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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-17157
NOVELLUS SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 77-0024666
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
3970 NORTH FIRST STREET SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices) (Zip Code)
(408) 943-9700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 27, 1998 the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $1,645,000,000 based on the
average of the high and low prices of the Common Stock as reported on the Nasdaq
National Market on such date. Shares of Common Stock held by officers, directors
and holders of more than 5% of the outstanding Common Stock have been excluded
from this calculation because such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares of Common Stock outstanding on February 27, 1998 was
33,824,931.
Part III of this Report on Form 10-K incorporates information by reference from
the Registrant's Proxy Statement for its 1998 Annual Meeting of Shareholders.
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PART I
ITEM 1. BUSINESS
Novellus Systems, Inc. ("Novellus" or "the Company") was incorporated in April
1984, as a California Corporation. The Company manufactures, markets and
services advanced automated wafer fabrication systems for the deposition of thin
films within the semiconductor equipment market. The Company is a leading
supplier of high productivity chemical vapor deposition ("CVD") systems used in
the fabrication of integrated circuits. CVD systems are used to deposit all of
the dielectric (insulating) layers and certain of the conductive metal layers on
the surface of a semiconductor wafer. The overall growth in the semiconductor
industry and the increasing number of layers used in complex integrated circuits
have led to increased demand for advanced CVD equipment. The Company's products
are differentiated from its competitors by their simultaneous ability to provide
superior film quality while providing high productivity and low cost of
ownership in the advanced CVD market. The Company's strategy is to focus on
major semiconductor manufacturers, and the Company has sold one or more of its
systems to each of the 20 largest semiconductor manufacturers in the world. On
June 20, 1997, the Company completed the acquisition of the Thin Film Systems
business ("TFS") of Varian Associates, Inc. ("Varian"). TFS manufactures and
markets equipment for physical vapor deposition ("PVD"), a critical technology
in the production of advanced semiconductor logic and memory devices.
INDUSTRY BACKGROUND
The semiconductor industry has experienced significant growth in recent years
due to the continued growth of the personal computer market, the expansion of
the telecommunications industry, the emergence of new applications such as
consumer electronics products, wireless communications devices and mobile
computers and the increased semiconductor content in these electronics systems.
Significant performance advantages and lower prices for integrated circuits have
contributed to the growth and expansion of the semiconductor industry. In
response to the growth in demand for integrated circuits, the semiconductor
industry is significantly increasing its manufacturing capacity through the
expansion of existing facilities and construction of new facilities.
The fabrication of integrated circuits requires a number of complex and
repetitive processing steps, including deposition, photolithography and etch.
Deposition is a process in which a film of either electrically insulating or
electrically conductive material is deposited on the surface of a wafer. The two
principal methods of this film deposition are CVD, which can be used to deposit
both insulating and conductive films, and PVD, which is used primarily for
sputtering conductive metals onto the wafer surface. In the CVD process, wafers
are typically placed in a reaction chamber and a variety of pure and precisely
metered gases are introduced while some form of energy is added to activate a
chemical reaction on the wafer surface. The result of this reaction is the
deposition of a film on the wafer.
PVD, also known as "sputtering," is a process whereby ions of an inert gas,
typically argon, are electrically accelerated in a high vacuum toward a target
of pure metal, such as aluminum, titanium or copper. Upon impact, the argon ions
"sputter" off bits of the target material, which then deposits on the silicon
wafer to form thin conductive films which "wire" the thousands of transistors in
the computer chip together.
CVD processes are used to deposit all of the dielectric films in an integrated
circuit. The dielectric layers in an integrated circuit include the initial
interlayer, portions of the interconnect layers and the final passivation layer.
CVD is also used for deposition of conductive metal layers, particularly those
metals that are more difficult to deposit in smaller line width geometry devices
through conventional PVD or other deposition technology. CVD technology is
particularly effective for depositing blanket tungsten as a "plug" layer that
connects one conductive metal layer to another in a multi-level integrated
circuit. For such applications, tungsten is replacing aluminum, which has
certain physical properties that reduce its efficacy for the smaller
interconnect holes of devices with smaller line width geometries.
PVD processes are used to provide conducting liner and barrier metal layers to
prevent diffusion or reactions between metals such as tungsten and silicon
regions, and to provide underlying foundations for the nucleation of other metal
deposition layers. The Company believes that, in the future, PVD tantalum
barrier and copper seed layers may play an important role in replacing aluminum
with copper as the primary wiring material. Currently, aluminum PVD is also
widely used as the primary wiring material in up to six or more layers of device
interconnect.
Advanced integrated circuit technology has created increased demand for more
sophisticated semiconductor processing equipment. Today's complex semiconductor
devices, such as 64 megabit DRAMs and 64-bit microprocessors, are being designed
with 0.35 micron and below micron line width geometries, and the microprocessors
have up to four layers of interconnect circuitry. The next generation of
semiconductor devices, including 256 megabit DRAMs, are being designed with 0.25
micron line geometries, and the microprocessors will incorporate four or more
interconnect layers. Each additional interconnect layer requires three separate
layers of deposition, which include the initial metal layer, a non-conductive
dielectric layer and then a "plug" metal film to fill patterned holes in the
dielectric layer that connects the metal layers on either side of the
dielectric. The Company believes that the greater complexity and number of
interconnect layers in advanced integrated circuits will enable the markets for
CVD and PVD systems to experience significant growth.
Semiconductor manufacturers generally measure the cost performance of their
production equipment in terms of "cost per wafer," which is determined by
factoring in the fixed costs for acquisition and installation of the system, its
variable operating costs and its net throughput rate. A system with higher
throughput allows the semiconductor manufacturer to recover the purchase price
of the system over a greater number of wafers and thereby reduce the cost of
ownership of the system on a per wafer basis. Throughput is most accurately
measured on a net or overall basis, which takes into account the processing
speed of the system and any non-operational downtime for cleaning, maintenance
or other repairs. Yield and film quality are also significant factors to the
semiconductor manufacturer in selecting processing equipment. The increased
costs of larger and more complex semiconductor wafers have made high yields
extremely important to semiconductor manufacturers. To achieve higher yields and
better film quality, deposition systems must be capable of repeating the
original process on a consistent basis without a disqualifying level of defects.
This characteristic, known in the industry as "repeatability," is extremely
important in achieving commercially acceptable
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yields. Repeatability is more easily achieved in those systems that can operate
at desired throughput rates without requiring the system to approach its
critical tolerance limits.
The continuing evolution of semiconductor devices to smaller line width
geometries and more complex multi-level circuitry has significantly increased
the cost and performance requirements of the capital equipment used to
manufacture these devices. Many of the advanced eight inch fabrication lines
that are currently planned or in construction will cost up to $1 billion each,
representing a substantial increase over the costs of prior generation
fabrication facilities. Increased capital depreciation costs will continue to
become a much larger percentage of the aggregate production costs for
semiconductor manufacturers relative to labor, materials and other variable
manufacturing costs. As a result, there has been an increasing focus by the
semiconductor industry on obtaining increased productivity and higher returns
from its semiconductor manufacturing equipment, thereby reducing the effective
cost of ownership of such systems.
THE NOVELLUS SOLUTION
Novellus focuses on advanced CVD and PVD systems that provide superior film
quality while attaining the high levels of productivity required to meet the
semiconductor industry's need for high volume, low cost wafer production. The
Company's multi-station continuous processing architecture enables its systems
to address each of the following critical parameters of CVD system performance:
Throughput, Cost per Wafer. In contrast to CVD systems which process only one
wafer at a time in a chamber, the Company's multi-station continuous processing
systems can process five, six, or even seven wafers at the same time in a
chamber, leading to higher throughput levels. The design simplicity and
automatic cleaning capabilities of the Company's systems further increase net
throughput by reducing production downtime. The Company believes that its CVD
systems attain the highest levels of productivity and lowest cost per wafer in
the advanced equipment market.
Film Quality. With Novellus' unique sequential, multi-station chamber design,
each wafer receives a fraction of the desired film thickness at each of the
five, six, or seven deposition stations in the process chamber. The "averaging"
effect created by this design tends to reduce anomalies in film thickness and
thereby improves film uniformity and quality. The Company's systems, for most
films, can obtain within-wafer and wafer-to-wafer uniformity levels of +/- 1% of
film thickness as measured at one standard deviation, which the Company believes
is leading in the industry.
Process Repeatability. Because of the inherently higher throughput potential of
continuous processing, the Company's systems are able to deposit materials at
lower, more controlled rates than single wafer processing systems which
generally deposit at faster rates closer to the process performance limits to
achieve production-level throughputs. Lower deposition rates avoid straining the
system's process tolerance limits and thereby permit increased process control
and repeatability.
Metal PVD Solutions. Through the acquisition of TFS, Novellus has extended its
capabilities introducing its newest PVD product, the INOVATM system. PVD
technology is a critical technology in the production of advanced semiconductor
logic and memory devices. It enables us to provide customers with the entire set
of deposition processes required for 0.25 micron devices and below.
STRATEGY
The Company's objective is to increase its market share in the worldwide CVD and
PVD markets and strengthen its position as a leading supplier of semiconductor
processing equipment.
The key elements of the Company's strategy are as follows:
Emphasis on High Productivity Systems. Novellus focuses on providing high
productivity CVD and PVD systems to leading semiconductor companies. The Company
addresses the needs of semiconductor manufacturers through either, its
multi-chamber or unique continuous processing architecture, which enables its
systems to attain high levels of wafer throughput, yield and film quality. The
architecture's simple design also provides the Company's systems with greater
up-time and smaller footprints compared to competitive systems, resulting in
additional cost of ownership advantages. The Company intends to retain its focus
on productivity by leveraging its multi-chamber and continuous processing
architecture in product enhancements and new product offerings.
Leadership in CVD and PVD Technology. The Company's strategy is to provide a
family of deposition systems which utilize advanced CVD and PVD technologies to
address leading-edge wafer processing needs. The Company's Concept
One-Dielectric offers dual frequency deposition technology to achieve superior
results for a wide variety of films on wafers as large as eight inches and
geometries as small as 0.35 micron. The Company's Concept One-W is used by
manufacturers to connect multiple metal layers in advanced devices and the
Company believes that it is currently the only system that provides full
coverage tungsten deposition. The Company's Concept Two system is a modular CVD
system designed to address the needs of wafer fabs that demand greater levels of
wafer processing integration, higher volume production and increased factory
automation. The Company is focusing its research and development efforts on
additional Concept Two modules, advanced PVD technology, "gap fill" technology,
primary conductor metals, low K dielectric materials, and additional advanced
technologies for the next generation of smaller geometry fabrication lines, as
well as equipment to process 300mm wafers. The Company's first offerings in the
advanced "gap fill" technology market , SPEED, was introduced in February 1996.
In addition, the Company believes its new INOVATM system will provide an
advanced PVD system that can deliver Maxfill aluminum and superior Ti/Ti-nitride
film quality with excellent particle performance.
Focus On Major Semiconductor Manufacturers. The Company has sold one or more CVD
systems to each of the 20 largest semiconductor manufacturers in the world. The
long term growth prospects for semiconductors have caused many of these
manufacturers to plan major capacity expansions over the next several years. The
Company's sales objective is to work closely with customers to secure purchase
orders for
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multiple systems as such customers expand existing facilities and build next
generation wafer fabs. The Company seeks to build customer loyalty and achieve a
high level of repeat business by offering high reliability products,
comprehensive field support and a responsive parts replacement and service
program.
Expansion Of Asian Market Presence. An industry source estimates that Asian
manufacturers accounted for over half of the worldwide market for processing
semiconductor equipment in 1996, due to Japan's large semiconductor industry and
the recent rapid growth of manufacturers in Korea, Taiwan and Singapore. While
Novellus derives a significant percentage of its net sales from the Asian
marketplace, the Company believes that substantial additional growth potential
exists. Currently, the Company's local presence in Asia includes sales and
support offices through the Company's wholly owned subsidiary in Japan and one
in each of Korea, Taiwan, Mainland China and Singapore. The Company also sells
its products through a distributor in Japan. Novellus feels it is an important
part of its current business strategy to aggressively build its infrastructure
in Asia to serve this rapidly growing region. Moreover, each region in the
global semiconductor equipment market exhibits unique characteristics that can
cause capital equipment investment patterns to vary significantly from period to
period. Although international markets provide the Company with significant
growth opportunities, periodic economic downturns, trade balance issues,
political instability and fluctuations in interest and foreign currency exchange
rates are all risks that could affect global products and service demand. Many
Pacific Rim countries are currently experiencing banking and currency
difficulties that could lead to economic recession in those countries.
Specifically, the decline in value of the Korean currency, together with
difficulties obtaining credit, could result in a decline in the purchasing power
of the Company's Korean customers. This in turn could result in the cancellation
or delay of orders for the Company's products from Korean customers, thus
adversely affecting the Company's business, financial condition or results of
operations. In addition, if Japan's economy weakens further, investments by
Japanese customers may be adversely affected and it is possible that economic
recovery in other Pacific Rim countries could be delayed.
Low Manufacturing Cost Structure. Novellus utilizes an outsourcing strategy for
the manufacture of major subassemblies and performs system design, assembly and
testing in-house. Novellus believes that outsourcing enables it to minimize its
fixed costs and capital expenditures while also providing the flexibility to
increase capacity as needed. This strategy also allows the Company to focus on
product differentiation through system design and quality control. Through the
use of third party manufacturing specialists, the Company ensures that its
subsystems incorporate advanced technologies in robotics, gas panels and
microcomputers. The Company works closely with its suppliers to achieve mutual
cost reduction through joint design efforts.
PRODUCTS
Since the introduction of its original Concept One Dielectric system in 1987,
the Company has developed and now offers a family of processing systems for the
CVD dielectric and metal markets. The Concept One Dielectric deposits a variety
of insulating or "dielectric" films on wafers including Oxide, Nitride and TEOS.
In 1990, the Company introduced a modified version of the Concept
One-Dielectric, the Concept One-W, which also uses a CVD process to deposit
blanket tungsten metal films on wafers primarily as the metal interconnect
between conductor layers in the integrated circuit layers. In November 1991, the
Company introduced the Concept Two, which is a modular, integrated production
system capable of depositing both dielectric and conductive metal layers by
combining one or more processing chambers around a common, automated robotic
wafer handler. In February 1996, the Company introduced SPEED on the Concept Two
platform. Targeted at advanced inter metal dielectric ("IMD") deposition, SPEED
is the semiconductor industry's first high density plasma deposition solution
capable of high volume manufacturing. Following the acquisition of TFS, the
Company announced the introduction of its INOVATM system, an advanced PVD system
that delivers Maxfill aluminum and superior Ti/Ti-nitride film quality with
excellent particle performance. Maxfill is an innovative, low-pressure, low-k
compatible process for aluminum via fill.
CONCEPT ONE-DIELECTRIC
The Concept One-Dielectric is shipped in two versions, the Concept One-150,
which processes 100, 125, and 150 mm (approximately 4, 5, and 6 inches) wafers
and the Concept One-200, which processes 125, 150 and 200 mm (approximately 5, 6
and 8 inches) wafers and is designed for advanced eight inch fabrication lines.
The Concept One consists principally of two attached chambers and associated
hardware and electronics. The first chamber of the system, called the
"loadlock," isolates the process chamber from the outside environment. Depending
on the model of the Concept One-Dielectric, the loadlock accepts up to 75 wafers
sized from 100 to 200 mm (approximately 4 to 8 inches) in diameter in cassette
carriers. The operator inserts the cassettes of wafers in batches into the
loadlock, and the pressure inside the loadlock is decreased to create a vacuum,
which matches the constant pressure level of the process chamber. A robotic arm,
the wafer transport mechanism, in the center of the loadlock transfers wafers
one at a time from the cassettes to the process chamber and, upon completion of
the deposition process, returns the finished wafers to the cassettes. The
loadlock isolates the process chamber from the fabrication environment,
permitting the process chamber to remain at constant temperature and pressure
while wafers are transferred from the cleanroom to the loadlock and from the
loadlock to the process chamber. These stable process chamber conditions enhance
film quality, process repeatability, and throughput. The loadlock design also
reduces particulate contamination because the robotic arm is the only moving
mechanism in the loadlock and because the wafer cassettes are isolated from the
cleanroom.
The process chamber for the Concept One-Dielectric has six or eight stations
depending on the model. One station is used as a load/unload site and the
remaining five, six, or seven stations are used for wafer deposition. Each
deposition station employs a dedicated shower head which delivers gases and
plasma energy to the wafer surface. In a six station process chamber, for
example, each wafer moves through the system and stops at each of the five
deposition stations to receive one-fifth of its preprogrammed film thickness.
Some CVD products, called "single wafer" systems, process only one wafer at a
time in a process chamber, while multistation continuous process systems, like
the Concept One, can process numerous wafers at the same time. The continuous
processing capabilities of a multistation system generally enable such systems
to
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attain higher throughput while using a less critical, more repeatable process
than would be required for a single wafer system at equivalent throughput
levels. This multiple deposition design also results in greater film uniformity
and improved film quality because small variations in deposition at any single
station tend to be offset by deposition of the same film at other stations.
After the entire batch of up to 75 wafers has been processed and returned to the
cassettes, an automatic cleaning cycle in the process chamber removes residual
deposition materials, which could otherwise cause particulate contamination in a
subsequent deposition process. During this cleaning cycle, the loadlock
automatically returns to atmospheric pressure, enabling the operator to remove
the cassettes of finished wafers without impacting system throughput.
The Concept One-Dielectric uses electrical, radio frequency (RF) plasma energy
to enhance thermal energy, enabling the system to process wafers at a relatively
low temperature, thereby reducing the risk of heat damage to existing metal
layers during processing. The system also suppresses hillock formation by
limiting the time that the wafer is exposed to elevated temperatures prior to
deposition. The wafer is heated for 10 seconds or less in advance of deposition
in the Concept One-Dielectric, which the Company believes is one of the shortest
preheat times of any CVD system. Stress related defects are addressed through
the system by addition of a proprietary dual frequency, "stress control" option
which the Company offers. The system's vacuum loadlock reduces the level of
particles, thereby improving film quality by isolating the process chamber of
the Concept One-Dielectric from temperature and pressure fluctuations. In
addition, the automatic cleaning capability and relatively simple mechanical
design of the system reduce particulate contaminants and thereby increase yields
and film quality.
