<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1997
Commission File No. 0-12933
LAM RESEARCH CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2634797
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4650 CUSHING PARKWAY, FREMONT, CALIFORNIA 94538
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 659-0200
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
As of September 30, 1997 there were 37,756,139 shares of Registrant's Common
Stock outstanding.
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INDEX
<TABLE>
<CAPTION>
Page
No.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION ...................................... 3
Item 1. Financial Statements (unaudited)............................ 3
Condensed Consolidated Balance Sheets..................... 3
Condensed Consolidated Statements of Operations........... 4
Condensed Consolidated Statements of Cash Flows........... 5
Notes to Condensed Consolidated Financial
Statements.............................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8
Results of Operations..................................... 9
Liquidity and Capital Resources........................... 11
Risk Factors.............................................. 12
PART II. OTHER INFORMATION........................................... 21
Item 1. Legal Proceedings............................................ 21
Item 4. Results of Vote of Stockholders.............................. 22
Item 6. Exhibits and Reports on Form 8-K............................. 22
</TABLE>
2
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ITEM 1. FINANCIAL STATEMENTS
LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
<TABLE>
<CAPTION>
September 30,
1997 June 30,
(Unaudited) 1997
---------- ----------
<S> <C> <C>
Assets
Cash and cash equivalents $ 14,602 $ 140,872
Short-term investments 456,973 54,821
Accounts receivable, net 233,652 232,073
Inventories 259,706 261,738
Prepaid expenses and other assets 25,597 37,707
Deferred income taxes 75,935 75,935
---------- ----------
Total Current Assets 1,066,465 803,146
Equipment and leasehold improvements, net 194,935 196,992
Other assets 45,143 34,911
---------- ----------
Total Assets $1,306,543 $1,035,049
========== ==========
Liabilities and Stockholders' Equity
Trade accounts payable $ 113,752 $ 117,163
Accrued expenses and other
current liabilities 174,603 167,685
Line of credit borrowings -- 35,000
Current portion of long-term debt and
capital lease obligations 19,681 21,127
---------- ----------
Total Current Liabilities 308,036 340,975
Long-term debt and capital lease
obligations, less current portion 353,964 46,592
---------- ----------
Total Liabilities 662,000 387,567
Preferred stock: 5,000 shares authorized;
none outstanding
Common Stock at par value of $.001 per share
Authorized -- 90,000 shares; issued
and outstanding 37,756 shares at September 30,
1997 and 37,334 shares at June 30, 1997 38 37
Additional paid-in capital 370,333 361,101
Retained earnings 274,172 286,344
---------- ----------
Total Stockholders' Equity 644,543 647,482
---------- ----------
$1,306,543 $1,035,049
========== ==========
</TABLE>
- -------------------------
See Notes to condensed consolidated financial statements.
Amounts presented above applicable to prior periods have been restated to
reflect the Company's merger with OnTrak Systems, Inc. ("OnTrak") accounted for
as a pooling of interests.
3
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LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
September 30,
-------------
1997 1996
--------- --------
<S> <C> <C>
Net sales $ 289,392 $292,687
Royalty income 534 6,559
--------- --------
Total revenue 289,926 299,246
Costs and expenses:
Cost of goods sold 176,940 175,546
Research and development 54,177 46,130
Selling, general and
administrative 53,204 51,564
Merger costs 17,685 --
Restructuring charge -- 9,021
--------- --------
Operating income (loss) (12,080) 16,985
Other expense, net 798 125
--------- --------
Income (loss) before income taxes (12,878) 16,860
Income tax expense (benefit) (706) 5,112
--------- --------
Net income (loss) $ (12,172) $ 11,748
========= ========
Net income (loss) per share
Primary $ (0.32) $ 0.31
========= ========
Fully diluted $ (0.32) $ 0.31
========= ========
Number of shares used in
per share calculations
Primary 37,600 37,381
========= ========
Fully diluted 37,600 37,381
========= ========
</TABLE>
See Notes to condensed consolidated financial statements.
Amounts presented above applicable to prior periods have been restated to
reflect the Company's merger with OnTrak accounted for as a pooling of
interests.
4
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LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 12,172) $ 11,748
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 15,148 12,683
Change in certain working capital
accounts 16,070 (1,296)
----------- ---------
Net cash provided by operating
activities 19,046 23,135
Cash flows from investing activities:
Capital expenditures (13,091) (32,345)
Purchase of short-term investments (4,559,637) (162,355)
Sale of short-term investments 4,157,485 123,655
Other (1,232) (753)
----------- ---------
Net cash used in investing activities (416,475) (71,798)
----------- ---------
Cash flows from financing activities:
Proceeds from borrowings under
line of credit -- 35,000
Repayments of borrowings under
line of credit (35,000) (25,000)
Sale of stock, net of issuance
costs 9,233 1,846
Net proceeds from issuance of
long-term debt 301,000 --
Principal payments on long-term debt
and capital lease obligations (4,074) (3,867)
----------- ---------
Net cash provided by financing
activities 271,159 7,979
----------- ---------
Net decrease in cash and
cash equivalents (126,270) (40,684)
Cash and cash equivalents at beginning
of period 140,872 87,096
----------- ---------
Cash and cash equivalents at end of
period $ 14,602 $ 46,412
=========== =========
</TABLE>
See Notes to condensed consolidated financial statements.
Amounts presented above applicable to prior periods have been restated to
reflect the Company's merger with OnTrak accounted for as a pooling of
interests.
5
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LAM RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. The accompanying unaudited condensed
consolidated financial statements should be read in conjunction with the audited
supplemental consolidated financial statements of Lam Research Corporation (the
Company or Lam) for the year ended June 30, 1997, which are included on Form S-3
File number 333-39167.
The prior period amounts have been restated to reflect the Company's
merger with OnTrak, accounted for as a pooling of interests. The results of
operations for the three months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the entire fiscal year ending
June 30, 1998.
NOTE B - MERGER WITH ONTRAK
On August 5, 1997, the stockholders of each Lam and OnTrak approved the
merger of Lam and OnTrak (the "Merger") and the issuance of Lam common Stock,
par value $0.001 per share ("Lam Common Stock") under the Agreement and Plan of
Merger between Lam and OnTrak. The Company issued approximately 6.5 million
shares of Lam Common Stock and options and rights to acquire approximately two
million shares of Lam Common Stock. The transaction has been accounted for as a
pooling of interests and is structured to qualify as a tax-free reorganization.
Costs associated with the Merger were approximately $17.7 million, including
investment advisory fees, legal and accounting fees, financial printing costs
and other merger related costs. Such costs associated with the Merger negatively
impacted the results of operations for the quarter ended September 30, 1997.
6
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NOTE C -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
Sept. 30, June 30,
1997 1997
--------- --------
(in thousands)
<S> <C> <C>
Raw materials $156,263 $136,698
Work-in-process 71,935 93,057
Finished goods 31,508 31,983
-------- --------
$259,706 $261,738
======== ========
</TABLE>
NOTE D -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
Sept. 30, June 30,
1997 1997
--------- ---------
(in thousands)
<S> <C> <C>
Equipment $ 168,265 $ 158,475
Furniture & fixtures 57,975 58,642
Leasehold improvements 104,556 100,222
--------- ---------
330,796 317,339
Accumulated depreciation and
amortization (135,861) (120,347)
--------- ---------
$ 194,935 $ 196,992
========= =========
</TABLE>
NOTE E -- OTHER EXPENSE, NET
The significant components of other expense, net are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1997 1996
------- -------
<S> <C> <C>
Interest expense $ 2,715 $ 1,536
Interest income (3,199) (1,119)
Other 1,282 (292)
------- -------
$ 798 $ 125
======= =======
</TABLE>
NOTE F -- NET INCOME (LOSS) PER SHARE
For the three month period ended September 30, 1997, net loss per share
is calculated using the weighted average number of shares of common stock
outstanding during the period. For the three month period ended September 30,
1996, primary net income per share is calculated using the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period. The common stock equivalents include shares issuable upon the
assumed exercise of stock options reflected under the treasury stock method.
