[SELECTED CONSOLIDATED FINANCIAL DATA] [in thousands, except per share data]:
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
Consolidated Statements
of Income Data:
Net sales $461,736 $373,732 $224,679 $113,543 $69,800
Gross profit 264,574 216,147 128,453 64,479 38,907
Net income 94,029 82,543 44,932 16,115 6,240
Net income per share $ 5.70 $ 4.82 $ 2.72 $ 1.10 $ .44
Shares used in per share calculations 16,509 17,137 16,495 14,670 14,342
DECEMBER 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets Data:
Cash, cash equivalents,
and short-term investments $176,668 $149,799 $136,539 $ 48,622 $42,988
Working capital 287,818 226,257 183,581 83,486 65,276
Total assets 459,787 364,688 265,000 113,117 97,334
Long-term obligations, excluding
current portions - - - - 763
Shareholders' equity 373,636 272,782 214,214 105,461 82,681
Cash dividends per share - - - - -
11
[MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS]
RESULTS OF OPERATIONS
NET SALES
Net sales were $461,736,000, $373,732,000, and $224,679,000 in 1996, 1995, and
1994, respectively. The increase of approximately 24% from 1995 to 1996 was
a result of continued worldwide demand in the first and second quarters of
the year offset by a slow down in the demand in the third and fourth quarters
of the year. The increase of approximately 66% from 1994 to 199S was caused
by continued worldwide demand for semiconductor equipment resulting in
significant growth in all product lines. The increase from 1995 to 1996 was
primarily due to continuing increases in demand for the Concept Two products,
particularly the introduction and significant demand for the industry's first
high density plasma (HDP) deposition system. This increase was offset by a
decline in the demand for the Company's Concept One products. Approximately
78% and 22% of the sales growth in 1995 from 1994 was due to increased
shipments and higher average unit prices, respectively. The higher average
unit prices were primarily due to an increased proportion of sales coming
from the higher priced Concept Two product lines. International sales were
approximately 64% of total sales in 1996, 56% in 1995 and 55% in 1994.
Strong demand in the Pacific Rim counties was the primary cause of the
increases in international sales. The Company expects international sales to
continue to represent a significant portion of its overall net sales.
GROSS PROFIT
Gross profit was $264,574,000, $216,147,000, and $128,453,000 in 1996, 1995,
and 1994, respectively. The increases were due to higher net sales. As a
percentage of net sales, gross profit was approximately 57%, 58%, and 57% in
1996, 1995, and 1994, respectively. The slight decrease in gross profit as a
percentage of net sales from 1995 to 1996 was primarily due to competitive
pricing pressures encountered during the industry slow down in the second
half of 1996. The Company anticipates this trend will continue throughout
1997. The slight increase in gross profit as a percentage of net sales from
1994 to 1995 was primarily due to increased manufacturing efficiencies and
material cost reductions on the Concept Two product line, as well as overall
efficiencies and lower fixed costs per system due to the higher volume of
systems manufactured and shipped in 1995 as compared to 1994.
RESEARCH AND DEVELOPMENT
Research and development expenses were $53,902,000, $41,009,000, and
$26,012,000 in 1996, 1995, and 1994, respectively. The increases were due to
continued increased spending on new product development. As a percentage of
net sales research and development expenses were approximately 12%, 11%, and
12%, 1996, 1995, and 1994, respectively. The Company plans to continue to
invest in new products and increase research and development spending in
absolute dollars.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general and administrative expenses were $74,419,000, $59,347,000,
and $38,744,000 in 1996, 1995, and 1994, respectively. As a percentage of
net sales, selling, general, and administrative expenses were approximately
16% in 1996 and 1995 and 17% in 1994. The increases in absolute dollars were
primarily due to higher sales commissions or increased revenues and generally
higher levels of spending to support an expanding worldwide business,
particularly in the Pacific Rim.
Gross profit, research and development expenses, and selling, general, and
administrative, expenses were affected throughout the periods indicated by
charges to expense for the Company's profit sharing and bonus programs.
Amounts charged to expense for these programs in 1996, 1995, and 1994 were
$10,222,000, $8,418,000, and $6,247,000, respectively.
NET INTEREST INCOME
Net interest income was $8,407,000, $9,274,000, and $4,382,000 in 1996, 1995,
and 1994, respectively. The decrease from 1995 to 1996 was primarily due to
lower interest rates earned on the outstanding cash and short-term investment
balances. The increase from 1994 to 1995 was primarily due to interest
earned on higher average outstanding cash and short-term investments
balances, resulting from cash generated from operations and proceeds from the
Company's common stock offering in 1994, as well as generally higher interest
rates.
12
PROVISION FOR INCOME TAXES
The provision for income taxes reflects an effective tax rate of 35% in 1996,
and 34% in 1995 and 1994. The increase from 1995 to 1996 was due to the fact
that the U.S. Congress did not reinstate the research and development tax
credit until the second half of 1996.
At December 31, 1996, the Company has recognized a deferred tax asset of
$18,058,000 related to temporary differences between the book and tax basis
of assets and liabilities. It is the opinion of management that it is more
likely than not that this asset will be realized by an offset against the
recognized deferred tax liability of $3,545,000 and by carryback against
previously paid income taxes.
REPURCHASE OF COMMON STOCK
During 1996 and 1995, the Company repurchased 86,000 and 641,000 shares of
common stock, respectively. The 1996 repurchase had no material impact on
earnings per share for 1996. The 1995 repurchase resulted in an increase to
earnings per share for 1995 of approximately $0.02.
FOREIGN CURRENCY ACCOUNTING
The local currency is the functional currency for all foreign operations. In
1996, the Company changed the functional currency for subsidiaries in Korea,
Taiwan, Singapore, the United Kingdom, the Netherlands, Germany, France, and
China from the U.S. dollar to the local currency. On January 1, 1995, the
Company changed the functional currency for its Japanese subsidiary from the
U.S. dollar to the local currency. These changes were made in order to
reflect the changing nature of the operations of the Company's foreign
subsidiaries. Accordingly, translation gains or losses related to the foreign
subsidiaries have been included as a component of shareholders' equity
subsequent to these changes.
