ITEM 1. BUSINESS
Novellus Systems, Inc. ("Novellus" or the "Company") manufactures, markets and services advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the device surface for these deposition processes. The Company is a leading supplier of high productivity deposition and surface preparation 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. On January 10, 2001, Novellus acquired GaSonics International Corporation ("GaSonics"), a leading developer and global supplier of photoresist and residue removal solutions used in advanced semiconductor device manufacturing. GaSonics is now the Surface Integrity Group of Novellus. The photoresist and residue removal systems manufactured by the Surface Integrity Group are used to clean and prepare the device surface after the manufacturing steps that precede the deposition process. In addition, the Novellus Surface Integrity Group also provides low pressure chemical vapor deposition, or LPCVD, systems for the flat panel display (FPD) industry. The Company's growth strategy focuses on major semiconductor manufacturers and the Company has sold one or more of its systems to each of the 20 largest semiconductor manufacturers in the world.
The Company was incorporated in California in April 1984 and is headquartered in San Jose, California. The mailing address for the Company's headquarters is 4000 North First Street, San Jose, California, 95134 and the Company's telephone number is (408) 943-9700. Additional information about the Company is available on the Company's website at www.novellus.com.
INDUSTRY BACKGROUND
The semiconductor industry has experienced significant growth over the past decade due to increased demand for personal computers and the growth of the Internet, the expansion of the telecommunications industry (especially wireless communications), and the emergence of new applications in consumer electronics and the increased semiconductor content in these consumer electronics systems. In addition, significant performance advantages and lower prices for integrated circuits have contributed to the growth and expansion of the semiconductor industry.
The late 1990s also saw the emergence of a new growth trend driven by the increasingly rapid pace in which the size of the circuitry on chips is decreasing. When chips decrease in size circuits can operate more quickly. In addition, with size reduction, more chips can be produced on a given wafer size and the yield per manufacturing machine increases. Because more chips can be produced per machine with decreasing chip size, there is less need to build new manufacturing plants, in particular, for pure capacity expansion. However, new equipment featuring the latest technological advances must often still be purchased to manufacture these smaller-sized chips and, in many cases, is retrofit into existing manufacturing facilities.
Although the semiconductor industry has experienced significant growth, the semiconductor market is cyclical by nature, characterized by short-term periods of either under or over supply for both memory and logic devices. When demand decreases, semiconductor manufacturers typically slow their purchasing of capital equipment; conversely, when demand increases, so does the manufacturers' capital spending.
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 (chemical vapor deposition), which can be used to deposit both insulating and conductive films; PVD (physical vapor deposition), which is used primarily for sputtering conductive metals onto the wafer surface; and electroplating, 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. The CVD process is the traditional method used to deposit 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 replaces 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 historic electroplating process has been modified by the semiconductor manufacturing industry to deposit copper conductive lines in extremely small features on integrated circuits. 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 first, 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. Electroplating 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.
Electroplating 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 0.10 micron design rule; 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 advanced semiconductor devices are being designed with line width geometries as small as 0.13 microns, with up to six layers of interconnect circuitry. The next generation of semiconductor devices will see line widths as small as 0.10 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 continue to grow over the short term.
The Company's acquisition of GaSonics illustrates the growing importance of the surface preparation step in the manufacturing of advanced semiconductor devices. Properly preparing the device surface is essential prior to the deposition process to ensure the proper adhesion of the film layer, and to prevent device-killing defects. The industry movement to new materials such as copper and low-k, as well as shrinking line widths and smaller wafer sizes, is driving the need for more advanced cleaning technologies that do not damage the device. The Company believes that its acquisition of the GaSonics surface preparation technology will lead to improved integration of the cleaning and deposition processes when building advanced devices, and particularly those manufactured with a copper dual damascene process.
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 300 mm wafer fabrication line can cost close to $2 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 and surface preparation equipment -- CVD, PVD, "electrofill" (electroplating), photoresist strip, and residue removal systems--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 plasma enhanced CVD (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.
Copper Electroplating Solutions
Introduced in June 1998 after an extensive joint development program with IBM's Microelectronics Division, the SABRE(TM) copper electrofill(TM) tool is the industry's leading production system 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 depositing advanced copper interconnects.
Photoresist Strip and Clean Solutions
Through the acquisition of GaSonics, completed in January 2001, Novellus now offers a suite of advanced photoresist strip and clean products, including the PEP 3510(Plus) and the Gamma 2100 for photoresist strip applications, and the PEP Iridia for residue clean processes. All surface preparation products, now part of Novellus' Surface Integrity Group, employ advanced dry process technology that allows more efficient removal of complex residues without attacking or contaminating the underlying device material.
STRATEGY
The Company's objective is to increase its market share in the worldwide interconnect market and strengthen its position as a leading supplier of semiconductor processing equipment. The key elements of the Company's strategy are as follows:
Emphasis on High Productivity Systems. Novellus has historically focused on providing high productivity 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 deposition, metals deposition and surface preparation technologies. The Company's strategy is to provide a family of systems which utilize advanced CVD, PVD, electrofilling and dry strip/clean 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 and 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 Concept Three(TM) system is also a modular CVD system, but designed to process 300 mm wafers. The Concept Three's architecture is similar to that of the Concept Two, but uses a single wafer loadlock. The Company is focusing its research and development efforts on 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. The Company's first offering in the advanced HDP technology market, SPEED(TM) was introduced in February 1996. The INOVA(TM) system provides 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. The SABRE electrofill tool has emerged as the industry's leading choice for the fill of copper vias and trenches using a dual damascene process. The PEP Iridia(TM), a dual purpose strip/clean system, is a plasma-based system for advanced, sub-0.25 micron device production, including copper dual damascene and low-k dielectric films. And finally, the Gamma 2100 system is a high throughput, low cost of ownership photoresist strip system employing a multi-station sequential processing architecture for simplicity, reliability and high productivity
Focus On Major Semiconductor Manufacturers. The Company has sold one or more of its 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 in the year 2000 showed a significant 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 China, and one office in each of Korea, Singapore and Malaysia. With the acquisition of GaSonics in January 2001, the Company furthered its presence in Asia with offices in Japan and Singapore. It is an important part of Novellus' current business strategy to continue 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.
DEPOSITION 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. In June 1998, the Company announced the SABRE copper Electrofill system for producing copper conductive layers. And most recently, in July 2000, the Company introduced VECTOR(TM), a new 200mm/300mm PECVD platform with twice the capital productivity of competitive market offerings.
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.
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 semiconductor devices at 0.18 micron and below.
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.
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 0.18 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 3.0 k to less than 2.4 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 ALTUS(TM). Because the Concept Three systems are based on the production proven Novellus Concept Two products, the Company believes that they 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, a multi-chamber single wafer processing system, incorporates Novellus' uniquely-designed Hollow Cathode Magnetron ("HCM(TM)") 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. In July 2000, the company introduced the INOVA xT, a 300mm version of INOVA with proven HCM extendability to the 0.10 um technology node, as well as an industry-leading 100 wph throughput.
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 0.10 micron trench features (at 9 or 10:1 aspect ratios) and 0.18 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 <5%, 3 sigma within 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 bevel etch/spin/rinse/dry (another 3 stations) within a compact footprint. The resulting simplicity of this design is key to the system's high reliability and manufacturing availability.
SABRExT
The second generation Sabre xT (introduced in 1999) is a 200mm/300mm bridge tool, and has become a market-leading platform at both wafer sizes. Continuous improvement has led to the availability of new features on the xT that were not found on the original SABRE, including programmable electrical waveforms, advanced plating chemistries, integrated anneal, and closed-loop chemical monitoring with the Smartdose(TM) predictive dosing system.
VECTOR
Introduced in July of 2000, VECTOR is a new PECVD system for dielectric films that radically transforms the playing field in terms of capital productivity. A 200mm/300mm bridge tool, VECTOR is designed to deliver a fully integrated low-k dielectric structure at 0.10 micron and smaller design rules. VECTOR is designed for high reliability, with 40% fewer critical subassemblies than the nearest competitor. With approximately 2/3rds the footprint of the nearest competitor, and a throughput of 120 wafers per hour, VECTOR delivers twice the capital productivity of any other PECVD system currently on the market.
SURFACE PREPARATION PRODUCTS
Through the acquisition of GaSonics, completed in January 2001, Novellus' Surface Integrity Group provides a suite of high productivity/low cost of ownership systems for the photoresist strip and clean markets, an area of semiconductor manufacturing that is becoming increasingly important with the move to copper dual damascene manufacturing.
PEP 3510(Plus)
The PEP 3510 is a versatile downstream microwave photoresist removal system designed for the clean, damage-free removal of photoresist materials. One of the most dependable bulk strip systems on the market, the PEP 3510 routinely delivers 300 hours MTBF with 95% uptime. More than 300 PEP-based systems have been installed in fabs around the world.
Gamma(TM) 2100
The Gamma 2100 photoresist removal system uses an interlaced, inductively coupled plasma source (I(2)CP) to strip photoresist, resulting in a more uniform distribution of results with reduced use of consumables. The Gamma architecture also features a multi-station chamber design with six strip stations, resulting in a wafer throughput of up to 175 wph with a minimal number of critical subsystems (one change, one remote dry pump, and one gasbox support all six stations).
