United States tax liability to the extent ASML is not
required to pay over the amount withheld to the Netherlands Tax
Administration. Currently, a Netherlands corporation that receives dividends
from qualifying non-Netherlands subsidiaries may credit source country tax
withheld from those dividends against Netherlands withholding tax imposed on a
dividend paid by a Netherlands corporation, up to a maximum of 3% of the
dividend paid by the Netherlands corporation. The credit reduces the amount of
dividend withholding that ASML is required to pay to the Netherlands Tax
Administration but does not reduce the amount of tax ASML is required to
withhold from dividends.
Taxation on Sale or Other Disposition of Ordinary Shares
Upon a sale or other disposition of ordinary shares, a U.S. Holder
will generally recognize capital gain or loss for U.S. federal income tax
purposes in an amount equal to the difference between the amount realized, if
paid in U.S. dollars, or the U.S. dollar value of the amount realized
(determined at the spot rate on the settlement date of the sale) if proceeds
are paid in currency other than the U.S. dollar, as the case may be, and the
U.S. Holder's tax basis (determined in U.S. dollars) in such ordinary shares.
Generally, the capital gain or loss will be long-term capital gain or loss if
the holding period of the U.S. Holder in the ordinary shares exceeds one year
at the time of the sale or other disposition. The deductibility of capital
losses is subject to limitations for U.S.
41
federal income tax purposes. Gain or loss from the sale or other disposition
of ordinary shares generally will be treated as U.S. source income or loss for
U.S. foreign tax credit purposes. Generally, any gain or loss resulting from
currency fluctuations during the period between the date of the sale of the
ordinary shares and the date the sale proceeds are converted into U.S. dollars
will be treated as ordinary income or loss from sources within the United
States. Each U.S. Holder should consult its tax advisor with regard to the
translation rules of its adjusted basis and the amount realized upon a sale or
other disposition of its ordinary shares if purchased in, or sold or disposed
of for, a currency other than U.S. dollar.
Information Reporting and Backup Withholding
Information returns may be filed with the Internal Revenue Service
("IRS") in connection with payments on the ordinary shares or proceeds from a
sale, redemption or other disposition of the ordinary shares. A "backup
withholding" tax may apply to these payments if the beneficial owner fails to
provide a correct taxpayer identification number to the paying agent and to
comply with certain certification procedures or otherwise establish an
exemption from backup withholding. Any amounts withheld under the backup
withholding rules will be refunded (or credited against the beneficial owner's
U.S. federal income tax liability, if any) provided that the required
information is furnished to the IRS.
F. Dividends and Paying Agents
Not applicable
G. Statement by Experts
Not applicable
H. Documents on Display
We are subject to certain of the reporting requirements of the
Exchange Act. As a "foreign private issuer", we are exempt from the rules
under the Exchange Act prescribing certain disclosure and procedural
requirements for proxy solicitations, and our officers, directors and
principal shareholders are exempt from the reporting and "short-swing" profit
recovery provisions contained in Section 16 of the Exchange Act, with respect
to their purchases and sales of shares. In addition, we are not required to
file annual, quarterly and current reports and financial statements with the
Commission as frequently or as promptly as U.S. companies whose securities are
registered under the Exchange Act. However, we will file with the Commission,
within 180 days after the end of each fiscal year, an annual report on Form
20-F containing financial statements audited by an independent accounting
firm. We will also publish unaudited interim financial information after the
end of each quarter, commencing with the first quarter of 2003. We furnish
this quarterly financial information to the Commission under cover of a
Form 6-K.
You may read and copy any document we file with the Commission at its
public reference facilities at 450 Fifth Street, N.W., Washington, DC 20549,
Woolworth Building, 233 Broadway, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You
may also obtain copies of the documents at prescribed rates by writing to the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington DC 20549. The Commission also maintains a website that contains
reports and other information regarding registrants that are required to file
electronically with the Commission. The address of this website is
http://www.sec.gov. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference facilities.
I. Subsidiary Information
See Item 4--"Information on the Company--Organizational Structure".
ITEM 11. Quantitative and Qualitative Disclosures About Market Risk
Although we price most of our product sales in euro, we anticipate
that a portion of our revenues from net sales, cost of sales and expenses will
remain denominated in U.S. dollars for the foreseeable future.
42
However, the carrying value of our accounts receivable and accounts payable
approximate fair value due to the short-term nature of those instruments.
Based on current rates for similar instruments with the same maturities, the
fair value of our remaining outstanding notes amounts to EUR 894.4 million.
See Item 5--"Operating and financial review and prospects--Foreign Exchange
Management" and Note 1 and Note 5 to our Consolidated Financial Statements,
which are incorporated herein by reference. We do not have any other material
market risk exposure.
ITEM 12. Description of Securities Other Than Equity Securities
Not applicable
43
PART II
ITEM 13. Defaults, Dividend Arrearages and Delinquencies
None
ITEM 14. Material Modifications to the Rights of Security Holders and
Use of Proceeds
None
ITEM 15. Controls and Procedures
Evaluation of Disclosure controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of our disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of
a date within 90 days prior to the filing date of this annual report (the
"Evaluation Date"). Based on such evaluation, such officers have concluded
that, as of the Evaluation Date, our disclosure controls and procedures are
effective in alerting them on a timely basis to material information relating
to ASML (including its consolidated subsidiaries) required to be included in
our periodic filings under the Exchange Act.
Changes in Internal Controls
Since the Evaluation Date, there have not been any significant
changes in our internal controls or in other factors that could significantly
affect such controls.
ITEM 16. Reserved
44
PART III
ITEM 17. Financial Statements
Not applicable
ITEM 18. Financial Statements
In response to this item, the Company incorporates herein by
reference the Consolidated Financial Statements of the Company set forth on
pages F-2 through F-31 hereto.
ITEM 19. Exhibits
Exhibit No. Description
----------- -----------
1 Articles of Association of ASML Holding N.V. (English
translation) (Incorporated by reference to Amendment No.
6 to the Registrant's Registration Statement on Form
8-A/A, filed with the Commission on June 18, 2002 (File
No. 0-25566))
2.1 Paying Agent, Conversion Agent, Conversion Calculation
Agent and Registrar Agreement between ASML Holding N.V.
and the Bank of New York relating to $575,000,000 5.75
percent Convertible Subordinated Notes due 2006
(incorporated by reference to Exhibit 2.3 to the
Registrant's Annual Report on Form 20-F, for the fiscal
year ended December 31, 2001)
2.2 Registration Rights Agreement, dated as of October 23,
2001, by and among ASML Holding N.V. and Morgan Stanley &
Co. International Limited, on behalf of several managers
named therein (Incorporated by reference to Exhibit 4 to
the Registrant's Registration Statement on Form F-3 (File
No. 333-83266))
4.1 Agreement between ASML Lithography B.V. and Carl Zeiss,
dated March 17, 2000 (Incorporated by reference to the
Registrant's Annual Report on Form 20-F for the fiscal
year ended December 31, 2000)
8 List of Subsidiaries*
10.1 Certification of CEO and CFO Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 *
10.2 Consent of Deloitte & Touche*
________________________
* Filed herewith
45
SIGNATURES
ASML hereby certifies that it meets all of the requirements for filing on Form
20-F and that it has duly caused and authorized the undersigned to sign this
annual report on its behalf.
ASML Holding N.V.
(Registrant)
/s/ Peter T.G.M. Wennink
------------------------
By: Peter T.F.M. Wennink
Principal Accounting and
Chief Financial Officer
Dated: March 7, 2003
46
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Doug J. Dunn, certify that:
1. I have reviewed this annual report on Form 20-F of ASML Holding N.V.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 7, 2003
Signature: /s/ Doug J. Dunn
------------------------
Name: Doug J. Dunn
Title: Chief Executive Officer
47
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Peter T.F.M. Wennink, certify that:
1. I have reviewed this annual report on Form 20-F of ASML Holding N.V;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 7, 2003
Signature: /s/ Peter T.F.M. Wennink
------------------------
Name: Peter T.F.M. Wennink
Title: Chief Financial Officer
48
INDEX TO FINANCIAL STATEMENTS
Financial Statements
Consolidated statements of operations for the years ended December 31,
2000, 2001 and 2002.............................................................................F-2
Consolidated statements of comprehensive income (loss) for the years
ended December 31, 2000, 2001 and 2002..........................................................F-3
Consolidated balance sheets as of December 31, 2001 and 2002....................................F-3
Consolidated Statements of shareholders' equity for the years ended
December 31, 2000, 2001 and 2002................................................................F-4
Consolidated statements of cash flows for the years ended
December 31, 2000, 2001 and 2002................................................................F-5
Notes to the consolidated financial statements..................................................F-6
Independent Auditors' Report...................................................................F-32
F-1
CONSOLIDATED STATEMENTS OF OPERATIONS(1)
For the year ended December 31
--------------------------------------------------------
2000 2001 2002 2002(2)
--------- ---------- ----------- ------------
EUR EUR EUR USD
(Amounts in thousands, except per share data)
Net product sales........................... 2,462,537 1,335,608 1,740,633 1,825,328
Net service sales........................... 210,093 253,639 218,039 228,648
--------- ---------- ----------- ------------
Total net sales............................. 2,672,630 1,589,247 1,958,672 2,053,976
Cost of product sales....................... 1,405,472 1,348,837 1,289,030 1,351,751
Cost of service sales....................... 166,344 209,397 202,038 211,869
--------- ---------- ----------- ------------
3 Total cost of sales......................... 1,571,816 1,558,234 1,491,068 1,563,620
Gross profit on sales....................... 1,100,814 31,013 467,604 490,356
Research and development costs.............. 327,015 347,333 324,419 340,204
16 Research and development credits............ (24,983) (16,223) (26,015) (27,281)
Selling, general and administrative costs... 256,513 245,962 263,243 276,052
Merger and acquisition costs................ 0 41,477 0 0
3 Restructuring charges....................... 0 3,082 0 0
--------- ---------- ----------- ------------
Operating income (loss)..................... 542,269 (590,618) (94,043) (98,619)
Interest income............................. 61,869 41,786 31,177 32,694
Interest expense............................ (49,276) (48,993) (67,958) (71,265)
Minority interest in net results from
subsidiaries (3,205) 3,606 0 0
--------- ---------- ----------- ------------
Income (loss) from continuing operations before
income taxes.............................. 551,657 (594,219) (130,824) (137,190)
17 (Provision for) benefits from income taxes.. (167,923) 179,017 42,779 44,861
--------- ---------- ----------- ------------
Net income (loss) from continuing operations
before effect of accounting changes....... 383,734 (415,202) (88,045) (92,329)
Cumulative effect of change in accounting
principle net of tax(3)................... (2,676) 0 0 0
--------- ---------- ----------- ------------
Net income (loss) from continuing operations 381,058 (415,202) (88,045) (92,329)
2 Loss from discontinued operations before
income taxes.............................. (3,685) (103,001) (183,624) (192,559)
17 Benefits from income tax.................... 674 39,211 63,846 66,953
--------- ---------- ----------- ------------
Net loss from discontinued operations....... (3,011) (63,790) (119,778) (125,606)
Net income (loss)........................... 378,047 (478,992) (207,823) (217,935)
Basic net income (loss) from continuing
operations per ordinary share............. 0.83 (0.89) (0.18)
Basic net loss from discontinued operations per
ordinary share............................ (0.01) (0.14) (0.26)
Basic net income (loss) per ordinary share.. 0.82 (1.03) (0.44)
Diluted net income (loss) from continuing
operations per ordinary share............. 0.79 (0.89) (0.18)
Diluted net (loss) from discontinued operations
per ordinary share........................ (0.01) (0.14) (0.26)
Diluted net income (loss) per ordinary share 0.78 (1.03) (0.44)
Number of ordinary shares used in computing per
share amounts (in thousands)
Basic(4)............................... 461,887 465,866 476,866
Diluted(4)............................. 483,127 465,866 476,866
__________________
(1) See Note 2 "Discontinued operations" and Note 3 "Restructuring" to the
Consolidated Financial Statements.
(2) Solely for the convenience of the reader, certain euro amounts presented
as of and for the year ended December 31, 2002, have been translated
into U.S. dollars using the exchange rate on December 31, 2002, of USD
1.00 = EUR 0.9536.
