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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _______ to _______
Commission File Number
0-17157
Novellus Systems, Inc.
(Exact name of Registrant as specified in its charter)
California 77-0024666
(State or other jurisdiction (I.R.S. Employer
of incorporation of Identification
organization) Number)
4000 North First Street
San Jose, California
(Address of principal 95134
executive offices) (Zip Code)
Registrant's telephone number, including area code:
(408) 943-9700
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 [ ]
As of May 5, 2000 130,623,069 shares of the Registrant's common stock, no par
value, were issued and outstanding.
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NOVELLUS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED APRIL 1, 2000
INDEX
Part I: Financial Information
Item 1: Financial Statements Page
Condensed Consolidated Balance Sheets at
April 1, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income
for the three months ended April 1, 2000
and March 27, 1999 4
Condensed Consolidated Statements of Cash Flows for
the three months ended April 1, 2000
and March 27, 1999 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Item 3: Quantitative and Qualitative Disclosures About
Market Risk 14
Part II: Other Information
Item 1: Legal Proceedings 15
Item 6: Exhibits and Reports on Form 8-K 18
Signatures 18
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
- -----------------------------------------------------------------------------------
Assets April 1, December 31,
2000 1999 (1)
(unaudited)
- -----------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 266,819 $ 181,568
Short-term investments 183,398 203,689
Accounts receivable, net 255,325 213,678
Inventories 119,674 103,883
Deferred taxes 24,521 24,521
Prepaid and other current assets 17,892 5,327
--------------------------
Total current assets 867,629 732,666
Property and equipment:
Machinery and equipment 145,488 138,518
Furniture and fixtures 9,425 9,335
Leasehold improvements 54,992 54,349
--------------------------
209,905 202,202
Less accumulated depreciation and amortization 102,356 95,423
--------------------------
107,549 106,779
Long-term deferred taxes 11,770 11,770
Other assets 57,409 58,714
--------------------------
Total Assets $1,044,357 $ 909,929
==========================
Liabilities and Shareholders' Equity
- -----------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 53,770 $ 43,438
Accrued payroll and related expenses 21,110 19,367
Accrued warranty 26,402 20,083
Other accrued liabilities 41,798 31,150
Income taxes payable 2,578 12,671
Current obligations under lines of credit 19,967 13,521
--------------------------
Total current liabilities 165,625 140,230
Commitments and contingencies
Shareholders' equity:
Common stock 543,559 490,587
Retained earnings 334,258 277,671
Accumulated other comprehensive income (loss) 915 1,441
--------------------------
Total shareholders' equity 878,732 769,699
--------------------------
Total Liabilities and Shareholders' Equity $1,044,357 $ 909,929
==========================
See accompanying notes.
(1) Derived from the December 31, 1999 audited financial statements.
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NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------
(in thousands, except per share data) Three Months Ended
(unaudited) April 1, March 27,
2000 1999
- -------------------------------------------------------------------------
Net sales $ 274,071 $ 115,231
Cost of sales 119,123 54,097
--------------------------
Gross profit 154,948 61,134
Operating expenses
Selling, general and administrative 37,030 21,871
Research and development 40,001 26,544
--------------------------
Total operating expenses 77,031 48,415
--------------------------
Operating income 77,917 12,719
Interest income, net 5,486 1,348
--------------------------
Income before provision for income taxes 83,403 14,067
Provision for income taxes 25,855 4,642
--------------------------
Net income $ 57,548 $ 9,425
==========================
Basic net income per share $ 0.48 $ 0.09
==========================
Diluted net income per share $ 0.45 $ 0.08
==========================
Shares used in basic calculation 120,622 107,928
==========================
Shares used in diluted calculation 129,142 113,393
==========================
See accompanying notes.