7
<PAGE> 8
In March 1997, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards No. 128 "Earnings Per
Share" ("FAS 128"), which is required to be adopted on December 31, 1997. At
that time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary net income per share (basic earnings per
share), the dilutive effect of stock options will be excluded. The Company's
basic and diluted earnings (loss) per share as calculated according to FAS 128
would be as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------
1997 1996
------ -----
<S> <C> <C>
Basic $(0.32) $0.32
Diluted $(0.32) $0.31
</TABLE>
NOTE G -- APPROVAL OF LAM RESEARCH 1997 INCENTIVE STOCK PLAN
On August 5, 1997 the stockholders of the Company approved the Lam
Research Corporation 1997 Stock Incentive Plan, which provides for the grant of
stock options, restricted stock, deferred stock and performance share awards to
participating officers, directors, employees, consultants and advisors of the
Company and its subsidiaries. Initially, 3,000,000 shares were reserved for
issuance. The number of shares to be issued will automatically be increased each
calendar quarter subject to certain provisions and restrictions, but in no event
shall exceed 5,000,000 shares.
NOTE H -- CONVERTIBLE SUBORDINATED NOTES
During August 1997, Lam completed an offering of $310.0 million of
Convertible Subordinated Notes (the "Notes"). The Notes bear interest at five
percent, mature on September 1, 2002 and are convertible into shares of Lam's
Common Stock at $87.77 per share. Expenses associated with the offering of
approximately $9.0 million were deferred and are included in other assets. Such
deferred costs will be amortized ratably over the term of the Notes.
NOTE I -- LITIGATION
See Part II, item 1 for discussion of litigation.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
With the exception of historical facts, the statements contained in this
discussion are forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended, and are subject to the Safe
Harbor provisions created by that statute. Such forward-looking statements
include, but are not limited to, statements that relate to the Company's future
revenue, royalty income, gross margins, levels of research and development and
operating expenses, management's plans and objectives for future operations of
the Company, the effects of the Company's merger with
8
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OnTrak, and the sufficiency of financial resources to support future operations
and capital expenditures. Such statements are based on current expectations that
involve risks and uncertainties, including those discussed below and under the
heading Risk Factors, that could cause actual results to differ materially from
those expressed. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. This discussion should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes presented thereto on pages
3 to 8 of this Form 10-Q for a full understanding of the Company's financial
position and results of operations for the quarter ended September 30, 1997.
RESULTS OF OPERATIONS
All financial data of the Company included herein reflects the
combination of the historical financial information of both Lam and OnTrak as
described in Note A.
The following table sets forth, for the fiscal periods indicated,
certain income and expense items as a percentage of total revenue:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------
1997 1996
----- -----
<S> <C> <C>
Net sales 99.8% 97.8%
Royalty income 0.2 2.2
----- -----
100.0 100.0
Cost of goods sold 61.0 58.7
Research and development 18.7 15.4
Selling, general
& administrative 18.4 17.2
Merger charge 6.1 --
Restructuring charge -- 3.0
----- -----
Operating income (loss) (4.2) 5.7
Other expense, net 0.2 0.1
----- -----
Income (loss) before taxes (4.4) 5.6
Income tax expense (benefit) (0.2) 1.7
----- -----
Net income (loss) (4.2)% 3.9%
===== =====
</TABLE>
9
<PAGE> 10
Results of Operations
Net sales for the three month period ended September 30, 1997 were
relatively flat compared to the year-ago period. The Company continues to see a
shift in its product sales from single-chamber to multi-chamber products.
Increased sales of the Company's Alliance(TM) cluster system, which utilizes
from one to four Transformer Coupled Plasma(TM) ("TCP") etch chambers each, were
offset by a decrease in stand-alone TCP system sales. Sales of the Company's
chemical mechanical planarization("CMP") cleaning systems were slightly higher
than the year-ago period. Total foreign sales were 52% of total revenue during
the first quarter of fiscal 1998 compared to 67% of total revenue for the
year-ago period. Domestic sales increased approximately 43% while all other
regions, except Asia Pacific which remained virtually flat, experienced
decreases in total revenue. Total spares and service sales were also flat
compared with the year-ago period. Service revenue represents approximately 5%
of total revenue for both the first quarter of fiscal 1998 and 1997. The Company
anticipates that net sales will remain flat for the first half of fiscal 1998
and that revenue may increase during calendar 1998 when the industry returns to
historical growth rates.
Royalty income decreased 92% from the year-ago period. The Company
expects that royalty income will remain relatively flat for the remainder of the
fiscal year. The reduction in royalty rate is due to the extended royalty
agreement with Tokyo Electron Limited which reduced the previous royalty rate
from 5% to 1%, effective January 1, 1997. Fiscal 1998 will be the first full
year with royalty income calculated at the reduced royalty rate of 1%.
The Company's gross margin percentage declined to 39.0% in the first
quarter of fiscal 1998 compared with 41.3% for the year-ago period. The Company
has achieved lower product margins on the Alliance cluster products as compared
to stand-alone systems and the shift in product mix to the cluster tools
negatively impacted overall margin performance. Worldwide spares margins also
declined as compared to the year-ago quarter. Also contributing to the gross
margin percentage decline was the decrease in royalty income.
Research and development ("R&D") expenses for the quarter ended
September 30, 1997 were 17.4% higher than the year-ago period. The Company
believes that in order to remain competitive, it must continue to invest
substantially in R&D. The Company continues to develop its CMP polishing system
and its chemical vapor deposition ("CVD") technologies, to invest in advanced
etch applications, flat panel display technology and to make enhancements to its
Alliance and TCP products, including developing the technology necessary to
incorporate the 300 mm wafer processing capabilities into its products.
Selling, general and administrative ("SG&A") expenses increased 3.2%
during the first quarter of fiscal 1998 compared to the year-ago period. The
Company continues to closely monitor its expenditures and capital spending
relative to revenue levels.
10
<PAGE> 11
During the first quarter of fiscal 1998, the Company recorded costs of
$17.7 million relating to the merger with OnTrak. Such expenses relate to
investment advisory fees, legal and accounting fees, financial printing costs
and other merger-related costs.
During the first quarter of fiscal 1997, the Company restructured its
operations by consolidating its previous business unit structure into a more
centralized functional organization. As a result, the Company recorded a
restructuring charge of $9.0 million for costs related primarily to severance
compensation and consolidation of facilities.
Other expenses increased $0.7 million to $0.8 million during the first
quarter of fiscal 1998 compared to the first quarter of fiscal 1997. During the
first quarter of fiscal 1998, the Company issued $310.0 million of Notes bearing
interest at 5% which are due to mature on September 1, 2002. The Company
anticipates that interest expense will increase as a result of the Notes and
interest income will increase as a result of the additional invested cash
realized from the sale of the Notes.
The Company recorded a tax benefit of 5.5% of its pre-tax loss. A
significant portion of the Merger charge recorded in the first quarter consists
of non tax-deductible expenses resulting in a lower effective tax benefit rate.
Liquidity and Capital Resources
Net cash provided by operating activities was $19.0 million for the
three months ended September 30, 1997, derived primarily by working capital of
$16.1 million. Cash used in investing activities was $416.5 million which was
primarily from the investment of the cash proceeds from the issuance of the
Notes into short-term investments. Capital expenditures for the three month
period ended September 30, 1997 were $13.1 million. The Company received
approximately $301.0 million of net cash from the issuance of the Notes. The
Company incurred $9.0 million of debt issuance costs which will be amortized
over the life of the Notes. During the first quarter of fiscal 1998, the Company
repaid $35.0 million of borrowings under its syndicated line of credit.
As of September 30, 1997, the Company had $471.6 million in cash, cash
equivalents and short-term investments compared with $195.7 million at June 30,
1997. The Company has a total of $210.0 million available under a syndicated
bank line of credit which was due to expire in December 1998 but has been
extended to December 2000. Borrowings under the line of credit bear interest at
the bank's prime rate or 0.55% to 0.75% over London Interbank Offered Rate. The
Company also has a line of credit of $10.0 million with a bank which expires in
November 1997 (the Company does not plan on renewing this line of credit);
borrowings under this line of credit bear interest at the bank's prime rate.
Borrowings under both lines of credit are subject to the Company's compliance
with financial covenants. On or before September 30, 1997, the Company received
amendments or waivers to certain of its financial covenants in connection with
the Merger and the issuance of the Notes.
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<PAGE> 12
The Company's cash, cash equivalents, short-term investments and
available lines of credit at the end of the first quarter of fiscal 1998 are
considered adequate to support current levels of operations for at least the
next twelve months.
