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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, 1998
[ ] 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.)
4000 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 26, 1999 the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $1,944,000,000 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 26, 1999 was
34,884,617.
Part III of this Report on Form 10-K incorporates information by reference from
the Registrant's Proxy Statement for its 1999 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 deposition systems used in the fabrication of integrated
circuits. Chemical Vapor Deposition (CVD) systems employ a chemical plasma to
deposit all of the dielectric (insulating) layers and certain of the conductive
metal layers on the surface of a semiconductor wafer. Physical Vapor Deposition
(PVD) systems are used to deposit conductive metal layers by sputtering metallic
atoms from the surface of a target source via high DC power. Electrofill systems
are used for depositing copper conductive layers in a dual damascene design
architecture using an Aqueous solution. The Company's strategy is to focus
on major semiconductor manufacturers, and has sold one or more of its systems to
each of the 20 largest semiconductor manufacturers in the world.
INDUSTRY BACKGROUND
The semiconductor industry has experienced significant growth over the past
decade due to increased demand for personal computers and the internet; the
expansion of the telecommunications industry (and especially wireless
communications); the emergence of new applications such as consumer electronics
products; 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 over time.
The semiconductor market is cyclical by nature, however, characterized by short
term periods of either under or oversupply for both memory and logic devices.
When demand decreases, semiconductor manufacturers typically slow their
purchasing of capital equipment; conversely, when demand increases, so does
capital purchasing. The market downturn that started in late 1997 also saw the
emergence of a new trend, driven by the increasingly rapid pace in which the
size of the circuitry on the chip is decreasing. When chips decrease in size,
circuits can operate more quickly. With size reduction, too, more chips can be
produced on a given wafer size, and the yield per manufacturing machine goes up.
So, with decreasing chip size more chips can be produced per machine, and
there's a decreased need to build new manufacturing plants, in particular, for
pure capacity expansion. New equipment featuring the latest technological
advances, however, must often be purchased to manufacture the smaller-sized
chips, and in many cases is retrofit into existing manufacturing 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
three principal methods of this film deposition are CVD, which can be used to
deposit both insulating and conductive films; PVD, which is used primarily for
sputtering conductive metals onto the wafer surface; and electrofill, a process
for depositing metal films via an electrically charged aqueous solution.
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. 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, 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, tantalum, 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.
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. Aluminum PVD is also widely used at the present time as the
primary wiring material in up to six or more layers of device interconnect. The
Company believes, however, that PVD tantalum barrier and copper seed layers will
play an important role in enabling the transition from aluminum to copper as the
primary wiring material.
Electrofilling is the process used to deposit copper wiring. Copper has lower
resistance and capacitance values than aluminum, the present conductive metal
used in integrated circuits. Because of this fact, copper has the potential to
double the speed of an advanced microprocessor while reducing the number of
metal layers required by as much as 50%.
The electrofilling process, developed to deposit copper conductive lines, poses
unique processing challenges. Due to the difficulties in etching copper, the
metal is filled in a structure created within the circuit's insulating layers in
a process called dual damascene: this is the reverse of the process used with
aluminum, where the metal is deposited, etched to create lines and vias, and
then filled with insulating layers between the metal lines. The most difficult
task is filling copper into interconnect structures which can be less than 0.25
micron in width, with aspect ratios of up to 5:1. Electrofilling employs a
liquid chemistry and electrolytic principles to deposit the copper wiring into
the dielectric structure, a simple and cost-effective process that is also
highly reliable.
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Electrofill processes are used to produce the primary copper conductive layers
in advanced integrated circuits (typically circuits smaller than 0.25 micron).
The technology is believed by the Company to be extendible until at least the
0.13 micron design rule, and possibly down to 0.10 design rules; or in other
words, approximately another 5 or 6 years given the current industry evolution.
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 line width geometries as small as 0.25 microns, with up to six layers of
interconnect circuitry. The next generation of semiconductor devices, including
256 megabit DRAMs, will see line widths as small as 0.18 micron, and Novellus
believes there will be widespread transition from aluminum to copper conductive
lines for faster processing speeds. 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 aluminum and PVD aluminum to grow over the short term.
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 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. An advanced 200 mm wafer fabrication line can cost
over $1 billion, representing a substantial increase over the costs of prior
generation 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 thin film deposition systems (CVD, PVD, and
electrofill) that provide high 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 system performance:
CVD Solutions
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.
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 state-of-the-art for 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 Varian's Thin Film Systems
division in 1997, Novellus has extended its capabilities in PVD, introducing the
INOVA(TM) system in April of 1998. PVD, a critical technology in the production
of advanced semiconductor logic and memory devices, enables Novellus to provide
metal deposition solutions for both aluminum primary conductor as well as copper
barrier/seed layers.
Copper Electrofilling Solutions. Introduced in June 1998 after an extensive
joint development program with IBM's Microelectronics Division, the SABRE(TM)
copper electrofill tool is the industry's only production-proven machine for
depositing copper conductive layers on sub-0.25 micron circuits. SABRE employs a
patented wafer fixture to avoid backside contamination of the wafer from the
plating bath; a unique bath cell design that ensures reproducibility of the
copper fill; and a simple system architecture that ensures both high wafer
throughput and system
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availability. Coupled with the INOVA PVD system, Novellus is able to offer a
complete copper solution for the deposition of advanced circuits.
STRATEGY
The Company's objective is to increase its market share in the worldwide Thin
Film Deposition market 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 thin film deposition 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 long
up-time and smaller footprints. 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 dielectric and metallization technologies. The Company's strategy
is to provide a family of deposition systems which utilize advanced CVD, PVD,
and electrofilling technologies to address leading-edge wafer processing needs.
The Company's Concept One(TM) Dielectric offers dual frequency deposition
technology to achieve 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;
the Company believes that it is currently the only system that provides full
coverage tungsten deposition. The Company's Concept Two(TM) 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 and electrofilling technology;
"gap fill" technology; 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 offering in the
advanced "gap fill" technology market, SPEED(TM), was introduced in February
1996. Novellus further believes that the INOVA(TM) system will provide an
advanced PVD system that can deliver tantalum barriers and copper seed layers
for copper metallization, as well as Maxfill(TM) aluminum and Ti/Ti-nitride film
quality with excellent particle performance. And finally, we believe the SABRE
electrofill tool is emerging as the industry choice for the fill of copper vias
and trenches using a dual damascene process.
Focus On Major Semiconductor Manufacturers. The Company has sold one or more
deposition systems to each of the 20 largest semiconductor manufacturers in the
world. The Company's sales objective is to work closely with customers to secure
purchase orders for multiple systems as these customers expand existing
facilities; retrofit old facilities with new equipment; or build new 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. While Novellus derives a significant
percentage of its net sales from the Asian marketplace, the Company believes
that substantial additional growth potential exists in the region over the long
term. While the present industry slowdown was exacerbated in large part by the
Asian financial crisis, countries such as Japan, Taiwan, and Korea continue to
represent a disproportionate share of the world's capacity for semiconductor
manufacturing. The Asian countries are particularly dominant in the
manufacturing of memory products, which at the end of 1998 appeared to be moving
from an oversupply to an undersupply market situation, and which are enabling
technologies for end use consumer applications such as the Internet. Currently,
the Company's local presence in Asia includes sales and support offices
throughout Japan (via the Company's wholly-owned subsidiary, Nippon Novellus),
and one each in Korea, Taiwan, China and Singapore. Novellus believes it is an
important part of its current business strategy to aggressively build its
presence in Asia to serve this strategically significant region. However, Asian
countries, particularly Japan and Korea, continue to experience banking,
currency and other difficulties that are contributing to economic slowdowns or
recessions in those countries. The region does not appear to be responding
quickly to significant efforts to stimulate its economies. As a result of the
economic difficulties within certain Asian countries, the Company has increased
sales subject to extended payment terms within this region. If Asian economies
remain stagnant or continue to deteriorate, capital investment by Asian
customers could decrease from current levels. 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 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.
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.
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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
dielectric and metal deposition 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.
Following the acquisition of Varian's Thin Film Systems Division, the Company
announced the introduction of its INOVA system, an advanced PVD system that
delivers Maxfill aluminum and Ti/Ti-nitride film quality for aluminum barrier
layer applications, as well as highly conformal tantalum barrier copper seed
layers (barrier/seed) for copper conductive layers. Most recently, in June 1998
Novellus announced the SABRE copper Electrofill(TM) system for producing copper
conductive layers. With the SABRE product announcement, Novellus can now provide
its customers with the entire set of metals and dielectrics deposition processes
required for 0.25 micron devices and below.
CONCEPT ONE-DIELECTRIC
The Concept One-Dielectric is shipped in two versions: the Concept One-150,
which processes 100, 125, and 150 mm wafers (approximately 4, 5, and 6 inches in
diameter), and the Concept One-200, which processes 125, 150 and 200 mm wafers
(approximately 5, 6 and 8 inches in diameter, 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, stored 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 in the center of the loadlock, the
wafer transport mechanism, 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
clean-room 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 clean-room.
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 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, and thus 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(TM). The Maxus extends the Company's performance
in nitride passivation by enhancing the nitride deposition rate while retaining
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.
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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, introduced in November 1991, 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, 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"), sponsored by SEMATECH.
The Concept Two in a typical configuration incorporates a central cassette
module and wafer handler that interfaces with the clean-room, and includes
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 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(TM), 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 clean-room. 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(TM), the Concept
Two SEQUEL(TM), 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(TM) was initially shipped in a single
chamber version targeted at thin dielectric films used in volume 200mm
inter-metal dielectric production applications.
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 believes that the Dual ALTUS is a solution in the industry for very high
volume 200mm wafer fabs producing 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. The Dual SEQUEL employs
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. The two products are available in both single and dual chamber versions.
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CONCEPT TWO PRISM(TM)
The Prism(TM) MOCVD Ti-nitride system offers thin barrier solutions for high
aspect ratio structures with barrier properties, conformality and film
stability. 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 uses a patented
hemispherical source design and a proprietary electrostatic chuck to provide
excellent fill, 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) that occupies 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"). 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 competitive throughput and low cost of ownership
for the industry. The Novellus ARL product is currently being used in production
in customer manufacturing facilities.
CONCEPT THREE (TM)
In December 1997, the Company introduced its Concept Three family of chemical
vapor deposition systems for dielectric and tungsten applications on 300mm
wafers. The new Concept Three(TM) products are the C3-SPEED(TM), the
C3-SEQUEL(TM), and the C-3 ALTUS(TM). Because the Concept Three 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
transition from 200mm to 300mm volume chipmaking.
INOVA (TM) SYSTEM
Introduced in April 1998, the INOVA system is an advanced PVD system that
delivers tantalum barrier and copper seed layers required prior to copper
electrofilling, as well as Maxfill aluminum and Ti/Ti-nitride films for aluminum
liner/barrier applications. The INOVA incorporates Novellus' uniquely-designed
Hollow Cathode Magnetron ("HCM") technology, which the Company believes offers
better target utilization, extended maintenance intervals, and lower cost of
ownership in comparison with collimated and other ionized sputtering techniques.
The INOVA is a multi-chamber single wafer processing system.
SABRE
The SABRE system, introduced in July 1998 after an extensive development program
with IBM, is believed by the Company to be the most reliable and technologically
advanced copper electrofilling system available on the market. SABRE has been
proven to provide void-free copper fill of sub-0.15 micron trench features (at 9
or 10:1 aspect ratios) and 0.25 micron vias (at 5:1 aspect ratios). SABRE
employs a proprietary electrofilling cell that eliminates the backside wafer
contamination of copper, and features a unique plating cell design that ensures
reproducibility of the copper fill, with a film uniformity of 3 sigma, [5% with
a wafer. SABRE requires only two types of process modules to complete the
electrofill process, for electrofilling (3 stations total) and the other for
spin/rinse/dry (another 3 stations). The resulting simplicity of this design is
key to the system's high reliability and manufacturing availability.
7
<PAGE> 8
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; Bethlehem,
Pennsylvania; Manassas, Virginia; and Beaverton, Oregon. In Europe, the
Company's products are predominantly sold through a wholly owned subsidiary,
Novellus Systems, Ltd., which has sales 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 wholly owned subsidiaries in Japan,
Korea, Taiwan, Singapore and China. The Company's Japanese subsidiary maintains
its headquarters near Tokyo and six sales offices throughout Japan.
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 deposition 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, 1997 and 1998, there were no customers who
accounted for more than 10% of the Company's net sales. The Company terminated
its contract with Seki Technotron in June 1998. For the year ended December 31,
1996, one customer, Seki Technotron (a distributor in Japan), accounted for 12%
of the Company's net sales.
Export sales for the year ended December 31, 1998 were approximately $262.3
million, or 51% of net sales. Export sales for the year ended December 31, 1997
were approximately $250.1 million, or 47% of net sales. For the year ended
December 31, 1996, export sales (including sales made by the Company's Japanese
subsidiary) were approximately $295.2 million or 64% of net sales.
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 1998, 1997 and 1996 accounted for 57%, 48%, and 59% 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 expend
substantial funds and management effort.
BACKLOG
As of December 31, 1998, the Company's backlog was $108.4 million, as compared
to a backlog of $223.9 million at December 31, 1997. 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.
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<PAGE> 9
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 1998, 1997 and 1996 were $106.5
million, $89.8 million, and $53.9 million, respectively, or approximately 21%,
17%, and 12% 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 Varian's Thin Film Systems
business (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, 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 clean-room
standards during shipment.
The Company uses numerous suppliers to supply parts, components and
subassemblies (collectively, "parts") for the manufacture and support of its
products. Although the Company makes reasonable efforts to ensure that parts are
available from multiple suppliers, this is not always possible; accordingly,
certain key parts are obtained from a single supplier or a limited group of
suppliers. These suppliers are, in some cases, thinly capitalized, independent
companies that generate significant portions of their business from the Company
and/or a small group of other companies in the semiconductor industry. 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 deposition
equipment 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 and its 1998 announcements of a copper
primary conductor product will allow the Company to develop and compete
successfully in the PVD and copper electrofill areas of the market,
respectively.
However, the semiconductor equipment industry is highly competitive and
characterized by increasingly rapid technological changes. The Company faces
substantial competition in the market in which it competes from both established
competitors and potential new entrants. In the CVD and PVD areas of the market,
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. In the copper
electrofill area of the market, the Company's principal competitors are Semitool
(which has a large installed base of R&D tools) and EEJA, a Japanese company
with ties to the chemistry supplier Enthone-OMI. 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 other overseas
and domestic sources.
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<PAGE> 10
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 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, some with pending foreign counterparts, 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 claim of 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 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.
EMPLOYEES
At December 31, 1998, the Company had 1,524 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 will be successful in retaining or recruiting key personnel. 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.
OTHER CAUTIONARY STATEMENTS
See Part II, Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations.
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ITEM 2. PROPERTIES
The Company's operations are conducted primarily in eight buildings in the North
San Jose, California area and one building in Wilsonville, Oregon. The San Jose
buildings are leased by the Company and consist of 558,613 square feet. The
leases expire in 2002 and provide for an extension to 2005. The buildings house
two Manufacturing operations, a Research and Development facility, various
Administrative and Customer Support offices, a Customer Demonstration Lab,
Corporate Headquarters, and a new state of the art Applications and Customer
Demonstration Lab.
The Wilsonville, Oregon building is a leased facility and consists of 26,900
square feet of Manufacturing, Research and Development, and Customer Support
space. The Wilsonville lease expires in August 2001 and provides for a 5 year
option to renew the lease.
Additionally, the Company subleases four buildings on and adjacent to the
Novellus campus, consisting of 270,000 square feet, to third party users on
leases expiring 2001 and 2002. The former Western Regional Sales office in North
San Jose was consolidated into a Novellus building and the office is subleased
to Microsoft through the remaining term.
The Company is currently developing the parcel of land leased from Stanford
University which formerly housed the Thin Films Systems (TFS) business Novellus
acquired in June 1997. The new 129,700 square foot building is leased to a
tenant and rent is expected to commence in November 1999.
The Company also controls 6.4 acres of vacant land adjacent to its Metals
Manufacturing operation in North San Jose that is being held for future
expansion needs.
The Company also operates a facility near Tokyo, Japan which serves as Nippon
Novellus Headquarters, Sales Office, Service, Technology and Customer
Demonstration center. The facility near Tokyo is operated under a five year
lease expiring in 2001. In addition, the Company maintains six sales offices
throughout Japan.
The Company leases various 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.
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
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<PAGE> 12
sufficient to fully reimburse the Company for its losses. If Applied were to
prevail in this dispute, it could have a material adverse effect on the
Company's business or results of operations.
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. If
Applied were to prevail against the Company Complaint, it will unlikely, but
could, have a material adverse effect on the Company's business or results of
operations.
Semitool, Inc. v. Novellus Systems, Inc. (Case No. C-98-3089 DLJ)
On August 10, 1998, Semitool sued the Company for patent infringement in the
United States District Court for the Northern District of California. Semitool
alleges that the Company's SABRE(TM) copper deposition system infringes two
Semitool patents, U.S. Patent No. 5,222,310, issued June 29, 1993, entitled
"Single Wafer Processor with a Frame," and U.S. Patent No. 5,377,708, issued
January 3, 1995, entitled "Multi-Station Semiconductor Processor with
Volatilization." Semitool seeks an injunction against the Company's manufacture
and sale of SABRE(TM) systems, and seeks damages for past infringement. Semitool
also seeks trebled damages for alleged willful infringement. Semitool also seeks
its attorneys' fees and COSTS, and interest on any judgement.
The Company believes that there are meritorious defenses to Semitool's
allegations, including among other things that the Company's operations
(including SABRE(TM) products and systems) do not infringe the Semitool Patents
and/or that the Semitool Patents are invalid and/or unenforceable. But the
resolution of intellectual property disputes is often fact intensive and, like
most other litigation matters, inherently uncertain. Although the Company
believes that the ultimate outcome of the dispute with Semitool will not have a
material adverse effect on the Company's business or results of operations
(taking into account the defenses available to the Company), there can be no
assurances that Semitool will not ultimately prevail in this dispute. If
Semitool were to prevail in this dispute, it could have a material adverse
effect on the Company's business or results of operations.
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 and Semitool, 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 NASDAQ 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>
1998 HIGH LOW
---------------------------------------------------
<S> <C> <C>
First Quarter $ 49 3/8 $ 29 13/16
Second Quarter 49 7/16 31 1/4
Third Quarter 43 1/16 23 11/16
Fourth Quarter 57 15/16 21 15/16
1997 HIGH LOW
---------------------------------------------------
First Quarter $ 45 1/4 $ 27 3/4
Second Quarter 43 9/16 24 1/8
Third Quarter 63 44
Fourth Quarter 64 11/16 29 7/8
</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 and senior credit
facility prohibit the Company's ability to pay dividends. As of December 31,
1998, there were 656 holders of record of the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data [in thousands, except per share data]:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales $ 518,778 $ 534,004 $ 461,736 $ 373,732 $ 224,679
Gross profit 280,865 290,438 264,574 216,147 128,453
Net income (loss) 52,828 (95,658)(1) 94,029 82,543 44,932
Basic earnings (loss) per share(2) $ 1.55 $ (2.88) $ 2.92 $ 2.52 $ 1.45
Diluted earnings (loss) per share(2) $ 1.51 $ (2.88)(3) $ 2.85 $ 2.41 $ 1.36
Shares used in basic per share
calculations(2) 34,035 33,257 32,156 32,712 31,090
Shares used in diluted per share
calculations(2) 34,987 33,257(3) 33,018 34,274 32,990
DECEMBER 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS DATA:
Cash, cash equivalents,
and short-term investments $ 130,818 $ 98,089 $ 176,668 $ 149,799 $ 136,539
Working capital 287,621 223,710 287,818 226,257 183,581
Total assets 551,939 493,300 459,787 364,688 265,000
Long-term obligations 65,000 65,000 -- -- --
Shareholders' equity 375,465 301,001 373,636 272,782 214,214
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.