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NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------
(in thousands) Three Months Ended
(unaudited) Apr. 1, Mar. 27,
2000 1999
- ----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 57,548 $ 9,425
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,626 6,683
Deferred income taxes -- 958
Deferred compensation 632 --
Changes in operating assets and liabilities
Accounts receivable (41,647) 20,419
Inventories (16,053) (8,600)
Prepaid and other current assets (12,565) (981)
Accounts payable 10,332 (5,945)
Accrued payroll and related expenses 1,743 (2,152)
Accrued warranty 6,319 (1,788)
Other accrued liabilities 10,648 (3,930)
Income taxes payable 18,527 1,611
-------------------------
Total adjustments (13,438) 6,275
-------------------------
Net cash provided by operating activities 44,110 15,700
-------------------------
Cash flows from investing activities:
Maturities and sales (purchases) of available-for-sale
debt securities, net 20,291 (136,216)
Capital expenditures (9,419) (4,568)
Decrease (increase) in other assets 1,065 (2,997)
-------------------------
Net cash provided by (used in) investing activities 11,937 (143,781)
-------------------------
Cash flows from financing activities:
Proceeds from sale of common stock 22,758 266,378
Proceeds (payments) on lines of credit, net 6,446 (65,290)
Repurchase of common stock -- (11)
-------------------------
Net cash provided by financing activities 29,204 201,077
-------------------------
Net increase in cash and cash equivalents 85,251 72,996
Cash and cash equivalents at the beginning of the period 181,568 81,224
-------------------------
Cash and cash equivalents at the end of the period $ 266,819 $ 154,220
=========================
Supplemental Disclosures
Cash paid during the period for:
Interest $ 181 $ 918
Income taxes $ 28 $ 503
Other noncash charges:
Income tax benefits from employee stock plans $ 28,620 $ 4,429
See accompanying notes.
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NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three-month period ended April 1,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consisted of the following (in thousands):
- ----------------------------------------------------------------
April 1, 2000 Dec. 31, 1999
- ----------------------------------------------------------------
Purchased parts $81,393 $71,688
Work-in-process 33,060 29,621
Finished goods 5,221 2,574
-------- ---------
$119,674 $103,883
======== =========
3. LINES OF CREDIT
The Company has lines of credit with four banks which expire at various dates
through September 2000 under which the Company can borrow up to $20.0 million at
the banks' prime rate. These facilities are available to the Company's Japanese
subsidiary, Nippon Novellus Systems K.K. Borrowings by the subsidiary are at the
banks' offshore reference rate. At April 1, 2000 and December 31, 1999, the
amounts outstanding were $20.0 million and $13.5 million, respectively. All
borrowings outstanding under the lines of credit were by Nippon Novellus.
4. NET INCOME PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share," basic net income per common share is computed based on
weighted average common shares outstanding during the period. Diluted earnings
per share is computed using the weighted average common and dilutive common
equivalent shares outstanding during the period. Stock options are considered
common stock equivalents and are included in the diluted calculation of weighted
average shares using the treasury stock method.
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NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
--------------------------
Three Months Ended
Apr. 1, Mar. 27,
2000 1999
---------- ----------
Numerator:
Net income $ 57,548 $ 9,425
Denominator:
Denominator for basic earnings per
share-weighted-average shares
outstanding 120,622 107,928
Employee stock options 8,520 5,465
---------- ----------
Denominator for diluted earnings per
share-adjusted weighted-average
shares outstanding 129,142 113,393
========== ==========
Basic earnings per share $ 0.48 $ 0.09
========== ==========
Diluted earnings per share $ 0.45 $ 0.08
========== ==========
Options to purchase approximately 141,000 and 1,700 shares of common stock at
weighted-average prices of $54.74 and $21.19 per share were outstanding during
the periods ended April 1, 2000 and March 27, 1999, respectively, but were not
included in the computation of diluted net income per common share because the
options' exercise price was greater than the average market price of the common
shares and, therefore, the effect would be antidilutive.
5. LONG-TERM DEBT
In June 1997, the Company entered into a five year, $125.0 million, Senior
Credit Facility structured as an unsecured revolving credit line. The credit
line expires in June 2002. Borrowings, at the option of the Company, bear
interest at either a base rate plus a margin or the London Interbank Offering
Rate ("LIBOR") plus a margin for interest periods of one to six months. There
were no borrowings outstanding under the Senior Credit Facility at April 1,
2000.
The Senior Credit Facility contains certain restrictive financial covenants. At
April 1, 2000, the Company was in compliance with these covenants.
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NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. COMMITMENTS
The Company has lease agreements on twelve properties. The agreements are for
five years each with the option to extend for an additional two years at an
interest rate that approximates the LIBOR. The lease terms expire at various
dates beginning on June 2002 through September 2003. At current interest rates,
the annual lease payments total approximately $18.4 million. During the terms of
the leases, the Company may elect to purchase the properties for an amount that
approximates the lessor's cost of the property and any current rent due and
payable. These leases contain certain restrictive financial covenants. At April
1, 2000, the Company was in compliance with these covenants.
