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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 MARCH 26, 2000
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 March 26, 2000 there were 124,411,008 shares of Registrant's Common Stock
outstanding.
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INDEX
Page
No.
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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.................................. 15
Results of Operations................................................ 15
Liquidity and Capital Resources...................................... 21
Risk Factors......................................................... 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 31
PART II. OTHER INFORMATION......................................................... 32
Item 1. Legal Proceedings......................................................... 32
Item 4. Submission of Matters to Vote of Security Holders ........................ 33
Item 6. Exhibits and Reports on Form 8-K.......................................... 33
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ITEM 1. FINANCIAL STATEMENTS
LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
March 26,
2000 June 30,
(unaudited) 1999
----------- -----------
Assets
Cash and cash equivalents $ 27,296 $ 37,965
Short-term investments 294,182 273,836
Accounts receivable, net 306,680 170,531
Inventories 217,145 183,716
Prepaid expenses and other assets 26,051 17,177
Deferred income taxes 55,645 55,645
----------- -----------
Total Current Assets 926,999 738,870
Equipment and leasehold improvements, net 115,303 103,337
Restricted cash 60,348 60,348
Deferred income taxes 51,745 51,745
Other assets 30,953 25,151
----------- -----------
Total Assets $ 1,185,348 $ 979,451
=========== ===========
Liabilities and Stockholders' Equity
Trade accounts payable $ 47,462 $ 51,216
Accrued expenses and other
current liabilities 229,534 172,213
Current portion of long-term debt and
capital lease obligations 7,644 20,566
----------- -----------
Total Current Liabilities 284,640 243,995
Long-term debt and capital lease
obligations, less current portion 323,057 326,500
----------- -----------
Total Liabilities 607,697 570,495
Preferred stock: 5,000 shares authorized;
none outstanding
Common Stock, at par value of $0.001 per share
Authorized -- 400,000 shares; issued and outstanding
124,411 shares at March 26, 2000 and 116,535 shares
at June 30, 1999 124 117
Additional paid-in capital 427,895 388,868
Treasury stock -- (8,429)
Accumulated other comprehensive loss (7,605) (432)
Retained earnings 157,237 28,832
----------- -----------
Total Stockholders' Equity 577,651 408,956
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,185,348 $ 979,451
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
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LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
March 26, March 31, March 26, March 31,
2000 1999 2000 1999
--------- --------- --------- ---------
Total revenue $ 326,349 $ 152,976 $ 856,551 $ 437,070
Costs and expenses:
Cost of goods sold - on net sales 182,212 98,674 485,927 285,520
Cost of goods sold -
on restructuring charge (recovery) (849) -- (849) --
--------- --------- --------- ---------
Gross margin 144,986 54,302 371,473 151,550
Research and development 45,881 35,751 125,429 104,857
Selling, general and administrative 41,147 33,175 113,647 112,589
Restructuring charge (recovery) (18,083) -- (18,083) 53,372
Purchased technology for
research and development -- -- 7,460 5,000
--------- --------- --------- ---------
Operating income (loss) 76,041 (14,624) 143,020 (124,268)
Other income (expense), net 1,883 (100) 5,013 6
--------- --------- --------- ---------
Income (loss) before taxes 77,924 (14,724) 148,033 (124,262)
Income tax expense 10,909 -- 19,628 --
--------- --------- --------- ---------
Net income (loss) $ 67,015 $ (14,724) $ 128,405 $(124,262)
========= ========= ========= =========
Net income (loss) per share
Basic $ 0.55 $ (0.13) $ 1.07 $ (1.08)
========= ========= ========= =========
Diluted $ 0.48 $ (0.13) $ 0.97 $ (1.08)
========= ========= ========= =========
Number of shares used in
per share calculations
Basic 122,646 116,022 119,747 115,290
========= ========= ========= =========
Diluted 145,931 116,022 131,752 115,290
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
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LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
---------------------------------
March 26, March 31,
2000 1999
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 128,405 $ (124,262)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 33,822 38,997
Restructuring charge (recovery) (18,932) 34,141
Purchased technology for research and
development expense 7,460 5,000
Change in certain working capital
accounts (112,346) (9,314)
----------- -----------
Net cash provided by (used in) operating
activities 38,409 (55,438)
Cash flows from investing activities:
Capital expenditures, net (38,970) (25,376)
Purchase of short-term investments (1,805,611) (2,691,166)
Sale/maturities of short-term investments 1,785,265 2,845,050
Cash paid for acquisition of technology
