Washington, DC 20549
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1999
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
.
Commission file number 0-6920
charter)
Certain of the information contained or incorporated by reference
in this Annual Report on Form 10-K is forward-looking in
nature. All statements included or incorporated by reference in
this Annual Report on Form 10-K or made by management of
Applied Materials, Inc. and its subsidiaries (Applied Materials),
other than statements of historical fact, are forward-looking
statements. Examples of forward-looking statements include
statements regarding Applied Materials’ future financial
results, operating results, product successes, business
strategies, projected costs, future products, competitive
positions and plans and objectives of management for future
operations. In some cases, forward-looking statements can be
identified by terminology such as “may,”
“will,” “should,” “would,”
“expects,” “plans,” “anticipates,”
“believes,” “estimates,”
“predicts,” “potential,”
“continue,” or the negative of these terms or other
comparable terminology. Any expectations based on these
forward-looking statements are subject to risks and uncertainties
and other important factors, including those discussed in the
section entitled “Management’s Discussion and
Analysis — Trends, Risks and Uncertainties” in the
Applied Materials 1999 Annual Report, which section is
incorporated herein by reference. These and many other factors
could affect the future financial and operating results of
Applied Materials, and could cause actual results to differ
materially from expectations based on forward-looking statements
made in this document or elsewhere by or on behalf of Applied
Materials. All references to fiscal year apply to Applied
Materials’ fiscal year, which ends on the last Sunday in
October.
Organized in 1967, Applied Materials develops, manufactures,
markets and services semiconductor wafer fabrication equipment
and related spare parts for the worldwide semiconductor industry.
Customers for these products include semiconductor wafer
manufacturers and semiconductor integrated circuit (IC or chip)
manufacturers, who either use the ICs they manufacture in their
own products or sell them to other companies. These ICs are the
key components in most advanced electronic products such as
computers, telecommunications devices, automotive engine
management systems and electronic games.
Building a chip requires the deposition of a series of film
layers. The deposition of these film layers is interspersed with
numerous other processes that create circuit patterns, remove
portions of the film layers, and perform other functions such as
heat treatment, measurement and inspection. Advanced chip designs
require well over 300 individual steps, and many of these
processes are performed multiple times. Most chips are built on a
base of silicon, called a wafer, and consist of two main
structures. The lower structure is made up of components,
typically transistors or capacitors, and the upper structure
consists of the “interconnect” circuitry that connects
the components. Applied Materials currently manufactures
equipment that performs most of the primary steps in the chip
fabrication process, including: physical and chemical deposition,
electroplating, etch, ion implantation, rapid thermal processing
(RTP), chemical mechanical polishing (CMP), metrology and
wafer/reticle inspection.
The architecture of most semiconductor manufacturing equipment is
either batch type, which processes many wafers at once, or
single-wafer type, which processes each wafer individually. Many
of Applied Materials’ single-wafer systems are designed to
accept multiple (two or more) individual processing chambers on a
platform and process wafers in each of the chambers
simultaneously. Single-wafer, multi-chamber systems provide
precision and control, as well as productivity and integration
capabilities. Applied Materials has four major single-wafer,
multi-chamber platforms: the Precision 5000®, the
Centura®, the Endura® and the Producer™. These
platforms currently support physical and chemical deposition,
etch and RTP technologies.
In fiscal 1999, Applied Materials began developing integrated
processing capabilities for its customers in the form of a
Process Module™ approach, to optimize sets of two to four
systems to work together as a unit. Applied Materials expects
this concept to save customers critical development and fab
start-up time, enabling them to more quickly bring new chip
technologies to market.
During fiscal 1999, Applied Materials purchased the remaining
50 percent of Applied Komatsu Technology, Inc.
(AKT) that it did not previously own. AKT supplies equipment
for fabricating flat panel displays (FPDs) that are used in
notebook PCs, desktop monitors, TVs and other applications.
Applied Materials also acquired Consilium, Inc. (Consilium), a
provider of manufacturing facility (fab) management software
to the semiconductor and FPD industries. For further details,
see the section below entitled “Acquisitions.”
Deposition is a fundamental step in fabricating an IC. During
deposition, a layer of either electrically conductive (material
used to carry current) or dielectric (material used as insulation
between conductors) film is deposited or grown on a wafer.
Applied Materials currently provides equipment to perform the
three main types of deposition: chemical vapor deposition,
physical vapor deposition and electroplating. Applied Materials
also offers certain types of dielectric deposition processes
using its RTP systems.
CVD is used by chipmakers to deposit dielectric films
(insulators) and metal films (conductors) on a wafer. During the
CVD process, gases that contain atoms of the material to be
deposited react on the wafer surface, forming a thin film of
solid material. The most common films deposited by CVD are
silicon dioxide (often called oxide), silicon nitride,
polysilicon and tungsten. Applied Materials offers the following
products and technologies to address CVD steps typically used in
chipmaking:
Producer — The Producer CVD platform was
launched in June 1998 and features Twin-Chamber™ modules
that have two single-wafer process chambers per unit. Up to three
Twin-Chamber modules can be mounted on each Producer platform,
giving it a maximum capacity of six wafers at a time for high
throughput manufacturing. Many of Applied Materials’
dielectric CVD film processes can be performed on this platform.
