UNITED STATES
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 September 29, 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 of incorporation of organization) (I.R.S. Employer Identification Number)
4000 NORTH FIRST STREET
SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices including zip code)
(408) 943-9700
(Registrant's telephone number, including area code)
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 October 29, 2001 143,316,426 shares of the Registrant's common stock, no
par value, were issued and outstanding.
NOVELLUS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 29, 2001
TABLE OF CONTENTS
Page
Part I: Financial Information
Item 1: Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income for the three and nine
months ended September 29, 2001 and September 30, 2000 3
Condensed Consolidated Balance Sheets at September 29, 2001
and December 31, 2000 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 29, 2001 and September 30, 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 5: Other Information 20
Item 6: Exhibits and Reports on Form 8-K 21
Signatures 21
2
PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months ended Nine months ended
September 29, September 30, September 29, September 30,
(in thousands, except per share data) 2001 2000 2001 2000
(unaudited) (Restated) (Restated)
------------ ------------ ------------ ------------
Net sales $ 303,687 $ 292,889 $1,139,291 $ 876,810
Cost of sales 163,549 134,308 544,544 399,083
---------- ---------- ---------- ----------
Gross profit 140,138 158,581 594,747 477,727
Operating expenses:
Selling, general, and administrative 46,844 61,585 170,218 164,450
Research and development 68,183 52,168 211,381 140,071
Special charges 47,946 -- 61,106 --
Bad debt write-off 7,662 -- 7,662 --
---------- ---------- ---------- ----------
Total operating expenses 170,635 113,753 450,367 304,521
---------- ---------- ---------- ----------
Income (loss) from operations (30,497) 44,828 144,380 173,206
Other income, net 10,180 18,221 40,119 37,731
---------- ---------- ---------- ----------
Income (loss) before income taxes and cumulative
effect of a change in accounting principle (20,317) 63,049 184,499 210,937
Provision (benefit) for income taxes (6,298) 19,765 57,195 65,625
---------- ---------- ---------- ----------
Income (loss) before cumulative effect of a change in
accounting principle (14,019) 43,284 127,304 145,312
Cumulative effect of a change in accounting principle,
net of tax -- -- -- (89,788)
---------- ---------- ---------- ----------
Net income (loss) $ (14,019) $ 43,284 $ 127,304 $ 55,524
========== ========== ========== ==========
Net income (loss) per share:
Basic per share amounts
Income (loss) before cumulative effect of a change in
accounting principle $ (0.10) $ 0.31 $ 0.90 $ 1.08
Cumulative effect of a change in accounting
principle -- -- -- (0.67)
---------- ---------- ---------- ----------
Basic net income (loss) per share $ (0.10) $ 0.31 $ 0.90 $ 0.41
========== ========== ========== ==========
Diluted per share amounts
Income (loss) before cumulative effect of a change in
accounting principle $ (0.10) $ 0.30 $ 0.85 $ 1.02
Cumulative effect of a change in accounting
principle -- -- -- (0.63)
---------- ---------- ---------- ----------
Diluted net income (loss) per share $ (0.10) $ 0.30 $ 0.85 $ 0.39
========== ========== ========== ==========
Shares used in basic calculations 143,218 138,939 142,165 134,314
========== ========== ========== ==========
Shares used in diluted calculations 143,218 147,121 149,079 142,815
========== ========== ========== ==========
See accompanying notes.
