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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1997
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)
3970 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
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As of June 28, 1997 16,629,566 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 28, 1997
INDEX
Part I: Financial Information
Item 1: Condensed Consolidated Financial Statements Page
Condensed Consolidated Balance Sheets at
June 28, 1997 and December 31, 1996. 3
Condensed Consolidated Statements of Income
for the three and six months ended June 28, 1997
and June 30, 1996. 4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 28, 1997
and June 30, 1996. 5
Notes to Condensed Consolidated Financial
Statements. 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Item 3: Not Applicable
Part II: Other Information
Item 1: Legal Proceedings 13
Item 4: Submission Of Matters to A Vote of Security Holders 15
Item 6: Exhibits and Reports on Form 8-K 15
Signatures 17
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NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
- ------------------------------------------------------------------------------------
Assets June 28, December 31,
1997 1996 (1)
(unaudited)
- ------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $34,116 $65,762
Short-term investments 15,557 110,906
Accounts receivable, net 134,157 119,710
Inventories 92,989 55,448
Deferred income taxes 16,299 18,058
Prepaid and other current assets 32,151 4,085
---------------------
Total current assets 325,269 373,969
Property and equipment:
Machinery and equipment 89,099 60,240
Furniture and fixtures 4,643 4,660
Leasehold improvements 37,273 36,309
---------------------
131,015 101,209
Less accumulated depreciation and amortization 43,031 34,991
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87,984 66,218
Deferred income taxes 24,674 --
Other assets 25,376 19,600
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$463,303 $459,787
=====================
Liabilities and Shareholders' Equity
- ------------------------------------------------------------------------------------
Current liabilities:
Current obligations under lines of credit $13,053 $13,153
Accounts payable 31,724 26,047
Accrued payroll and related expenses 16,760 17,404
Accrued warranty 33,310 18,566
Other accrued liabilities 54,858 10,210
Income taxes payable -- 771
----------------------
Total current liabilities 149,705 86,151
Long-term debt 65,000 --
Commitments and contingencies
Shareholders' equity:
Common stock 142,406 128,751
Cumulative translation adjustment (442) (81)
Retained earnings 106,634 244,966
----------------------
Total shareholders' equity 248,598 373,636
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$463,303 $459,787
======================
See accompanying notes.
(1) Derived from the December 31, 1996 audited financial statements.
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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 28, June 30, June 28, June 30,
1997 1996 1997 1996
- ----------------------------------------------------------------- ----------------------
Net sales $114,466 $120,248 $216,094 $235,532
Cost of sales 51,510 50,430 97,242 98,849
------------------- ----------------------
Gross profit 62,956 69,818 118,852 136,683
Operating expenses
Research and development 19,655 12,443 36,497 24,746
Selling, general and administrative 18,595 18,283 36,126 35,489
In-process research and development 119,246 -- 119,246 --
Restructuring and other costs 14,243 -- 14,243 --
Litigation settlement and related legal costs 84,021 -- 84,021 --
Bad debt write-off 17,700 -- 17,700 --
------------------- ----------------------
Total operating expenses 273,460 30,726 307,833 60,235
------------------- ----------------------
Operating income (loss) (210,504) 39,092 (188,981) 76,448
Interest income, net 1,370 1,684 3,503 3,573
------------------- ----------------------
Income (loss) before income taxes (209,134) 40,776 (185,478) 80,021
Provision (benefit) for income taxes (55,395) 14,272 (47,352) 28,008
------------------- ----------------------
Net income (loss) ($153,739) $26,504 ($138,126) $52,013
=================== ======================
Net income (loss) per share ($9.31) $1.60 ($8.40) $3.15
=================== ======================
Shares used in per share calculations 16,510 16,531 16,445 16,520
=================== ======================
See accompanying notes.
