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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
Mark one
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 25, 1998
[ ] 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 0-6920
APPLIED MATERIALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-1655526
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3050 Bowers Avenue, Santa Clara, California 95054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 727-5555
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of class on which registered
-------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant as of December 18, 1998: $16,799,361,740
Number of shares outstanding of the issuer's Common Stock, $.01 par value,
as of December 18, 1998: 371,763,263
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Applied Materials 1998 Annual Report for the year ended
October 25, 1998 are incorporated by reference into Parts I, II and IV of this
Form 10-K.
Portions of the definitive Proxy Statement for Applied Materials' Annual
Meeting of Stockholders to be held on March 31, 1999 are incorporated by
reference into Part III of this Form 10-K.
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When used in this Form 10-K, the words "anticipate," "estimate," "expect," and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements reflect management's opinion as of the date hereof
and are subject to certain risks and uncertainties that could cause actual
results to differ materially from those stated or implied. Applied Materials,
Inc. (Applied Materials or the Company) assumes no obligation to update this
information. Risks and uncertainties include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis-
Trends, Risks and Uncertainties" in the Applied Materials 1998 Annual Report,
which section is incorporated herein by reference.
PART I
ITEM 1: BUSINESS
Organized in 1967, Applied Materials develops, manufactures, markets and
services semiconductor wafer fabrication equipment and related spare parts for
the worldwide semiconductor industry. The Company's customers include
semiconductor wafer manufacturers and semiconductor integrated circuit (IC)
manufacturers, who either use the ICs they manufacture in their own products or
sell them to other companies. In early fiscal 1999, the Company entered the
semiconductor and electronics manufacturing execution systems software and
services business through its acquisition of Consilium, Inc.
PRODUCTS
Applied Materials' products are used to build ICs, or chips, on a substrate of
material (typically silicon). These products, also referred to as equipment or
systems, are designed using sophisticated physics, chemistry and engineering
technology to provide chipmakers productive, reliable and cost-effective
solutions for the manufacture of their products.
Building a chip requires the deposition of a series of film layers, which may be
conductors, insulators (called "dielectrics") or semiconductors. The deposition
of these film layers is interspersed with numerous other processes that create
circuit patterns, remove portions of the film layers, and perform other
functions, such as heat treatment, measurement and inspection. Most advanced
chip designs require well over 300 individual steps, so many of these processes
are performed multiple times. Most chips are built on a base of silicon, called
a wafer, and consist of two main structures. The lower structure is made up of
components, typically transistors or capacitors, that perform the "smart"
functions of the chip. The upper structure consists of the "interconnect"
circuitry that connects the components.
Applied Materials' product line includes equipment capable of performing the
following major steps in the chip-building process: film deposition, etching,
ion implantation, rapid thermal processing (RTP), chemical mechanical polishing
(CMP), reticle inspection, wafer defect detection and review, and metrology. In
calendar 1998, the Company estimates that it was the leading supplier of
chemical and physical vapor deposition, plasma etch, epitaxial deposition, RTP
and CMP systems to the semiconductor industry.
SYSTEM ARCHITECTURES
The architecture of most semiconductor processing equipment is basically either
a "batch" or "single-wafer" type. Batch systems process many wafers at once,
whereas single-wafer systems process each wafer individually. Among single-wafer
systems, there are single-chamber and multi-chamber designs. Multi-chamber
systems can accept two or more individual processing chambers or stations on a
"platform" and can process wafers in each of these chambers simultaneously.
In addition to the process precision and control afforded by single-wafer
process chambers, the multi-chamber platform concept provides customers a
significant benefit in processing productivity and integration. Several process
chambers can be mounted on a platform, which acts as a central wafer-handling
system. This architecture provides a closed, vacuum controlled environment for
the wafer and enables the system to process several wafers simultaneously. Since
Applied Materials' first multi-chamber platform (the Precision 5000(R)) was
introduced in 1987, the use of multi-chamber platform technology has helped the
Company achieve fast and efficient entry into new market segments by allowing
new technology development to focus on the process chamber.
Applied Materials is the global leader in single-wafer, multi-chamber platforms,
and has four major processing architectures--the Precision 5000, the Centura(R),
the Endura(R) and the Producer(TM) platforms, which together have a global
installed base exceeding 6,500 systems. These platforms currently support
chemical vapor deposition, physical vapor deposition, RTP, epitaxy,
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polysilicon and plasma etch technologies. The Company's Mirra(R) CMP, ion
implantation, reticle inspection, wafer defect detection and review, and
metrology systems each use their own proprietary platform due to the unique
nature of their technologies.
PROCESS TECHNOLOGIES
Deposition. Deposition is a fundamental step in fabricating an integrated
circuit. During deposition, a layer of either electrically insulating
(dielectric) or electrically conductive material is deposited or grown on a
wafer. The Company offers products in chemical vapor deposition, physical vapor
deposition, epitaxial deposition and polysilicon deposition. Additionally, the
Company offers certain types of dielectric deposition processes with its RTP
systems (see page 5).
Chemical Vapor Deposition (CVD) Systems. CVD is used to deposit films that
function as dielectrics (insulators), metals (conductors) or semiconductors
(partial conductors). Applied Materials uses three platforms for depositing
dielectric CVD films: Precision 5000, Centura and Producer. The Company entered
the CVD market with the Precision 5000 platform in 1987, and continued product
development on the Precision 5000 and Centura platforms during the 1990s. The
Producer was introduced in June 1998 for high-volume blanket film applications,
and features unique Twin-Chamber(TM) process modules with two single-wafer
process chambers per module unit. Up to three Twin-Chamber modules can be
mounted on each Producer platform, thus considerably increasing wafer throughput
by allowing six wafers to be processed simultaneously. Producer offers many of
the Company's standard dielectric CVD applications for blanket (non-gap-fill)
films.
High-Density Plasma CVD (HDP-CVD) is one of the most advanced technology market
segments in dielectric CVD because of its ability to fill very small, deep
spaces (gaps) without voids. In November 1996, the Company launched a
second-generation HDP-CVD technology, called the Ultima HDP-CVD(TM) Centura. A
unique "Remote Plasma Clean" technology was first introduced on the Ultima
HDP-CVD system, and has since been expanded to other CVD systems, offering
"soft" chamber cleaning without damage to chamber parts and virtually zero
perfluorocompound "global warming" emissions. This feature provides
environmental benefits that are becoming increasingly important to chipmakers.
Other dielectric CVD process technologies include films deposited using
plasma-enhanced CVD (PECVD) methods as well as sub-atmospheric CVD (SACVD)
methods. A steady stream of chamber enhancements and new chamber designs -- like
the zero-consumables xZ(TM)-series of chambers -- have contributed to the
continuing acceptance of these products in the most advanced fabs. The Company's
newest dielectric film is Black Diamond(TM), a low dielectric constant (low k)
film used as insulating material between copper circuit lines.
Metal films are used in specific areas of an integrated circuit to form the
interconnect circuitry, or wiring, of a semiconductor device. Applied Materials
has offered metal CVD systems since 1989, beginning with blanket tungsten
capability on the Precision 5000 CVD system and later extended to the Centura
platform. Since that time, tungsten silicide, titanium, titanium nitride and
aluminum have been added to the Company's metal CVD capabilities. Fiscal 1998
new process announcements included a proprietary low-resistivity tungsten
process that cuts the electrical resistance of tungsten by up to 40 percent. A
new type of titanium/titanium nitride (Ti/TiN) process using TiCl4 chemistry was
launched for very small, deep contacts in DRAM (Dynamic Random Access Memory)
ICs.
Physical Vapor Deposition (PVD) Systems. PVD is mainly a physical, rather than
chemical, process used to deposit metal films on a wafer. Applied Materials
entered the PVD market in April 1990 with the Endura PVD system. This system is
designed with a multi-chamber, dual-loadlock architecture that moves a wafer
through a staged vacuum sequence to an ultra-high vacuum level, which ensures
maximum purity of the deposited films. The Endura system, with its many
subsequent enhancements, has been the basis for a broad range of advanced PVD
applications. A variety of process advancements have also been continually
introduced to keep pace with customers' changing technology requirements.
Ion Metal Plasma (IMP) PVD, introduced in 1997, uses a proprietary technology to
allow metal atoms to fill very narrow, deep structures with a uniform layer of
film. IMP has been generally accepted by the industry as a technology that
extends low-cost PVD technology to future processing schemes. IMP technology is
used in Applied Materials' Endura Electra(TM) Barrier/Seed Cu system and Endura
Ti/TiN Liner/Barrier systems.
The flexible architecture of the Endura system has encouraged the development of
integrated processes that combine multiple PVD processes or integrated
combinations of metal CVD and PVD technologies. In 1996, two integrated
processes combining metal CVD and PVD technologies were announced on the Endura
platform. The Endura Advanced Liner system features PVD titanium technology
coupled with either CVD TiN or IMP PVD TiN to form the critical liner/barrier
films in interconnect structures. The Cool Al(TM)
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process uses CVD aluminum and PVD aluminum for the bulk filling of very small,
deep interconnect structures. The low temperature of the process is compatible
with the low k dielectric films that are being developed to make high speed,
multi-level devices at or below 0.25-micron design geometries.
Epitaxial Deposition Systems. Epitaxial deposition (epitaxy or epi) systems grow
a layer of extremely pure silicon on a wafer in a perfectly uniform
crystalline structure to form a high quality base for building certain types of
chips. Applied Materials' experience in epi dates from the Company's inception.
In 1993, the Company introduced the Epi Centura, a single-wafer, multi-chamber
epi system for wafers up to 200mm (8 inches) in diameter. The Epi Centura is
also being used to develop and manufacture leading-edge silicon-germanium
(SiGe)-based devices for faster performing transistors with lower power
consumption.
Polysilicon Deposition Systems. Polysilicon (often called poly) is a material
used to form various portions of a transistor structure within a semiconductor
device. In September 1992, the Company announced the Poly Centura, a
single-wafer, multi-chamber system that deposits thin polysilicon films at high
temperatures. The Polycide Centura, launched in December 1993, combines chambers
for polysilicon and tungsten silicide deposition in an integrated process to
create the "polycide" structures found in advanced semiconductors. By depositing
both films in a single integrated sequence under vacuum, the Polycide Centura
avoids oxide growth at the film interface for high device reliability. An
enhancement was made to the system in 1998 called the Polycide xZ system, which
features the extension of the integrated polysilicon-tungsten silicide process
technology to the most recent "xZ" process chamber for tungsten silicide.
In 1997, using a variant of the technology for polysilicon deposition, Applied
Materials launched a new process for depositing high-temperature, single-wafer
silicon nitride, a film previously deposited almost exclusively in batch
furnaces. The process control of the single-wafer approach results in films of
greater uniformity and precision, which is increasingly important as transistor
structures shrink to smaller dimensions.
Dry Etching. The etching process selectively removes patterned material from the
surface of a wafer to create the device structures. With the advent of
sub-micron feature sizes, "dry" (plasma) etching has become one of the most
frequently-used processes in semiconductor manufacturing. Applied Materials
entered the etch market in 1981, and has since introduced systems for etching
three basic materials, including metal, silicon and dielectric films.
Since 1993, the Company has launched a series of MxP(TM) process chambers for
metal, dielectric and silicon etching, available on both the Precision 5000 and
Centura platforms. This reactive ion etch chamber has proven capable of
continuous technology improvements, with the latest chamber enhancement in use
for 0.25-micron designs. In addition to providing excellent etch technology, MxP
chambers are known for reliability and low operating costs in high-volume
production environments.
Beginning in 1996, the Company introduced a new series of high-density plasma
etch systems for critical, advanced etch applications. The introductions of the
Metal Etch DPS(TM) (Decoupled Plasma Source) Centura system and the Silicon Etch
DPS Centura system target 0.35-micron and below device designs for etching metal
and silicon, respectively. In July 1997, a second-generation chamber design was
introduced for the Metal Etch DPS Centura system, employing several key
engineering enhancements to the system. Both DPS etch systems offer leading-edge
technology for multiple device generations: from 0.35-micron to 0.18-micron
feature sizes and beyond.
In April 1997, the Company launched its most advanced, high-density plasma
system for etching dielectric films, called the Dielectric Etch IPS(TM) Centura.
It is designed for etching very small, deep interconnect structures, including
damascene, as well as for other dielectric etch applications.
Ion Implantation. Ion implantation inserts carefully controlled amounts of
selected impurities or "dopant" elements into parts of a transistor structure to
create the electronic properties that govern the transistor's operation. Applied
Materials entered the high-current portion of the implant market in 1985 with
the Precision Implant 9000 and introduced the Precision Implant 9200 in 1988. In
November 1992, the Company introduced a new high-current ion implantation
system, the Precision Implant 9500, for the production of high-density
semiconductors, such as 16Mb and 64Mb memory devices and advanced
microprocessors.
In 1996, the Company introduced a new series of compact implant systems with the
Implant xR80, and subsequently added two new systems to the xR family--the
Implant xR120 and Implant xR LEAP(TM) (Low Energy Advanced Processing). The
xR120 extended the energy range of the xR80 to 120 kilovolts while maintaining
the same small size. The xR LEAP enhanced low energy performance by
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doubling beam current in the sub-5 kilovolt energy range. These systems were
enhanced in 1997 with an "S" series that offers significantly increased system
throughput and lower cost of ownership.
In 1998, the low-energy capabilities of the xR LEAP system were being used by
many chipmakers to create ultra-shallow junction transistors, enabling denser
and higher speed devices. The xR LEAP system is being used in collaboration with
the Company's RTP (see below) technology to offer the Ultra-Shallow Junction
Equipment Set Solution, a module consisting of both implant and RTP technologies
that has been optimized for the highest degree of technical performance. Also in
1998, the Company entered into a collaborative arrangement with Orion
Technologies for the development of a completely new generation of ion implant
systems.
Rapid Thermal Processing (RTP). RTP subjects the wafer to short, intense bursts
of heat to modify the properties of various materials, such as those implanted
with dopants. In June 1995, Applied Materials launched its first RTP system, the
RTP Centura. Its proprietary temperature sensing and heating calibration
technologies allow wafer temperature control that is completely insensitive to
wafer backside emissivity. An enhanced version, called the XE model, was
introduced in 1997, with a further enhancement, called the XEplus, in August
1998. Moving beyond core heat treatment applications, the Company's RTP system
is now also used to deposit very thin dielectric films. A nitric oxide process
deposits critical (50 angstroms) gate dielectric layers required for the most
advanced logic, DRAM and flash memory devices. A wet oxide process, introduced
in 1997, can grow gate oxides as thin as 25 angstroms.
Chemical Mechanical Polishing (CMP). CMP is a process in which uneven film
material is removed from the wafer to create a flat (planarized) surface, thus
making it easier to pattern subsequent layers before etching. The Company
announced its entry into the CMP market with the Mirra CMP system in December
1995. This system uses a four-station, rotating "carousel" design, in which
three separate "active" planarization stations process wafers while a fourth
station loads and unloads wafers. In June 1997, the Company announced the new
Titan Head(TM) polishing unit for the Mirra CMP system, which allows better
uniformity and a higher degree of planarity than traditional polishing heads.
The Mirra CMP system has steadily expanded its library of CMP processes, which
now includes several dielectric films as well as tungsten.
RETICLE INSPECTION, WAFER DEFECT DETECTION AND REVIEW, AND METROLOGY
Reticle Inspection. Reticles are high precision quartz plates that contain
microscopic images of electronic circuits. These recticles are used to transfer
circuit patterns onto semiconductor wafers to fabricate ICs. The reticle must be
defect-free, with perfect image fidelity, because any imperfection will be
replicated on the wafer. Reticle inspection systems look for possible defects
that could be transmitted to the design pattern on the wafer. Applied Materials'
RT 8000 reticle inspection system was upgraded in August 1998 to the RT 8200ES
with a variety of new features that improved its sensitivity, productivity and
reliability to meet the demands of the sub-0.25 micron, 256Mb generation of
semiconductor devices. The RT 8200ES doubles the scan speed and throughput of
the earlier model and reduces reticle inspection cost. The system's enhanced
sensitivity capabilities enable detection for the most advanced technologies
such as optical proximity correction and phase-shifting masks.
Wafer Defect Detection and Review. Patterned wafer defect detection systems
inspect wafers as they move between processing steps. Defect detection requires
advanced image-capturing technology combined with high-speed computer data
processing to maintain high yield in chip production. Defects may include
particles, design abnormalities and other problems. Launched in February 1998,
the WF-731 and WF-736 DUO are used to inspect highly advanced semiconductor
devices and perform "on-the-fly" classification of defects as they are detected.
Defect Review Scanning Electron Microscopes (DR-SEMs) analyze and then classify
even smaller defects on the wafer, such as small particles, scratches or
residues. Introduced in May 1998, Applied Materials' SEMVision(TM) system
reviews and classifies a broad range of defect types found on blanket or
patterned wafers. SEMVision is the industry's first high-throughput, fully
automatic DR-SEM, marking a major advance over conventional, manually operated
systems.
Metrology. SEMs use an electron beam to image and measure surface features on a
semiconductor wafer at a much higher resolution than images captured by optical
microscopes. Critical Dimension (CD) SEMs are used by semiconductor makers to
measure the "dimension" of critical sub-micron-sized design features on a chip,
thus assuring the accuracy of the manufacturing process. Applied Materials'
7830Si CD-SEM, introduced in 1997, generates images of critical device
structures having depth to width ratios of up to 10:1 with high resolution of
the bottom details of these structures. The production-proven OperatorFree(TM)
platform allows advanced measurement of 0.18-micron processes with 3-nanometer
precision for lines and spaces.
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300mm
Throughout its history, the semiconductor industry has migrated to increasingly
larger wafer sizes--from one and two-inch wafers in its early days, through
several intermediate sizes, to today's 200mm (8 inch) standard. To gain the
economic advantages of a larger surface area on which to fabricate semiconductor
devices, the industry is generally anticipating that 300mm (12 inches) will be
the next wafer size (300mm wafers have a 2.25x-greater surface area than 200mm
wafers). The hardware required for processing 300mm wafers will be entirely new
or scaled up from 200mm dimensions depending on the equipment's configuration.
The Company is designing some systems with dual 200mm-300mm capabilities.
With many customers in the planning process for possible migration to 300mm
wafer fabs, Applied Materials has been developing a complete line of 300mm
systems in its mainstream process technologies, covering more than 60
applications. In March 1997, Applied Materials shipped the industry's first
300mm system, for RTP, to a customer. Several other 300mm systems, including epi
and CVD systems, have been delivered to customers and to industry consortia at
various locations, including a multi-system purchase by Semiconductor 300 in
Dresden, Germany, the industry's only operating 300mm fab. The success of these
new and enhanced products in the market has yet to be determined. Over the
course of fiscal 1998, and particularly in the second half, the Company's 300mm
product development efforts were reduced significantly to reflect the
semiconductor industry's decision to slow migration to 300mm wafer processing.
EQUIPMENT SET SOLUTIONS
Applied Materials is proactive in developing advanced technology that enables
chipmakers to meet the demand for more complex chips. In addition to
manufacturing, selling and supporting individual systems, the Company has
recently begun to offer customers fully supported, integrated "sets" of
equipment designed to reduce customers' development and engineering time and
enable faster time-to-market when those customers introduce new chip
technologies. An Equipment Set Solution(TM) (ESS(TM)) combines multiple systems
and/or technologies into a single package.
TRANSITION TO NEW MATERIALS
After decades of using the same materials to build ICs, advanced generation
devices are now being designed with many new materials. Each new material
involves a number of challenges in making it a reliable part of the
semiconductor device. The most significant material change involves a switch
from aluminum to copper as the conducting material used in the interconnect.
In the next several years, the Company believes that chipmakers will transition
from aluminum to copper as the interconnect material in ICs to reduce costs and
improve speed and performance. Applied Materials has been working with key
customers to develop copper-related technologies and believes that such
technologies will be available to meet the anticipated demand. In December 1997,
Applied Materials announced the industry's first system for depositing the
critical barrier and copper seed layers of the copper interconnect structure --
the Endura Electra Barrier/Seed Cu system. The barrier and seed layers are key
to ensuring the integrity of the copper structure.
In November 1998, Applied Materials announced the industry's first integrated,
multi-system product for building the copper interconnect structure (Copper
Interconnect ESS). Since using copper will demand a new process methodology, the
Copper Interconnect ESS eases the transition to these new materials for
chipmakers by providing a completely demonstrated, tested and pre-qualified set
of systems. This set of systems includes the following products, technologies
and services: Black Diamond low k deposition system; Dielectric Etch IPS Centura
system; 7830Si CD-SEM; Endura Electra Barrier/Seed Cu system; electroplating
technology; Mirra CMP Cu system; low temperature annealing technology; WF-736
DUO system; SEMVision(TM); test chips; mask set for test chips; and Applied
Materials' ESS start-up and implementation support package at the customer's
location.
The Copper Interconnect ESS can be fully demonstrated in Applied Materials' new
Equipment and Process Integration Center (EPIC) facility. Opened in November
1998, EPIC houses all of the equipment and processes needed for chipmakers to
develop and test a multi-level metal, completely integrated copper interconnect
process before installing it in their fabs.
In addition to the transition to copper wiring on the IC, many chipmakers are
planning to incorporate new low k dielectric (insulating) materials between the
metal lines to replace the conventional silicon dioxide dielectric for better
performance. In November 1998, Applied Materials introduced Black Diamond, a
product that provides chipmakers a cost efficient low k dielectric deposition
solution for this application. This film can be integrated with other existing
process technologies.
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There are other new materials being evaluated for use in the transistor
structure, particularly high k dielectrics that can store a larger charge in the
capacitor of memory chips. The first of these new materials is tantalum
pentoxide, which was introduced in July 1998 on the Company's Tanox xZ Centura
system.
CUSTOMER SERVICE AND SUPPORT
The Installed Base Support Services organization (IBSS) plays a unique and
critical role in the Company's ability to satisfy its customers' production
requirements. IBSS installs equipment and provides warranty service worldwide
through offices located in the United States, Europe (including Israel), Japan,
Korea, Taiwan and Asia-Pacific (China and Southeast Asia). IBSS has more than
2,000 highly-trained customer engineers and process support engineers, usually
located in or near the customers' fab site, servicing more than 10,000 Applied
Materials' systems currently operating in customer facilities. IBSS also manages
a complex global spare parts operation. Semiconductor fabrication systems are
highly complex, often elaborately customized machines with thousands of
specialized parts. Having the required consumable and spare parts available to
customers anywhere in the world on very short notice enables a cost-effective,
profitable production system. In addition, IBSS provides service and labor,
technical training, product enhancements and systems refurbishment.
The Company maintains approximately 79 sales and service offices worldwide, with
29 offices located in North America (primarily the United States), 14 in Europe,
23 in Japan, 6 in Korea, 2 in Taiwan and 5 in Asia-Pacific.
BACKLOG
The Company's backlog decreased from $1.7 billion at October 26, 1997 to $917
million at October 25, 1998. The Company schedules production of its systems
based upon order backlog and customer commitments. Backlog includes only orders
for which written authorizations have been accepted and shipment dates within 12
months have been assigned. However, customers may delay delivery of products or
cancel orders at their option. Due to possible customer changes in delivery
schedules and cancellation of orders, the Company's backlog at any particular
date is not necessarily indicative of actual sales for any succeeding period. A
reduction of backlog during any particular period could have a material adverse
effect on the Company's business, financial condition and results of operations.
MANUFACTURING, RAW MATERIALS AND SUPPLIES
The Company's manufacturing activities consist primarily of assembling various
commercial and proprietary components into finished systems, principally in the
United States, with additional operations in England, Israel, Japan, Korea and
Taiwan. Production requires some raw materials and a wide variety of mechanical
and electrical components that are manufactured to the Company's specifications.
The Company uses numerous suppliers to supply parts, components and
subassemblies (collectively, "parts") for the manufacture and support of its
products. Although the Company makes reasonable efforts to ensure that parts are
available from multiple suppliers, this is not always possible; accordingly,
certain key parts may be obtained from a single supplier or a limited group of
suppliers. These suppliers are, in some cases, thinly capitalized, independent
companies that generate significant portions of their business from the Company
and/or a small group of other companies in the semiconductor industry. The
Company has sought, and will continue to seek, to minimize the risk of
production and service interruptions and/or shortages of key parts by: (1)
selecting and qualifying alternative suppliers for key parts; (2) monitoring the
financial stability of key suppliers; and (3) maintaining appropriate
inventories of key parts. There can be no assurance that the Company's results
of operations will not be materially and adversely affected if, in the future,
the Company is unable to receive a sufficient supply of parts to meet its
requirements in a timely and cost-effective manner.
MARKETING AND SALES
Because of the highly technical nature of its products, the Company markets its
products worldwide through a direct sales force, with sales and service offices
in the United States, Europe, Japan, Korea, Taiwan and Asia-Pacific. For the
fiscal year ended October 25, 1998, net sales to customers in North America
(primarily the United States), Europe, Japan, Korea, Taiwan and Asia-Pacific
were 38 percent, 16 percent, 17 percent, 4 percent, 20 percent and 5 percent,
respectively, of the Company's total net sales. The Company's business is not
usually seasonal in nature, but it is cyclical based on the capital equipment
investment patterns of major semiconductor manufacturers. These expenditure
patterns are based on many factors, including anticipated market demand for
integrated circuits, the development of new technologies and global and regional
economic conditions.
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The Company sells systems and provides services to customers located throughout
the world. Managing global operations and sites located throughout the world
presents challenges associated with, among other things, cultural diversities
and organizational alignment. Moreover, each region in the global semiconductor
equipment market exhibits unique characteristics that can cause capital
equipment investment patterns to vary significantly from period to period.
Periodic economic downturns, trade balance issues, political instability and
fluctuations in interest and foreign currency exchange rates are all risks that
could materially and adversely affect, and in the past have affected, global
product and service demand, and therefore, the Company's financial performance.
Information on sales to unaffiliated customers, transfers among geographic
regions, net sales, income/(loss) from operations and identifiable assets
attributable to the Company's geographic regions is included in Note 12 of Notes
to Consolidated Financial Statements contained in the Applied Materials 1998
Annual Report, which note is incorporated herein by reference.
RESEARCH, DEVELOPMENT AND ENGINEERING
Applied Materials' long-term growth strategy requires continued development of
new semiconductor manufacturing technology. The Company's significant investment
in research, development and engineering (RD&E) has generally enabled it to
deliver new products and technologies before the emergence of strong
competition, thus allowing customers to incorporate these products into their
manufacturing plans at an early stage in the technology selection cycle. The
Company works closely with its global customers to design systems that meet
their planned technical and production requirements. Engineering organizations
are located in the United States, England, Israel and Japan, with process
support and customer demonstration laboratories in the United States, England,
Israel, Japan, Korea and Taiwan.
In fiscal 1998, the Company invested $644 million, or 15.9 percent of net sales,
in RD&E for product development and engineering programs to improve or sustain
existing product lines. During fiscal 1996 and 1997, RD&E expenses were $481
million and $568 million, respectively. The Company has spent an average of 13
percent of net sales on RD&E over the last five years. In addition to RD&E in
specific product technologies, the Company maintains ongoing programs in
software, automation control systems, materials research, microcontamination and
environmental control that have applications to its products.
Key activities during fiscal 1998 involved development of a number of process
technologies used in fabricating the copper/low k interconnect structure for
emerging copper-based devices. These technologies include copper CMP,
electrochemical deposition, copper etch, low k dielectric CVD and
inspection/metrology tools.
As part of its technology development program, Applied Materials has built the
semiconductor equipment industry's first complete interconnect fabrication line,
containing all necessary process tools to fabricate and test the interconnect
structures in copper-based devices. This facility enables customers to develop
and test a completely integrated copper interconnect process flow before
installing it in their fab.
COMPETITION
The global semiconductor equipment industry is highly competitive and is
characterized by increasingly rapid technological advancements and demanding
worldwide service requirements. Applied Materials' ability to compete depends on
its ability to continually improve its products, processes and services, as well
as its ability to develop new products that meet constantly evolving customer
requirements. Each of the Company's products competes in markets defined by the
particular wafer fabrication process it performs. There are several companies
that compete with Applied Materials in each of these markets. Competitors are
primarily based in the United States, Japan and Europe, and range in size from
small companies competing in specific market segments (single product) to large
multinationals with products that span several market segments. At present, no
single company competes with Applied Materials in all of the same market
segments. Competitors in a given technology tend to have different degrees of
market presence in the various regional geographic markets. Competition is based
on many factors, primarily technological advancements, productivity and
cost-effectiveness, customer support, contamination control and overall product
quality. Management believes that the Company's competitive position in each of
its served markets is based on the ability of its products and services to
address customer requirements related to these competitive factors. Management
believes that the Company is a strong competitor with respect to its products,
services and resources. However, new products, pricing pressures, rapid changes
in technology and other competitive actions from both new and existing
competitors could materially affect the Company's market position.
8
<PAGE> 9
APPLIED KOMATSU TECHNOLOGY, INC. JOINT VENTURE
In September 1993, the Company entered into an agreement with Komatsu, Ltd. to
form Applied Komatsu Technology, Inc. (AKT), a joint venture corporation that
develops, manufactures and markets systems used to produce Flat Panel Displays
for laptop, notebook and palmtop computers, desktop monitors, digital/video
cameras, portable televisions and instrument displays. During the fourth fiscal
quarter of 1998, the Company decided to discontinue the operations of AKT. The
Company's interest in this joint venture will be wound down over a period not to
exceed twelve months from the date of the decision to discontinue operations. As
a result of this decision, AKT has stopped selling PVD and Etch systems and has
ceased development efforts on new and next generation systems and technology.
AKT will continue to offer its existing CVD product line for sale and will also
provide existing customers with ongoing system support. See "Management's
Discussion and Analysis - AKT Joint Venture" and Note 4 of Notes to Consolidated
Financial Statements, which are incorporated herein by reference from the
Applied Materials 1998 Annual Report.
ACQUISITION
On October 12, 1998, the Company announced that it entered into an agreement to
acquire Consilium, Inc. (Consilium), a leading independent supplier of
integrated semiconductor and electronics manufacturing execution systems
software and services, in a stock-for-stock merger. The acquisition was
consummated on December 11, 1998 and will be accounted for as a pooling of
interests. The Company issued approximately 2 million shares of its common stock
in connection with this transaction. Consilium's financial condition and
historical results of operations are not material in relation to the Company's
financial condition and historical results of operations.
PATENTS AND LICENSES
Management believes that the Company's competitive position is significantly
dependent upon skills in engineering, production and marketing, rather than its
patent position. However, protection of the Company's technology assets by
obtaining and enforcing patents is important. Therefore, the Company has an
active program to file patent applications in the United States and other
countries for inventions that the Company considers significant. The Company has
a number of patents in the United States and other countries and additional
applications are pending for new developments in its equipment and processes. In
addition to patents, the Company also possesses other proprietary intellectual
property, including trademarks, know-how, trade secrets and copyrights.
The Company enters into patent and technology licensing agreements with other
companies when management determines it is in the Company's best interest. The
Company pays royalties under existing patent license agreements for the use, in
several of its products, of certain patented technologies that are licensed to
the Company for the life of the patents. The Company also receives royalties
from licenses granted to third parties. Royalties received from third parties
have not been, and are not expected to be, material.
In the normal course of business, the Company from time to time receives and
makes inquiries regarding possible patent infringement. In dealing with such
inquiries, it may become necessary or useful for the Company to obtain or grant
licenses or other rights. However, there can be no assurance that such licenses
or rights will be available to the Company on commercially reasonable terms.
Although there can be no assurance about the outcome of patent infringement
inquiries, the Company believes it is unlikely that their resolution will have a
material adverse effect on its financial condition or results of operations.
ENVIRONMENTAL MATTERS
Two of the Company's locations have been designated as Superfund sites by the
United States Environmental Protection Agency since 1987; however, neither
compliance with Federal, State and local provisions regulating discharge of
materials into the environment, nor remedial agreements or other actions
relating to the environment, has had, or is expected to have, a material effect
on the Company's capital expenditures, financial condition, results of
operations or competitive position. The Company has been designated a
"Responsible Party" by the U.S. Environmental Protection Agency with respect to
one site and a "Potentially Responsible Party" with respect to the other site.
9
<PAGE> 10
EMPLOYEES
At October 25, 1998, the Company employed 12,060 regular employees. In the
high-technology industry, competition for highly-skilled employees is intense.
The Company believes that its future success is highly dependent upon on its
continued ability to attract and retain qualified employees. There can be no
assurance that the Company will be able to attract and retain qualified
employees. In response to the current semiconductor industry downturn, the
Company completed two separate restructuring actions in 1998 that reduced its
global workforce by approximately 2,800 employees. All activities of the Company
were subject to this restructuring effort. None of the Company's employees are
represented by a trade union, and management considers its relations with
employees to be good.