Ultima HDP-CVD™ Centura —
High-density plasma CVD (HDP-CVD) is used to fill very small,
deep spaces with dielectric film. One of the processes offered on
the system is fluorinated silicate glass (FSG), a material that
has better insulating capability than conventional oxide
materials. These types of films are referred to as low dielectric
constant (“low k”) materials, an electrical
characteristic whereby a reduced “k” value indicates
greater insulating efficiency. These low k films absorb less
electric charge and allow higher current to flow through more
closely spaced metal wires, thus enabling denser and faster IC
performance. In fiscal 1999, a number of major customers used FSG
deposition for manufacturing, making it the first low k
dielectric film to be used for production chipmaking.
Other Low k Dielectric Films — Throughout
fiscal 1999, Applied Materials accelerated its programs for
developing dielectric films with lower “k” values to
complement the trend of using copper material for even faster
chip speeds. Applied Materials has introduced several low k
dielectric materials using its established CVD technologies.
Black Diamond™, a silicon-based low k dielectric film
launched in early fiscal 1999, is designed for copper-based
interconnect structures. A second low k dielectric introduced in
July 1999, called BLOk™ (Barrier Low k), provides a low k
solution for critical barrier layers in semiconductor devices,
enabling the complete, multi-layer dielectric chip structure to
benefit from low k technology.
Epitaxial Deposition — Epitaxial silicon
(epitaxy or epi), used in some semiconductor devices, is a layer
of pure silicon grown in a uniform crystalline structure on the
wafer to form a high quality base for the device circuitry.
Applied Materials has manufactured epitaxial deposition systems
for more than 30 years. In addition to silicon applications,
Applied Materials offers an Epi Centura system for
silicon-germanium (SiGe) epi process technology, which can reduce
power usage and increase speed in certain kinds of advanced ICs.
Polysilicon Deposition — Polysilicon is a type
of silicon used to form portions of the transistor structure
within the semiconductor device. Applied Materials’ Poly
Centura is a single-wafer, multi-chamber system that deposits
thin polysilicon films at high temperatures. A variant of the
system, the Polycide Centura, combines chambers for polysilicon
and tungsten silicide deposition on the Centura platform in an
integrated process to create the polycide structures found in
advanced semiconductors. The process control provided by the
single-wafer approach is superior to batch processing, and is
expected to become increasingly important as transistor
structures shrink to smaller dimensions and as chipmakers move to
larger wafer diameters.
Applied Materials introduced a new high-temperature system to
deposit silicon nitride film in July 1999 called the SiNgen™
Centura. This system operates at a lower deposition temperature
than conventional methods to minimize the amount of time the
wafer is exposed to high temperatures and to reduce particles
while improving many areas of operating cost and productivity in
critical transistor nitride layers for sub-0.18 micron devices.
PVD, also called sputtering, is a physical process in which atoms
of a heavy gas such as argon are accelerated at a target of pure
metal. The metal atoms chip off, or sputter away, and are then
deposited on the wafer. The Endura PVD platform offers a broad
range of advanced deposition processes, including aluminum,
titanium/titanium nitride (Ti/TiN), tantalum/tantalum nitride and
copper (Cu). The Endura’s highly flexible, multi-chamber
architecture allows the integration of multiple PVD processes or
combinations of metal CVD and PVD technologies on the same
system. The Endura’s PVD Ti technology can be coupled with
either CVD TiN or PVD TiN processes to form the critical lining
layers of interconnect structures. These structures are
subsequently bulk-filled with tungsten, aluminum or other film
materials.
Copper-Based Devices — A majority of process
steps used in chipmaking are performed to build the interconnect,
a complex matrix of microscopic wires that carry electrical
signals to connect the transistor and capacitor components of the
IC. Chipmakers have traditionally used aluminum as the main
conducting material for the interconnect circuitry. However, the
trend of fabricating smaller and denser ICs requires a new
material that can carry more current in a smaller area. After
years of development, copper is beginning to be used as a new
circuit material in semiconductors. Copper has lower resistance
than aluminum and allows chipmakers to continue making faster and
more powerful chips.
Applied Materials is a leading supplier of systems for
copper-based chipmaking, with systems that perform deposition of
the barrier and seed layers (Endura Electra Cu™
Barrier & Seed), copper bulk-fill by electroplating
(Electra Cu ECP), and copper planarization by CMP (Mirra®
CMP). In addition, Applied Materials makes a full line of systems
for depositing and etching the dielectric layers used in the
copper interconnect, and for inspection and metrology.
The Endura Electra Cu Barrier & Seed system, launched at the
end of 1997, continues to be used by chipmakers for fabricating
copper-based ICs. Using PVD technology, the system sequentially
deposits the critical layers that prevent copper material from
entering other areas of the device and prime the structure for
subsequent deposition of bulk copper material by electroplating.
Electroplating is a process by which metal atoms are removed from
a chemical fluid (the electrolyte) and deposited on the surface
of an object immersed in the electrolyte. Electroplating is one
of the newest technologies used in chipmaking. Its main
application is to deposit copper in circuit wiring structures
following the deposition of barrier and seed layers.
Launched in April 1999, the Electra Cu ECP (ElectroChemical
Plating) is Applied Materials’ first system to use
electroplating technology. The Electra Cu ECP system offers the
first completely automated ECP chemical management technology to
the industry and provides process control and productivity not
available in manually controlled systems. The Electra Cu
ECP’s high-throughput system architecture features two
twin-cell modules that allow the simultaneous processing of four
wafers.
Etching is used many times throughout the semiconductor
manufacturing process to selectively remove material from the
surface of a wafer. Before etching begins, the wafer is coated
with a light-sensitive film called photoresist and exposed to a
circuit pattern during a photolithography process step, which
projects the circuit pattern onto the wafer. Etching removes
material only from areas dictated by the photoresist pattern.