3
NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 29, December 31,
(in thousands) 2001 2000
(unaudited) (Restated)
------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 540,796 $ 589,415
Short-term investments 395,341 630,249
Restricted short-term investments 917,356 --
Accounts receivable, net 265,092 401,291
Inventories 251,621 201,672
Deferred taxes 69,255 137,929
Prepaid and other current assets 94,817 14,279
----------- -----------
Total current assets 2,534,278 1,974,835
Property and equipment
Machinery and equipment 254,922 212,836
Furniture and fixtures 13,861 11,038
Leasehold improvements 79,770 60,690
Land 8,782 8,782
----------- -----------
357,335 293,346
Less accumulated depreciation and amortization 164,520 141,791
Property and equipment, net 192,815 151,555
Other assets 101,349 79,084
Note receivable 244,673 --
----------- -----------
Total assets $ 3,073,115 $ 2,205,474
=========== ===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 70,454 $ 123,023
Accrued payroll and related expenses 63,682 70,211
Accrued warranty 49,311 51,343
Other accrued liabilities 36,201 46,187
Restructuring accrual 46,779 --
Income taxes payable 6,622 57,720
Deferred profit 54,873 193,913
Current obligations under lines of credit 28,037 21,602
Convertible subordinated debentures 862,513 --
----------- -----------
Total current liabilities 1,218,472 563,999
Shareholders' equity
Common stock 1,271,407 1,200,718
Retained earnings 580,795 453,250
Accumulated other comprehensive income (loss) 2,441 (12,493)
----------- -----------
Total shareholders' equity 1,854,643 1,641,475
----------- -----------
Total liabilities and shareholders' equity $ 3,073,115 $ 2,205,474
=========== ===========
See accompanying notes.
4
NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 29, September 30,
(in thousands) 2001 2000
(unaudited) (Restated)
------------- --------------
Cash flows from operating activities:
Net income $ 127,304 $ 55,524
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change, net of tax -- 89,788
Noncash portion of special charges 28,902 --
Impairment charge 8,556 --
Bad debt write-off 7,662 --
Depreciation and amortization 37,695 34,965
Deferred income taxes 68,674 42,829
Deferred compensation 1,088 1,342
Adjustment to conform fiscal year end of GaSonics 863 --
Changes in operating assets and liabilities:
Accounts receivable 128,537 (81,126)
Inventories (55,546) (52,092)
Prepaid and other current assets (80,538) (91,169)
Accounts payable (52,569) 52,933
Accrued payroll and related expenses (6,529) 28,363
Accrued warranty (2,032) 24,331
Deferred profit (139,040) 43,539
Other accrued liabilities 14,278 12,484
Income taxes payable (51,098) 23,675
Income tax benefits from employee stock plans 26,235 36,516
----------- -----------
Total adjustments (64,862) 166,378
----------- -----------
Net cash provided by operating activities 62,442 221,902
Cash flows from investing activities:
Purchases of available-for-sale securities (1,173,086) (664,542)
Purchases of restricted short-term investments (899,165) --
Proceeds from the sale and maturity of available-for-
sale securities 1,394,601 432,991
Capital expenditures (71,461) (56,003)
Participation in synthetic lease receivable (244,673) --
Increase in other assets (28,969) (2,284)
----------- -----------
Net cash used in investing activities (1,022,753) (289,838)
Cash flows from financing activities:
Proceeds from convertible subordinated debentures 862,400 --
Proceeds from employee compensation plans 42,744 84,014
Proceeds from lines of credit, net 6,548 5,814
Proceeds from common stock offering, net -- 526,265
----------- -----------
Net cash provided by financing activities 911,692 616,093
Net increase (decrease) in cash and cash equivalents (48,619) 548,157
Cash and cash equivalents at the beginning of the period 589,415 198,426
----------- -----------
Cash and cash equivalents at the end of the period $ 540,796 $ 746,583
=========== ===========
See accompanying notes.
5
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 nine month periods ended
September 29, 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 September 30, 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 nine months ended June 30, 2000 (in thousands).
Conforming
Novellus GaSonics Adjustments Combined
-------- -------- ----------- --------
Three months ended
September 30, 2000
Revenue $250,140 $ 43,863 $ (1,114) $292,889
Net income 39,720 6,574 (3,010) 43,284
Nine months ended
September 30, 2000
Revenue $783,853 $103,171 $(10,214) $876,810
Net income 56,892 11,514 (12,882) 55,524
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 nine months ended September 29, 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.
