<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 26, 1999
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) 572-0200
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 26, 1999 there were 39,441,302 shares of Registrant's Common
Stock outstanding.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
No.
----
<S> <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 .......................... 12
Results of Operations ...................................... 13
Liquidity and Capital Resources ............................ 19
Risk Factors ............................................... 20
Item 3. Quantitative and Qualitative Disclosures about Market
Risk ......................................................... 29
PART II. OTHER INFORMATION ........................................... 29
Item 1. Legal Proceedings ............................................ 29
Item 6. Exhibits and Reports on Form 8-K ............................. 30
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
September 26, June 30,
1999 1999
------------- -----------
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 57,049 $ 37,965
Short-term investments 257,203 273,836
Accounts receivable, net 211,372 170,531
Inventories 191,945 183,716
Prepaid expenses and other assets 20,610 17,177
Deferred income taxes 55,645 55,645
----------- -----------
Total Current Assets 793,824 738,870
Equipment and leasehold improvements, net 97,144 103,337
Restricted cash 60,348 60,348
Other assets 79,140 76,896
----------- -----------
Total Assets $ 1,030,456 $ 979,451
=========== ===========
Liabilities and Stockholders' Equity
Trade accounts payable $ 48,198 $ 51,216
Accrued expenses and other
current liabilities 196,441 172,213
Current portion of long-term debt and
capital lease obligations 22,313 20,566
----------- -----------
Total Current Liabilities 266,952 243,995
Long-term debt and capital lease
obligations, less current portion 327,018 326,500
----------- -----------
Total Liabilities 593,970 570,495
Preferred stock: 5,000 shares authorized;
none outstanding
Common stock at par value of $0.001 per share
Authorized -- 90,000 shares; issued and
outstanding 39,441 shares at September 26,
1999 and 38,845 shares at June 30, 1999 39 39
Additional paid-in capital 394,106 388,946
Treasury stock (5,154) (8,429)
Accumulated other comprehensive loss (6,019) (432)
Retained earnings 53,514 28,832
----------- -----------
Total Stockholders' Equity 436,486 408,956
----------- -----------
$ 1,030,456 $ 979,451
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
September 26, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Total revenue $ 241,582 $ 142,199
Costs and expenses:
Cost of goods sold 140,771 92,043
Research and development 39,264 35,114
Selling, general and administrative 34,500 41,836
---------- ----------
Operating income (loss) 27,047 (26,794)
Other income, net 378 22
---------- ----------
Income (loss) before income taxes 27,425 (26,772)
Income tax expense 2,743 --
---------- ----------
Net income (loss) $ 24,682 $ (26,772)
========== ==========
Net income (loss) per share
Basic $ 0.63 $ (0.70)
========== ==========
Diluted $ 0.58 $ (0.70)
========== ==========
Number of shares used in
per share calculations
Basic 39,084 38,400
========== ==========
Diluted 42,584 38,400
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
September 26, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 24,682 $ (26,772)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 11,354 15,013
Deferred taxes -- (724)
Change in certain working capital
accounts (32,329) (36,915)
----------- -----------
Net cash provided by (used in) operating
activities 3,707 (49,398)
Cash flows from investing activities:
Capital expenditures, net (5,541) (6,268)
Purchase of short-term investments (782,695) (874,693)
Sale/maturities of short-term investments 799,328 1,048,341
Other 1,273 2,613
----------- -----------
Net cash provided by investing activities 12,365 169,993
----------- -----------
Cash flows from financing activities:
Treasury stock repurchase (5,146) (3,937)
Reissuances of treasury stock 8,421 --
Sale of stock, net of issuance costs 5,160 3,709
Principal payments on long-term debt
and capital lease obligations (8,521) (3,030)
Net proceeds from the issuance of long-term debt 8,685 --
Foreign currency translation adjustment (5,587) (1,005)
----------- -----------
Net cash provided by (used in) financing
activities 3,012 (4,263)
----------- -----------
Net increase in cash and cash equivalents 19,084 116,332
Cash and cash equivalents at beginning
of period 37,965 13,509
----------- -----------
Cash and cash equivalents at end of
period $ 57,049 $ 129,841
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
LAM RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 26, 1999
(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
consolidated financial statements of Lam Research Corporation (the "Company" or
"Lam") for the fiscal year ended June 30, 1999, which are included in the Annual
Report on Form 10-K, File Number 0-12933.
Effective fiscal year 2000, the Company will change its reporting period
to a fifty-two/fifty-three week fiscal year. The Company's fiscal year end will
fall on the last Sunday of June each year. The Company's 2000 fiscal year will
end on June 25, 2000. Adoption of the change in fiscal year is not expected to
have a material impact on the Company's consolidated financial statements.
NOTE B -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
------------------------------------------------------------
September 26, June 30,
(in thousands) 1999 1999
------------------------------------------------------------
<S> <C> <C>
Raw materials $138,958 $123,311
Work-in-process 46,967 44,181
Finished goods 6,020 16,224
------------------------------------------------------------
$191,945 $183,716
============================================================
</TABLE>
NOTE C -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
September 26, June 30,
(in thousands) 1999 1999
-----------------------------------------------------------------
<S> <C> <C>
Equipment $ 97,275 $ 93,112
Leasehold improvements 89,735 90,902
Furniture & fixtures 47,861 45,427
-----------------------------------------------------------------
234,871 229,441
Accumulated depreciation and
amortization (137,727) (126,104)
-----------------------------------------------------------------
$ 97,144 $ 103,337
=================================================================
</TABLE>
6
<PAGE> 7
NOTE D -- OTHER INCOME (EXPENSE), NET
The significant components of other income (expense), net are as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------------
(in thousands) Three Months Ended
----------------------------------------------------------
September 26, September 30,
1999 1998
----------------------------------------------------------
<S> <C> <C>
Interest expense $ (4,845) $ (4,871)
Interest income 5,475 5,932
Other (252) (1,039)
----------------------------------------------------------
$ 378 $ 22
==========================================================
</TABLE>
NOTE E -- NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated using the weighted
average number of shares of common stock outstanding during the period. Diluted
net income per share includes the assumed exercise of employee stock options.
The assumed conversion of the convertible subordinated notes to common shares
was excluded from diluted net income (loss) per share because its effect would
have been antidilutive. Options were outstanding during the three month period
ended September 30, 1998 but were excluded from the computation of diluted net
loss per share because the effect in periods with a net (loss) would have been
antidilutive. The shares potentially issuable under the third party put option
transactions have been excluded from the computation of net income per share
because the effect would have been antidilutive. The Company's basic and diluted
net income (loss) per share amounts are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Three Months Ended
- ------------------------------------------------------------------------------------------
September 26, September 30,
(in thousands, except per share data) 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Numerator:
Numerator for basic net income (loss) per share $ 24,682 $ (26,772)
- ------------------------------------------------------------------------------------------
Numerator for diluted net income (loss) per share $ 24,682 $ (26,772)
- ------------------------------------------------------------------------------------------
Denominator:
Basic net income (loss) per share - average shares
outstanding 39,084 38,400
- ------------------------------------------------------------------------------------------
Effect of potential dilutive securities:
Convertible subordinated notes -- --
Employee stock options 3,500 --
- ------------------------------------------------------------------------------------------
Total potential net dilutive common shares 3,500 --
- ------------------------------------------------------------------------------------------
Diluted net income (loss) per share - average shares
outstanding and other potential common shares 42,584 38,400
- ------------------------------------------------------------------------------------------
Basic net income (loss) per share $ 0.63 $ (0.70)
==========================================================================================
Diluted net income (loss) per share $ 0.58 $ (0.70)
==========================================================================================
</TABLE>
7
<PAGE> 8
NOTE F -- COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of tax, are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(in thousands) Three Months Ended
- ----------------------------------------------------------------------------
September 26, September 30,
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $ 24,682 $ (26,772)
Foreign currency translation adjustment (5,587) (1,005)
- ----------------------------------------------------------------------------
Comprehensive income (loss) $ 19,095 $ (27,777)
============================================================================
</TABLE>
Accumulated other comprehensive loss presented on the accompanying
condensed consolidated balance sheets consists of the accumulated foreign
currency translation adjustment.