FOREIGN EXCHANGE CONTRACTS
The Company conducts its business in various foreign currencies. The Company
enters into forward foreign exchange contracts primarily to hedge against the
short-term impact of foreign currency fluctuations of intercompany accounts
payable denominated in U.S. dollars recorded by the Japanese subsidiary. The
Company also enters into forward foreign exchange contracts to buy and sell
foreign currencies as economic hedges of the parent's intercompany balances
denominated in a currency other than the U.S. dollar. In 1996, these hedging
contracts were denominated primarily in the Japanese Yen. The maturities of
all the forward foreign exchange contacts are generally short-term in nature.
Because the impact of movements in currency exchange rates on forward foreign
exchange contracts offsets the related impact on the underlying items being
hedged, these financial instruments do not subject the Company to speculative
risk that would otherwise result from changes in currency exchange rates.
Net foreign currency gains and losses have not been material.
OTHER ISSUES
In 1995, the Financial Accounting Standards Board released the Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS 121 requires recognition of impairment of long-lived assets in the event
the net book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. The Company adopted SFAS 121 on January 1,
1996. Adoption of SFAS 121 did not have a material impact on the Company's
financial condition or results of operations.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." In accordance with the provisions of SFAS No. 123, the Company
applies APB Opinion 25 and related interpretations in accounting for its
employee stock option and stock purchase plans and, accordingly, does not
recognize compensation cost.
13
CAUTIONARY STATEMENTS
Certain of the statements contained in this annual report are forward-looking
statements that involve a number of risks and uncertainties. These forward
looking statements include, but are not limited to the statements above
regarding the Company's expectation that the Company will continue to grow,
international sales will continue to represent a significant portion of its
overall net sales, gross profit will continue to decrease due to competitive
pricing pressures, the Company's plans to continue to invest in new products
and increase research and development spending in absolute dollars and the
Company's belief that the deferred tax asset will be realized by an offset
against the recognized deferred tax liability, and other matters discussed in
this report. These risks and uncertainties could cause actual results to
differ materially from those described herein and include the following:
MARKET RISK
The Company's business depends predominantly on capital expenditures of
semiconductor manufacturers, which, in turn, depend on the current and
anticipated market demand for integrated circuits and products utilizing
integrated circuits. The semiconductor industry has historically been very
cyclical and has experienced periodic downturns which have had a material
adverse effect on the semiconductor industry's demand for semiconductor
processing equipment, including equipment manufactured and marketed by the
Company. No assurance can be given that the Company's net sales and
operating results will not be adversely affected if downturns or slowdowns in
the rate of capital investment in the semiconductor industry occur in the
future. In addition, the semiconductor equipment industry is highly
competitive and subject to rapid change and new products and enhancements.
COMPETITION
The Company faces substantial competition in each of the markets in which it
sells its products. Certain of the Company's competitors are larger and have
greater resources, financial and otherwise, than the Company. There can be
no assurance that be Company will be successful or as successful as in
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 the Company's business,
financial condition, and results of operations.
PATENTS AND PROPRIETARY RIGHTS
There has been substantial litigation regarding patent and other intellectual
property rights in semiconductor related industries. The Company is
currently involved in such litigation (see Note 9 to the Consolidated
Financial Statements), and although the Company is not aware of any
infringement by its products of any patent or proprietary rights of others,
it could become involved in additional litigation in the future. Although
the Company does not believe the outcome of the current litigation will have
a material impact on the Company's financial condition or results of
operations, no assurances can be given that this litigation or future
litigation will not have such an impact.
INTERNATIONAL OPERATIONS
Export sales accounted for approximately 64%, 56%, and 55% of net sales in
1996, 1995, and 1994, respectively. The Company anticipates that export
sales will account for a significant portion of net sales in the foreseeable
future. As a result a significant portion of the Company's sales will be
subject to certain risks, including tariffs and other barriers, difficulties
in staffing and managing foreign subsidiary operations, difficulties in
managing distributors, potentially adverse tax consequences, and the
possibility of difficulty in accounts receivable collection. The Company is
also subject to the risks associated with the imposition of legislation and
regulations relating to the import and export of semiconductor products. The
Company cannot predict whether quotas, duties, taxes, or other changes or
restrictions will be implemented by the United States or any other country
upon the importation or exportation of the Company's products in the future.
There can be no assurance that any of these factors or the adoption of
restrictive policies will not have a material adverse effect on the Company's
business, financial condition, or results of operations.
14
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital resources through cash
flow from operations, sale of equity securities, and borrowings. The
Company's primary sources of funds at December 31, 1996 consisted of
$176,668,000 of cash, cash equivalents, and short-term investments. In
addition, at December 31, 1996, there was $15,153,000 available under bank
lines of credit that expire at various dates through April 30, 1997. At
December 31, 1996, there were no borrowings by the parent company and the
Japanese subsidiary had $13,153,000 outstanding under these bank lines of
credit which bear interest at an annual weighted average rate of 1.26%.
Cash and cash equivalents increased $5,648,000 from $60,114,000 at December
31, 1995 to $65,762,000 at December 31, 1996. Net cash provided by operating
activities represented $67,274,000 primarily due to net income of
$94,029,000, and depreciation and amortization of $11,332,000. These amounts
were partially offset by increases in accounts receivable ($7,867,000), and
inventories ($18,669,000), and a decrease in accounts payable of $6,819,000.
The increases are generally due to the higher levels of business activity in
1996, as evidenced by the 24% increase in net sales. The increase in
accounts receivable was affected by an increase in days sales outstanding in
receivables, from 86 days at December 31, 1995 to 97 days at December 31,
1996. This increase is primarily due to the expansion of business in the
Pacific Rim, as receivables there typically have longer collection cycles.
In 1996, the Company used $72,046,000 of cash for investing activities,
primarily to purchase short-term investments and for capital expenditures to
increase manufacturing capacity, to support new product development, and to
expand other facilities to support the higher levels of business activity.