7. COMPREHENSIVE INCOME
As of January 1, 1999, the Company adopted the Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS 130 requires unrealized gains
or losses on the Company's available-for sale securities and foreign currency
translation adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income.
The following are the components of comprehensive income:
- -------------------------------------------------------------------------
Three Months Ended
April 1, 2000 March 27, 1999
- -------------------------------------------------------------------------
Net income $ 57,548 $ 9,425
Foreign currency translation adjustment (526) (398)
---------- ----------
Comprehensive income $ 57,022 $ 9,027
========== ==========
The components of accumulated other comprehensive income (loss), net of related
tax are as follows:
- -------------------------------------------------------------------------
April 1, 2000 Dec. 31, 1999
- -------------------------------------------------------------------------
Foreign currency translation adjustment $ 915 $ 1,441
========== ===========
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NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. OTHER ISSUES
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements of all public registrants. The semiconductor
capital equipment industry association and a number of association members
including the Company have met with the Staff of the SEC to discuss and evaluate
the applicability of SAB 101 and various practical implementation
considerations. We currently expect to adopt the new accounting principle
effective for the period ending July 1, 2000. Accordingly, any shipments
previously reported as revenue, including revenue reported for the first quarter
of fiscal 2000, that do not meet SAB 101's guidance will be recorded as revenue
in future periods. Changes in our revenue recognition policy resulting from the
interpretation of SAB 101 would not involve the restatement of prior financial
statements, but would, to the extent applicable, be reported as a change in
accounting principle in the quarter ending July 1, 2000. On March 24, 2000, the
Staff of the SEC issued Staff Accounting Bulletin 101A (SAB 101A), which
permitted the delay in the Company's implementation date of SAB 101 until the
second quarter of fiscal 2000. As a result of the delay in the implementation of
SAB 101, the Company's reported results of operations for the six months ending
July 1, 2000 will include a cumulative adjustment for all prior annual and
interim periods including an adjustment for revenue reported in the first
quarter of fiscal 2000 as if SAB 101 had been adopted on January 1, 2000.
Management believes that SAB 101 and 101A, to the extent that they impact us,
will not affect the underlying strength or weakness of our business operations
as measured by the dollar value of our product shipments and cash flows.
9. SUBSEQUENT EVENT
On April 25, 2000 and May 4, 2000, the Company completed a public offering of
approximately 9.0 million shares of common stock that resulted in net proceeds
to the Company of approximately $527.0 million.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the three months ended April 1, 2000 were $274.1 million, compared
with $115.2 million for the comparable year-ago quarter, and $191.7 million for
the immediately preceding quarter. The increases in net sales are due to ongoing
growth in the semiconductor industry resulting in continued capacity and
technology buys of our core products. Bookings for the first quarter of 2000
significantly exceeded the 1:1 book to bill ratio. In the second quarter of
2000, the Company anticipates sequential bookings growth, sequential revenue
growth, sequential earnings growth, and the book to bill ratio to exceed one to
one.
International net sales (including export sales) for the three months ended
April 1, 2000, were 74.7% of total net sales, which compares to the comparable
year-ago period of 59.9% and 64.9% for the immediately preceding quarter. The
increase from the comparable year ago period is primarily due to higher net
sales in Taiwan, Japan and Europe. The increase over the preceding quarter
relates primarily to higher net sales in Korea and Japan.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements of all public registrants. The semiconductor
capital equipment industry association and a number of association members
including the Company have met with the Staff of the SEC to discuss and evaluate
the applicability of SAB 101 and various practical implementation
considerations. We currently expect to adopt the new accounting principle
effective for the period ending July 1, 2000. Accordingly, any shipments
previously reported as revenue, including revenue reported for the first quarter
of fiscal 2000, that do not meet SAB 101's guidance will be recorded as revenue
in future periods. Changes in our revenue recognition policy resulting from the
interpretation of SAB 101 would not involve the restatement of prior financial
statements, but would, to the extent applicable, be reported as a change in
accounting principle in the quarter ending July 1, 2000. On March 24, 2000, the
Staff of the SEC issued Staff Accounting Bulletin 101A (SAB 101A), which
permitted the delay in the Company's implementation date of SAB 101 until the
second quarter of fiscal 2000. As a result of the delay in the implementation of
SAB 101, the Company's reported results of operations for the six months ending
July 1, 2000 will include a cumulative adjustment for all prior annual and
interim periods including an adjustment for revenue reported in the first
quarter of fiscal 2000 as if SAB 101 had been adopted on January 1, 2000.