NOTE G -- RESTRUCTURINGS
During the Company's first fiscal 1997 quarter ended September 30, 1996,
the Company projected and announced that revenues would be lower than previous
quarters due to a projected 20% general market decline. The Company's revenues
during that quarter fell to $299.2 million, a decrease of 24% from the prior
quarter. The Company assessed that market conditions would remain depressed and,
therefore, that its revenues would continue to be adversely affected.
Accordingly, and as announced on August 26, 1996, the Company organizationally
restructured its business units into a more centralized structure and cut its
workforce by approximately 11%.
The Company's quarterly revenue would eventually decline to $233.3
million in the March 1997 quarter, 40% lower than the peak reached in the
quarter ended June 1996. Subsequently, in the latter part of calendar 1997, the
industry rebounded quickly and entered into what eventually became a short-lived
upturn cycle. During the June 1997 quarter, the Company's revenues grew back to
$282.6 million and reached $292.1 million by the December 1997 quarter. However,
the Company's outlook in late January 1998 was that the industry was again
entering into a steep downturn brought on by depressed DRAM pricing and the
Asian financial crisis. The Company therefore announced a further set of
restructuring activities in a news release on February 12, 1998. At that time,
the Company's assessment related to industry conditions was that its revenues
for the March and June 1998 quarters would decline by approximately 20%. The
Company's restructuring plans aligned its cost structure to this level of
revenues by exiting part of its Chemical Vapor Deposition ("CVD") business and
all of its Flat Panel Display ("FPD") business, consolidating its manufacturing
facilities and substantially reducing its remaining infrastructure and
workforce. The Company's actual June 1998 revenues were in line with those
expectations; however, by the mid-June 1998 time-frame the industry conditions
further deteriorated and the outlook for future quarters significantly worsened.
The Company projected revenues to drop to a run rate of approximately $180
million per quarter and determined it needed once more to reduce its cost
structure in line with the projected reductions
8
<PAGE> 9
in revenue. Accordingly, another separate restructuring plan was developed and
announced in June 1998. As a result of the restructurings in fiscal 1998, the
Company reduced its global workforce by approximately 28% and exited the
remainder of its CVD operations.
The Company's revenue outlook in June 1998 was based on the Company's
projection that the worldwide wafer fabrication industry would deteriorate from
a quarterly revenue amount of $4.2 billion to $3.2 billion, or a 25% decline.
The semiconductor equipment market contracted beyond what was
anticipated, to quarterly revenues of $2.6 billion. The Company's shortfall of
revenues during the September 1998 quarter declined in line with the industry as
a whole, and resulted in lower than anticipated revenues, falling to $142.2
million. At that point in time, the Company projected that its quarterly
revenues would remain closer to the $140-$150 million levels for at least the
next several quarters. This necessitated another restructuring plan and further
cost reductions via employee terminations, facilities consolidation and a
contraction of operating activities, all of which resulted in the additional
write-down of plant related assets. This plan was announced and publicly
communicated on November 12, 1998. As a result of the fiscal 1999 restructuring,
the Company reduced further its global workforce by approximately 15%.
Below is a table summarizing restructuring activity relating to the
fiscal 1999 restructuring:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Lease
Severance Payments Abandoned Credit on
and on Vacated Fixed Returned
(in thousands) Benefits Facilities Assets Equipment Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal year 1999 provision $ 16,521 $ 1,125 $ 28,141 $ 7,585 $ 53,372
Cash payments (11,663) (440) -- (258) (12,361)
Non-cash charges -- -- (28,141) (1,959) (30,100)
- -------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $ 4,858 $ 685 $ -- $ 5,368 $ 10,911
Cash payments (831) (171) -- -- (1,002)
- -------------------------------------------------------------------------------------------------------
Balance at September 26, 1999 $ 4,027 $ 514 $ -- $ 5,368 $ 9,909
=======================================================================================================
</TABLE>
Severance and Benefits relates to the salary and fringe benefit expense
for the involuntarily terminated employees representing approximately 15% of the
global workforce. Prior to the date of the financial statements, management,
with the proper level of authority, approved and committed the Company to a plan
of termination and determined the benefits the employees being terminated would
receive. Prior to the financial statement date, the expected termination
benefits were communicated to employees in enough detail that they could
determine their type and amount of benefit. The termination of employees
occurred shortly after the plan of restructuring was finalized.
Lease Payments on Vacated Facilities relates to 24 months of rent and
common area maintenance expense for the vacated facilities. The Company also
estimated, given the then-current real estate market
9
<PAGE> 10
conditions, that it would take approximately 24 months to sub-lease its excess
facilities in Fremont, California.
The Company wrote-off all leasehold improvements for the excess
facilities, computer equipment, furniture and fixtures related to the
involuntarily terminated employees, and other assets deemed to have no future
use as a result of the restructuring.
Credit on Returned Equipment relates to the charge associated with the
requirement by certain of the Company's customers to return their previously
purchased CVD systems and spare parts.
Below is a table summarizing restructuring activity relating to the
fiscal 1998 restructuring:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Lease Excess
Severance Payments Abandoned and Credit on Other
and on Vacated Fixed Obsolete Returned Exit
(in thousands) Benefits Facilities Assets Inventory Equipment Costs Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fiscal year 1998 provision $ 40,317 $ 16,998 $ 47,341 $ 31,933 $ 6,547 $ 5,722 $ 148,858
Cash payments (9,766) (1,518) -- -- -- -- (11,284)
Non-cash charges -- -- (47,341) (31,933) (4,135) (5,722) (89,131)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 30,551 15,480 -- -- 2,412 -- 48,443
Adjustment -- -- -- -- 1,528 -- 1,528
Cash payments (19,777) (3,039) -- -- (2,150) -- (24,966)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 10,774 12,441 -- -- 1,790 -- 25,005
Cash payments (253) (795) -- -- -- -- (1,048)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at September 26, 1999 $ 10,521 $ 11,646 $ -- $ -- $ 1,790 $ -- $ 23,957
================================================================================================================================
</TABLE>
Severance and Benefits relates to the salary and fringe benefit expense
for the involuntarily terminated employees of the CVD and FPD operations which
were exited, the shutdown of the Wilmington, Massachusetts manufacturing
facility, and the employees impacted by the overall across-the-board reduction
of the employee base. Prior to the date of the financial statements, management,
with the proper level of authority, approved and committed the Company to a plan
of termination and determined the benefits the employees being terminated would
receive. Prior to the financial statement date, the expected termination
benefits were communicated to employees in enough detail that they could
determine their type and amount of benefit. The restructuring plans resulted in
the Company reducing its global workforce by approximately 28%. The termination
of employees occurred shortly after the plan of restructuring was finalized.
During fiscal 1998, the Company revised its estimate relating to severance and
benefits and transferred the excess balance of remaining lease payments on
vacated facilities to severance and benefits.
Lease Payments on Vacated Facilities which was included in the
restructuring charge related to remaining rent and common area maintenance on
the closed Wilmington, Massachusetts manufacturing facility. The Company also
estimated, given the then-current real estate market conditions, that it would
take approximately 24 months to sub-lease its excess facilities in Fremont,
California. The Company,
10
<PAGE> 11
therefore, included 24 months of rent and common area maintenance expense
related to excess facilities in its restructuring charge.
The Company wrote-off all fixed assets relating to the operations which
were exited, leasehold improvements for the excess facilities, computer
equipment, furniture and fixtures related to the involuntarily terminated
employees, and other assets deemed to have no future use as a result of the
restructuring.
The inventory write-off which was included in the restructuring charge
related to inventory from the operations which were exited. The inventory
write-off included raw material on hand and inventory purchased under
non-cancelable commitments from suppliers, spare parts, work-in-process and
finished goods related to the products from the exited operations.
Credit on Returned Equipment relates to the charge associated with the
requirement by certain of the Company's customers to return their previously
purchased CVD systems and spare parts. During fiscal 1999, the Company recorded
an adjustment to the restructuring reserve of $1.5 million for the recovery of a
previously written off machine.