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NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------
(in thousands) Six Months Ended
(unaudited) June 28, June 30,
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Cash flows provided by operating activities:
Net income ($138,126) $52,013
Adjustments to reconcile net income to net cash
provided by operating activities:
In-process research & development 119,246 --
Restructuring & other costs 14,243 --
Bad debt write-off 17,700 --
Deferred income taxes (24,674) --
Depreciation and amortization 8,132 5,496
Changes in operating assets and liabilities
Accounts receivable (18,331) (2,254)
Inventories (13,431) (18,067)
Prepaid taxes and other current assets (638) (1,561)
Accounts payable (2,363) (9,807)
Accrued payroll and related expenses (3,167) (1,350)
Accrued warranty 1,025 1,240
Other accrued liabilities 15,110 4,131
Income taxes payable / refundable (21,730) (5,032)
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Total adjustments 91,122 (27,204)
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Net cash provided by operating activities (47,004) 24,809
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Cash flows from investing activities:
Maturities and sale (purchases) of Available-For-Sale
Debt Securities, net 95,349 (20,445)
Purchase of the net assets of the Thin Film Systems
business of Varian Associates (148,325) --
Capital expenditures (12,556) (18,514)
(Increase) decrease in other assets 6,830 (828)
-----------------------
Net cash used for investing activities (58,702) (39,787)
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Cash flows from financing activities:
Proceeds (payments)on lines of credit, net (100) 4,541
Borrowings under long-term debt 65,000 --
Repurchase of common stock (206) (592)
Proceeds from sale of common stock 9,366 3,027
-----------------------
Net cash provided by financing activities 74,060 6,976
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Net increase decrease in cash and cash equivalents (31,646) (8,002)
Cash and cash equivalents at the beginning of the period 65,762 60,114
-----------------------
Cash and cash equivalents at the end of the period $34,116 $52,112
=======================
Supplemental Disclosures Cash paid during the period for:
Interest $265 $176
Income taxes $359 $31,563
Other noncash charges:
Income tax benefits from employee stock plans $4,289 $1,442
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
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
28, 1997 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1996.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consisted of the following (in thousands):
- ----------------------------------------------------------------
June 28, 1997 Dec 31, 1996
- ----------------------------------------------------------------
Purchased parts $56,879 $40,211
Work-in-process 32,397 11,347
Finished goods 3,713 3,890
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$92,989 $55,448
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3. LINES OF CREDIT
The Company has lines of credit with four banks under which the Company can
borrow up to $15,053,000 at the banks' prime rate which expire at various dates
through June 1998. A portion of this facility ($13,053,000) is available to the
Company's Japanese subsidiary, Nippon Novellus Systems K.K. Borrowings by the
subsidiary are at the banks' offshore reference rate. At June 28, 1997 there
were no borrowings by the parent company, and $13,053,000 by the subsidiary.
4. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on weighted average common and dilutive
common equivalent shares outstanding during the period. Stock options are
considered common stock equivalents and are included in the weighted average
computation using the treasury stock method. Stock options were not included in
the computation of loss per share for the three and six months ended June 28,
1997 as their effect was antidilutive.
In February 1997, the Financial Accounting Standards Board issued the Statement
on Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share,"
which is required to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements, primary
earnings per share will be replaced by basic earnings per share. The primary
difference between primary earning per share and basic earnings per share is the
dilutive effect of stock options is excluded from
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basic earnings per share. The impact is expected to result in an increase in
calculated earnings (loss) per share for the second quarter ended June 28, 1997
and June 30, 1996 of $0.00 and $0.05 per share, respectively and for the 6
months ended June 28, 1997 and June 30, 1996 of $0.00 and $0.10 per share,
respectively. The impact of SFAS 128 on the calculation of fully diluted
earnings per share for these quarters is not expected to be material.
5. LITIGATION
On May 4, 1997, the Company entered into a comprehensive global settlement of
all of its ongoing legal disputes, to that date, with Applied Materials, Inc.
("Applied"). The Company recorded an expense of $84.0 million relating to the
settlement, consisting of a cash payment of $80.0 million to Applied and $4.0
million primarily related to legal costs associated with the settlement. See
Part II, Item 1 of this Form 10-Q for a description of Legal Proceedings.
