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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, 1999
[ ] 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 29, 2000 the aggregate market value of voting stock held by
non-affiliates of the registrant was approximately $5,786,500,000 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 29, 2000 was
120,466,785.
Documents Incorporated by Reference: Part II of this Report on Form 10-K
incorporates by reference to Registrant's 1999 Annual Report to Shareholders.
Part III of this Report on Form 10-K incorporates information by reference from
the Registrant's Proxy Statement for its 2000 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 spending. The late 1990s 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 technologies. 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 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.
As the industry transitions to smaller and smaller line widths, a fundamental
change is occurring with the movement from aluminum to copper wires as the
primary conductors. 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 was developed to deposit copper conductive lines. 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 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 sequential processing
architecture of its PECVD and CVD tungsten products enables these 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 sequential
deposition 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 system 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.
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.
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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 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 Deposition 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 deposition 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 system 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 on a wafer's surface. 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" high-density plasma (HDP)
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 HDP
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 Ti/Ti-nitride film quality with excellent particle performance. And
finally, the company believes that 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. Countries such as Japan, Taiwan, and Korea continue to represent a
disproportionate share of the world's capacity for semiconductor manufacturing,
and all are now showing a rebound from the industry downturn of 1997-1999. The
Asian countries are particularly dominant in the manufacturing of memory
products, 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); two offices in Taiwan, and one each in Korea, 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.
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 metal and dielectric 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, 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 of a 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 SEQUEL EXPRESS(TM)
Introduced in June of 1999, SEQUEL EXPRESS is an advanced version of the SEQUEL
system, designed to deposit Novellus' CORAL(TM) family of low-k dielectric
films, as well as all other advanced films required for 0.18 micron and smaller
devices. With a throughput in excess of 110 wafers per hour, SEQUEL EXPRESS
delivers up to 40 percent higher capital productivity and up to 40 percent lower
cost of ownership than competing CVD systems.
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. 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 film ("ARL"). The ARL product, PEARL(TM), 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 PEARL offers competitive throughput and low
cost of ownership for the industry. The PEARL product is currently being used in
production in customer manufacturing facilities.
CORAL(TM) LOW-K DIELECTRIC FILMS
Commensurate with the launch of SEQUEL EXPRESS in June of 1999, Novellus
introduced the CORAL family of low dielectric constant (low-k) films, designed
for the manufacture of advanced devices down to sub-0.1 micron geometries, and
in particular, copper dual damascene structures. CORAL films are carbon-doped
oxide CVD films with dielectric constants in the range of 3.3 k to less than 2.5
k. Matched with Novellus' thin films for copper barriers and etch stops, CORAL
yields an effective capacitance reduction of up to 40 percent in semiconductor
devices.
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 Concept Three(TM) products include the C3-SPEED(TM), the
C3-SEQUEL(TM), and the C-3 ALTUST(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 was introduced in July 1998 after an extensive development
program with IBM and 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, one 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.
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SABRE xT
Introduced in April of 1999, the SABRE xT is a second-generation electrofill
tool designed to provide void-free fill in 0.13 micron geometries with aspect
ratios up to 10:1. The xT is a 200 mm/300 mm "bridge tool" (i.e., capable of
processing either 200 or 300 mm wafers) that incorporates process enhancements
in the areas of electrical waveforms, advanced bath chemistries, and automated
chemical monitoring and control using Novellus' proprietary SmartDose(TM)
algorithm. Up to 75 wafers per hour can be processed by the SABRE xT. Within
wafer uniformity performance of <2% 1 sigma and wafer-to-wafer uniformity of <1%
1 sigma has been achieved with the SABRE xT in a production environment.
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 Salem, New Hampshire;
Orlando, Florida; Austin and Dallas, Texas; Phoenix, Arizona; Hopewell Junction,
New York; Williston, Vermont; Bath, Pennsylvania; Manassas, Virginia; Vancouver,
Washington, and Newport Beach, California. 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, 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 has
eight 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 year ended December 31, 1999, one customer accounted for approximately
17% of the Company's net sales. For the years ended December 31, 1998 and 1997,
there were no individual customers who accounted for more than 10% of the
Company's net sales.
Export sales (including sales made by the Company's Japanese subsidiary) for the
year ended December 31, 1999 were approximately $394.4 million, or 67% of net
sales. Export sales for the year ended December 31, 1998 were approximately
$262.3 million, or 51% of net sales. For the year ended December 31, 1997,
export sales were approximately $250.1 million or 47% 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 1999, 1998 and 1997 accounted for 65%, 57%, and 48% 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, 1999, the Company's backlog was $329.5 million, as compared
to a backlog of $108.4 million at December 31, 1998. 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.
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RESEARCH AND DEVELOPMENT
The semiconductor manufacturing industry is subject to rapid technological
change and new product introductions and enhancements. The Company's ability to
remain competitive in this market will depend in part upon its ability to
develop new and enhanced systems and to introduce these systems at competitive
prices and on a timely and cost-effective basis. Accordingly, the Company
devotes a significant portion of its personnel and financial resources to
research and development programs and seeks to maintain close relationships with
its customers to remain responsive to their product needs.
The Company's current research and development efforts are directed at
development of new systems and processes and improving existing system
capabilities. The Company is focusing its research and development efforts on
additional Concept Two modules, advanced PVD systems, advanced gap fill
technology, primary conductor metals, low-K dielectric materials and additional
advanced technologies for the next generation of smaller geometry fabrication
lines, as well as equipment to process 300mm wafers.
Expenditures for research and development during 1999, 1998 and 1997 were $119.7
million, $106.5 million, and $89.8 million, respectively, or approximately 20%,
21%, and 17% of net sales, respectively. The amount and percentage of sales in
1997 for research and development exclude the in-process research and
development charge of $119.2 million 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 these 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.
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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), EEJA, a Japanese company with
ties to the chemistry supplier Enthone-OMI, and Applied Materials, which entered
the market with an electroplating tool in April of 1999. 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. 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 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, 1999, the Company had 1,749 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.
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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 Company's inability to effectively
manage growth, or to attract and retain the personnel it requires, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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 rules; 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, (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, and
(d) the Company's belief that sales to certain customers will decrease in the
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 the market and that manufacturers will
be generally reliant upon specific equipment, 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." 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. 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 Report to
Shareholders.
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, an Applications Demonstration Lab,
Corporate Headquarters, and a new state of the art 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 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 eight 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 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,
financial condition or results of operations.
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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 could have a material
adverse effect on the Company's business, financial condition or results of
operations.
On July 13, 1999, in the Company lawsuit against Applied where the Company has
alleged that Applied infringes Company patents, the Court ruled on the
interpretation of the claims of the Company patents. On September 20, 1999, in
the Applied lawsuit against Varian and the Company, where Applied has alleged
that Varian and the Company infringe Applied patents, the Court ruled on the
interpretation of the claims of the Applied patents. On January 14, 2000,
Applied withdrew its U.S. Patent No. 5,496,455 from the lawsuits against the
Company and Varian.
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.
On September 24, 1999, the Court ruled on the interpretation of the claims of
the Semitool patents. On December 18, 1999, Novellus filed a motion for summary
judgement of non-infringement. On February 18, 2000, the Court heard oral
arguments on Novellus' motion. The parties await a decision on Novellus' motion.
On March 17, 2000, the Court granted the Company's motion for summary judgement
of non-infringement. The Court ruled that the Company's SABRE and SABRE xT
systems do not infringe on the two patents asserted by Semitool. Therefore, the
Company believes that the dispute with Semitool will not have a material adverse
affect on the Company's business, financial condition and results of operations.
Plasma Physics Litigation
On December 28, 1999, Plasma Physics Corporation and Solar Physics Corporation
filed a patent infringement lawsuit against many of the Company's Japanese and
Korean customers. The suit is entitled Plasma Physics Corp v. Fujitsu, Ltd., 99
Civ. 8593, and is pending in the United States District Court for the Eastern
District of New York. Plasma Physics has asserted U.S. Patent Nos. 4,226,897,
5,470,784, and 5,543,634. Many of the defendants have notified the Company that
they believe that the Company has indemnification obligations and liability for
the lawsuit. Plasma Physics has not yet identified what, if any, of the
Company's equipment used by the customers is accused of infringement.
Plasma Physics seeks an injunction against the defendants' alleged infringement
of the '784 and '634 patents (the '897 patent has expired). Plasma Physics also
seeks trebled damages for alleged willful infringement. Plasma Physics also
seeks its attorneys' fees and costs, and interest on any judgement.
The Company believes that there are meritorious defenses to Plasma Physics'
allegations, including among other things, that the defendants' use of the
Company's equipment does not infringe the Plasma Physics patents and/or that the
Plasma Physics 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 Plasma Physics will not have a material
adverse effect on the Company's business, financial condition, or results of
operations (taking into account the defenses available to the Company), there
can be no assurances that Plasma Physics will not ultimately prevail in this
dispute and that the Company will not have any indemnity obligations or
liability. If Plasma Physics were to prevail in the dispute, it could have a
material adverse effect on the Company's business, financial condition 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 business, financial condition and results of
operations.
13
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information required by this item is included under "Stock Information" on
page 28 of the Company's 1999 Annual Report to Shareholders and incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included under "Selected Consolidated
Financial Data" on page 17 of the Company's 1999 Annual Report to Shareholders
and incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is included under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 18-25 of
the Company's 1999 Annual Report to Shareholders and incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included under "Quantitative and
Qualitative Disclosures About Market Risk" on pages 26-28 of the Company's 1999
Annual Report to Shareholders and incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included on pages 29-46 of the
Company's 1999 Annual Report to Shareholders and incorporated herein by
reference. Such information is listed under Item 14 of Part IV of this Report on
Form 10-K.
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 Proxy Statement to be
filed in connection with its 2000 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 Proxy Statement to be filed in
connection with its 2000 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
Proxy Statement to be filed in connection with its 2000 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 Proxy Statement to be filed in connection
with its 2000 Annual Meeting of Shareholders and is incorporated herein by
reference.
14
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are incorporated by reference:
(1) Financial Statements.
The following financial statements and schedules of the
Registrant are contained on pages 29-46 of the Company's
1999 Annual Report to Shareholders and are incorporated
herein by reference:
Consolidated Statements of Operations - Years Ended
December 31, 1999, 1998 and 1997
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Cash Flows - Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statement of Shareholders' Equity - Years
Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
(2) Financial Statement Schedules.
The following financial statement schedule is filed as part
of this Report on Form 10-K and should be read in
conjunction with the financial statements:
Schedule II - Valuation and Qualifying Accounts
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)
3.1 Amended and Restated Articles of Incorporation of
Registrant.
3.2(9) Form of Bylaws of Registrant as amended
3.2.1(8) Bylaws Section 2.5 as amended in 1995 re Election and Term
of Office.
3.2.2(8) Bylaws Section 2.2 as amended in 1997 re Number of
Directors.
10.1(5) Asset Purchase Agreement by and between Varian Associates,
Inc. and the Company dated May 7, 1997.
10.2(5) First Amendment to Asset Purchase Agreement by and between
Varian Associates, Inc. and the Company dated June 20,
1997.
10.3(5) 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(5) Sublease (Portion of Unit 9, Palo Alto) by and between
Varian Associates, Inc. and the Company dated May 7, 1997.
10.6(5) Environmental Agreement by and between Varian Associates,
Inc. and the Company dated May 7, 1997.
10.7(5) Cross License Agreement by and between Varian Associates,
Inc. and the Company dated May 7, 1997.
10.8(5) Parts Supply Agreement by and between Varian Associates,
Inc. and the Company dated May 7, 1997.
15
<PAGE> 16
10.9(6) 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(6) 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(6) 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(7) 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(7) 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(7) 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(7) 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(7) 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(7) 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(7) 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(7) 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(7) 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.
*10.20(2) Registrant's Amended and Restated 1984 Stock Option Plan,
together with forms of agreements thereunder
*10.21(4) Registrant's 1992 Stock Option Plan, together with forms of
agreements thereunder
*10.21.1 Form of Restated Stock Purchase Agreement dated December
16, 1999 between Registrant and Jeff Benzing Wilbert van
den Hoek and certain other employees of Registrant
*10.22(3) Registrant's 1992 Employee Stock Purchase Plan
*10.23(1) Form of Agent Indemnification Agreement and amendment
thereto
*10.25(3) Employment Agreement dated June 15, 1992 between the
Registrant and Peter Hanley
*10.26(4) Offer Letter Agreement dated November 1, 1993 between
Registrant and Richard S. Hill
*10.27(9) Employment Agreement dated October 1, 1998 between
Registrant and Richard S. Hill
*10.27.1 Amendment dated December 16, 1999 to Employment Agreement
between Registrant and Richard S. Hill
*10.27.2 Restricted Stock Purchase Agreement dated December 16,
1999 between Registrant and Richard S. Hill
10.28(10) First Amendment to Participation Agreement dated June 4,
1999
10.29(11) Asset Purchase Agreement by and between Fairchild
Technologies USA, Inc. and the Company dated July 29, 1999.
16
<PAGE> 17
13.1 Registrant's 1999 Annual Report to Shareholders (only
portions of this document specifically incorporated herein
by reference are included in this exhibit)
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 18)
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, 1992.
(3) 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.
(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 18,
1994.
(5) 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.
(6) 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.
(7) 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.
(8) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission on March 9, 1998.
(9) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission on March 10, 1999.
(10) Incorporated by reference to Exhibit 10.28 filed with Registrant's Form
10-Q filed with the Securities and Exchange Commission on August 9, 1999.