Other Exit Costs of $5.7 million relates to the net book value of
licensing and manufacturing agreements related to the restructured operations.
Below is a table summarizing restructuring activity relating to the fiscal
1997 restructuring:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Lease
Severance Payments Abandoned
and on Vacated Fixed
(in thousands) Benefits Facilities Assets Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal year 1997 provision $ 6,170 $ 1,789 $ 1,062 $ 9,021
Cash payments (5,592) (703) -- (6,295)
Non-cash charges -- -- (1,062) (1,062)
- ----------------------------------------------------------------------------------------------
Balance at June 30, 1997 578 1,086 -- 1,664
Adjustment 1,086 (1,086) -- --
Cash payments (406) -- -- (406)
- ----------------------------------------------------------------------------------------------
Balance at June 30, 1998 1,258 -- -- 1,258
Cash charges (409) -- -- (409)
- ----------------------------------------------------------------------------------------------
Balance at June 30, 1999 849 -- -- 849
Cash charges (47) -- -- (47)
- ----------------------------------------------------------------------------------------------
Balance at September 26, 1999 $ 802 $ -- $ -- $ 802
==============================================================================================
</TABLE>
Severance and Benefits relates to the salary and fringe benefit expense
for the involuntarily terminated employees, which represented approximately 11%
of the global workforce. Prior to the date of the financial statements,
management, with the proper level of authority, approved and committed the
Company to a plan of termination and determined the benefits the employees being
terminated would receive. Prior to the financial statement date, the expected
termination benefits were communicated to employees in enough detail that they
could determine their type and amount of benefit. The termination of
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<PAGE> 12
employees occurred shortly after the plan of restructuring was finalized.
Lease Payments on Vacated Facilities relates to remaining rent and
common area maintenance expense for the vacated facilities.
The Company wrote-off all leasehold improvements for the excess
facilities, computer equipment, furniture and fixtures related to the
involuntarily terminated employees, and other assets deemed to have no future
use as a result of the restructuring.
NOTE H -- CHANGE IN FUNCTIONAL CURRENCY
The Company has determined that the functional currency of its European and Asia
Pacific foreign subsidiaries is no longer the U.S. dollar but the individual
subsidiary's local currency. The following are the reasons for the Company's
change in functional currency: the Company's European and Asia Pacific foreign
subsidiaries primarily generate and expend cash in their local currency; their
labor and services are primarily in local currency (workforce is paid in local
currency); their individual assets and liabilities are primarily in the foreign
currency and do not materially impact the Company's cash flows and there is an
active local sales market for the foreign subsidiaries products and services. In
addition, the European community adopted a new Single European Currency, the
Euro, which required implementation of that currency as of January 1, 1999 and
transition through January 1, 2002. All balance sheet accounts are translated at
the current exchange rate, and income statement accounts are translated at an
average rate for the period. The resulting translation adjustments are recorded
as currency translation adjustment, which is a component of accumulated other
comprehensive loss. Previously, some balance sheet accounts were translated at
an historic rate and translation adjustments were made directly to the statement
of operations. The impact of the change in functional currency was not material
to the Company's financial statements.
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 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, 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 our future revenue, product development, demand, acceptance and market
share, competitiveness, royalty income, gross margins, levels of research and
development and operating expenses, our management's plans and objectives for
our current and future operations, the effects of our on-going reorganization
and consolidation of operations and facilities, our ability to complete
reorganizations or consolidations on time or within anticipated costs, and the
sufficiency of financial resources
12
<PAGE> 13
to support future operations and capital expenditures. Such statements are based
on current expectations and are subject to risks, uncertainties, and changes in
condition, significance, value and effect, including those discussed below under
the heading Risk Factors, and other documents we may file from time to time with
the Securities and Exchange Commission, specifically our last filed Annual
Report on Form 10-K for the fiscal year ended June 30, 1999. Such risks,
uncertainties and changes in condition, significance, value and effect could
cause our actual results to differ materially from those expressed herein and in
ways not readily foreseeable. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date hereof and
of information currently and reasonably known. We undertake no obligation to
release any revisions to these forward-looking statements which may be made to
reflect events or circumstances which occur after the date hereof or to reflect
the occurrence or effect of anticipated or unanticipated events. This discussion
should be read in conjunction with the Condensed Consolidated Financial
Statements and Notes presented thereto on pages 3 to 12 of this Form 10-Q for a
full understanding of our financial position and results of operations for the
three month period ended September 26, 1999.
RESULTS OF OPERATIONS
Total Revenue
Our total revenue for the three month period ended September 26, 1999
increased 70% compared to the comparable period of the prior fiscal year as we
experienced increased revenue levels for all of our product lines.
Regional geographic breakdown of our revenue is as follows:
<TABLE>
<CAPTION>
Three months ended
--------------------------------------------
September 26, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
North America 40% 58%
Europe 18% 21%
Asia Pacific 28% 15%
Japan 14% 6%
</TABLE>
We are currently entering an upturn in the global semiconductor
equipment industry brought on by the increased profitability of semiconductor
manufacturers. We anticipate increased demand for our systems, as semiconductor
manufacturers increase capacity in their most advanced lines, and we expect our
net revenues to increase sequentially for at least the next quarter. During
calendar 1998, the global semiconductor industry experienced a slowdown. By
contrast, the slowdown in equipment demand had been brought on by depressed DRAM
pricing, production overcapacity as well as uncertainty in the worldwide
financial markets.
Gross Margin
During the first quarter of fiscal 2000, our gross margin percentage
increased to 41.7% from 35.3% during the first quarter of fiscal 1999. The
increase in our gross margin percentage is due in
13
<PAGE> 14
large part to cost reductions and economies of scale. We anticipate that our
gross margins will continue to improve over the next quarter.
Research and Development
Research and development ("R&D") expenses for the three month period
ended September 26, 1999 increased by 11.8% compared with the comparable
year-ago period. The increase in R&D expenses is due to the Company's continued
investments in strategic R&D programs and initiatives in etch, CMP and post-CMP
wafer cleaning products.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses decreased by 17.5%
for the first three month period of fiscal 2000 when compared to the year-ago
period. The decrease in SG&A expenses is largely the result of our
restructurings in both fiscal 1998 and 1999 and our continued focus on improving
efficiencies.
Restructuring Charge
Our overall outlook in late January 1998 was that the industry had
entered into a steep downturn brought on by depressed DRAM pricing and the Asian
financial crisis. We therefore announced a set of restructuring activities in a
news release on February 12, 1998. At that time, our assessment related to
industry conditions was that our revenues for the March and June 1998 quarters
would decline by approximately 20%. Our restructuring plans aligned our cost
structure to a lower level of revenues by exiting part of our CVD business and
our FPD business, consolidating our manufacturing facilities and substantially
reducing our remaining infrastructure and workforce. Our actual June 1998
revenues were in line with those expectations; however, by the mid-June 1998
time-frame the industry conditions further deteriorated and the outlook for
future quarters significantly worsened. We projected revenues to decrease to a
run-rate of approximately $180 million per quarter and determined that, once
more, reductions of our cost structure were required to align with the projected
reductions in revenue. Accordingly, another separate restructuring plan was
developed and announced in June 1998. During fiscal 1998, we incurred a total
restructuring charge of $148.9 million relating to severance and benefits, lease
payments on vacated facilities, the write-off of fixed assets, excess and
obsolete inventory, returned equipment credits and other exit costs. As a result
of the fiscal 1998 restructurings, we reduced our global workforce by
approximately 28%. At September 26, 1999, a total of $24.0 million of
restructuring-related accruals remained on our balance sheet, of which $10.5
million, $11.6 million and $1.8 million, respectively, relates to future
severance and benefit costs, lease payments, and returned equipment credits.
There will be further charges against the restructuring reserves in fiscal 2000,
as we complete the restructuring programs.