The Company also invested in equipment used for customer evaluation and
demonstration purposes. Net cash provided by financing activities in 1996
was $10,420,000, as purchases under the stock option and employee stock
repurchase plans ($7,880,000) were partially offset by expenditures under the
Company's common stock repurchase plan ($3,244,000).
The Company believes that funds generated from operations, existing cash
balances, and borrowing capacity will be sufficient to meet the Company's
requirements through 1997.
15
STOCK INFORMATION
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:
1996 HIGH LOW
------------------------------------------------------
First Quarter $61 1/4 $43 1/4
Second Quarter 63 1/8 35 3/4
Third Quarter 44 32 3/4
Fourth Quarter 62 1/2 39
1995 HIGH LOW
------------------------------------------------------
First Quarter $65 1/2 $42 3/4
Second Quarter 72 1/4 55 3/4
Third Quarter 87 1/4 66 7/8
Fourth Quarter 74 1/4 47 3/4
The Company has not paid cash dividends on its common stock since inception,
and its Board of Directors presently plans to reinvest the Company's earnings
in its business. Accordingly, it is anticipated that no cash dividends will
be paid to holders of common stock in the foreseeable future. Additionally,
certain covenants set forth in the Company's bank lines of credit limit the
Company's ability to pay dividends. As of December 31, 1996, there were 607
holders of record of the Company's common stock.
16
[consolidated statements of income] [in thousands, except per share data]:
YEAR ENDED DECEMBER 31, 1996 1995 1994
- ------------------------------------------------------------------------------
Net Sales $461,736 $373,732 $224,679
Cost of Sales 197,162 157,585 96,226
-------------------------------------
Gross profit 264,574 216,147 128,453
Operating expenses:
Research and development 53,902 41,009 26,012
Selling, general and administrative 74,419 59,347 38,744
-------------------------------------
Total operating expenses 128,321 100,356 64,756
-------------------------------------
Operating income 136,253 115,791 63,697
Interest:
Income 8,884 9,501 4,670
Expense (477) (227) (288)
-------------------------------------
Net interest 8,407 9,274 4,382
-------------------------------------
Income before provision for income taxes 144,660 125,065 68,079
Provision for income taxes 50,631 42,522 23,147
-------------------------------------
Net income
$94,029 $82,543 $44,932
-------------------------------------
Net income per share $ 5.70 $ 4.82 $ 2.72
-------------------------------------
Shares used in per share calculations 16,509 17,137 16,495
-------------------------------------
See accompanying notes.
17
[consolidated balance sheets] [in thousands):
DECEMBER 31, 1996 1995
- -----------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 65,762 $ 60,114
Short-term investments 110,906 89,685
Accounts receivable, net of allowance for doubtful
accounts of $2,777 in 1996 and $2,196 in 1995 119,710 112,088
Inventories 55,448 36,779
Deferred taxes 18,058 16,666
Prepaid and other current assets 4,085 2,831
--------------------
Total current assets 373,969 318,163
Property and equipment:
Machinery and equipment 60,240 39,590
Furniture and fixtures 4,660 2,587
Leasehold improvements 36,309 23,947
--------------------
101,209 66,124
Less accumulated depreciation and amortization 34,991 23,745
--------------------
66,218 42,379
Other assets 19,600 4,146
--------------------
Total assets $459,787 $364,688
--------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current obligations under lines of credit $ 13,153 $ 7,369
Accounts payable 26,047 32,866
Accrued payroll and related expenses 17,404 15,578
Accrued warranty 18,566 15,261
Other accrued liabilities 10,210 9,580
Income taxes payable 771 11,252
--------------------
Total current liabilities 86,151 91,906
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value;
Authorized shares - 10,000
Issued and outstanding shares - none - -
Common stock, no par value;
Authorized shares - 40,000
Issued and outstanding shares - 16,255 in 1996
and 15,942 in 1995 128,751 118,423
Retained earnings 244,966 153,595
Cumulative translation adjustments (81) 764
--------------------
Total shareholders' equity 373,636 272,782
--------------------
Total liabilities and shareholders' equity $459,787 $364,688
--------------------
See accompanying notes.
18
[consolidated statements of cash flows] (in thousands):
YEAR ENDED DECEMBER 31, 1996 1995 1994
- ------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $94,029 $82,543 $44,932
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,332 7,649 3,973
Changes in operating assets and
liabilities:
Accounts receivable (7,867) (51,774) (24,294)
Inventories (18,669) (9,576) (6,157)
Deferred taxes and prepaid and
other current assets (2,646) (9,538) (6,857)
Accounts payable (6,819) 18,021 6,622
Accrued payroll and related
expenses 1,626 5,459 5,852
Accrued warranty 3,305 7,001 4,860
Other accrued liabilities 430 2,601 4,274
Income taxes payable (7,447) 9,484 7,244
-----------------------------
Total adjustments (26,755) (20,673) (4,483)
-----------------------------
Net cash provided by operating activities 67,274 61,870 40,449
INVESTING ACTIVITIES
Purchase of held-to-maturity debt securities - (518,021) (128,565)
Proceeds from the sale and maturity of
held-to-maturity debt securities - 518,888 62,577
Purchase of available-for-sale securities (387,709) - -
Proceeds from the sale and maturity of
available-for-sale securities 366,488 - -
Capital expenditures (35,285) (21,829) (12,689)
(Increase) decrease in other assets (15,540) (596) 58
-----------------------------
Net cash used for investing activities (72,046) (21,558) (78,619)
-----------------------------
FINANCING ACTIVITIES
Principal payments under capital lease
obligations - - (38)
Proceeds from lines of credit 5,784 2,851 38
Common stock issued 7,880 6,696 60,099
Common stock repurchased (3,244) (35,732) -
-----------------------------
Net cash provided by (used in) financing
activities 10,420 (26,185) 60,099
-----------------------------
Net increase in cash and cash equivalents 5,648 14,127 21,929
Cash and cash equivalents at the beginning
of the period 60,114 45,987 24,058
-----------------------------
Cash and cash equivalents at the end
of the period $65,762 $60,114 $45,987
-----------------------------
Supplemental disclosures:
Cash paid during the year for:
Interest $ 477 $ 227 $ 287
Income taxes 57,611 40,209 21,892
OTHER NONCASH CHANGES:
Income tax benefits from employee stock plans 3,034 4,297 3,722
Transfers of securities from held-to-maturity
to available-for-sale - 145,265 -
See accompanying notes.