Management believes that SAB 101 and 101A, to the extent that they impact us,
will not affect the underlying strength or weakness of our business operations
as measured by the dollar value of our product shipments and cash flows.
Gross profit as a percentage of net sales for the three months ended April 1,
2000 was 56.5%, compared with 55.6% for the immediately preceding quarter and
53.1% for the comparable year-ago period. The increases in gross margin are due
to improved absorption of fixed overhead costs due to the increased level of
shipments.
Selling, general and administrative expenses for the three months ended April 1,
2000 were $37.0 million compared with $21.9 million in the comparable year-ago
quarter, and $29.9 million from the immediately preceding quarter. Selling,
general and administrative expenses as a percentage of net sales for the three
months ended April 1, 2000 were 13.5% compared with 19.0% for the comparable
year-ago quarter, and 15.6% for the immediately preceding quarter.
The increases in absolute dollars from the comparable year-ago period and
immediate preceding quarter are primarily due to increased costs associated with
the growth in
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net sales. The decreases in selling, general and administrative expenses as a
percentage of net sales are primarily due to increasing net sales coupled with
the Company's on-going efforts to minimize and control selling, general and
administrative costs.
Research and development (R&D) expenses for the three months ended April 1, 2000
were $40.0 million compared with $26.5 million for the comparable year-ago
quarter, and $32.6 million for the immediately preceding quarter. R&D expenses
as a percentage of net sales for the three months ended April 1, 2000 were 14.6%
compared with the 23.0% for the comparable year-ago period, and 17.0% for the
immediately preceding quarter. R&D expenses as a percentage of net sales
continues to decrease quarter over quarter, although in absolute dollars it
continues to increase reflecting Novellus' continuing commitment to the
development of new products. These products include additional Concept Two
modules, advanced PVD systems, electrofill systems, advanced "gap fill"
technology, primary conductor metals, low K dielectric materials and additional
advanced technologies for the next generation of smaller geometry fabrication
lines, as well as equipment to process 300mm wafers.
Net interest income for the three months ended April 1, 2000 was $5.5 million
compared with $1.3 million for the comparable year-ago quarter, and $5.2 million
recorded in the immediately preceding quarter. The increases in net interest
income over the comparable year-ago quarter and the immediate preceding quarter
are primarily due to increased cash and short-term investment balances.
The Company's effective tax rate for the three months ended April 1, 2000 was
31% compared with 33% for the immediately preceding quarter and the comparable
year-ago period. The decrease in the effective tax rate is due to the increased
benefit from tax credits for 2000.
Deferred tax assets were $54.6 million, net of valuation allowances of $13.0
million and $13.8 million at April 1, 2000 and December 31, 1999, respectively.
The Company believes that it is more likely than not that these assets will be
realized by an offset against the recognized tax liability of $18.3 million for
both April 1, 2000 and December 31, 1999, and by future taxable income.
Net income for the three months ended April 1, 2000 was $57.5 million or $0.45
per share compared with $9.4 million or $0.08 per share for the comparable
year-ago period, and $33.0 million or $0.27 per share for the immediately
preceding quarter.
The number of shares used in the per share calculations for the three months
ended April 1, 2000 was 129.1 million compared with 113.4 million for the
comparable year-ago period and 124.3 million for the immediately preceding
period. The increase in shares used for both the comparable year-ago period and
the immediate preceding quarter is due to an increased number of common stock
equivalents.
