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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 27, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-6920
APPLIED MATERIALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-1655526
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3050 BOWERS AVENUE, SANTA CLARA, CALIFORNIA 95054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (408) 727-5555
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant as of December 27, 1996: $6,490,391,240
Number of shares outstanding of the issuer's Common Stock, $.01 par value,
as of December 27, 1996: 180,916,829
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Applied Materials 1996 Annual Report for the year ended October
27, 1996 are incorporated by reference into Parts I, II and IV of this Form
10-K.
Portions of the definitive Proxy Statement for the Company's Annual Meeting
of Stockholders to be held on March 19, 1997 are incorporated by reference into
Part III of this Form 10-K.
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PART I
ITEM 1: BUSINESS
Organized in 1967, Applied Materials, Inc. ("Applied Materials" or the
"Company") develops, manufactures, markets and services semiconductor wafer
fabrication equipment and related spare parts. The Company's worldwide customers
include both companies which manufacture semiconductor devices for use in their
own products and companies which manufacture semiconductor devices for sale to
others. Applied Materials operates exclusively in the semiconductor wafer
fabrication equipment industry. The Company is also a fifty percent stockholder
in Applied Komatsu Technology, Inc., a joint venture corporation which develops,
manufactures, markets and services thin film transistor fabrication systems used
to produce active-matrix liquid crystal displays. On November 24, 1996, the
Company announced that it had entered into agreements to acquire two companies
in the metrology and inspection semiconductor equipment market. Opal, Inc. is a
leading supplier of critical dimension scanning electron microscope systems that
measure certain critical dimensions of integrated circuits at various stages of
the manufacturing process. Orbot Instruments, Ltd. is a supplier of wafer and
reticle inspection systems with leading-edge technologies. Both acquisitions
were completed during the Company's first fiscal quarter of 1997 ending on
January 26, 1997.
PRODUCTS
Applied Materials' products are sophisticated systems that utilize
state-of-the-art technology in wafer processing chemistry and physics,
particulate management, process control, software and automation. Many of the
Company's technologies are complementary and can be applied across all of its
product offerings. The Company's products, which provide enabling technology,
productivity and yield enhancements to semiconductor manufacturers, are used to
fabricate semiconductor devices on a substrate of semiconductor material
(primarily silicon). A finished device consists of thin film layers which can
form anywhere from one to millions of tiny electronic components that combine to
perform desired electrical functions. The fabrication process must control film
and feature quality to ensure proper device performance while meeting yield and
throughput goals. The Company currently manufactures equipment that addresses
three major steps in wafer fabrication: deposition, etch and ion implantation.
The Company also manufactures a Rapid Thermal Processing (RTP) system that
provides versatility and broad application to many areas of semiconductor
manufacturing, a Chemical Mechanical Polishing (CMP) system that planarizes
wafers after various processing steps, and systems for metrology and inspection.
Single-wafer, multi-chamber architecture
Recognizing the trend toward more stringent process requirements and larger
wafer sizes, Applied Materials developed a single-wafer, multi-chamber system
called the Precision 5000. The Company introduced the Precision 5000 with
dielectric chemical vapor deposition (DCVD) processes in 1987, etch processes in
1988 and tungsten CVD (WCVD) processes in 1989. The Precision 5000's
single-wafer, multi-chamber architecture features several processing chambers,
each of which is attached to a central handling system, and is designed for both
serial and integrated processing. The Precision 5000's integrated processing
capability makes it possible to perform multiple process steps on a wafer in a
controlled environment, thus reducing the risk of particulate contamination. The
Company leveraged its expertise in single-wafer, multi-chamber architecture to
develop an evolutionary platform in 1990 called the Endura 5500 PVD (Physical
Vapor Deposition), which features a staged, ultra-high vacuum (UHV) architecture
for the rapid sputtering of aluminum and other metal films used to form the
circuit interconnections on advanced devices. In October 1991, the Company
announced its second-generation Precision 5000 system,
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the Precision 5000 Mark II, with numerous enhancements to the platform, process
chambers and remote support equipment. The Precision 5000 Mark II is used to
manufacture advanced devices, such as 16 megabit DRAMs (Dynamic Random Access
Memories), on 200mm (8-inch) wafers. In September 1992, the Company announced
its latest generation single-wafer, multi-chamber platform, the Centura, to
target the high temperature thin films market and future process applications
with 0.5-micron and below specifications. This platform improves upon the
Precision 5000 by incorporating high vacuum capabilities and advanced robotics
that provide significantly higher throughput.
Deposition
A fundamental technology in semiconductor fabrication, deposition is a
process in which a layer of either electrically insulating (dielectric) or
electrically conductive material is deposited on a wafer. Deposition can be
divided into several different categories, of which Applied Materials currently
participates in three: chemical vapor deposition (CVD), physical vapor
deposition (PVD), and epitaxial and polysilicon deposition.
CVD. Chemical vapor deposition is a process used in semiconductor
fabrication in which thin films (insulators, conductors and semiconductors)
are deposited from gaseous sources. In 1987, the Company introduced the
Precision 5000 CVD platform for DCVD which, with its automated
multi-chamber architecture, provides the flexibility to perform a broad
range of deposition processes utilizing up to four individual chambers on a
single system. In 1989, the Company entered the tungsten (W) CVD market
with the introduction of a system for blanket tungsten deposition, the
Precision 5000 WCVD. The Company has continued to add functionality to this
system, including integrated tungsten plug fabrication capability which
combines WCVD deposition and etchback capabilities in the same system. The
Company has also added tungsten silicide and titanium nitride processes to
further extend its offerings. In 1992, the Company introduced the
single-wafer, multi-chamber Centura platform. The Centura platform
accommodates both DCVD and metal CVD processes. In 1994, the Company
introduced the Precision 5000 Mark II CVD platform with sub-atmospheric
process technologies that address applications to 0.35-microns. Also in
1994, the Company announced a new chamber technology called "xZ" on the
Centura platform, which provides a significant enhancement by improving
system throughput, providing no consumable parts and reducing operating
costs. Most of the mainstream CVD applications offered by the Company are
now available using this technology, with the exception of the HDP-CVD
(High-Density Plasma CVD) Centura. Launched in February, the HDP-CVD
Centura system is aimed at the most advanced sectors of the semiconductor
market, including emerging semiconductor production, research and
development and pilot lines. In April 1996, the Company entered a new
market with a high-productivity silane-based CVD process for
anti-reflective coating (ARC) applications. ARC films are typically used to
enhance photolithography.