In 1995, the Company introduced an extension to its Concept One-Dielectric
system, the Concept One Maxus. The Maxus extends the Company's performance in
nitride passivation by enhancing the nitride deposition rate while retaining
superior nitride film performance. It also enhances the gap fill capability of
TEOS films by enabling fluorinated-TEOS (F-TEOS) processing for .35 micron gap
fill. F-TEOS enables the customer to lower the dielectric constant to 3.7, an
important capability in enhancing device performance. The Maxus is also
available on the Concept Two platform.
CONCEPT ONE-W
The Concept One-W was introduced in 1990 to address the tungsten CVD market. The
Concept One-W deposits blanket tungsten metal films, which are increasingly used
in advanced semiconductor devices to connect multiple metal layers in the
integrated circuit. Like the Concept One-Dielectric, the Concept One-W uses a
multistation, sequential deposition design that achieves high throughput with
desirable film properties for the entire range of film thickness. The Concept
One-W also uses an approach patented by the Company to provide full-coverage
front-side tungsten deposition while preventing deposition of tungsten on the
backside of the wafer. This capability helps prevent the generation of damaging
particles on the wafer and eliminates the need for time-consuming etching on the
backside of the wafer to remove the film.
During 1993, the Concept One-W successfully completed a 21 day, 24 hour per day
wafer manufacturing trial at SEMATECH, a U.S. semiconductor industry consortium.
The results of this extended manufacturing trial demonstrated that the Concept
One-W achieved or surpassed all program goals, which included system
availability, film uniformity, particulates and other film properties. In 1993,
SEMATECH also announced that the Concept One-W was one group of U.S.
manufactured semiconductor production tools capable of producing devices with
0.35 micron geometries. The success of the Concept One-W in these SEMATECH
trials was a major milestone for the Company in attaining market acceptance for
the Concept One-W with major U.S. semiconductor manufacturers and in enabling
the Company to penetrate certain of these important accounts.
CONCEPT TWO
The Concept Two, which was introduced in November 1991, is a modular, integrated
production system that is capable of depositing both dielectric and conductive
metal layers by combining one or more processing chambers around a common,
robotic wafer handler. The Concept Two enables the semiconductor manufacturer to
increase production throughput and system capability as needed without equipment
replacement by adding additional process modules through the Concept Two's
modular configuration. The Concept Two was initially available with a tungsten
process chamber and a PVD process module for deposition of certain metal layers.
In late 1994, a dielectric process module became available for Concept Two
systems. The Concept Two has been designed to be compatible with the modular
equipment interface standard established by the Modular Equipment Standards
Committee ("MESC"), which is sponsored by SEMATECH.
The Concept Two in a typical configuration incorporates a central cassette
module and wafer handler that interfaces with the cleanroom and has multiple
interfaces for process or transport modules. The cassette module, through its
robotics, manages wafer movement between the various processing stations that
can be included in a particular Concept Two configuration. Different cassette
modules are available depending on the customer requirements. An optional
isolation chamber is also available that is connected to the cassette module to
connect high vacuum process chambers and other portions of the system.
In 1993, the Company introduced the Concept Two-ALTUS, which combines the
modular architecture of the Concept Two system with an advanced tungsten CVD
process chamber. The system features a dual loadlock cassette module with full
factory automation capability to meet the high throughput requirements of high
volume automated eight inch wafer fabs. This dual loadlock cassette handler
permits continuous operation of the process chamber with one loadlock, while a
second loadlock is simultaneously being loaded or unloaded by the operator in
the cleanroom. Through its modular configuration, the Concept Two enables the
semiconductor manufacturer to combine multistation modules for slower processes
with single wafer modules for faster processes to balance the throughput of the
overall system. A dielectric version of the Concept Two ALTUS, the Concept Two
SEQUEL, was shipped in late 1994. This system brought the same level of factory
automation and throughput to the dielectric market as the ALTUS did to the
metals market. The Concept Two SEQUEL was initially shipped in a single chamber
version targeted at thin dielectric films used in volume 200mm IMD production
applications.
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In 1994, the Company introduced the Concept Two-Dual ALTUS tungsten deposition
system. The Dual ALTUS features the production proven performance of Novellus'
tungsten CVD chamber in a dual chamber configuration that delivers the
throughput power to dramatically lower the cost of tungsten deposition. The
Company feels that the Dual ALTUS is a superior solution in the industry for
very high volume 200mm wafer fabs producing state-of-the-art 0.35 micron
semiconductor devices.
Subsequent to 1994, the Company has continued to expand its Concept Two product
offerings as follows:
CONCEPT TWO DUAL SEQUEL
This dual chamber version of the SEQUEL dielectric family is designed for high
throughput deposition of thick films, such as layers before CMP (chemical-
mechanical polishing), and dual layer passivation films. It utilizes two process
chambers to provide the throughput power of twelve stations, resulting in
dramatic improvements in productivity for these types of films.
CONCEPT TWO SEQUEL-S AND ALTUS-S
These enhanced versions of the SEQUEL and ALTUS systems offer improved
throughput performance for both thick and thin dielectric films, while occupying
45% less space than previous versions. They also provide a range of improved
maintainability features and design enhancements that reduce customer facilities
costs. They are available in both single and dual chamber versions.
CONCEPT TWO PRISM(TM)
The Prism(TM) MOCVD Ti-nitride system offers thin barrier solutions for high
aspect ratio structures with superior barrier properties, conformality and film
stability. The Prism system is in pilot production at major logic customer sites
with multiple repeat orders. This system is used to form a high quality, low
cost barrier/adhesion layer prior to depositing tungsten. The Company began
shipments of this system in 1996.
CONCEPT TWO SPEED
Introduced in February 1996, SPEED is the Company's advanced dielectric gap fill
system, the semiconductor capital equipment industry's first high density plasma
deposition solution capable of high-volume manufacturing. SPEED is targeted for
advanced IMD deposition for 0.35 micron devices and below. The IMD market is
currently the largest segment in dielectric CVD and is also currently the
fastest growing. SPEED is offered either as a stand alone gap fill system or
integrated with the Concept Two SEQUEL to provide a complete high- throughput,
low-cost gap fill and chemical mechanical polishing gap layer solution for logic
manufacturing. SPEED is a single wafer processing system and utilizes a patented
hemispherical source design and a proprietary electrostatic chuck to provide
excellent fill, superior reproducibility, low damage and high throughput. In
1996 the Company received and shipped orders for multiple production SPEED
systems and announced an enhanced version (SPEED-S) occupying 40% less space,
thus improving throughput densities for customers.
ANTI REFLECTION LAYER
In December 1996, the Company announced a new plasma enhanced anti-reflection
layer ("ARL") product. The ARL product achieves tighter levels of critical
dimension control with in-line and Deep UV lithography in advanced semiconductor
devices while reducing cost per wafer. Running on a Concept Two Sequel, the
Company believes that the ARL offers very competitive throughput and low cost of
ownership for the industry. The Novellus ARL product is currently being used in
production in customer manufacturing facilities.
INOVA(TM) SYSTEM
The INOVA(TM) system, which is in the final stages of its development, is an
advanced PVD system that delivers Maxfill aluminum and superior Ti/Ti-nitride
film quality with excellent particle performance. Maxfill is an innovative,
low-pressure, low-k compatible process for aluminum via fill. The Ti/TiN process
is in production with Controlled Divergence Technology (CDS), and the Company
believes that the next generation of processing will use ionized PVD with the
Hollow Cathode Magnetron ("HCM") source technology. The INOVA(TM) is a
multi-chamber single wafer processing system. INOVA(TM) Tantalum films are
designed to enable barriers for copper metallization.
CONCEPT THREE TM
In December 1997, the Company introduced its Concept ThreeTM family of chemical
vapor deposition systems for dielectric and tungsten applications on 300mm
wafers. The new Concept ThreeTM products are the C3-SPEEDTM, the C3-SEQUELTM,
and the C-3 ALTUSTM . Because the Concept ThreeTM systems are based on the
production proven Novellus Concept Two products, the Company believes that they
should offer minimal risk to its customers in making the major transition from
200mm to 300mm volume chipmaking.
MARKETING, SALES AND SERVICE
Novellus markets its products worldwide to manufacturers of semiconductors,
including both captive fabrication lines, which produce semiconductors primarily
for internal consumption, and merchant semiconductor manufacturers, which
produce semiconductors primarily for sales to third party customers. In North
America, the Company sells products primarily through a direct sales force. The
Company's U.S. sales and support offices are located in Boston, Orlando, Austin,
Dallas, Phoenix, Hopewell Junction, New York, Williston, Vermont and Beaverton,
Oregon. In Europe, the Company's products are predominantly sold through a
wholly owned subsidiary, Novellus Systems, Ltd, which has sales
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and support facilities outside London, England, and in Scotland. The Company
also has sales and services support offices in The Netherlands, France, Germany,
Spain, Ireland and Israel. In Asia, the Company sells its products through a
wholly owned subsidiary and through an independent distributor in Japan and
through wholly owned subsidiaries in Korea, Taiwan, Singapore and Mainland
China. The Company's Japanese subsidiary maintains two offices located near
Tokyo (including Company headquarters), three offices in Western Japan, and two
offices in Kyushu.
The ability to provide prompt and effective field support is critical to the
Company's sales efforts, due to the substantial operational and financial
commitments made by customers that purchase a CVD or PVD system. The Company's
strategy of supporting its installed base through both its customer support and
research and development groups has served to encourage use of the Company's
systems in production applications and has accelerated penetration of certain
key accounts. The Company believes that its marketing efforts are enhanced by
the technical expertise of its research and development personnel who provide
customer process support and participate in a number of industry forums such as
conferences and publications.
The Company believes that its ability to service its customers is enhanced by
the design simplicity of its systems. The Company generally warrants its
products against defects in design, materials, and workmanship. In 1992, the
Company became the first semiconductor equipment manufacturer to extend its
warranty to 24 months from shipment and in 1993 also included the cost of all
consumable parts in the system and preventative maintenance parts under
warranty. The Company offers maintenance contracts as an additional service to
its customers.
For the years ended December 31, 1996 and 1995, one customer, Seki Technotron (a
distributor in Japan), accounted for 12% and 11% of the Company's net sales,
respectively. For the year ended December 31, 1997 there we no customers who
accounted for more than 10% of the Company's net sales.
Export sales for the year ended December 31, 1997 were approximately $250.1
million, or 47% of net sales. For the years ended December 31, 1996, and 1995,
export sales (including sales made by the Company's Japanese subsidiary) were
approximately $295.2 million and $209.4 million, respectively, or 64% and 56% of
net sales, respectively. Export sales increased in 1996 due to strong
international demand for semiconductor processing equipment, particularly in
Asia.
Historically, the Company has sold a significant proportion of its systems in
any particular period to a limited number of customers. Sales to the Company's
ten largest customers in 1997, 1996 and 1995 accounted for 53%, 59% and 58% of
net sales, respectively. The Company expects that sales of its products to
relatively few customers will continue to account for a high percentage of its
net sales in the foreseeable future. None of the Company's customers has entered
into a long-term agreement requiring it to purchase the Company's products. The
Company believes that sales to certain of its customers will decrease in the
near future as those customers complete current purchasing requirements for new
or expanded fabrication facilities. Although the composition of the group
comprising the Company's largest customers has varied from year to year, the
loss of a significant customer or any reduction in orders from any significant
customer, including reductions due to customer departures from recent buying
patterns, market, economic or competitive conditions in the semiconductor
industry or in the industries that manufacture products utilizing integrated
circuits, could adversely affect the Company's business, financial condition and
results of operations. In addition, sales of the Company's systems depend, in
significant part, upon the decision of a prospective customer to increase
manufacturing capacity or to expand current manufacturing capacity, both of
which typically involve a significant capital commitment. The Company has from
time to time experienced delays in finalizing system sales following initial
system qualification. Due to these and other factors, the Company's systems
typically have a lengthy sales cycle during which the Company may expand
substantial funds and management effort.
BACKLOG
As of December 31, 1997, the Company's backlog was $223.9 million, as compared
to a backlog of $156.4 million at December 31, 1996. The Company includes in its
backlog only those customer orders for which it has accepted purchase orders and
assigned shipment dates within twelve months. All orders are subject to
cancellation or rescheduling by customers with limited or no penalties. Because
of orders received in the same quarter in which a system is shipped, possible
changes in system delivery schedules, cancellations of orders and delays in
systems shipments, the Company's backlog at any particular date is not
necessarily a reliable indicator of actual sales for any succeeding period.
RESEARCH AND DEVELOPMENT
The semiconductor manufacturing industry is subject to rapid technological
change and new product introductions and enhancements. The Company's ability to
remain competitive in this market will depend in part upon its ability to
develop new and enhanced systems and to introduce these systems at competitive
prices and on a timely and cost-effective basis. Accordingly, the Company
devotes a significant portion of its personnel and financial resources to
research and development programs and seeks to maintain close relationships with
its customers to remain responsive to their product needs.
The Company's current research and development efforts are directed at
development of new systems and processes and improving existing system
capabilities. The Company is focusing its research and development efforts on
additional Concept Two modules, advanced PVD systems, advanced gap fill
technology, primary conductor metals, low-K dielectric materials and additional
advanced technologies for the next generation of smaller geometry fabrication
lines, as well as equipment to process 300mm wafers.
Expenditures for research and development during 1997, 1996 and 1995 were $89.8
million, $53.9 million, and $41.0 million, respectively, or approximately 17%,
12%, and 11% of net sales, respectively. (The amount and percentage of sales in
1997 for research and development exclude the in-process research and
development charge related to the acquisition of TFS.) The Company expects in
future years that research and development expenditures will continue to
represent a substantial percentage of net sales.
The success of the Company in developing, introducing and selling new and
enhanced systems depends upon a variety of factors, including product selection,
timely and efficient completion of product design and development, timely and
efficient implementation of manufacturing and assembly processes, product
performance in the field and effective sales and marketing. There can be no
assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new products or in enhancing its existing products.
As is typical in the semiconductor capital equipment market, the Company has
experienced delays from time to time in the introduction of, and certain
technical and manufacturing difficulties with, certain of its systems and
enhancements and may experience delays and technical and manufacturing
difficulties in future introductions or volume production of new systems or
enhancements. The Company's inability to complete the development or meet the
technical specifications of any of its new systems or enhancements or to
manufacture and ship these systems or enhancements in volume in a timely manner
would materially adversely affect the Company's business, financial condition
and results of operations. In addition,
7
<PAGE> 8
the Company may incur substantial unanticipated costs to ensure the
functionality and reliability of its future product introductions early in the
product's life cycle. If new products have reliability or quality problems,
reduced orders or higher manufacturing costs, delays in collecting accounts
receivable and additional service and warranty expense may result. Any of such
events could materially adversely affect the Company's business, financial
condition and results of operations.
MANUFACTURING
The Company's manufacturing activities consist primarily of assembling and
testing components and subassemblies which are acquired from third party vendors
and then integrated into a finished system by the Company. The Company utilizes
an outsourcing strategy for the manufacture of major subassemblies and performs
system design, assembly and testing in-house. Novellus believes that outsourcing
enables it to minimize its fixed costs and capital expenditures while also
providing the flexibility to increase production capacity. This strategy also
allows the Company to focus on product differentiation through system design and
quality control. Through the use of manufacturing specialists, the Company
believes that its subsystems incorporate advanced technologies in robotics, gas
panels and microcomputers. The Company works closely with its suppliers on
achieving mutual cost reduction through joint design efforts.
The Company manufactures its system units in clean-room environments which are
similar to the clean rooms used by semiconductor manufacturers for wafer
fabrication. This procedure is intended to reduce the amount of particulates and
other contaminants in the final assembled system, which in turn improves yield
and reduces the level of contaminants at the customer level. Following assembly,
the completed system is packaged in a plastic shrink wrap to maintain cleanroom
standards during shipment.
Certain of the components and subassemblies included in the Company's products
are obtained from a limited group of suppliers. Although the Company seeks to
reduce its dependence on these limited source suppliers, disruption or
termination of certain of these sources could occur and such disruptions could
have at least a temporary adverse effect on the Company's operations. Moreover,
a prolonged inability to obtain certain components could have a material adverse
effect on the Company's business, financial condition and results of operations
and could result in damage to customer relationships.
COMPETITION
Significant competitive factors in the semiconductor equipment market include
system performance and flexibility, cost, the size of each manufacturer's
installed customer base, capability for customer support and breadth of product
line. The Company believes that it competes favorably in the CVD marketplace
primarily on the basis of system performance and flexibility, cost and customer
support capability. In addition, the Company believes that the acquisition of
TFS., will allow the Company to develop and compete successfully in the PVD
market.
However, the semiconductor equipment industry is highly competitive. The Company
faces substantial competition in the markets in which it competes from both
established competitors and potential new entrants. In the CVD and PVD markets,
the Company's principal competitor is Applied Materials, Inc., which is a major
supplier of CVD and PVD systems and has established a substantial base of CVD,
PVD and other equipment in large semiconductor manufacturers. Certain of the
Company's competitors have greater financial, marketing, technical or other
resources, broader product lines, greater customer service capabilities and
larger and more established sales organizations and customer bases than the
Company. The Company may also face future competition from new market entrants
from Japan and other overseas and domestic sources. The Company expects its
competitors to continue to improve the design and performance of their products.
There can be no assurance that the Company's competitors will not develop
enhancements to or future generations of competitive products that will offer
superior price or performance features. In addition, a substantial investment is
required by customers to install and integrate capital equipment into a
semiconductor production line. As a result, once a semiconductor manufacturer
has selected a particular vendor's capital equipment, the Company believes that
the manufacturer will be generally reliant upon that equipment for the specific
production line application. Accordingly, the Company may experience difficulty
in selling a product line to a particular customer for a significant period of
time if that customer selects a competitor's product. Increased competitive
pressure could lead to lower prices for the Company's products, thereby
materially adversely affecting the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be able
to compete successfully in the future.