(3) The cumulative effect for change in accounting principles reflects an
adjustment in 2000 for Staff Accounting Bulletin (SAB 101) revenue
recognition.
(4) All net income per ordinary share amounts have been retroactively
adjusted to reflect the three-for-one stock split in April 2000 as well
as the issuance of shares to merge with SVG in May 2001.
F-2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the year ended December 31
-----------------------------------------------------------
2000 2001 2002 2002
---------- ---------- ----------- ---------------
EUR EUR EUR USD
(Amounts in thousands)
Net income (loss).................................. 378,047 (478,992) (207,823) (217,935)
Foreign currency translation....................... 118,782 26,744 5,859 6,144
--------- ---------- ----------- ------------
Comprehensive income (loss)........................ 496,829 (452,248) (201,964) (211,791)
CONSOLIDATED BALANCE SHEETS
As of December 31
------------------------------------------
2001 2002 2002
----------- ------------ -------------
EUR EUR USD
(Amounts in thousands,
except share and per share data)
Assets
Cash and cash equivalents..................... 910,678 668,760 701,301
6 Accounts receivable, net...................... 510,566 556,664 583,750
7 Inventories, net.............................. 778,269 730,025 765,546
17 Current tax assets............................ 50,107 178,706 187,401
17 Deferred tax assets........................... 362 0 0
8 Other current assets.......................... 192,614 175,095 183,615
2 Assets from discontinued operations........... 208,822 106,094 111,256
----------- ------------ -------------
Total current assets............................ 2,651,418 2,415,344 2,532,869
17 Deferred tax assets........................... 262,091 314,795 330,112
8 Other assets.................................. 89,384 61,757 64,762
9 Intangible assets............................. 16,275 14,069 14,754
10 Property, plant and equipment, net............ 624,672 495,723 519,844
----------- ------------ -------------
Total assets.................................... 3,643,840 3,301,688 3,462,341
Liabilities and Shareholders' Equity
Accounts payable.............................. 275,463 213,423 223,808
3, 11 Accrued liabilities and other................. 458,863 448,848 470,688
17 Deferred tax liability........................ 665 4,465 4,682
17 Current tax liability......................... 0 19,947 20,917
2 Liabilities from discontinued operations...... 93,716 66,091 69,307
----------- ------------ -------------
Total current liabilities....................... 828,707 752,774 789,402
17 Deferred tax liability........................ 34,302 133,516 140,013
Other deferred liabilities.................... 19,111 15,391 16,140
12 Convertible subordinated debt................. 1,510,902 1,064,040 1,115,814
12 Other long term debt.......................... 24,531 20,451 21,446
----------- ------------ -------------
Total liabilities............................... 2,417,553 1,986,172 2,082,815
Cumulative Preference Shares, EUR 0.02 nominal
value; 900,000,000 shares authorized; none
outstanding as of December 31, 2002 ............ 0 0 0
Priority Shares, EUR 0.02 nominal value; 23,100
shares authorized, issued and outstanding as of
December 31, 2001 and 2002...................... 1 1 1
ordinary shares, EUR 0.02 nominal value;
900,000,000 shares authorized; 466,978,391 shares
issued and outstanding as of December 31, 2001
and 482,182,485 as of December 31, 2002......... 9,339 9,643 10,112
Share premium................................... 579,564 870,453 912,807
F-3
Retained earnings............................... 484,149 276,326 289,771
Accumulated other comprehensive income.......... 153,234 159,093 166,835
22 Total shareholders' equity...................... 1,226,287 1,315,516 1,379,526
----------- ------------ -------------
Total liabilities and shareholders' equity...... 3,643,840 3,301,688 3,462,341
=========== ============ =============
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the year ended December 31
-----------------------------------------------------------
2000 2001 2002 2002
---------- ------------ ------------- -------------
EUR EUR EUR USD
(Amounts in thousands, except share data)
Priority Shares Balance, end of year................ 1 1 1 1
Priority Shares Balance, beginning of year.......... 9,069 9,268 9,339 9,793
Adjustment for pooling of interests fourth quarter
2000 SVG1........................................ 0 7 0 0
Balance, beginning of year, as restated............. 9,069 9,275 9,339 9,793
Issuance of ordinary shares......................... 199 64 304 319
---------- ------------ ------------- ------------
Balance, end of year................................ 9,268 9,339 9,643 10,112
Share Premium Balance, beginning of year............ 512,060 551,343 579,564 607,764
Adjustment for pooling of interests fourth quarter 0 6,636 0 0
2000 SVG.........................................
Balance, beginning of year, as restated............. 512,060 557,979 579,564 607,764
Issuance of ordinary shares......................... 39,283 21,585 290,889 305,043
---------- ------------ ------------- ------------
Balance, end of year................................ 551,343 579,564 870,453 912,807
Retained Earnings Balance, beginning of year........ 566,562 944,609 484,149 507,706
Adjustment for pooling of interests fourth quarter
2000 SVG......................................... 0 18,532 0 0
Balance, beginning of year, as restated............. 566,562 963,141 484,149 507,706
Net income (loss)................................... 378,047 (478,992) (207,823) (217,935)
---------- ------------ ------------ ------------
Balance, end of year................................ 944,609 484,149 276,326 289,771
Comprehensive Income
Cumulative Translation Adjustments
Balance, beginning of year.......................... 42,209 160,991 153,234 160,691
Adjustment for pooling of interests fourth quarter
2000 SVG............................................ 0 (34,501) 0 0
---------- ------------ ------------- ------------
Balance, beginning of year, as restated............. 42,209 126,490 153,234 160,691
Exchange rate adjustments for pooling of interests.. 114,128 54,450 0 0
Exchange rate changes for the year and other........ 4,654 (27,706) 5,859 6,144
---------- ------------ ------------- ------------
Balance, end of year................................ 160,991 153,234 159,093 166,835
Number of ordinary shares outstanding (in thousands)
Number of ordinary shares beginning of year......... 460,412 463,395 466,978
Adjustment for pooling of interests fourth quarter
2000 SVG............................................ 0 365 0
Issuance of ordinary shares......................... 2,983 3,218 15,204
---------- ------------ -------------
Number of ordinary shares outstanding, end of year.. 463,395 466,978 482,182
========== ============ =============
______________________
(1) See Note 1 to the Consolidated Financial Statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31
-----------------------------------------------------------
2000 2001 2002 2002
----------- ------------- ------------- -------------
EUR EUR EUR USD
(Amounts in thousands)
Cash Flows from Operating Activities
Net income (loss) from continued operations......... 381,058 (415,202) (88,045) (92,329)
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization....................... 111,133 126,759 166,035 174,114
Impairment charges.................................. 0 12,200 20,651 21,656
----------- ------------- ------------- -------------
Allowance for doubtful debts........................ 835 3,310 0 0
Allowance for obsolete inventory.................... 10,215 367,140 112,164 117,622
Changes in assets and liabilities that provided
(used) cash:
Accounts receivable................................. (238,092) 308,978 (57,183) (59,965)
Deferred income taxes............................... (8,973) (156,676) (22,361) (23,449)
Inventories, gross.................................. (184,106) (380,006) (77,408) (81,175)
Other assets........................................ (63,835) (111,673) 31,365 32,891
Accrued liabilities................................. 143,308 89,494 (41,683) (43,711)
Accounts payable.................................... 68,132 48,301 (71,927) (75,427)
Income tax payable.................................. 31,069 (92,240) (25,759) (27,013)
----------- ------------- ------------- -------------
Net cash provided by (used in) operating activities
from continuing operations.......................... 250,744 (199,615) (54,151) (56,786)
Cash Flows from Investing Activities
Purchases of property, plant and equipment.......... (181,007) (312,857) (138,587) (145,330)
Proceeds from sale of property, plant and equipment. 3,030 21,672 58,735 61,593
Investments in financial fixed assets............... 0 (34,404) 0 0
Purchases of short-term investments, available for (18,744) 0 0 0
sales...............................................
Maturities of short-term investments, available for 44,835 0 0 0
sales...............................................
Purchase of intangible assets....................... 0 (506) 0 0
----------- ------------- ------------- -------------
Net cash used in investing activities from continuing
operations.......................................... (151,886) (326,095) (79,852) (83,737)
Cash Flows from Financing Activities
Proceeds from issuance of convertible subordinated
notes............................................... 0 652,176 0 0
Payment of underwriting commission.................. 0 (14,237) 0 0
Net proceeds from issuance of shares and stock options 35,948 26,351 26,630 27,926
Other financing activities.......................... (1,750) 0 (5,203) (5,456)
----------- ------------- ------------- -------------
Net cash provided by financing activities from
continuing operations............................... 34,198 664,290 21,427 22,470
Net cash flows...................................... 133,056 138,580 (112,576) (118,054)
Minority interest................................... 121,119 (121,119) 0 0
Effect of changes in exchange rates on cash......... 39,685 17,604 (1,869) (1,960)
Net cash used by SVG for the quarter
ended December 31, 2000(2).......................... 0 (38,772) 0 0
Net cash flow (used) provided by
discontinued operations............................. (45,048) (69,815) (127,473) (133,676)
----------- ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 248,812 (73,522) (241,918) (253,689)
Cash and cash equivalents at beginning of the year.. 735,388 984,200 910,678 954,990
Cash and cash equivalents at end of the year........ 984,200 910,678 668,760 701,301
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest............................................ 18,427 33,444 66,614 69,855
Taxes............................................... 146,520 73,922 3,642 3,819
Supplemental non-cash investing and financing activities:
Conversion of Bonds into 13, 634,782 ordinary shares 0 0 265,411 278,325
_________________
(2) The decrease in net cash used by SVG for the quarter ended December 31,
2000 consists of EUR 31,659 provided by operating activities, EUR
(16,336) used for investing activities, EUR (58,430) used for
discontinued activities and EUR 4,335 provided by financing activities.
F-5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
The accompanying Consolidated Financial Statements include the Financial
Statements of ASML Holding N.V. Veldhoven, the Netherlands, and its
consolidated subsidiaries (together referred to as "ASML" or the "Company").
ASML is a worldwide business engaged in the development, production,
marketing, sale and servicing of advanced semiconductor equipment systems,
mainly consisting of lithography systems. ASML's principal operations are in
the Netherlands, the United States and Asia.
ASML follows accounting principles generally accepted in the United States of
America ("U.S. GAAP"). ASML's reporting currency is the euro. The accompanying
Consolidated Financial Statements are stated in thousands of euro ("EUR")
except that, solely for the convenience of the reader, certain euro amounts
presented as of and for the year ended December 31, 2002 have been translated
into United States dollars ("USD") using the exchange rate in effect on
December 31, 2002 of USD 1.00 = EUR 0.9536. These translations should not be
construed as representations that the euro amounts could be converted into
U.S. dollars at that rate.
On May 21, 2001, ASML merged with SVG, a company active in the lithography,
Track and Thermal business. The merger with SVG is accounted for under the
"pooling of interests" method. For accounting and financial reporting
purposes, the companies are treated as if they had always been combined.
Therefore, the Consolidated Financial Statements for each of the three years
ended December 31, 2002, 2001 and 2000 reflect the combination of Financial
Statements for ASML's historical operations with those of SVG for all periods
presented. Because SVG's fiscal year ended on September 30, prior to the
merger ASML's comparative figures for fiscal 2000 include the results of
ASML's historical operations for the twelve months ended December 31, and the
results of SVG's historical operations for the twelve months ended September
30. Consequently, SVG's net sales and net income for the quarter ended
December 31, 2000, of USD 247 million and USD 17 million respectively,
were excluded from the consolidated statement of operations for the fiscal
year 2000. The fiscal years of the two companies were aligned effective
January 1, 2001, resulting in a cumulative adjustment to shareholders' equity
of EUR (9,326) which reflects the difference between SVG's shareholder's
equity as of September 30, 2000 and December 31, 2000.
On December 18, 2002 ASML announced the proposed divestiture of its Thermal
business, including related customer support activities, and the termination
of its activities in the Track business. As a result of this decision, the
presentation of the Company's financial statements and the notes thereto have
been retroactively adjusted to reflect the effects of the decision to
discontinue these operations. Further reference is made to Note 2.
Principles of consolidation
The Consolidated Financial Statements include the accounts of ASML Holding
N.V. and all of its majority-owned subsidiaries. All inter-company profits,
transactions and balances have been eliminated in the consolidation.
