<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from _______ to _______
Commission File Number
0-17157
Novellus Systems, Inc.
(Exact name of Registrant as specified in its charter)
California 77-0024666
(State or other jurisdiction (I.R.S. Employer
of incorporation of Identification
organization) Number)
4000 North First Street
San Jose, California
(Address of principal 95134
executive offices) (Zip Code)
Registrant's telephone number, including area code:
(408) 943-9700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of August 4, 2000 131,068,829 shares of the Registrant's common stock, no par
value, were issued and outstanding.
1
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NOVELLUS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED JULY 1, 2000
INDEX
Part I: Financial Information
<TABLE>
<CAPTION>
Item 1: Condensed Consolidated Financial Statements Page
<S> <C>
Condensed Consolidated Balance Sheets at
July 1, 2000 and December 31, 1999. 3
Condensed Consolidated Statements of Income
for the three and six months ended July 1, 2000
and June 26, 1999. 4
Condensed Consolidated Statements of Cash Flows for
the three and six months ended July 1, 2000
and June 26, 1999. 5
Notes to Condensed Consolidated Financial
Statements. 6
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Item 3: Quantitative and Qualitative Disclosure About
Market Risk 15
Part II: Other Information
Item 1: Legal Proceedings 15
Item 4: Submission of Matters to a Vote of Security Holders 19
Item 6: Exhibits and Reports on Form 8-K 19
</TABLE>
<TABLE>
<S> <C>
Signatures 20
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
July 1, December 31,
2000 1999 (1)
Assets (unaudited)
------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 888,316 $ 181,568
Short-term investments 183,088 203,689
Accounts receivable, net 285,996 213,678
Inventories 136,859 103,883
Deferred income taxes 24,521 24,521
Prepaid and other current assets 7,213 5,327
--------------------------
Total current assets 1,525,993 732,666
Property and equipment:
Machinery and equipment 161,420 138,518
Furniture and fixtures 9,711 9,335
Leasehold improvements 57,082 54,349
Land 8,782 --
--------------------------
236,995 202,202
Less accumulated depreciation and amortization 110,073 95,423
--------------------------
126,922 106,779
Long-term deferred income taxes 11,770 11,770
Other assets 53,637 58,714
--------------------------
Total Assets $1,718,322 $ 909,929
==========================
Liabilities and Shareholders' Equity
-----------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 82,999 $ 43,438
Accrued payroll and related expenses 32,188 19,367
Accrued warranty 34,989 20,083
Other accrued liabilities 37,639 31,150
Income taxes payable 24,989 12,671
Current obligations under lines of credit 15,946 13,521
--------------------------
Total current liabilities 228,750 140,230
Commitments and contingencies
Shareholders' equity:
Common stock 1,078,535 490,587
Retained earnings 409,868 277,671
Accumulated other comprehensive income 1,169 1,441
--------------------------
Total shareholders' equity 1,489,572 769,699
--------------------------
Total Liabilities and Shareholders' Equity $1,718,322 $ 909,929
==========================
</TABLE>
(1) Derived from the December 31, 1999 audited financial statements.
See accompanying notes.
3
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NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
-------------------------------------------------------------------- ----------------------
(in thousands, except per share data) Three Months Ended Six Months Ended
(unaudited) July 1, June 26, July 1, June 26,
2000 1999 2000 1999
-------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C>
Net sales $325,987 $130,878 $600,058 $246,109
Cost of sales 141,250 61,296 260,373 115,393
---------------------- ----------------------
Gross profit 184,737 69,582 339,685 130,716
Operating expenses
Selling, general and administrative 42,302 24,728 79,332 46,599
Research and development 46,100 29,909 86,101 56,453
---------------------- ----------------------
Total operating expenses 88,402 54,637 165,433 103,052
---------------------- ----------------------
Operating income 96,335 14,945 174,252 27,664
Interest income, net 13,342 3,561 18,828 4,909
---------------------- ----------------------
Income before provision for income taxes 109,677 18,506 193,080 32,573
Provision for income taxes 34,000 6,107 59,855 10,749
---------------------- ----------------------
Net income $ 75,677 $ 12,399 $133,225 $ 21,824
====================== ======================
Basic net income per share $ 0.59 $ 0.11 $ 1.07 $ 0.19
====================== ======================
Diluted net income per share $ 0.56 $ 0.10 $ 1.00 $ 0.19
====================== ======================
Shares used in basic calculation 128,148 116,335 124,385 112,131
====================== ======================
Shares used in diluted calculation 136,029 120,781 132,585 117,087
====================== ======================
</TABLE>
See accompanying notes.