6
NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
($0.63) per share for the nine months ended September 30, 2000, to reflect the
cumulative effect of the accounting change as of the beginning of the fiscal
year. During the three and nine months ended September 30, 2000, Novellus
recognized revenue of $32.9 million and $201.8 million, respectively, that was
included in the cumulative effect adjustment as of January 1, 2000, which
increased net income by $13.2 million and $76.4 million for the three and nine
months ended September 30, 2000. During the three months ended September 29,
2001, Novellus did not recognize any revenue that was included in the cumulative
effect at January 1, 2000. During the nine months ended September 29, 2001,
Novellus recognized revenue of $7.0 million that was included in the cumulative
effect adjustment as of January 1, 2000, which increased net income by $2.6
million for the nine months ended September 29, 2001.
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
SFAS 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. The implementation of SFAS 142 could result
in a charge related to an impairment of goodwill and indefinite lived intangible
assets, and therefore could have a material adverse effect on Novellus'
financial condition and results of operations in the period of implementation.
7
NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consisted of the following (in thousands):
September 29, 2001 December 31, 2000
------------------ -----------------
Purchased parts $197,150 $135,204
Work-in-process 48,628 56,997
Finished goods 5,843 9,471
-------- --------
Total inventory, net $251,621 $201,672
======== ========
4. LINES OF CREDIT
Novellus has lines of credit with four banks which expire at various dates
through April 2002 under which Novellus can borrow up to $35.7 million at rates
that approximate the banks' prime rates. These facilities are available to
Novellus' Japanese subsidiary, Novellus Systems, Japan.
5. NET INCOME (LOSS) 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 include the dilutive effect of employee stock options.
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share amounts):
Three months ended Nine months ended
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Numerator:
Income (loss) before cumulative effect of a change
in accounting principle $ (14,019) $ 43,284 $ 127,304 $ 145,312
Cumulative effect of a change in accounting principle -- -- -- (89,788)
--------- --------- --------- ---------
Net income (loss) $ (14,019) $ 43,284 $ 127,304 $ 55,524
========= ========= ========= =========
Denominator:
Basic weighted-average shares outstanding 143,218 138,939 142,165 134,314
Employee stock options -- 8,182 6,914 8,501
--------- --------- --------- ---------
Diluted weighted-average shares outstanding 143,218 147,121 149,079 142,815
========= ========= ========= =========
Basic earnings (loss) per share $ (0.10) $ 0.31 $ 0.90 $ 0.41
========= ========= ========= =========
Diluted earnings (loss) per share $ (0.10) $ 0.30 $ 0.85 $ 0.39
========= ========= ========= =========
8
NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. COMMITMENTS
On April 18, 2001, Novellus entered into a lease agreement, which increased the
total number of properties under lease to fourteen. On September 21, 2001,
Novellus entered into a lease agreement, which refinanced thirteen properties
that had been financed under four previous lease agreements. The two current
agreements are for five years each with the option to extend for three one-year
renewal periods. The lease terms expire at various dates between April 2006 and
September 2006. Certain of these agreements have been collateralized by Novellus
of which $49.3 million is included in restricted short-term investments and
$34.3 million is included in other noncurrent assets. Additionally, Novellus is
participating as one of the lenders in the lease agreement and will participate
in the other lease agreement upon completion of construction. Novellus'
commitment under the participation agreement is $404.5 million, of which $244.7
million has been funded by the Company and is recorded as a note receivable at
September 29, 2001.
Rent obligations bear a direct relationship to the lessor's carrying costs. At
current rates, Novellus' net annual cash obligations approximate $500,000.
Additionally, Novellus has unborrowed financing facilities, which will increase
the net annual cash obligations to approximately $900,000. 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, of which
Novellus was in compliance at September 29, 2001.
7. CONVERTIBLE SUBORDINATED DEBENTURES
On July 26, 2001, Novellus issued $880.0 million of Liquid Yield Option(TM)
Notes (LYONs) due July 26, 2031. The net proceeds after issuance costs (which
will be amortized over 30 years) from the LYONs offering were $862.4 million.
The LYONs are zero coupon, zero-yield 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 13.09504 shares of
Novellus common stock per LYON, subject to antidilutive adjustments.
Approximately $868.0 million has been deposited into a pledge account to secure
Novellus' obligations under the LYONs until July 26, 2002. Security holders of
the LYONs have the ability to deliver to Novellus the LYONs on July 26, 2002 and
require Novellus to purchase the LYONs 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. Additionally, Novellus
has the option of redeeming the LYONs on or after July 26, 2004 for cash.
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.
Payments on the LYONs will also effectively be subordinated to all existing and
future indebtedness of our subsidiaries. As of September 30, 2001, (i) we had
approximately $383.2 million of indebtedness outstanding that would have
constituted senior indebtedness, reflecting among other indebtedness, trade and
other payables and liabilities of a type not required to be reflected on a
balance sheet in accordance with generally accepted accounting principals, but
excluding intercompany liabilities; and (ii) our subsidiaries had $52.6 million
of trade and other payables outstanding to which the LYONs would have been
effectively subordinated.
9
NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. SPECIAL CHARGES
Restructuring
In September 2001, Novellus announced its intention to restructure its
operations which was driven by the anticipated decline in Novellus' orders due
to the forecasted contraction of the semiconductor equipment market from
calendar year 2000 levels. During the third quarter, the Plan was approved by
the appropriate level of management necessary to commit the Company to its
specific actions. The Company began implementing the restructuring plan during
the third quarter of 2001 and recorded restructuring charges totaling $55.0
million, of which $47.9 million is included in operating expenses and $7.1
million is included in cost of sales. Novellus will complete restructuring
activities within one year from the Plan's initiation. Assets will be written
off and scrapped within the next twelve months and facilities are expected to be
subleased within the next twelve months. Below is a table summarizing activity
relating to the September 2001 Plan (in thousands):
Balance at
Non-cash September 29,
Provisions Cash payments charges 2001
---------- ------------- -------- -------------
Vacated facilities $33,818 $(198) $(968) $32,652
Abandoned assets 9,495 -- -- 9,495
Write-off of purchased
technology 4,632 -- -- 4,632
------- ----- ----- -------
Restructuring accrual $47,945 $(198) $(968) $46,779
Discontinued inventory 7,102 -- -- 7,102
------- ----- ----- -------
Total $55,047 $(198) $(968) $53,881
======= ===== ===== =======
The charge for vacated facilities relates to rent obligations after the
abandonment of certain facilities currently under long-term operating lease
agreements. When applicable, anticipated future sublease income relating to
vacated buildings has been offset against the charge for the remaining lease
payments. All leasehold improvements relating to the vacated buildings which
have no future economic benefit have been abandoned. Additionally, certain fixed
assets associated with these facilities had no future economic benefit and are
to be written off.
The charge for abandoned assets and discontinued inventory are associated with
programs exited by Novellus. The write-off of purchased technology relates to
technology which has been abandoned by the Company.
Merger-related expense
During the first quarter of 2001, Novellus incurred merger costs related to the
acquisition of GaSonics of $13.2 million. These costs included professional
fees, financial printing, and other related costs. Additionally, these costs
included changes related to the cancellation of various contracts and the
write-off of certain redundant assets.
9. IMPAIRMENT CHARGE
During the third quarter of 2001, Novellus incurred a charge of $8.6 million
related to an other than temporary decline in value of an investment which is
included in other income.
10. BAD DEBT WRITE-OFF
In September 2001, Novellus determined that due to the financial difficulties
facing one of its customers, an outstanding accounts receivable balance was at
risk for collection. Accordingly, Novellus recorded a write-off of $7.7 million.
10
NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
11. COMPREHENSIVE INCOME (LOSS)
The following are the components of comprehensive income (loss):
Three months ended Nine months ended
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
(Restated) (Restated)
------------- ------------- ------------- -------------
Net income (loss) $(14,019) $ 43,284 $127,304 $ 55,524
Foreign currency translation adjustment 759 (407) 1,579 (1,439)
Unrealized gain (loss) on available-for-sale securities (866) (5,371) 7,451 (4,781)
Reclassification adjustment for a loss included
in net income (loss), net of tax 5,904 -- 5,904 --
-------- -------- -------- --------
Other comprehensive income (loss) $ (8,222) $ 37,506 $142,238 $ 49,304
======== ======== ======== ========
The components of accumulated other comprehensive loss, net of related tax are
as follows:
September 29, December 30,
2001 2000
------------- ------------
Foreign currency translation adjustment $ (723) $ (2,302)
Unrealized gain (loss) on available-for-sale securities $ 3,164 (10,191)
-------- --------
Other comprehensive income (loss) $ 2,441 $(12,493)
======== ========
12. LITIGATION
For a discussion of legal matters, see Part II: Other Information, Item 1: Legal
Proceedings.