RISK FACTORS
FLUCTUATIONS IN QUARTERLY REVENUES
The Company's quarterly revenues have fluctuated in the past and may
fluctuate in the future. The Company's revenues are dependent on many factors,
including but not limited to the economic conditions in the semiconductor
industry, customer capacity requirements, the size and timing of the receipt of
orders from customers, customer cancellations or delays of shipments, the
Company's ability to develop, introduce and market new and enhanced products on
a timely basis, the introduction of new products by its competitors, changes in
average selling prices and product mix, and exchange rate fluctuations, among
others. The Company's expense levels will be based, in part, on expectations of
future revenues. If revenue levels in a particular quarter do not meet
expectations, operating results could be adversely affected. The Company derives
its revenue primarily from the sale of a relatively small number of high-priced
systems. The Company's systems can range in price from approximately $150,000 to
over $3 million per unit. The sale of fewer systems than anticipated in any
quarter may have a substantial negative impact on the operating results for the
quarter. The Company's results of operations for a particular quarter could be
adversely affected if anticipated orders are not received in time to enable
shipment during such quarter, if anticipated shipments are delayed or canceled
by one or more customers, or if shipments are delayed due to procurement
shortages or manufacturing difficulties. The slowdown in the semiconductor
industry and in the construction of new wafer fabrication facilities has
resulted in the Company experiencing a reduction in new orders as well as
rescheduled and canceled orders. There can be no assurance that this slowdown
will not continue. The Company generally realizes a higher margin on sales of
its mature products, such as Rainbow etch systems and CMP cleaning systems, and
on revenue from service and spare parts than on sales of Alliance, CVD, FPD, and
newly released TCP products. Newer products usually have lower margins in the
initial phase of production. The impact of these and other factors on the
Company's revenues and operating results in any future period is difficult for
the Company to forecast. There can be no assurance that these and other factors
will not materially adversely affect the Company's future business and financial
results.
VOLATILITY IN THE SEMICONDUCTOR EQUIPMENT INDUSTRY
The business of the Company depends on the capital equipment
expenditures of semiconductor manufacturers, which in turn depend on the current
and anticipated market demand for integrated circuits and products utilizing
integrated circuits. The semiconductor industry has been cyclical in nature and
historically has experienced periodic downturns. The semiconductor industry has
been experiencing a slowdown of product demand and volatility in product
pricing. This slowdown and volatility have caused the semiconductor industry to
reduce or delay purchases of semiconductor manufacturing equipment and
construction of new fabrication facilities. These conditions have adversely
affected
12
<PAGE> 13
and may continue to adversely affect the Company's aggregate bookings, revenues
and operating results, and no assurance can be given that the Company's
bookings, revenue and operating results will not be adversely affected by future
downturns in the semiconductor industry. Even during periods of reduced
revenues, in order to remain competitive, the Company will be required to
continue to invest in R&D and to maintain extensive ongoing worldwide customer
service and support capability, which could adversely affect its financial
results.
RISKS RELATED TO THE MERGER WITH ONTRAK
Integration of Operations
The realization of the benefits sought from the Merger depends on the
ability of the combined company to effectively utilize the joint product
development capabilities, sales and marketing capabilities, administrative
organizations and facilities of the two companies. There can be no assurance
that these benefits will be achieved or that the activities of the Company will
be integrated in a coordinated, timely and efficient manner. The combination of
the two organizations also will require the dedication of management resources,
which will detract such persons' attention from the day-to-day business of the
Company. There can be no assurance that the integration will be completed
without disrupting the Company's business. The inability of the Company to
effectively utilize resources and to achieve integration in a timely and
coordinated fashion could result in a material adverse effect on the Company's
financial condition, operating results and cash flows. There can be no assurance
that the Company will retain and successfully integrate its key management,
technical, sales and customer support personnel, or that it will obtain any of
the anticipated benefits of the Merger.
Substantial Expenses Resulting from the Merger
Costs associated with the Merger of approximately $17.7 million
negatively impacted results of operations in the fiscal quarter ended September
30, 1997. Such expenses include investment advisory fees, legal and accounting
fees, financial printing costs and other Merger-related costs. Although the
Company does not believe that actual Merger costs will exceed the aforementioned
amount, there can be no assurance that the Company's estimate is correct or that
unanticipated contingencies will not occur that will substantially increase the
costs of combining the operations of the two companies.
Potential Dilutive Effect to Stockholders
Although the Company believes that beneficial synergies will result from
the Merger, there can be no assurance that combining the two companies'
businesses, even in an efficient, effective and timely manner, will result in
combined results of operations and financial condition superior to what would
have been achieved by each company independently, or as to the period of time
required to achieve such result. The issuance of the Company's Common Stock in
connection with the Merger may have the effect of reducing the Company's net
income per share from levels otherwise expected for the Company and could reduce
the market price of the Company's Common Stock unless revenue growth or
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<PAGE> 14
cost savings and other business synergies sufficient to offset the effect of
such issuance can be achieved.
DEPENDENCE ON NEW PRODUCTS AND PROCESSES; RAPID TECHNOLOGICAL CHANGE
Rapid technological changes in semiconductor manufacturing processes
subject the semiconductor manufacturing equipment industry to increased pressure
to maintain technological parity. The Company believes that the future success
of the Company will depend in part upon its ability to develop, manufacture and
successfully introduce new products and product lines with improved capabilities
and to continue to enhance existing products. Due to the risks inherent in
transitioning to new products, the Company will be required to accurately
forecast demand for new products while managing the transition from older
products. If new products have reliability or quality problems, reduced orders,
higher manufacturing costs, delays in acceptance of and payment for new products
and additional service and warranty expenses may result. In the past, the
Company has experienced some delays as well as reliability and quality problems
in connection with product introductions, resulting in some of these
consequences. There can be no assurance that the Company will successfully
develop and manufacture new products, or that new products introduced by the
Company will be accepted in the marketplace. If the Company does not
successfully introduce new products, the Company's results of operations will be
materially adversely affected.
In addition, the Company expects to continue to make significant
investments in R&D. The Company also must manage product transitions
successfully, as introduction of new products could adversely affect sales of
existing products. There can be no assurance that future technologies, processes
or product developments will not render the Company's current product offerings
obsolete or that the Company will be able to develop and introduce new products
or enhancements to existing products which satisfy customer needs in a timely
manner or achieve market acceptance. The failure to do so could adversely affect
the Company's business. Furthermore, if the Company is not successful in the
marketing and selling of advanced processes or equipment to customers with whom
the Company has formed strategic alliances, the results of operations of the
Company could be adversely affected. In addition, in connection with the
development of the Company's new products, the Company will invest in high
levels of preproduction inventory, and the failure to complete development and
commercialization of these new products in a timely manner could result in
inventory obsolescence, which could have an adverse effect on the Company's
financial results.
PRODUCT CONCENTRATION; LACK OF PRODUCT REVENUE DIVERSIFICATION
A substantial percentage of the Company's revenues to date have been
derived from a limited number of products, and such products are expected to
continue to account for a substantial percentage of the Company's revenues in
the near term. Continued market acceptance of the Company's primary products is
therefore critical to the future success of the Company. Any decline in demand
for or failure to achieve continued market acceptance of such products or any
new version of these products, if any, as a result of competition, technological
change, failure of the Company to timely release new versions of these products,
or otherwise, could have a material adverse effect on the business, operating
results, financial condition and cash flows of the Company. During fiscal 1997,
the Company
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<PAGE> 15
experienced a faster than anticipated transition from its single-chamber etch
products to its next generation, multi-chamber etch cluster tools, which
resulted in the need for higher than anticipated reserve provisions for excess
and obsolete manufacturing and spare parts inventories and additional provisions
for installation and warranty costs. These factors, among others, resulted in
the Company reporting a loss for the fiscal year ended June 30, 1997.
DEPENDENCE UPON KEY SUPPLIERS AND KEY DISTRIBUTORS
Certain of the components and subassemblies included in the products of
the Company are obtained from a single supplier or a limited group of suppliers.
The Company's key suppliers include Bullen Ultrasonics, Inc., which supplies
electrodes, Edwards High Vacuum Inc., Lam's supplier of chillers, and Advanced
Energy Industries, Lam's RF generator supplier. Lam purchases in excess of
$500,000 of supplies on a monthly basis from these suppliers. Each of these
suppliers has a one year blanket purchase contract with Lam under which Lam may
issue purchase orders. These contracts may be renewed annually. Each of these
suppliers has sold products to Lam during at least the last four years, and Lam
has no reason to expect that they will not continue to renew these contracts in
the future. Lam believes that alternative sources could be obtained and
qualified to supply these products. Nevertheless, a prolonged inability to
obtain certain components could have an adverse effect on the Company's
operating results and could result in damage to customer relationships.