Foreign currency translation
The financial information for subsidiaries outside the euro-zone is generally
measured using local currencies as the functional currency. The financial
statements of those foreign subsidiaries are translated into euro in the
preparation of ASML's consolidated financial statements. Assets and
liabilities are translated into euro at the exchange rate in effect on the
respective balance sheet dates. Income and expenses are translated into euro
based on the average rate of exchange for the corresponding period. The
resulting translation adjustments are recorded directly in shareholders'
equity. Currency differences on inter-company loans that have the nature of a
permanent investment are accounted for in a similar way.
Derivative financial instruments
The Company principally uses derivative foreign currency hedging instruments
for the management of foreign currency risks. Applying Statement of Financial
Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments
and Hedging Activities" and SFAS No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities an amendment of FASB Statement No.
133" the Company measures all derivative foreign currency hedging instruments
based on fair values derived from market prices of the instruments. The
Company adopts hedge accounting for all hedges that meet SFAS No. 133
effectiveness
F-6
criteria. Forwards and options used to hedge the impact of the fluctuations in
exchange rates on cash flows from purchase activities and sales transactions
in non-functional currencies are treated as cash flow hedges. The critical
terms of the hedging instruments are the same as those for the underlying
transactions. The changes in fair value of the derivatives are intended to
offset changes in the expected cash flows from the underlying transactions.
The change in the fair value of cash flow hedges are deferred in other
comprehensive income until the underlying exposure is recognized in the Income
Statement.
When the underlying transaction is recognized, the related gain or loss on the
cash flow hedge accumulated in other comprehensive income is released to the
income statement. Gains and losses of hedges on sales transactions are
recognized in revenue, while gains and losses of hedges on forecasted purchase
transactions are recognized in cost of sales. In the event that the underlying
transaction does not occur, or it becomes probable that it will not occur, the
gain or loss on the related cash flow hedge is released from accumulated other
comprehensive income and included in the Income Statement.
Forwards used to hedge accounts receivable, accounts payable and other
monetary assets and liabilities denominated in non-functional currencies are
designated as fair value hedges. Both the change in the fair value of these
hedges and their underlying exposure are recognized in the Income Statement.
Interest rate swaps that are being used to hedge the fair value of fixed loan
coupons payable are designated as fair value hedges, with changes in fair
value recorded in the Income Statement. The change in fair value is intended
to offset the change in the fair value of the underlying fixed loan coupons,
which is recorded accordingly. Interest rate swaps that are being used to
hedge changes in the variability of future interest receipts are designated as
cash flow hedges. The critical terms of the hedging instruments are the same
as those for the underlying assets. Accordingly, all changes in fair value of
these derivative instruments are recorded as other comprehensive income. The
accumulated changes in fair value of the derivatives are intended to offset
changes in future interest cash flows on the assets.
The Company records any ineffective portion of foreign currency hedging
instruments in cost of sales in the Income Statement. Ineffectiveness of
hedging instruments had an impact of EUR 0.8 million on cost of sales in 2002.
The ineffective portion of interest rate swaps is recorded in interest income
(expense). The Company did not incur effects due to ineffectiveness of
interest rate swaps in 2002.
Cash and cash equivalents
Cash and cash equivalents consist primarily of highly liquid investments, such
as bank deposits and commercial paper, with insignificant interest rate risk
and remaining maturities of three months or less at the date of acquisition.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market value. Cost includes net prices paid for materials purchased, charges
for freight and customs duties, production labor cost and factory overhead.
Allowances are made for slow moving, obsolete or unsaleable inventory.
Intangible assets
Intangible assets include acquired intellectual property rights that are
valued at cost and are amortized on a straight-line basis over their estimated
useful life of 10 years.
Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is calculated using the
straight-line method based on the estimated useful lives of the related
assets. In the case of leasehold improvements, the estimated useful lives of
the related assets do not exceed the remaining term of the corresponding
lease. The following table presents the assigned economic lives of ASML's
property, plant and equipment:
Category Assigned economic life
------------------------------------------------------ ----------------------
Buildings and constructions............................ 5 - 40 years
Machinery and equipment................................ 2 - 5 years
Office furniture/fixtures.............................. 3 - 5 years
Leasehold improvements................................. 5 - 10 years
F-7
Certain internal and external costs associated with the purchase and/or
development of internally used software are capitalized when both the
preliminary project stage is completed and management has authorized further
funding for the project, which it has deemed probable to be completed and to
be usable for the intended function. These costs are amortized on a
straight-line basis over the period of related benefit, which ranges primarily
from two to five years.
Evaluation of long-lived assets for impairment
The Company evaluates its long-lived assets, which include property, plant and
equipment and intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying amount of those assets may not be
recoverable. Recoverability of these assets is measured by a comparison of the
carrying amount of the asset to future undiscounted net cash flows expected to
be generated by the asset. If those assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the asset. Assets held for sale
are reported at the lower of the carrying amount or fair value less the cost
to sell.
Recognition of revenues, income and expenses
ASML distinguishes between revenues from "new" and "proven" technology
systems. Revenue for "proven technology" systems is recognized upon shipment,
since title passes to the customer at that moment, and the customer has
unconditionally accepted the system during a factory test prior to shipment.
Revenues on "new technology" systems are deferred until installation and
acceptance at the customer's premises are completed. As soon as a track record
has been established regarding the successful and timely installation and
acceptance of equipment previously identified as "new technology," ASML
considers the equipment to be "proven technology". At that time, ASML changes
the timing of revenue recognition to the shipment date in accordance with its
revenue policy for "proven technology" and recognizes previously deferred
revenue. In the second half of 2002, the TwinscanTM technology, which was
previously identified as "new technology", has been marked "proven
technology." The fair value of installation services provided to the customers
is initially deferred and is recognized when the installation is completed.
Sales from service contracts are recognized when performed. Revenue from
prepaid service contracts is recognized over the life of the contract.
Cost of sales
Costs of product sales comprise direct product costs such as materials, labor,
cost of warranty, depreciation and related overhead costs. Repayments of
certain technical development credits, which are calculated as a percentage of
sales, are also charged to cost of product sales (see "Research and
development cost and credits," below).
ASML accrues for the estimated cost of the warranty on its systems, which
includes the cost of labor and parts necessary to repair systems during the
warranty period. The amounts recorded in the warranty accrual are estimated
based on actual historical expenses incurred and on estimated probable future
expenses related to current sales. Actual warranty costs are charged against
the accrued installation and warranty reserve. Costs of service sales comprise
direct service costs such as materials, labor, depreciation and overhead costs
relating to providing extended warranty and maintenance services.
Restructuring
ASML applies the criteria defined in Emerging Issues Task Force consensus
("EITF") 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring)," in order to determine when a liability for restructuring
or exit costs should be recognized. With respect to employee termination
costs, one of these criteria relates to the existence of authorized plans that
have been communicated to the employees involved in a sufficient level of
detail. Other exit costs include purchase and other commitments to be settled
or fulfilled.
Related costs are estimated based on expected settlement fees and committed
payments, taking into account future potential benefits, if any, from those
commitments.
Research and development costs and credits
Costs relating to research and development are charged to operating expense as
incurred. Subsidies and other governmental credits for research and
development costs relating to approved projects are recorded as research and
development credits in the period when the research and development cost to
which the subsidy or credit relates occurs. Technical development credits
(Technische Ontwikkelingskredieten or "TOKs") received from
F-8
the Netherlands government to offset the cost of certain research and
development projects are contingently repayable, including accrued interest,
as a percentage of the revenues from future sales, if any, of equipment
developed in such projects. These repayments are charged to cost of sales at
the time such sales are recorded (see Note 16). No repayments are required if
such sales do not occur.
Stock options
ASML applies Accounting Principles Board Opinion ("APB") 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
stock option plans. SFAS 123, Accounting for Stock-Based Compensation, allows
companies to elect to recognize the fair value of the stock options granted to
employees as an expense, or to account for stock option plans using the
intrinsic value method under APB 25 and provide pro forma disclosure of the
impact of the fair value method on net income and earnings per share. ASML
continues to account for its stock options under the intrinsic value method
and discloses the pro forma effects of SFAS 123 in Note 13.
Net income (loss) per ordinary share
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average ordinary shares outstanding for that period. Diluted net
income per share reflects the potential dilution that could occur if options
issued under ASML's stock compensation plan were exercised, and if ASML's
convertible loans were converted, unless the conversion would have an
anti-dilutive effect. The dilutive effect is calculated using the treasury
method. As a result of the losses incurred by the Company, there is no
difference between basic and diluted earnings in 2002 and 2001 because the
assumed conversion of loans and exercise of stock options would have been
anti-dilutive.
A summary of the weighted average number of shares and ordinary equivalent
shares is as follows:
Year ended December 31
---------------------------------------------
2000 2001 2002
---------- ---------- ------------
(Amounts in thousands)
Basic weighted average shares outstanding........... 461,887 465,866 476,866
Weighted average ordinary equivalent shares......... 21,240 0 0
Diluted weighted average shares outstanding......... 483,127 465,866 476,866
Excluded from the diluted weighted average share outstanding calculation are
cumulative preference shares contingently issuable to the preference share
foundation, since they represent a different class of stock than the ordinary
shares. See further discussion in Note 22.
Use of estimates
The preparation of ASML's Consolidated Financial Statements in conformity with
U.S. GAAP requires Management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities on the balance sheet dates and the reported amounts of
revenue and expense during the reported periods. Actual results could differ
from those estimates.
Comprehensive income
Comprehensive income consists of net income (loss) and other comprehensive
income (loss). Other comprehensive income (loss) refers to revenues, expenses,
gains and losses that are not included in net income, but recorded directly in
shareholders' equity. For the years ended December 31, 2002, 2001 and 2000,
comprehensive income consists of net income (loss), unrealized gains and
losses on derivative financial instruments and foreign currency translation
adjustments.
Segment disclosure
In prior years and the first half of 2002, ASML reported in two business
segments, Lithography and Track and Thermal. As ASML has terminated
substantially its entire Track business and initiated the sale of the Thermal
business, they are presented as discontinued operations and no longer
presented as a separate segment. Customer support obligations and activities
related to the Track business are continuing and reported as part of the
lithography business (see Note 2). ASML operates in three general geographic
locations (see Note 18).
F-9
Income taxes
The asset and liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for operating
loss and tax credit carryforwards and for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the results of
operations in the period that includes the enactment date. If it is more
likely than not that the carrying amount of deferred tax assets will not be
realized, a valuation allowance will be recorded.
Newly adopted accounting pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Intangible Assets."
SFAS No. 141 requires that all business combinations initiated after June 30,
2001 be accounted for under the purchase method and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired
in a business combination. The adoption of this standard did not impact ASML's
financial position, result of operations or cash flows.
SFAS No. 142 addresses the initial recognition and measurement of intangible
assets acquired outside of a business combination and the accounting for
goodwill and other intangible assets subsequent to their acquisition. SFAS No.
142 provides that intangible assets with finite useful lives be amortized and
that goodwill and intangible assets with indefinite lives not be amortized,
but instead tested at least annually for impairment. The adoption of SFAS No.
142 as of January 1, 2002, did not have an impact on the Company's financial
position, result of operations or cash flows, since it did not have any
goodwill or intangible assets with indefinite lives.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses the impairment or
disposal of long-lived assets and supersedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations, for a disposal of a segment of a business." SFAS 144 is effective
for fiscal years beginning after December 15, 2001, with earlier application
encouraged. ASML adopted SFAS 144 as of January 1, 2002. The Company performed
an assessment of its long-lived assets within the Track and Thermal businesses
and recorded impairment losses of EUR 11 million. The impairment charges
related to the Track and Thermal businesses that resulted from the adoption of
SFAS 144 have been included in the `result of discontinued operations'.
Furthermore, ASML assessed the valuation of fixed assets for continuing
operations. This lead to an impairment charge of EUR 20 million that has been
recognized in cost of sales of continuing operations.
Under SFAS 144, a component of a business is reported in discontinued
operations if the operations and cash flows will be, or have been eliminated
from the ongoing operations of the company and the company will not have any
significant continuing involvement in such operations. Accordingly, ASML
reported its Thermal and Track businesses as discontinued operations, details
of which are provided in Note 2.
In 2002, Netherlands legislation was adopted that requires full disclosure of
individual management remuneration. The legislation became effective for
financial years starting on or after January 1, 2002. ASML has included the
required disclosures in Note 19.