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<PAGE> 15
Below is a table summarizing restructuring activity relating to the fiscal
1998 restructurings:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Lease Excess
Severance Payments Abandoned and Credit on Other
and on Vacated Fixed Obsolete Returned Exit
(in thousands) Benefits Facilities Assets Inventory Equipment Costs Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fiscal year 1998 provision $ 40,317 $ 16,998 $ 47,341 $ 31,933 $ 6,547 $ 5,722 $ 148,858
Cash payments (9,766) (1,518) -- -- -- -- (11,284)
Non-cash charges -- -- (47,341) (31,933) (4,135) (5,722) (89,131)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 30,551 15,480 -- -- 2,412 -- 48,443
Adjustment -- -- -- -- 1,528 -- 1,528
Cash payments (19,777) (3,039) -- -- (2,150) -- (24,966)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 10,774 12,441 -- -- 1,790 -- 25,005
Cash payments (253) (795) -- -- -- -- (1,048)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at September 26, 1999 $ 10,521 $ 11,646 $ -- $ -- $ 1,790 $ -- $ 23,957
==============================================================================================================================
</TABLE>
During the quarter ended September 30, 1998, the semiconductor equipment
market contracted beyond the anticipated $3.2 billion revenue level to $2.6
billion, according to Dataquest. Our shortfall of revenues during the September
1998 quarter was in line with the industry as a whole, and resulted in our
revenues falling to $142.2 million for the quarter ended September 30, 1998. At
that point in time, we projected that our quarterly revenues would remain closer
to the $140-$150 million levels for at least the next several quarters. This
necessitated another restructuring plan and further cost reductions through
employee terminations, facilities consolidation and a contraction of operating
activities, and the write-off of vacated plant related assets. This plan was
announced and publicly communicated on November 12, 1998. During the second
quarter of fiscal 1999, we recorded a restructuring charge of $53.4 million,
relating to severance compensation and benefits for involuntarily terminated
employees worldwide (representing approximately 15% of the global workforce),
lease payments on abandoned facilities, the write-off of related leasehold
improvements and fixed assets and returned equipment credits issued to certain
customers. During fiscal 1999, we recorded an adjustment to the restructuring
reserve of $1.5 million for the recovery of a previously written-off machine. At
September 26, 1999, $9.9 million of this charge remains accrued on our
consolidated balance sheet to cover continuing obligations. There will be
further charges against this restructuring reserve in fiscal 2000, as we
complete the restructuring program.
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<PAGE> 16
Below is a table summarizing restructuring activity relating to the
fiscal 1999 restructuring:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Lease
Severance Payments Abandoned Credit on
and on Vacated Fixed Returned
(in thousands) Benefits Facilities Assets Equipment Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal year 1999 provision $ 16,521 $ 1,125 $ 28,141 $ 7,585 $ 53,372
Cash payments (11,663) (440) -- (258) (12,361)
Non-cash charges -- -- (28,141) (1,959) (30,100)
- -------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $ 4,858 $ 685 $ -- $ 5,368 $ 10,911
Cash payments (831) (171) -- -- (1,002)
- -------------------------------------------------------------------------------------------------------
Balance at September 26, 1999 $ 4,027 $ 514 $ -- $ 5,368 $ 9,909
=======================================================================================================
</TABLE>
We have carried-out, and continue to carry-out, our restructuring
activities according to our original plan and timeline and we believe that the
anticipated cost reductions did not vary materially from our original
expectations and plan. We intend to operate at levels of spending that are
consistent with our ability to generate revenues, therefore our spending levels
may increase or decrease depending upon our assessment of our current needs. We
do not believe that our decision to exit the CVD and FPD business will have a
material impact on our ability to generate future revenue growth.
Tax Expense
The estimated effective tax rate for the fiscal 2000 period is 10% due
primarily to the benefit of net operating losses and research tax credits
carried over from prior periods.
Transition to Single European Currency
During fiscal 1999, we established a team to address issues raised by
the introduction of the Single European Currency ("Euro") for initial
implementation as of January 1, 1999, and through the transition period to
January 1, 2002. We met all related legal requirements by January 1, 1999, and
we expect to meet all legal requirements through the transition period. We do
not expect the cost of any related system modifications to be material and do
not currently expect that the introduction and use of the Euro will materially
affect our foreign exchange and hedging activities, or will result in any
material increase in transaction costs. We will continue to evaluate the impact
over time of the introduction of the Euro; however, based on currently available
information our management does not believe that the introduction of the Euro
has or will have a material adverse impact on our financial condition or results
of our operations.
Year 2000 Issues
We rely heavily on our existing application software and operating
systems. The Year 2000 compliance issue (in which systems do not properly
recognize date-sensitive information when the year changes from 1999 to 2000)
creates risks for us: if internal data management, accounting and/or
manufacturing or operational software and systems do
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<PAGE> 17
not adequately or accurately process or manage day or date information beyond
the year 1999, there could be an adverse impact on our operations. To address
the issue, we assembled in fiscal 1999 a task force to review and assess
internal software, data management, accounting, and manufacturing and
operational systems to ensure that they do not malfunction as a result of the
Year 2000 date transition. The review and corrective measures are proceeding in
parallel. These reviews and corrective measures are intended to encompass all
significant categories of internal systems that we use, including data
management, accounting, manufacturing, sales, human resources and operational
software and systems. We are also working with our significant suppliers of
products and systems to ensure that the products and systems we are supplied,
and the products we supply to our customers, are Year 2000-compliant.
We have identified all critical systems necessary to our internal system
operations and have asked suppliers to provide assurances that such systems are
Year 2000-compliant, or to identify replacement or upgrade systems. In many
instances, we have developed upgrades internally which will assure Year 2000
compliance of these systems. With respect to Year 2000 compliance of our
suppliers' systems, we are in the process of evaluating and assessing the
adequacy of responses from our various suppliers, and requesting further
responses and assurances where appropriate. This process is largely completed
and is expected to be fully completed by the end of calendar 1999.
Our next-generation enterprise resource planning and information system
will replace many of the system operations currently being performed by existing
internal system software. Implementation of this next-generation system is now
scheduled for completion during the first half of calendar 2000, and we have
received assurances that it will be Year 2000-compliant. Our existing internal
system encompassing core manufacturing, service, sales, inventory and warranty
operations, which will be replaced by the next-generation system, is currently
Year 2000-compliant and can continue to support our significant operational
systems, as needed. Many of our cash management and payroll operations are
handled on an out-sourced basis, and we have received written assurances from
our providers that the systems providing these out-sourced services are Year
2000-compliant. As separate internal systems affecting individual and
group-level company operations are replaced or upgraded over time in the
ordinary course of business, all such replacement or upgrade systems will be
Year 2000-compliant. Such separate individual and group level internal systems
are not believed to affect any of our material operations and the cost to
replace or upgrade such individual or group level internal systems in the
ordinary course of business, though not fully known at this time, is not
expected to be material. We do not separately track and budget the internal
costs incurred in connection with the Year 2000 compliance project. Instead,
substantially all such expenses have been, or will be, included in the
operational budgets of the effected groups.
With respect to compliance of our products we supply to our customers,
we adhere to Year 2000 test case scenarios established by SEMATECH, an industry
group consisting of U.S. semiconductor
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<PAGE> 18
manufacturers. Our compliance efforts, and review and identification of
corrective measures and contingency planning (where necessary), are
substantially complete. The application systems and software of a significant
number of our products currently supplied to our customers are Year
2000-compliant, with the remainder expected to be so by the end of the second
quarter of fiscal 2000. With respect to certain of our products already
installed in the field, we have determined that in most instances where the
application systems and software are not Year 2000-compliant, there is either no
appreciable effect or the effect during the product's operation is limited to
certain aspects of the product's ability to report data concerning its
operational parameters. However, the product's operation, manufacturing
capabilities or quality are not affected. We are in the process of identifying
and offering to our customers product upgrades with the goal of resolving all
material programs and systems prior to the Year 2000 date transition. In this
regard, we are incurring, and will continue to incur throughout fiscal 2000,
various costs to provide customer support regarding Year 2000 issues. Through
the end of the first quarter of fiscal 2000, these costs have totaled less than
$3 million, with total program costs estimated going forward and through
completion to be approximately $5 million. We estimate that most, if not
substantially all, of these estimated costs going forward will be off-set by
revenues from product upgrades and customer service and support. Accordingly,
the full cost of these activities is not expected to be material and, to the
extent will be borne by us, have already in large part been incurred by us.