11
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 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' anticipation of downward pressure on gross profits as a percentage of
sales and of a decline in revenue levels in 4th quarter 2001; Novellus' beliefs
regarding the effect of SFAS 142; Novellus' belief regarding the impact of the
Euro conversion, Novellus' expectations regarding investments in property and
equipment in fiscal 2001; 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' beliefs that there are
meritorious defenses in the Applied Materials, Semitool and Plasma Physics
litigation matters and regarding whether the ultimate outcome of such litigation
matters will or will not have a material adverse effect on Novellus' business or
results of operations; and Novellus' beliefs and expectations with respect to
the outcomes of the Applied Materials, Semitool and Plasma Physics litigation
matters and current patent infringement inquiries.
Novellus' expectations, beliefs, objectives, anticipations, intentions and
strategies regarding the future, expected operating results, revenues and
earnings and current and potential litigation, or set forth in the other
forward-looking statements found herein, 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 including, but not limited to, the current downturn in the
U.S. economy generally, periodic downturns in the semiconductor industry which
could have a material adverse effect on the semiconductor industry's demand for
semiconductor processing equipment, the greater financial, marketing, technical
or other resources, broader product lines, and more established customer bases
that some of Novellus' competitors possess, future competition from new market
entrants, improvement of the design and performance of Novellus' competitors'
products, Novellus' success in selecting, developing, and marketing new
products, or enhancing existing products, its ability to enforce its patents and
the inherent uncertainty in the outcome of litigation matters, the availability
of raw materials and critical manufacturing equipment, and risks associated with
regulatory and trade environments.
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.
12
Net sales for the three and nine months ended September 29, 2001 were $303.7
million and $1,139.3 million, respectively. Net sales for the three and nine
months ended September 30, 2000 were $292.9 million and $876.8 million,
respectively. Net sales were $376.9 million in the quarter ended June 30, 2001.
The increases in net sales over the comparable periods in the prior year 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 in
2001.
International net sales (including export sales) for both the three and nine
months ended September 29, 2001, were 53% and 55% of total net sales, which
compares to the comparable periods in the prior year of 58% and 66%,
respectively, and 55% 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 Japan and Europe.
Gross profit as a percentage of net sales for the three and nine months ended
September 29, 2001 was 46.1% and 52.2%, compared with 54.1% and 54.5%,
respectively, for the comparable periods in the prior year. Excluding a one-time
restructuring related charge of $7.1 million relating to a write-down of
inventory, gross profit as a percentage of sales was 48.5% and 52.8% for the
three and nine months ended September 29, 2001. Gross profit as a percentage of
net sales decreased from 53.0% in the immediately preceding quarter. The
decreases from the comparable periods in the prior year and the immediately
preceding quarter are due to reduced absorption of fixed overhead as the result
of lower shipments and lower gross margins on 300mm systems, which have higher
costs as they are not yet in high volume production. Novellus anticipates
continued pressure on gross profit as a percentage of sales as a result of its
continued anticipation of a decline in revenue levels in the fourth quarter of
2001.
Selling, general, and administrative (SG&A) expense for the three and nine
months ended September 29, 2001 was $46.8 million and $170.2 million compared
with $61.6 million and $164.5 million in the comparable periods in the prior
year, and $54.5 million in the immediately preceding quarter. SG&A expense as a
percentage of net sales for the three and nine months ended September 29, 2001
was 15.4% and 14.9% compared with 21.0% and 18.8% for the comparable periods in
the prior year, and 14.5% for the immediately preceding quarter. The decrease in
SG&A expense in absolute dollars from the immediately preceding quarter and
versus the comparable prior year quarter is due to the continuous impact of cost
reduction measures implemented in Q1 2001, including mandatory vacation days,
travel and other discretionary spending reductions, temporary workforce
reductions, executive and employee pay reductions, and facilities consolidation.