4
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NOVELLUS SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
(in thousands) Six Months Ended
(unaudited) July 1, June 26,
2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 133,225 $ 21,824
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes -- 4,191
Deferred compensation 1,013 --
Depreciation and amortization 19,079 13,624
Changes in operating assets and liabilities:
Accounts receivable (72,318) 4,132
Inventories (33,407) (23,378)
Prepaid and other current assets (1,886) (630)
Accounts payable 39,561 13,646
Accrued payroll and related expenses 12,821 2,058
Accrued warranty 14,906 (5,724)
Other accrued liabilities 6,490 (2,747)
Income taxes payable 44,460 2,840
-------------------------
Total adjustments 30,719 8,012
-------------------------
Net cash provided by operating activities 163,944 29,836
-------------------------
Cash flows from investing activities:
Maturities and sale (purchases) of available-for-sale
securities, net 21,457 (182,087)
Capital expenditures (38,273) (8,136)
Decrease/(increase) in other assets 3,697 (9,076)
-------------------------
Net cash used in investing activities (13,119) (199,299)
-------------------------
Cash flows from financing activities:
Proceeds/(payments) on lines of credit, net 2,425 (1,355)
Repayment on long-term debt -- (65,000)
Proceeds from sale of common stock 553,498 268,179
-------------------------
Net cash provided by financing activities 555,923 201,824
-------------------------
Net increase in cash and cash equivalents 706,748 32,361
Cash and cash equivalents at the beginning of the period 181,568 81,224
-------------------------
Cash and cash equivalents at the end of the period $ 888,316 $ 113,585
=========================
Supplemental Disclosures
Cash paid during the period for:
Interest $ 351 $ 1,185
Income taxes $ 13,923 $ 928
Other noncash charges:
Income tax benefits from employee stock plans $ 32,408 $ 5,057
</TABLE>
See accompanying notes.
5
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NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and six month periods ended
July 1, 2000 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
----------------------------------------------------------------
July 1, 2000 Dec. 31, 1999
----------------------------------------------------------------
<S> <C> <C>
Purchased parts $94,169 $71,688
Work-in-process 40,641 29,621
Finished goods 2,049 2,574
-------- ---------
$136,859 $103,833
======== =========
</TABLE>
3. LINES OF CREDIT
The Company has lines of credit with three banks which expire at various dates
through September 2000 under which the Company can borrow up to $15.9 million.
These facilities are available to the Company's Japanese subsidiary, Nippon
Novellus Systems K.K. Borrowings by the subsidiary are at the banks' offshore
reference rate. At July 1, 2000 and December 31, 1999, the amounts outstanding
were $15.9 million and $13.5 million, respectively.
4. EARNINGS PER SHARE
In accordance with Statement on Financial Accounting Standards No. 128,
"Earnings per Share," basic net income per common share is computed based on
weighted average common shares outstanding during the period. Diluted earnings
per share is computed using the weighted average common and dilutive common
equivalent shares outstanding during the period. Stock options are considered
common stock equivalents and are included in the diluted calculation of weighted
average shares using the treasury stock method.