Applied Materials offers systems for etching three basic types of
materials: metal, silicon and dielectric. Applied
Materials’ Dielectric Etch IPS™ Centura is used for
etching the dielectric films used in many critical chip
structures, especially in the formation of copper interconnects.
Applied Materials also continued to extend an established etch
technology, called reactive ion etch, into the 0.18 micron
generation of semiconductors, in which it operates with high
productivity and low cost of ownership in high-volume production
environments. The Dielectric Etch Super e Centura was introduced
in mid-1999 as an extension of Applied Materials’ MxP+
process chamber. Applied Materials’ Metal Etch and Silicon
Etch DPS™ Plus Centura systems have been enhanced in fiscal
1999 with new features for greater productivity and increased
technical capability in etching smaller metal and silicon
structures on the chip.
During ion implantation, silicon wafers are bombarded by a
high-velocity beam of ions, called dopants, that penetrate
(“implant”) the film surface to a desired depth.
Implantation, which occurs in the transistor structure, changes
the properties of the material in which the dopants are implanted
to achieve a particular electrical performance.
Fiscal 1999 saw an acceleration of an industry trend toward a
type of implant technology called low-energy implantation, which
enables the fabrication of smaller structures and thus
contributes to faster transistor performance. Applied
Materials’ 1996 introduction of an implant system called the
xR LEAP (low-energy advanced processing) made commercial
production of low-energy implantation possible, enabling the
throughput necessary for manufacturing. Using an enhanced system
called the Quantum™ LEAP, introduced in fiscal 1999, this
technology has found growing acceptance by many chipmakers to
create thinner transistor structures. The Quantum LEAP has also
been optimized to be used with Applied Materials’ RTP
technology for high technical performance and productivity.
RTP subjects a wafer to a very brief burst of intense heat that
can take the wafer from room temperature to more than 1,000
degrees Celsius in less than 10 seconds. RTP is used mainly for
modifying the properties of deposited films, using processes such
as annealing, which activates dopant atoms in the device after
implantation. Applied Materials’ RTP systems, which include
the RTP Xeplus™ and Radiance™ Centura products,
offer advances in temperature and ramp rate control as well as
other features aimed at providing leading-edge capability for
sub-0.18 micron generations. Recently, these single-wafer systems
have also gained increasing acceptance for growing high quality
oxide and oxynitride films, deposition steps that have
traditionally been assigned to furnaces. This trend to
single-wafer processing versus batch furnaces is expected to
continue as the industry transitions to larger 300mm wafers.
CMP removes material from uneven topography on a wafer surface
until a flat (planarized) surface is created. This allows
subsequent photolithography patterning steps to take place with
greater accuracy and enables film layers to build up with minimal
height variations. CMP is performed primarily in the
interconnect structure of the chip, where it is used multiple
times, and is especially crucial to fabricating copper-based ICs
to define the circuit wires that create the interconnect.
Throughout fiscal 1999, the Mirra CMP system continued to expand
its portfolio of technologies and added a polysilicon film
process that is used in the transistor portion of the device. The
requirement to use polysilicon CMP has been increasing due to
the growing need to control the topography of the transistor and
capacitor structures as chip dimensions shrink. During fiscal
1999, another process was introduced to polish copper that
enabled Applied Materials to complete its set of systems for
building copper interconnects.
In June 1999, the Mirra CMP was enhanced with a cleaning
capability that is integrated into the system to act in a fully
automated CMP/cleaning mode. This system, called the Mirra
Mesa™, can be used with all of the Mirra’s CMP process
technologies.
In October 1999, Applied Materials acquired Obsidian, Inc.
(Obsidian), a developer of slurry-free (i.e., does not use wet
abrasive material) CMP technology. This developing technology may
be attractive to customers because it offers potentially lower
operating costs and enhanced precision processing.
Applied Materials produces several types of products that are
used to inspect the wafer during various stages of the
fabrication process. Applied Materials also supplies a system to
photomask manufacturers that is used to detect defects on quartz
plates, called reticles. These reticles (also called masks) are
used by photolithography systems to transfer microscopic circuit
designs onto wafers. The reticle must be defect-free with perfect
image fidelity because any imperfection will be replicated on
the wafer.
Electron Microscopes (CD-SEMs and DR-SEMs)
Scanning electron microscopes (SEMs) use an electron beam to form
images of microscopic features on a semiconductor wafer at
extremely high magnification. Applied Materials provides
chipmakers with operator-free automation, along with the high
accuracy and sensitivity needed for measuring advanced-generation
feature sizes. Introduced in February 1999, the new
VeraSEM™ extends CD-SEM technology beyond critical dimension
measurement to also enable the monitoring of multiple process
parameters.
DR-SEMs review defects on the wafer (i.e., particles, scratches
or residues) that are first located by other detection systems
and then classify the defects to identify their source. The
high-throughput, fully automatic technology of Applied
Materials’ SEMVision™ DR-SEM, launched in May 1998,
marked a major advance over conventional, manually operated
systems. With the SEMVision, customers are using DR-SEM
technology as an integral part of their production lines, rather
than using it off-line to occasionally
sample wafers. The enhanced SEMVision cX model introduced in
fiscal 1999 added higher throughput, automatic material
classification and color imaging to its list of features.
Using laser-based technology, Applied Materials’ WF-736
system detects defects on patterned wafers (wafers with circuit
images printed on them) as they move between processing steps.