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EURO CONVERSION
On January 1, 1999, several member countries of the European Union established
fixed conversion rates between their existing sovereign currencies and adopted
the Euro as their new common legal currency. As of that date, the Euro traded on
currency exchanges and the legacy currencies remain legal tender in the
participating countries for a transition period between January 1, 1999 and
January 1, 2002. During the transition period, non-cash payments can be made in
the Euro, and parties can elect to pay for goods and services and transact
business using either the Euro or legacy currency. Between January 1, 1999 and
January 1, 2002 the participating countries will introduce Euro notes and coins
and withdraw all legacy currencies so that they will no longer be available. The
Euro conversion may affect cross-border competition by creating cross-border
transparency. The Company is assessing its pricing/marketing strategy in order
to ensure that it remains competitive in a broader European market. The Company
is also assessing its information technology systems to allow for transactions
to take place in both legacy currencies and the Euro and the eventual
elimination of the legacy currencies, and reviewing whether certain existing
contracts will need to be modified. The Company's currency risk for operations
in participating countries may be reduced as the legacy currencies are converted
to the Euro.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and capital resources
through cash flow from operations, sales of equity securities and borrowings.
The Company's primary sources of funds at April 1, 2000 consisted of $450.2
million of cash, cash equivalents and short-term investments. This amount
represents an increase of $65.0 million from the December 31, 1999 balance of
$385.3 million. During the second quarter of 1997, the Company entered into a
five year $125 million Senior Credit Facility structured as an unsecured
revolving credit line. The borrowings, at the option of the Company, bear
interest at either a base rate plus a margin or the LIBOR plus a margin for
interest periods of one to six months. During March 1999, total borrowings of
$65 million under the Senior Credit Facility were repaid. The Senior Credit
Facility requires the Company to be in compliance with certain financial
covenants. At April 1, 2000, the Company was in compliance with these financial
covenants. In addition, at April 1, 2000, there was $20.0 million available
under bank lines of credit that expire at various dates through September 2000.
At April 1, 2000, approximately $20.0 million was outstanding under these bank
lines of credit, which bear interest at the banks' prime lending rates or
offshore reference rates.
During the three months ended April 1, 2000, the Company's cash and cash
equivalents increased $85.3 million to $266.8 million from $181.6 million at
December 31, 1999. Net cash provided by operating activities during the first
three months of 2000 was $44.1 million due primarily to net income of $57.5
million, non-cash depreciation and amortization charges of $8.6 million, and
increases in income taxes payable, other accrued liabilities and accounts
payable of $18.5 million, $10.6 million and $10.3 million, respectively. These
amounts were partially offset by increases in accounts receivable of $41.6
million and inventories of $16.1 million.
Net cash flows provided by investing activities were $11.9 million during the
first three months of 2000. During this period, the Company had net sales of
$20.3 million of available-for-sale debt securities. These amounts were
partially offset by capital expenditures of $9.4 million during the period.
The Company expects investments in property and equipment in the current fiscal
year to approximate $64.0 million of which $9.4 million had been incurred as of
April 1, 2000. The Company intends to finance these investments from existing
cash balances and cash flows from operations.
During the first three months of 2000, net cash provided by financing activities
increased $29.2 million due primarily to $22.8 million of proceeds from the
issuance of common stock related to the exercise of employee stock options. In
addition, the Company received proceeds of $6.4 million under one of its bank
lines of credit.
On April 25, 2000 and May 4, 2000, the Company completed a public offering of
approximately 9.0 million shares of common stock that resulted in net proceeds
to the Company of approximately $527.0 million.
The Company believes that its current cash position and cash generated through
operations, if any, will be sufficient to meet the Company's needs through at
least the next twelve months.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not Applicable.
Statement Regarding Forward-Looking Statements Under
The Private Securities Litigation Reform Act of 1995
----------------------------------------------------
The statements contained in this Report on Form 10-Q that are not purely
historical in nature are "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21 E of the Securities
Exchange Act of 1934, including, without limitation, statements regarding the
Company's estimations, anticipations, determinations, commitments, expectations,
plans, hopes, beliefs, intentions or strategies regarding the future. Forward
looking statements include, without limitation, the statement regarding the
Company's anticipations as to sequential bookings growth, sequential revenue
growth, sequential earnings growth, and the book to bill ratio exceeding one to
one in the second quarter of 2000, the Company's increasing commitment to the
development of new products, the Company's possible reduction of currency risk,
the Company's belief as to the realization of tax assets, the statements
regarding the Company's beliefs as to the sufficiency of its current cash
position to meet the Company's needs, the Company's expectations as to the
amount of its property and equipment investments in the current fiscal year, and
the Company's intention to finance such investments from existing cash balances
and cash flows from operations. These forward-looking statements involve risks
and uncertainties including, but not limited to, domestic and international
economic conditions, product demand and industry capacity, competitive products
and pricing, manufacturing efficiencies, new product development, ability to
enforce patents, the outcome of availability of raw materials and critical
manufacturing equipment, new plant startups, the regulatory and trade
environment, and other risks indicated in filings with the Securities and
Exchange Commission (SEC). Actual results may differ materially. Novellus
assumes no obligation to update this information. For more details, please refer
to other SEC filings, including the Company's most recent Annual Report on Form
10-K and Quarterly Reports on Form 10-Q.