ITEM 2: PROPERTIES
Certain information concerning the Company's principal properties at October 25,
1998 is set forth below:
<TABLE>
<CAPTION>
SQUARE
LOCATION TYPE PRINCIPAL USE FOOTAGE OWNERSHIP
-------- ---- ------------- --------- ---------
<S> <C> <C> <C> <C>
Santa Clara, CA Office, plant & Headquarters, Marketing, 968,000 owned
warehouse Manufacturing, Distribution, 3,120,000 (1) leased
Research and Engineering
Austin, TX Office, plant & Manufacturing 824,000 owned
warehouse 320,000 leased
Horsham, England Office, plant & Manufacturing, Research 126,000 leased
warehouse and Engineering
Narita, Japan Office, plant & Manufacturing, Research 222,000(2) owned
warehouse and Engineering
Chunan, Korea Office, plant & Manufacturing, Research 107,000 owned
warehouse and Engineering
Hsinchu, Taiwan Office, plant & Manufacturing, Research 89,000 owned
warehouse and Engineering 130,000 leased
Tel Aviv, Israel Office Research and Engineering 21,000 leased
Nes Ziona, Israel Office, plant Manufacturing, Research 72,000 leased
& warehouse and Engineering
Yavne, Israel Office, plant Manufacturing, Research 55,000 leased
& warehouse and Engineering
</TABLE>
- -------------
(1) Includes approximately 765,000 square feet that is either currently being
subleased or is being marketed for sublease.
(2) Subject to loans of $43 million, secured by property and equipment having an
approximate net book value of $63 million at October 25, 1998.
The Company also leases office space for 79 sales and service offices throughout
the world: 29 offices are located in North America (primarily the United
States), 14 in Europe, 23 in Japan, 6 in Korea, 2 in Taiwan and 5 in
Asia-Pacific.
The Company currently owns 167,000 square feet of manufacturing and other
operating facilities in California that have not yet been completed and placed
in service. In addition, the Company is currently constructing 330,000 square
feet of manufacturing facilities in Texas.
10
<PAGE> 11
The Company also owns 99 acres of buildable land in Austin, Texas, 43 acres of
buildable land in Santa Clara, California and 9 acres of buildable land in
Narita, Japan. The Austin, Santa Clara and Narita land can accommodate
approximately 1,509,000, 1,046,000 and 766,000 square feet, respectively, of
additional building space to help satisfy the Company's current and future
needs.
Management considers the above facilities suitable and adequate to meet the
Company's requirements.
ITEM 3: LEGAL PROCEEDINGS
In April 1997, the Company initiated separate lawsuits against AST Electronik
GmbH and AST Electronik USA, Inc. (collectively AST), and AG Associates, Inc.
(AG) (case no. C-97-20375-RWM) in the United States District Court for the
Northern District of California, alleging infringement of certain patents
concerning rapid thermal processing technology. Discovery has commenced and
trial in the AG matter has been set for July 1999. In October 1997, AST and AG
each filed counterclaims against the Company alleging patent infringement
concerning related technology. AG later filed additional counterclaims, alleging
infringement of several patents. These additional counterclaims were dismissed
by the court in July 1998. In response, in August 1998, AG filed two separate
patent infringement lawsuits based on these same patents, one in the United
States District Court for the Northern District of California (case no.
C98-03044-WHO) and one in the United States District Court for the District of
Delaware (civil action no. 98-479). No trial dates have been set in these
actions. The Company and AST have resolved their dispute under terms and
conditions set forth in a Memorandum of Understanding signed by the parties, and
a final Settlement Agreement is being completed. The settlement is not expected
to be material. The Company continues to believe it has meritorious claims and
defenses against AG, and intends to pursue them vigorously.
As a result of the Company's acquisition of Orbot Instruments, Ltd. (Orbot), the
Company is involved in a lawsuit captioned KLA Instruments Corporation (KLA) v.
Orbot (case no. C93-20886-JW) in the United States District Court for the
Northern District of California. KLA alleges that Orbot infringes one patent
regarding equipment for the inspection of masks and reticles, and seeks an
injunction, damages and such other relief as the Court may find appropriate.
There has been limited discovery, but no trial date has been set. Management
believes it has meritorious defenses and intends to pursue them vigorously.
On June 13, 1997, the Company filed a lawsuit against Varian Associates, Inc.
(Varian) captioned Applied Materials, Inc. v. Varian Associates, Inc. (case no.
C-97-20523-RMW), alleging infringement of several of the Company's patents
concerning physical vapor deposition (PVD) technology. The complaint was later
amended on July 7, 1997 to include Novellus Systems, Inc. (Novellus) as a
defendant as a result of Novellus' acquisition of Varian's thin film systems PVD
business. The Company seeks damages for past infringement, a permanent
injunction, treble damages for willful infringement, pre-judgment interest and
attorneys' fees. Varian answered the complaint by denying all allegations,
counterclaiming for declaratory judgment of invalidity and unenforceability and
alleging conduct by the Company in violation of antitrust laws. On June 23,
1997, Novellus filed a separate lawsuit against the Company captioned Novellus
Systems, Inc. v. Applied Materials, Inc. (case no. C-97-20551-EAI), alleging
infringement by the Company of three patents concerning PVD technology that were
formerly owned by Varian. On July 8, 1997, Varian filed a separate lawsuit
against the Company captioned Varian Associates, Inc. v. Applied Materials, Inc.
(case no. C-97-20597-PVT), alleging a broad range of conduct in violation of
federal antitrust laws and state unfair competition and business practice laws.
Discovery has commenced in these actions, but no trial dates have been set.
Management believes it has meritorious claims and defenses and intends to
pursue them vigorously.
During fiscal 1998, the Company settled all outstanding litigation with ASM
International N.V. As a result of this settlement, the Company received a
convertible note for $80 million, against which $15 million was collected in
November 1997. Because of the impact of the current industry downturn on ASM's
financial condition and liquidity, ASM was not able to pay the $65 million
remaining balance at the maturity date. Therefore, ASM's obligations under the
November 1997 litigation settlement agreement were restructured in December
1998. Pursuant to the new agreement, ASM paid $20 million upon completion of the
restructuring, and agreed to pay $10 million on November 2, 1999 and $35 million
no later than November 2, 2000. Certain other obligations of ASM were also
modified; however, these modifications are not expected to be material to the
Company's financial condition or results of operations.
In November 1997, OKI Electric Industry, Co., Ltd. (OKI) filed suit against one
of the Company's wholly-owned subsidiaries, Applied Materials Japan (AMJ), in
Tokyo District Court in Japan, alleging that AMJ is obligated to indemnify OKI
for a portion of patent license royalties paid by OKI to Texas Instruments, Inc.
Several hearings have been held, but no trial date has been set. Management
believes it has meritorious defenses and intends to pursue them vigorously.
11
<PAGE> 12
The Company is subject to various other legal proceedings and claims, either
asserted or unasserted, that arise in the ordinary course of business. Although
the outcome of these claims cannot be predicted with certainty, management does
not believe that any of these legal matters will have a material adverse effect
on the Company's financial condition or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS IN FOURTH FISCAL
QUARTER OF 1998
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table and notes thereto identify and set forth information about
the Company's five executive officers:
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL CAPACITIES IN WHICH SERVED
------------------ --------------------------
<C> <S>
James C. Morgan(1)....... Chairman of the Board of Directors and Chief
Executive Officer
Dan Maydan(2)............ President of the Company and Chairman of Applied
Komatsu Technology, Inc.
Joseph R. Bronson(3)..... Senior Vice President, Office of the President, Chief
Financial Officer and Chief Administrative Officer
Sasson Somekh(4).......... Senior Vice President, Office of the President
David N.K. Wang(5)........ Senior Vice President, Office of the President
</TABLE>
- ----------
(1) Mr. Morgan, age 60, has been Chief Executive Officer since 1977 and
Chairman of the Board of Directors since 1987. Mr. Morgan also served as
President of the Company from 1976 to 1987.
(2) Dr. Maydan, age 63, was appointed President of the Company in December 1993.
Dr. Maydan served as Executive Vice President from 1990 to December 1993.
Prior to that, Dr. Maydan had been Group Vice President since February 1989.
Dr. Maydan joined the Company in 1980 as a Director of Technology.
(3) Mr. Bronson, age 50, was appointed Senior Vice President, Office of the
President, Chief Financial Officer and Chief Administrative Officer in
January 1998. Mr. Bronson served as Group Vice President from April 1994 to
January 1998. Prior to that, Mr. Bronson had been Vice President since
November 1990. Mr. Bronson joined the Company in September 1984 as Corporate
Controller.
(4) Dr. Somekh, age 52, was appointed to the Office of the President in January
1998, and was appointed Senior Vice President of the Company in December
1993. Dr. Somekh served as Group Vice President from 1990 to 1993. Prior to
that, Dr. Somekh had been a divisional Vice President. Dr. Somekh joined the
Company in 1980 as a Project Manager.
(5) Dr. Wang, age 52, was appointed to the Office of the President in January
1998, and was appointed Senior Vice President of the Company in December
1993. Dr. Wang served as Group Vice President from 1990 to 1993. Prior to
that, Dr. Wang had been a divisional Vice President. Dr. Wang joined Applied
Materials in 1980 as a Manager, Process Engineering and Applications.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
"Stock Price History" on page 66 of the Applied Materials 1998 Annual Report is
incorporated herein by reference.
The Company's common stock is traded on the Nasdaq over-the-counter market. As
of December 18, 1998, there were approximately 5,791 holders of record of the
common stock.
To date, the Company has paid no cash dividends to its stockholders. The Company
has no plans to pay cash dividends in the near future.
12
<PAGE> 13
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
"Selected Consolidated Financial Data" on page 29 of the Applied Materials 1998
Annual Report is incorporated herein by reference.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Management's Discussion and Analysis" on pages 30 through 43 of the Applied
Materials 1998 Annual Report is incorporated herein by reference.
ITEM 7a: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
"Market Risk Disclosure" on page 43 of the Applied Materials 1998 Annual Report
is incorporated herein by reference.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the report thereon of
PricewaterhouseCoopers LLP, Independent Accountants, dated November 17, 1998,
except as to Note 14 which is dated as of December 23, 1998, and appearing on
pages 44 through 64 and page 66 of the Applied Materials 1998 Annual Report, are
incorporated herein by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, portions of
the information required by Part III of Form 10-K are incorporated by reference
from the Company's Proxy Statement to be filed with the Commission in connection
with the 1999 Annual Meeting of Stockholders ("the Proxy Statement").
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Information concerning directors of the Company appears in the Company's
Proxy Statement, under Item 1 -- "Election of Directors." This portion of
the Proxy Statement is incorporated herein by reference.
(b) For information with respect to Executive Officers, see Part I of this
Annual Report on Form 10-K.
ITEM 11: EXECUTIVE COMPENSATION
Information concerning executive compensation appears in the Company's Proxy
Statement, under Item 1 -- "Election of Directors." This portion of the Proxy
Statement is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of certain beneficial owners and
management appears in the Company's Proxy Statement, under Item 1 -- "Election
of Directors." This portion of the Proxy Statement is incorporated herein by
reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions appears in
the Company's Proxy Statement, under Item 1 -- "Election of Directors." This
portion of the Proxy Statement is incorporated herein by reference.
13
<PAGE> 14
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The consolidated financial statements listed in the accompanying "Index
to Financial Statements and Financial Statement Schedule" are
incorporated herein by reference from the Applied Materials 1998 Annual
Report.
2. FINANCIAL STATEMENT SCHEDULE
The financial statement schedule listed in the accompanying "Index to
Financial Statements and Financial Statement Schedule" is filed as part
of this Annual Report on Form 10-K.
3. EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this Annual Report on Form 10-K.
(b) The Company filed a Report on Form 8-K on October 23, 1998. The report
contains the Company's press release, dated October 23, 1998, announcing
the completion of a previously announced restructuring plan and one-time
charges for the fourth fiscal quarter of 1998.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
(Item 14(a))
<TABLE>
<CAPTION>
ANNUAL REPORT
PAGE NUMBER
-------------
<S> <C>
(1) Financial Statements
Consolidated Statements of Operations for the Fiscal Years Ended
October 27, 1996, October 26, 1997 and October 25, 1998............... 44
Consolidated Balance Sheets at October 26, 1997 and October 25,
1998.................................................................. 45
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended October 27, 1996, October 26, 1997 and October 25, 1998......... 46
Consolidated Statements of Cash Flows for the Fiscal Years Ended
October 27, 1996, October 26, 1997 and October 25, 1998............... 47
Notes to Consolidated Financial Statements............................ 48 - 64
Report of Independent Accountants..................................... 66
</TABLE>
<TABLE>
<CAPTION>
FORM 10-K
PAGE NUMBER
-----------
<S> <C>
(2) Financial Statement Schedule
Report of Independent Accountants on Financial Statement Schedule....... 19
Schedule II -- Valuation and Qualifying Accounts........................ 20
</TABLE>
Schedules not listed above have been omitted because they are not required or
the information required to be set forth therein is included in the Consolidated
Financial Statements or Notes to Consolidated Financial Statements.
The consolidated financial statements listed in the above index that are
included in the Applied Materials 1998 Annual Report are incorporated herein by
reference. With the exception of the pages listed in the above index and the
portion of such report referred to in items 1, 5, 6, 7, 7a and 8 of this Form
10-K, the Applied Materials 1998 Annual Report is not to be deemed filed as part
of this report.
14
<PAGE> 15
INDEX TO EXHIBITS
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K:
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Agreement and Plan of Merger, by and among Applied Materials,
Inc., Orion Corp. I, and Opal, Inc. dated as of November 24, 1996,
previously filed with the Company's Annual Report on Form 10-K for
the year ended October 27, 1996, and incorporated herein by
reference.
2.2 Stock Purchase Agreement dated as of November 24, 1996 by and
among Applied Materials, Inc., Orbot Instruments, Ltd. and the
Stockholders of Orbot Instruments, Ltd., previously filed with the
Company's Annual Report on Form 10-K for the year ended October
27, 1996, and incorporated herein by reference.
2.3 Agreement and Plan of Merger And Reorganization between Applied
Materials, Inc. and Consilium, Inc., previously filed with the
Company's Form S-4A dated November 6, 1998, and incorporated
herein by reference.
3(i) Certificate of Incorporation of Applied Materials, Inc., a
Delaware corporation, as amended to March 18, 1996, previously
filed with the Company's Annual Report on Form 10-K for the year
ended October 27, 1996, and incorporated herein by reference.
3(i)(a) Amendment to Articles of Incorporation dated March 27, 1998,
previously filed with the Company's Form 10-Q for the quarter
ended July 26, 1998, and incorporated herein by reference.
3(i)(b) Articles of Incorporation (as amended to March 27, 1998),
previously filed with the Company's Form 10-Q for the quarter
ended July 26, 1998, and incorporated herein by reference.
3(ii) Bylaws of Applied Materials, Inc., as amended to December 13,
1996, previously filed with the Company's Annual Report on Form
10-K for the year ended October 27, 1996, and incorporated herein
by reference.
4.1 Rights Agreement, dated as of June 14, 1989, between Applied
Materials, Inc. and Bank of America NT&SA, as Rights Agent,
including Form of Rights Certificate and Form of Summary of Rights
to Purchase Common Stock, previously filed with the Company's
report on Form 8-K dated June 14, 1989, and incorporated herein by
reference.
4.2 Form of Indenture (including form of debt security) dated as of
August 24, 1994 between Applied Materials, Inc. and Harris Trust
Company of California, as Trustee, previously filed with the
Company's Form 8-K on August 17, 1994, and incorporated herein by
reference.
10.1* The 1976 Management Stock Option Plan, as amended to October 5,
1993, previously filed with the Company's Form 10-K for fiscal
year 1993, and incorporated herein by reference.
10.2* Applied Materials, Inc., Supplemental Income Plan, as amended,
including Participation Agreements with James C. Morgan, Walter
Benzing, and Robert Graham, previously filed with the Company's
Form 10-K for fiscal year 1981, and incorporated herein by
reference.
10.3* Amendment to Supplemental Income Plan, dated July 20, 1984,
previously filed with the Company's Form 10-K for fiscal year
1984, and incorporated herein by reference.
10.4* The Applied Materials Employee Financial Assistance Plan,
previously filed with the Company's definitive Proxy Statement in
connection with the Annual Meeting of Shareholders held on March
5, 1981, and incorporated herein by reference.
10.5* The 1985 Stock Option Plan for Non-Employee Directors, previously
filed with the Company's Form 10-K for fiscal year 1985, and
incorporated herein by reference.
10.6* Amendment 1 to the 1985 Stock Option Plan for Non-Employee
Directors dated June 14, 1989, previously filed with the Company's
Form 10-K for fiscal year 1989, and incorporated herein by
reference.
10.7* Applied Materials, Inc. Supplemental Income Plan as amended to
December 15, 1988, including the Participation Agreement with
James C. Morgan, previously filed with the Company's Form 10-K for
fiscal year 1988, and incorporated herein by reference.
15
<PAGE> 16
10.8 License Agreement dated January 1, 1992 between the Company and
Varian Associates, Inc., previously filed with the Company's Form
10-K for fiscal year 1992, and incorporated herein by reference.
10.9* Amendment dated December 9, 1992 to Applied Materials, Inc.
Supplemental Income Plan dated June 4, 1981 (as amended to
December 15, 1988), previously filed with the Company's Form 10-K
for fiscal year 1993, and incorporated herein by
reference.
10.10* The Applied Materials, Inc. Executive Deferred Compensation Plan
dated July 1, 1993 and as amended on September 2, 1993, previously
filed with the Company's Form 10-Q for the quarter ended August 1,
1993, and incorporated herein by reference.
10.11 Joint Venture Agreement between Applied Materials, Inc. and
Komatsu, Ltd. dated September 14, 1993 and exhibits thereto,
previously filed with the Company's Form 10-K for fiscal year
1993, and incorporated herein by reference. (Confidential
treatment has been requested for certain portions of the
agreement).
10.12* Amendment No. 2 to Applied Materials, Inc. 1985 Stock Option Plan
for Non-Employee Directors, dated September 10, 1992, previously
filed with the Company's Form 10-K for fiscal year 1993, and
incorporated herein by reference.
10.13* Amendment No. 3 to Applied Materials, Inc. 1985 Stock Option Plan
for Non-Employee Directors, dated October 5, 1993, previously
filed with the Company's Form 10-K for fiscal year 1993, and
incorporated herein by reference.
10.14* Amendment No. 2 to the Applied Materials, Inc. Executive Deferred
Compensation Plan, dated May 9, 1994, previously filed with the
Company's Form 10-Q for the quarter ended May 1, 1994, and
incorporated herein by reference.
10.15* Amendment No. 4 to Applied Materials, Inc. 1985 Stock Option Plan
for Non-Employee Directors, dated December 8, 1993, previously
filed with the Company's Form 10-Q for the quarter ended May 1,
1994, and incorporated herein by reference.
10.16* Applied Komatsu Technology, Inc. 1994 Executive Incentive Stock
Purchase Plan, together with forms of Promissory Note, 1994
Executive Incentive Stock Purchase Agreement, and Loan and
Security Agreement, previously filed with the Company's Form 10-Q
for the quarter ended July 31, 1994, and incorporated herein by
reference.
10.17* The Applied Materials, Inc. 1995 Equity Incentive Plan, dated
April 5, 1995, previously filed with the Company's Form 10-Q for
the quarter ended April 30, 1995, and incorporated herein by
reference.
10.18* The Applied Materials, Inc. Senior Executive Bonus Plan, dated
September 23, 1994, previously filed with the Company's Form 10-Q
for the quarter ended April 30, 1995, and incorporated herein by
reference.
10.19* The Applied Materials, Inc. Executive Deferred Compensation Plan,
as amended and restated on April 1, 1995, previously filed with
the Company's Form 10-Q for the quarter ended April 30, 1995, and
incorporated herein by reference.
10.20 Applied Materials, Inc. Medium-Term Notes, Series A Distribution
Agreement, dated August 24, 1995, previously filed with the
Company's Form 10-K for fiscal year 1995, and incorporated herein
by reference.
10.21* Resolution pertaining to the Amendment of the Applied Materials,
Inc. 1995 Equity Incentive Plan, adopted by the Stock Option and
Compensation Committee of the Board of Directors of Applied
Materials on December 12, 1996, previously filed with the
Company's Form 10-Q for the quarter ended April 27, 1997, and
incorporated herein by reference.
10.22 Participation Agreement dated as of April 30, 1997 among Applied
Materials, Inc. (as Lessee and Construction Agent), Credit Suisse
Leasing 92A, L.P., (as Lessor and Borrower), Greenwich funding
Corporation (as CP Lender), The Persons Named on Schedule I (as
Eurodollar Lenders) and Credit Suisse First Boston (acting through
its New York Branch, as Agent), previously filed with the
Company's Form 10-Q for the quarter ended April 27, 1997, and
incorporated herein by reference.
10.23 Appendix 1 to Participation Agreement, Master Lease Agreement and
Loan Agreement, dated as of April 30, 1997 (Definitions and
Interpretation) for Applied Materials, Inc., previously filed with
the Company's Form 10-Q for the quarter ended April 27, 1997, and
incorporated herein by reference.
10.24 Loan Agreement dated as of April 30, 1997 among Credit Suisse
Leasing 92A, L.P. (as
16
<PAGE> 17
Borrower), Greenwich Funding Corporation (as CP Lender), The
Persons Named on Schedule I (as Eurodollar Lenders) and Credit
Suisse First Boston (acting through its New York Branch, as Agent)
for Revolving Commercial Paper, Eurodollar Credit and Base Rate
Program, previously filed with the Company's Form 10-Q for the
quarter ended April 27, 1997, and incorporated herein by
reference.
10.25 Real Estate and Equipment Facility Master Lease dated as of April
30, 1997 between Credit Suisse Leasing 92A, L.P. (as Lessor), and
Applied Materials, Inc. (as Lessee), previously filed with the
Company's Form 10-Q for the quarter ended April 27, 1997, and
incorporated herein by reference.
10.26 Underwriting Agreement between Applied Materials, Inc. and Morgan
Stanley & Co. Incorporated dated October 9, 1997, previously filed
with the Company's Form S-3 dated October 9, 1997, and
incorporated herein by reference.
10.27 Prospectus Supplement for Applied Materials' $400 million Senior
Notes dated October 9, 1997, previously filed with the Company's
Form S-3 dated October 9, 1997, and incorporated herein by
reference.
10.28 $250,000 Five Year Credit Agreement and $250,000 364-Day Credit
Agreement, each dated as of March 13, 1998 among Applied
Materials, Inc., Morgan Guaranty Trust Company of New York, as
Documentation Agent and Administrative Agent, and Citicorp
Securities, Inc., as Syndication Agent, previously filed with the
Company's Form 10-Q for the quarter ended April 26, 1998, and
incorporated herein by reference.
10.29* Amendment No. 1 to the Applied Materials, Inc. Executive Deferred
Compensation Plan dated August 1, 1997, previously filed with the
Company's Form 10-Q for the quarter ended July 26, 1998, and
incorporated herein by reference.
10.30* Amendment No. 2 to the Applied Materials, Inc. Executive Deferred
Compensation Plan dated December 1, 1997, previously filed with
the Company's Form 10-Q for the quarter ended July 26, 1998, and
incorporated herein by reference.
10.31* Applied Materials, Inc. 1995 Equity Incentive Plan, as amended on
March 17, 1998, previously filed with the Company's Preliminary
Proxy Statement dated January 27, 1998, and incorporated herein by
reference.
10.32 Letters of Guarantee dated October 28, 1998 between Applied
Materials, Inc. and Bank of Tokyo-Mitsubishi, Ltd., Sanwa Bank,
Ltd., Sakura Bank, Ltd. and Sumitomo Bank, Ltd. on behalf of
Applied Komatsu Technology, Inc.
10.33 Promissory Note dated December 15, 1998 between Applied Materials,
Inc. and Applied Komatsu Technology America, Inc.
10.34 Receivables Purchase Agreement dated October 22, 1998 between
Applied Materials, Inc. and Deutsche Financial Services
Corporation.
10.35* Amendment No. 1 to the Applied Materials, Inc. Senior Executive
Bonus Plan dated September 2, 1998.
12.1 Ratio of Earnings to Fixed Charges.
13 Applied Materials 1998 Annual Report for the fiscal year ended
October 25, 1998 (to the extent expressly incorporated by
reference).
21 Subsidiaries of Applied Materials, Inc.
23 Consent of Independent Accountants.
24 Power of Attorney.
27 Financial Data Schedule: filed electronically.
- -----------
* Indicates, as required by Item 14(a)3, a management contract or compensatory
plan or arrangement.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
APPLIED MATERIALS, INC.
By /s/ JAMES C. MORGAN
-----------------------------------
James C. Morgan
Chairman of the Board and
Chief Executive Officer
Dated: January 20, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ JAMES C. MORGAN Chairman of the Board and January 20, 1999
- --------------------------------------- Chief Executive Officer
James C. Morgan
/s/ JOSEPH R. BRONSON Senior Vice President, January 20, 1999
- --------------------------------------- Office of the President,
Joseph R. Bronson Chief Financial Officer and
Chief Administrative Officer
(Principal Financial Officer)
/s/ MICHAEL K. O'FARRELL Vice President, Global Controller January 20, 1999
- --------------------------------------- and Chief Accounting Officer
Michael K. O'Farrell (Principal Accounting Officer)
Directors:
James C. Morgan Director
Dan Maydan* Director
Michael H. Armacost* Director
Deborah A. Coleman* Director
Herbert M. Dwight, Jr.* Director
Philip V. Gerdine* Director
Tsuyoshi Kawanishi* Director
Paul R. Low* Director
Alfred J. Stein* Director
</TABLE>
* By /s/ JAMES C. MORGAN
------------------------------------
James C. Morgan, Attorney-in-Fact **
**By authority of the power of attorney filed herewith.
18
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Applied Materials, Inc.
Our audits of the consolidated financial statements referred to in our report
dated November 17, 1998, except as to Note 14, which is dated as of December 23,
1998, appearing on page 66 of the 1998 Annual Report to Stockholders of Applied
Materials, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K), also included an
audit of the Financial Statement Schedule listed in Item 14(a) of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
- --------------------------------
PricewaterhouseCoopers LLP
San Jose, California
November 17, 1998
19
<PAGE> 20
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(Dollars in thousands)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS- BALANCE
FISCAL YEAR BEGINNING OF YEAR CHARGED TO INCOME DEDUCTIONS AT END OF YEAR
----------- ----------------- ----------------- ---------- --------------
<S> <C> <C> <C> <C>
1996 $ 3,017 $ 1,548 $ (396) $ 4,169
1997 $ 4,169 $ 2,433 $(1,024) $ 5,578
1998 $ 5,578 $ -- $(4,948) $ 630
</TABLE>
20
<PAGE> 21
EXHIBITS INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S-K:
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Agreement and Plan of Merger, by and among Applied Materials,
Inc., Orion Corp. I, and Opal, Inc. dated as of November 24, 1996,
previously filed with the Company's Annual Report on Form 10-K for
the year ended October 27, 1996, and incorporated herein by
reference.
2.2 Stock Purchase Agreement dated as of November 24, 1996 by and
among Applied Materials, Inc., Orbot Instruments, Ltd. and the
Stockholders of Orbot Instruments, Ltd., previously filed with the
Company's Annual Report on Form 10-K for the year ended October
27, 1996, and incorporated herein by reference.
2.3 Agreement and Plan of Merger And Reorganization between Applied
Materials, Inc. and Consilium, Inc., previously filed with the
Company's Form S-4A dated November 6, 1998, and incorporated
herein by reference.
3(i) Certificate of Incorporation of Applied Materials, Inc., a
Delaware corporation, as amended to March 18, 1996, previously
filed with the Company's Annual Report on Form 10-K for the year
ended October 27, 1996, and incorporated herein by reference.
3(i)(a) Amendment to Articles of Incorporation dated March 27, 1998,
previously filed with the Company's Form 10-Q for the quarter
ended July 26, 1998, and incorporated herein by reference.
3(i)(b) Articles of Incorporation (as amended to March 27, 1998),
previously filed with the Company's Form 10-Q for the quarter
ended July 26, 1998, and incorporated herein by reference.
3(ii) Bylaws of Applied Materials, Inc., as amended to December 13,
1996, previously filed with the Company's Annual Report on Form
10-K for the year ended October 27, 1996, and incorporated herein
by reference.
4.1 Rights Agreement, dated as of June 14, 1989, between Applied
Materials, Inc. and Bank of America NT&SA, as Rights Agent,
including Form of Rights Certificate and Form of Summary of Rights
to Purchase Common Stock, previously filed with the Company's
report on Form 8-K dated June 14, 1989, and incorporated herein by
reference.
4.2 Form of Indenture (including form of debt security) dated as of
August 24, 1994 between Applied Materials, Inc. and Harris Trust
Company of California, as Trustee, previously filed with the
Company's Form 8-K on August 17, 1994, and incorporated herein by
reference.
10.1* The 1976 Management Stock Option Plan, as amended to October 5,
1993, previously filed with the Company's Form 10-K for fiscal
year 1993, and incorporated herein by reference.
10.2* Applied Materials, Inc., Supplemental Income Plan, as amended,
including Participation Agreements with James C. Morgan, Walter
Benzing, and Robert Graham, previously filed with the Company's
Form 10-K for fiscal year 1981, and incorporated herein by
reference.
10.3* Amendment to Supplemental Income Plan, dated July 20, 1984,
previously filed with the Company's Form 10-K for fiscal year
1984, and incorporated herein by reference.
10.4* The Applied Materials Employee Financial Assistance Plan,
previously filed with the Company's definitive Proxy Statement in
connection with the Annual Meeting of Shareholders held on March
5, 1981, and incorporated herein by reference.
10.5* The 1985 Stock Option Plan for Non-Employee Directors, previously
filed with the Company's Form 10-K for fiscal year 1985, and
incorporated herein by reference.
10.6* Amendment 1 to the 1985 Stock Option Plan for Non-Employee
Directors dated June 14, 1989, previously filed with the Company's
Form 10-K for fiscal year 1989, and incorporated herein by
reference.
10.7* Applied Materials, Inc. Supplemental Income Plan as amended to
December 15, 1988, including the Participation Agreement with
James C. Morgan, previously filed with the Company's Form 10-K for
fiscal year 1988, and incorporated herein by reference.
<PAGE> 22
10.8 License Agreement dated January 1, 1992 between the Company and
Varian Associates, Inc., previously filed with the Company's Form
10-K for fiscal year 1992, and incorporated herein by reference.
10.9* Amendment dated December 9, 1992 to Applied Materials, Inc.
Supplemental Income Plan dated June 4, 1981 (as amended to
December 15, 1988), previously filed with the Company's Form 10-K
for fiscal year 1993, and incorporated herein by
reference.
10.10* The Applied Materials, Inc. Executive Deferred Compensation Plan
dated July 1, 1993 and as amended on September 2, 1993, previously
filed with the Company's Form 10-Q for the quarter ended August 1,
1993, and incorporated herein by reference.
10.11 Joint Venture Agreement between Applied Materials, Inc. and
Komatsu, Ltd. dated September 14, 1993 and exhibits thereto,
previously filed with the Company's Form 10-K for fiscal year
1993, and incorporated herein by reference. (Confidential
treatment has been requested for certain portions of the
agreement).
10.12* Amendment No. 2 to Applied Materials, Inc. 1985 Stock Option Plan
for Non-Employee Directors, dated September 10, 1992, previously
filed with the Company's Form 10-K for fiscal year 1993, and
incorporated herein by reference.
10.13* Amendment No. 3 to Applied Materials, Inc. 1985 Stock Option Plan
for Non-Employee Directors, dated October 5, 1993, previously
filed with the Company's Form 10-K for fiscal year 1993, and
incorporated herein by reference.
10.14* Amendment No. 2 to the Applied Materials, Inc. Executive Deferred
Compensation Plan, dated May 9, 1994, previously filed with the
Company's Form 10-Q for the quarter ended May 1, 1994, and
incorporated herein by reference.
10.15* Amendment No. 4 to Applied Materials, Inc. 1985 Stock Option Plan
for Non-Employee Directors, dated December 8, 1993, previously
filed with the Company's Form 10-Q for the quarter ended May 1,
1994, and incorporated herein by reference.
10.16* Applied Komatsu Technology, Inc. 1994 Executive Incentive Stock
Purchase Plan, together with forms of Promissory Note, 1994
Executive Incentive Stock Purchase Agreement, and Loan and
Security Agreement, previously filed with the Company's Form 10-Q
for the quarter ended July 31, 1994, and incorporated herein by
reference.
10.17* The Applied Materials, Inc. 1995 Equity Incentive Plan, dated
April 5, 1995, previously filed with the Company's Form 10-Q for
the quarter ended April 30, 1995, and incorporated herein by
reference.
10.18* The Applied Materials, Inc. Senior Executive Bonus Plan, dated
September 23, 1994, previously filed with the Company's Form 10-Q
for the quarter ended April 30, 1995, and incorporated herein by
reference.
10.19* The Applied Materials, Inc. Executive Deferred Compensation Plan,
as amended and restated on April 1, 1995, previously filed with
the Company's Form 10-Q for the quarter ended April 30, 1995, and
incorporated herein by reference.
10.20 Applied Materials, Inc. Medium-Term Notes, Series A Distribution
Agreement, dated August 24, 1995, and incorporated herein by
reference.
10.21* Resolution pertaining to the Amendment of the Applied Materials,
Inc. 1995 Equity Incentive Plan, adopted by the Stock Option and
Compensation Committee of the Board of Directors of Applied
Materials on December 12, 1996, previously filed with the
Company's Form 10-Q for the quarter ended April 27, 1997, and
incorporated herein by reference.