19
[consolidated statements of shareholders' equity] [in thousands]:
TOTAL
COMMON STOCK RETAINED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT EARNINGS ADJUSTMENT EQUITY
- --------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1994 14,167 $ 48,711 $ 56,750 $ - $105,461
Exercise of stock options 456 5,213 - - 5,213
Shares issued under employee
stock purchase plan 46 999 - - 999
Income tax benefits realized from
activity in employee stock
plans - 3,722 - - 3,722
Stock offering 1,500 53,887 - - 53,887
Net income - - 44,932 - 44,932
---------------------------------------------------------------
Balance at December 31, 1994 16,169 112,532 101,682 - 214,214
Exercise of stock options 372 5,230 - - 5,230
Shares issued under employee
stock purchase plan 42 1,466 - - 1,466
Income tax benefits realized from
activity in employee stock
plans - 4,297 - - 4,297
Common stock repurchased (641) (5,102) (30,630) - (35,732)
Cumulative translation adjustment - - - 764 764
Net income - - 82,543 - 82,543
---------------------------------------------------------------
Balance at December 31, 1995 15,942 118,423 153,595 764 272,782
Exercise of stock options 335 5,619 - - 5,619
Shares issued under employee
stock purchase plan 64 2,261 - - 2,261
Income tax benefits realized from
activity in employee stock
plans - 3,034 - - 3,034
Common stock repurchased (86) (586) (2,658) - (3,244)
Cumulative translation adjustment - - - (845) (845)
Net income - - 94,029 - 94,029
---------------------------------------------------------------
Balance at December 31, 1996 16,255 $128,751 $244,966 $ (81) $373,636
---------------------------------------------------------------
See accompanying notes.
20
[notes to consolidated financial statements] [December 31, 1996]:
NOTE 1 BUSINESS AND NATURE OF OPERATIONS
NATURE OF OPERATIONS
Novellus Systems, Inc. (the Company) is a leading manufacturer of chemical
vapor deposition (CVD) systems used in the fabrication of integrated
circuits. The Company's products are differentiated by their ability to
provide simultaneous solutions to productivity and wafer quality problems
facing the worldwide semiconductor manufacturing industry. Novellus serves
the global semiconductor manufacturing market from its corporate headquarters
in San Jose, California and through subsidiaries in Europe and the Pacific
Rim.
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 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 counterpart 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 and contracts it enters into with any one party.
CONCENTRATIONS OF OTHER RISKS
Certain of the statements contained in this annual report are forward looking
statements that involve a number of risks and uncertainties. These risks and
uncertainties could cause actual results to differ materially from those
described herein and include the following:
Market Risk
The Company's business depends predominantly on capital
expenditures of semiconductor manufacturers, which in turn,
depend on the current and anticipated market demand for
integrated circuits and products utilizing integrated
circuits. The semiconductor industry has historically been
very cyclical and has experienced periodic downturns, which
have had a material adverse effect on the semiconductor
industry's demand for semiconductor processing equipment,
including equipment manufactured and marketed by the Company.
No assurance can be given that the Company's net sales and
operating results will not be adversely affected if downturns
or slowdowns in the rate of capital investment in the
semiconductor industry occur in the future. In addition, the
semiconductor equipment industry is highly competitive, and
subject to rapid technological change and new products and
enhancements.
Competition
The Company faces substantial competition in each of the
markets in which it sells its products. Certain of the
Company's competitors are larger, and have greater resources,
financial, and otherwise, than the Company. There can be no
assurances that the Company will be successful or as
successful as its competitors, in selecting, developing,
manufacturing and marketing its new products, or in enhancing
its existing products. Failure to successfully develop new
products could materially adversely affect the Company's
business, financial condition and results of operations.
Patents and Proprietary Rights
There has been substantial litigation regarding patent and
other intellectual property rights in semiconductor related
industries. The Company is currently involved in such
litigation (see Note 9) and although it is not aware of any
infringement by its products of any patents 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 financial condition, or
results of operations, no assurances can be given that this
litigation or future litigation will not have such an impact.
International Operations
Export sales accounted for approximately 64%, 56%, and 55% of
net sales in 1996, 1995, and 1994, respectively. The Company
anticipates that export sales will account for a significant
portion of net sales in the foreseeable future. As a result,
a significant portion of the Company's sales will be subject
to certain risks, including tariffs and other barriers,
difficulties in staffing and managing foreign subsidiary
operations, difficulties in managing distributors, potentially
adverse tax consequences, and the possibility of difficulty in
accounts receivable collection. The Company is also subject
to the
21
risks associated with the legislation and regulations related to the import
and export of semiconductor products. The Company cannot predict whether
quotas, duties, taxes or large charges or restrictions will be implemented by
the United States or any other country upon the importation or exportation of
the Company's products in the future. There can be no assurance that any of
these factors or the adoption of restrictive policies will not have a
material adverse affect upon the Company's business, financial condition, or
results of operations.
- --------------------------------------------------------------------------------
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
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 1996 presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results inevitably will differ from those estimates and such
differences may be material to the financial statements.
REVENUE RECOGNITION
Net sales consist of system and spare part sales as well as revenues from
maintenance and service contracts. Revenue related to system and spare part
sales is recognized on shipment. Revenue related to maintenance and service
contracts is recognized ratably over the duration of the contracts. Unearned
maintenance and service contract revenue is immaterial and included in
accrued liabilities.
WARRANTY AND INSTALLATION
The Company generally warrants its systems for a period of up to 24 months
from shipment for material and labor to repair and service the system. A
provision for the estimated cost of installation and warranty is recorded
upon shipment.
CASH AND CASH EQUIVALENTS
For the purpose of the statement of cash flows, the Company considers all
highly liquid debt instruments with insignificant interest rate risk and
maturities of ninety days or less at date of purchase to be cash equivalents.