(11) Incorporated by reference to Exhibit 10.29 filed with Registrant's Form
10-Q filed with the Securities and Exchange Commission on November 8, 1999.
* Management contracts or compensatory plans or arrangements.
17
<PAGE> 18
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 24th day of March, 2000.
NOVELLUS SYSTEMS, INC.
By: /s/ Robert H. Smith
-----------------------------------------
Robert H. Smith
EXECUTIVE VICE PRESIDENT,
FINANCE AND ADMINISTRATION,
PRINCIPAL FINANCIAL OFFICER AND SECRETARY
By: /s/ Kevin S. Royal
-----------------------------------------
Kevin S. Royal
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 24, 2000
- ------------------------------ President and Chief Executive Officer
Richard S. Hill (Principal Executive Officer)
/s/Robert H. Smith Executive Vice President, March 24, 2000
- ------------------------------ Finance and Administration,
Robert H. Smith Chief Financial Officer and Secretary
(Principal Financial Officer)
/s/D. James Guzy Director March 24, 2000
- ------------------------------
D. James Guzy
/s/Tom Long Director March 24, 2000
- ------------------------------
Tom Long
/s/Glen Possley Director March 24, 2000
- ------------------------------
Glen Possley
/s/J. David Litster Director March 24, 2000
- ------------------------------
J. David Litster
/s/William R. Spivey Director March 24, 2000
- ------------------------------
William R. Spivey
</TABLE>
18
<PAGE> 19
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, 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
Year Ended December 31, 1999
Allowance for Doubtful Accounts $ 3,135 $ 586 $ -- $ 3,721
</TABLE>
(1) $15.6 million write-off of the outstanding amount from Submicron
Technology, Inc., total charge $17.7 million. See Note 7, Notes to the
Consolidated Financial Statements.
<PAGE> 20
Exhibit Index
(a) The following documents are incorporated by reference:
<TABLE>
<S> <C>
(1) Financial Statements.
The following financial statements and schedules of the
Registrant are contained on pages 29-46 of the Company's 1999
Annual Report to Shareholders and are incorporated herein by
reference:
Consolidated Statements of Operations - Years Ended December 31,
1999, 1998 and 1997
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Cash Flows - Years Ended December 31,
1999, 1998 and 1997
Consolidated Statement of Shareholders' Equity - Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
(2) Financial Statement Schedules.
The following financial statement schedule is filed as part of
this Report on Form 10-K and should be read in conjunction with
the financial statements:
Schedule II - Valuation and Qualifying Accounts
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)
3.1 Amended and Restated Articles of Incorporation of Registrant.
3.2(9) Form of Bylaws of Registrant as amended
3.2.1(8) Bylaws Section 2.5 as amended in 1995 re Election and Term
of Office.
3.2.2(8) Bylaws Section 2.2 as amended in 1997 re Number of
Directors.
10.1(5) Asset Purchase Agreement by and between Varian Associates,
Inc. and the Company dated May 7, 1997.
10.2(5) First Amendment to Asset Purchase Agreement by and between
Varian Associates, Inc. and the Company dated June 20, 1997.
10.3(5) 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(5) Sublease (Portion of Unit 9, Palo Alto) by and between Varian
Associates, Inc. and the Company dated May 7, 1997.
</TABLE>
<PAGE> 21
<TABLE>
<S> <C>
10.6(5) Environmental Agreement by and between Varian Associates, Inc.
and the Company dated May 7, 1997.
10.7(5) Cross License Agreement by and between Varian Associates, Inc.
and the Company dated May 7, 1997.
10.8(5) Parts Supply Agreement by and between Varian Associates, Inc.
and the Company dated May 7, 1997.
10.9(6) 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(6) 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(6) 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(7) 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(7) 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(7) 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(7) 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(7) 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(7) 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(7) 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(7) 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(7) 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.
*10.20(2) Registrant's Amended and Restated 1984 Stock Option Plan,
together with forms of agreements thereunder
*10.21(4) Registrant's 1992 Stock Option Plan, together with forms of
agreements thereunder
*10.21.1 Form of Restated Stock Purchase Agreement dated December 16,
1999 between Registrant and Jeff Benzing, Wilbert van den Hoek
and certain other employees of Registrant
*10.22(3) Registrant's 1992 Employee Stock Purchase Plan
*10.23(1) Form of Agent Indemnification Agreement and amendment thereto
*10.25(3) Employment Agreement dated June 15, 1992 between the Registrant
and Peter Hanley
*10.26(4) Offer Letter Agreement dated November 1, 1993 between Registrant
and Richard S. Hill
*10.27(9) Employment Agreement dated October 1, 1998 between Registrant
and Richard S. Hill
*10.27.1 Amendment dated December 16, 1999 to Employment Agreement
between Registrant and Richard S. Hill
*10.27.2 Restricted Stock Purchase Agreement dated December 16, 1999
between Registrant and Richard S. Hill
</TABLE>
<PAGE> 22
<TABLE>
<S> <C>
10.28(10) First Amendment to Participation Agreement dated June 4, 1999
10.29(11) Asset Purchase Agreement by and between Fairchild Technologies
USA, Inc. and the Company dated July 29, 1999.
13.1 Registrant's 1999 Annual Report to Shareholders (only portions
of this document specifically incorporated herein by reference
are included in this exhibit)
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 18)
27.1 Financial Data Schedule
</TABLE>
----------------
(1) Incorporated by reference to the exhibit filed with Registrant's
Registration Statement on Form S-1, File No. 33-23011, which was declared
effective August 11, 1988.
(2) Incorporated by reference to the exhibit filed with Registrant's Report on
Form 10-K filed with the Securities and Exchange Commission on March 30, 1992.
(3) 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.
(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 18,
1994.
(5) 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.
(6) 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.
(7) 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.
(8) Incorporated by reference to the exhibit filed with Registrant's Report
on Form 10-K filed with the Securities and Exchange Commission on March 9,
1998.
(9) Incorporated by reference to the exhibit filed with Registrant's Report
on Form 10-K filed with the Securities and Exchange Commission on March 10,
1999.
(10) Incorporated by reference to Exhibit 10.28 filed with Registrant's Form
10-Q filed with the Securities and Exchange Commission on August 9, 1999.
(11) Incorporated by reference to Exhibit 10.29 filed with Registrant's Form
10-Q filed with the Securities and Exchange Commission on November 8, 1999.
* Management contracts or compensatory plans or arrangements.
<PAGE> 1
EXHIBIT 3.1
RESTATED
ARTICLES OF INCORPORATION
OF
NOVELLUS SYSTEMS, INC.
Robert F. Graham and Joseph F. Dox hereby certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of Novellus Systems, Inc., a California corporation (the
"Corporation").
2. The Articles of Incorporation of the Corporation are amended and
restated to read in full as follows:
ARTICLE I
NAME
The name of this Corporation is Novellus Systems, Inc.
ARTICLE II
PURPOSE
The purpose of this Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business,
or the practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
STOCK
The Corporation is authorized to issue two classes of shares 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 20,000,000.
The Preferred shares authorized by these Articles of Incorporation may
be issued from time to time in one or more series. The Board of Directors is
authorized to determine or alter any
<PAGE> 2
or all of the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of Preferred shares, and to fix or alter
the number of shares comprising any such series and the designation thereof, or
any of them, and to provide for the rights and terms of redemption or conversion
of the shares of any such series.
ARTICLE IV
LIABILITY OF DIRECTORS
The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
ARTICLE V
INDEMNIFICATION OF AGENTS
The Corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) for breach of duty
to the Corporation and its stockholders through bylaw provisions, through
agreements with the agents, or otherwise, in excess of the indemnification
otherwise permitted by Section 317 of the California Corporations Code, subject
to the limits on such excess indemnification set forth in Section 204 of the
California Corporations Code.
3. The foregoing amendment and restatement of articles of incorporation
has been duly approved by the Board of Directors of the Corporation.
4. The foregoing amendment and restatement of articles of incorporation
has been duly approved by the required vote of the shareholders of this
corporation in accordance with Section 902 of the California General Corporation
Law.
The total number of outstanding shares of this Corporation entitled to
vote with respect to the foregoing amendment was 5,412,730 shares of Common
Stock. The number of shares voting in favor of the amendment equaled or exceeded
the vote required. The percentage vote required was more than 50%. No preferred
shares are outstanding.
/s/ Robert F. Graham
------------------------------------
Robert F. Graham, President
/s/ Joseph F. Dox
------------------------------------
<PAGE> 3
Joseph F. Dox, Secretary
The undersigned certify under penalty of perjury that they have read the
foregoing certificate and know the contents thereof, and that the statements
therein are true.
Executed at San Jose, California, on August 18, 1988.
/s/ Robert F. Graham
------------------------------------
Robert F. Graham, President
/s/ Joseph F. Dox
------------------------------------
Joseph F. Dox, Secretary
<PAGE> 4
CERTIFICATE OF AMENDMENT
OF THE
RESTATED ARTICLES OF INCORPORATION OF
NOVELLUS SYSTEMS, INC.
Robert F. Graham and Joseph F. Dox hereby certify that:
1. They are the President and Secretary, respectively, of Novellus
Systems, Inc., a California corporation.
2. Articles IV of the Restated Articles of Incorporation of this
corporation is amended to read in its entirety as follows:
"IV
SECTION 4.1. LIMITATION OF DIRECTORS' LIABILITY. The liability
of the directors of the corporation for monetary damages shall be
eliminated to the fullest extent permissible under California law.
SECTION 4.2. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The
corporation is authorized to indemnify the directors and officers of the
corporation to the fullest extent permissible under California law.
SECTION 4.3. REPEAL OR MODIFICATION. Any repeal or modification
of the foregoing provisions of this Article IV by the shareholders of
the corporation shall not adversely affect any right or protection of a
director or officer of the corporation existing at the time of such
repeal or modification."
3. Article V of the Restated Articles of Incorporation is deleted in its
entirety.
4. The foregoing amendment to the Restated Articles of Incorporation of
this corporation has been duly approved by the Board of Directors of this
corporation.
5. The foregoing amendment of the Restated Articles of Incorporation has
been duly approved by the required vote of shareholders in accordance with
Section 902 of the California Corporations Code. The total number of outstanding
shares of the corporation is 5,464,365
<PAGE> 5
shares of Common Stock. The number of shares voting in favor of the amendment
equalled or exceeded the vote required. The percentage vote required was more
than 50%.
We 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.
Dated as of April 28, 1989.
/s/ Robert F. Graham
------------------------------------
Robert F. Graham, President
/s/ Joseph F. Dox
------------------------------------
Joseph F. Dox, Secretary
<PAGE> 6
NOVELLUS SYSTEMS, INC.
CERTIFICATE OF AMENDMENT OF
RESTATED ARTICLES OF INCORPORATION
Robert Graham and Joseph Dox certify that:
1. They are the President and the Secretary, respectively, of NOVELLUS
SYSTEMS, INC., a California corporation.
2. Article III of the Articles of Incorporation of this corporation is
amended in its entirety to read as follows:
"III.
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 40,000,000. 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."
The Preferred shares authorized by these Articles of
Incorporation may be issued from time to time in one or more series. The
Board of Directors is authorized to determine or alter any of the
rights, preferences, privileges and restrictions granted to or imposed
upon any wholly unissued series of Preferred shares, and to fix or alter
the number of shares comprising any such series and the designation
thereof, or any of them, and to provide for the rights and terms of
redemptions or conversion of the shares of any such series."
3. The foregoing amendment of the Restated Articles of Incorporation was
duly approved by the Board of Directors on July 13, 1990.
4. The foregoing amendment to the 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, and pursuant to Section
902(c) of the California Corporations Code shareholder approval is not required
for this action. The corporation has only one class of shares outstanding, to
wit, Common Shares.
5. The foregoing amendment of the Restated Articles of Incorporation of
Novellus Systems, Inc. shall become effective at the close of business on August
1, 1990.
<PAGE> 7
Each of the undersigned further declares under penalty of perjury under
the laws of the State of California that the matters set forth in the foregoing
certificate are true of his own knowledge.
Executed on July 17, 1990 at San Jose, California.
/s/ Robert F. Graham
------------------------------------
Robert F. Graham, President
/s/ Joseph F. Dox
------------------------------------
Joseph F. Dox, Secretary
<PAGE> 8
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 to the 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.
<PAGE> 9
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
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> 10
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 240,000,000. 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 three (3)
shares of Common Stock."
3. The foregoing amendment of the Restated Articles of Incorporation was
duly approved by the Board of Directors on December 17, 1997.
4. The foregoing amendment to the Restated Articles of Incorporation is
to effect a three-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
December 30, 1999.
<PAGE> 11
IN WITNESS WHEREOF, the undersigned have executed this certificate on
December 22, 1999.
/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
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 22nd day of December, 1999, 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 10.21.1
NOVELLUS SYSTEMS, INC.
RESTRICTED STOCK AGREEMENT
THIS AGREEMENT is entered into as of the 16th day of December, 1999, by
and between Novellus Systems, Inc., a California corporation (the "Company") and
_____________ ("Recipient").
W I T N E S S E T H:
WHEREAS, the Company regards Recipient as a valuable contributor to the
Company and has determined that it would be in the interest of the Company and
its shareholders to issue the Stock (as defined below) provided for in this
Agreement to Recipient as a reward and incentive for his continued service with
the Company;
WHEREAS, the issuance of the Stock pursuant to this Agreement shall be
in accordance with the Company's 1992 Stock Option Plan, as amended (the "Plan")
and subject to the terms of the Plan pertaining to stock grants to employees
thereunder.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the parties to this Agreement hereby agree as follows:
1. Restricted Stock Grant.
(a) Stock Grant. On the Effective Date (as defined in
Section 1(c) below), the Company grants and issues to Recipient _____________
shares of Common Stock, no par value, of the Company (the "Stock") as
consideration for past services performed by Recipient for the Company. Stock
certificates evidencing the Stock will be retained by the Company, accompanied
by blank stock powers executed by Recipient (attached as Exhibit A), for the
period during which the Stock constitutes Restricted Stock (as defined below)
pursuant to the terms of Sections 2 and 3 hereof.