In connection with our review and implementation of corrective measures,
both to ensure that our internal products and systems and the application
systems accompanying the products sold to our customers are Year 2000-compliant,
we expect both to replace some software and systems and to upgrade others where
appropriate. As a contingency with respect to products we currently offer to our
customers, we may replace all non-compliant application systems and software
with systems and software demonstrated to be Year 2000-compliant. With respect
to products and systems supplied to us for use internally, we may upgrade all
non-compliant products and systems and, where necessary or where no reasonable
upgrade is available, replace such non-compliant products and systems with
products and systems demonstrated to be Year 2000-compliant.
Our failure to ensure, at all or in a timely or reasonable manner, that
our products are Year 2000-compliant may cause disruption in the ability of our
customers to derive expected productivity from those products or to integrate
the products fully and functionally into certain automated manufacturing
environments. With respect to products and systems we purchase for use
internally, failure to ensure Year 2000 compliance may cause disruption in our
automated accounting, financial planning, data management and manufacturing
operations which could have a material effect on our short-term ability to
manage our day-to-day operations in an efficient, cost-effective and reliable
manner.
One of the responsibilities of our Year 2000 compliance task force has
been to develop contingency plans to maintain operations under a number of
hypothetical scenarios. We have begun to develop a contingency plan and expect
to have the contingency plan in place prior
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<PAGE> 19
to December 1999. In the event we fail to anticipate the degree of disruptions
caused by Year 2000 problems, our systems could be affected in some or all of
the following respects:
- disruptions of an extended period (i.e. in excess of one week) in the
economic infrastructure of the regions in which we do business, including
power, communication and transportation system disruptions, could materially
effect our ability to deliver systems as scheduled or to provide in a timely
manner spare parts or warranty support for such systems; and
- disruptions of an extended period (i.e. generally in excess of 30 days)
could materially effect our supply of parts for system manufacture and delay
scheduled system or spare parts shipments to our customers.
Our spares inventory, distribution system and customer support
organization, as well as the contingency plans we implemented, are intended to
ensure that temporary disruptions to regional and global infrastructure systems
will have no materially adverse effect on our operations and financial
performance. However, extended disruptions in these systems beyond our control
or ability to remedy, such as described above, could impact our ability to
deliver product and services to our customers on schedule and to maintain our
operations and provide appropriate employee support (including payroll and
benefits), and would, thereby, potentially have a materially adverse effect on
our operations and financial performance.
We believe that our Year 2000 compliance project will be completed on a
timely basis, and in advance of the Year 2000 date transition, and will not have
a material adverse effect on our financial condition or overall trends in the
results of operations. However, there can be no assurance that delays or
problems, including the failure to ensure Year 2000 compliance by systems or
products supplied to us by a third party, will not have an adverse effect on our
financial performance, or our competitiveness or customer acceptance of our
products. Further, our current understanding of expected costs is subject to
change as the project progresses, and does not include potential costs related
to actual customer claims or the cost of internal software and hardware replaced
in the normal course of business (whose installation otherwise in the normal
course of business may be accelerated to provide solutions to Year 2000
compliance issues).
LIQUIDITY AND CAPITAL RESOURCES
As of September 26, 1999, we had $374.6 million in cash, cash
equivalents, short-term investments and restricted cash, compared with $372.1
million at June 30, 1999. We have a total of $100.0 million available under a
syndicated bank line of credit, which is due to expire in April 2001. Borrowings
are subject to our compliance with financial and other covenants set forth in
the credit documents. The syndicated bank line bears interest at rates ranging
from 0.55% to 1.25% over LIBOR. At September 26, 1999, we were in compliance
with all our financial and other covenants.
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<PAGE> 20
Net cash provided from operating activities was $3.7 million for the
three months ended September 26, 1999. Cash payouts relating to our
restructurings was approximately $2.1 million. Increases in accounts receivable
and inventory (which were brought on by higher revenue levels) and decreases in
accounts payable were offset by increases in accrued liabilities (due to
increases in accrued compensation and miscellaneous taxes) resulting in a use of
cash of $32.3 million. Cash provided by investing activities was $12.4 million,
which was primarily from the net sales of short-term investments of $16.6
million. Capital expenditures, net of retirements, for the three month period
ended September 26, 1999 were $5.5 million. Financing activities provided $3.0
million. During the quarter ended September 26, 1999, we purchased $5.1 million
of our common stock and reissued $8.4 million of our treasury stock in
conjunction with our employee option and stock purchase programs. Net proceeds
from the issuance of our common stock generated $5.2 million. Currency
translation adjustment decreased $5.6 million. Principal payments of $8.5
million of debt and capital leases were offset by issuances of debt of $8.7
million.
Given the cyclical nature of the semiconductor equipment industry, we
believe that maintenance of sufficient liquidity reserves is important to ensure
our ability to maintain levels of investment in R&D and capital infrastructure
through ensuing business cycles. Based upon our current business outlook, our
cash, cash equivalents, short-term investments, restricted cash and available
lines of credit at September 26, 1999 are expected to be sufficient to support
our currently anticipated levels of operations and capital expenditures through
at least the next 18 months.
RISK FACTORS
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE UNPREDICTABLE
Our revenues and operating results may fluctuate significantly from
quarter to quarter due to a number of factors, not all of which are in our
control. These factors include:
- economic conditions in the semiconductor industry generally, and the
equipment industry specifically;
- customer capacity requirements;
- the size and timing of orders from customers;
- customer cancellations or delays in our shipments;
- our ability in a timely manner to develop, introduce and market new,
enhanced and competitive products;
- our competitors' introduction of new products;
- legal or technical challenges to our products and technology;
- changes in average selling prices and product mix; and
- exchange rate fluctuations.
We base our expense levels in part on our expectations of future
revenues. If revenue levels in a particular quarter do not meet our
expectations, our operating results are adversely affected.
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<PAGE> 21
We derive our revenue primarily from the sale of a relatively small
number of high-priced systems. Our systems can range in price from approximately
$150,000 to over $4 million per unit. Our operating results for a quarter may
suffer substantially if:
- we sell fewer systems than we anticipate in any quarter;
- we do not receive anticipated orders in time to enable actual shipment
during that quarter;
- one or more customers delay or cancel anticipated shipments; or
- shipments are delayed by procurement shortages or manufacturing
difficulties.
Further, because of our continuing consolidation of manufacturing
operations and capacity at our Fremont, California facility, natural, physical,
logistical or other events or disruptions affecting this facility (including
labor disruptions) could adversely impact our financial performance.
THE SEMICONDUCTOR EQUIPMENT INDUSTRY IS VOLATILE, WHICH AFFECTS OUR
REVENUES AND FINANCIAL RESULTS
Our business 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 using integrated circuits.
The semiconductor industry is cyclical in nature and historically experiences
periodic downturns. During the past twelve months the semiconductor industry has
experienced severe swings of product demand and volatility in product pricing.
In early fiscal 1999 and fiscal 1998, the semiconductor industry reduced or
delayed significantly purchases of semiconductor manufacturing equipment and
construction of new fabrication facilities because of an industry downturn. We
expect this volatility to continue throughout fiscal 2000, but we have seen
indications of a recovery, which may extend through fiscal 2000. Lower levels of
investment by the semiconductor manufacturers and pricing volatility will
continue to affect materially our aggregate bookings, revenues and operating
results. Even during periods of reduced revenues, we must continue to invest in
research and development and to maintain extensive ongoing worldwide customer
service and support capabilities to remain competitive, which may harm our
financial results.
WE DEPEND ON NEW PRODUCTS AND PROCESSES FOR OUR SUCCESS. FOR THIS
REASON, WE ARE SUBJECT TO RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL
CHANGE
Rapid technological changes in semiconductor manufacturing processes
subject us to increased pressure to maintain technological parity with deep
submicron process technology. We believe that our future success depends in part
upon our ability to develop, manufacture and introduce successfully new products
and product lines with improved capabilities, and to continue to enhance our
existing products. Due to the risks inherent in transitioning to new products,
we must forecast accurately demand for new products while managing the
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<PAGE> 22
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, product introductions caused some delays and reliability
and quality problems. We may fail to develop and manufacture new products
successfully, or new products that we introduce may fail in the marketplace,
which would materially and adversely affect our results from operations.