SHORT-TERM INVESTMENTS
The Company classifies its marketable debt and equity securities as
available-for-sale in accordance with the provisions of the Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for
Certain Investments in Debt and Equity Securities." Securities classified as
available-for-sale are reported at fair market value with the related
unrealized gains and losses included in retained earnings. Realized gains
and losses and declines in value of securities judged to be other than
temporary are included in net interest. Interest on all securities is
included in net interest.
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):
1996 1995
- -----------------------------------------------------------------------------
PURCHASED AND SPARE PARTS $40,211 $17,571
WORK-IN-PROCESS 11,347 14,550
FINISHED GOODS 3,890 4,658
- -----------------------------------------------------------------------------
$55,448 $36,779
- -----------------------------------------------------------------------------
22
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided mainly on the straight-line method over the following useful lives:
- -----------------------------------------------------------------------------
MACHINERY AND EQUIPMENT 3-5 YEARS
FURNITURE AND FIXTURES 3-5 YEARS
LEASEHOLD IMPROVEMENTS SHORTER OF USEFUL LIFE OR
REMAINING LEASE TERM
- -----------------------------------------------------------------------------
In 1995, the Financial Accounting Standards Board released the Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS 121 requires recognition of impairment of long-lived assets in the event
the net book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. SFAS 121 is effective for fiscal years
beginning after December 15, 1995. The Company adopted SFAS 121 on January
1, 1996. Adoption of SFAS 121 did not have a material impact on the Company's
financial position or results of operations.
FOREIGN CURRENCY ACCOUNTING
The local currency is the functional currency for all foreign operations. In
1996, the Company changed the functional currency for subsidiaries in Korea,
Taiwan, Singapore, the United Kingdom, the Netherlands, Germany, France, and
China from the U.S. dollar to the local currency. On January 1, 1995, the
Company changed the functional currency for its Japanese subsidiary from the
U.S. dollar to the local currency. These changes were made in order to
reflect the changing nature of the operations of the Company's foreign
subsidiaries. These changes had no material impact on financial position or
results of operations for the year ended December 31, 1996. Accordingly,
translation gains or losses related to the foreign subsidiaries have been
included as a component of shareholders' equity subsequent to these changes.
FORWARD FOREIGN EXCHANGE CONTRACTS
The Company enters into forward foreign exchange contracts primarily to hedge
against the short-term impact of foreign currency fluctuations of
intercompany accounts payable denominated in U.S. Dollars recorded by the
Japanese subsidiary. The Company also enters into forward foreign exchange
contracts to buy and sell foreign currencies as economic hedges of the
parent's intercompany balances denominated in a currency other than the U.S.
dollar. In 1996, these hedging contracts were denominated primarily in the
Japanese Yen. The maturities of all forward foreign exchange contracts are
generally short-term in nature. Because the impact of movements in currency
exchange rates on forward foreign exchange contracts offsets the related
impact on the underlying items being hedged, these financial instruments do
not subject the Company to speculative risk that would otherwise result from
changes in currency exchange rates. Net foreign currency gains and losses
have not been material.
NET INCOME PER SHARE
Net income per share is based on the weighted average common and dilutive
common equivalent shares outstanding during the period. Stock options are
considered common stock equivalents and are included in the weighted average
computation using the treasury stock method.
ADVERTISING EXPENSES
The Company accounts for advertising costs as expenses in the period in which
they are incurred. Advertising expenses for 1996, 1995, and 1994 were
$3,259,000, $2,692,000, and $1,164,000, respectively.
EMPLOYEE STOCK PLANS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." In accordance with the provisions of SFAS No. 123, the Company
applies APB Opinion 25 and related interpretations in accounting for its
employee stock option and stock purchase plans and, accordingly, does not
recognize compensation cost. Note 6 to the Consolidated Financial Statements
contains a summary of the pro forma effects to reported net income and
earnings per share for 1996 and 1995 as if the Company had elected to
recognize compensation cost based on the fair value of the options granted at
grant date as prescribed by SFAS No. 123.
23
- --------------------------------------------------------------------------------
NOTE 3 FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
As part of the Company's asset and liability management, the Company enters
into various types of transactions that involve financial instruments with
off-balance sheet risk. The Company enters into foreign forward exchange
contracts in order to manage foreign exchange risk. The notional values,
carrying amounts, and fair market values are as follows at December 31 (in
thousands):
1996 1995
-----------------------------------------------------------------------------
NOTIONAL CARRYING ESTIMATED NOTIONAL CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE AMOUNT AMOUNT FAIR VALUE
-----------------------------------------------------------------------------
SELL FOREIGN CURRENCY, PRIMARILY YEN $27,140 $(279) $1,325 $24,031 $(222) $2,257
AVAILABLE-FOR-SALE SECURITIES
The Company currently invests in only high quality, short-term investments
which it classifies as available-for-sale. As such, there were no
significant differences between amortized cost and estimated fair value at
December 31, 1996 and 1995. Additionally, because investments are short-term
and are generally allowed to mature, realized gains and losses for both years
have been minimal. All investments held at December 31, 1996 are due in less
than one year.
The following table presents the estimated fair value of the Company's
investments by balance sheet classification at December 31 (IN THOUSANDS):
1996 1995
------------------------------------------------------------------------
INSTITUTIONAL MONEY MARKET FUNDS $ - $ 2,942
COMMERCIAL PAPER 27,339 52,638
------------------------------------------------------------------------
AMOUNT INCLUDED IN CASH AND CASH EQUIVALENTS 27,339 55,580
------------------------------------------------------------------------
COMMERCIAL PAPER 75,085 76,019
U.S. TREASURY SECURITIES AND OBLIGATIONS OF
U.S. GOVERNMENT AGENCIES 35,821 13,666
------------------------------------------------------------------------
AMOUNTS INCLUDED IN SHORT-TERM INVESTMENTS 110,906 89,685
------------------------------------------------------------------------
U.S. TREASURY SECURITIES 5,489 -
------------------------------------------------------------------------
AMOUNTS INCLUDED IN OTHER ASSETS 5,489 -
------------------------------------------------------------------------
TOTAL AVAILABLE-FOR-SALE SECURITIES $143,734 $145,265
------------------------------------------------------------------------
On November 15, 1995, the Financial Accounting Standards Board (FASB) staff
issued a Special Report "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities." In
accordance with the provisions in the Special Report, the Company chose to
reclassify securities from held-to-maturity to available-for-sale. At
December 31, 1995, (the date of transfer) the amortized cost of these
securities was $145,265,000 and the unrealized gain was not material.
FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
The carrying and fair values of the Company's other financial instruments
were as follows at December 31 (IN THOUSANDS):
1996 1995
------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
------------------------------------------------------
CASH AND CASH EQUIVALENTS $65,762 $65,762 $60,114 $60,114
CURRENT OBLIGATIONS UNDER LINES OF CREDIT $13,153 $13,153 $ 7,369 $ 7,369
24
The fair values of the Company's short-term investments are based on quoted
market prices as of December 31, 1996 and 1995. The fair value of the
Company's obligations under lines of credit is based on current rates offered
to the Company for similar debt instruments of the same remaining maturities.
- --------------------------------------------------------------------------------
NOTE 4 LINES OF CREDIT
- --------------------------------------------------------------------------------
The Company has lines of credit with three banks under which the Company can
borrow up to $15,153,000 at the bank's prime rates (1% to 8.25% at December
31, 1996), which expire at various dates through June 1998. The lines
restrict payment of cash dividends on the Company's stock. A portion of this
facility ($13,153,000) is available to the Company's Japanese subsidiary.
Borrowings by the subsidiary are at various rates as negotiated with the
banks. At December 31, 1996 and 1995, there were no borrowings by the parent
company, and $13,153,000 and $7,369,000 by the Japanese subsidiary,
respectively, at annual weighted average interest rates of 1.26% and 3.80%,
respectively.
- --------------------------------------------------------------------------------
NOTE 5 COMMITMENTS
- --------------------------------------------------------------------------------
The Company leases its facilities under operating leases. These leases
expire January 1997 through October 2006. As of December 31, 1996, the
minimum annual rental commitments are as follows (IN THOUSANDS):
1997 3,897
1998 3,577
1999 3,575
2000 3,407
2001 1,139
BEYOND 1,535
------------------------
$17,130
------------------------
Rent expense was approximately $4,094,000, $2,854,000, and $1,748,000 for the
years ended December 31, 1996, 1995, and 1994, respectively.
On April 10, 1996, the Company entered into a lease agreement for five
buildings in the San Jose area, three of which are currently occupied and
were previously leased by the Company. The agreement is for five years at
interest rates that approximate the London Interbank Offering Rate (LIBOR).
At current interest rates, the annual lease payments represent approximately
$1.9 million. During the term of the lease, the Company may elect to
purchase the buildings for an amount that approximates the lessor's cost of
the property and any current rent due and payable. The guaranteed residual
payment on the lease agreement is approximately $28.0 million. In connection
with the collateral requirements of this agreement, at the option of the
Company to reduce interest expense related to this lease agreement, it has
pledged securities of approximately $29.4 million which are included in
short-term investments.
On October 24, 1996, the Company entered into an additional lease agreement
for approximately 4.4 acres of undeveloped land adjacent to the five
buildings referred to above. The agreement is for ten years at an interest
rate that approximates LIBOR. At current interest rates, the annual lease
payments represent approximately $0.3 million. During the term of the lease,
the Company may elect to purchase the land for an amount that approximates
the lessor's cost of the property and any current rent due and payable. The
guaranteed residual payment on the lease agreement is approximately $5.2
million. In connection with the collateral requirements of this agreement,
the Company has pledged securities of approximately $5.5 million which are
included in other assets.
These leases contain certain restrictive financial covenants. The Company
was in compliance with these covenants at December 31, 1996.
25
- --------------------------------------------------------------------------------
NOTE 6 EMPLOYEE BENEFIT PLANS
- --------------------------------------------------------------------------------
EMPLOYEE STOCK OPTION PLANS
The Company grants options to employees under the 1984 and 1992 Stock Option
Plans (the Plans). Under the Plans, options to purchase up to 5,670,000
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, 1996,
approximately 2,502,000 shares were reserved for future issuance under the
Employee Stock Option Plans and options to purchase 580,715 shares were
exercisable at a weighted average exercise price of $30.30.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option Plans. Had compensation cost for the Company's stock option and
stock purchase plans been determined based on the fair value at the grant
date for awards in 1996 and 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:
1996 1995
--------------------------
NET INCOME AS REPORTED $94,029 $82,543
PRO FORMA NET INCOME $86,791 $79,553
EARNINGS PER SHARE AS REPORTED $ 5.70 $ 4.82
PRO FORMA EARNINGS PER SHARE $ 5.23 $ 4.73
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
approximately 1997.
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 1996 and
1995:
1996 1995
--------------------------
DIVIDEND YIELD NONE NONE
EXPECTED VOLATILITY 56% 56%
RISK FREE INTEREST RATE 5.98% 6.34%
EXPECTED LIVES 2.9 YEARS 2.9 YEARS
The weighted average fair value of options granted during the year were
$21.45 and $26.25 for 1996 and 1995, respectively.
The pro forma net income and earnings per share listed above includes expense
related to the Company's Employee Stock Purchase Plans. 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 1996 and 1995:
1996 1995
--------------------------
DIVIDEND YIELD NONE NONE
EXPECTED VOLATILITY 60% 60%
RISK FREE INTEREST RATE 5.8% 5.8%
EXPECTED LIVES 1/2 YEAR 1/2 YEAR
The weighted average fair value of purchase rights granted during the year
were $13.82 and $17.51 for 1996 and 1995, respectively.