Research and development (R&D) expense for the three and nine months ended
September 29, 2001 was $68.2 million and $211.4 million compared with $52.2
million and $140.1 million for the comparable periods in the prior year. In
addition, R&D expense decreased $4.5 million over the immediately preceding
quarter. R&D expense as a percentage of net sales for the three and nine months
ended September 29, 2001 were 22.5% and 18.6% compared with 17.8% and 16.0% for
the comparable periods in the prior year, and 19.3% for the immediately
preceding quarter. The increase in R&D expense over the comparable periods in
the prior year in absolute dollars and as a percentage of sales are primarily
due to programs to accelerate Novellus 300-millimeter and advanced technology
product offerings.
In September 2001, Novellus announced its intention to restructure its
operations which was driven by the anticipated decline in Novellus' orders due
to the forecasted contraction of the semiconductor equipment market from
calendar year 2000 levels. During the third quarter, the Plan was approved by
the appropriate level of management necessary to commit the Company to its
specific actions. The Company began implementing the restructuring plan during
the third quarter of 2001 and recorded restructuring charges totaling $55.0
million, of which $47.9 million is included in operating expenses and $7.1
million is included in cost of sales. The restructuring charges included $33.8
million related to vacated facilities, $9.5 million related to abandoned assets
associated with the discontinuation of certain projects, and $4.6 million
related to the write-off of purchased technology. Additionally, the
discontinuation of certain projects resulted in $7.1 million of inventory
write-downs, which are included in cost of sales. Novellus will complete
restructuring activities within one year from the Plan's initiation. Assets
will be written off and scrapped within the next twelve months and facilities
are expected to be subleased within the next twelve months.
The charge for vacated facilities relates to rent obligations after the
abandonment of certain facilities currently under long-term operating lease
agreements. When applicable, anticipated future sublease income relating to
vacated buildings has been offset against the charge for the remaining lease
payments. All leasehold improvements relating to the vacated buildings which
have no future economic benefit have been abandoned. Additionally, certain fixed
assets associated with these facilities had no future economic benefit and are
to be written off.
The charge for abandoned assets and discontinued inventory are associated with
programs exited by Novellus. The write-off of purchased technology relates to
technology which has been abandoned by the Company. For further discussion on
these charges, see Notes to Condensed Consolidated Financial Statements,
"Special Charges".
As a result of an other than temporary decline in value of an investment, the
Company also recorded an $8.6 million charge during the third quarter of 2001,
which is included in other income. For further discussion on these charges, see
Notes to Condensed Consolidated Financial Statements, "Impairment Charge".
In September 2001, Novellus determined that due to the financial difficulties
facing one of its customers, an outstanding accounts receivable balance was at
risk for collection. Accordingly, Novellus recorded a write-off of $7.7 million.
13
Merger costs related to the acquisition of GaSonics were $13.2 million during
the nine months ended September 29, 2001. These costs included professional
fees, financial printing, and other related costs. Additionally, these costs
included charges related to the cancellation of various contracts and the
write-off of certain redundant assets.
Other income, including interest income, for the three and nine months ended
September 29, 2001 was $10.2 million and $40.1 million, compared with $18.2
million and $37.7 million for the comparable periods in the prior year, and
$13.4 million in the immediately preceding quarter. The decrease is due to the
$8.6 million write down of an investment due to an other than temporary decline
in fair value under FASB115, partially offset by interest income on higher cash
and short term investment balances, primarily as a result of the $880.0 million
LYONs offering.
Novellus' effective tax rate for the three and nine months ended September 29,
2001 was 31%, which is the same as the comparable periods in the prior year and
the immediately preceding quarter.
Net income (loss) for the three and nine months ended September 29, 2001 was
$(14.0) million and $127.3 million or $(0.10) per basic share and $0.85 per
fully diluted share, respectively, compared with $43.3 million and $145.3
million or $0.29 and $1.02 per fully diluted share, respectively (excluding a
cumulative effect of a change in accounting principle of $89.8 million or $0.63
per fully diluted share) for the comparable periods in the prior year, and net
income of $59.2 million, or $0.40 per fully diluted share for the immediately
preceding quarter.
