1
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 June 30, 2001
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 August 2, 2001 143,200,068 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 JUNE 30, 2001
INDEX
Page
Part I: Financial Information
Item 1: Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at
June 30, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Income
for the three and six months ended June 30, 2001
and July 1, 2000 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2001
and July 1, 2000 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Item 3: Quantitative and Qualitative Disclosures About
Market Risk 16
Part II: Other Information
Item 1: Legal Proceedings 17
Item 4: Submission of Matters to a Vote of Security
Holders 22
Item 6: Exhibits and Reports on Form 8-K 23
Signatures 23
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PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
- --------------------------------------------------------------------------------
June 30, December 31,
2001 2000
(Restated)
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 708,428 $ 589,415
Short-term investments 545,889 630,249
Accounts receivable, net 299,285 401,291
Inventories 272,311 201,672
Deferred taxes 94,571 137,929
Prepaid and other current assets 46,832 14,279
----------- -----------
Total current assets 1,967,316 1,974,835
Property and equipment:
Machinery and equipment 245,331 212,836
Furniture and fixtures 11,387 11,038
Leasehold improvements 79,351 60,690
Land 8,782 8,782
----------- -----------
344,851 293,346
Less accumulated depreciation and amortization 158,958 141,791
----------- -----------
Property and equipment, net 185,893 151,555
Other assets 74,102 79,084
----------- -----------
Total Assets $ 2,227,311 $ 2,205,474
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 92,415 $ 123,023
Accrued payroll and related expenses 56,210 70,211
Accrued warranty 52,872 51,343
Other accrued liabilities 40,009 46,187
Income taxes payable 7,800 57,720
Deferred profit 98,618 193,913
Current obligations under lines of credit 27,547 21,602
----------- -----------
Total current liabilities 375,471 563,999
Shareholders' equity:
Common stock 1,260,381 1,200,718
Retained earnings 594,815 453,250
Accumulated other comprehensive loss (3,356) (12,493)
----------- -----------
Total shareholders' equity 1,851,840 1,641,475
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,227,311 $ 2,205,474
=========== ===========
See accompanying notes.
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NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(in thousands, except per share data) Three Months Ended Six Months Ended
(unaudited) June 30, July 1, June 30, July 1,
2001 2000 2001 2000
(Restated) (Restated)
--------- --------- --------- ---------
Net sales $ 376,899 $ 363,963 $ 835,604 $ 583,921
Cost of sales 177,275 161,982 380,995 264,775
--------- --------- --------- ---------
Gross profit 199,624 201,981 454,609 319,146
Operating expenses
Selling, general and administrative 54,468 55,043 123,374 102,865
Research and development 72,707 47,218 143,198 87,903
Merger related costs -- -- 13,160 --
--------- --------- --------- ---------
Total operating expenses 127,175 102,261 279,732 190,768
--------- --------- --------- ---------
Operating income 72,449 99,720 174,877 128,378
Interest income, net 13,379 13,718 29,939 19,511
--------- --------- --------- ---------
Income before provision for income taxes
and cumulative effect of change in
accounting principle 85,828 113,438 204,816 147,889
Provision for income taxes 26,607 35,227 63,493 45,861
--------- --------- --------- ---------
Income before cumulative effect of
change in accounting principle 59,221 78,211 141,323 102,028
Cumulative effect of change in
accounting principle, net of tax -- -- -- (89,788)
--------- --------- --------- ---------
Net income $ 59,221 $ 78,211 $ 141,323 $ 12,240
========= ========= ========= =========
Net income per share:
Basic per share amounts:
Income before cumulative effect of
change in accounting principle $ 0.42 $ 0.58 $ 1.00 $ 0.77
Cumulative effect of change in
accounting principle -- -- -- $ (0.68)
--------- --------- --------- ---------
Basic net income per share $ 0.42 $ 0.58 $ 1.00 $ 0.09
========= ========= ========= =========
Diluted per share amounts:
Income before cumulative effect of
change in accounting principle $ 0.40 $ 0.54 $ 0.95 $ 0.73
Cumulative effect of change in
accounting principle -- -- -- $ (0.64)
--------- --------- --------- ---------
Diluted net income per share $ 0.40 $ 0.54 $ 0.95 $ 0.09
========= ========= ========= =========
Shares used in basic calculations 142,267 135,759 141,638 132,002
========= ========= ========= =========
Shares used in diluted calculations 149,643 144,249 148,876 140,663
========= ========= ========= =========
See accompanying notes.
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NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(in thousands) Six Months Ended
(unaudited) June 30, July 1,
2001 2000
(restated)
----------- -----------
Cash flows from operating activities:
Net income $ 141,323 $ 12,240
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle -- 89,788
Depreciation and amortization 22,809 21,184
Deferred income taxes 43,358 (15,960)
Deferred compensation 725 1,013
Adjustment to conform fiscal year end of GaSonics 863 --
Changes in operating assets and liabilities
Accounts receivable 102,006 (21,895)
Inventories (73,184) (37,344)
Prepaid and other current assets (32,553) (2,031)
Accounts payable (30,608) 44,974
Accrued payroll and related expenses (14,001) 11,538
Accrued warranty 1,529 15,514
Other accrued liabilities (6,178) 8,617
Income taxes payable (49,920) 14,136
Deferred profit (95,295) (10,380)
Income tax benefits from employee stock plans 24,311 32,408
----------- -----------
Total adjustments (106,138) 151,562
----------- -----------
Net cash provided by operating activities 35,185 163,802
----------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities (980,500) (289,540)
Maturities and sales of available-for-sale securities 1,073,177 303,636
Capital expenditures (49,355) (39,475)
Decrease (increase) in other assets 555 4,095
----------- -----------
Net cash provided by (used in) investing activities 43,877 (21,284)
----------- -----------
Cash flows from financing activities:
Proceeds from employee compensation plans 34,006 30,097
Proceeds from lines of credit, net 5,945 3,224
Proceeds from common stock offering -- 526,265
----------- -----------
Net cash provided by financing activities 39,951 559,586
----------- -----------
Net increase in cash and cash equivalents 119,013 702,104
Cash and cash equivalents at the beginning of the period 589,415 198,426
----------- -----------
Cash and cash equivalents at the end of the period $ 708,428 $ 900,530
=========== ===========
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 with 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 and six month periods ended
June 30, 2001 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2001. For further information, refer to the
restated combined consolidated financial statements and footnotes thereto for
the year ended December 31, 2000, included in Novellus' Form 8-K dated June 1,
2001.