PEP Iridia(TM)
The PEP Iridia is an advanced cleaning system designed for sub-0.25 micron applications and enabling technologies such as copper dual damascene. The Iridia's modular architecture allows the system to be configurable for both front-end-of-line (FEOL) and back-end-of-line clean applications down to 0.10 micron device geometries. For low-k dielectric clean applications, the Iridia offers the highest capital and footprint productivity of any clean system currently on the market.
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; Colorado Springs, Colorado; Boise, Idaho; Portland, Hillsboro, and Eugene, Oregon 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 service 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.
Through the acquisition of GaSonics in January 2001, Novellus added sales and service support offices located in the U.K., Ireland, France, Germany, Israel, Japan, Italy and Singapore as well as sales and service centers in the United States located in Austin, Texas; Orlando, Florida; Mesa, Arizona and East Fishkill, New York. GaSonics' headquarters in San Jose, California now functions as Novellus' Surface Integrity Group's primary operations.
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, 2000, one customer accounted for approximately 11% of the Company's net sales. For the year ended December 31, 1999, one customer accounted for approximately 17% of the Company's net sales
and in 1998, there were no individual customers who accounted for more than 10% of the Company's net sales. The above discussion does not include GaSonics since the acquisition of GaSonics was consummated after December 31, 2000.
Export sales (including sales made by the Company's Japanese subsidiary) for the year ended December 31, 2000 were approximately $770.5 million, or 66% of net sales. Export sales for the year ended December 31, 1999 were approximately $378.1 million, or 64% of net sales. For the year ended December 31, 1998, export sales were approximately $284.4 million, or 55% of net sales. The above discussion does not include GaSonics since the acquisition of GaSonics was consummated after December 31, 2000. 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 2000, 1999 and 1998 accounted for 56%, 65% and 57% 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, 2000, the Company's backlog was $575.7 million, as compared to a backlog of $329.5 million at December 31, 1999. 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. The above discussion does not include GaSonics since the acquisition of GaSonics was consummated after December 31, 2000.
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, and advanced clean and strip systems. All new systems being developed are capable of processing 300mm wafers.
Expenditures for research and development during 2000, 1999 and 1998 were $178.3 million, $119.7 million and $106.5 million, respectively, or approximately 15%, 20% and 21% of net sales, respectively. The Company expects in future years that research and development expenditures will continue to represent a substantial percentage of net sales. The above discussion does not include GaSonics since the acquisition of GaSonics was consummated after December 31, 2000.
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.
However, the semiconductor equipment industry is highly competitive and characterized by increasingly rapid technological changes. The Company faces substantial competition in the market in which it competes from both established competitors and potential new entrants. In the CVD and PVD areas of the market, the Company's principal competitor is Applied Materials, Inc., which is a major supplier of CVD and PVD systems and has established a substantial base of CVD, PVD and other equipment in large semiconductor manufacturers. In the copper electrofill area of the market, the Company's principal competitors are Semitool (which has a large installed base of R&D tools), and Applied Materials, which entered the market with an electroplating tool in April of 1999. In the surface preparation marketplace, the Company's principal competitors are Mattson Technologies and Axcelis Technologies. 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, 2000, the Company had 3,054 full time and temporary employees. With the acquisition of GaSonics which was consummated on January 10, 2001, Novellus added approximately 475 full time and temporary employees.
The success of the Company's future operations depends in large part on the Company's ability to recruit and retain engineers and technicians, as well as marketing, sales, service and other key personnel, who in each case are in great demand. There can be no assurance that the Company will be successful in retaining or recruiting key personnel.
None of the Company's employees is represented by a labor union and the Company has never experienced a work stoppage, slowdown or strike. The Company currently considers its employee relations to be good.
The Company's success depends to a significant extent upon a limited number of key employees and other members of senior management of the Company. The loss of the service of one or more of these key employees could have a material adverse effect on the Company. Although the Company has recently experienced significant growth in net sales, there can be no assurance that the Company will be able to continue to maintain or increase the level of net sales in future periods. This growth has placed, and is expected to continue to place, a significant strain on the Company's management and operations. The 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.
BUSINESS COMBINATIONS
On January 10, 2001 Novellus acquired GaSonics International Corporation in a stock-for-stock merger, accounted for as a pooling-of-interests. All outstanding shares of GaSonics capital stock was converted into approximately 9,240,000 shares of Novellus common stock in the merger. In addition, all outstanding options to purchase shares of GaSonics capital stock were automatically converted into options to purchase approximately 1,400,000 shares of Novellus common stock.
For further details regarding Novellus' business combinations, please see Note 12 of Notes to Consolidated Financial Statements.
ENVIRONMENTAL MATTERS
Neither compliance with federal, state and local provisions regulating discharge of materials into the environment, nor remedial agreements or other actions relating to the environment, has had, or is expected to have, a material effect on Novellus' capital expenditures, financial condition, results of operations or competitive position.
ITEM 2.
ITEM 2. PROPERTIES
The Company's operations are conducted primarily in eleven buildings (including three buildings acquired from GaSonics in January 2001) in the North San Jose, California area and two buildings in the Portland, Oregon area. The San Jose buildings are leased by the Company and consist of 694,383 square feet. Eight of the leases expire in 2002 and provide for an extension to 2005, and three of the leases expire in 2006. The buildings house three manufacturing operations, a research and development facility, various administrative and customer support offices, an applications demonstration lab and the Company's headquarters.
The Portland, Oregon buildings consist of a 26,900 square foot building in Wilsonville, Oregon, and a 64,576 square foot building in Tualatin, Oregon. These locations provide manufacturing, research and development and customer support for the company's Electrofill product (Sabre). The Wilsonville lease expires in August 2002 and the Tualatin facility is owned by the Company.
It is currently anticipated that construction on 27 acres on the Tualatin, Oregon site will commence by the end of March 2001. The site will be developed in several phases. The Company anticipates that the first phase will be completed in the second quarter of 2002 and will provide the Company with 370,000 square feet of new manufacturing, research and development, engineering and training facilities.
Additionally, the Company subleases four buildings consisting of 270,000 square feet on and adjacent to the Novellus campus pursuant to leases that expire in 2001 and 2002.
The Company also operates a facility near Tokyo, Japan which serves as headquarters, sales office, service, technology and customer demonstration center for Nippon Novellus. The facility near Tokyo is operated under a five year lease that expires 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. Customer service and sales centers were added and expanded in Korea, Taiwan, Malaysia, China and Singapore in order to support new customer requirements. Additionally, a software development office should be completed in Bangalore, India in the second quarter of 2002.
The Company currently believes that its current properties and its currently planned properties will be sufficient to meet the Company's requirements for the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Applied Materials, Inc. vs. Varian Associates Inc. (Case No.C-9720523 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.
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 September 10, 1999, the Company filed a motion for summary judgment that claims 1, 2 and 8 of its U.S. Patent No. 5,314,597 are not invalid over the prior art asserted against it by Applied. On September 29, 1999, Applied filed a counter-motion for summary judgment that these claims are invalid based on the on-sale bar. On December 7, 1999, the Court entered an order granting the Company's motion and denying Applied's motion.
On November 4, 1999, Applied moved for leave of Court to amend its prior art chart with respect to the Company's U.S. Patent No. 5,314,597. On February 15, 2000, the Court granted Applied's motion. On October 4, 2000, the Court entered an order denying the Company's motion for reconsideration of this order.
On December 17, 1999, the Company and Varian moved for summary judgment that certain claims of Applied's U.S. Patent No. 5,171,412 were invalid as anticipated or obvious over the prior art. On March 16, 2000, the Court granted this motion in part, and deferred ruling in part.
On December 23, 1999, the Company moved for summary judgment that its U.S. Patent No. 5,635,036 is not invalid as obvious over the prior art. On March 20, 2000, the Court denied the Company's motion without prejudice.
On January 14, 2000, Applied withdrew its U.S. Patent No. 5,496,455 from the lawsuits against the Company and Varian.
On February 4, 2000, Applied filed a motion for summary judgment that claims 10, 11 and 13 of the Company's U.S. Patent No. 5,314,597 are invalid over the prior art. On March 10, 2000, the Company filed an opposition and cross-moved for leave to amend its claim chart to withdraw these claims. On April 5, 2000, the Court issued an order denying Applied's motion as moot and granting the Company's motion.
On March 31, 2000, the Company filed a renewed motion for partial summary judgment that its U.S. Patent No. 5,635,036 is not invalid as obvious over the prior art. On January 3, 2001, the Court entered an order in response to this motion tentatively amending certain claim constructions and requesting additional briefing.
On July 28, 2000, Applied filed a motion for summary judgment of non-infringement of the Company's U.S. Patent No. 5,330,628. On October 20, 2000, the Company filed a non-opposition to that motion, pending appeal of the Court's claim construction. The Company also cross-moved for the Court to dismiss Applied's allegations that the '628 patent was invalid or unenforceable. On November 20, 2000, the Court entered an order granting both motions.