We expect to continue to make significant investments in research and
development and to pursue joint development relationships with customers or
other members of the industry. We must manage product transitions or joint
development relationships successfully, as introduction of new products could
adversely affect our sales of existing products. Future technologies, processes
or product developments may render our current product offerings obsolete, or we
may be unable in a timely manner to develop and introduce new products or
enhancements to our existing products which satisfy customer needs or achieve
market acceptance. Furthermore, if we are unsuccessful in the marketing and
selling of advanced processes or equipment to customers with whom we have
strategic alliances, we may be unsuccessful in selling existing products to
those customers. In addition, in connection with our developing new products, we
will invest in high levels of pre-production inventory, and our failure in a
timely manner to complete development and commercialization of these new
products could result in inventory obsolescence, which would adversely affect on
our financial results.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH THE INTRODUCTION OF A NEW
PRODUCT
During the second quarter of fiscal 1999, we began shipping units of our
Teres(TM) chemical mechanical planarization system, for which we recorded
revenue during the first quarter of fiscal 2000. We expect to face significant
competition from multiple current and future competitors. Among the companies
currently offering polishing systems are Applied Materials, Inc., Ebara
Corporation and SpeedFram-IPEC, Inc. We believe that other companies are
developing polishing systems and are planning to introduce new products to this
market, which may affect our ability to sell this new product.
During the first quarter of fiscal 2000, we began shipping units of our
Exelan(TM) oxide etch system. We expect to face significant competition from
multiple current and future competitors. Among the companies currently offering
oxide etch systems are Applied Materials, Inc. and Tokyo Electron Limited.
WE ARE SUBJECT TO RISKS RELATING TO PRODUCT CONCENTRATION AND LACK OF
PRODUCT REVENUE DIVERSIFICATION
We derive a substantial percentage of our revenues to date from a
limited number of products, and we expect these products to continue to account
for a large percentage of our revenues in the near term. Continued market
acceptance of our primary products is, therefore, critical to our future
success. Our business, operating results, financial condition and cash flows
could therefore be adversely affected by:
- a decline in demand for our products;
- a failure to achieve continued market acceptance of our products;
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<PAGE> 23
- an improved version of one of our products being produced by a
competitor;
- technological change which we are unable to match in our products; and
- a failure to release new versions of our products on a timely basis.
WE ARE DEPENDENT UPON A LIMITED NUMBER OF KEY SUPPLIERS
We obtain certain components and sub-assemblies included in our products
from a single supplier or a limited group of suppliers. Each of our key
suppliers has a one year blanket purchase contract under which we may issue
purchase orders. We may renew these contracts periodically. Each of these
suppliers sold us products during at least the last four years, and we expect
that we will continue to renew these contracts in the future or that we will
otherwise replace them with competent alternative source suppliers. We believe
that we could obtain alternative sources to supply these products. Nevertheless,
a prolonged inability to obtain certain components could adversely affect our
operating results and result in damage to our customer relationships.
ONCE A SEMICONDUCTOR MANUFACTURER COMMITS TO PURCHASE A COMPETITOR'S
SEMICONDUCTOR MANUFACTURING EQUIPMENT IT TYPICALLY CONTINUES TO PURCHASE
THAT EQUIPMENT, MAKING IT MORE DIFFICULT FOR LAM TO SELL ITS EQUIPMENT
TO THAT MANUFACTURER
The semiconductor equipment industry is highly competitive. We expect to
continue to face substantial competition throughout the world. Semiconductor
manufacturers must make a substantial investment to install and integrate
capital equipment into a semiconductor production line. We believe that once a
semiconductor manufacturer selects a particular supplier's capital equipment,
the manufacturer generally relies upon that equipment for the entire specific
production line application. Accordingly, we expect to experience difficulty in
selling to a given customer if that customer initially selects a competitor's
equipment. We believe that to remain competitive we will require significant
financial resources to offer a broad range of products, to maintain customer
service and support centers worldwide and to invest in product and process
research and development.
WE MAY LACK THE FINANCIAL RESOURCES OR TECHNOLOGICAL CAPABILITIES OF
CERTAIN OF OUR COMPETITORS NEEDED TO CAPTURE INCREASED MARKET SHARE
Large semiconductor equipment manufacturers who have the resources to
support customers on a worldwide basis are increasingly dominating the
semiconductor equipment industry. Certain of our competitors have substantially
greater financial resources and more extensive engineering, manufacturing,
marketing and customer service and support than we do. In addition, there are
smaller emerging semiconductor equipment companies that may provide innovative
technology which may have performance advantages over systems we currently, or
expect to, offer.
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<PAGE> 24
We expect our competitors to continue to improve the design and
performance of their current products and processes and to introduce new
products and processes with enhanced performance characteristics. If our
competitors enter into strategic relationships with leading semiconductor
manufacturers covering products similar to those we sell or may develop, it
could adversely affect our ability to sell products to those manufacturers. For
these reasons, we may fail to continue to compete successfully worldwide.
Our present or future competitors may be able to develop products
comparable or superior to those we offer or that adapt more quickly to new
technologies or evolving customer requirements. In particular, while we
currently are developing additional product enhancements that we believe will
address customer requirements, we may fail in a timely manner to complete the
development or introduction of these additional product enhancements
successfully, or these product enhancements may not achieve market acceptance or
be competitive. Accordingly, we may be unable to continue to compete effectively
in our markets, competition may intensify or future competition may have a
material adverse effect on our revenues, operating results, financial condition
and cash flows.
OUR FUTURE SUCCESS DEPENDS ON INTERNATIONAL SALES
International sales accounted for approximately 54% of our total revenue
in fiscal 1999, 55% in fiscal 1998, 57% in fiscal 1997, 60% for the first three
months of fiscal 2000 and 42% for the first three months of fiscal 1999. We
expect that international sales will continue to account for a significant
portion of our total revenue in future years. International sales are subject to
risks, including:
- foreign exchange risks; and
- economic, banking and currency problems in the relevant region.
We currently enter into foreign currency forward contracts to minimize
the impact of exchange rate fluctuations on yen-dominated assets, and will
continue to enter into hedging transactions in the future.
A FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS MAY ADVERSELY AFFECT
OUR OPERATING RESULTS
We are 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. We believe that we are in general compliance with
these regulations and that we have obtained (or will obtain or are otherwise
addressing) all necessary environmental permits to conduct our 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 us, suspension of production, cessation of our operations generally
or reduction in our customers' acceptance of our products. These regulations
could require us to alter our current operations, to acquire significant
equipment or to incur substantial other expenses to comply with environmental
regulations. Our failure to control the use, sale or transport, or adequately to
restrict our
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<PAGE> 25
discharge or disposal, of hazardous substances could subject us to future
liabilities.
OUR ABILITY TO MANAGE POTENTIAL GROWTH; INTEGRATION OF POTENTIAL
ACQUISITIONS AND POTENTIAL DISPOSITION OF PRODUCT LINES AND TECHNOLOGIES
CREATES RISKS FOR US
Our management may face significant challenges in improving financial
and business controls, management processes, information systems and procedures
on a timely basis, and expanding, training and managing our work force if we
experience additional growth. There can be no assurance that we will be able to
perform such actions successfully. In the future, we may make additional
acquisitions of complementary companies, products or technologies, or we may
reduce or dispose of certain product lines or technologies which no longer
complement our long-term strategy, such as our exiting of FPD and CVD
operations. Managing an acquired business or disposing of product technologies
entails numerous operational and financial risks, including difficulties in
assimilating acquired operations and new personnel or separating existing
business or product groups, diversion of management's attention to other
business concerns, amortization of acquired intangible assets and potential loss
of key employees or customers of acquired or disposed operations. Our success
will depend, to a significant extent, on the ability of our executive officers
and other members of our senior management to identify and respond to these
challenges effectively. There can be no assurance that we will be able to
achieve and manage effectively any such growth, integration of potential
acquisitions or disposition of product lines or technologies, or that our
management, personnel or systems will be adequate to support continued
operations. Any such inabilities or inadequacies would have a material adverse
effect on our business, operating results, financial condition and cash flows.