for research and development (6,460) (3,000)
Other (5,414) 3,163
----------- -----------
Net cash provided by (used in) investing activities (71,190) 128,671
----------- -----------
Cash flows from financing activities:
Treasury stock repurchase (5,146) (13,216)
Reissuance of treasury stock 13,575 --
Sale of stock, net of issuance costs 39,034 10,780
Principal payments on long-term debt
and capital lease obligations (26,863) (22,676)
Net proceeds from the issuance of short and
long term debt 8,685 12,076
Foreign currency translation adjustment (7,173) (657)
----------- -----------
Net cash provided by (used in) financing activities 22,112 (13,693)
----------- -----------
Net increase (decrease) in cash and
cash equivalents (10,669) 59,540
Cash and cash equivalents at beginning of period 37,965 13,509
----------- -----------
Cash and cash equivalents at end of period $ 27,296 $ 73,049
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
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LAM RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 26, 2000
(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 changed 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 current 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 -- RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements of all public registrants. Changes
in the Company's revenue recognition policy resulting from the interpretation of
SAB 101 would be reported as a change in accounting principle. The change in the
revenue recognition policy would result in a cumulative adjustment in the
quarter the Company adopts SAB 101. The Company is still in the process of
assessing the impact of SAB 101 on its financial statements.
NOTE C -- INVENTORIES
Inventories consist of the following:
March 26, June 30,
2000 1999
-------- --------
(in thousands)
Raw materials $150,947 $123,311
Work-in-process 56,300 44,181
Finished goods 9,898 16,224
-------- --------
$217,145 $183,716
======== ========
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NOTE D -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
March 26, June 30,
2000 1999
--------- ---------
(in thousands)
Equipment $ 107,801 $ 93,112
Leasehold improvements 106,274 90,902
Furniture & fixtures 50,872 45,427
--------- ---------
264,947 229,441
Accumulated depreciation and amortization (149,644) (126,104)
--------- ---------
$ 115,303 $ 103,337
========= =========
NOTE E -- STOCKHOLDERS' EQUITY
On March 6, 2000, the Company held a special stockholders' meeting. At
the meeting, the Company's stockholders approved an increase in the number of
authorized shares of the Company's Common Stock from 90 million to 400 million
shares and approved a three-for-one stock split of its outstanding shares of
Common Stock. Stockholders' approval of the amendment to the Company's
Certificate of Incorporation satisfies the condition for the previously
announced three-for-one stock split approved by Lam's Board of Directors on
January 21, 2000. All prior period shares and per share amounts have been
restated to reflect the three-for-one split.
NOTE F -- OTHER INCOME (EXPENSE), NET
The significant components of other income (expense), net are as
follows:
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
March 26, March 31, March 26, March 31,
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands)
Interest expense $ (4,833) $ (5,202) $(14,588) $(15,194)
Interest income 6,557 5,579 18,179 17,364
Other 159 (477) 1,422 (2,164)
-------- -------- -------- --------
$ 1,883 $ (100) $ 5,013 $ 6
======== ======== ======== ========
NOTE G -- 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. For the
quarter ended March 26, 2000, diluted net income per share includes the assumed
exercise of employee stock options and the assumed conversion of the convertible
subordinated notes to common shares. For the nine months ended March 26, 2000,
only the assumed exercise of employee stock options was included; the assumed
conversion of convertible subordinated notes to common shares was excluded from
the computation of diluted net income per share because the effect would have
been antidilutive. Options outstanding during
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the three and nine month periods ended March 31, 1999 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:
Three Months Ended Nine Months Ended
-------------------------- --------------------------
March 26, March 31, March 26, March 31,
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands except per share data)
Numerator:
Numerator for basic net income (loss) per share $ 67,015 $ (14,724) $ 128,405 $(124,262)
--------- --------- --------- ---------
Add:
Interest expense on convertible
subordinated notes, net of income taxes 3,717 -- -- --
--------- --------- --------- ---------
Numerator for diluted net income (loss) per share $ 70,732 $ (14,724) $ 128,405 $(124,262)
========= ========= ========= =========
Denominator:
Basic net income (loss) per share -
average shares outstanding 122,646 116,022 119,747 115,290
--------- --------- --------- ---------
Effect of potential dilutive securities:
Convertible subordinated notes 10,596 -- -- --
Employee stock options 12,689 -- 12,005 --