Recent accounting pronouncements
In June 2001, FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 establishes accounting standards for the recognition
and measurement of legal obligations associated with the retirement of
tangible long-lived assets and requires recognition of a liability for an
asset retirement obligation in the period in which it is incurred. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company does not anticipate that the
adoption of SFAS 143 will have a material impact on its Consolidated Financial
Statements.
In April, 2002, the FASB issued SFAS 145, "Rescission of SFAS No. 4, 44, 64,
Amendment of SFAS 13, and Technical Corrections." SFAS 145 applies to fiscal
years beginning after May 15, 2002 or certain transactions entered into after
May 15, 2002. ASML did not enter into transactions that are within the scope
of SFAS 145
F-10
after May 15, 2002 and does not expect the adoption of SFAS 145 to have a
material impact on its Financial Statements.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." This statement defines the accounting and
reporting for costs associated with exit or disposal activities and is
effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. SFAS 146 supersedes Emerging
Issues Task Force (EITF) issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity." ASML will
adopt SFAS 146 as of January 1, 2003 and does not expect the adoption of the
statement to have a significant impact on its financial position and result of
operations.
In December 2002, the FASB Issued Statement No.148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB
Statement No. 123," ("SFAS 148"). SFAS 148 amends FASB Statement No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123") and provides
alternative methods for accounting for a change by registrants to the fair
value method of accounting for stock-based compensation. Additionally, SFAS
148 amends the disclosure requirements of SFAS 123. The statement is effective
for fiscal years beginning after December 15, 2002, and disclosures are
effective for the first fiscal quarter beginning after December 15, 2002. ASML
has not yet determined the impact of the adoption of SFAS 148 on the Company's
result of operations or financial position.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." The disclosure provisions of
FIN 45 are effective for financial statements of interim or annual periods
that end after December 15, 2002. The provisions for initial recognition and
measurement are effective on a prospective basis for guarantees that are
issued or modified after December 31, 2002, irrespective of a guarantor's
year-end. ASML has not yet determined the impact of the adoption of FIN 45 on
the Company's result of operations or financial position.
In November 2002, the EITF 00-21 "Revenue Arrangements with Multiple
Deliverables" was released. The provisions of EITF Issue No. 00-21 will apply
to revenue arrangements entered into in fiscal periods beginning after June
15, 2003. ASML is currently evaluating the effect that the adoption of EITF
Issue No. 00-21 will have on its result of operations and financial condition.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") addressing consolidation by business
enterprises of variable interest entities, which include various special
purpose vehicles and off-balance structures. FIN 46 requires consolidation
where there is a controlling financial interest in a variable interest entity
or where the variable interest entity does not have sufficient equity at risk
to finance its activities without additional subordinated financial support
from other parties. FIN 46 applies immediately to variable interest entities
created after January 31, 2003, and applies in the first year or interim
period beginning after June 15, 2003 to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
It is reasonably possible that upon adoption of FIN 46, certain variable
interest entities could be required to be included in the Company's
Consolidated Financial Statements.
We assessed and will continue to evaluate the impact of this interpretation on
our financial condition and results of operations. Our preliminary assessment
has indicated that ASML is party to a transaction involving a variable
interest entity relating to the lessor of the Veldhoven headquarters building
that is under construction, together with adjacent office space.
ASML has a commitment to fund the lessor with a subordinated loan of EUR 5.4
million at the inception of the lease of the headquarters building, expected
mid-2003. The lease of the adjacent office space commenced July 1, 2002. Both
leases will expire in 2018. The Company has an option to purchase the
property, according to a predetermined price scheme, throughout the term of
the lease. Total assets of the lessor, upon completion of the headquarters
building, will amount to approximately EUR 54 million and are funded through
third party equity, third party loans and the subordinated loan provided by
ASML. ASML's maximum exposure to loss is estimated as the amount of the
subordinated loan issued to the lessor of EUR 5.4 million.
We are currently in the process of analyzing whether ASML is the primary
beneficiary in the lessor entity and may as such be required to consolidate
the specific assets and liabilities of the lessor in ASML's third quarter 2003
quarterly balance sheet.
F-11
2. Discontinued operations
Discontinuance of Track and Thermal businesses
On December 18, 2002 ASML announced the proposed sale of its Thermal business
and the termination of its activities in the Track business. Both discontinued
businesses met the criteria of SFAS 144 and have been classified accordingly.
The Company reviewed its long-lived assets used in the Thermal business for
potential impairment. No impairment charges were recorded on the
Thermal-related net assets. The Company is currently in ongoing negotiations
with interested buyers and expects to sell the Thermal business in 2003. The
net loss from operations of the Thermal business amounted to EUR 61.2 million
in 2002 compared to EUR 42.8 million in 2001.
The termination of the Track business has resulted in an exit plan that
includes workforce reduction, fixed asset impairments and inventory write-offs
due to discontinued product lines. The exit plan includes the disposal of
remaining assets related to the Track business. ASML will continue to service
its existing customers for which ASML has warranty or other service
obligations. Consequently, customer support related to the Track business has
not been included in discontinued operations.
The net loss from operations of the Track business amounted to EUR 56.6
million for 2002 (2001:EUR 20.9 million ) including total pre-tax estimated
exit costs of EUR 47.0 million. These exit costs include asset impairments,
inventory write downs, purchase and other commitment settlements and employee
termination costs. The number of employees to be terminated under the plan is
expected to be approximately 200.
From a tax perspective, assets impairment costs, employee termination costs,
inventory write-off and losses from discontinued operations mostly reside and
will remain with ASML U.S. group companies. These losses can be offset against
future profits from continuing operations of these U.S. group companies.
Summarized results of operations for discontinued operations are as follows:
Years ended December 31
------------------------------------------------
2000 2001 2002
------------ ------------- -------------
Revenues
Track........................................... 88,320 51,472 7,236
Thermal......................................... 301,694 203,642 105,929
------------ ------------- -------------
Total........................................... 390,014 255,114 113,165
Loss from discontinued operations, net of taxes
Track loss from operations...................... (2,368) (20,946) (27,991)
Track exit costs (net of taxes)................. 0 0 (30,626)
Thermal loss from operations.................... (643) (42,844) (61,161)
------------ ------------- -------------
Total........................................... (3,011) (63,790) (119,778)
Summarized assets and assumed liabilities from discontinued operations are as
follows:
As of December 31
------------------------------------------------------------------------------
2001 2002
--------------------------------------- --------------------------------------
Track Thermal Total Track Thermal Total
----- ------- ----- ----- ------- -----
Assets
Intangible assets............. 0 2,101 2,101 0 4,410 4,410
Tangible fixed assets......... 15,182 33,493 48,675 3,812 29,182 32,994
Inventories................... 23,442 67,177 90,619 339 34,354 34,693
Receivables................... 5,082 54,470 59,552 1,529 31,535 33,064
Other......................... 3,428 4,447 7,875 256 677 933
-------- ---------- --------- --------- --------- --------
Total Assets....................... 47,134 161,688 208,822 5,936 100,158 106,094
Liabilities
Accounts payable.............. 3,923 10,878 14,801 2,200 8,263 10,463
Accrued liabilities........... 18,947 34,106 53,053 26,425 15,316 41,741
Installation and warranty..... 0 25,862 25,862 0 13,887 13,887
-------- ---------- --------- --------- --------- --------
Total Liabilities.................. 22,870 70,846 93,716 28,625 37,466 66,091
F-12
ASML organizes its financing activity at the corporate level and does not
allocate funding to individual net assets identified as assets from
discontinued operations. The following table represents cash flows directly
attributable to ASML's discontinued operations.
Years ended December 31
----------------------------------------------------
2000 2001 2002
------------- ----------- -------------
Net cash provided (used) by
operating activities of discontinued operations (35,615) (35,937) (121,039)
Net cash used in investing activities of
discontinued operations (9,433) (33,878) (6,434)
------------- ----------- -------------
Net cash used in discontinued operations (45,048) (69,815) (127,473)
3. Restructuring
On December 18, 2002 ASML announced measures to contain costs for its
lithography business, including customer support, to lower the breakeven point
by adjusting labor capacity and increasing operating flexibility. ASML intends
to reduce its lithography-related work force by approximately 700 positions
worldwide (11.7 percent). In combination with the effects of discontinued
operations, this will result in an expected total work force of approximately
5,300 by the end of the first half of 2003. Total costs worldwide for
lithography-related employee termination are estimated at approximately EUR
14.5 million, which will be largely recorded in 2003 since the final details
on the plan had not been finally determined by December 31, 2002. ASML also
recorded provisions of EUR 78.5 million during 2002 for slow-moving and
obsolete lithography inventory and impairments of tangible fixed assets which
were recorded as cost of sales.
On October 16, 2001, as a consequence of the ongoing downturn in the
semiconductor industry, ASML announced cost reductions and a restructuring
plan which should result in the consolidation of manufacturing facilities and
discontinuance of certain product lines related to SVG.
The components of the 2001 restructuring charge were as follows:
Selling, general
and
administrative
Cost of Sales expenses Total
------------- ------------------ --------
Inventory write-off 300,443 0 300,443
Purchase commitments 51,761 0 51,761
Fixed assets write-off 31,345 462 31,807
Building closure costs 2,700 865 3,565
Severance payments 13,370 1,755 15,125
Total restructuring charges 399,619 3,082 402,701
The restructuring provision relating to the 2001 restructuring is as follows
as of December 31, 2002:
Purchase Building closure Severance
commitments costs payments Total
----------- ----------------- ---------- --------
Balance as of December 31, 2001 51,761 2,058 9,181 63,000
Incurred to date (27,126) (2,044) (6,580) (35,750)
Adjustments (6,337) 2,116 (1,686) (5,907)
Effect of foreign currency translation (8,272) (330) (915) (9,517)
----------- ----------------- ---------- --------
Balance as of December 31, 2002 10,026 1,800 0 11,826
Adjustments to the 2001 restructuring plan amounting to EUR 5,907 have been
recognized in 2002 and are classified as costs of sales. The Company expects
to finalize its 2001 restructuring in fiscal year 2003.
4. Other significant events
In April 2002 ASML exercised its option to redeem and did thereby call for
redemption on May 3,2002, its remaining outstanding bonds under its 2.5
percent convertible loan (EUR 268.5 million) at a redemption price of 100.00
percent of the principal amount of the bonds plus accrued interest. Before May
3, bondholders converted bonds for a total of EUR 265.4 million into
13,634,782 ordinary shares.
F-13
5. Market risk and derivatives
Market risk represents the risk of a change in the value of a financial
instrument, derivative or non derivative, caused by fluctuations in currency
exchange rates and interest rates. The Company addresses market risk in
accordance with established policies and thereby enters into various
derivative transactions. No such transactions are entered into for trading
purposes.
Foreign currency management
The Company uses the euro as its invoicing currency in order to limit the
exposure to foreign currency movements. Exception may occur on a customer by
customer basis. To the extent that invoicing is done in a currency other than
the euro, the Company is exposed to foreign currency risk.
It is the Company's policy to hedge material transaction exposures, such as
sales transactions and forecasted cash flows from sales and accounts
receivable/accounts payable. ASML hedges these exposures through the use of
foreign exchange options and forward contracts. The use of a mix of foreign
exchange options and forwards is aimed at reflecting the likelihood of the
transactions occurring. The effectiveness of all outstanding hedge contracts
is monitored closely throughout the life of the hedges.
During the twelve months ended December 31, 2002, EUR 0.8 million of net gain
was recognized in cost of sales relating to hedges of forecasted transactions
that did not occur. As of December 31, 2002, EUR 0.6 million of other
comprehensive income represents the total anticipated loss to be charged to
cost of sales, and EUR 3.2 million is the total anticipated gain to be
released to cost of sales over the next twelve months as the forecasted
revenue and purchase transactions occur.
It is the Company's policy to hedge material re-measurement exposures. These
net exposures from certain monetary assets and liabilities in non-functional
currencies are hedged with forwards. Furthermore, the Company uses forwards to
hedge its 320 million Swedish Kroner loan to Micronic.
It is the Company's policy to manage material translation exposures resulting
predominantly from ASML's U.S. dollar net investments. ASML's USD 520
million 4.25 percent Convertible Subordinated Notes due 2004 are assigned to
certain of the Company's net U.S. dollar investments. As a result,
fluctuations in the Company's balance sheet ratio's resulting from changes in
exchange rates are reduced.