On May 12, 2000, the Company and Varian moved for summary judgment that the Inova and MB2 do not infringe Applied's U.S. Patent No. 5,186,718. On August 8, 2000, the Court granted this motion with respect to the Inova. The Company's motion that the MB2 does not infringe the '718 patent is currently off calendar pending completion of discovery.
On August 18, 2000, Applied filed a motion for partial summary judgment that certain of its products did not infringe the Company's U.S. Patent No. 5,635,036. On October 24, the Court entered an order denying Applied's motion. The Court, in the same order, also allowed the Company to withdraw its assertion that certain Applied products infringed certain claims of its U.S. Patent No. 5,314,597.
On or about September 25, 2000, Varian and Applied executed a "License and Settlement Agreement." On September 29, 2000, Varian and Applied filed a Stipulated Dismissal with Prejudice with the Court that reciprocally dismisses all causes of action that Varian and Applied had asserted or could have asserted against one another in the litigation. In addition, Applied has stated, in its agreement with Varian, that it will release the Company from all claims that arose out of or relate to the litigation that relate to any infringement alleged with respect to the Inova, in the form as it existed as of the effective date of the Company's purchase of Varian's TFS division. The Stipulated Dismissal, however, expressly excludes the Company from the scope of any release.
On October 6, 2000, Applied filed a motion for summary judgment of noninfringement of the Company's U.S. Patent No. 5,314,597. On November 13, 2000, the Company filed an opposition to that motion, and cross-moved for summary judgment of infringement as to claims 1 and 8 of the '597 patent. These motions were orally argued on January 5, 2001 and are presently under submission.
On November 22, 2000, Applied filed a second motion for summary judgment that its accused products do not infringe the Company's U.S. Patent No. 5,635,036. This motion was orally argued on January 19, 2001 and is presently under submission.
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) and SABRE xT(TM) copper deposition systems infringe 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 the SABRE(TM) and SABRE xT(TM) systems, and seeks damages for past infringement. Semitool also seeks trebled damages for alleged willful infringement. Semitool further 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, the Company filed a motion for summary judgement of non-infringement.
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(TM) and SABRE xT(TM) systems do not infringe the two patents asserted by Semitool.
On May 15, 2000, Semitool filed a notice of appeal, appealing the Court's judgement to the United States Court of Appeals for the Federal Circuit. Semitool filed its opening brief on July 24, 2000. The Company filed its opening brief on October 3, 2000. Semitool filed its reply brief on November 3, 2000. Although the Company believes that the Court's order granting summary judgment of non-infringement was correct, and that the Company will prevail on appeal, there can be no assurances that the Company will prevail in its litigation against Semitool. If the Court's order is reversed on appeal, and if Semitool were to prevail against the Company following the appeal Complaint, it could have a material adverse effect on the Company's business, financial condition or results of operations.
Plasma Physics Litigation
On December 28, 1999, Plasma Physics Corporation and Solar Physics Corporation (collectively, "Plasma Physics") filed a patent infringement lawsuit against many of the Company's Japanese and Korean customers. The suit was entitled Plasma Physics and Solar Physics v. Fujitsu et al., Civil Action No. 99-8593, and was pending in the United States District Court for the Eastern District of New York. On July 24, 2000, the Court ordered Plasma Physics to re-file separate complaints against the Japanese and Korean defendants, whereupon, Civil Action No. 99-8593 would be dismissed without prejudice. In accordance with the Court's order, Plasma Physics has since re-filed separate complaints against the Japanese and Korean defendants in the United States District Court for the Eastern District of New York. Many of the defendants have notified the Company that they believe that the Company has indemnification obligations and liability for the lawsuits.
Plasma Physics has asserted U.S. Patent Nos. 4,226,897; 5,470,784, and 5,543,634 (the "'897, '784, and '634 patents," respectively). 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 further seeks its attorney's fees and costs, and interest on any judgement.
On April 17, 2000, Applied Materials filed a declaratory relief action against Plasma Physics and Solar Physics requesting a judgement of non-infringement, invalidity, and unenforceability with respect to the '897 and '784 patents. The suit is entitled Applied Materials v. Plasma Physics and Solar Physics, Civil Action No. 00-2199, and is pending in the United States District Court for the Eastern District of New York. On May 23, 2000, Plasma Physics filed a motion to dismiss Applied Material's complaint for a lack of subject matter jurisdiction. Plasma Physics' motion to dismiss Applied Materials' complaint was denied without prejudice on July 24, 2000. Plasma Physics subsequently filed an Answer and Conditional Counterclaim.
On June 1, 2000, the Company filed a declaratory relief action against Plasma Physics and Solar Physics requesting a judgement of non-infringement, invalidity, and unenforceability with respect to the '897 and '784 patents. The suit is entitled Novellus v. Plasma Physics and Solar Physics, Civil Action No. 00-3146, and is pending in the United States District Court for the Eastern District of New York. On June 30, 2000, Plasma Physics filed a motion to dismiss the Company's complaint for a lack of subject matter jurisdiction. Plasma Physics' motion to dismiss the Company's complaint was denied without prejudice on July 24, 2000. On July 31, 2000, Plasma Physics filed an Answer and Conditional Counterclaim. Plasma Physics denies that the '897 and '784 patents are invalid and unenforceable. Plasma Physics further denies that the '784 patent is not infringed by the Company. Plasma Physics also asserted a conditional counterclaim against the Company, alleging that the Company's PECVD processing systems infringe the '784 patent.
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 result 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, Semitool, and Plasma Physics, 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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
STOCK INFORMATION(1)
Novellus' common stock is traded on the NASDAQ Stock Market and is quoted on the NASDAQ National Market under the symbol "NVLS." The following table sets forth the high and low closing prices as reported by the NASDAQ National Market for the periods indicated:
(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 lines of credit with certain banks and its senior credit facility prohibit the Company's from paying dividends. As of December 31, 2000, there were 734 holders of record of the Company's common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
The above data does not reflect the financial position or results of operations after the merger with GaSonics International Corporation, which was consummated after December 31, 2001. See Note 12 in Item 8. Financial Statements and Supplementary Data -- Notes to Consolidated Financial Statements.
* Data is not available to provide pro forma information for these years.
(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.
(4) The Company recorded a non-cash charge of $84.6 million, after reduction for income taxes of $45.8 million, or $0.63 per diluted share, to reflect the cumulative effect of the accounting change as of January 1, 2000 related to the adoption of Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Novellus manufactures, markets and services advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the device surface for these deposition processes to semiconductor manufacturers worldwide. Demand for the Company's systems can vary significantly from period to period as a result of various factors, including but not limited to, downturns in the semiconductor industry, supply and demand for semiconductor devices and substantial competition in the semiconductor industry among suppliers of similar products. For these and other reasons, Novellus' results of operations for fiscal 1998, 1999 and 2000 may not necessarily be indicative of future operating results.
Net Sales
Net sales were $1,173.7 million, $592.7 million, and $518.8 million in 2000, 1999, and 1998, respectively. Net sales of $1,173.7 million in 2000 reflect the Company's adoption of SAB 101, discussed below in "Recent Accounting Pronouncements". The increase of approximately 98% from 1999 is attributable to the increase in net sales across all product lines as the semiconductor industry increased purchases related to both capacity and technology buys. The increase of approximately 14% from 1998 to 1999 reflected the strengthening of the semiconductor industry, as the industry was in the early stages of a broad-based recovery. The increase in sales is attributable to semiconductor manufacturers' need for additional capacity and new technology. 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. International sales were approximately 66% of net sales in 2000, an increase from 64% in 1999. The increase is attributable to higher demand in the Pacific Rim, Japan, and Europe partially offset by lower demand in Korea. International sales were approximately 64% of net sales in 1999, an increase from 55% in 1998. The increase is the result of higher demand in Japan, Korea, and Pacific Rim countries offset by lower demand in Europe.
Gross Profit
Gross profit was $657.2 million, $321.0 million, and $280.9 million in 2000, 1999, and 1998, respectively. The absolute dollar increases are due to higher net sales. As a percentage of net sales, gross profit was 56% in 2000 and 54% in 1999 and 1998, respectively. The increase in gross profit from the prior fiscal periods reflect successful cost reduction efforts and improved absorption of fixed overhead costs due to the increased levels of shipments. During 1999 and 1998 gross profit remained flat, with improvements in unabsorbed fixed costs offset by higher warranty costs in 1999 as compared to 1998.
Selling, General, and Administrative
Selling, general, and administrative expenses were $191.0 million, $101.0 million, and $95.4 million in 2000, 1999, and 1998, respectively. As a percentage of net sales, selling, general, and administrative expenses were approximately 16%, 17%, and 18% in 2000, 1999, and 1998, respectively. The increase in absolute dollars across periods is attributable to increased costs associated with the growth in revenues. However, the decrease as a
percentage of net sales across periods reflects the Company's ongoing efforts to control and reduce selling, general, and administrative expenses despite the rapid growth in revenues.