HIGHLY COMPETITIVE INDUSTRY
The semiconductor processing industry is highly competitive. The Company
has experienced and expects to continue to face substantial competition
throughout the world. A substantial investment is required by semiconductor
manufacturers to install and integrate capital equipment into a semiconductor
production line. The Company believes that as a result, once a semiconductor
manufacturer has selected a particular supplier's capital equipment, the
manufacturer generally relies upon that equipment for the specific production
line application and frequently will attempt to consolidate its other capital
equipment requirements with the same supplier. Accordingly, the Company would
expect to experience difficulty in selling to a given customer if that customer
had initially selected or selects a competitor's capital equipment. The Company
believes that to remain competitive, the Company will require significant
financial resources in order to offer a broad range of products, to maintain
customer service and support centers worldwide, and to invest in product and
process R&D.
The Company intends to continue to invest substantial resources to
increase sales of its systems to Japanese semiconductor manufacturers, who
represent a substantial portion of the worldwide semiconductor market and whose
market is difficult for non-Japanese equipment companies to penetrate. The
Company believes that the semiconductor equipment industry is becoming
increasingly dominated by large manufacturers who have the resources to support
customers on a worldwide basis, and certain of its competitors have
substantially greater financial resources and more extensive engineering,
manufacturing, marketing and customer service and support capabilities. In
addition, there are smaller emerging semiconductor equipment companies that
provide innovative technology that may have performance advantages over systems
offered by the Company.
15
<PAGE> 16
The Company faces significant competitive factors in the etch equipment
market which include etch quality, repeatability, process capability and
flexibility and overall cost of ownership, including reliability, software
automation, throughput, customer support and system price. Although the Company
believes that it competes favorably with respect to each of these factors, the
Company's ability to compete successfully in this market will depend upon its
ability to introduce product enhancements and new products on a timely basis.
There can be no assurance that the Company will continue to compete successfully
in the future. In the etch equipment market, the Company's primary competitors
are Applied Materials, Inc., Tokyo Electron Limited and Hitachi Ltd.
The Company faces significant competitive factors in the CVD equipment
market, including film quality, flow uniformity, contamination control,
temperature control and overall cost of ownership, including throughput, system
reliability, cost of consumables, system price and customer support. In the CVD
equipment market, the principal suppliers of equipment are Applied Materials,
Inc., Canon Sales Co. Inc., Novellus Systems, Inc. and Watkins-Johnson Company.
The CMP polishing system under development by the Company is expected to
face significant competition from multiple current and future competitors.
Companies currently offering polishing systems include Applied Materials, Inc.,
Cybeq Systems, Ebara Corporation, Integrated Process Equipment Corp. ("IPEC"),
SpeedFam Corp., Strasbaugh and Sumitomo Metals Limited. IPEC currently has the
largest installed base of CMP polishers and also offers an integrated CMP
polishing and cleaning system. Lam believes that other companies are developing
polishing systems and are planning to introduce new products to this market
before or during the same time frame as the Company's planned introduction of
its CMP polishing system.
In CMP slurry removal and cleaning applications, as developed by OnTrak,
the Company's principal competitor is Dainippon Screen Manufacturing Co. Ltd.
("Dainippon Screen"). The Company expects that it will face increased
competition from IPEC, which currently offers a slurry removal cleaning system,
and SpeedFam, as well as others as the CMP market continues to develop. In
general cleaning applications the Company competes against Dainippon Screen and
others.
The Company expects its competitors to continue to improve the design
and performance of their current products and processes and to introduce new
products and processes with improved price and performance characteristics. If
the Company's competitors enter into strategic relationships with leading
semiconductor manufacturers covering etch, CMP or CVD products similar to those
sold or being developed by the Company, the Company's ability to sell its
products to those manufacturers could be adversely affected. No assurance can be
given that the Company will continue to compete successfully in the United
States or worldwide.
Present or future competitors may be able to develop products comparable
or superior to those offered by the Company or adapt more quickly to new
technologies or evolving customer requirements. In particular, while the Company
currently is developing additional product enhancements that it believes address
customer requirements, there can be no assurance that the development or
introduction of these additional product enhancements will be successfully
completed on a timely basis or that these product enhancements will achieve
market acceptance. Accordingly, there can be no assurance that the Company will
be able to continue to compete effectively in its markets, that competition will
not intensify or that future competition will not have
16
<PAGE> 17
a material adverse effect on the business, operating results, financial
condition and cash flows of the Company.
INTERNATIONAL OPERATIONS AND EXPANSION
International sales accounted for 57%, 63%, 53%, 52% and 67%,
respectively, of the Company's net revenues in the fiscal years 1997, 1996 and
1995 and the fiscal quarters ended September 30, 1997 and 1996. The Company
anticipates that international sales will continue to account for a significant
portion of net sales. Additionally, the Company intends to continue expansion of
international operations, including expansion of facilities in the Asia Pacific
region. As a result, a significant portion of the Company's sales and operations
will be subject to certain risks, including tariffs and other barriers,
difficulties in staffing and managing foreign subsidiary and branch operations,
difficulties in managing distributors, potentially adverse tax consequences and
the possibility of difficulties in accounts receivable collection.
In addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent in doing business on an
international level, such as unexpected changes in regulatory requirements,
political instability, fluctuations in currency exchange rates, and seasonal
reductions in business activity during summer months in Europe and certain other
parts of the world, and adverse changes in the economic markets in various
regions, especially Asia, any of which could have an adverse impact on the
success of international operations. Sales of products by the Company currently
are denominated principally in United States dollars. Accordingly, any increase
in the value of the United States dollar as compared to currencies in the
Company's principal overseas markets would increase the foreign
currency-denominated cost of the Company's products, which may negatively affect
the Company's sales in those markets. In Japan, the Company's sales are
denominated in the Japanese yen and a weakening of the value of the Japanese yen
as compared to the U.S. dollar could negatively impact operating margins.
Currently, the Company enters into foreign currency forward contracts to
minimize the impact of exchange rate fluctuations on the value of the
yen-denominated assets and liabilities, and the Company will enter into such
hedging transactions in the future. In addition, effective patent, copyright,
trademark and trade secret protection may be limited or unavailable under the
laws of certain foreign jurisdictions. It is also possible that the Company's
Korean manufacturing facility may experience difficulties in management,
procurement, production and staffing. There can be no assurance that one or more
of such factors will not have a material adverse effect on the Company's
international operations and, consequently, on the business, operating results,
financial condition and cash flows of the Company.
INTELLECTUAL PROPERTY MATTERS
From time to time, the Company has received notices from third parties
alleging infringement of such parties' patent rights by the Company's products.
In such cases, it is the policy of the Company to defend against the claims or
negotiate licenses on commercially reasonable terms where considered
appropriate. However, no assurance can be given that the Company will be able to
negotiate necessary licenses on commercially reasonable terms, or at all, or
that any litigation resulting from such claims would not have a material adverse
effect on the Company's business and financial results.
17
<PAGE> 18
In October 1993, Varian Associates, Inc. ("Varian") brought suit against
the Company in the United States District Court for the Northern District of
California, seeking monetary damages and injunctive relief based on the
Company's alleged infringement of certain patents held by Varian. The lawsuit is
in the late stages of discovery and has been reassigned to a new judge. The
trial date has been set for March 1998. The Company has asserted defenses of
invalidity and unenforceability of the patents that are the subject of the
lawsuit, as well as noninfringement of such patents by the Company's products.
While litigation is subject to inherent uncertainties and no assurance can be
given that Lam will prevail in such litigation or will obtain a license under
such patents on commercially reasonable terms, or at all, if such patents are
held valid and infringed by the Company's products, the Company believes that
the Varian lawsuit will not have a material adverse effect on the Company's
operating results or the Company's financial position.
The Company's success depends in part on its proprietary technology.
While the Company attempts to protect its proprietary technology through
patents, copyrights and trade secret protection, it believes that the success of
the Company will depend on more technological expertise, continuing the
development of new systems, market penetration and growth of its installed base
and the ability to provide comprehensive support and service to customers. There
can be no assurance that the Company will be able to protect its technology or
that competitors will not be able to develop similar technology independently.
The Company currently has a number of United States and foreign patents and
patent applications. There can be no assurance that any patents issued to the
Company will not be challenged, invalidated or circumvented or that the rights
granted thereunder will provide competitive advantages to the Company.
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of governmental regulations related
to the discharge or disposal of toxic, volatile, or otherwise hazardous
chemicals used in the manufacturing process. The Company believes that it is in
general compliance with these regulations and that it has obtained (or otherwise
addressed) all necessary environmental permits to conduct its business, which
permits generally relate to the disposal of hazardous wastes. Nevertheless, the
failure to comply with present or future regulations could result in fines being
imposed on the Company, suspension of production or cessation of operations.