PVD. Physical vapor deposition sputters metals on wafers during
semiconductor fabrication to form the circuit interconnects. Unlike CVD,
the sources of the deposited materials are solid sources called targets.
Applied Materials entered the PVD market in April 1990 with the Endura 5500
PVD system. This system utilizes a modular, single-wafer, multi-chamber
platform which accommodates UHV processes like PVD, and conventional high
vacuum processes like CVD and etch. In July 1993, the Company introduced
the Endura HP (High Productivity) PVD system, an enhanced version of the
Endura 5500 PVD system. In November 1993, the Centura HP PVD was introduced
in order to offer customers a choice of platforms using the Company's PVD
technology.
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In November 1994, the Endura VHP (Very High Productivity) PVD system
was launched, further enhancing the wafer transfer system to raise
throughput. A key advance in process technology was announced in July 1996
with the Vectra IMP (Ion Metal Plasma) chamber for titanium (Ti) and
titanium nitride (TiN) deposition. This technology creates metal ions from
the materials sputtered from the target, whose directionality can then be
controlled in the chamber for dramatically improved step coverage
performance in very small contacts and vias. In September 1996, the Liner
TxZ Centura system was launched. This system combines a new CVD TiN chamber
with a Coherent PVD Ti chamber, and allows for deposition of sequential
layers of Ti and CVD TiN in high-aspect-ratio metal structures under
vacuum.
Epitaxial and polysilicon deposition. Epitaxial (Epi) and polysilicon
deposition involve depositing layers of high-quality, silicon-based
compounds on the surface of a silicon wafer to change its electrical
properties and, in the case of epi, to form the base on which the
integrated circuit is built. In 1989, the Company introduced the Precision
7700 Epi system for advanced silicon deposition. The 7700 system extends
the capabilities of radiantly-heated "barrel" technology and incorporates
fully automated wafer handling as well as many features for particulate
control. In September 1992, the Company announced the Poly Centura, a
single-wafer, multi-chamber platform targeted at the high temperature thin
film deposition of polysilicon on wafers up to 200mm (8 inches) in
diameter. The Epi Centura, which features deposition of epitaxial silicon,
was announced in March 1993. In December 1993, the Company launched the
Polycide Centura which combines chambers for polysilicon and tungsten
silicide deposition on the Centura platform.
Etch
Prior to etch processing, a wafer is patterned with photoresist during the
photolithography process. Etching then selectively removes material from areas
which are not covered by the photoresist pattern. Applied Materials entered the
etch market in 1981 with the introduction of the AME 8100 Etch system, which
utilized a batch process technology for dry plasma etching. In 1985, the Company
introduced the Precision Etch 8300, which featured improved levels of automation
and particulate control. The Company continues to sell the Precision Etch 8300
product. Applied Materials' first single-wafer, multi-chamber system for the dry
etch market was the Precision 5000 Etch, introduced in 1988. In 1990, the
Company introduced a metal etch system based on the Precision 5000 architecture
which provides single-wafer, aluminum etch capabilities. In 1993, the Company
introduced its next generation etch platform, the Centura HDP Dielectric Etcher,
designed for critical high density plasma oxide etch applications requiring
sub-0.5-micron design rules, and the Precision 5000 Mark II Etch MxP, a new
model of the Precision 5000-series etch system with several enhancements
including process capability for 0.35-micron applications. In July 1994, Applied
Materials introduced the Metal Etch MxP Centura, which combines sub-0.5-micron
process technology with improved throughput. The Company launched a new
dielectric etch system in April 1995, combining its latest Centura platform with
an enhanced etch chamber, called the Dielectric Etch MxP+ Centura. The Remote
Plasma Source (RPS) Centura, introduced in June 1995, extended the Company's
range of dielectric dry etch process technologies to several isotropic etch
steps. Two new etch systems were launched in 1996 for HDP etching of metal and
silicon films, using the Company's new DPS (Decoupled Plasma Source) technology.
The DPS Metal Etch Centura and DPS Silicon Etch Centura are aimed at very
advanced applications, primarily for deep submicron devices (0.25-micron). In
addition, the products deliver very high throughput, for superior cleanroom
space utilization.
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Ion Implantation
During ion implantation, silicon wafers are bombarded by a high-velocity
beam of electrically charged ions. These ions are embedded within a wafer at
selected sites and change the electrical properties of the implanted area.
Applied Materials entered the high-current portion of the implant market in 1985
with the Precision Implant 9000 and introduced the Precision Implant 9200 in
1988. In 1989, the Company added enhancements to the 9200 series, including a
new option for automated selection of implant angles and new hardware/software
options that enable customers to perform remote monitoring and diagnostics. In
1991, the Company announced an enhanced version of its high-current ion
implanter and designated it the Precision Implant 9200XJ. In November 1992, the
Company introduced a new high-current ion implantation system, the Precision
Implant 9500, to address the production of high-density semiconductor devices,
such as 16 megabit and 64 megabit memory devices and advanced microprocessors.