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(3) Excludes common stock equivalents as they are antidilutive to the loss per
share for the year.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales
Net sales were $518.8 million, $534.0 million, and $461.7 million in 1998, 1997,
and 1996, respectively. The decrease of approximately 3% from 1997 to 1998
reflects the slowdown in capital spending by semiconductor equipment
manufacturers during 1998, particularly for capacity purchases. 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 of Chemical Vapor Deposition ("CVD")
equipment. The Company's CVD equipment showed 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. International sales were
approximately 51% of net sales in 1998, an increase from 47% in 1997. The
increase is the result of higher demand in Europe and Korea offset by lower
demand in Japan and the Pacific Rim countries. International sales were
approximately 47% of net sales in 1997, a decrease from 64% in 1996. The
decrease in 1997 versus 1996 is the result of strong demand for the Company's
products in the U.S. partially offsetting lower demand in Japan. During the
year, the Company terminated a distribution agreement with its Japanese
distributor, Seki Technotron. The termination agreement provided for an orderly
transition from Seki Technotron to Nippon Novellus. 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.
Gross Profit
Gross profit was $280.9 million, $290.4 million, and $264.6 million in 1998,
1997, and 1996, respectively. The absolute dollar decrease from 1997 to 1998 was
due to lower net sales. As a percentage of net sales, gross profit was
approximately 54% in 1998 and 1997, and 57% in 1996. Gross profit as a
percentage of net sales from 1997 to 1998 remained consistent due to continued
shipment of older Physical Vapor Deposition ("PVD") systems which have lower
margins than the Company's CVD systems as well as lower absorption of fixed
overhead costs resulting from decreased shipment volume offset by cost reduction
efforts. The decrease in gross profit as a percentage of net sales from 1996 to
1997 was due to the shipment of older PVD systems which have lower margins than
the Company's CVD systems, 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 that it will experience competitive pricing pressures in the
future which will be offset by cost reduction programs and increasing sales
volumes which could result in near term gross margins that approximate levels
experienced in 1998.
Research and Development
Research and development expenses were $106.5 million, $89.8 million (excluding
a one-time charge for in-process research and development of $119.2 million),
and $53.9 million, in 1998, 1997, and 1996, 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 21%, 17%, (excluding the one-time
charge of $119.2 million relating to in-process research and development), and
12% in 1998, 1997, and 1996, 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 $95.4 million, $89.5 million,
and $74.4 million in 1998, 1997, and 1996, respectively. As a percentage of net
sales, selling, general, and administrative expenses were approximately 18%,
17%, and 16% in 1998, 1997, and 1996, respectively. The increase as a percentage
of net sales and in absolute dollars from 1997 to 1998 is related to the impact
of a full year of selling, general and administrative expenses associated with
the PVD product line. 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 Company expects its
selling, general and administrative expenses to approximate the levels
experienced in 1998.
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 1998, 1997, and 1996 were $5.5 million,
$8.0 million, and $10.2 million, respectively.
Acquisition of Thin Film Systems
In connection with the acquisition of Thin Film Systems from Varian Associates,
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. As of December
31, 1998, all of the restructuring charges had been incurred and the Company had
made approximately $2.6 million of cash payments, primarily related to lease
payments.
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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 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.
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 $1.1 million, $2.9 million, and $8.4 million, in 1998,
1997, and 1996 respectively. The decrease from 1997 to 1998 was due to lower
average cash and short-term investment balances and a full year's interest
expense associated with the Company's $65.0 million debt which was incurred in
order to complete the acquisition of TFS. 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.
Provision (Benefit) for Income Taxes
The provision for income taxes reflects an effective tax rate of 34% in 1998,
(21%) in 1997, and 35% in 1996. The lower effective tax rate in 1997 is
primarily due to the in-process research and development charge, which was not
fully tax benefited.
At December 31, 1998, the Company has recognized a deferred tax asset of $49.3
million, after a valuation allowance of $16.9 million. The Company believes that
it is more likely than not that this asset will be realized by an offset against
the recognized deferred tax liability of $11.1 million and future taxable
income.
Net Income (Loss)
Net income for the year ended December 31, 1998 was $52.8 million or $1.55 and
$1.51 per basic and diluted shares, respectively, compared with a net (loss) for
the year ended December 31, 1997 of $(95.7) million or $(2.88) per basic and
diluted shares. The net loss recorded in 1997 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.
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, 1998 was 34.0 and 35.0 million shares, respectively for the basic
and diluted income per share calculations, compared with 33.3 million for both
the basic and diluted income per share calculations 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 1998, 1997 and 1996, the Company repurchased 9,000, 6,000 and 172,000
shares of common stock, respectively. These share repurchases had no material
impact on earnings (loss) per share amounts in each period.
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 1998, 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, the
Company believes 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.
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Other Issues
Effective January 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Adoption of SFAS No. 130 did not have a material
impact on the Company's consolidated financial statements.
Effective January 1998, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS changes 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. The Company has adopted the provisions of
SFAS No. 131 for the year ended December 31, 1998. Adoption of SFAS No. 131 did
not have a material impact on the Company's consolidated financial statements.
In June 1998, the FASB released SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company is still in the process of
assessing the impact of SFAS No. 133 on its financial statements.
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, objectives, anticipations, 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 that electrofill
process technology will be extendible to at least the 0.13 micron design rule,
and possibly down to 0.10 design words; or, in other words, approximately
another 5 or 6 years given the current industry evolution; (c) Novellus' belief
that there will be widespread transition from aluminum to copper conductive
lines for faster processing speeds, and (d) the Company's belief regarding the
greater complexity and number of interconnect layers in advanced integrated
circuits, (e) 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, the Company's
belief that within-wafer and wafer-to-wafer uniformity levels of +/- 1% of film
thickness as measured at one standard deviation are state-of-the-art for the
industry, 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 belief that the 10-second heating period in advance of
deposition in the Concept One - Dielectric is one of the shortest preheat times
of any CVD system, under the heading "Item 1, Business - Products - Concept
One-Dielectric;" the Company's belief that the Dual ALTUS offers a solution in
the industry for very high volume 200 mm wafer fabs producing 0.35 micron
semiconductor devices, under the heading "Item 1, Business - Products - Concept
Two;" the Company's belief that ARL offers competitive throughput and low cost
of ownership for the industry, under the heading "Item 1, Business - Products
Anti Reflection Layer," the Company's belief that the Concept Three family of
systems should offer minimal risks to its customers in making the transition
from 200 mm to 300 mm volume chipmaking, under the heading "Item 1, Business -
Products - Concept Three;" the Company's belief that HCM technology offers
better target utilization, extended maintenance intervals, and lower cost of
ownership in comparison with collimated and other ionized sputtering
techniques, under the heading "Item 1, Business - Products - Inova System;" the
Company's belief that the SABRE system is the most reliable and technologically
advanced electrofilling system available on the market, under the heading "Item
1, Business - Products - SABRE." Forward looking statements also include (a) the
Company's belief that its marketing efforts are enhanced by the technical
expertise of its research and development personnel, (b) belief that its service
to its customers is enhanced by the design simplicity of its systems, and (c)
the 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 deposition equipment marketplace and the Company's belief
that the acquisition of TFS and its 1998 announcement of a copper primary
conductor product will allow the Company to develop and compete successfully in
the PVD and copper electrofill areas of market, under the heading "Item 1,
Business - Competition"; the Company's belief that its current properties will
be sufficient to meet the Company's requirements for the foreseeable future,
under heading "Item 2, Properties"; the Company's belief that there are
meritorious defenses in the Applied and Semitool litigations, and the Company's
beliefs with respect to the outcomes of the Applied Materials and Semitool
litigations and current patent infringement inquiries, under the heading "Item
3, Legal Proceedings"; the Company's strategies, beliefs, plans, expectations,
anticipations and hopes with respect to Net Sales, Gross Profit, Research and
Development, Selling, General and Administrative, Provision (Benefit) for Income
Taxes, and Foreign Exchange Contracts set forth under "Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations"; the
Company's belief that there is not a significant risk of nonperformance by
counterparties on its foreign exchange contracts used in hedging activities,
under "Items 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations -Cautionary Statements - Concentration of Credit Risk" and
"Items 8, Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements Note 1 Business and Nature of Operations - Concentration of
Credit Risk;" the Company's estimates that its year 2000 compliance expense will
be approximately $1.7 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
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adjustment to the Thin Film Systems 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 8, Financial Statements and
Supplementary Data -- Notes to Consolidated Financial Statements - Note 2
"Acquisition of 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." The reader should also consult the
cautionary statements and 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:
DRAM Overcapacity and Demand Shifts in the PC Industry. The semiconductor
industry is characterized by excess production capacity for DRAM devices, which
has caused semiconductor manufacturers to decrease capital spending. In the PC
market, a shift in demand from more expensive, high-performance products to
lower-priced products (sub-$1,000 PCs) has resulted in reduced profitability for
semiconductor manufacturers. Therefore, during fiscal 1998, many of the
Company's customers delayed or decreased their purchases of the Company's
products. Continued DRAM overcapacity and strengthening demand for sub-$1,000
PCs could cause further delays or decreased demand for the Company's products.
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 51%, 47%, and
64% of net sales in 1998, 1997, and 1996, 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 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 materially and adversely affect global products
and service demand, and, therefore, the Company's business operations and
financial condition. Asian countries, particularly Japan and Korea, continue to
experience banking, currency and other difficulties that are contributing to
economic slowdowns or recessions in those countries. The region does not appear
to be responding quickly to significant efforts to stimulate its economies. As a
result of the economic difficulties within certain Asian countries, the Company
has increased sales subject to extended payment terms within this region. If
Asian economies remain stagnant or continue to deteriorate, capital investment
by Asian customers could decrease from current levels. 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.
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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. During periods of reduced and declining demand, the Company must be
able to quickly and effectively align its cost structure with prevailing market
conditions, and motivate and retain key employees. During periods of rapid
growth, the Company must be able to acquire and/or develop sufficient
manufacturing capacity to meet customer demand, and hire and assimilate a
sufficient number of qualified people. 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.
Possible Volatility of Stock Price. The stock price of the Company's Common
Stock 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. Shareholders should be willing to incur the risk of such
fluctuations. Sales of substantial amounts of Common Stock in the public market
after any offering of the Company's Securities could adversely affect the market
price of the outstanding Common Stock.
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 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 operation of
information technology ("IT") and non-information technology ("Non-IT") systems
as the millennium (year 2000) approaches. The "Year 2000" problem is pervasive
and complex, with the possibility to affect many IT and Non-IT systems, as the
result of the rollover of the two digit year value from "99" to "00". The
concern is whether such systems will properly recognize data sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or fail. In addition to
the Company's own systems, the Company relies, directly and indirectly, on
external systems of its customers, suppliers, creditors, financial
organizations, utilities providers and governmental entities, both domestic and
internationally (collectively, "Third Parties"). Consequently, the Company could
be affected through disruptions in the operations of the Third Parties with
which the Company interacts. Furthermore, the purchasing frequency and volume of
customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to make their current systems Year 2000
compliant.
The Company is utilizing both internal and external resources to address (a) the
Company's state of readiness (including the readiness of Third Parties, with
which the Company interacts) with respect to the Year 2000 problem, (b) the
costs to the Company to address Year 2000 issues related to internal IT and
Non-IT systems, which, if uncorrected, could have a material adverse effect on
the business, financial condition or results of operations of the Company, (c)
the known risks related to the consequences of any failure to correct any Year
2000 problems identified by the Company, and (d) what contingency plans, if any,
should be adopted by the Company should any identified Year 2000 problems not be
corrected.
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State of Readiness.
The following discussion broadly addresses the Company's efforts to identify and
address the Company's and applicable Third Parties' Year 2000 problems with
respect to (a) the Company's products, (b) the Company's information technology
systems, including facilities and infrastructure, and (c) the Company's
suppliers. However, it would be impractical for the Company to attempt to
address all Year 2000 problems of Third Parties that have been or may in the
future be identified. Specifically, Year 2000 problems have been or may in the
future be identified with respect to the IT and Non-IT systems of Third Parties
having widespread national and international interactions with persons and
entities generally (for example, certain IT and Non-IT systems of governmental
agencies, utilities and telecommunications, information and financial networks)
that, if uncorrected, could have a material adverse impact on the Company's
business, financial condition or results of operations. Notwithstanding anything
set forth below, the Company is not in a position to address any such Year 2000
problems.
(a) The Company's products.
The Company has completed a Year 2000 compliance evaluation of all of its
products utilizing testing guidelines prepared by Sematech, a consortium of
suppliers to the worldwide semiconductor manufacturers that assists its members
with strategic marketing opportunities. It is the Company's plan to comply with
Sematech's guidelines for Year 2000 compliance. The Company's new products are
designed to be Year 2000 compliant. However, some of the Company's older
products will require upgrades for Year 2000 compliance. At this time, software
upgrades have been or will be provided to all Novellus customers products free
of charge. Any hardware needed to achieve Year 2000 compliance on out of
warranty systems will need to be purchased from Novellus. However,
notwithstanding such efforts, any failure of the Company's products to perform,
including system malfunctions due to the onset of Year 2000, could result in
claims against the Company, which could have a material adverse effect on the
Company's business, results of operations or financial condition. Moreover, the
Company's customers could choose to convert to other Year 2000 compliant
products in order to avoid such malfunctions, which could have a material
adverse effect on the Company's business, financial condition or results of
operations.
In June of 1997, the Company acquired the Thin Films Systems division of Varian
Associates, Inc. (TFS). During the Company's evaluation of Year 2000 readiness
for its products, it was determined that some of the TFS products acquired from
Varian Associates, Inc. are not, and will not be Year 2000 compliant prior to
December 31, 1999. The Company is taking measures to inform its applicable
customers of that fact. The Company currently anticipates that the failure of
such products to be Year 2000 compliant will not have a material adverse effect
on the Company's business, results of operations or financial condition.
(b) Information technology systems including facilities and infrastructure.
The Company currently uses standard mass-market vendor supplied software on its
desktop systems and laptops. These standard software applications limit the
number of information technology vendors that Novellus must work with to ensure
Year 2000 readiness. Many of these vendors are still implementing their Year
2000 compliance programs. Novellus maintains maintenance contracts with all
information technology vendors and will implement the Year 2000 compliant
versions of hardware and/or software as required when those solutions become
available. Novellus will be Year 2000 compliant with all of the business
applications in April of 1999. Novellus also uses a third party service provider
to provide electronic exchange of data (EDI). The vendor software is Year 2000
compliant, therefore, we do not believe we face any significant EDI Year 2000
issues. The Company's hardware for workstations, servers, and network routers
will be Year 2000 compliant by Q2 1999. As of December 31, 1998, approximately
95% of the Company's hardware and software applications were Year 2000
compliant. However, no assurance can be provided that all such programs will be
implemented in a timely manner or that the failure to so implement such programs
will not have a material adverse effect on the Company's business, results of
operations or financial condition.
The Company is in the process of assessing its Year 2000 risk with respect to
building automation systems, electronic security systems, utility and water
systems. Formal queries to landlords, local fire departments, water and utility
providers for the Company's domestic and international locations will be sent by
March 1999. As of December 31, 1998, approximately 80% of the Company's
facilities and infrastructure were Year 2000 compliant.
(c) Suppliers.
Novellus has contacted those suppliers that could have a material adverse impact
on Novellus' ability to provide uninterrupted service to its customers should
the IT or Non-IT systems of such suppliers have uncorrected Year 2000 problems.
By the end of December 1998, 90% of these suppliers had documentation with
respect to their Year 2000 readiness on file with Novellus. The remaining 10%
are being contacted to complete the Sematech Year 2000 Readiness Supplier
Questionnaire or to document their Year 2000 compliance status as is appropriate
for their business. However, such documentation does not assure Year 2000
compliance of the IT and Non-IT systems used by such suppliers, but instead
provides only a description of their relevant systems and the status of efforts,
if any, by such suppliers to make such systems Year 2000 compliant. Accordingly,
no assurance can be provided that (a) the IT and Non-IT systems of Company
suppliers (including those suppliers who have provided documentation to the
Company regarding their Year 2000 compliance) will be Year 2000 compliant, (b)
that such documentation accurately and fully reflects the Year 2000 compliance
status of such suppliers' systems, or (c) that the failure by any such
suppliers' systems to be Year 2000 compliant will not have a material adverse
effect on the Company's business, results of operations or financial condition.
19
<PAGE> 20
Costs to Address Year 2000 Issues.
The Company currently expects to incur total software, hardware and
systems-related costs of approximately $1.7 million in connection with
remediations of Year 2000 compliance issues. Of the estimated total costs,
approximately $1.4 million has been incurred to date. There can be no assurance
that the cost estimates associated with the Company's Year 2000 issues will
prove to be accurate or that the actual costs will not have a material adverse
effect on the Company's business, results of operations or financial condition.
Known Risks.
The Company currently anticipates that any identified Year 2000 problem
affecting its own systems or that of its significant customers, suppliers,
creditors, financial organizations and utilities providers will be either
corrected by December 31, 1999 or will not have a material adverse affect on the
Company's business, financial condition or results of operations. Moreover, the
Company is working to minimize any disruption to the business of its vendors and
suppliers due to Year 2000 problems that may have a material adverse affect on
the Company's business, financial condition or results of its operations.
However, notwithstanding the Company's efforts to identify and correct such Year
2000 problems, there can be no assurance that the Company will be successful in
addressing the year 2000 problems as they pertain to its products and its
internal systems, and that the failure to do so would not have a material
adverse effect on the Company's business, financial condition or results of
operations. In addition, notwithstanding such efforts, there can be no assurance
that the systems of Third Parties with which the Company interacts will not
suffer from Year 2000 problems, or that such problems would not have a material
adverse effect on the Company's business, financial condition or results of
operations. In particular, Year 2000 problems that have been or may in the
future be identified with respect to the IT and Non-IT systems of Third Parties
having widespread national and international interactions with persons and
entities generally (for example, certain IT and Non-IT Systems of governmental
agencies, utilities and information and financial networks) could have a
material adverse impact on the Company's business, financial condition or
results of operations.
Contingency Plans.
The Company currently is in the process of reviewing its Year 2000 compliance
plans to determine what contingency plans, if any, are appropriate. The Company
does not currently have any contingency plans. The Company anticipates
completing such review and preparing contingency plans, if appropriate, by
September 1999. There can be no assurance that such measures will prevent the
occurrence of Year 2000 problems, which could have a material adverse effect
upon the Company's business, results of operations or financial condition.
Euro Conversion. On January 1, 1999, several member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and adopted the Euro as their new common legal currency. As of that
date, the Euro traded on currency exchanges and the legacy currencies remain
legal tender in the participating countries for a transition period between
January 1, 1999 and January 1, 2002. During the transition period, noncash
payments can be made in the Euro, and parties can elect to pay for goods and
services and transact business using either the Euro or legacy currency. Between
January 1, 1999 and January 1, 2002 the participating countries will introduce
Euro notes and coins and withdraw all legacy currencies so that they will no
longer be available. The Euro conversion may affect cross-border competition by
creating cross-border transparency. The Company is assessing its
pricing/marketing strategy in order to insure that it remains competitive in a
broader European market. The Company is also assessing its information
technology systems to allow for transactions to take place in both legacy
currencies and the Euro and the eventual elimination of the legacy currencies,
and reviewing whether certain existing contracts will be need to be modified.