6. ACQUISITION OF THE THIN FILM SYSTEMS BUSINESS OF VARIAN ASSOCIATES
On June 20, 1997, the Company completed the acquisition of the Thin Film Systems
business("TFS") of Varian Associates ("Varian"). TFS manufactures and markets
equipment for physical vapor deposition ("PVD"), a critical technology in the
production of advanced semiconductor logic and memory devices. The acquisition
has been accounted for under the purchase method of accounting, and accordingly,
the accompanying financial statements include the results of operations of TFS
subsequent to the acquisition date.
The currently estimated total purchase price of $148.3 million, consisted of a
cash payment of $145.5 million to Varian and $2.8 million of related acquisition
expenses. Acquired assets and liabilities were recorded at their estimated fair
values at the date of the acquisition. The aggregate purchase price, plus
related acquisition expenses, have been allocated to the assets and liabilities
acquired based on independent valuations. Amounts allocated to in-process
research and development of approximately $119.2 million were written-off at the
acquisition date, representing an estimated value (using risk-adjusted cash
flows, discounted at 35%) of development programs that have not yet reached
technological feasibility. Amounts allocated to developed technology, $11.7
million and workforce in place, $1.0 million are amortized on a straight line
basis over periods of seven and three years, respectively.
Pro-forma results of operations as if the transaction had occurred at the
beginning of fiscal 1996 are not shown as the information is unavailable at the
time of this filing. Pro-forma information is expected to be included in an
amendment to the Form 8-K, filed by the Company on July 7, 1997, reporting the
purchase of TFS. The purchase price allocation is preliminary and is dependent
on the Company's completion of the opening balance sheet audit of TFS.
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As a result of the acquisition of TFS the Company recorded restructuring costs
of $14.2 million comprised primarily of write-offs of duplicative assets and
exiting certain facilities. The Company expects that primarily all of these
actions will be incurred in the year ended December 31, 1997, with the exception
of certain lease commitments. The components of the restructuring charge are
summarized as follows:
- -----------------------------------------------------------
June 28, 1997
- -----------------------------------------------------------
Duplicative machinery and equipment $ 9,039
Lease commitments and leasehold improvements 3,143
Other exiting costs 2,061
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$14,243
========
7. LONG-TERM DEBT
In June 1997, the Company entered into a five year $125 million Senior Credit
Facility structured as an unsecured revolving credit line. The borrowings, at
the option of the Company bear interest at either a base rate plus a margin or
the London Interbank Offering Rate ("LIBOR") plus a margin for interest periods
of one to six months. As of June 28, 1997, total borrowings under the revolving
credit line were $65 million with a weighted average interest rate of
approximately 6.5%. The Senior Credit facility requires the Company maintain
compliance with certain financial covenants. At June 28, 1997, the Company was
in compliance with these financial covenants. The Senior Credit Facility
currently prohibits the Company from paying dividends.
8. BAD DEBT WRITE-OFF
In June 1997, the Company determined that due to the financial difficulties
facing one of its customers and lack of a satisfactory response from the
customer, during the quarter, the outstanding accounts receivable balance was at
risk for collection. Accordingly, the Company recorded a write-off of $17.7
million, representing the outstanding accounts receivable balance and other
related expenses for the repossession of its equipment.
9. COMMITMENTS
In June 1997, the Company entered into two new lease agreements adding two
buildings to the five existing buildings and 4.4 acres of undeveloped land
leased by the Company at December 31, 1996 . The agreements are for five years
each at an interest rate that approximates LIBOR. At current interest rates the
annual lease payments total approximately $3.5 million. During the term of the
lease, the Company may elect to purchase the properties for an amount that
approximates the lessor's cost of the property and any current rent due and
payable. The guaranteed residual amount under the lease agreements is
approximately $53.9 million.
The Company's facilities leases contain certain restrictive financial covenants.
At June 28, 1997, the Company was in compliance with these covenants.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the three months ended June 28, 1997 were $114.5 million, compared
with $120.2 million for the comparable year-ago quarter, and $101.6 million for
the immediately preceding quarter. Net sales for the six months ended June 28,
1997 were $216.1 million as compared with $235.5 million for the comparable
period a year ago. There was no material impact on the current quarter revenues
associated with the June 20, 1997 purchase of the Thin Film Systems business
("TFS"), of Varian Associates ("Varian"). The increase in net sales from the
immediately preceding quarter reflects increasing shipments of the Company's
Concept Two product line (which has a higher average selling price than the
Concept One product) and an overall increase in demand for semiconductor
equipment. The Company continues to see strong demand for its Concept Two
product line. Bookings for the second quarter of 1997 were greater than a 1:1
ratio. The decreases in net sales from the comparable year-ago periods was
primarily due to an overall decline in demand for semiconductor equipment which
began in the third quarter of 1996.
International net sales (including export sales) for the three and six months
ended June 28, 1997, were 30.6% and 42.3%, respectively, as a percentage of
total net sales, which compares to the prior year periods of 69.9% and 72.8%,
respectively. The decrease relates primarily to increased sales in the U.S.
offsetting the slow down in Japan, for which net sales as a percentage of
revenue have decreased to 10% and 11.1% for the three and six months ended June
28, 1997, from 35.1% and 35.4% for the comparable year-ago periods. The
Company's international system sales are primarily made directly to its
customers.
Gross profit as a percentage of net sales for the three and six months ended
June 28,1997 was 55%, compared with 58% for the comparable year-ago periods and
55% for the immediately preceding quarter. Gross profit as a percentage of sales
remained flat against the immediately preceding period, reflecting the continued
shift in mix away from the Company's higher margin Concept One product to its
Concept Two products, offset by increased absorption of fixed overhead costs due
to the increased manufacturing activity. The decreases in gross profit as a
percentage of net sales from the comparable year-ago periods is due to several
factors which include the shift in mix from the Company's high margin Concept
One product to its Concept Two products, pricing pressures due to the industry
slow-down and lower absorption of fixed overhead costs due to reduced
manufacturing activity. In addition, as a result of the TFS acquisition the
Company expects gross margins to decline in the third and fourth quarters of
fiscal 1997.
Research and development expenses for the three and six months ended June 28,
1997 were $19.7 million and $36.5 million respectively, an increase of $7.2
million and $11.8 million when compared with comparable periods last year and an
increase of $2.8 million when compared with the immediately preceding quarter.
Research and development expenses as a percentage of net sales for the three and
six months ended June 28,1997 represented 17.2% and 16.9% respectively, compared
with 10.3% and 10.5% for the comparable year-ago periods, and 16.6% for the
immediately preceding quarter. Absolute dollar levels of research and
development expenses increased significantly in the reported periods reflecting
the Company's increasing commitment to research and development spending on new
product development, even during periods of
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flat to declining revenues, particularly in the development of the Company's
Concept two and 300mm product lines. This spending, expressed as a percentage of
sales, increased dramatically because of the impact of lower net sales for the 6
months ended June 28, 1997.
Selling, general, and administrative expenses for the three and six months ended
June 28, 1997 were $18.6 million and $36.1 million respectively, essentially
flat compared with the comparable periods last year, and an increase of $1.1
million compared to the immediately preceding quarter. Selling, general, and
administrative expenses as a percentage of net sales for the three and six
months ended June 28,1997 were 16.2% and 16.7% respectively, compared with 15.2%
and 15.1% for the comparable year-ago periods and 17.2% for the immediately
preceding quarter. The increase in selling, general, and administrative expenses
as a percentage of sales from the year ago periods is primarily due to the
impact of the addition of TFS. The decrease in selling, general, and
administrative expenses as a percentage of sales from the immediately preceding
quarter is a result of increased sales levels quarter over quarter.
Acquisition of TFS. On June 20, 1997, the Company completed the acquisition of
TFS. In connection with this, the Company recorded pre tax charges of $133.5
million during the three months ended June 28, 1997. These charges included
$119.3 million for in-process research and development and $14.2 million
attributed to restructuring charges, relating to write-offs of duplicative
assets and facilities at the Company.