6
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NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
---------------------- ----------------------
Three Months Ended Six Months Ended
July 1, June 26, July 1, June 26,
2000 1999 2000 1999
---------------------- ----------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 75,677 $ 12,399 $133,225 $ 21,824
Denominator:
Denominator for basic earnings per
share-weighted-average shares
outstanding 128,148 116,335 124,385 112,131
Employee stock options 7,881 4,446 8,200 4,956
---------------------- ----------------------
Denominator for diluted earnings per
share-adjusted weighted-average
shares outstanding 136,029 120,781 132,585 117,087
====================== ======================
Basic earnings per share $ 0.59 $ 0.11 $ 1.07 $ 0.19
====================== ======================
Diluted earnings per share $ 0.56 $ 0.10 $ 1.00 $ 0.19
====================== ======================
</TABLE>
5. LONG-TERM DEBT
In June 1997, the Company entered into a five year, $125.0 million, Senior
Credit Facility structured as an unsecured revolving credit line. The credit
line expires in June 2002. Borrowings, at the option of the Company, bear
interest at either a base rate plus a margin or the London Interbank Offering
Rate ("LIBOR") plus a margin for interest periods of one to six months. There
were no borrowings outstanding under the Senior Credit Facility at July 1, 2000
and December 31, 1999.
The Senior Credit Facility contains certain restrictive financial covenants. At
July 1, 2000 and December 31, 1999, the Company was in compliance with these
covenants.
6. COMMITMENTS
The Company has lease agreements on twelve properties. The agreements are for
five years each with the option to extend for an additional two years at an
interest rate that approximates LIBOR. The lease terms expire at various dates
beginning on June 2002 through September 2003. At current interest rates, the
annual lease payments total approximately $20.5 million. During the term of the
leases, the Company may elect to purchase the properties for an amount that
approximates the lessor's cost of the property and any current rent due and
payable. These leases contain certain restrictive financial covenants. At July
1, 2000, the Company was in compliance with these covenants.
7
<PAGE> 8
NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
7. COMPREHENSIVE INCOME
As of January 1, 1999, the Company adopted the Statement on Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS 130 requires unrealized gains
or losses on the Company's available-for-sale securities and foreign currency
translation adjustments, which prior to adoption were reported separately in
shareholder's equity, to be included in other comprehensive income.
The following are the components of comprehensive income:
<TABLE>
<CAPTION>
------------------------- -------------------------
Three Months Ended Six Months Ended
July 1, June 26, July 1, June 26,
2000 1999 2000 1999
------------------------- -------------------------
<S> <C> <C> <C> <C>
Net income $ 75,677 $ 12,399 $ 133,225 $ 21,824
Foreign currency translation
adjustment (336) 168 (862) (230)
Net unrealized change in
available-for-sale securities 590 -- 590 --
------------------------- -------------------------
Comprehensive income $ 75,931 $ 12,567 $ 132,953 $ 21,594
========================= =========================
</TABLE>
The components of accumulated other comprehensive income (loss), net of related
tax are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
July 1, 2000 Dec. 31, 1999
------------------------------------------------------------------------------------
<S> <C> <C>
Foreign currency translation adjustment $ 579 $1,441
Unrealized change in available-for-sale securities 590 --
------ ------
$1,169 $1,441
====== ======
</TABLE>
8. RECENT ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements of all public registrants. On
March 24, 2000, the SEC issued Staff Accounting Bulletin 101A (SAB 101A), which
permitted the delay in the Company's implementation date of SAB 101 until the
second quarter of fiscal 2000. On June 26, 2000, the SEC issued
8
<PAGE> 9
NOVELLUS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONTINUED
Staff Accounting Bulletin 101B (SAB 101B), which permitted a further delay in
the Company's implementation date of SAB 101 until the fourth quarter of fiscal
2000. The Semiconductor Capital Equipment Industry Association and a number of
association members, including the Company, have met with the SEC to discuss and
evaluate the applicability of SAB 101 and various practical implementation
considerations. We currently expect to implement the provisions of SAB 101 in
the quarter ended December 31, 2000. Changes, if any, in our revenue recognition
policy resulting from the interpretation of SAB 101 would not involve the
restatement of prior period financial statements, but would, to the extent
applicable, be reported as a change in accounting principle in the quarter
ending December 31, 2000, as if SAB 101 had been adopted on January 1, 2000.
Accordingly, any shipments previously recorded as revenue, including revenue
reported for the first through third quarters of fiscal 2000, that do not meet
SAB 101's guidance will be recorded as revenue in periods subsequent to that in
which they were originally recorded.