The Company's currency risk and risk management for operations in participating
countries may be reduced as the legacy currencies are converted to the Euro.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operating and capital resource
requirements through cash flows from operations, sales of equity securities, and
borrowings. The Company's primary source of funds at December 31,1998 consisted
of $130.8 million of cash, cash equivalents and short-term investments. This
amount represents an increase of $32.7 million from the December 31, 1997
balance of $98.1 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, 1998, 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, 1998, 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, 1998, there was $14.0 million available under bank lines of credit
that expire at various dates through June 2002. At December 31, 1998
approximately $13.0 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, 1998 for borrowings
under the bank lines of credit was 1.52%.
Net cash provided by operating activities during the year ended December 31,
1998 was $56.1 million. This amount consisted primarily of net income of $52.8
million, non-cash depreciation and amortization charges of $23.8 million, a
decrease of $13.2 million in deferred income taxes, and a decrease of $12.9
million in inventories partially offset by an increase in accounts receivable of
$39.4 million and a decrease in accrued warranty of $12.0 million.
20
<PAGE> 21
Net cash used in investing activities was $57.2 million during the year ended
December 31, 1998. During this period, the Company had capital expenditures of
$36.1 million. These cash outflows also consisted of purchases of approximately
$10.3 million, net, of available-for-sale securities. The Company expects
investment in property and equipment for the fiscal year 1999 to approximate
$32.0 million. The Company intends to finance these investments from existing
cash balances and cash flows from operations.
During the year ended December 31, 1998, net cash provided by financing
activities was $23.0 million, due primarily to proceeds of $22.0 million from
common stock option exercises.
On February 24, 1999, the Company sold 3,860,000 shares of Common Stock at
$67.50 per share. The Company granted the underwriter a 30-day option to
purchase up to an additional 579,000 shares of common stock to cover
overallotments, if any. The net proceeds to the Company, not including the
overallotment option, totaled approximately $255.3 million.
The Company believes that its current cash position, cash generated through
operations and equity offerings, and available borrowings will be sufficient to
meet the Company's needs through the next twelve months.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment portfolio and
long-term debt obligations. The Company does not use derivative financial
instruments in its investment portfolio. The Company places its investments with
high credit quality issuers and, by policy, limits the amount of credit exposure
to any one issuer.
The Company mitigates default risk by investing in only the safest and highest
credit quality securities and by monitoring the credit rating of investment
issuers. The portfolio includes only marketable securities with active secondary
or resale markets to ensure portfolio liquidity.
The Company has no cash flow exposure due to rate changes for cash equivalents
and short-term investments, as all of these investments are at fixed interest
rates. The Company's short-term borrowing is at a fixed interest rate. Long-term
debt is at variable interest rates. The short-term borrowing is used by the
Company's Japanese subsidiary for general corporate purposes including capital
expenditures and working capital needs. The long-term debt was incurred in
connection with the Company's acquisition of TFS.
The table below presents principal amounts and related weighted average interest
rates by year of maturity for the Company's investment portfolio and debt
obligations.
<TABLE>
<CAPTION>
FAIR VALUE
DECEMBER 31,
IN THOUSANDS 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash equivalents $ 81,224 -- -- -- -- -- $ 81,224 $81,224
Average interest rate 4.42% -- -- -- -- -- 4.42%
Short-term investments $ 49,594 -- -- -- -- -- $ 49,594 $49,594
Average interest rate 5.50% -- -- -- -- -- 5.50%
Total investment securitie $ 130,818 -- -- -- -- -- $ 130,818 $130,818
Average interest rate 4.83% -- -- -- -- -- 4.83%
Short-term borrowing $ 12,986 -- -- -- -- -- $ 12,986 $12,986
Average interest rate 1.52% -- -- -- -- -- 1.52%
Long-term debt
Variable rate -- -- -- $ 65,000 -- -- $ 65,000 $65,000
Average interest rate -- -- -- 6.51% -- -- 6.51%
Total debt $ 12,986 -- -- $ 65,000 -- -- $ 77,986 $77,986
Average interest rate 1.52% -- -- 6.51% -- -- 5.68%
</TABLE>
The Company has lease agreements on several properties. The agreements are for
five years with interest rates that approximate the London Interbank Offering
Rate (LIBOR). At current interest rates, the annual lease payments total
approximately $12.7 million.
21
<PAGE> 22
Foreign Currency Risk. The Company transacts business in various foreign
countries. Its primary foreign currency cash flows are in countries in Asia and
Europe. During 1998 and 1997, the Company employed a foreign currency hedging
program utilizing foreign currency forward exchange contracts and certain
foreign currency denominated balance sheet positions. Under this program,
increases or decreases in currency commitments and balance sheet positions, as
translated into U.S. dollars, are primarily offset by realized gains and losses
on the hedging instruments. The goal of the hedging program is to economically
guarantee or lock in exchange rates on the Company's foreign currency cash
outflows and to minimize the impact to the Company of foreign currency
fluctuations. The Company does not use foreign currency forward exchange
contracts for speculative or trading purposes.
Under the hedging program, all foreign currency contracts are marked-to-market
and realized and unrealized gains and losses are included as a component of
other income and expense. The following table provides information as of
December 31, 1998 about the Company's derivative financial instruments, which
are comprised of foreign currency forward exchange contracts. The information is
provided in U.S. dollar equivalent amounts, as presented in the Company's
financial statements. The table presents the notional amounts (at the contract
exchange rates), the weighted average contractual foreign currency exchange
rates, and the estimated fair value of those contracts.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 NOTIONAL AVERAGE ESTIMATED
IN THOUSANDS, EXCEPT FOR AVERAGE CONTRACT RATE AMOUNT CONTRACT RATE FAIR VALUE
- ---------------------------------------------- ---------------------------------------
<S> <C> <C> <C>
Foreign currency forward exchange contracts:
Japanese yen $24,014 117.09 $(954)
British pound $(1,086) 1.69 $ (15)
French franc $ 152 5.63 $ (1)
Irish punt $ (49) 1.50 --
Germany mark $ 382 1.66 --
Dutch guilder $ 185 1.89 $ (2)
Singapore dollar $ 132 1.65 --
Taiwan dollar $(2,320) 32.32 $ 11
---------------------------------------
$21,410 $(961)
</TABLE>
The statements contained in this Report on Form 10-K that are not purely
historical in nature are "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including without limitation, statements regarding the
Company's estimations, anticipations, determinations, commitments, expectations,
plans, beliefs, intentions or strategies regarding the future. These forward
looking statements involve risks and uncertainties including, but not limited
to, domestic and international economic conditions, product demand and industry
capacity, competitive products and pricing, manufacturing efficiencies, new
product development, ability to enforce patents, the availability of raw
materials and critical manufacturing equipment, new plant startups, the
regulatory and trade environment, and other risks indicated in filings with the
Securities and Exchange Commission (SEC). Actual results may differ materially.
Novellus assumes no obligation to update this information. For more details,
please refer to other SEC filings, including the Company's Annual Report on Form
10-K, Quarter Reports on Form 10-Q and Reports on Form 8-K.
22
<PAGE> 23
NOVELLUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 518,778 $ 534,004 $ 461,736
Cost of sales 237,913 243,566 197,162
-------------------------------------------
Gross profit 280,865 290,438 264,574
Operating expenses:
Research and development 106,510 89,830 53,902
Selling, general and administrative 95,407 89,474 74,419
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 201,917 414,514 128,321
-------------------------------------------
Operating income (loss) 78,948 (124,076) 136,253
Interest:
Income 5,968 5,684 8,884
Expense (4,869) (2,741) (477)
-------------------------------------------
Net interest income 1,099 2,943 8,407
-------------------------------------------
Income (loss) before provision (benefit) for 80,047 (121,133) 144,660
income taxes
Provision (benefit) for income taxes 27,219 (25,475) 50,631
-------------------------------------------
Net income (loss) $ 52,828 $ (95,658) $ 94,029
===========================================
Basic earnings (loss) per share $ 1.55 $ (2.88) $ 2.92
===========================================
Diluted earnings (loss) per share $ 1.51 $ (2.88) $ 2.85
===========================================
Shares used in basic per share calculations 34,035 33,257 32,156
===========================================
Shares used in diluted per share calculations 34,987 33,257 33,018
===========================================
</TABLE>
See accompanying notes.
23
<PAGE> 24
NOVELLUS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 81,224 $ 59,265
Short-term investments 49,594 38,824
Accounts receivable, net of allowance for doubtful
accounts of $3,135 in 1998 and $3,547 in 1997 173,364 133,925
Inventories 69,223 82,133
Deferred taxes 21,003 22,241
Prepaid and other current assets 4,687 14,621
---------------------------
Total current assets 399,095 351,009
Property and equipment:
Machinery and equipment 113,268 83,972
Furniture and fixtures 8,295 6,456
Leasehold improvements 52,237 47,294
---------------------------
173,800 137,722
Less accumulated depreciation and amortization 68,221 44,382
---------------------------
105,579 93,340
Long-term deferred taxes 17,516 29,498
Other assets 29,749 19,453
---------------------------
Total assets $ 551,939 $ 493,300
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,966 $ 22,865
Accrued payroll and related expenses 13,138 20,632
Accrued warranty 25,872 37,836
Other accrued liabilities 23,720 34,314
Income taxes payable 4,792 --
Current obligations under lines of credit 12,986 11,652
---------------------------
Total current liabilities 111,474 127,299
Long-term debt 65,000 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 - 34,499
in 1998 and 33,719 in 1997 176,140 154,167
Retained earnings 201,581 149,061
Accumulated other comprehensive income (loss) (2,256) (2,227)
---------------------------
Total shareholders' equity 375,465 301,001
---------------------------
Total liabilities and shareholders' equity $ 551,939 $ 493,300
===========================
</TABLE>
See accompanying notes.
24
<PAGE> 25
NOVELLUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 52,828 ($ 95,658) $ 94,029
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 23,839 18,288 11,332
In-process research and development -- 119,246 --
Restructuring and other costs -- 12,043 --
Bad debt write-off -- 17,700 --
Deferred income taxes 13,220 (37,226) 1,767
Changes in operating assets and liabilities:
Accounts receivable (39,439) (17,899) (7,867)
Inventories 12,895 (5,232) (18,669)
Prepaid and other current assets 9,934 4,067 (4,413)
Accounts payable 8,101 (11,294) (6,819)
Accrued payroll and related expenses (7,494) 993 1,626
Accrued warranty (11,964) 5,551 3,305
Other accrued liabilities (10,594) 12,068 430
Income taxes payable 4,792 -- (7,447)
-------------------------------------------
Total adjustments 3,290 118,305 (26,755)
-------------------------------------------
Net cash provided by operating activities 56,118 22,647 67,274
-------------------------------------------
INVESTING ACTIVITIES
Purchases of available-for-sale securities (67,457) (125,663) (387,709)
Proceeds from the sale and maturity of 56,687 197,745 366,488
available-for-sale securities
Purchase of the net assets of the Thin Film
Systems business of Varian Associates, Inc. -- (148,325) --
Capital expenditures (36,092) (36,153) (35,285)
(Increase) decrease in other assets (10,296) 2,208 (15,540)
-------------------------------------------
Net cash used in investing activities (57,158) (110,188) (72,046)
-------------------------------------------
FINANCING ACTIVITIES
Proceeds (payments) from lines of credit, net 1,334 (1,501) 5,784
Borrowings under long-term debt -- 65,000 --
Common stock issued 22,016 17,817 7,880
Common stock repurchased (351) (272) (3,244)
-------------------------------------------
Net cash provided by financing activities 22,999 81,044 10,420
-------------------------------------------
Net increase (decrease) in cash and cash 21,959 (6,497) 5,648
equivalents
Cash and cash equivalents at the beginning of the period 59,265 65,762 60,114
-------------------------------------------
Cash and cash equivalents at the end of the period $ 81,224 $ 59,265 $ 65,762
===========================================
Supplemental disclosures:
Cash paid during the year for:
Interest $ 4,876 $ 2,741 $ 477
Income taxes $ 4,693 $ 393 $ 57,611
Other non-cash changes:
Income tax benefits from employee stock plans $ 4,728 $ 7,624 $ 3,034
</TABLE>
See accompanying notes.
25
<PAGE> 26
NOVELLUS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON STOCK RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 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
Net income -- -- 94,029 -- 94,029
Cumulative translation adjustment -- -- -- (845) (845)
---------
Comprehensive income -- -- -- -- 93,184
---------
Common stock repurchased (172) (586) (2,658) -- (3,244)
-----------------------------------------------------------------------
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
Net loss -- -- (95,658) -- (95,658)
Cumulative translation adjustment -- -- -- (2,146) (2,146)
---------
Comprehensive loss -- -- -- -- (97,804)
---------
Common stock repurchased (6) (25) (247) -- (272)
-----------------------------------------------------------------------
Balance at December 31, 1997 33,719 154,167 149,061 (2,227) 301,001
Exercise of stock options 618 12,617 -- -- 12,617
Shares issued under employee stock
purchase plan 171 4,671 -- -- 4,671
Income tax benefits realized from activity
in employee stock plans -- 4,728 -- -- 4,728
Net income -- -- 52,828 -- 52,828
Cumulative translation adjustment -- -- -- (29) (29)
---------
Comprehensive income -- -- -- -- 52,799
---------
Common stock repurchased (9) (43) (308) -- (351)
-----------------------------------------------------------------------
Balance at December 31, 1998 34,499 $ 176,140 $ 201,581 $(2,256) $ 375,465
=======================================================================
</TABLE>
See accompanying notes.
26
<PAGE> 27
NOVELLUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 BUSINESS AND NATURE OF OPERATIONS
Nature of Operations
Novellus Systems, Inc. (the Company) is a leading manufacturer of high
productivity deposition systems (CVD, PVD, and electrofill) used in the
fabrication of integrated circuits. CVD systems employ a chemical plasma to
deposit all of the dielectric (insulating) layers and certain of the conductive
metal layers on the surface of a semiconductor wafer. PVD systems are used to
deposit conductive metal layers by sputtering metallic atoms from the surface of
a target source via high DC power. Electrofill systems are used for depositing
copper conductive layers in a dual damascene design architecture using a plating
bath solution. The overall growth in the semiconductor industry and the
increasing number of layers used in complex integrated circuits have led to
demand for advanced deposition equipment. The Company's products are able to
provide simultaneous solutions to productivity and wafer quality problems facing
the worldwide semiconductor manufacturing industry.
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 1998 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
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>
1998 1997
-----------------------
<S> <C> <C>
Purchased and spare parts $50,591 $45,556
Work-in-process 13,005 30,326
Finished goods 5,627 6,251
-----------------------
$69,223 $82,133
========== ============
</TABLE>
27
<PAGE> 28
NOVELLUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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'
financial statements 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 its 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 and 1998,
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. All foreign currency contracts are marked-to-market and realized
and unrealized gains and losses are included as a component of other income and
expense. 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>
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $52,828 $(95,658) $94,029
Denominator:
Denominator for basic earnings (loss) per
share - weighted-average shares outstanding 34,035 33,257 32,156
Employee stock options 952 -- 862
-------------------------------------
Denominator for diluted earnings (loss) per
share - adjusted weighted-average shares outstanding 34,987 33,257 33,018
-------------------------------------
Basic earnings (loss) per share $ 1.55 $ (2.88) $ 2.92
Diluted earnings (loss) per share $ 1.51 $ (2.88) $ 2.85
=====================================
</TABLE>
Options to purchase 824,000 and 1,918,000 shares of common stock at
weighted-average prices of $44.21 and $29.73 per share were outstanding during
1998 and 1996, 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. 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.
28
<PAGE> 29
NOVELLUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Advertising Expenses
The Company expenses advertising costs as incurred. Advertising expenses for
1998, 1997, and 1996 were $6,065,000, $3,233,000 and $3,259,000, respectively.
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. As a result of the economic difficulties within certain Asian
countries, the Company has increased sales subject to extended payment terms
within this region. 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.
Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted the Statement of Financial Accounting
Standard No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS 130 requires unrealized gains
or losses on the Company's available-for-sale securities and foreign currency
translation adjustments to be included in other comprehensive income. Prior to
adoption, unrealized gains or losses related to foreign currency translation
adjustments were reported as a separate component of shareholders' equity.
The following are the components of comprehensive income (loss), (in thousands):
<TABLE>
<CAPTION>
Years Ended
Dec. 31, Dec. 31, Dec. 31,
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 52,828 $(95,658) $ 94,029
Foreign currency translation adjustment (29) (2,146) (845)
----------------------------------------
Comprehensive income (loss) $ 52,799 $(97,804) $ 93,184
========================================
The component of accumulated other comprehensive income,
net of related tax is as follows:
Foreign currency translation adjustment $ (2,256) $ (2,227) $ (81)
========================================
</TABLE>
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, Notes to the Consolidated Financial
Statements.
Recent Accounting Pronouncements
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS changes 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. The Company has adopted the provisions of
SFAS No. 131 for the year ended December 31, 1998. Adoption of SFAS No. 131 did
not have a material impact on the Company's consolidated financial statements.
In June 1998, the FASB released SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company is still in the process of
assessing the impact of SFAS No. 133 on its financial statements.
29
<PAGE> 30
NOVELLUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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. The Company has disputed the results of
the audit of the pre-acquisition financial statements and in accordance with the
purchase agreement, has demanded arbitration in order to resolve the disputes
over the purchase price of TFS. 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. All of these actions were
completed in the year ended December 31, 1998. As of December 31, 1998, the
Company had made $2.6 million of cash payments relating primarily to lease
payments. 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 1998
---------------------------------------
<S> <C> <C> <C>
Duplicative machinery and equipment $ 9,039 $ 9,039 $0
Lease commitments and leasehold improvements $ 3,143 $ 3,143 $0
Other exiting costs $ 2,061 $ 2,061 $0
---------------------------------------
$14,243 $14,243 $0
=======================================
</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).
<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 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>
<CAPTION>
<S> <C>
Working capital acquired $ (2,117)
Property, plant and equipment 18,498
Intangible assets 12,698
In-process research and development 119,246
---------
Total purchase price $ 148,325
=========
</TABLE>
30
<PAGE> 31
NOVELLUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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>
1998 1997
------- ----- ----- ------- ----- ------
NOTIONAL CARRYING ESTIMATED NOTIONAL CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE AMOUNT AMOUNT FAIR VALUE
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sell foreign currency, $21,410 $(166) $(961) $31,522 $(239) $1,124
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, 1998 and 1997, 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, 1998
and 1997. 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, 1998 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>
1998 1997
-----------------------
<S> <C> <C>
Institutional money market funds $ 36,373 $35,868
Commercial paper 44,851 23,397
-----------------------
Amounts included in cash and cash equivalents 81,224 59,265
-----------------------
Commercial paper 11,129 34,320
Certificates of deposits 2,499 4,504
Auction rate preferred stock 3,200 --
Corporate securities 29,763 --
U.S. Treasury securities and obligations of
U.S. Government Agencies 3,003 --
-----------------------
Amounts included in short-term investments 49,594 38,824
Total available-for-sale securities $130,818 $98,089
=======================
</TABLE>
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>
1998 1997
------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $81,224 $81,224 $59,265 $59,265
Current obligations under lines of credit $12,986 $12,986 $11,652 $11,652
Long-term debt $65,000 $65,000 $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, 1998 and 1997. 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 $14.0 million at the banks' prime rates (1% to 7.75% at December
31, 1998), which expire at various dates through June 2002. The lines restrict
payment of cash dividends on the Company's common stock. A portion of this
facility ($13.0 million at December 31, 1998) are available to the Company's
Japanese subsidiary, Nippon Novellus Systems K.K. Borrowings by the subsidiary
are at the banks' offshore reference rate. At December 31, 1998 and 1997, there
were borrowings by the Japanese subsidiary under lines of credit of $13.0
million and $11.7 million respectively, at annual weighted average interest
rates of 1.52% and 1.02%, respectively. All borrowings under the line of credit
were by Nippon Novellus.