Interest rate management
The Company has both assets and liabilities that bear interest, which expose
the Company to fluctuations in the prevailing market rate of interest. The
Company uses interest rate swaps to align the interest typical terms of
interest bearing assets with the interest typical terms of interest bearing
liabilities. The Company still retains residual financial statement exposure
risk to the extent that the asset and liability positions do not fully offset.
It is the Company's policy to enter into interest rate swaps to hedge this
residual exposure. For this purpose, the Company uses interest rate swaps,
both to hedge changes in market value of fixed loan coupons payable due to
changes in interest rates as well as to hedge the variability of future
interest receipts as a result of changes in market interest rates.
Financial instruments as of December 31, 2002
Primary financial instruments recorded on the balance sheet include cash and
cash equivalents, accounts receivable and accounts payable. The carrying
amount of these financial instruments approximates their fair value due to the
short-term nature of these instruments.
The following table summarizes the Company's derivative financial instruments,
their market values and their sensitivity to changes in exchange rate or
interest rates:
Fair value
change resulting Fair value change
from a 1% resulting from a
non-favorable 10% weakening of
Notional Fair increase in EUR against other
Derivative Amount Value interest rate currency
--------------------- --------- ------------- ---------------- ---------------------
Forward contracts 223,000 845 N/A 5,246
Currency options 41,000 782 N/A (12)
Interest rate swaps 982,000 5,684 (18,659) N/A
F-14
Credit risk
ASML is exposed to credit-related losses in the event of non-performance by
counter parties to financial instruments. Although ASML selects and monitors
counter parties and uses protective measures, such as letters of credit, where
deemed necessary, provisions for potential losses are set up.
6. Accounts receivable
Accounts receivable consist of the following:
As of December 31,
----------------------------------------
2001 2002
-------------- --------------
Gross accounts receivable 513,320 556,988
Allowance for doubtful debts (2,754) (324)
-------------- --------------
Net accounts receivable 510,566 556,664
A summary of activity in the allowance for doubtful debt:
Balance at beginning of year (1,439) (2,754)
Utilization of the provision 0 2,430
Additional provision in the year (1,315) 0
-------------- --------------
Balance at end of year (2,754) (324)
7. Inventories
Inventories consist of the following:
As of December 31,
----------------------------------------
2001 2002
-------------- --------------
Raw materials 566,609 267,054
Work-in-process 449,625 366,440
Finished products 262,526 381,795
-------------- --------------
Total inventories, gross 1,278,760 1,015,289
Allowance for obsolescence and/or
lower market value (500,491) (285,264)
-------------- --------------
Total inventories, net 778,269 730,025
A summary of activity in the allowance for obsolescence is as follows:
Balance at beginning of year 126,779 500,491
Adjustment for pooling of interests 5,040 0
Balance at beginning of year as restated 131,819 500,491
Provision for the year(1) 393,005 112,164
Effect of exchange rates 4,013 (36,673)
Utilization of provision (28,346) (290,718)
-------------- --------------
Balance at end of year 500,491 285,264
(1) Refer to Note 3, "Restructuring"
8. Other assets
Other non-current assets consist of the following:
As of December 31,
----------------------------------------
2001 2002
-------------- --------------
Loan to Micronic AB(1) 34,405 35,176
Compensation plan assets(2) 10,078 10,994
Prepaid expenses 24,480 14,915
F-15
Other 20,421 672
-------------- --------------
Total other long-term assets 89,384 61,757
(1) The loan to Micronic has a notional amount of 320 million Swedish Kroners
and is non-interest bearing. The loan is repayable in 2004 or can be
converted into 1 million shares of Micronic upon the first request of ASML.
(2) For further details on compensation plan refer to Note 13.
Other current assets consist of the following:
As of December 31,
----------------------------------------
2001 2002
-------------- --------------
Loans to Zeiss 95,925 76,443
VAT 33,424 34,654
Prepaid expenses 42,393 43,745
Other 20,872 20,253
-------------- --------------
Total other current assets 192,614 175,095
The non-interest bearing loans to Zeiss are repayable by future shipments of
lenses or can be redeemed in cash depending on the specific contractual terms
of the individual loans.
9. Intangible assets
In July 1999, ASML obtained, through its purchase of the business of
MaskTools, the intellectual property rights relating to Optical Proximity
Correction technology. This technology enhances leading edge lithography
systems to accurately and reliably print line widths below 0.2 micron. These
rights have been valued at cost and are amortized on a straight-line basis
over their estimated useful life of 10 years.
As of December 31,
----------------------------------------
2001 2002
-------------- --------------
Balance, January 1 19,969 20,475
Additions 506 0
-------------- --------------
Balance, December 31 20,475 20,475
Accumulated depreciation
Balance, January 1 2,102 4,200
Amortization 2,098 2,206
-------------- --------------
Balance, December 31 4,200 6,406
-------------- --------------
Net book value December 31 16,275 14,069
10. Property, plant and equipment
Property, plant and equipment consist of the following:
Office
Buildings & Machinery and Leasehold furniture and
constructions equipment improvements fixtures Total
----------------- --------------- -------------- --------------- ----------
Cost
Balance, January 1 183,236 664,802 107,093 135,091 1,090,222
Additions 2,331 105,525 7,001 23,729 138,586
Disposals (1,006) (118,936) (76) (2,130) (122,148)
Effect of exchange rates (17,581) (52,645) (1,199) (2,639) (74,064)
--------- --------- --------- --------- ---------
Balance, December 31, 2002 166,980 598,746 112,819 154,051 1,032,596
Accumulated depreciation
Balance, January 1 59,446 278,533 39,768 87,803 465,550
Depreciation 9,853 99,586 17,901 26,469 153,809
Impairment* 0 20,651 0 0 20,651
Disposals (1,078) (59,385) (22) (1,584) (62,069)
Effect of exchange rates (7,622) (30,274) (1,050) (2,122) (41,068)
--------- --------- --------- --------- ---------
Balance, December 31, 2002 60,599 309,111 56,597 110,566 536,873
F-16
Net Book Value
December 31, 2001 123,790 386,269 67,325 47,288 624,672
--------- --------- --------- --------- ---------
December 31, 2002 106,381 289,635 56,222 43,485 495,723
_______________________
* Impairment charges were recognized for own use equipment that was identified
as idle capacity. Reference is made to Note 2.
11. Accrued liabilities and other
Accrued liabilities and other consist of the following:
As of December 31,
----------------------------------
2001 2002
------------ ------------
Deferred revenue 57,119 1,616
Warranty and installation 66,194 69,684
Materials and costs to be paid 73,756 73,620
Advances from customers 74,544 126,860
Personnel related items 55,251 60,814
Investment credits payable (TOK) 364 31,651
Restructuring 63,000 11,826
Other 68,635 72,777
------------ ------------
Total accrued liabilities and other 458,863 448,848
12. Long-term debt, borrowing arrangements and commitments
The following table summarizes the company's outstanding convertible debt
securities as of the dates indicated:
As of December 31,
----------------------------------
2001 2002
------------ ------------
2.5 percent convertible 268,519 0
4.25 percent convertible 589,931 495,757
5.75 percent convertible 652,452 568,283
------------ ------------
Total convertible debt 1,510,902 1,064,040
In April 1998, ASML completed an offering of EUR 272 million principal amount
of its 2.5 percent Convertible Subordinated Bonds due 2005, with interest
payable annually commencing April 9, 1999. In April 2002, ASML exercised its
option to redeem and did thereby call for redemption on May 3, 2002, all of
the Company's remaining outstanding bonds (EUR 268.5 million) at a redemption
price of 100.00 percent of the principal amount of the bonds plus accrued
interest. Before May 3, bondholders converted bonds for a total of EUR 265.4
million into 13,634,782 ordinary shares.
In November 1999, ASML completed an offering of USD 520 million principal
amount of its 4.25 percent Convertible Subordinated Notes due November 30,
2004, with interest payable semi-annually on November 30 and May 30 of each
year, commencing on May 30, 2000. The remaining notes are convertible into
13,956,975 ordinary shares at USD 37.25 (EUR 35.52) per share at any time
prior to maturity. At any time on or after December 5, 2002, the notes are
redeemable at the option of ASML, in whole or in part, at the prices specified
below, together with accrued interest. During 2001 and 2002, none of the notes
were converted into ordinary shares.
The redemption prices, expressed as a percentage of the outstanding principal
amount of the notes being redeemed are:
Redemption Price
January 1, 2003, through December 4, 2003 101.70%
December 5, 2003, through November 29, 2004 100.85%
November 30, 2004, and thereafter 100.00%
F-17
In October 2001, ASML completed an offering of USD 575 million principal
amount of its 5.75 percent Convertible Subordinated Notes due October 15,
2006, with interest payable semi-annually on April 15 and October 15 of each
year, commencing on April 15, 2002. The notes are convertible into 30,814,576
ordinary shares at USD 18.66 (EUR 17.79) per share at any time prior to
maturity. At any time on or after October 22, 2004, the notes are redeemable
at the option of ASML, in whole or in part, at 100 percent of its principal
amount, together with accrued interest, provided that the Company's shares
close above 130 percent of the conversion price for twenty trading days out of
a thirty-day period. During 2002 none of the notes were converted into
ordinary shares. Deferred interest rate swap proceeds amounting to EUR 19,985
have been classified under this convertible debt. The fair value of all
remaining outstanding notes as of December 31, 2002 amounted to EUR 894.4
million (USD 937.9 million).
Other long term debt
In February 1997, the Company received a USD 6.5 million (EUR 6.2 million)
loan from the Connecticut Development Authority. The loan has a ten-year term,
bears interest at 8.25 percent, and is secured by the Company's Wilton,
Connecticut facility.
In 1999, the Company assumed three yen-denominated loans in connection with
its merger with SVG. Approximately EUR 4 million (JPY 574 million), which is
secured by land and buildings in Japan, is payable in monthly installments
through the year 2011, bearing interest at 2.5 percent. Approximately EUR 11
million (JPY 1,350 million) and EUR 2 million (JPY 200 million) are unsecured,
are repayable in 2006 and 2007, respectively and bear interest at 3.1 percent
and 2.2 percent, respectively, payable semiannually.
Lines of credit
At December 31, 2002, the Company had available credit facilities for a total
of EUR 288 million (2001, EUR 288 million), all of which expire in 2005. These
credit lines bear interest at the European Interbank Offered Rate (EURIBOR)
plus a margin. No amounts were outstanding under these credit facilities at
the end of 2002. The credit facilities contain certain restrictive covenants.
These covenants amongst others require the maintenance of a minimum equity to
asset ratio. At December 31, 2002 ASML was in compliance with these covenants
and the Company does not currently anticipate any difficulty in continuing to
meet these covenant requirements.
Contractual obligations and commercial commitments
The Company's contractual obligations and commercial commitments as of
December 31, 2002 can be summarized as follows:
Contractual obligations Total Less than 1-3 4-5 After 5
1 year years years years
______________________________________________________________________________________________________________
Long Term Debt 1,084,491 571 496,899 585,264 1,757
Operating Lease Obligations 317,220 36,115 62,149 51,763 167,193
Unconditional Purchase Obligations 766,017 615,319 150,698 0 0
______________________________________________________________________________________________________________
Total Contractual Cash Obligations 2,167,728 652,005 709,746 637,027 168,950
Operating lease obligations include leases of equipment and facilities. Rental
expense was EUR 52 million, EUR 61 million and EUR 56 million for the years
ended December 31, 2000, 2001 and 2002, respectively.
Deferred compensation plan
Unconditional purchase obligations include medium to long-term purchase
agreements. These contracts can take several forms and may include restrictive
clauses. Any identified losses that would result from purchase commitments
that are expected to be forfeited are provided for. In its negotiations with
key suppliers ASML continuously seeks to align its purchase commitments with
its business objectives.