An important element of our management strategy is to review acquisition
prospects that would complement our existing products, augment our market
coverage and distribution ability, or enhance our technological capabilities. We
may acquire additional businesses, products or technologies in the future. Any
acquisitions could result in changes such as potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities and the
amortization expense related to goodwill and other intangible assets, any of
which could materially adversely affect our business, financial condition and
results of operations and/or the price of our Common Stock.
THE MARKET FOR OUR COMMON STOCK IS VOLATILE, WHICH MAY AFFECT OUR
ABILITY TO RAISE CAPITAL OR MAKE ACQUISITIONS
The market price for our common stock is volatile and has fluctuated
significantly over the prior years. The trading price of our common stock could
continue to be highly volatile and fluctuate widely in response to factors,
including the following:
- general market or semiconductor industry conditions;
- variations in our quarterly operating results;
25
<PAGE> 26
- shortfalls in our revenues or earnings from levels securities analysts
expect;
- announcements of restructurings, technological innovations, reductions
in force, departure of key employees, consolidations of operations or
introduction of new products;
- government regulations;
- developments in or claims relating to patent or other proprietary
rights;
- disruptions with key customers; or
- political, economic or environmental events occurring globally or in our
key sales regions.
In addition, the stock market has in recent years experienced
significant price and volume fluctuations. Recent fluctuations affecting our
common stock were tied in part to the actual or anticipated fluctuations in
interest rates, and the price of and market for semiconductors generally. These
broad market and industry factors may adversely affect the market price of our
common stock, regardless of our actual operating performance. In the past,
following volatile periods in the market price of stock, many companies become
the object of securities class action litigation. If we are sued in a securities
class action, we could incur substantial costs and it could divert management's
attention and resources and have an effect on the market price for our common
stock
RISK ASSOCIATED WITH OUR CALL AND PUT OPTIONS
We have entered into certain third party option transactions for the
purchase and sale of our stock. The option position will be of value to us if
our stock price exceeds the exercise price of the call options at the time the
option is exercised. Of course, our stock price could also decline. If our stock
price on the exercise date of the options were below the put option exercise
price, we would have to settle the put obligation by paying cash or the
equivalent value of our common stock obligation.
If settlement were to occur prior to option expiration because of the
occurrence of certain events, such as material breach of the agreement, default
on certain indebtedness or covenants relating to our financial condition,
reduction in our credit rating or drop in price of our common stock to less than
$5.00 per share, the third parties have the right to terminate the transactions.
We will be required to pay to the third parties the value of their position in
cash or equivalent value of our common stock (which would depend on a number of
factors, including the time remaining to expiration and volatility of our common
stock) which could be greater or lesser than the difference between the options'
exercise prices and the then market price of our stock, as well as any costs or
expenses incurred by the third parties as a result of unwinding the
transactions.
26
<PAGE> 27
THE POTENTIAL ANTI-TAKEOVER EFFECTS OF OUR BYLAWS PROVISIONS AND THE
RIGHTS PLAN WE HAVE IN PLACE MAY AFFECT OUR STOCK PRICE AND INHIBIT A
CHANGE OF CONTROL DESIRED BY SOME OF OUR STOCKHOLDERS
On January 23, 1997, Lam 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 our Common Stock, 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, our Board of Directors also adopted a number of amendments to
our 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
Lam 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. Rather it is designed to enhance the ability of our Board
of Directors to negotiate with a potential acquirer on behalf of all of our
stockholders.
In addition, our Certificate of Incorporation authorizes issuance of
5,000,000 shares of undesignated preferred stock. Our Board of Directors,
without further stockholder approval, may issue this preferred stock on such
terms as the Board of Directors may determine, which also could have the effect
of delaying or preventing a change in control of Lam. The issuance of preferred
stock could also adversely affect the voting power of the holders of our common
stock, including causing the loss of voting control. Our Bylaws and indemnity
agreements with certain officers, directors and key employees provide that we
will indemnify officers and directors against losses that they may incur in
legal proceedings resulting from their service to Lam. Moreover, Section 203 of
the Delaware General Corporation Law restricts certain business combinations
with "interested stockholders", as defined by that statute.
INTELLECTUAL PROPERTY AND OTHER CLAIMS AGAINST US CAN BE COSTLY AND
COULD RESULT IN THE LOSS OF SIGNIFICANT RIGHTS WHICH ARE NECESSARY TO
OUR CONTINUED BUSINESS AND PROFITABILITY
Other parties may assert infringement, unfair competition or other
claims against us. Additionally, from time to time, other parties send us
notices alleging that our products infringe their patent or other intellectual
property rights. In such cases, it is our policy either to defend the claims or
to negotiate licenses on commercially reasonable terms. However, we may be
unable in the future to negotiate necessary licenses on commercially reasonable
terms, or at all, and any litigation resulting from these claims by other
parties may materially adversely affect our business and financial results.
27
<PAGE> 28
In October 1993, Varian Associates, Inc. ("Varian") sued us in the
United States District Court for the Northern District of California, seeking
monetary damages and injunctive relief based on our alleged infringement of
certain patents Varian held. We asserted defenses that the subject patents are
invalid and unenforceable, and that our products do not infringe these patents.
Litigation is inherently uncertain and we may fail to prevail in this
litigation. However, we believe that the Varian lawsuit will not materially
adversely affect our operating results or financial position. See Item 3 of this
Form 10-Q for a discussion of the Varian lawsuit.
Additionally, in September 1999, Tegal Corporation ("Tegal") sued us in
the United States District Court for the Eastern District of Virginia, seeking
monetary damages and injunctive relief based on our alleged infringement of
certain patents Tegal holds. Specifically, Tegal identified our 4520XLE(TM) and
Exelan(TM) products as infringing the patents Tegal is asserting. Litigation is
inherently uncertain and we may fail to prevail in this litigation. However, we
believe that the Tegal lawsuit will not materially adversely affect our
operating results or financial position. See Part II Item 1 of this Form 10-Q
for a discussion of the Tegal lawsuit.
WE MAY FAIL TO PROTECT OUR PROPRIETARY TECHNOLOGY RIGHTS, WHICH WOULD
AFFECT OUR BUSINESS
Our success depends in part on our proprietary technology. While we
attempt to protect our proprietary technology through patents, copyrights and
trade secret protection, we believe that our success depends on increasing our
technological expertise, continuing our development of new systems, increasing
market penetration and growth of our installed base, and providing comprehensive
support and service to our customers. However, we may be unable to protect our
technology in all instances, or our competitors may develop similar or more
competitive technology independently. We currently hold a number of United
States and foreign patents and pending patent applications. However, other
parties may challenge or attempt to invalidate or circumvent any patents United
States or foreign governments issue to us or these governments may fail to issue
pending applications. In addition, the rights granted or anticipated under any
of these patents or pending patent applications may be narrower than we expect
or in fact provide no competitive advantages.
YEAR 2000 COMPLIANCE
See discussion of Year 2000 issues in the section of this report
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
28
<PAGE> 29
ITEM 3. Quantitative And Qualitative Disclosures about Market Risk
For financial market risks related to changes in interest rates and
foreign currency exchange rates, refer to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in the Company's Annual Report on
Form 10-K for the year ended June 30, 1999.
During fiscal 1999, we entered into certain third party option
transactions for the purchase and sale of our common stock, in order to offset
the antidilutive effect of a potential conversion into common stock of the
$310.0 million Convertible Subordinated Notes (the "Notes") we previously issued
and due September 2, 2002. We have as of September 26, 1999 acquired call
options to purchase 1.24 million shares of our common stock: the weighted
average exercise price of these options is $33.87. The call options provide that
our maximum benefit at expiration is $53.90 per option share (the difference
between $87.77, which is the conversion price of the Notes, and the weighted
average exercise price of the call options). We have also entered into put
options with the same third parties covering 1.86 million shares of our common
stock, giving those third parties the right to sell to us shares of our common
stock at a weighted average price of $28.43 per share.