Certain amounts in the prior year balances have been reclassified to conform to
current year presentation.
On January 10, 2001, Novellus acquired GaSonics International Corporation
(GaSonics), a developer and supplier of photoresist and residue removal
technologies. At the completion of the merger, GaSonics became a wholly owned
subsidiary of Novellus. The GaSonics merger was accounted for as a
pooling-of-interests combination for financial reporting purposes in accordance
with generally accepted accounting principles and accordingly, Novellus'
historical consolidated financial statements presented have been restated to
include the financial position, results of operations, and cash flows of
GaSonics. The condensed consolidated financial statements for July 1, 2000
include results of Novellus' operations and balance sheet data on a December 31
fiscal year basis and GaSonics' results and balance sheet data on a September 30
fiscal year basis. In the transaction, Novellus acquired all outstanding shares
of GaSonics in a stock-for-stock merger, with all outstanding shares of GaSonics
capital stock converted into approximately 9,240,000 shares of Novellus common
stock. In addition, all outstanding options to purchase shares of GaSonics
capital stock were automatically converted into options to purchase
approximately 1,400,000 shares of Novellus common stock. There were no
transactions between GaSonics and Novellus prior to the combination.
The following information shows revenue and net income of the separate companies
for the periods preceding the combination. Information related to GaSonics is
for the three and six months ended March 31, 2000 (in thousands).
Conforming
Novellus GaSonics Adjustments Combined
-------- -------- -------- --------
Three months ended
July 1, 2000
Revenue $334,999 $ 33,705 $ (4,741) $363,963
Net income 77,222 3,602 (2,613) 78,211
Six months ended
July 1, 2000
Revenue $533,713 $ 59,308 $ (9,100) $583,921
Net income 17,172 4,940 (9,872) 12,240
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NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Revenue and net income of GaSonics for the three-month period ended December 31,
2000, which is excluded in the accompanying financial statements was $47.7
million and $863,000, respectively. Included in the accompanying condensed
consolidated statement of income for the six months ended June 30, 2001 are
merger related expenses totaling $13.2 million consisting primarily of
professional fees, financial printing, and other related costs. Additionally,
these costs included charges related to vacating certain service agreements and
the write-off of certain redundant assets. Conforming adjustments consist of an
adjustment to the provision for income taxes for the realization of deferred tax
assets in fiscal 1999, rather than in fiscal 2000, adjustments related to
adoption of Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" as of October 1, 1999, and certain reclassifications to comply with
Novellus' accounting policies.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Revenue Recognition in Financial Statements
Novellus changed its revenue recognition policy effective January 1, 2000, based
on guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB 101),
"Revenue Recognition in Financial Statements." Novellus recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the seller's price is fixed and determinable and
collectibility is reasonably assured. Certain of Novellus' product sales are
accounted for as multiple-element arrangements. If Novellus has met defined
customer acceptance experience levels with both the customer and the specific
type of equipment, Novellus recognizes equipment revenue upon shipment and
transfer of title, with the remainder when it becomes due (generally upon
acceptance). All other product sales with customer acceptance provisions are
recognized upon customer acceptance. Revenue related to spare part sales is
recognized on shipment. Revenue related to maintenance and service contracts is
recognized ratably over the duration of the contracts.
In accordance with guidance provided in SAB 101, Novellus recorded a non-cash
charge of $89.8 million (after reduction for income taxes of $48.6 million), or
($0.64) per share for the six months ended June 30, 2001, to reflect the
cumulative effect of the accounting change as of the beginning of the fiscal
year. During the three and six months ended July 1, 2000, Novellus recognized
revenue of $110.6 million and $165.6 million, respectively, that was included in
the cumulative effect adjustment as of January 1, 2000, which increased income
by $44.4 million and $66.9 million, respectively, net of tax, for the three and
six months ended July 1, 2000. There was no amount of revenue recorded in the
three and six months ended June 30, 2001 that was included in the cumulative
effect adjustment as of January 1, 2000.
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NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Accounting for Derivative Instruments and Hedging Activities
On January 1, 2001, Novellus adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133), which establishes accounting and reporting standards for derivative
instruments, including forward exchange contracts, and hedging activities. SFAS
133 requires Novellus to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative are either offset against the change
in fair value of assets, liabilities, or firm commitments through earnings (fair
value hedges) or recognized in other comprehensive income until the hedged item
is recognized in earnings (cash flow hedges). The ineffective portion of a
derivative's change in fair value is immediately recognized in earnings. The
adoption of SFAS 133 did not have a material impact on Novellus' consolidated
financial position or operating results.
Business Combinations and Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141), and
No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), effective for fiscal
years beginning after December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with SFAS 141 and
142. Other intangible assets will continue to be amortized over their useful
lives.
Novellus will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of SFAS 142 is expected to result in an increase in
net income of $3.5 million per year. During 2002, Novellus will perform the
first of the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002. At this time, Novellus is unable to
determine the effect of these tests on its earnings and financial position.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consisted of the following (in thousands):
Jun. 30, 2001 Dec. 31, 2000
-------- --------
Purchased parts $195,478 $135,204
Work-in-process 69,975 56,997
Finished goods 6,858 9,471
-------- --------
$272,311 $201,672
======== ========
4. LINES OF CREDIT
Novellus has lines of credit with three banks which expire at various dates
through May 2002 under which Novellus can borrow up to $36.6 million at rates
that approximate the banks' prime rates. These facilities are available to
Novellus' Japanese subsidiaries, Nippon Novellus Systems K.K. and GaSonics
International Corporation K.K.