Such regulations could require the Company to acquire significant equipment or
to incur substantial other expenses to comply with environmental regulations.
Any failure by the Company to control the use of, or adequately restrict the
discharge or disposal of, hazardous substances could subject the Company to
future liabilities.
DEPENDENCE ON KEY PERSONNEL AND DIFFICULTY OF IDENTIFYING AND HIRING CERTAIN
PERSONNEL
The performance of the Company is substantially dependent on the
performance of its executive officers and key employees. The loss of the
services of any of the executive officers or other key employees of the Company
could have a material adverse effect on the business, operating results,
financial condition and cash flows of the Company.
The future success of the Company also depends on its continuing ability
to identify, hire, train and retain other highly qualified technical and
managerial personnel. Competition for such personnel is
18
<PAGE> 19
intense, and the Company has experienced difficulty in identifying and hiring
qualified engineering personnel. There can be no assurance that the Company will
be able to attract, assimilate or retain highly qualified technical and
managerial personnel in the future. The inability to attract and retain the
necessary technical and managerial personnel could have a material adverse
effect on the Company's business, operating results, financial condition, and
cash flows.
MANAGEMENT TRANSITION
In recent years, the Company has experienced expansion of its operations
that has placed significant demands on its respective administrative,
operational and financial resources, the demands of which are expected to
intensify as a result of the Merger. James W. Bagley, the Chairman and Chief
Executive Officer of OnTrak, became the Chief Executive Officer of Lam on August
6, 1997. In addition, Lam hired a new Chief Financial Officer, Mercedes Johnson,
in April 1997 and a new Chief Operating Officer, Stephen G. Newberry, in August
1997. There can be no assurance that such management transitions can be
accomplished in an efficient manner without business disruption.
MANAGEMENT OF POTENTIAL GROWTH; INTEGRATION OF POTENTIAL ACQUISITIONS
To manage future growth, if any, management of the Company will face
significant challenges in improving financial and management controls,
management processes, business and management information systems and procedures
on a timely basis and expanding, training and managing its work force. There can
be no assurance that the Company will be able to perform such actions
successfully. In the future, the Company may make additional acquisitions of
complementary companies, products or technologies. Managing an acquired business
entails numerous operational and financial risks, including difficulties in
assimilating acquired operations and new personnel, diversion of management's
attention to other business concerns, amortization of acquired intangible assets
and potential loss of key employees or customers of acquired operations. The
Company's success will depend, to a significant extent, on the ability of its
executive officers and other members of senior management to respond to these
challenges effectively. There can be no assurance that the Company will be able
to effectively achieve and manage any such growth, or that its management,
personnel or systems will be adequate to support the Company's operations. Any
such inabilities or inadequacies would have a material adverse effect on the
Company's business, operating results, financial condition and cash flows.
An important element of the Company's management strategy is to review
acquisition prospects that would complement the Company's existing products,
augment its market coverage and distribution ability or enhance its
technological capabilities. While the Company has no current agreements in place
with respect to any new acquisitions, the Company may acquire additional
businesses, products or technologies in the future. Future acquisitions by the
Company could result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities and amortization expense related
to goodwill and other intangible assets, and other changes which could
materially adversely affect the Company's business, financial condition and
results of operations and/or the price of Lam Common Stock.
19
<PAGE> 20
POTENTIAL VOLATILITY OF COMMON STOCK PRICE
The market price for Lam Common Stock has been volatile. The market
price of Lam Common Stock could be subject to significant fluctuations in
response to variations in quarterly operating results, shortfalls in revenues or
earnings from levels expected by securities analysts and other factors such as
announcements of technological innovations or new products by the Company or by
the Company's competitors, government regulations, developments in patent or
other proprietary rights. In addition, the stock market has in recent years
experienced significant price fluctuations. These fluctuations often have been
unrelated to the operating performance of the specific companies whose stocks
are traded. Broad market fluctuations, as well as economic conditions generally
in the semiconductor industry, may adversely affect the market price of Lam
Common Stock.
POTENTIAL ANTI-TAKEOVER EFFECTS OF RIGHTS PLAN AND BYLAWS
On January 23, 1997, the Company adopted a Rights Plan (the "Rights
Plan") in which rights were distributed as a dividend at the rate of one right
for each share of Common Stock, par value $0.001 per share, of the Company held
by stockholders of record as of the close of business on January 31, 1997 and
thereafter. In connection with the adoption of the Rights Plan, the Board of
Directors also adopted a number of amendments to the Company's Bylaws, including
amendments requiring advance notice of stockholder nominations of directors and
stockholder proposals.
The Rights Plan may have certain anti-takeover effects. The Rights Plan
will cause substantial dilution to a person or group that attempts to acquire
the Company in certain circumstances. Accordingly, the existence of the Rights
Plan and the issuance of the related rights may deter certain acquirers from
making takeover proposals or tender offers. The Rights Plan, however, is not
intended to prevent a takeover but rather is designed to enhance the ability of
the Board of Directors to negotiate with a potential acquirer on behalf of all
of the stockholders.
In addition, the Certificate of Incorporation authorizes 5,000,000
shares of undesignated preferred stock. The Board of Directors of the Company,
without further stockholder approval, may issue this preferred stock with such
terms as the Board of Directors may determine, which could have the effect of
delaying or preventing a change in control of the Company. The issuance of
preferred stock could also adversely affect the voting power of the holders of
Common Stock, causing the loss of voting control. The Company's Bylaws and
indemnity agreements with officers and directors provide that the Company will
indemnify officers and directors against losses that they may incur in legal
proceedings resulting from their service to the Company. Moreover, Section 203
of the Delaware General Corporation Law restricts certain business combinations
with "interested stockholders" as defined by that statute.
SIGNIFICANT LEVERAGE; DEBT SERVICE
In connection with the issuance of the Notes, the Company incurred $310
million of indebtedness which resulted in a ratio of long-term debt to total
capitalization at September 30, 1997 of approximately 37%. As a result of this
additional indebtedness, the Company's principal and interest obligations will
increase substantially. The degree to which the
20
<PAGE> 21
Company is leveraged could materially and adversely affect the Company's ability
to obtain financing for working capital, acquisitions or other purposes and
could make it more vulnerable to industry downturns and competitive pressures.
The Company's ability to meet its debt service obligations will be dependent
upon the Company's future performance.
The Company will require substantial amounts of cash to fund scheduled
payments of principal and interest on its outstanding indebtedness, including
the Notes, future capital expenditures and any increased working capital
requirements. If the Company is unable to meet its cash requirements out of cash
flows from operations and its available borrowings, there can be no assurance
that it will be able to obtain alternative financing or that it will be
permitted to do so under the terms of its existing financing arrangements. In
the absence of such financing, the Company's ability to respond to changing
business and economic conditions, to make future acquisitions, to absorb adverse
operating results or to fund capital expenditures or increased working capital
requirements may be adversely affected. If the Company does not generate
sufficient increases in cash flows from operations to repay the Notes at
maturity, it could attempt to refinance the Notes; however, no assurance can be
given that such a refinancing would be available on terms acceptable to the
Company, if at all. Any failure by the Company to satisfy its obligations with
respect to the Notes at maturity (with respect to payments of principal) or
prior thereto (with respect to payments of interest or required repurchases)
would constitute a default under the Indenture and could cause a default under
agreements governing other indebtedness, if any, of the Company.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In October 1993, Varian brought suit against the Company in the United
States District Court, Northern District of California, seeking monetary damages
and injunctive relief based on the Company's alleged infringement of certain
patents held by Varian. The lawsuit is in the late stages of discovery and was
reassigned a new judge. A trial date has been set for March 1998. The Company
has asserted defenses of invalidity and unenforceability of the patents that are
the subject of the lawsuit, as well as noninfringement of such patents by the
Company's products. While litigation is subject to inherent uncertainties and no
assurance can be given that the Company will prevail in such litigation or will
obtain a license under such patents on commercially reasonable terms or at all
if such patents are held valid and infringed by the Company's products, the
Company believes that the Varian lawsuit will not have a material adverse effect
on the Company's consolidated financial statements.
In addition, the Company is from time to time notified by various
parties that it may be in violation of certain patents. In such cases, it is the
Company's intention to seek negotiated licenses where it is considered
appropriate. The outcome of these matters will not, in management's opinion,
have a material impact on the Company's consolidated financial position,
operating results or cash flows.