31
<PAGE> 32
NOVELLUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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. Borrowings 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, 1998, total borrowings under the senior
credit facility were $65 million. The weighted average interest rate at December
31, 1998 was approximately 6.5%. The Senior Credit Facility requires the Company
maintain compliance with certain financial covenants. At December 31, 1998, 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.
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.
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. If Applied were to prevail in
this dispute, it could have a material adverse effect on the Company's business
or results of operations.
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. If
Applied were to prevail against the Company Complaint, it will unlikely, but
could, have a material adverse effect on the Company's business or results of
operations.
Semitool Litigation
On August 10, 1998, Semitool sued the Company for patent infringement in the
United States District Court for the Northern District of California. Semitool
alleges that the Company's SABRE(TM) copper deposition system infringes two
Semitool patents, U.S. Patent No. 5,222,310, issued June 29, 1993, entitled
"Single Wafer Processor with a Frame," and U.S. Patent No. 5,377,708, issued
January 3, 1995, entitled "Multi-Station Semiconductor Processor with
Volatilization." Semitool seeks an injunction against the Company's manufacture
and sale of SABRE(TM) systems, and seeks damages for past infringement. Semitool
also seeks trebled damages for alleged willful infringement. Semitool also seeks
its attorneys' fees and COSTS, and interest on any judgement.
32
<PAGE> 33
NOVELLUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
The Company believes that there are meritorious defenses to Semitool's
allegations, including among other things, that the Company's operations
(including SABRE(TM) products and systems) do not infringe the Semitool Patents
and/or that the Semitool Patents are invalid and/or unenforceable. But the
resolution of intellectual property disputes is often fact intensive and, like
most other litigation matters, inherently uncertain. Although the Company
believes that the ultimate outcome of the dispute with Semitool will not have a
material adverse effect on the Company's business or results of operations
(taking into account the defenses available to the Company), there can be no
assurances that Semitool will not ultimately prevail in this dispute. If
Semitool were to prevail in this dispute, it could have a material adverse
effect on the Company's business or results of operations.
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 and Semitool, 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. See Note 12, Notes to
the Consolidated Financial Statements.
NOTE 8 COMMITMENTS
The Company leases its facilities under operating leases, that expire through
2002. As of December 31, 1998, the minimum annual rental commitments are as
follows (in thousands):
<TABLE>
<S> <C>
1999 $ 15,892
2000 14,840
2001 13,763
2002 226,416
2003 1,898
Beyond 40
--------
272,849
Less future sublease
income (80,174)
--------
$ 192,675
========
</TABLE>
Rent expense was approximately $12.8 million, $7.2 million, and $4.1 million for
the years ended December 31, 1998, 1997, and 1996, respectively, net of sublease
income of $2.1 million, $1.5 million and $0.6 million for the years ended
December 31, 1998, 1997, and 1996, respectively.
The Company has lease agreements on twelve properties and 6.4 acres of
undeveloped land. The agreements are for five years each with the option to
extend for an additional two years at an interest rate that approximates LIBOR.
At current interest rates, the annual lease payments total approximately $12.7
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 payable. The guaranteed residual amount under the lease
agreements is approximately $204.5 million. These leases contain certain
restrictive financial covenants. The Company was in compliance with these
covenants at December 31, 1998.
33
<PAGE> 34
NOVELLUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 16.2 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, 1998, approximately
869,000 shares were reserved for future issuance under the Employee Stock Option
Plans and options to purchase 1.7 million shares were exercisable at a weighted
average exercise price of $28.84.
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 (in
thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ---------- --------
<S> <C> <C> <C>
Net income (loss) as reported $ 52,828 $ (95,658) $ 94,029
Pro forma net income (loss) $ 38,196 $ (107,940) $ 86,791
Basic earnings (loss) per share as reported $ 1.55 $ (2.88) $ 2.92
Diluted earnings (loss) per share as reported $ 1.51 $ (2.88) $ 2.85
Pro forma basic earnings (loss) per share $ 1.12 $ (3.25) $ 2.70
Pro forma diluted earnings (loss) per share $ 1.09 $ (3.25) $ 2.63
</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 1998, 1997 and
1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Dividend yield None None None
Expected volatility 0.63 0.61 0.56
Risk free interest rate 5.14% 5.92% 5.98%
Expected lives 3.2 years 3.0 years 2.9 years
</TABLE>
The weighted average fair value of options granted during the year were $19.31,
$16.91 and $10.73 for 1998, 1997 and 1996, 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 effects on pro forma
disclosures of applying SFAS 123 are not likely to be representative of the
effects on pro forma disclosures of future years. Because SFAS 123 is applicable
only to options granted subsequent to December 31, 1995, the pro forma effect
will not be fully reflected until 1999. 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 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Dividend yield None None None
Expected volatility 0.74 0.51 0.60
Risk free interest rate 5.5% 5.5% 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
$12.51, $7.05 and $6.91 for 1998, 1997 and 1996, respectively.
34
<PAGE> 35
NOVELLUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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>
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
Additional authorization 1,100 -- --
Options granted (1,259) 1,259 $ 23.69 -- $49.25 $ 42.21
Options exercised -- (618) $ 22.88 -- $59.00 $ 20.53
Options canceled 405 (405) $ 16.00 -- $58.88 $ 33.36
--------------------------------------------------------------------
Balance at December 31, 1998 869 4,865 $ 8.63 -- $58.88 $ 33.36
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998 (share information in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------- -------------------------------
Options Weighted Options
Outstanding at Average Remaining Weighted Exercisable at Weighted
Range of December 31, Contractual Life Average December 31, Average
Exercise Prices 1998 (years) Exercise Price 1998 Exercise Price
- -------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$ 8.63 - $24.75 856 7.19 $20.32 358 $17.50
$24.91 - $27.88 895 6.86 $26.81 461 $26.33
$28.25 - $31.09 817 7.54 $30.07 424 $30.05
$32.13 - $37.13 821 8.64 $33.88 216 $33.50
$37.50 - $48.75 688 7.86 $42.00 235 $41.43
$49.25 - $58.88 788 9.80 $50.29 26 $57.26
- -------------------------------------------------------------------- -------------------------------
$ 8.63 - $58.88 4,865 7.95 $33.36 1,720 $28.84
- -------------------------------------------------------------------- -------------------------------
</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 April 1998, the Board of Directors approved an amendment
to the Purchase Plan increasing the number of shares available for issuance
thereunder from 700,000 shares to 950,000 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 168,000, 145,000, and 128,000 shares
issued under the two plans in 1998, 1997, and 1996, respectively. At December
31, 1998, approximately 185,000 shares were reserved for future issuance under
the Employee Stock Purchase Plan.
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. During 1998, the
Company repurchased 9,000 shares under the program, and had purchased a total of
1,577,000 shares as of December 31, 1998.
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 $5.5 million, $8.0
million, and $10.2 million in 1998, 1997, and 1996, respectively.
35
<PAGE> 36
NOVELLUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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>
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
State
Current $ 1,794 $ -- $ 6,145
Deferred 452 (5,248) 222
---------------------------------------
2,246 (5,248) 6,367
Federal
Current 4,715 3,376 38,701
Deferred 13,175 (31,978) 1,545
---------------------------------------
17,890 (28,602) 40,246
Foreign
Current 2,355 751 984
Income tax benefits attributable to employee stock plan
activity allocated to shareholders' equity 4,728 7,624 3,034
---------------------------------------
Total provision (benefit) for income taxes $ 27,219 ($25,475) $50,631
=======================================
</TABLE>
Pre-tax income (loss) from foreign operations was $4.4 million, $2.2 million,
and $(2.1) million in 1998, 1997 and 1996, 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>
1998 1997
--------------------------
<S> <C> <C>
Deferred tax assets:
Financial valuation accounts $ 4,525 $ 5,377
Expenses not currently deductible 18,741 26,774
Other 8,369 7,173
Capitalized In-Process R&D 34,575 39,606
--------------------------
Subtotal 66,210 78,930
Valuation allowance (16,924) (20,024)
--------------------------
Total deferred tax assets 49,286 58,906
--------------------------
Deferred tax liabilities:
Fixed assets (11,175) (7,167)
--------------------------
Total net deferred tax assets $ 38,111 $ 51,739
==========================
</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>
1998 1997 1996
----------------------------------------
<S> <C> <C> <C> <C>
Expected provision (benefit) at 35% $ 28,016 $(42,397) $ 50,631
State taxes, net of federal benefit 1,460 (2,924) 4,200
Research and development credits (1,530) (665) (500)
Foreign sales corporation benefit (430) (365) (4,300)
Unbenefitted in-process R&D -- 19,477 --
Valuation allowance increase/(decrease) (3,100) -- --
Other 2,803 1,399 600
----------------------------------------
$ 27,219 $(25,475) $ 50,631
========================================
</TABLE>
36
<PAGE> 37
NOVELLUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 11 GEOGRAPHIC INFORMATION REPORTING AND MAJOR CUSTOMERS
The Company operates in one segment as it manufactures, markets and services
advanced automated wafer fabrication systems for the deposition of thin films
within the semiconductor equipment market. The Company is a supplier of high
productivity deposition systems used in the fabrication of integrated circuits.
All products and services are marketed within the geographic regions in which
the Company operates. The Company's current product offerings qualify for
aggregation under SFAS 131 as its products are manufactured and distributed in
the same manner, have similar long-term gross margins and are sold to the same
customer base.
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>
1998
Sales to unaffiliated customers $ 468,204 $ 2,063 $ 48,511 $ -- $ 518,778
Transfers between geographic locations 12,301 5,962 11,137 (29,400) --
---------------------------------------------------------------
Total net sales $ 480,505 $ 8,025 $ 59,648 $ (29,400) $ 518,778
Operating income (loss) $ 78,598 $ (971) $ 6,770 $ -- $ 84,397
===============================================================
Long-lived assets $ 107,629 $ 232 $ 8,503 $ -- $ 116,364
All other identifiable assets 383,210 2,162 50,203 -- 435,575
===============================================================
Total assets $ 490,839 $ 2,394 $ 58,706 $ -- $ 551,939
===============================================================
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)
===============================================================
Long-lived assets $ 96,471 $ 184 $ 9,360 $ -- $ 106,015
All other identifiable assets 333,099 5,798 48,388 -- 387,285
===============================================================
Total 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
========= ======= ======== ========== =========
Long-lived assets $ 59,100 $ 121 $ 9,009 $ -- $ 68,230
All other identifiable assets 348,372 1,380 41,805 -- 391,557
========= ======= ======== ========== =========
Total assets $ 407,472 $ 1,501 $ 50,814 $ -- $ 459,787
========= ======= ======== ========== =========
</TABLE>
Revenue in each geographic area is recognized upon shipment from the locations
within a designated geographic region. Transfers and commission arrangements
between geographic areas are at prices sufficient to recover a reasonable
profit. No customers exceeded 10% of net sales in 1998 or 1997. In 1996, sales
to one customer (a distributor) was approximately 12% of net sales. Export sales
were 51% of net sales in 1998, 47% of net sales in 1997, and 64% of net sales in
1996.
NOTE 12 RELATED PARTY TRANSACTIONS
At December 31, 1998 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.
During 1997 and 1996, the President of Submicron Technology, Inc. (Submicron),
which was one of the Company's customers, was 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 transactions with Submicron in 1998.
Trade receivables from Submicron at December 31, 1996 were $10.2 million.
37
<PAGE> 38
NOVELLUS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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).
NOTE 13 QUARTERLY FINANCIAL INFORMATION (UNAUDITED--IN THOUSANDS,
EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 QUARTER ENDED MAR 28 JUNE 27 SEPT 26 DEC 31
---------- --------- -------- --------
<S> <C> <C> <C> <C>
Net sales $163,214 $ 142,844 $106,704 $106,016
Gross profit $ 89,931 $ 78,566 $ 56,082 $ 56,286
Gross profit as a % of sales 55% 55% 53% 53%
Operating income $ 31,711 $ 24,031 $ 11,212 $ 11,994
Net income $ 20,950 $ 16,115 $ 7,623 $ 8,140
Basic earnings per share(2) $ 0.62 $ 0.47 $ 0.22 $ 0.24
Diluted earnings per share(2) $ 0.60 $ 0.46 $ 0.22 $ 0.23
Shares used in basic per share calculations(2) 33,816 33,932 34,095 34,298
Shares used in diluted per share calculations(2) 34,857 35,047 34,659 35,384
1997 QUARTER ENDED MAR 29 JUNE 28 SEPT 27 DEC 31
---------- --------- -------- --------
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) $ 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 35,276 34,984
</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.
NOTE 14 SUBSEQUENT EVENT (UNAUDITED)
On February 24, 1999, the Company sold 3,860,000 shares of Common Stock at
$67.50 per share. The Company granted the underwriter a 30-day option to
purchase up to an additional 579,000 shares of common stock to cover
overallotments, if any. The net proceeds to the Company, not including the
overallotment option totaled approximately $255.3 million.
38
<PAGE> 39
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, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, 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 18, 1999
39
<PAGE> 40
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 1999 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 1999 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 1999 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 1999 Annual Meeting of Shareholders and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) The following documents are filed as part of this Report:
(1) Financial Statements and Report of Ernst & Young LLP, Independent Auditors
Consolidated Statements of Operations - Years Ended December 31, 1998, 1997 and 1996 23
Consolidated Balance Sheets at December 31, 1998 and 1997 24
Consolidated Statements of Cash Flows - Years Ended December 31, 1998, 1997 and 1996 25
Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1998, 1997 and 1996 26
Notes to Consolidated Financial Statements 27
Report of Ernst & Young LLP, Independent Auditors 39
(2) Financial Statement Schedules
The following financial statement schedule is included herein:
Schedule II - Valuation and Qualifying Accounts 43
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>
40
<PAGE> 41
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 Form of Bylaws of Registrant as amended
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.
10.6(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 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.
41
<PAGE> 42
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, 1996
Allowance for Doubtful Accounts $2,196 $ 581 $ -- $2,777
Year Ended December 31, 1997
Allowance for Doubtful Accounts 2,777 16,370 15,600(1) 3,547
Year Ended December 31, 1998
Allowance for Doubtful Accounts $3,547 $ 452 $ 864 $3,135
</TABLE>
(1) $15.6 million write-off of the outstanding account from Submicron, total
charge $17.7 million, see Note 7, Notes to the Consolidated Financial
Statements
43
<PAGE> 43
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,
PRINCIPAL FINANCIAL OFFICER AND SECRETARY
By: /s/J. Michael Dodson
--------------------------
J. Michael Dodson
VICE PRESIDENT AND CORPORATE CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
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 Chairman of the Board of Directors March 5, 1999
- ------------------------------- President and Chief Executive Officer
Richard S. Hill
/s/Robert H. Smith Executive Vice President, Finance and Administration, March 5, 1999
- ------------------------------- Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
Robert H. Smith
/s/D. James Guzy Director March 5, 1999
- -------------------------------
D. James Guzy
/s/Tom Long Director March 5, 1999
- -------------------------------
Tom Long
/s/Glen Possley Director March 5, 1999
- -------------------------------
Glen Possley
/s/J. David Lister Director March 5, 1999
- -------------------------------
J. David Lister
/s/William R. Spivey Director March 5, 1999
- -------------------------------
William R. Spivey
</TABLE>
44
<PAGE> 44
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
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 Form of Bylaws of Registrant as amended
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.
10.6(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 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.
<PAGE> 45
10.19.1 Seki Technotron Corporation Termination Agreement dated July
22, 1998
*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
*10.27 Employment Agreement dated October 1, 1998 between Registrant
and Richard S. Hill
22.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 39)
27.1 Financial Data Schedule
- ---------------
(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.
(b) Report on Form 8-K, filed by the Company on February 26, 1999, with
respect to the underwriting agreement between the Company and Hambrecht
& Quist, LLC relating to the public offering by the Company of 3,860,000
shares of its Common Stock (plus an underwriters over-allotment option
of up to 579,000 additional shares).
* Management contracts or compensatory plans or arrangements.
<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
AMENDED AND RESTATED
BYLAWS
OF
NOVELLUS SYSTEMS, INC.
(a California corporation)
ARTICLE I
OFFICES
Section 1.1. Principal Office. The principal office for the
transaction of the business of the corporation shall be located at 4000 North
First, San Jose, California 95134. The Board of Directors is hereby granted full
power and authority to change said principal office to another location within
or without the State of California.
Section 1.2. Other Offices. One or more branch or other subordinate
offices may at any time be fixed and located by the Board of Directors at such
place or places within or without the State of California as it deems
appropriate.
ARTICLE II
DIRECTORS
Section 2.1. Exercise of Corporate Powers. Except as otherwise
provided by the Articles of Incorporation of the corporation or by the laws of
the State of California now or hereafter in force, the business and affairs of
the corporation shall be managed and all corporate powers shall be exercised by
or under the direction of the Board of Directors. The Board may delegate the
management of the day-to-day operation of the business of the corporation as
permitted by law provided that the business and affairs of the corporation shall
be managed and all corporate powers shall be exercised under the ultimate
direction of the Board.
Section 2.2. Number. The number of directors of the corporation
shall not be less than six (6) nor more than eleven (11) 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.
Section 2.3. Need Not Be Shareholders. The directors of the
corporation need not be shareholders of the corporation.
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Section 2.4. Compensation. Directors shall receive such
compensation for their services as directors and such reimbursement for their
expenses of attendance at meetings as may be determined from time to time by
resolution of the Board, Nothing herein contained shall be construed to preclude
any director from serving the corporation in any other capacity and receiving
compensation therefor.
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.
Section 2.6. Vacancies. A vacancy or vacancies in the Board of
Directors shall exist when any authorized position of director is not then
filled by a duly elected director, whether caused by death, resignation,
removal, change in the authorized number of directors (by the Board or the
shareholders) or otherwise. The Board of Directors may declare vacant the office
of a director who has been declared of unsound mind by an order of court or
convicted of a felony. A vacancy created by the removal of a director may be
filled only by the approval of the shareholders. Except for a vacancy created by
the removal of a director, vacancies on the Board may be filled by a majority of
the directors then in office, whether or not less than a quorum, or by a sole
remaining director. The shareholders may elect a director at any time to fill
any vacancy not filled by the directors, but any such election by written
consent other than to fill a vacancy created by removal requires the consent of
a majority of the outstanding shares entitled to vote. Any director may resign
effective upon giving written notice to the Chairman of the Board, the
President, the Secretary, or the Board of Directors of the corporation, unless
the notice specifies a later time for the effectiveness of such resignation. If
the resignation is effective at a future time, a successor may be elected to
take office when the resignation becomes effective.
Section 2.7. Removal.
2.7.1. General Rule. Any and all of the directors may be
removed without cause if such removal is approved by the affirmative vote of a
majority of the outstanding shares entitled to vote at an election of directors,
except as set forth in subsections 2.7.2 and 2.7.3.
2.7.2. Supermajority Vote Required, No director may be
removed (unless the entire Board is removed) when the votes cast against
removal, or not consenting in writing to such removal, would be sufficient to
elect such director if voted cumulatively at an election at which the same total
number of votes were cast (or, if such action is taken by written consent, all
shares entitled to vote were voted) and the entire number of directors
authorized at the time of the director's most recent election were then being
elected;
2.7.3. Class Vote. When by the provisions of the Articles
the holders of the shares of any class or series, voting as a class or series,
are entitled to elect one or more directors, any director so elected may be
removed only by the applicable vote of the holders of the shares of that class
or series.
2.7.4. Effect of Reduction of Size of Board. Any reduction
of the authorized number of directors does not remove any director prior to the
expiration of such director's term of office.
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<PAGE> 3
Section 2.8. Meetings of Directors.