Research and Development
Research and development (R&D) expenses were $178.3 million, $119.7 million, and $106.5 million in 2000, 1999, and 1998, 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 the next generation of smaller geometry fabrication lines, as well as equipment to process 300mm wafers. The increase from the prior year also reflects a full period of costs associated with the Company's investment in its facilities infrastructure to support its ongoing R&D commitment. As a percentage of net sales, research and development expenses were approximately 15%, 20%, and 21% in 2000, 1999, and 1998, respectively. The Company plans to continue to invest in new products and increase research and development spending in absolute dollars. The Company continues to believe that significant investment in R&D is required to remain competitive, and anticipates, on a forward-looking basis, that such expenses in 2001 will increase in absolute dollars, although such expenses as a percentage of net revenues may fluctuate between periods.
Net Interest Income
Net interest income was $53.7 million, $14.0 million, and $1.1 million, in 2000, 1999, and 1998, respectively. The increase from 1999 to 2000 is attributable to higher cash and short-term investment balances, as a result of a secondary public offering in April 2000 of approximately 9.0 million shares of common stock that resulted in net proceeds to the Company of approximately $526.3 million and cash provided by operating activities. 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 $255.1 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.
Provision for Income Taxes
The provision for income taxes reflects an effective tax rate of 31% in 2000, 33% in 1999, and 34% in 1998. The decrease in the effective tax rate is primarily due to the increased benefits from the foreign sales corporation.
At December 31, 2000, the Company has recognized a deferred tax asset of $151.8 million, net of a valuation allowance of $10.7 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 $29.1 million and future taxable income.
Net Income
Net income, before a $84.6 million charge related to a cumulative effect of an accounting change (described further in "Recent Accounting Pronouncements" below), for the year ended December 31, 2000 was $235.7 million. On a basic and diluted shares basis, earnings per share were $1.85 and $1.75, respectively, before the $84.6 million charge.
Net income for the year ended December 31, 2000 was $151.1 million or $1.18 and $1.12 per basic and diluted shares, respectively, compared with net income for the year ended December 31, 1999 of $76.6 million or $0.67 and $0.64 per basic and diluted shares, respectively.
Net income for the year ended December 31, 1999 of $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.
The number of shares used in the per share calculations for the year ended December 31, 2000 was 127.7 million and 135.1 million shares, respectively, for basic and diluted income per share calculations, compared with 114.8 million and 120.1 million shares, respectively for the year ended December 31, 1999. The increase in shares compared to the year-ago period is primarily due to an increased number of common shares outstanding resulting from the common stock offering of 9.0 million shares in April 2000 and the exercise of stock options in 2000.
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 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 prior year is attributable to an increased number of common shares outstanding resulting from the common stock offering of 11.6 million shares in February 1999 and the exercise of stock options in 1999.
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 Company's 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 2000, 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. As the impact of movements in currency exchange rates on forward foreign exchange contracts offset 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 significant.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including forward exchange contracts, and hedging activities. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities --- Deferral of the Effective Date of FASB Statement No. 133. SFAS No. 133 is now effective for fiscal years beginning after June 15, 2000 and, therefore, the Company adopted this accounting standard effective January 1, 2001. The impact of the adoption of SFAS No. 133 is not significant.
Acquisition of GaSonics International Corporation
On January 10, 2001 the Company completed its acquisition of GaSonics International Corporation. In the transaction, the Company acquired all outstanding shares of GaSonics in a stock-for-stock merger, with all outstanding shares of GaSonics capital stock converted into approximately 9,240,000 shares of Novellus common stock. In addition, all outstanding options to purchase shares of GaSonics capital stock were automatically converted into options to purchase approximately 1,400,000 shares of Novellus common stock. The transaction will be accounted for as a pooling-of-interests.
RECENT ACCOUNTING PRONOUNCEMENTS
On December 3, 1999, the staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The SEC Staff addressed several issues in SAB No. 101, including the timing of revenue recognition for sales that involve contractual customer acceptance provisions and installation of the product if these events occur after shipment and transfer of title. The Company's previous revenue recognition policy was to recognize revenue at the time the customer takes title to the product, generally at the time of shipment. In October 2000, the SEC issued Staff Accounting Bulleting No. 101: Revenue Recognition in Financial Statements -- Frequently Asked Questions and Answers ("SAB 101 FAQ"). The SAB 101 FAQ was issued to clarify many of the implementation questions surrounding SAB No. 101.
The Company derives revenues from three sources -- equipment sales, spare part sales and service contracts. SAB 101 has no effect on the Company's revenue recognition policy for spare parts or services. For equipment sales,
there are different revenue recognition points under SAB 101, which are described as follows:
Acceptance: For equipment sales to a new customer, existing products with new specifications and/or a new product, revenue is recognized upon customer acceptance.
Shipment and acceptance: Equipment sales to existing customers, who have purchased the same equipment with the same customer-specified acceptance provisions in the past, are accounted for as multiple-element arrangement sales. Upon shipment, the lesser of the fair value of the equipment or the contractual amount billable upon shipment is recorded as revenue and title is transferred. The remainder is recorded as revenue upon customer acceptance.
Revenue related to spare part sales is recognized on shipment. Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts.
As a result of SAB 101, the Company changed its method of accounting for revenue recognition. The Company has reported this change in accounting principle in accordance with APB Opinion No. 20, "Accounting Changes", by a cumulative effect adjustment. Because Novellus is a calendar year company adopting SAB 101 in the fourth quarter, no cumulative effect of the change is included in net income in the fourth quarter. Instead, APB 20 requires that the change be made as of the beginning of the year (January 1, 2000) and that financial information for interim periods reported prior to the change, in this case the first three quarters of 2000, be restated by applying SAB 101 to those periods. No restatement of 1999 information is necessary.
In accordance with guidance provided in SAB 101, the Company recorded a non-cash charge of $84.6 million (after reduction for income taxes of $45.8 million), or ($0.63) per share, to reflect the cumulative effect of the accounting change as of the beginning of the fiscal year. The decrease to net income before the cumulative effect of the accounting change as a result of the adoption of SAB 101 was a decrease of $87.1 million or ($0.68) per diluted share for fiscal year 2000.
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, 2000 consisted of $1,152.1 million of cash, cash equivalents and short-term investments. This amount represents an increase of $766.9 million from the December 31, 1999 balance of $385.3 million. During the second quarter of 2000, the Company completed a secondary public offering of approximately 9.0 million shares of common stock that resulted in net proceeds to the Company of approximately $526.3 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.
In 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. No amounts were outstanding under this facility at December 31, 2000. The Senior Credit Facility requires the Company to be in compliance with certain financial covenants. At December 31, 2000, the Company was in compliance with these financial covenants. In addition, at December 31, 2000, there was $33.9 million available under bank lines of credit that expire at various dates through May 2001. At December 31, 2000 approximately $16.1 million was outstanding under these bank lines of credit which bear interest at the banks' offshore reference rates. The weighted average interest rate at December 31, 2000 for borrowings under the bank lines of credit was 0.86%.
Net cash provided by operating activities during the year ended December 31, 2000 was $277.4 million. This amount consisted primarily of net income of $151.1 million, net of $84.6 million cumulative effect of a change in accounting principle, non-cash depreciation and amortization charges of $40.1 million, an increase of $66.1 million in accounts payable, partially offset by an increase of $152.5 million in accounts receivable, and an increase in
inventories of $75.5 million. The increases in accounts payable, inventories and accounts receivable were the result of increased net sales volume.
Net cash used in investing activities was $452.6 million during the year ended December 31, 2000. During this period, the Company's cash outflows consisted of purchases of approximately $387.9 million, net, of available-for-sale securities. In addition, the Company had capital expenditures of $68.5 million and a decrease in other assets of $3.8 million
The Company expects investments in property and equipment for the fiscal year 2001 to approximate $85.0 million. The Company intends to finance these investments from existing cash balances and cash flows from operations.
During the year ended December 31, 2000, net cash provided by financing activities was $564.4 million due primarily to net proceeds of $526.3 million from a secondary public offering of common stock in the second quarter of 2000, $36.7 million from common stock option exercises and purchases of common stock under the Company's employee stock purchase plan, and an increase in the Company's lines of credit of $2.5 million. In October 2000, the Company announced that its Board of Directors had rescinded its authorization for the purchase of common stock under the common stock purchase program.
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 at least the next twelve months.
TRENDS, RISKS AND UNCERTAINTIES
Set forth below and elsewhere in this Annual Report and in other documents the Company files with the Securities and Exchange Commission are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report.
MARKET RISK AND CYCLICAL DOWNTURNS IN THE SEMICONDUCTOR INDUSTRY
Novellus' 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 Novellus. During periods of reduced and declining demand, Novellus 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, Novellus 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 Novellus' 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..
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 semiconductor manufacturers. Strengthening demand for sub-$1,000 PCs could cause further delays or decreased demand for the Company's products.