PATENTS AND PROPRIETARY RIGHTS
The Company intends to continue to pursue the legal protection of its technology
primarily through patent and trade secret protection. The Company currently
holds over 100 patents and intends to file additional patent applications as
appropriate. There can be no assurance that patents will be issued from any of
these pending applications or that any claims allowed from existing or pending
patents will be sufficiently broad to protect the Company's technology. While
the Company intends to protect its intellectual property rights vigorously,
there can be no assurance that any patents held by the Company will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide competitive advantages to the Company, (see Item 3 "Legal
Proceedings"). The Company also relies on trade secrets and proprietary
technology that it seeks to protect, in part, through confidentiality agreements
with employees, consultants and other parties. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known to or independently developed by others.
There has also been substantial litigation regarding patent and other
intellectual property rights in semiconductor related industries. The Company is
currently involved in such litigation, (see Item 3 "Legal Proceedings"), and,
although, except as set forth in Item 3 "Legal Proceedings", it is not aware of
any infringement by its products of any patent or proprietary rights of others,
it could become involved in additional litigation in the future. Although the
Company does not believe the outcome of the current litigation will have a
material impact on
8
<PAGE> 9
the Company's business, financial condition or results of operations, no
assurances can be given that this litigation or future litigation will not have
such an impact. In addition to the current litigation, the Company's operations,
including the further commercialization of the Company's products, could provoke
additional claims of infringement from third parties. In the future, litigation
may be necessary to enforce patents issued to the Company, to protect trade
secrets or know-how owned by the Company or to defend the Company against
claimed infringement of the rights of others and to determine the scope and
validity of the proprietary rights of others. Any such litigation could result
in substantial cost and diversion of effort by the Company, which by itself
could have a material adverse effect on the Company's financial condition and
operating results. Further, adverse determinations in such litigation could
result in the Company's loss of proprietary rights, subject the Company to
significant liabilities to third parties, require the Company to seek licenses
from third parties or prevent the Company from manufacturing or selling its
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
OTHER CAUTIONARY STATEMENTS
See Part II, Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations.
EMPLOYEES
At December 31, 1997, the Company had 1,776 full time and temporary employees.
The success of the Company's future operations depends in large part on the
Company's ability to recruit and retain engineers and technicians, as well as
marketing, sales, service and other key personnel, who in each case are in great
demand. There can be no assurance that the Company will be successful in
retaining or recruiting key personnel.
None of the Company's employees is represented by a labor union and the Company
has never experienced a work stoppage, slowdown, or strike. The Company
currently considers its employee relations to be good.
The Company's success depends to a significant extent upon a limited number of
key employees and other members of senior management of the Company. The loss of
the service of one or more of these key employees could have a material adverse
effect on the Company. Although the Company has recently experienced significant
growth in net sales, there can be no assurance that the Company will be able to
continue to maintain or increase the level of net sales in future periods. This
growth has placed, and is expected to continue to place, a significant strain on
the Company's management and operations. The success of the Company's future
operations depends in large part on the Company's ability to recruit and retain
engineers and technicians, as well as marketing, sales, service and other key
personnel, who in each case are in great demand. There can be no assurance that
the Company's inability to effectively manage growth, should it occur, or to
attract and retain the personnel it requires, could have a material adverse
effect on the Company's results of operations.
ITEM 2. PROPERTIES
The Company's operations are conducted primarily in a business park and two
additional buildings located near each other in San Jose, California. The
business park contains five buildings with a combined square footage of 249,000
square feet, four of which are currently occupied by the Company with the fifth
building occupied by a third party. The Company leases the business park and the
two additional buildings under a lease that expires in 2002, with an option to
extend through 2005, and subleases the building that it does not occupy. Of the
four buildings occupied by the Company, in the business park, one serves as
corporate headquarters and consists of 42,000 square feet, the second is used
primarily for manufacturing and consists of 43,000 square feet, the third
consists of 60,000 square feet and is used primarily for office space and
warehousing, and the fourth was sublet through August 1997, and is now used for
office space. One of the additional buildings consists of 58,000 square feet and
is used for research and development and customer demonstrations. The second
additional building consists of 38,000 square feet and is currently used for
customer training and warehousing. The Company also operates a research and
development facility in Wilsonville, Oregon comprising 17,000 square feet under
a lease that expires in 2001. In addition, the Company entered into a lease
agreement in June 1997 for five additional buildings, of which three are sublet.
The three sublet buildings represent approximately 199,000 square feet and are
sublet on leases that expire through 2001. The remaining two buildings represent
approximately 93,000 and 146,000 square feet, respectively. The former building
is currently anticipated to be used primarily for customer training, and the
latter for manufacturing.
Through the acquisition of TFS the Company acquired a facility in Palo Alto,
California. The building is owned by the Company, on land leased under a
long-term lease, that expires in 2011, with an option to apply for a 46 year
extension. The facility comprises approximately 99,000 square feet, and is
currently used as a manufacturing facility. The Company currently plans to
vacate the building during 1998 and sublet the property.
In June 1997, the Company amended its 10 year lease agreement for approximately
4.4 acres of undeveloped land adjacent to the leased business park to a five
year lease, expiring in the year 2002, with an option to extend through 2005.
The Company is currently building a research and development facility on this
land, which is expected to be completed during 1998. The Company also entered
into a lease agreement in October 1997 for 6.4 acres of undeveloped land,
adjacent to the Company's planned additional manufacturing facility. The Company
anticipates that this land will be used to support future business expansion.
The Company also operates facilities in Kawasaki and Sagamihara, Kanagawa
Prefecture, Japan. The former serves as corporate headquarters, sales offices,
service, technology and customer demonstration center and the latter as a
logistics, customer training, and production engineering facility for the
Company's Japanese subsidiary. The facility in Kawasaki is operated under a five
year lease expiring in 2001. The facility in Sagamihara is operated under a two
year lease with options to renew every two years up to a total of ten years. If
all the options to renew are exercised, the lease would end in 2001.
The Company leases various other smaller facilities worldwide which are used as
sales and customer service centers.
The Company currently believes that its current properties will be sufficient to
meet the Company's requirements for the foreseeable future.
9
<PAGE> 10
ITEM 3. LEGAL PROCEEDINGS
Applied Materials, Inc. vs. Varian Associates Inc. (Case No. C-97-20523 RMW) and
Novellus Systems, Inc. v. Applied Materials, Inc. (Case No. C-97-20551 RMW).
On July 7, 1997, prior to the consummation of the purchase of the Thin Film
Systems Business ("TFS") of Varian Associates ("Varian"), Applied Materials,
Inc. ("Applied") filed a complaint (the "Applied Complaint") against Varian in
the United States District Court for the Northern District of California San
Jose Division, Civil Action No. C-97-20523 RMW, alleging, among other things,
infringement by Varian (including the making, using, selling and/or offering for
sale of certain products and systems made by TFS) of United States Patent Nos.
5,171,412, 5,186,718, 5,496,455 and 5,540,821 (the "Applied Patents"), which
patents are owned by Applied.
Immediately after consummation of the TFS purchase, the Company filed a
complaint (the "Company Complaint") against Applied in the same Court, Civil
Action No. C-97-20551 RMW, alleging infringement by Applied (including the
making, using, selling and/or offering for sale of certain products and systems)
of United States Patent Nos. 5,314,597, 5,330,628, and 5,635,036 (the "Company
Patents"), which patents the Company acquired from Varian in the TFS purchase.
In the Company Complaint, the Company also alleged that it is entitled to
declarations from Applied that the Company does not infringe the Applied Patents
and/or that the Applied Patents are invalid and/or unenforceable. Applied has
filed counterclaims alleging that the Company infringes the Applied Patents.
Also after consummation of the TFS purchase, but some time after the Company
filed the Company Complaint, Applied amended the Applied Complaint to add the
Company as a defendant. The Company has requested that the Court dismiss the
Company as a defendant in Applied's lawsuit against Varian. The Court has not
yet required the Company to file an answer to the Applied Complaint.
In addition to a request for a permanent injunction against further
infringement, the Applied Complaint and Applied's counterclaims to the Company
Complaint include requests for damages for alleged prior infringement and treble
damages for alleged "willful" infringement. In connection with the consummation
of the TFS purchase, Varian agreed, under certain circumstances, to reimburse
the Company for certain of its legal and other expenses in connection with the
defense and prosecution of this litigation, and to indemnify the Company for a
portion of any losses incurred by the Company arising from this litigation
(including losses resulting from a permanent injunction). The Company and Varian
believe that there are meritorious defenses to Applied's allegations, including
among other things, that the Company's operations (including TFS products and
systems) do not infringe the Applied Patents and/or that the Applied Patents are
invalid and/or unenforceable. However, the resolution of intellectual property
disputes is often fact intensive and, therefore, inherently uncertain. Although
the Company believes that the ultimate outcome of the dispute with Applied will
not have a material adverse effect on the Company's business or results of
operations (taking into account both the defenses available to the Company and
Varian's reimbursement and indemnity obligations), there can be no assurances
that Applied will not ultimately prevail in this dispute and that, in such an
event, Varian's reimbursement and indemnity obligations will not be sufficient
to fully reimburse the Company for its losses.
The Company Complaint against Applied also includes requests for damages for
prior infringement and treble damages for "willful" infringement, in addition to
a request for a permanent injunction for further infringement. Although the
Company believes that it will prevail against Applied, there can be no
assurances that the Company will prevail in its litigation against Applied.
Other Litigation
In addition, in the normal course of business, the Company from time to time
receives inquiries with regard to possible other patent infringements. The
Company believes it is unlikely that the outcome of the patent infringement
inquiries will have a material adverse effect on the Company's financial
position or results of operations.
There has been substantial litigation regarding patent and other intellectual
property rights in semiconductor-related industries. Although the Company is not
aware of any infringement by its products of any patents or proprietary rights
of others except as claimed by Applied, further commercialization of the
Company's products could provoke claims of infringement from third parties. In
the future, litigation may be necessary to enforce patents issued to the
Company, to protect trade secrets or know-how owned by the Company or to defend
the Company against claimed infringement of the rights of others and to
determine the scope and validity of the proprietary rights of others. Any such
litigation could result in substantial cost and diversion of effort by the
Company, which by itself could have a material adverse effect on the Company's
financial condition and operating results. Further, adverse determinations in
such litigation could result in the Company's loss of proprietary rights,
subject the Company to significant liabilities to third parties, require the
Company to seek licenses from third parties or prevent the Company from
manufacturing or selling its products, any of which could have a material
adverse effect on the Company's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
STOCK INFORMATION(1)
Novellus' common stock is traded on the Nadsaq Stock Market and is quoted on the
Nasdaq National Market under the symbol "NVLS". The following table sets forth
the high and low closing prices as reported by the Nasdaq National Market for
the periods indicated:
<TABLE>
<CAPTION>
1997 HIGH LOW
-------------------------------------------------
<S> <C> <C>
First Quarter $ 45 1/4 $ 27 3/4
Second Quarter 43 9/16 24 4/9
Third Quarter 63 44
Fourth Quarter 64 9/13 29 8/9
</TABLE>
<TABLE>
<CAPTION>
1996 HIGH LOW
-------------------------------------------------
<S> <C> <C>
First Quarter $ 30 5/8 $ 21 5/8
Second Quarter 31 9/16 17 7/8
Third Quarter 22 16 3/8
Fourth Quarter 31 1/4 19 1/2
</TABLE>
(1) Stock prices have been restated to reflect the Company's two-for-one stock
split, effective October 1997.
The Company has not paid cash dividends on its common stock since inception, and
its Board of Directors presently plans to reinvest the Company's earnings in its
business. Accordingly, it is anticipated that no cash dividends will be paid to
holders of common stock in the foreseeable future. Additionally, certain
covenants set forth in the Company's bank lines of credit limit and senior
credit facility the Company's ability to pay dividends. As of December 31, 1997,
there were 446 holders of record of the Company's common stock.
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<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
selected consolidated financial data
[in thousands, except per share data]:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993
- ------------------------------------ ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales $ 534,004 $ 461,736 $ 373,732 $ 224,679 $ 113,543
Gross profit 290,438 264,574 216,147 128,453 64,479
Net income (loss) (95,658)(1) 94,029 82,543 44,932 16,115
Basic earnings (loss) per share(2),(4) $ (2.88) $ 2.92 $ 2.52 $ 1.45 $ 0.58
Diluted earnings (loss) per share(2),(4) $ (2.88)(3) $ 2.8 $ 2.41 $ 1.36 $ 0.55
Shares used in basic per share calculations(2) 33,257 32,156 32,712 31,090 27,928
Shares used in diluted per share calculations(2) 33,257 (3) 33,018 34,274 32,990 29,340
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash, cash equivalents,
and short-term investments $98,089 $176,668 $149,799 $136,539 $48,622
Working capital 223,710 287,818 226,257 183,581 83,486
Total assets 493,300 459,787 364,688 265,000 113,117
Long-term obligations 65,000 -- -- -- --
Shareholders' equity 301,001 373,636 272,782 214,214 105,461
Cash dividends per share -- -- -- -- --
</TABLE>
(1) The Company's reported loss of $95.7 million or $2.88 per share for the
year ended December 31, 1997 includes pre-tax one-time charges totaling
$235.2 million, consisting of $133.5 million in connection with the
acquisition of TFS, a write-off of $17.7 million in connection with
outstanding accounts receivable from Submicron Technology, Inc. and
charges totaling $84.0 million in connection with the May 4, 1997
settlement of the TEOS patent litigation.
(2) The earnings (loss) per share amounts have been adjusted to reflect the
Company's two-for-one stock split, effective October 1997.
(3) Excludes common stock equivalents as they are antidilutive to the loss
per share for the year.
(4) The earnings per share amounts shown for 1993 through 1996 have been
restated to comply with Statement of Financial Accounting Standards No.
128, "Earnings Per Share".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales
Net sales were $534.0 million, $461.7 million, and $373.7 million in 1997, 1996,
and 1995, respectively. The increase of approximately 16% from 1996 to 1997 was
the result of the acquisition of the Thin Film Systems business ("TFS") from
Varian Associates in June of 1997, combined with continued strong sales in the
Company's core Chemical Vapor Deposition ("CVD") business. The Company's core
CVD business was able to show strong sales primarily as a result of increasing
demand for its Concept Two SPEED system, an advanced dielectric gap fill system,
released in February 1996. In addition, the Company's other Concept Two products
continued to show strong demand, offset by the decline in demand for the
Company's Concept One products. The increase of approximately 24% from 1995 to
1996 was primarily due to increases in demand for the Company's Concept Two
products, offset by a decline in the demand for the Company's Concept One
products. International sales were approximately 47% of net sales in 1997, a
decrease from 64% in 1996. The decrease is the result of strong demand for the
Company's products in the U.S. partially offsetting the economic slowdown in
Japan. International sales increased as a percentage of net sales from 56% in
1995 to 64% in 1996 due to strong demand in the Pacific Rim countries. The
Company expects international sales to continue to represent a significant
portion of its overall net sales. The Company's international sales are
primarily made directly to its customers.
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<PAGE> 13
Gross Profit
Gross profit was $290.4 million, $264.6 million, and $216.1 million in 1997,
1996, and 1995, respectively. The absolute dollar increases were due to higher
net sales. As a percentage of net sales, gross profit was approximately 54%,
57%, and 58% in 1997, 1996, and 1995, respectively. The decrease in gross profit
as a percentage of net sales from 1996 to 1997 was due to the shipment of older
Physical Vapor Deposition ("PVD") systems which have lower margins than the
Company's traditional CVD business, combined with the change in mix from the
Company's higher margin Concept One products to the Company's Concept Two
products. The Company anticipates continued pressure on the gross margins as a
result of the TFS acquisition and the continued reduced demand for the Company's
Concept One product. The decrease in gross profit as a percentage of net sales
from 1995 to 1996 was primarily due to competitive pricing pressures encountered
during the industry slow down in the second half of 1996.
Research and Development
Research and development expenses were $89.8 million (excluding a one-time
charge for in-process research and development of $119.2 million), $53.9
million, and $41.0 million, in 1997, 1996, and 1995, respectively. The increases
reflect the Company's increasing commitment to the development of new products,
including additional Concept Two modules, advanced PVD systems, advanced "gap
fill" technology, primary conductor metals, low K dielectric materials and
additional advanced technologies for the next generation of smaller geometry
fabrication lines, as well as equipment to process 300mm wafers . As a
percentage of net sales, expenses were approximately 17% , (excluding the
one-time charge of $119.2 million relating to in-process research and
development), 12%, and 11% in 1997, 1996, and 1995, respectively. The Company
plans to continue to invest in new products and increase research and
development spending in absolute dollars.
Selling, General, and Administrative
Selling, general, and administrative expenses were $89.5 million, $74.4 million,
and $59.3 million in 1997, 1996, and 1995, respectively. As a percentage of net
sales, selling, general, and administrative expenses were approximately 17% in
1997, and 16% in each of 1996 and 1995. The increase as a percentage of net
sales and in absolute dollars from 1996 to 1997 is related to incremental
expenses associated with selling and supporting the acquired PVD product line.
The increase in absolute dollars from 1995 to 1996 were primarily due to higher
sales commissions on increased net revenues and generally higher levels of
spending to support an expanding worldwide business, particularly in the Pacific
Rim.
Gross profit, research and development expenses, and selling, general, and
administrative expenses were affected throughout the periods indicated by
charges to expense for the Company's profit sharing and bonus programs. Amounts
charged to expense for these programs in 1997, 1996, and 1995 were $8.0 million,
$10.2 million, and $8.4 million, respectively.