2.8.1. Place of Meetings. Unless otherwise specified in
the notice thereof, meetings (whether regular, special or adjourned) of the
Board of Directors of the corporation shall be held at the principal office of
the corporation for the transaction of business, as specified in accordance with
Section 1.1 hereof, which is hereby designated as an office for such purpose in
accordance with the laws of the State of California, or at any other place
within or without the State which has been designated from time to time by
resolution of the Board or by written consent of all members of the Board.
2.8.2. Regular Meetings. Regular meetings of the Board of
Directors, of which no notice need be given except as required by the laws of
the State of California, shall be held after the adjournment of each annual
meeting of the shareholders (which meeting shall be designated the Regular
Annual Meeting) and at such other times as may be designated from time to time
by resolution of the Board of Directors, Such regular meetings shall be held at
the principal office of the corporation for the transaction of business as
specified in accordance with Section 1.1 hereof or at any other place within or
without the State of California which has been designated from time to time by
resolution of the Board or by written consent of all members of the Board,
unless notice of the place thereof be given in the same manner as for special
meetings.
2.8.3. Special Meetings. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board, the President,
any Vice President, the Secretary, or any two or more of the directors.
2.8.4. Notice of Meetings. Except in the case of regular
meetings, notice of which has been dispensed with, all meetings of the Board of
Directors shall be held upon four (4) days' notice by mail or forty-eight (48)
hours' notice delivered personally or by telephone, telegraph, or other
electronic or wireless means. If the address of a director is not shown on the
records and is not readily ascertainable, notice shall be addressed to him at
the city or place in which the meetings of the directors are regularly held.
Except as set forth in subsection 2.8.6 below, notice of the time and place of
holding an adjourned meeting need not be given to absent directors if the time
and place be fixed at the meeting adjourned.
2.8.5. Quorum. A majority of the authorized number of
directors constitutes a quorum of the Board for the transaction of business.
Every act or decision done or made by a majority of the directors present at a
meeting duly held at which a quorum is present shall be regarded as the act of
the Board of Directors except as otherwise provided by law. A meeting at which a
quorum is initially present may continue to transact business notwithstanding
the withdrawal of directors, if any action taken is approved by at least a
majority of the required quorum for such meeting.
2.8.6. Adjourned Meetings. A majority of the directors
present, whether or not a quorum is present, may adjourn any meeting to another
time and place. If the meeting is adjourned for more than 24 hours, notice of
any adjournment to another time or place shall be given prior to the time of the
adjourned meeting to the directors who were not present at the time of the
adjournment.
3
<PAGE> 4
2.8.7. Waiver of Notice and Consent. Notice of a meeting
need not be given to any director who signs a waiver of notice or a consent to
holding the meeting or an approval of the minutes thereof, whether before or
after the meeting, or who attends the meeting without protesting, prior thereto
or at its commencement, the lack of notice to such director. All such waivers,
consents, and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
2.8.8. Action Without a Meeting. Any action required or
permitted to be taken by the Board may be taken without a meeting, if all
members of the Board shall individually or collectively consent in writing to
such action. Such written consent or consents shall be filed with the minutes of
the proceedings of the Board. Such action by written consent shall have the same
force and effect as a unanimous vote of such directors.
2.8.9. Conference Telephone Meetings. Members of the Board
may participate in a meeting through use of conference telephone or similar
communications equipment, so long as all members participating in such meeting
can hear one another. Participation in a meeting pursuant to this Section
constitutes presence in person at such meeting.
2.8.10.Meetings of Committees. The provisions of this
Section apply also to committees of the Board and action by such committees,
with such changes in points of detail as may be necessary,
ARTICLE III
OFFICERS
Section 3.1. Election and Qualifications. The officers of the
corporation shall consist of a President, one or more Vice Presidents, a
Secretary, and a Chief Financial Officer who shall be chosen by the Board of
Directors and such other officers, including a Chairman of the Board, as the
Board of Directors shall deem expedient, who shall be chosen in such manner and
hold their offices for such terms as the Board of Directors may prescribe. Any
two or more of such offices may be held by the same person. Any Vice President,
Assistant Treasurer, or Assistant Secretary may exercise any of the powers of
the President, the Chief Financial Officer, or the Secretary, respectively, as
directed by the Board of Directors, and shall perform such other duties as are
imposed upon such officer by the Bylaws or the Board of Directors.
Section 3.2. Term of Office and Compensation. The term of office
and salary of each of said officers and the manner and time of the payment of
such salaries shall be fixed and determined by the Board of Directors and may be
altered by said Board from time to time at its pleasure, subject to the rights,
if any, of said officers under any contract of employment.
Section 3.3. Removal and Vacancies. Any officer of the corporation
may be removed at the pleasure of the Board of Directors at any meeting or at
the pleasure of any officer who may be granted such power by a resolution of the
Board of Directors. Any officer may resign at any time upon written notice to
the corporation without prejudice to the rights, if any, of the corporation
under any contract to which the officer is a party. If any vacancy occurs in any
office of the corporation, the Board of Directors may elect a successor to fill
such vacancy for the remainder of the unexpired term and until a successor is
duly chosen and qualified.
4
<PAGE> 5
ARTICLE IV
CHAIRMAN OF THE BOARD
The Chairman of the Board of Directors, if there be one, shall have
the power to preside at all meetings of the Board of Directors, and to call
meetings of the shareholders and of the Board of Directors to be held within the
limitations prescribed by law or by these Bylaws, at such times and at such
places as the Chairman of the Board shall deem proper. The Chairman of the Board
shall have such other powers and shall be subject to such other duties as the
Board of Directors may from time to time prescribe.
ARTICLE V
PRESIDENT
Section 5.1. Powers and Duties. The powers and duties of the
President are:
(a) To act as the chief executive officer of the corporation and,
subject to the control of the Board of Directors, to have general supervision,
direction, and control of the business and affairs of the corporation.
(b) To preside at all meetings of the shareholders and, in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board of Directors.
(c) To call meetings of the shareholders and also of the Board of
Directors to be held, subject to the limitations prescribed by law or by these
Bylaws, at such times and at such places as the President shall deem proper,
(d) Subject to the direction of the Board of Directors, to have
general charge of the property of the corporation and to supervise and control
all officers, agents, and employees of the corporation.
Section 5.2. President Pro Tem. If neither the Chairman of the
Board, the President, nor any Vice President is present at any meeting of the
Board of Directors, a President pro tem may be chosen to preside and act at such
meeting. If neither the President nor any Vice President is present at any
meeting of the shareholders, a President pro tem may be chosen to preside at
such meeting.
ARTICLE VI
VICE PRESIDENT
In case of the absence, disability, or death of the President, the
Vice President, or one of the Vice Presidents, shall exercise all the powers and
perform all the duties of the President. If there is more than one Vice
President, the order in which the Vice Presidents shall succeed to the powers
and duties of the President shall be fixed by the Board of Directors. The Vice
President or Vice Presidents shall have such other powers and perform such other
duties as may be granted or prescribed by the Board of Directors.
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<PAGE> 6
ARTICLE VII
SECRETARY
The powers and duties of the Secretary are:
(a) To keep a book of minutes at the principal office of the
corporation, or such other place as the Board of Directors may order, of all
meetings of its directors and shareholders with the time and place of holding,
whether regular or special, and, if special, how authorized, the notice
thereof given, the names of those present at directors' meetings, the number of
shares present or represented at shareholders' meetings, and the proceedings
thereof.
(b) To keep the seal of the corporation and to affix the same to
all instruments which may require it.
(c) To keep or cause to be kept at the principal office of the
corporation, or at the office of the transfer agent or agents, a share register,
or duplicate share registers, showing the names of the shareholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for shares, and the number and date of cancellation of every
certificate surrendered for cancellation.
(d) To keep a supply of certificates for shares of the corporation,
to fill in all certificates issued, and to make a proper record of each such
issuance; provided, that so long as the corporation shall have one or more duly
appointed and acting transfer agent of the shares, or any class or series of
shares, of the corporation, such duties with respect to such shares shall be
performed by such transfer agent or transfer agents,
(e) To transfer upon the share books of the corporation any and all
shares of the corporation; provided, that so long as the corporation shall have
one or more duly appointed and acting transfer agent of the shares, or any class
or series of shares, of the corporation, such duties with respect to such shares
shall be performed by such transfer agent or transfer agents, and the method of
transfer of each certificate shall be subject to the reasonable regulations of
the transfer agent to which the certificate is presented for transfer, and also,
if the corporation then has one or more duly appointed and acting registrars, to
the reasonable regulations of the registrar to which the new certificate is
presented for registration; and provided, further, that no certificate for
shares of stock shall be issued or delivered or, if issued or delivered, shall
have any validity whatsoever until and unless it has been signed or
authenticated in the manner provided in Section 11.2 hereof.
(f) To make service and publication of all notices that may be
necessary or proper, and without command or direction from anyone. In case of
the absence, disability, refusal, or neglect of the Secretary to make service or
publication of any notices, then such notices may be served and/or published by
the President, a Vice President, any person
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<PAGE> 7
thereunto authorized by either of them, the Board of Directors, or the holders
of a majority of the outstanding shares of the corporation.
(g) Generally to do and perform all such duties as pertain to the
office of Secretary and as may be required by the Board of Directors,
ARTICLE VIII
CHIEF FINANCIAL OFFICER
The powers and duties of the Chief Financial Officer are:
(a) To supervise and control the keeping and maintaining of
adequate and correct accounts of the corporation's properties and business
transactions, including accounts of its assets, liabilities, receipts,
disbursements, gains,, losses, capital, retained earnings, and shares. The books
of account shall at all reasonable times be open to inspection by any director,
(b) To have the custody of all funds, securities evidences of
indebtedness, and other valuable documents of the corporation, and, at the Chief
Financial Officer's discretion, to cause any or all thereof to be deposited for
the account of the corporation with such depositary as may be designated from
time to time by the Board of Directors,
(c) To receive or cause to be received, and to give or cause to be
given, receipts and acquittances for moneys paid in for the account of the
corporation.
(d) To disburse, or cause to be disbursed, all funds of the
corporation as may be directed by the Board of Directors, taking proper vouchers
for such disbursements.
(e) To render to the President and the Board of Directors, whenever
they may require, accounts of all transactions and of the financial condition of
the corporation.
(f) Generally to do and perform all such duties as pertain to the
office of Chief Financial Officer and as may be required by the Board of
Directors,
ARTICLE IX
COMMITTEES OF THE BOARD
Section 9.1. Appointment and Procedure. The Board of Directors may,
by resolution adopted by a majority of the authorized number of directors,
designate one or more committees, each consisting of at least two or more
directors, to serve at the pleasure of the Board. The Board may designate one or
more directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of a committee requires the vote of a majority of the authorized number
of directors.
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<PAGE> 8
Section 9.2. Powers. Any committee appointed by the Board of
Directors, to the extent provided in the resolution of the Board or in these
Bylaws, shall have all the authority of the Board except with respect to:
(a) the approval of any action which requires the approval or vote
of the shareholders;
(b) the filling of vacancies on the Board or on any committee;
(c) the fixing of compensation of the directors for serving on the
Board or on any committee;
(d) the amendment or repeal of Bylaws or the adoption of new
Bylaws;
(e) the amendment or repeal of any resolution of the Board which by
its express terms is not so amendable or repealable;
(f) a distribution as defined at Section 166 of the California
Corporations Code, except at a rate or in a periodic amount or within a price
range set forth in the Articles of Incorporation or determined by the Board;
(g) the appointment of other committees of the Board or the members
thereof.
Section 9.3. Executive Committee. In the event that the Board of
Directors appoints an Executive Committee, such Executive Committee, in all
cases in which specific directions to the contrary shall not have been given by
the Board of Directors, shall have and may exercise, during the intervals
between the meetings of the Board of Directors, all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation (except as provided in Section 9.2 hereof) in such manner as the
Executive Committee may deem best for the interests of the corporation.
ARTICLE X
MEETINGS OF SHAREHOLDERS
Section 10.1. Place of Meetings. Meetings (whether regular,
special, or adjourned) of shareholders of the corporation shall be held at the
principal office for the transaction of business as specified in accordance with
Section 1.1 hereof, or any place within or without the State which may be
designated by written consent of all the shareholders entitled to vote thereat,
or which may be designated by the Board of Directors.
Section 10.2. Time of Annual Meetings. The annual meeting of the
shareholders shall be held at the hour of 10:00 o'clock in the morning on the
last day in March in each year, if not a legal holiday, and if a legal holiday,
then on the next succeeding business day not a legal holiday, or such other time
or date within fifteen months of the date of incorporation or the date of the
last annual meeting of shareholders (whichever is later) as may be set by the
Board of Directors.
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<PAGE> 9
Section 10.3. Special Meetings. Special meetings of the
shareholders may be called by the Board of Directors, the Chairman of the Board,
the President, or the holders of shares entitled to cast not less than 10% of
the vote at the meeting.
Section 10.4. Notice of Meetings. Whenever shareholders are
required or permitted to take any action at a meeting, a written notice of the
meeting shall be given not less than 10 (or, if sent by third-class mail, 30)
nor more than 60 days before the day of the meeting to each shareholder entitled
to vote thereat. Such notice shall state the place, date, and hour of the
meeting and (a) in the case of a special meeting, the general nature of the
business to be transacted, and no other business may be transacted, or (b) in
the case of the annual meeting, those matters which the Board, at the time of
the mailing of the notice, intends to present for action by the shareholders.
The notice of any meeting at which directors are to be elected shall include the
names of nominees intended at the time of the notice to be presented by the
Board of Directors for election.
Subject to the provisions of Section 10.8 hereof any matter
properly brought before an annual meeting may be presented at the meeting for
such action. To be properly brought before an annual meeting, business must be
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, otherwise properly brought before the
meeting by or at the direction of the Board of Directors or otherwise properly
brought before the meeting by a shareholder. In addition to any other applicable
requirements, for business to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the secretary of the corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation, not less than 45 days nor more than 75 days prior to the date on
which the corporation first mailed its proxy materials for the previous year's
annual meeting of shareholders (or the date on which the corporation mails its
proxy materials for the current year if during the prior year the corporation
did not hold an annual meeting or if the date of the annual meeting was changed
more than 30 days from the prior year). A shareholder's notice to the secretary
shall set forth as to each matter the shareholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of the shareholder proposing
such business, (iii) the class and number of shares of the corporation which are
beneficially owned by the shareholder, and (iv) any material interest of the
shareholder in such business.
Notwithstanding anything in the Bylaws to the contrary, no business
shall be conducted at the annual meeting except in accordance with the
procedures set forth in this Section 10.4, provided, however, that nothing in
this Section 10.4 shall be deemed to preclude discussion by any shareholder of
any business properly brought before the annual meeting in accordance with said
procedure.
The chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 10.4, and
if he should so determine he shall so declare to the meeting, and any such
business not properly brought before the meeting shall not be transacted.
Nothing in this Section 10.4 shall affect the right of a
shareholder to request inclusion of a proposal in the corporation's proxy
statement to the extent that such right is provided by an applicable rule of the
Securities and Exchange Commission.
Section 10.5. Delivery of Notice. Notice of a shareholders' meeting
or the furnishing of any report shall be given either personally or by
first-class mail, or, if the corporation has outstanding
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shares held of record by 500 or more persons on the record date for the
shareholder's meeting, notice may be sent third-class mail, or other means of
written communication, addressed to the shareholder at the address of such
shareholder appearing on the books of the corporation or given by the
shareholder to the corporation for the purpose of notice; or if no such address
appears or is given, at the place where the principal executive office of the
corporation is located or by publication at least once in a newspaper of general
circulation in the county in which the principal executive office is located.
The notice or report shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by other means of written
communication. A verified statement of mailing of any notice or report in
accordance with the provisions of this Section, executed by the secretary,
assistant secretary, or any transfer agent, shall be prima facie evidence of the
giving of the notice or report, If any notice or report addressed to the
shareholders at the address of such shareholder appearing on the books of the
corporation is returned to the corporation by United States Postal Service
marked to indicate that the United States Postal Service is unable to deliver
the notice or report to the shareholder at such address, all future notices or
reports shall be deemed to have been duly given without further mailing if the
same shall be available for the shareholder upon written demand of the
shareholder at the principal executive office of the corporation for a period of
one year from the date of the giving of the notice to all other shareholders.
Section 10.6. Adjourned Meetings. When a shareholders' meeting is
adjourned to another time or place, unless these Bylaws otherwise require,
notice need not be given of the adjourned meeting if the time and place thereof
is announced at the meeting at which the adjournment is taken. At the adjourned
meeting the corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than 45 days
or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each shareholder of
record entitled to vote at the meeting,
Section 10.7. Consent to Shareholders' Meeting. The transactions of
any meeting shareholders, however called and noticed, and wherever held, are as
valid as though had at a meeting duly held after regular call and notice, if a
quorum is present either in person or by proxy, and if, either before or after
the meeting, each of the persons entitled to vote not present in person or by
proxy signs a written waiver of notice or consent to the holding of the meeting
or an approval of the minutes thereof. All such waivers, consents, and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by the California
General Corporation Law to be included in the notice but not so included in the
notice if such objection is expressly made at the meeting, Neither the business
to be transacted at nor the purpose of any regular or special meeting of
shareholders need be specified in any written notice, consent to the holding of
the meeting or approval of the minutes thereof, unless otherwise provided in the
Articles of Incorporation or Bylaws, except as provided in Section 10.8.
Section 10.8. Notice of Business to be Transacted in Certain Cases.
Any shareholder approval at a meeting, other than unanimous approval by those
entitled to vote, on any of the matters listed below shall be valid only if the
general nature of the proposal so approved was stated in the notice of meeting
or in any written waiver of notice:
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(a) a proposal to approve a contract or other transaction
between a corporation and one or more of its directors, or between a corporation
and any corporation, firm, or association in which one or more director has a
material financial interest;
(b) a proposal to amend the Articles of Incorporation;
(c) a proposal regarding a reorganization, mergers or
consolidation involving the corporation;
(d) a proposal to wind up and dissolve the corporation;
(e) a proposal to adopt a plan of distribution of the
shares, obligations, or securities of any other corporation, domestic or
foreign, or assets other than money which is not in accordance with the
liquidation rights of any preferred shares as specified in the Articles of
Incorporation.
Section 10.9. Quorum; Vote Required.
10.9.1. Quorum Required. The presence in person or by
proxy of the persons entitled to vote a majority of the voting shares at any
meeting shall constitute a quorum for the transaction of business. If a quorum
is present, the affirmative vote of a majority of the shares represented and
voting at a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute at least a majority of the required quorum) shall
be the act of the shareholders, unless the vote of a greater number or voting by
classes is required by law, the Articles of Incorporation, or these Bylaws, and
except as provided in subsection 10.9.2.
10.9.2. Continuation of Business Despite Lack of Quorum.
The shareholders present at a duly called or held meeting at which a quorum is
present may continue to transact business until adjournment notwithstanding the
withdrawal of the number of enough shareholders to leave less than a quorum, if
any action taken (other than adjournment) is approved by at least a majority of
the shares required to constitute a quorum.
10.9.3. No Votes Without Quorum. In the absence of a
quorum, any meeting of shareholders may be adjourned from time to time by the
vote of a majority of the shares represented either in person or by proxy, but
no other business may be transacted, except as provided in subsection 10.9.2.
Section 10.10. Actions Without Meeting.
10.10.1. Majority Consent. Any action which may be taken
at any annual or special meeting of shareholders may be taken without a meeting
and without prior notices if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding shares having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted; provided that, subject to the provisions of Section 2.6, directors
may not be elected by written consent except by unanimous written consent of all
shares entitled to vote for the election of directors.