Defects may include particles, open circuit lines, shorts between
lines or other problems. In fiscal 1999, Applied Materials
introduced the enhanced WF-736 XS system, offering greater
sensitivity for 0.15 micron and below devices.
Introduced in early fiscal 1999, the ARIS-i™ system is an
automated, ultraviolet wavelength-based advanced inspection
system for reticles used in 0.18 micron and below generation
devices. The system features enhanced image acquisition
technology, data handling capabilities and sensitivity for the
most advanced mask designs.
The most advanced FPDs are manufactured using technologies
similar to those for making semiconductors. One difference is the
vastly larger area of the substrate (panel). Compared to
today’s largest wafers (300mm diameter), the panels can be
up to seven times larger. Applied Materials began development of
FPD process technology in 1990, beginning with a CVD process. In
September 1993, Applied Materials and Komatsu, Ltd. (Komatsu)
formed a joint venture company, Applied Komatsu Technology, Inc.
(AKT), to develop, market and manufacture FPD systems for the
global market. In October 1999, Applied Materials acquired
Komatsu’s 50 percent ownership interest in AKT, making
AKT a wholly-owned subsidiary. For further details, see
Note 4 of Notes to Consolidated Financial Statements
contained in the Applied Materials 1999 Annual Report, which note
is incorporated herein by reference.
In December 1998, Applied Materials acquired Consilium, a
provider of manufacturing execution systems software and services
to the global semiconductor industry. Consilium’s software
products, WorkStream™ and FAB300™, are designed for
semiconductor and FPD manufacturers to control and optimize their
facility operations.
Throughout its history, the semiconductor industry has migrated
to increasingly larger wafer sizes, from one-inch wafers to the
200mm (eight inches) standard predominant today. To gain the
economic advantages of a larger surface area, the industry has
begun using 300mm (12 inches) wafers as the next wafer size.
The surface area of a 300mm wafer is more than two times that of
a 200mm wafer. Entirely new hardware is needed to process 300mm
wafers, although some recently introduced systems, called bridge
tools, have dual 200mm-300mm capabilities.
Applied Materials has been actively developing a complete line of
300mm systems in its core process technologies, covering more
than 60 applications. Applied Materials has shipped several 300mm
systems to customers and to industry consortia, including
Semiconductor 300 in Dresden, Germany. All of Applied
Materials’ mainstream process technologies are being readied
for 300mm wafer sizes. To meet the increased interest in 300mm
process technology, Applied Materials significantly expanded its
demonstration and development capability for these systems in
fiscal 1999.
Applied Materials’ customer service organization plays a
unique and critical role in Applied Materials’ ability to
satisfy its customers’ production requirements. Over 2,500
highly trained customer engineers and process support engineers
are deployed in more than a dozen countries. These engineers are
usually located at or near the customers’ fab sites and
service more than 11,000 Applied Materials’ systems.
In fiscal 1999, Applied Materials introduced a new line of
service products, called Total Service Solutions™ (TSS),
which offers a novel approach to maintaining and servicing
Applied Materials’ equipment in the fab. In one part of the
TSS program, called Total Parts Management™ (TPM), Applied
Materials is responsible for the spare parts used in its
equipment at a customer’s fab site. Under TPM, chipmakers no
longer need to own or manage Applied Materials’ inventory.
A second product, called Total Support Package™
(TSP), is a comprehensive equipment service solution that
includes parts inventory management and maintenance, with
operating cost reduction and system performance improvement
guarantees for Applied Materials’ equipment.
Applied Materials’ backlog increased from $917 million
at October 25, 1998 to $1.7 billion at October 31,
1999. Applied Materials schedules production of its systems
based on order backlog and customer commitments. Backlog includes
only orders for which written authorizations have been accepted
and shipment dates within 12 months have been assigned.
However, customers may delay delivery of products or cancel
orders suddenly and without sufficient notice, subject to
cancellation penalties. Due to possible customer changes in
delivery schedules and cancellations of orders, Applied
Materials’ backlog at any particular date is not necessarily
indicative of actual sales for any succeeding period. Delays in
delivery schedules and/or a reduction of backlog during any
particular period could have, and in the past have had, a
material adverse effect on Applied Materials’ business and
results of operations.
Applied Materials’ manufacturing activities consist
primarily of assembling various commercial and proprietary
components into finished systems, principally in the United
States, with additional operations in Taiwan, Japan, Israel and
the United Kingdom. Production requires some raw materials and a
wide variety of mechanical and electrical components that are
manufactured to Applied Materials’ specifications. Applied
Materials uses numerous vendors to supply parts, components and
subassemblies (collectively, “parts”) for the
manufacture and support of its products. Although Applied
Materials makes reasonable efforts to ensure that parts are
available from multiple suppliers, this is not always possible;
accordingly, some key parts may be obtained only from a single
supplier or a limited group of suppliers. Applied Materials has
sought, and will continue to seek, to minimize the risk of
production and service interruptions and/or shortages of key
parts by: 1) selecting and qualifying alternative suppliers
for key parts; 2) monitoring the financial stability of key
suppliers; and 3) maintaining appropriate inventories of key
parts. There can be no assurance that Applied Materials’
results of operations will not be materially and adversely
affected if, in the future, Applied Materials does not receive in
a timely and cost-effective manner a sufficient quantity of
parts to meet its production requirements.