(b) Rights of Shareholder; Additional Securities. All shares
of Stock issued hereunder shall be deemed issued to Recipient as fully paid and
nonassessable shares, and Recipient shall have all rights of a shareholder with
respect thereto, including the right to vote, receive dividends (including stock
dividends), participate in stock splits or other recapitalizations, and exchange
such shares in a merger, consolidation or other reorganization. The term
"Stock," in addition to the shares purchased pursuant to this Agreement, also
refers to all securities received as a result of ownership of the Stock
(hereinafter called "Additional Securities"), including, without limitation,
warrants, options and securities received as a stock dividend or as a result of
any stock split, or as a result of a recapitalization, reorganization, exchange
or the like.
1
<PAGE> 2
(c) Date. The "Effective Date" for purposes of this Agreement
shall be December 16, 1999.
2. Transfer Restrictions. No Stock issued to the Recipient hereunder
shall be sold, transferred by gift, pledged, hypothecated, or otherwise
transferred or disposed of by the Recipient prior to the date when the Recipient
shall become vested in such Stock pursuant to Section 3 below, and such Stock
shall constitute "Restricted Stock" until such date. Any attempt to transfer
Stock in violation of this Section 2 shall be null and void and shall be
disregarded by the Company.
3. Forfeiture Condition and Vesting.
(a) Forfeiture Condition. Except as set forth hereinbelow, in
the event that Recipient's Continuous Service terminates for any reason, at a
time when the Recipient holds any Restricted Stock, such Restricted Stock shall
be forfeited and deemed reconveyed to the Company without payment of any
consideration by the Company and without further action by Recipient or the
Company. In such event, the Company shall thereafter have all rights and
interest in or related to such Restricted Stock and be authorized to take such
action as it deems appropriate to retire the Restricted Stock through use of the
executed stock power and share certificate held by the Company in the escrow
established pursuant to Section 4 below.
(b) Vesting of the Stock.
(i) "TIME VESTING." The Company and Recipient agree
that (A) 50% of the Stock shall be vested and no longer be deemed Restricted
Stock as of December 31, 2003 (the "Time Vesting Date") provided that
Recipient's Continuous Service has not terminated on or prior to the Time
Vesting Date; and (B) irrespective of the Recipient's termination of Continuous
Service on or prior to the Time Vesting Date, such 50% of the Stock shall be
vested and no longer be deemed Restricted Stock upon the termination of
Recipient's Continuous Service as a result of Recipient's death or Permanent
Disability, and shall not be forfeited to the Company, notwithstanding the
provisions of the Forfeiture Condition set forth in Section 3(a).
(ii) "PERFORMANCE VESTING." The Company and Recipient
agree that 25% of the Stock shall be vested and no longer be deemed Restricted
Stock provided that (A) Recipient's Continuous Service has not terminated on or
prior to the Time Vesting Date and (B) the Company shall have achieved a $1.5
billion annual revenue level measured by the total of the publicly reported
revenues of the Company for any four consecutive completed fiscal quarters
ending on or before the Time Vesting Date. The Company and Recipient further
agree that an additional 25% of the Stock shall be vested and no longer be
deemed Restricted Stock provided that (C) Recipient's Continuous Service has not
terminated on or prior to the Time Vesting Date and (D) the Company shall have
achieved a $2 billion annual revenue level measured by the total of the publicly
reported revenues of the Company for any four consecutive completed fiscal
quarters ending on or before the Time Vesting Date. In the event that as of the
Time Vesting Date, the Company has not met either of the revenue levels
described in (B) or (D), above, in each such case 25% of the Stock shall be
forfeited in accordance with the
2
<PAGE> 3
provisions of the Forfeiture Condition set forth in Section 3(a), above, as if
the Recipient's Continuous Service had then terminated.
(c) Definitions. For purposes of this Agreement, the following
definitions shall apply:
(i) "CONTINUOUS SERVICE" shall mean that the provision
of services to the Company or a Related Entity by the Recipient in any capacity
of employee, director or consultant, is not interrupted or terminated.
Continuous Service shall not be considered interrupted in the case of (i) any
approved leave of absence, (ii) transfers among the Company, any Related Entity,
or any successor, in any capacity of employee, director or consultant, or (iii)
any change in status as long as the individual remains in the service of the
Company or a Related Entity in any capacity of employee, director or consultant.
An approved leave of absence shall include sick leave, military leave, or any
other authorized personal leave;
(ii) "PERMANENT DISABILITY" shall mean a physical or
mental condition that prevents Recipient from performing his duties to the
Company for a period of ninety (90) consecutive days or one hundred twenty (120)
days during any one hundred eighty (180) day period; and
(iii) "RELATED ENTITY" shall mean any Parent, Subsidiary
and any business, corporation, partnership, limited liability company or other
entity in which the Company, a Parent or a Subsidiary holds a substantial
ownership interest, directly or indirectly..
4. Escrow of Stock. For purposes of facilitating the enforcement of the
provisions of Sections 2 and 3, Recipient agrees, immediately upon receipt of
the certificate(s) for the Stock, to deliver such certificate(s), together with
a stock power (attached as Exhibit A) executed in blank by Recipient and
Recipient's spouse (if required for transfer) with respect to each such stock
certificate, to the Secretary or Assistant Secretary of the Company, or their
designee, to hold in escrow for so long as such Stock remains Restricted Stock,
with the authority to take all such actions and to effectuate all such transfers
and/or releases as may be necessary or appropriate to accomplish the objectives
of this Agreement in accordance with the terms hereof. Recipient hereby
acknowledges that the appointment of the Secretary or Assistant Secretary of the
Company (or their designee) as the escrow holder hereunder with the stated
authorities is a material inducement to the Company to make this Agreement and
that such appointment is coupled with an interest and is accordingly
irrevocable. Recipient agrees that such escrow holder shall not be liable to any
party hereto (or to any other party) for any actions or omissions unless such
escrow holder is grossly negligent relative thereto. The escrow holder may rely
upon any letter, notice or other document executed by any signature purported to
be genuine and may resign at any time. Any Additional Securities shall be
retained by the Company in the same manner and subject to the same conditions as
the Restricted Stock with respect to which they were issued. Recipient shall be
entitled to direct the Company to exercise any warrant or option received as
Additional Securities upon supplying the funds necessary to do so, in which
event the securities so purchased shall constitute Additional Securities, but
the Recipient may not direct the Company to sell any such warrant or option. If
Additional
3
<PAGE> 4
Securities consist of a convertible security, Recipient may exercise any
conversion right, and any securities so acquired shall be deemed Additional
Securities. Additional Securities shall be subject to the provisions of this
Agreement in the same manner as the Restricted Stock.
5. Withholding of Taxes. At such time as the Stock becomes vested as
provided in Section 3 hereof, Recipient shall immediately pay the Company the
amount necessary to satisfy any applicable federal, state, and local income and
employment tax withholding requirements. After the possibilities of forfeiture
under Section 3 have lapsed and subject to the approval of the Stock Option and
Compensation Committee if required by Rule 16b-3 of the Securities and Exchange
Commission, Recipient may surrender to the Company any number of shares of Stock
necessary to pay all or part of any withholding tax due arising from shares
awarded under this Agreement, based on the fair market value of such shares
surrendered. The fair market value shall be the closing price of the Company's
Common Stock on the NASDAQ National Market System for the last trading day prior
to surrender, as reported in The Wall Street Journal.
6. Legends; Stop Transfer.
(a) All certificates for shares of the Stock shall bear
substantially the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE TERMS
OF THAT CERTAIN RESTRICTED STOCK AGREEMENT BETWEEN THE COMPANY AND THE
NAMED SHAREHOLDER. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH SUCH AGREEMENT, A COPY OF WHICH IS
ON FILE WITH THE SECRETARY OF THE COMPANY.
(b) The certificates for shares of the Stock shall also bear
any other legends required by applicable state corporate or securities laws.
7. Stop-Transfer Notices. In order to ensure compliance with the
restrictions on transfer set forth in this Agreement, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and, if
the Company transfers its own securities, it may make appropriate notations to
the same effect in its own records.
8. Refusal to Transfer. The Company shall not be required (i) to
transfer on its books any Stock that has been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Stock or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Stock shall have been so transferred.
9. NO EFFECT ON TERMS OF CONTINUOUS SERVICE. THIS AGREEMENT SHALL NOT
CONFER UPON RECIPIENT ANY RIGHT WITH RESPECT TO CONTINUATION OF RECIPIENT'S
CONTINUOUS SERVICE WITH
4
<PAGE> 5
THE COMPANY OR A RELATED ENTITY, NOR SHALL IT INTERFERE IN ANY WAY WITH THE
RIGHT OF RECIPIENT OR THE COMPANY TO TERMINATE RECIPIENT'S CONTINUOUS SERVICE
WITH THE COMPANY OR A RELATED ENTITY AT ANY TIME FOR ANY REASON WITH OR WITHOUT
CAUSE OR CHANGE THE TERMS OF RECIPIENT'S CONTINUOUS SERVICE.
10. Section 83(b) Election and Withholding of Taxes. The Recipient shall
provide the Company with a copy of any timely election made pursuant to Section
83(b) of the Internal Revenue Code or similar provision of state law
(collectively, an "83(b) Election"), a form of which is attached hereto as
Exhibit B. If the Recipient makes a timely 83(b) Election, the Recipient shall
immediately pay the Company the amount necessary to satisfy any applicable
foreign, federal, state, and local income and employment tax withholding
obligations. If the Recipient does not make a timely 83(b) Election, the
Recipient shall, as Stock shall vest or at the time withholding is otherwise
required by any applicable law, pay the Company the amount necessary to satisfy
any applicable foreign, federal, state, and local income and employment tax
withholding obligations. The Recipient may satisfy his or her withholding
obligations by authorizing the Company to transfer to the Company the number of
vested shares held in escrow that have an aggregate fair market value equal to
the withholding obligations. The Recipient hereby represents that he or she
understands (a) the contents and requirements of the 83(b) Election, (b) the
application of Section 83(b) to the receipt of the Stock by the Recipient
pursuant to this Agreement, (c) the nature of the election to be made by the
Recipient under Section 83(b), and (d) the effect and requirements of the 83(b)
Election under relevant state and local tax laws. The Recipient further
represents that he or she understands that if he or she intends to file an
election pursuant to Section 83(b) with the Internal Revenue Service, he or she
must do so within thirty (30) days following the Effective Date, and must submit
a copy of such election with his or her federal tax return for the calendar year
in which the Effective Date falls.
11. Successors. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
12. Governance of the Agreement. The Stock is being issued to Recipient
hereunder pursuant to the terms of the Plan, which shall govern with respect to
Recipient in the event of any conflict with the terms of the Plan.
13. Entire Agreement: Governing Law. The Plan and this Agreement
constitute the entire agreement of the parties with respect to the subject
matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and the Recipient with respect to the subject matter
hereof, and may not be modified adversely to the Recipient's interest except by
means of a writing signed by the Company and the Recipient. These agreements are
to be construed in accordance with and governed by the internal laws of the
State of California (as permitted by Section 1646.5 of the California Civil
Code, or any similar successor provision) without giving effect to any choice of
law rule that would cause the application of the laws of any jurisdiction other
than the internal laws of the State of California to the rights and duties of
the parties. Should any provision of this Agreement be determined by a
5
<PAGE> 6
court of law to be illegal or unenforceable, the other provisions shall
nevertheless remain effective and shall remain enforceable.
14. Dispute Resolution The provisions of this Section 14 shall be the
exclusive means of resolving disputes arising out of or relating to the Plan and
this Agreement. The Company and the Recipient shall attempt in good faith to
resolve any disputes arising out of or relating to the Plan and this Agreement
by negotiation between individuals who have authority to settle the controversy.
Negotiations shall be commenced by either party by notice of a written statement
of the party's position and the name and title of the individual who will
represent the party. Within thirty (30) days of the written notification, the
parties shall meet at a mutually acceptable time and place, and thereafter as
often as they reasonably deem necessary, to resolve the dispute. If the dispute
has not been resolved by negotiation, the parties agree that any suit, action,
or proceeding arising out of or relating to the Plan or this Agreement shall be
brought in the United States District Court for the Northern District of
California (or should such court lack jurisdiction to hear such action, suit or
proceeding, in a California state court in the County of Santa Clara) and that
the parties shall submit to the jurisdiction of such court. The parties
irrevocably waive, to the fullest extent permitted by law, any objection the
party may have to the laying of venue for any such suit, action or proceeding
brought in such court. THE PARTIES ALSO EXPRESSLY WAIVE ANY RIGHT THEY HAVE OR
MAY HAVE TO A JURY TRIAL OF ANY SUCH SUIT, ACTION OR PROCEEDING. If any one or
more provisions of this Section 14 shall for any reason be held invalid or
unenforceable, it is the specific intent of the parties that such provisions
shall be modified to the minimum extent necessary to make it or its application
valid and enforceable.
15. Notices. Any notice required or permitted hereunder shall be given
in writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail by certified mail (if the parties are within
the United States) or upon deposit for delivery by an internationally recognized
express mail courier service (for international delivery of notice), with
postage and fees prepaid, addressed to the other party at its address as shown
beneath its signature in the Notice, or to such other address as such party may
designate in writing from time to time to the other party.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have duly executed this
Restricted Stock Agreement as of the date first above written.