--------- --------- --------- ---------
Total potential net dilutive common shares 23,285 -- 12,005 --
--------- --------- --------- ---------
Diluted net income (loss) per share -
average shares outstanding and other
potential common shares 145,931 116,022 131,752 115,290
========= ========= ========= =========
Basic net income (loss) per share $ 0.55 $ (0.13) $ 1.07 $ (1.08)
========= ========= ========= =========
Diluted net income (loss) per share $ 0.48 $ (0.13) $ 0.97 $ (1.08)
========= ========= ========= =========
NOTE H -- COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of tax, are as
follows:
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
March 26, March 31, March 26, March 31,
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands)
Net income (loss) $ 67,015 $ (14,724) $ 128,405 $(124,262)
Foreign currency translation adjustment (579) (94) (7,173) (657)
--------- --------- --------- ---------
Comprehensive income (loss) $ 66,436 $ (14,818) $ 121,232 $(124,919)
========= ========= ========= =========
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Accumulated other comprehensive income (loss) presented on the
accompanying consolidated condensed balance sheets consists of the accumulated
foreign currency translation adjustment.
NOTE I -- COMMITMENTS
During the third quarter of fiscal 2000, the Company entered into a five
year Operating Lease Agreement (the "Agreement"), relating to certain buildings
at its Fremont, California campus, in order to obtain more favorable terms and
to reduce the amount of the previous minimum lease payments. As part of the
Agreement, the Company is required to provide a guaranteed residual value of
$25.2 million at the end of the lease term.
NOTE J -- RESTRUCTURING
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 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.
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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-off 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%.
Beginning in late fiscal 1999, there were indications of a recovery in
the semiconductor industry. On a global basis, semiconductor makers began adding
new capacity to address an increase in the demand for semiconductors. In
addition to new capacity, the semiconductor industry accelerated a migration to
new materials such as copper and the new interconnect processes required to
implement them. At the end of the second quarter of fiscal 2000, the Company
determined that the upturn would be sustained and is anticipated to continue
through the end of the calendar year.
During the third quarter of fiscal 2000 the Company completed the
majority of its restructuring activities in accordance with its previously
established and announced plans. As a result of the stronger than anticipated
recovery of the semiconductor capital equipment market, the Company was able to
recover a portion of the restructuring charges recorded in prior periods of
approximately $18.9 million. Of this amount, $1.4 million was recovered due to
outplacement services guaranteed by the Company for terminated employees and
other exit costs not being utilized. Another $5.6 million was recovered from a
change in the Company's assessment of its ability to utilize certain
manufacturing and administrative facilities under long-term operating leases
which had been vacated by the Company. Management had or was in the process of
securing subleases for these facilities prior to the upturn in market
conditions. Currently, the Company believes it can reoccupy these facilities and
fully utilize them through the end of their respective lease terms. The Company
also recovered $3.1 million through the sale of previously abandoned and written
off facilities in Korea. Additionally, the Company anticipates future use of
leasehold improvements of $5.5 million in certain manufacturing and
administration facilities under operating lease which have been or will be
reoccupied as a result of the stronger than anticipated rebound in the Company's
business. Approximately $0.8 million was recovered from the salvage of CVD
inventories previously segregated and written off due to requests from former
customers to purchase certain piece parts. The remaining $2.5 million was
recovered due to
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certain customers not utilizing system return credits they requested and which
were issued by the Company as a result of the decision to exit the CVD and FPD
businesses.
Below is a table summarizing restructuring activity relating to the
fiscal 1999 restructuring:
Severance Lease Payments Credit on
and on Vacated Abandoned Returned
Benefits Facilities Fixed Assets Equipment Total
--------- -------------- ------------ --------- --------
(in thousands)
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
Recovery of assets -- -- 4,218 -- 4,218
Cash payments (1,738) (509) -- (275) (2,522)
Non-cash Charges -- -- -- (806) (806)
Reversal of restructuring reserve (274) (176) (4,218) (749) (5,417)
-------- -------- -------- -------- --------
Balance at March 26, 2000 $ 2,846 $ -- $ -- $ 3,538 $ 6,384
======== ======== ======== ======== ========
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.