10.22 Participation Agreement dated as of April 30, 1997 among Applied
Materials, Inc. (as Lessee and Construction Agent), Credit Suisse
Leasing 92A, L.P., (as Lessor and Borrower), Greenwich funding
Corporation (as CP Lender), The Persons Named on Schedule I (as
Eurodollar Lenders) and Credit Suisse First Boston (acting through
its New York Branch, as Agent), previously filed with the
Company's Form 10-Q for the quarter ended April 27, 1997, and
incorporated herein by reference.
10.23 Appendix 1 to Participation Agreement, Master Lease Agreement and
Loan Agreement, dated as of April 30, 1997 (Definitions and
Interpretation) for Applied Materials, Inc., previously filed with
the Company's Form 10-Q for the quarter ended April 27, 1997, and
incorporated herein by reference.
10.24 Loan Agreement dated as of April 30, 1997 among Credit Suisse
Leasing 92A, L.P. (as
<PAGE> 23
Borrower), Greenwich Funding Corporation (as CP Lender), The
Persons Named on Schedule I (as Eurodollar Lenders) and Credit
Suisse First Boston (acting through its New York Branch, as Agent)
for Revolving Commercial Paper, Eurodollar Credit and Base Rate
Program, previously filed with the Company's Form 10-Q for the
quarter ended April 27, 1997, and incorporated herein by
reference.
10.25 Real Estate and Equipment Facility Master Lease dated as of April
30, 1997 between Credit Suisse Leasing 92A, L.P. (as Lessor), and
Applied Materials, Inc. (as Lessee), previously filed with the
Company's Form 10-Q for the quarter ended April 27, 1997, and
incorporated herein by reference.
10.26 Underwriting Agreement between Applied Materials, Inc. and Morgan
Stanley & Co. Incorporated dated October 9, 1997, previously filed
with the Company's Form S-3 dated October 9, 1997, and
incorporated herein by reference.
10.27 Prospectus Supplement for Applied Materials' $400 million Senior
Notes dated October 9, 1997, previously filed with the Company's
Form S-3 dated October 9, 1997, and incorporated herein by
reference.
10.28 $250,000 Five Year Credit Agreement and $250,000 364-Day Credit
Agreement, each dated as of March 13, 1998 among Applied
Materials, Inc., Morgan Guaranty Trust Company of New York, as
Documentation Agent and Administrative Agent, and Citicorp
Securities, Inc., as Syndication Agent, previously filed with the
Company's Form 10-Q for the quarter ended April 26, 1998, and
incorporated herein by reference..
10.29* Amendment No. 1 to the Applied Materials, Inc. Executive Deferred
Compensation Plan dated August 1, 1997, previously filed with the
Company's Form 10-Q for the quarter ended July 26, 1998, and
incorporated herein by reference.
10.30* Amendment No. 2 to the Applied Materials, Inc. Executive Deferred
Compensation Plan dated December 1, 1997, previously filed with
the Company's Form 10-Q for the quarter ended July 26, 1998, and
incorporated herein by reference.
10.31* Applied Materials, Inc. 1995 Equity Incentive Plan, as amended on
March 17, 1998, previously filed with the Company's Preliminary
Proxy Statement dated January 27, 1998, and incorporated herein by
reference.
10.32 Letters of Guarantee dated October 28, 1998 between Applied
Materials, Inc. and Bank of Tokyo-Mitsubishi, Ltd., Sanwa Bank,
Ltd., Sakura Bank, Ltd. and Sumitomo Bank, Ltd. on behalf of
Applied Komatsu Technology, Inc.
10.33 Promissory Note dated December 15, 1998 between Applied Materials,
Inc. and Applied Komatsu Technology America, Inc.
10.34 Receivables Purchase Agreement dated October 22, 1998 between
Applied Materials, Inc. and Deutsche Financial Services
Corporation.
10.35* Amendment No. 1 to the Applied Materials, Inc. Senior Executive
Bonus Plan dated September 2, 1998.
12.1 Ratio of Earnings to Fixed Charges.
13 Applied Materials 1998 Annual Report for the fiscal year ended
October 25, 1998 (to the extent expressly incorporated by
reference).
21 Subsidiaries of Applied Materials, Inc.
23 Consent of Independent Accountants.
24 Power of Attorney.
27 Financial Data Schedule: filed electronically.
- -----------
* Indicates, as required by Item 14(a)3, a management contract or compensatory
plan or arrangement.
19
<PAGE> 1
EXHIBIT 10.32
October 28, 1998
To: The Bank of Tokyo -- Mitsubishi, Ltd.
LETTER OF GUARANTEE
Dear Sirs:
With reference to the credit facilities extended by you to Applied
Komatsu Technology, Inc., ("AKT") a company duly organized and existing under
the laws of Japan, having its principal office at KSK West Bldg. 3F, 3-25-9,
Hacchobori, Tokyo 104-0032 for the sum of, up to Japanese Yen One Thousand,
Three Hundred and Fifty Million (JYen1,350,000,000), including principal,
interest and all other charges payable under the facilities, the undersigned
Applied Materials, Inc., ("Applied") a company duly organized and existing under
the laws of Delaware and having its principal office at 3050 Bowers Avenue,
Santa Clara, California, 95054, hereby guarantees the due fulfillment of payment
obligations of AKT to you under the facilities up to the sum of Japanese Yen Six
Hundred and Seventy-Five Million (JYen675,000,000), or 50% of amount of the
credit facilities used at any time, whichever is smaller, and agrees to pay you
the same if AKT fails to pay any amount due.
This guarantee shall continue in full force and effect from October 28, 1998
until April 30, 1999.
Sincerely,
/s/ Nancy H. Handel
----------------------------------------
Nancy H. Handel
Applied Materials, Inc.
Vice President, Global Finance and
Treasurer
<PAGE> 2
October 28, 1998
To: The Sakura Bank Ltd.
LETTER OF GUARANTEE
Dear Sirs:
With reference to the credit facilities extended by you to Applied
Komatsu Technology, Inc., ("AKT") a company duly organized and existing under
the laws of Japan, having its principal office at KSK West Bldg. 3F, 3-25-9,
Hacchobori, Tokyo 104-0032 for the sum of up to Japanese Yen Eight Hundred
Million (JYen800,000,000), including principal, interest and all other charges
payable under the facilities, the undersigned Applied Materials, Inc.,
("Applied") a company duly organized and existing under the laws of Delaware and
having its principal office at 3050 Bowers Avenue, Santa Clara, California,
95054, hereby guarantees the due fulfillment of payment obligations of AKT to
you under the facilities up to the sum of Japanese Yen Four Hundred Million
(JYen400,000,000), or 50% of amount of the credit facilities used at any time,
whichever is smaller, and agrees to pay you the same if AKT fails to pay any
amount due.
This guarantee shall continue in full force and effect from October 28, 1998
until April 30,1999.
Sincerely,
/s/ Nancy H. Handel
----------------------------------------
Nancy H. Handel
Applied Materials, Inc.
Vice President, Global Finance and
Treasurer
<PAGE> 3
October 28, 1998
To: The Sanwa Bank, Limited
LETTER OF GUARANTEE
Dear Sirs:
With reference to the credit facilities extended by you to Applied
Komatsu Technology, Inc., ("AKT") a company duly organized and existing under
the laws of Japan, having its principal office at KSK West Bldg. 3F, 3-25-9,
Hacchobori, Tokyo 104-0032 for the sum of up to Japanese Yen Eight Hundred
Million (JYen800,000,000), including principal, interest and all other charges
payable under the facilities, the undersigned Applied Materials, Inc.,
("Applied") a company duly organized and existing under the laws of Delaware and
having its principal office at 3050 Bowers Avenue, Santa Clara, California,
95054, hereby guarantees the due fulfillment of payment obligations of AKT to
you under the facilities up to the sum of Japanese Yen Four Hundred Million
(JYen400,000,000), or 50% of amount of the credit facilities used at any time,
whichever is smaller, and agrees to pay you the same if AKT fails to pay any
amount due.
This guarantee shall continue in full force and effect from October 28, 1998
until April 30, 1999.
Sincerely,
/s/ Nancy H. Handel
----------------------------------------
Nancy H. Handel
Applied Materials, Inc.
Vice President, Global Finance and
Treasurer
<PAGE> 4
October 28, 1998
To: The Sumitomo Bank, Limited
LETTER OF GUARANTEE
Dear Sirs:
With reference to the credit facilities extended by you to Applied
Komatsu Technology, Inc., ("AKT") a company duly organized and existing under
the laws of Japan, having its principal office at KSK West Bldg. 3F, 3-25-9,
Hacchobori, Tokyo 104-0032 for the sum of up to Japanese Yen One Thousand Seven
Hundred Seventy Million (JYen1,770,000,000), including principal, interest and
all other charges payable under the facilities, the undersigned Applied
Materials, Inc., ("Applied") a company duly organized and existing under the
laws of Delaware and having its principal office at 3050 Bowers Avenue, Santa
Clara, California, 95054, hereby guarantees the due fulfillment of payment
obligations of AKT to you under the facilities up to the sum of Japanese Yen
Eight Hundred Eighty Five Million (JYen885,000,000), or 50% of amount of the
credit facilities used at any time, whichever is smaller, and agrees to pay you
the same if AKT fails to pay any amount due.
This guarantee shall continue in full force and effect from October 28, 1998
until April 30, 1999.
Sincerely,
/s/ Nancy H. Handel
----------------------------------------
Nancy H. Handel
Applied Materials, Inc.
Vice President, Global Finance and
Treasurer
<PAGE> 1
EXHIBIT 10.33
PROMISSORY NOTE
$4,946,000.00 Santa Clara, California
December 15, 1998
FOR VALUE RECEIVED, Applied Komatsu Technology America, Inc. ("Borrower") agrees
to pay on demand to Applied Materials, Inc. ("Lender"), or its assignee, at
Santa Clara, California, or such other place as the holder of this Note may from
time to time designate, the principal sum of four million, nine hundred and
forty-six thousand dollars ($4,946,000.00), with simple interest on the unpaid
principal balance from time to time outstanding at an interest rate of three
month US dollar LIBOR plus 0.3% per annum until paid, commencing on the date
hereof and reset on the last business day of each fiscal quarter during which
the loan is outstanding. Interest will be calculated on the actual number of
days elapsed on the basis of actual days in the year. Interest will be due and
payable in arrears annually, on or before January 31st of each year. Any
interest unpaid as of January 31st of each year will be added to the principal
balance then outstanding and begin accruing interest.
All payments by Borrower shall be made in freely transferable same day funds in
such manner as the holder may designate. Borrower may prepay all amounts due
under this Note at any time without penalty.
Borrower shall pay reasonable attorney's fees and all other costs and expenses
of any collection or litigation regarding this Note. Borrower waives formal
presentment or demand.
This Note shall be governed by the laws of the State of California as applied to
contracts entered into and wholly performed within said state.
APPLIED KOMATSU TECHNOLOGY APPLIED MATERIALS, INC
AMERICA, INC.
By /s/ Howard L. Neff By /s/ Nancy H. Handel
----------------------------------- -------------------------------------
Name: Howard L. Neff Name: Nancy H. Handel
Title: President Title: Vice President Global
Finance and Treasurer
By /s/ Tadashi Saito
----------------------------------
Name: Tadashi Saito
Title: Chief Financial Officer
<PAGE> 1
EXHIBIT 10.34
EXECUTION COPY
RECEIVABLES PURCHASE AGREEMENT
THIS RECEIVABLES PURCHASE AGREEMENT ("Agreement") is dated as of the 22nd
day of October, 1998, by and between APPLIED MATERIALS, INC., a Delaware
corporation ("Seller") and DEUTSCHE FINANCIAL SERVICES CORPORATION, a Nevada
corporation ("Purchaser").
R E C I T A L S
A. Among other things, Seller sells certain manufacturing products and
provides services related thereto in the ordinary course of its business (the
"Products" and the "Services", respectively, or collectively, the "Goods").
B. Seller may sell and Purchaser may purchase from time to time, on the
terms and conditions set forth herein, all of Seller's right, title and interest
in and to payment for the Products sold and Services rendered by Seller to the
Obligors (as defined herein) (such accounts collectively referred to herein as
the "Receivables" or, individually, a "Receivable").
C. Purchaser wishes that Seller act as Purchaser's initial Collection
Agent with respect to Receivables sold by Seller in connection with the
collection of the amounts owing on the Receivables, and wishes to pay the Seller
a Collection Agent Fee, as herein defined, in return for the Seller's services
as Collection Agent.
D. Seller and Purchaser desire to enter into this Agreement to govern the
purchase and sale of the Receivables, the administration and collection thereof,
and related matters.
NOW, THEREFORE, in consideration of the agreements contained herein and
for other good and valuable consideration, the parties hereto mutually agree as
follows:
ARTICLE 1
Definitions
Section 1.1. Definitions.
Except as otherwise specified in this Agreement, all references (i) to any
Person, other than Seller, shall be deemed to include such Person's successors
and assigns, and (ii) to any law, agreement, statute or contract specifically
defined or referred to in this Agreement shall be deemed references to such
agreement, or contract as the same may be supplemented, amended, waived,
consolidated, replaced or modified from time to time, but only to the extent
permitted by, and effected in accordance with, the terms hereof. The words
"herein," "hereof" and "hereunder" and words of similar import, when used in
this Agreement shall refer to this Agreement as a whole and not to any provision
of this Agreement, and "Article," "Section," "paragraph," "Schedule" and
respective references are to this Agreement unless otherwise specified. Whenever
the context so requires, words importing any gender include the other genders.
Any of the terms defined in this Article 1 may, unless
<PAGE> 2
the context otherwise requires, be used in the singular or the plural depending
on the reference; the singular includes the plural and the plural includes the
singular.
All terms defined in this Article 1 shall have the defined meanings when
used in this Agreement or, except as otherwise expressly stated therein, any
certificate, opinion or other document delivered pursuant to this Agreement.
All accounting terms not otherwise defined in this Article 1 or elsewhere
in this Agreement shall have the meanings assigned them in conformity with GAAP.
All terms used in Article 9 of the UCC and not specifically defined in this
Article 1 or elsewhere in this Agreement shall be defined herein as such terms
are defined in the UCC as in effect in the State of California on the date
hereof.
References to "writing" include printing, typing, lithography and other
means of reproducing words in a tangible visible form. References to "written"
include "printed," "typed," "lithographed" and other adjectives relating to
words reproduced in a tangible visible form consistent with the preceding
sentence including electronic mail. The words "including," "includes" and
"include" shall be deemed to be followed by the words "without limitation."
A/R Limit. As defined in Section 2.1.B.
Balance. As defined in Section 2.1.B.
Billing Date. The date on which an invoice is issued with respect to the
sale of Goods resulting in the creation of a Receivable.
Business Day. Any day on which dealings in currencies and exchange may be
carried on in the interbank eurodollar market, excluding Saturday, Sunday and
any day which is a day on which national banking institutions are authorized or
required by law or other governmental action to close.
Collateral. As defined in Section 5.1.
Collection Agent. A Person that is selected and appointed by Purchaser, in
accordance with Section 3.1, to act on Purchaser's behalf in the administration,
servicing and collection of the Sold Receivables. Such Person may be Seller. The
term "Collection Agent" includes a Successor Collection Agent.
Collection Agent Fee. A fee calculated and payable by Purchaser to Seller
in accordance with the terms of Article 4 hereof.
Collection Settlement Date. With respect to each Funding Date in connection
with the sale of Sold Receivables to Purchaser, the related First Collection
Settlement Date (the 60th day after such Funding Date or if such date is not a
Business Day, the Business Day thereafter), and to the extent the Outstanding
Balances of such Sold Receivables have not been reduced to zero, each succeeding
Business Day.
2
<PAGE> 3
Collections. All amounts received by the Collection Agent or Purchaser from
any Obligor as a payment with respect to a Sold Receivable.
Contract. An agreement pursuant to which an Obligor agrees to pay money to
Seller for Products sold or Services rendered by Seller in the ordinary course
of its business.
Credit Adjustment. Any refund, rebate, credit, early pay discount or other
adjustment granted to an Obligor with respect to a Sold Receivable after such
Receivable is sold to Purchaser.
Defaulted Receivable. (i) A Sold Receivable that the Collection Agent
determines in good faith to be uncollectible, or (ii) a Sold Receivable which
remains unpaid, for any reason, including without limitation, set off by the
Obligor (whether in connection with the same or a related transaction or
unrelated transaction) or a bankruptcy proceeding of the Obligor where the
Obligor is the debtor, more than 45 days from the Billing Date.
Discount. With respect to any Sold Receivable, an amount equal to the
product of: (a) the LIBOR Rate (Reserve Adjusted)-Two Month plus ninety-eight
one-hundredths of one percent (0.98%) per annum of the Outstanding Balance of
such Sold Receivable, and (b) 60/365.
Dollars. Lawful money of the United States of America.
Eligible Receivable. Any Receivable which does not otherwise constitute an
Ineligible Receivable.
Eurocurrency Liabilities. Has the meaning specified in Regulation D of the
Board of Governors of the Federal Reserve System, as in effect from time to
time.
Eurocurrency Reserve Percentage. For any Purchase, means the reserve
percentage, if any, applicable two (2) Business Days before the date the
applicable LIBOR Rate is determined under regulations issued from time to time
by the Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement (including without limitation any
emergency, supplemental or other marginal reserve requirement for a member bank
of the Federal Reserve System in New York City) with respect to liabilities or
assets consisting of or including Eurocurrency Liabilities (or with respect to
any other category of liabilities that includes deposits by reference to which
the interest rate on Purchases is determined) having a one-month term for LIBOR
Rate-One Month, and a two-month term, for LIBOR Rate-Two Month.
Event of Default. As defined in Section 12.1.
Facility Termination Date. The earlier of the Termination Date or when
Purchaser terminates this Agreement under Section 12.2.
Federal Bankruptcy Code. The bankruptcy code of the United States of
America codified in Title 11 of the United States Code, as amended.
Financing Statement. The financing statements that are properly filed with
the various Secretaries of State or other jurisdictions to perfect security
interests in any property described by such financing statements.
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First Collection Settlement Date. With respect to each Funding Date that
date which is sixty (60) days after such Funding Date, provided that if such
date is not a Business Day, then the First Collection Settlement Date shall be
the next succeeding Business Day.
Funding Date. The Initial Funding Date, and such other and further dates as
the parties hereto may agree to in writing as of the date on which Purchaser
acquires additional Receivables hereunder.
GAAP. Generally accepted accounting principles set forth in the opinions
and pronouncements of the Accounting Principles Board of the American Institute
of Certified Public Accountants and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as may be approved by a significant segment of the accounting profession,
which are applicable to the circumstances as of the date of determination.
Goods. As defined in the Recitals to this Agreement.
Indemnitees. As defined in Section 10.1.
Ineligible Receivables. Shall mean any of the following, as determined by
Purchaser in its reasonable discretion, at the time of each Purchase hereunder:
(a) Receivables created from the sale of Goods and services not in
accordance with Seller's Payment Terms as described in Exhibit III
attached hereto;
(b) Receivables created from the sale of Goods that allow for payment to
be made more than forty-five (45) days after the Billing Date and/or
Receivables which are unpaid more than forty-five (45) days from the
Billing Date;
(c) all Receivables of an Obligor if fifty percent (50%) or more of the
Outstanding Balance of all such Obligor's Receivables are more than
forty-five (45) days past the applicable due date;
(d) all Receivables of an Obligor if the Outstanding Balance of all Sold
Receivables of such Obligor exceeds either (i) Fifty Million Dollars
($50,000,000.00) (or any other Dollar limitations as may be set forth
on Schedule B hereto, as amended from time to time) or as otherwise
agreed to by Purchaser, or (ii) fifty percent (50%) of the Outstanding
Balance of all Eligible Receivables;
(e) Receivables with respect to which the Obligor is an officer, employee,
agent, parent, Subsidiary or affiliate of Seller or has common
officers or directors with Seller;
(f) Receivables arising out of any consignment sale;
(g) Receivables with respect to which the payment by the Obligor is
conditional, other than as may be required by applicable statute;
(h) Receivables with respect to which the Obligor is not a commercial or
institutional entity;
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(i) Receivables with respect to which Seller is or may become liable to
the Obligor thereof for goods sold or services rendered by such
Obligor to Seller, other than as may be required by applicable
statute;
(j) Receivables with respect to which any warranty or representation
provided in Sections 7.3, 8.4 or 8.8 is not true and correct;
(k) Receivables which represent goods purchased for a personal, family or
household purpose;
(l) Receivables which are progress payment, retention or contra accounts;
(m) Receivables with respect to which the Obligor is in default of any
material provision of any agreement between Seller and Obligor
governing such Receivable, including, without limitation, Receivables
paid with checks returned and marked "Insufficient Funds" and
Receivables which are otherwise in dispute and, in each case, not
resolved within thirty (30) days;
(n) Receivables arising pursuant to documentation not satisfactory to
Purchaser in its sole discretion;
(o) Receivables on which the Obligor is not located in the United States
if such Receivable is not fully secured by foreign credit insurance or
letter of credit, in each case acceptable to Purchaser in its sole
discretion;
(p) Receivables which were not incurred in the ordinary course of Seller's
business;
(q) Receivables which, prior to sale, were not owned by Seller; or
(r) any and all other Receivables which Purchaser deems to be
unacceptable; provided, however, that Receivables of the Obligors
listed on Schedule B hereto which also satisfy paragraphs (c) through
(q) above, shall be deemed acceptable to Purchaser, subject to any
limitations in such Schedule B.
Initial Funding Date. The date that Purchaser makes its initial Purchase of
Receivables, in accordance with Section 2.1, which, unless otherwise agreed to
by the parties in writing, shall be October 23, 1998.
LIBOR Rate-One-Month. Shall mean, for purposes solely of calculation of the
Collection Agent Fee, the London Interbank Offered Rate (LIBOR) for one-month
deposits in U.S. Dollars that appears on Page 3745 of the Bloomberg News Service
(or any other page that may replace any such page on such service in the
reasonable judgment of Purchaser) on the Business Day of any such Collection
Agent Fee payment.
LIBOR Rate-Two Month. Shall mean for any Purchase, the London Interbank
Offered Rate (LIBOR) for two-month deposits in U.S. Dollars that appears on Page
3745 of the Bloomberg News Service (or any other page that may replace any such
page on such service in the reasonable
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judgment of Purchaser) on the third Business Day immediately preceding a Funding
Date.
LIBOR Rate (Reserve Adjusted)-One Month. Shall mean, the rate per annum
obtained by dividing the LIBOR Rate-One Month by a percentage equal to 100%
minus the Eurocurrency Reserve Percentage.
LIBOR Rate (Reserve Adjusted)-Two Month. Shall mean, the rate per annum
obtained by dividing the LIBOR Rate-Two Month by a percentage equal to 100%
minus the Eurocurrency Reserve Percentage.
Lien. A mortgage, pledge, lien, security interest or other charge or
encumbrance of any kind (including without limitation any conditional sale or
other title retention agreement, any lease in the nature thereof, and any
agreement to give any security interest).
Net Purchase Price. With respect to any Eligible Receivable, the total
Outstanding Balance of such Eligible Receivable, minus: (i) the Discount
attributable to such Eligible Receivable, as determined as of the Settlement
Date and (ii) Twenty-Three One Hundredths of One Percent (0.23%) of the total
Outstanding Balance of such Eligible Receivable, as of such Settlement Date.
Notices. All notices, requests, demands and other communications provided
for under this Agreement.
Obligor. Each customer to whom Seller has sold Products or provided
Services and who has agreed to pay money to Seller therefor whether or not
pursuant to a Contract.
Officer's Certificate. A certificate executed on behalf of Seller by its
chief financial officer, treasurer or other authorized officer.
Outstanding Balance. With respect to any Sold Receivable as of any date,
the total outstanding principal balance thereof as of such date.
Outstanding Eligible Receivables. As at any moment, all Eligible
Receivables which are then outstanding (i.e., not yet paid by their respective
Obligors).
Party. Seller or Purchaser, as defined.
Person. Natural persons, corporations, limited partnerships, general
partnerships, joint stock companies, joint ventures, incorporated or
unincorporated associations, companies, limited liability companies, trusts or
other organizations, whether or not legal entities, and governments and agencies
and political subdivisions thereof, or any other entity of any kind.
Prime Rate. The prime rate as published in The Wall Street Journal. The
Prime Rate will change and take effect for purposes of this Agreement on the day
of any change in the prime rate published in The Wall Street Journal.
Products. As defined in the Recitals to this Agreement.
Purchase. A purchase of Receivables made by Purchaser pursuant to Section
2.1.
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Receivables. As defined in the Recitals to this Agreement.
Receivables Purchase Settlement Statement. A statement substantially in the
form of Exhibit II to be executed by Seller and Purchaser, prepared in
accordance with Section 2.1.C and other provisions of this Agreement.
Releases. The termination statements or other documents that are filed with
the various Secretaries of State or other jurisdictions for the purpose of
releasing any security interests that have been filed or perfected through the
filing of one or more Financing Statements.
Request for Information or Copies. The documents that are submitted to the
various Secretaries of State or other jurisdictions for the purpose of
ascertaining whether or not any financing statements, tax liens, judgment liens
or other filings have been filed with respect to some item of property.
Secretary of State. Any Secretary of State, or any person acting in an
official capacity for such person or for other jurisdictions, elected or
appointed, to receive filings of Financing Statements, articles of incorporation
or other documents pertaining to the business structure or operation of any of
the entities referred to in this Agreement.
Services. As defined in the Recitals to this Agreement.
Settlement Date. The first Business Day immediately preceding each Funding
Date, and such other dates as may be agreed to in writing by Seller and
Purchaser.
Sold Receivable. A Receivable purchased by Purchaser until paid in full by
the Obligor.
Status Report. As defined in Section 3.2.B.
Subsidiary. With respect to any Person, any corporation, association or
other business entity of which more than 50% of the total voting power of shares
of common stock or units of ownership or beneficial interest entitled to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person.
Successor Collection Agent. As defined in Section 3.1.C.
Termination Date. As defined in Section 11.1.
UCC. The California Uniform Commercial Code.
ARTICLE 2
Amount and Terms of Purchase Commitments
Section 2.1. Purchase of Receivables.
A. Sale; Effective Date of Sale.
(i) Generally. On each Funding Date, Purchaser shall Purchase the
Eligible Receivables from Seller, in accordance with the terms hereof, that
Purchaser has elected, in its sole discretion, to Purchase.
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Purchaser's decision to make a Purchase hereunder will not be binding until the
funds are actually advanced. A condition of each Purchase on any Funding Date
shall be delivery by Seller of the Receivables Purchase Settlement Statement
required pursuant to Section 2.1.C on the Settlement Date. No Purchase shall
occur after the Facility Termination Date or if Purchaser exercises its rights
under Section 12.2.
(ii) Limitations. Notwithstanding anything herein, Seller shall have no
obligation to sell, and Purchaser shall have no obligation to Purchase, any
Receivables: (1) on any dates other than the Funding Dates, and (2) which fail
to comply with the terms hereof.
B. Purchase; Transfer of Receivables. Each Purchase hereunder shall take
place on the applicable Funding Date, at the office of Purchaser at 2401 East
Katella Avenue, Suite 400, Anaheim, CA 92803-4850, or such other place as may be
mutually agreed upon by Seller and Purchaser. Purchaser shall purchase the
applicable Receivables on any Funding Date for an aggregate purchase price equal
to the Net Purchase Price of the Eligible Receivables reflected on the
Receivables Purchase Settlement Statement prepared in connection with such
Purchase. Seller agrees further that, at all times during the term of this
Agreement, the aggregate cumulative amount of all Net Purchase Prices received
by Seller in respect of the then Outstanding Eligible Receivables, minus all
Collections received thereon (the "Balance"), shall not exceed One Hundred
Million Dollars ($100,000,000.00) (the "A/R Limit"). Title to all Receivables
which are acquired by Purchaser shall pass to Purchaser on the applicable
Funding Date. Each Purchase shall be made without recourse, except as
specifically provided herein.
C. Receivables Purchase Settlement Statements. On each Settlement Date,
Seller shall execute a Receivables Purchase Settlement Statement, dated as of
such date, which, among other things: (i) assigns and transfers to Purchaser,
effective as of the Funding Date, all right, title and interest of Seller in and
to the Sold Receivables described in the schedule attached to such Receivables
Purchase Settlement Statement, free and clear of all security interests, liens,
charges, encumbrances and rights of others, other than the respective Obligor's
interest in the Products and/or Services, as appropriate, relating thereto, (ii)
includes copies of all invoices and a summary of all sales resulting in Sold
Receivables, and a calculation of the Eligible Receivables to be sold, a
schedule of the Sold Receivables, and the Net Purchase Price, and (iii) provides
such other information as Purchaser may reasonably request at least five (5)
days in advance of such Settlement Date for the purpose of effecting the
transactions contemplated hereby.
D. Collateral Assignment. Certain of the Obligors have granted Seller a
Lien on certain of such Obligor's assets as security for the obligations of such
Obligor to Seller. On or prior to each Settlement Date, Seller shall deliver to
Purchaser, assignments of all security agreements, instruments or other
documents pursuant to which such Obligors have granted Seller such a Lien in its
assets.
E. Power of Attorney. Seller hereby grants to Purchaser an irrevocable
power of attorney, with full power of substitution, coupled with an interest, to
take in the name of Seller or in Purchaser's own name all steps necessary or
advisable to (i) whether or not an Event of Default has occurred and is
continuing, endorse and negotiate any writing or other right of any kind held or
owned by Seller or transmitted to or received by Purchaser as payment on account
or otherwise in respect of any Sold Receivables, and (ii) effective upon the
occurrence and during the continuance of any Event of Default, enforce,
foreclose, demand or accelerate on any writing or other right of any kind held
or owned by Seller or transmitted to or received by Purchaser as payment on
account or
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otherwise in respect of any Sold Receivable, and (ii) effective upon the
occurrence and during the continuance of any Event of Default, enforce,
foreclose, demand or accelerate on any writing or other right of any kind held
or owned by Seller or transmitted to or received by Purchaser as payment on
account or otherwise in respect of any Sold Receivable.
ARTICLE 3
Collections; Maintenance of Records;
Disbursements of Collections
Section 3.1. Collection Procedure.
A. Appointment of Seller as Collection Agent. Purchaser hereby appoints
Seller to act as Collection Agent with respect to Sold Receivables and Seller
hereby accepts such appointment until a Successor Collection Agent is appointed
in accordance with the terms hereof.
B. Duties and Standard of Care as Collection Agent.
(1) The Collection Agent will endeavor to collect the amount owing to
Purchaser on each Sold Receivable in accordance with terms hereof, as and when
the same becomes due, at Seller's cost and expense and as agent for Purchaser,
but subject to the right of Purchaser to direct and control such activities in
accordance with the terms hereof.
(2) In performing its functions and duties on behalf of Purchaser as
the Collection Agent, Seller shall exercise the same care that it would exercise
in the collection of Receivables for its own account, in accordance with, among
other things, Seller's current Collection Procedures attached hereto as Exhibit
IV, which standard of care shall not be less than the standard of care prevalent
in the industry in which Seller engages. Collection Agent may amend, from time
to time, its Collection Procedures with the consent of Purchaser, such consent
not to be unreasonably withheld.
(3) The Collection Agent may allow such Credit Adjustments for
Purchaser's account as the Collection Agent may determine in good faith to be
either (i) appropriate to facilitate maximum Collections or (ii) required by
applicable law or any applicable Contract and may receive any Products relating
thereto, subject to Purchaser's aforesaid interests, as may be returned or
rejected by, or repossessed from, the Obligors; provided, however, that any
Credit Adjustment shall be reflected in a Status Report or other writing
delivered by Collection Agent to Purchaser prepared for the period in which the
Credit Adjustment was made, and the amount of any such Credit Adjustment shall
be paid to Purchaser in full, in good funds, on each Collection Settlement Date.
With respect to each Defaulted Receivable, the Collection Agent shall have the
power and authority, on behalf of Purchaser, to take action in accordance with
Seller's standard collection policies (including, in the case of any such
Receivable in respect of which a security interest in Products shall have been
obtained, the repossession and resale of such Products). Purchaser may request,
to the extent reasonable, from time to time information relating to any
Defaulted Receivable. A Collection Agent other than Seller may also make Credit
Adjustments for Purchaser's account with the consent of Purchaser. Any such
Credit Adjustment made pursuant to clause (ii) above by a Collection Agent other
than Seller, shall be treated the same as a Credit Adjustment made by Seller as
Collection Agent, including for purposes of requiring payment or credit by
Seller.
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(4) In the enforcement or collection of any Sold Receivable, the
Collection Agent must obtain Purchaser's prior written consent to name Purchaser
as a party in any legal proceeding; provided, however, that nothing contained
herein shall limit Purchaser's right, exercisable in its sole discretion,
following demand made by Purchaser on Seller and Seller's refusal or inability
to proceed against an Obligor, to sue or proceed against any Obligor in its own
name at any time upon two (2) days prior written notice to Seller after the 60th
day after the applicable Funding Date. Moreover, notwithstanding the foregoing,
(i) following the occurrence and during the continuance of any Event of Default
after notice to Seller, (ii) if Seller has determined in good faith that a Sold
Receivable is uncollectible, or (iii) if (1) an Obligor becomes insolvent or
becomes subject to the Federal Bankruptcy Code, any state insolvency law or any
similar law, as a debtor, (2) an Obligor makes a general assignment for the
benefit of creditors, or (3) a receiver is appointed for any assets of an
Obligor; no demand by Purchaser on Seller shall be required before Purchaser may
sue or proceed against any Obligor in its own name.