21
<PAGE> 22
ITEM 4. Results of Vote of Stockholders
The Special Meeting of Stockholders of Lam Research Corporation was held
at the principal office of the Company at 4650 Cushing Parkway, Fremont,
California 94538 on August 5, 1997.
Out of 30,886,648 shares of Common Stock entitled to vote at the meeting,
25,677,141 shares were present in person or by proxy.
The results of voting on the following items were as set forth below:
(a) Approval of the issuance of shares of Lam Common Stock in connection
with Lam's acquisition of OnTrak.
IN FAVOR OPPOSED WITHHELD BROKER NON-VOTES
-------- ------- -------- ----------------
20,537,655 109,381 69,573 4,960,532
This proposal was approved by the stockholders.
(b) Approval of the adoption of the Lam Research Corporation 1997 Stock
Incentive Plan.
IN FAVOR OPPOSED WITHHELD BROKER NON-VOTES
-------- ------- -------- ----------------
19,267,862 6,288,911 120,368 None
This proposal was approved by the stockholders.
(c) Approval of the amendment of the Company's Certificate of Incorporation
to eliminate stockholder action by written consent.
IN FAVOR OPPOSED WITHHELD BROKER NON-VOTES
-------- ------- -------- ----------------
7,894,069 12,896,909 190,147 4,696,016
This proposal was not approved by the stockholders.
(d) Approval of the amendment of the Company's Certificate of Incorporation
to eliminate cumulative voting in the election of the members of the
Company's Board of Directors.
IN FAVOR OPPOSED WITHHELD BROKER NON-VOTES
-------- ------- -------- ----------------
9,537,394 11,217,996 228,935 4,692,816
This proposal was not approved by the stockholders.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.44 Consent and Waiver Agreement among Lam Research
Corporation, IBJTC Leasing Corporation - BSC and
Participants dated October 7, 1997.
Exhibit 10.45 Third Amendment to Credit Agreement among Lam
Research Corporation, ABN-AMRO Bank, as agent,
and a syndicate of lenders, dated October 7, 1997.
Exhibit 11.1 Statement Re: Computation of Earnings (Loss)
Per Share
Exhibit 27 Financial Data Schedule
22
<PAGE> 23
(b) Reports on Form 8-K
The Company filed a Form 8-K on August 15, 1997, reporting that on
August 5, 1997, the stockholders of each Lam and OnTrak approved the merger of
Lam and OnTrak and the issuance of Lam Common Stock under the Agreement and Plan
of Merger with OnTrak. This Form 8-K was amended, on a Form 8K/A, on October 3,
1997 to include the financial statements of OnTrak.
The Company filed a Form 8-K on September 2, 1997, announcing that on
August 19, 1997, it had sold $310 million of 5% convertible subordinated notes
due 2002 in an offering within the U.S. to qualified institutional buyers in
accordance with Rule 144A and outside the U.S. to non-U.S. persons. The notes
are convertible into the common stock of the Company. The offering closed on
August 26, 1997.
The Company filed a Form 8-K on September 9, 1997, reporting that on
August 19, 1997, pursuant to a written amendment, Lam and ChaseMellon
Shareholder Services, LLC. modified certain terms of the Rights Agreement dated
January 30, 1997.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements 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.
Date: November 14, 1997
LAM RESEARCH CORPORATION
By: /s/ Mercedes Johnson
---------------------------------
Mercedes Johnson, Vice President,
Finance & Chief Financial Officer
24
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
Exhibit 10.44 Consent and Waiver Agreement among Lam Research
Corporation, IBJTC Leasing Corporation - BSC and
Participants dated October 7, 1997.
Exhibit 10.45 Third Amendment to Credit Agreement among Lam
Research Corporation, ABN-AMRO Bank, as agent,
and a syndicate of lenders, dated October 7, 1997.
Exhibit 11.1 Statement Re: Computation of Earnings (Loss)
Per Share
Exhibit 27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.44
CONSENT AGREEMENT
THIS CONSENT AGREEMENT (this "Consent") is made as of October 7, 1997,
by and among LAM RESEARCH CORPORATION, a Delaware corporation ("Lessee"), IBJTC
LEASING CORPORATION-BSC, a New York Corporation, THE INDUSTRIAL BANK OF JAPAN,
LIMITED, WELLS FARGO BANK, N.A., THE BANK OF NOVA SCOTIA and FLEET NATIONAL BANK
(collectively, "Participants"),
W I T N E S S E T H:
WHEREAS, the parties hereto, along with The Industrial Bank of Japan,
Limited, acting as agent, are also parties to that certain Participation
Agreement dated as of March 27, 1996, and amended as of September 27, 1996 (as
amended, the "Participation Agreement"); and
WHEREAS, Section 10.2 of the Participation Agreement requires Lessee to
comply with all covenants contained in Section 5.02 of the Credit Agreement, and
any amendment to, or waiver of, Section 5.02 of the Credit Agreement requires
the prior written consent of the Required Participants; and
WHEREAS, the parties hereto desire to consent to the amendment to the
Credit Agreement, all as set forth below;
NOW, THEREFORE, in consideration of the mutual agreements herein
contained and other good and valuable consideration, the receipt and adequacy of
which is hereby acknowledged, the parties hereto agree as follows:
1. Definitions. Capitalized terms used herein and not defined herein
shall have the meanings assigned to such terms in Appendix A to the
Participation Agreement.
2. Consent. Each of the Participants hereby consents to the amendment to
the Credit Agreement, as set forth in the form of Third Amendment to Credit
Agreement attached hereto as Exhibit A.
-1-
<PAGE> 2
3. Effect. Except as expressly modified by this Consent, all terms of
the Participation Agreement and the Credit Agreement shall remain unchanged and
in full force and effect.
4. Governing Law. This Consent shall in all respects be governed by and
construed in accordance with the laws of the State of California applicable to
agreements made and to be performed entirely within such state, including all
matters of construction, validity and performance.
5. Counterpart Execution. This Consent may be executed in any number of
counterparts and by each of the parties hereto in separate counterparts, all
such counterparts together constituting but one and the same instrument.
IN WITNESS WHEREOF, each of the parties hereto has caused this Consent
to be duly executed by an officer thereunto duly authorized as of the day and
year first above written.
LAM RESEARCH CORPORATION, as Lessee,
Construction Agent and Guarantor
By /s/ Richard H. Lovgren
-----------------------------------------
Title Vice President and General Counsel
IBJTC LEASING CORPORATION-BSC,
as Lessor and Participation Agent
By /s/ M. Watanabe
-----------------------------------------
Title Senior Vice President
-2-
<PAGE> 3
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
as Tranche A Lender and Tranche B Lender
By /s/ Haruhiko Masuda
-----------------------------------------
Title Deputy General Manager
--------------------------------------
WELLS FARGO BANK, N.A., as Tranche A
Lender and Tranche B Lender
By /s/ Matt Jurgens
-----------------------------------------
Title Assistant Vice President
--------------------------------------
THE BANK OF NOVA SCOTIA, as Tranche A
Lender and Tranche B Lender
By /s/ C. Osborne
-----------------------------------------
Title Relationship Manager
--------------------------------------
FLEET NATIONAL BANK, as Tranche A
Lender and Tranche B Lender
By /s/ M. S. Barclay
-----------------------------------------
Title AVP
--------------------------------------
-3-
<PAGE> 4
EXHIBIT A
See Attached.
<PAGE> 1
EXHIBIT 10.45
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
October 7, 1997, is entered into by and among:
(1) LAM RESEARCH CORPORATION, a Delaware corporation
("Borrower");
(2) Each of the financial institutions currently listed in
Schedule I to the Credit Agreement referred to in Recital A below
(collectively, the "Lenders"); and
(3) ABN AMRO BANK N.V., San Francisco International Branch, as
agent for the Lenders (in such capacity, "Agent").
RECITALS
A. Borrower, the Lenders and Agent are parties to a Credit Agreement
dated as of December 20, 1995, as amended by a First Amendment to Credit
Agreement dated as of January 22, 1997, and as amended by a Second Amendment to
Credit Agreement dated as of March 30, 1997 (as so amended, the "Credit
Agreement").
B. Borrower has requested the Lenders and Agent to amend the Credit
Agreement in certain respects.