The Severance and Benefits reserve balance of $2.8 million as of March
26, 2000 will be utilized through the remainder of those former employees'
separation contracts.
Lease Payments on Vacated Facilities generally 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 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
anticipated return of previously purchased CVD systems and spare parts by
certain customers of the Company.
Most of the Credit on Return Equipment reserve balance of $3.5 million
as of March 26, 2000 will be utilized by the end of the current calendar year.
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Below is a table summarizing restructuring activity relating to the
fiscal 1998 restructuring:
Lease
Payments Abandoned Excess and Credit on Other
Severance On Vacated Fixed Obsolete Returned Exit
and Benefits Facilities Assets Inventory Equipment Costs Total
------------ ---------- --------- ---------- --------- --------- ---------
(in thousands)
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
Recovery of assets -- -- 4,390 849 -- 146 5,385
Cash payments (1,104) (1,930) -- -- -- -- (3,034)
Non-cash charges -- (66) -- -- -- -- (66)
Reversal of restructuring charges (958) (5,382) (4,390) (849) (1,790) (146) (13,515)
--------- --------- --------- --------- --------- --------- ---------
Balance at March 26, 2000 $ 8,712 $ 5,063 $ -- $ -- $ -- $ -- $ 13,775
========= ========= ========= ========= ========= ========= =========
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.
The Severance and Benefits reserve balance of $8.7 million as of March
26, 2000 will be utilized through the remainder of those former employees'
separation contracts.
Lease Payments on Vacated Facilities which was included in the
restructuring charge generally 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, therefore, included 24 months of rent and
common area maintenance expense related to excess facilities in its
restructuring charge. Subsequently, the Company has subleased some of its excess
facilities.
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.
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The inventory write-off 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
anticipated return previously purchased CVD systems and spare parts by certain
customers of the Company. 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:
Lease
Severance Payments on Abandoned
and Vacated Fixed
Benefits Facilities Assets Total
--------- ----------- ---------- -------
(in thousands)
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 payments (409) -- -- (409)
------- ------- ------- -------
Balance at June 30, 1999 849 -- -- 849
Cash payments (134) -- -- (134)
------- ------- ------- -------
Balance at March 26, 2000 $ 715 $ -- $ -- $ 715
======= ======= ======= =======
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 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.
The Severance and Benefits reserve balance of $0.7 million as of March
26, 2000 will be utilized through the remainder of those former employees'
separation contracts.
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Lease Payments on Vacated Facilities generally 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 K -- 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
denominated in the local 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. The European and Asia Pacific foreign
subsidiaries are currently less dependent on the Company's US corporate office
with their daily operations. 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. Upon
implementation of the functional currency to the individual subsidiaries' local
currency as of July 1, 1999, 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 adjustments, which is a component of accumulated other
comprehensive income (loss). Previously, some balance sheet accounts were
translated at a 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 L -- LITIGATION
See Part II, item 1 for discussion of litigation.
NOTE M -- PURCHASED TECHNOLOGY FOR RESEARCH AND DEVELOPMENT
During the second quarter of fiscal 2000, the Company purchased
intellectual property rights related to the semiconductor equipment industry
from Oliver Design, Inc. ("Oliver"). The Company recognized an expense for the
purchase of research development technology of approximately $7.5 million and
capitalized $1.5 million related to acquired patents, which will be amortized
ratably over five years. The technology is being used in a single discrete next
generation post-CMP wafer cleaning product development project and has no future
alternative use. The Company may make up to $2.0 million in additional license
payments to Oliver based on product sales in the event it is successful in
commercialization of the technology.
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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, and the sufficiency of financial resources 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 14 of this Form 10-Q for a
full understanding of our financial position and results of operations for the
three and nine month periods ended March 26, 2000.
RESULTS OF OPERATIONS
Total Revenue
Our total revenue for the three and nine month periods ended March 26,
2000 increased 113.3% and 96.0%, respectively, compared to the prior fiscal year
periods. We experienced increased revenues for all of our products during both
the three and nine month periods of fiscal 2000 compared to the year-ago
periods. Our increased revenue in Alliance(TM) cluster system, which utilizes
from one to four chambers each, was the major contributor to our higher total
revenue for both three and nine month periods ended March 26, 2000 compared to
the year ago periods.