To determine the value of the acquired in-process research and development
technology, the Company considered, among other factors, the stage of
development of each project, the time and resources needed to complete each
project, expected income, target markets and associated risks. Associated risks
include the inherent difficulties and uncertainties in completing each project
and thereby achieving technological feasibility, and the risks related to the
viability of potential changes in future target markets. Due to the absence of a
completed working model at which point functions, features and technical
performance requirements can be demonstrated, as of the date of the acquisition,
the Company concluded that the in-process technology had no alternate future use
after considering potential future usage in different products, resale, and
internal usage. A discount rate of 35% was applied in the independent valuation
of in-process technology. The analysis resulted in a valuation of $119.3
million. Therefore, in accordance with generally accepted accounting principles,
the $119.3 million was expensed. The estimated cost associated with the
remaining development of these projects is expected to be $54.8 million, which
the Company expects to incur over the next three to four years.
Other charges. The Company recorded one time charges of $84.0 million and $17.7
million related to the settlement of the Applied Materials CVD patent suit and a
customer account write-off, respectively. (See Part II, Item 1 of this Form 10-Q
for a description of Legal Proceedings.)
Net interest income decreased by $0.3 million and $0.1 million for the three and
six months ended June 28, 1997 compared with the comparable year-ago periods,
and $0.7 million for the immediately preceding quarter. The decreases from the
year-ago periods and the immediately preceding period is due to lower cash
balances, as a result of the payment of $80 million to Applied Materials, for
the settlement of the CVD patent suit and to a lesser extent, the payment to
Varian for the acquisition of TFS.
The Company's effective tax rate for the three and six months ended June 28,1997
was 26% compared with 35% for the comparable year-ago periods and 34% for the
immediately preceding period. The decrease is primarily attributable
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to the valuation reserve established against a portion of the deferred tax asset
arising from the write-off of the purchased in-process research & development.
The Company expects that taxable income in future periods will be sufficient to
realize all the benefits of the recorded net deferred tax assets. The effective
tax rate for the remainder of fiscal 1997 is anticipated to be 34%.
Net income (loss) for the three and six months ended June 28,1997 was $(153.7)
million or $(9.31) per share and $(138.1) million or $(8.40) per share
respectively, compared with $26.5 million or $1.60 per share and $52.0 million
or $3.15 per share for the comparable year-ago periods, and $15.6 million or
$0.91 per share for the immediately preceding quarter. The change to a net loss
from a net income for the three and six month ended June 28, 1997, is
attributable to the impact of the charges of $119.2 million related to the
in-process research and development and $14.2 million attributed to
restructuring charges, in connection with the acquisition of TFS, and charges of
$84.0 million and $17.7 million related to the settlement of the Applied
Materials CVD patent suit and a customer account write-off, respectively.
Without giving effect to these charges the Company's operating results reflected
net income for the three and six months ended June 28, 1997 of $17.2 million or
$1.00 per share and $32.8 million or $1.91 per share, respectively.
The number of shares used in the per share calculations for the three and six
months ended June 28,1997 was 16.5 million and 16.4 million respectively,
compared with 16.5 million for the comparable year-ago periods and 17.1 million
for the immediately preceding period. The decrease in shares used compared to
the immediately preceding quarter is the impact of the exclusion of common stock
equivalents for the three and six months ended June 28, 1997 as they are
antidilutive to loss periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and capital resources
through cash flow from operations, sales of equity securities, and borrowings.
The Company's primary sources of funds at June 28, 1997 consisted of $49.7
million of cash, cash equivalents and short term investments. This amount
represents a decrease of $127.0 million from the December 31, 1996 balance of
$176.7 million. During the quarter the Company entered into a five year $125
million Senior Credit Facility structured as an unsecured revolving credit line.
The borrowings, at the option of the Company bear interest at either a base rate
plus a margin or LIBOR plus a margin for interest periods of one to six months.
As of June 28, 1997, total borrowings under the Senior Credit Facility were $65
million with a weighted average interest rate of approximately 6.5%. The Senior
Credit facility requires the Company to be in compliance with certain financial
covenants. At June 28, 1997, the Company was in compliance with these financial
covenants. The Senior Credit Facility currently prohibits the Company from
paying dividends. In addition at June 28, 1997, there was $15 million available
under bank lines of credit that expire at various dates through June 1998. At
June 28, 1997 approximately $13.1 million was outstanding under these bank lines
of credit which bear interest at the banks' prime lending rates or offshore
reference rates.