INTENSE COMPETITION IN THE SEMICONDUCTOR EQUIPMENT INDUSTRY
The semiconductor equipment industry is highly competitive. Novellus faces substantial competition in the markets in which it competes from both established competitors and potential new entrants. Certain of Novellus' 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 Novellus. Novellus may also face future competition from new market entrants from overseas and domestic sources. Novellus expects its competitors to continue to improve the design and performance of their products. There can be no assurance that Novellus' competitors will not develop enhancements to or future generations of competitive products that will offer superior price or performance features over Novellus' products, and there can be no assurance that Novellus will be successful, or as successful as its competitors, in selecting, developing, manufacturing, and marketing its new products, or enhancing its existing products. Failure to successfully develop new products could materially adversely affect Novellus' revenues, financial condition, and results of operations. In addition, a substantial investment is required by Novellus' customers to install and integrate capital equipment into a semiconductor production line. As a result, once a semiconductor manufacturer has selected
another vendor's capital equipment, Novellus believes that the manufacturer will be generally reliant upon that equipment vendor for the specific production line application. Accordingly, Novellus may experience difficulty in selling a product to a particular customer for a significant period of time if that customer first selects a competitor's product. Increased competitive pressure could lead to lower prices for Novellus' products, thereby adversely affecting Novellus' revenue and operating results. There can be no assurance that Novellus will be able to compete successfully against established competitors and new entrants in the future.
INTERNATIONAL OPERATIONS
Export sales accounted for approximately 66%, 64%, and 55%, of net sales in 2000, 1999, and 1998, respectively. Novellus anticipates that export sales will account for a significant portion of net sales in the foreseeable future. As a result, a significant portion of Novellus' 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. Novellus is also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of semiconductor products. Novellus 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 Novellus' 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 Novellus' 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 Novellus 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, Novellus' business operations and financial condition. Asian countries, particularly Japan and Korea, are affected by banking, currency and other difficulties that contribute to the economic developments in those countries. Novellus 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 Novellus' products from Asian customers, thus materially adversely affecting Novellus' business, financial condition or results of operations. In addition to the concerns described above, sales of systems shipped by Novellus' Japanese subsidiary are denominated in Japanese Yen. Novellus sells the systems to its Japanese subsidiary in U.S. Dollars. Novellus 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 Novellus' business, financial condition or results of operations.
POSSIBLE VOLATILITY OF STOCK PRICE
The 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
If Novellus' operating results are below the expectations of public market analysts or investors, then the market price of its common stock could decline. Novellus has experienced and expects to continue to experience significant fluctuations in its quarterly operating results. During each quarter, Novellus customarily sells a relatively small number of systems that typically sell for prices in excess of $1 million. Novellus' backlog at the beginning of each quarter does not necessarily include all system sales needed to achieve expected net sales for that quarter. Consequently, Novellus is often dependent on obtaining orders for shipment in the same quarter that the order is received. Because Novellus builds its systems according to forecast, the absence of
significant backlog for an extended period of time could hinder Novellus' ability to plan production and inventory levels, which could adversely affect operating results. Novellus' net sales and operating results could also be adversely affected for a particular quarter if an anticipated order for even a few systems is not received in time to permit shipment during that quarter. Moreover, customers may reschedule or cancel shipments, with, in the case of cancellations, little or no penalties, and production difficulties could delay shipments. A delay in a shipment in any quarter, due, for example, to an unanticipated shipment rescheduling, to cancellations by customers or to unexpected manufacturing difficulties experienced by Novellus may cause net sales in such quarter to fall significantly below expectations and may materially adversely affect Novellus' operating results for such quarter. The timing of new product announcements and releases by Novellus may also contribute to fluctuations in quarterly operating results, particularly in cases where new product offerings cause customers to defer ordering products from Novellus' existing product lines. Novellus' results of operations also could be affected by new product announcements and releases by Novellus' 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. Novellus' 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 Novellus' 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.
BENEFITS OF NOVELLUS' ACQUISITION OF GASONICS MAY NOT BE REALIZED
The integration of Novellus and GaSonics will be a complex, time consuming and expensive process and may disrupt Novellus' and GaSonics' businesses if not completed in a timely and efficient manner. The challenges involved in this integration include the following: satisfying the needs of the combined company's customers in a timely and efficient manner and maintaining GaSonics' and Novellus' key customer relationships; persuading employees that Novellus' and GaSonics' business cultures are compatible and retaining the combined company's key management, marketing, customer support and technical personnel; maintaining management's ability to focus on anticipating, responding to or utilizing changing technologies in the semiconductor industry; combining GaSonics' product offerings and technologies with Novellus' product offerings and technologies effectively and quickly and coordinating research and development activities to enhance introduction of new products and technologies; maintaining GaSonics' key supplier relationships; and introduction of new technologies by competitors to the marketplace which reduce GaSonics' market share prior to the successful integration of the two companies. It is not certain that Novellus and GaSonics can be successfully integrated in a timely manner or at all or that any of the anticipated benefits will be realized. Failure to do so could materially harm the business and operating results of the combined company. Also, neither Novellus nor GaSonics can assure you that the growth rate of the combined company will equal the historical growth rates experienced by Novellus and GaSonics. Novellus and GaSonics employees may experience uncertainty about their future role with the combined company until or after strategies with regard to the combined company are announced or executed. This may adversely affect the combined company's ability to attract and retain key management, marketing, sales, customer support and technical personnel, which could harm the combined company. The combined entity may incur charges to operations, which are not currently reasonably estimable, in the first quarter of 2001 (the quarter in which the merger is completed) or the following quarters, to reflect costs associated with integrating the two companies. There is no assurance that the combined company will not incur additional material charges in subsequent quarters to reflect additional costs associated with the merger.
A LARGE PORTION OF NOVELLUS' NET SALES IS DERIVED FROM SALES TO A FEW CUSTOMERS
Historically, Novellus has sold a significant proportion of its systems in any particular period to a limited number of customers. Sales to Novellus' ten largest customers in 2000, 1999 and 1998 accounted for 56%, 65% and 57% of net sales, respectively. Novellus 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 Novellus' customers have entered into a long-term agreement requiring them to purchase Novellus' products. Novellus 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 Novellus' 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 Novellus' business, financial condition and results of operations. In addition, sales of Novellus' 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. Novellus has from time to time experienced delays in finalizing system sales following initial system qualification. Due to these and other factors, Novellus' systems typically have a lengthy sales cycle during which Novellus may expend substantial funds and management effort with no guarantee that Novellus will sell a particular system.
NOVELLUS' INDUSTRY IS CHARACTERIZED BY RAPIDLY CHANGING TECHNOLOGY
The semiconductor manufacturing industry is subject to rapid technological change and new product introductions and enhancements. Novellus' ability to remain competitive in this market depends in part upon Novellus' ability to develop new and enhanced systems and to introduce these systems at competitive prices and on a timely and cost-effective basis. Accordingly, Novellus devotes a significant portion of its personnel and financial resources to research and development programs and seek to maintain close relationships with its customers to remain responsive to their product needs. Novellus' current research and development efforts are directed at development of new systems and processes and improving existing system capabilities. Novellus 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. There is no assurance that Novellus' research and programs will allow Novellus to remain responsive to its customers' product needs or that Novellus' current or new customers will buy its new products.
RESEARCH AND DEVELOPMENT EXPENDITURES REPRESENT A SUBSTANTIAL PORTION OF NOVELLUS' NET SALES
Novellus' expenditures for research and development during 2000, 1999 and 1998 were $178.3 million, $119.7 million and $106.5 million, respectively, or approximately 15%, 20%, and 21% of net sales, respectively. Novellus expects in future years that research and development expenditures will continue to represent a substantial percentage of its net sales. Novellus' success 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 Novellus 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, Novellus 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. Novellus' 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 Novellus' business, financial condition and results of operations. In addition, Novellus 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 Novellus' business, financial condition and results of operations.
NOVELLUS' INTELLECTUAL PROPERTY IS CRITICAL TO THE SUCCESS OF ITS BUSINESS
Novellus intends to continue to pursue the legal protection of its technology primarily through patent and trade secret protection. Novellus 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 Novellus' technology. While Novellus intends to protect its intellectual property rights vigorously, there can be no assurance that any patents held by Novellus will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to Novellus. Novellus also relies on trade secrets and proprietary technology that it seeks to protect, in part, through Novellus' confidentiality agreements with employees, consultants and other parties. There can be no assurance that these agreements will not be breached, that Novellus will have adequate remedies for any breach, or that Novellus' 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. Novellus is currently involved in such litigation (see Item 3. Legal Proceedings). Except as set forth in "Item 3. Legal Proceedings," Novellus is not aware of any claim of infringement by Novellus' products of any patent or proprietary rights of others, however, Novellus could become involved in additional litigation in the future. Although Novellus does not believe the outcome of the current litigation will have a material impact on its 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, Novellus' operations, including the further commercialization of Novellus' products, could provoke additional claims of infringement from third parties. In the future, litigation may be necessary to enforce patents issued to Novellus, to protect trade secrets or know-how owned by Novellus or to defend Novellus 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 Novellus, which by itself could have a material adverse effect on Novellus' financial condition and operating results. Further, adverse determinations in such litigation could result in Novellus' loss of proprietary rights, subject Novellus to significant liabilities to third parties, require Novellus to seek licenses from third parties or prevent Novellus from manufacturing or selling its products, any of which could have a material adverse effect on Novellus' business, financial condition and results of operations.