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Geographic breakdown of revenue is as follows:
Three Months Ended Nine Months Ended
---------------------------- --------------------------
March 26, March 31, March 26, March 31,
2000 1999 2000 1999
--------- --------- --------- ---------
North America 23% 40% 30% 49%
Europe 32% 26% 28% 23%
Asia Pacific 30% 23% 29% 19%
Japan 15% 11% 13% 9%
During calendar 1998, the global semiconductor industry experienced a
slowdown driven by depressed DRAM pricing, production overcapacity, as well as
uncertainty in the worldwide financial markets. This brought on a slowdown in
equipment demand, which unfavorably impacted our sales for the first nine months
of fiscal 1999. In the last quarter of fiscal 1999, the global semiconductor
equipment industry began to recover, as a result of increased sales and
profitability of semiconductor manufacturers. We experience and anticipate
greater demand for our systems as our customers continue to add capacity in
their most advanced lines, migrate to new lines, small geometries and new
materials such as copper. We expect our net revenue for the next quarter to be
higher than the revenue achieved in the third quarter of fiscal year 2000.
Gross Margin
Our gross margin percentage increased to 44.4% and 43.4%, respectively,
in the three and nine month periods ended March 26, 2000, compared with 35.5%
and 34.7%, respectively, for the year-ago periods. The increase in our gross
margin percentage is due in large part to material cost reductions and greater
sales volume. Also contributing to the gross margin percentage increase is a one
time restructuring reversal credit related to previously written off inventory.
We anticipate that our gross margins will continue to improve through fiscal
2000.
Research and Development
Research and development ("R&D") expenses for the three and nine month
periods ended March 26, 2000 were 28.3% and 19.6% higher than the year-ago
periods, respectively. However, as a percentage of revenue, R&D expenses were
14.1% and 14.6% of total revenue for the three and nine month periods of fiscal
2000, respectively, compared with 23.4% and 24.0%, respectively, for the three
and nine month periods of fiscal 1999. The increase in R&D expenses was a result
of our continued investments in advanced etch applications and to make
enhancements to our existing products, including developing the technology
necessary to incorporate 300MM wafer processing capabilities into our products.
We believe that in order to remain competitive, we must continue to invest
substantially in R&D.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased by 24.0%
and 1.0% for the three and nine month periods ended March 26, 2000 when compared
to the year-ago periods. As a percentage of revenue, SG&A expenses for the three
and nine month periods ended March 26, 2000 were 12.6% and 13.3%, respectively,
of total revenue compared to 21.7% and 25.8%, respectively, of total revenue for
the
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year-ago periods. The increase in SG&A expenses for the three and nine month
periods ended March 26, 2000, when compared to the prior year period, was a
result of higher sales and marketing expenses related to higher sales volume and
an overall increase in headcount. We anticipate SG&A expenses will increase at a
slower rate than our revenues will expand in the last quarter of fiscal 2000.
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%. During fiscal 1999, we recorded an adjustment to the
restructuring reserve of $1.5 million for the recovery of a previously
written-off machine. The Severance and Benefits reserve balance of $8.7 million
as of March 26, 2000 will be utilized through the remainder of those former
employees' separation contracts.
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Below is a table summarizing restructuring activity relating to the
fiscal 1998 restructurings:
Lease
Payments Abandoned Excess and Credit on Other
Severance On Vacated Fixed Obsolete Returned Exit
and Benefits Facilities Assets Inventory Equipment Costs Total
------------ ---------- --------- ---------- --------- --------- ---------
(in thousands)
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
Recovery of assets -- -- 4,390 849 -- 146 5,385
Cash payments (1,104) (1,930) -- -- -- -- (3,034)
Non-cash charges -- (66) -- -- -- -- (66)
Reversal of restructuring
charges (958) (5,382) (4,390) (849) (1,790) (146) (13,515)
--------- --------- --------- --------- --------- --------- ---------
Balance at March 26, 2000 $ 8,712 $ 5,063 $ -- $ -- $ -- $ -- $ 13,775
========= ========= ========= ========= ========= ========= =========
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. The Severance and Benefits reserve balance of $2.8 million as of
March 26, 2000 will be utilized through the remainder of those former employees'
separation contracts. Most of the Credit on Return Equipment reserve balance of
$3.5 million as of March 26, 2000 will be utilized by the end of the current
calendar year.