Management believes that SAB 101, 101A and 101B, to the extent that they impact
us, will not affect the underlying strength or weakness of our business
operations as measured by the dollar value of our product shipments and cash
flows.
9
<PAGE> 10
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the three and six months ended July 1, 2000 were $326.0 million
and $600.1 million, respectively. Net sales for the three and six months ended
June 26,1999 were $130.9 million and $246.1 million, respectively. The net sales
were $274.1 million in the quarter ended April 1, 2000. The increase in net
sales from the comparable year-ago periods and the immediately preceding quarter
is due to the continued capacity and technology purchases of the Company's core
products. Bookings for the second quarter of 2000 exceeded the 1:1 book-to-bill
ratio. The Company anticipates sequential revenue growth and the book-to-bill
ratio to exceed one to one, in the third quarter of 2000.
International net sales (including export sales) for the three and six months
ended July 1, 2000, were 68.9% and 71.6%, respectively, as a percentage of total
net sales, which compares to the prior year periods of 64.9% and 60.1%
respectively, and 74.7% for the immediately preceding quarter. The increase to
comparable prior year-ago periods is primarily due to higher net sales in the
Pacific Rim. The decrease from the immediately preceding quarter is primarily
due to increased net sales in North America.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements of all public registrants. On
March 24, 2000, the SEC issued Staff Accounting Bulletin 101A (SAB 101A), which
permitted the delay in the Company's implementation date of SAB 101 until the
second quarter of fiscal 2000. On June 26, 2000, the SEC issued Staff Accounting
Bulletin 101B (SAB 101B), which permitted a further delay in the Company's
implementation date of SAB 101 until the fourth quarter of fiscal 2000. The
Semiconductor Capital Equipment Industry Association and a number of association
members, including the Company, have met with the SEC to discuss and evaluate
the applicability of SAB 101 and various practical implementation
considerations. We currently expect to implement the provisions of SAB 101 in
the quarter ended December 31, 2000. Changes, if any, in our revenue recognition
policy resulting from the implementation of SAB 101 would not involve the
restatement of prior period financial statements, but would, to the extent
applicable, be reported as a change in accounting principle in the quarter
ending December 31, 2000, as if SAB 101 had been adopted on January 1, 2000.
Accordingly, any shipments previously recorded as revenue, including revenue
reported for the first through third quarters of fiscal 2000, that do not meet
SAB 101's guidance will be recorded as revenue in periods subsequent to that in
which they were originally recorded.
Management believes that SAB 101, 101A and 101B, to the extent that they impact
us, will not affect the underlying strength or weakness of our business
operations as measured by the dollar value of our product shipments and cash
flows.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTINUED
Gross profit as a percentage of net sales for the three months ended July 1,
2000 was 56.7% compared with 53.2% for the year-ago quarter. Gross profit as a
percentage of net sales increased slightly from 56.5% for the immediately
preceding quarter. Gross profit as a percentage of net sales for the six months
ended July 1, 2000 and June 26, 1999 was 56.6% and 53.1%, respectively. The
increase in gross margin from the comparable year-ago periods and the
immediately preceding quarter is due to improved absorption of fixed overhead
cost due to the increasing levels of shipments.
Selling, general and administrative expenses for the three and six months ended
July 1, 2000 were $42.3 million and $79.3 million, respectively, compared with
$24.7 million and $46.6 million in the comparable year-ago periods, and $37.0
million in the immediately preceding quarter. Selling, general and
administrative expenses as a percentage of net sales for the three and six
months ended July 1, 2000 were 13.0% and 13.2%, respectively, compared to 18.9%
for both comparable year-ago periods, and 13.5% for the immediately preceding
quarter. The increase in absolute dollars from the comparable year-ago periods
and the immediately preceding quarter is due to incremental selling expenses
associated with the increased sales volume, and related costs associated with
increased headcount to support the higher shipments. The decrease as a
percentage of net sales from the comparable prior year-ago periods and the
immediately preceding quarter is due to the Company's ongoing efforts to control
and minimize selling, general and administrative costs despite the rapid growth
of the Company.