Acquisition of TFS
In connection with the acquisition of TFS, the Company recorded pre-tax charges
of $133.5 million during 1997. These charges included $119.2 million for
in-process research and development and $14.2 million attributed to
restructuring charges, relating primarily to write-offs of duplicative assets
and facilities at the Company. At December 31, 1997, $0.4 million remains in
accrued liabilities relating to lease commitments and other exit costs. As of
December 31, 1997, the Company had made approximately $2.2 million of cash
payments, relating to the restructuring reserve.
To determine the value of the acquired in-process research and development
technology, the Company considered, among other factors, the stage of
development of each project, the time and resources needed to complete each
project, expected income, target markets and associated risks. Associated risks
include the inherent difficulties and uncertainties in completing each project
and thereby achieving technological feasibility, and the risks related to the
viability of potential changes in future target markets. Due to the absence of a
completed working model at which point functions, features and technical
performance requirements can be demonstrated, as of the date of the acquisition,
the Company concluded that the in-process technology had no alternate future use
after considering potential future usage in different products, resale, and
internal usage. A discount rate of 35% was applied in the independent valuation
of in-process technology. The analysis resulted in a valuation of $119.2
million. Therefore, in accordance with generally accepted accounting principles,
the $119.2 million was expensed. The estimated cost associated with the
remaining development of these projects is expected to be approximately $54.0
million, which the Company expects to incur over the next three to four years.
Other Charges
In the quarter ended June 28, 1997, the Company recorded one-time charges of
$84.0 million and $17.7 million related to the settlement of the TEOS patent
litigation and a customer account write-off, respectively.
Net Interest Income
Net interest income was $2.9 million, $8.4 million, and $9.3 million, in 1997,
1996, and 1995 respectively. The decrease from 1996 to 1997 was due to lower
cash balances as a result of the payment of $80.0 million to Applied Materials
for the settlement of the TEOS patent litigation in May, 1997 and the
acquisition of TFS, financed through the use of $80.5 million of existing cash,
and long-term borrowings of $65.0 million. The decrease from 1995 to 1996 was
primarily due to lower interest rates earned on the outstanding cash and
short-term investment balances.
Provision (Benefit) for Income Taxes
The provision for income taxes reflects an effective tax rate (benefit) of (21)%
in 1997, 35% in 1996, and 34% in 1995. The lower effective tax rate in 1997 is
primarily due to the in-process research and development charge, which was not
fully tax benefited. The effective tax rate for the fiscal year 1998 is
anticipated to be 34%.
At December 31, 1997, the Company has recognized a deferred tax asset of $58.9
million, after a valuation allowance of $20.0 million, related to temporary
differences between the book and tax basis of assets and liabilities. It is the
opinion of management that it is more likely than not that this asset will be
realized by an offset against the recognized deferred tax liability of $7.2
million and future taxable income.
13
<PAGE> 14
Net Income (Loss)
Net (loss) for the year ended December 31, 1997 was $(95.7) million or $(2.88)
per basic and diluted shares, compared with net income of $94.0 million or $2.92
and $2.85 per basic and diluted shares, respectively, for the year ended
December 31, 1996. The change to a net loss in 1997 from net income in 1996, is
attributable to the TFS acquisition and other charges described above. Without
giving effect to these charges the Company's operating income for the year ended
December 31, 1997, would have approximated, $75.3 million or $2.26 and $2.17 per
basic and diluted shares, respectively.
The number of shares used in the per share calculations for the year ended
December 31, 1997 was 33.3 million shares for both the basic and diluted loss
per share calculations, compared with 32.2 million and 33.0 million used in the
basic and diluted income per share calculations, respectively, for the year
ended December 31, 1996. Shares used for year ended December 31, 1997 exclude
common stock equivalents as they are antidilutive.
Repurchase of Common Stock
During 1997, 1996 and 1995, the Company repurchased 6,000, 172,000 and 1,282,000
shares of common stock, respectively. The 1997 and 1996 repurchases had no
material impact on earnings (loss) per share amounts in each period. The 1995
repurchase resulted in an increase to earnings per share for 1995 of
approximately $0.02, on both basic and diluted earnings per share.
Foreign Currency Accounting
The local currency is the functional currency for all foreign operations.
Accordingly, translation gains or losses related to the foreign subsidiaries are
included as a component of shareholders' equity.
Foreign Exchange Contracts
The Company conducts its business in various foreign currencies. The Company
enters into forward foreign exchange contracts primarily to hedge against the
short-term impact of foreign currency fluctuations of intercompany accounts
payable denominated in U.S. dollars recorded by the Japanese subsidiary. The
Company also enters into forward foreign exchange contracts to buy and sell
foreign currencies as economic hedges of the parent's intercompany balances
denominated in a currency other than the U.S. dollar. In 1997, these hedging
contracts were denominated primarily in the Japanese Yen. The maturities of all
the forward foreign exchange contracts are generally short-term in nature. As
the impact of movements in currency exchange rates on forward foreign exchange
contracts offsets the related impact on the underlying items being hedged, these
financial instruments do not subject the Company to speculative risk that would
otherwise result from changes in currency exchange rates. Net foreign currency
gains and losses have not been material.
Other Issues
Effective January 1996, the Company implemented the disclosure requirements of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation". In accordance with the provisions of SFAS No. 123,
the Company accounts for stock-based employee compensation arrangements under
the intrinsic value method prescribed by the Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and will provide pro forma
disclosures of net income (loss) and earning (loss) per share as if the fair
value method prescribed by SFAS No. 123 had been applied in measuring employee
compensation expense.
Effective October, 1997, the Company adopted SFAS No. 128, "Earnings Per Share".
SFAS No. 128 replaced the calculation of primary and fully diluted earnings
(loss) per share with basic and diluted earnings (loss) per share. Unlike
primary earnings (loss) per share, basic earnings (loss) per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings (loss) per share is very similar to the previously reported fully
diluted earnings (loss) per share. Earnings (loss) per share amounts for all
periods presented have been restated to conform to SFAS No. 128 requirements.
In June 1997, the Financial Accounting Standards Board ("FASB") released SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements and is effective for fiscal
years beginning after December 15, 1997. The Company believes that adoption of
SFAS No. 130 will not have a material impact on the Company's consolidated
financial statements.
In June 1997, the FASB released SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 will change the way companies
report selected segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial reports to shareholders. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company has not yet reached a conclusion
as to the appropriate segments, if any, which it will be required to report to
comply with the disclosure requirements of SFAS No. 131.
14
<PAGE> 15
CAUTIONARY STATEMENTS
The statements contained in this Report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of section 27A of
the Securities Act of 1993 and Section 21E of the Securities Exchange Act of
1934, including, without limitation, statements regarding the Company's
expectations, plans, hopes, beliefs, intentions or strategies regarding the
future. Forward looking statements include, without limitation, the discussion
of the Company's strategy to focus on major semiconductor manufacturers, under
the heading "Item 1. Business;" the statements regarding (a) the Company's
belief that PVD, tantalum barrier and copper seed layers may play an important
role in replacing aluminum with copper as the primary wiring material, (b) the
Company's belief regarding the greater complexity and number of interconnect
layers in advanced integrated circuits, and (c) the effect of the evolution of
semiconductor devices to smaller line width geometries and more complex
multi-level circuitry on the cost and performance requirements of capital
equipment used to manufacture these devices, under the heading "Item 1. Business
- - Industry Background;" the Company's beliefs regarding Throughput, Cost per
Wafer and Film Quality under the heading "Item 1. Business - The Novellus
Solution;" the discussion of the Company's strategies under the heading "Item 1.
Business - Strategy;" the Company's statement with respect to the INOVA(TM)
System being in its final stages of development and the Company's belief that
the next generation of process will use ionized PVD with HCM source technology,
under the Heading "Item 1. Business - Products - INOVA(TM) System;" the Company
belief that its Concept Three products should offer minimal risk to its
customers in making the major transition from 200mm to 300mm volume chipmaking,
under the Heading "Item 1. Business - Products - CONCEPT THREE(TM);" the
Company's expectation that sales of its products to relatively few customers
will continue to account for a high percentage of its net sales in the
foreseeable future, under the heading "Item 1. Business - Marketing, Sales and
Service"; the Company's expectation that research and development expenditures
will continue to represent a substantial percentage of sales, under the heading
"Item 1. Business - Research and Development"; the Company's belief as to its
favorable competitiveness in the CVD marketplace, under the heading "Item 1.
Business - Competition"; the Company's anticipation with respect to the
projected uses of its properties, under the heading "Item 2. Properties"; the
Company's belief that its currents properties will be sufficient to meet the
Company's requirements for the foreseeable future, under heading "Item 2.
Properties"; the Companies belief that there are meritorious defenses in the
Applied litigation, and the Company's beliefs with respect to the outcomes of
the Applied Materials litigation and current patent infringement inquiries,
under the heading "Item 3. Legal Proceedings"; the Company's strategies,
beliefs, plans, expectations and hopes with respect to Net Sales, Gross Profit,
Research and Development, Selling, General and Administrative, Provision
(Benefit) for Income Taxes, Foreign Exchange Contracts and Other Issues set
forth under "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations"; the Company's estimates that its year 2000
compliance expense will be approximately $3.0 million, the Company's requirement
as to the availability of the year 2000 compatible release of the Company's
internal information system from the vendor, the Company's belief that the year
2000 issue is not going to be a significant issue as it pertains to its vendors,
and the Company's expectation that its year 2000 conversion project will be
completed on a timely basis, under the heading "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Cautionary
Statements - Year 2000"; and the Company's expectations and beliefs with respect
to its current cash position, cash generated through operations and its
expectations with respect to the return from investments in property and
equipment and the sufficiency of funds from operations, existing cash balances
and borrowing capacity, under the heading "Item 7. Liquidity and Capital
Resources"; and the Company's expectation that any adjustment to the TFS
purchase price, as a result of arbitration, would not have a material effect on
the Company's business, financial condition or results of operations, under the
heading "Item 7. Notes to the Consolidated Financial Statements - Note 2
Acquisition of the Thin Film Systems Business of Varian Associates". All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward looking statements. It is important to
note that the Company's actual results could differ materially from those
included in such forward looking statements. Among the factors that cause actual
results to differ materially are the factors detailed in the following
discussion on "Other Cautionary Statements." You should also consult the risk
factors listed from time to time in the Company's Reports on Forms 10-Q, 8-K,
10-K and Annual Reports to Shareholders.
These additional risks and uncertainties could cause actual results to differ
materially from those described herein and include the following:
Concentration of Credit Risk. The Company uses financial instruments that
potentially subject it to concentrations of credit risk. Such instruments
include cash equivalents, short-term investments, accounts receivable, and
financial instruments used in hedging activities. The Company invests its cash
in cash deposits, money market funds, commercial paper, certificates of deposit,
readily marketable debt securities, or medium term notes. The Company places its
investments with high-credit-quality financial institutions and limits the
credit exposure from any one financial institution or instrument. To date, the
Company has not experienced material losses on these investments. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally requires no collateral. The Company has an exposure to nonperformance
by counterparties on the foreign exchange contracts used in hedging activities.
These counterparties are large international financial institutions and to date,
no such counterparty has failed to meet its financial obligations to the
Company. The Company does not believe there is a significant risk of
nonperformance by these counterparties because the Company continuously monitors
its positions and the credit ratings of such counterparties and the amount of
contracts it enters into with any one party. However, there can be no assurance
that there will be no significant nonperformance by these counterparties and
that this would not materially adversely affect the Company's business,
financial condition, and results of operations.
International Operations. Export sales accounted for approximately 47%, 64%, and
56% of net sales in 1997, 1996, and 1995, respectively. The Company anticipates
that export sales will account for a significant portion of net sales in the
foreseeable future. As a result, a significant portion of the Company's sales
will be subject to certain risks, including tariffs and other barriers,
difficulties in staffing and managing foreign
15
<PAGE> 16
subsidiary operations, difficulties in managing distributors, potentially
adverse tax consequences, and the possibility of difficulty in accounts
receivable collection. The Company is also subject to the risks associated with
the imposition of legislation and regulations relating to the import or export
of semiconductor products. The Company cannot predict whether quotas, duties,
taxes, or other charges or restrictions will be implemented by the United States
or any other country upon the importation or exportation of the Company's
products in the future. There can be no assurance that any of these factors or
the adoption of restrictive policies will not have a material adverse effect on
the Company's business, financial condition or results of operations. Moreover,
each region in the global semiconductor equipment market exhibits unique
characteristics that can cause capital equipment investment patterns to vary
significantly from period to period. Although international markets provide the
Company with significant growth opportunities, periodic economic downturns,
trade balance issues, political instability and fluctuations in interest and
foreign currency exchange rates are all risks that could affect global products
and service demand. Many Pacific Rim countries are currently experiencing
banking and currency difficulties that could lead to economic recession in those
countries. Among other things, the decline in value of the Korean currency,
together with difficulties obtaining credit, could result in a decline in the
purchasing power of the Company's Korean customers. This in turn could result in
the cancellation or delay of orders for the Company's products from Korean
customers, thus materially adversely affecting the Company's business, financial
condition or results of operations. In addition, if Japan's economy weakens
further, investments by Japanese customers may be adversely affected and it is
possible that economic recovery in other Pacific Rim countries could be delayed.
In addition to the concerns described above, sales of systems shipped by the
Company's Japanese subsidiary are denominated in Japanese Yen. The Company sells
the systems to its Japanese subsidiary in U.S. Dollars. It then enters into
forward foreign exchange contracts to hedge against the short-term impact of
foreign currency fluctuations of intercompany accounts payable denominated in
U.S. Dollars recorded by the Japanese subsidiary in order to manage this
exposure, however, there can be no assurance that future changes in the Japanese
Yen will not have a material effect on the Company's business, financial
condition or results of operations.
Market Risk. The Company's business depends predominantly on capital
expenditures of semiconductor manufacturers, which, in turn, depends on the
current and anticipated market demand for integrated circuits and products
utilizing integrated circuits. The semiconductor industry has historically been
very cyclical and has experienced periodic downturns, which have had a material
adverse effect on the semiconductor industry's demand for semiconductor
processing equipment, including equipment manufactured and marketed by the
Company. No assurance can be given that the Company's net sales and operating
results will not be adversely affected if downturns or slowdowns in the rate of
capital investment in the semiconductor industry occur in the future. In
addition, the semiconductor equipment industry is highly competitive, and
subject to rapid change and new products and enhancements.
Possible Volatility of Stock Price. The stock price of the Securities may be
subject to wide fluctuations and possible rapid increases or declines in a short
time period. These fluctuations may be due to factors specific to the Company
such as variations in quarterly operating results or changes in analysts'
earnings estimates, or to factors relating to the semiconductor industry or to
the securities markets in general, which, in recent years, have experienced
significant price fluctuations. These fluctuations often have been unrelated to
the operating performance of the specific companies whose stocks are traded.
Investors in the Securities should be willing to incur the risk of such
fluctuations. Sales of substantial amounts of Securities in the public market
after any offering of Securities could adversely affect the market price of
outstanding Securities.
Variability of Quarterly Operating Results. The Company has experienced and
expects to continue to experience significant fluctuations in its quarterly
operating results. During each quarter, the Company customarily sells a
relatively small number of systems that typically sell for prices in excess of
$1 million. The Company's backlog at the beginning of each quarter does not
necessarily include all system sales needed to achieve expected net sales for
that quarter. Consequently, the Company will often be dependent on obtaining
orders for shipment in the same quarter that the order is received. Because the
Company builds its systems according to forecast, the absence of significant
backlog for an extended period of time could hinder the Company's ability to
plan production and inventory levels, which could adversely affect operating
results. The Company's net sales and operating results could also be adversely
affected for a particular quarter if an anticipated order for even a few systems
is not received in time to permit shipment during that quarter. Moreover,
customers may reschedule or cancel shipments, with, in the case of
cancellations, little or no penalties, and production difficulties could delay
shipments. A delay in a shipment in any quarter, due, for example, to an
unanticipated shipment rescheduling, to cancellations by customers or to
unexpected manufacturing difficulties experienced by the Company, may cause net
sales in such quarter to fall significantly below the Company's expectations and
may thus materially adversely affect the Company's operating results for such
quarter. The timing of new product announcements and releases by the Company may
also contribute to fluctuations in quarterly operating results, particularly in
cases where new product offerings cause customers to defer ordering products
from the Company's existing product lines. The Company's results of operations
also could be affected by new product announcements and releases by the
Company's competitors, the volume, mix and timing of orders received during a
period, availability and pricing of key components, fluctuations in foreign
exchange rates, and conditions in the semiconductor equipment industry. The
Company's operating results also fluctuate based on gross profit realized on
system sales. Gross profit as a percentage of net sales may vary based on a
variety of factors, including the mix and average selling prices of products
sold and costs to manufacture upgrades and to customize systems. Because the
Company's operating expenses are based on anticipated net sales levels, and a
high percentage of those expenses are relatively fixed, a variation in the
timing of recognition of net sales and the level of gross profit from a single
transaction can cause material variations in operating results from quarter to
quarter.
Year 2000. The Company is aware of the issues associated with the programming
code in existing computer systems as the millennium (year 2000) approaches. The
"year 2000" problem is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two digit year
value to 00. The concern is whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company is currently utilizing both internal and external
resources to correct or reprogram, and test the systems it owns or operates for
the year 2000 problems. To date, the Company has had communications with its
customers that plans are being developed to address the issues as it pertains to
its own products. In addition, the Company believes it has identified all
internal information systems that require updates to be year 2000 compliant, and
has commenced a program to upgrade its current internal information system.
Having completed the first stage of the upgrade for most of the Company in 1997,
the Company is now preparing to upgrade it's internal information systems to the
year 2000 compatible release, as it becomes available from the vendor.