F-18
13. Employee benefits
In February 1997, SVG adopted a non-qualified deferred compensation plan that
allowed a select group of management and highly compensated employees and
directors to defer a portion of their salary, bonus and commissions. The plan
allowed SVG to credit additional amounts to participants' account balances,
depending on the amount of the employee's contribution, up to a maximum of 5
percent of an employee's annual salary and bonus. In addition, interest is
credited to the participants' account balances at 120 percent of the average
Moody's corporate bond rate.(4) For calendar years 2001 and 2002,
participants' accounts were credited at 9.54 percent and 8.89 percent,
respectively. SVG's contributions and related interest became 100 percent
vested five years after the year in which the contribution was made or in the
event of a change in control of SVG, or retirement, death or disability of the
participant. The plan became fully vested in May 2001 with the merger of SVG
and ASML. During fiscal years 2000, 2001 and 2002, the expense incurred under
this plan was EUR 2 million, EUR 2 million and EUR 1 million, respectively. As
of December 31, 2002, the Company's liability under the deferred compensation
plan was EUR 14 million.
_____________________
(4) "Moody's Corporate Bond Yield Average -Avg. Corp," calculated for the
month of October preceding the applicable plan year.
In July 2002 ASML adopted a non-qualified deferred compensation plan for its
U.S. employees that allows a select group of management or highly compensated
employees to defer a portion of their salary, bonus, and other benefits. The
plan allows ASML to credit additional amounts to the participants' account
balances. The participants invest their funds between the investments
available in the plan. Participants elect to receive their funds in future
periods after the earlier of their employment termination or their withdrawal
election, at least 3 years after deferral. There were minor plan expenses in
2002. On December 31, 2002, the Company's liability under the deferred
compensation plan was EUR 1 million.
Pension plans
ASML and its consolidated subsidiaries maintain various retirement plans
covering substantially all of its employees. Employees in the Netherlands
participate in a multi-employer union plan which consists of defined benefits
determined in accordance with the respective collective bargaining agreements.
This plan is subject to a salary cap. Employees with a salary exceeding this
cap also participate in an ASML defined contribution pension plan.
For employees working outside the Netherlands, ASML maintains a defined
contribution pension plan, with employer contribution based on a percentage of
salary. For employees participating in the United States pension plan, the
Company may make, at its sole discretion, an additional contribution to the
plan if the Company meets certain financial performance criteria.
No such contributions were made in 2000, 2001 or 2002.
The employer pension costs for all employees were:
Year ended December 31, 2000 2001 2002
________________________________________________________________________________
Pension plan based on defined benefit 10,051 17,528 15,059
Pension plan based on defined contribution 7,991 6,609 7,265
Total 18,042 24,137 22,324
________________________________________________________________________________
Profit-sharing plan
ASML has a profit-sharing plan covering all employees. Under the plan,
employees who are eligible receive an annual profit-sharing bonus, based on a
percentage of net income to sales ranging from 0 to 20 percent of annual
salary. The profit-sharing percentages of the years 2000, 2001 and 2002 were
12 percent, 0 percent and 0 percent respectively.
Stock options
Each year, the Board of Management determines, by category of ASML personnel,
the total available number of options that can be granted in that year. The
determination is subject to the approval of the Supervisory Board and the
holders of priority shares of the Company.
________________________
4 "Moody's corporate Bond Yield Average-Avg. Corp," calculated for the
month of October preceding the applicable plan year.
F-19
1998
In 1998, the company issued 3,348,576 options to purchase ordinary shares,
consisting of options to purchase 2,097,831 ordinary shares for eligible
employees of ASML and options to purchase 1,250,745 ordinary shares for key
personnel and management. This issuing of options included a feature whereby
eligible employees were given the right to elect to receive options to
purchase ordinary shares in lieu of distribution under the profit-sharing
plan. The options have fixed exercise prices equal to the closing price of the
Company's ordinary shares on Euronext Amsterdam N.V. on the applicable grant
dates. Stock options granted to eligible employees vested over a three-year
period with any unexercised stock options expiring six years after the grant
date. Stock options granted to key personnel in 1998 vested over a three and
four-year period with any unexercised stock options expiring six years after
the grant date.
1999
In 1999, stock options were authorized to purchase up to 3,000,000 ordinary
shares, including a feature whereby eligible employees were given the right to
elect to receive options to purchase ordinary shares in lieu of distribution
under the profit sharing plan. The options have fixed exercise prices equal to
the closing price of the Company's ordinary shares on Euronext Amsterdam N.V.
on the applicable grant dates. Granted stock options vested over a three-year
period with any unexercised stock options expiring six years after the grant
date.
2000
In 2000, options were authorized to purchase up to 4,500,000 ordinary shares.
Granted stock options vest over a three-year period with any unexercised stock
options expiring six years after the grant date.
2001
In 2001, options were authorized to purchase up to 6,000,000 ordinary shares,
including a feature whereby eligible employees were given the right to elect
to receive options to purchase ordinary shares in lieu of distribution under
the profit sharing plan. Options granted under these plans have fixed exercise
prices that are equal either to the closing price of the Company's ordinary
shares on Euronext Amsterdam N.V. on the applicable grant date, or 135 percent
of the closing price of the Company's ordinary shares on Euronext Amsterdam
N.V. on the applicable grant dates. Granted stock options vest over a
three-year period with any unexercised stock options expiring six years after
the grant date, with the exception of a designated part of grants made in July
2001 that have a graded vest of 1/3 (one third) after the first year, 1/3 (one
third) after the second year and 1/3 (one third) in the third year. During
2001, 232,520 options to purchase ordinary shares were granted to the Board of
Management. No options were exercised during 2001 by members of the Board of
Management.
2002
In 2002, options were authorized to purchase up to 6,000,000 ordinary shares,
including a feature whereby eligible employees were given the right to elect
to receive options to purchase ordinary shares in lieu of a percentage of
their salary. Options granted under these plans have fixed exercise prices
equal to the closing price of the Company's ordinary shares on Euronext
Amsterdam N.V. on the applicable grant dates. A designated part of the granted
stock options vest over a one year period with any unexercised stock options
expiring six years after the grant date. The remaining part of the granted
stock options vest over a three-year period with any unexercised stock options
expiring six years after the grant date.
Stock Option Extension Plans
In 2002, employees were offered an extension of the option period for options
granted in 1997 up to and including 2000. For the years 1997 up to and
including 1999, this extension is either until October 21, 2008, or October
21, 2005. For 2000, the option period is extended until 2012.
Financing of stock option plans
Option plans that were issued before 2001 were constructed with a virtual
financing arrangement whereby ASML financed the fiscal value of the options
granted to employees subject to the Netherlands tax-regime. The loans issued
under this arrangement are repayable to ASML on the exercise date of the
respective option, provided that the option was actually exercised. If the
options expire unexercised, the respective loans are forgiven. ASML accrues a
liability for the respective fiscal implication of this arrangement.
F-20
The following three tables have not been restated for discontinued operations:
Stock option transactions are summarized as follows:
Number of shares Weighted average
exercise price per
share (EUR)
Outstanding, December 31, 1999 13,167,024 12.68
______________________________________________________________________________
Granted 6,959,868 37.43
Exercised (2,630,710) 12.82
Cancelled (427,143) 18.90
______________________________________________________________________________
Outstanding, December 31, 2000 17,069,039 28.84
Granted 5,883,550 32.78
Exercised (1,488,107) 9.75
Cancelled (265,212) 23.22
Outstanding, December 31, 2001 21,199,270 26.01
Granted 4,483,070 19.30
Exercised (1,539,132) 9.45
Cancelled (266,760) 17.46
______________________________________________________________________________
Outstanding, December 31, 2002 23,876,448 25.13
______________________________________________________________________________
Exercisable, December 31, 2002 9,551,860 14.77
Exercisable, December 31, 2001 6,870,466 15.22
Exercisable, December 31, 2000 6,138,839 12.57
Information with respect to stock options outstanding at December 31, 2002 is
as follows:
Weighted average
Options outstanding Number remaining Weighted average
Range of exercise Outstanding contractual life exercise price
prices (EUR) December 31, 2002 (years) (EUR)
__________________________________________________________________________________________
2.36-8.98 571,826 4.31 7.50
9.29-12.15 4,684,526 4.93 11.34
12.87-31.75 12,357,060 4.54 21.58
35.45-47.15 6,263,036 7.35 44.06
__________________________________________________________________________________________
Total 23,876,448 5.35 25.13
Under the provisions of APB 25, no significant compensation expense was
recorded for ASML's stock-based compensation plans. Had compensation cost been
determined based upon the fair value at the grant date for awards under the
plan consistent with the methodology prescribed under SFAS 123, ASML's net
income and calculation for net income per ordinary share would have been as
follows:
Year ended December 31, 2000 2001 2002
________________________________________________________________________________
Net income (loss)
As reported 378,047 (478,992) (207,823)
Pro forma 328,489 (523,860) (349,020)*
________________________________________________________________________________
Basic net income (loss)
per ordinary share
F-21
As reported 0.82 (1.03) (0.44)
Pro forma 0.71 (1.12) (0.73)
________________________________________________________________________________
Diluted net income (loss)
per ordinary share
As reported 0.78 (1.03) (0.44)
Pro forma 0.68 (1.12) (0.73)
* Contains compensation for stock option extension plans that consequently
creates a new measurement date.
The estimated weighted average fair value of options granted during 2000, 2001
and 2002 was EUR 20.91, EUR 20.68 and EUR 11.55 respectively, on the date of
grant using the Black-Scholes option-pricing model, with the following
assumptions in 2000, 2001 and 2002 respectively: no dividend yield, volatility
of 73.0, 74.0 and 87.4 percent, risk-free interest rate of 7.20, 4.95 and 3.18
percent, no assumed forfeiture rate and an expected life of two years after
the vesting period. Presented figures take into account the non-tax deductible
element of the respective compensation expenses. The increase in pro-forma
compensation expense in 2002 was caused, for a large part, by the option
extension plan, resulting in a new measurement date for the options granted.
As most of this extension has already vested, the major effect of the
remeasurement is included in the 2002 pro forma result.
14. Legal Contingencies
ASML is party to various legal proceedings generally incidental to its
business. Since late 2001, ASML has been a party to a series of litigation and
administrative proceedings in which Nikon alleges ASML's infringement of Nikon
patents relating to photolithography. These are discussed below. ASML also
faces exposure from other actual or potential claims and legal proceedings.
Although the ultimate disposition of these other claims and proceedings cannot
be predicted with certainty, it is the opinion of the Company's management
that the outcome of any such other claim that is pending or threatened, either
individually or on a combined basis, is expected not to have a materially
adverse effect on ASML's consolidated financial condition.
On occasion, certain ASML customers have received notices of infringement from
third parties. These notices allege that the ASML equipment used by those
customers in the manufacture of semiconductor products, and/or the methods
relating to use of the ASML equipment, infringes one or more patents issued to
those third parties. ASML has been advised that, if these claims were
successful, it could be required to indemnify such customers for some or all
of any losses incurred or damages assessed against them as a result of that
infringement.
On May 23, 2000, Ultratech Stepper, Inc. ("Ultratech") filed a lawsuit in the
United States District Court for the Eastern District of Virginia (which has
subsequently been transferred to the United States District Court for the
Northern District of California) against ASML. Ultratech alleges that ASML is
infringing Ultratech's rights under a United States patent, through the
manufacture and commercialization in the U.S. of advanced photolithography
equipment embodying technology that, in particular, is used in Step & Scan
equipment. Ultratech's complaint seeks injunctive relief and damages. On
August 16, 2002, the Court granted ASML's motion for summary judgment of
non-infringement based upon the previously reported favorable interpretation
by the Court as to the scope and meaning of the claims of the asserted patent.
A final judgment on those favorable rulings has not yet been entered, and
issues remain open before the Court with respect to ASML's challenge to the
validity and enforceability of the patent. Management believes, however, based
on current information, that ASML has meritorious defenses to Ultratech's
claims, which ASML intends to vigorously assert.
On October 12, 2001, ASML filed a lawsuit in the United States District Court
for the District of Massachusetts against Ultratech. ASML's complaint alleges
that Ultratech's manufacture, use, offer for sale and sale of certain of its
photolithography stepper devices in the United States infringe six U.S.
patents held by ASML. ASML's complaint seeks injunctive relief and damages.
Discovery is currently ongoing in the matter. ASML intends to vigorously
pursue these claims.
In 2002, the Company settled its previously disclosed litigation with Fullman
International Inc. and Fullman Company LLC for an immaterial amount.
Nikon case U.S.