(5) Purchaser may at any time with contemporaneous notice to Seller,
contact any Obligor utilizing the form of verification letter attached hereto as
Schedule C, for any purpose related to the performance of audits and
verification analyses, and the determination of account balances and other data
maintained by Seller. Except for sending the verification letter to the Obligors
and except as otherwise provided herein, Purchaser shall not contact any Obligor
with respect to the transactions contemplated herein. Purchaser may at any time
following (i) the occurrence and during the continuance of an Event of Default;
or (ii) the termination of Seller as Collection Agent: (a) notify any Obligor of
the purchase by Purchaser of any Sold Receivable hereunder; (b) direct any
Obligor to make all payments in respect of Sold Receivables directly to
Purchaser at an address designated by Purchaser, or to a third party or a bank
or depositary designated by Purchaser; and/or (c) proceed directly against any
Obligor, either with respect to the collection of any Sold Receivable or any
related matter.
(6) All Collections received by the Collections Agent on and prior to
the related First Collection Settlement Date shall be paid on each Tuesday (for
Collections received by the Collection Agent during the immediately preceding
calendar week), directly to the Purchaser as provided in Section 3.3. All
Collections received by the Collections Agent after the related First Collection
Settlement Date, shall be paid within one Business Day directly to the Purchaser
as provided in Section 3.3. On any Collection Settlement Date, Seller shall
remit to Purchaser, for Purchaser's own account, all amounts representing Credit
Adjustments which relate to the Sold Receivables which are applicable to each
such Collection Settlement Date. All payments and all amounts received in
settlement, adjustment or liquidation of any Sold Receivable will be credited by
Purchaser on the Business Day good funds are received by Purchaser. All payments
in respect of Sold Receivables of a particular Obligor shall be applied against
specific items of Sold Receivables as specifically identified in writing by the
Obligor thereon. If an Obligor fails to so specify, then the Collection Agent
shall use its best efforts, including contacting such Obligor, to determine the
appropriate application of the payment.
C. Termination of Appointment. Upon the occurrence and continuance of an
Event of Default or upon termination of this Agreement, Purchaser may at any
time immediately terminate Seller's
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appointment as the Collection Agent by delivery of a notice of such termination
in writing to Seller, provided, however, that if there exists no Event of
Default, Purchaser's termination of Seller as Collection Agent shall be
effective fifteen (15) days after Purchaser's giving of notification thereof to
Seller. Upon the termination of Seller as the Collection Agent, without
limitation, (i) Purchaser, or a financial institution designated by Purchaser
(Purchaser in such capacity or such third party, a "Successor Collection
Agent"), shall administer the administrative, servicing and collection functions
with respect to Purchases from Seller in any commercially reasonable manner and
in accordance with this Agreement; (ii) Purchaser shall, at any time thereafter,
be entitled to notify the Obligors on any Sold Receivables to make payment of
amounts due thereunder directly to Purchaser at an address designated by
Purchaser or to such third party or to a bank or other depositary designated by
Purchaser; and (iii) Seller shall, at its own expense, (a) if so requested by
Purchaser, endorse each instrument, if any, evidencing any Sold Receivable to
Purchaser in such manner as Purchaser shall reasonably direct and (b) perform
any and all acts and execute any and all documents as may be reasonably
requested by Purchaser in order to effect the purposes of this Agreement and the
Purchase of Receivables and to perfect and protect the ownership interest of
Purchaser in the Sold Receivables.
Section 3.2. Records and Reports.
A. Maintenance of Records. Until the earlier of the termination of this
Agreement or until each Sold Receivable has been paid in full, Purchaser shall
have the right (but not the obligation), for the purposes hereunder described,
to enter upon Seller's premises from time to time during normal business hours
following three (3) Business Days notice to Seller (unless an Event of Default
has occurred and is continuing, in which event no advance notice will be
required hereunder, but such entry shall be during normal business hours) during
the term of this Agreement. The purposes for which Purchaser may enter pursuant
to the terms of this Section 3.2 are as follows: (i) to examine Seller's books,
accounts, records or other papers pertaining to Sold Receivables and otherwise
pertaining to the transactions which are the subject of this Agreement, and for
no other purposes; (ii) to examine the Collateral; (iii) to appraise the
Collateral as security; (iv) to verify the condition of the Collateral; (v) to
verify that all Collateral has been properly accounted for; and (vi) to verify
that Seller is in compliance with all terms and provisions of this Agreement;
provided, in all cases, that Purchaser shall have no right to examine any
documents covered by attorney-client privileges or attorney work-product. Any
fees, costs or expenses incurred by Purchaser in connection with such
inspections, audits and examinations as aforesaid, shall be the sole
responsibility of Purchaser (unless an Event of Default has occurred and is
continuing, in which event Seller shall be solely responsible for such fees,
costs and expenses). From time to time upon the reasonable written request of
Purchaser, Seller, at its own expense, will deliver to Purchaser, or any agent
selected by Purchaser (which agent Seller shall have consented to, such consent
not to be unreasonably withheld), as the case may be: (i) a schedule of the Sold
Receivables (or Sold Receivables relating to such Obligors as Purchaser may
specify) sold by Seller to Purchaser indicating as to each such Sold Receivable
information as to the Obligor thereon, the Outstanding Balance thereof, the
location of any Contract evidencing such Sold Receivable and such other
information as Purchaser may reasonably deem appropriate; and (ii) copies of any
such Contract and such records and invoices pertaining thereto and evidence
thereof as Purchaser may reasonably deem necessary to enable Purchaser to
enforce its rights thereunder. At Purchaser's
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request, Seller shall: (a) identify and hold as agent for Purchaser at the
offices of Seller listed in Schedule A hereto (including without limitation for
the purpose of protecting Purchaser's ownership interest therein) all books,
records and documents evidencing or relating to the Sold Receivables, including
any underlying Contracts, and maintain a current record of all Sold Receivables
owned by Purchaser at any time in such reasonable detail and in form and
substance satisfactory to Purchaser; (b) mark the legend "Receivables assigned
to Deutsche Financial Services Corporation, under a Receivables Purchase
Agreement, dated as of October 22, 1998" on Seller's aging schedule applicable
to the Sold Receivables, and upon the occurrence of an Event of Default, on such
instruments as Purchaser may from time to time reasonably designate; and/or (c)
maintain and implement administrative and operating procedures (including
without limitation an ability to recreate records evidencing the Sold
Receivables in the event of the destruction of the original records), and keep
and maintain all documents, books, records and other information reasonably
necessary for the collection of the Sold Receivables for Purchaser.
B. Status Reports. Seller shall submit to Purchaser a Status Report on
the dates specified in the immediately following sentence, substantially in the
form of Exhibit V ("Status Report") consisting of information concerning
Collections, Credit Adjustments, and Defaulted Receivables. Seller shall submit
a Status Report to Seller (i) no later than the thirty-fifth (35th) day after a
Funding Date, with respect to the 30-day period which commenced on such Funding
Date, and (ii) no later than two (2) days after a First Collection Settlement
Date, with respect to the 30-day period immediately preceding such First
Collection Settlement Date. The Status Report shall include such other reports
as Purchaser shall reasonably request. If any date for the delivery of a Status
Report is not a Business Day, then such report shall be due on the next
succeeding Business Day.
Section 3.3. Manner and Time of Payments.
A. Payments to Seller. (i) On the Funding Date. With respect to any
Funding Date, so long as Purchaser receives the Receivables Purchase Settlement
Statement by 10:00 a.m., Pacific time, on the related Settlement Date, Purchaser
shall pay the amounts that are payable to Seller hereunder on such Funding Date,
as applicable, in immediately available funds deposited to the account of Seller
listed in Section 13.2 hereof, no later than 2:00 p.m., Pacific time, and
subject to the provisions of any other information reasonably requested by
Purchaser from Seller in connection therewith in effect on or prior to such
date. (ii) Collection Agent Fee. Purchaser's payment of the Collection Agent Fee
to Seller shall be made in immediately available funds deposited to the account
of Seller listed in Section 13.2 hereof, no later than 2:00 p.m., Pacific time,
on the dates and as otherwise provided under the terms of Article 4 hereof.
(iii) Generally. The foregoing notwithstanding, any amounts due Purchaser from
Seller hereunder or in connection herewith, may be deducted by Purchaser from
any amounts owed to Seller, with notice to Seller.
B. Payments to Purchaser. Seller shall pay the amounts that are payable
to Purchaser hereunder, in immediately available funds, deposited to the account
of Purchaser listed in Section 13.2 hereof, no later than 2:00 p.m., Pacific
time, on any Collection Settlement Date, or as otherwise provided, subject to
the provisions of any Status Report, or other information reasonably requested
by Purchaser from Seller in connection therewith in effect on or prior to such
date. In no
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way limiting the foregoing, Seller agrees to pay Purchaser the following:
(i) Delinquent Receivables. If the Outstanding Balance of a Sold
Receivable has not been paid in full on or before the 60th day after the Funding
Date on which the Purchaser purchased such Sold Receivable, then, the Seller
shall pay to the Purchaser an amount equal to the Payment Percentage of the
unpaid Outstanding Balance of such Sold Receivable for each day after such 60th
day that the Outstanding Balance is greater than zero until the earlier of (A)
the date on which the Seller notifies Purchaser that it has determined in good
faith that such Sold Receivable is uncollectible, (B) the date that is the 90th
day after the Funding Date on which the Purchaser purchased such Sold
Receivable, and (C) the date on which the Outstanding Balance is reduced to
zero. Any amount required to be paid under this paragraph shall be paid to the
Purchaser on the immediately following Collection Settlement Date. As used
herein, the "Payment Percentage" is equal to the sum of: (a) the LIBOR Rate
(Reserve Adjusted)-Two Month relating to the Purchase of such Sold Receivables
plus ninety-eight one-hundredths of one percent (0.98%) per annum, divided by
365, plus (b) Twenty-Three One Hundredths of One Percent (0.23%), divided by 60.
Section 3.4. Eurodollar Deposits Unavailable or Rate Unascertainable. (a)
In the event that on or prior to the date the LIBOR Rate-Two Month is
determined, Purchaser shall have determined (which determination shall be
conclusive and binding on the parties hereto) that by reason of circumstances
affecting the interbank eurodollar market, adequate and reasonable means do not
exist for ascertaining the LIBOR Rate-Two Month applicable to a Purchase,
Purchaser shall promptly give notice of such determination to Seller, and any
such Purchase shall be made using a Discount based upon the Prime Rate less the
difference in the per annum interest rate between the Prime Rate (at the date
the LIBOR Rate-Two Month ceased to exist) and the average of the LIBOR Rate-Two
Month over the 30-day period immediately preceding the date the LIBOR Rate-Two
Month ceased to exist. (b) In the event that on or prior to the date the LIBOR
Rate-One Month is determined, Purchaser shall have determined (which
determination shall be conclusive and binding on the parties hereto) that by
reason of circumstances affecting the interbank eurodollar market, adequate and
reasonable means do not exist for ascertaining the LIBOR Rate-One Month
applicable to calculation and payment of the Collection Agent Fee, Purchaser
shall promptly give notice of such determination to Seller, and any such
Collection Agent Fee shall be made based upon the Prime Rate less the difference
in the per annum interest rate between the Prime Rate (at the date the LIBOR
Rate-One Month ceased to exist) and the average of the LIBOR Rate-One Month over
the 30-day period immediately preceding the date the LIBOR Rate-One Month ceased
to exist.
ARTICLE 4
Collection Agent Fee
Section 4.1. Collection Agent Fee. A fee shall be payable by Purchaser to
Seller in its capacity as Collection Agent (the "Collection Agent Fee"), in an
amount equal to the LIBOR Rate (Reserve Adjusted)-One Month on the average daily
balance of the Collections received by Purchaser during the 30-day period
preceding each Collection Agent Fee payment date specified in the immediately
following sentence. The Collection Agent Fee shall be payable, in arrears, on
that date which is thirty (30) days after a Funding Date (provided that if such
date is not a Business Day, then on the next succeeding Business Day), and on
the
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First Collection Settlement Date. In no event, however, shall any Collection
Agent Fee be payable to Seller for Collections relating to the applicable Sold
Receivables received after the related First Collection Settlement Date. The
Collection Agent Fee is to be paid by the Purchaser to the Seller as Collection
Agent in consideration of Seller's agreement to serve as a Collection Agent and
as compensation for such Collection Agent's services. Any amounts due to
Purchaser from Seller hereunder, may be deducted from any Collection Agent Fee
and credited to Purchaser, upon notice to Seller. Following the termination of
Seller as a Collection Agent, Seller shall not continue to earn any Collection
Fees.
ARTICLE 5
Security Interest
Section 5.1. Sale; Grant of Security Interest. The parties hereto intend
that the Purchase by Purchaser of Sold Receivables pursuant to this Agreement
shall constitute a sale under all applicable laws. Notwithstanding such intent,
if for any reason the Sold Receivables are not under applicable law deemed to
have been Purchased by Purchaser, Purchaser shall be deemed to have made a loan
to Seller in the amount of the purchase price paid to Seller, secured by the
following grant of security in Seller's assets. In the event of any such
designation as a loan, all provisions of this Agreement referring to the sale of
the Sold Receivables shall be construed as the context may require as references
to the grant of a security interest in such Receivables. In such regard and in
any event to secure all of Seller's current and future debts to Purchaser under
this Agreement or any side letters entered into between Purchaser and Seller in
connection with this Agreement, whether now or hereafter existing, due or to
become due, direct or indirect, or absolute or contingent, indemnification
obligations pursuant to Section 10.1 and payments on account of Collections
received, Seller hereby assigns and grants to Purchaser a security interest in
all of Seller's right, title and interest now or hereafter existing in, to and
under (i) all Sold Receivables, now owned or hereafter acquired, (ii) all
contract rights, chattel paper, security agreements, instruments, documents of
title, deposit accounts, reserves and general intangibles, now owned or
hereafter acquired, all returned, reclaimed or repossessed inventory and
Products, in each case securing or otherwise supporting such Sold Receivables,
and (iii) all proceeds of any of the foregoing (the "Collateral"). To the extent
so defined, the above assets shall have the same meanings as in Article 9 of the
UCC. Seller will hold all of the Collateral in trust for Purchaser and will
account for and remit directly to Purchaser all such proceeds when payment is
required under terms of this Agreement. Purchaser's lien or security interest
will not be impaired by any payments Seller may make to any other person or
entity. This Agreement shall constitute a security agreement under applicable
law with regard to the security interest granted pursuant to this Section 5.1.
ARTICLE 6
Seller's Affirmative Covenants
Seller covenants and agrees that, unless Purchaser shall otherwise give its
express prior written consent, until the earlier of the termination of this
Agreement or each Sold Receivable has been paid in full, Seller shall comply
with and perform in accordance with all covenants contained in this Article 6.
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Section 6.1. Financial Statements and Other Reports. Seller will maintain a
system of accounting established and administered in accordance with sound
business practices to permit preparation of financial statements of Seller in
conformity with GAAP. Seller will deliver to Purchaser:
A. as soon as available and in any event within 50 days after the end of
each of the first three quarters of each fiscal year of Seller, consolidated
balance sheets of Seller as of the end of such quarter and consolidated
statements of income and of cash flows of Seller for the period commencing at
the end of the previous fiscal year and ending with the end of such quarter,
certified by the Treasurer of Seller; provided that Seller may satisfy this
obligation by filing its Form 10-Q for such fiscal quarter with the Securities
and Exchange Commission;
B. as soon as available and in any event within 105 days after the end of
each fiscal year of Seller a copy of the annual report of such year for Seller
containing consolidated financial statements for such year certified by Seller's
independent public accountants; provided that Seller may satisfy this obligation
by filing its Form 10-K for such fiscal year with the Securities and Exchange
Commission;
C. promptly after the sending or filing thereof, copies of all reports
which Seller sends to its security holders generally, and copies of all
registration statements which Seller files with the Securities and Exchange
Commission or any national securities exchange (other than those on Form S-8);
D. promptly upon any vice president or president of Seller obtaining
knowledge or becoming aware of an occurrence of a breach of Seller's obligations
under this Agreement which would give rise to an Event of Default, an Officer's
Certificate specifying the nature and period of existence of any such breach,
condition or event, or specifying the notice given or action taken by such
holder or Person and the nature of such claimed breach, event or condition, and
what action, if any, Seller has taken, is taking and proposes to take with
respect thereto;
E. thirty (30) days' notice prior to Seller's changing its name or any
name under which it does business or relocating its chief executive offices or
relocating the books, records and documents evidencing the Receivables owned or
to be purchased by Purchaser hereunder;
F. prior to the implementation of any material change in Seller's
policies, procedures or practices with respect to extending credit to its
customers, making Credit Adjustments or collecting amounts owed by customers, in
each case that would affect Sold Receivables, a written description of such
proposed change at least ten (10) days in advance of such change;
G. with reasonable promptness, such other information, reports or
documents concerning the Receivables which are owned or to be purchased by
Purchaser hereunder, the underlying Contracts, or the credit or collection
policies, practices and procedures of Seller, as Purchaser may from time to time
reasonably request; and
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H. such other information respecting the financial condition or
operations of Seller as Purchaser may from time to time reasonably request.
Section 6.2. Corporate Existence, etc. Subject to Section 7.5 hereof,
Seller will at all times preserve and keep in full force and effect its
corporate existence and all material licenses, rights and privileges relating to
Sold Receivables, and qualify and remain qualified as a foreign corporation in
each jurisdiction in which such qualification is necessary to avoid a material
adverse effect on the validity, enforceability and collectibility of Sold
Receivables.
Section 6.3. Compliance with Laws, etc. Seller will comply in all material
respects with the requirements of all applicable laws, rules, regulations and
orders of any governmental authority, noncompliance with which would adversely
affect the validity, enforceability or collectibility of Sold Receivables.
Section 6.4. Transfer of Receivables. Seller shall take all steps necessary
or, in the reasonable opinion of Purchaser, advisable to validate or protect the
ownership interest of Purchaser in, or to defeat the assertion by any third
party of any adverse claims with respect to, the Sold Receivables or any
underlying Contracts. If an Event of Default by Seller hereunder has occurred
and is continuing, Seller hereby irrevocably authorizes Purchaser to execute and
deliver, in Seller's name and on Seller's behalf, such instruments and documents
(including bills of sale and assignments) necessary or desirable to evidence or
protect Purchaser's ownership interest in the Sold Receivables. Regardless of
whether an Event of Default by Seller has occurred and is continuing, Seller
hereby irrevocably authorizes Purchaser to execute and file, in Seller's name
and on Seller's behalf, financing statements (including amendments and
continuation statements) under the UCC (or similar law where the UCC is not
enacted) in such jurisdictions where it may be necessary to validate or protect
Purchaser's position as owner of, or, as provided in Section 5.1, secured party
with respect to, such Sold Receivables. Seller shall execute and deliver such
additional documents and shall take such further action as Purchaser may
reasonably request to effect or evidence the transfer of the Sold Receivables
and shall execute and deliver to Purchaser such powers-of-attorney as may be
necessary or appropriate to enable Purchaser to endorse for payment any check,
draft or other instrument delivered in payment of any amount under or in respect
of a Sold Receivable. If, at any time, Seller receives any cash or checks,
drafts or other instruments for the payment of money on account or otherwise in
respect of Sold Receivables, Seller shall segregate such cash and other items,
hold such cash and other items (properly endorsed, where required, so that such
items may be collected by Purchaser) in trust for Purchaser, and promptly paid
directly to Purchaser in accordance with Section 3.1.B(6).
Section 6.5. Assignment of Contracts; Instruments. Seller hereby assigns to
Purchaser all rights of Seller under each Contract underlying a Sold Receivable
relating to the collectibility of payments thereunder, security interests and
other liens created in connection therewith and the enforcement thereof, but
Purchaser does not and shall not thereby assume any obligations of Seller under
any such Contract. Such assignment shall include without limitation security
interests in favor of Seller in any property (including without limitation any
Goods) securing any Sold Receivable, whether pursuant to the contract underlying
such Sold Receivables or otherwise, and all terms and
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conditions of this Agreement shall be deemed applicable to such assigned
security interests generally in the same manner and to the same extent as
applied to the related Sold Receivable. In the event any Sold Receivable
becomes, either at the time of creation of such Sold Receivable or any time
thereafter, evidenced by a promissory note or other document or instrument
(other than a Contract), Seller will promptly endorse and physically deliver
such promissory note, document or instrument to Purchaser.
ARTICLE 7
Seller's Negative Covenants
Until the earlier of the termination of this Agreement or each Sold
Receivable has been paid in full, unless Purchaser shall otherwise give prior
written consent, Seller will perform all covenants contained in this Article 7.
Section 7.1. Character of Business. Seller will make no material change in
its Collection Procedures that would adversely affect the validity,
enforceability or collectibility of the Sold Receivables or materially adversely
affect the ability of Seller to perform its obligations hereunder without the
consent of Purchaser.
Section 7.2. Modification of Contracts. Except as set forth in Section
3.1.B(3), without the prior written consent of Purchaser, Seller will not amend,
modify or waive any term or condition of any Contract underlying any Sold
Receivable, which amendment, modification or waiver would adversely affect the
validity, enforceability or collectibility of such Receivable or adversely
affect Purchaser's right to collect any Sold Receivables.
Section 7.3. Quality of Receivables. Seller will not sell to Purchaser any
Receivable that is not an Eligible Receivable on the date of sale. Seller will
not sell to Purchaser any Receivable, that, on the date of sale : (i) is an
Ineligible Receivable; (ii) is evidenced by a promissory note or other document
or instrument (other than a Contract); (iii) does not conform with applicable
laws, rules or regulations or is based on a Contract that does not conform in
all material respects with applicable laws, rules or regulations; (iv) is a
Defaulted Receivable; (v) is a Receivable with respect to which Seller is
engaged in any dispute or warranty claim or which is subject to any lien, claim,
security interest, offset, counterclaims or defense; (vi) permits the Obligor to
pay less than the Outstanding Balance for any reason other than a Credit
Adjustment; (vii) does not satisfy the requirements of Sections 8.4 and 8.8
hereof in all material respects; or (viii) the Purchase of which by Purchaser,
or the sale of which by Seller, is subject to any order, judgment or decree of
any court, arbitrator or similar tribunal or governmental authority, or is the
subject of any proceedings before any such court, arbitrator or similar tribunal
or government authority purporting to enjoin or restrain Purchaser from making
any Purchase, Seller from selling such Receivable or the Collection Agent or
Purchaser from making any Collection of such Receivables. Purchaser may from
time to time, in its discretion, upon advance written notification to Seller,
withdraw its approval of any or all of the Obligors, including but not limited
to those listed on Schedule B hereto.
Section 7.4. Financial Statements. Seller will not prepare, or permit the
preparation of, any financial statements which shall account for the
transactions contemplated hereby in a manner that is
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inconsistent with Purchaser's ownership interest in the Sold Receivables.
Section 7.5. Restriction on Fundamental Changes. Seller can merge with
another Person if immediately thereafter, giving effect to such merger, no Event
of Default exists and either (i) the Seller survives the merger or (ii) the
successor agrees to be bound by this Agreement.
Section 7.6. Seller's Interest. Seller will not retain any interest in any
Sold Receivable hereunder and each sale of a Sold Receivable hereunder shall be
of all of Seller's right, title and interest in such Sold Receivable.
Section 7.7. Negative Pledge. Seller will not mortgage, pledge, grant or
permit to exist a security interest or Lien caused by it, in or upon any of the
Sold Receivables or the Collateral.
ARTICLE 8
Seller's Representations and Warranties
In order to induce Purchaser to enter into this Agreement and to make the
Purchases, Seller represents and warrants to Purchaser that the following
statements are true, correct and complete in all material respects (except to
the extent such representations and warranties are already qualified as to
materiality in which case they are true, correct and complete) as of the date
hereof and as of the date of each sale of Receivables hereunder (all
representations and warranties concerning Receivables shall be made solely as of
the date of the sale of such Receivables hereunder):
Section 8.1. Organization, Powers and Good Standing.
A. Organization and Powers. Seller is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation. Seller has all requisite corporate power and authority to own and
operate its properties, to carry on its business as such business is now
conducted and as it is proposed to be conducted hereunder, to enter into this
Agreement and to carry out the transactions contemplated hereby, except where
failure to have such licenses and permits would not have a material adverse
effect on the financial condition or assets of Seller.
B. Good Standing. Seller is in good standing wherever necessary to carry
on its present business and operations, except in jurisdictions in which the
failure to be in good standing has and will have no material adverse effect on
the conduct of the business of Seller or any adverse effect on the validity,
enforceability or collectibility of any Sold Receivable.
Section 8.2. Authorization of Sales, etc.
A. Authorization of Sales. The execution, delivery and performance of
this Agreement and the sales of Receivables sold and to be sold to Purchaser
hereunder and the grant of the security interest in the Collateral have been
duly authorized by all necessary corporate action by Seller.
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B. No Conflict. The execution, delivery and performance by Seller of this
Agreement and the sales of Receivables do not and will not: (i) violate any
provision of law applicable to Seller, the Certificate of Incorporation or
Bylaws of Seller, or any order, judgment or decree of any court or other agency
of government binding on Seller; (ii) conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under or permit
an acceleration or increased amortization of any material obligation of Seller;
(iii) result in or require the creation or imposition of any Lien, charge or
encumbrance of any nature whatsoever upon any of the properties or assets of
Seller except as provided herein or pursuant to the terms hereof; or (iv)
require any approval of stockholders or any approval or consent of any Person
under any obligation of Seller or Contract to which Seller is a party other than
approvals or consents that have been obtained and disclosed in writing to
Purchaser.
C. Governmental Consents. The execution, delivery and performance by
Seller of this Agreement and the Purchases of Receivables do not and will not
require any registration with, consent or approval of, or notice to, or other
action to, with or by, any federal, state or other governmental authority or
regulatory body or other Person, other than a filing with certain Secretaries of
State and other jurisdictions evidencing the Purchase of Receivables hereunder,
and no transaction contemplated hereby requires compliance with any bulk sales
act or similar law.
D. Binding Obligation. This Agreement creates and constitutes legal,
valid and binding obligations of Seller, enforceable in accordance with its
terms, except as enforcement may be limited by applicable bankruptcy, insolvency
or similar laws and principles of equity.
Section 8.3. No Material Adverse Change. Since September 9, 1998, there has
been no material adverse change in the business, operations, properties, or
financial position of the Seller and its subsidiaries taken as a whole.
Section 8.4. Protection of Ownership Interest. All filings or other actions
under the UCC have been made or taken in each jurisdiction that are necessary or
appropriate to validate and perfect Purchaser's ownership interest in and rights
to collect any and all Sold Receivables and the proceeds thereof; Purchaser has
a valid and perfected ownership or security interest in the Sold Receivables and
the proceeds thereof, free and clear of all security interests, liens, charges,
encumbrances or rights of others except as otherwise expressly provided herein;
and no effective financing statement or other instrument similar in effect
covering all or any part of the Sold Receivables is currently on file or of
record at any location except as has been filed or recorded from time to time in
favor of Purchaser in accordance with this Agreement.
Section 8.5. Office Locations. As of the date hereof, the chief executive
office of Seller is located at the address of Seller's business office appearing
in Schedule A hereof, and the books, records and documents evidencing the
Receivables to be sold hereunder are located at Seller's business offices
located at the address appearing in Schedule A hereof.
Section 8.6. Taxes, etc. Seller's federal tax identification number is
94-1655526. There is no federal, state or local law or ordinance (other than
income or franchise tax laws applicable to
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Purchaser generally) under which any Receivable which is sold to Purchaser under
this Agreement shall be subjected to any property, excise, sales or other tax,
assessment or governmental charge other than income or franchise taxes of
Purchaser. To the extent any such Receivable is subject to any such tax,
assessment or governmental charge, Seller hereby agrees to pay all such taxes,
assessments and governmental charges.
Section 8.7. Disclosure. No representation or warranty of Seller contained
in this Agreement or any other document, certificate or written statement
furnished to Purchaser by Seller in connection with the transactions
contemplated by this Agreement contains any untrue statement of a material fact
or omits to state any material fact necessary in order to make the statements
contained herein or therein, in the light of the circumstances under which they
were made, not misleading; provided that any projections, proforma or
preliminary financial information furnished are based on good faith estimates
and assumptions believed to be reasonable at the time made and Purchaser
acknowledges that such projections as to future events are not to be viewed as
facts and that actual results for such period may differ from such projected
results. There is no fact known to Seller (other than matters of a general
economic nature) that materially adversely affects the business, operations,
property, assets or condition (financial or otherwise) of Seller and its
Subsidiaries, taken as a whole, that has not been disclosed herein or in such
other documents, certificates and statements furnished to Purchaser for use in
connection with the transactions contemplated hereby.
Section 8.8. Receivables Valid and Binding; No Litigation. Each Receivable
sold to Purchaser hereunder constitutes at the time of sale the legal, valid and
binding obligation of the Obligor to Seller, subject to laws affecting the
rights of creditors generally. Each such Receivable complies at the time of sale
with the provisions of all applicable laws and regulations, whether federal,
state or local, applicable thereto, other than provisions as to which the
failure to comply would not adversely affect the validity, enforceability or
collectibility of the Receivables, and satisfies at the time of sale the
requirements of Section 7.3 hereof in all respects. Each such Receivable is
denominated and payable in Dollars. There are no known counterclaims or rights
of set-off limiting the right of Purchaser to collect the Outstanding Balance,
as adjusted for Credit Adjustments, of each such Receivable. To the best of
Seller's knowledge, there is no order, judgment or decree of any court,
arbitrator or similar tribunal or governmental authority purporting to enjoin or
restrain Purchaser from making any Purchase, Seller from selling any Receivable
or the Collection Agent or Purchaser from making any Collection, or which might
otherwise adversely affect Seller's ability to perform its obligations
hereunder. To the best of Seller's knowledge, there are no proceedings before
any court, arbitrator or similar tribunal or governmental authority seeking to
enjoin or restrain Purchaser from making any Purchase, Seller from selling any
Receivable or the Collection Agent or Purchaser from making any Collection, or
which might otherwise adversely affect Seller's ability to perform its
obligations hereunder.
Section 8.9. Satisfaction of Conditions Precedent. At the time of each
Purchase hereunder, each of the conditions precedent to such Purchase set forth
in Article 9 will have been (i) waived in writing by Purchaser, or (ii)
satisfied.
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ARTICLE 9
Conditions To Purchases
Section 9.1. Conditions to Initial Purchases. The obligation of Purchaser
to make its initial Purchase is, in addition to the conditions precedent
specified in Sections 9.2 and 9.3 hereof, subject to prior or concurrent
satisfaction of the following conditions. On or before the Initial Closing Date,
Seller shall deliver to Purchaser:
A. Good Standing, Etc. Evidence reasonably satisfactory to Purchaser that
Seller is duly organized and existing under the laws of Seller's state of
incorporation and in California;
B. Corporate Resolutions. Resolutions of the Board of Directors of Seller
approving and authorizing the execution, deliver and performance of this
Agreement and the sales of Receivables to be made hereunder, certified as of the
Initial Funding Date by its corporate secretary or an assistant secretary;
C. Signature and Incumbency Certificate. Signature and incumbency
certificates of the officers of Seller executing this Agreement;
D. UCC Searches. A certificate copy of each Request for Information or
Copies (Form UCC-11) (or a similar search report acceptable to Purchaser)
listing the Financing Statements filed with respect to the Collateral (or
similar search reports for jurisdictions where the UCC is not enacted), and
showing that no Financing Statements have been filed with respect to, and
presently cover, such Receivables (except those filed pursuant to this
Agreement); the foregoing notwithstanding, Purchaser hereby confirms that with
respect to the Initial Funding Date, Purchaser shall obtain such searches
required hereunder;
E. Agreement. Executed original of this Agreement;
F. Opinion of Counsel. Executed original of one or more favorable written
opinions of counsel, substantially in the form of Exhibit I hereto, reasonably
satisfactory to Purchaser, dated as of the Initial Funding Date;
G. UCC-1s. Purchaser shall have received from Seller acknowledgment
copies of all Financing Statements (Form UCC-1) filed with respect to the
Collateral in each jurisdiction where necessary or appropriate to perfect
Purchaser's ownership interest in such Collateral (or evidence of the
satisfaction of such similar filing or other requirements as may be so necessary
in each jurisdiction where the UCC is not enacted), Purchaser hereby agreeing
that with respect to the Initial Funding Date, if Purchaser has received duly
executed originals of the Financing Statements required hereunder at least two
(2) days prior to the Initial Funding Date, then the acknowledgment copies of
such filings required hereunder will be acceptable if received by Purchaser no
later than ten (10) Business Days after such Initial Funding Date;
H. Receivables Purchase Settlement Statement. As of the Settlement Date
in respect of the Initial Funding Date, Seller shall deliver the Receivables
Purchase Settlement Statement required by Section 2.1.C;
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I. Subordination Agreements. Subordination agreements in form and
substance acceptable to Purchaser from any and all prior filers with conflicting
security interests in the Collateral; and
J. Other Documents. Such other documents, certificates, submissions,
instruments, and agreements as reasonably requested by Purchaser relating to the
transaction herein contemplated.