5. NET INCOME PER SHARE
Earnings per share is calculated in accordance with SFAS No. 128. Basic earnings
per share exclude the dilutive effect of employee stock options. Diluted
earnings per share includes the dilutive effect of employee stock options.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
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NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three Months Ended Six Months Ended
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
--------- --------- --------- ---------
Numerator:
Income before cumulative
effect of change in
accounting principle 59,221 78,211 141,323 102,028
Cumulative effect of change
in accounting principle -- -- -- (89,788)
--------- --------- --------- ---------
Net income $ 59,221 $ 78,211 $ 141,323 $ 12,240
========= ========= ========= =========
Denominator:
Basic weighted-average
shares outstanding 142,267 135,759 141,638 132,002
Employee stock options 7,376 8,490 7,238 8,661
--------- --------- --------- ---------
Diluted weighted-average
shares outstanding 149,643 144,249 148,876 140,663
========= ========= ========= =========
Basic earnings per share $ 0.42 $ 0.58 $ 1.00 $ 0.09
========= ========= ========= =========
Diluted earnings per share $ 0.40 $ 0.54 $ 0.95 $ 0.09
========= ========= ========= =========
6. LONG-TERM DEBT
During the second quarter of 1997, Novellus entered into a five year $125.0
million Senior Credit Facility structured as an unsecured revolving credit line.
Novellus terminated the Senior Credit Facility on June 8, 2001.
7. COMMITMENTS
On April 13, 2001 and April 18, 2001, Novellus entered into two additional lease
agreements, increasing the total number of properties under lease agreements to
fourteen. One agreement refinanced an already existing property, while the other
agreement added a property under the lease agreements. The agreements are for
five years each with the option to extend for three one-year renewal periods at
an interest rate that is based on LIBOR plus a margin. These lease terms expire
at various dates beginning June 2002 through April 2006.
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NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
At current interest rates, the annual lease payments total approximately $15.0
million. Additionally, Novellus has unborrowed financing facilities which will
increase its annual lease payments by approximately $8.9 million once these
lines are utilized. During the terms of the leases, Novellus 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. In connection with its sale of $880 million of
debentures on July 26, 2001 discussed in Note 9 below, Novellus was not,
following the closing of the sale of the debentures, in compliance with all of
these covenants. Novellus has, however, secured a temporary waiver of certain of
these covenants until September 24, 2001, at which time Novellus believes it
will have reached agreement on a permanent waiver or a change in the covenants.
8. COMPREHENSIVE INCOME
The following are the components of comprehensive income:
Three Months Ended Six Months Ended
Jun. 30, Jul. 1, Jun. 30, Jul. 1,
2001 2000 2001 2000
(Restated) (Restated)
-------- -------- -------- --------
Net income $ 59,221 $ 78,211 $141,323 $ 12,240
Foreign currency translation
adjustment (1,391) (455) 820 (1,032)
Unrealized gain on available-
for-sale securities 2,991 590 8,317 590
-------- -------- -------- --------
Comprehensive income $ 60,821 $ 78,346 $150,460 $ 11,798
======== ======== ======== ========
The components of accumulated other comprehensive loss, net of related tax are
as follows:
Jun. 30, Dec. 31,
2001 2000
-------- --------
Foreign currency translation
adjustment $ (1,482) $ (2,302)
Unrealized loss on available-
for-sale securities (1,874) (10,191)
-------- --------
$ (3,356) $(12,493)
======== ========
9. SUBSEQUENT EVENT
On July 26, 2001, Novellus issued and sold $880 million of Liquid Yield
Option(TM) Notes (LYONs) due July 26, 2031. The net proceeds from the LYONs
offering were $862.4 million. The LYONs are zero-coupon, subordinated debentures
that may be converted into shares of Novellus common stock, subject to specified
conditions as set forth in the indenture. The LYONs are convertible into 13.0950
shares of Novellus common stock per LYON, subject to antidilutive adjustments.
Certain proceeds from the sale of the LYONs have been pledged into a pledge
account to secure Novellus' obligations under the LYONs until July 26, 2002.
Novellus may be required to purchase some or all of the LYONs on July 26, 2002
for cash. Additionally, Novellus has the option of redeeming the LYONs on or
after July 26, 2004 for cash. Upon expiration of the obligations under the
pledge account, Novellus intends to use the net proceeds of the offering, if
any, for general corporate purposes.
Novellus may be obligated to pay contingent interest on the LYONs during the
six-month period commencing July 27, 2004 and during any six-month period
thereafter if the average market price of a LYON for a certain measurement
period immediately preceding the applicable six-month period equals 120% or
more of the issue price of the LYONs. The amount of contingent interest payable
during any six-month period will be the sum of any contingent interest payable
in the first and the second three-month periods during such six-month period.
During any three-month period in which contingent interest is payable, the
contingent interest payable per LYON for such period will be equal to the
greater of (1) .0625% of the average market price of a LYON for the measurement
period referred to above, or (2) the sum of all regular cash dividends paid by
us per share on our common stock during such three-month period multiplied by
the number of shares of common stock issuable upon conversion of a LYON at the
then applicable conversion rate.
As a result of the sale of the LYONs and the grant of the security interests
contemplated by the LYONs, Novellus would, absent a waiver, have been in
violation of certain covenants, which could have given rise to defaults, under
certain of Novellus' real property leases (the "Lease Agreements") and
participation agreements for those leases (the "Participation Agreements"). The
outstanding lease amounts under such leases aggregated approximately $300
million at June 30, 2001. Novellus has obtained temporary waivers of such
covenants which waivers will, unless extended, expire on September 24, 2001.
Novellus is currently seeking permanent waivers of the relevant covenants under
the Participation Agreements. Novellus is also evaluating restructuring and
refinancing options for Novellus' real property Lease Agreements and
Participation Agreements which, if timely obtained, would eliminate the need
for the permanent waivers. While Novellus believes it will be successful in
securing the necessary amendments or waivers or in concluding any restructuring
or refinancing in a timely manner, failure to obtain the amendments or waivers
or to restructure or refinance the real property leases could result in
defaults under as well as increases in rental payments under the Lease
Agreements and the Participation Agreements.