F-22
On December 21, 2001, Nikon Corporation ("Nikon") and two of its United States
subsidiaries filed a so-called Section 337 complaint against ASML with the
United States International Trade Commission (ITC). On January 23, 2002, the
ITC instituted an investigation based on Nikon's complaint. The complaint in
the ITC investigation alleges that ASML's photolithography machines imported
into the United States infringe seven United States patents held by Nikon.
Nikon's patents relate to several different aspects of photolithography
equipment. Nikon seeks to exclude the importation of infringing products. ASML
believes that the asserted patents are both not infringed and invalid. A trial
before an administrative law judge on these issues was completed in November,
2002.
On January 29, 2003, the administrative law judge (ALJ) in the ITC proceedings
ruled that ASML had not violated Section 337. Nikon has stated that it intends
to seek review by the full ITC of this initial determination. In addition,
Nikon may pursue further appeals to the United States Court of Appeals for the
Federal Circuit. If a final non-appealable decision in the ITC proceeding were
to be rendered that was adverse to ASML, it would substantially restrict or
prohibit ASML's sales into the United States, which in turn would have a
material adverse effect on the Company's financial position and results of
operations.
On December 21, 2001, Nikon also filed a separate patent infringement action
in the United States District Court for the Northern District of California
alleging infringement of four different Nikon patents and seeking injunctive
relief and damages. On March 22, 2002, Nikon amended its complaint to allege
infringement of an additional patent. On April 8, 2002, ASML answered this
complaint denying infringement, asserting affirmative defenses of invalidity
and unenforceability, and alleging counterclaims.
On April 5, 2002, ASML filed a counterclaim in the ITC action alleging that
Nikon's photolithography machines sold in the United States infringe five ASML
patents. According to ITC procedure, these counterclaims were initially
transferred to the United States District Court for the District of Arizona.
On October 17, 2002, these claims were transferred to the United States
District Court for the Northern District of California, where they are now
pending.
On October 18, 2002, Nikon filed a second patent infringement action in the
United States District Court for the Northern District of California alleging
infringement of six out of the seven patents from the ITC action and two
additional patents. On December 2, 2002, ASML answered this second complaint
denying infringement of these additional patents and asserting affirmative
defenses of invalidity and unenforceability.
ASML intends to vigorously pursue its claims and believes it has meritorious
defenses against Nikon's claims. Discovery in the California litigation is
currently ongoing; however, trial is not expected to commence until some time
in 2004. In the event a final non-appealable decision were to be rendered that
was adverse to ASML, it could substantially restrict or prohibit ASML's sales
(from and into) the United States, which in turn would have a material adverse
effect on the Company's financial position and results of operations.
Nikon case Japan
On August 19, 2002, ASML filed a patent infringement complaint against Nikon
with the Tokyo District Court in Japan. In the complaint, the company seeks
injunctive relief to cause Nikon to cease the manufacture and sale of
lithography devices that infringe ASML's patents. ASML also seeks damages
totaling approximately EUR 97 million plus interest for Nikon's past
infringement. In October 2002, Nikon filed a counter-complaint with the Tokyo
District Court alleging that ASML lithography devices infringe 12 Japanese
patents held by Nikon. Nikon's counter-complaint seeks injunctive relief as
well as damages of approximately EUR 12.3 million plus interest. On January
16, 2003, ASML filed a second complaint against Nikon alleging that Nikon
infringes another of ASML's patents and seeks injunctive relief against Nikon
to cease its manufacture and sale of lithography devices that infringe ASML's
patents.
This litigation is still in its early stages, and a final decision is not
expected before 2005. The Company, however, intends to vigorously pursue its
claims and believes it has meritorious defenses against Nikon's counterclaims.
In the event a final non-appealable decision in the Japanese proceedings were
rendered that was adverse to ASML, it could substantially restrict or
eliminate ASML's ability to achieve future sales growth in Japan, which could
in turn have a material adverse effect on the Company's results of operations.
Nikon case Korea
On October 8, 2002, Nikon filed a patent infringement action against ASML and
its Korean subsidiary in the Seoul District Court alleging that ASML's
photolithography machines infringe five of Nikon's patents, four of which are
related to Nikon's patents asserted in its U.S. litigation. The complaint
seeks to prohibit ASML from the manufacture, use, sale, import or export of
infringing products, the destruction of the manufacturing
F-23
facilities for these products and damages. On January 15, 2003, ASML filed a
complaint against Nikon and its Korean subsidiary alleging that Nikon
infringes on one of ASML's patents, seeking injunctive relief against Nikon to
cease the manufacture and sale of lithography devices that infringe ASML's
patent. This litigation is still in its early stages, and a final decision is
not expected before 2006. The Company, however, intends to vigorously pursue
its claims and believes it has meritorious defenses against Nikon's claims. In
the event that a final non-appealable decision were to be rendered in the
Korean proceedings that was adverse to ASML, it could substantially restrict
or eliminate ASML's sales in Korea, which would have a material adverse effect
on the Company's results of operations.
15. Other contingencies
ASML has research and development agreements with the government of the
Netherlands, Ministry of Economic Affairs. In previous years, credits were
received for research and development projects relating to new generations of
semiconductor lithography systems. The agreements require that the majority of
the amounts received are to be repaid, with interest, to the extent that
product sales occur that relate to the research. The amount of the repayment
due is based on a percentage of the selling price of the product and is
charged to cost of sales when such a sale is recorded.
As of December 31, 2001 and 2002, ASML has contingent obligations totaling EUR
49 million and EUR 12 million to repay TOK credits received in previous years.
16. Research and development credits
ASML receives subsidies and credits for research and development from various
sources as follows:
As of December 31, 2000 2001 2002
--------------------------------------------------------------------------------
Netherlands government technology subsidy 10,042 15,881 25,981
Netherlands Ministry of:
Economic Affairs (TOKs) credits* 8,176 0 0
European community and other subsidies 6,765 342 34
--------------------------------------------------------------------------------
Total subsidies and credits received 24,983 16,223 26,015
* In 2001 and 2002, ASML recorded EUR 3.6 million and EUR 36.1 million,
respectively, for repayment obligations. Further references
is made to Note 15.
17. Income taxes
The components of income before income taxes are as follows:
Year Ended December 31, 2000 2001 2002
--------------------------------------------------------------------------------
Domestic 406,559 (36,486) (206,001)
Foreign 143,228 (660,734) (108,447)
--------------------------------------------------------------------------------
Total 549,787 (697,220) (314,448)
The foreign component predominantly relates to the U.S.
The Netherlands domestic statutory tax rate is 34.5 percent. The
reconciliation between the provision for income taxes shown in the
consolidated statement of operations, based on the effective tax rate, and
expense based on the domestic tax rate, is as follows:
Year Ended December 31, 2000 2001 2002
--------------------------------------------------------------------------------
Income tax expense based on
domestic rate 192,425 (244,027) (108,485)
Different foreign tax rates (19,936) 25,974 12,362
F-24
Other credits and non-taxable items (5,240) (175) (10,502)
--------------------------------------------------------------------------------
Provision for income taxes
shown in the income statement 167,249 (218,228) (106,625)
ASML's provision for income taxes consists of the following:
Year Ended December 31, 2000 2001 2002
--------------------------------------------------------------------------------
Current
Domestic 136,881 (28,343) 26
Foreign 40,015 6,002 5,668
Deferred
Domestic (9,061) 0 (46,020)
Foreign (586) (195,887) (66,299)
--------------------------------------------------------------------------------
Total 167,249 (218,228) (106,625)
Deferred tax assets (liabilities) consist of the following:
As of December 31, 2001 2002
--------------------------------------------------------------------------------
Tax effect carry forward losses 176,959 230,474
Inventories (22,692) 896
Temporary depreciation investments 0 (133,516)
Other temporary differences 73,219 78,960
--------------------------------------------------------------------------------
Total 227,486 176,814
Deferred tax assets (liabilities) are classified in the Consolidated Financial
Statements as follows:
As of December 31, 2001 2002
--------------------------------------------------------------------------------
Deferred tax assets - current 362 0
Deferred tax assets - non-current 262,091 314,795
Deferred tax liabilities - current (665) (4,465)
Deferred tax liabilities - non-current (34,302) (133,516)
--------------------------------------------------------------------------------
Total 227,486 176,814
Tax losses, that are the basis for the recorded deferred tax assets, are
predominantly incurred in the U.S. and the Netherlands. Tax losses incurred by
Netherlands group companies can in general be offset for an indefinite period
against future taxable profits. Tax losses incurred by U.S. group companies
can in general be offset against future profits realized in 20 years following
the year in which the losses are incurred. The total amount of tax loss
carried forward as of December 31, 2002 is EUR 667 million. This loss amount
is exclusive of the loss carry forward related to the temporary depreciation
for Netherlands tax purposes of ASML's investments in its U.S. group
companies. Reference is made to the paragraph below. A large part of loss
compensation rights will expire in 2022. Based on its analysis, management
believes that the U.S. tax losses will be offset by future taxable income
before the statute on loss compensation expires. The analysis takes into
account the projected future taxable income from operations and the expected
outcome of a bi-lateral Advance Pricing Agreement (APA) initiated by ASML.
Management believes that it is more likely than not that these negotiations
will result in an agreement between the U.S. and Netherlands tax authorities
regarding, certain inter-company transfers of assets, tangible and intangible,
covered by the APA. These transactions are the result of the realignment of
group operations. The APA negotiations are not expected to be finalized before
the end of 2003.
F-25
Pursuant to Netherlands tax laws, ASML can temporarily depreciate its
investment in its U.S. group companies and the depreciation can be deducted
from the taxable base in The Netherlands. The short-term tax receivable
amounting to EUR 134 million resulting from this temporary depreciation is
recorded under current tax assets . This temporary depreciation must be added
back on a straight-line basis to the taxable base in the period 2005 through
2009. The tax effect of this repayment obligation, amounting to EUR 395
million, is recorded as a long term deferred tax liability, net of the
long-term asset amounting to EUR 261 million.
18. Segment disclosure
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
ASML's decision to sell its Thermal business, and to terminate Track equipment
business has resulted in the presentation of these businesses as discontinued
operations for all periods presented. These elements within discontinued
operations were previously separately reported in the Track and Thermal
segment.
Consequently, the Company recognizes only one reporting segment in continuing
operations; lithography. The remaining part of the Track business (customer
support on existing contracts) has been presented as part of continuing
operations. A separate compressed analysis of discontinued operations is
provided in Note 2 in place of the segmental information on Track and Thermal
that was provided in previous years.
ASML markets and sells its products in the United States and Europe
principally through its direct sales organization. ASML makes all its sales
into the United States through its U.S. operation and its sales into Asia
primarily through its Hong Kong operation. Intra-area sales are accounted for
at prices that provide a profit and take into consideration the rules and
regulations of the respective governing tax authorities.
The following table summarizes net sales, operating income and identifiable
assets of ASML's operations in the Netherlands, the United States and Asia,
the significant geographic areas in which ASML operates.
Asia Netherlands United States Eliminations Consolidated
---------- ----------- ------------- ------------ ------------
2000
Net sales to
unaffiliated customers 1,237,170 339,795 1,095,665 0 2,672,630
Inter-company sales 0 1,688,960 0 (1,688,960) 0
-------------------------------------------- ------------------ ------------------ -------------- --------------
Total net sales 1,237,170 2,028,755 1,095,665 (1,688,960) 2,672,630
Operating income 122,830 357,605 62,122 (288) 542,269
Identifiable assets 393,847 2,030,771 988,985 (295,755) 3,117,849
2001
Net sales to
unaffiliated customers 742,697 150,127 696,423 0 1,589,247
Inter-company sales 0 1,106,485 0 (1,106,485) 0
-------------------------------------------- ------------------ ------------------ -------------- --------------
Total net sales 742,697 1,256,612 696,423 (1,106,485) 1,589,247
Operating income (48,024) 39,634 (544,811) (37,417) (590,618)
Identifiable assets 365,918 3,141,398 825,591 (941,090) 3,391,817
2002
Net sales to
unaffiliated customers 1,066,476 190,196 702,000 0 1,958,672
Inter-company sales 0 1,580,790 27,971 (1,608,761) 0
-------------------------------------------- ------------------ ------------------ -------------- --------------
Total net sales 1,066,476 1,770,986 729,971 (1,608,761) 1,958,672
Operating income 5,569 (84,460) 30,392 (45,544) (94,043)
Identifiable assets 438,976 3,360,456 630,824 (1,248,732) 3,181,524
Assets, liabilities and capital expenditures by segment are not evaluated by
executive management and are not used for the purpose of making decisions
about allocating resources to the segment or assessing its performance.