Section 9.2. Conditions to All Purchases. The obligation of Purchaser to
make each Purchase, including the initial Purchase, is subject to the following
further conditions precedent:
A. Purchaser shall have received, in accordance with the provisions of
Section 2.1 as of any Settlement Date, an originally executed Receivables
Purchase Settlement Statement relating to such Purchase, signed by the chief
executive officer, the chief financial officer, the treasurer or any other
authorized officer or designee of Seller on behalf of Seller.
B. As of the date of any Purchase:
1. The representations and warranties of Seller contained herein shall be
true, correct and complete in all material respects on and as of the date
of Purchase to the same extent as though made on and as of that date;
2. All Receivables sold by Seller on such date hereunder shall comply in
all material respects with Section 7.3 hereof;
3. No event shall have occurred and be continuing or would result from
the consummation of the Purchase contemplated by such Receivables Purchase
Settlement Statement that would constitute an Event of Default or permit
the acceleration or the increased amortization of the obligations created,
or but for the passage of time or the giving of notice or both would
constitute an Event of Default or permit the acceleration or the increased
amortization of the obligations created, under this Agreement or any other
agreement to which Seller is a party;
4. Seller shall have performed in all material respects all agreements
and satisfied all conditions which this Agreement provides shall be
performed by it on or before such date of Purchase;
5. Seller shall have delivered such other and further Receivables
Purchase Settlement Statements as may be required hereunder;
6. There shall not have occurred and be continuing an Event of Default by
Seller under this Agreement;
7. Seller shall have delivered such other and further UCC-1s, amendments
thereto and Subordination Agreements as Purchaser shall deem reasonably
necessary; and
8. Seller shall have delivered such other documents, certificates,
submissions, instruments, and agreements as reasonably requested by
Purchaser relating to the transaction herein contemplated.
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ARTICLE 10
Indemnities By Seller
Section 10.1. Right to Indemnification. Without prejudice to any other
rights that Purchaser may have hereunder or under applicable law, Seller agrees
to indemnify, pay and hold Purchaser and the employees and agents of Purchaser
(collectively called the "Indemnitees") harmless from and against, any and all
liabilities, obligations, losses, damages (including consequential damages,
except as expressly set forth below), penalties, actions, judgments, suits,
claims, costs and expenses (including without limitation the reasonable fees and
disbursements of counsel for such Indemnitees and reasonable costs of
investigation and accountants) (collectively, "Indemnified Amounts"), which
arise or result from: (i) any breach by Seller of its duties hereunder
individually or as the Collection Agent, in connection with the collection of
Sold Receivables; (ii) any dispute, claim, offset or defense of any Obligor
(other than as a result of the Obligor's bankruptcy or insolvency) to the
payment of any Receivable owned by Purchaser (including without limitation a
defense based on such Receivable or the underlying Contract not being the legal,
valid and binding obligation of such Obligor enforceable against such Obligor in
accordance with its terms), in either case other than as a result of an act or
omission of Purchaser not required or permitted under this Agreement; (iii) any
other claim resulting from the sale of the Products and Services underlying the
Receivable (including without limitation any warranty or product liability
claims); or (iv) any breach by Seller of any of the terms, covenants, conditions
or representations of this Agreement; excluding, in all cases however, (A)
Indemnified Amounts to the extent resulting from gross negligence or willful
misconduct on the part of such Indemnitee, (B) consequential, indirect, punitive
or exemplary damages, except such damages which are imposed on the Indemnitee in
favor of any third party in connection with the actions described in (i) through
(iv) above, and (C) recourse for uncollectible Receivables and all income and
franchise taxes on Purchaser; provided, further, that if an arbitrator or court
of competent jurisdiction in a final non-appealable order determines that such
Indemnified Amounts arose in part from such Indemnitee's gross negligence or
willful misconduct, Seller shall reimburse such Indemnitee for the portion of
such claim not resulting from such Indemnitee's gross negligence or willful
misconduct. The obligations of Seller pursuant to this Section 10.1 shall
survive any termination of this Agreement.
Section 10.2. Notification of Potential Liability. Each party will make
good faith efforts to identify potential situations involving possible liability
under this Article 10, and to determine the amount, if any, of such liability or
obligations, and will, upon learning of such potential situations, promptly
advise the other party.
Section 10.3. Litigation. The Seller agrees at its expense, at the
Purchaser's request, to cooperate with the Purchaser in any action, suit or
proceeding brought by or against the Purchaser relating to any of the
transactions contemplated by this Agreement or to any of the Sold Receivables
owned by the Purchaser (other than an action, suit or proceeding by the Seller
against the Purchaser). In addition, the Seller agrees to notify the Purchaser
and the Purchaser agrees to notify the Seller, at the Seller's expense, promptly
upon learning of any pending or threatened action, suit or proceeding if the
judgment or expenses of defending such action, suit or proceeding would be
covered by Section 10.1 and (except for an action, suit or proceeding by the
Seller against the Purchaser) to consult with the Purchaser, concerning
23
<PAGE> 24
the defense and prior to settlement; provided, however, that if (i) the Seller
shall have acknowledged that Section 10.1 would cover any judgment or expenses
in any action, suit or proceeding and (ii) in the Purchaser's sole
determination, the Seller has the financial ability to satisfy such judgment or
expenses, then the Seller shall have the right, on the Purchaser's behalf but at
the Seller's expense, to defend such action, suit or proceeding with counsel
selected by the Seller and shall have sole discretion as to whether to litigate,
appeal or enter into an exclusively monetary settlement; and provided further
that (i) the Purchaser's failure to provide any notice pursuant to this Section
10.3 shall not affect the indemnification of any party by the Seller hereunder,
and (ii) the Seller's sole and exclusive remedy in the event of any such failure
to give notice by the Purchaser shall be a separate action against the Purchaser
for damages actually incurred by the Seller as a direct result of the
Purchaser's failure to provide such notice.
Section 10.4. Seller to Remain Obligated. Anything herein to the contrary
notwithstanding: (i) Seller shall remain responsible and liable under the
Contracts to the extent set forth in such Contracts or otherwise to perform all
of its duties and obligations thereunder to the same extent as if the Sold
Receivables applicable to such Contracts had not been sold to Purchaser
hereunder; (ii) the exercise by Purchaser of any of its rights hereunder shall
not release Seller from any of its duties or obligations under such Contracts;
and (iii) Purchaser shall not have any obligation or liability under such
Contracts by reason of the purchase of the applicable Sold Receivables
hereunder, nor shall Purchaser be obligated to perform any of the obligations or
duties of Seller thereunder.
ARTICLE 11
Termination
Section 11.1. Termination. Absent termination of this Agreement pursuant to
Article 12, this Agreement shall continue in full force and effect until the
earlier of the date (i) which is ninety (90) days after written notice from any
Party to the other Party of its election to terminate this Agreement, or (ii) on
which all obligations of Seller to Purchaser and Purchaser to Seller, have been
satisfied in full (the "Termination Date"). Subject to the provisions of Article
12, (i) no termination of this Agreement shall affect any monetary obligations
hereunder of any Party arising prior to the effective date of such termination,
(ii) no termination of this Agreement shall affect the obligation of Seller to
make any payments to Purchaser required hereunder, including but not limited to
payments of Credit Adjustments, (iii) no termination of this Agreement shall
affect any obligations which, specifically by their terms, survive termination
hereof, including but not limited to, Seller's indemnification obligations
hereunder, and (iv) payments of any and all amounts from Obligors with respect
to Sold Receivables (regardless of the existence of any other obligation or
indebtedness of such Obligors then owed to the Seller or any other person or
entity) to the Seller shall continue to be treated as Collections and shall be
applied to repayment of Sold Receivables as set forth herein. Notwithstanding
any such termination, Seller agrees that from time to time thereafter it will
promptly execute and deliver all further instruments and documents, and take all
further actions, that may be necessary or that Purchaser may reasonably request,
in order to perfect, protect or more fully evidence Purchaser's right, title and
interest in and to the Sold Receivables owned by Purchaser hereunder; to enable
Purchaser to exercise or enforce any such rights; to facilitate
24
<PAGE> 25
maximum Collections; and/or otherwise to effectuate the intent of the Parties
hereto with respect to the Sold Receivables and Collections.
ARTICLE 12
Events of Default
Section 12.1. Events of Default. Any of the following events will
constitute an Event of Default by Seller under this Agreement:
(a) Except for the breach described in Section 12.1(c) below, Seller
fails to perform any of its obligations contained herein or in any other related
agreements between Seller and Purchaser, and such breach is not cured within
thirty (30) days of Seller's receipt of written notice of such breach from
Purchaser;
(b) any representation, statement, report, or certificate made or
delivered by Seller to Purchaser is not accurate in all material respects when
made (or when deemed made);
(c) Seller fails to pay any of its monetary obligations payable to
Purchaser hereunder or under any other agreements related to this Agreement
within five (5) days of when due and payable;
(d) any event or condition shall occur which results in the
acceleration of the maturity of any debt of Seller or any subsidiary of Seller
to a third party in excess of $50,000,000 or enables (or, with the giving of
notice or lapse of time or both, would enable) the holder of such debt or any
Person acting on such holder's behalf to accelerate the maturity thereof;
(e) final judgments or orders for the payment of money in excess of
$50,000,000 in the aggregate (excluding amounts with respect to which a
financially sound and reputable insurer has admitted liability) shall be
rendered against the Seller or any subsidiary of Seller and such judgments or
orders shall continue unsatisfied or unstayed for a period of thirty (30)
consecutive days;
(f) an attachment, sale or seizure issues or is executed against any
assets of Seller or any subsidiary of Seller; provided, however, that no event
that would otherwise constitute an Event of Default under this Section 12.1(f)
shall be an Event of Default if the total assets of all entities with respect to
which such event has occurred which would otherwise have constituted an Event of
Default under Sections 12.1 (f), (h), or (i) do not exceed $50,000,000 in the
aggregate;
(g) Seller shall cease existence as a corporation, other than as
permitted under Section 7.5 hereof;
(h) Seller or any subsidiary of Seller shall commence a voluntary
case or other proceeding seeking liquidation, reorganization or other relief
with respect to itself or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an involuntary case
or other proceeding commenced against it, or shall make a general assignment for
the benefit of creditors, or shall fail generally to pay its debts as they
become due, or shall take any corporate action to authorize any of
25
<PAGE> 26
the foregoing; provided, however, that no event that would otherwise constitute
an Event of Default under this Section 12.1(h) shall be an Event of Default if
the total assets of all entities with respect to which such event has occurred
which would otherwise have constituted and Event of Default under Sections 12.1
(f), (h), or (i) do not exceed $50,000,000 in the aggregate; or
(i) an involuntary case or other proceeding shall be commenced
against Seller or any subsidiary of Seller seeking liquidation, reorganization
or other relief with respect to it or its debts under any bankruptcy, insolvency
or other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of 60 days; or an order for
relief shall be entered against Seller or any subsidiary of Seller under the
federal bankruptcy laws as now or hereafter in effect; provided, however, that
no event that would otherwise constitute an Event of Default under this Section
12.1(i) shall be an Event of Default if the total assets of all entities with
respect to which such event has occurred which would otherwise have constituted
and Event of Default under Sections 12.1 (f), (h) or (i) do not exceed
$50,000,000 in the aggregate.
Section 12.2. Remedies. If any Event of Default is not cured within the
period specified above, if any (with respect to Sections 12.1 (h) or (i)
Purchaser may act immediately upon the occurrence of any such Event of Default),
Purchaser may, at any time of its election, without prior notice or demand to
Seller, do any one or more of the following: (i) cease making Purchases
hereunder; (ii) declare the Facility Termination Date to have occurred; (iii)
apply a default charge to Seller's outstanding monetary obligations then due and
payable to Purchaser hereunder equal to the lesser of four percent (4%) per
annum in excess of the Prime Rate, or the highest lawful contract rate of
interest permitted by applicable law; provided, however, that such default
charge shall accrue only during the continuance of an Event of Default or until
payment of such monetary obligation and only be applicable to (A) Collections
which Seller has failed to pay to Purchaser in accordance with the terms hereof
after the applicable First Collection Settlement Date, and (B) Credit
Adjustments, any delinquent Receivables payments described in Section 3.3.B(i)
hereof, and any other obligations payable by Seller to Purchaser hereunder or
under any other related agreements, which Seller has failed to pay to Purchaser
when due (other than any indemnification obligations), or (iv) exercise any or
all rights under applicable law. All Purchaser's rights and remedies are
cumulative. The Purchaser's failure to exercise any of its rights or remedies
hereunder will not waive any of its rights or remedies as to any past, current
or future Event of Default.
ARTICLE 13
Miscellaneous
Section 13.1. Costs, Expenses and Taxes. Seller shall pay on demand all
costs and expenses incurred by Purchaser in connection with enforcement of this
Agreement and the other documents to be delivered hereunder, including
accountants' and attorneys' fees and expenses. The obligations of Seller under
this Section 13.1 shall survive the termination of this Agreement.
Section 13.2. Addresses. All Notices provided for hereunder shall be in
writing (including facsimile transmissions or telegraphic or
26
<PAGE> 27
telex communications) and mailed (return receipt requested), telecopied,
telegraphed, telexed or delivered, as appropriate, to each party at the address
set forth as follows or at such other address as the party affected may
designate in a written notice to the other parties hereto complying as to
delivery with the terms of this Article 13. All such Notices and fund transfers
shall be effective when received.
If Notice to Purchaser:
Deutsche Financial Services Corporation
2401 East Katella Avenue, Suite 400
Anaheim, CA 92803-4850
Attention: Regional Vice President
Facsimile No.: (714) 937-0199
With a copy to:
Deutsche Financial Services Corporation
655 Maryville Centre Drive
St. Louis, MO 63141-5832
Attention: General Counsel
Facsimile No.: (314) 523-3190
If Notice to Seller:
Applied Materials, Inc.
3050 Bowers Avenue, M/S 2036
Santa Clara, CA 95054
Attention: Diane Gale, Assistant Treasurer
Facsimile No.: (408) 986-7825
With a copy to:
Applied Materials, Inc.
3050 Bowers Avenue, M/S 2062
Santa Clara, CA 95054
Attention: Barry Quan, Managing Director, Legal Affairs
Facsimile No.: (408) 986-2836
All funds transfers shall be made as follows:
If funds transfer to Purchaser:
Bank: Chase Manhattan Bank, New York
ABA Routing No.: 021000021
Account No.: 9102734903
Reference: Deutsche Financial Services
If funds transfer to Seller:
Bank: Mellon Bank, Pittsburgh, PA
ABA Routing No.: 043000261
Account No.: 020-8830
Reference: Applied Materials Inc.
Section 13.3. Further Cooperation. Seller agrees that from time to time, at
its expense, it will promptly execute and deliver all further instruments and
documents, and take all further action, that may be necessary or that Purchaser
may reasonably request, in order to
27
<PAGE> 28
perfect, protect or more fully evidence Purchaser's right, title and interest in
and to the Sold Receivables owned by Purchaser hereunder or to enable Purchaser
to exercise or enforce any such rights. Purchaser will promptly execute and
deliver any release or termination statement required under the UCC when this
Agreement shall have terminated and all Sold Receivables shall have either been
collected in full or otherwise discharged in a manner reasonably satisfactory to
Purchaser.
Section 13.4. Severability. In case any provision in or obligation under
this Agreement shall be invalid, illegal or unenforceable in any jurisdiction,
the validity, legality and enforceability of the remaining provisions or
obligations, or of such provision or obligation in any other jurisdiction,
shall, to the extent permitted by law, not in any way be affected or impaired
thereby.
Section 13.5. Amendments and Waivers. No amendment or waiver of any
provision of this Agreement, nor consent to any departure by Seller or Purchaser
therefrom, shall in any event be effective unless the same shall be in writing
and signed by Seller and Purchaser, and then such waiver or consent shall be
effective only in the specified instance and for the specific purpose for which
given.
Section 13.6. Cumulative Rights. All rights and remedies of the parties
hereto under this Agreement shall, except as otherwise specifically provided
herein, be cumulative and nonexclusive of any rights and remedies which they may
have under any other agreement or instrument, by operation of law, or otherwise.
Section 13.7. Effectiveness. This Agreement shall become effective when it
shall have been executed and delivered by all parties hereto and thereafter
shall be binding upon and inure to the benefit of Seller and Purchaser and their
respective successors and assigns, except that neither party shall have the
right to assign its rights hereunder or any interest herein without the prior
written consent of the other party, which consent may in the discretion of such
other party be withheld; provided, however, that Purchaser may participate any
of its interest in this Agreement and the Sold Receivables to a third party,
with the consent of Seller if no Event of Default exists and no consent of
Seller but with notice to Seller if an Event of Default exists.
Section 13.8. Execution in Counterparts. This Agreement may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same Agreement.
Section 13.9. Confidentiality. The Purchaser and the Seller each shall hold
all non-public information obtained pursuant to this Agreement and the
transactions contemplated hereby or effected in connection herewith
confidential. Purchaser may make disclosure reasonably required by any bona fide
transferee or prospective transferee in connection with the contemplated
transfer of any Sold Receivable or participation in this Agreement by the
Purchaser so long as such Person signs a confidentiality agreement. Either Party
may disclose confidential information as required by law or as requested by any
governmental agency or representative thereof or pursuant to legal process;
provided that, unless specifically prohibited by applicable law or court order,
each party hereto shall notify the other parties hereto of any request by any
governmental agency or representative thereof (other than any such request in
connection with an examination of the
28
<PAGE> 29
financial condition of the Purchaser by such governmental agency) for disclosure
of any such non-public information prior to disclosure of such information to
permit the party affected to contest such disclosure, if possible; provided
further that in no event shall the Purchaser be obligated or required to return
any materials furnished by the Seller.
Section 13.10. No Affiliation. Purchaser and Seller each hereby represents
and warrants that neither Purchaser nor Seller is under common control or
ownership with the other. Neither Seller nor Purchaser shall have any right or
authority to bind the other or create any obligation or responsibility, express
or implied, on behalf of the other, or in the other's name, except as may be
herein expressly permitted. Nothing stated in this Agreement shall be construed
as constituting Seller and Purchaser as partners or joint venturers, or as
creating the relationship of employer and employee, master and servant,
franchisor and franchisee, or principal and, except for Seller being Collection
Agent, agent between Seller and Purchaser.
Section 13.11. List of Schedules and Exhibits. The following Schedules and
Exhibits are attached to this Agreement and are incorporated herein by this
reference:
Schedule A - Seller's Chief Executive Offices
Schedule B - Acceptable Obligors
Schedule C - Form of Receivable Verification Letter
Exhibit I - Forms of Opinions of Counsel
Exhibit II - Form of Receivables Purchase Settlement
Statement
Exhibit III - Seller's Payment Terms
Exhibit IV - Seller's Collection Procedures
Exhibit V - Form of Monthly Status Report
Section 13.12. Limitation on Damages. Except as may be expressly provided
for in this Agreement or any other agreement between them, neither Purchaser nor
Seller shall be liable to the other for exemplary, consequential or punitive
damages.
Section 13.13. Jurisdiction; Jury Trial Waiver, Etc. ANY LEGAL PROCEEDING
WITH RESPECT TO ANY DISPUTE OR OTHER MATTER ARISING OUT OF OR IN ANY WAY RELATED
TO THIS AGREEMENT OR THE DOCUMENTS INSTRUMENTS OR AGREEMENTS RELATED HERETO WILL
BE TRIED IN A COURT OF COMPETENT JURISDICTION LOCATED IN SANTA CLARA COUNTY,
CALIFORNIA, BY A JUDGE WITHOUT A JURY. SELLER AND PURCHASER WAIVE ANY RIGHT TO A
JURY TRIAL IN ANY SUCH PROCEEDING. SELLER AND PURCHASER FURTHER WAIVE ANY RIGHT
TO CLAIM ANY EXEMPLARY OR PUNITIVE DAMAGES IN ANY SUCH PROCEEDING.
Section 14. GOVERNING LAW. Purchaser and Seller acknowledge and agree that
this and all other agreements between Purchaser and Seller have been
substantially negotiated, and will be substantially performed, in the state of
California. Accordingly, Purchaser and Seller agree that this Agreement and all
matters relating hereto shall be governed by and construed in accordance with
the laws of the State of California.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
29
<PAGE> 30
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement by their officers thereunto duly authorized as of the date first above
written.
THIS AGREEMENT CONTAINS JURY WAIVER AND PUNITIVE DAMAGES WAIVER PROVISIONS.
APPLIED MATERIALS, INC.
By: /s/ Nancy H. Handel
------------------------------------
Nancy H. Handel
Title: Vice President, Global
Finance and Treasurer
By: /s/ Joseph R. Bronson
------------------------------------
Joseph R. Bronson
Title: Senior Vice President and
Chief Financial Officer
DEUTSCHE FINANCIAL SERVICES CORPORATION
By:/s/ Dennis L. VanLeeuwen
------------------------------------
Dennis L. VanLeeuwen
Title: Director of Operations
<PAGE> 31
SCHEDULE A
CHIEF EXECUTIVE OFFICES
Applied Materials, Inc.
3050 Bowers Avenue
Santa Clara, CA 95054
31
<PAGE> 32
SCHEDULE B
ACCEPTABLE OBLIGORS
The following Obligors shall be deemed acceptable, subject in all events
to the terms of the Agreement and subject further to the maximum Outstanding
Balance limitation set forth opposite such Obligor's name, which additionally
are subject, in all events to the A/R Limit:
<TABLE>
<CAPTION>
OBLIGOR MAXIMUM
OUTSTANDING
BALANCE LIMITATION
- --------------------------------------------------------------------------------
<S> <C>
1. Advanced Micro Devices, Inc. $ 2,198,944.17
2. International Business Machines Corporation $ 4,277,575.10
3. Intel Corporation $ 2,410,000.00
4. Lucent Technologies, Inc. $13,947,867.70
5. Motorola Corp. $ 8,532,489.68
6. National Semiconductor $ 4,772,451.80
7. Rockwell International $ 1,164,709.31
</TABLE>
32
<PAGE> 33
SCHEDULE C
FORM OF RECEIVABLE VERIFICATION LETTER
33
<PAGE> 34
EXHIBIT I
FORMS OF OPINIONS OF COUNSEL
34
<PAGE> 35
EXHIBIT II
FORM OF RECEIVABLES PURCHASE SETTLEMENT STATEMENT
35
<PAGE> 36
EXHIBIT III
SELLER'S PAYMENT TERMS
36
<PAGE> 37
EXHIBIT IV
SELLER'S COLLECTION PROCEDURES
37
<PAGE> 38
EXHIBIT V
FORM OF MONTHLY STATUS REPORT
(SELLER TO SUPPLY)
38
<PAGE> 1
Exhibit 10.35
AMENDMENT NO. 1 TO THE
APPLIED MATERIALS, INC.
SENIOR EXECUTIVE BONUS PLAN
APPLIED MATERIALS, INC., having adopted the Applied Materials, Inc.
Senior Executive Bonus Plan (the "Plan"), hereby amends the Plan, effective as
of September 2, 1998, as follows:
1. Section 2.2 is amended in its entirety as follows:
2.2 "Annual Revenue" means the Company's or business unit's net
sales for the Plan Year, determined in accordance with generally
accepted accounting principles; provided, however, that prior to the
Determination Date, the Committee shall determine whether any
significant items(s) shall be excluded or included from the calculation
of Annual Revenue with respect to one or more Participants.
2. Section 2.15 is amended in its entirety as follows:
2.15 "Net Income" means as to any Plan Year, the income after
taxes of the Company and its consolidated subsidiaries for the Plan
Year, determined in accordance with generally accepted accounting
principles, provided that prior to the Determination Date, the Committee
shall determine whether any significant item(s) shall be included or
excluded from the calculation of Net Income with respect to one or more
Participants.
IN WITNESS WHEREOF, Applied Materials, Inc., by its duly authorized
officer, has executed this Amendment No. 1 on the date indicated below.
APPLIED MATERIALS, INC.
Dated: September 2, 1998 By: /s/ DONALD A. SLICHTER
--------------------------- -----------------------------------
Donald A. Slichter
Secretary
<PAGE> 1
Exhibit 12.1
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income before taxes and fixed charges (net
of capitalized interest):
Income from continuing operations
before taxes and cumulative effect of
accounting change $334,497 $698,543 $922,436 $798,921 $437,833
Add fixed charges net of capitalized interest (1) 27,032 34,504 42,819 44,161 69,543
-------- -------- -------- -------- --------
Total income before taxes and fixed charges $361,529 $733,047 $965,255 $843,082 $507,376
-------- -------- -------- -------- --------
Fixed charges:
Interest expense $ 15,962 $ 21,401 $ 20,733 $ 20,705 $ 45,309
Capitalized interest -- -- 5,108 750 4,268
Interest component of rent expense (2) 11,070 13,103 22,086 23,013 23,720
-------- -------- -------- -------- --------
Total fixed charges $ 27,032 $ 34,504 $ 47,927 $ 44,468 $ 73,297
-------- -------- -------- -------- --------
Ratio of earnings to fixed charges 13.37x 21.25x 20.14x 18.96x 6.92x
======== ======== ======== ======== ========
</TABLE>
- ----------
(1) Capitalized interest includes interest capitalized during the period, less
the amount of previously capitalized interest that was amortized during the
period.
(2) The interest factor is estimated at one-third of total rent expense for the
applicable period, which management believes represents a reasonable
approximation of the interest factor.
21
<PAGE> 1
EXHIBIT 13
APPLIED MATERIALS
1998 ANNUAL REPORT
FISCAL YEAR ENDED OCTOBER 25, 1998
<PAGE> 2
SELECTED CONSOLIDATED FINANCIAL DATA Applied Materials 29
<TABLE>
<CAPTION>
Fiscal year ended* 1994 1995 1996 1997 1998
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales $1,659,807 $3,061,881 $ 4,144,817 $ 4,074,275 $4,041,687
Gross margin $768,295 $1,409,848 $1,949,739 $1,900,925 $1,863,156
(% of net sales) 46.3 46.0 47.0 46.7 46.1
Research, development
and engineering $189,126 $329,676 $481,394 $567,612 $643,852
(% of net sales) 11.4 10.8 11.6 13.9 15.9
Marketing, selling and
administrative $239,932 $386,240 $539,694 $566,595 $593,715
(% of net sales) 14.4 12.6 13.0 13.9 14.7
Income from continuing operations
before taxes and cumulative
effect of accounting change $334,497 $698,543 $922,436 $798,921 $437,833
(% of net sales) 20.2 22.8 22.3 19.6 10.8
Effective tax rate (%)** 35.0 35.0 35.0 37.6 34.0
Income from continuing operations*** $217,423 $454,053 $599,585 $498,474 $288,970
Income from continuing operations
per diluted share $0.64 $1.28 $1.63 $1.32 $0.76
Average common shares and
equivalents (in thousands) 340,084 354,696 367,214 377,838 378,508
- ---------------------------------------------------------------------------------------------------------
Order backlog $715,200 $1,508,800 $1,422,800 $1,721,711 $916,767
Working capital $734,104 $1,449,882 $1,757,842 $2,368,269 $2,400,629
Current ratio 2.5 2.7 2.9 2.7 3.1
Long-term debt $209,114 $279,807 $275,485 $623,090 $616,572
Stockholders' equity $966,264 $1,783,503 $2,370,425 $2,942,171 $3,120,621
Book value per share $2.87 $4.97 $6.58 $8.01 $8.48
Total assets $1,702,665 $2,965,379 $3,637,987 $5,070,766 $4,929,692
Capital expenditures, net $180,440 $265,557 $452,535 $339,364 $448,607
Regular full-time employees 6,497 10,537 11,403 13,924 12,060
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* The fiscal year ends on the last Sunday in October of each year. The fiscal
year ends for the periods presented are: October 30, 1994, October 29, 1995,
October 27, 1996, October 26, 1997 and October 25, 1998.
** The fiscal 1997 tax rate is higher than the expected rate of 35 percent due
to the non-deductible nature of acquired in-process research and development
expense of $59,500. During fiscal 1998, the Company changed its effective
tax rate to 34 percent (see Note 11 of Notes to Consolidated Financial
Statements).
*** Income from continuing operations includes one-time expenses, net, on an
after-tax basis, of: $16,315 for fiscal 1996, $25,257 for fiscal 1997 and
$146,670 for fiscal 1998. Fiscal 1994 excludes equity in net loss of joint
venture of $3,727 and cumulative effect of accounting change of $7,000.
Including these items, fiscal 1994 data would be: net income of $220,696 and
earnings per diluted share of $0.65. Fiscal 1998 excludes one-time costs of
$58,068 associated with the discontinued operations of Applied Komatsu
Technology, Inc. (AKT), the Company's joint venture. Including AKT, fiscal
1998 data would be: net income of $230,902 and earnings per diluted share of
$0.61.
<PAGE> 3
30 Applied Materials MANAGEMENT'S DISCUSSION AND ANALYSIS
When used in this Annual Report, including this Management's Discussion and
Analysis, the words "anticipate," "estimate," "expect" and similar expressions
are intended to identify forward-looking statements. These forward-looking
statements reflect management's current opinions and are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those stated or implied. Applied Materials, Inc. (the Company) assumes no
obligation to update this information. Risks and uncertainties include, but are
not limited to, those discussed in the section entitled "Management's Discussion
and Analysis--Trends, Risks and Uncertainties."
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
NET SALES
Although the Company's net sales are comparable for fiscal 1996, 1997 and 1998,
each fiscal year was subject to cyclical industry conditions that caused
significant fluctuations in quarterly new orders and net sales, both within and
across fiscal years. Demand for semiconductor equipment has historically been
volatile as a result of sudden changes in semiconductor supply and demand, as
well as rapid shifts in technology. Information with respect to quarterly new
orders and net sales is as follows:
<TABLE>
<CAPTION>
Quarter
------------------------------------------------- Fiscal
First Second Third Fourth Year
- -------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C> <C>
1996:
New orders $1,329 $1,323 $932 $683 $4,267
Net sales $1,041 $1,128 $1,115 $861 $4,145
1997:
New orders $905 $1,014 $1,240 $1,374 $4,533
Net sales $836 $901 $1,057 $1,280 $4,074
1998:
New orders $1,290 $1,027 $608 $684 $3,609
Net sales $1,308 $1,176 $885 $673 $4,042
- -------------------------------------------------------------------------------------
</TABLE>
In addition, each region in the global semiconductor equipment market exhibits
unique characteristics that can cause, and have caused, capital equipment
investment patterns to vary significantly from period to period. Information
with respect to net sales by geographic region is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
- ---------------------------------------------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
$ % $ % $ %
North America* 1,270 30.6 1,501 36.8 1,549 38.3
Europe 686 16.6 600 14.7 645 16.0
Japan 1,009 24.3 750 18.4 678 16.8
Korea 567 13.7 333 8.2 167 4.1
Taiwan 406 9.8 696 17.1 817 20.2
Asia-Pacific 207 5.0 194 4.8 186 4.6
- ---------------------------------------------------------------------------------------------------------
4,145 100.0 4,074 100.0 4,042 100.0
- ---------------------------------------------------------------------------------------------------------
</TABLE>
*Primarily the United States.
During 1996, the semiconductor industry experienced a slowdown as a result of
excess production capacity and sharply decreasing device prices within the DRAM
market segment. This slowdown caused semiconductor manufacturers to reduce and
delay their equipment investments, thus negatively impacting the Company's
results of operations for the second half of fiscal 1996 and first half of
fiscal 1997.
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS Applied Materials 31
During the Company's third fiscal quarter of 1997, the semiconductor industry
began to recover from this slowdown, and the Company was able to achieve record
levels of quarterly new orders and net sales for its fourth fiscal quarter of
1997. These record levels of new orders and net sales were driven by
strengthening demand for leading-edge capability from logic and microprocessor
device manufacturers, foundry capacity investments by customers primarily
located in Taiwan, and selected strategic investments in 0.25 micron technology
by DRAM manufacturers.
The current industry downturn, which began during the first half of the
Company's fiscal 1998, has been much more severe than the slowdown that impacted
the Company's results of operations during the first half of fiscal 1997. This
downturn is the result of the convergence of several factors: an economic crisis
in Asia; semiconductor industry overcapacity (particularly DRAM devices); and
reduced profitability for semiconductor manufacturers resulting from a movement
among end users to sub-$1,000 personal computers (PCs). With respect to the
Company's net sales for fiscal 1998, DRAM overcapacity and the Asian economic
crisis particularly affected customers in Japan and Korea. These factors caused
semiconductor manufacturers to significantly reduce and delay investment in
manufacturing equipment during fiscal 1998. For example, new orders and net
sales for the Company's fourth fiscal quarter of 1998 decreased almost 50
percent from the levels achieved for the first fiscal quarter of 1998.
Therefore, despite comparable annual net sales for fiscal 1997 and fiscal 1998,
the Company is entering fiscal 1999 in a dramatically different industry
environment from the one that existed at the beginning of fiscal 1998. There is
a high degree of uncertainty regarding the length and severity of the current
industry downturn. For this and other reasons, the Company's results of
operations for fiscal 1998 are not necessarily indicative of future operating
results.