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Below is a table summarizing restructuring activity relating to the
fiscal 1999 restructuring:
Severance Lease Payments Credit on
and on Vacated Abandoned Returned
Benefits Facilities Fixed Assets Equipment Total
--------- -------------- ------------ ---------- --------
(in thousands)
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
Recovery of assets -- -- 4,218 -- 4,218
Cash payments (1,738) (509) -- (275) (2,522)
Non-cash Charges -- -- -- (806) (806)
Reversal of restructuring reserve (274) (176) (4,218) (749) (5,417)
-------- -------- -------- -------- --------
Balance at March 26, 2000 $ 2,846 $ -- $ -- $ 3,538 $ 6,384
======== ======== ======== ======== ========
We have carried-out, and continue to carry-out, our restructuring
activities according to our original plans. 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.
Beginning in late fiscal 1999, there were indications of a recovery in
the semiconductor industry. On a global basis, semiconductor makers began adding
new capacity to address an increase in the demand for semiconductors. In
addition to new capacity, the semiconductor industry accelerated a migration to
new materials such as copper and the new interconnect processes required to
implement them. At the end of the second quarter of fiscal 2000, we determined
that the upturn would be sustained and is anticipated to continue through the
end of the calendar year.
During the third quarter of fiscal 2000 we completed the majority of our
restructuring activities in accordance with its previously established and
announced plans. As a result of the stronger than anticipated recovery of the
semiconductor capital equipment market, we were able to recover a portion of the
restructuring charges recorded in prior periods of approximately $18.9 million.
Of this amount, $1.4 million was recovered due to outplacement services
guaranteed by us for terminated employees and other exit costs not being
utilized. Another $5.6 million was recovered from a change in our assessment of
the ability to utilize certain manufacturing and administrative facilities under
long-term operating leases which had been vacated by us. Our management had or
was in the process of securing subleases for these facilities prior to the
upturn in market conditions. Currently, we believe we can reoccupy these
facilities and fully utilize them through the end of their respective lease
terms. We also recovered $3.1 million through the sale of previously abandoned
and written off facilities in Korea. Additionally, we anticipate future use of
leasehold improvements of $5.5 million in certain manufacturing and
administration facilities under operating lease which have been or will be
reoccupied as a result of the stronger than anticipated rebound in our business.
Approximately $0.8 million was recovered from the salvage of CVD inventories
previously segregated and written off due to requests from former customers to
purchase certain piece parts. The remaining $2.5 million was recovered due to
certain
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customers not utilizing system return credits they requested and which were
issued by us as a result of the decision to exit the CVD and FPD businesses.
Purchased Technology for Research and Development
During the second quarter of fiscal 2000, we purchased intellectual
property rights related to the semiconductor equipment industry from Oliver
Design, Inc ("Oliver"). We recognized an expense for the purchase of research
development technology of approximately $7.5 million and capitalized $1.5
million related to acquired patents, which will be amortized ratably over five
years. The technology is being used in a single discrete next generation
post-CMP wafer cleaning product development project and has no future
alternative use. We may make up to $2.0 million in additional license payments
to Oliver based on product sales in the event we are successful in the
commercialization of this technology.
Tax Expenses
Our third fiscal quarter income tax provision was 14% of profits, in
accordance with a revised estimated effective tax rate of 13% for the fiscal
year ending June 25, 2000. This rate reflects the benefit of net operating
losses and research and development tax credits carried over from prior periods.
We expect to increase the effective income tax rate to approximately 30% in
fiscal year 2001, based on our current revenue and profit outlook for that
period.
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
To date, we have not experienced any material Year 2000 related issues,
and we expect minimal future Year 2000 issues based on the performance to date
of internal systems that we use and the products we supply to our customers.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 26, 2000, we had $321.5 million in cash, cash equivalents
and short-term investments, compared with $311.8 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
London Interbank Offered Rate ("LIBOR"). At March 26, 2000, we were in
compliance with all our financial and other covenants.