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PART II: OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
APPLIED LITIGATION
On July 7, 1997, prior to the consummation of the purchase of TFS from Varian,
Applied filed a complaint (the "Applied Complaint") against Varian in the United
States District Court for the Northern District of California San Jose Division,
Civil Action No. C-97-20523 RMW, alleging, among other things, infringement by
Varian (including the making, using, selling and/or offering for sale of certain
products and systems made by TFS) of United States Patent Nos. 5,171,412,
5,186,718, 5,496,455 and 5,540,821 (the "Applied Patents"), which patents are
owned by Applied.
Immediately after consummation of the TFS purchase, the Company filed a
complaint (the "Company Complaint") against Applied in the same Court, Civil
Action No. C-97-20551 RMW, alleging infringement by Applied (including the
making, using, selling and/or offering for sale of certain products and systems)
of United States Patent Nos. 5,314,597, 5,330,628, and 5,635,036 (the "Company
Patents"), which patents the Company acquired from Varian in the TFS purchase.
In the Company Complaint, the Company also alleged that it is entitled to
declarations from Applied that the Company does not infringe the Applied Patents
and/or that the Applied Patents are invalid and/or unenforceable. Applied has
filed counterclaims alleging that the Company infringes the Applied Patents.
Also after consummation of the TFS purchase, but some time after the Company
filed the Company Complaint, Applied amended the Applied Complaint to add the
Company as a defendant. The Company has requested that the Court dismiss the
Company as a defendant in Applied's lawsuit against Varian. The Court has not
yet required the Company to file an answer to the Applied Complaint.
In addition to a request for a permanent injunction against further
infringement, the Applied Complaint and Applied's counterclaims to the Company
Complaint include requests for damages for alleged prior infringement and treble
damages for alleged "willful" infringement. In connection with the consummation
of the TFS purchase, Varian agreed, under certain circumstances, to reimburse
the Company for certain of its legal and other expenses in connection with the
defense and prosecution of this litigation, and to indemnify the Company for a
portion of any losses incurred by the Company arising from this litigation
(including losses resulting from a permanent injunction). The Company and Varian
believe that there are meritorious defenses to Applied's allegations, including
among other things, that the Company's operations (including TFS products and
systems) do not infringe the Applied Patents and/or that the Applied Patents are
invalid and/or unenforceable. However, the resolution of intellectual property
disputes is often fact intensive and, therefore, inherently uncertain. Although
the Company believes that the ultimate outcome of the dispute with Applied will
not have a material adverse effect on the Company's business or results of
operations (taking into account both the defenses available to the Company and
Varian's reimbursement and indemnity obligations), there can be no assurances
that Applied will not ultimately prevail in this dispute and that, in such an
event, Varian's reimbursement and indemnity obligations will not be sufficient
to fully reimburse the Company for its losses. If Applied were to prevail in
this dispute, it could have a material adverse effect on the Company's business
or results of operations.
15
16
The Company Complaint against Applied also includes requests for damages for
prior infringement and treble damages for "willful" infringement, in addition to
a request for a permanent injunction for further infringement. Although the
Company believes that it will prevail against Applied, there can be no
assurances that the Company will prevail in its litigation against Applied. If
Applied were to prevail against the Company Complaint, it could have a material
adverse effect on the Company's business, financial condition or results of
operations.
On July 13, 1999, in the Company lawsuit against Applied where the Company has
alleged that Applied infringes Company patents, the Court ruled on the
interpretation of the claims of the Company patents. On September 20, 1999, in
the Applied lawsuit against Varian and the Company, where Applied has alleged
that Varian and the Company infringe Applied patents, the Court ruled on the
interpretation of the claims of the Applied patents. On January 14, 2000,
Applied withdrew its U.S. Patent No. 5,496,455 from the lawsuits against the
Company and Varian.