Applied Materials’ long-term growth strategy requires
continued development of new semiconductor and flat panel display
manufacturing technology. Applied Materials’ significant
investment in RD&E has generally enabled it to deliver new
products and technologies before the emergence of strong demand,
thus allowing customers to incorporate these products into their
manufacturing plans at an early stage in the technology selection
cycle. Applied Materials works closely with its global customers
to design systems that meet their planned technical and
production requirements. Engineering organizations are located in
the United States, the United Kingdom, Israel and Japan, with
process support and customer demonstration laboratories in the
United States, the United Kingdom, Israel, Japan, Korea and
Taiwan.
In fiscal 1999, Applied Materials invested $682 million, or
14 percent of net sales, in RD&E for product development
and engineering programs to improve or sustain existing product
lines. During fiscal 1997 and 1998, RD&E expenses were
$568 million (14 percent of net sales) and
$644 million (16 percent of net sales), respectively.
Applied Materials has spent an average of 13 percent of net
sales on RD&E over the last five years. In addition to
RD&E for specific product technologies, Applied Materials
maintains ongoing programs in software, automation control
systems, materials research, microcontamination and environmental
control that have applications to its products. Key activities
during fiscal 1999 involved development of wafer fabrication
equipment for smaller feature sizes, copper-based devices and
300mm wafers.
Because of the highly technical nature of its products, Applied
Materials markets its products worldwide through a direct sales
force, with sales and service offices in the United States,
Taiwan, Japan, Europe, Korea, and Asia-Pacific. For the fiscal
year ended October 31, 1999, net sales to customers in North
America (primarily the United States), Taiwan, Japan, Europe,
Korea, and Asia-Pacific were 34 percent, 20 percent,
17 percent, 16 percent, 7 percent and
6 percent, respectively, of Applied Materials’ total
net sales. Applied Materials’ business is usually not
seasonal in nature, but it is cyclical based on the capital
equipment investment patterns of major
semiconductor manufacturers. These expenditure patterns are based
on many factors, including anticipated market demand for
integrated circuits, the development of new technologies and
global and regional economic conditions.
Applied Materials has operations and sites located throughout the
world to support its sales and services to the global
semiconductor industry. Managing global operations and sites
located throughout the world presents challenges associated with,
among other things, cultural diversities and organizational
alignment. Moreover, each region in the global semiconductor
equipment market exhibits unique characteristics that can cause,
and in the past have caused, capital equipment investment
patterns to vary significantly from period to period. Periodic
economic downturns, trade balance issues, political instability
and fluctuations in interest and foreign currency exchange rates
are among the many risks associated with operating a global
business that could materially and adversely affect demand for
Applied Materials’ products (including systems and related
services).
Information on net sales to unaffiliated customers and long-lived
assets attributable to Applied Materials’ geographic
regions is included in Note 12 of Notes to Consolidated Financial
Statements contained in the Applied Materials 1999 Annual
Report, which note is incorporated herein by reference. For
fiscal 1997 and 1998, no individual customer accounted for more
than 10 percent of Applied Materials’ net sales. For
fiscal 1999, Intel Corporation accounted for more than
10 percent of Applied Materials’ net sales.
The global semiconductor equipment industry is highly competitive
and is characterized by increasingly rapid technological
advancements and demanding worldwide service requirements.
Applied Materials’ ability to compete depends on its ability
to continually improve its products, processes and services, as
well as its ability to develop new products that meet constantly
evolving customer requirements. Significant competitive factors
for succeeding in the semiconductor manufacturing equipment
market include the equipment’s technical capability,
productivity and cost-effectiveness, overall reliability, ease of
use and maintenance, contamination and defect control, and the
level of technical service and support provided by the vendor.
The importance of each of these factors varies depending on the
specific customer’s needs and criteria, including
considerations such as the customer’s process application,
product requirements, timing of the purchase and particular
circumstances of the purchasing decision. The pace of
technological change is rapid, with customers continually moving
to smaller critical dimensions and larger wafer sizes and
adopting new materials for use in semiconductor manufacturing.
Sometimes, existing technology can be adapted to the new
requirements; however, the new requirements sometimes create the
need for an entirely new technical approach. The rapid pace of
technological change continually creates new opportunities for
existing competitors and start-ups, and can quickly diminish the
value of existing technologies.
Substantial competition exists for each of Applied
Materials’ products. Competitors range from small, agile
companies that compete with a single innovative product, to
companies with a large and diverse line of semiconductor
processing products, and to large multinationals. Many of Applied
Materials’ competitors compete with Applied Materials for
sales of more than one product. For example, one competitor sells
CVD, electroplating and PVD equipment, while another competitor
sells etch and CMP equipment. Competitors in a given technology
tend to have different degrees of market presence in the various
regional markets. Management believes that Applied
Materials’ competitive position is based on the ability of
its products and services to continue to address customer
requirements. Success for Applied Materials will require a
continued high level of investment in research, development and
engineering and in sales and marketing. Management believes that
Applied Materials is a strong competitor with respect to its
products and services. However, new products, pricing pressures,
rapid changes in technology and other competitive actions from
both new and existing competitors could materially and adversely
affect Applied Materials’ market position.
On December 11, 1998, Applied Materials acquired Consilium,
a supplier of integrated semiconductor and electronics
manufacturing execution systems and services, in a
stock-for-stock merger accounted for as a pooling of interests.