Management estimates that the remaining Company's year 2000 compliance expense
will be approximately $3.0 million. The Company does not anticipate that there
is a significant issue as it pertains to its vendors, due to the Company's
strategy of ensuring that it has alternate vendors for key components. The
Company expects its year 2000 date conversion project, with respect to its owns
systems, to be completed on a timely basis. However, there can be no assurance
that the systems of other companies on which the Company's systems and business
rely also will be timely converted or that any such failure to convert by
another company would not have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, there can
be no assurance that the Company will be successful in addressing the year 2000
issues as they pertain to its own products and its own internal information
systems, and that failure to do so would not have a material adverse effect on
the Company's business, financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and capital resource
requirements through cash flows from operations, sales of equity securities, and
borrowings. The Company's primary source of funds at December 31,1997 consisted
of $98.1 million of cash, cash equivalents and short-term investments. This
amount represents a decrease of $78.6 million from the December 31, 1996 balance
of $176.7 million. During the second quarter of 1997, the Company entered into a
five year $125 million Senior Credit Facility structured as an unsecured
revolving credit line. The borrowings, at the option of the Company, bear
interest at either a base rate plus a margin or LIBOR plus a margin for interest
periods of one to six months. As of December 31, 1997, total borrowings under
the Senior Credit Facility were $65 million with a weighted average
16
<PAGE> 17
interest rate of approximately 6.5%. The Senior Credit Facility requires the
Company to be in compliance with certain financial covenants. At December 31,
1997, the Company was in compliance with these financial covenants. The Senior
Credit Facility currently restricts the Company from paying dividends. In
addition, at December 31, 1997, there was $13.7 million available under bank
lines of credit that expire at various dates through June 1998. At December 31,
1997 approximately $11.7 million was outstanding under these bank lines of
credit which bear interest at the banks' prime lending rates or offshore
reference rates. The weighted average interest rates at December 31, 1997 for
borrowings under the bank lines of credit was 1.02%.
Net cash provided by operating activities during the year ended December 31,
1997 was $22.6 million. The net loss of $95.7 million and the impact of
recording a $37.2 million deferred tax asset were offset by approximately $131.3
million in non-cash special charges (in-process research and development- $119.2
million and restructuring and other costs - $12.0 million) and the $17.7 million
non-cash charge recorded in connection with a customer account write-off.
Net cash used in investing activities was $110.2 million during the year ended
December 31, 1997. During this period, the Company paid $148.3 million for the
purchase of TFS, which consisted of $145.5 million in cash and $2.8 million in
related expenses, and had capital expenditures of $36.2 million. These cash
outflows were partially offset by sales of approximately $72.1 million, net, of
available-for-sale securities. The Company expects investment in property and
equipment for the fiscal year 1998 to approximate $65 million, this amount
includes the 1998 portion of its projected year 2000 compliance expenditure (see
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations - Cautionary Statements - Year 2000). The Company intends to
finance these investments from existing cash balances and cash flows from
operations.
During the year ended December 31, 1997, net cash provided by financing
activities was $81.0 million, due primarily to the drawing down of $65 million
on the $125 million Senior Credit Facility. Additionally, the Company has
received proceeds from common stock option exercises of $17.8 million.
The Company believes that its current cash position and cash generated through
operations will be sufficient to meet the Company's needs through the next
twelve months.
17
<PAGE> 18
NOVELLUS SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------- --------- --------- ---------
<S> <C> <C> <C>
Net sales $ 534,004 $ 461,736 $ 373,732
Cost of sales 243,566 197,162 157,585
--------- --------- ---------
Gross profit 290,438 264,574 216,147
Operating expenses:
Research and development 89,830 53,902 41,009
Selling, general and administrative 89,474 74,419 59,347
In-process research and development 119,246 -- --
Restructuring and other costs 14,243 -- --
Litigation settlement and other related 84,021 -- --
legal costs
Bad debt write-off 17,700 -- --
--------- --------- ---------
Total operating expenses 414,514 128,321 100,356
--------- --------- ---------
Operating income (loss) (124,076) 136,253 115,791
Interest:
Income 5,684 8,884 9,501
Expense (2,741) (477) (227)
--------- --------- ---------
Net interest 2,943 8,407 9,274
--------- --------- ---------
Income (loss) before provision (benefit) for (121,133) 144,660 125,065
income taxes
Provision (benefit) for income taxes (25,475) 50,631 42,522
========= ========= =========
Net income (loss) $ (95,658) $ 94,029 $ 82,543
========= ========= =========
Basic earnings (loss) per share $ (2.88) $ 2.92 $ 2.52
========= ========= =========
Diluted earnings (loss) per share $ (2.88) $ 2.85 $ 2.41
========= ========= =========
Shares used in basic per share calculations 33,257 32,156 32,712
========= ========= =========
Shares used in diluted per share calculations 33,257 33,018 34,274
========= ========= =========
</TABLE>
See accompanying notes.
18
<PAGE> 19
NOVELLUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ------------ --------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 59,265 $ 65,762
Short-term investments 38,824 110,906
Accounts receivable, net of allowance for
doubtful accounts of $3,547 in 1997 and
$2,777 in 1996 133,925 119,710
Inventories 82,133 55,448
Deferred taxes 22,241 14,513
Prepaid and other current assets 14,621 7,630
--------- ---------
Total current assets 351,009 373,969
Property and equipment:
Machinery and equipment 72,466 60,240
Furniture and fixtures 17,962 4,660
Leasehold improvements 47,294 36,309
--------- ---------
137,722 101,209
Less accumulated depreciation and amortization 44,382 34,991
--------- ---------
93,340 66,218
Long-term deferred taxes 29,498 --
Other assets 19,453 19,600
========= =========
Total assets $ 493,300 $ 459,787
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,865 $ 26,047
Accrued payroll and related expenses 20,632 17,404
Accrued warranty 37,836 18,566
Other accrued liabilities 34,314 10,210
Income taxes payable -- 771
Current obligations under lines of credit 11,652 13,153
--------- ---------
Total current liabilities 127,299 86,151
Long-term debt 65,000 --
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value;
Authorized shares - 20,000
Issued and outstanding shares - none -- --
Common stock, no par value;
Authorized shares - 80,000
Issued and outstanding shares - 33,719
in 1997
and 32,510 in 1996 154,167 128,751
Retained earnings 149,061 244,966
Cumulative translation adjustment (2,227) (81)
--------- ---------
Total shareholders' equity 301,001 373,636
========= =========
Total liabilities and shareholders' equity $ 493,300 $ 459,787
========= =========
</TABLE>
See accompanying notes.
19
<PAGE> 20
NOVELLUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------- --------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($ 95,658) $ 94,029 $ 82,543
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 18,288 11,332 7,649
In-process research and development 119,246 -- --
Restructuring and other costs 12,043 -- --
Bad debt write-off 17,700 -- --
Deferred income taxes (37,226) 1,767 (8,434)
Changes in operating assets and
liabilities:
Accounts receivable (17,899) (7,867) (51,774)
Inventories (5,232) (18,669) (9,576)
Prepaid and other current assets 4,067 (4,413) (1,104)
Accounts payable (11,294) (6,819) 18,021
Accrued payroll and related expenses 993 1,626 5,459
Accrued warranty 5,551 3,305 7,001
Other accrued liabilities 12,068 430 2,601
Income taxes payable -- (7,447) 9,484
--------- --------- ---------
Total adjustments 118,305 (26,755) (20,673)
--------- --------- ---------
Net cash provided by operating activities 22,647 67,274 61,870
--------- --------- ---------
INVESTING ACTIVITIES
Purchases of held-to-maturity debt securities -- -- (518,021)
Proceeds from the sale and maturity of -- -- 518,888
held-to-maturity debt securities
Purchases of available-for-sale securities (125,663) (387,709) --
Proceeds from the sale and maturity of 197,745 366,488 --
available-for-sale securities
Purchase of the net assets of the Thin Film
Systems business of Varian Associates, Inc. (148,325) -- --
Capital expenditures (36,153) (35,285) (21,829)
(Increase) decrease in other assets 2,208 (15,540) (596)
--------- --------- ---------
Net cash used in investing activities (110,188) (72,046) (21,558)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds (payments) from lines of credit, net (1,501) 5,784 2,851
Borrowings under long-term debt 65,000 -- --
Common stock issued 17,817 7,880 6,696
Common stock repurchased (272) (3,244) (35,732)
--------- --------- ---------
Net cash provided by (used in) financing activities 81,044 10,420 (26,185)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (6,497) 5,648 14,127
Cash and cash equivalents at the beginning of
the period 65,762 60,114 45,987
--------- --------- ---------
Cash and cash equivalents at the end of the
period $ 59,265 $ 65,762 $ 60,114
========= ========= =========
Supplemental disclosures:
Cash paid during the year for:
Interest $ 2,741 $ 477 $ 227
Income taxes 393 57,611 40,209
Other non-cash changes:
Income tax benefits from employee stock plans 7,624 3,034 4,297
Transfers of securities from held-to-maturity -- -- 145,265
to available-for-sale
</TABLE>
See accompanying notes.
20
<PAGE> 21
NOVELLUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE TOTAL
COMMON STOCK RETAINED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT EARNINGS ADJUSTMENT EQUITY
------ --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 32,338 $ 112,532 $ 101,682 $ -- $ 214,214
Exercise of stock options 744 5,230 -- -- 5,230
Shares issued under employee
stock purchase plan 84 1,466 -- -- 1,466
Income tax benefits realized
from activity in employee
stock plans-- -- 4,297 -- -- 4,297
Common stock repurchased (1,282) (5,102) (30,630) -- (35,732)
Cumulative translation
adjustment -- -- -- 764 764
Net income -- -- 82,543 -- 82,543
------ --------- --------- --------- -------
Balance at December 31, 1995 31,884 118,423 153,595 764 272,782
Exercise of stock options 670 5,619 -- -- 5,619
Shares issued under employee
stock purchase plan 128 2,261 -- -- 2,261
Income tax benefits realized
from activity in employee
stock plans-- -- 3,034 -- -- 3,034
Common stock repurchased (172) (586) (2,658) -- (3,244)
Cumulative translation
adjustment -- -- -- (845) (845)
Net income -- -- 94,029 -- 94,029
------ --------- --------- --------- -------
Balance at December 31, 1996 32,510 128,751 244,966 (81) 373,636
Exercise of stock options 1,070 14,956 -- -- 14,956
Shares issued under employee
stock purchase plan 145 2,861 -- -- 2,861
Income tax benefits realized
from activity in employee
stock plans-- -- 7,624 -- -- 7,624
Common stock repurchased (6) (25) (247) -- (272)
Cumulative translation
adjustment -- -- -- (2,146) (2,146)
Net (loss) -- -- (95,658) -- (95,658)
------ --------- --------- --------- -------
Balance at December 31, 1997 33,719 $ 154,167 $ 149,061 $ (2,227) 301,001
====== ========= ========= ========= =======
</TABLE>
See accompanying notes.
21
<PAGE> 22
NOVELLUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Novellus Systems, Inc. (the Company) is a leading manufacturer of chemical vapor
deposition (CVD) systems used in the fabrication of integrated circuits. The
Company's products are able to provide simultaneous solutions to productivity
and wafer quality problems facing the worldwide semiconductor manufacturing
industry. Novellus serves the global semiconductor manufacturing market from its
corporate headquarters in San Jose, California and through subsidiaries in
Europe and the Pacific Rim. On June 20, 1997, the Company completed the
acquisition of the Thin Film Systems business ("TFS") of Varian Associates, Inc.
("Varian"). TFS manufactures and markets equipment for physical vapor deposition
("PVD"), a critical technology in the production of advanced semiconductor logic
and memory devices.
22
<PAGE> 23
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries after elimination of all significant
intercompany accounts and transactions.
Certain prior year amounts in the consolidated financial statements and the
notes thereto have been reclassified to conform to the 1997 presentation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results inevitably will differ from those estimates and such differences
may be material to the financial statements.
Revenue Recognition
Net sales consist of system and spare part sales as well as revenues from
maintenance and service contracts. Revenue related to system and spare part
sales is recognized on shipment. Revenue related to maintenance and service
contracts is recognized ratably over the duration of the contracts. Unearned
maintenance and service contract revenue is immaterial and included in accrued
liabilities.
Warranty and Installation
The Company generally warrants its systems for a period of up to 24 months from
shipment for material and labor to repair and service the system. A provision
for the estimated cost of installation and warranty is recorded upon shipment.
Cash and Cash Equivalents
For the purpose of the statement of cash flows, the Company considers all highly
liquid debt instruments with insignificant interest rate risk and maturities of
ninety days or less to be cash equivalents.
Short-Term Investments
The Company classifies its marketable debt securities as available-for-sale in
accordance with the provisions of the Statement of Financial Accounting Standard
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Securities classified as available-for-sale are reported at fair
market value with the related unrealized gains and losses included in retained
earnings. Realized gains and losses and declines in value of securities judged
to be other than temporary are included in interest income or expense.
Interest on all securities is included in interest income.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Purchased and spare parts $45,556 $40,211
Work-in-process 30,326 11,347
Finished goods 6,251 3,890
------- -------
$82,133 $55,448
======= =======
</TABLE>
23
<PAGE> 24
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided mainly on the straight-line method over the following useful lives:
Machinery and equipment 3-5 years
Furniture and fixtures 3-5 years
Leasehold improvements Shorter of useful life
or remaining
lease term
Foreign Currency Accounting
The local currency is the functional currency for all foreign operations.
Accordingly, translation gains or losses related to the foreign subsidiaries are
included as a component of shareholders' equity.
Forward Foreign Exchange Contracts
The Company enters into forward foreign exchange contracts primarily to hedge
against the short-term impact of foreign currency fluctuations of intercompany
accounts payable denominated in U.S. Dollars recorded by the Japanese
subsidiary. The Company also enters into forward foreign exchange contracts to
buy and sell foreign currencies as economic hedges of the parent's intercompany
balances denominated in a currency other than the U.S. dollar. In 1996 and 1997,
these hedging contracts were denominated primarily in the Japanese Yen. The
maturities of all the forward foreign exchange contracts are generally
short-term in nature. Because the impact of movements in currency exchange rates
on forward foreign exchange contracts offsets the related impact on the
underlying items being hedged, these financial instruments do not subject the
Company to speculative risk that would otherwise result from changes in currency
exchange rates. Net foreign currency gains and losses have not been material.
Stock Split
On September 22, 1997 the Company announced that its Board of Directors had
approved a two-for-one split of Novellus' common stock. Each shareholder of
record as of the close of business on September 29, 1997 received one additional
share of common stock for every share held. All prior period common stock and
applicable share and per share amounts have been restated to reflect the
two-for-one split, effective October, 1997.
Earnings (Loss) Per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128
(Earnings per Share". SFAS No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. Earnings per share amounts for all periods presented have been restated
to conform to SFAS No. 128.
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- -------
<S> <C> <C> <C>
Numerator:
Net Income (loss) $(95,658) $94,029 $82,543
Denominator:
Denominator for basic earnings
(loss) per share -
weighted-average shares
outstanding 33,257 32,156 32,712
Employee stock options -- 862 1,562
--------- ------- -------
Denominator for diluted earnings
(loss) per share - adjusted
weighted-average shares outstanding 33,257 33,018 34,274
--------- ------- -------
Basic earnings (loss) per share $ (2.88) $ 2.92 $ 2.52
Diluted earnings (loss) per share $ (2.88) $ 2.85 $ 2.41
========= ======= =======
</TABLE>
Options were outstanding during 1997, but were excluded from the computation of
diluted net loss per common share because the effect in years with a net loss
would be antidilutive. Options to purchase 1,918,000 and 569,000 shares of
common stock at a weighted-average price of $29.73 and $35.75 per share were
outstanding during 1996 and 1995, respectively, but were not included in the
computation of diluted net income per common share because the options' exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
Advertising Expenses
The Company accounts for advertising costs as expenses in the period in which
they are incurred. Advertising expenses for 1997, 1996, and 1995 were
$3,233,000, $3,259,000 and $2,692,000, respectively.
24
<PAGE> 25
Concentration of Credit Risk
The Company uses financial instruments that potentially subject it to
concentrations of credit risk. Such instruments include cash equivalents,
short-term investments, accounts receivable, and financial instruments used in
hedging activities. The Company invests its cash in cash deposits, money market
funds, commercial paper, certificates of deposit, readily marketable debt
securities, or medium term notes. The Company places its investments with
high-credit-quality financial institutions and limits the credit exposure from
any one financial institution or instrument. To date, the Company has not
experienced material losses on these investments. The Company performs ongoing
credit evaluations of its customers' financial condition and generally requires
no collateral. The Company has an exposure to nonperformance by counterparties
on the foreign exchange contracts used in hedging activities. These
counterparties are large international financial institutions and to date, no
such counterparty has failed to meet its financial obligations to the Company.
The Company does not believe there is a significant risk of nonperformance by
these counterparties because the Company continuously monitors its positions and
the credit ratings of such counterparties and the amount of contracts it enters
into with any one party. However, there can be no assurance that there will be
no significant nonperformance by these counterparties and that this would not
materially adversely affect the Company's business, financial condition, and
results of operations.
Employee Stock Plans
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation". In accordance with the provisions of SFAS No. 123,
the Company accounts for stock-based employee compensation arrangements under
the intrinsic value method prescribed by the Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and will provide pro forma
disclosures of net income (loss) and earning (loss) per share as if the fair
value method prescribed by SFAS No. 123 had been applied in measuring employee
compensation expense. See Note 9 to the Consolidated Financial Statements.
Recent Accounting Pronouncements
In June 1997, the FASB released SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company believes that adoption of SFAS No. 130 will not have a
material impact on the Company's consolidated financial statements.
In June 1997, the FASB released SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 will change the way companies
report selected segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial reports to shareholders. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company has not yet reached a conclusion
as to the appropriate segments, if any, which it will be required to report to
comply with the disclosure requirements of SFAS No. 131.
NOTE 2 ACQUISITION OF THE THIN FILM SYSTEMS BUSINESS OF VARIAN ASSOCIATES
In June 1997, the Company completed the acquisition of the Thin Film Systems
business ("TFS") of Varian Associates, Inc. ("Varian"). TFS manufactures and
markets equipment for physical vapor deposition ("PVD"), a critical technology
in the production of advanced semiconductor logic and memory devices. The
acquisition has been accounted for under the purchase method of accounting, and
accordingly, the accompanying consolidated financial statements include the
results of operations of TFS subsequent to the acquisition date.