In the event of such defaults, the lessors and their participants under the
Lease Agreements and Participation Agreements could require Novellus to purchase
the real properties covered thereby for the outstanding aggregate lease amounts
of approximately $300 million and pay related costs and other expenses
associated with the early termination of the Lease Agreements. In addition,
because the Lease Agreements are off balance sheet transactions under generally
accepted accounting principles, any such purchases could result in substantial
depreciation expenses (in excess of Novellus' current lease payments) that
Novellus would be required to recognize over a substantial period of time, which
could negatively impact Novellus' results of operations, earnings per share and
the trading performance of its Common Stock and LYONs.
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NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10. LITIGATION
For a discussion of legal matters, see Part II: Other Information, Item 1: Legal
Proceedings.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. All statements included in this Quarterly Report, other than statements
that are purely historical, are forward-looking statements. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions also identify forward-looking statements. These
forward-looking statements, which include statements about Novellus' beliefs,
expectations and intentions regarding the future and current litigation are not
guarantees of future performance and are subject to risks and uncertainties that
could cause actual results to differ materially from the results contemplated by
the forward-looking statements.
Forward-looking statements in this Quarterly Report include, without limitation:
Novellus' expectation that investments in property and equipment in fiscal 2001
will approximate $77.0 million; Novellus' intent to finance its investments in
property and equipment in fiscal 2001 from existing cash balances and cash flows
from operations; Novellus' intent to use certain proceeds of its July 2001
debentures offering for general corporate purposes; Novellus' belief that its
current cash position and cash generated through operations will be sufficient
to meet Novellus' needs through at least the next twelve months; Novellus'
belief that there are meritorious defenses in the Applied Materials, Semitool
and Plasma Physics litigation matters; and Novellus' beliefs with respect to the
outcomes of the Applied Materials, Semitool and Plasma Physics litigation
matters and current patent infringement inquiries.
All forward-looking statements included in this Quarterly Report are based on
information available to Novellus on the date hereof, and Novellus assumes no
obligation to update any such forward-looking statements. You are cautioned not
to place undue reliance on such statements, which speak only as of the date of
this Quarterly Report. You should also consult the cautionary statements and
risk factors listed from time to time in Novellus' Reports on Forms 10-Q, 8-K,
10-K and its Annual Reports to Shareholders, including Novellus' most recent
Annual Report on Form 10-K for the year ended December 31, 2000.
RESULTS OF OPERATIONS
On January 10, 2001, Novellus acquired GaSonics International Corporation
(GaSonics), a developer and supplier of photoresist and residue removal
technologies. At the completion of the merger, GaSonics became a wholly owned
subsidiary of Novellus. The GaSonics merger was accounted for as a
pooling-of-interests combination for financial reporting purposes in accordance
with generally accepted accounting principles and accordingly, Novellus'
historical consolidated financial statements have been restated to include the
accounts and results of operations of GaSonics. In the transaction, Novellus
acquired all outstanding shares of GaSonics in a stock-for-stock merger, with
all outstanding shares of GaSonics capital stock converted into approximately
9,240,000 shares of Novellus common stock. In addition, all outstanding options
to purchase shares of GaSonics capital stock were automatically converted into
options to purchase approximately 1,400,000 shares of Novellus common stock.
There were no transactions between GaSonics and Novellus prior to the
combination and certain adjustments were necessary to conform GaSonics'
accounting policies to Novellus' accounting policies.
Net sales for the three and six months ended June 30, 2001 were $376.9 million
and $835.6 million, respectively. Net sales for the three and six months ended
July 1, 2000 were $364.0 million and $583.9 million, respectively. Net sales
were $458.7 million in the quarter ended March 31, 2001. The increases in net
sales over the comparable year-ago periods are primarily due to the recognition
of prior quarters' shipments in accordance with SAB 101. The decrease from the
immediately preceding quarter is primarily due to market conditions, as
shipments significantly decreased quarter over quarter.
International net sales (including export sales) for both the three and six
months ended June 30, 2001, were 55% of total net sales, which compares to the
comparable year-ago periods of 69% and 71%, respectively, and 56% for the
immediately preceding quarter. The decreases from the comparable prior year
periods primarily relate to decreases in net sales in Korea, Malaysia, and
Taiwan. The decrease from the immediately preceding quarter is primarily
attributable to a decrease in net sales in Korea.
Gross profit as a percentage of net sales for the three and six months ended
June 30, 2001 was 53.0% and 54.4%, compared with 55.5% and 54.7%, respectively,
for the comparable year-ago periods. Gross profit as a percentage of net sales
decreased from 55.6% in the immediately preceding quarter. The decreases from
the comparable year-ago periods and the immediately preceding quarter are due to
reduced absorption of fixed overhead as the market conditions continued to
weaken in the industry. Novellus anticipates continued pressure on gross profit
as a percentage of sales as a result of an anticipated decline in revenue levels
in the third and fourth quarters of 2001.
Selling, general and administrative (SG&A) expenses for the three and six months
ended June 30, 2001 were $54.5 million and $123.4 million compared with $55.0
million and $102.9 million in the comparable year-ago periods, and $68.9 million
in the immediately preceding quarter. SG&A expenses as a percentage of net sales
for the three and six months ended June 30, 2001 were 14.5% and 14.8% compared
with 15.1% and 17.6% for the comparable year-ago periods, and 15.0% for the
immediately preceding quarter. The increase in SG&A expenses for the six month
period ended June 30, 2001 (in absolute dollars) from the comparable year-ago
period is due to higher selling costs and the effect of combining the SG&A
organizations of GaSonics with Novellus. The decrease in SG&A expenses as a
percentage of revenue from the comparable year-ago periods is due to
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Novellus' efforts to control costs as a percentage of revenues. The decrease in
SG&A expenses from the immediately preceding quarter is primarily due to lower
sales-related costs such as trade shows and commissions.
Research and development (R&D) expenses for the three and six months ended June
30, 2001 were $72.7 million and $143.2 million compared with $47.2 million and
$87.9 million for the comparable year-ago periods. In addition, research and
development expenses increased $2.2 million over the immediately preceding
quarter. R&D expenses as a percentage of net sales for the three and six months
ended June 30, 2001 were 19.3% and 17.1% compared with 13.0% and 15.1% for the
comparable year-ago periods, and 15.4% for the immediately preceding quarter.