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10.10.2. Notice to Nonconsenting Shareholders. Unless the
consents of all shareholders entitled to vote have been solicited in writing,
(a) notice of any shareholder approval on matters
described in subsections (a), (c), or (e) of section 10.8 or respecting
indemnification of agents of the corporation without a meeting by less than
unanimous written consent shall be given at least ten (10) days before the
consummation of the action authorized by such approval, and
(b) prompt notice shall be given of the taking of any
other corporate action approved by shareholders without a meeting by less than
unanimous written consent, to those shareholders entitled to vote but who have
not consented in writing; the provisions of Section 10.5 shall apply to such
notice.
Section 10.11. Revocation of Consent. Any shareholder giving a
written consent, or the shareholder's proxy-holders, or a transferee of the
shares or a personal representative of the shareholder or their respective
proxy-holders, may revoke the consent by a writing received by the corporation
prior to the time that written consents of the number of shares required to
authorize the proposed action have been filed with the secretary of the
corporation, but may not do so thereafter. Such revocation is effective upon its
receipt by the secretary of the corporation.
Section 10.12. Voting Rights. Except as provided in Section 10.14,
in the Articles of Incorporation, or in any statute relating to the election of
directors or to other particular matters, each outstanding share, regardless of
class, shall be entitled to one vote on each matter submitted to a vote of
shareholders. Any holder of shares entitled to vote on any matter may vote part
of the shares in favor of the proposal and refrain from voting the remaining
shares or vote them against the proposal, other than elections to office, but,
if the shareholder fails to specify the number of shares such shareholder is
voting affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to all shares such shareholder is entitled to
vote.
Section 10.13. Determination of Holders of Record.
10.13.1. Record Date. In order that the corporation may
determine the shareholders entitled to notice of any meeting, to vote, to
receive payment of any dividend or other distribution or allotment of any
rights, or to exercise any rights in respect of any other lawful action, the
Board of Directors may fix, in advance, a record date, which shall not be more
than 60 nor less than 10 days prior to the date of such meeting nor more than 60
days prior to any other action.
10.13.2. Absence of Determination By Board. In the absence
of any record date set by the Board of Directors pursuant to subsection 10.13.1
above, then:
(a) The record date for determining shareholders entitled
to notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held,
(b) The record date for determining shareholders entitled
to give consent to corporate action in writing without a meeting, when no prior
action by the Board has been taken, shall be the day on which the first written
consent is given.
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(c) The record date for determining share holders for any
other purpose shall be at the close of business on the day on which the Board
adopts the resolution relating thereto, or the 60th day prior to the date of
such other action, whichever is later.
10.13.3. Adjournments. A determination of shareholders of
record entitled to notice of or to a vote at a meeting of shareholders shall
apply to any adjournment of the meeting unless the Board fixes a new record date
for the adjourned meeting, but the Board shall fix a new record date if the
meeting is adjourned for more than 45 days from the date set for the original
meeting.
10.13.4. Effect of Post Record Date Transfers.
Shareholders at the close of business on the record date are entitled to notice
and to vote or to receive the dividend, distribution, or allotment of rights or
to exercise the rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date, except as
otherwise provided in the Articles, these Bylaws, agreement, or applicable law.
Section 10.14. Elections for Directors.
10.14.0 Right to Cumulate. Every shareholder complying
with subsection 10.14.2 and normally entitled to vote at any election of
directors may cumulate such shareholder's votes and give one candidate a number
of votes equal to the number of directors to be elected multiplied by the number
of votes to which the shareholder's shares are entitled, or distribute the
shareholder's votes on the same principle among as many candidates as the
shareholder thinks fit.
10.14.2. Procedure for Cumulating Votes, No shareholder
shall be entitled to cumulate votes (i.e., cast for any candidate a number of
votes greater than the number of the votes which such shareholder normally is
entitled to cast) unless such candidate or candidates' names have been placed in
nomination prior to the voting and the shareholder has given written notice to
the chairman of the meeting at the meeting prior to the voting of the
shareholder's intention to cumulate the shareholder's votes. If any one
shareholder has given such notice, all shareholders may cumulate their votes for
candidates in nomination.
10.14.3. Directors Elected. In any election of directors,
the candidates receiving the highest number of affirmative votes of the shares
entitled to be voted for them up to the number of directors to elected by such
shares are elected; votes against directors and votes withheld shall have no
effect.
10.14.4. Ballot Optional. Elections for directors need not
be by ballot unless a shareholder demands election by ballot at the meeting and
before the voting begins.
Section 10.15. Proxies.
10.15.1. Proxies Authorized. Every person entitled to vote
shares may authorize another person or persons to act by proxy with respect to
such shares, Any proxy purporting to be executed in accordance with the
provisions of the General Corporation Law of the State of California shall be
presumptively valid.
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10.15.2. Term of Proxy. No proxy shall be valid after the
expiration of 11 months from the date thereof unless otherwise provided in the
proxy. Every proxy continues in full force and effect until revoked by the
person executing it prior to the vote pursuant thereto, except as otherwise
provided in this Section. Such revocation may be effected by a writing delivered
to the corporation stating that the proxy is revoked or by a subsequent proxy
executed by the person executing the prior proxy and presented to the meeting,
or as to any meeting by attendance at such meeting and voting in person by the
person executing the proxy. The dates contained on the forms of proxy
presumptively determine the order of execution, regardless of the postmark dates
on the envelopes in which they are mailed.
10.15.3. Death of Proxy Maker. A proxy is not revoked by
the death or incapacity of the maker unless, before the vote is counted, written
notice of such death or incapacity is received by the corporation.
Section 10.16. Inspectors of Election.
10.16.1. Appointment. In advance of any meeting of
shareholders, the Board may appoint inspectors of election to act at the meeting
and any adjournment thereof. If inspectors of election are not so appointed, or
if any persons so appointed fail to appear or refuse to act, the chairman of any
meeting of shareholders may, and on the request of any shareholder or a
shareholder's proxy shall, appoint inspectors of election (or persons to replace
those who so fail or refuse) at the meeting. The number of inspectors shall be
either one or three. If appointed at a meeting on the request of one or more
shareholders or proxies, the majority of shares represented in person or by
proxy shall determine whether one or three inspectors are to be appointed,
10.16.2. Duties. The inspectors of election shall
determine the number of shares outstanding and the voting power of each, the
shares represented at the meeting, the existence of a quorum, the authenticity,
validity, and effect of proxies, receive votes, ballots, or consents, hear and
determine all challenges and questions in any way arising in connection with the
right to vote, count, and tabulate all votes and consents, determine when the
polls shall close, determine the result, and do such acts as may be proper to
conduct the election or vote with fairness to all shareholders.
10.16.3. Good Faith; Acts. The inspectors of election
shall perform their duties impartially, in good faith, to the best of their
ability, and as expeditiously as is practical. If there are three inspectors of
election, the decision, act, or certificate of a majority is effective in all
respects as the decision, act, or certificate of all. Any report or certificate
made by the inspectors of election is prima facie evidence of the facts stated
therein.
ARTICLE XI
SUNDRY PROVISIONS
Section 11.1. Shares Held by the Corporation. Shares in other
corporations standing in the name of this corporation may be voted or
represented and all rights incident thereto may be exercised on behalf of this
corporation by the President or by any other officer of this corporation
authorized so to do by resolution of the Board of Directors.
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Section 11.2. Certificates of Stock. There shall be issued to each
holder of fully paid shares of the capital stock of the corporation a
certificate or certificates for such shares. Every holder of shares in the
corporation shall be entitled to have a certificate signed in the name of the
corporation by the Chairman or Vice Chairman of the Board, the President, or a
Vice President and by the Chief Financial Officer, an Assistant Treasurer, the
Secretary, or any Assistant Secretary, certifying the number of shares and the
class or series of shares owned by the shareholder. Any or all of the signatures
on the certificates may be facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if such person were an officer, transfer agent, or registrar at
the date of issue.
Section 11.3. Lost Certificates. The corporation may issue a new
share certificate or a new certificate for any other security in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen, or
destroyed, and the corporation may require the owner of the lost, stolen, or
destroyed certificate or the owner's legal representative to give the
corporation a bond (or other adequate security) sufficient to indemnify it
against any claim that may be made against it (including any expense or
liability) on account of the alleged loss, theft, or destruction of any such
certificate or the issuance of such new certificate. The Board of Directors may
adopt such other provisions and restrictions with reference to lost
certificates, not inconsistent with applicable law, as it shall in its
discretion deem appropriate.
Section 11.4. Certification and Inspection of Bylaws. The
corporation shall keep at its principal executive office in this state, or if
its principal executive office is not in this state at its principal business
office in this state, the original or a copy of these Bylaws as amended to date,
which shall be open to inspection by the shareholders at all reasonable times
during office hours. If the principal executive office of the corporation is
outside this state and the corporation has no principal business office in this
state, it shall upon the written request of any shareholder furnish to such
shareholder a copy of the Bylaws as amended to date.
Section 11.5. Notices. Any reference in these Bylaws to the time a
notice is given or sent means, unless otherwise expressly provided, the time a
written notice by mail is deposited in the United States mails, postage prepaid;
or the time any other written notice is personally delivered to the recipient or
is delivered to a common carrier for transmission, or actually transmitted by
the person giving the notice by electronic means, to the recipient; or the time
any oral notice is communicated, in person or by telephone or wireless, to the
recipient or to a person at the office of the recipient who the person giving
the notice has reason to believe will promptly communicate it to the recipient.
Section 11.6. Reports to Shareholders, Except as may otherwise be
required by law, the rendition of an annual report to the shareholders is waived
so long as there are less than 100 holders of record of the shares of the
corporation (determined as provided in Section 605 of the California General
Corporation Law), At such time or times, if any, that the corporation has 100 or
more holders of record of its shares, the Board of Directors shall cause an
annual report to be sent to the shareholders not later than 120 days after the
close of the fiscal year or within such shorter time period as may be required
by applicable law, and such annual report shall contain such information and be
accompanied by such other documents as may be required by applicable law,
Section 11.7. Indemnification of Directors, Officers, and
Employees.
11.7.1. "Agent." For the purposes of this Section, "agent"
means any person who is or was a director, officer, employee, or other agent of
the corporation, or is or was serving at the
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request of the corporation as a director, officer, employee, or agent of another
foreign or domestic corporation, partnership, joint venture, trust, or other
enterprise, or was a director, officer, employee, or agent of a foreign or
domestic corporation which was a predecessor corporation of the corporation, or
of another enterprise at the request of such predecessor corporation;
"proceeding" means any threatened, pending, or completed action or proceeding,
whether civil, criminal, administrative, or investigative; and "expenses"
includes without limitation attorneys' fees and any expenses of establishing a
right to indemnification under subsection 11.7.4 or paragraph (c) of subsection
11.7.5.
11.7.2. Indemnification For Third Party Claims. Subject to
the specific determination required by subsection 11.7.5, the corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any proceeding (other than an action by or in the right of the corporation to
procure a judgment in its favor) by reason of the fact that such person is or
was an agent of the corporation, against expenses, judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with such proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in the best interests of the corporation and,
in the case of a criminal proceeding, had no reasonable cause to believe the
conduct of such person was unlawful. The termination of any proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contenders or
its equivalent shall not, of itself, create a presumption that the person did
not act in good faith or in a manner which the person reasonably believed to be
in the best interests of the corporation or that the person had reasonable cause
to believe that the person's conduct was unlawful.
11.7.3. Indemnification For Claims By the Corporation.
Subject to the specific determination required by subsection 11.7.5, the
corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending, or completed action by or in the
right of the corporation to procure a judgment in its favor by reason of the
fact that such person is or was an agent of the corporation, against expenses
actually and reasonably incurred by such person in connection with the defense
or settlement of such action if such person acted in good faith, in a manner
such person believed to be in the best interests of the corporation, and with
such care, including reasonable inquiry, as an ordinarily prudent person in a
like position would use under similar circumstances. No indemnification shall be
made under this subsection 11.7.3:
(a) In respect of any claim, issue, or matter as to which
such person shall have been adjudged to be liable to the corporation in the
performance of such person's duty to the corporation, unless and only to the
extent that the court in which such proceeding is or was pending shall determine
upon application that, in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for the expenses which such court
shall determine;
(b) Of amounts paid in settling or otherwise disposing of
a threatened or pending action, with or without court approval; or
(c) Of expenses incurred in defending a threatened or
pending action which is settled or otherwise disposed of without court approval.
11.7.4. Indemnification For Successful Defense. To the
extent that an agent of a corporation has been successful on the merits in
defense of any proceeding referred to in subsection 11.7.2 or 11.7.3 or in
defense of any claim, issue, or matter therein, the agent shall be indemnified
against expenses actually and reasonably incurred by the agent in connection
therewith.
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11.7.5. Determination Required to Permit Indemnification.
Except as provided in subsection 11.7.4, any indemnification under this Section
shall be made by the corporation only if authorized in the specific case, upon a
determination that indemnification of the agent is proper in the circumstances
because the agent has met the applicable standard of conduct set forth in
subsection 11.7.2 or 11.7.3, by:
(a) A majority vote of a quorum consisting of directors
who are not parties to such proceeding;
(b) Approval of the shareholders, with the shares owned by
the person to be indemnified not being entitled to vote thereon; or
(c) The court in which such proceeding is or was pending
upon application made by the corporation or the agent or the attorney or other
person rendering services in connection with the defense, whether or not such
application by the agent, attorney, or other person is opposed by the
corporation.
11.7.6. Advances of Expenses. Expenses incurred in
defending any proceeding may be advanced by the corporation prior to the final
disposition of such proceeding upon receipt of an undertaking by or on behalf of
the agent to repay such amount unless it shall be determined ultimately that the
agent is entitled to be indemnified as authorized in this Section.
11.7.7. Prohibition of Nonconforming Arrangements. No
provision made by the corporation to indemnify its or its subsidiary's directors
or officers for the defense of any proceeding, whether contained in a resolution
of shareholders or directors, an agreement, or otherwise, shall be valid unless
consistent with this Section, Nothing contained in this Section shall affect any
right to indemnification to which persons other than such directors and officers
may be entitled by contract or otherwise.
11.7.8. Prohibitions on Indemnification, No
indemnification or advance shall be made under this Section, except as provided
in subsection 11.7.4 or paragraph (c) of subsection 11.7.5, in any circumstance
where it appears:
(a) That it would be inconsistent with a provision of the
Articles, Bylaws, a resolution of the shareholders, or an agreement in effect at
the time of the accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred or other amounts were paid, which
prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition
expressly imposed by a court in approving a settlement.
11.7.9. Insurance. The corporation shall have the power to
purchase and maintain insurance on behalf of any agent of the corporation
against any liability asserted against or incurred by the agent in such capacity
or arising out of the agent's status as such whether or not the corporation
would have the power to indemnify the agent against such liability under the
provisions of this Section.
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11.7.10. Application of Other Laws, Nothing in this
Section shall restrict the power of the corporation to indemnify its agents
under any provision of law from time to time applicable to the corporation, nor
shall anything in this Section authorize the corporation to indemnify its agents
in situations prohibited by law.
Section 11.8. Loans to Officers. The Board may approve loans of
money or property to, and guaranties of the obligations of, officers of the
corporation, and may adopt employee benefit plans authorizing such loans and
guaranties to officers of the corporation, without the approval of the
shareholders of the corporation, provided that:
(a) the corporation has outstanding shares held of record by more
than 100 persons;
(b) the vote of any interested director or directors is not
counted; and
(c) the Board determines that such loan, guaranty, or plan may
reasonably be expected to benefit the corporation.
ARTICLE XII
CONSTRUCTION OF BYLAWS WITH
REFERENCE TO PROVISIONS OF LAW
Section 12.1. Definitions. Unless defined otherwise in these Bylaws
or unless the context otherwise requires, terms used herein shall have the same
meaning, if any, ascribed thereto in the California General Corporation Law, as
amended from time to time.
Section 12.2. Bylaw Provisions Additional and Supplemental to
Provisions of Law. All restrictions, limitations, requirements, and other
provisions of these Bylaws shall be construed, insofar as possible, as
supplemental and additional to all provisions of law applicable to the subject
matter thereof and shall be fully complied with in addition to the said
provisions of law unless such compliance shall be illegal.
Section 12.3. Bylaw Provisions Contrary to or Inconsistent with
Provisions of Law. Any article, section, subsection, paragraph, subparagraph,
sentence, clause, or phrase of these Bylaws which upon being construed in the
manner provided in Section 12.2 hereof shall be contrary to or inconsistent with
any applicable provision of law shall not apply so long as said provision of law
shall remain in effect, but such result shall not affect the validity or
applicability of any other portions of these Bylaws, it being hereby declared
that these Bylaws would have been adopted and each article, section, subsection,
subsection, sentence, clause, or phrase thereof, irrespective of the fact that
any one or more articles, sections, subsections, subsections, sentences,
clauses, or phrases is or are illegal.
ARTICLE XIII
ADOPTION, AMENDMENT, OR REPEAL OF BYLAWS
Section 13.1. By Shareholders. Bylaws may be adopted,
amended, or repealed by the approval of the affirmative vote of a majority of
the outstanding shares of the corporation entitled to vote.
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Section 13.2. By the Board of Directors. Subject to the right of
shareholders to adopt, amend, or repeal Bylaws, Bylaws other than a Bylaw or
amendment thereof changing the authorized number of directors or any provision
of this Article XIII may be adopted, amended, or repealed by the Board of
Directors. A Bylaw adopted by the shareholders may restrict or eliminate the
power of the Board of Directors to adopt, amend, or repeal any or all Bylaws.
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EXHIBIT 10.19.1
TERMINATION AGREEMENT
THIS TERMINATION AGREEMENT (this "Agreement") is entered into as of
July 1, 1998, by and between Novellus Systems, Inc., a California corporation
("Manufacturer"), and Seki Technotron Corporation ("Distributor").
RECITALS
A. Manufacturer and Distributor entered into that certain Distribution
Agreement dated January 1, 1996 (the "Distribution Agreement"), pursuant to
which Distributor agreed to distribute certain products of Manufacturer, upon
the terms and conditions set forth in the Distribution Agreement. All
capitalized terms used herein, but not defined, shall have the meanings ascribed
to such terms in the Distribution Agreement.
B. Pursuant to the Distribution Agreement, the term thereof is not
scheduled to expire prior to December 31, 1999. However, Distributor has
requested Manufacturer to agree to terminate the Distribution Agreement
effective July 1, 1998, and to transition the customer support obligations to
Manufacturer as set forth below.
C. Manufacturer has agreed to Distributor's request, conditioned on,
among other things, Distributor's execution and delivery of this Agreement.
NOW, THEREFORE, in consideration of the foregoing, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Manufacturer and Distributor hereby agree as follows:
AGREEMENT
1. Termination of Distribution Agreement.
(a) Notwithstanding anything to the contrary set forth in the
Distribution Agreement, the Distribution Agreement shall terminate effective
July 1, 1998 (the "Termination Date"), and, except solely as provided herein,
neither party shall have any further rights, interests, liabilities,
responsibilities or obligations thereunder from and after the Termination Date.
Except as provided in Sections 1(b), 2 and 3 below, the Distribution Agreement
shall continue in full force and effect, unmodified hereby, until the
Termination Date.
(b) Notwithstanding Section 3.02 of the Distribution
Agreement, no later than the Termination Date, Distributor shall pay to
Manufacturer (i) all amounts owed by Distributor to Manufacturer pursuant to
Section 3.01 of the Distribution Agreement for all Products purchased by
Distributor on or prior to the Termination Date, and (ii) all
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other amounts owed by Distributor to Manufacturer pursuant to the Distribution
Agreement.