The currently estimated total purchase price of $148.3 million consisted of a
cash payment of $145.5 million to Varian and $2.8 million of related acquisition
expenses. The purchase price is dependent on the results of the audit of the TFS
pre-acquisition financial statements. Adjustments to the estimated purchase
price, if any, could ultimately be determined through arbitration. The Company
expects that any adjustment to the purchase price, as a result of such
arbitration, would not have a material effect on the Company's business,
financial condition or results of operations. Acquired assets and liabilities
were recorded at their estimated fair values at the date of the acquisition. The
aggregate purchase price, plus related acquisition expenses, have been allocated
to the assets and liabilities acquired based on independent valuations. Amounts
allocated to in-process research and development of approximately $119.2 million
were written-off at the acquisition date, representing an estimated value (using
risk-adjusted cash flows, discounted at 35%) of development programs that have
not yet reached technological feasibility. Amounts allocated to developed
technology, $11.7 million, and workforce in place, $1.0 million, are being
amortized on a straight line basis over periods of seven and three years,
respectively.
As a result of the acquisition of TFS the Company recorded restructuring and
other costs of $14.2 million comprised primarily of write-offs of duplicative
assets and the cost of exiting certain facilities. Primarily all of these
actions were completed in the year ended December 31, 1997. As of December 31,
1997, the Company had made $2.2 million of cash payments relating to
restructuring and other costs. The components of the restructuring and other
costs are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Total
Restructuring Balance at
and Other Spending/ December 31,
Costs Charges 1997
------------- --------- -----------
<S> <C> <C> <C>
Duplicative machinery and equipment $9,039 $9,039 $0
Lease commitments and leasehold improvements 3,143 2,778 365
Other exiting costs 2,061 2,061 0
------- ------- -----
$14,243 $13,878 $365
======= ======= =====
</TABLE>
The following unaudited pro forma summary presents the consolidated results of
operations of the Company as if the acquisition of TFS had occurred at the
beginning of fiscal 1996 and does not purport to be indicative of what would
have occurred had the acquisition been made as of the beginning of fiscal 1996
or of results which may occur in the future (in thousands, except per share
data).
25
<PAGE> 26
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net sales $ 584,453 $ 666,403
Income before provision for income taxes(1) $ 3,345 $ 158,481
Net income(1) $ 2,208 $ 103,013
Basic earnings per share(1) $ 0.07 $ 3.20
Diluted earnings per share(1) $ 0.06 $ 3.12
</TABLE>
(1)Amounts exclude the $119.2 million in relating to the in-process research and
development charge and the $14.2 million restructuring costs recorded in
the second quarter of 1997, as a result of the acquisition.
The effects of the TFS acquisition on the 1997 consolidated statement of cash
flows were as follows (in thousands):
<TABLE>
<S> <C>
Working capital acquired $ (2,117)
Property, plant and equipment 18,498
Intangibles and goodwill 12,698
In-process research and development 119,246
---------
Total purchase price $ 148,325
=========
</TABLE>
NOTE 3 FINANCIAL INSTRUMENTS
Financial Instruments with Off-Balance-Sheet Risk
As part of the Company's asset and liability management, the Company enters into
various types of transactions that involve financial instruments with
off-balance sheet risk. The Company enters into foreign forward exchange
contracts in order to manage foreign exchange risk. The notional amounts,
carrying amounts, and estimated fair values of the Company's foreign forward
exchange contracts are as follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------------- -------------------------------
NOTIONAL CARRYING ESTIMATED NOTIONAL CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VAULE VALUE AMOUNT FAIR VALUE
--------- -------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sell foreign currency, $31,522 $(239) $1,124 $27,140 $(279) $1,325
primarily yen
</TABLE>
The fair value of the Company's foreign forward exchange contracts are
calculated based upon the related foreign exchange rate at the end of December
31, 1997 and 1996, respectively.
Available-for-Sale Securities
The Company currently invests in only high quality, short-term investments which
it classifies as available-for-sale. As such, there were no significant
differences between amortized cost and estimated fair value at December 31, 1997
and 1996. Additionally, because investments are short-term and are generally
allowed to mature, realized gains and losses for both years have been minimal.
All investments held at December 31, 1997 are due in less than one year.
The following table presents the estimated fair value of the Company's
investments by balance sheet classification at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Institutional money market funds $35,868 $ 38,423
Commercial paper 23,397 27,339
------- --------
Amounts included in cash and cash equivalents 59,265 65,762
------- --------
Commercial paper 34,320 75,085
Certificates of deposits 4,504 --
U.S. Treasury securities and obligations of
U.S. Government Agencies -- 35,821
------- --------
Amounts included in short-term investments 38,824 110,906
------- --------
U.S. Treasury securities -- 5,489
------- --------
Amounts included in other assets -- 5,489
------- --------
Total available-for-sale securities $98,089 $182,157
======= ========
</TABLE>
26
<PAGE> 27
On November 15, 1995, the FASB staff issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." In accordance with the provisions in the Special Report,
the Company chose to reclassify securities from held-to-maturity to
available-for-sale. At December 31, 1995, (the date of transfer) the amortized
cost of these securities was $145.3 million and the unrealized gain was not
material.
Fair Value of Other Financial Instruments
The carrying and estimated fair values of the Company's other financial
instruments were as follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------- -----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $59,265 $59,265 $65,762 $65,762
Current obligations under $11,652 $11,652 $13,153 $13,153
lines of credit
Long-term debt $65,000 $65,000 $ -- $ --
</TABLE>
The fair values of the Company's short-term investments are based on quoted
market prices as of December 31, 1997 and 1996. The fair value of the Company's
obligations under lines of credit and long-term debt are based on current rates
offered to the Company for similar debt instruments of the same remaining
maturities.
NOTE 4 LINES OF CREDIT
The Company has lines of credit with three banks under which the Company can
borrow up to $13.7 million at the banks prime rates (1% to 8.25% at December 31,
1997), which expire at various dates through June 1998. The lines restrict
payment of cash dividends on the Company's common stock. A portion of these
facilities ($11.7 million at December 31, 1997) are available to the Company's
Japanese subsidiary. Borrowings by the subsidiary are at various rates as
negotiated with the banks. At December 31, 1997 and 1996, there were borrowings
by the Japanese subsidiary under lines of credit of $11.7 million and $13.2
million respectively, at annual weighted average interest rates of 1.02% and
1.26%, respectively.
NOTE 5 LONG TERM DEBT
In June 1997, the Company entered into a five year, $125 million, Senior Credit
Facility structured as an unsecured revolving credit line. The borrowing under
the senior credit facility, at the option of the Company, bear interest at
either a base rate plus a margin or the London Interbank Offered Rate ("LIBOR")
plus a margin for interest periods of one to six months. As of December 31,
1997, total borrowings under the senior credit facility were $65 million with a
weighted average interest rate of approximately 6.5%. The Senior Credit Facility
requires the Company to be in compliance with certain financial covenants. At
December 31, 1997, the Company was in compliance with these financial covenants.
The Senior Credit Facility currently prohibits the Company from paying dividends
on its common stock.
NOTE 6 LITIGATION
Applied Litigation
On May 4, 1997, the Company entered into a comprehensive global settlement of
all of its ongoing legal disputes, to that date, with Applied Materials, Inc.
("Applied"). The Company recorded an expense of $84.0 million relating to the
settlement, consisting of a cash payment of $80.0 million to Applied and $4.0
million related to legal costs associated with the settlement. (See the
Company's report on Form 10-Q for the period ended June 28, 1997, filed with the
Securities and Exchange Commission on August 11, 1997.)
On July 7, 1997, prior to the consummation of the purchase of TFS from Varian,
Applied filed a complaint (the "Applied Complaint") against Varian in the United
States District Court for the Northern District of California San Jose Division,
Civil Action No. C-97-20523 RMW, alleging, among other things, infringement by
Varian (including the making, using, selling and/or offering for sale of certain
products and systems made by TFS) of United States Patent Nos. 5,171,412,
5,186,718, 5,496,455 and 5,540,821 (the "Applied Patents"), which patents are
owned by Applied.
Immediately after consummation of the TFS purchase, the Company filed a
complaint (the "Company Complaint") against Applied in the same Court, Civil
Action No. C-97-20551 RMW, alleging infringement by Applied (including the
making, using, selling and/or offering for sale of certain products and systems)
of United States Patent Nos. 5,314,597, 5,330,628, and 5,635,036 (the "Company
Patents"), which patents the Company acquired from Varian in the TFS purchase.
In the Company Complaint, the Company also alleged that it is entitled to
declarations from Applied that the Company does not infringe the Applied Patents
and/or that the Applied Patents are invalid and/or unenforceable. Applied has
filed counterclaims alleging that the Company infringes the Applied Patents.
Also after consummation of the TFS purchase, but some time after the Company
filed the Company Complaint, Applied amended the Applied Complaint to add the
Company as a defendant. The Company has requested that the Court dismiss the
Company as a defendant in Applied's lawsuit against Varian. The Court has not
yet required the Company to file an answer to the Applied Complaint.
27
<PAGE> 28
In addition to a request for a permanent injunction against further
infringement, the Applied Complaint and Applied's counterclaims to the Company
Complaint include requests for damages for alleged prior infringement and treble
damages for alleged "willful" infringement. In connection with the consummation
of the TFS purchase, Varian agreed, under certain circumstances, to reimburse
the Company for certain of its legal and other expenses in connection with the
defense and prosecution of this litigation, and to indemnify the Company for a
portion of any losses incurred by the Company arising from this litigation
(including losses resulting from a permanent injunction). The Company and Varian
believe that there are meritorious defenses to Applied's allegations, including
among other things, that the Company's operations (including TFS products and
systems) do not infringe the Applied Patents and/or that the Applied Patents are
invalid and/or unenforceable. However, the resolution of intellectual property
disputes is often fact intensive and, therefore, inherently uncertain. Although
the Company believes that the ultimate outcome of the dispute with Applied will
not have a material adverse effect on the Company's business or results of
operations (taking into account both the defenses available to the Company and
Varian's reimbursement and indemnity obligations), there can be no assurances
that Applied will not ultimately prevail in this dispute and that, in such an
event, Varian's reimbursement and indemnity obligations will not be sufficient
to fully reimburse the Company for its losses.
The Company Complaint against Applied also includes requests for damages for
prior infringement and treble damages for "willful" infringement, in addition to
a request for a permanent injunction for further infringement. Although the
Company believes that it will prevail against Applied, there can be no
assurances that the Company will prevail in its litigation against Applied.
Other Matters
In addition, in the normal course of business, the Company from time to time
receives inquiries with regard to possible other patent infringements. The
Company believes it is unlikely that the outcome of the patent infringement
inquiries will have a material adverse effect on the Company's financial
position or results of operations.
There has been substantial litigation regarding patent and other intellectual
property rights in semiconductor-related industries. Although the Company is not
aware of any infringement by its products of any patents or proprietary rights
of others except as claimed by Applied, further commercialization of the
Company's products could provoke claims of infringement from third parties. In
the future, litigation may be necessary to enforce patents issued to the
Company, to protect trade secrets or know-how owned by the Company or to defend
the Company against claimed infringement of the rights of others and to
determine the scope and validity of the proprietary rights of others. Any such
litigation could result in substantial cost and diversion of effort by the
Company, which by itself could have a material adverse effect on the Company's
financial condition and operating results. Further, adverse determinations in
such litigation could result in the Company's loss of proprietary rights,
subject the Company to significant liabilities to third parties, require the
Company to seek licenses from third parties or prevent the Company from
manufacturing or selling its products, any of which could have a material
adverse effect on the Company's financial condition and results of operations.
NOTE 7 BAD DEBT WRITE-OFF
In June 1997, the Company determined that due to the financial difficulties
facing one of its customers an outstanding accounts receivable balance was at
risk for collection. Accordingly, the Company recorded a write-off of $17.7
million, representing the outstanding accounts receivable balance and other
related expenses for the repossession of its equipment.
NOTE 8 COMMITMENTS
The Company leases its facilities under operating leases, that expire through
2011. As of December 31, 1997, the minimum annual rental commitments are as
follows (in thousands):
<TABLE>
<S> <C> <C>
1998 $ 12,422
1999 11,476
2000 10,845
2001 9,849
2002 5,706
Beyond 73,099
---------
123,397
Less future
sublease
income (6,804)
=========
$116,593
=========
</TABLE>
Rent expense was approximately $7.2 million, $4.1 million, and $2.9 million for
the years ended December 31, 1997, 1996, and 1995, respectively, net of sublease
income of $1.5 million, $0.6 million and $0.0 million for the years ended
December 31, 1997, 1996, and 1995, respectively.
During 1997, the Company entered into lease agreements adding five buildings and
6.4 acres of undeveloped land to the five existing buildings and 4.4 acres of
undeveloped land leased by the Company at December 31, 1996. The agreements are
for five years each at an interest rate that approximates LIBOR. At current
interest rates, the annual lease payments total approximately $8.5 million.
During the terms of the leases, the Company may elect to purchase the properties
for an amount that approximates the lessor's cost of the property and any
current rent due and
28
<PAGE> 29
payable. The guaranteed residual amount under the lease agreements is
approximately $120.7 million. These leases contain certain restrictive financial
covenants. The Company was in compliance with these covenants at December 31,
1997.
NOTE 9 EMPLOYEE BENEFIT PLANS
Employee Stock Option Plans
The Company grants options to employees under the 1984 and 1992 Stock Option
Plans ("the Plans"). Under the Plans, options to purchase up to 15.1 million
shares of the Company's common stock may be granted at not less than fair market
value. Options generally vest ratably over a four year period on the anniversary
date of the grant or as determined by the Board of Directors. Stock options
expire ten years after date of grant. At December 31, 1997, approximately
623,000 shares were reserved for future issuance under the Employee Stock Option
Plans and options to purchase 1.1 million shares were exercisable at a weighted
average exercise price of $23.99.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no expense has been
recognized for options granted to employees under the Plans. Had compensation
expense for the Company's plans been determined based on the fair value at the
grant date for awards made subsequent to December 15, 1995 consistent with the
provisions of SFAS No. 123, the Company's net income (loss) and earnings (loss)
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
------------- --------- ---------
<S> <C> <C> <C>
Net income (loss) as reported $ (95,658) $ 94,029 $ 82,543
Pro forma net income (loss) $ (107,940) $ 86,791 $ 79,553
Basic earnings (loss) per $ (2.88) $ 2.92 $ 2.52
share as reported
Diluted earnings (loss) per $ (2.88) $ 2.85 $ 2.41
share as reported
Pro forma basic earnings $ (3.25) $ 2.70 $ 2.43
(loss) per share
Pro forma diluted earnings $ (3.25) $ 2.63 $ 2.37
(loss) per share
</TABLE>
In calculating pro forma compensation, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions for grants made in 1997, 1996 and
1995:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Dividend yield None None None
Expected volatility 0.61 0.56 0.56
Risk free interest rate 5.92% 5.98% 6.34%
Expected lives 3.0 years 2.9 years 2.9 years
</TABLE>
The weighted average fair value of options granted during the year were $16.91,
$10.73 and $13.13 for 1997, 1996 and 1995, respectively. The pro forma net
income (loss) and earnings (loss) per share listed above include expense related
to the Company's Employee Stock Purchase Plans. The fair value of issuance's
under the employee stock purchase plans is estimated on the issuance date using
the Black-Scholes model with the following weighted average assumptions for
issuance's made in 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Dividend yield None None None
Expected volatility 0.51 0.60 0.60
Risk free interest rate 5.5% 5.8% 5.8%
Expected lives 1/2 year 1/2 year 1/2 year
</TABLE>
The weighted average fair value of purchase rights granted during the year were
$7.05, $6.91 and $8.75 for 1997, 1996 and 1995, respectively.
29
<PAGE> 30
Information with respect to stock option activity is as follows:
(in thousands, except per share data)
<TABLE>
<CAPTION>
Weighted Average
Authorized Outstanding Price per Share Exercise Price
----------- ----------- --------------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 86 3,670 $ 0.20 -- $ 26.69
Additional authorization 1,400 -- --
Options granted (1,542) 1,542 $ 24.07 -- $ 41.63
Options exercised -- (744) $ 2.85 -- $ 26.69
Options canceled 357 (389) $ 4.19 -- $ 41.63
----------- ----------- --------------------- --------------
Balance at December 31, 1995 301 4,079 $ 0.20 -- $ 41.63 $ 19.42
Additional authorization 1,360 -- --
Options granted (1,770) 1,770 $ 18.19 -- $ 30.13 $ 26.19
Options exercised -- (652) $ 4.19 -- $ 28.63 $ 7.78
Options canceled 384 (470) $ 0.20 -- $ 41.63 $ 24.71
----------- ----------- --------------------- --------------
Balance at December 31, 1996 275 4,727 $ 4.19 -- $ 41.63 $ 23.06
Additional authorization 1,320 -- --
Options granted (1,478) 1,478 $ 26.63 -- $ 58.88 $ 38.30
Options exercised -- (1,070) $ 4.19 -- $ 41.63 $ 13.97
Options canceled 506 (506) $ 4.19 -- $ 58.88 $ 30.31
----------- ----------- --------------------- --------------
Balance at December 31, 1997 623 4,629 $ 7.00 -- $ 58.88 $ 29.24
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------ --------------------------
Weighted
Average Options
Options Remaining Exercisable
Outstanding at Contractual Weighted at Weighted
Range of December 31, Life Average December 31, Average
Exercise Prices 1997 (years) Exercise Price 1997 Exercise Price
- ---------------- --------------- --------------- ----------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
$ 7.00 - $19.25 566 5.51 $14.28 413 $13.64
$19.81 - $23.25 515 8.33 $21.27 96 $21.01
$24.06 - $27.50 651 7.56 $25.96 163 $25.53
$27.75 - $30.13 1,308 8.49 $29.34 271 $29.78
$31.00 - $33.25 711 9.39 $32.96 54 $31.74
$33.38 - $40.00 453 8.57 $38.31 85 $36.63
$41.00 - $58.88 425 8.76 $47.55 66 $42.99
- ---------------- --------------- --------------- ----------------- ------------- ------------
$ 7.00 - $58.88 4,629 8.15 $29.24 1,148 $23.99
- ---------------- --------------- --------------- ----------------- ------------- ------------
</TABLE>
Employee Stock Purchase Plans
In December 1988 and May 1992, the Company adopted qualified Employee Stock
Purchase Plans under Sections 421 and 423 of the Internal Revenue Code and
reserved 400,000 and 300,000 shares of common stock for issuance under the
plans, respectively. In 1995, the Company's shareholders approved an amendment
to increase shares reserved for issuance under the 1992 Employee Stock Purchase
Plan from 300,000 shares to 500,000 shares. In March 1996 the shareholders
ratified an amendment to the Purchase Plan to increase the number of shares
available for issuance thereunder from 500,000 to 580,000. In April 1997, the
Board of Directors approved an amendment to the Purchase Plan increasing the
number of shares available for issuance thereunder from 580,000 shares to
700,000 shares. Under the two plans, qualified employees are entitled to
purchase shares at 85% of the fair market value on specified dates. There were
approximately 145,000, 128,000, and 84,000 shares issued under the two plans in
1997, 1996, and 1995, respectively.