In November 1994, the 9500xR model was introduced, further extending the range
of the 9500 system into the traditional medium-current area with enhanced
low-dose, low-energy implant performance. In October 1995, the Company
introduced its latest implant system, the Precision Implant xR80. This system
features low-energy and a very small system footprint, while maintaining high
throughput. Two extensions of the basic xR80 architecture were introduced in
1996: the Precision Implant xR LEAP (Low Energy Advanced Processing) in May and
the xR120 in July. Both of these systems extend the energy range of the xR80
system for customers needing those capabilities.
Rapid Thermal Processing
In June 1995, Applied Materials introduced a new system, the Rapid Thermal
Processing (RTP) Centura, into the emerging RTP market. RTP uses very rapid
heating cycles to perform high-temperature processes traditionally done by
slower-heating batch furnace technologies. The system is designed to solve the
limiting technical issues -- temperature measurement and control and uniformity
and process repeatability -- that have historically kept RTP from becoming a
production technology. The RTP Centura's implant annealing processes offer
chipmakers improved device performance, with demonstrated potential for
significant yield improvements and faster factory cycle time.
Chemical Mechanical Processing
In December 1995, the Company entered a new market with the introduction of
a Chemical Mechanical Polishing (CMP) system. CMP uses a combination of
corrosive slurry and mechanical pressure to flatten or "planarize" the
topography on semiconductor wafers. The Company's Mirra CMP system uses a unique
multi-station "carousel" design, within which several wafers can be processed
simultaneously.
Metrology and Inspection
In fiscal 1997, the Company entered into the metrology and inspection
market with the acquisitions of two companies, Opal, Inc., and Orbot
Instruments, Ltd. Opal, Inc. is a supplier of advanced scanning electron
microscopes (SEMs) for the automated measurement of sub-micron circuit features,
or critical dimensions (CDs), to verify the performance of critical lithography
and patterning processes. Orbot Instruments manufactures two types of optical
inspection equipment: one product locates and identifies defects in the wafer
circuitry and is used in the in-line examination of patterned wafers; another
product assures that the masks and reticles used in the lithography process are
error free.
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CUSTOMER SERVICE AND SUPPORT
The demand for improved production yields of integrated circuits requires
that semiconductor wafer processing equipment operate reliably, with maximum
uptime and within very precise tolerances. Applied Materials installs its
equipment and provides warranty service worldwide through offices located in
North America, Europe (including Israel), Japan, Korea and Asia-Pacific (Taiwan,
China and Singapore). Applied Materials maintains 70 sales/service offices
worldwide, with 24 offices in North America, 10 offices in Europe, 25 offices in
Japan, 6 offices in Korea and 5 offices in Asia-Pacific. The Company offers a
variety of service contracts to customers for maintenance of installed equipment
and provides a comprehensive training program for all customers.
BACKLOG
At October 27, 1996, the Company's backlog totaled $1.4 billion, compared
to $1.5 billion at October 29, 1995. The Company schedules production of its
systems based upon order backlog and customer commitments. The backlog includes
orders for which written authorizations have been accepted and shipment dates
within 12 months have been assigned. Due to possible changes in customer
delivery schedules and cancellations of orders, the Company's backlog at any
particular date is not necessarily indicative of actual sales for any succeeding
period.
MANUFACTURING, RAW MATERIALS AND SUPPLIES
The Company's manufacturing activities consist primarily of assembling
various commercial and proprietary components into finished systems, principally
in the United States, with additional operations in England, Japan, Korea and
Taiwan. Production requires some raw materials and a wide variety of mechanical
and electrical components, which are manufactured to the Company's
specifications. Multiple commercial sources are available for most components.
The Company has consolidated the number of sources for several key purchased
items for purposes of improving its position with suppliers, resulting in
improved on-time delivery, lower inventory levels and better pricing to the
Company. There have been no significant delays in receiving components from sole
source suppliers; however, the unavailability of any of these components could
disrupt scheduled deliveries to customers.
MARKETING AND SALES
Because of the highly technical nature of its products, the Company markets
its products worldwide through a direct sales force, with sales, service and
spare parts offices in North America, Japan, Europe, Korea and Asia-Pacific. For
the fiscal year ended October 27, 1996, sales to customers in North America,
Europe, Japan, Korea and Asia-Pacific were approximately 31%, 16%, 24%, 14% and
15%, respectively, of the Company's net sales. For the fiscal year ended October
29, 1995, sales to customers in North America, Europe, Japan, Korea and
Asia-Pacific were approximately 32%, 15%, 26%, 17% and 10%, respectively, of the
Company's net sales. The Company's business is not seasonal in nature, but it is
subject to the capital equipment investment patterns of major semiconductor
manufacturers located throughout the world. Each region in the global
semiconductor equipment market exhibits unique characteristics that cause
capital equipment investment patterns to vary from period to period. While
international markets provide the Company with significant growth opportunities,
periodic economic downturns, trade balance issues, political instability and
fluctuations in interest and foreign currency exchange rates are all risks that
could affect global product and service demand.
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RESEARCH AND DEVELOPMENT
The market served by the Company is characterized by rapid technological
change. The Company's research and development efforts are global in nature.
Engineering organizations are located in the United States, Japan, England and
Israel, with process support and customer demonstration laboratories in the
United States, Japan, England, Taiwan and Korea. Since 1984, the Company has
operated a large-scale technology center in Narita, Japan, which has been
expanded several times to meet the requirements of its Japanese customer base.