- --------------------------------------------------------------------------------
GROSS MARGIN
Gross margin as a percentage of net sales was 47.0 percent for fiscal 1996, 46.7
percent for fiscal 1997 and 46.1 percent for fiscal 1998. The decrease in gross
margin as a percentage of net sales from fiscal 1996 to fiscal 1997 can be
attributed primarily to the fact that fiscal 1997 quarterly net sales were lower
than those for the comparable fiscal 1996 quarters, with the exception of the
fourth fiscal quarter, thus resulting in lower overall business volume. The
decrease in gross margin as a percentage of net sales from fiscal 1997 to fiscal
1998 is the result of lower overall business volume, combined with
underutilization of manufacturing resources during the second half of fiscal
1998 as business volume dropped significantly.
- --------------------------------------------------------------------------------
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company's future operating results depend, to a considerable extent, on its
ability to maintain a competitive advantage in the products and services it
provides. The Company believes it is critical to continue to make substantial
investments in research and development to ensure the availability of innovative
technology that meets the requirements of its customers' most advanced chip
designs. Research, development and engineering expenses increased from 11.6
percent of net sales for fiscal 1996, to 13.9 percent for fiscal 1997 and 15.9
percent for fiscal 1998.
<PAGE> 5
32 Applied Materials MANAGEMENT'S DISCUSSION AND ANALYSIS
The increase in absolute spending from fiscal 1996 to fiscal 1997 was primarily
for early stage development of 300mm products and continued investment in the
development of systems for 0.25 micron and below production. In fiscal 1997, the
Company introduced several advanced new products, including: the Ultima
HDP-CVD(TM) (high density plasma chemical vapor deposition) Centura(R) for
advanced, high-speed 0.25 micron devices; the Endura(R) HP Liner/Barrier systems
for depositing critical titanium and titanium nitride films in 0.25 micron
devices; the High Temperature Silicon Nitride Centura, which uses single-wafer
technology for depositing high temperature films; and the Dielectric Etch
IPS(TM) Centura, which is the industry's most advanced oxide etcher for 0.25
micron and below devices. The Company also introduced numerous process and
technology advancements to existing products during 1997.
The increase in absolute spending from fiscal 1997 to fiscal 1998 resulted from
several trends in semiconductor production technology, particularly the
beginning of a shift to copper-based interconnects and the shrinking of device
sizes. The Company opened a new facility, the Equipment and Process Integration
Center (EPIC), and announced its Copper Interconnect Equipment Set Solution
(ESS) product on November 3, 1998. These two industry "firsts" offer customers a
complete set of integrated systems to fabricate the copper interconnect portion
of their devices and a facility in which to demonstrate and test a set of
systems before installation in their fabs. The facility houses all technologies
needed to make the copper interconnect, including systems not offered by the
Company but needed for demonstration purposes. Some of the Company's new
technologies being demonstrated in the center are: the Endura Electra Barrier/
Seed Cu(TM) system, the industry's first and current market-leading product to
deposit the critical barrier/seed layers of the copper interconnect; an
innovative "low k" dielectric material called Black Diamond; chemical mechanical
polishing (CMP) of copper and barrier metals using the Company's Mirra(R) CMP
system; and electroplating technology to fill the interconnect with bulk metal.
The latter two technologies are in advanced stages of development and are
expected to be introduced as products in fiscal 1999.
In addition to the Endura Electra Barrier/Seed Cu(TM) system, the Company
introduced several new products in fiscal 1998 for the production of sub-0.25
micron devices, including: the Producer(TM), a new high-throughput platform for
CVD applications; the SEMVision(TM) Defect Review Scanning Electron Microscope
(SEM) system, the first fully-automated defect review and classification SEM
specifically designed for in-line operation within advanced semiconductor
production lines; the WF-73X series defect detection and classification systems
for rapid yield ramping and high-throughput in-line monitoring; and the RTP
(rapid thermal processing) XEplus(TM) Centura, an enhanced version of the
Company's RTP system with an accelerating, highly controlled temperature ramp
rate for forming ultra-shallow junctions. The Company also introduced numerous
process and technology advancements to existing products during fiscal 1998, and
development continued on a wide range of products using 300mm wafers in
anticipation of future customer processing requirements. However, over the
course of fiscal 1998, and particularly in the second half, the Company's 300mm
product development efforts were reduced significantly to reflect the
semiconductor industry's decision to slow migration to 300mm wafer processing.
The success of these new and enhanced products in the market has yet to be
determined (see "Trends, Risks and Uncertainties").
- --------------------------------------------------------------------------------
MARKETING, SELLING, GENERAL AND ADMINISTRATIVE
Marketing, selling, general and administrative expenses as a percentage of net
sales increased from 13.0 percent for fiscal 1996, to 13.9 percent for fiscal
1997 and 14.7 percent for fiscal 1998. During each of these fiscal years, the
Company increased spending in marketing and selling programs to support the
development of international markets and to increase customer awareness of new
products and services. Administrative expenses have increased during each of the
last three fiscal years to support the Company's revenue and headcount levels,
to improve information technology capability and to protect the Company's
intellectual property rights.
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS Applied Materials 33
NON-RECURRING ITEMS
Non-recurring operating expense items do not include litigation settlements and
costs associated with Applied Komatsu Technology, Inc. (AKT) (see "Litigation
Settlements" and "AKT Joint Venture" below). Non-recurring operating expense
items for fiscal 1996, 1997 and 1998 included the following:
<TABLE>
<CAPTION>
1996 1997 1998
- -------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Acquired in-process research and development $-- $59,500 $32,227
Write-down of impaired assets -- -- 70,000
Restructuring 25,100 -- 135,000
Bad debt expense -- 16,318 --
- -------------------------------------------------------------------------------------
$25,100 $75,818 $237,227
- -------------------------------------------------------------------------------------
</TABLE>
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT During the first fiscal quarter of
1997, the Company acquired two companies, Opal, Inc. (Opal) and Orbot
Instruments, Ltd. (Orbot), in separate transactions for $293 million, consisting
primarily of cash, and recognized $59.5 million of acquired in-process research
and development expense. With the exception of this charge, the transactions did
not have a material effect on the Company's results of operations for fiscal
1997. During fiscal 1998, the Company determined that certain intangible assets
recorded in connection with these acquisitions were impaired (see "Write-down of
Impaired Assets" below). There can be no assurance that the Company will not
incur additional charges in connection with these or other acquisitions (see
"Trends, Risks and Uncertainties").
During the first fiscal quarter of 1998, the Company entered into an agreement
with Trikon Technologies, Inc. for a non-exclusive, worldwide, perpetual license
of MORI(TM) plasma source and Forcefill(TM) deposition technology. Because the
development of this technology had not yet reached technological feasibility at
the time of its acquisition and had no alternative future use, the Company
recognized $32 million, including transaction costs, of acquired in-process
research and development expense at the time of its acquisition.
WRITE-DOWN OF IMPAIRED ASSETS During the fourth fiscal quarter of 1998, the
Company determined that the carrying value of certain purchased technology
exceeded its net realizable value as a result of rapid changes in technology and
a reduced demand outlook caused by significant changes in business conditions.
This determination was supported by the results of an independent analysis
prepared by a nationally-recognized valuation firm. In accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company
recorded a pre-tax charge of $70 million for this impairment in asset value.
RESTRUCTURING During the fourth fiscal quarter of 1996, the Company recorded a
pre-tax restructuring charge of $25 million in connection with a reduction of
its workforce and related consolidation of facilities. These actions were taken
in response to a downturn in the semiconductor industry.
During fiscal 1998, the Company recorded a pre-tax restructuring charge of $135
million, consisting of $75 million for headcount reductions and $60 million for
consolidation of facilities and related fixed assets. These restructuring
actions occurred in the Company's third and fourth fiscal quarters, and were
taken to align the Company's cost structure with prevailing market conditions
and to create a more flexible and efficient organization that is well-positioned
for an industry recovery. During the third fiscal quarter of 1998, the Company
completed a voluntary separation plan that resulted in a headcount reduction of
approximately 800 employees, or six percent of its global workforce, for a cost
of $25 million. The majority of employees who terminated employment were located
in California and Texas. During the fourth fiscal quarter of 1998, the Company
eliminated approximately 2,000 additional positions, or 15 percent of its global
workforce, for a cost of $50 million. Approximately 1,350 of these positions
were eliminated in California and Texas, with the remainder being eliminated
from other locations worldwide.
<PAGE> 7
34 Applied Materials MANAGEMENT'S DISCUSSION AND ANALYSIS
Total cash outlays for fiscal 1998 restructuring activities will be $105
million. The remaining $30 million of restructuring costs consists of non-cash
charges primarily for asset write-offs. During fiscal 1998, $42 million of cash
was used for restructuring costs. The majority of the remaining cash outlays of
$63 million is expected to occur in fiscal 1999 (see Note 7 of Notes to
Consolidated Financial Statements).
BAD DEBT EXPENSE During fiscal 1997, the Company determined that its outstanding
accounts receivable balance from Thailand-based Submicron Technology PCL (SMT)
was not collectible. Therefore, the Company repossessed systems previously sold
to SMT and recorded $16 million of bad debt expense.
- --------------------------------------------------------------------------------
LITIGATION SETTLEMENTS
During fiscal 1997, the Company settled certain outstanding litigation with
Novellus Systems, Inc. (Novellus) and General Signal Corporation (GSC). In
connection with the Novellus settlement, the Company received $80 million in
damages for past patent infringement, and was awarded the right to receive
ongoing royalties for certain system shipments subsequent to the date of the
settlement. In connection with the GSC settlement, the Company paid $11 million
and acquired ownership from GSC of five patents regarding "cluster tool"
architecture.
During the first fiscal quarter of 1998, the Company settled all outstanding
patent litigation with ASM International N.V. (ASM). As a result of this
settlement, the Company received a convertible note for $80 million, against
which $15 million was collected in November 1997. Because of the impact of the
current industry downturn on ASM's financial condition and liquidity, ASM was
not able to pay the $65 million remaining balance at the maturity date.
Therefore, the Company determined based on known facts and circumstances that
collection of the note was doubtful, and recorded, for the fourth fiscal quarter
of 1998, a $65 million pre-tax charge to fully reserve the outstanding note. The
net effect of the ASM settlement is $15 million of non-operating income for
fiscal 1998. Subsequent to the end of fiscal 1998, ASM secured financing and
made a partial payment to the Company (see "Subsequent Events"). ASM is also
required, as part of the litigation settlement, to pay ongoing royalties for
certain system shipments subsequent to the date of the settlement. Ongoing
royalties have not been, and are not expected to be, material.
- --------------------------------------------------------------------------------
INTEREST EXPENSE
Interest expense was $21 million for fiscal 1996 and fiscal 1997, and $45
million for fiscal 1998. There was not a significant change in interest expense
from fiscal 1996 to fiscal 1997 since the Company's outstanding weighted average
interest-bearing obligations and interest rates did not change significantly
during these periods. The increase from fiscal 1997 to fiscal 1998 is primarily
the result of interest expense associated with $400 million of debt issued by
the Company during the fourth fiscal quarter of 1997.
- --------------------------------------------------------------------------------
INTEREST INCOME
Interest income was $40 million for fiscal 1996, $60 million for fiscal 1997 and
$80 million for fiscal 1998. The increases from year to year can be attributed
primarily to higher average cash and investment balances.
- --------------------------------------------------------------------------------
TAX RATE
The Company's effective income tax rate was 35 percent for fiscal 1996, 37.6
percent for fiscal 1997 and 34 percent for fiscal 1998. The 37.6 percent
effective income tax rate for fiscal 1997 was higher than the expected rate of
35 percent due to the non-deductible nature of a $59.5 million charge for
acquired in-process research and development. The reduction to a 34 percent
effective income tax rate for fiscal 1998 is attributable to several factors,
including a reduction in state income taxes, U.S.-based income tax credits and a
shift in the geographic composition of pre-tax income to entities operating in
countries with lower tax rates.
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS Applied Materials 35
AKT JOINT VENTURE
The Company has a 50 percent ownership interest in AKT, a joint venture
corporation that develops thin film transistor manufacturing systems for Flat
Panel Displays. The Company accounts for the joint venture using the equity
method. During the fourth fiscal quarter of 1998, the Company decided to
discontinue the operations of AKT. The operations of AKT will be wound down over
a period not to exceed twelve months from the date of the decision to
discontinue operations. As a result of this decision, AKT has stopped selling
PVD and Etch systems and has ceased development efforts on new and next
generation systems and technology. AKT will continue to offer its existing CVD
product line for sale and will also provide existing customers with ongoing
system support. The Company expects to provide a maximum of $27.5 million of
funding to AKT, $20 million of which had already been provided as of the end of
fiscal 1998, and has also guaranteed approximately $20 million of AKT's bank
debt. The Company believes it has sufficient reserves for the potential
financial effects of its funding expectations and debt guarantee.
The Company recorded, for its fourth fiscal quarter of 1998, after-tax costs of
$58 million, consisting of $18 million for the Company's share of AKT's net
losses prior to the decision to discontinue AKT's operations and $40 million for
net expenses and other obligations expected to be incurred during the wind-down
period. There can be no assurance that the Company will not incur additional
costs associated with the discontinuance of AKT's operations.
- --------------------------------------------------------------------------------
FOREIGN CURRENCY
Significant operations of the Company are conducted in foreign currencies,
primarily Japanese yen. Forward exchange and currency option contracts are
purchased to hedge certain existing firm commitments and foreign currency
denominated transactions expected to occur within twelve months. Gains and
losses on these contracts are recognized in income when the related transactions
being hedged are recognized. Because the effect of movements in currency
exchange rates on forward exchange and currency option contracts generally
offsets the related effect on the underlying items being hedged, these financial
instruments are not expected to subject the Company to risks that would
otherwise result from changes in currency exchange rates. The Company does not
use derivative financial instruments for trading or speculative purposes. Net
foreign currency gains and losses did not have a significant effect on the
Company's results of operations for fiscal 1996, 1997 or 1998.
- --------------------------------------------------------------------------------
SUBSEQUENT EVENTS
ACQUISITION
On October 12, 1998, the Company announced that it entered into an agreement to
acquire Consilium, Inc. (Consilium), a leading independent supplier of
integrated semiconductor and electronics manufacturing execution systems
software and services, in a stock-for-stock merger. The acquisition was
consummated on December 11, 1998, and will be accounted for as a pooling of
interests. Each share of Consilium's stock was exchanged for 0.165 of a share of
the Company's common stock. The Company expects to issue approximately 2 million
shares of its common stock to complete this transaction. Consilium's historical
financial condition and results of operations are not material in relation to
the Company's historical financial condition and results of operations.
- --------------------------------------------------------------------------------
SUBSEQUENT PAYMENT FROM ASM
During the first fiscal quarter of 1999, and subsequent to the original maturity
date of the note, the Company received a $20 million payment against its $65
million outstanding note receivable from ASM. The $65 million note receivable
was fully reserved as of the end of fiscal 1998; accordingly, the $20 million
cash receipt will be reported as pre-tax non-operating income for the first
fiscal quarter of 1999. ASM's payment was made in accordance with a
restructuring of ASM's obligations under a November 1997
<PAGE> 9
36 Applied Materials MANAGEMENT'S DISCUSSION AND ANALYSIS
litigation settlement agreement. Pursuant to the new agreement, ASM agreed to
pay $20 million upon completion of the restructuring, $10 million on November 2,
1999 and $35 million no later than November 2, 2000. The Company will recognize
income related to the remaining balance of the note receivable on a cash
receipts basis going forward. Certain other obligations of ASM were also
modified; however, these modifications are not expected to be material to the
Company's financial condition or results of operations.
- --------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company will adopt SFAS 130 in the first fiscal
quarter of 1999.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 (SFAS 131), "Disclosures About Segments of an Enterprise and Related
Information," which changes the way public companies report information about
operating segments. SFAS 131, which is based on a management approach to segment
reporting, establishes requirements to report selected segment information
quarterly and to report annually entity-wide disclosures about products and
services, major customers, and the countries in which the entity holds material
assets and reports revenue. The Company is currently assessing the disclosure
effects of adopting SFAS 131, which will be effective for the Company's fiscal
1999.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132 (SFAS 132), "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS 132 does not change the measurement or
recognition of such plans, but does standardize the disclosure requirements for
pensions and other postretirement benefits to the extent practicable. SFAS 132
also requires disclosure of additional information about changes in benefit
obligations and fair values of plan assets, and eliminates certain other
disclosures that were previously required. The Company will be required to adopt
SFAS 132 in fiscal 1999.
In April 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance regarding whether computer software is internal-use software, the
capitalization of costs incurred for computer software developed or obtained for
internal use and accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the public.
The Company does not expect the impact of adopting SOP 98-1, which will be
effective for the Company's fiscal 2000, to be material to its financial
condition or results of operations.
In April 1998, the AICPA issued Statement of Position 98-5 (SOP 98-5),
"Reporting on the Costs of Start-Up Activities." SOP 98-5 requires companies to
expense start-up and organization costs as incurred. SOP 98-5 broadly defines
start-up activities and provides examples to help entities determine costs that
are and are not within the scope of SOP 98-5. SOP 98-5 will be effective for the
Company's fiscal 2000, and its initial application will be reported as a
cumulative effect of a change in accounting principle. The Company does not
expect the impact of adopting SOP 98-5 to be material to its financial condition
or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS 133 requires that all derivatives be
recognized at fair value in the statement of financial position, and that the
corresponding gains or losses be reported either in the statement of operations
or as a component of comprehensive income, depending on the type of hedging
relationship that exists. The Company is in the process of assessing the effect
of adopting SFAS 133, which will be effective for the Company's fiscal 2000.
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS Applied Materials 37
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained strong, as the ratio of current
assets to current liabilities improved from 2.7:1 at October 26, 1997 to 3.1:1
at October 25, 1998. The Company increased its cash, cash equivalents and
short-term investments from $1.5 billion at October 26, 1997 to $1.8 billion at
October 25, 1998.
The Company generated $692 million of cash from continuing operations in fiscal
1996, $702 million in fiscal 1997 and $816 million in fiscal 1998. The primary
sources of cash from continuing operations in fiscal 1998 were net income (plus
non-cash charges for one-time items, depreciation and amortization) of $676
million and decreases of $332 million in accounts receivable and $134 million in
inventories. These sources were partially offset by an increase of $49 million
in net deferred tax assets and decreases of $159 million in accounts payable and
accrued expenses and $106 million in income taxes payable.
The Company used $603 million of cash for investing activities in fiscal 1996,
$1.0 billion in fiscal 1997 and $574 million in fiscal 1998. Cash used for
investing activities in fiscal 1996 was for capital expenditures and net
purchases of short-term investments. Cash used for investing activities in
fiscal 1997 was for the acquisitions of Opal and Orbot, capital expenditures and
net purchases of short-term investments. Cash used for investing activities in
fiscal 1998 was primarily for net purchases of short-term investments ($93
million) and property, plant and equipment ($449 million), as well as the
acquisition of licensed technology ($32 million).
The Company generated $30 million of cash from financing activities in fiscal
1996, $391 million in fiscal 1997, and used $123 million in fiscal 1998. The
primary sources of cash from financing activities in fiscal 1996 were net
borrowings of $27 million and proceeds from stock issuances of $40 million,
which were partially offset by stock repurchases of $37 million. The primary
source of cash from financing activities in fiscal 1997 was the issuance of $400
million of senior notes payable, which was partially offset by stock repurchases
and the early retirement of certain long-term debt. Cash used for financing
activities in fiscal 1998 was primarily for stock repurchases of $153 million
and net debt repayments of $64 million, which were partially offset by net
proceeds from stock issuances of $94 million.
In March 1996, the Board of Directors authorized the Company to systematically
repurchase up to 5,000,000 shares of its common stock in the open market through
February 1999 to reduce the dilution from the Company's stock-based employee
benefit and incentive plans. In December 1997, the Board of Directors rescinded
the limitation on the number of shares and extended the authorization to March
2001. In fiscal 1996, the Company repurchased 2,370,000 shares of its common
stock at an average price of $15.63 per share, for a total cash outlay of $37
million. In fiscal 1997, the Company repurchased 2,654,000 shares of its common
stock at an average price of $29.46 per share, for a total cash outlay of $78
million. In fiscal 1998, the Company repurchased 4,863,000 shares of its common
stock at an average price of $31.53 per share, for a total cash outlay of $153
million.
<PAGE> 11
38 Applied Materials MANAGEMENT'S DISCUSSION AND ANALYSIS
At October 25, 1998, the Company's principal sources of liquidity consisted of
$1.8 billion of cash, cash equivalents and short-term investments, and
approximately $600 million of available credit facilities. The Company has a
$250 million revolving line of credit agreement that expires in March 1999 and a
$250 million credit agreement that expires in March 2003; no amounts were
outstanding under these agreements at the end of any fiscal year presented. The
remaining credit facilities of $100 million are primarily with Japanese and
European banks at rates indexed to their prime reference rate. In addition to
cash and available credit facilities, the Company may from time to time raise
additional capital in the debt and equity markets. The Company's liquidity is
affected by many factors, some based on the normal ongoing operations of the
business and others related to the uncertainties of the industry and global
economies. Although the Company's cash requirements will fluctuate based on the
timing and extent of these factors, management believes that cash generated from
operations, together with the liquidity provided by existing cash balances and
borrowing capability, will be sufficient to satisfy commitments for capital
expenditures and other cash requirements for the next fiscal year.
- --------------------------------------------------------------------------------
TRENDS, RISKS AND UNCERTAINTIES
INDUSTRY VOLATILITY
The semiconductor equipment industry has historically been cyclical and subject
to sudden changes in supply and demand. The timing, length and severity of these
cycles are difficult to predict. During periods of reduced and declining demand,
the Company must be able to quickly and effectively align its cost structure
with prevailing market conditions, and motivate and retain key employees. During
periods of rapid growth, the Company must be able to acquire and/or develop
sufficient manufacturing capacity to meet customer demand, and hire and
assimilate a sufficient number of qualified people. There can be no assurance
that the Company will be able to align its cost structure quickly, motivate or
retain key employees, acquire or develop sufficient manufacturing capacity or
assimilate a sufficient number of qualified people during these industry cycles.
The semiconductor industry was in a severe downturn as of the end of the
Company's fiscal 1998. In response to this industry downturn, the Company has
taken a number of actions intended to align its cost structure with prevailing
market conditions. Most recently, on October 23, 1998, the Company announced the
completion of a restructuring plan whereby approximately 2,000 positions, or 15
percent of the Company's global workforce, were eliminated, and plans to
consolidate facilities and related fixed assets were developed. During the third
fiscal quarter of 1998, the Company completed a voluntary separation plan and
developed plans to consolidate certain facilities. In connection with these two
restructuring events, the Company incurred a pre-tax restructuring charge of
$135 million, consisting of $75 million for headcount reductions and $60 million
for consolidation of facilities and related fixed assets. The Company has also
significantly restricted new hiring and utilized mandatory shutdown days in an
effort to reduce costs. There can be no assurance that these actions have
sufficiently aligned the Company's cost structure with prevailing market
conditions.
- --------------------------------------------------------------------------------
DRAM OVERCAPACITY AND DEMAND SHIFTS IN THE PC INDUSTRY
The semiconductor industry is currently characterized by excess production
capacity for DRAM devices, which has caused semiconductor manufacturers to
decrease capital spending. In the PC market, a shift in demand from more
expensive, high-performance products to lower-priced products (sub-$1,000 PCs)
has resulted in reduced profitability for semiconductor manufacturers.
Therefore, during fiscal 1998, many of the Company's customers delayed or
decreased their purchases of the Company's products. Continued DRAM overcapacity
and strengthening demand for sub-$1,000 PCs could cause further delays or
decreased demand for the Company's products.
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS Applied Materials 39
JAPANESE AND KOREAN ECONOMIES
Japan and Korea continue to experience banking, currency and other difficulties
that are contributing to economic slowdowns or recessions in those countries.
They also do not appear to be responding quickly to significant efforts to
stimulate their economies. If these economies remain stagnant or continue to
deteriorate, capital investment by Japanese and Korean customers could decrease
from current levels. As a result of these negative economic conditions, combined
with the industry uncertainties discussed above, customers in Japan and Korea
canceled or delayed a significant amount of orders for the Company's products in
fiscal 1998 and may cancel or delay additional orders in the future. For fiscal
1998, new orders from, and net sales to, customers located in Japan and Korea
were 20 percent and 21 percent, respectively, of the Company's totals. If the
economies of Japan and Korea remain stagnant or deteriorate further, the
economies of other countries, particularly those in Asia, could also be
negatively affected, possibly resulting in a material adverse effect on the
Company's business, financial condition and results of operations.
- --------------------------------------------------------------------------------
GLOBAL BUSINESS
The Company sells systems and provides services to customers located throughout
the world. Managing global operations and sites located throughout the world
presents challenges associated with, among other things, cultural diversities
and organizational alignment. Moreover, each region in the global semiconductor
equipment market exhibits unique characteristics that can cause capital
equipment investment patterns to vary significantly from period to period.
Periodic economic downturns, trade balance issues, political instability and
fluctuations in interest and foreign currency exchange rates are all risks that
could materially and adversely affect global product and service demand, and
therefore, the Company's financial performance.
- --------------------------------------------------------------------------------
HIGHLY COMPETITIVE INDUSTRY AND RAPID TECHNOLOGICAL CHANGE
The Company operates in a highly competitive industry characterized by
increasingly rapid technological changes. For example, the Company was required
to record, for its fourth fiscal quarter of 1998, a $70 million pre-tax
write-down of purchased technology that was acquired in connection with a
January 1997 acquisition. The value of this asset was impaired primarily as the
result of rapid changes in technology between January 1997 and September 1998
that, together with significant changes in business conditions, contributed to a
reduced demand outlook for products incorporating this technology.
The Company's competitive advantage and future success depend on its ability to
develop new products and technologies and to: develop new markets in the
semiconductor industry for its products and services; introduce new products to
the marketplace on a timely basis; qualify new products with its customers; and
commence production to meet customer demands.
New products and technologies include those for copper interconnect, production
of 300mm wafers and 0.25 micron and below devices. The introduction of new
products and technologies grows increasingly complex over time. If the Company
does not develop and introduce new products and technologies in a timely manner
in response to changing market conditions or customer requirements, its
financial condition and results of operations could be materially and adversely
affected.
- --------------------------------------------------------------------------------
ACQUISITIONS
As part of its business strategy, the Company has made and expects to make
acquisitions of, or significant investments in, businesses with complementary
products, services and/or technologies. Acquisitions involve numerous risks,
including, but not limited to: difficulties and increased costs in connection
with integration of the operations, technologies, and products of the acquired
companies; possible write-downs of impaired assets; diverting management
attention from normal daily operations; and the potential loss of key employees
of the acquired companies. The inability to effectively manage these risks could
materially and adversely affect the Company's business, financial condition and
results of operations.
<PAGE> 13
40 Applied Materials MANAGEMENT'S DISCUSSION AND ANALYSIS
AKT JOINT VENTURE
The Company has a 50 percent ownership interest in AKT, a joint venture
corporation that develops thin film transistor manufacturing systems for Flat
Panel Displays. The Company accounts for the joint venture using the equity
method. During the fourth fiscal quarter of 1998, the Company decided to
discontinue the operations of AKT. The operations of AKT will be wound down over
a period not to exceed twelve months from the date of the decision to
discontinue operations. As a result of this decision, AKT has stopped selling
PVD and Etch systems and has ceased development efforts on new and next
generation systems and technology. AKT will continue to offer its existing CVD
product line for sale and will also provide existing customers with ongoing
system support. The Company expects to provide a maximum of $27.5 million of
funding to AKT, $20 million of which had already been provided as of the end of
fiscal 1998, and has also guaranteed approximately $20 million of AKT's bank
debt. The Company believes it has sufficient reserves for the potential
financial effects of its funding expectations and debt guarantee.
The Company recorded, for its fourth fiscal quarter of 1998, after-tax costs of
$58 million, consisting of $18 million for the Company's share of AKT's net
losses prior to the decision to discontinue AKT's operations and $40 million for
net expenses and other obligations expected to be incurred during the wind-down
period. There can be no assurance that the Company will not incur additional
costs associated with the discontinuance of AKT's operations.
- --------------------------------------------------------------------------------
DEPENDENCE UPON KEY SUPPLIERS
The Company uses numerous suppliers to supply parts, components and
subassemblies (collectively, "parts") for the manufacture and support of its
products. Although the Company makes reasonable efforts to ensure that parts are
available from multiple suppliers, this is not always possible; accordingly,
certain key parts are obtained from a single supplier or a limited group of
suppliers. These suppliers are, in some cases, thinly capitalized, independent
companies that generate significant portions of their business from the Company
and/or a small group of other companies in the semiconductor industry. The
Company has sought and will continue to seek to minimize the risk of production
and service interruptions and/or shortages of key parts by: 1) selecting and
qualifying alternative suppliers for key parts; 2) monitoring the financial
stability of key suppliers; and 3) maintaining appropriate inventories of key
parts. There can be no assurance that the Company's results of operations will
not be materially and adversely affected if, in the future, the Company does not
receive sufficient parts to meet its requirements in a timely and cost-effective
manner.
- --------------------------------------------------------------------------------
BACKLOG
The Company's backlog decreased from $1.7 billion at October 26, 1997 to $917
million at October 25, 1998. The Company schedules production of its systems
based upon order backlog and customer commitments. Backlog includes only orders
for which written authorizations have been accepted and shipment dates within 12
months have been assigned. However, customers generally may delay delivery of
products or cancel orders. Due to possible customer changes in delivery
schedules and cancellation of orders, the Company's backlog at any particular
date is not necessarily indicative of actual sales for any succeeding period. A
reduction of backlog during any particular period could have a material adverse
effect on the Company's business, financial condition and results of operations.
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS Applied Materials 41
RISKS RELATED TO "YEAR 2000" COMPLIANCE
The Company has an initiative in place to address certain Year 2000 issues. The
Company's Year 2000 Program Office focuses on four key readiness programs: 1)
Internal Infrastructure Readiness, addressing internal hardware and software,
including both information technology and non-information technology systems; 2)
Supplier Readiness, addressing the preparedness of those suppliers providing
material incorporated into the Company's products; 3) Product Readiness,
addressing product functionality; and 4) Customer Readiness, addressing customer
support and transactional activity. For each readiness area, the Company is
systematically performing a global risk assessment, conducting testing and
remediation (renovation and implementation), developing contingency plans to
mitigate unknown risk, and communicating with employees, suppliers, customers
and other third parties related to the Year 2000 problem.
INTERNAL INFRASTRUCTURE READINESS PROGRAM The Company, assisted by a third
party, has completed an inventory of internal applications and information
technology hardware and has commenced work on remediation strategies and
testing. Some software applications have been made Year 2000 compliant, and
resources have been assigned to address other applications based on their
criticality and the time required to make them Year 2000 compliant. Readiness
activities are intended to encompass all major categories of applications in use
by the Company, including manufacturing, engineering, sales, finance and human
resources. All software remediation is scheduled to be completed no later than
July 1999. The Year 2000 compliance evaluation of hardware, including hubs,
routers, telecommunication equipment, workstations and other items, is nearing
completion. Upon completion of the evaluation, the Company plans to implement
Year 2000 compliant versions of hardware, as required. In addition to
applications and information technology hardware, the Company is in the process
of assessing, testing and remediating its non-information technology systems,
including embedded systems, facilities and other operations, such as financial,
banking, security and utility systems. A contingency plan addressing issues
related to the Company's internal infrastructure will be developed when ongoing
testing and remediation activities are complete. Although the Company believes
it is feasible to complete its evaluation and remediation efforts according to
its current schedule, there can be no assurance that all such activities will be
completed on time, or that such efforts will be successful.
SUPPLIER READINESS PROGRAM This program focuses on minimizing two areas of risk
associated with suppliers: 1) a supplier's business capability to continue
providing products and services; and 2) a supplier's product integrity. The
Company has identified and contacted key suppliers based on their relative risks
in these two areas. To date, the Company has received responses from over 90
percent of its key suppliers, most of which indicate that they believe the
products provided to the Company are either Year 2000 compliant or will be made
Year 2000 compliant on a timely basis. The responses received also indicate that
most suppliers are in the process of developing or executing remediation plans
to address Year 2000 issues that may affect the supplier's capability to
continue providing products and services to the Company. Based on the Company's
assessment of each supplier's progress to adequately address the Year 2000
issue, the Company expects to develop a supplier action list and contingency
plans by April 1999. However, no assurance can be provided as to the effect or
timely implementation of such action list or contingency plans, or that
suppliers will effectively address their Year 2000 issues to enable them to
continue providing the Company with products and services.
PRODUCT READINESS PROGRAM This program focuses on identifying and resolving Year
2000 issues existing in the Company's products. The program encompasses a number
of activities, including testing, evaluation, engineering and manufacturing
implementation. The Company has completed a Year 2000 readiness evaluation for
over 95 percent of its current generation of released products based upon a
series of testing scenarios. All testing and engineering activity for the
Company's current generation of products is scheduled to be completed by the end
of January 1999. The Company plans to ship all products Year 2000 ready by
January 1999, to make Year 2000 retrofits available to customers during the
first calendar quarter of 1999 and to have retrofits installed in the field by
June 1999. The Company plans to make a contingency team available to address
issues related to product readiness as a component of its Customer Readiness
Program discussed below. However, the Company can make no assurance that product
testing will identify all Year 2000 related issues or that the Company will
effectively address all failures of the Company's products due to the Year 2000
problem.