The increases in R&D expenses over the comparable year-ago periods and the
immediately preceding quarter in absolute dollars and as a percentage of sales
are primarily due to programs to accelerate Novellus 300-millimeter and low-k
product offerings.
Merger costs related to the acquisition of GaSonics were $13.2 million during
the six months ended June 30, 2001. These costs included professional fees,
financial printing, and other related costs. Additionally, these costs included
charges related to vacating certain service agreements and the write-off of
certain redundant assets.
Net interest income for the three and six months ended June 30, 2001 was $13.4
million and $29.9 million, respectively, when compared with $13.7 million and
$19.5 million for the comparable year-ago periods, and $16.6 million in the
immediately preceding quarter. The decrease in net interest income compared to
the comparable year-ago three-month period and the immediately preceding quarter
is due to lower interest rates earned on Novellus' cash and short term
investment balances. The increase in net interest income over the comparable
year-ago six-month period is primarily due to increased cash and short-term
investment balances as a result of Novellus' secondary public offering of
approximately 9.0 million shares during the second quarter of 2000, offset by
declining rates of return.
Novellus' effective tax rate for the three and six months ended June 30, 2001
was 31%, which is the same as the comparable year-ago periods and the
immediately preceding quarter.
Net income for the three and six months ended June 30, 2001 was $59.2 million
and $141.3 million or $0.40 and $0.95 per diluted share, respectively, compared
with $78.2 million and $102.0 million or $0.54 and $0.73 per diluted share,
respectively (excluding a cumulative effect of a change in accounting principle
of $89.8 million or $0.64 per diluted share) for the comparable year-ago
periods, and net income of $82.1 million, or $0.55 per diluted share for the
immediately preceding quarter.
Net income for the six months ended June 30, 2001, excluding $13.2 million in
one-time charges taken in connection with the acquisition of GaSonics, was
$150.4 million or $1.01 per diluted share. This represents a substantial
increase over the comparable six-month period in 2000 in which Novellus earned
$102.0 million or $0.73 per share, excluding the cumulative effect of a change
in accounting principle of $89.8 million or $0.64 per diluted share.
The number of shares used in the per share calculations for the three and six
months ended June 30, 2001 was 149.6 million and 148.9 million, respectively,
compared with 144.2 million and 140.7 million for the comparable year-ago
periods and 148.1 million for the immediately preceding quarter. The increases
in shares used compared to the comparable year-ago periods are due to Novellus'
secondary public offering of approximately 9.0 million shares during the second
quarter of 2000 and stock option exercises. The increase in shares used over
the immediately preceding quarter is due to stock option exercises.
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RECENT ACCOUNTING PRONOUNCEMENTS
Revenue Recognition in Financial Statements
Novellus changed its revenue recognition policy effective January 1, 2000, based
on guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB 101),
"Revenue Recognition in Financial Statements." Novellus recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the seller's price is fixed and determinable and
collectibility is reasonably assured. Certain of Novellus' product sales are
accounted for as multiple-element arrangements. If Novellus has met defined
customer acceptance experience levels with both the customer and the specific
type of equipment, Novellus recognizes equipment revenue upon shipment and
transfer of title, with the remainder when it becomes due (generally upon
acceptance). All other product sales with customer acceptance provisions are
recognized upon customer acceptance. Revenue related to spare part sales is
recognized on shipment. Revenue related to maintenance and service contracts is
recognized ratably over the duration of the contracts.
In accordance with guidance provided in SAB 101, Novellus recorded a non-cash
charge of $89.8 million (after reduction for income taxes of $48.6 million), or
($0.64) per share for the six months ended June 31, 2001, to reflect the
cumulative effect of the accounting change as of the beginning of the fiscal
year. During the three and six months ended July 1, 2000, Novellus recognized
revenue of $110.6 million and $165.6 million, respectively, that was included in
the cumulative effect adjustment as of January 1, 2000, which, included
increased income by $44.4 million and $66.9 million, respectively, net of tax
for the three and six months ended July, 1, 2000. There was no amount of revenue
recorded in the three and six months ended June 30, 2001 that was included in
the cumulative effect adjustment as of January 1, 2000.
Accounting for Derivative Instruments and Hedging Activities
On January 1, 2001, Novellus adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133), as discussed in Note 2, "Recent Accounting Pronouncements" in the Notes to
Condensed Consolidated Financial Statements. Novellus enters into forward
foreign exchange contracts primarily to hedge against the short-term impact of
foreign currency fluctuations of intercompany accounts payable denominated in
U.S. dollars recorded by Novellus' Japanese subsidiary, Nippon Novellus Systems
K.K. Novellus also enters into forward foreign exchange contracts to buy and
sell foreign currencies as economic hedges of the parent's intercompany balances
denominated in a currency other than the U.S. dollar. The forward foreign
exchange contracts are marked to market each period with net foreign currency
gains and losses immediately recognized in earnings. The adoption of SFAS 133
did not have a significant impact on Novellus' consolidated financial position
or operating results.
Business Combinations and Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141), and
No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), effective for fiscal
years beginning after December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with SFAS 141 and
142. Other intangible assets will continue to be amortized over their useful
lives.
Novellus will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of SFAS 142 is expected to result in an increase in
net income of $3.5 million per year. During 2002, Novellus will perform the
first of the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002. At this time, Novellus is unable to
determine the effect of these tests on its earnings and financial position.
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.
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LIQUIDITY AND CAPITAL RESOURCES
Novellus has historically financed its operations and capital resources through
cash flow from operations, equity securities offerings, and borrowings.
Novellus' primary sources of funds at June 30, 2001 consisted of $1,254.3
million of cash, cash equivalents, and short-term investments. This amount
represents an increase of $34.7 million from the December 31, 2000 balance of
$1,219.7 million. During the second quarter of 2000, Novellus completed a
secondary public offering of approximately 9.0 million shares of common stock
that resulted in net proceeds to Novellus of approximately $526.3 million.
During the second quarter of 1997, Novellus entered into a five year $125.0
million Senior Credit Facility structured as an unsecured revolving credit line.