26
Information with respect to stock option activity is as follows:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
WEIGHTED AVERAGE
AUTHORIZED OUTSTANDING PRICE PER SHARE EXERCISE PRICE
---------------------------------------------------------------------
Balance at December 31, 1993 454 1,880 $ 0.40 - $34.00
Options granted (516) 516 $28.13 - $53.38
Options exercised - (456) $ 3.50 - $38.50
Options canceled 105 (105) $ 7.06 - $43.50
---------------------------------------------------------------------
Balance at December 31, 1994 43 1,835 $ 0.40 - $53.38
Additional authorization 700 - -
Options granted (771) 771 $48.13 - $83.25
Options exercised - (372) $ 5.69 - $53.38
Options canceled 179 (194) $ 8.38 - $83.25
---------------------------------------------------------------------
Balance at December 31, 1995 151 2,040 $ 0.40 - $83.25 $38.83
Additional authorization 680 - -
Options granted (885) 885 $36.38 - $60.25 $52.37
Options exercised - (326) $ 8.38 - $57.25 $15.56
Options canceled 192 (235) $ 0.40 - $83.25 $49.41
---------------------------------------------------------------------
Balance at December 31, 1996 138 2,364 $ 8.38 - $83.25 $46.13
---------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------- ------------------------------------
OPTIONS WEIGHTED OPTIONS
OUTSTANDING AT AVERAGE REMAINING WEIGHTED EXERCISABLE AT WEIGHTED
RANGE OF DECEMBER 31, CONTRACTUAL LIFE AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1996 (YEARS) EXERCISE PRICE 1996 EXERCISE PRICE
- ------------------------------------------------------------------------------------- ------------------------------------
$8.38 - $23.13 252,813 0.78 $12.41 215,493 $11.54
$23.38 - $34.00 390,243 6.84 27.50 202,532 26.91
$35.50 - $41.38 229,295 9.31 39.82 8,794 37.86
$43.50 - $49.98 237,461 8.70 46.38 22,087 45.71
$50.75 - $57.25 528,477 8.57 53.90 33,162 54.90
$60.25 460,600 9.62 60.25 30,000 60.25
$62.00 - $83.25 264,788 8.24 70.92 68,647 68.28
- ------------------------------------------------------------------------------------- ------------------------------------
$8.38 - $83.25 2,363,677 7.71 $46.13 580,715 $30.30
- ------------------------------------------------------------------------------------- ------------------------------------
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 200,000 and 150,000 shares of common stock for issuance under the
plans, respectively. In 1995, the Company's shareholders approved an
amendment to increase shares reserved for issuance under the 1992 Employee
Stock Purchase Plan from 150,000 shares to 250,000 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 62,000, 42,000,
and 46,000 shares issued under the two plans in 1996, 1995, and 1994,
respectively. At December 31, 1996, approximately 20,000 shares were
reserved for future issuance under the Employee Stock Purchase Plans.
COMMON STOCK REPURCHASE PROGRAM
In October 1992 and January 1996, the Company announced it would repurchase
700,000 and 1,000,000 shares, respectively, of common stock for issuance in
future Company employee benefit and compensation plans and other
requirements. During 1996, the Company repurchased 86,000 shares under the
program, and had purchased a total of 781,000 shares as of December 31, 1996.
27
Employee Savings and Retirement Plan
The Company maintains a 401(k) retirement savings plan for its full-time
employees. Participants in the plan may contribute up to 20% of their annual
salary, limited by the maximum dollar amount allowed by the Internal Revenue
Code.
Profit Sharing and Bonus Programs
The Company has profit sharing and bonus programs that distribute cash based
on the performance of the Company and its employees, including the executive
officers. Charges to operations under these programs were $10,222,000,
$8,418,000, $6,247,000 in 1996, 1995, and 1994, respectively.
NOTE 7 TAXES ON INCOME
Significant components of the provision for income taxes attributable to
operations are as follows (in thousands):
1996 1995 1994
--------------------------------
State:
Current $ 6,145 $ 6,251 $4,053
Deferred 222 (1,248) (466)
--------------------------------
6,367 5,003 3,587
Federal:
Current 38,701 38,245 21,084
Deferred 1,545 (7,186) (5,662)
--------------------------------
40,246 31,059 15,422
Foreign:
Current 984 2,163 416
Income tax benefits attributable
to employee stock plan activity
allocated to shareholders' equity 3,034 4,297 3,722
--------------------------------
Total provision for income taxes $50,631 $42,522 $23,147
--------------------------------
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):
1996 1995
--------------------
Deferred tax assets:
Financial valuation accounts $ 5,464 $ 5,524
Expenses not currently deductible 9,807 9,754
State and other taxes 1,315 1,388
Foreign losses 1,472 -
--------------------
Total deferred tax assets 18,058 16,666
--------------------
Deferred tax liabilities:
Fixed assets (3,545) (386)
--------------------
Total net deferred tax assets $14,513 $16,280
--------------------
28
The provisions for income taxes differ from provisions calculated by applying
the federal statutory tax rate to income before taxes because of the
following (in thousands):
1996 1995 1994
--------------------------------
Expected provisions at 35% $50,631 $43,773 $23,828
State taxes, net of federal benefit 4,200 3,252 2,332
Research and development credits (500) (566) (962)
Foreign Sales Corporation benefit (4,300) (3,868) (2,195)
Other 600 (69) 144
--------------------------------
$50,631 $42,522 $23,147
--------------------------------
NOTE 8 GEOGRAPHIC INFORMATION REPORTING AND MAJOR CUSTOMERS
The Company and its subsidiaries operate in one industry segment, principally
the development, manufacture, sale and service of chemical vapor deposition
systems for use in the manufacture of integrated circuits.
The following is a summary of operations in geographic areas (in thousands):
North America Europe Pacific Rim Eliminations Consolidated
-------------------------------------------------------------------------------
1996
Sales to unaffiliated customers $387,396 $4,336 $70,004 $ - $461,736
Transfers between geographic locations 59,771 2,377 9,438 (71,586) -
-------------------------------------------------------------------------------
Total net sales 447,167 6,713 79,442 (71,586) 461,736
Operating income 137,887 203 (1,837) - 136,253
Identifiable assets 407,472 1,501 50,814 - 459,787
1995
Sales to unaffiliated customers $315,976 $2,967 $54,789 $ - $373,732
Transfers between geographic locations 39,376 2,190 8,164 (49,730) -
--------------------------------------------------------------------------------
Total net sales 355,352 5,157 62,953 (49,730) 373,732
Operating income 110,224 201 5,366 - 115,791
Identifiable assets 319,502 1,072 44,114 - 364,688
1994
Sales to unaffiliated customers $194,139 $2,633 $27,907 $ - $224,679
Transfers between geographic locations 24,160 1,822 7,495 (33,477) -
--------------------------------------------------------------------------------
Total net sales 218,299 4,455 35,402 (33,477) 224,679
Operating income 61,656 223 1,818 - 63,697
Identifiable assets 237,870 882 26,248 - 265,000
Transfers and commission arrangements between geographic areas are at prices
sufficient to recover a reasonable profit.