C. The Lenders and Agent are willing so to amend the Credit Agreement
upon the terms and subject to the conditions set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Borrower, the Lenders and Agent hereby agree as follows:
1. DEFINITIONS, INTERPRETATION. All capitalized terms defined above and
elsewhere in this Amendment shall be used herein as so defined. Unless otherwise
defined herein, all other
<PAGE> 2
capitalized terms used herein shall have the respective meanings given to those
terms in the Credit Agreement, as amended by this Amendment. The rules of
construction set forth in Section I of the Credit Agreement shall, to the extent
not inconsistent with the terms of this Amendment, apply to this Amendment and
are hereby incorporated by reference.
2. AMENDMENTS TO CREDIT AGREEMENT. Subject to the satisfaction of the
conditions set forth in paragraph 5 below, the Credit Agreement is hereby
amended as follows:
(a) The definition of "EBIT" set forth in Paragraph 1.01 is
amended to read in its entirety as follows:
"EBIT" shall mean, with respect to any Person for any
period, the sum of the following, determined on a consolidated
basis in accordance with GAAP where applicable:
(a) The net income or net loss of such Person and
its Subsidiaries (excluding interest income) for such
period before provision for income taxes;
plus
(b) All Interest Expenses of such Person and its
Subsidiaries accruing during such period (to the extent
deducted in calculating net income or loss in clause (a)
above).
(b) The definition of "Interest Expenses" set forth in Paragraph
1.01 is amended to read in its entirety as follows:
"Interest Expenses" shall mean, with respect to any Person
for any period, the sum, determined on a consolidated basis in
accordance with GAAP, of all interest accruing on the
Indebtedness of such Person during such period (including
interest attributable to Capital Leases).
(c) The definition of "Maturity Date" set forth in Paragraph 1.01
is amended to read in its entirety as follows:
-2-
<PAGE> 3
"Maturity Date" shall mean December 20, 2000.
(d) The definition of "Equity Securities" set forth in Paragraph
1.01 is amended to read in its entirety as follows:
"Equity Securities" of any Person shall mean (a) all
common stock, preferred stock, participations, shares,
partnership interests or other equity interests in and of such
Person (regardless of how designated and whether or not voting or
non-voting) and (b) all warrants, options and other rights to
acquire any of the foregoing, other than convertible debt
securities which have not been converted into common stock,
preferred stock, participations, shares, partnership interests or
other equity interests in any such Person.
(e) The definition of "Subordinated Debt" set forth in Paragraph
1.01 is amended to read in its entirety as follows:
"Subordinated Debt" shall mean, collectively, (i)
Borrower's $310,000,000 Five Percent (5%) Convertible
Subordinated Notes due 2002, and (ii) and any other subordinated
debt permitted by Subparagraph 5.02(a)(xi).
(f) Paragraph 1.01 is amended by adding a new definition of "Debt
Service Coverage Ratio" thereto in alphabetical order to read in its
entirety as follows:
"Debt Service Coverage Ratio" shall mean, with respect to
any Person for any fiscal quarter, the ratio, determined on a
consolidated basis in accordance with GAAP where applicable, of;
(a) The EBIT of such Person and its Subsidiaries
for such quarter;
to
(b) The sum of (i) all Interest Expenses of such
Person and its Subsidiaries for such quarter
-3-
<PAGE> 4
and (ii) one-fourth of all principal payments on
Indebtedness for borrowed money of such Person and its
Subsidiaries scheduled for payment during the four
quarters immediately succeeding the quarter for which EBIT
is calculated pursuant to clause (a).
(g) Paragraph 1.01 is amended by deleting in their entirety the
definitions of "Interest Coverage Ratio", "Leverage Ratio" and "Total
Liabilities" set forth therein.
(h) Subparagraph 5.01(a) is hereby amended by (i) renumbering
clause (vi) as clause (vii); (ii) deleting the "; and" at the end of
clause (v) thereof and replacing it with a ";", and (iii) adding a new
clause (vi) to read in its entirety as follows:
(vi)Contemporaneously with any Investment by Borrower
consisting of any purchase or other acquisition of any
Equity Securities or Indebtedness of any other Person or
any capital contribution to or any other investment in any
other Person having a value in excess of $60,000,000, a
pro forma Compliance Certificate certified by the
president, chief financial officer or treasurer of
Borrower which sets forth the calculation of the financial
ratios and tests provided in Subparagraph 5.02(l) after
giving effect to any such Investment; and
(i) Clause (ii) of subparagraph 5.02(e) is hereby amended to read
in its entirety as follows:
(ii)Other Investments, provided that the aggregate
amount of such other Investments plus the aggregate cost
of assets acquired, mergers consummated and Subsidiaries
established or acquired by Borrower and its Subsidiaries
pursuant to Subparagraph 5.02(d) does not exceed in any
fiscal year $150,000,000 for any amounts paid in cash.
(j) Subparagraph 5.02(l) is hereby amended to read in its
entirety as follows:
-4-
<PAGE> 5
(l) Financial Covenants.
(i) Borrower shall not permit its Quick Ratio during
any period to be less than 1.10 to 1.00.
(ii) Borrower shall not permit its Debt Service
Coverage Ratio during any period set forth below to be
less than the ratio set forth opposite such period below:
January 1, 1998 -
March 31, 1998.....................1.25 to 1.00;
April 1, 1998 -
June 30, 1998......................1.50 to 1.00;
July 1, 1998 -
December 31, 1998..................2.00 to 1.00;
Thereafter............................3.00 to 1.00.
(iii) Borrower shall not permit its Senior Indebtedness
Ratio during any period to be greater than 0.35 to 1.00.
(iv) Borrower shall not permit its Tangible Net Worth
on any date of determination (such date to be referred to
herein as a "determination date") which occurs after
September 30, 1997 (such date to be referred to herein as
the "base date") to be less than the sum on such
determination date of the following:
(A) Ninety percent (90%) of Borrower's and
its Subsidiaries Tangible Net Worth as of September
30, 1997, as set forth in the Financial Statements
of Borrower and its Subsidiaries for the fiscal
quarter ending on September 30,
1997;
(B) Seventy-five percent (75%) of the sum of
Borrower's consolidated quarterly net income
(ignoring any quarterly losses) for each quarter
ending after the base date
-5-
<PAGE> 6
through and including the quarter ending
immediately prior to the determination date;
(C) One hundred percent (100%) of the Net
Proceeds of all Equity Securities issued by
Borrower and its Subsidiaries during the period
commencing on the base date and ending on the
determination date; and
(D) One hundred percent (100%) of the
aggregate decrease in the total liabilities of
Borrower and its Subsidiaries resulting from
conversions of convertible Subordinated
Indebtedness or other liabilities of Borrower and
its Subsidiaries into Equity Securities of Borrower
and its Subsidiaries during the period commencing
on the base date and ending on the determination
date.
(v) Borrower shall generate a net profit of at least
$1.00, determined in accordance with GAAP,for the fiscal quarter
ending December 31, 1997.
(k) Schedule 1.01(a) is amended to read in its entirety as set
forth in Attachment "A" hereto.
3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants to Agent and the Lenders that the following are true and correct on the
date of this Amendment and that, after giving effect to the amendments set forth
in paragraph 2 above, the following will be true and correct on the Effective
Date (as defined below):
(a) The representations and warranties of Borrower set forth in
Paragraph 4.01 of the Credit Agreement and in the other Credit Documents
are true and correct in all material respects;
(b) No Default or Event of Default has occurred and is continuing
(except such Defaults or Events of Default that have been previously
disclosed by Borrower to the Agent); and
-6-
<PAGE> 7
(c) Each of the Credit Documents is in full force and effect.
(Without limiting the scope of the term "Credit Documents," Borrower expressly
acknowledges in making the representations and warranties set forth in this
paragraph 3 that, on and after the date hereof, such term includes this
Amendment.)
4. AMENDMENT FEE. On the Effective Date (as defined below), Borrower
shall pay to the Agent for distribution to the Lenders in accordance with their
respective Proportionate Shares a nonrefundable amendment fee (the "Amendment
Fee") of $105,000.
5. EFFECTIVE DATE. The amendments effected by paragraph 2 above shall
become effective on October 7, 1997 (the "Effective Date"), subject to receipt
by Agent and the Lenders on or prior to the Effective Date of the following,
each in form and substance satisfactory to Agent, the Lenders and their
respective counsel:
(a) This Amendment duly executed by Borrower and the Lenders;
(b) A favorable written opinion of Jan Kang, counsel to Borrower,
as to such matters as Agent may reasonably request;
(c) The Amendment Fee payable to each Lender which has executed
this Amendment on or prior to the Effective Date; and
(d) Such other evidence as Agent or any Lender may reasonably
request to establish the accuracy and completeness of the
representations and warranties and the compliance with the terms and
conditions contained in this Amendment and the other Credit Documents.