NOVELLUS IS SUSCEPTIBLE TO SUPPLY SHORTAGES
Novellus uses numerous suppliers to supply parts, components and sub-assemblies for the manufacture and support of its products. Although Novellus makes reasonable efforts to ensure that such parts are available from multiple suppliers, this is not always possible. Accordingly, Novellus obtains certain key parts 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 Novellus and/or a small group of other companies in the semiconductor industry. Although Novellus 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 Novellus' operations. Moreover, a prolonged inability to obtain certain components could have a material adverse effect on Novellus' business, financial condition and results of operations and could result in damage to its customer relationships.
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.
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, non-cash 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. Novellus is assessing its pricing/marketing strategy in an effort to insure that it remains competitive in a broader European market. Novellus is also assessing its information technology systems in an effort to allow for transactions to take place in both legacy currencies and the Euro with the eventual elimination of the legacy currencies, and is reviewing whether certain existing contracts will need to be modified. Novellus' currency risk and risk management for operations in participating countries may be reduced as the legacy currencies are converted to the Euro.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio and long-term debt obligations. The Company does not use derivative financial instruments in its investment portfolio. The Company places its investments with high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer.
The Company mitigates default risk by investing in only the safest and highest credit quality securities and by monitoring the credit rating of investment issuers. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.
The Company has no cash flow exposure due to rate changes for cash equivalents and short-term investments, as all of these investments are at fixed interest rates. The Company's short-term borrowing is at a fixed interest rate. Short-term borrowing is used by the Company's Japanese subsidiary for general corporate purposes, including capital expenditures and working capital needs.
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 and the fair value of each as of December 31, 2000 and 2001.
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 $21.0 million as of December 31, 2000 and $16.9 million as of December 31, 1999.
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 2000 and 1999, the Company employed a foreign currency hedging program utilizing foreign currency forward exchange contracts and certain foreign currency denominated balance sheet positions. Under this program, increases or decreases in currency commitments and balance sheet positions, as translated into U.S. dollars, are primarily offset by realized gains and losses on the hedging instruments. The goal of the hedging program is to economically guarantee or lock in exchange rates on the Company's foreign currency cash outflows and to minimize the impact to the Company of foreign currency fluctuations. The Company does not use foreign currency forward exchange contracts for speculative or trading purposes.
Under the hedging program, all foreign currency contracts are marked-to-market and realized and unrealized gains and losses are included as a component of other income and expense. The following table provides information as of December 31, 2000 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NOVELLUS SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
* Data is not available in sufficient detail to provide pro forma information for this year.
See accompanying notes.
NOVELLUS SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
See accompanying notes.
NOVELLUS SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes.
NOVELLUS SYSTEMS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
See accompanying notes.
NOVELLUS SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BUSINESS AND NATURE OF OPERATIONS
NATURE OF OPERATIONS
Novellus Systems, Inc. (the Company) manufactures, markets and services 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 2000 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
The Company changed its revenue recognition policy effective January 1, 2000, based on guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller's price is fixed or determinable and collectibility is reasonably assured. Certain of the Company's product sales are accounted for as multiple-element arrangements. If the Company has met defined customer acceptance experience levels with both the customer and the specific type of equipment, the Company recognizes equipment revenue upon shipment and transfer of title, with the remainder when it becomes due (generally upon acceptance). All other product sales with customer acceptance provisions are recognized upon customer acceptance. Revenue related to 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 not significant and included in accrued liabilities.
In accordance with guidance provided in SAB 101, the Company recorded a non-cash charge of $84.6 million (after reduction for income taxes of $45.8 million), or ($0.63) per share, to reflect the cumulative effect of the accounting change as of the beginning of the fiscal year. The decrease to net income before the cumulative effect of the accounting change as a result of the adoption of SAB 101 was a decrease of $87.1 million or ($0.68) per diluted share for fiscal year 2000.
The deferred profit balance as of January 1, 2000 was $221.7 million. This amount is comprised of equipment that was shipped and previously recorded as revenue but had not been accepted or did not qualify for multiple-element accounting as of December 31, 1999. In addition to deferred revenue, deferred profit includes deferred amounts
related to cost of sales. Of the $221.7 million in deferred profit, $212.6 million was recognized as revenue in fiscal 2000. The pro forma amounts presented in the income statement were calculated assuming the accounting change was retroactive to prior periods. For periods prior to 1999, data was not available to provide pro-forma information.
Prior to 2000, the Company's revenue recognition policy was to recognize revenue at the time the customer takes title to the product, generally at the time of shipment. Revenue related to maintenance and service contracts was recognized ratably over the duration of the contracts.
WARRANTY AND INSTALLATION
The Company generally warrants its systems for a period of 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 when the revenue is recognized.
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 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, net of tax, in accumulated other comprehensive income (loss). Realized gains and losses and declines in value of securities judged to be other than temporary are included in interest income or expense. Interest on all securities is included in interest income.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consisted of the following at December 31 (in thousands):
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:
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 (loss).
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 2000 and 1999, 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 significant.
EARNINGS PER SHARE
Earnings per share is calculated in accordance with SFAS No. 128. Basic earnings per share exclude any dilutive effect of employee stock options. Diluted earnings per share includes the dilutive effect of employee stock options.
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Options to purchase 485,000, 261,000 and 2,472,000 shares of common stock at weighted-average prices of $22.19, $25.52 and $14.74 per share were outstanding during 2000, 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.
ADVERTISING EXPENSES
The Company expenses advertising costs as incurred. Advertising expenses for 2000, 1999, and 1998 were $9.3 million, $4.9 million and $6.1 million, 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 significant 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.
OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss), net of related tax is as follows (in thousands):
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 provides pro forma disclosures of net income and earning per share as if the fair value method prescribed by SFAS No. 123 had been applied in measuring employee compensation expense. See Notes to the Consolidated Financial Statements -- Note 7 "Employee Benefit Plans".
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including forward exchange contracts, and hedging activities. SFAS No. 133, as amended by SFAS 137 and SFAS 138, is now effective for fiscal years beginning after June 15, 2000 and, therefore, the Company adopted this accounting standard effective January 1, 2001. The impact of the adoption of SFAS No. 133 was not significant.
NOTE 2 FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
As part of the Company's asset and liability management, the Company enters into various types of transactions that involve financial instruments with off-balance sheet risk. The Company enters into foreign forward exchange contracts in order to manage foreign exchange risk. The notional amounts, carrying amounts, and estimated fair values of the Company's foreign currency forward exchange contracts are as follows at December 31 (in thousands):
The fair value of the Company's foreign forward exchange contracts are calculated based on quoted market prices or pricing models using current market rates at the end of December 31, 2000 and 1999, respectively.
AVAILABLE-FOR-SALE SECURITIES
The following table presents the estimated fair value of the Company's investments by balance sheet classification at December 31 (in thousands):
As of December 31, 2000, the Company held equity securities with a cost basis of $16.2 million which had an associated unrealized loss of $10.2 million. These securities are classified in the corporate securities line in the fair market value table above. Unrealized gains (losses) on all other securities as of December 31, 2000 and in total as of December 31, 1999 were not significant.
Realized gains and losses on sales of available for sale securities for the years ended December 31, 2000, 1999, and 1998 were not significant. All debt securities held at December 31, 2000 are due in less than one year.
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):
The fair values of the Company's short-term investments are based on quoted market prices as of December 31, 2000 and 1999. The fair value of the Company's obligations under lines of credit are based on current rates offered to the Company for similar debt instruments of the same remaining maturities.
NOTE 3 LINES OF CREDIT
The Company has lines of credit with three banks, which expire at various dates through May 2001 under which the Company can borrow up to $33.9 million at the banks' prime rates (0.67%, 0.89% and 1.16% at December 31, 2000). 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, 2000 and 1999, amounts outstanding were $16.1 million and $13.5 million respectively, at annual weighted average interest rates of 0.86% and 1.14%, respectively. All borrowings under the line of credit were by Nippon Novellus.
NOTE 4 LONG TERM DEBT
In June 1997, the Company entered into a five year, $125.0 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, 2000 and 1999 there were no outstanding borrowings.
The credit facility contains certain financial restrictive covenants including a restriction from paying dividends. At December 31, 2000, the Company was in compliance with these covenants.
NOTE 5 LITIGATION
APPLIED LITIGATION
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, financial condition, 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.
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 September 10, 1999, the Company filed a motion for summary judgment that claims 1, 2 and 8 of its U.S. Patent No. 5,314,597 are not invalid over the prior art asserted against it by Applied. On September 29, 1999, Applied filed a counter-motion for summary judgment that these claims are invalid based on the on-sale bar. On December 7, 1999, the Court entered an order granting the Company's motion and denying Applied's motion.
On November 4, 1999, Applied moved for leave of Court to amend its prior art chart with respect to the Company's U.S. Patent No. 5,314,597. On February 15, 2000, the Court granted Applied's motion. On October 4, 2000, the Court entered an order denying the Company's motion for reconsideration of this order.