In 1996, 1995, and 1994, sales to one customer (a distributor) were
approximately 12%, 11%, and 13% of net sales, respectively.
Export sales were 64% in 1996 (54% to the Pacific Rim, 10% to all other), 56% of
net sales in 1995 (47% to the Pacific Rim, 9% to all other), and 55% of net
sales in 1994 (43% to the Pacific Rim, 12% to all other).
29
NOTE 9 LEGAL PROCEEDINGS AND CONTINGENCIES
On January 20, 1995, Applied Materials Inc. (Applied) filed a patent
infringement suit against the Company, alleging that the Company's TEOS
products infringe one of Applied's patents that was issued in November 1994.
The Company expects the case to go to trial in the second quarter of 1997.
On September 15, 1995, Applied and the Company filed separate lawsuits each
claiming the other is liable for patent infringement. As the lawsuits,
including counterclaims, are now amended, the Company alleges that: (1)
Applied's tungsten products infringe three of the Company's patents, issued
in July 1993, August 1993, and December 1994, respectively. (2) Applied's
TEOS products infringe one of the Company's patents issued in June 1995.
Applied alleges that one of the Company's tungsten processes infringes one of
Applied's patents that was issued in 1991. Discovery is ongoing in the
matters initiated on September 15, 1995 and trial is currently scheduled for
August 1997, but is expected to the continued until a later date.
Management's expectations are that the ultimate resolution of these matters
will not have a material adverse effect on the Company's financial position,
cash flows or results of operations; however, based on future developments,
management's estimate of the ultimate outcome could change in the near term.
In the normal course of business, the Company from time to time receives
inquiries with regard to possible patent infringements. Management believes
that 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.
NOTE 10 RELATED PARTY TRANSACTIONS
The President of Submicron Technology, Inc. (Submicron), which is one of the
Company's customers, is also a member of the Company's Board of Directors.
The Company sells systems and spare parts to Submicron.
During 1996, the Company sold approximately $20,200,000 to Submicron.
Management believes these transactions were under terms no less favorable to
the Company than those arranged with other parties. There were no material
transactions with Submicron prior to 1996. Trade receivables from Submicron
at December 31, 1996 were $10,195,000.
30
[report of Ernst & Young LLP, independent auditors]
The Shareholders and Board of Directors
Novellus Systems, Inc.
We have audited the accompanying consolidated balance sheets of Novellus
Systems, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Novellus
Systems, Inc. at December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
San Jose, California
January 19, 1997
31
[shareholders' information]
- --------------------------------------------------------------------------------
ANNUAL MEETING
THE 1997 ANNUAL MEETING OF THE SHAREHOLDERS WILL BE HELD AT 8:00 A.M. ON MAY
23, 1997 AT NOVELLUS CORPORATE HEADQUARTERS
3970 NORTH FIRST STREET,
SAN JOSE CA 95134.
FORM 10-K
THE COMPANY'S FISCAL 1996 ANNUAL REPORT ON FORM 10K, FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, WILL BE AVAILABLE AFTER MARCH 10, 1997. A
COPY OF THIS REPORT MAY BE OBTAINED BY WRITING THE SECRETARY OF THE
CORPORATION.
TRANSFER AGENT
CHEMICAL MELLON SHAREHOLDERS SERVICE
SAN FRANCISCO, CALIFORNIA
AUDITORS
ERNST & YOUNG LLP
SAN JOSE, CALIFORNIA
GENERAL COUNSEL
MORRISON & FOERSTER LLP
PALO ALTO, CALIFORNIA
STOCK LISTING
NOVELLUS SYSTEMS' COMMON STOCK IS TRADED ON THE NATIONAL MARKET SYSTEM OF
NASDAQ UNDER THE SYMBOL NVLS.
[corporate directory]
BOARD OF DIRECTORS CORPORATE OFFICERS OPERATING OFFICERS
- ------------------------------------------------------------------------------------
RICHARD S. HILL RICHARD S. HILL DAVID AVERY
CHAIRMAN OF THE BOARD CHAIRMAN OF THE BOARD PRESIDENT, EUROPEAN OPERATIONS
AND CHIEF EXECUTIVE OFFICER AND CHIEF EXECUTIVE OFFICER
NOVELLUS SYSTEMS, INC. MATTHEW CHAN
ROBERT H. SMITH PRESIDENT, ASIA OPERATIONS
D. JAMES GUZY EXECUTIVE VICE PRESIDENT,
PRESIDENT AND CHIEF FINANCIAL OFFICER NAK-KYUNG CHUNG
ARBOR COMPANY PRESIDENT, KOREA OPERATIONS
PETER HANLEY
TOM LONG EXECUTIVE VICE PRESIDENT, YUTAKA KISANUKI
DIRECTOR OF PROGRAMS SALES AND MARKETING PRESIDENT, JAPAN OPERATIONS
PLANAR ADVANCE, INC.
JOHN CHENAULT DENNIS R. RICCIO
GLEN POSSLEY VICE PRESIDENT, OPERATIONS PRESIDENT, U.S. OPERATIONS
PRESIDENT OF SUBMICRON
TECHNOLOGY, INC. JEFFREY C. BENZING
VICE PRESIDENT, ENGINEERING
ROBERT H. SMITH
EXECUTIVE VICE PRESIDENT ALAIN HARRIS
AND CHIEF FINANCIAL OFFICER VICE PRESIDENT AND
NOVELLUS SYSTEMS, INC. CHIEF TECHNICAL OFFICER
JOSEPH VAN POPPELEN
PRESIDENT
VAN POPPELEN COMPANY
32