Research and development expenses for the three and six months ended July 1,
2000 were $46.1 million and $86.1 million, respectively, an increase of $16.2
million and $29.6 million, respectively, when compared with comparable year-ago
periods. In addition, research and development expenses increased $6.1 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 July 1,
2000 were 14.1% and 14.3%, respectively, compared with 22.9% for both comparable
year-ago periods, and 14.6% for the immediately preceding quarter. The increase
in absolute dollars from the comparable year-ago periods and the immediately
preceding quarter reflects the Company's continuing commitment to the
development of new products, including additional Concept Two modules, advanced
PVD systems, electrofill systems, advanced "gap fill" technology, primary
conductor metals, low K dielectric materials and additional advanced
technologies for the next generation of smaller geometry fabrication lines, as
well as equipment to process 300mm wafers.
Net interest income for the three and six months ended July 1, 2000 was $13.3
million and $18.8 million respectively, compared with $3.6 million and $4.9
million for the comparable year-ago periods, and $5.5 million for the
immediately preceding quarter. On April 25, 2000 and May 4, 2000, the Company
completed a public offering of approximately 9.0 million shares of common stock
that resulted in net proceeds to the Company of approximately $526.3 million.
The increase in net interest income for the three and six months ended July 1,
2000, when compared to comparable year ago periods, is primarily due to interest
earned on the increased cash and short-term investments
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CONTINUED
resulting from the funds raised in the equity offering and from higher interest
rates earned on the Company's investment portfolio.
The Company's effective tax rate for the three and six months ended July 1, 2000
was 31% compared with 33% for the comparable year-ago periods. The decrease in
the effective tax rate from the comparable year-ago periods is due to increased
benefits from the Company's tax credits.
Deferred tax assets were $54.6 million net of valuation allowances of $12.3
million and $13.8 million at July 1, 2000 and December 31, 1999. The Company
believes that it is more likely than not that these assets will be realized by
an offset against the recognized tax liability of $18.3 million at July 1, 2000
and December 31, 1999, respectively, and by future taxable income.
Net income for the three and six months ended July 1, 2000 was $75.7 million and
$133.2 million, or $0.56 and $1.00 per share respectively, compared with net
income of $12.4 million and $21.8 million, or $0.10 and $0.19 per share, for the
comparable year-ago periods, and net income of $57.5 million, or $0.45 per
share, for the immediately preceding quarter.
The number of shares used in the per share calculations for the three and six
months ended July 1, 2000 was 136.0 million and 132.6 million, respectively,
compared with 120.8 million and 117.1 million for the comparable year-ago
periods and 129.1 million for the immediately preceding period. The increase in
shares used compared to the comparable year-ago periods and the immediately
preceding quarter is primarily due to an increased number of common stock
outstanding resulting from the common stock offering of 9.0 million shares in
April and May 2000.
EURO CONVERSION
On January 1, 1999, several member countries of the European Union established
fixed conversion rates between their existing sovereign currencies and adopted
the Euro as their new common legal currency. As of that date, the Euro traded on
currency exchanges and the legacy currencies remain legal tender in the
participating countries for a transition period between January 1, 1999 and
January 1, 2002. During the transition period, non-cash payments can be made in
the Euro, and parties can elect to pay for goods and services and transact
business using either the Euro or legacy currency. Between January 1, 1999 and
January 1, 2002 the participating countries will introduce Euro notes and coins
and withdraw all legacy currencies so that they will no longer be available. The
Euro conversion may affect cross-border competition by creating cross-border
transparency. The Company is assessing its pricing/marketing strategy in order
to ensure that it remains competitive in a broader European market. The Company
is also assessing its information technology systems to allow for transactions
to take place in both legacy currencies and the Euro and the eventual
elimination of the legacy currencies, and reviewing whether certain existing
contracts will need to be modified. The Company's currency risk for operations
in participating countries may be reduced as the legacy currencies are converted
to the Euro.