Novellus terminated the Senior Credit Facility on June 8, 2001.
Novellus has lines of credit with three banks which expire at various dates
through May 2002 under which Novellus can borrow up to $36.6 million at rates
that approximate the banks' prime rates. These facilities are available to
Novellus' Japanese subsidiaries, Nippon Novellus Systems K.K. and GaSonics
International Corporation K.K.
During the six months ended June 30, 2001, Novellus' cash and cash equivalents
increased $119.0 million to $708.4 million from $589.4 million at December 31,
2001. Net cash provided by operating activities during the first six months of
2001 was $35.2 million primarily due to net income of $141.3 million and a
decrease in accounts receivable of $102.0 million, offset by decreases in
deferred profit and income taxes payable of $95.3 million and $49.9 million,
respectively, and an increase in inventories of $73.2 million.
Net cash flows provided by investing activities were $43.9 million during the
first six months of 2001. The amount provided by investing activities was
primarily due to net sales and maturities of available-for-sale securities of
$92.7 million, partially offset by $49.4 million in capital expenditures.
Novellus expects investments in property and equipment in the current fiscal
year to approximate $77.0 million of which $34.7 million had been committed as
of June 30, 2001. Novellus intends to finance these investments from existing
cash balances and cash flows from operations.
During the first six months of 2001, net cash provided by financing activities
was $40.0 million primarily due to $34.0 million of proceeds from the issuance
of common stock related to employee incentive stock option and stock purchase
plans. In addition, Novellus received proceeds of $6.0 million under its bank
lines of credit.
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On July 26, 2001, Novellus issued and sold $880 million of Liquid Yield
Option(TM) Notes (LYONs) due July 26, 2031. The net proceeds from the LYONs
offering were $862.4 million. The LYONs are zero-coupon, subordinated debentures
that may be converted into shares of Novellus common stock, subject to specified
conditions as set forth in the indenture. The LYONs are convertible into 13.0950
shares of Novellus common stock per LYON, subject to antidilutive adjustments.
Certain proceeds from the sale of the LYONs have been pledged into a pledge
account to secure Novellus' obligations under the LYONs until July 26, 2002.
Novellus may be required to purchase some or all of the LYONs on July 26, 2002
for cash. Additionally, Novellus has the option of redeeming the LYONs on or
after July 26, 2004 for cash. Upon expiration of the obligations under the
pledge account, Novellus intends to use the net proceeds of the offering, if
any, for general corporate purposes.
Novellus may be obligated to pay contingent interest on the LYONs during the
six-month period commencing July 27, 2004 and during any six-month period
thereafter if the average market price of a LYON for a certain measurement
period immediately preceding the applicable six-month period equals 120% or
more of the issue price of the LYONs. The amount of contingent interest payable
during any six-month period will be the sum of any contingent interest payable
in the first and the second three-month periods during such six-month period.
During any three-month period in which contingent interest is payable, the
contingent interest payable per LYON for such period will be equal to the
greater of (1) .0625% of the average market price of a LYON for the measurement
period referred to above, or (2) the sum of all regular cash dividends paid by
us per share on our common stock during such three-month period multiplied by
the number of shares of common stock issuable upon conversion of a LYON at the
then applicable conversion rate.
As a result of the sale of the LYONs and the grant of the security interests
contemplated by the LYONs, Novellus would, absent a waiver, have been in
violation of certain covenants, which could have given rise to defaults, under
certain of Novellus' real property leases (the "Lease Agreements") and
participation agreements for those leases (the "Participation Agreements"). The
outstanding lease amounts under such leases aggregated approximately $300
million at June 30, 2001. Novellus has obtained temporary waivers of such
covenants which waivers will, unless extended, expire on September 24, 2001.
Novellus is currently seeking permanent waivers of the relevant covenants under
the Participation Agreements. Novellus is also evaluating restructuring and
refinancing options for Novellus' real property Lease Agreements and
Participation Agreements which, if timely obtained, would eliminate the need
for the permanent waivers. While Novellus believes it will be successful in
securing the necessary amendments or waivers or in concluding any restructuring
or refinancing in a timely manner, failure to obtain the amendments or waivers
or to restructure or refinance the real property leases could result in
defaults under as well as increases in rental payments under the Lease
Agreements and the Participation Agreements.
In the event of such defaults, the lessors and their participants under the
Lease Agreements and Participation Agreements could require Novellus to purchase
the real properties covered thereby for the outstanding aggregate lease amounts
of approximately $300 million and pay related costs and other expenses
associated with the early termination of the Lease Agreements. In addition,
because the Lease Agreements are off balance sheet transactions under generally
accepted accounting principles, any such purchases could result in substantial
depreciation expenses (in excess of Novellus' current lease payments) that
Novellus would be required to recognize over a substantial period of time, which
could negatively impact Novellus' results of operations, earnings per share and
the trading performance of its Common Stock and LYONs.
Novellus believes that its current cash position and cash generated through
operations will be sufficient to meet Novellus' needs through at least the next
twelve months.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not Applicable.
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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 Materials, Inc. ("Applied") filed a complaint (the "Applied Complaint")
against Varian in the United States District Court for the Northern District of
California San Jose Division, Civil Action No. C-97-20523 RMW, alleging, among
other things, infringement by Varian (including the making, using, selling
and/or offering for sale of certain products and systems made by TFS) of United
States Patent Nos. 5,171,412, 5,186,718, 5,496,455 and 5,540,821 (the "Applied
Patents"), which patents are owned by Applied.
Immediately after consummation of the TFS purchase, Novellus filed a complaint
(the "Novellus 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 "Novellus Patents"),
which patents Novellus acquired from Varian in the TFS purchase. In the Novellus
Complaint, Novellus also alleged that it is entitled to declarations from
Applied that Novellus does not infringe the Applied Patents and/or that the
Applied Patents are invalid and/or unenforceable. Applied has filed
counterclaims alleging that Novellus infringes the Applied Patents.