(c) On the Termination Date, Distributor shall immediately
deliver to Manufacturer all books, records, computer disks, manuals, logs,
notes, factory automation interface software, drawings, designs, intangible
property (including, without limitation, all trade secrets, know-how,
proprietary rights and processes and other intellectual property and all
documents, computer discs or other media relating to such intellectual
property), accounts, and other documents, data and information, of whatever
nature, (i) created or maintained by Distributor and relating to the Products
(including the sale or servicing thereof), or (ii) provided by Manufacturer to
Distributor, except to the extent such items have previously been delivered by
Distributor to Manufacturer pursuant to Section 2(a) below. Without limiting any
other provision of this Agreement, effective on the Termination Date,
Distributor shall have no further right to retain or use any of the foregoing
items, all of which are acknowledged and agreed to be Manufacturer's sole
property.
2. Transfer of Service Obligations.
(a) Notwithstanding anything to the contrary set forth in the
Distribution Agreement, all Product repair and service rights and obligations of
Distributor under the Distribution Agreement with respect to Products sold to
and installed for Fujitsu, as of the date hereof, terminated effective May 1,
1998 (the "Fujitsu Service Transfer Date"), and, from and after such date,
Distributor shall have no further obligation or right to perform such services,
all of which obligations and rights shall be assumed by Manufacturer effective
as of such date. Distributor represents and warrants that it has transferred to
Manufacturer all customer service accounts and other books and records related
to Product servicing maintained by Distributor with respect to Products sold to
Fujitsu by Distributor.
(b) Notwithstanding anything to the contrary set forth in the
Distribution Agreement, all Product repair and service rights and obligations of
Distributor under the Distribution Agreement (other than all such rights and
obligations described in Section 2(a) above) shall terminate effective July 1,
1998 (the "General Service Transfer Date"), and, from and after such date,
Distributor shall have no further obligation or right to perform such services,
all of which obligations and rights shall be assumed by Manufacturer effective
as of such date. Prior to the General Service Transfer Date, Distributor shall
transfer to Manufacturer all customer service accounts and other books and
records related to Product servicing maintained by Distributor (other than all
such accounts books and records previously transferred pursuant to Section 2(a)
above).
(c) The parties hereby agree that the aggregate outstanding
warranty and service obligations of Distributor being transferred to and assumed
by Manufacturer are valued at 216 million Japanese Yen, which amount shall be
payable to Manufacturer by Distributor on the date hereof (the "Warranty and
Service Obligation").
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3. Backlog.
(a) Notwithstanding Section 13.02 of the Distribution
Agreement or any other provision therein to the contrary, no commission, fee or
other payment shall be made by Manufacturer with respect to Distributor's
backlog as of the Termination Date, except as follows: (i) Manufacturer shall
pay to Distributor a sales commission of 5% of the Net Invoice Price (as
hereinafter defined), if, as and when received by Manufacturer, for each sale
originated by Distributor and in Distributor's backlog, provided that, as of the
Termination Date, Manufacturer has received a hard copy acceptable purchase
order (or a customer-issued, signed and priced acceptable letter of intent) for
such sale and has recorded such sale on its books (the receipt of such a
purchase order or such a letter of intent and the recordation of the applicable
sale on Manufacturer's books, "Booked"), provided that Manufacturer receives
payment in full for such Product no later than twelve (12) months after the
applicable Product is installed at the customer's site; and (ii) with respect to
the sale of each of the Products specified on Schedule 3 attached hereto to the
customers specified on Schedule 3, Manufacturer shall pay to Distributor a sales
commission equal to the percentage of the Net Invoice Price received by
Manufacturer for such Product (if, as and when received by Manufacturer)
calculated in accordance with Schedule 3, provided that Manufacturer shall have
no obligation to pay any commission to Distributor pursuant to this clause (ii)
with respect to (x) any such sale that is not Booked on or prior to December 31,
1998, and (y) any sale that is Booked on or prior to December 31, 1998, but with
respect to which Manufacturer does not receive full payment from the applicable
customer on or prior to the date that is twelve (12) months after the date the
applicable Product is installed at the customer's site. All commissions payable
by Manufacturer pursuant to this Section 3(a) shall be payable, if at all,
within thirty (30) days after the date on which Manufacturer receives full
payment for the Product sale in question. For the purposes hereof, the term "Net
Invoice Price" shall mean the total invoice price of the applicable item minus
(1) applicable customs duties, (2) transportation costs, and (3) value added
taxes.
(b) Distributor shall (i) during the remainder of 1998,
provide Manufacturer with reasonable sales support, consistent with the amount
of commissions anticipated to be received by Distributor pursuant to Section
3(a) above, for Manufacturer to sell Products to Distributor's existing Products
customer base, and (ii) without limiting Section 6 below, not take any action,
or permit to be taken any action within Distributor's reasonable control, the
effect of which harms or impairs or could reasonably harm or impair
Manufacturer's marketing or sales activities in the Territory. Without limiting
the generality of clause (i) above, during the period from the Termination Date
through and including December 31, 1998, Distributor shall cause, at no cost to
Manufacturer (except solely for expense reimbursements to the extent provided
herein), M. Furuyama, Distributor's employee, to provide sales and marketing
assistance to Manufacturer in the Territory, as and when requested by
Manufacturer, provided that M. Furuyama's obligation shall be limited to such
assistance full time (x) two (2) days per week during each week commencing with
the week in which the Termination Date occurs through and including the week in
which September 26, 1998 occurs, and (y) one day per week during each week
thereafter through and including the week in which December 31, 1998
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<PAGE> 4
occurs; provided that, in the event that M. Furuyama or Distributor has a
conflicting obligation regarding M. Furuyama's availability, Distributor retains
the right to allocate M. Furuyama's services solely at Distributor's discretion
after August 31, 1998. In that event, Distributor will promptly provide
Manufacturer with a schedule of M. Furuyama's availability. Manufacturer will
reimburse Distributor reasonable travel and actual expenses incurred by M.
Furuyama as a result of providing such sales and marketing assistance to
Manufacturer. Manufacturer acknowledges that Distributor does not represent or
warrant that the Services provided will be useful or effective in achieving
Manufacturer's goal. If Distributor materially breaches any of its covenants
pursuant to this Section 3(b), then, without limiting any other rights of
Manufacturer, under this Agreement, at law or in equity, Manufacturer's
obligations under Sections 3(a) and 4 shall immediately terminate and be of no
further force or effect.
(c) Until March 31, 2001, Distributor will have the right to engage, at
its own expense, an independent auditor reasonably acceptable to Manufacturer to
examine Manufacturer's records to verify (i) the amounts of commissions payable
to Distributor pursuant to Section 3(a) above, and (ii) the amount of any sums
payable to Distributor pursuant to Section 4 below. Such audits may be conducted
no more frequently than once in any fiscal year, and shall be performed during
Manufacturer's normal business hours on not less than three (3) days prior
written notice once. Any overpayments or underpayments revealed by any such
audit shall be paid, without interest, by the party responsible therefor within
thirty (30) days after receipt of such audit by such party.
4. Spare Parts Inventory; Demonstration Unit. On the Termination Date,
Manufacturer shall purchase all Distributors inventory of spare parts for
Products, all of which inventory is listed on Schedule 4 attached hereto, for an
aggregate purchase price of 216 million Japanese Yen (together with reasonable
out-of-pocket transportation costs incurred to transport such parts to
Manufacturer's facility), which purchase price shall be offset against the
Warranty and Service Obligation.
5. Facility Lease. Effective on the Termination Date, Distributor shall
assign to Manufacturer the lease pursuant to which Distributor occupies and uses
its field service office in Wakamatsu, Japan, provided that, if its consent is
required by the terms of such leases or other agreements, the lessor under such
lease consents to such assignment. Distributor shall use its reasonable
commercial efforts to obtain any such consent and Manufacturer shall reasonably
cooperate with such efforts. Manufacturer shall assume all obligations under
such lease accruing from facts or circumstances first occurring from and after
the date of such assignment (including, without limitation, all rent accrued and
payable with respect to periods from and after the date of such assignment).
Provided that such assignment occurs, Manufacturer shall promptly reimburse
Distributor for all rent, taxes and insurance premiums paid by Distributor under
such lease for all periods from and after the Termination Date. To the extent
that Manufacturer makes use of such premises prior to the Termination Date, the
parties shall agree on an equitable reimbursement amount for Manufacturer's use
of such facilities. Distributor and Manufacturer agree to execute any documents
necessary to facilitate such transfer. Manufacturer further agrees, to the
extent the lease requires that Distributor remain liable
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<PAGE> 5
while Manufacturer utilizes such premises, Manufacturer shall defend, indemnify
and hold Distributor harmless from and against any liability, claim, suit, costs
or damages (including reasonable attorneys' fees) arising out of Manufacturer's
occupation of the premises or Manufacturer's acts or omissions therein.
6. Release. In consideration of Manufacturer's agreement to terminate
the Distribution Agreement prior to its scheduled expiration, Distributor hereby
irrevocably and forever releases Manufacturer (and its subsidiaries and
affiliates) from any and all claims, costs, liabilities, losses, damages,
responsibilities, obligations and expenses, liquidated or unliquidated, fixed or
contingent, foreseeable or unforeseeable, with respect to the Distribution
Agreement, or arising from or due to the performance (or failure of performance)
by Manufacturer or its subsidiaries of any provision of the Distribution
Agreement, accruing with respect to facts and circumstances first occurring
prior to the date hereof. With the exception of any costs, losses, expenses,
damages or liabilities incurred by Manufacturer due to or arising as a result of
(a) modifications made to Products by or on behalf of Distributor, including,
without limitation, CIM interface software made by, or under contract to
Distributor, or (b) commitments made, or obligations incurred, by Distributor to
customers which are outside of Manufacturer's standard terms and conditions,
Manufacturer hereby irrevocably and forever releases Distributor (and its
subsidiaries and affiliates) from any and all claims, costs, liabilities,
losses, damages, responsibilities, obligations and expenses, liquidated or
unliquidated, fixed or contingent, foreseeable or unforeseeable, with respect to
the Distribution Agreement, or arising from or due to the performance (or
failure of performance) by Distributor or its subsidiaries of any provision of
the Distribution Agreement, accruing with respect to facts and circumstances
first occurring prior to the date hereof.
7. Noncompete; Confidentiality.
(a) Prior to January 1, 2000, Distributor shall not, without
the prior written consent of Manufacturer (which consent Manufacturer may grant
or withhold in its sole discretion), (i) manufacture, sell, supply, distribute,
service, repair, upgrade or otherwise use, handle or deal with, in any manner,
products in Japan (or spare parts or components of products, other than such
spare parts or components manufactured by or on behalf of Manufacturer or its
subsidiaries or affiliates) which, in Manufacturer's reasonable judgment, are
similar to or competitive with any products of the Manufacturer or its
subsidiaries or affiliates, or (ii) agree to do any of the foregoing. For the
purposes of this paragraph, prohibited products include all Products, including
CVD equipment and processes, PVD equipment and processed, and copper
electroplating equipment and processes. Without limiting the foregoing, if, at
any time prior to such date, Distributor takes any of the actions described in
clauses (i) or (ii) above, then, without limiting any remedies available to
Manufacturer, under this Agreement, at law or in equity, for a breach by
Distributor of its obligations pursuant to the preceding sentence,
Manufacturer's obligations pursuant to Section 3(a) shall immediately terminate
and be of no further force or effect.
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(b) At all times from and after the Termination Date,
Distributor shall hold in strict confidence and not use or disclose to others,
any technical, business or financial information or data, manufacturing
technique, process, trade secret, know-how or other intellectual property or
proprietary rights of Manufacturer or its subsidiaries or affiliates, whether or
not any of such items have been identified as confidential by Manufacturer.
8. Notices. All notices and other communications in connection with
this Agreement shall be delivered in the form, in the manner and to the
addresses set forth in Section 22 of the Distribution Agreement.
9. Survival of Provisions; Incorporation by Reference. The following
provisions of the Distribution Agreement shall survive the termination thereof
on the Termination Date and are hereby incorporated herein by this reference:
Section 3.03 (Currency); Section 6 (Warranty) (other than the last sentence of
the first paragraph of such Section and the last paragraph of such Section);
Section 9 (Intellectual Property); Section 10 (Relationship of Parties); Section
16 (Export-Import Laws); Section 17 (Limitation on Liability); Section 18
(Governing Law); Section 19 (Arbitration); Section 20 (Severability of
Provisions); Section 21 (Waiver of Compliance). Section 7 (Products Liability)
is also hereby incorporated herein by this reference, provided that,
Manufacturer's obligations under such Section shall continue until the date that
is ten (10) years after the Termination Date. All references in such
incorporated provisions to the term "Agreement" shall mean this Agreement.
10. Entire Agreement; Assignment This Agreement and, solely to the
extent provided herein, the Distribution Agreement, constitutes the entire
agreement between the parties with respect to the matters discussed herein, and
supercedes and replaces all prior oral or written agreements, negotiations,
discussions or understandings. In the event of any conflict between the
provisions of this Agreement and the provisions of the Distribution Agreement
(including any provision thereof incorporated herein by reference pursuant to
Section 9 above), the provisions of this Agreement shall control. This Agreement
may not be assigned by Distributor (by operation of law or otherwise).
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which, taken
together, constitute one and the same document.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
MANUFACTURER: NOVELLUS SYSTEM, INC.
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
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DISTRIBUTOR: SEKI TECHNOTRON CORPORATION
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
7
<PAGE> 8
SCHEDULE 3
<TABLE>
<CAPTION>
COMPANY PRODUCT PRICE
- ------- ------- -----
<S> <C> <C>
Hamahoto Photonics C-150 $1,210,000
FASL D-Altus $2,300,000
Fujitsu Mie Low K $2,875,000
Fujitsu Mie Ta(2)O(5) $2,200,000
Fujitsu Mie Speed M $1,100,000
Fujitsu Mie Speed/Seq $3,100,000
Fujitsu Mie D-Speed $2,800,000
Fujitsu Mie D-Speed $2,800,000
Fujitsu Mie D-Speed $2,800,000
Fujitsu Mie Sequel $1,704,000
Fujitsu Mie Sequel $1,704,000
Fujitsu Mie D-Altus $2,954,000
Fujitsu Mie D-Altus $2,954,000
Fujitsu Wakamatsu Speed M $1,100,000
Fujitsu Iwate C1-W $1,600,000
MEC Kyoto Speed $1,800,000
MEC Tonami D-Sequel $2,600,000
MEC Tonami D-Speed $3,022,000
MEC Tonami D-Speed $3,022,000
MEC Tonami D-Speed $3,022,000
MEC Tonami C3-DSP/Seq $4,400,000
MEC Tonami C3-Altus $2,400,000
MEC Tonami C3-DSP/Seq $4,400,000
MEC Tonami C3-Altus $2,400,000
MEC Tonami C3-Sequel $2,400,000
MEC Tonami C3-Sequel $2,400,000
MEC Tonami C3-Sequel $2,400,000
MEC Uozu C-150 $1,200,000
Rohm Kyoto C-150 $1,200,000
Rohm Apollo C1-200 $1,500,000
Rohm Apollo C1-200 $1,500,000
Rohm Apollo C1-W $1,500,000
Toko C1-150 $1,600,000
Yamaha D-Sequel $2,700,000
Yamaha D-Altus $2,600,000
Yamaha Speed $1,600,000
</TABLE>
Commission Formula*
5% for sales Booked on or before June 26, 1998 (Novellus 2nd Quarter)
4% for sales Booked on or before September 26, 1998 (Novellus 3rd Quarter)
2% for sales Booked on or before December 31, 1998 (Novellus 4th Quarter)
*The applicable commission shall be reduced by 10% for each 1% decrease in the
price of the applicable Product below 90% of the price listed in column 3 above
with respect to that Product.
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<PAGE> 1
EXHIBIT 10.27
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement"), entered into effective October
1, 1998, is between Novellus Systems, Inc., a California corporation (the
"Company"), and Richard Hill ("Executive") (collectively, "the parties").
RECITALS
1. Executive has been employed by the Company and is currently serving
as the Chairman and Chief Executive Officer.
2. The Company desires to continue to employ Executive and to assure
itself of the continued services of Executive for the term of this Agreement,
and Executive desires to be employed by the Company for such period, upon the
following terms and conditions.
AGREEMENT
ACCORDINGLY, the parties agree as follows:
1. PERIOD OF EMPLOYMENT
a. BASIC TERM. The Company shall continue to employ Executive
to render services to the Company in the position and with the duties and
responsibilities described in Section 2 from the date of this Agreement through
December 31, 2001 (the "Term Date"), unless Executive's employment is terminated
sooner in accordance with Section 4 below.
2. POSITION, DUTIES, RESPONSIBILITIES
a. POSITION: Executive is employed by the Company to render
services to the Company in the position of Chairman and Chief Executive Officer
and shall perform all services appropriate to that position, as well as such
other services as may reasonably be assigned by the Company. Executive shall
devote his best efforts and full-time attention to the performance of his
duties. Executive shall report to the Board of Directors of the Company.
b. OTHER ACTIVITIES. Except upon the prior written consent of
the Company, Executive will not (i) accept any other employment, or (ii) engage,
directly or indirectly, in any other business activity (whether or not pursued
for pecuniary advantage) that is or may be in conflict with, or that might place
Executive in a conflicting position to that of, the Company. Notwithstanding the
foregoing, while the Company does not request Executive's service on the boards
of directors of other corporations, the Company does not, in principle, object
to such service where Executive would have no conflict of interest with duties
owed to the Company.
c. PROPRIETARY INFORMATION. "Proprietary Information" is all
information and any idea in whatever form, tangible or intangible, pertaining in
any manner to the business of the Company, or any Affiliate, or its employees,
clients, consultants, or business associates,
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which was produced by any employee of the Company, or any Affiliate, in the
course of his or her employment or otherwise produced or acquired by or on
behalf of the Company, or any Affiliate. All Proprietary Information not
generally known outside of the Company's organization, and all Proprietary
Information so known only through improper means, shall be deemed "Confidential
Information." Without limiting the foregoing definition, Proprietary and
Confidential Information shall include, but not be limited to: (i) formulas,
teaching and development techniques, processes, trade secrets, computer
programs, electronic codes, inventions, improvements, and research projects;
(ii) information about costs, profits, markets, sales, and lists of customers or
clients; (iii) business, marketing, and strategic plans; and (iv) employee
personnel files and compensation information. Executive should consult any
Company procedures instituted to identify and protect certain types of
Confidential Information, which are considered by the Company to be safeguards
in addition to the protection provided by this Agreement. Nothing contained in
those procedures or in this Agreement is intended to limit the effect of the
other.
d. GENERAL RESTRICTIONS ON USE. During the Period of
Employment, Executive shall use Proprietary Information, and shall disclose
Confidential Information, only for the benefit of the Company and as is
necessary to carry out his responsibilities under this Agreement. Following
termination, Executive shall neither, directly or indirectly, use any
Proprietary Information nor disclose any Confidential Information, except as
expressly and specifically authorized in writing by the Company. The publication
of any Proprietary Information through literature or speeches must be approved
in advance in writing by the Company.
3. COMPENSATION. In consideration of the services to be rendered under
this Agreement, Executive shall be entitled to the following:
a. The Company shall continue to pay Executive at an initial
base annual salary equivalent to Executive's current annual base rate of pay of
$382,885.00, payable bi-weekly. Payment of Executive's current base rate of pay
is subject to a temporary fifteen percent (15%) reduction, pursuant to the
Company's management's decision to temporarily reduce the annual base salaries
of all of its officers. At such time when the Company's management decides to
restore the annual base salaries of its officers to their prior base rate of pay
or higher, the Company shall adjust Executive's base annual salary to
$525,000.00. Thereafter, Executive's salary will be reviewed from time to time
in accordance with Company's established procedures for adjusting salaries for
similarly situated employees. Executive shall also be eligible to participate in
the Company's executive bonus plan, as already established by the Company, and
as may be amended from time to time in the Company's sole discretion.
b. Executive shall be eligible to participate in the Company's
benefit plans, and to receive perquisites of employment, as established by the
Company, and as may be amended from time to time in the Company's sole
discretion at least equal to those provided to other Company officers.
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<PAGE> 3
c. The Company shall pay any interest accrued to date and
shall, through December 31, 1999, pay any additional interest on the two
relocation loans made by the Company to Executive in June and July 1997, as
evidenced by the two promissory notes.
d. The Company shall pay the monthly dues, fees, and
assessments for Executive's membership in a golf club, to be selected by
Executive. Company shall also reimburse Executive in accordance with Company
guidelines and procedures for golf club expenses associated with the normal
course of conduct with customers.
e. The Company shall have the right to deduct or withhold from
the compensation due to Executive hereunder any and all sums required for
federal income and social security taxes and all state or local taxes now
applicable or that may be enacted and become applicable in the future.
4. TERMINATION OF EMPLOYMENT
a. TERMINATION BY DEATH. Executive's employment shall
terminate automatically upon the death of Executive. Company shall pay to
Executive's beneficiaries or estate, as appropriate, any compensation then due
and owing, and shall continue to pay Executive's salary and benefits, bi-weekly,
through the second full month after Executive's death. As of the date of death,
all stock options available to Executive through the Term Date shall, in
accordance with the terms of the Company's stock option plan and Executive's
stock option agreements, be exercisable by the appropriate representative
beneficiary of Executive's estate. Thereafter, all obligations of Company under
this Agreement shall cease. Nothing in this Section shall affect any entitlement
of Executive's heirs to the benefits of any life insurance plan or other
applicable benefits.
b. TERMINATION BY DISABILITY. If, in the sole opinion of the
Company, Executive shall be prevented from properly performing his duties
hereunder by reason of any physical or mental incapacity for a period of more
than one hundred eighty (180) days in the aggregate in any twelve-month period,
then, to the extent permitted by law, Company may relieve Executive of his
duties. Company shall pay to Executive all compensation to which Executive is
entitled up through the last day of the month in which the 180th day of
incapacity occurs, and thereafter, the Company shall continue to employ
Executive at 66 2/3% of his base annual salary at the time of disability and
shall include Executive in the Company's health insurance benefit plans
beginning on the 181st day of his disability, such payment of salary and
inclusion in Company health insurance benefits to continue until Executive
reaches age 65. Any long term disability insurance payments received by
Executive shall be credited to the Company's obligation for such disability
payments. The Executive's rights to exercise stock options shall be in
accordance with the terms of the Company's stock option plan and Executive's
stock option agreements. Nothing in this Section shall affect Executive's rights
under any disability plan in which he is a participant.
Executive agrees that he shall, on or about the
first and second anniversary dates of this agreement, undergo at the Company's
expense a complete medical examination.
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<PAGE> 4
c. TERMINATION BY COMPANY NOT FOR CAUSE. At any time, Employer
may terminate the Period of Employment Not For Cause for any reason by providing
Executive ten (10) days' advance written notice, provided that Executive shall,
in addition to all compensation due and owing through the last day actually
worked, receive the following:
(i) The greater of a severance payment equal to two
years of the Executive's then current base salary, or his base salary through
the Term Date per paragraph 1(a) above. The severance payment will be made in
the form of salary continuation for two years (the "Severance Period"), payable
on the Company's normal payroll schedule.
(ii) During the Severance Period, Executive will
continue to receive annual bonus payments equal to 150 percent of his then
current base annual salary, payable in any year in which any bonus payments are
made by the Company to any other employees. During the Severance Period,
Executive's annual bonus payments, if any, shall be payable when the Company
makes annual bonus payments to any other similarly situated employees.
(iii) Payment of the Executive's share of health
insurance premiums throughout the Severance Period and for a period of eighteen
(18) months thereafter. Thereafter, the Company shall use reasonable efforts to
cause health insurance benefits to be made available to Executive and his
dependents under the Company's group health insurance plans for as long as
permitted under such plans.
(iv) Executive's stock options shall continue to
vest during the Severance Period. Executive shall not be required to exercise
such options until three (3) years following the end of the Severance Period
during which three (3) year period he shall serve as a consultant to the Company
on terms agreeable to the Executive and the Company.
(v) Executive's obligation to repay the Company for
the relocation loans made by the Company to Executive in June and July 1997,
evidenced by two promissory notes, shall not become payable until the end of the
Severance Period. In the event that Executive's employment is terminated
following a change of control, the Company shall pay interest on and shall not
require repayment of the principal of the Executive's two relocation loans until
the date two years following the end of the Severance Period.
(vi) The amount of any payment provided for in this
Section 4.c. shall not be reduced, offset or subject to recovery by the Company
by reason of any compensation earned by Executive as the result of employment by
another employer during the Severance Period so long as Executive does not
violate the provisions of Section 5.d. below.
(vii) The severance benefits described in this
Section 4.c. shall be conditioned upon Executive's continued observance of the
obligations described in Section 5.d. throughout the Severance Period. Should
Executive engage in or pursue any of the activities described in Section 5.d. at
any time during the Severance Period, all severance benefits described in this
Section 4.c. shall cease and the two promissory notes described in Section
4.c(v) shall become immediately due and payable in full.
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<PAGE> 5
d. TERMINATION BY COMPANY FOR CAUSE. At any time, and without
prior notice, the Company may terminate Executive's employment For Cause (as
defined below). The Company shall pay Executive all compensation then due and
owing; thereafter, all of the Company's obligations under this Agreement shall
cease. Termination for "Cause" shall mean termination of Executive's employment
because of Executive's (i) involvement in fraud, misappropriation or
embezzlement related to the business or property of the company; (ii) conviction
for, or guilty plea to, a felony; (iii) willful material breach of this
Agreement; (iv) willful and continued failure to substantially perform his
duties under this Agreement, provided, however, that if such Cause is reasonably
curable, the company shall not terminate Executive's employment hereunder unless
the Company first gives notice of its intention to terminate and the grounds of
such termination, and the Executive has not within ninety (90) days following
receipt of this notice, cured such Cause.
e. BY EXECUTIVE NOT FOR CAUSE. At any time, Executive may
terminate the Period of Employment for any reason, with or without cause, by
providing Employer thirty (30) days' advance written notice. Employer shall have
the option, in its complete discretion, to make termination of the Period of
Employment effective at any time prior to the end of such notice period,
provided Employer pays Executive all compensation due and owing through the last
day actually worked, plus an amount equal to the base salary Executive would
have earned through the balance of the above notice period; thereafter, all of
Employer's obligations under this Agreement shall cease.
f. BY EXECUTIVE FOR GOOD REASON. Executive may terminate,
without liability, the Period of Employment for Good Reason (as defined below),
provided Executive gives Employer ninety (90) days' advance written notice of
the reason for termination and his intent to terminate this Agreement. During
this period, Employer shall have an opportunity to correct the condition
constituting Good Reason. If the condition is remedied within this period,
Executive's notice to terminate shall be rescinded automatically; if not
remedied, termination of the Period of Employment shall become effective upon
expiration of the above notice period. In this event, Employer shall pay
Executive all compensation due and owing through the last day actually worked
including any accrued but unused vacation. Employer shall also have the option,
in its complete discretion, to make termination effective at any time prior to
the end of the notice period, provided that Employer pays Executive all
compensation due and owing through the balance of the notice period (not to
exceed ninety (90) days). Executive shall be entitled to exercise his right to
terminate this Agreement for Good Reason only if he gives the required notice
not more than ninety (90) days after the occurrence of the event that is the
basis for the Good Reason. If Executive terminates the Period of Employment for
Good Reason pursuant to the provisions of this Section 4.f., Executive shall
receive the severance benefits described in and pursuant to the terms of
subparagraphs 4.c.(i)-(vii) above.
Termination shall be for "Good Reason" if Executive
voluntarily resigns following: (i) a change in Executive's position with
employer which materially reduces Executive's level of responsibility; (ii) a
relocation of Executive's principal place of employment by more than fifty (50)
miles, provided and only if such change, reduction or relocation is effected by
the Employer
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without Executive's consent; (iii) a reduction in base
compensation; or (iv) a reduction in bonus payments not permitted by this
Employment Agreement.
5. TERMINATION OBLIGATIONS
a. RETURN OF COMPANY'S PROPERTY Executive hereby acknowledges
and agrees that all personal property, including, without limitation, all books,
manuals, records, reports, notes, contracts, lists, blueprints, and other
documents, or materials, or copies thereof, and equipment furnished to or
prepared by Executive in the course of or incident to Executive's employment,
belong to Company and shall be promptly returned to Company upon termination of
Executive's employment.
b. REPRESENTATIONS AND WARRANTIES SURVIVE TERMINATION OF
EMPLOYMENT. The representations and warranties contained herein, except
Executive's obligations under Section 2(b), shall survive termination of
Executive's employment and expiration of this Agreement.
c. COOPERATION IN PENDING WORK. Following any termination of
Executive's employment, Executive shall fully cooperate with Company in all
matters relating to the winding up of pending work on behalf of Company and the
orderly transfer of work to other employees of Company. Executive shall also
cooperate in the defense of any action brought by any third party against
Company that relates in any way to Executive's acts or omissions while employed
by Company.
d. NONCOMPETITION. Executive acknowledges and agrees that
during his employment with the Company, he has had access to confidential
information and the activities forbidden by this subsection would necessarily
involve the improper use and disclosure of this confidential information. To
forestall this use or disclosure, Executive agrees that during the Severance
Period described in Section 4.c., Executive shall not, directly or indirectly,
(i) divert or attempt to divert from the Company (or any Affiliate) any business
of any kind in which it is engaged; (ii) employ or recommend for employment any
person employed by the Company (of any Affiliate); or (iii) engage in any
business activity that is competitive with the Company (of any Affiliate) in any
state where the Company conducts its business, unless Executive can prove that
any of the above actions was done without the use of confidential information.
In addition to the above restrictions on noncompetitive activity, and regardless
of whether any use of confidential information is involved, Executive agrees
that during the Severance Period Executive shall not, directly or indirectly,
(i) solicit any customer of the Company (or any Affiliate) known to Executive
(while he was employed by the Company) to have been a customer with respect to
products or services competitive with products or services offered by the
Company; or (ii) solicit for employment any person employed by the Company (or
any Affiliate).
6. ALTERNATIVE DISPUTE RESOLUTION
Company and Executive mutually agree that any controversy or claim
arising out of or relating to this Agreement or the breach thereof, or any other
dispute between the parties, shall be
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<PAGE> 7
submitted to mediation before a mutually agreeable mediator, which cost is to be
borne by the Company. In the event mediation is unsuccessful in resolving the
claim or controversy, such claim or controversy shall be resolved by
arbitration. The claims covered by this Agreement ("Arbitrable Claims") include,
but are not limited to, claims for wages or other compensation due; claims for
breach of any contract (including this Agreement) or covenant (express or
implied); tort claims; claims for discrimination (including, but not limited to,
race, sex, religion, national origin, age, marital status, medical condition, or
disability); claims for benefits (except where an employee benefit or pension
plan specifies that its claims procedure shall culminate in an arbitration
procedure different from this one), and claims for violation of any federal,
state, or other law, statute, regulation, or ordinance, except claims excluded
in the following paragraph. The parties hereby waive any rights they may have to
trial by jury in regard to Arbitrable Claims.
Claims Executive may have for Workers' Compensation or unemployment
compensation benefits are not covered by this Agreement. Also not covered is
either party's right to obtain provisional remedies or interim relief from a
court of competent jurisdiction.
Arbitration under this Agreement shall be the exclusive remedy for all
Arbitrable Claims. Company and Executive agree that arbitration shall be held in
or near Santa Clara County, California, and shall be in accordance with the then
current Employment Dispute Resolution Rules of the American Arbitration
Association, before an arbitrator licensed to practice law in the State of
California. The arbitrator shall have authority to award or grant both legal,
equitable, and declaratory relief. Such arbitration shall be final and binding
on the parties. The Federal Arbitration Act shall govern the interpretation and
enforcement of this section pertaining to Alternative Dispute Resolution.
This Agreement to mediate and arbitrate survives termination of
Executive's employment.
7. NOTICES
All notices or other communications required or permitted hereunder
shall be made in writing and shall be deemed to have been duly given if
delivered by hand or mailed, postage prepaid, by certified or registered mail,
return receipt requested, and addressed to the Company:
Novellus Systems, Inc.
3970 North First Street
San Jose, CA 95134
Attn: Corporate Secretary
with a copy to:
Morrison & Foerster LLP
755 Page Mill Road
Palo Alto, CA 94304-1018
Attn: William D. Sherman, Esq.
7
<PAGE> 8
and to Executive at:
Mr. Richard Hill
187 Heather
Atherton, CA 94047
with a copy to:
Miller, Nash, Wiener, Hager & Carlsen LLP
4400 Two Union Square
601 Union Street
Seattle, WA 98101-2322
Attn: John L. West, Esq.
Executive and the Company shall be obligated to notify the other party
of any change in address. Notice of change of address shall be effective only
when made in accordance with this Section.
8. ENTIRE AGREEMENT
This Agreement is intended to be the final, complete, and exclusive
statement of the terms of Executive's employment by The Company. Except for any
stock option agreements and any other agreements evidencing a loan or trust from
the Company to Executive (including but not limited to the two loan agreements
between Executive and the Company dated July 1, 1997 and July 31, 1997, and the
agreement evidencing the creation of a trust for the benefit of Executive dated
May 26, 1994, this Agreement supersedes all other prior and contemporaneous
agreements and statements pertaining in any manner to the employment of
Executive and it may not be contradicted by evidence of any prior or
contemporaneous statements or agreements. To the extent that the practices,
policies, or procedures of Company, now or in the future, apply to Executive and
are inconsistent with the terms of this Agreement, the provisions of this
Agreement shall control.
9. AMENDMENTS, WAIVERS
This Agreement may not be modified, amended, or terminated except by an
instrument in writing, signed by Executive and by a duly authorized
representative of Company other than Executive. No failure to exercise and no
delay in exercising any right, remedy, or power under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, or power under this Agreement preclude any other or further
exercise thereof, or the exercise of any other right, remedy, or power provided
herein or by law or in equity.
10. ASSIGNMENT; SUCCESSORS AND ASSIGNS
Executive agrees that he will not assign, sell, transfer, delegate or
otherwise dispose of, whether voluntarily or involuntarily, or by operation of
law, any rights or obligations under this Agreement, nor shall Executive's
rights be subject to encumbrance or the claims of creditors.
8
<PAGE> 9
Any purported assignment, transfer, or delegation shall be null and void.
Nothing in this Agreement shall prevent the consolidation of the Company with,
or its merger into, any other corporation, or the sale by the Company of all or
substantially all of its properties or assets, or the assignment by the Company
of this Agreement and the performance of its obligations hereunder to any
successor in interest. In the event of a change in ownership or control of the
Company, the terms of this Agreement will remain in effect and shall be binding
upon any successor in interest. Notwithstanding and subject to the foregoing,
this Agreement shall be binding upon and shall inure to the benefit of the
parties and their respective heirs, legal representatives, successors, and
permitted assigns, and shall not benefit any person or entity other than those
enumerated above.
11. SEVERABILITY; ENFORCEMENT
If any provision of this Agreement, or the application thereof to any
person, place, or circumstance, shall be held by a court of competent
jurisdiction to be invalid, unenforceable, or void, the remainder of this
Agreement and such provisions as applied to other persons, places, and
circumstances shall remain in full force and effect. 12. GOVERNING LAW
The validity, interpretation, enforceability, and performance of this
Agreement shall be governed by and construed in accordance with the law of the
State of California.
13. ACKNOWLEDGMENT OF PARTIES
The parties acknowledge (a) that they have consulted with or have had
the opportunity to consult with independent counsel of their own choice
concerning this Agreement, and (b) that they have read and understand the
Agreement, are fully aware of its legal effect, and have entered into it freely
based on their own judgment and not on any representations or promises other
than those contained in this Agreement.
9
<PAGE> 10
14. DATE OF AGREEMENT
The parties have duly executed this Agreement as of the date first
written above.
----------------------------------------
Richard Hill
NOVELLUS SYSTEMS, INC.
By:
-------------------------------------
Robert H. Smith
Executive Vice President
10
<PAGE> 1
Exhibit 22.1
LIST OF SUBSIDIARIES
<TABLE>
<S> <C>
Novellus Systems, Ltd. Nippon Novellus Systems, KK
Unit 1EB, Bishops Weald House, K5P Bldg., R&D C-10F,
Albion Way, 3-2-1 Sakado, Takatsu-Ku, Kawasaki-shi
Horsham, West Sussex Kanagawa-ken 213, Japan
RH12 1AH, England T 81.44.850.1777
T 44.1403.265550 F 81.44.850.1778
F 44.1403.266554
Novellus Systems, BV Novellus Systems Korea
Dillenburgstraat 5 B 2F DaeWoo Engineering Bldg., 9-3 SuNae-Dong,
5652 AM Eindhoven BunDang-Ku, SungNam City, KyungKi-Do 463-020 Korea
The Netherlands T 82.342.738.1114
T 31.40.291.8010 F 82.342.714.9921
F 31.40.257.3590
Novellus Systems GmbH Novellus Systems Taiwan
Koenigsbruecker Strasse 150 B, 5F-1, No. 295, Sec. 2
D - 01099 Dresden, Kwang Fu Road
Germany Hsin-Chu City, Taiwan 30801 R.O.C.
T 49.351.89252.10 T 886.35.730550
F 49.351.89252.20 F 886.35.730553
Novellus Systems Ireland Ltd Novellus Systems Semiconductor
IR4-1-10, Equipment Shanghai Co., Ltd
Collinstown Industrial Park, 603-611 No. 300
Leixlip Tian-Lin Bldg., Tain-Lin Road
Co. Kildare., Ireland Shanghai 200233, China
T 353.1.606.5247 T 86.21.6485.3889
F 353.1.606.5180 F 86.21.6485.1282
Novellus Systems Israel Ltd Novellus Singapore Pte Ltd.
Asia House, 4 Weizmann Street 101 Thomson Road
64239 Tel-Aviv #21-01/02 United Square
Israel Singapore 307591
T 65.353.9288
F 65.353.6833
Novellus Systems SARL
Parc de la Julienne, Bat. D, 1 er etage,
91830 Le Coudray - Montceaux
France
T 33.1.64.93.7070
F 33.1.64.93.8787
Novellus Systems Spain
Avenida Diagonal, 482
Barcelona 08006
Spain
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-48037) and the related Prospectus and Registrations Statements (Form
S-8 Nos. 333-11825, 33-88156, 33-51056, 33-36787, 33-25897, 33-62807, 333-35487,
333-65567) 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 18, 1999, 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, 1998.
/s/ ERNST & YOUNG LLP
San Jose, California
March 3, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 81,224
<SECURITIES> 49,594
<RECEIVABLES> 176,499
<ALLOWANCES> 3,135
<INVENTORY> 69,223
<CURRENT-ASSETS> 399,095
<PP&E> 173,800
<DEPRECIATION> 68,221
<TOTAL-ASSETS> 551,939
<CURRENT-LIABILITIES> 111,474
<BONDS> 65,000
0
0
<COMMON> 176,140
<OTHER-SE> 199,325
<TOTAL-LIABILITY-AND-EQUITY> 551,939
<SALES> 518,778
<TOTAL-REVENUES> 518,778
<CGS> 237,913
<TOTAL-COSTS> 237,913
<OTHER-EXPENSES> 201,917
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,099
<INCOME-PRETAX> 80,047
<INCOME-TAX> 27,219
<INCOME-CONTINUING> 52,828
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,828
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 1.51
</TABLE>