12
<PAGE> 13
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 July 1, 2000 consisted of $1,071.4
million of cash, cash equivalents and short-term investments. This amount
represents an increase of $686.1 million from the December 31, 1999 balance of
$385.3 million. During the second quarter of 2000, the Company completed a
secondary public offering of 9.0 million shares of common stock that resulted in
net proceeds to the Company of $526.3 million. During the second quarter of
1997, the Company entered into a five year $125 million Senior Credit Facility
structured as an unsecured revolving credit line. The borrowings, at the option
of the Company, bear interest at either a base rate plus a margin or the LIBOR
plus a margin for interest periods of one to six months. During March 1999,
total borrowings of $65 million under the Senior Credit Facility were repaid.
The Senior Credit Facility requires the Company to be in compliance with certain
financial covenants. At July 1, 2000, the Company was in compliance with these
financial covenants. In addition, at July 1, 2000, there was $15.9 million
available under bank lines of credit that expire at various dates through
September 2000. At July 1, 2000, approximately $15.9 million was outstanding
under these bank lines of credit, which bear interest at the banks' offshore
reference rates.
During the six months ended July 1, 2000, the Company's cash and cash
equivalents increased $706.7 million to $888.3 million from $181.6 million at
December 31, 1999. Net cash provided by operating activities during the first
six months of 2000 was $163.9 million due primarily to net income of $133.2
million, non-cash depreciation and amortization charges of $19.1 million, and
increases in current liabilities totaling $118.2 million partially offset by
increases in accounts receivable and inventories of $72.3 million and $33.4
million, respectively. The increases in inventories and current liabilities were
a result of increasing net sales volume, the related headcount increases to
support the higher sales volume and the Company's growing installed base.
Net cash flows used for investing activities was $13.1 million during the first
six months of 2000. During this period, the Company had capital expenditures of
$38.3 million which were partially offset by $21.5 million in maturities and
sales of available-for-sale securities and a $3.7 million decrease in other
assets.
The Company expects investments in property and equipment in the current fiscal
year to approximate $75.8 million of which $43.0 million had been committed as
of July 1, 2000. The Company intends to finance these investments from existing
cash balances and cash flows from operations.
During the first six months of 2000, net cash provided by financing activities
was $555.9 million primarily due to proceeds of $553.5 million from the sale of
common stock and a $2.4 million increase in the borrowings under the Company's
lines of credit.
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.
13
<PAGE> 14
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this Report on Form 10-Q that are not purely
historical in nature are "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21 E of the Securities
Exchange Act of 1934, including, without limitation, statements regarding the
Company's estimations, anticipations, determinations, commitments, expectations,
plans, hopes, beliefs, intentions or strategies regarding the future. Forward
looking statements include, without limitation, the statement regarding the
expected adoption of SAB 101 and its impact on the Company, the Company's
anticipations as to sequential bookings growth, sequential revenue growth,
sequential earnings growth, and the book to bill ratio exceeding one to one in
the second quarter of 2000, the Company's increasing commitment to the
development of new products, the Company's possible reduction of currency risk,
the Company's belief as to the realization of tax assets, the statements
regarding the Company's beliefs as to the sufficiency of its current cash
position to meet the Company's needs, the Company's expectations as to the
amount of its property and equipment investments in the current fiscal year, and
the Company's intention to finance such investments from existing cash balances
and cash flows from operations. These forward-looking statements involve risks
and uncertainties including, but not limited to, domestic and international
economic conditions, product demand and industry capacity, competitive products
and pricing, manufacturing efficiencies, new product development, ability to
enforce patents, the outcome of availability of raw materials and critical
manufacturing equipment, new plant startups, the regulatory and trade
environment, and other risks indicated in filings with the Securities and
Exchange Commission (SEC). Actual results may differ materially. Novellus
assumes no obligation to update this information. For more details, please refer
to other SEC filings, including the Company's most recent Annual Report on Form
10-K for the year ended December 31, 1999 and Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
APPLIED MATERIALS LITIGATION
On July 7, 1997, prior to the consummation of the purchase of TFS from Varian,
Applied Materials ("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.