Also after consummation of the TFS purchase, but some time after Novellus filed
the Novellus Complaint, Applied amended the Applied Complaint to add Novellus as
a defendant. Novellus has requested that the Court dismiss Novellus as a
defendant in Applied's lawsuit against Varian. The Court has not yet required
Novellus 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 Novellus
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
Novellus for certain of its legal and other expenses in connection with the
defense and prosecution of this litigation, and to indemnify Novellus for a
portion of any losses incurred by Novellus arising from this litigation
(including losses resulting from a permanent injunction). Novellus and Varian
believe that there are meritorious defenses to Applied's allegations, including
among other things, that Novellus' 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
Novellus believes that the ultimate outcome of the dispute with Applied will not
have a material adverse effect on Novellus' business, financial condition, or
results of operations (taking into account both the defenses available to
Novellus 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 Novellus for its losses. If Applied were to
prevail in this dispute, it could have a material adverse effect on Novellus'
business or results of operations.
The Novellus 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 Novellus
believes that it will prevail against Applied, there can be no assurances that
Novellus will prevail in its litigation against Applied. If Applied were to
prevail against the Novellus Complaint, it could have a
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material adverse effect on Novellus' business, financial condition, or results
of operations.
On July 13, 1999, in the Novellus lawsuit against Applied where Novellus has
alleged that Applied infringes Novellus patents, the Court ruled on the
interpretation of the claims of Novellus patents. On September 20, 1999, in the
Applied lawsuit against Varian and Novellus, where Applied has alleged that
Varian and Novellus infringe Applied patents, the Court ruled on the
interpretation of the claims of the Applied patents.
On September 10, 1999, Novellus filed a motion for summary judgment that claims
1, 2, and 8 of its U.S. Patent No. 5,314,597 are not invalid over the prior art
asserted against it by Applied. On September 29, 1999, Applied filed a
counter-motion for summary judgment that these claims are invalid based on the
on-sale bar. On December 7, 1999, the Court entered an order granting Novellus'
motion and denying Applied's motion.
On November 4, 1999, Applied moved for leave of Court to amend its prior art
chart with respect to Novellus' U.S. Patent No. 5,314,597. On February 15, 2000,
the Court granted Applied's motion. On October 4, 2000, the Court entered an
order denying Novellus' motion for reconsideration of this order.
On December 17, 1999, Novellus and Varian moved for summary judgment that
certain claims of Applied's U.S. Patent No. 5,171,412 were invalid as
anticipated or obvious over the prior art. On March 16, 2000, the Court granted
this motion in part, and deferred ruling in part.
On December 23, 1999, Novellus moved for summary judgment that its U.S. Patent
No. 5,635,036 is not invalid as obvious over the prior art. On March 20, 2000,
the Court denied Novellus' motion without prejudice.
On January 14, 2000, Applied withdrew its U.S. Patent No. 5,496,455 from the
lawsuits against Novellus and Varian.
On February 4, 2000, Applied filed a motion for summary judgment that claims 10,
11 and 13 of Novellus' U.S. Patent No. 5,314,597 are invalid over the prior art.
On March 10, 2000, Novellus filed an opposition and cross-moved for leave to
amend its claim chart to withdraw these claims. On April 5, 2000, the Court
issued an order denying Applied's motion as moot and granting Novellus' motion.
On March 31, 2000, Novellus filed a renewed motion for partial summary judgment
that its U.S. Patent No. 5,635,036 is not invalid as obvious over the prior art.
On January 3, 2001, the Court entered an order in response to this motion
tentatively amending certain claim constructions and requesting additional
briefing.
On 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 three 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.
On July 28, 2000, Applied filed a motion for summary judgment of
non-infringement of Novellus' U.S. Patent No. 5,330,628 (the "'628 Patent"). On
October 20, 2000, Novellus filed a non-opposition to that motion, pending appeal
of the Court's claim construction. Novellus also cross-moved for the Court to
dismiss Applied's allegations that the '628 patent was invalid or unenforceable.
On November 20, 2000, the Court entered an order granting both motions.
On May 12, 2000, Novellus and Varian moved for summary judgment that the Inova
and MB2 do not infringe Applied's U.S. Patent No. 5,186,718 (the "'718 Patent").
On August 8,
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2000, the Court granted this motion with respect to the Inova. Novellus' motion
that the MB2 does not infringe the '718 patent is currently off calendar pending
completion of discovery.
On August 18, 2000, Applied filed a motion for partial summary judgment that
certain of its products did not infringe Novellus' U.S. Patent No. 5,635,036. On
October 24, 2000, the Court entered an order denying Applied's motion. The
Court, in the same order, also allowed Novellus to withdraw its assertion that
certain Applied products infringed certain claims of its U.S. Patent No.
5,314,597.
On or about September 25, 2000, Varian and Applied executed a "License and
Settlement Agreement." On September 29, 2000, Varian and Applied filed a
Stipulated Dismissal with Prejudice with the Court that reciprocally dismisses
all causes of action that Varian and Applied had asserted or could have asserted
against one another in the litigation. In addition, Applied has stated, in its
agreement with Varian, that it will release Novellus from all claims that arose
out of or relate to the litigation that relate to any infringement alleged with
respect to the Inova, in the form as it existed as of the effective date of
Novellus' purchase of Varian's TFS division. The Stipulated Dismissal, however,
expressly excludes Novellus from the scope of any release.
On October 6, 2000, Applied filed a motion for summary judgment of
noninfringement of Novellus' U.S. Patent No. 5,314,597. On November 13, 2000,
Novellus filed an opposition to that motion, and cross-moved for summary
judgment of infringement as to claims 1 and 8 of the '597 patent. These motions
were orally argued on January 5, 2001 and are presently under submission.
On November 22, 2000, Applied filed a second motion for summary judgment that
its accused products do not infringe Novellus' U.S. Patent No. 5,635,036. This
motion was orally argued on January 19, 2001 and is presently under submission.
SEMITOOL I LITIGATION
On August 10, 1998, Semitool sued Novellus for patent infringement in the United
States District Court for the Northern District of California. Semitool alleged
that Novellus' 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
sought an injunction against Novellus' manufacture and sale of SABRE(TM)
systems, and damages for past infringement. Semitool also sought trebled damages
for alleged willful infringement. Semitool also sought 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 March 17, 2000, the Court granted Novellus' motion for summary judgement of
non-infringement. The Court ruled that Novellus' SABRE and SABRE xT systems do
not infringe on the two patents asserted by Semitool.