Net income, for the three months ended September 29, 2001, excluding one-time
charges of $71.3 million, was $35.2 million, or $0.24 per fully diluted share.
Net income, for the nine months ended September 29, 2001, excluding one-time
charges of $84.4 million, was $185.6 million, or $1.24 per fully diluted share.
The number of shares used in the per fully diluted share calculations for the
three and nine months ended September 29, 2001 was 143.2 million and 149.1
million, respectively, compared with 147.1 million and 142.8 million for the
comparable periods in the prior year and 149.6 million for the immediately
preceding quarter. The decrease in shares used for the three months ended
September 29, 2001 compared to the comparable three-month period in the prior
year is due to the removal of the dilutive effect of 6.3 million shares of stock
options as Novellus incurred a loss in the three month period ended September
29, 2001. The increase in shares used over the comparable nine-month period in
the prior year is due to stock option exercises and Novellus' secondary public
offering of 9.0 million shares of our common stock during the second quarter of
2000.
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
($0.63) per share for the nine months ended September 30, 2000, to reflect the
cumulative effect of the accounting change as of the beginning of the fiscal
year. During the three and nine months ended September 30, 2000, Novellus
recognized revenue of $32.9 million and $201.8 million, respectively, that was
included in the cumulative effect adjustment as of January 1, 2000, which
increased net income by $13.2 million and $76.4 million for the three and nine
months ended September 30, 2000. During the three months ended September 29,
2001, Novellus did not recognize any revenue that was included in the cumulative
effect at January 1, 2000. During the nine months ended September 29, 2001,
14
Novellus recognized revenue of $7.0 million that was included in the cumulative
effect adjustment as of January 1, 2000, which increased net income by $2.6
million for the nine months ended September 29, 2001.
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
SFAS 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. The implementation of SFAS 142 could result
in a charge related to an impairment of goodwill and indefinite lived intangible
assets, and therefore could have a material adverse effect on Novellus'
financial condition and results of operations in the period of implementation.
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.
Novellus does not believe that the Euro conversion will have a significant
impact on its business, financial position, or results of operations.
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 source of funds at September 29, 2001 consisted of $936.1
million of cash, cash equivalents, and short-term investments. This amount
represents a decrease of $283.5 million from the December 31, 2000 balance of
$1,219.7 million and a decrease of $318.2 million from the prior quarter's
balance. The decreases are primarily attributable to Novellus' decision to
participate as a lender in certain of its operating leases. 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.
Novellus has lines of credit with four banks which expire at various dates
through April 2002 under which Novellus can borrow up to $35.7 million at rates
that approximate the banks' prime rates. These facilities are available to
Novellus' Japanese subsidiary, Novellus Systems, Japan.
15
During the second quarter of 2001, Novellus issued $880.0 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.
Approximately $868.0 million has been deposited into a pledge account to secure
Novellus' obligations under the LYONs until July 26, 2002. Security holders of
the LYONs have the ability to deliver to Novellus the LYONs on July 26, 2002 and
require Novellus to purchase the LYONs 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. Additionally, Novellus
has the option of redeeming the LYONs on or after July 26, 2004 for cash.
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. For further discussion on these debentures, see
Notes to Condensed Consolidated Financial Statements, "Convertible Subordinated
Debentures".
During the nine months ended September 29, 2001, Novellus' cash and cash
equivalents decreased $48.6 million to $540.8 million from $589.4 million at
December 31, 2000 and decreased $167.6 million from the prior quarter. Net cash
provided by operating activities during the first nine months of 2001 was $62.4
million primarily due to net income of $127.3 million, tax benefits from
employee stock plans of $26.2 million and a decrease in accounts receivable of
$128.5 million, offset by a decrease in deferred profit of $139.0 million and an
increase in prepaids and other assets of $80.5 million.