6. EFFECT OF THIS AMENDMENT. On and after the Effective Date, each
reference in the Credit Agreement and the other Credit Documents to the Credit
Agreement shall mean the Credit Agreement as amended hereby. Except as
specifically amended above, (a) the Credit Agreement and the other Credit
Documents shall remain in full force and effect and are hereby ratified and
confirmed and (b) the execution, delivery and effectiveness of this Amendment
-7-
<PAGE> 8
shall not, except as expressly provided herein, operate as a waiver of any
right, power, or remedy of the Lenders or Agent, nor constitute a waiver of any
provision of the Credit Agreement or any other Credit Document.
7. MISCELLANEOUS.
(a) Counterparts. This Amendment may be executed in any number of
identical counterparts, any set of which signed by all the parties
hereto shall be deemed to constitute a complete, executed original for
all purposes.
(b) Headings. Headings in this Amendment are for convenience of
reference only and are not part of the substance hereof.
(c) Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of California without
reference to conflicts of law rules.
IN WITNESS WHEREOF, Borrower, Agent and the Lenders executing this
Amendment have caused this Amendment to be executed as of the day and year first
above written.
BORROWER: LAM RESEARCH CORPORATION
By: /s/ Mercedes Johnson
----------------------------------------
Name: Mercedes Johnson
---------------------------------
Title: V.P., CFO
---------------------------------
AGENT: ABN AMRO BANK, N.V., SAN FRANCISCO
INTERNATIONAL BRANCH
By: /s/ Robin S. Yim
----------------------------------------
Name: Robin S. Yim
---------------------------------
Title: Group Vice President
---------------------------------
By: /s/ Candace J. Hsu
----------------------------------------
-8-
<PAGE> 9
Name: Candace J. Hsu
---------------------------------
Title: Corporate Banking Officer
---------------------------------
LENDERS: ABN AMRO BANK, N.V., SAN FRANCISCO
INTERNATIONAL BRANCH
By: /s/ Robin S. Yim
----------------------------------------
Name: Robin S. Yim
---------------------------------
Title: Group Vice President
---------------------------------
By: /s/ Candace J. Hsu
----------------------------------------
Name: Candace J. Hsu
---------------------------------
Title: Corporate Banking Officer
---------------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Kevin Mc Mahon
----------------------------------------
Name: Kevin Mc Mahon
---------------------------------
Title: Managing Director
---------------------------------
BANQUE NATIONALE DE PARIS, SAN
FRANCISCO BRANCH
By: /s/ William J. La Herran
----------------------------------------
Name: William J. La Herran
---------------------------------
Title: Vice President
---------------------------------
By: /s/ Charles H. Day
----------------------------------------
Name: Charles H. Day
---------------------------------
Title: Assistant Vice President
---------------------------------
COMERICA BANK-CALIFORNIA
By: /s/ Scott T. Smith
----------------------------------------
Name: Scott T. Smith
---------------------------------
-9-
<PAGE> 10
Title: Vice President
---------------------------------
WELLS FARGO BANK, N.A.
By: /s/ Matt Jurgens
----------------------------------------
Name: Matt Jurgens
---------------------------------
Title: Assistant Vice President
---------------------------------
By:
----------------------------
Name:
----------------------
Title:
---------------------
BANKBOSTON, N.A.
By: /s/ Joseph L. Massimo
----------------------------------------
Name: Joseph L. Massimo
---------------------------------
Title: Vice President
---------------------------------
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Wade Schlueter
----------------------------------------
Name: Wade Schlueter
---------------------------------
Title: Vice President
---------------------------------
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
SAN FRANCISCO AGENCY
By: /s/ Haruhiko Masuda
----------------------------------------
Name: Haruhiko Masuda
---------------------------------
Title: Deputy General Manager
---------------------------------
-10-
<PAGE> 11
ATTACHMENT A TO THIRD AMENDMENT
SCHEDULE 1.01(A)
PRICING GRID
<TABLE>
<CAPTION>
LEVEL 1 LEVEL 2 LEVEL 3
------- ------- -------
<S> <C> <C> <C>
APPLICABLE MARGINS:
Base Rate Loans 0.00% 0.00% 0.00%
LIBOR Loans 0.55% 0.65% 0.75%
COMMITMENT FEE PERCENTAGE: 0.20% 0.225% 0.25%
- -------------------------
LC USAGE FEE PERCENTAGE:
- ------------------------
Non-Financial Performance
Letters of Credit 0.275%* 0.325%* 0.375%*
Financial Performance Letters
of Credit 0.55%* 0.65%* 0.75%*
</TABLE>
* Does not include LC Issuance Fees payable to Issuing Bank
EXPLANATION
1. The Applicable Margin for each Borrowing and Loan, the Commitment Fee
Percentage, and the LC Usage Fee Percentage will be determined as
provided below and will vary depending upon whether Level 1 pricing,
Level 2 pricing or Level 3 pricing is applicable.
2. From the Closing Date until the date that either Paragraph 3 or
Paragraph 4 below is applicable, Level 1 pricing shall apply.
3. At all times that Paragraph 4 does not apply, commencing on the
fifteenth day following the date Borrower is first required to deliver
the Financial Statements and information under Subparagraphs 5.01(a)(i)
and (iii) of the Credit Agreement, pricing will vary depending upon
Borrower's Senior Indebtedness Ratio as set forth in such Financial
Statements and information:
1.01(a)-1
<PAGE> 12
(a) If the Senior Indebtedness Ratio is less than 0.175, Level 1
pricing will apply.
(b) If the Senior Indebtedness Ratio is equal to or greater than
0.175 but less than or equal to 0.25, Level 2 pricing will apply.
(c) If the Senior Indebtedness Ratio is greater than 0.25, Level 3
pricing will apply.
4. On and after the fifteenth day following the Borrower's failure to
deliver to Agent the Financial Statements and information required under
Subparagraphs 5.01(a)(i) and (iii) of the Credit Agreement within the
time periods set forth therein, and until the fifteenth day following
receipt by Agent of such Financial Statements and information (at which
time Paragraph 3 above will apply), Level 3 pricing will apply.
5. Examples:
(a) The Senior Indebtedness Ratio for the fiscal quarter ending
December 31, 1997 is 0.14. Assuming the Financial Statements and
information are delivered within the time periods required under
the Credit Agreement, commencing March 6, 1998, Level 1 pricing
will apply.
(b) The Senior Indebtedness Ratio for the fiscal quarter ending March
31, 1998 is 0.18. Assuming the Financial Statements and
information are delivered within the time periods set forth in
the Credit Agreement, commencing June 4, 1998, Level 2 pricing
will apply.
1.01(a)-2
<PAGE> 1
EXHIBIT 11.1
LAM RESEARCH CORPORATION
STATEMENT RE: COMPUTATION OF EARNINGS (LOSS) PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
(In thousands except per share data)
-----------------------------------------------
September 30, September 30,
1997 1996
---------------------- -------------------
Fully Fully
Primary Diluted Primary Diluted
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $(12,172) $(12,172) $11,748 $11,748
-------- -------- ------- -------
$(12,172) $(12,172) $11,748 $11,748
======== ======== ======= =======
Average shares outstanding 37,600 37,600 36,525 36,525
Net effect of dilutive
stock options 856 856
-------- -------- ------- -------
37,600 37,600 37,381 37,381
-------- -------- ------- -------
Net income (loss) per share $ (0.32) $ (0.32) $ 0.31 $ 0.31
======== ======== ======= =======
</TABLE>
Amounts presented above applicable to prior periods have been restated to
reflect the Company's merger with OnTrak accounted for as a pooling of
interests.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS, THE CONSOLIDATED BALANCE SHEET AND THE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 14,602
<SECURITIES> 456,973
<RECEIVABLES> 235,985
<ALLOWANCES> 2,333
<INVENTORY> 259,706
<CURRENT-ASSETS> 1,066,465
<PP&E> 330,796
<DEPRECIATION> 135,861
<TOTAL-ASSETS> 1,306,543
<CURRENT-LIABILITIES> 308,036
<BONDS> 310,000
0
0
<COMMON> 38
<OTHER-SE> 644,505
<TOTAL-LIABILITY-AND-EQUITY> 1,306,543
<SALES> 289,392
<TOTAL-REVENUES> 289,926
<CGS> 176,940
<TOTAL-COSTS> 302,006
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,715
<INCOME-PRETAX> (12,878)
<INCOME-TAX> (706)
<INCOME-CONTINUING> (12,172)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,172)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