F-26
19. Board remuneration
The total remuneration and related costs (in euro) of the members of the
Board of Management can be specified as follows:
Year ended December 31, 2000 2001 2002
-------------------------------------------------------------------------------
Salaries 1,728,000 2,187,000 2,016,000
Bonuses 675,000 0 0
Pension cost 200,000 172,000 263,000
-------------------------------------------------------------------------------
Total 2,603,000 2,359,000 2,279,000
The 2002 cash remuneration in euro of the individual members of the Board of
Management was as follows:
Salary Bonus Total
--------------------------------------------------------------------------------
D.J. Dunn 590,000 0 590,000
P.T.F.M. Wennink 300,000 0 300,000
M.A. van den Brink 375,000 0 375,000
S.K. McIntosh 355,000 0 355,000
D.P. Chavoustie(1) 370,000 0 370,000
__________________
(1) Amounts in USD
F-27
The 2002 vested pension benefit(2) of individual members of the Board of
Management were as follows:
D.J. Dunn 112,080
P.T.F.M. Wennink 34,032
M.A. van den Brink 43,560
S.K. McIntosh 64,608
D.P. Chavoustie(1) 8,000
__________________
(1) Amounts in USD
(2) Since the pension arrangement for members of the Board of Management is
a defined contribution plan, the Company does not have further pension
obligations beyond the annual premium contribution.
Details of options held by Board of Management in the ordinary shares of ASML
Holding N.V.
Share
Granted Exercised price on
during during Dec. 31, Exercise exercise Expiration
Jan 1, 2002 2002 2002 2002 price date date
------------------------- ------------ ------------ ----------- ------------ ------------- ----------- ---------------
D.J. Dunn 600,000 - 600,000 17.51 - 01-04-2005
67,500 - 67,500 58.00 - 20-01-2012
30,000 - 30,000 40.40 - 22-01-2007
30,000 - 30,000 20.28 - 21-01-2008
------------------------- ------------ ------------ ----------- ------------ ------------- ----------- ---------------
P.T.F.M. Wennink 30,000 - 30,000 11.05 - 01-01-2005
31,500 - 31,500 58.00 - 20-01-2012
15,660 - 15,660 40.40 - 22-01-2007
50,000 - 50,000 29.92 - 22-01-2007
20,960 - 20,960 22.12 - 20-07-2007
20,000 - 20,000 20.28 - 21-01-2008
------------------------- ------------ ------------ ----------- ------------ ------------- ----------- ---------------
M.A. van den Brink 21,600 - 21,600 14.87 - 21-01-2005
31,500 - 31,500 58.00 - 20-01-2012
19,860 - 19,860 40.40 - 22-01-2007
26,560 - 26,560 22.12 - 20-07-2007
20,000 - 20,000 20.28 - 21-01-2008
------------------------- ------------ ------------ ----------- ------------ ------------- ----------- ---------------
D.P. Chavoustie 60,000 - 60,000 15.24 - 15-04-2003
30,000 - 30,000 10.42 - 23-12-2004
46,800 - 46,800 14.87 - 21-01-2005
67,500 - 67,500 56.48 - 20-01-2012
25,500 - 25.500 29.92 - 22-01-2007
30,240 - 30,240 22.12 - 20-07-2007
20,000 - 20,000 20.28 - 21-01-2008
------------------------- ------------ ------------ ----------- ------------ ------------- ----------- ---------------
S.K. McIntosh 21,000 - 21,000 40.40 - 22-01-2007
250,000 - 250,000 29.92 - 22-01-2007
28,080 - 28,080 22.12 - 20-07-2007
20,000 - 20,000 20.28 - 21-01-2008
The details of the financing arrangement relating to the Company's option
plans are described in Note 13, "Employee Benefits".
F-28
Supervisory Board
During 2002, the individual members of the Supervisory Board received the
following remuneration (in euro):
Year ended December 31, 2001 2002
--------------------------------------------------------------------------------
H. Bodt 22,690 40,000
P.H. Grassmann 18,151 25,000
S. Bergsma 18,151 25,000
A.Westerlaken(1) 18,151 25,000
J.A. Dekker 18,151 25,000
M.J. Attardo(2) 0 25,000
J.W.B. Westerburgen(3) 0 0
__________________________________
(1) membership ended March 21, 2002.
(2) membership started May 21, 2001.
(3) membership started March 21, 2002.
Members of the Board of Management and/or Supervisory Board are free to
acquire or dispose of ASML shares or options for their own account, provided
they comply with the ASML Insider Trading Rules 2002. Those securities are not
part of members' remuneration from the Company and are therefore not included.
20. Selected operating expenses and additional information
Personnel expenses for all employees were:
Years ended December 31 2000 2001 2002
--------------------------------------------------------------------------------
Wages and salaries 316,009 413,011 371,281
Social security expenses 27,805 33,412 31,897
Pension and retirement expenses 17,960 24,137 22,324
--------------------------------------------------------------------------------
Total 361,774 470,560 425,502
The average number of employees during 2000, 2001 and 2002 was 5,437, 6,434
and 5,640, respectively (excluding non-payroll employees). The total number of
personnel employed per sector was:
As of December 31, 2000 2001 2002
------------------------------------------------------------------------------
Marketing & Technology 1,860 1,689 1,708
Goodsflow 1,923 1,526 1,416
Customer Support 1,931 1,964 2,090
General 711 716 588
Sales 203 144 169
Total continuing operations 6,628 6,039 5,971
Total discontinued operations 1,495 1,031 712
Total number of employees
(including non-payroll employees) 8,123 7,070 6,683
In 2000, 2001 and 2002, a total of 3,329, 2,972 and 2,857 employees in our
continuing operations (excluding non-payroll employees), respectively, were
employed in the Netherlands.
21. Vulnerability due to certain concentrations
ASML relies on outside vendors to manufacture the components and subassemblies
used in its systems, each of which is obtained from a sole supplier or a
limited number of suppliers. ASML's reliance on a limited group of suppliers
involves several risks, including a potential inability to obtain an adequate
supply of required components and reduced control over pricing and timely
delivery of these subassemblies and components. In particular, the number of
systems ASML has been able to produce has occasionally been limited by the
F-29
production capacity of Zeiss. Zeiss is currently ASML's sole external supplier
of lenses and other critical optical components and is capable of producing
these lenses only in limited numbers and only through the use of its
manufacturing and testing facility in Oberkochen, Germany. ASML sells a
substantial number of lithography systems to a limited number of customers. In
2002, sales to one customer accounted for EUR 377 million or 19 percent of net
sales. In 2001, sales to one customer accounted for EUR 202 million, or 13
percent of net sales.
22. Capital stock
Cumulative preference shares
In April 1998, the Company has granted to the preference share foundation,
"Stichting Preferente Aandelen ASML" (the "Foundation") an option to acquire
cumulative preference shares in the capital of the Company (the "Preference
Share Option"). The object of the Foundation is to protect the interests of
the Company and the enterprises maintained by it. The cumulative preference
shares have the same voting rights as ordinary shares but are entitled to
dividends on a preferential basis at a percentage based on the average
official interest rate determined by EURIBOR plus 2 percent.
The Preference Share Option gives the Foundation the right to acquire a number
of cumulative preference shares equal to the number of ordinary shares
outstanding at the time of exercise of the cumulative preference share option
for a subscription price equal to their EUR 0.02 nominal value. Only
one-fourth of this subscription price is payable at the time of initial
issuance of the cumulative preference shares. The cumulative preference shares
may be cancelled and repaid by the Company upon the authorization by the
General Meeting of Shareholders of a proposal to do so by the Board of
Management approved by the Supervisory Board and the Meeting of Priority
Shareholders. Exercise of the Preference Share Option would effectively dilute
the voting power of the ordinary shares then outstanding by one-half. The
practical effect of any such exercise could be to prevent attempts by third
parties to acquire control of the Company.
Declaration of Independence
The Board of Directors of the Foundation and the Board of Management of the
Company together declare that the Foundation is independent of the Company as
defined in article A2bI of "Bijlage X bij het Fondsenreglement van Euronext
Amsterdam N.V." The Board of the Foundation comprises three voting members
from the Netherlands business and academic communities, Mr. R.E. Selman, Mr.
F.H.M. Grapperhaus and Mr. M.W. den Boogert, and one non-voting member, the
Chairman of the Company's Supervisory Board, Mr. H. Bodt.
Priority shares
The priority shares are held by a foundation having a self-elected board that
must consist solely of members of the Company's Supervisory Board and Board of
Management.
As of December 31, 2002, the board members were:
o Doug J. Dunn
o Henk Bodt
o Syb Bergsma
o Jan A. Dekker
o Peter T.F.M. Wennink
An overview of the other functions held by above persons can be obtained at
the Company's office. In the joint opinion of the Company and the foregoing
members of the board of the priority share foundation, the composition of the
board conforms with Appendix X, Article C.10 of the Listing and Issuing Rules
of the Euronext Amsterdam Exchange N.V.(5)
__________________________
(5) Article 10 states that the issuer shall ensure that not more than half
of the priority shares are being held by managing directors of the
issuer or, where the priority shares are held by a legal entity, that
no more than half of the number of votes to be exercised in meetings of
the foundation in which decisions are made about the exercise of the
voting rights of the priority shares, can be exercised, directly or
indirectly, by persons who are also managing directors of the issuer.
F-30
The priority shares are not entitled to dividends but have a preferred right
over all other outstanding preferred and ordinary shares on the return of
their nominal value in the case of winding up the Company. Holders of priority
shares are required to approve certain significant corporate decisions and
transactions of the Company. These decisions and transactions encompass, but
are not limited to, amendment of the Articles of Association, winding up of
the Company, issuance of shares, limitation of pre-emptive rights and
repurchase and cancellation of shares.
Veldhoven, January 30, 2003
Adopted by
The Board of Management:
Doug J. Dunn
Peter T.F.M. Wennink
Martin A. van den Brink
David P. Chavoustie
Stuart K. McIntosh
Approved by
The Supervisory Board:
Henk Bodt
Syb Bergsma
Michael J. Attardo
Peter H. Grassmann
Jos W. B Westerburgen
Jan A. Dekker
F-31
Independent Auditors' Report
To the Supervisory Board, Board of Management and Shareholders of ASML Holding
N.V. Veldhoven, the Netherlands.
We have audited the accompanying consolidated balance sheets of ASML Holding
N.V. and its subsidiaries (collectively, the "Company") as of December 31,
2001 and 2002, and the related consolidated statements of operations,
comprehensive income, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2002. These Financial Statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these Financial Statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
Financial Statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the Financial Statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall Financial Statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated Financial Statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2001 and 2002, and the results of its operations, comprehensive income and its
cash flows for each of the three years in the period ended December 31, 2002,
in conformity with accounting principles generally accepted in the United
States of America.
Eindhoven, the Netherlands
January 30, 2003
F-32
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
1 Articles of Association of ASML Holding N.V. (English
translation) (Incorporated by reference to Amendment No.
6 to the Registrant's Registration Statement on Form
8-A/A, filed with the Commission on June 18, 2002 (File
No. 0-25566))
2.1 Paying Agent, Conversion Agent, Conversion Calculation
Agent and Registrar Agreement between ASML Holding N.V.
and the Bank of New York relating to $575,000,000 5.75
percent Convertible Subordinated Notes due 2006
(incorporated by reference to Exhibit 2.3 to the
Registrant's Annual Report on Form 20-F, for the fiscal
year ended December 31, 2001)
2.2 Registration Rights Agreement, dated as of October 23,
2001, by and among ASML Holding N.V. and Morgan Stanley &
Co. International Limited, on behalf of several managers
named therein (Incorporated by reference to Exhibit 4 to
the Registrant's Registration Statement on Form F-3 (File
No. 333-83266))
4.1 Agreement between ASML Lithography B.V. and Carl Zeiss,
dated March 17, 2000 (Incorporated by reference to the
Registrant's Annual Report on Form 20-F for the fiscal
year end December 31, 2000)
8 List of Subsidiaries*
10.1 Certification of CEO and CFO Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002*
10.2 Consent of Deloitte & Touche*
________________________
* Filed herewith