Net cash flows used in investing activities were $1,022.8 million during the
nine months of 2001. The amount used in investing activities was primarily due
to purchases of restricted short-term investments of $899.2 million related to
the issuance of the LYONs and the refinancing of certain leases, a participation
in a synthetic lease receivable of $244.7 million, and capital expenditures of
$71.5 million, partially offset by net sales and maturities of
available-for-sale securities of $221.5 million.
During the first nine months of 2001, net cash provided by financing activities
was $911.7 million primarily due to $862.4 million in net proceeds from the
issuance of the LYONs and $42.7 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 $6.5 million under its bank lines of
credit.
At September 29, 2001, Novellus has no material commitments for capital
expenditures.
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.
16
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, financial condition, 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 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-
17
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 July 24, 2001, the Court entered an order denying Novellus' motion.
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, 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 (the "'597 Patent"). 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 still under
submission.
18
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 (the
"'036 Patent"). On July 24, 2001, the Court entered an order denying Applied's
motion, and modifying its claim construction with respect to the '036 patent.
On August 31, 2001 Applied filed a third motion for summary judgment that its
accused products do not infringe Novellus' U.S. Patent No. 5,635,036. Novellus
filed an opposition to this motion on October 5, 2001.
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.
On or about September 6, 2001, Semitool filed a petition for writ of certiorari
with the United States Supreme Court to review the judgment of the Federal
Circuit Court of Appeals. On October 10, 2001, Novellus filed an opposition to
Semitool's petition for writ of certiorari.
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
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 Novellus for patent infringement in the United
States District Court for the District of Oregon (the "District Court").
Semitool alleges that Novellus infringes Semitool's U.S. Patent No. 6,197,181
(the "'181 Patent"), issued March 6, 2001, entitled "Apparatus and Method for
Electrolytically Depositing a Metal on a Microelectronic Workpiece". Semitool
seeks an injunction against Novellus 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. Novellus
answered Semitool's complaint on July 23, 2001. In its answer, Novellus alleges
that it has not infringed Semitool's `181 patent, and that the `181 patent is
invalid.
Novellus believes that there are meritorious defenses to Semitool's allegations,
including among other things, that Novellus 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 Novellus believes that the ultimate outcome of the dispute with
Semitool will not have a material adverse effect on Novellus' business,
financial condition, or results of operations (taking into account the defenses
available to Novellus), 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 Novellus' business, financial
condition, or results of operations.
19
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 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.
ITEM 5: OTHER INFORMATION
The ratio of earnings to fixed charges for the nine months ended September 29,
2001 and each of the five most recent fiscal years was as follows:
Nine months ended
September 29, Year ended December 31,
2001 2000 1999 1998 1997 1996
- ------------------ ---- ---- ---- ---- ----
14.27 16.30 6.95 6.33 -- 146.59
The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings before income taxes and before the cumulative effect of a change
in accounting principle plus fixed charges. Fixed charges consist of interest
expense and that portion of net rental expense deemed representative of
interest. In the year ended December 31, 1997, Novellus incurred a loss of $92.7
million, net of an income tax benefit of $23.8 million. Fixed charges for this
period were $5.0 million.
20
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Participation Agreement by and among Novellus Systems, Inc., ABN
AMRO Leasing, Inc., Novellus Investment I, LLC, and ABN AMRO
Bank, N.V., as agent for the participants named therein, dated
September 21, 2001.
10.2 First Amendment to the Participation Agreement, dated April 18,
2001, by and among Novellus Systems, Inc., ABN AMRO Leasing,
Inc., and ABN AMRO Bank, N.V., as agent for the participants
named therein, dated September 21, 2001.
(b) Reports on Form 8-K
None
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)
November 13, 2001
------------------------------------
Date
21
EXHIBIT INDEX
Exhibits Description
-------- -----------
10.1 Participation Agreement by and among Novellus Systems, Inc., ABN
AMRO Leasing, Inc., Novellus Investment I, LLC, and ABN AMRO
Bank, N.V., as agent for the participants named therein, dated
September 21, 2001.
10.2 First Amendment to the Participation Agreement, dated April 18,
2001, by and among Novellus Systems, Inc., ABN AMRO Leasing,
Inc., and ABN AMRO Bank, N.V., as agent for the participants
named therein, dated September 21, 2001.