Common Stock Repurchase Program
In October 1992 and January 1996, the Company announced it would repurchase
1,400,000 and 2,000,000 shares, respectively, of common stock for issuance in
future Company employee benefit and compensation plans and other requirements.
During 1997, the Company repurchased 6,000 shares under the program, and had
purchased a total of 1,568,000 shares as of December 31, 1997.
Employee Savings and Retirement Plan
The Company maintains a 401(k) retirement savings plan for its full-time
employees. Participants in the plan may contribute up to 20% of their annual
salary, limited by the maximum dollar amount allowed by the Internal Revenue
Code.
Profit Sharing and Bonus Programs
The Company has profit sharing and bonus programs that distribute cash based on
the performance of the Company and its employees, including the executive
officers. Charges to operations under these programs were $8.0 million, $10.2
million, and $8.4 million in 1997, 1996, and 1995, respectively.
30
<PAGE> 31
NOTE 10 TAXES ON INCOME (LOSS)
Significant components of the provision (benefit) for income taxes attributable
to operations are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
State
Current $ -- $ 6,145 $ 6,251
Deferred (5,248) 222 (1,248)
------- ------- -------
(5,248) 6,367 5,003
Federal
Current 3,376 38,701 38,245
Deferred (31,978) 1,545 (7,186)
------- ------- -------
(28,602) 40,246 31,059
Foreign
Current 751 984 2,163
Income tax benefits attributable to employee
stock plan activity
allocated to shareholders' equity 7,624 3,034 4,297
------- ------- -------
Total provision (benefit) for income taxes ($25,475) $50,631 $42,522
======= ======= =======
</TABLE>
Pre-tax income (loss) from foreign operations was $2.2 million, $(2.1) million,
and $5.4 million in 1997, 1996 and 1995, respectively. Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities are
as follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Financial valuation accounts $ 5,377 $ 5,464
Expenses not currently deductible 26,774 9,807
Other 7,173 2,787
Capitalized In-Process R&D 39,606 --
------- -------
Subtotal 78,930 18,058
Valuation allowance (20,024) --
------- -------
Total deferred tax assets 58,906 18,058
------- -------
Deferred tax liabilities:
Fixed assets (7,167) (3,545)
------- -------
Total net deferred tax assets $51,739 $14,513
======= =======
</TABLE>
The provision (benefit) for income taxes differs from the provision (benefit)
calculated by applying the federal statutory tax rate to income (loss) before
taxes because of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Expected provision (benefit) at 35% $(42,397) $50,631 $43,773
State taxes, net of federal benefit (2,924) 4,200 3,252
Research and development credits (665) (500) (566)
Foreign sales corporation benefit (365) (4,300) (3,868)
Unbenefited in-process R&D 19,477 -- --
Other 1,399 600 (69)
-------- ------- -------
$(25,475) $50,631 $42,522
</TABLE>
At December 31, 1997, the Company has recognized a deferred tax asset of $58.9
million, after a valuation allowance of $20.0 million, related to temporary
differences between the book and tax basis of assets and liabilities. It is the
opinion of management that it is more likely than not that this asset will be
realized by an offset against the recognized deferred tax liability of $7.2
million and future taxable income.
31
<PAGE> 32
NOTE 11 GEOGRAPHIC INFORMATION REPORTING AND MAJOR CUSTOMERS
The Company and its subsidiaries operate in one industry segment, principally
the development, manufacture, sale and service of chemical vapor deposition
systems for use in the manufacture of integrated circuits.
The following is a summary of operations in geographic areas (in thousands):
<TABLE>
<CAPTION>
NORTH AMERICA EUROPE PACIFIC RIM ELIMINATIONS CONSOLIDATED
------------ ------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1997
Sales to unaffiliated customers $ 480,388 $ 5,908 $ 47,708 $ - $ 534,004
Transfers between geographic locations 33,347 2,908 11,094 (47,349) -
------------ ------- ----------- ----------- ------------
Total net sales 513,735 8,816 58,802 (47,349) 534,004
Operating income (loss) (126,044) 885 1,083 - (124,076)
Identifiable assets 429,570 5,982 57,748 - 493,300
1996
Sales to unaffiliated customers $ 387,396 $ 4,336 $ 70,004 $ - $ 461,736
Transfers between geographic locations 59,771 2,377 9,438 (71,586) -
------------ ------- ----------- ----------- ------------
Total net sales 447,167 6,713 79,442 (71,586) 461,736
Operating income (loss) 137,887 203 (1,837) - 136,253
Identifiable assets 407,472 1,501 50,814 - 459,787
1995
Sales to unaffiliated customers $ 315,976 $ 2,967 $ 54,789 $ - $ 373,732
Transfers between geographic locations 39,376 2,190 8,164 (49,730) -
------------ ------- ----------- ----------- ------------
Total net sales 355,352 5,157 62,953 (49,730) 373,732
Operating income 110,224 201 5,366 - 115,791
Identifiable assets 319,502 1,072 44,114 - 364,688
</TABLE>
Transfers and commission arrangements between geographic areas are at prices
sufficient to recover a reasonable profit. In 1996 and 1995, sales to one
customer (a distributor) were approximately 12% and 11% of net sales,
respectively. No customers exceeded 10% of net sales in 1997. Export sales were
47% of net sales in 1997, 64% of net sales in 1996, and 56% of net sales in
1995.
NOTE 12 RELATED PARTY TRANSACTIONS
The President of Submicron Technology, Inc. (Submicron), which was one of the
Company's customers, is also a member of the Company's Board of Directors.
For the years ended December 31, 1997 and 1996, the Company sold $5.4 million
and $20.2 million of CVD systems to Submicron, respectively. Management believes
these transactions were under terms no less favorable to the Company than those
arranged with other parties. There were no material transactions with Submicron
prior to 1996. Trade receivables from Submicron at December 31, 1996 were $10.2
million.
During the second quarter of 1997, the Company recorded a bad debt write-off of
$17.7 million, representing the outstanding accounts receivable balance and
other related expenses, (see Note 7, Notes to the Consolidated Financial
Statements).
At December 31, 1997 the Company had outstanding notes receivable from one of
its officers, totaling $1.5 million. The notes incur interest at 6.0% per year,
compounded semi-annually, and is repayable in July 2000. This amount represents
the highest amount owing from the officer during the year.
32
<PAGE> 33
NOTE 13 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997 QUARTER ENDED MAR 29 JUNE 28 SEPT. 27 DEC. 31
- -------------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $ 101,628 $ 114,466 $ 155,080 $ 162,830
Gross profit $ 55,896 $ 62,956 $ 82,192 $ 89,394
Gross profit as a % of sales 55% 55% 53% 55%
Operating income (loss) $ 21,523 $ (210,504)(1) $ 31,002 $ 33,903
Net income (loss) $ 15,613 $ (153,739)(1) $ 20,079 $ 22,389
Basic earnings (loss) per
share(2)(4) $ 0.48 $ (4.66) $ 0.60 $ 0.66
Diluted earnings (loss) per
share(2) $ 0.46 $ (4.66)(3) $ 0.57 $ 0.64
Shares used in basic per share
calculations(2) 32,760 33,020 33,546 33,700
Shares used in diluted per share
calculations(2) 34,274 33,020(3) 35,276 34,984
</TABLE>
<TABLE>
<CAPTION>
1996 QUARTER ENDED MAR 31 JUNE 30 SEPT. 30 DEC. 31
- -------------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $ 115,284 $ 120,248 $ 121,597 $ 104,607
Gross profit $ 66,865 $ 69,818 $ 69,316 $ 58,575
Gross profit as a % of sales 58% 58% 57% 56%
Operating income $ 37,357 $ 39,092 $ 36,185 $ 23,619
Net income $ 25,509 $ 26,504 $ 25,138 $ 16,878
Basic earnings per share(2),(4) $ 0.80 $ 0.83 $ 0.78 $ 0.52
Diluted earnings per share(2),(4) $ 0.77 $ 0.80 $ 0.77 $ 0.51
Shares used in basic per share
calculations(2) 31,957 32,101 32,189 32,378
Shares used in diluted per share
calculations(2) 33,0162 33,062 32,834 33,180
</TABLE>
(1) The Company's reported loss of $153.7 million or $4.66 per share for the
quarter ended June 28, 1997 includes pre-tax one-time charges totaling
$235.2 million, consisting of $133.5 million in connection with the
acquisition of TFS, a write-off of $17.7 million in connection with
outstanding accounts receivable from Submicron Technology, Inc. and
charges totaling $84.0 million in connection with the May 4, 1997
settlement of the TEOS patent litigation.
(2) The earnings (loss) per share amounts and shares used have been adjusted
to reflect the Company's the two-for-one stock split, effective October
1997.
(3) Excludes common stock equivalents as they are antidilutive to the loss
per share for the quarter.
(4) The earnings (loss) per share amounts shown for 1996 and the first three
quarters of 1997 have been restated to comply with Statement of
Financial Accounting Standards No. 128 "Earnings Per Share".
33
<PAGE> 34
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Shareholders and Board of Directors
Novellus Systems, Inc.
We have audited the accompanying consolidated balance sheets of Novellus
Systems, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Novellus Systems,
Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ERNST & YOUNG LLP
San Jose, California
January 16, 1998
34
<PAGE> 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included under "Proposal No. 1:
Election of Directors," "Other Information - Executive Officers" and "Compliance
with Section 16(a) of the Exchange Act" in the Company's Definitive Proxy
Statement to be filed in connection with its 1998 Annual Meeting of Shareholders
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under "Other Information -
Executive Compensation" in the Company's Definitive Proxy Statement to be filed
in connection with its 1998 Annual Meeting of Shareholders and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under "Other Information -
Security Ownership of Certain Beneficial Owners and Management" in the Company's
Definitive Proxy Statement to be filed in connection with its 1998 Annual
Meeting of Shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under "Other Information -
Certain Transactions" in the Company's Definitive Proxy Statement to be filed in
connection with its 1998 Annual Meeting of Shareholders and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
<TABLE>
<S> <C> <C>
(1) Financial Statements and Report of Ernst & Young, LLP, Independent Auditors
Report of Ernst & Young LLP, Independent Auditors 34
Consolidated Balance Sheets at December 31, 1997 and 1996 19
Consolidated Statements of Operations - Years Ended December 31, 1997, 1996
and 1995 18
Consolidated Statements of Shareholders' Equity - Years Ended December 31,
1997, 1996 and 1995 21
Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996
and 1995 20
Notes to Consolidated Financial Statements 22
(2) Financial Statement Schedules
The following financial statement schedule is included herein:
Schedule II - Valuation and Qualifying Accounts 38
All other schedules are omitted because they are not required or
the required information is included in the financial statements
or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
</TABLE>
35
<PAGE> 36
<TABLE>
<S> <C>
3.1(5) Amended and Restated Articles of Incorporation of Registrant.
3.1.1 Amendment to the Restated Articles of Incorporation of Registrant
3.2 (1) Form of Bylaws of Registrant.
3.2.1 Bylaws Section 2.5 as amended in 1995 re Election and Term of Office.
3.2.2 Bylaws Section 2.2 as amended in 1997 re Number of Directors.
10.1(7) Asset Purchase Agreement by and between Varian Associates, Inc.
and the Company dated May 7, 1997.
10.2(7) First Amendment to Asset Purchase Agreement by and between Varian
Associates, Inc. and the Company dated June 20, 1997.
10.3(7) Assignment and Assumption of Lessee's Interest in Lease (Units 8
and 9, Palo Alto) and Covenants, Conditions and Restrictions on Leasehold
Interests (Units 1-12 Palo Alto) by and between Varian Associates, Inc.
and the Company dated May 7, 1997.
10.4(7) Sublease (Portion of Unit 9, Palo Alto) by and between Varian
Associates, Inc. and the Company dated May 7, 1997.
10.5(7) Shared Use Agreement by and between Varian Associates, Inc. and
the Company dated May 7, 1997.
10.6(7) Environmental Agreement by and between Varian Associates, Inc.
and the Company dated May 7, 1997.
10.7(7) Cross License Agreement by and between Varian Associates, Inc.
and the Company dated May 7, 1997.
10.8(7) Parts Supply Agreement by and between Varian Associates, Inc.
and the Company dated May 7, 1997.
10.9(8) Settlement Agreement by and between Applied Materials, Inc. and
the Company dated May 7, 1997. Confidential treatment has been granted
with respect to portions of this Exhibit.
10.10(8) Credit Agreement by and among ABN AMRO Bank, N.V., as agent,
the lenders named therein, and the Company dated May 7, 1997.
10.11(8) Participation Agreement by and among Lease Plan North America,
Inc. the Company and ABN AMRO Bank, N.V., as agent for the participations
named therein, dated June 9, 1997.
10.11.1(9) Letter Amendment, dated June 20, 1997, to the Participation
Agreement by and among Lease Plan North America, Inc., the Company and
ABN AMRO Bank, N.V., as agent for the participants named therein, dated
June 9, 1997.
10.11.2(9) Amendment no. 1, dated August 28, 1997, to the Participation
Agreement by and among Lease Plan North America, Inc., the Company and
ABN AMRO Bank, N.V., as agent for the participants named therein, dated
June 9, 1997.
10.11.3(9) Amendment no. 2, dated September 26, 1997, to the
Participation Agreement by and among Lease Plan North America, Inc., the
Company and ABN AMRO Bank, N.V., as agent for the participants named
therein, dated June 9, 1997.
10.12(9) Amendment no. 1, dated August 28, 1997, to the Facility 2
Lease Agreement, Construction Deed of Trust With Assignment of Rents,
Security Agreement and Fixture Filing by and between Lease Plan North
America, Inc. and the Company dated June 9, 1997.
10.13(9) Amendment no. 2, dated September 26, 1997, to the Facility 2
Lease Agreement, Construction Deed of Trust With Assignment of Rents,
Security Agreement and Fixture Filing by and between Lease Plan North
America, Inc. and the Company dated June 9, 1997.
10.13(9) Amendment no. 1, dated September 26, 1997, to the Facility 1
Lease Agreement, Deed of Trust With Assignment of Rents, Security
Agreement and Fixture Filing by and between Lease Plan North America,
Inc. and the Company dated June 9, 1997.
10.14(9) Participation Agreement by and among Lease Plan USA, Inc., the
Company and ABN AMRO Bank, N.V., as agent for the participants named
therein, dated October 15, 1997.
10.15(9) Facility 1 Lease Agreement, Deed of Trust With Assignment of
Rents, Security Agreement and Fixture Filing by and between Lease Plan
USA, Inc. and the Company dated October 15, 1997.
10.16(9) Facility 2 Lease Agreement, Construction Deed of Trust With
Assignment of Rents, Security Agreement and Fixture
</TABLE>
36
<PAGE> 37
<TABLE>
<S> <C>
Filing by and between Lease Plan USA, Inc. and the Company dated October
15, 1997.
10.17 (3) Distribution Agreement dated April 1, 1991 between Registrant
and Seki Technotron Corporation.
10.18 (5) First Amendment dated January 1, 1993 to Distribution
Agreement dated April 1, 1991 between the Registrant and Seki Technotron
Corporation
10.19 (6) Distribution Agreement dated January 1, 1996 between Registrant and
Seki Technotron Corporation. .
*10.20 (3) Registrant's Amended and Restated 1984 Stock Option Plan,
together with forms of agreements thereunder
*10.21 (5) Registrant's 1992 Stock Option Plan, together with forms of agreements
thereunder
*10.22 (4) Registrant's 1992 Employee Stock Purchase Plan
*10.23 (1) Form of Agent Indemnification Agreement and amendment thereto
*10.24 (2) Employment Agreement dated June 1, 1989 between Registrant and Evert
van de Ven
*10.25 (4) Employment Agreement dated as of June 15, 1992 between the Registrant
and Peter Hanley
*10.26 (5) Offer Letter Agreement dated November 1, 1993 between Registrant and
Richard S. Hill
22.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 39)
24.1 Power of Attorney (see page 40)
27.1 Financial Data Schedule
----------------
</TABLE>
(1) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1, File No. 33-23011, which was
declared effective August 11, 1988.
(2) Incorporated by reference to the exhibit filed with Registrant's
Report on Form 10-K filed with the Securities and Exchange Commission on
March 30, 1990.
(3) Incorporated by reference to the exhibit filed with Registrant's
Report on Form 10-K filed with the Securities and Exchange Commission on
March 30, 1992.
(4) Incorporated by reference to the exhibit filed with Registrant's
Report on Form 10-K filed with the Securities and Exchange Commission on
February 26, 1993.
(5) Incorporated by reference to the exhibit filed with Registrant's
Report on Form 10-K filed with the Securities and Exchange Commission on
February 18, 1994.