In 1996, additional technology centers were opened in Korea and Taiwan to better
serve customers in the Korea and Asia-Pacific regions. The Company also operates
a technology center in Israel to develop controller configuration and software
tools for its semiconductor processing systems. Applied Materials works closely
with its global customers to design systems that meet their planned technical
and production requirements. The Company's research and development activities
are primarily directed toward the development of new wafer processing systems
and new process applications for existing products. The Company is also
investing in the development of new products in conjunction with the
semiconductor industry's move to the next-generation 300mm wafer size. Together
with today's standard 200mm wafers, 300mm wafers will be used to produce
semiconductor devices with geometries of 0.25 micron and below, probably
including the 256Mbit generation of DRAMs.
To meet emerging customer requirements for advanced manufacturing
solutions, the Company is developing a capability called Process Sequence
Integration (PSI). Choosing from Applied Materials' broad lineup of process
technologies, customers will be able to order "process modules" which consist of
multiple systems whose sequential processes can create complete structures
within the semiconductor device, such as the interconnect structure found in
multi-level metal device designs.
COMPETITION
The global semiconductor equipment industry is highly competitive and is
characterized by increasingly rapid technological advancements and demanding
worldwide service requirements. Each of the Company's products competes in
markets defined by the particular wafer fabrication process it performs. There
are several companies that compete with Applied Materials in each of these
markets. Competition is based on many factors, primarily technological
advancements, productivity and cost-effectiveness, customer support,
contamination control and overall product quality. Management believes that the
Company's competitive advantage in each of its served markets is based on the
ability of its products and services to address customer requirements as they
relate to these competitive factors.
Applied Materials is a principal supplier in each of its served markets.
The Company faces strong competition throughout the world from other
semiconductor equipment manufacturers as well as semiconductor manufacturers who
design and produce fabrication equipment for their own internal uses and, in
some cases, for resale. Management believes that the Company is a strong
competitor with respect to its products, services and resources. However, new
products, pricing pressures and other competitive actions from both new and
existing competitors could adversely affect the Company's market position.
JOINT VENTURE
In September 1991, the Company announced its plans to develop thin film
transistor (TFT) manufacturing systems for Active-Matrix Liquid Crystal Displays
(AMLCDs). The AMLCD market currently includes screens for laptop, notebook and
palmtop computers, desktop monitors, digital/video cameras, portable televisions
and instrument displays. The Company believes that this market in the future may
include
high-resolution workstations and direct view wall television. In September 1993,
a joint
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venture was formed with Applied Materials, Inc. and Komatsu, Ltd. of Japan
sharing a 50-50 ownership. The joint venture, Applied Komatsu Technology, Inc.
(AKT), is accounted for using the equity method. The Company's management
believes that systems developed by AKT have the potential to lower the
manufacturing costs of AMLCDs and provide new process technologies to enhance
flat panel capabilities. The Company has granted to AKT an exclusive license to
use the Company's intellectual property to develop, manufacture and sell
products for the production of flat panel displays, in exchange for royalties in
respect thereof. AKT has recently broadened its product offerings, and now has
process capability in CVD, PVD and Etch for a wide range of substrate sizes.
Investment in research and development will continue in 1997 on next generation
systems to further lower AMLCD manufacturing costs and increase substrate size
capability.
PATENTS AND LICENSES
Management believes that the Company's competitive position is primarily
dependent upon skills in engineering, production, and marketing rather than its
patent position. However, protection of the Company's technology assets by
obtaining and enforcing patents is increasingly important. Consequently, the
Company has an active program to file applications in the United States and
other countries on inventions which the Company considers significant. The
Company has a number of patents in the United States and other countries and
additional applications are pending for new developments in its equipment and
processes. In addition to patents, the Company also possesses other proprietary
intellectual property, including trademarks, know-how, trade secrets and
copyrights.
The Company enters into patent and technology licensing agreements with
others when management determines it is in the Company's best interest to do so.
The Company pays royalties under existing patent license agreements for the use,
in several of its products, of certain patents which are licensed to the Company
for the life of the patents.
The Company has made its technology, including patents, available to AKT
through a license arrangement which permits AKT to use the Company's technology
to develop, manufacture and sell equipment for the flat panel display industry.
In the normal course of business, the Company from time to time receives
and makes inquiries with regard to possible patent infringement. In dealing with
such inquiries, it may become necessary or useful for the Company to obtain and
grant licenses or other rights. However, there can be no assurance that such
license rights will be available to the Company on commercially reasonable
terms. While there can be no assurance about the outcome of such inquiries, the
Company believes that it is unlikely that their resolution will have a material
adverse effect on its financial condition or results of operations.
ENVIRONMENTAL MATTERS
Although one of the Company's locations has been designated as a Superfund
site by the United States Environmental Protection Agency, 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 the Company's
capital expenditures, results of operations, financial condition or competitive
position.
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EMPLOYEES
At October 27, 1996, the Company employed approximately 11,403 regular
full-time employees. In the high technology industry, competition for highly
skilled employees is intense. The Company believes that a great part of its
future success depends on its continued ability to attract and retain qualified
employees. None of the Company's employees are represented by a trade union.
Management considers its relations with its employees to be good.
INCORPORATION BY REFERENCE
The following portions of the Company's 1996 Annual Report are incorporated
herein by reference: "Management's Discussion and Analysis of Financial
Condition and Results of Operations," pages 27 through 30, and the Consolidated
Financial Statements and accompanying notes thereto, pages 31 through 48.
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ITEM 2: PROPERTIES
Certain information concerning the Company's principal properties at
October 27, 1996 is set forth below:
SQUARE
LOCATION TYPE PRINCIPAL USE FOOTAGE OWNERSHIP
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Santa Clara, CA Office, plant & Headquarters, Marketing, 498,000 owned
warehouse Manufacturing, Research 1,789,000 leased
and Engineering
Austin, TX Office, plant & Manufacturing 566,000 owned
warehouse 233,000 leased
Horsham, England Office, plant & Manufacturing, Research 81,000 leased
warehouse and Engineering
Narita, Japan Office, plant & Manufacturing, Research 222,000 owned*
warehouse and Engineering
Chun-An, Korea Office Manufacturing, Research 107,000 owned
and Engineering
Hsin-Chu, Taiwan Office Manufacturing, Research 69,000 owned
and Engineering
Tel Aviv, Israel Office Research and Engineering 21,000 leased
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* Subject to loans totaling $73 million secured by property and equipment having
an approximate net book value of $79 million at October 27, 1996.
The Company also leases office space for 70 sales and service offices
throughout the world: 24 offices are located in North America, 10 in Europe, 25
in Japan, 6 in Korea and 5 in Asia-Pacific.
The Company currently owns 875,000 square feet of manufacturing and other
operating facilities in California that have not yet been completed and placed
in service. In addition, the Company is currently constructing 258,000 square
feet of manufacturing facilities in Texas.
The Company also owns 108 acres in Austin, Texas and 30 acres in Santa
Clara, California, of buildable land. The Austin and Santa Clara land can
accommodate approximately 1,000,000 and 865,000 square feet, respectively, of
additional building space to help satisfy the Company's current and future
needs.
Management considers the above facilities suitable and adequate to meet the
Company's requirements.
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ITEM 3: LEGAL PROCEEDINGS
In the first of two lawsuits filed by the Company, captioned Applied
Materials, Inc. v. Advanced Semiconductor Materials America, Inc., Epsilon
Technology, Inc. (doing business as ASM Epitaxy) and Advanced Semiconductor
Materials International N.V. (collectively "ASM") (case no. C-91-20061-RMW),
Judge William Ingram of the United States District Court for the Northern
District of California ruled on April 26, 1994 that ASM's Epsilon I epitaxial
reactor infringed three of the Company's United States patents and issued an
injunction against ASM's use and sale of the ASM Epsilon I in the United States.
On October 28, 1996, the U.S. Court of Appeals for the Federal Circuit decided
ASM's appeal of this decision, affirming the trial court's judgment that one of
the Company's patents is valid and infringed. Permanent injunctions are now
effective to halt ASM's manufacture, use and sale of its epitaxial reactors in
the United States. The trial of the Company's second patent infringement lawsuit
against ASM, captioned Applied Materials, Inc. v. ASM (case no. C-92-20643-RMW),
was concluded before Judge Whyte in May 1995. On November 1, 1995, the Court
issued its judgment holding that two of the Company's United States patents were
valid and infringed by ASM's reduced pressure epitaxial reactors. ASM appealed
this decision. On December 17, 1996, the U.S. Court of Appeals for the Federal
Circuit rejected ASM's appeal, and affirmed the District Court's ruling. The
permanent injunction entered on March 7, 1996 prohibiting ASM's use or sale of
its ribbed quartz epitaxial reactors within the United States is now effective.
Trial in the District Court has been set for July 28, 1997 to determine ASM
International's liability, damages and wilfulness, for both case no.
C-91-20061-RMW and C-92-20643-RMW.
In a separate lawsuit filed by ASM against the Company involving one patent
relating to the Company's single wafer epitaxial product line, captioned ASM
America, Inc. v. Applied Materials, Inc. (case no. C-93-20853-RMW), the Court
granted three motions for summary judgment in favor of the Company which
eliminate the Company's liability on this patent. ASM has not indicated whether
it intends to appeal this matter. The Company's counterclaims against ASM for
inequitable conduct were tried by the Court in July 1996. The Company is
awaiting a decision. A separate action severed from ASM's case, captioned ASM
America, Inc. v. Applied Materials, Inc. (case no. C-95-20169-RMW), involves one
United States patent which relates to the Company's Precision 5000 product. A
prior trial date has been vacated; no trial date is currently set. In these
cases, ASM seeks injunctive relief, damages and such other relief as the Court
may find appropriate.
Further, the Company has filed a Declaratory Judgment action against ASM,
captioned Applied Materials, Inc. v. ASM (case no. C-95-20003-RMW), requesting
that an ASM United States patent be held invalid and not infringed by the
Company's single wafer epitaxial product line. No trial date has been set. On
April 10, 1996, the Court denied ASM's motion for summary judgment and granted
the Company's motion for summary judgment finding several independent grounds
why the Company's reactors do not literally infringe ASM's patent. With this
ruling, the Company's liability has been substantially eliminated on this
patent. ASM has not indicated whether it intends to appeal this decision. On
July 7, 1996, ASM filed a lawsuit, captioned ASM America, Inc. v. Applied
Materials, Inc. (case no. C95-20586-RMW), concerning alleged infringement of a
United States patent by susceptors in chemical vapor deposition chambers.
Discovery is proceeding.
On January 13, 1997, the Company filed a patent infringement suit against
ASM's newly released Epsilon 2000 reactor. Discovery has not yet commenced.
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In September 1994, General Signal Corporation filed a lawsuit against the
Company (case no. 94-461-JJF) in the United States District Court, District of
Delaware. General Signal alleges that the Company infringes five of General
Signal's United States patents by making, using, selling or offering for sale
multi-chamber wafer fabrication equipment, including for example, the Precision
5000 series machines. General Signal seeks an injunction, multiple damages and
costs, including reasonable attorneys' fees and interest, and such other relief
as the court may deem appropriate. This lawsuit is currently in active discovery
and pre-trial preparation. A January 1997 trial date has been postponed, and
will be rescheduled for later in 1997.
In January 1995, the Company filed a lawsuit against Novellus Systems, Inc.
in the United States District Court, Northern District of California (case no.
C-95-0243-MMC). This lawsuit alleges that Novellus' Concept One, Concept Two,
and Maxxus F TEOS systems infringe the Company's United States patent relating
to the TEOS-based, plasma enhanced CVD process for silicon oxide deposition. The
lawsuit seeks an injunction, damages and costs, including reasonable attorneys'
fees and interest, and such other relief as the court may deem appropriate.
Damages and counterclaims have been bifurcated for separate trial. A jury trial
has been scheduled for March 24, 1997 before Judge Charles A. Legge. The Court
recently ruled on a number of substantive motions finding, on the issues raised,
that the Company's patent in suit is valid and definite. On September 15, 1995,
the Company filed another lawsuit against Novellus alleging that Novellus' then
newly announced blanket tungsten interconnect process infringes the Company's
United States patent relating to a tungsten CVD process. The Company also sought
a declaration that a Novellus United States patent for a gas purge mechanism is
not infringed by the Company and/or is invalid. Novellus answered by denying the
allegations and counterclaimed by alleging that the Company's plasma enhanced
TEOS CVD systems infringe Novellus' United States patents concerning gas purge
and gas debubbler mechanisms. Novellus also filed a separate lawsuit as a
plaintiff before the same court which contains the same claims as those stated
in Novellus' defense of the Company's lawsuit. Both cases have been assigned to
Judge Legge. Discovery has commenced, and trial which had been set for August
1997 has been postponed and will be rescheduled.
In the normal course of business, the Company from time to time receives
and makes inquiries with regard to possible patent infringement. Management
believes that it has meritorious defenses and intends to vigorously pursue these
matters.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS IN FOURTH QUARTER
OF FISCAL 1996
None.
12
13
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and notes thereto identify and set forth information
about the Company's seven executive officers:
NAME OF INDIVIDUAL CAPACITIES IN WHICH SERVED
- ------------------------- ---------------------------------------------------------
James C. Morgan(1)....... Chairman of the Board of Directors and Chief Executive
Officer
James W. Bagley(2)....... Vice Chairman of the Board of Directors
Dan Maydan(3)............ President of the Company and Co-Chairman of Applied
Komatsu Technology, Inc.
Gerald F. Taylor(4)...... Senior Vice President and Chief Financial Officer
Sasson Somekh(5)......... Senior Vice President
David N.K. Wang(6)....... Senior Vice President
Keisuke Yawata(7)........ Senior Vice President of the Company and President and
Chief Executive Officer of Applied Materials Japan, Inc.
- ---------------
(1) Mr. Morgan, age 58, has been Chief Executive Officer since 1977 and Chairman
of the Board of Directors since 1987. Mr. Morgan also served as President of
the Company from 1976 to 1987.
(2) Mr. Bagley, age 58, was appointed Vice Chairman of the Board of Directors in
December 1993. Mr. Bagley was Chief Operating Officer of the Company from
1987 through October 1995, and served as President of the Company from
December 1987 to December 1993. Prior to that, Mr. Bagley served as Senior
Vice President of the Company since 1981. Mr. Bagley is a director of
Kulicke and Soffa Industries, Inc. and Tencor Instruments. Mr. Bagley
resigned as Vice Chairman of the Board and Chief Operating Officer of the
Company on May 17, 1996.
(3) Dr. Maydan, age 61, was appointed President of the Company in December 1993.
Dr. Maydan served as Executive Vice President from 1990 to December 1993.
Prior to that, Dr. Maydan had been Group Vice President since February 1989.
Dr. Maydan joined Applied Materials in 1980 as a Director of Technology.
(4) Mr. Taylor, age 56, has been Chief Financial Officer of the Company since
1984. Mr. Taylor has also been a Senior Vice President of the Company since
1991 and was previously Vice President of Finance from 1984 to 1991.
(5) Dr. Somekh, age 50, was appointed Senior Vice President of the Company in
December 1993. Dr. Somekh served as Group Vice President from 1990 to 1993.
Prior to that, Dr. Somekh had been a divisional Vice President. Dr. Somekh
joined Applied Materials in 1980 as a Project Manager.
(6) Dr. Wang, age 50, was appointed Senior Vice President of the Company in
December 1993. Dr. Wang served as Group Vice President from 1990 to 1993.
Prior to that, Dr. Wang had been a divisional Vice President. Dr. Wang
joined Applied Materials in 1980 as a Manager, Process Engineering and
Applications.
(7) Mr. Yawata, age 62, was appointed President and Chief Executive Officer of
Applied Materials Japan, effective January 1, 1995. From 1985 through 1994,
Mr. Yawata was a Vice President, and from 1993 through 1994, he was
Executive Advisor to the Chairman of LSI Logic Corp. From 1985 through 1992,
Mr. Yawata was President, and from 1992 through 1993, he was Chairman, of
LSI Logic K.K.
13
14
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
"Stock Price History" on page 50 of the Applied Materials' 1996 Annual
Report is incorporated herein by reference.
The Company's common stock is traded on the Nasdaq over-the-counter market.
As of December 27, 1996, there were approximately 3,832 holders of record of the
common stock.
To date, the Company has paid no cash dividends to its stockholders. The
Company has no plans to pay cash dividends in the near future.
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
"Selected Consolidated Financial Data" on page 26 of the Applied Materials
1996 Annual Report is incorporated herein by reference.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Management's Discussion and Analysis" on pages 27 through 30 of the
Applied Materials 1996 Annual Report is incorporated herein by reference.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the report thereon of
Price Waterhouse LLP, Independent Accountants, dated November 20, 1996 and
appearing on pages 31 through 48, and page 50 of the Applied Materials 1996
Annual Report, are incorporated herein by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
15
PART III
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K,
portions of the information required by Part III of Form 10-K are incorporated
by reference from the Company's Proxy Statement to be filed with the Commission
in connection with the 1997 Annual Meeting of Stockholders ("the Proxy
Statement").
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Information concerning directors of the Company appears in the
Company's Proxy Statement, under Item 1 -- "Election of Directors."
This portion of the Proxy Statement is incorporated herein by
reference.
(b) For information with respect to Executive Officers, see Part I of this
Form 10-K.
ITEM 11: EXECUTIVE COMPENSATION
Information concerning executive compensation appears in the Company's
Proxy Statement, under Item 1 -- "Election of Directors," and is incorporated
herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of certain beneficial owners
and management appears in the Company's Proxy Statement, under Item
1 -- "Election of Directors," and is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
appears in the Company's Proxy Statement, under Item 1 -- "Election of
Directors," and is incorporated herein by reference.
15
16
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The consolidated financial statements listed in the accompanying index
to financial statements and financial statement schedule are filed or
incorporated by reference as part of this annual report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULE
The financial statement schedule listed in the accompanying index to
financial statements and financial statement schedule is filed as part
of this annual report on Form 10-K.
3. EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this annual report on Form 10-K.
(B) Report on Form 8-K was filed on August 13, 1996. The report contains the
Company's financial statements for the period ended July 28, 1996, as
attached to its press release dated August 13, 1996.
16
17
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
(ITEM 14(A))
ANNUAL REPORT
(1) Financial Statements PAGE NUMBER
-------------
Consolidated Statements of Operations for the Fiscal Years ended October
27, 1996, October 29, 1995 and October 30, 1994........................... 31
Consolidated Balance Sheets at October 27, 1996 and October 29, 1995....... 32
Consolidated Statements of Cash Flows for the Fiscal Years ended October
27, 1996, October 29, 1995 and October 30, 1994........................... 33
Notes to Consolidated Financial Statements................................. 34-48
Report of Independent Accountants.......................................... 50
FORM 10-K
(2) Financial Statement Schedule PAGE NUMBER
-------------
Report of Independent Accountants on Financial Statement Schedule.......... 22
Schedule II -- Valuation and Qualifying Accounts........................... 23
Schedules not listed above have been omitted because they are not required
or the information required to be set forth therein is included in the
Consolidated Financial Statements or Notes to Consolidated Financial Statements.
The consolidated financial statements listed in the above index that are
included in the Company's Annual Report to Stockholders are hereby incorporated
by reference. With the exception of the pages listed in the above index and the
portion of such report referred to in items 1, 5, 6, 7 and 8 of this Form 10-K,
the 1996 Annual Report to Stockholders is not to be deemed filed as part of this
report.
17
18
INDEX TO EXHIBITS
These Exhibits are numbered in accordance with the Exhibit Table of Item
601 of Regulation S-K:
2.1 Agreement and Plan of Merger, by and among Applied Materials, Inc., Orion Corp. I,
and Opal, Inc. dated as of November 24, 1996.
2.2 Stock Purchase Agreement dated as of November 24, 1996 by and among Applied
Materials, Inc., Orbot Instruments, Ltd. and the Stockholders of Orbot Instruments,
Ltd.
3(i) Certificate of Incorporation of Applied Materials, Inc., a Delaware corporation, as
amended to March 18, 1996.
3(ii) Bylaws of Applied Materials, Inc., as amended to December 13, 1996.
4.1 Rights Agreement, dated as of June 14, 1989, between Applied Materials, Inc. and Bank
of America NT&SA, as Rights Agent, including Form of Right Certificate and the Form
of Summary of Rights to Purchase Common Stock, previously filed with the Company's
report on Form 8-K dated June 14, 1989, and incorporated herein by reference.
4.2 Form of Indenture (including form of debt security) dated as of August 24, 1994
between Applied Materials, Inc. and Harris Trust Company of California, as Trustee,
previously filed with the Company's Form 8-K on August 17, 1994, and incorporated
herein by reference.
10.1 The 1976 Management Stock Option Plan, as amended to October 5, 1993, previously
filed with the Company's Form 10-K for fiscal year 1993, and incorporated herein by
reference.
10.2 Applied Materials, Inc., Supplemental Income Plan, as amended, including
Participation Agreements with James C. Morgan, Walter Benzing, and Robert Graham,
previously filed with the Company's Form 10-K for fiscal year 1981, and incorporated
herein by reference.
10.3 Amendment to Supplemental Income Plan, dated July 20, 1984, previously filed with the
Company's Form 10-K for fiscal year 1984, and incorporated herein by reference.
10.4 The Applied Materials Employee Financial Assistance Plan, previously filed with the
Company's definitive Proxy Statement in connection with the Annual Meeting of
Shareholders held on March 5, 1981, and incorporated herein by reference.
10.5 The 1985 Stock Option Plan for Non-Employee Directors, previously filed with the
Company's Form 10-K for fiscal year 1985, and incorporated herein by reference.
10.6 Amendment 1 to the 1985 Stock Option Plan for Non-Employee Directors dated June 14,
1989, previously filed with the Company's Form 10-K for fiscal year 1989, and
incorporated herein by reference.
18
19
10.7 Applied Materials, Inc. Supplemental Income Plan as amended to December 15, 1988,
including participation agreement with James C. Morgan, previously filed with the
Company's Form 10-K for fiscal year 1988, and incorporated herein by reference.
10.8 License agreement dated January 1, 1992 between the Company and Varian Associates,
Inc., previously filed with the Company's Form 10-K for fiscal year 1992, and
incorporated herein by reference.
10.9 Amendment dated December 9, 1992 to Applied Materials, Inc. Supplemental Income Plan
dated June 4, 1981 (as amended to December 15, 1988), previously filed with the
Company's Form 10-K for fiscal year 1993, and incorporated herein by reference.
10.10 The Applied Materials, Inc. Executive Deferred Compensation Plan dated July 1, 1993
and as amended on September 2, 1993, previously filed with the Company's Form 10-Q
for the quarter ended August 1, 1993, and incorporated herein by reference.
10.11 Joint Venture Agreement between Applied Materials, Inc. and Komatsu Ltd. dated
September 14, 1993 and exhibits thereto, previously filed with the Company's Form
10-K for fiscal year 1993, and incorporated herein by reference. (Confidential
treatment has been requested for certain portions of the agreement)
10.12 $125,000,000 Credit agreement dated as of September 8, 1994 between Applied Materials
and a group of seven banks, previously filed with the Company's Form 10-K for fiscal
year 1994, and incorporated herein by reference.
10.13 Amendment No. 2 to Applied Materials, Inc. 1985 Stock Option Plan for Non-Employee
Directors, dated September 10, 1992, previously filed with the Company's Form 10-K
for fiscal year 1993, and incorporated herein by reference.
10.14 Amendment No. 3 to Applied Materials, Inc. 1985 Stock Option Plan for Non-Employee
Directors, dated October 5, 1993, previously filed with the Company's Form 10-K for
fiscal year 1993, and incorporated herein by reference.
10.15 Amendment No. 2 to the Applied Materials, Inc. Executive Deferred Compensation Plan,
dated May 9, 1994, previously filed with the Company's Form 10-Q for the quarter
ended May 1, 1994, and incorporated herein by reference.
10.16 Amendment No. 4 to Applied Materials, Inc. 1985 Stock Option Plan for Non-Employee
Directors, dated December 8, 1993, previously filed with the Company's Form 10-Q for
the quarter ended May 1, 1994, and incorporated herein by reference.
19
20
10.17 Applied Komatsu Technology, Inc. 1994 Executive Incentive Stock Purchase Plan,
together with forms of Promissory Note, 1994 Executive Incentive Stock Purchase
Agreement, Loan and Security Agreement, previously filed with the Company's Form 10-Q
for the quarter ended July 31, 1994, and incorporated herein by reference.
10.18 The Applied Materials, Inc. 1995 Equity Incentive Plan, dated April 5, 1995,
previously filed with the Company's Form 10-Q for the quarter ended April 30, 1995,
and incorporated herein by reference.
10.19 The Applied Materials, Inc. Senior Executive Bonus Plan, dated September 23, 1994,
previously filed with the Company's Form 10-Q for the quarter ended April 30, 1995,
and incorporated herein by reference.
10.20 The Applied Materials, Inc. Executive Deferred Compensation Plan, as amended and
restated on April 1, 1995, previously filed with the Company's Form 10-Q for the
quarter ended April 30, 1995, and incorporated herein by reference.
10.21 Employment Agreement with James Bagley, dated August 15, 1995, previously filed with
the Company's Form 10-Q for the quarter ended July 30, 1995, and incorporated herein
by reference.
10.22 Applied Materials, Inc. Medium-Term Notes, Series A Distribution Agreement, dated
August 24, 1995, and incorporated herein by reference.
10.23 Amendment No. 1 To Credit Agreement, dated February 12, 1996.
10.24 Amendment to Employment Agreement with James Bagley, dated May 17, 1996, previously
filed with the Company's Form 10-Q for the quarter ended July 28, 1996, and
incorporated herein by reference.
12.1 Ratio of Earnings to Fixed Charges
13 Applied Materials 1996 Annual Report for the fiscal year ended October 27, 1996 (to
the extent expressly incorporated by reference)
21 Subsidiaries of Applied Materials, Inc.
23 Consent of Independent Accountants
24 Power of Attorney
27 Financial Data Schedule: filed electronically.
20
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
APPLIED MATERIALS, INC.
By /s/ JAMES C. MORGAN
------------------------------------
James C. Morgan
Chairman of the Board and
Chief Executive Officer
Dated: January 23, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
TITLE DATE
--------------------------------- -----------------
/s/ JAMES C. MORGAN Chairman of the Board and January 23, 1997
- ------------------------------------- Chief Executive Officer
James C. Morgan
/s/ GERALD F. TAYLOR Senior Vice President and January 23, 1997
- ------------------------------------- Chief Financial Officer
Gerald F. Taylor (Principal Financial Officer
/s/ MICHAEL K. O'FARRELL Vice President and Corporate January 23, 1997
- ------------------------------------- Controller (Principal
Michael K. O'Farrell Accounting Officer)
Directors:
James C. Morgan Director January 23, 1997
Dan Maydan* Director
Michael H. Armacost* Director
Herbert M. Dwight, Jr.* Director
George B. Farnsworth* Director
Philip V. Gerdine* Director
Tsuyoshi Kawanishi* Director
Paul R. Low* Director
Alfred J. Stein* Director
*By /s/ JAMES C. MORGAN January 23, 1997
---------------------------------
James C. Morgan,
Attorney-in-Fact**
**By authority of powers of attorney filed herewith.
21
22
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Applied Materials, Inc.
Our audits of the consolidated financial statements referred to in our
report dated November 20, 1996 appearing on page 50 of the 1996 Annual Report to
Stockholders of Applied Materials, Inc., (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the Financial Statement Schedule listed in Item
14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PRICE WATERHOUSE LLP
- ----------------------------------
Price Waterhouse LLP
San Jose, California
November 20, 1996
22
23
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
BALANCE AT ADDITIONS- BALANCE
BEGINNING CHARGED DEDUCTIONS- AT END
OF YEAR TO INCOME RECOVERIES OF YEAR
---------- ---------- ----------- -------
As of:
October 27, 1996................................. $3,017 $1,548 $(396) $ 4,169
October 29, 1995................................. $1,089 $2,138 $(210) $ 3,017
October 30, 1994................................. $ 487 $ 875 $(273) $ 1,089
23