During the third quarter of fiscal 2000, we entered into a five-year
Operating Lease Agreement (the "Agreement"), relating to certain buildings at
our Fremont, California campus, in order to obtain more favorable terms and to
reduce the amount of the previous minimum lease payments. As part of the
Agreement, we are required to provide a guaranteed residual value of $25.2
million at the end of the lease term.
Net cash provided by operating activities was $38.4 million for the nine
months ended March 26, 2000. This primarily resulted from net income of $128.4
million and uses of working capital, particularly increases in accounts
receivable and inventories required to support the increase in sales volume
offset by increase in accrued liabilities related to employee tax accrual. Also
included in net cash provided by operating activities was the restructuring
recovery of $18.9 million and purchased technology for research and development
for $7.5 million. Cash used in investing activities was $71.2 million, which was
primarily from the net purchase of short-term investments of $20.3 million and
net capital expenditures of $39.0 million. Net cash provided by financing
activities was $22.1 million. We made principal payments on long-term debt and
capital lease obligations of $26.9 million offset by proceeds from the issuance
of short-term debt of $8.7 million. We repurchased $5.1 million of Common Stock
and reissued $13.6 million of our treasury stock through our employee option and
stock purchase programs. Net proceeds from the issuance of our Common Stock
generated $39.0 million. Cash payments relating to our restructurings were
approximately $5.7 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 and available lines of credit at
March 26, 2000 are expected to be sufficient to support our currently
anticipated levels of operations and capital expenditures through at least the
next 12 months.
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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.
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
$400,000 to $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.
WE MAY EXPERIENCE DIFFICULTY TRANSITIONING TO OUR NEW ENTERPRISE
RESOURCE SYSTEM
We implemented a new next-generation enterprise resource planning and
information system in the current quarter of fiscal 2000. It replaced most of
the transactional systems utilized in the past, including core manufacturing,
finance, service, sales, shipping, inventory and warranty operations and other
significant operational systems. Delays in our ability to transition to this new
planning and information system, or disruptions in our internal operations or
systems caused by the transition or the need to free up additional support and
resources in order to ensure our timely transition, could
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temporarily disrupt certain of our operations. This could include a temporary
delay in our ability to manufacture and ship equipment and/or spare parts to our
customers, which could cause a near-term short fall in quarterly operating
results, including revenues and earnings.
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 two years 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.
However, beginning in late fiscal 1999, we saw indications of a recovery, which
is expected to extend through calendar 2000. Fluctuating 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
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 be unable 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
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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 the development of new
products, we will invest in significant levels of initial production inventory.
Our failure in a timely manner to complete commercialization of these new
products could result in inventory obsolescence, which would adversely affect
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. 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 SpeedFam-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. 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 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;
- an improved version of products being offered by a competitor in
the market we participate in;
- technological change which we are unable to match in our
products; and
- a failure to release new enhanced versions of our products on a
timely basis.
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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 CUSTOMER
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 that specific
production line application. Accordingly, we expect it to be more difficult to
sell 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 resources 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.
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.
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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, 70% for the nine months
ended March 26, 2000 and 51% for the nine months ended March 31, 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 short term impact of exchange rate fluctuations on yen-denominated 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. These
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 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, transport or disposal of hazardous
substances could subject us to future liabilities.
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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 Flat Panel Display and
Chemical Vapor Deposition 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 past 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;
- shortfalls in our revenues or earnings from levels securities
analysts expect;
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- 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 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 options are
exercised. Conversely, 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.
During fiscal 1999, we entered into third party option transactions for
the purchase and sale of our Common Stock, in order to offset the dilutive
effect of a potential conversion into Common Stock of the $310.0 million
Convertible Subordinated Notes (the "Notes") we previously issued and which are
due September 2, 2002. We have as of March 26, 2000 acquired call options to
purchase 3.72 million shares of our Common Stock. The weighted average exercise
price of these options is $11.29. The call options provide that our maximum
benefit at expiration is $17.97 per option share (the difference between $29.26,
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 5.58 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 $9.48 per share.
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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.
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
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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 Part II Item 1 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 the
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".
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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 third party option transactions for
the purchase and sale of our Common Stock, in order to offset the dilutive
effect of a potential conversion into Common Stock of the $310.0 million
Convertible Subordinated Notes (the "Notes") we previously issued and which are
due September 2, 2002. We have as of March 26, 2000 acquired call options to
purchase 3.72 million shares of our Common Stock. The weighted average exercise
price of these options is $11.29. The call options provide that our maximum
benefit at expiration is $17.97 per option share (the difference between $29.26,
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 5.58 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 $9.48 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.
At March 26, 2000 At Maturity
----------------- -----------
Stock Value (in thousands)
- -----------
$ 5.00 $(20,441) $(24,883)
$ 15.00 $ 7,372 $ 13,988
$ 25.00 $ 22,597 $ 50,417
$ 35.00 $ 31,852 $ 66,162
$ 45.00 $ 37,880 $ 66,722
$ 55.00 $ 42,009 $ 66,729
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In October 1993, Varian brought suit against 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 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, there has been no
determination as to the actual scope of those claims, or whether our products
have infringed or are infringing Varian's patents. The trial date previously
scheduled for March 2000 has been vacated, pending the court's decision of
certain motions. There have been no findings in the action which have caused us
reasonably to believe that any infringement, if found, or any damages, if
awarded, would have a material adverse effect on our operating results or our
financial position.
In September 1999, Tegal brought suit against 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 held
by Tegal. Specifically, Tegal identified our 4520XLE and Exelan products as
infringing the patents Tegal is asserting. On our motion, this case was
transferred to California and is now pending in the United States District Court
for the Northern District of California. To date, however, there has been no
determination as to the actual scope of those claims, or whether our 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 us reasonably to believe that any infringement, if found, or
any damages, if awarded, could have a material adverse effect on our operating
results or our financial position.
From time to time, we have received notices from third parties alleging
infringement of such parties' patent or other intellectual property rights by
our products. In such cases, it is our policy to defend the claims or negotiate
licenses on commercially reasonable terms, where considered appropriate.
However, no assurance can be given that we 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 our business and financial results.
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ITEM 4. Submission of Matters to Vote of Security Holders
A Special Meeting of our stockholders (the "Meeting") was held at the
principal executive offices located at 4650 Cushing Parkway, Fremont, California
94538, at 11:00 A.M. on Monday, March 6, 2000. According to the certified list
of stockholders at the date of the Meeting, there were 40,547,716 shares of our
Common Stock outstanding and entitled to vote. There were present at the
Meeting, in person or by proxy, the holders of 37,415,913 shares of our Common
Stock, representing 92% of the total votes eligible to be cast, constituting a
majority and more than a quorum of the outstanding shares entitled to vote.
At the meeting, our stockholders approved an increase in the number of
authorized shares of our Common Stock from 90 million to 400 million shares and
approved a three-for-one stock split of our outstanding shares of Common Stock.
Stockholders' approval of the amendment to our Certificate of Incorporation
satisfies the condition for the previously announced three-for-one stock split
approved by our Board of Directors on January 21, 2000.
For 29,005,035
Against 8,392,992
Abstain 17,886
Broker Non-vote N/A
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.70 Lease Agreement between Lam Research Corporation
and Scotiabanc Inc., dated January 10, 2000.
Exhibit 10.71 Participation Agreement between Lam Research
Corporation, Scotiabanc Inc., and The Bank of Nova
Scotia, dated January 19, 2000.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
We filed a Form 8-K on January 24, 2000 making an Item 5
disclosure to disclose our announcement of the Board of
Directors approval, subject to obtaining stockholder approval
for a three-for-one split of our outstanding Common Stock and an
increase in our authorized number of shares of Common Stock to
400 million shares (up from 90 million authorized shares).
We filed a Form 8-K on March 6, 2000 making an Item 5 disclosure
to disclose our announcement of our stockholders approval for a
three-for-one stock split of our outstanding shares of Common
Stock and increase of our authorized Common Stock to 400 million
shares.
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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: May 8, 2000
LAM RESEARCH CORPORATION
By: /s/ Mercedes Johnson
----------------------------------------
Mercedes Johnson, Vice President,
Finance & Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
Exhibit 10.70 Lease Agreement between Lam Research Corporation
and Scotiabanc Inc., dated January 10, 2000.
Exhibit 10.71 Participation Agreement between Lam Research
Corporation, Scotiabanc Inc., and The Bank of Nova
Scotia, dated January 19, 2000.
Exhibit 27 Financial Data Schedule