NOVELLUS SYSTEMS, INC., RECIPIENT:
a California corporation
By: ____________________________ _______________________________
Title: _________________________
7
<PAGE> 8
EXHIBIT A
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Restricted Stock
Agreement between the undersigned ("Recipient") and Novellus Systems, Inc. (the
"Company") dated December 16, 1999 (the "Agreement"), Recipient hereby sells,
assigns and transfers unto Novellus Systems, Inc. ___________ (___) shares of
Common Stock of Novellus Systems, Inc. standing in Recipient's name on the books
of said corporation represented by Certificate No. _________ herewith and does
hereby irrevocably constitute and appoint the Secretary of the Company to
transfer said stock on the books of the Company with full power of substitution
in the premises. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT
AND THE EXHIBITS THERETO.
Dated: ______________________
________________________________________
The undersigned spouse of _______________________________ joins in this
assignment.
Dated: ______________________
________________________________________
(Spouse of ___________________)
INSTRUCTION: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to effect
the forfeiture condition set forth in the Agreement without
requiring additional signatures on the part of Recipient.
<PAGE> 9
EXHIBIT B
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to the Internal
Revenue Code, to include in gross income for 19__ the amount of any compensation
taxable in connection with the taxpayer's receipt of the property described
below:
1. The name, address, taxpayer identification number and taxable
year of the undersigned are:
TAXPAYER'S NAME:
SPOUSE'S NAME:
TAXPAYER'S SOCIAL SECURITY NO.:
SPOUSE'S SOCIAL SECURITY NO.:
TAXABLE YEAR: Calendar Year 19__
ADDRESS:
2. The property which is the subject of this election is
__________ shares of common stock of Novellus Systems, Inc.
3. The property was transferred to the undersigned on
____________, 19__.
4. The property is subject to the following restrictions.
5. The fair market value of the property at the time of transfer
(determined without regard to any restriction other than a restriction which by
its terms will never lapse) is: $_____ per share x ______ shares = $_________.
6. The undersigned paid $______ per share x _________ shares for
the property transferred or a total of $__________.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The undersigned taxpayer is the person performing the
services in connection with the transfer of said property.
The undersigned will file this election with the Internal Revenue
Service office to which he files his annual income tax return not later than 30
days after the date of transfer of the property. A copy of the election also
will be furnished to the person for whom the services were performed.
Additionally, the undersigned will include a copy of the election with his
income tax return for the taxable year in which the property is transferred. The
undersigned understands that this election will also be effective as an election
under _____________ law.
<PAGE> 10
Dated: _________________________ _______________________________________
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: _________________________ _______________________________________
Spouse of Taxpayer
<PAGE> 1
Exhibit 10.27.1
AMENDMENT TO
EMPLOYMENT AGREEMENT
This Amendment is made and dated December 17, 1999 by and between
Novellus Systems, Inc., a California corporation (the "Company"), and Richard
Hill ("Executive") (collectively, "the parties") with respect to that certain
Employment Agreement between the parties dated October 1, 1998 (the
"Agreement").
RECITALS
1. Executive has been employed by the Company and is currently
serving as the Chairman and Chief Executive Officer pursuant to the terms and
conditions of the Agreement dated October 1, 1998.
2. The parties now desire to amend certain terms of that Agreement
upon the following terms and conditions.
AGREEMENT
ACCORDINGLY, the parties agree as follows:
1. ADDITION OF PARAGRAPH 1(b). Following Paragraph 1(a) of the
Agreement, the parties hereby add the following Paragraph 1(b), entitled
"Renewal":
b. RENEWAL. The term and provisions of this Agreement shall
automatically extend for additional one-year periods if
Executive remains employed on and after December 31 of
each year during the Basic Term of this Agreement, unless
either party notifies the other in writing to the contrary
at least three (3) months prior to the applicable December
31 date that it, or he, does not want the term to so
extend.
2. AMENDMENT OF PARAGRAPH 3(a). Paragraph 3(a) of the
Agreement (regarding Executive's salary) is hereby amended in its entirety to
read as follows:
a. The Company shall pay Executive at an initial base annual
salary of $615,000.00, payable bi-weekly. 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.
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<PAGE> 2
3. AMENDMENT OF PARAGRAPH 3(c). Paragraph 3(c) of the Agreement
(regarding the two relocation loans made by the Company to Executive in June and
July 1997) is hereby amended in its entirety to read as follows:
c. The two relocation loans made by the Company to Executive
in June and July 1997, as evidenced by the two promissory
notes, shall be repaid in full by Executive. However, the
Company shall forgive any interest that accrued on the
relocation loans to date and shall, through March 31,
2000, forgive any additional interest on the two
relocation loans.
4. AMENDMENT OF PARAGRAPH 4(c)(iii). Paragraph 4(c)(iii) (regarding
the Company obligation to pay for Executive's share of health insurance premiums
in the event of a Termination of Executive's Period of Employment by the Company
Not for Cause) is hereby amended in its entirety to read as follows:
(iii) Payment of Executive's share of health insurance premiums
for Executive and his qualified dependents, in accordance
with the Company's existing officer retirement health
benefit program, as evidenced by the July 1993 Board of
Directors' Resolution Regarding Officers' Retirement,
Medical and Dental Coverage without regard to age or
length of service limitations therein.
5. REMOVAL OF PARAGRAPH 4(c)(v). The parties hereby rescind
Paragraph 4(c)(v) (regarding Executive's obligation to repay the Company for the
relocation loans in the event of a Termination of Executive's Period of
Employment by the Company Not For Cause).
6. ADDITION OF PARAGRAPH 4(c)(v). The parties hereby add the
following Paragraph 4(c)(v):
(v) Executive's restricted stock shall immediately vest on the
date his termination becomes effective and, as a
consequence, the Company's right to repurchase such
restricted stock shall immediately lapse on that date.
7. AMENDMENT OF PARAGRAPH 4(e). Paragraph 4(e), entitled "By
Executive Not for Cause," is hereby amended in its entirety to read as follows:
c. 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 the Company's obligations under
this Agreement shall cease, except as otherwise provided
for in this Paragraph
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<PAGE> 3
4(e). In the event Executive terminates the Period of
Employment pursuant to this Paragraph 4(e), the Company
shall pay for Executive's share of health insurance
premiums for Executive and his qualified dependents, in
accordance with the Company's existing officer retirement
health benefit program, as evidenced by the Company's July
1993 Board of Directors' Resolution Regarding Officers'
Retirement, Medical and Dental Coverage, without regard to
age or length of service limitations therein.
8. AGREEMENT CONTINUES. Except as specifically modified herein, the
terms and conditions of the Agreement shall remain in full force and effect.
This Amendment shall be attached to the Agreement as Exhibit A.
9. DEFINITIONS. Capitalized terms used herein shall have the
meanings set for the Agreement, unless otherwise specifically defined herein.
10. REPRESENTATION BY COUNSEL. The parties acknowledge that (a) they
have had the opportunity to consult counsel in regard to this Amendment; (b)
they have read and understand the Amendment and they are fully aware of its
legal effect; and (c) they are entering into this Amendment freely and
voluntarily, and based on each party's own judgment and not on any
representations or promises made by the other party, other than those contained
in this Amendment.
11. DATE OF AMENDMENT. The parties have duly executed this Amendment
as of the date first written above.
________________________________________
Richard Hill
NOVELLUS SYSTEMS, INC.
By: ____________________________________
Robert H. Smith
Executive Vice President
3
<PAGE> 1
Exhibit 10.27.2
NOVELLUS SYSTEMS, INC.
RESTRICTED STOCK AGREEMENT
THIS AGREEMENT is entered into as of the 16th day of December, 1999, by
and between Novellus Systems, Inc., a California corporation (the "Company") and
Richard Hill ("Recipient").
W I T N E S S E T H:
WHEREAS, the Company regards Recipient as a valuable contributor to the
Company and has determined that it would be in the interest of the Company and
its shareholders to issue the Stock (as defined below) provided for in this
Agreement to Recipient as a reward and incentive for his continued service with
the Company;
WHEREAS, the issuance of the Stock pursuant to this Agreement shall be
in accordance with the Company's 1992 Stock Option Plan, as amended (the "Plan")
and subject to the terms of the Plan pertaining to stock grants to employees
thereunder.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the parties to this Agreement hereby agree as follows:
1. Restricted Stock Grant.
(a) Stock Grant. On the Effective Date (as defined in
Section 1(c) below), the Company will grant and issue to Recipient 20,000 shares
of Common Stock, no par value, of the Company (the "Stock") as a consideration
for past services performed by Recipient for the Company. Stock certificates
evidencing the Stock will be retained by the Company, accompanied by blank stock
powers executed by Recipient, for the period during which the Stock constitutes
Restricted Stock (as defined below) pursuant to the terms of Sections 2 and 3
hereof.
(b) Rights of Shareholder; Additional Securities. All shares
of Stock issued hereunder shall be deemed issued to Recipient as fully paid and
nonassessable shares, and Recipient shall have all rights of a shareholder with
respect thereto, including the right to vote, receive dividends (including stock
dividends), participate in stock splits or other recapitalizations, and exchange
such shares in a merger, consolidation or other reorganization. The term
"Stock," in addition to the shares purchased pursuant to this Agreement, also
refers to all securities received as a result of ownership of the Stock
(hereinafter called "Additional Securities"), including, without limitation,
warrants, options and securities received as a stock dividend or as a result of
any stock split, or as a result of a recapitalization, reorganization, exchange
or the like.
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<PAGE> 2
(c) Date. The "Effective Date" for purposes of this Agreement
shall be December 16, 1999.
2. Transfer Restrictions. No Stock issued to the Recipient hereunder
shall be sold, transferred by gift, pledged, hypothecated, or otherwise
transferred or disposed of by the Recipient prior to the date when the Recipient
shall become vested in such Stock pursuant to Section 3 below, and such Stock
shall constitute "Restricted Stock" until such date. Any attempt to transfer
Stock in violation of this Section 2 shall be null and void and shall be
disregarded by the Company.
3. Forfeiture Condition.
(a) Vesting of the Stock. In the event that Recipient's
employment with the Company shall terminate for any reason prior to (1) December
16, 2000, the date on which 33-% of the shares of Stock shall be deemed vested
and cease to be Restricted Stock for the purpose of this Section 3(a) ("1st
Vesting Date"), (2) December 16, 2001, the date on which 33-% of the shares of
Stock issued shall be deemed vested and cease to be Restricted Stock for the
purpose of this Section 3(a) ("2nd Vesting Date"), or (3) December 16, 2002, the
date on which 33-% of the shares of Stock issued shall be deemed vested and
cease to be Restricted Stock for the purpose of this Section 3(a) ("3rd Vesting
Date"), the unvested Stock shall be forfeited and transferred to the Company in
the amounts and in the manner provided in this Section 3(a) effective as of the
date of such termination without further action by Recipient or the Company. In
such event, the Company shall thereafter be authorized to take such action as it
deems appropriate to retire the unvested Stock through use of the executed stock
power and share certificate held by the Company in the escrow established
pursuant to Section 4 below. Subject to the foregoing, the Company and Recipient
agree that (w) 33-% of the Stock shall be vested and no longer be deemed
Restricted Stock as of the 1st Vesting Date (unless the Stock shall have been
previously forfeited by Recipient pursuant to this Section 3); (x) 33-% of the
Stock shall be vested and no longer be deemed Restricted Stock as of the 2nd
Vesting Date (unless the Stock or a portion of the Stock shall have been
previously forfeited by Recipient pursuant to this Section 3); (y) 33-% of the
Stock shall be vested and no longer be deemed Restricted Stock as of the 3rd
Vesting Date (unless the Stock, or a portion of the Stock shall have been
previously forfeited by Recipient pursuant to this Section 3); and (z)
irrespective of the occurrence of the 1st Vesting Date, the 2nd Vesting Date or
the 3rd Vesting Date, 100% of the Stock shall be vested and no longer be deemed
Restricted Stock upon the termination of Recipient's employment with the Company
as a result of his death, Permanent Disability, Involuntary Termination Without
Cause or Constructive Termination.
(b) Definitions. For purposes of this Section, the following
definitions shall apply:
(i) "CONSTRUCTIVE TERMINATION" shall mean any
termination by Recipient of his employment with the Company within sixty (60)
days following the occurrence of any of the following: (A) unless approved in
writing in advance by Recipient, the assignment to Recipient of any duties
materially inconsistent with his position, duties,
2
<PAGE> 3
responsibilities, authority and status, or the removal of any material duties,
responsibilities or authority from such position, except to the extent necessary
in connection with a disability that would qualify under the Company's existing
disability plan, if any, but for any requirement in such plan that the
disability continue for any period of time, for the period of such disability;
(B) unless made on a substantially equal percentage basis as part of a general
reduction applicable to all employees of the Company of the same or greater
rank, a reduction in Recipient's annual base salary in effect at the time any
determination thereof is to be made; or (C) unless approved in writing in
advance by the Recipient's Representative, the Company's requiring the Recipient
to work, apart from reasonable business trips, more than 100 miles from the
location at which Recipient was working on the date of this Agreement;
(ii) "INVOLUNTARY TERMINATION WITHOUT CAUSE" shall mean
the termination by the Company of Recipient's employment with the Company other
than as a result of one or more of the following reasons: (w) chronic alcoholism
or drug addiction, to the extent discharge therefor is permitted by applicable
law; (x) misappropriation of any money or other assets or properties of the
Company or any subsidiary of the Company; (y) the conviction of Recipient of any
felony, or of any lesser crime or offense materially and adversely affecting the
property, reputation or goodwill of the Company or any of its subsidiaries; or
(z) willful or gross neglect by Recipient of his duties, or willful misconduct
by Recipient in connection with the performance of his duties, which neglect or
misconduct shall have an adverse effect on the Company or one of its
subsidiaries and which shall remain unremedied for thirty (30) days after
written notice (indicating with reasonable specificity the events of neglect
and/or misconduct) given to Recipient by the Company through its Board of
Directors; and
(iii) "PERMANENT DISABILITY" shall mean a physical or
mental condition that prevents Recipient from performing his employment duties
to the Company for a period of ninety (90) consecutive days or one hundred
twenty (120) days during any one hundred eighty (180) day period.
4. Escrow of Stock. For purposes of facilitating the enforcement of
the provisions of Sections 2 and 3, Recipient agrees, immediately upon receipt
of the certificate(s) for the Stock, to deliver such certificate(s), together
with a stock power executed in blank by Recipient and Recipient's spouse (if
required for transfer) with respect to each such stock certificate, to the
Secretary or Assistant Secretary of the Company, or their designee, to hold in
escrow for so long as such Stock remains Restricted Stock, with the authority to
take all such actions and to effectuate all such transfers and/or releases as
may be necessary or appropriate to accomplish the objectives of this Agreement
in accordance with the terms hereof. Recipient hereby acknowledges that the
appointment of the Secretary or Assistant Secretary of the Company (or their
designee) as the escrow holder hereunder with the stated authorities is a
material inducement to the Company to make this Agreement and that such
appointment is coupled with an interest and is accordingly irrevocable.
Recipient agrees that such escrow holder shall not be liable to any party hereto
(or to any other party) for any actions or omissions unless such escrow holder
is grossly negligent relative thereto. The escrow holder may rely upon any
letter, notice or other document executed by any signature purported to be
genuine and may resign at any time. Any Additional Securities shall be retained
by the Company in the same
3
<PAGE> 4
manner and subject to the same conditions as the Restricted Stock with respect
to which they were issued. Recipient shall be entitled to direct the Company to
exercise any warrant or option received as Additional Securities upon supplying
the funds necessary to do so, in which event the securities so purchased shall
constitute Additional Securities, but the Recipient may not direct the Company
to sell any such warrant or option. If Additional Securities consist of a
convertible security, Recipient may exercise any conversion right, and any
securities so acquired shall be deemed Additional Securities. Additional
Securities shall be subject to the provisions of Sections 2, 4 and 6 in the same
manner as the Restricted Stock.
5. Withholding of Taxes. At such time as the Stock becomes vested as
provided in Section 3 hereof, Recipient shall immediately pay the Company the
amount necessary to satisfy any applicable federal, state, and local income and
employment tax withholding requirements. After the possibility of forfeiture
under Section 3 has lapsed and subject to the approval of the Stock Option
Committee if required by Rule 16b-3 of the Securities and Exchange Commission,
Recipient may surrender to the Company any number of shares of Stock necessary
to pay all or part of any withholding tax due arising from shares awarded under
this Agreement, based on the fair market value of such shares surrendered. The
fair market value shall be the closing price of the Company's Common Stock on
the NASDAQ National Market System for the last trading day prior to surrender,
as reported in The Wall Street Journal.
6. Corporate Transaction.
(a) Definition. For purposes of this Section 6, a "Corporate
Transaction" shall include any of the following shareholder-approved
transactions to which the Company is a party:
(i) a merger or consolidation in which the Company is
not the surviving entity, except for a transaction the principal purpose of
which is to change the state of the Company's incorporation;
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company in liquidation or dissolution of
the Company; or
(iii) any reverse merger in which the Company is the
surviving entity but in which securities representing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding securities
are transferred to holders different from those who held such securities
immediately prior to such merger.
(b) Release of Forfeiture Condition. In the event of any
Corporate Transaction, any Restricted Stock shall vest in its entirety and
thereby be released from restrictions on transfer and the Forfeiture Condition,
immediately prior to the specified effective date of the Corporate Transaction.
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<PAGE> 5
7. Legends; Stop Transfer.
(a) All certificates for shares of the Stock shall bear
substantially the following legends:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE
TERMS OF THAT CERTAIN RESTRICTED STOCK AGREEMENT BETWEEN THE
COMPANY AND THE NAMED SHAREHOLDER. THE SHARES REPRESENTED BY THIS
CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH SUCH
AGREEMENT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE
COMPANY.
(b) The certificates for shares of the Stock shall also bear
any other legends required by applicable state corporate or securities laws. 8.
NO EFFECT ON TERMS OF EMPLOYMENT. THIS AGREEMENT SHALL NOT CONFER UPON RECIPIENT
ANY RIGHT WITH RESPECT TO CONTINUATION OF RECIPIENT'S EMPLOYMENT WITH THE
COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH THE RIGHT OF RECIPIENT OR THE
COMPANY TO TERMINATE RECIPIENT'S EMPLOYMENT WITH THE COMPANY AT ANY TIME FOR ANY
REASON WITH OR WITHOUT CAUSE OR CHANGE THE TERMS OF EMPLOYMENT OF RECIPIENT.
9. Successors. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
10. Governance of the Plan. The Stock is being issued to Recipient
hereunder pursuant to the terms of the Plan, which shall govern with respect to
Recipient in the event of any conflict with the terms of this Agreement.
11. California Law. The interpretation, performance and enforcement
of this Agreement shall be governed by the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Restricted Stock Agreement as of the date first above written.
NOVELLUS SYSTEMS, INC., RECIPIENT:
a California corporation
By: _____________________________ _______________________________________
Richard Hill
Title: __________________________
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<PAGE> 6
ATTACHMENT A
CONSENT OF SPOUSE
(IF APPLICABLE)
I, _____________________, spouse of Richard Hill have read and approved
the foregoing Agreement. In consideration of the right of my spouse to acquire
shares of Novellus Systems, Inc., as set forth in the Agreement, I hereby
appoint my spouse as my attorney-in-fact in respect to the exercise of any
rights under the Agreement insofar as I may have any rights under the community
property laws of the State of California or similar laws relating to marital
property in effect in the state of our residence as of the date of the signing
of the foregoing Agreement.
Dated: December 16, 1999 _______________________________________
<PAGE> 7
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Restricted Stock
Agreement between the undersigned ("Recipient") and Novellus Systems, Inc. (the
"Company") dated December 16, 1999 (the "Agreement"), Recipient hereby sells,
assigns and transfers unto the Company _______ thousand (_______) shares of
Common Stock of the Company standing in Recipient's name on the books of the
Company represented by Certificate No. _________ herewith and does hereby
irrevocably constitute and appoint the Secretary of the Company to transfer said
stock on the books of the Company with full power of substitution in the
premises. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND
THE EXHIBITS THERETO.
Dated: ____________________, _______
By: ___________________________________
___________________________________
INSTRUCTION: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to effect
the forfeiture condition set forth in the Agreement without
requiring additional signatures on the part of Recipient.
<PAGE> 1
EXHIBIT 13.1
FINANCIAL HIGHLIGHTS (IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE DATA)
<TABLE>
<CAPTION>
1999 QUARTER ENDED (UNAUDITED) MAR 27 JUN 26 SEP 25 DEC 31
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 115,231 $ 130,878 $ 154,916 $ 191,716
Gross profit $ 61,134 $ 69,582 $ 83,721 $ 106,594
Gross profit as a % of sales 53% 53% 54% 56%
Operating income $ 12,719 $ 14,945 $ 28,605 $ 44,068
Net income $ 9,425 $ 12,399 $ 21,773 $ 32,977
Basic earnings per share(2) $ 0.09 $ 0.11 $ 0.19 $ 0.28
Diluted earnings per share(2) $ 0.08 $ 0.10 $ 0.18 $ 0.27
Shares used in basic per share
calculations(2) 107,928 116,335 116,823 118,183
Shares used in diluted per share
calculations(2) 113,393 120,781 121,937 124,277
</TABLE>
<TABLE>
<CAPTION>
1998 QUARTER ENDED (UNAUDITED) MAR 28 JUN 27 SEP 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) $ 0.21 $ 0.16 $ 0.07 $ 0.08
Diluted earnings per share(2) $ 0.20 $ 0.15 $ 0.07 $ 0.08
Shares used in basic per share
calculations(2) 101,449 101,796 102,285 102,894
Shares used in diluted per share
calculations(2) 104,572 105,142 103,977 106,153
</TABLE>
(2) The earnings per share amounts and shares used have been adjusted to
reflect the Company's three-for-one stock split, effective January 15,
2000.
11
<PAGE> 2
Selected Consolidated Financial Data [in thousands, except per share data]:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995
- ------------------------------------- ----------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales $592,741 $518,778 $534,004 $461,736 $373,732
Gross profit 321,031 280,865 290,438 264,574 216,147
Net income (loss) 76,574 52,828 (95,658)(1) 94,029 82,543
Basic earnings (loss) per share(2) $ 0.67 $ 0.52 $ (0.96) $ 0.97 $ 0.84
Diluted earnings (loss) per share(2) $ 0.64 $ 0.50 $ (0.96) $ 0.95 $ 0.80
Shares used in basic per share
calculations(2) 114,817 102,106 99,770 96,468 98,136
Shares used in diluted per share
calculations(2) 120,097 104,961 99,770(3) 99,054 102,822
DECEMBER 31, 1999 1998 1997 1996 1995
- ------------------------------------- ----------- ----------- ----------- ---------- ------------
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents,
and short-term investments $385,257 $130,818 $ 98,089 $176,668 $149,799
Working capital 592,436 287,621 223,710 287,818 226,257
Total assets 909,929 551,939 493,300 459,787 364,688
Long-term obligations -- 65,000 65,000 -- --
Shareholders' equity 769,699 375,465 301,001 373,636 272,782
Cash dividends per share -- -- -- -- --
</TABLE>
(1) The Company's reported loss of $95.7 million or $0.96 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 and shares used have been adjusted
to reflect the Company's two-for-one stock split, effective October 1997
and the Company's three-for-one stock split, effective January 15, 2000.
(3) Excludes common stock equivalents as they are antidilutive to the loss per
share for the year.
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<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Net Sales
Net sales were $592.7 million, $518.8 million, and $534.0 million in 1999, 1998,
and 1997, respectively. The increase of approximately 14% from 1998 to 1999
reflects the strengthening of the semiconductor industry, as it appears to be in
the early stages of a broad-based recovery. The increase in sales is
attributable to both capacity and technology purchases. The Company's CVD
equipment showed strong sales primarily as a result of increasing demand for its
Concept Two products offset by the decline in demand for the Company's Concept
One products. 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. International sales were
approximately 67% of net sales in 1999, an increase from 51% in 1998. The
increase is the result of higher demand in Japan, Korea, and Pacific Rim
countries offset by lower demand in Europe. 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. 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 $321.0 million, $280.9 million, and $290.4 million in 1999,
1998, and 1997, respectively. The absolute dollar increase from 1998 to 1999 is
due to higher net sales. The absolute dollar decrease from 1997 to 1998 was due
to lower net sales. As a percentage of net sales, gross profit remained
consistent at 54% in 1999, 1998 and 1997. While gross profit as a percentage of
sales remained constant in all three years, the Company experienced a higher
level of unabsorbed fixed costs in 1998 as compared with 1997. The higher
unabsorbed fixed costs in 1998 were offset by stronger system gross margins due
to lower sales of older, lower margin PVD systems associated with the
acquisition of TFS. During the latter half of 1999, the level of unabsorbed
fixed costs declined, however, the Company incurred higher warranty costs in
1999 as compared to 1998. The Company anticipates that continuing cost reduction
programs, increasing sales volumes and the corresponding higher absorption of
fixed overhead costs will result in improved near term gross margins.
Selling, General, and Administrative
Selling, general, and administrative expenses were $101.0 million, $95.4
million, and $89.5 million in 1999, 1998, and 1997, respectively. As a
percentage of net sales, selling, general, and administrative expenses were
approximately 17%, 18%, and 17% in 1999, 1998, and 1997, respectively. The
increase in absolute dollars from 1998 to 1999 is attributable to increased
costs associated with the growth in revenues. However, the decrease as a
percentage of net sales from 1998 to 1999 reflects the Company's ongoing efforts
to control selling, general, and administrative expenses despite the rapid
growth in revenues. 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,
acquired from Varian in June 1997.
Research and Development
Research and development expenses were $119.7 million, $106.5 million, and $89.8
million (excluding a charge for acquired in-process research and development of
$119.2 million), in 1999, 1998, and 1997, respectively. The increases reflect
the Company's continued 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
18
<PAGE> 4
the next generation of smaller geometry fabrication lines, as well as equipment
to process 300mm wafers. As a percentage of net sales, research and development
expenses were approximately 20%, 21%, and 17% in 1999, 1998, and 1997,
respectively. The Company plans to continue to invest in new products and
increase research and development spending in absolute dollars. However, as the
Company continues to experience growth in revenues, research and development
expenses as a percentage of revenues will continue to decline.
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 1999, 1998, and 1997 were $10.3
million, $5.5 million, and $8.0 million, respectively.
Acquisition of Thin Film Systems
In connection with the acquisition of the Thin Film Systems Division 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. As of December 31, 1999, 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.
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
In the quarter ended June 28, 1997, the Company recorded 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 $14.0 million, $1.1 million, and $2.9 million, in 1999,
1998, and 1997, respectively. The increase from 1998 to 1999 was due to higher
average cash and short-term investment balances. In February 1999, the Company
completed a secondary public offering of 11.6 million shares of common stock,
resulting in net proceeds to the Company of $255.3 million. In addition,
long-term borrowings of $65.0 million were repaid subsequent to the stock
offering, which resulted in a reduction of interest expense. 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.
Provision (Benefit) for Income Taxes
The provision for income taxes reflects an effective tax rate of 33% in 1999,
34% in 1998, and (21%) in 1997. The decrease in the effective tax rate in 1999
versus 1998 is due to increased benefit from the foreign sales corporation. 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, 1999, the Company has recognized a deferred tax asset of $54.6
million, net of a valuation allowance of $13.8 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 $18.3 million and future
taxable income.
19
<PAGE> 5
Net Income (Loss)
Net income for the year ended December 31, 1999 was $76.6 million or $0.67 and
$0.64 per basic and diluted shares, respectively, compared with net income for
the year ended December 31, 1998 of $52.8 million or $0.52 and $0.50 per basic
and diluted shares, respectively.
Net income for the year ended December 31, 1998 was $52.8 million or $0.52 and
$0.50 per basic and diluted shares, respectively, compared with a net (loss) for
the year ended December 31, 1997 of $(95.7) million or $(0.96) 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 $0.75 and $0.72 per basic and diluted
shares, respectively.
The number of shares used in the per share calculations for the year ended
December 31, 1999 was 114.8 million and 120.1 million shares, respectively for
the basic and diluted income per share calculations, compared with 102.1 million
and 105.0 million for the basic and diluted income per share calculations,
respectively, for the year ended December 31, 1998. The increase in shares used
compared to the comparable year-ago periods is primarily due to an increased
number of common stock outstanding resulting from the common stock offering of
11.6 million shares in February 1999 and the exercise of stock options in 1999.
Shares used for year ended December 31, 1997 exclude common stock equivalents as
they are antidilutive.
Repurchase of Common Stock
During 1999, 1998 and 1997, the Company repurchased 18,000, 27,000 and 18,000
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 accumulated other comprehensive income.
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 1999, 1998, and 1997,
these hedging contracts were denominated primarily in the Japanese Yen. The
maturities of all the forward foreign exchange contracts are generally
short-term in nature. 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.
Other Issues
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, 2000. The Company is still in the process of
assessing the impact of SFAS No. 133 on its financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB 101
provides guidance on the recognition,
20
<PAGE> 6
presentation, and disclosure of revenue in financial statements of all public
registrants. The semiconductor capital equipment industry and the accounting
profession are currently evaluating various practical implementation
considerations. Changes in our revenue recognition policy resulting from the
interpretation of SAB 101 would not involve any restatement of prior periods but
would, to the extent applicable, be reported as a change in accounting principle
in the quarter ending July 1, 2000. To the extent that SAB 101 is relevant to
recognition of revenue on our future shipments, we would adopt the new
accounting principle effective April 2, 2000. Accordingly, any shipments
previously reported as revenue that do not meet SAB 101 revenue recognition
guidance would be recorded as revenue in future periods. At the current time, it
is not possible to determine the effect this change will have on our financial
statements. However, management believes that SAB 101, to the extent applicable
to us, will not affect the underlying strength or weakness of our business
operations as measured by the dollar value of our product shipments and cash
flows.
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 31,1999 consisted
of $385.3 million of cash, cash equivalents and short-term investments. This
amount represents an increase of $254.5 million from the December 31, 1998
balance of $130.8 million. During the first quarter of 1999, the Company
completed a secondary public offering of 11.6 million shares of common stock
that resulted in net proceeds to the Company of $255.1 million. During the
second quarter of 1997, the Company entered into a five year $125.0 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.
During March 1999, total borrowings of $65.0 million were repaid. The Senior
Credit Facility requires the Company to be in compliance with certain financial
covenants. At December 31, 1999, the Company was in compliance with these
financial covenants. In addition, at December 31, 1999, there was $13.5 million
available under bank lines of credit that expire at various dates through June
2002. At December 31, 1999 approximately $13.5 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,
1999 for borrowings under the bank lines of credit was 1.14%.
Net cash provided by operating activities during the year ended December 31,
1999 was $83.7 million. This amount consisted primarily of net income of $76.6
million, non-cash depreciation and amortization charges of $29.8 million, an
increase of $12.5 million in accounts payable, increases in other accrued
liabilities and accrued payroll of $7.4 million and $6.2 million, respectively,
and an increase of $28.4 million in income taxes payable partially offset by an
increase in inventories of $32.8 million, an increase in accounts receivable of
$40.3 million and a decrease in accrued warranty of $5.8 million. The increases
in inventories and accounts receivable were the result of increased net sales
volume, coupled with additions to spare parts inventory to support new sites,
new systems at existing sites and new products in the Company's growing
installed base.
Net cash used in investing activities was $212.2 million during the year ended
December 31, 1999. During this period, the Company's cash outflows consisted of
purchases of approximately $154.1 million, net, of available-for-sale
securities. In addition, the Company had capital expenditures of $28.8 million
and an increase in other assets of $29.4 million. During July 1999, the Company
acquired certain assets, technology, and contract obligations from Fairchild
Technologies USA, Inc. for $7.6 million. The purchase price was allocated to
$1.1 million of assets and $6.5 million of acquired technology. The $6.5 million
of acquired technology was capitalized as an intangible asset in July 1999.
The Company expects investments in property and equipment for the fiscal year
2000 to approximate $64.0 million. The Company intends to finance these
investments from existing cash balances and cash flows from operations.
21
<PAGE> 7
During the year ended December 31, 1999, net cash provided by financing
activities was $228.9 million due primarily to net proceeds of $255.1 million
from a secondary public offering of common stock in the first quarter of 1999
and $38.8 million from common stock option exercises and purchases of common
stock under the Company's employee stock purchase plan. These amounts were
partially offset by a decrease in long-term debt of $65 million, which was
repaid from proceeds of the common stock offering during the first quarter of
1999.
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.
CAUTIONARY STATEMENTS
The statements contained in this Annual Report to Shareholders 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 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 "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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Cautionary Statements - Concentration of Credit Risk" and
"Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note 1 Business and Nature of Operations Concentration of Credit
Risk;" the Company's anticipation that export sales will account for a
significant portion of net sales for the foreseeable future set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Cautionary Statements - International Operations"; the Company's
expectation that it will continue to experience significant fluctuations in its
quarterly operating results set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Cautionary
Statements - Variability of Quarter Operating Results"; 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
"Liquidity and Capital Resources". 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
Report to Shareholders.
Other Cautionary Statements
These additional risks and uncertainties could cause actual results to differ
materially from those described herein and include the following:
Demand Shifts in the PC Industry. 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
22
<PAGE> 8
semiconductor manufacturers. 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 67%, 51%, and
47% of net sales in 1999, 1998, and 1997, 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, are affected
by banking, currency and other difficulties that are contributing to the
economic developments in those countries. The Company derives a substantial
portion of its revenues from customers in Asian countries particularly Japan and
Korea. Economic developments in late 1997 and early 1998 resulted in decreased
capital investments by Asian customers. Recent economic developments indicate
that the economies of Japan, Korea and other Asian countries have recovered
somewhat from 1997 and 1998 levels. Any negative economic developments or delays
in the economic recovery of Asian countries could result in the cancellation or
delay of orders for the Company's products from Asian customers, thus materially
adversely affecting the Company's business, financial condition or results of
operations.
23
<PAGE> 9
In addition to the concerns described above, sales of systems shipped by the
Company's Japanese subsidiary are denominated in Japanese Yen. The Company sells
the systems to its Japanese subsidiary in U.S. Dollars. It then enters into
forward foreign exchange contracts to hedge against the short-term impact of
foreign currency fluctuations of intercompany accounts payable denominated in
U.S. Dollars recorded by the Japanese subsidiary in order to manage this
exposure. However, there can be no assurance that future changes in the Japanese
Yen will not have a material effect on the Company's business, financial
condition or results of operations.
Market Risk. The Company's business depends predominantly on capital
expenditures of semiconductor manufacturers, which in turn depends on the
current and anticipated market demand for integrated circuits and products
utilizing integrated circuits. The semiconductor industry has historically been
very cyclical and has experienced periodic downturns, which have had a material
adverse effect on the semiconductor industry's demand for semiconductor
processing equipment, including equipment manufactured and marketed by the
Company. 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 ship-
24
<PAGE> 10
ment 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.
Impact of Year 2000. In the prior years, the Company discussed the nature and
progress of its plans to become Year 2000 compliant. In late 1999, the Company
completed its remediation and testing of systems. As a result of those planning
and implementation efforts, the Company experienced no significant disruptions
in mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000 date
change. The Company expensed approximately $1.7 million during 1999 in
connection with remediating its systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its products, its
internal systems, or the products and services of third parties. The Company
will continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
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.
25
<PAGE> 11
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 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 $16.9 million as of December 31, 1999 and $12.7 million as of
December 31, 1998.
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 1999 and 1998, 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.
26
<PAGE> 12
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 2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999
---- ---- ---- ---- ---- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash equivalents $181,568 -- -- -- -- -- $181,568 $181,568
Average interest rate 6.17% -- -- -- -- 6.17%
Short-term investments $203,689 -- -- -- -- -- $203,689 $203,689
Average interest rate 5.70% -- -- -- -- 5.70%
Total investment securities $385,257 -- -- -- -- -- $385,257 $385,257
Average interest rate 5.92% -- -- -- -- 5.92%
Short-term borrowing $ 13,521 -- -- -- -- -- $ 13,521 $ 13,521
Average interest rate 1.14% -- -- -- -- 1.14%
</TABLE>
<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 securities $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>
27
<PAGE> 13
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, 1999 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, 1999 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 $38,888 103.19 $(1,424)
British pound (1,085) 0.62 (2)
French franc (13) 6.41 --
Irish punt (104) 0.77 (2)
Germany mark 80 1.91 1
Dutch guilder (95) 2.15 (1)
Singapore dollar (474) 1.66 (1)
Taiwan dollar (4,407) 31.18 (3)
-------------- -------------- -------------
$32,790 $(1,432)
============== ============== =============
</TABLE>
<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>
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>
1999 HIGH LOW
---------------------- ------------- --------------
<S> <C> <C>
First Quarter $25.17 $16.48
Second Quarter 23.58 14.96
Third Quarter 25.29 17.29
Fourth Quarter 42.79 22.29
1998 HIGH LOW
---------------------- ------------- --------------
First Quarter $16.46 $ 9.94
Second Quarter 16.48 10.42
Third Quarter 14.35 7.90
Fourth Quarter 19.31 7.31
</TABLE>
(1) Stock prices have been restated to reflect the Company's three-for-one stock
split, effective January 15, 2000.
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,
1999, there were 581 holders of record of the Company's common stock.
28
<PAGE> 14
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------------------------- -------------- ------------- --------------
(in thousands, except per share data)
<S> <C> <C> <C>
Net sales $592,741 $518,778 $534,004
Cost of sales 271,710 237,913 243,566
-------------- ------------- --------------
Gross profit 321,031 280,865 290,438
Operating expenses:
Selling, general and administrative 101,027 95,407 89,474
Research and development 119,667 106,510 89,830
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 220,694 201,917 414,514
-------------- ------------- --------------
Operating income (loss) 100,337 78,948 (124,076)
Interest:
Income 15,656 5,968 5,684
Expense (1,703) (4,869) (2,741)
-------------- ------------- --------------
Net interest income 13,953 1,099 2,943
-------------- ------------- --------------
Income (loss) before provision (benefit) for 114,290 80,047 (121,133)
income taxes
Provision (benefit) for income taxes 37,716 27,219 (25,475)
-------------- ------------- --------------
Net income (loss) $ 76,574 $ 52,828 $ (95,658)
============== ============= ==============
Basic earnings (loss) per share $ 0.67 $0.52 $ (0.96)
==============
============== =============
Diluted earnings (loss) per share $ 0.64 $0.50 $ (0.96)
============== ============= ==============
Shares used in basic per share calculations 114,817 102,106 99,770
============== ============= ==============
Shares used in diluted per share calculations 120,097 104,961 99,770
============== ============= ==============
</TABLE>
See accompanying notes.
29
<PAGE> 15
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- ------------------------------------------------- ------------ -----------------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 181,568 $ 81,224
Short-term investments 203,689 49,594
Accounts receivable, net of allowance for
doubtful accounts of $3,721 in 1999 and $3,135
in 1998 213,678 173,364
Inventories 103,883 69,223
Deferred tax assets 24,521 21,003
Prepaid and other current assets 5,327 4,687
------------ -----------------
Total current assets 732,666 399,095
Property and equipment:
Machinery and equipment 138,518 113,268
Furniture and fixtures 9,335 8,295
Leasehold improvements 54,349 52,237
------------ -----------------
202,202 173,800
Less accumulated depreciation and amortization 95,423 68,221
------------ -----------------
106,779 105,579
Long-term deferred tax assets 11,770 17,516
Other assets 58,714 29,749
------------ -----------------
Total assets $909,929 $551,939
============ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 43,438 $ 30,966
Accrued payroll and related expenses 19,367 13,138
Accrued warranty 20,083 25,872
Other accrued liabilities 31,150 23,720
Income taxes payable 12,671 4,792
Current obligations under lines of credit 13,521 12,986
------------ -----------------
Total current liabilities 140,230 111,474
Long-term debt -- 65,000
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value;
Authorized shares - 10,000
Issued and outstanding shares - none -- --
Common stock, no par value;
Authorized shares - 240,000
Issued and outstanding shares - 119,064
in 1999 and 103,497 in 1998 490,587 176,140
Retained earnings 277,671 201,581
Accumulated other comprehensive income 1,441 (2,256)
(loss)
------------ -----------------
Total shareholders' equity 769,699 375,465
------------ -----------------
Total liabilities and shareholders' equity $909,929 $551,939
============ =================
</TABLE>
See accompanying notes.
30
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------------------------- ------------- ---------------- ----------------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $76,574 $52,828 ($95,658)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 29,832 23,839 18,288
In-process research and development -- -- 119,246
Restructuring and other costs -- -- 12,043
Bad debt write-off -- -- 17,700
Deferred income taxes 2,228 13,220 (37,226)
Changes in operating assets and
liabilities:
Accounts receivable (40,314) (39,439) (17,899)
Inventories (32,812) 12,895 (5,232)
Prepaid and other current assets (640) 9,934 4,067
Accounts payable 12,472 8,101 (11,294)
Accrued payroll and related expenses 6,229 (7,494) 993
Accrued warranty (5,789) (11,964) 5,551
Other accrued liabilities 7,430 (10,594) 12,068
Income taxes payable 28,423 9,520 7,624
------------- ---------------- ----------------
Total adjustments 7,059 8,018 125,929
------------- ---------------- ----------------
Net cash provided by operating activities 83,633 60,846 30,271
------------- ---------------- ----------------
INVESTING ACTIVITIES
Purchases of available-for-sale securities (407,472) (67,457) (125,663)
Proceeds from the sale and maturity of 253,377 56,687 197,745
available-for-sale securities
Purchase of the net assets of the Thin Film
Systems business of Varian Associates, Inc. -- -- (148,325)
Capital expenditures (28,794) (36,092) (36,153)
(Increase) decrease in other assets (29,354) (10,296) 2,208
------------- ---------------- ----------------
Net cash used in investing activities (212,243) (57,158) (110,188)
------------- ---------------- ----------------
FINANCING ACTIVITIES
Proceeds (payments) from lines of credit, net 535 1,334 (1,501)
Borrowings (repayment) under long-term debt (65,000) -- 65,000
Proceeds from common stock offering, net 255,133 -- --
Common stock issued 38,839 17,288 10,193
Common stock repurchased (553) (351) (272)
------------- ---------------- ----------------
Net cash provided by financing activities 228,954 18,271 73,420
------------- ---------------- ----------------
Net increase (decrease) in cash and cash 100,344 21,959 (6,497)
equivalents
Cash and cash equivalents at the beginning of 81,224 59,265 65,762
the year
------------- ---------------- ----------------
Cash and cash equivalents at the end of the year $181,568 $81,224 $59,265
============= ================ ================
Supplemental disclosures:
Cash paid during the year for:
Interest $ 1,703 $ 4,876 $ 2,741
Income taxes $ 1,399 $ 4,693 $ 393
Other non-cash changes:
Income tax benefits from employee stock plans $ 20,544 $ 4,728 $ 7,624
</TABLE>
See accompanying notes.
31
<PAGE> 17
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
COMMON STOCK RETAINED INCOME SHAREHOLDERS'
SHARES AMOUNT EARNINGS (LOSS) EQUITY
- ---------------------------------------- ---------- ---------- -------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 97,530 $128,751 $244,966 $ (81) $373,636
Exercise of stock options 3,210 14,956 -- -- 14,956
Shares issued under employee stock
Purchase plan 435 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 (18) (25) (247) -- (272)
------- -------- ------- -------- -----------
Balance at December 31, 1997 101,157 154,167 149,061 (2,227) 301,001
Exercise of stock options 1,854 12,617 -- -- 12,617
Shares issued under employee
stock purchase plan 513 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 (27) (43) (308) -- (351)
---------- -------- ------- ------- -----------
Balance at December 31, 1998 103,497 176,140 201,581 (2,256) 375,465
Proceeds from common stock
offering, net 11,580 255,133 -- -- 255,133
Exercise of stock options 3,573 33,566 -- -- 33,566
Shares issued under employee
stock Purchase plan 432 5,273 -- -- 5,273
Income tax benefits realized
from activity in employee
stock plans -- 20,544 -- -- 20,544
Net income -- -- 76,574 -- 76,574
Cumulative translation
adjustment -- -- -- 3,697 3,697
----------
Comprehensive income -- -- -- -- 80,271
----------
Common stock repurchased (18) (69) (484) -- (553)
-------- -------- -------- ------- ----------
Balance at December 31, 1999 119,064 $490,587 $277,671 $ 1,441 $769,699
======== ======== ======== ======= ==========
</TABLE>
See accompanying notes.
32
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1999 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.
33
<PAGE> 19
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>
1999 1998
-------- -------
<S> <C> <C>
Purchased and spare parts $ 71,688 $50,591
Work-in-process 29,621 13,005
Finished goods 2,574 5,627
-------- -------
$103,883 $69,223
======== =======
</TABLE>
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 accumulated other
comprehensive income.
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 1999 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 December 17, 1999 the Company announced that its Board of Directors had
approved a three-for-one split of Novellus' common stock. Each shareholder of
record as of the close of business on December 30, 1999 received two additional
shares 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
three-for-one split, effective January 15, 2000. 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
Earnings (loss) per share is calculated in accordance with SFAS No. 128. Basic
earnings per share exclude any dilutive effects of options. Diluted earnings per
share includes any dilutive effects of options.
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 76,574 $ 52,828 $(95,658)
Denominator:
Denominator for basic earnings (loss)
per share - weighted-average
shares outstanding 114,817 102,106 99,770
Employee stock options 5,280 2,855 --
-------- ------- --------
Denominator for diluted earnings (loss)
per share - adjusted weighted-
average shares outstanding 120,097 104,961 99,770
========= ======== ========
Basic earnings (loss) per share $ 0.67 $ 0.52 $ (0.96)
========= ======== ========
Diluted earnings (loss) per share $ 0.64 $ 0.50 $ (0.96)
========= ======== ========
</TABLE>
34
<PAGE> 20
Options to purchase 261,000 and 2,472,000 shares of common stock at
weighted-average prices of $25.52 and $14.74 per share were outstanding during
1999 and 1998, 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.
Advertising Expenses
The Company expenses advertising costs as incurred. Advertising expenses for
1999, 1998, and 1997 were $4,883,000, $6,065,000 and $3,233,000, 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)
The component of accumulated other comprehensive income,
net of related tax is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Foreign currency translation adjustment $1,441 $(2,256) $(2,227)
------ ------- -------
</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
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, 2000. The Company is still in the process of
assessing the impact of SFAS No. 133 on its financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB 101
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements of all public registrants. Changes in the Company's
revenue recognition policy resulting from the interpretation of SAB 101 would be
reported as a change in accounting principle in the quarter ending July 1,
2000. The change in the revenue recognition policy would result in a cumulative
adjustment in the second quarter of 2000 to reflect the deferral of revenue for
shipments previously reported as revenue, that do not meet SAB 101 revenue
recognition
35
<PAGE> 21
guidance as of April 1, 2000. At the current time, it is not possible to
determine the effect this change will have on the Company's financial
statements. However, management believes that SAB 101, to the extent applicable
to the Company, will not affect the underlying strength or weakness of the
Company's business operations as measured by the dollar value of its product
shipments and cash flows.
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 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. Acquired
assets and liabilities were recorded at their estimated fair values at the date
of the acquisition. The total purchase price has 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, 1999, 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 1999
------------ ----------- -----------
<S> <C> <C> <C>
Duplicative machinery and equipment $ 9,039 $ 9,039 --
Lease commitments and leasehold improvements $ 3,143 $ 3,143 --
Other exiting costs $ 2,061 $ 2,061 --
------------ ----------- -----------
$14,243 $14,243 --
============ =========== ===========
</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 1997 and does not purport to be indicative of what would
have occurred had the acquisition been made as of the beginning of fiscal 1997
or of results which may occur in the future (in thousands, except per share
data).
<TABLE>
<CAPTION>
Year ended
Dec. 31,
1997
------------
<S> <C>
Net sales $584,453
Income before provision for income taxes(1) $ 3,345
Net income(1) $ 2,208
Basic earnings per share(1) $ 0.07
Diluted earnings per share(1) $ 0.06
</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>
<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>
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.
36
<PAGE> 22
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>
1999 1998
--------- -------- ---------- --------- ---------- ----------
NOTIONAL CARRYING ESTIMATED NOTIONAL CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE AMOUNT AMOUNT FAIR VALUE
--------- -------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sell foreign currency, $32,790 -- $(1,432) $21,410 -- $(961)
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, 1999 and 1998, 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, 1999
and 1998. 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, 1999 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>
1999 1998
----------- -----------
<S> <C> <C>
Institutional money market funds $ 64,988 $ 36,373
Commercial paper 116,580 44,851
----------- -----------
Amounts included in cash and cash equivalents 181,568 81,224
----------- -----------
Commercial paper 132,290 11,129
Certificates of deposits 17,992 2,499
Auction rate preferred stock -- 3,200
Corporate securities 38,415 29,763
U.S. Treasury securities and obligations of U.S. Government
Agencies 14,992 3,003
----------- -----------
Amounts included in short-term investments 203,689 49,594
----------- -----------
Total available-for-sale securities $385,257 $130,818
=========== ===========
</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>
1999 1998
---------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $181,568 $181,568 $81,224 $81,224
Current obligations under $ 13,521 $ 13,521 $12,986 $12,986
lines of credit
Long-term debt -- -- $65,000 $65,000
</TABLE>
The fair values of the Company's short-term investments are based on quoted
market prices as of December 31, 1999 and 1998. 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 two banks, which expire at various dates
through October 2000 under which the Company can borrow up to $13.5 million at
the banks' prime rates (0.85% and 1.88% at December 31, 1999). This facility is
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, 1999 and 1998, amounts outstanding were $13.5 million and $13.0
million respectively, at annual weighted average interest rates of 1.14% and
1.52%, respectively. All borrowings under the line of credit were by Nippon
Novellus.
37
<PAGE> 23
NOTE 5 LONG TERM DEBT
In June 1997, the Company entered into a five year, $125 million, Senior Credit
Facility structured as an unsecured revolving credit line. The credit line
expires in June 2002. 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,
1999, total borrowings of $65 million under the revolving line of credit, which
were outstanding at December 31, 1998, were repaid.
The credit facility contains certain financial restrictive covenants. At
December 31, 1999, the Company was in compliance with those covenants.
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,
financial condition or results of operations.
38
<PAGE> 24
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 could have a material
adverse effect on the Company's business, financial condition or results of
operations.
On July 13, 1999, in the Company lawsuit against Applied where the Company has
alleged that Applied infringes Company patents, the Court ruled on the
interpretation of the claims of the Company patents. On September 20, 1999, in
the Applied lawsuit against Varian and the Company, where Applied has alleged
that Varian and the Company infringe Applied patents, the Court ruled on the
interpretation of the claims of the Applied patents. On January 14, 2000,
Applied withdrew its U.S. Patent No. 5,496,455 from the lawsuits against the
Company and Varian.
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.
On September 24, 1999, the Court ruled on the interpretation of the claims of
the Semitool patents. On December 18, 1999, Novellus filed a motion for summary
judgement of non-infringement. On February 18, 2000, the Court heard oral
arguments on Novellus' motion. The parties await a decision on Novellus' motion.
On March 17, 2000, the Court granted the Company's motion for summary judgement
of non-infringement. The Court ruled that the Company's SABRE and SABRE xT
systems do not infringe on the two patents asserted by Semitool. Therefore, the
Company believes that the dispute with Semitool will not have a material adverse
affect on the Company's business, financial condition and results of operations.
Plasma Physics Litigation
On December 28, 1999, Plasma Physics Corporation and Solar Physics Corporation
filed a patent infringement lawsuit against many of the Company's Japanese and
Korean customers. The suit is entitled Plasma Physics Corp v. Fujitsu, Ltd., 99
Civ. 8593, and is pending in the United States District Court for the Eastern
District of New York. Plasma Physics has asserted U.S. Patent Nos. 4,226,897,
5,470,784, and 5,543,634. Many of the defendants have notified the Company that
they believe that the Company has indemnification obligations and liability for
the lawsuit. Plasma Physics has not yet identified what, if any, of the
Company's equipment used by the customers is accused of infringement.
Plasma Physics seeks an injunction against the defendants' alleged infringement
of the '784 and '634 patents (the '897 patent has expired). Plasma Physics also
seeks trebled damages for alleged willful infringement. Plasma Physics also
seeks its attorneys' fees and costs, and interest on any judgement.
The Company believes that there are meritorious defenses to Plasma Physics'
allegations, including among other things, that the defendants' use of the
Company's equipment does not infringe the Plasma Physics patents and/or that the
Plasma Physics 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 Plasma Physics will not have a material
adverse effect on the Company's business, financial condition, or results of
operations (taking into account the defenses available to the Company), there
can be no assurances that Plasma Physics will not ultimately prevail in this
dispute and that the Company will not have any indemnity obligations or
liability. If Plasma Physics were to prevail in the dispute, it could have a
material adverse effect on the Company's business, financial condition 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
39
<PAGE> 25
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
2006. As of December 31, 1999, the minimum annual rental commitments are as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
2000 $ 21,170
2001 19,905
2002 243,816
2003 17,077
2004 1,642
Beyond 11,902
---------
315,512
Less future sublease
Income (111,356)
---------
$ 204,156
=========
</TABLE>
Rent expense was approximately $18.2 million, $12.8 million, and $7.2 million
for the years ended December 31, 1999, 1998, and 1997, respectively, net of
sublease income of $3.0 million, $2.1 million and $1.5 million for the years
ended December 31, 1999, 1998, and 1997, respectively.
The Company has lease agreements on twelve properties. The agreements are for
five years each with the option to extend for an additional two years at an
interest rate that approximates LIBOR. The lease terms expire at various dates
beginning on June 2002 through August 2003. At current interest rates, the
annual lease payments total approximately $16.9 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 $229.9 million as of December 31, 1999. These leases contain
certain restrictive financial covenants. The Company was in compliance with
these covenants at December 31, 1999.
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, 1999, approximately
1,632,000 shares were reserved for future issuance under the Employee Stock
Option Plans and options to purchase 5.5 million shares were exercisable at a
weighted average exercise price of $10.76.
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
40
<PAGE> 26
reduced to the pro forma amounts indicated below (in thousands, except per
share data):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ---------------- -------------
<S> <C> <C> <C>
Net income (loss) as reported $76,574 $52,828 $ (95,659)
Pro forma net income (loss) $57,359 $38,196 $(107,940)
Basic earnings (loss) per share $ 0.67 $ 0.52 $ (0.96)
as reported
Diluted earnings (loss) per $ 0.64 $ 0.50 $ (0.96)
share as reported
Pro forma basic earnings (loss) $ 0.50 $ 0.37 $ (1.08)
per share
Pro forma diluted earnings $ 0.48 $ 0.36 $ (1.08)
(loss) per share
</TABLE>
In calculating pro forma compensation, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions for grants made in 1999, 1998 and
1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- -------------
<S> <C> <C> <C>
Dividend yield None None None
Expected volatility 0.72 0.63 0.61
Risk free interest rate 5.6% 5.1% 5.9%
Expected lives 3.4 years 3.2 years 3.0 years
</TABLE>
The weighted average fair value of options granted during the year were $12.67,
$6.44 and $5.64 for 1999, 1998 and 1997, 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. SFAS 123 is applicable only to options
granted subsequent to December 31, 1995, therefore, the pro forma effect is not
fully reflected until 1999. The fair value of issuances under the employee stock
purchase plans is estimated on the issuance date using the Black-Scholes model
with the following weighted average assumptions for issuances made in 1999, 1998
and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- -------------
<S> <C> <C> <C>
Dividend yield None None None
Expected volatility 0.81 0.74 0.51
Risk free interest rate 4.9% 5.5% 5.5%
Expected lives 1/2 year 1/2 year 1/2 year
</TABLE>
The weighted average fair value of purchase rights granted during the year were
$7.43, $4.17 and $2.35 for 1999, 1998 and 1997, respectively.
Information with respect to stock option activity is as follows:
(in thousands, except per share data)
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Authorized Outstanding Price per Share Price
------------ ------------- -------------------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 825 14,181 $ 1.40 -- $13.88 $ 7.69
Additional authorization 3,960 -- --
Options granted (4,434) 4,434 $ 8.88 -- $19.63 $12.77
Options exercised -- (3,210) $ 1.40 -- $13.88 $ 4.66
Options canceled 1,518 (1,518) $ 1.40 -- $19.63 $10.10
------------ ------------- -------------------------- -------------
Balance at December 31, 1997 1,869 13,887 $ 2.33 -- $19.63 $ 9.75
Additional authorization 3,300 -- --
Options granted (3,777) 3,777 $ 7.90 -- $16.42 $14.07
Options exercised -- (1,854) $ 7.63 -- $19.67 $ 6.84
Options canceled 1,215 (1,215) $ 5.33 -- $19.63 $11.12
------------ ------------- -------------------------- -------------
Balance at December 31, 1998 2,607 14,595 $ 2.88 -- $19.63 $11.12
Additional authorization 4,200 -- --
Options granted (5,909) 5,909 $15.77 -- $29.69 $24.21
Options exercised -- (3,573) $ 2.88 -- $19.63 $ 9.44
Options canceled 734 (734) $ 6.06 -- $29.69 $13.16
------------ ------------- -------------------------- -------------
Balance at December 31, 1999 1,632 16,197 $ 3.96 -- $29.69 $16.17
============ ============= ========================== =============
</TABLE>
41
<PAGE> 27
The following table summarizes information about stock options outstanding at
December 31, 1999 (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 1999 (years) Exercise Price 1999 Exercise Price
- -------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.96 - $ 9.29 3,159 6.32 $ 8.16 2,148 $8.24
$ 9.42 - $11.08 3,029 7.25 $10.47 1,799 $10.36
$11.13 - $16.25 2,022 7.15 $13.30 900 $13.08
$16.42 - $19.15 3,101 9.00 $17.29 597 $16.81
$19.56 - $29.69 4,886 9.88 $25.35 51 $19.60
- -------------------------------------------------------------------- -------------------------------
$ 3.96 - $29.69 16,197 8.18 $16.17 5,495 $10.76
==================================================================== ===============================
</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 1,200,000 and 900,000 shares of common stock for issuance under the
plans, respectively. In April 1998, the Board of Directors approved an amendment
to the Purchase Plan, which was subsequently ratified by shareholders increasing
the number of shares available for issuance thereunder from 2,100,000 shares to
2,850,000 shares. In April 1999, the Board of Directors approved an amendment to
the Purchase Plan, which was subsequently ratified by shareholders increasing
the number of shares available for issuance thereunder from 2,850,000 shares to
3,900,000 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 433,000, 504,000, and 435,000 shares issued under the two plans in
1999, 1998, and 1997, respectively. At December 31, 1999, approximately
1,171,000 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
4,200,000 and 6,000,000 shares, respectively, of common stock for issuance in
future Company employee benefit and compensation plans and other requirements.
During 1997, the Company repurchased 18,000 shares under the program, and had
purchased a total of 4,704,000 shares as of December 31, 1997. During 1998, the
Company repurchased 27,000 shares under the program, and had purchased a total
of 4,731,000 shares as of December 31, 1998. During 1999, the Company
repurchased 18,000 shares under the program, and had purchased a total of
4,749,000 shares as of December 31, 1999.
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. In January 2000, the Company announced that it would contribute a
percentage of each participating employee's salary deferral contributions up to
a maximum of $2,000 or 50% of the first 6% of an employee's annual compensation.
Company matching contributions are invested in Novellus' common stock and become
fully vested at the end of the employee's third year of service beginning on
January 1, 2000. The Company did not record any matching contributions under
this plan through 1999.
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 $10.3 million, $5.5
million, and $8.0 million in 1999, 1998, and 1997, respectively.
42
<PAGE> 28
NOTE 10 INCOME TAXES
Significant components of the provision (benefit) for income taxes attributable
to operations are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
State
Current $ 1,365 $ 1,794 $ --
Deferred 421 452 (5,248)
-------------------------------------
1,786 2,246 (5,248)
Federal
Current 4,560 4,715 3,376
Deferred 1,400 13,175 (31,978)
-------------------------------------
5,960 17,890 (28,602)
Foreign
Current 9,426 2,355 751
Income tax benefits attributable to employee
stock plan activity allocated to
shareholders' equity 20,544 4,728 7,624
-------------------------------------
Total provision (benefit) for income taxes $37,716 $27,219 $(25,475)
=====================================
</TABLE>
Pre-tax income from foreign operations was $19.9 million, $3.3 million, and $1.6
million in 1999, 1998 and 1997, 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>
1999 1998
------------------------
<S> <C> <C>
Deferred tax assets:
Financial valuation accounts $ 4,475 $ 4,525
Expenses not currently deductible 13,566 18,741
Other 18,341 8,369
Capitalized in-process R&D 32,014 34,575
------------------------
Subtotal 68,396 66,210
Valuation allowance (13,823) (16,924)
----------- ------------
Total deferred tax assets 54,573 49,286
------------------------
Deferred tax liabilities:
Fixed assets (18,282) (11,175)
------------------------
Total net deferred tax assets $ 36,291 $ 38,111
========================
</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>
1999 1998 1997
------------------------------------
<S> <C> <C> <C> <C>
Expected provision (benefit) at 35% $40,005 $28,016 $(42,397)
State taxes, net of federal benefit 2,285 1,460 (2,924)
Research and development credits (2,231) (1,530) (665)
Foreign sales corporation benefit (1,338) (430) (365)
Unbenefitted in-process R&D -- -- 19,477
Valuation allowance increase/(decrease) (3,100) (3,100) --
Other 2,095 2,803 1,399
------------------------------------
$37,716 $27,219 $(25,475)
======================== ===========
</TABLE>
43
<PAGE> 29
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, "Disclosure about Segments of an Enterprise and
Related Information," 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>
1999
Sales to unaffiliated customers $ 507,696 $ 681 $ 84,364 $ -- $ 592,741
Transfers between geographic locations 29,877 6,813 14,704 (51,394) --
-------------------------------------------------------------
Total net sales 537,573 7,494 99,068 (51,394) 592,741
Operating income $ 90,569 $ 881 $ 19,178 $ -- $ 110,628
=============================================================
Long-lived assets $ 112,981 $ 155 $ 7,570 $ -- $ 120,706
All other identifiable assets 727,479 1,451 60,293 -- 789,223
-------------------------------------------------------------
Total assets $ 840,460 $ 1,606 $ 67,863 $ -- $ 909,929
=============================================================
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
=============================================================
</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. One customer accounted for 17% of net sales in 1999. No individual
customers exceeded 10% of net sales in 1998 or 1997. Export sales were 67% of
net sales in 1999, 51% of net sales in 1998, and 47% of net sales in 1997.
44
<PAGE> 30
NOTE 12 RELATED PARTY TRANSACTIONS
At December 31, 1999 and 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 are repayable in July 2000. The $1.5 million
represents the highest amount owing from the officer during the year.
During 1997, 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 year ended December 31, 1997, the Company sold $5.4 million of CVD
systems to Submicron. 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 1999 and 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 from
Submicron and other related expenses. See Note 7, Notes to the Consolidated
Financial Statements.
45
<PAGE> 31
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, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
San Jose, California
January 17, 2000
46
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
Novellus Systems, Ltd.
Unit 1EB, Bishops Weald House,
Albion Way,
Horsham, West Sussex
RH12 1AH, England
T 44.1403.265550
F 44.1403.266554
Novellus Systems, BV
Dillenburgstraat 5 B
5652 AM Eindhoven The
Netherlands
T 31.40.291.8010
F 31.40.257.3590
Novellus Systems GmbH
Manfred-von-Ardenni-Ring 20,
01099 Dresden,
Germany
T 49.351.89252.10
F 49.351.89252.20
Novellus Systems Ireland Ltd
IR4-1-10,
Collinstown Industrial Park,
Leixlip
Co. Kildare., Ireland
T 353.1.606.5247
F 353.1.606.5180
Novellus Systems Israel Ltd
Asia House, 4 Weizmann Street
64239 Tel-Aviv
Israel
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
Nippon Novellus Systems, KK
K5P Bldg., R&D C-10F,
3-2-1 Sakado, Takatsu-Ku, Kawasaki-shi
Kanagawa-ken 213, Japan
T 81.44.850.1777
F 81.44.850.1778
Novellus Systems Korea
2F DaeWoo Engineering Bldg., 9-3 SuNae-Dong,
BunDang-Ku, SungNam City, KyungKi-Do 463-020 Korea
T 82.342.738.1114
F 82.342.714.9921
Novellus Systems Taiwan
5F-1, No. 295, Sec. 2
Kwang Fu Road
Hsin-Chu City, Taiwan 30801 R.O.C.
T 886.35.730550
F 886.35.730553
Novellus Systems Semiconductor
Equipment Shanghai Co., Ltd
603-611 No. 300
Tian-Lin Bldg., Tain-Lin Road
Shanghai 200233, China
T 86.21.6485.3889
F 86.21.6485.1282
Novellus Singapore Pte Ltd.
101 Thomson Road
#21-01/02 United Square
Singapore 307591
T 65.353.9288
F 65.353.6833
Novellus Systems Beijing
B1010 Floor 10 Building B
Wan Tone New World Plaza
2 Fuchengmenwaidajie,
Beijing, China 100037
T 86.10.68578698
F 86.10.68578697
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Novellus Systems, Inc. of our report dated January 17, 2000, included in the
1999 Annual Report to Shareholders of Novellus Systems. Our audits also included
the financial statement schedule of Novellus Systems, Inc. listed in Item 14(a).
This schedule is the responsibility of management. Our responsibility is to
express an opinion based on our audits. In our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also 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, and 333-80453) 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 17, 2000, with
respect to the consolidated financial statements of Novellus Systems, Inc.
incorporated by reference in the Annual Report (Form 10-K) for the year ended
December 31, 1999.
/s/ ERNST & YOUNG LLP
San Jose, California
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 181,568
<SECURITIES> 203,689
<RECEIVABLES> 217,399
<ALLOWANCES> 3,721
<INVENTORY> 103,883
<CURRENT-ASSETS> 732,666
<PP&E> 202,202
<DEPRECIATION> 95,423
<TOTAL-ASSETS> 909,929
<CURRENT-LIABILITIES> 140,230
<BONDS> 0
0
0
<COMMON> 490,587
<OTHER-SE> 279,112
<TOTAL-LIABILITY-AND-EQUITY> 909,929
<SALES> 592,741
<TOTAL-REVENUES> 518,778
<CGS> 271,710
<TOTAL-COSTS> 271,710
<OTHER-EXPENSES> 220,694
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,703
<INCOME-PRETAX> 114,290
<INCOME-TAX> 37,716
<INCOME-CONTINUING> 76,574
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,574
<EPS-BASIC> 0.67
<EPS-DILUTED> 0.64
</TABLE>