During the six months ended June 28, 1997, the Company's cash and cash
equivalents decreased $31.6 million to $34.1 million from $65.7 million at
December 31, 1996. Net cash used by operating activities during the first six
months of 1997 was $(47.0) million due primarily to a net loss of $138.1
million, increases in accounts receivable and inventories of $18.3 million and
$13.4 million respectively, income taxes payable / refundable of $21.7 million,
and the impact of recording the deferred income tax asset of $24.7
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million. These amounts were partially offset by non-cash charges of $119.2
million, $14.2 million and $17.7 million, relating to the write-off of
in-process research and development, restructuring costs and a bad debt
write-off, respectively. The increase in accounts receivable was primarily due
to the increased level of sales for the quarter ended June 28, 1997 as compared
to the quarter ended December 31, 1996.
Net cash flows from investing activities used $58.7 million during the first six
months of 1997. During this period, the Company paid $148.3 million for the
purchase of TFS and had capital expenditures of $12.6 million, which was offset
by the net sales of Available-For-Sale Debt Securities which generated $95.3
million.
During the first six months of 1997, net cash provided by financing activities
was $74.3 million, due primarily to the drawing down of $65 million on the $125
million Senior Credit Facility. Additionally, the Company has received proceeds
from common stock option exercises of $9.4 million. The Company believes that
its current cash position and cash generated through operations, if any, will be
sufficient to meet the Company's needs through at least the next twelve months.
The Company expects investment in property and equipment in the current fiscal
year to approximate $42 million of which $12.5 million has been incurred as of
June 28, 1997. The Company intends to finance these investments from existing
cash balances and cash flows from operations.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: The statements regarding the Company continuing to see strong demand for
its Concept Two product line, the statement regarding the Company's increasing
commitment to research and development spending on new product development. The
statement regarding the estimated cost associated with the remaining development
of TFS research and development projects, the statement regarding the Company's
cash needs over the next twelve months, the statement regarding the Company's
expectation that gross margins will decline in third and fourth quarters of
fiscal 1997, the statement regarding the Company's expectation that taxable
income in future periods will be sufficient to realize the benefits of the
recorded net deferred tax assets, the statement regarding the effective tax rate
for the remainder of fiscal 1997 is anticipated to be 34%, and the statements as
to the Company's anticipated investments in property and equipment in the
current fiscal year and the Company's intentions as to the source of financing
for these investments, except for any historical data, are forward-looking
statements. The forward-looking statements involve risks and uncertainties
including, but not limited to, economic conditions, product demand and industry
capacity, competitive products and pricing, manufacturing efficiencies, new
product development, ability to enforce patents, the outcome of litigation (see
"Legal Proceedings" Part II Item 1), availability of raw materials and critical
manufacturing equipment, new plant startups, the regulatory and trade
environment, and other risks indicated in filings with the Securities and
Exchange Commission (SEC). Actual results may differ materially. Novellus
assumes no obligation to update this information. For more details, please refer
to other SEC filings, including its most recent Annual Report on Form 10-K and
Quarterly Report on Form 10-Q.
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PART II OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
Applied Materials, Inc. vs. Novellus Systems, Inc. (Case No. C-95-0243-CAL).
On April 11, 1997, after a jury trial, a jury verdict was entered in favor of
Applied Materials, Inc. ("Applied") and against the Company in the TEOS action,
case no. C-95-0243-CAL in the United States District Court for the Northern
District of California. On May 4, 1997, the Company entered in to a
comprehensive global settlement of all of its then-ongoing legal disputes with
Applied. Pursuant to the terms of a Settlement Agreement, Applied and the
Company agreed as follows:
(1) the Company and Applied agreed to dismiss with prejudice all legal actions
then-ongoing between Applied and the Company and entered into mutual general
releases of any related claims;
(2) the Company agreed to pay Applied $80 million;
(3) Applied granted the Company a non-exclusive, worldwide, non-transferable
and, with limited exceptions, non-assignable license under U.S. patent no.