Due to the immateriality of Consilium’s financial position
and results of operations in relation to those of Applied
Materials, Applied Materials’ prior period financial
statements have not been restated. Applied Materials issued
1.7 million shares of its common stock to complete this
transaction, and recorded $5 million of transaction costs as
a one-time operating expense. The Consilium acquisition did not
have a material effect on Applied Materials’ financial
condition or results of operations for fiscal 1999. For further
details, see Note 14 of Notes to Consolidated Financial
Statements contained in the Applied Materials 1999 Annual Report,
which note is incorporated herein by reference.
On October 5, 1999, Applied Materials acquired Obsidian, a
developer of fixed-abrasive chemical mechanical polishing
solutions for the semiconductor industry, by issuing shares of
common stock having a market value of $150 million. The Obsidian
acquisition was accounted for as a purchase business combination.
The purchase price in excess of the fair value of
Obsidian’s net tangible assets was allocated to intangible
assets and in-process research and development expense. Except
for in-process research and development expense of
$35 million, the Obsidian acquisition did not have a
material effect on Applied Materials’ financial condition or
results of operations. For further details, see Note 14 of
Notes to Consolidated Financial Statements contained in the
Applied Materials 1999 Annual Report, which note is incorporated
herein by reference.
In September 1993, Applied Materials and Komatsu formed AKT, a
joint venture corporation that developed, manufactured, marketed
and serviced thin film transistor manufacturing systems for FPDs.
Because Applied Materials and Komatsu each owned 50 percent
of the AKT joint venture, Applied Materials accounted for its
interest in the joint venture using the equity method. During the
fourth fiscal quarter of 1998, Applied Materials decided to
discontinue the operations of AKT over a 12-month period. As a
result of this decision, Applied Materials recorded a
$40 million provision for discontinued operations,
consisting of $19 million primarily for immediate headcount
reductions and lease terminations, and $21 million for net
expenses and other obligations expected to be incurred during, or
at completion of, the 12-month wind-down period. In addition to
the above amounts, Applied Materials also recorded its
$18 million share of AKT’s operating losses as a
component of discontinued operations. In late fiscal 1999, an
overall improvement in demand for FPDs enhanced AKT’s
financial condition and improved its business outlook. This
change caused Applied Materials to reassess its decision to
discontinue AKT’s operations. Based on this reassessment,
Applied Materials reversed its decision to discontinue the
operations of AKT and acquired Komatsu’s 50 percent
interest in AKT for $87 million in cash on October 29,
1999. As a result, the $21 million provision established in
fiscal 1998 for net expenses and other obligations expected to be
incurred during the wind-down of AKT’s operations was
reversed into income in fiscal 1999, and all prior period amounts
relating to AKT’s continuing operations were reclassified
from discontinued operations to continuing operations. These
reclassifications had no effect on Applied Materials’ net
income for any period affected, and were recorded in accordance
with Emerging Issues Task Force Issue No. 90-16,
“Accounting for Discontinued Operations Subsequently
Retained.” The acquisition of AKT was accounted for as a
purchase business combination. The purchase price in excess of
the fair value of AKT’s net tangible assets was allocated to
intangible assets and in-process research and development
expense. For further details, see Note 4 of Notes to Consolidated
Financial Statements contained in the Applied Materials 1999
Annual Report, which note is incorporated herein by reference.
On January 12, 2000, Applied Materials announced that it
entered into an agreement to acquire Etec Systems, Inc. (Etec), a
supplier of mask patterning generating equipment for the
worldwide semiconductor and electronics industries, in a
stock-for-stock merger that will be accounted for as a pooling of
interests. The closing of the transaction is subject to approval
from Etec’s shareholders and clearance by regulatory
authorities. Each share of Etec’s stock will be exchanged
for 0.649 of a share of Applied Materials’ common stock.
Applied Materials expects to issue approximately 14 million
shares of its common stock to complete this transaction.
Management believes that Applied Materials’ competitive
position is significantly dependent upon skills in engineering,
production and marketing, rather than its patent position.
However, protection of Applied Materials’ technology assets
by obtaining and enforcing patents is important. Therefore,
Applied Materials has an active program to file patent
applications in the United States and other countries for
inventions that Applied Materials considers significant. Applied
Materials 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, Applied Materials also possesses other proprietary
intellectual property, including trademarks, know-how, trade
secrets and copyrights.
Applied Materials enters into patent and technology licensing
agreements with other companies when management determines that
it is in Applied Materials’ best interest to do so. Applied
Materials pays royalties under existing patent license agreements
for the use, in several of its products, of certain patented
technologies that are licensed to Applied Materials for the life
of the patents. Applied Materials also receives royalties from
licenses granted to third parties. Royalties received from third
parties have not been, and are not expected to be, material.
In the normal course of business, Applied Materials from time to
time receives and makes inquiries regarding possible patent
infringement. In dealing with such inquiries, it may become
necessary or useful for Applied Materials to obtain or grant
licenses or other rights. However, there can be no assurance that
such licenses or rights will be available to Applied Materials
on commercially reasonable terms. Although there can be no
assurance about the outcome of patent infringement inquiries,
Applied Materials believes it is unlikely that their resolution
will have a material adverse effect on its financial condition or
results of operations.
Two of Applied Materials’ locations have been designated as
Superfund sites by the United States Environmental Protection
Agency since 1987. Applied Materials has been designated a
“Responsible Party” by the U.S. Environmental
Protection Agency with respect to one site and a
“Potentially Responsible Party” with respect to the
other site. However, 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 Applied Materials’ capital expenditures, financial
condition, results of operations or competitive position.
At October 31, 1999, Applied Materials employed 12,755
regular employees. In the high-technology industry, competition
for highly-skilled employees is intense. Applied Materials
believes that its future success is highly dependent upon on its
continued ability to attract and retain qualified employees.