On December 17, 1999, the Company and Varian moved for summary judgment that certain claims of Applied's U.S. Patent No. 5,171,412 were invalid as anticipated or obvious over the prior art. On March 16, 2000, the Court granted this motion in part, and deferred ruling in part.
On December 23, 1999, the Company moved for summary judgment that its U.S. Patent No. 5,635,036 is not invalid as obvious over the prior art. On March 20, 2000, the Court denied the Company's motion without prejudice.
On January 14, 2000, Applied withdrew its U.S. Patent No. 5,496,455 from the lawsuits against the Company and Varian.
On February 4, 2000, Applied filed a motion for summary judgment that claims 10, 11 and 13 of the Company's U.S. Patent No. 5,314,597 are invalid over the prior art. On March 10, 2000, the Company filed an opposition and cross-moved for leave to amend its claim chart to withdraw these claims. On April 5, 2000, the Court issued an order denying Applied's motion as moot and granting the Company's motion.
On March 31, 2000, the Company filed a renewed motion for partial summary judgment that its U.S. Patent No. 5,635,036 is not invalid as obvious over the prior art. On January 3, 2001, the Court entered an order in response to this motion tentatively amending certain claim constructions and requesting additional briefing.
On July 28, 2000, Applied filed a motion for summary judgment of non-infringement of the Company's U.S. Patent No. 5,330,628. On October 20, 2000, the Company filed a non-opposition to that motion, pending appeal of the Court's claim construction. The Company also cross-moved for the Court to dismiss Applied's allegations that the '628 patent was invalid or unenforceable. On November 20, 2000, the Court entered an order granting both motions.
On May 12, 2000, the Company and Varian moved for summary judgment that the Inova and MB2 do not infringe Applied's U.S. Patent No. 5,186,718. On August 8, 2000, the Court granted this motion with respect to the Inova. The Company's motion that the MB2 does not infringe the '718 patent is currently off calendar pending completion of discovery.
On August 18, 2000, Applied filed a motion for partial summary judgment that certain of its products did not infringe the Company's U.S. Patent No. 5,635,036. On October 24, the Court entered an order denying Applied's motion. The Court, in the same order, also allowed the Company to withdraw its assertion that certain Applied products infringed certain claims of its U.S. Patent No. 5,314,597.
On or about September 25, 2000, Varian and Applied executed a "License and Settlement Agreement." On September 29, 2000, Varian and Applied filed a Stipulated Dismissal with Prejudice with the Court that reciprocally dismisses all causes of action that Varian and Applied had asserted or could have asserted against one another in the litigation. In addition, Applied has stated, in its agreement with Varian, that it will release the Company from all claims that arose out of or relate to the litigation that relate to any infringement alleged with respect to the Inova, in the form as it existed as of the effective date of the Company's purchase of Varian's TFS division. The Stipulated Dismissal, however, expressly excludes the Company from the scope of any release.
On October 6, 2000, Applied filed a motion for summary judgment of noninfringement of the Company's U.S. Patent No. 5,314,597. On November 13, 2000, the Company filed an opposition to that motion, and cross-moved for summary judgment of infringement as to claims 1 and 8 of the '597 patent. These motions were orally argued on January 5, 2001 and are presently under submission.
On November 22, 2000, Applied filed a second motion for summary judgment that its accused products do not infringe the Company's U.S. Patent No. 5,635,036. This motion was orally argued on January 19, 2001 and is presently under submission.
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) and SABRE xT(TM) copper deposition systems infringe 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 the SABRE(TM) and SABRE xT(TM) systems, and seeks damages for past infringement. Semitool also seeks trebled damages for alleged willful infringement. Semitool further 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, the Company filed a motion for summary judgement of non-infringement.
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(TM) and SABRE xT(TM) systems do not infringe the two patents asserted by Semitool.
On May 15, 2000, Semitool filed a notice of appeal, appealing the Court's judgement to the United States Court of Appeals for the Federal Circuit. Semitool filed its opening brief on July 24, 2000. The Company filed its opening brief on October 3, 2000. Semitool filed its reply brief on November 3, 2000. Although the Company believes that
the Court's order granting summary judgment of non-infringement was correct, and that the Company will prevail on appeal, there can be no assurances that the Company will prevail in its litigation against Semitool. If the Court's order is reversed on appeal, and if Semitool were to prevail against the Company following the appeal Complaint, it could have a material adverse effect on the Company's business, financial condition or results of operations.
PLASMA PHYSICS LITIGATION
On December 28, 1999, Plasma Physics Corporation and Solar Physics Corporation (collectively, "Plasma Physics") filed a patent infringement lawsuit against many of the Company's Japanese and Korean customers. The suit was entitled Plasma Physics and Solar Physics v. Fujitsu et al., Civil Action No. 99-8593, and was pending in the United States District Court for the Eastern District of New York. On July 24, 2000, the Court ordered Plasma Physics to re-file separate complaints against the Japanese and Korean defendants, whereupon, Civil Action No. 99-8593 would be dismissed without prejudice. In accordance with the Court's order, Plasma Physics has since re-filed separate complaints against the Japanese and Korean defendants in the United States District Court for the Eastern District of New York. Many of the defendants have notified the Company that they believe that the Company has indemnification obligations and liability for the lawsuits.
Plasma Physics has asserted U.S. Patent Nos. 4,226,897; 5,470,784, and 5,543,634 (the "'897, '784, and '634 patents," respectively). 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 further seeks its attorney's fees and costs, and interest on any judgement.
On April 17, 2000, Applied Materials filed a declaratory relief action against Plasma Physics and Solar Physics requesting a judgement of non-infringement, invalidity, and unenforceability with respect to the '897 and '784 patents. The suit is entitled Applied Materials v. Plasma Physics and Solar Physics, Civil Action No. 00-2199, and is pending in the United States District Court for the Eastern District of New York. On May 23, 2000, Plasma Physics filed a motion to dismiss Applied Material's complaint for a lack of subject matter jurisdiction. Plasma Physics' motion to dismiss Applied Materials' complaint was denied without prejudice on July 24, 2000. Plasma Physics subsequently filed an Answer and Conditional Counterclaim.
On June 1, 2000, the Company filed a declaratory relief action against Plasma Physics and Solar Physics requesting a judgement of non-infringement, invalidity, and unenforceability with respect to the '897 and '784 patents. The suit is entitled Novellus v. Plasma Physics and Solar Physics, Civil Action No. 00-3146, and is pending in the United States District Court for the Eastern District of New York. On June 30, 2000, Plasma Physics filed a motion to dismiss the Company's complaint for a lack of subject matter jurisdiction. Plasma Physics' motion to dismiss the Company's complaint was denied without prejudice on July 24, 2000. On July 31, 2000, Plasma Physics filed an Answer and Conditional Counterclaim. Plasma Physics denies that the '897 and '784 patents are invalid and unenforceable. Plasma Physics further denies that the '784 patent is not infringed by the Company. Plasma Physics also asserted a conditional counterclaim against the Company, alleging that the Company's PECVD processing systems infringe the '784 patent.
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 result 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 patents or proprietary rights of others except as claimed by Applied, Semitool, and Plasma Physics, 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.
NOTE 6 COMMITMENTS
The Company leases its facilities under operating leases that expire through 2006. As of December 31, 2000, the minimum annual rental commitments are as follows (in thousands):
Rent expense was approximately $16.7 million, $18.2 million, and $12.8 million for the years ended December 31, 2000, 1999, and 1998, respectively, net of sublease income of $8.1 million, $3.0 million and $2.1 million for the years ended December 31, 2000, 1999, and 1998, 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 $20.2 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 $274.5 million as of December 31, 2000. These leases contain certain restrictive financial covenants. The Company was in compliance with these covenants at December 31, 2000.
NOTE 7 EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OPTION PLANS
The Company grants options to employees under the 1992 Stock Option Plan ("the Plan"). Under the Plan, options to purchase up to 33.3 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, 2000, approximately 4.0 million shares were reserved for future issuance under the Employee Stock Option Plan and options to purchase 6.2 million shares were exercisable at a weighted average exercise price of $14.88.
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 Plan. Had compensation expense for the Company's plan 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 and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share data):
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 2000, 1999 and 1998:
The weighted average fair value of options granted during the year were $21.18, $12.67 and $6.44 for 2000, 1999 and 1998, respectively.
The pro forma net income and earnings 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 2000, 1999 and 1998:
The weighted average fair value of purchase rights granted during the year were $21.66, $7.43 and $4.17 for 2000, 1999 and 1998, respectively.
Information with respect to stock option activity is as follows: (in thousands, except per share data)
The following table summarizes information about stock options outstanding at December 31, 2000 (share information in thousands):
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 237,000, 433,000, and, 504,000 shares issued under the two plans in 2000, 1999, and 1998, respectively. At December 31, 2000, approximately 936,000 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 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. During 2000, the Company repurchased 20,000 shares under the program, and had purchased a total of 4,769,000 shares as of December 31, 2000. In October 2000, the Company announced that its Board of Directors had rescinded its authorization for the purchase of common stock under the common stock purchase program.