Following consummation of the TFS purchase, the Company filed a complaint (the
"Company Complaint") against Applied in the same Court, Civil Action No.
C-97-20551 RMW, alleging infringement by Applied (including the making, using,
selling and/or offering for sale of certain products and systems) of United
States Patent Nos. 5,314,597, 5,330,628, and 5,635,036 (the "Company Patents"),
which patents the Company acquired from Varian in the TFS purchase. In the
Company Complaint, the Company also alleged that it is entitled to a declaration
from the Court that the Company does not infringe the Applied Patents and/or
that the Applied Patents are invalid and/or unenforceable. Applied has filed
counterclaims alleging that it does not infringe the Company Patents and that
the Company Patents are invalid and/or unenforceable.
Also after consummation of the TFS purchase, but some time after the Company
filed the Company Complaint, Applied sought to amend the Applied Complaint to
add the Company as a defendant. The Company has requested that the Court dismiss
the Company as a defendant in Applied's lawsuit against Varian. The Court has
not yet required the Company to file an answer to the Applied Complaint.
In addition to a request for a permanent injunction against further
infringement, the Applied Complaint includes a request for damages for alleged
prior infringement and treble damages for alleged "willful" infringement. In
connection with the consummation of the TFS purchase, Varian agreed, under
certain circumstances, to reimburse the Company for certain of its legal and
other expenses in connection with the defense and prosecution of this
litigation, and to indemnify the Company for a portion of any losses incurred by
the Company arising from this litigation (including losses resulting from a
permanent injunction). The Company and Varian believe that there are meritorious
defenses to Applied's allegations, including among other things, that the
Company's operations (including TFS products and systems) do not infringe the
Applied Patents and/or that the Applied Patents are invalid and/or
unenforceable. However, the resolution of intellectual property disputes is
often fact intensive and, therefore, inherently uncertain. Although the Company
believes that the ultimate outcome of the dispute with
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<PAGE> 16
Applied will not have a material adverse effect on the Company's business or
results of operations (taking into account both the defenses available to the
Company and Varian's reimbursement and indemnity obligations), there can be no
assurances that Applied will not ultimately prevail in this dispute and that, in
such an event, Varian's reimbursement and indemnity obligations will not be
sufficient to fully reimburse the Company for its losses. If Applied were to
prevail in this dispute, it could have a material adverse effect on the
Company's business or results of operations.
The Company Complaint also includes requests for damages for prior infringement
and treble damages for "willful" infringement, in addition to a request for a
permanent injunction against further infringement. Although the Company believes
that it will prevail against Applied, there can be no assurance that the Company
will prevail in its litigation against Applied. If Applied were to prevail
against the Company on the Company Complaint, it could have a material adverse
effect on the Company's business or results of operations.
On July 13, 1999, in the Company lawsuit against Applied where the Company has
alleged that Applied infringes Company patents, the Court ruled on the
interpretation of the claims of the Company patents. On September 20, 1999, in
the Applied lawsuit against Varian and the Company, where Applied has alleged
that Varian and the Company infringe Applied patents, the Court ruled on the
interpretation of the claims of the Applied patents. On January 14, 2000,
Applied withdrew its U.S. Patent No. 5,496,455 from the lawsuits against the
Company and Varian.
On March 16, 2000, the Court granted Varian's motion for summary judgement that
claims 14 & 18 of Applied's U.S. Patent No. 5,171,412 are invalid. In the same
order, the Court gave Applied 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.
SEMITOOL LITIGATION
On August 10, 1998, Semitool sued the Company for patent infringement in the
United States District Court for the Northern District of California. Semitool
alleges that the Company's SABRE(TM) and SABRE xT(TM) copper deposition systems
infringe two Semitool patents, U.S. Patent No. 5,222,310, issued June 29, 1993,
entitled "Single Wafer Processor with a Frame," and U.S. Patent No. 5,377,708,
issued January 3, 1995, entitled "Multi-Station Semiconductor Processor with
Volatilization." Semitool seeks an injunction against the Company's manufacture
and sale of SABRE(TM) and SABRE xT(TM) systems, and seeks 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 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.
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<PAGE> 17
On March 17, 2000, the Court granted the Company's motion for summary judgement
of non-infringement. The Court ruled that the Company's SABRE(TM) and SABRE
xT(TM) systems do not infringe the two patents asserted by Semitool.
On May 15, 2000, Semitool filed a notice of appeal, appealing the Court's
judgement to the United States Court of Appeals for the Federal Circuit.
PLASMA PHYSICS AND SOLAR PHYSICS LITIGATIONS
On December 28, 1999, Plasma Physics Corporation and Solar Physics Corporation
(collectively, "Plasma Physics") filed a patent infringement lawsuit against
many of the Company's Japanese and Korean customers. The suit is entitled Plasma
Physics and Solar Physics v. Fujitsu et al., Civil Action No. 99-8593, and is
pending in the United States District Court for the Eastern District of New
York. Plasma Physics has asserted U.S. Patent Nos. 4,226,897, 5,470,784, and
5,543,634 (the "'897, '784, and '634 patents," respectively). Many of the
defendants have notified the Company that they believe that the Company has
indemnification obligations and liability for the lawsuit. Plasma Physics has
not yet identified which of the Company's equipment used by customers is accused
of infringement.
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 April 17, 2000, Applied Materials 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 Applied Materials v. Plasma Physics and Solar Physics, Civil
Action No. 00-2199, and is pending in the United States District Court for the
Eastern District of New York. Applied Materials asked that this case be
consolidated with the pending patent infringement lawsuit against many of
Applied Material's Japanese and Korean customers. On May 23, 2000, Plasma
Physics filed a motion to dismiss Applied Material's complaint for a lack of
subject matter jurisdiction.
On June 1, 2000, the Company 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. The Company asked that this case be consolidated with the
pending patent infringement lawsuit against many of the Company's Japanese and
Korean customers. On June 30, 2000, Plasma Physics filed a motion to dismiss
Novellus' complaint for a lack of subject matter jurisdiction.
The Company believes that there are meritorious defenses to Plasma Physics'
allegations, including among other things, that the defendants' use of the
Company's equipment does not infringe the Plasma Physics patents and/or that the
Plasma Physics patents are invalid and/or unenforceable. But the resolution of
intellectual property disputes is often fact intensive and, like
17
<PAGE> 18
most other litigation matters, inherently uncertain. Although the Company
believes that the ultimate outcome of the dispute with Plasma Physics will not
have a material adverse effect on the Company's business, financial condition,
or result of operations (taking into account the defenses available to the
Company), there can be no assurances that Plasma Physics will not ultimately
prevail in this dispute and that the Company will not have any indemnity
obligations or liability. If Plasma Physics were to prevail in the dispute, it
could have a material adverse effect on the Company's business, financial
condition or results of operations.
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<PAGE> 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders, held on May 12, 2000, the
following proposals were adopted by the margins indicated.
1. Election of Directors
<TABLE>
<CAPTION>
Nominee In Favor Withheld
<S> <C> <C>
Richard S. Hill 103,521,509 249,704
D. James Guzy 103,531,100 240,113
J. David Litster 103,540,363 230,850
Tom Long 103,478,340 292,873
Glen Possley 103,521,244 249,969
Robert H. Smith 103,471,404 299,809
William R. Spivey 103,541,854 229,359
</TABLE>
2. Approval of an Amendment to the Company's 1992 Stock Option Plan to Increase
the Shares Reserved for Issuance by 5,805,000 Shares
In Favor Opposed Abstained
52,094,188 51,456,014 221,011
3. Ratification of Appointment of Ernst & Young LLP as Certified Public
Accountants of the Company for the next fiscal year ended December 31, 2000.
In Favor Opposed Abstained
103,616,077 49,143 105,993
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No reports on Form 8-K have been filed by the Company during the quarter
for which this report was filed.
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<PAGE> 20
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 Officer)
/s/ Kevin S. Royal
-----------------------------------------
Kevin S. Royal
Corporate Controller
(Principal Accounting Officer)
August 8, 2000
-----------------------------------------
Date
20