<PAGE> 15
42 Applied Materials MANAGEMENT'S DISCUSSION AND ANALYSIS
CUSTOMER READINESS PROGRAM This program focuses on customer support issues,
including the coordination of retrofit activity, testing existing customer
electronic transaction capability, and providing other services to the Company's
customers. Currently, in cooperation with its customers, the Company is
assessing its products in use at customer sites, developing potential retrofit
or upgrade programs, and offering assistance in making its products Year 2000
ready. The Company is also offering different upgrade packages for its products,
including various parts, software and services in the form of "Year 2000 ready
kits." Finally, the Customer Readiness Program plans to make a contingency team
available, through the year 2000, to customers experiencing difficulty with the
Company's products. There can be no assurance, however, that these activities
will prevent or effectively address the occurrence of Year 2000 related problems
in the Company's products in use at customer sites.
The Company estimates that total Year 2000 costs will range from $30 million to
$50 million, the majority of which will be incurred by January 2000. This
includes costs to support customer satisfaction programs and services. It does
not include the cost of internal hardware and software that was to be replaced
in the normal course of business but has been accelerated because of Year 2000
capability concerns. To date, Year 2000 costs incurred have either not been
material or have been incurred in the normal course of business. The Company is
continuing its assessments and developing alternatives that will require changes
to this estimate over time. There can be no assurance, however, that there will
not be a delay in, or increased costs associated with, the programs described in
this section.
As discussed (see "Subsequent Events"), the Company completed an acquisition of
Consilium in December 1998. Although the Company examined certain issues related
to Consilium's Year 2000 readiness in connection with its due diligence
examination of Consilium, the Company has not conducted a systematic assessment
of Consilium's Year 2000 readiness in the same way that it has assessed its own
readiness. Until the Company has completed an assessment of the Year 2000
readiness of Consilium's products, information technology and other systems,
there can be no assurances concerning the Year 2000 readiness of Consilium's
products and systems, the probability that remediation efforts directed to
Consilium's products and systems will be successful, or the materiality of the
costs of such assessment and remediation.
The programs described in this section are ongoing. Further, the Company has not
yet identified all potential Year 2000 complications. Therefore, at this time,
the Company cannot determine the potential impact of these complications and
contingencies on the Company's financial condition and results of operations. If
computer systems used by the Company or its suppliers, or the software
applications used in systems manufactured and sold by the Company, fail or
experience significant difficulties related to the Year 2000, the Company's
financial condition and results of operations could be materially and adversely
affected.
- --------------------------------------------------------------------------------
FOREIGN CURRENCY
Significant operations of the Company are conducted in foreign currencies,
primarily Japanese yen. The Company actively manages its exposure to changes in
foreign currency exchange rates, but there can be no assurance that future
changes in foreign currency exchange rates will not have a material and adverse
effect on the Company's financial condition or results of operations.
- --------------------------------------------------------------------------------
EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union are
scheduled to establish fixed conversion rates between each of their existing
sovereign currencies and the Single European Currency (the "euro"). The
participating countries have agreed to adopt the euro as their common legal
currency on
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS Applied Materials 43
that date. The Company is currently evaluating issues raised by the introduction
and initial implementation of the euro on January 1, 1999, and during the
transition period through January 1, 2002. The Company anticipates that its
internal systems that are likely to be affected by the initial implementation of
the euro will be euro capable by January 1, 1999. The Company does not expect
costs of system modifications to be material, nor does it expect the
introduction and use of the euro to materially and adversely affect its
financial condition or results of operations. The Company will continue to
evaluate the impact of the euro introduction. There can be no assurance that
affected systems will be euro capable by January 1, 1999, or that there will be
no material effect to the Company.
- --------------------------------------------------------------------------------
RISKS ASSOCIATED WITH LITIGATION
The Company and certain of its subsidiaries are currently involved in litigation
regarding patent infringement, intellectual property rights, antitrust and other
matters and could become involved in additional litigation in the future. The
Company from time to time receives and makes inquiries with regard to possible
patent infringement, and is subject to various other legal proceedings and
claims, either asserted or unasserted. Any such claims, whether with or without
merit, could be time-consuming and expensive to defend and could divert
management's attention and resources. There can be no assurance regarding the
outcome of current or future litigation or patent infringement inquiries. See
Note 13 of Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
MARKET RISK DISCLOSURE
INTEREST RATE RISK
As of October 25, 1998, the Company's investment portfolio includes fixed-income
securities of $1.4 billion. These securities are subject to interest rate risk,
and will decline in value if interest rates increase. Due to the short duration
of the Company's investment portfolio, an immediate 10 percent increase in
interest rates would not have a material effect on the Company's financial
condition or results of operations.
The Company's long-term debt bears interest at fixed rates; therefore, the
Company's results of operations would only be affected by interest rate changes
to the extent that variable rate short-term notes payable are outstanding. Due
to the short-term nature and insignificant amount of the Company's notes
payable, an immediate 10 percent change in interest rates would not have a
material effect on the Company's results of operations over the next fiscal
year.
- --------------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company uses financial instruments such as forward exchange contracts to
hedge certain firm commitments denominated in foreign currencies and currency
option contracts to hedge certain anticipated, but not yet committed,
transactions expected to be denominated in foreign currencies. The Company does
not use derivative financial instruments for trading or speculative purposes.
Forward exchange contracts are denominated in the same currency as the
underlying transaction (primarily Japanese yen and British pounds), and the
terms of the forward foreign exchange contracts generally match the terms of the
underlying transactions. As of October 25, 1998, the majority of the Company's
outstanding forward exchange contracts are marked to market (see Note 2 of Notes
to Consolidated Financial Statements), as are the underlying transactions being
hedged; therefore, the impact of exchange rate changes on the forward contracts
will be substantially offset by the impact of such changes on the underlying
transactions. The effect of an immediate 10 percent change in exchange rates on
the forward exchange contracts and the underlying hedged positions denominated
in Japanese yen and British pounds would not be material to the Company's
financial condition or results of operations. The Company's downside risk with
respect to currency option contracts (Japanese yen) is limited to the premium
paid for the right to exercise the option. Premiums paid for options outstanding
as of October 25, 1998 were not material.
<PAGE> 17
44 Applied Materials CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal year ended 1996 1997 1998
- -------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net sales $4,144,817 $4,074,275 $4,041,687
Cost of products sold 2,195,078 2,173,350 2,178,531
- -------------------------------------------------------------------------------------------
Gross margin 1,949,739 1,900,925 1,863,156
Operating expenses:
Research, development and engineering 481,394 567,612 643,852
Marketing and selling 313,631 314,381 321,606
General and administrative 226,063 252,214 272,109
Non-recurring items 25,100 75,818 237,227
- -------------------------------------------------------------------------------------------
Income from operations 903,551 690,900 388,362
Income from litigation settlements, net -- 69,000 15,000
Interest expense 20,733 20,705 45,309
Interest income 39,618 59,726 79,780
- -------------------------------------------------------------------------------------------
Income from continuing operations before taxes 922,436 798,921 437,833
Provision for income taxes 322,851 300,447 148,863
- -------------------------------------------------------------------------------------------
Income from continuing operations 599,585 498,474 288,970
Discontinued operations:
Equity in net loss of joint venture -- -- (17,911)
Provision for discontinued operations
of joint venture -- -- (40,157)
- --------------------------------------------------------------------------------------------
Net income $599,585 $498,474 $230,902
- -------------------------------------------------------------------------------------------
Earnings per share:
Basic--continuing operations $1.67 $1.37 $0.79
Basic--discontinued operations -- -- (0.16)
- --------------------------------------------------------------------------------------------
Total basic $1.67 $1.37 $0.63
- -------------------------------------------------------------------------------------------
Diluted--continuing operations $1.63 $1.32 $0.76
Diluted--discontinued operations -- -- (0.15)
- --------------------------------------------------------------------------------------------
Total diluted $1.63 $1.32 $0.61
Weighted average number of shares:
Basic 359,104 363,542 366,849
Diluted 367,214 377,838 378,508
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 18
CONSOLIDATED BALANCE SHEETS Applied Materials 45
<TABLE>
<CAPTION>
Fiscal year ended 1997 1998
- ---------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $448,043 $575,205
Short-term investments 1,094,912 1,188,351
Accounts receivable, less allowance for doubtful accounts of
$5,578 and $630 1,110,885 764,472
Inventories 686,451 555,881
Deferred income taxes 324,568 337,906
Other current assets 105,498 97,140
- ---------------------------------------------------------------------------------------------------------
Total current assets 3,770,357 3,518,955
Property, plant and equipment, net of accumulated depreciation 1,066,053 1,261,520
Other assets 234,356 149,217
- ---------------------------------------------------------------------------------------------------------
Total assets $5,070,766 $4,929,692
=========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $55,943 $644
Current portion of long-term debt 10,563 7,367
Accounts payable and accrued expenses 1,157,808 1,041,341
Income taxes payable 177,774 68,974
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 1,402,088 1,118,326
Long-term debt 623,090 616,572
Deferred income taxes 47,177 11,341
Other liabilities 56,240 62,832
- ---------------------------------------------------------------------------------------------------------
Total liabilities 2,128,595 1,809,071
- ---------------------------------------------------------------------------------------------------------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock; $.01 par value per share; 1,000 shares authorized;
no shares issued -- --
Common stock; $.01 par value per share; 1,100,000 shares authorized;
367,250 and 367,864 shares outstanding 3,672 3,679
Additional paid-in capital 850,902 792,145
Retained earnings 2,098,038 2,328,940
Cumulative translation adjustments (10,441) (4,143)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,942,171 3,120,621
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $5,070,766 $4,929,692
=========================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 19
46 Applied Materials CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
- ---------------------------------------------------------------------------------------------------------
Additional Cumulative
Paid-In Retained Translation
Shares Amount Capital Earnings Adjustments Total
- ---------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at October 29, 1995 358,556 $3,586 $758,263 $999,979 $21,675 $1,783,503
Net issuance under stock
plans, including tax
benefits of $11,894 4,284 43 40,338 -- -- 40,381
Stock repurchases (2,370) (24) (37,028) -- -- (37,052)
Translation adjustments -- -- -- -- (15,992) (15,992)
Net income -- -- -- 599,585 -- 599,585
- ---------------------------------------------------------------------------------------------------------
Balance at October 27, 1996 360,470 3,605 761,573 1,599,564 5,683 2,370,425
Net issuance under stock
plans, including tax
benefits of $82,543 9,434 94 167,499 -- -- 167,593
Stock repurchases (2,654) (27) (78,170) -- -- (78,197)
Translation adjustments -- -- -- -- (16,124) (16,124)
Net income -- -- -- 498,474 -- 498,474
- ---------------------------------------------------------------------------------------------------------
Balance at October 26, 1997 367,250 3,672 850,902 2,098,038 (10,441) 2,942,171
Net issuance under stock
plans, including tax
benefits of $26,112 5,477 55 94,527 -- -- 94,582
Stock repurchases (4,863) (48) (153,284) -- -- (153,332)
Translation adjustments -- -- -- -- 6,298 6,298
Net income -- -- -- 230,902 -- 230,902
- ---------------------------------------------------------------------------------------------------------
Balance at October 25, 1998 367,864 $3,679 $792,145 $2,328,940 $(4,143) $3,120,621
=========================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> 20
CONSOLIDATED STATEMENTS OF CASH FLOWS Applied Materials 47
<TABLE>
<CAPTION>
Fiscal year ended 1996 1997 1998
- ---------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $599,585 $498,474 $230,902
Loss from discontinued operations:
Equity in net loss of joint venture -- -- 17,911
Provision for discontinued operations of joint venture -- -- 40,157
Adjustments required to reconcile income from continuing
operations to cash provided by continuing operations:
Acquired in-process research and development expense -- 59,500 32,227
Write-down of intangible assets -- -- 70,000
Bad debt expense -- 16,318 --
Depreciation and amortization 148,865 219,435 284,500
Deferred income taxes (85,852) (52,543) (49,400)
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable (43,789) (332,047) 332,249
Inventories (60,036) (171,201) 133,791
Other current assets 23,369 (29,041) (9,478)
Other assets (3,183) (8,525) (9,366)
Accounts payable and accrued expenses 167,346 352,540 (159,471)
Income taxes payable (73,938) 137,560 (106,142)
Other liabilities 19,662 11,242 8,504
- ---------------------------------------------------------------------------------------------------------
Cash provided by continuing operations 692,029 701,712 816,384
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures, net of retirements (452,535) (339,364) (448,607)
Cash paid for acquisitions, net of cash acquired -- (246,333) --
Cash paid for licensed technology -- -- (32,227)
Proceeds from sales of short-term investments 707,620 664,194 779,356
Purchases of short-term investments (857,877) (1,125,362) (872,795)
- ---------------------------------------------------------------------------------------------------------
Cash used for investing (602,792) (1,046,865) (574,273)
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Short-term borrowings, net 22,360 (21,731) (54,811)
Long-term debt borrowings 29,832 407,568 --
Long-term debt repayments (25,164) (67,372) (9,422)
Issuances of common stock, net 40,381 150,446 94,582
Repurchases of common stock (37,052) (78,197) (153,332)
- ---------------------------------------------------------------------------------------------------------
Cash provided by/(used for) financing 30,357 390,714 (122,983)
- ---------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1,551) (1,406) 8,034
- ---------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 118,043 44,155 127,162
Cash and cash equivalents--beginning of year 285,845 403,888 448,043
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents--end of year $403,888 $448,043 $575,205
=========================================================================================================
</TABLE>
Cash payments for interest were $23,708, $18,802 and $46,296 in 1996, 1997 and
1998, respectively. Cash payments for income taxes were $429,651, $130,247 and
$264,886 in 1996, 1997 and 1998, respectively. See accompanying notes to the
consolidated financial statements.
<PAGE> 21
48 Applied Materials NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The consolidated financial
statements include the accounts of Applied Materials, Inc. and its subsidiaries
(the Company) after elimination of intercompany balances and transactions. The
Company's 50 percent joint venture investment in Applied Komatsu Technology,
Inc. (AKT) is accounted for using the equity method, and is included in accounts
payable and accrued expenses. The Company's fiscal years presented are the 52
week periods that ended on the last Sunday of October in each year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ materially from those estimates.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS All highly-liquid investments
purchased with a remaining maturity of three months or less are considered to be
cash equivalents. All of the Company's short-term investments are classified as
available-for-sale as of the balance sheet dates. Investments classified as
available-for-sale are recorded at fair value and any material temporary
difference between an investment's cost and its fair value is presented as a
separate component of stockholders' equity.
INVENTORIES Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out (FIFO) basis.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Estimated useful lives for financial reporting
purposes are as follows: buildings and improvements, 5 to 33 years;
demonstration and manufacturing equipment, 3 to 5 years; and furniture, fixtures
and other equipment, 3 to 15 years. Leasehold improvements are amortized over
the shorter of five years or the lease term.
INTANGIBLE ASSETS Purchased technology and goodwill are presented at cost, net
of accumulated amortization, and are being amortized using the straight-line
method over their estimated useful lives of eight years.
LONG-LIVED ASSETS The Company reviews long-lived assets and certain identifiable
intangible assets to be held and used, or disposed of, for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company assesses the impairment of long-lived
assets, including purchased technology and goodwill, based upon the estimated
future cash flows from these assets.
REVENUE RECOGNITION Revenue related to systems is generally recognized upon
shipment, which usually precedes customer acceptance. A provision for the
estimated future cost of system installation and warranty is recorded when
revenue is recognized. Service revenue is generally recognized ratably over the
period of the related contract.
DERIVATIVE FINANCIAL INSTRUMENTS The Company uses financial instruments such as
forward exchange contracts to hedge certain firm commitments denominated in
foreign currencies and currency option contracts to hedge certain anticipated,
but not yet committed, transactions expected to be denominated in foreign
currencies. The terms of the currency instruments used are generally consistent
with the timing of the committed or anticipated transactions being hedged. The
purpose of the Company's foreign currency management activity is to protect the
Company from the risk that eventual cash flows from foreign currency denominated
transactions may be adversely affected by changes in exchange rates. Gains and
losses on forward exchange and option contracts are deferred and recognized in
income when the related transactions being hedged are recognized. If the
underlying transaction being hedged fails to occur, or occurs prior to the
maturity of the financial instrument, the Company immediately recognizes the
gain or loss on the associated financial instrument. Forward exchange contracts
that have been marked to market are included in accounts payable and accrued
expenses on the Company's consolidated balance sheet. To date, premiums paid for
currency option contracts have not been material. The Company does not use
derivative financial instruments for trading or speculative purposes.
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Applied Materials 49
FOREIGN CURRENCY TRANSLATION The Company's subsidiaries located in Japan and
Europe operate primarily using local functional currencies. Accordingly, all
assets and liabilities of these subsidiaries are translated using exchange rates
in effect at the end of the period, and revenues and costs are translated using
average exchange rates for the period. The resulting cumulative translation
adjustments are presented as a separate component of stockholders' equity.
Subsidiaries located in Ireland, Italy, Israel, Korea, Taiwan, Southeast Asia
and China use the U.S. dollar as their functional currency. Accordingly, assets
and liabilities are translated using period-end exchange rates, except for
inventories and property, plant and equipment, which are translated using
historical rates. Revenues and costs are translated using average exchange rates
for the period, except for costs related to those balance sheet items that are
translated using historical rates. The resulting translation gains and losses
are included in income as they are incurred.
EMPLOYEE STOCK PLANS In accordance with the provisions of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation," the Company may elect to continue to apply the provisions of
Accounting Principles Board's Opinion No. 25 (ABP 25), "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its employee
stock option and stock purchase plans, or adopt the fair value method of
accounting prescribed by SFAS 123. The Company has elected to continue to
account for its stock plans using APB 25, and therefore is generally not
required to recognize compensation expense in connection with these plans.
Companies that continue to use APB 25 are required to present, in the notes to
the consolidated financial statements, the pro forma effects on reported net
income and earnings per share as if compensation expense had been recognized
based on the fair value of options granted (see Note 10 of Notes to Consolidated
Financial Statements).
CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist principally of cash
equivalents, short-term investments, trade accounts receivable and derivative
financial instruments used in hedging activities.
The Company invests in a variety of financial instruments such as certificates
of deposit, municipal bonds and treasury bills, and, by policy, limits the
amount of credit exposure with any one financial institution or commercial
issuer.
The Company's customers consist of semiconductor manufacturers located
throughout the world. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral to secure
accounts receivable. The Company maintains an allowance for doubtful accounts
based on an assessment of the collectibility of such accounts.
The Company is exposed to credit-related losses in the event of nonperformance
by counterparties to derivative financial instruments, but does not expect any
counterparties to fail to meet their obligations.
EARNINGS PER SHARE The Company adopted Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share," in the first fiscal quarter
of 1998. Under the provisions of SFAS 128, primary earnings per share has been
replaced by basic earnings per share, which does not include the dilutive effect
of stock options in its calculation. In addition, fully diluted earnings per
share has been replaced by diluted earnings per share. All prior period earnings
per share amounts have been restated to reflect the requirements of SFAS 128.
Basic earnings per share has been computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share has been
computed using the weighted average number of common shares and equivalents
(representing the dilutive effect of stock options) outstanding during the
period. Net income has not been adjusted for any period presented for purposes
of computing basic or diluted earnings per share.
For purposes of computing diluted earnings per share, weighted average common
share equivalents do not include stock options with an exercise price that
exceeds the average fair market value of the Company's common stock for the
period. For fiscal 1998, options to purchase approximately 4,091,000 shares of
common stock at an average price of $36.91 were excluded from the computation.
<PAGE> 23
50 Applied Materials NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS Certain amounts prior to fiscal 1998 have been reclassified to
conform to the 1998 financial statement presentation.
RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
130 (SFAS 130), "Reporting Comprehensive Income," which establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. The Company will adopt SFAS
130 in the first fiscal quarter of 1999.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 (SFAS 131), "Disclosures About Segments of an Enterprise and Related
Information," which changes the way public companies report information about
operating segments. SFAS 131, which is based on a management approach to segment
reporting, establishes requirements to report selected segment information
quarterly and to report annually entity-wide disclosures about products and
services, major customers, and the countries in which the entity holds material
assets and reports revenue. The Company is currently assessing the disclosure
effects of adopting SFAS 131, which will be effective for the Company's fiscal
1999.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132 (SFAS 132), "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS 132 does not change the measurement or
recognition of such plans, but does standardize the disclosure requirements for
pensions and other postretirement benefits to the extent practicable. SFAS 132
also requires disclosure of additional information about changes in benefit
obligations and fair values of plan assets, and eliminates certain other
disclosures that were previously required. The Company will be required to adopt
SFAS 132 in fiscal 1999.
In April 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance regarding whether computer software is internal-use software, the
capitalization of costs incurred for computer software developed or obtained for
internal use and accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the public.
The Company does not expect the impact of adopting SOP 98-1, which will be
effective for the Company's fiscal 2000, to be material to its financial
condition or results of operations.
In April 1998, the AICPA issued Statement of Position 98-5 (SOP 98-5),
"Reporting on the Costs of Start-Up Activities." SOP 98-5 requires companies to
expense start-up and organization costs as incurred. SOP 98-5 broadly defines
start-up activities and provides examples to help entities determine costs that
are and are not within the scope of SOP 98-5. SOP 98-5 will be effective for the
Company's fiscal 2000, and its initial application is to be reported as the
cumulative effect of a change in accounting principle. The Company does not
expect the impact of adopting SOP 98-5 to be material to its financial condition
or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS 133 requires that all derivatives be
recognized at fair value in the statement of financial position, and that the
corresponding gains or losses be reported either in the statement of operations
or as a component of comprehensive income, depending on the type of hedging
relationship that exists. The Company is in the process of assessing the effect
of adopting SFAS 133, which will be effective for the Company's fiscal 2000.
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Applied Materials 51
NOTE 2 FINANCIAL INSTRUMENTS
INVESTMENTS At October 26, 1997 and October 25, 1998, the fair value of the
Company's short-term investments approximated cost. Accordingly, temporary
differences between the short-term investment portfolio's fair value and its
cost have not been presented as a separate component of stockholders' equity.
Information about short-term investments is as follows:
<TABLE>
<CAPTION>
1997 1998
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Obligations of states and political subdivisions $218,689 $253,709
U.S. commercial paper, corporate bonds and medium-term notes 410,088 473,654
Bank certificates of deposit 233,794 138,053
U.S. treasury securities 176,764 211,094
Other debt securities 55,577 111,841
- -----------------------------------------------------------------------------------------
$1,094,912 $1,188,351
- -----------------------------------------------------------------------------------------
</TABLE>
Investments in debt and equity securities of $218 million and $183 million are
included in cash and cash equivalents at October 26, 1997 and October 25, 1998,
respectively.
Information about the contractual maturities of short-term investments at
October 25, 1998 is as follows:
<TABLE>
<CAPTION>
Due After One
Due in One Year Through Due After
Year or Less Three Years Three Years Total
- ---------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Obligations of states and political subdivisions $ 52,042 $134,397 $67,270 $253,709
U.S. commercial paper, corporate bonds and
medium-term notes 294,449 134,730 44,475 473,654
Bank certificates of deposit 138,053 -- -- 138,053
U.S. treasury securities 73,729 17,447 119,918 211,094
Other debt securities 19,108 54,007 38,726 111,841
- ---------------------------------------------------------------------------------------------------------
$577,381 $340,581 $270,389 $1,188,351
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Gross unrealized holding gains and losses were not material as of October 26,
1997 or October 25, 1998. Gross realized gains and losses on sales of short-term
investments were not material for the years ended October 27, 1996, October 26,
1997 or October 25, 1998. The Company manages its cash equivalents and
short-term investments as a single portfolio of highly marketable securities
that is intended to be available to meet the Company's current cash
requirements.
DERIVATIVE FINANCIAL INSTRUMENTS The notional amounts of derivative financial
instruments as of October 26, 1997 and October 25, 1998 were as follows:
<TABLE>
<CAPTION>
1997 1998
- -------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Forward exchange contracts to sell U.S. dollars for foreign currency (primarily yen) $224,956 $ 88,248
Forward exchange contracts to sell foreign currency (primarily yen) for U.S. dollars $477,881 $274,326
Currency option contracts to sell Japanese yen for U.S. dollars $429,257 $189,380
Currency option contracts to sell U.S. dollars for British pounds $ 38,648 $ --
- -------------------------------------------------------------------------------------------------------------
</TABLE>
All forward exchange and currency option contracts outstanding as of October 25,
1998 have remaining maturities of less than one year. Management believes that
these contracts should not subject the Company to undue risk from foreign
exchange movements because gains and losses on these contracts generally offset
gains and losses on the underlying assets, liabilities and transactions being
hedged.
<PAGE> 25
52 Applied Materials NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS For certain of the Company's financial
instruments, including cash and cash equivalents, short-term investments,
accounts receivable, notes payable, accounts payable and accrued expenses, the
carrying amounts approximate fair value due to their short maturities.
Consequently, such financial instruments are not included in the following table
that provides information about the carrying amounts and estimated fair values
of other financial instruments, both on and off the balance sheets:
<TABLE>
<CAPTION>
1997 1998
- ---------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term debt, including current portion $633,653 $647,983 $623,939 $656,603
Forward exchange contracts:
Sell foreign currency $491,796 $491,240 $241,517 $239,827
Buy foreign currency $217,016 $216,779 $99,293 $99,293
Currency option contracts:
Sell foreign currency $4,636 $10,337 $3,892 $202
Buy foreign currency $525 $351 $-- $--
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The estimated fair value of long-term debt is based primarily on quoted market
prices for the same or similar issues. The fair value of forward exchange and
currency option contracts is based on quoted market prices of comparable
instruments.
- --------------------------------------------------------------------------------
NOTE 3 BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
(In thousands) 1997 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
INVENTORIES:
Customer service spares $207,938 $239,139
Raw materials 106,406 98,180
Work-in-process 256,737 126,533
Finished goods 115,370 92,029
- --------------------------------------------------------------------------------
$686,451 $555,881
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land $112,050 $125,467
Buildings and improvements 561,803 712,740
Demonstration and manufacturing equipment 398,588 501,648
Furniture, fixtures and other equipment 329,178 384,069
Construction in progress 164,136 274,220
- --------------------------------------------------------------------------------
1,565,755 1,998,144
- --------------------------------------------------------------------------------
Accumulated depreciation (499,702) (736,624)
- --------------------------------------------------------------------------------
$1,066,053 $1,261,520
- --------------------------------------------------------------------------------
OTHER ASSETS:
Purchased technology, net $186,127 $91,218
Goodwill, net 13,438 11,614
Other 34,791 46,385
- --------------------------------------------------------------------------------
$234,356 $149,217
- --------------------------------------------------------------------------------
ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable $347,584 $182,616
Compensation and employee benefits 219,384 185,391
Installation and warranty 216,962 179,742
Restructuring 151 91,781
Other 373,727 401,811
- --------------------------------------------------------------------------------
$1,157,808 $1,041,341
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Applied Materials 53
NOTE 4 AKT JOINT VENTURE
In September 1993, the Company entered into an agreement with Komatsu, Ltd. to
form AKT, a joint venture corporation that develops, manufactures and markets
systems used to produce Flat Panel Displays (FPDs). The FPD market currently
includes screens for laptop, notebook and palmtop computers, desktop monitors,
digital/video cameras, portable televisions and instrument displays and may
eventually include High Definition Television.
During the fourth fiscal quarter of 1998, the Company decided to discontinue the
operations of AKT. The operations of AKT will be wound down over a period not to
exceed twelve months from the date of the decision to discontinue operations. As
a result of this decision, AKT has stopped selling PVD and Etch systems and has
ceased development efforts on new and next generation systems and technology.
AKT will continue to offer its existing CVD product line for sale and will also
provide existing customers with ongoing system support. The Company expects to
provide a maximum of $27.5 million of funding to AKT, $20 million of which had
already been provided as of the end of fiscal 1998, and has also guaranteed
approximately $20 million of AKT's bank debt. The Company believes it has
sufficient reserves for the potential financial effects of its funding
expectations and debt guarantee. The Company recorded, for its fourth fiscal
quarter of 1998, after-tax costs of $58 million, consisting of $18 million for
the Company's share of AKT's net losses prior to the decision to discontinue
AKT's operations and $40 million for net expenses and other obligations expected
to be incurred during the wind-down period. There can be no assurance that the
Company will not incur additional costs associated with the discontinuance of
AKT's operations.
Royalties received by the Company on AKT sales did not materially affect the
Company's results of operations for fiscal 1996, 1997 or 1998.
- --------------------------------------------------------------------------------
NOTE 5 NOTES PAYABLE
The Company has credit facilities for unsecured borrowings in various currencies
up to $600 million, of which $500 million is a revolving credit agreement in the
United States with a group of ten banks. This agreement consists of a $250
million revolving line of credit agreement that expires in March 1999 and a $250
million credit agreement that expires in March 2003. The agreement requires the
Company to pay facility fees, allows for borrowings at various rates including
the lead bank's prime reference rate and includes certain financial and other
covenants with which the Company was in compliance as of October 25, 1998. No
amount was outstanding under this agreement at the end of any fiscal year
presented. The remaining $100 million of credit facilities is primarily with
Japanese and European banks at rates indexed to their prime reference rate. At
October 26, 1997, $56 million was outstanding under Japanese credit facilities
at an average annual interest rate of 0.7 percent. At October 25, 1998, no
material amounts were outstanding under these credit facilities.
<PAGE> 27
54 Applied Materials NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 LONG-TERM DEBT
Information with respect to the Company's long-term debt at October 26, 1997 and
October 25, 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
- ------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Japanese debt, 1.72%-4.85%, maturing 1999-2011 $60,653 $50,939
6.65-7.00% medium-term notes due 2000-2005,
interest payable March 15 and September 15 73,000 73,000
8% noncallable unsecured senior notes due 2004,
interest payable March 1 and September 1 100,000 100,000
6.75% noncallable unsecured senior notes due 2007,
interest payable April 15 and October 15 200,000 200,000
7.125% noncallable unsecured senior notes due 2017,
interest payable April 15 and October 15 200,000 200,000
- ------------------------------------------------------------------------------------
633,653 623,939
Current portion (10,563) (7,367)
- ------------------------------------------------------------------------------------
$623,090 $616,572
- ------------------------------------------------------------------------------------
</TABLE>
$43 million of Japanese debt is secured by property and equipment having a net
book value of approximately $63 million at October 25, 1998.
The Company has certain debt agreements containing covenants that limit
additional borrowings by U.S. subsidiaries, liens placed on assets and certain
sale and leaseback transactions. As of October 25, 1998, the Company was in
compliance with all covenants.
As of October 25, 1998, aggregate debt maturities were as follows: $7 million in
fiscal 1999; $37 million in fiscal 2000; $10 million in fiscal 2001; $5 million
in fiscal 2002; $5 million in fiscal 2003; and $560 million thereafter.
- --------------------------------------------------------------------------------
NOTE 7 NON-RECURRING ITEMS
Non-recurring operating expense items do not include litigation settlements and
costs associated with AKT (see Note 8 and Note 4 of Notes to Consolidated
Financial Statements). Non-recurring operating expense items for fiscal 1996,
1997 and 1998 included the following:
<TABLE>
<CAPTION>
1996 1997 1998
- ----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Acquired in-process research and development $-- $59,500 $32,227
Write-down of impaired assets -- -- 70,000
Restructuring 25,100 -- 135,000
Bad debt expense -- 16,318 --
- ----------------------------------------------------------------------------------------
$25,100 $75,818 $237,227
- ----------------------------------------------------------------------------------------
</TABLE>
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT During the first fiscal quarter of
1997, the Company acquired two companies, Opal, Inc. and Orbot Instruments, Ltd.
(Orbot), in separate transactions for $293 million, consisting primarily of
cash, and recognized $59.5 million of acquired in-process research and
development expense. With the exception of this charge, the transactions did not
have a material effect on the Company's results of operations for fiscal 1997.
During fiscal 1998, the Company determined that certain intangible assets
recorded in connection with these acquisitions were impaired (see "Write-down of
Impaired Assets" below). There can be no assurance that the Company will not
incur additional charges in connection with these or other acquisitions (see
"Management's Discussion and Analysis--Trends, Risks and Uncertainties").
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Applied Materials 55
During the first fiscal quarter of 1998, the Company entered into an agreement
with Trikon Technologies, Inc. for a non-exclusive, worldwide, perpetual license
of MORI(TM) plasma source and Forcefill(TM) deposition technology. Because the
development of this technology had not yet reached technological feasibility at
the time of its acquisition and had no alternative future use, the Company
recognized $32 million, including transaction costs, of acquired in-process
research and development expense at the time of its acquisition.
WRITE-DOWN OF IMPAIRED ASSETS During the fourth fiscal quarter of 1998, the
Company determined that the carrying value of certain purchased technology
exceeded its net realizable value as a result of rapid changes in technology and
a reduced demand outlook caused by significant changes in business conditions.
This determination was supported by the results of an independent analysis
prepared by a nationally-recognized valuation firm. In accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company
recorded a pre-tax charge of $70 million for this impairment in asset value.
RESTRUCTURING During the fourth fiscal quarter of 1996, the Company recorded a
pre-tax restructuring charge of $25 million in connection with a reduction of
its workforce and related consolidation of facilities. These actions were taken
in response to a downturn in the semiconductor industry.