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 recorded $2.8 million in matching contributions under this plan for the year ended December 31, 2000.
NOTE 8 INCOME TAXES
Significant components of the provision for income taxes attributable to income before income taxes and cumulative effect of a change in accounting principle are as follows (in thousands):
Pre-tax income from foreign operations was $28.0 million, $19.9 million, and $3.3 million in 2000, 1999 and 1998, 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):
The provision for income taxes differs from the provision calculated by applying the federal statutory tax rate to income before income taxes, and cumulative effect of a change in accounting principle, because of the following (in thousands):
NOTE 9 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):
Revenue for each geographic area is recognized in accordance with SAB 101 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 11% and for 17% of net sales in 2000 and 1999 respectively. There were no individual customers who accounted for more than 10% of the Company's net sales in 1998. Export sales were 66% of net sales in 2000, 64% of net sales in 1999, and 55% of net sales in 1998.
NOTE 10 QUARTERLY FINANCIAL DATA (UNAUDITED)
On December 3, 1999, the SEC staff issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The SEC Staff addresses several issues in SAB No. 101, including the timing for recognizing revenue derived from selling arrangements that involve contractual customer acceptance provisions and installation of the product if these events occur after shipment and transfer of title. The Company's previous revenue recognition policy was to recognize revenue at the time the customer takes title to the product, generally at the time of shipment, because the Company has always met its installation obligations and obtained customer acceptance. On October 9, 2000, the SEC issued Staff Accounting Bulletin No. 101: Revenue Recognition in Financial Statements - -- Frequently Asked Questions and Answers ("SAB 101 FAQ"). The SAB 101 FAQ was issued to clarify many of the implementation questions surrounding SAB No. 101. The Company recorded a non-cash charge of $84.6 million (after reduction for income taxes of $45.8 million), or $0.63 per share, to reflect the cumulative effect of the accounting change as of the beginning of the fiscal year. The Company's revenue recognition policies are disclosed in Note 1.
The Company has included the following information below to demonstrate the effect on Q1 through Q3, 2000 as if the provisions of SAB 101 had been applied as of the beginning of fiscal year 2000:
Amounts as reported for period ending December 31, 1999 are as follows:
(1) 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.
NOTE 11 RELATED PARTY TRANSACTIONS
There were no significant related party transactions in the year ended December 31, 2000. At December 31, 1999 and 1998, the Company had outstanding notes receivable from one of its officers, totaling $1.5 million with interest at 6.0% per year, compounded semi-annually. These notes were repaid in March 2000.
NOTE 12 SUBSEQUENT EVENT (UNAUDITED)
On January 10, 2001 the Company completed its acquisition of GaSonics International Corporation (GaSonics), a developer and supplier of photoresist and residue removal technologies. In the transaction, the Company acquired all outstanding shares of GaSonics in a stock-for-stock merger, with all outstanding shares of GaSonics capital stock converted into approximately 9,240,000 shares of Novellus common stock. In addition, all outstanding options to purchase shares of GaSonics capital stock were automatically converted into options to purchase approximately 1,400,000 shares of Novellus common stock. The business combination will be accounted for as a pooling-of-interests combination and accordingly, the Company's historical consolidated financial statements presented in future reports will be restated to include the accounts and results of operations of GaSonics.
The following unaudited pro forma data summarizes the combined results of operations of the Company and GaSonics as if the combination had been consummated on December 31, 2000. Data for the fiscal year ended December 31, 2000 reflects the adoption of SAB 101 for both Novellus and GaSonics.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of Novellus Systems, Inc. as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with 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, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2000, the Company changed its method of accounting for revenue recognition in accordance with guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements."
/s/ ERNST & YOUNG LLP San Jose, California January 15, 2001
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
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 2001 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 11.
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 2001 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12.
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 2001 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 13.
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 2001 Annual Meeting of Shareholders and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
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(1) Incorporated by reference to Exhibit 10.2 filed with the Company's Registration Statement on Form S-1, File No. 33-23011, which was declared effective August 11, 1988.
(2) Incorporated by reference to Exhibit 10.1 filed with the Company's Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 1992.
(3) Incorporated by reference to Exhibit 10.30 filed with the Company's Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 1993.
(4) Incorporated by reference to Exhibit 10.31 filed with the Company's Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 1993.
(5) Incorporated by reference to Exhibit 10.34 filed with the Company's Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 1993.
(6) Incorporated by reference to Exhibit 10.41 filed with the Company's Report on Form 10-K filed with the Securities and Exchange Commission on February 18, 1994.
(7) Incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(8) Incorporated by reference to Exhibit 2.2 to the Company's Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(9) Incorporated by reference to Exhibit 2.3 to the Company's Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(10) Incorporated by reference to Exhibit 2.4 to the Company's Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(11) Incorporated by reference to Exhibit 2.6 to the Company's Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(12) Incorporated by reference to Exhibit 2.7 to the Company's Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(13) Incorporated by reference to Exhibit 2.8 to the Company's Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(14) Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on August 11, 1997.
(15) Incorporated by reference to Exhibit 10.2 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on August 11, 1997.
(16) Incorporated by reference to Exhibit 10.4 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(17) Incorporated by reference to Exhibit 10.1.1 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(18) Incorporated by reference to Exhibit 10.1.2 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(19) Incorporated by reference to Exhibit 10.1.3 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(20) Incorporated by reference to Exhibit 10.2 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(21) Incorporated by reference to Exhibit 10.2.1 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(22) Incorporated by reference to Exhibit 10.3 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(23) Incorporated by reference to Exhibit 10.4 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(24) Incorporated by reference to Exhibit 10.5 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(25) Incorporated by reference to Exhibit 10.6 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(26) Incorporated by reference to the exhibit with the corresponding exhibit number in the Company's Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 1999.
(27) Incorporated by reference to the exhibit with the corresponding exhibit number in the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on August 9, 1999.
(28) Incorporated by reference to the exhibit with the corresponding exhibit number in the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 8, 1999.
(29) Incorporated by reference to the exhibit with the corresponding exhibit number in the Company's Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2000.
* Management contracts or compensatory plans or arrangements.
(b) Reports on Form 8-K:
The Company filed one report on Form 8-K during the fourth quarter ended December 31, 2000. Information regarding the item reported on is as follows:
November 1, 2000: The Company announced the acquisition of GaSonics International Corporation.
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 on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California on this 23rd day of March, 2001.
NOVELLUS SYSTEMS, INC.
By: /s/ Robert H. Smith ------------------------------------- Robert H. Smith EXECUTIVE VICE PRESIDENT, FINANCE AND ADMINISTRATION, CHIEF FINANCIAL OFFICER AND SECRETARY
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard S. Hill and Robert H. Smith, and each of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the date indicated.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
EXHIBIT INDEX
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(1) Incorporated by reference to Exhibit 10.2 filed with the Company's Registration Statement on Form S-1, File No. 33-23011, which was declared effective August 11, 1988.
(2) Incorporated by reference to Exhibit 10.1 filed with the Company's Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 1992.
(3) Incorporated by reference to Exhibit 10.30 filed with the Company's Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 1993.
(4) Incorporated by reference to Exhibit 10.31 filed with the Company's Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 1993.
(5) Incorporated by reference to Exhibit 10.34 filed with the Company's Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 1993.
(6) Incorporated by reference to Exhibit 10.41 filed with the Company's Report on Form 10-K filed with the Securities and Exchange Commission on February 18, 1994.
(7) Incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(8) Incorporated by reference to Exhibit 2.2 to the Company's Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(9) Incorporated by reference to Exhibit 2.3 to the Company's Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(10) Incorporated by reference to Exhibit 2.4 to the Company's Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(11) Incorporated by reference to Exhibit 2.6 to the Company's Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(12) Incorporated by reference to Exhibit 2.7 to the Company's Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(13) Incorporated by reference to Exhibit 2.8 to the Company's Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 1997.
(14) Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on August 11, 1997.
(15) Incorporated by reference to Exhibit 10.2 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on August 11, 1997.
(16) Incorporated by reference to Exhibit 10.4 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(17) Incorporated by reference to Exhibit 10.1.1 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(18) Incorporated by reference to Exhibit 10.1.2 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(19) Incorporated by reference to Exhibit 10.1.3 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(20) Incorporated by reference to Exhibit 10.2 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(21) Incorporated by reference to Exhibit 10.2.1 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(22) Incorporated by reference to Exhibit 10.3 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(23) Incorporated by reference to Exhibit 10.4 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(24) Incorporated by reference to Exhibit 10.5 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(25) Incorporated by reference to Exhibit 10.6 to the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 10, 1997.
(26) Incorporated by reference to the exhibit with the corresponding exhibit number in the Company's Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 1999.
(27) Incorporated by reference to the exhibit with the corresponding exhibit number in the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on August 9, 1999.
(28) Incorporated by reference to the exhibit with the corresponding exhibit number in the Company's Report on Form 10-Q filed with the Securities and Exchange Commission on November 8, 1999.
(29) Incorporated by reference to the exhibit with the corresponding exhibit number in the Company's Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2000.
* Management contracts or compensatory plans or arrangements.