5,362,526 (the "526 Patent") to make, use, sell, lease, service, support and
import TEOS systems manufactured by or, under limited circumstances, for the
Company until expiration of the `526 patent and related foreign patents;
(4) the Company agreed to pay Applied a royalty based on a percentage of net
revenue of licensed TEOS systems and subsystems until the expiration of the `526
patent;
(5) the Company granted Applied a royalty-free, non-exclusive, worldwide,
non-transferable and, with limited exceptions, non-assignable license under
certain of the Company's chemical vapor deposition ("CVD") patents to make, use,
sell, lease, service, support and import equipment manufactured and marketed by
Applied until the expiration of such patents;
(6) Applied granted to the Company a royalty-free, non-exclusive, worldwide,
non-transferable and, with limited exceptions, non-assignable license under
certain of Applied's chemical vapor deposition ("CVD") patents to make, use,
sell, lease, service, support and import equipment manufactured and marketed by
the Company until the expiration of such patents; and
(7) the Company gave Applied the right to terminate the Settlement Agreement,
including the license of Applied's `526 and CVD patents upon the sale by the
Company of all or substantially all of specified portions of the Company's
business or assets or the occurrence of certain merger, combination or
investment transactions involving the Company.
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Applied Materials, Inc. vs. Varian Associates Inc. and Novellus Systems, Inc.
(Case No. 6-97-20523).
On July 7, 1997, prior to the consummation of the purchase of the Thin Film
Systems Business ("TFS") of Varian Associates ("Varian"), Applied Materials,
Inc. ("Applied") filed a complaint (the "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, operating, 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. After consummation of the TFS
purchase, Applied amended the Complaint to add the Company as a defendant. In
addition to a request for a permanent injunction against further infringement,
the Complaint includes requests for damages for alleged prior infringement and
treble damages for alleged "willful" infringement. In connection with the
consummation of the TFS purchase, Varian agreed, under certain circumstances, to
reimburse the Company for certain of its legal and other expenses in connection
with the defense and prosecution of this litigation, and to indemnify the
Company for a portion of any losses incurred by the Company arising from this
litigation (including losses resulting from a permanent injunction). The Company
believes, and has been advised by Varian, that Varian believes that there are
meritorious defenses to Applied's allegations, including among other things,
that the Company's operations (including TFS products and systems) do not
infringe the Applied Patents and that a portion of the Applied Patents are
invalid. However, the resolution of intellectual property disputes is often fact
intensive and, therefore, inherently uncertain. Although the Company believes
that the ultimate outcome of the dispute with Applied will not have a material
adverse effect on the Company's business or results of operations (taking into
account both the defenses available to the Company and Varian's reimbursement
and indemnity obligations), there can be no assurances that Applied will not
ultimately prevail in this dispute and that, in such an event, Varian's
reimbursement and indemnity obligations will not be sufficient to fully
reimburse the Company for its losses.
Other Litigation
In the normal course of business, the Company from time to time receives
inquiries with regard to possible patent infringements. Management believes that
it is unlikely that the outcome of the patent infringement inquiries will have a
material adverse effect on the Company's financial position 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 23, 1997, the
following proposals were adopted by the margins indicated.
1. Election of Directors
Nominee In Favor Withheld
------- -------- --------
Richard S. Hill 14,800,793 49,589
D. James Guzy 14,800,460 49,922
Tom Long 14,798,318 52,064
Glen Possley 14,796,517 53,865
Robert H. Smith 14,797,459 52,923
Joseph Van Pappelen 14,798,052 52,330
2. Approval of an Amendment to the Company's 1992 Stock Option Plan to Increase
the Shares Reserved for Issuance by 660,000 Shares
In Favor Opposed Abstained Broker Non-Votes
-------- ------- --------- ----------------
7,409,474 7,102,260 37,490 301,158
3. Approval of an Amendment to the Company's 1992 Employee Stock Purchase Plan
to Increase the Shares Reserved for Issuance by 40,000 Shares
In Favor Opposed Abstained Broker Non-Votes
-------- ------- --------- ----------------
14,376,641 206,513 37,643 229,585
4. Ratification of Appointment of Ernst & Young LLP as Certified Public
Accountants of the Company for the next fiscal year ended December 31, 1997.