On June 8, 2001, the United States Court of Appeals for the Federal Circuit
affirmed the District Court's Order. Semitool has not yet informed the Company
whether it will appeal or seek a rehearing of the Federal Circuit's decision.
Although Novellus believes that the Court's order granting summary judgment of
non-infringement was correct, and that Novellus will continue to prevail on
appeal, there can be no assurances that Novellus will ultimately prevail in its
litigation against Semitool. If the Federal Circuit's order is reversed by the
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United States Supreme Court, and if Semitool were to prevail against Novellus
following the appeal, this could have a material adverse effect on Novellus'
business, financial condition, or results of operations.
SEMITOOL II LITIGATION
On June 11, 2001, Semitool sued the Company for patent infringement in the
United States District Court for the District of Oregon (the "District Court").
Semitool alleges that the Company infringes Semitool's U.S. Patent No.
6,197,181, issued March 6, 2001, entitled "Apparatus and Method for
Electrolytically Depositing a Metal on a Microelectronic Workpiece" (the "'181
Patent"). Semitool seeks an injunction against the Company and damages for past
infringement. Semitool also seeks trebled damages for alleged willful
infringement. Semitool further seeks its attorneys' fees and costs, and interest
on any judgment. The Company answered Semitool's complaint on July 23, 2001. In
its answer, the Company alleges that the Company has not infringed Semitool's
`181 patent, and that the `181 patent is invalid.
The Company believes that there are meritorious defenses to Semitool's
allegations, including among other things, that the Company does not infringe
the '181 Patent and/or that the '181 Patent is 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
Semitool 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 Semitool will not
ultimately prevail in this dispute. If Semitool were to prevail in the dispute,
it could have a material adverse effect on the Company's business, financial
condition, or results of operations.
PLASMA PHYSICS LITIGATION
On December 28, 1999, Plasma Physics Corporation and Solar Physics Corporation
(collectively, "Plasma Physics") filed a patent infringement lawsuit against
many of Novellus' Japanese and Korean customers. The suit was entitled Plasma
Physics and Solar Physics v. Fujitsu et al., Civil Action No. 99-8593, and was
pending in the United States District Court for the Eastern District of New
York. On July 24, 2000, the Court ordered Plasma Physics to re-file separate
complaints against the Japanese and Korean defendants, whereupon, Civil Action
No. 99-8593 would be dismissed without prejudice. In accordance with the Court's
order, Plasma Physics has since re-filed separate complaints against the
Japanese and Korean defendants in the United States District Court for the
Eastern District of New York. Many of the defendants have notified Novellus that
they believe that Novellus has indemnification obligations and liability for the
lawsuits.
Plasma Physics has asserted U.S. Patent Nos. 4,226,897; 5,470,784, and 5,543,634
(the "'897, '784, and '634 patents," respectively). Plasma Physics seeks an
injunction against the defendants' alleged infringement of the '784 and '634
patents (the '897 patent has expired). Plasma Physics also seeks trebled damages
for alleged willful infringement. Plasma Physics further seeks its attorney's
fees and costs, and interest on any judgement.
On June 1, 2000, Novellus filed a declaratory relief action against Plasma
Physics and Solar Physics requesting a judgement of non-infringement,
invalidity, and unenforceability with respect to the '897 and '784 patents. The
suit is entitled Novellus v. Plasma Physics and Solar Physics, Civil Action No.
00-3146, and is pending in the United States District Court for the Eastern
District of New York. On June 30, 2000, Plasma Physics filed a motion to dismiss
Novellus' complaint for a lack of subject matter jurisdiction. Plasma
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Physics' motion to dismiss Novellus' complaint was denied without prejudice on
July 24, 2000. On July 31, 2000, Plasma Physics filed an Answer and Conditional
Counterclaim. Plasma Physics denies that the '897 and '784 patents are invalid
and unenforceable. Plasma Physics further denies that the '784 patent is not
infringed by Novellus. Plasma Physics also asserted a conditional counterclaim
against Novellus, alleging that Novellus' PECVD processing systems infringe the
'784 patent.
Novellus believes that there are meritorious defenses to Plasma Physics'
allegations, including among other things, that the defendants' use of Novellus'
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 Novellus believes that the
ultimate outcome of the dispute with Plasma Physics will not have a material
adverse effect on Novellus' business, financial condition, or result of
operations (taking into account the defenses available to it), there can be no
assurances that Plasma Physics will not ultimately prevail in this dispute and
that Novellus 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 Novellus' business, financial condition, or results of operations.
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ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders, held on May 11, 2001, the
following proposals were adopted by the margins indicated:
1. Election of Directors.
Nominee In Favor Withheld
------- ----------- ----------
Richard S. Hill 98,590,930 14,562,921
D. James Guzy 112,421,097 732,754
J. David Litster 112,420,961 732,890
Tom Long 112,418,604 735,247
Glen Possley 112,409,501 744,350
Robert H. Smith 98,147,737 15,006,114
William R. Spivey 112,427,422 726,429
2. Approval of the Company's 2001 Stock Incentive Plan (the "Plan"), which
reserved for the issuance of 6,360,000 shares under the Plan.
In Favor Opposed Abstained
---------- ---------- ---------
85,963,470 26,705,215 485,166
3. Ratification of Appointment of Ernst & Young LLP as Certified Public
Accountants of the Company for the next fiscal year ended December 31, 2001.
In Favor Opposed Abstained
----------- ---------- ---------
109,153,283 3,607,625 392,943
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Not applicable.
(b) Reports on Form 8-K
Report on Form 8-K dated June 1, 2001 filing a copy of the restated
financials related to the merger between Novellus and GaSonics.
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.
/s/ Robert H. Smith
---------------------------------------
Robert H. Smith
Executive Vice President
Finance and Administration
(Principal Financial Officer)
/s/ Kevin S. Royal
---------------------------------------
Kevin S. Royal
Vice President and Corporate Controller
(Principal Accounting Officer)
August 14, 2001
---------------------------------------
Date
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