On March 16, 2000, the Court granted Varian's motion for summary judgement that
claims 14 & 18 of Applied's U.S. Patent No 5,171,412 are invalid. In the same
order, the Court gave Applied 3 months to conduct discovery concerning an issue
relating to Varian's motion for summary judgement that claim 21 is invalid.
After that discovery period, Varian may renew its motion to invalidate claim 21.
SEMITOOL LITIGATION
On August 10, 1998, Semitool sued the Company for patent infringement in the
United States District Court for the Northern District of California. Semitool
alleges that the Company's SABRE(TM) copper deposition system infringes two
Semitool patents, U.S. Patent No. 5,222,310, issued June 29, 1993, entitled
"Single Wafer Processor with a Frame," and U.S. Patent No. 5,377,708, issued
January 3, 1995, entitled "Multi-Station Semiconductor Processor with
Volatilization." Semitool seeks an injunction against the Company's manufacture
and sale of SABRE(TM) systems, and seeks damages for past infringement. Semitool
also seeks trebled damages for alleged willful infringement. Semitool also seeks
its attorneys' fees and costs, and interest on any judgement.
On September 24, 1999, the Court ruled on the interpretation of the claims of
the Semitool patents. On December 18, 1999, Novellus filed a motion for summary
judgement of non-infringement. On February 18, 2000, the Court heard oral
arguments on Novellus' motion.
On March 17, 2000, the Court granted the Company's motion for summary judgement
of non-infringement. The Court ruled that the Company's SABRE and SABRE xT
systems do not infringe on the two patents asserted by Semitool.
PLASMA PHYSICS LITIGATION
On December 28, 1999, Plasma Physics Corporation and Solar Physics Corporation
filed a patent infringement lawsuit against many of the Company's Japanese and
Korean customers. The suit is entitled Plasma Physics Corp v. Fujitsu, Ltd., 99
Civ. 8593, and is pending in the United States District Court for the Eastern
District of New York. Plasma Physics has asserted U.S. Patent Nos. 4,226,897,
5,470,784, and 5,543,634. Many of the defendants have notified the Company that
they believe that the Company has indemnification obligations and liability for
the lawsuit. Plasma Physics has not yet identified what, if any, of the
Company's equipment used by the customers is accused of infringement.
16
17
Plasma Physics seeks an injunction against the defendants' alleged infringement
of the `784 and `634 patents (the `897 patent has expired). Plasma Physics also
seeks trebled damages for alleged willful infringement. Plasma Physics also
seeks its attorneys' fees and costs, and interest on any judgement.
The Company believes that there are meritorious defenses to Plasma Physics'
allegations, including among other things, that the defendants' use of the
Company's equipment does not infringe the Plasma Physics patents and/or that the
Plasma Physics patents are invalid and/or unenforceable. But the resolution of
intellectual property disputes is often fact intensive and, like most other
litigation matters, inherently uncertain. Although the Company believes that the
ultimate outcome of the dispute with Plasma Physics will not have a material
adverse effect on the Company's business, financial condition, or results of
operations (taking into account the defenses available to the Company), there
can be no assurances that Plasma Physics will not ultimately prevail in this
dispute and that the Company will not have any indemnity obligations or
liability. If Plasma Physics were to prevail in the dispute, it could have a
material adverse effect on the Company's business, financial condition or
results of operations.
17
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Not Applicable
Report on Form 8-K dated April 19, 2000 filing a copy of
the underwritten agreement related to the underwritten
offering of up to 9,047,379 shares of the Company's common
stock pursuant to a registered public offering.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOVELLUS SYSTEMS, INC.
----------------------
REGISTRANT
/s/ Robert H. Smith
--------------------------------------------
Robert H. Smith
Executive Vice President
Finance and Administration
(Principal Chief Financial Officer)
/s/ Kevin Royal
--------------------------------------------
Kevin Royal
Corporate Controller
(Principal Chief Accounting Officer)
May 16, 2000
------------
Date
18
19
EXHIBIT INDEX
EXHIBIT # DESCRIPTION
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27.1 Financial Data Schedule