Below is a table showing, at assumed exercise prices for the put and
call options and market prices for our common stock, our gain or (loss) under
the put and call options upon exercise or upon maturity of the option
transactions.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
At September 26, 1999 At Maturity
- ----------------------------------------------------------------
Stock Value ($ in thousands)
<S> <C> <C>
$ 5.00 $(34,944) $(43,605)
$25.00 $(10,352) $ (6,390)
$45.00 $ 4,778 $ 13,808
$65.00 $ 15,034 $ 38,618
$85.00 $ 22,395 $ 63,428
- ----------------------------------------------------------------
</TABLE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In October 1993, 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. By order of the Court, those proceedings were
bifurcated into an initial phase to determine the validity of the Varian patents
and Lam's infringement (if any), and a secondary phase to determine damages to
Varian (if any) and whether Lam's infringement (if shown) was willful. On April
13, 1999, the Court issued an interlocutory order construing the meaning of the
terms of the patent claims at issue in the action. To date, however,
29
<PAGE> 30
there has been no determination as to the actual scope of those claims, or
whether Lam's products have infringed or are infringing Varian's patents. A
trial date is currently scheduled for March 2000. Furthermore, there have been
no findings in the action which have caused the Company reasonably to believe
that any infringement, if found, or any damages, if awarded, would have a
material adverse effect on the Company's operating results or the Company's
financial position.
In September 1999, Tegal brought suit against the Company in the United
States District Court, for the Eastern District of Virginia, seeking monetary
damages and injunctive relief based on the Company's alleged infringement of
certain patents held by Tegal. Specifically, Tegal identified the Company's
4520XLE and Exelan products as infringing the patents Tegal is asserting. To
date, however, there has been no determination as to the actual scope of those
claims, or whether Lam's products have infringed or are infringing Tegal's
patents. No trial date is currently scheduled in the action. Furthermore, there
have been no findings in the action which have caused the Company reasonably to
believe that any infringement, if found, or any damages, if awarded, could have
a material adverse effect on the Company's operating results or the Company's
financial position.
From time to time, Lam has received notices from third parties alleging
infringement of such parties' patent or other intellectual property rights by
the Company's products. In such cases, it is the policy of the Company to defend
the claims or negotiate licenses on commercially reasonable terms, where
considered appropriate. However, no assurance can be given that Lam will be able
in the future 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.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.69 The First Amendment Agreement between Lam Research
Corporation and Credit Suisse Financial products, dated
August 31, 1999
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the quarter ended
September 26, 1999.
30
<PAGE> 31
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 10, 1999
LAM RESEARCH CORPORATION
By: /s/ Mercedes Johnson
------------------------------------
Mercedes Johnson, Vice President,
Finance and Chief Financial Officer
31
<PAGE> 32
EXHIBIT INDEX
Exhibit Description
------- -----------
Exhibit 10.69 The First Amendment Agreement between Lam Research
Corporation and Credit Suisse Financial products, dated
August 31, 1999
Exhibit 27 Financial Data Schedule
<PAGE> 1
Exhibit 10.69
FIRST AMENDMENT AGREEMENT
THIS FIRST AMENDMENT AGREEMENT dated as of the 31 August 1999, is entered into
between LAM Research Corporation ("LRC") and Credit Suisse Financial Products
("CSFP") and amends the ISDA Master Agreement dated as of 1 June 1999 between
LRC and SCFP (the "Agreement").
NOW IT IS HEREBY AGREED as follows:
1. Definitions
1.1 Capitalised terms used but not defined herein shall have the meaning
ascribed to them in the Agreement.
1.2 The Agreement shall continue in full force and effect as amended from
time to time (including by this First Amendment Agreement), and all
references to the Agreement shall be construed as a reference to the
Agreement as so amended.
2. Amendments
Part 1(h) of the Schedule to the Agreement is hereby deleted in its
entirety and replaced with the following:-
"(h) Additional Termination Event. The following shall be an Additional
Termination Event with respect to Party B for the purposes of this
Agreement, with Party B as the sole Affected Party:-.
Party B fails to maintain, as reasonable determined by Party A, a
Cash Balance of USD75,000,000.
For the purpose of this Additional Termination Event the
following definitions shall apply:-
"Cash Balance" means the sum of cash and Cash Equivalents as
reported in Party B's last filed quarterly unaudited or annually audited
accounts and for the avoidance of doubt "Cash Balance" shall not include
restricted cash as reported in Party B's last filed quarterly unaudited
or annually audited accounts.
"Cash Equivalents" shall mean (I) securities issued directly and
fully guaranteed or insured by the United States or any agency or
instrumentality thereof (provided that the full faith and credit of the
United States is pledged in support thereof) having maturities of not
more than two years from the date of acquisition, (ii) time deposits and
certificates of deposit of any commercial bank having, or which is the
principal banking subsidiary of a bank holding company organized under
the laws of the United States, any State thereof or the District of
Columbia, having capital, surplus and undivided profits aggregating in
excess of US$500,000.00 with maturities of not more than two years from
the date of acquisition, (iii) repurchase obligations with a term not
more than 30 days for underlying securities of the types described in
clause (i) above entered into with any bank meeting the qualifications
specified in clause (ii) above, (iv) commercial paper issued by any
person incorporated in the United States rated at least A-1 or the
equivalent thereof by Standard & Poor's Rating Service, a division of
McGraw-Hill Inc., or at least P-1 or the equivalent thereof by Moody's
Investors Service. Inc., and in each case maturing not more than one
year after the date of acquisition by such person, (v) investments in
money market funds substantially all of whose assets are comprised of
securities of the types described in clauses (i) through (iv) above,
(vi) demand deposit accounts maintained in the ordinary course of
business and (vii) any investment made or held consistent with and
authorized by Party B's Investment Rules (a copy of which is attached
hereto)."
3. Miscellaneous Provisions
The provisions of or incorporated in the Agreement relating to Powers
(Section 3(a)(ii), No Violation or Conflict (Section 3(a)(iii)),
Consents (Section 3(a)(iv), Obligations Binding (Section 3(a)(v)),
Entire Agreement (Section 9(a)), Amendments (Section 9(b)), Survival of
Obligations (Section 9(c)), Remedies
<PAGE> 2
Cumulative (Section 9(d)), No Waiver of Rights (Section 9 (f)), Heading
(Section 9(g)), Notices (Section 12), Jurisdiction (Section 13(b)),
Service of Process (Section 13(c)) and Waiver of Immunities (Section
13(d)) shall also apply to this First Amendment Agreement as though such
provisions were set forth in full herein (except that references in such
provisions to the Agreement shall be deemed to be references to this
First Amendment Agreement).
4. Governing Law
This First Amendment Agreement will be governed by and construed in
accordance with the laws of the State of New York (without reference to
choice to law doctrine).
IN WITNESS WHEREOF, the parties hereto have duly executed this document
on the respective dates specified below with effect from the date
specified on the first page of this document.
LAM RESEARCH CORPORATION
By: Craig Garber, Vice President, Finance, and Treasurer,
October 21, 1999
CREDIT SUISSE FINANCIAL PRODUCTS
By:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS 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-25-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-26-1999
<CASH> 57,049
<SECURITIES> 257,203
<RECEIVABLES> 215,689
<ALLOWANCES> 4,317
<INVENTORY> 191,945
<CURRENT-ASSETS> 793,824
<PP&E> 234,871
<DEPRECIATION> 137,727
<TOTAL-ASSETS> 1,030,456
<CURRENT-LIABILITIES> 266,952
<BONDS> 310,000
0
0
<COMMON> 39
<OTHER-SE> 436,447
<TOTAL-LIABILITY-AND-EQUITY> 1,030,456
<SALES> 241,582
<TOTAL-REVENUES> 241,582
<CGS> 140,771
<TOTAL-COSTS> 214,535
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,845
<INCOME-PRETAX> 27,425
<INCOME-TAX> 2,743
<INCOME-CONTINUING> 24,682
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,682
<EPS-BASIC> 0.63
<EPS-DILUTED> 0.58
</TABLE>