(6) Incorporated by reference to the exhibit filed with Registrant's
Report on Form 10-K filed with the Securities and Exchange Commission on
March 20, 1996.
(7) Incorporated by reference to the Exhibit 2.1 to the Company's Form
8-K filed with the Securities and Exchange Commission on July 7, 1997.
(8) Incorporated by reference to the Exhibit 10.1 to the Company's Form
10-Q filed with the Securities and Exchange Commission on August 11,
1997.
(9) Incorporated by reference to the Exhibit 10.4 to the Company's Form
10-Q filed with the Securities and Exchange Commission on November 10,
1997.
* Management contracts or compensatory plans or arrangements.
b)i) Report on Form 8-K (No. 000 17157) was filed by the Company on July 7, 1997
with respect to the Company's purchase of the Thin Film Systems business of
Varian Associates, Inc. as described in Item 2 of the Form 8-K.
ii) Report on Form 8-K/A (No. 000 17157) was filed by the Company on September
5, 1997 with respect to the financial statements of the Thin Film Systems
business acquired from Varian Associates, Inc. as described in Item 2 of the
Form 8-K/A.
37
<PAGE> 38
SCHEDULE II
NOVELLUS SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGED TO END
DESCRIPTION OF PERIOD EXPENSE DEDUCTIONS OF PERIOD
- ----------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1995
Allowance for Doubtful Accounts $1,761 $495 $ 60 (1) $ 2,196
Year Ended December 31, 1996
Allowance for Doubtful Accounts 2,196 581 -- 2,777
Year Ended December 31, 1997 $2,777 $16,370 $ 15,600 (2) $ 3,547
Allowance for Doubtful Account
</TABLE>
(1)Charges for uncollectable accounts
(2)$15.6 write-off of the outstanding account from Submicron, total charge $17.7
million, see Note 7, Notes to the Consolidated Financial Statements
38
<PAGE> 39
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 Nos. 33-11825, 33-88156, 33-51056, 33-36787, 33-25897, 33-62807, 333-35487)
pertaining to the Amended and Restated 1992 Employee Stock Purchase Plan, the
Amended and Restated 1984 Stock Option Plan, the Employee Stock Purchase Plan,
and the Amended and Restated 1992 Stock Option Plan, and in the related
prospectuses of our report dated January 16, 1998, with respect to the
consolidated financial statements and schedule of Novellus Systems, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
San Jose, California
March 5, 1998
39
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in San Jose,
California on the 8th day of March, 1998.
NOVELLUS SYSTEMS, INC.
By: /s/Robert H. Smith
----------------------------
Robert H. Smith
EXECUTIVE VICE PRESIDENT, FINANCE AND ADMINISTRATION,
CHIEF FINANCIAL OFFICER AND SECRETARY
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard S. Hill and Robert H. Smith, and each of
them, his attorneys-in-fact, each with the power of substitution, for him in any
and all capacities, to sign any amendments to this Report on Form 10-K and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------- -------- ----
<S> <C> <C>
/s/Richard S. Hill President and Chief Executive Officer March 6, 1998
- ---------------------------------
Richard S. Hill
/s/Robert H. Smith Executive Vice President, Finance and March 6, 1998
- --------------------------------- Administration, Chief Financial Officer
Robert H. Smith and Secretary Principal Financial
and Accounting Officer)
/s/Richard S. Hill Chairman of the Board of Directors March 6, 1998
- ---------------------------------
Richard S. Hill
/s/D. James Guzy Director March 6, 1998
- ---------------------------------
D. James Guzy
/s/Tom Long Director March 6, 1998
- ---------------------------------
Tom Long
/s/Glen Possley Director March 6, 1998
- ---------------------------------
Glen Possley
/s/Robert H. Smith Director March 6, 1998
- ---------------------------------
Robert H. Smith
/s/Joseph Van Poppelen Director March 6, 1998
- ---------------------------------
Joseph Van Poppelen
/s/J. David Litster Director March 6, 1998
- ---------------------------------
J. David Litster
</TABLE>
40
<PAGE> 41
EXHIBIT INDEX
<TABLE>
EXHIBT SEQUENTIALLY
NO. DESCRIPTION PAGE NUMBER
------ ----------- -------------
<S> <C> <C>
3.1(5) Amended and Restated Articles of Incorporation of Registrant.
3.1.1 Amendment to the Restated Articles of Incorporation of Registrant
3.2 (1) Form of Bylaws of Registrant, as amended to date.
3.2.1 Bylaws Section 2.5 as amended in 1995 re Election and Term of Office.
3.2.2 Bylaws Section 2.2 as amended in 1997 re Number of Directors.
10.1(7) Asset Purchase Agreement by and between Varian Associates, Inc.
and the Company dated May 7, 1997.
10.2(7) First Amendment to Asset Purchase Agreement by and between Varian Associates,
Inc. and the Company dated June 20, 1997.
10.3(7) Assignment and Assumption of Lessee's Interest in Lease (Units 8
and 9, Palo Alto) and Covenants, Conditions and Restrictions on
Leasehold Interests (Units 1-12 Palo Alto) by and between Varian
Associates, Inc. and the Company dated May 7, 1997.
10.4(7) Sublease (Portion of Unit 9, Palo Alto) by and between Varian
Associates, Inc. and the Company dated May 7, 1997.
10.5(7) Shared Use Agreement by and between Varian Associates, Inc. and
the Company dated May 7, 1997.
10.6(7) Environmental Agreement by and between Varian Associates, Inc.
and the Company dated May 7, 1997.
10.7(7) Cross License Agreement by and between Varian Associates, Inc.
and the Company dated May 7, 1997.
10.8(7) Parts Supply Agreement by and between Varian Associates, Inc.
and the Company dated May 7, 1997.
10.9(8) Settlement Agreement by and between Applied Materials, Inc. and
the Company dated May 7, 1997. Confidential treatment has been granted
with respect to portions of this Exhibit.
10.10(8) Credit Agreement by and among ABN AMRO Bank, N.V., as agent,
the lenders named therein, and the Company dated May 7, 1997.
10.11(8) Participation Agreement by and among Lease Plan North America, Inc. the
Company and ABN AMRO Bank, N.V., as agent for the participations named therein, dated
June 9, 1997.
10.11.1(9) Letter Amendment, dated June 20, 1997, to the Participation
Agreement by and among Lease Plan North America, Inc., the Company and
ABN AMRO Bank, N.V., as agent for the participants named therein, dated
June 9, 1997.
10.11.2(9) Amendment no. 1, dated August 28, 1997, to the Participation
Agreement by and among Lease Plan North America, Inc., the Company and
ABN AMRO Bank, N.V., as agent for the participants named therein, dated
June 9, 1997.
10.11.3(9) Amendment no. 2, dated September 26, 1997, to the
Participation Agreement by and among Lease Plan North America, Inc., the
Company and ABN AMRO Bank, N.V., as agent for the participants named
therein, dated June 9, 1997.
10.12(9) Amendment no. 1, dated August 28, 1997, to the Facility 2
Lease Agreement, Construction Deed of Trust With Assignment of Rents,
Security Agreement and Fixture Filing by and between Lease Plan North
America, Inc. and the Company dated June 9, 1997.
10.13(9) Amendment no. 2, dated September 26, 1997, to the Facility 2
Lease Agreement, Construction Deed of Trust With Assignment of Rents,
Security Agreement and Fixture Filing by and between Lease Plan North
America, Inc. and the Company dated June 9, 1997.
10.13(9) Amendment no. 1, dated September 26, 1997, to the Facility 1
Lease Agreement, Deed of Trust With Assignment of Rents, Security
Agreement and Fixture Filing by and between Lease Plan North America,
Inc. and the Company dated June 9, 1997.
10.14(9) Participation Agreement by and among Lease Plan USA, Inc., the
Company and ABN AMRO Bank, N.V., as agent for the participants named
therein, dated October 15, 1997.
10.15(9) Facility 1 Lease Agreement, Deed of Trust With Assignment of
Rents, Security Agreement and Fixture Filing by and between Lease Plan
USA, Inc. and the Company dated October 15, 1997.
10.16(9) Facility 2 Lease Agreement, Construction Deed of Trust With
Assignment of Rents, Security Agreement and Fixture
</TABLE>
<PAGE> 42
<TABLE>
EXHIBT SEQUENTIALLY
NO. DESCRIPTION PAGE NUMBER
------ ----------- -------------
<S> <C> <C>
Filing by and between Lease Plan USA, Inc. and the Company dated October
15, 1997.
10.17 (3) Distribution Agreement dated April 1, 1991 between Registrant
and Seki Technotron Corporation.
10.18 (5) First Amendment dated January 1, 1993 to Distribution
Agreement dated April 1, 1991 between the Registrant and Seki Technotron
Corporation
10.19 (6) Distribution Agreement dated January 1, 1996 between Registrant and
Seki Technotron Corporation. .
*10.20 (3) Registrant's Amended and Restated 1984 Stock Option Plan,
together with forms of agreements thereunder
*10.21 (5) Registrant's 1992 Stock Option Plan, together with forms of agreements
thereunder
*10.22 (4) Registrant's 1992 Employee Stock Purchase Plan
*10.23 (1) Form of Agent Indemnification Agreement and amendment thereto
*10.24 (2) Employment Agreement dated June 1, 1989 between Registrant and Evert
van de Ven
*10.25 (4) Employment Agreement dated as of June 15, 1992 between the Registrant
and Peter Hanley
*10.26 (5) Offer Letter Agreement dated November 1, 1993 between Registrant and
Richard S. Hill
22.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 39)
24.1 Power of Attorney (see page 40)
27.1 Financial Data Schedule
----------------
</TABLE>
(1) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1, File No. 33-23011, which was
declared effective August 11, 1988.
(2) Incorporated by reference to the exhibit filed with Registrant's
Report on Form 10-K filed with the Securities and Exchange Commission on
March 30, 1990.
(3) Incorporated by reference to the exhibit filed with Registrant's
Report on Form 10-K filed with the Securities and Exchange Commission on
March 30, 1992.
(4) Incorporated by reference to the exhibit filed with Registrant's
Report on Form 10-K filed with the Securities and Exchange Commission on
February 26, 1993.
(5) Incorporated by reference to the exhibit filed with Registrant's
Report on Form 10-K filed with the Securities and Exchange Commission on
February 18, 1994.
(6) Incorporated by reference to the exhibit filed with Registrant's
Report on Form 10-K filed with the Securities and Exchange Commission on
March 20, 1996.
(7) Incorporated by reference to the Exhibit 2.1 to the Company's Form
8-K filed with the Securities and Exchange Commission on July 7, 1997.
(8) Incorporated by reference to the Exhibit 10.1 to the Company's Form
10-Q filed with the Securities and Exchange Commission on August 11,
1997.
(9) Incorporated by reference to the Exhibit 10.4 to the Company's Form
10-Q filed with the Securities and Exchange Commission on November 10,
1997.
* Management contracts or compensatory plans or arrangements.
b)i) Report on Form 8-K (No. 000 17157) was filed by the Company on July 7, 1997
with respect to the Company's purchase of the Thin Film Systems business of
Varian Associates, Inc. as described in Item 2 of the Form 8-K.
ii) Report on Form 8-K/A (No. 000 17157) was filed by the Company on September
5, 1997 with respect to the financial statements of the Thin Film Systems
business acquired from Varian Associates, Inc. as described in Item 2 of the
Form 8-K/A.
<PAGE> 1
Exhibit 3.1.1
CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
NOVELLUS SYSTEMS, INC.
(A CALIFORNIA CORPORATION)
The undersigned Richard S. Hill and Robert H. Smith certify that:
1. They are the Chief Executive Officer and Secretary,
respectively, of NOVELLUS SYSTEMS, INC., a California
corporation (the "Corporation").
2. The first paragraph of Article III of the Restated Articles of
Incorporation of the Corporation is amended to read as follows:
"This corporation is authorized to issue two classes of shares
of stock to be designated respectively "Preferred" and "Common".
The total number of Preferred shares authorized is 10,000,000
and the total number of Common shares authorized is 80,000,000.
Upon the amendment of this Article III as herein set forth, each
outstanding share of Common Stock of this corporation is split
up and converted into two (2) shares of Common Stock."
3. The foregoing amendment of the Restated Articles of
Incorporation was duly approved by the Board of Directors on
September 19, 1997.
4. The foregoing amendment of Restated Articles of Incorporation is
to effect a two-for-one stock split and a proportionate increase
is authorized in the authorized number of shares of Common
Stock. The Corporation has only one class of shares outstanding,
Common Stock. Pursuant to Section 902 (C) of the California
Corporations Code shareholder approval is not required for this
action.
5. The foregoing amendment of the Restated Articles of
Incorporation of Novellus Systems, Inc. shall become effective
at the close of business on September 29, 1997. IN WITNESS
WHEREOF, the undersigned have executed this certificate on
September 26, 1997.
/s/Richard S. Hill
--------------------------------------
Richard S. Hill
Chairman of the Board and
Chief Executive Officer
/s/Robert H. Smith
--------------------------------------
Robert H. Smith
Executive Vice President, Finance and
Administration,
Chief Financial Officer and Secretary
<PAGE> 2
Each of the undersigned further declare under penalty of perjury under
the laws of the State of California that the matters set forth in this
certificate are true and correct of our own knowledge.
Executed on this 26th day of September, 1997, at San Jose, California.
/s/Richard S. Hill
-------------------------------------
Richard S. Hill
Chairman of the Board and
Chief Executive Officer
/s/Robert H. Smith
--------------------------------------
Robert H. Smith
Executive Vice President, Finance and
Administration,
Chief Financial Officer and Secretary
<PAGE> 1
Exhibit 3.2.1
Bylaws Section 2.5
as amended in 1995
Section 2.5. Election and Term of Office. At each annual meeting of
shareholders, directors shall be elected to hold office until the next annual
meeting, provided that if for any reason said annual meeting or an adjournment
thereof is not held or the directors are not elected thereat, then the directors
may be elected at any special meeting of the shareholders called and held for
that purpose. The term of office of the directors shall begin immediately after
their election and shall continue until the expiration of the term for which
elected and until their respective successors have been elected and qualified.
No person may be elected or run for reelection to the Board of Directors after
having attained the age of 70 years.
<PAGE> 1
Exhibit 3.2.2
Bylaws Section 2.2
as amended in 1997
Section 2.2. Number. The number of directors of the corporation shall not be
less than four (4) no more than seven (7) until changed by amendment of the
Articles of Incorporation or by a Bylaw amending this Section 2.2 duly adopted
by the vote or written consent of holders of a majority of the outstanding
shares. The exact number of directors may be fixed from time to time, within the
limits specified in the Articles of Incorporation or in this Section 2.2, by (i)
a bylaw or amendment thereof duly adopted by the vote of a majority of the
shares entitled to vote represented at a duly held meeting at which a quorum is
present, or by the written consent of the holders of a majority of the
outstanding shares entitled to vote, or by the Board of Directors, or (ii)
resolution of the Board of Directors.
<PAGE> 1
Exhibit 22.1
LIST OF SUBSIDIARIES
Novellus Systems, Ltd
Unit 1EB, Bishops Weald House,
Albion Way,
Horsham West Sussex
RH12 1AH, England
T44.1403.265550
F44.1403.266554
Novellus Systems, BV
Dillenburgstraat 5 B
5652 AM Eindhoven
The Netherlands
T31.40.291.8010
F31.40.257.3590
Novellus Systems GmbH
Koenigsbruecker Strasse 150 B,
D-01099 Dresden,
Germany
T49.351.89252.10
F49.351.89252.20
Novellus Systems Ireland Ltd
IR4-1-3,
Collingstown Industrial Park,
Leixlip
Co. Kildare., Ireland
T353.1.606.5247
Novellus Systems Israel Ltd
Zohar Tal #11,
Herzlia Petuach,
46741, Israel
T979.9.957.1951
T972.9.957.1951
Novellus Systems SARL
Parc de la Julienne, Bat. D, 1 er etage,
91830 Le Coudray-Montceaux
France
T33.1.64.93.7070
F33.1.64.93.8787
Nippon Novellus Systems, KK
KSP Bldg., R&D C-10F
3-2-1 Sakado, Takatsu-Ku, Kawasaki-shi
Kanagawa-ken 213, Japan
T81.44.850.1777
F81.44.850.1778
Novellus Systems Korea
2F DaeWoo Engineering Bldg. 9-3 SuNae-Dong,
BunDang-Ku, SungNam-City, KyungKi-Do 4463
020 Korea
T82.2.4040.500
F82.2.4005.104
Novellus Systems Taiwan
5F-1, No. 295, Sec. 2
Kwang Fu Road
Hsin-Chu City, Taiwan 30811 R.O.C.
T886.35.730.550
F886.35.739.553
Novellus Systems Semiconductor
Equipment Shanghai Co., Ltd
603-611 No. 300
Tian-Lin Bldg., Tian-Lin Road
Shanghai 200233, China
T86.21.6485.3889
F86.21,6485.1282
Novellus Singapore Pte Ltd.
101 Thompson Road
#21-01/02 United Square
Singapore 307591
T65.353.9288
F54.353.6833
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 59,265
<SECURITIES> 38,824
<RECEIVABLES> 137,472
<ALLOWANCES> 3,547
<INVENTORY> 82,133
<CURRENT-ASSETS> 351,009
<PP&E> 137,722
<DEPRECIATION> 44,382
<TOTAL-ASSETS> 493,300
<CURRENT-LIABILITIES> 127,299
<BONDS> 65,000
0
0
<COMMON> 154,167
<OTHER-SE> 146,834
<TOTAL-LIABILITY-AND-EQUITY> 493,300
<SALES> 534,004
<TOTAL-REVENUES> 534,004
<CGS> 243,566
<TOTAL-COSTS> 243,566
<OTHER-EXPENSES> 414,514
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,943
<INCOME-PRETAX> (121,133)
<INCOME-TAX> (25,475)
<INCOME-CONTINUING> (95,658)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (95,658)
<EPS-PRIMARY> (2.88)
<EPS-DILUTED> (2.88)
</TABLE>