In Favor Opposed Abstained
-------- ------- ---------
14,827,765 9,501 13,116
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) 2.1 Asset Purchase Agreement by and between Varian Associates, Inc. and the
Company dated May 7, 1997, attached as Exhibit 2.1 to the Company's Form 8-K
dated July 7, 1997 and incorporated herein by reference thereto.
2.2 First Amendment to Asset Purchase Agreement by and between Varian
Associates, Inc. and the Company dated June 20, 1997 attached as Exhibit 2.2 to
the Company's Form 8-K dated July 7, 1997 and incorporated herein by reference
thereto.
2.3 Assignment and Assumption of Lessee's Interest in Lease (Units 8
and 9, Palo Alto) and Covenants, Conditions and Restrictions on Leasehold
Interests (Units 1-12 Palo Alto) by and between Varian Associates, Inc. and
15
16
the Company dated May 7, 1997 attached as Exhibit 2.3 to the Company's Form 8-K
dated July 7, 1997 and incorporated herein by reference thereto.
2.4 Sublease (Portion of Unit 9, Palo Alto) by and between Varian
Associates, Inc. and the Company dated May 7, 1997 attached as Exhibit 2.4 to
the Company's Form 8-K dated July 7, 1997 and incorporated herein by reference
thereto.
2.5 Shared Use Agreement by and between Varian Associates, Inc. and the
Company dated May 7, 1997 attached as Exhibit 2.5 to the Company's Form 8-K
dated July 7, 1997 and incorporated herein by reference thereto.
2.6 Environmental Agreement by and between Varian Associates, Inc. and
the Company dated May 7, 1997 attached as Exhibit 2.6 to the Company's Form 8-K
dated July 7, 1997 and incorporated herein by reference thereto.
2.7 Cross License Agreement by and between Varian Associates, Inc. and
the Company dated May 7, 1997 attached as Exhibit 2.7 to the Company's Form 8-K
dated July 7, 1997 and incorporated herein by reference thereto.
2.8 Parts Supply Agreement by and between Varian Associates, Inc. and
the Company dated May 7, 1997 attached as Exhibit 2.8 to the Company's Form 8-K
dated July 7, 1997 and incorporated herein by reference thereto.
10.1 Settlement Agreement by and between Applied Materials, Inc. and
the Company dated May 7, 1997. Confidential treatment has been requested with
respect to portions of this Exhibit.
10.2 Credit Agreement by and among ABN AMRO Bank, N.V., as agent, the
lenders named therein, and the Company dated May 7, 1997.
10.3 Facility 1 Lease Agreement, Deed of Trust With Assignment of
Rents, Security Agreement and Fixture Filing by and between Lease Plan North
America, Inc. and the Company dated June 9, 1997.
10.4 Facility 2 Lease Agreement, Construction Deed of Trust With
Assignment of Rents, Security Agreement and Fixture Filing by and between Lease
Plan North America, Inc. and the Company dated June 9, 1997.
(b) Report on Form 8-K (No. 000 17157) was filed by Company the July 7, 1997
with respect to the Company's purchase of the Thin Film Systems Business of
Varian Associates, Inc. as described in item 2 of the Form 8-K.
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17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOVELLUS SYSTEMS, INC.
----------------------
REGISTRANT
/S/ ROBERT H. SMITH
---------------------------------------------
Robert H. Smith
Executive Vice President
Finance and Administration
(Principal Financial and Accounting Officer)
August 11, 1997
---------------
Date
17
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EXHIBIT INDEX
10.1 Settlement Agreement by and between Applied Materials, Inc. and
the Company dated May 7, 1997. Confidential treatment has been requested with
respect to portions of this Exhibit.
10.2 Credit Agreement by and among ABN AMRO Bank, N.V., as agent, the
lenders named therein, and the Company dated May 7, 1997.
10.3 Facility 1 Lease Agreement, Deed of Trust With Assignment of
Rents, Security Agreement and Fixture Filing by and between Lease Plan North
America, Inc. and the Company dated June 9, 1997.
10.4 Facility 2 Lease Agreement, Construction Deed of Trust With
Assignment of Rents, Security Agreement and Fixture Filing by and between Lease
Plan North America, Inc. and the Company dated June 9, 1997.
27 Financial Data Schedule