During fiscal 1998, the Company recorded a pre-tax restructuring charge of $135
million, consisting of $75 million for headcount reductions and $60 million for
consolidation of facilities and related fixed assets. These restructuring
actions occurred in the Company's third and fourth fiscal quarters, and were
taken to align the Company's cost structure with prevailing market conditions
and to create a more flexible and efficient organization that is well-positioned
for an industry recovery. During the third fiscal quarter of 1998, the Company
completed a voluntary separation plan that resulted in a headcount reduction of
approximately 800 employees, or six percent of its global workforce, for a cost
of $25 million. The majority of employees who terminated employment were located
in California and Texas. During the fourth fiscal quarter of 1998, the Company
eliminated approximately 2,000 additional positions, or 15 percent of its global
workforce, for a cost of $50 million. Approximately 1,350 of these positions
were eliminated in California and Texas, with the remainder being eliminated
from other locations worldwide.
Total cash outlays for fiscal 1998 restructuring activities will be $105
million. The remaining $30 million of restructuring costs consists of non-cash
charges primarily for asset write-offs. During fiscal 1998, $42 million of cash
was used for restructuring costs. The majority of the remaining cash outlays of
$63 million is expected to occur in fiscal 1999.
Restructuring activity for fiscal 1998 was as follows:
<TABLE>
<CAPTION>
Severance
and Benefits Facilities Total
- ---------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Fiscal 1996 provision $19,329 $5,771 $25,100
Amount utilized in fiscal 1996 (13,238) (348) (13,586)
- ---------------------------------------------------------------------------------
Balance, October 27, 1996 6,091 5,423 11,514
Amount utilized in fiscal 1997 (6,091) (5,272) (11,363)
- ---------------------------------------------------------------------------------
Balance, October 26, 1997 -- 151 151
Provision for fiscal 1998 74,812 60,188 135,000
Amount utilized in fiscal 1998 (39,526) (3,844) (43,370)
- ---------------------------------------------------------------------------------
Balance, October 25, 1998 $35,286 $56,495 $91,781
- ---------------------------------------------------------------------------------
</TABLE>
BAD DEBT EXPENSE During fiscal 1997, the Company determined that its outstanding
accounts receivable balance from Thailand-based Submicron Technology PCL (SMT)
was not collectible. Therefore, the Company repossessed systems previously sold
to SMT and recorded $16 million of bad debt expense.
<PAGE> 29
56 Applied Materials NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 LITIGATION SETTLEMENTS
During fiscal 1997, the Company settled certain outstanding litigation with
Novellus Systems, Inc. (Novellus) and General Signal Corporation (GSC). In
connection with the Novellus settlement, the Company received $80 million in
damages for past patent infringement, and was awarded the right to receive
ongoing royalties for certain system shipments subsequent to the date of the
settlement. In connection with the GSC settlement, the Company paid $11 million
and acquired ownership from GSC of five patents regarding "cluster tool"
architecture.
During the first fiscal quarter of 1998, the Company settled all outstanding
litigation with ASM International N.V. (ASM). As a result of this settlement,
the Company received a convertible note for $80 million, against which $15
million was collected in November 1997. Because of the impact of the current
industry downturn on ASM's financial condition and liquidity, ASM was not able
to pay the $65 million remaining balance at the maturity date. Therefore, the
Company determined based on known facts and circumstances that collection of the
note was doubtful, and recorded, for the fourth fiscal quarter of 1998, a $65
million pre-tax charge to fully reserve the outstanding note. The net effect of
the ASM settlement is $15 million of non-operating income for fiscal 1998.
Subsequent to the end of fiscal 1998, ASM secured financing and made a partial
payment to the Company (see Note 14 of Notes to Consolidated Financial
Statements).
- --------------------------------------------------------------------------------
NOTE 9 COMMON STOCK
STOCK REPURCHASE PROGRAM In March 1996, the Board of Directors authorized the
Company to systematically repurchase up to 5,000,000 shares of its common stock
in the open market through February 1999 to reduce the dilution from the
Company's employee benefit and incentive plans such as the stock option and
employee stock purchase plans. In December 1997, the Board of Directors
rescinded the limitation on the number of shares and extended the authorization
to March 2001. In fiscal 1996, 1,970,000 shares were repurchased under this plan
at an average price of $14.97 per share. In fiscal 1997, 2,654,000 shares were
repurchased under this plan at an average price of $29.46 per share. In fiscal
1998, 4,863,000 shares were repurchased under this plan at an average price of
$31.53 per share.
The Company also repurchased 400,000 shares of its common stock in the open
market in fiscal 1996 at an average price of $18.88 per share in accordance with
a separate authorization from the Board of Directors to fund certain stock-based
employee benefit plans.
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Applied Materials 57
NOTE 10 EMPLOYEE BENEFIT PLANS
STOCK OPTIONS The Company grants options to key employees and non-employee
directors to purchase shares of its common stock, at future dates, at the fair
market value on the date of grant. Options generally vest over one to four
years, and generally expire no later than seven years from the date of grant.
There were 12,554,000, 12,445,000 and 12,762,000 shares available for grant at
the end of fiscal 1996, 1997 and 1998, respectively. Stock option activity was
as follows:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1996 Price 1997 Price 1998 Price
- ---------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 27,938 $10.51 30,564 $10.05 34,057 $15.16
Granted 16,894 14.79 13,324 21.21 26,848 29.14
Exercised (3,074) 3.52 (7,744) 6.00 (4,041) 8.08
Canceled (11,194) 20.32 (2,087) 12.82 (4,231) 24.29
- ---------------------------------------------------------------------------------------------------------
Outstanding, end of year 30,564 $10.05 34,057 $15.16 52,633 $22.10
Exercisable, end of year 9,584 $ 5.53 8,298 $8.51 12,772 $13.46
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information with respect to options outstanding
and exercisable at October 25, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------
Weighted Weighted Average Weighted
Average Remaining Average
Number Exercise Contractual Number Exercise
Range of exercise prices of Shares Price Life (In Years) of Shares Price
- ---------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
$0.01-$9.96 4,209 $7.98 2.3 3,909 $ 7.95
$9.97-$19.93 17,206 13.36 4.2 6,911 12.07
$19.94-$29.89 17,350 25.63 6.3 1,194 23.84
$29.90-$39.85 12,959 31.89 6.1 502 34.22
$39.86-$49.81 909 45.99 5.7 256 46.27
- ---------------------------------------------------------------------------------------------------------
52,633 $22.10 5.3 12,772 $13.46
- ---------------------------------------------------------------------------------------------------------
</TABLE>
During 1996, the Company canceled options to purchase 9,802,728 shares. The
canceled options were originally granted between June 15, 1995 and May 21, 1996
at exercise prices ranging from $13.10 to $26.25 per share. New options to
purchase 9,802,728 shares at exercise prices ranging from $11.94 to $14.25 per
share were then granted. All vesting under the canceled options was lost and new
vesting periods were started. Executive officers of the Company were not
permitted to cancel options.
During the first fiscal quarter of 1998, the Company granted to each employee
(excluding officers) an option to purchase 200 shares, for a total grant of
approximately 2,900,000 shares. This grant was made in recognition of the
Company's 30th anniversary. Also, later in fiscal 1998, the Company granted to
each employee (excluding executives) an option to purchase 200 shares, for a
total grant of approximately 2,500,000 shares. This grant was made to address
employee morale and retention concerns in light of the prolonged industry
downturn and necessary Company restructuring actions. Neither of these grants
required stockholder approval.
EMPLOYEE STOCK PURCHASE PLAN The Company sponsors two employee stock purchase
plans (ESPP) for the benefit of U.S. and international employees. The U.S. plan
is qualified under Section 423 of the Internal Revenue Code. Under the ESPP,
substantially all employees may purchase the Company's common stock through
payroll deductions at a price equal to 85 percent of the lower of the fair
market value at the beginning or end of each six-month offering period. Stock
purchases under the ESPP are limited to 10 percent of
<PAGE> 31
58 Applied Materials NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
an employee's compensation, up to a maximum of $12,750, in any plan year. During
fiscal 1996, 1997 and 1998, 771,346, 1,697,284 and 1,436,165 shares,
respectively, were issued under the ESPP. As of October 25, 1998, 4,095,205
shares were reserved for future issuance under the ESPP.
STOCK-BASED COMPENSATION The Company has adopted the disclosure-only provisions
of SFAS 123. Accordingly, no compensation cost has been recognized for any of
the Company's stock option plans. If compensation cost for the Company's stock
option plan and ESPP had been determined based on the grant date fair value for
awards in fiscal 1996, 1997 and 1998 consistent with the provisions of SFAS 123,
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
- -------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net income as reported $599,585 $498,474 $230,902
Pro forma net income $589,750 $466,395 $146,094
Earnings per share as reported:
Basic $1.67 $1.37 $0.63
Diluted $1.63 $1.32 $0.61
Pro forma earnings per share:
Basic $1.64 $1.28 $0.40
Diluted $1.61 $1.23 $0.39
- -------------------------------------------------------------------------------------
</TABLE>
The effects on the above pro forma disclosures of applying SFAS 123 are not
likely to be representative of the effects on pro forma disclosures of future
years. Since SFAS 123 is applicable only to stock options granted subsequent to
December 15, 1995, the pro forma effects will not be fully reflected until
fiscal 2000.
In calculating pro forma compensation, the fair value of each stock option grant
and stock purchase right is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for stock option and ESPP grants in fiscal 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Stock Options ESPP
- ---------------------------------------------------------------------------------------------------------
1996 1997 1998 1996 1997 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dividend yield None None None None None None
Expected volatility 55% 55% 55% 55% 55% 55%
Risk free interest rate 6.11% 6.27% 5.33% 6.01% 6.39% 5.93%
Expected lives 3.6 3.6 3.7 .5 .5 .5
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Using the Black-Scholes option-pricing model, the weighted average estimated
fair value of employee stock options granted was $6.78 in fiscal 1996, $10.96 in
fiscal 1997 and $13.54 in fiscal 1998. The weighted average estimated fair value
of purchase rights granted under the ESPP was $6.02 in fiscal 1996, $7.31 in
fiscal 1997 and $9.61 in fiscal 1998.
EMPLOYEE BONUS PLANS The Company has various employee bonus plans. A profit
sharing plan provides for the distribution of a percentage of pre-tax profits to
substantially all of the Company's employees, up to a maximum percentage of
compensation. Another plan awards annual bonuses to the Company's executive
staff based on the achievement of profitability and other specific performance
criteria. The Company also has agreements with certain key technical employees
that provide for additional compensation related to the success of new product
development and achievement of specified profitability criteria. Charges to
expense under these plans were $113 million in fiscal 1996, $126 million in
fiscal 1997 and $111 million in fiscal 1998.
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Applied Materials 59
EMPLOYEE SAVINGS AND RETIREMENT PLAN The Employee Savings and Retirement Plan is
qualified under Section 401(k) of the Internal Revenue Code. The Company
contributes a percentage of the amount of salary deferral contributions made by
each participating employee. Company contributions are invested in the Company's
common stock and become 20 percent vested upon an employee's third year of
service, and vest 20 percent per year of service thereafter until becoming fully
vested upon seven years of service. The Company's matching contributions under
this plan were $15 million in fiscal 1996, $13 million in fiscal 1997 and $18
million in fiscal 1998.
DEFINED BENEFIT PLANS OF FOREIGN SUBSIDIARIES Certain of the Company's foreign
subsidiaries have defined benefit pension plans covering substantially all of
their eligible employees. The benefits under these plans are based on years of
service and final average compensation levels. Funding is limited by the local
statutory requirements of the countries in which the subsidiaries are located.
Expenses under these plans were $7 million, consisting principally of service
cost, for fiscal 1996, 1997 and 1998. At October 25, 1998, the aggregate
accumulated benefit obligation was $28 million, the projected benefit obligation
was $47 million, and the fair value of plan assets was $16 million.
- --------------------------------------------------------------------------------
NOTE 11 INCOME TAXES
The components of income from continuing operations before taxes were as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
- ---------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
U.S. $697,659 $678,049 $383,210
Foreign 224,777 120,872 54,623
- ---------------------------------------------------------------------------------------------
Income from continuing operations before taxes $922,436 $798,921 $437,833
- ---------------------------------------------------------------------------------------------
</TABLE>
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
- ---------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
U.S. $266,693 $261,120 $133,852
Foreign 99,739 60,594 44,267
State 39,122 31,276 20,144
- ---------------------------------------------------------------------------------------------
405,554 352,990 198,263
- ---------------------------------------------------------------------------------------------
Deferred:
U.S. (70,382) (51,939) (34,277)
Foreign (6,289) 1,207 (5,456)
State (6,032) (1,811) (9,667)
- ---------------------------------------------------------------------------------------------
(82,703) (52,543) (49,400)
- ---------------------------------------------------------------------------------------------
Provision for income taxes $322,851 $300,447 $148,863
- ---------------------------------------------------------------------------------------------
</TABLE>
The Company's effective income tax rate was 35 percent for fiscal 1996, 37.6
percent for fiscal 1997 and 34 percent for fiscal 1998. The 37.6 percent
effective income tax rate for fiscal 1997 was higher than the expected rate of
35 percent due to the non-deductible nature of a $59.5 million charge for
acquired in-process research and development. The reduction to a 34 percent
effective income tax rate for fiscal 1998 is attributable to several factors,
including a reduction in state income taxes, U.S. based income tax credits and a
shift in the geographic composition of pre-tax income to entities operating in
countries with lower tax rates.
<PAGE> 33
60 Applied Materials NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes differs from the amount computed by applying the
statutory U.S. federal income tax rate of 35 percent as follows:
<TABLE>
<CAPTION>
1996 1997 1998
- ---------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Tax provision at U.S. statutory rate $322,851 $279,622 $153,242
Acquired in-process research and development -- 20,825 --
Effect of foreign operations taxed at various rates 997 6,633 5,486
State income taxes, net of federal benefit 21,509 19,152 6,810
Research tax credits (3,624) (6,540) (8,141)
FSC benefit (24,266) (17,645) (14,991)
Other 5,384 (1,600) 6,457
- ---------------------------------------------------------------------------------------------
Provision for income taxes $322,851 $300,447 $148,863
- ---------------------------------------------------------------------------------------------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of net
deferred income tax assets were as follows:
<TABLE>
<CAPTION>
1997 1998
- ---------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred income tax assets:
Inventory reserves and basis difference $74,642 $86,296
Warranty and installation reserves 71,103 59,194
Accrued liabilities 145,394 153,923
Restructuring accrual -- 32,370
Other 33,429 6,123
Deferred income tax liabilities:
Depreciation (11,554) (638)
Purchased technology (38,598) (19,159)
Other 2,975 8,456
- ---------------------------------------------------------------------------------
Net deferred income tax assets $277,391 $326,565
- ---------------------------------------------------------------------------------
</TABLE>
U.S. income taxes have not been provided for approximately $44 million of
cumulative undistributed earnings of certain non-U.S. subsidiaries. The Company
intends to reinvest these earnings indefinitely in operations outside of the
United States.
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Applied Materials 61
NOTE 12 INDUSTRY SEGMENT AND FOREIGN OPERATIONS
The Company operates exclusively in the semiconductor wafer fabrication
equipment industry. The Company's selling and support services operations are
its principal revenue-producing activities. For geographical reporting, revenues
are attributed to the geographic location in which the customer is located, and
costs directly and indirectly incurred in generating revenues are similarly
attributed. Corporate assets consist primarily of cash equivalents and
short-term investments. Corporate operating expenses consist primarily of
general and administrative expenses not allocable to specific geographic
regions.
During fiscal 1996, 1997 and 1998, no individual customer accounted for greater
than 10 percent of the Company's net sales.
<TABLE>
<CAPTION>
Income/(loss) Total
Net Sales from Operations Assets
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
1996:
North America* $1,270,359 $ 344,343 $1,566,000
Europe 685,887 113,865 291,223
Japan 1,008,597 288,853 614,805
Korea 567,116 124,866 118,159
Taiwan 406,143 125,312 119,665
Asia-Pacific 206,715 63,780 60,906
Corporate -- (157,468) 867,229
- --------------------------------------------------------------------------------
Consolidated $4,144,817 $903,551 $3,637,987
- --------------------------------------------------------------------------------
1997:
North America* $1,500,926 $454,616 $2,263,706
Europe 600,227 62,814 386,623
Japan 749,706 101,421 621,111
Korea 333,380 77,831 152,114
Taiwan 696,312 214,382 232,295
Asia-Pacific 193,724 27,760 97,279
Corporate -- (247,924) 1,317,638
- --------------------------------------------------------------------------------
Consolidated $4,074,275 $ 690,900 $5,070,766
- --------------------------------------------------------------------------------
1998:
North America* $1,549,337 $377,293 $2,342,926
Europe 645,570 69,845 358,518
Japan 677,737 65,157 469,138
Korea 166,511 26,206 119,944
Taiwan 816,730 254,382 159,346
Asia-Pacific 185,802 40,400 53,200
Corporate -- (444,921) 1,426,620
- --------------------------------------------------------------------------------
Consolidated $4,041,687 $388,362 $4,929,692
- --------------------------------------------------------------------------------
</TABLE>
*Primarily the United States.
<PAGE> 35
62 Applied Materials NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intercompany transfers of products from North America (primarily the United
States) to other regions were $1.8 billion in fiscal 1996, $1.7 billion in
fiscal 1997 and $1.6 billion in fiscal 1998, and from Europe were $122 million
in fiscal 1996, $102 million in fiscal 1997 and $198 million in fiscal 1998.
Transfers and commission arrangements between geographic areas are at prices
sufficient to recover a reasonable profit. At October 25, 1998, net accounts
receivable were $268 million from customers located in North America, $80
million from Europe, $235 million from Japan, $93 million from Taiwan, $54
million from Korea and $34 million from Asia-Pacific.
- --------------------------------------------------------------------------------
NOTE 13 COMMITMENTS AND CONTINGENCIES
The Company leases certain of its facilities and equipment under noncancelable
operating leases and has options to renew most leases, with rentals to be
negotiated. The Company also leases certain office and general operating
facilities in Santa Clara, California, under an agreement that provides for
monthly payments based on the London interbank offering rate (LIBOR) or the
relevant commercial paper (CP) rate. In accordance with this agreement, the
Company must maintain compliance with covenants identical to those contained in
its credit facilities. At the end of these leases, the Company is required to
acquire the properties at their original cost or arrange for these properties to
be acquired by a third party. The Company is contingently liable under 82
percent first-loss clauses for up to approximately $53 million as of October 25,
1998. Management believes that these contingent liabilities will not have a
material adverse effect on the Company's financial condition or results of
operations.
Total rent expense for fiscal 1996, 1997 and 1998 was $66 million, $69 million
and $71 million, respectively. Future minimum lease payments at October 25, 1998
are: $62 million for fiscal 1999; $41 million for fiscal 2000; $31 million for
fiscal 2001; $31 million for fiscal 2002; $33 million for fiscal 2003 and $120
million thereafter.
During fiscal 1998, approximately $488 million of trade notes and accounts
receivable from certain U.S. and Japanese customers were sold, subject to
certain recourse provisions, at a discount to financial institutions. As of
October 25, 1998, $268 million of these sold receivables were outstanding. The
Company does not expect the recourse provisions to have a material effect on its
financial condition or results of operations.
- --------------------------------------------------------------------------------
LEGAL MATTERS
The Company, as plaintiff, filed a patent infringement lawsuit against Varian
Associates, Inc. (Varian), alleging infringement of several of the Company's
patents for physical vapor deposition (PVD) technology. As a result of Novellus'
acquisition of Varian's thin film PVD business unit, this lawsuit has been
amended to include Novellus as a defendant. Varian denied all allegations and
counterclaimed for declaratory judgment of invalidity and unenforceability and
alleged conduct by the Company violative of the antitrust laws. Novellus filed
suit against the Company alleging infringement of three patents for PVD
technology that were formerly owned by Varian. Finally, Varian filed suit
against the Company alleging a broad range of conduct in violation of federal
antitrust laws and state unfair competition and business practice laws.
Discovery has commenced in both cases. No trial dates have been set.
During fiscal 1998, the Company settled all outstanding litigation with ASM
International N.V. (see Note 8 of Notes to Consolidated Financial Statements).
As a result of the acquisition of Orbot, the Company is defending a lawsuit
brought by KLA Instruments Corp. (KLA) against Orbot. KLA alleges that Orbot
infringes a patent for mask and reticle inspection equipment. Limited discovery
has occurred; no trial date has been set.
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Applied Materials 63
In April 1997, the Company initiated separate lawsuits against AST Electronik
GmbH and AST Electronik USA, Inc. (collectively "AST") and AG Associates, Inc.
(AG), alleging infringement of certain patents concerning rapid thermal
processing technology. In October 1997, AST and AG each filed counterclaims
alleging infringement by the Company of patents concerning related technology.
The Company and AST recently resolved their dispute concerning these patents on
mutually acceptable terms and conditions. The Company is continuing its
litigation against AG. Discovery is in process and trial is set for July 1999.
In addition, on August 5, 1998, AG filed a lawsuit in California against the
Company alleging infringement of another patent relating to rapid thermal
processing technology, and, on August 13, 1998, AG filed a lawsuit in Delaware
against the Company alleging infringement of two other patents concerning
related technology. The Company has moved to have the Delaware case transferred
to California. No trial dates have been set.
In November 1997, OKI Electric Industry, Co., Ltd. (OKI) filed suit against the
Company's subsidiary, Applied Materials Japan (AMJ), in Tokyo District Court in
Japan, alleging that AMJ is obligated to indemnify OKI for a portion of the
patent license royalties paid by OKI to Texas Instruments, Inc. Several hearings
have been held, but no trial date has been set.
The Company is subject to various other legal proceedings and claims, either
asserted or unasserted, that arise in the ordinary course of business. Although
the outcome of these claims cannot be predicted with certainty, management does
not believe that any of these legal matters will have a material adverse effect
on the Company's financial condition or results of operations.
- --------------------------------------------------------------------------------
NOTE 14 SUBSEQUENT EVENTS
ACQUISITION On October 12, 1998, the Company announced that it entered into an
agreement to acquire Consilium, Inc. (Consilium), a leading independent supplier
of integrated semiconductor and electronics manufacturing execution systems
software and services, in a stock-for-stock merger. The acquisition was
consummated on December 11, 1998, and will be accounted for as a pooling of
interests. Each share of Consilium's stock was exchanged for 0.165 of a share of
the Company's common stock. The Company expects to issue approximately 2 million
shares of its common stock to complete this transaction. Consilium's historical
financial condition and results of operations are not material in relation to
the Company's historical financial condition and results of operations.
SUBSEQUENT PAYMENT FROM ASM During the first fiscal quarter of 1999, and
subsequent to the original maturity date of the note, the Company received a $20
million payment against its $65 million outstanding note receivable from ASM.
The $65 million note receivable was fully reserved as of the end of fiscal 1998;
accordingly, the $20 million cash receipt will be reported as pre-tax
non-operating income for the first fiscal quarter of 1999. ASM's payment was
made in accordance with a restructuring of ASM's obligations under a November
1997 litigation settlement agreement. Pursuant to the new agreement, ASM agreed
to pay $20 million upon completion of the restructuring, $10 million on November
2, 1999 and $35 million no later than November 2, 2000. The Company will
recognize income related to the remaining balance of the note receivable on a
cash receipts basis going forward. Certain other obligations of ASM were also
modified; however, these modifications are not expected to be material to the
Company's financial condition or results of operations.
<PAGE> 37
64 Applied Materials NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Quarter
----------------------------------------------------- Fiscal
(in thousands, except per share amounts) First Second Third Fourth Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997:
Net sales $835,776 $900,862 $1,057,241 $1,280,396 $4,074,275
Gross margin $371,656 $414,017 $498,896 $616,356 $1,900,925
Income from continuing operations* $29,577 $102,131 $186,631 $180,135 $498,474
Discontinued operations -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
Net income $29,577 $102,131 $186,631 $180,135 $498,474
Earnings per share:
Continuing operations $0.08 $0.27 $0.49 $0.47 $1.32
Discontinued operations -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
Total $0.08 $0.27 $0.49 $0.47 $1.32
- ----------------------------------------------------------------------------------------------------------------
1998:
Net sales $1,307,685 $1,176,316 $884,491 $673,195 $4,041,687
Gross margin $629,441 $554,289 $394,389 $285,037 $1,863,156
Income/(loss) from continuing
operations** $228,893 $141,221 $47,517 $(128,661) $288,970
Discontinued operations -- -- -- (58,068) (58,068)
- ----------------------------------------------------------------------------------------------------------------
Net income/(loss) $228,893 $141,221 $47,517 $(186,729) $230,902
Earnings/(loss) per share:
Continuing operations $0.60 $0.37 $0.13 $(0.35) $0.76
Discontinued operations -- -- -- (0.16) (0.15)
- ----------------------------------------------------------------------------------------------------------------
Total $0.60 $0.37 $0.13 $(0.51) $0.61
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Income from continuing operations includes one-time items, on an after-tax
basis, of: $59,500 unfavorable for the first fiscal quarter, $41,393
favorable for the third fiscal quarter and $7,510 unfavorable for the fourth
fiscal quarter.
** Income from continuing operations includes one-time items, on an after-tax
basis, of: $31,530 favorable for the first fiscal quarter, $23,100
unfavorable for the third fiscal quarter and $155,100 unfavorable for the
fourth fiscal quarter.
<PAGE> 38
66 Applied Materials REPORT OF INDEPENDENT ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF APPLIED MATERIALS, INC.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Applied
Materials, Inc. and its subsidiaries as of October 26, 1997 and October 25, 1998
and the results of their operations and their cash flows for each of the three
years in the period ended October 25, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
San Jose, California
November 17, 1998, except as to Note 14, which is as of December 23, 1998.
- --------------------------------------------------------------------------------
STOCK PRICE HISTORY
<TABLE>
<CAPTION>
Fiscal year 1997 1998
- ---------------------------------------------------------------------------------------
High Low High Low
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First quarter 24 5/32 12 15/16 38 7/16 26 1/8
Second quarter 27 7/32 22 1/16 38 7/8 30 1/4
Third quarter 46 5/16 25 7/16 39 1/2 27 3/16
Fourth quarter 54 33 7/16 35 1/8 22 3/8
- ---------------------------------------------------------------------------------------
</TABLE>
The preceding table sets forth the high and low closing sale prices as reported
on the Nasdaq National Market during the last two years.
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF APPLIED MATERIALS, INC.
<TABLE>
<CAPTION>
LEGAL ENTITY NAME PLACE OF INCORPORATION
--------------------------------------------------------------- ----------------------
<S> <C> <C>
Applied Materials Japan, Inc. Japan
Applied Materials Europe BV (1) Netherlands
Applied Materials International BV Netherlands
Applied Acquisition Subsidiary California
Applied Materials (Holdings) (2) California
Applied Materials Asia-Pacific, Ltd. (3) Delaware
Applied Materials Israel, Ltd. (4) Israel
Opal, Inc. Delaware
AM Japan LLC Delaware
--------------------------------------------------------------- ---------------------
(1) Applied Materials Europe BV owns the following subsidiaries:
Applied Materials GmbH Germany
Applied Materials France SARL France
Applied Materials Ltd. United Kingdom
Applied Materials Ireland Ltd. Ireland
Applied Materials Sweden AB Sweden
Applied Materials Israel Services (1994) Ltd. Israel
Applied Materials Italy Srl. Italy
Applied Materials Belgium S.A. Belgium
--------------------------------------------------------------- ---------------------
(2) Applied Materials (Holdings) owns the following subsidiary:
Applied Implant Technology, Ltd. California
--------------------------------------------------------------- ---------------------
(3) Applied Materials Asia-Pacific, Ltd. owns the following
subsidiaries:
Applied Materials Korea, Ltd. Korea
Applied Materials Taiwan, Ltd. Taiwan
Applied Materials South East Asia Pte., Ltd. (a) Singapore
Applied Materials China, Ltd. (b) Hong Kong
AMAT (Thailand) Limited Thailand
--------------------------------------------------------------- ---------------------
(4) Applied Materials Israel, Ltd. owns the following
subsidiaries:
Integrated Circuit Testing GmbH Germany
Orbot Instruments Pacific, Ltd. Hong Kong
--------------------------------------------------------------- ---------------------
(a) Applied Materials South East Asia Pte., Ltd. owns the
following subsidiary:
Applied Materials (AMSEA) Sdn Bhd Malaysia
--------------------------------------------------------------- ---------------------
(b) Applied Materials China, Ltd. owns the following subsidiary:
Applied Materials China Tianjin Co. Ltd. P.R. China
</TABLE>
50-50 JOINT VENTURE OF APPLIED MATERIALS, INC.
<TABLE>
<CAPTION>
LEGAL ENTITY NAME PLACE OF INCORPORATION
--------------------------------------------------------------- ----------------------
<S> <C> <C>
Applied Komatsu Technology, Inc. Japan
</TABLE>
22
<PAGE> 1
EXHIBIT 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Nos. 2-69114; 2-77987; 2-77988; 2-85545; 2-94205;
33-24530; 33-52072; 33-52076; 33-63847; 33-64285; 333-21367; 333-31289;
333-31291; 333-45007; 333-45011; 333-69193) of Applied Materials, Inc. of our
report dated November 17, 1998, except as to Note 14, which is dated as of
December 23, 1998, appearing on page 66 of the Annual Report to Stockholders
which is incorporated in this Annual Report on Form 10-K. We also consent to the
inclusion of our report on the Financial Statement Schedule, which appears on
page 19 of this Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PricewaterhouseCoopers LLP
San Jose, California
January 20, 1999
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
The undersigned directors and officers of Applied Materials, Inc. (the Company),
a Delaware corporation, hereby constitute and appoint James C. Morgan and Joseph
R. Bronson, and each of them with full power to act without the other, the
undersigned's true and lawful attorney-in-fact, with full power of substitution
and resubstitution, for the undersigned and in the undersigned's name, place and
stead in the undersigned's capacity as an officer and/or director of the
Company, to execute in the name and on behalf of the undersigned an annual
report of the Company on Form 10-K for the fiscal year ended October 25, 1998
(the "Report"), under the Securities and Exchange Act of 1934, as amended, and
to file such Report, with exhibits thereto and other documents in connection
therewith and any and all amendments thereto, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact, and each of them, full power
and authority to do and perform each and every act and thing necessary or
desirable to be done and to take any other action of any type whatsoever in
connection with the foregoing which, in the opinion of such attorney-in-fact,
may be of benefit to, in the best interest of, or legally required of, the
undersigned, it being understood that the documents executed by such
attorney-in-fact on behalf of the undersigned pursuant to this Power of Attorney
shall be in such form and shall contain such terms and conditions as such
attorney-in-fact may approve in such attorney-in-fact's discretion.
IN WITNESS WHEREOF, I have hereunto set my hand this 11th day of
December, 1998.
/s/MICHAEL H. ARMACOST /s/ALFRED J. STEIN
- ------------------------------------ -------------------------------------
Michael H. Armacost Alfred J. Stein
Director Director
/s/DEBORAH A. COLEMAN /s/JAMES C. MORGAN
- ------------------------------------ -------------------------------------
Deborah A. Coleman James C. Morgan
Director Chairman, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/HERBERT M. DWIGHT, JR. /s/DAN MAYDAN
- ------------------------------------ -------------------------------------
Herbert M. Dwight, Jr. Dan Maydan
Director President and Director
/s/PHILIP V. GERDINE /s/JOSEPH R. BRONSON
- ------------------------------------ -------------------------------------
Philip V. Gerdine Joseph R. Bronson
Director Senior Vice President, Office of
the President, Chief Financial
Officer and Chief Administrative
Officer (Principal Financial Officer)
/s/TSUYOSHI KAWANISHI /s/MICHAEL K. O'FARRELL
- ------------------------------------ -------------------------------------
Tsuyoshi Kawanishi Michael K. O'Farrell
Director Vice President, Global Controller and
Chief Accounting Officer
(Principal Accounting Officer)
/s/PAUL R. LOW
- ------------------------------------
Paul R. Low
Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED OCTOBER 25, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-25-1998
<PERIOD-END> OCT-25-1998
<CASH> 575,205
<SECURITIES> 1,188,351
<RECEIVABLES> 765,102
<ALLOWANCES> 630
<INVENTORY> 555,881
<CURRENT-ASSETS> 3,518,955
<PP&E> 1,998,144
<DEPRECIATION> 736,624
<TOTAL-ASSETS> 4,929,692
<CURRENT-LIABILITIES> 1,118,326
<BONDS> 616,572
0
0
<COMMON> 3,679
<OTHER-SE> 3,116,942
<TOTAL-LIABILITY-AND-EQUITY> 4,929,692
<SALES> 4,041,687
<TOTAL-REVENUES> 4,041,687
<CGS> 2,178,531
<TOTAL-COSTS> 2,178,531
<OTHER-EXPENSES> 643,852<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,309
<INCOME-PRETAX> 437,833
<INCOME-TAX> 148,863
<INCOME-CONTINUING> 288,970
<DISCONTINUED> 58,068
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230,902
<EPS-PRIMARY> 0.63<F2>
<EPS-DILUTED> 0.61
<FN>
<F1>ITEM CONSISTS OF RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES.
<F2>ITEM CONSISTS OF BASIC EARNINGS PER SHARE.
</FN>
</TABLE>