There can be no assurance that Applied Materials will be able to
attract, hire, assimilate and retain a sufficient number of
qualified people. None of Applied Materials’ employees are
represented by a trade union, and management considers its
relations with employees to be good.
Information concerning Applied Materials’ principal
properties at October 31, 1999 is set forth below:
Santa Clara, CA
Office, plant &
Headquarters, Marketing,
warehouse
Manufacturing, Distribution, Research and Engineering
Austin, TX
Office, plant &
Manufacturing
warehouse
Horsham, England
Office, plant & warehouse
Manufacturing, Research and Engineering
Narita, Japan
Office, plant & warehouse
Manufacturing, Research and Engineering
Chunan, Korea
Office, plant & warehouse
Research and Engineering
Hsinchu, Taiwan
Office, plant &
Manufacturing, Research and
warehouse
Engineering
Rehovot, Israel
Office, plant & warehouse
Manufacturing, Research and Engineering
Nes Ziona, Israel
Office, plant & warehouse
Manufacturing, Research and Engineering
Yavne, Israel
Office, plant & warehouse
Manufacturing, Research and Engineering
either currently being subleased or is being marketed for
sublease.
property and equipment having an approximate net book value of
$64 million at October 31, 1999.
Applied Materials also leases office space for sales and service
offices in 70 locations throughout the world: 22 in North
America (primarily the United States), 2 in Taiwan, 23 in Japan,
12 in Europe, 6 in Korea and 5 in Asia-Pacific.
Applied Materials currently owns 167,000 square feet of
manufacturing and other operating facilities in California that
have not yet been completed and placed in service. An 80,000
square foot owned facility is currently under construction in
Taiwan.
Applied Materials also owns 121 acres of buildable land in
Austin, Texas, 43 acres of buildable land in Santa Clara,
California and 9 acres of buildable land in Narita, Japan. The
Austin, Santa Clara and Narita land can accommodate approximately
1,845,000, 1,247,000 and 766,000 square feet, respectively, of
additional building space to help satisfy Applied Materials’
current and future needs.
Applied Materials considers the above facilities suitable and
adequate to meet its requirements.
In April 1997, Applied Materials initiated separate lawsuits in
the Northern District of California against AST Electronik GmbH
and AST Electronik USA, Inc. (collectively “AST”) and
AG Associates, Inc. (AG), alleging infringement of certain
patents concerning rapid thermal processing technology (case
no. C-97-20375-RMW). In October 1997, AST and AG each filed
counterclaims alleging infringement by Applied Materials of
patents concerning related technology. In addition, on
August 5, 1998, AG filed a lawsuit in California against
Applied Materials alleging infringement of another patent
relating to rapid thermal processing technology (case
no. C-98-20833-RMW), and, on August 13, 1998, AG filed
a lawsuit in Delaware against Applied Materials alleging
infringement of two other patents concerning related technology.
The Delaware case was subsequently transferred to California
(case no. C-99-20432). In February 1999, Applied Materials
and AST resolved their dispute on mutually acceptable terms and
conditions. In addition, in December 1999, all disputes between
Applied Materials and AG were resolved on mutually acceptable
terms and conditions, and each of the three cases has been
dismissed.
As a result of Applied Materials’ acquisition of Orbot
Instruments, Ltd. (Orbot), Applied Materials is involved in a
lawsuit captioned KLA Instruments Corporation (KLA) v. Orbot
(case no. C-93-20886-JW) in the United States District
Court for the Northern District of California. KLA alleges that
Orbot infringes a patent regarding equipment for the inspection
of masks and reticles, and seeks an injunction, damages and such
other relief as the Court may find appropriate. There has been
limited discovery, but no trial date has been set. Management
believes it has meritorious defenses and intends to pursue them
vigorously.
On June 13, 1997, Applied Materials filed a lawsuit against
Varian Associates, Inc. (Varian) captioned Applied Materials,
Inc. v. Varian Associates, Inc. (case
no. C-97-20523-RMW), alleging infringement of several of
Applied Materials’ patents concerning physical vapor
deposition (PVD) technology. The complaint was later amended on
July 7, 1997 to include Novellus Systems, Inc. (Novellus) as
a defendant as a result of Novellus’ acquisition of
Varian’s thin film systems PVD business. Applied Materials
seeks damages for past infringement, a permanent injunction,
treble damages for willful infringement, pre-judgment interest
and attorneys’ fees. Varian answered the complaint by
denying all allegations, counterclaiming for declaratory judgment
of invalidity and unenforceability and alleging conduct by
Applied Materials in violation of antitrust laws. On
June 23, 1997, Novellus filed a separate lawsuit against
Applied Materials captioned Novellus Systems, Inc. v.
Applied Materials, Inc. (case no. C-97-20551-EAI), alleging
infringement by Applied Materials of three patents concerning PVD
technology that were formerly owned by Varian. On July 8, 1997,
Varian filed a separate lawsuit against Applied Materials
captioned Varian Associates, Inc. v. Applied Materials, Inc.
(case no. C-97-20597-PVT) alleging a broad range of conduct in
violation of federal antitrust laws and state unfair competition
and business practice laws. On July 16, 1999, Varian was
granted permission to file a First Amended Complaint in that
action. On November 8, 1999, the Court granted in part
Applied Materials’ partial motion to dismiss the First
Amended Complaint. On December 10, 1999, Varian filed its
Second Amended Complaint and Applied Materials has answered.
Discovery has commenced in these actions. The Court has scheduled
trial of all patent claims for April 2001. No other trial dates
have been set. Management believes it has meritorious claims and
defenses and intends to pursue them vigorously.
In November 1997, OKI Electric Industry, Co., Ltd. (OKI) filed
suit against Applied Materials’ subsidiary, Applied
Materials Japan (AMJ), in Tokyo District Court in Japan, alleging
that AMJ is obligated to indemnify OKI for patent license
payments OKI made to a third party. Several hearings have been
held, but no trial date has been set. Applied Materials does not
expect the final case resolution to have a material effect on its
financial condition or results of operations.
Applied Materials is subject to various other legal proceedings
and claims, either asserted or unasserted, that arise in the
ordinary course of business. Although the outcome of these claims
cannot be predicted with certainty, management does not believe
that any of these other legal matters will have a material
adverse effect on Applied Materials’ financial condition or
results of operations.
Item 4:
Submission of Matters to a Vote of Security Holders in
Fourth Fiscal Quarter of 1999
None.
The following table and notes thereto identify and set forth
information about Applied Materials’ five executive
officers:
James C. Morgan(1)
Chairman of the Board of Directors and Chief Executive Officer
Dan Maydan(2)
Director and President
Joseph R. Bronson(3)
Senior Vice President, Office of the President, Chief Financial
Officer and Chief Administrative Officer
Sasson Somekh(4)
Senior Vice President, Office of the President
David N.K. Wang(5)
Senior Vice President, Office of the President
(1)
Mr. Morgan, age 61, has been Chief Executive Officer since
1977 and Chairman of the Board of Directors since 1987.
Mr. Morgan also served as President of Applied Materials
from 1976 to 1987.
(2)
Dr. Maydan, age 64, was appointed President of Applied
Materials in December 1993 and has been a member of the Board of
Directors since 1992. 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.
(3)
Mr. Bronson, age 51, was appointed Senior Vice President,
Office of the President, Chief Financial Officer and Chief
Administrative Officer in January 1998. Mr. Bronson served
as Group Vice President from April 1994 to January 1998. Prior to
that, Mr. Bronson had been Vice President since November
1990. Mr. Bronson joined Applied Materials in September 1984
as Corporate Controller.
(4)
Dr. Somekh, age 53, was appointed to the Office of the
President in January 1998, and was appointed Senior Vice
President of Applied Materials 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.
(5)
Dr. Wang, age 53, was appointed to the Office of the
President in January 1998, and was appointed Senior Vice
President of Applied Materials 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.
Equity and Related Stockholder Matters
“Stock Price History” on page 54 of the Applied
Materials 1999 Annual Report is incorporated herein by reference.
Applied Materials’ common stock is traded on the Nasdaq
over-the-counter market. As of January 2, 2000, there were
approximately 5,347 holders of record of the common stock.
To date, Applied Materials has not declared or paid cash
dividends to its stockholders. Applied Materials has no plans to
declare and pay cash dividends in the near future.
The selected consolidated financial data for the five years ended
October 31, 1999, which appears on page 21 of the
Applied Materials 1999 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 22
through 32 of the Applied Materials 1999 Annual Report is
incorporated herein by reference.
Disclosures about Market Risk
“Market Risk Disclosure” on pages 31 through 32 of the
Applied Materials 1999 Annual Report is incorporated herein by
reference.
Data
The consolidated financial statements, together with the report
thereon of PricewaterhouseCoopers LLP dated November 17,
1999, and appearing on pages 33 through 52 and page 54
of the Applied Materials 1999 Annual Report, are incorporated
herein by reference.
Accountants on Accounting and Financial Disclosure
None.
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 Applied Materials’ Proxy Statement to be filed with the
Commission in connection with the 2000 Annual Meeting of
Stockholders (“the Proxy Statement”).
Registrant
(a) Information concerning directors of Applied Materials
appears in Applied Materials’ 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 Annual Report on Form 10-K.
Information concerning executive compensation appears in Applied
Materials’ Proxy Statement, under Item 1 —
“Election of Directors.” This portion of the Proxy
Statement is incorporated herein by reference.
Beneficial Owners and Management
Information concerning the security ownership of certain
beneficial owners and management appears in Applied
Materials’ Proxy Statement, under Item 1 —
“Election of Directors.” This portion of the Proxy
Statement is incorporated herein by reference.
Transactions
Information concerning certain relationships and related
transactions appears in Applied Materials’ Proxy Statement,
under Item 1 — “Election of Directors.”
This portion of the Proxy Statement is incorporated herein by
reference.
Item 14:
Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) The following documents are filed as part of this
Annual Report on Form 10-K:
(1) Financial Statements:
Consolidated Statements of Operations for each of the three years
in the period ended October 31, 1999
Consolidated Balance Sheets at October 25, 1998 and
October 31, 1999
Consolidated Statements of Stockholders’ Equity for each of
the three years in the period ended October 31, 1999
Consolidated Statements of Cash Flows for each of the three years
in the period ended October 31, 1999
Notes to Consolidated Financial Statements
Report of Independent Accountants
*
Incorporated herein by reference from the indicated pages of the
Applied Materials 1999 Annual Report. With the exception of the
pages listed above and the portion of such report referred to in
items 1, 5, 6, 7, 7a and 8 of this Annual Report on
Form 10-K, the Applied Materials 1999 Annual Report is not
to be deemed filed as part of this report.
(2) Financial Statement Schedule: