1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended APRIL 27, 1997 or
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-6920
------
APPLIED MATERIALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-1655526
- - --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3050 Bowers Avenue, Santa Clara, California 95054-3299
- - --------------------------------------------------------------------------------
Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code (408) 727-5555
--------------
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 .
--- ---
Number of shares outstanding of the issuer's common stock as of April 27,
1997: 181,509,733
2
PART I. FINANCIAL INFORMATION
APPLIED MATERIALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
- - --------------------------------------------------------------------------------------------
April 27, April 28, April 27, April 28,
(In thousands, except per share amounts) 1997 1996 1997 1996
- - --------------------------------------------------------------------------------------------
Net sales $ 900,862 $1,127,855 $1,736,638 $2,168,435
Cost of products sold 486,845 586,564 950,965 1,130,344
---------- ---------- ---------- ----------
Gross margin 414,017 541,291 785,673 1,038,091
Operating expenses:
Research, development and
engineering 131,973 124,918 248,465 235,270
Marketing and selling 74,965 80,587 141,236 157,869
General and administrative 59,617 54,820 119,225 104,375
Acquired in-process research and
development - - 59,500 -
---------- ---------- ---------- ----------
Income from operations 147,462 280,966 217,247 540,577
Interest expense 4,935 4,917 10,735 10,085
Interest income 14,598 9,829 28,155 19,426
---------- ---------- ---------- ----------
Income from consolidated companies
before taxes 157,125 285,878 234,667 549,918
Provision for income taxes 54,994 100,057 102,959 192,471
---------- ---------- ---------- ----------
Income from consolidated companies 102,131 185,821 131,708 357,447
Equity in net income/(loss) of joint
venture - - - -
---------- ---------- ---------- ----------
Net income $ 102,131 $ 185,821 $ 131,708 $ 357,447
---------- ---------- ---------- ----------
Earnings per share $ .54 $ 1.01 $ .71 $ 1.94
---------- ---------- ---------- ----------
Average common shares and equivalents 187,899 183,699 186,762 183,921
- - -----------------------------------------------------------------------------------------
See accompanying notes to consolidated condensed financial statements.
2
3
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS*
- - ----------------------------------------------------------------------------------
April 27, Oct. 27,
(In thousands) 1997 1996
- - ----------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 202,660 $ 403,888
Short-term investments 872,190 633,744
Accounts receivable, net 807,181 822,384
Inventories 507,632 478,552
Deferred income taxes 278,352 281,586
Other current assets 83,295 72,915
---------- ----------
Total current assets 2,751,310 2,693,069
Property, plant and equipment, net 900,041 919,038
Other assets 240,510 25,880
---------- ----------
Total assets $3,891,861 $3,637,987
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 19,892 $ 77,522
Current portion of long-term debt 7,659 22,640
Accounts payable and accrued expenses 875,808 791,897
Income taxes payable 147,713 43,168
---------- ----------
Total current liabilities 1,051,072 935,227
Long-term debt 227,808 275,485
Deferred income taxes and other liabilities 107,601 56,850
---------- ----------
Total liabilities 1,386,481 1,267,562
---------- ----------
Stockholders' equity:
Common stock 1,815 1,802
Additional paid-in capital 781,281 763,376
Retained earnings 1,731,272 1,599,564
Cumulative translation adjustments (8,988) 5,683
---------- ----------
Total stockholders' equity 2,505,380 2,370,425
---------- ----------
Total liabilities and stockholders' equity $3,891,861 $3,637,987
- - ----------------------------------------------------------------------------------
* Amounts as of April 27, 1997 are unaudited. Amounts as of October 27, 1996
were obtained from the October 27, 1996 audited financial statements.
See accompanying notes to consolidated condensed financial statements.
3
4
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- - -----------------------------------------------------------------------------------
Six Months Ended
April 27, April 28,
(In thousands) 1997 1996
- - -----------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 131,708 $ 357,447
Adjustments required to reconcile net income
to cash provided by operations:
Acquired in-process research & development 59,500 -
Deferred taxes 4,095 1,404
Depreciation and amortization 105,826 63,143
Equity in net income/(loss) of joint venture - -
Changes in assets and liabilities, net of amounts
acquired:
Accounts receivable 16,303 (228,277)
Inventories (15,243) (136,132)
Other current assets (7,303) 12,963
Other assets (317) (2,047)
Accounts payable and accrued expenses 68,807 139,295
Income taxes payable 106,458 (81,332)
Other liabilities 5,284 10,325
--------- ---------
Cash provided by operations 475,118 136,789
--------- ---------
Cash flows from investing activities:
Capital expenditures, net of dispositions (76,521) (249,206)
Cash paid for acquisitions, net of cash acquired (246,565) -
Proceeds from sales of short-term investments 244,937 328,489
Purchases of short-term investments (483,383) (287,407)
--------- ---------
Cash used for investing (561,532) (208,124)
--------- ---------
Cash flows from financing activities:
Short-term debt activity, net (58,318) (9,568)
Long-term debt activity, net (55,807) 8,506
Common stock transactions, net 771 (12,717)
--------- ---------
Cash used for financing (113,354) (13,779)
--------- ---------
Effect of exchange rate changes on cash (1,460) (738)
--------- ---------
Decrease in cash and cash equivalents (201,228) (85,852)
Cash and cash equivalents - beginning of period 403,888 285,845
--------- ---------
Cash and cash equivalents - end of period $ 202,660 $ 199,993
- - -----------------------------------------------------------------------------------
For the six months ended April 27, 1997, cash payments for interest were $9,908
and net income tax refunds were $8,190. For the six months ended April 28, 1996,
cash payments for interest and income taxes were $12,053 and $253,118,
respectively.
See accompanying notes to consolidated condensed financial statements.
4
5
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED APRIL 27, 1997
(IN THOUSANDS)
1) Basis of Presentation
In the opinion of management, the unaudited consolidated condensed financial
statements included herein have been prepared on a consistent basis with the
October 27, 1996 audited consolidated financial statements and include all
material adjustments, consisting of normal recurring adjustments, necessary
to fairly present the information set forth therein. These interim financial
statements should be read in conjunction with the October 27, 1996 audited
consolidated financial statements and notes thereto.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ materially from those amounts.
2) Acquisitions
During the first quarter of fiscal 1997, the Company acquired two companies
(Opal, Inc. and Orbot Instruments, Ltd.) in separate transactions for
approximately $293 million, consisting primarily of cash. Opal, Inc. ("Opal")
is a supplier of CD-SEM (critical dimension scanning electron microscope)
systems for use in semiconductor manufacturing. Orbot Instruments, Ltd.
("Orbot") supplies wafer and reticle inspection systems for use in the
production of semiconductors. The acquisitions were completed by the early
part of January 1997, and have been accounted for using the purchase method
of accounting; accordingly, the Company's consolidated results of operations
for the six months ended April 27, 1997 include the operating results of Opal
and Orbot subsequent to their acquisition dates.
In connection with the acquisitions, the Company incurred a $59.5 million
pre-tax charge, or $0.32 per share after tax, for acquired in-process
research and development. With the exception of this charge, the Company's
results of operations for the six months ended April 27, 1997 were not
materially impacted by the acquisitions. As of April 27, 1997, the Company
had $213 million of net intangible assets (see note 5) and $46 million of
deferred tax liabilities that resulted from the acquisitions. With the
exception of these items, the Company's financial condition as of April 27,
1997 has not been materially impacted by the acquisitions.
The Company's pro-forma net sales, income from operations, net income and
earnings per share for the six months ended April 27, 1997 and April 28,
1996, assuming the acquisitions occurred at the beginning of such periods,
would not have been materially different from the actual amounts reported for
such periods.
5
6
3) Earnings Per Share
Earnings per share has been computed using the weighted average number of
common shares and equivalents outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 (SFAS 128), "Earnings Per Share,"
which the Company is required to adopt in the first quarter of fiscal 1998.
Under the requirements of SFAS 128, primary earnings per share will be
replaced by basic earnings per share and the dilutive effect of stock options
will be excluded from its calculation. For companies with potentially
dilutive securities such as outstanding stock options, fully diluted earnings
per share will be replaced with diluted earnings per share. Upon adoption of
SFAS 128, the Company's basic earnings per share for the second quarter of
fiscal 1997 and 1996 are expected to be $0.56 and $1.04, respectively, and
diluted earnings per share for the same periods are expected to be $0.54 and
$1.01, respectively.
4) Inventories
Inventories are stated at the lower of cost or market, with cost determined
on a first-in, first- out (FIFO) basis. The components of inventories are as
follows:
April 27, 1997 October 27, 1996
-------------- ----------------
Customer service spares $181,795 $182,320
Systems raw materials 67,688 70,959
Work-in-process 178,588 140,964
Finished goods 79,561 84,309
-------- --------
$507,632 $478,552
======== ========
5) Other Assets
The components of other assets are as follows:
April 27, 1997 October 27, 1996
-------------- ----------------
Purchased technology, net $198,709 $ -
Goodwill, net 14,375 -
Other 27,426 25,880
-------- --------
$240,510 $ 25,880
======== ========
Purchased technology and goodwill are presented at cost, net of accumulated
amortization, and are being amortized using the straight-line method over
their estimated useful lives of eight years. The Company periodically
analyzes these assets to determine whether an impairment in carrying value
has occurred. The Company does not believe that any impairment has occurred
to date.
6
7
6) Accounts Payable and Accrued Expenses
The components of accounts payable and accrued expenses are as follows:
April 27, 1997 October 27, 1996
-------------- ----------------
Accounts payable $258,962 $192,607
Compensation and benefits 158,043 170,881
Installation and warranty 188,258 187,873
Other 270,545 240,536
-------- --------
$875,808 $791,897
======== ========
7) Early Retirement of Debt
During the first quarter of fiscal 1997, the Company repaid its unsecured
senior notes prior to their scheduled maturities. The noteholders received
approximately $56 million, representing principal, accrued interest and
prepayment charges, on December 19, 1996. The prepayment charge was not
material.
8) Litigation Settlement
On May 5, 1997, the Company announced a settlement of all outstanding
litigation with Novellus Systems, Inc., pursuant to which the Company
received $80 million in damages from Novellus for past patent infringement.
This amount will be reflected in the Company's results of operations for the
third fiscal quarter ending July 27, 1997. Novellus also agreed to pay
ongoing royalties for certain system shipments subsequent to the date of the
settlement.
7
8
APPLIED MATERIALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
=============================================================================
ACQUISITIONS
During the first quarter of fiscal 1997, the Company acquired Opal, Inc.
("Opal") and Orbot Instruments, Ltd. ("Orbot") in separate transactions for
approximately $293 million, consisting primarily of cash. Opal is a supplier
of CD-SEM (critical dimension scanning electron microscope) systems for use in
semiconductor manufacturing. Orbot supplies wafer and reticle inspection
systems for use in the production of semiconductors. These acquisitions marked
the Company's entry into the metrology and inspection semiconductor equipment
markets. The acquisitions were completed by the early part of January 1997,
and have been accounted for using the purchase method of accounting;
accordingly, the Company's consolidated results of operations for the six
months ended April 27, 1997 include the operating results of Opal and Orbot
subsequent to their acquisition dates. In connection with the acquisitions,
the Company recorded a one-time, pre-tax charge of $59.5 million, or $0.32 per
share after tax, for acquired in-process research and development. With the
exception of this charge, the acquisitions did not materially impact the
Company's results of operations for the six months ended April 27, 1997.
RESULTS OF OPERATIONS
During the latter half of the Company's fiscal 1996, the semiconductor
industry began a period of transition during which sharply lower memory device
prices and excess production capacity caused the Company's customers to reduce
their purchases of semiconductor manufacturing equipment and push out delivery
of previously ordered systems. The Company's results of operations for the
last four fiscal quarters have reflected this industry slowdown. The Company
believes that the low point of its business cycle occurred in the fourth
quarter of fiscal 1996, during which the Company received $683 million of new
orders. The Company's new orders have increased in each of the last two fiscal
quarters, and net sales increased in the second quarter of fiscal 1997,
compared to net sales in the first quarter of fiscal 1997. New orders and net
sales are expected to increase modestly in each of the next two fiscal
quarters. Although quarterly new orders and net sales are improving, they have
not yet returned to the levels achieved during the first two quarters of
fiscal 1996.
8
9
New orders of $1,014 million were received during the second quarter of fiscal
1997, versus new orders of $905 million in the first quarter of fiscal 1997.
The increase in new orders is primarily the result of strengthening demand for
the Company's advanced technologies, including 0.25 micron capable production
systems, from logic and microprocessor device manufacturers, and selected
strategic investments by DRAM manufacturers. North America (primarily the
United States) new orders increased to $406 million in the second quarter of
fiscal 1997 from $252 million in the first quarter of fiscal 1997; Europe
increased to $136 million from $94 million; Japan increased to $221 million
from $214 million; Korea decreased to $66 million from $135 million; and
Asia-Pacific (Taiwan, China and Southeast Asia) decreased to $185 million from
$210 million. Backlog at April 27, 1997 was $1,485 million, versus $1,448
million at January 26, 1997 and $1,423 million at October 27, 1996.
The Company's net sales for the three and six months ended April 27, 1997
decreased 20.1 and 19.9 percent, respectively, from the corresponding periods of
fiscal 1996. These decreases occurred in all regions except Asia-Pacific, and
are primarily the result of the industry slowdown discussed earlier. Sales by
region as a percentage of total sales were as follows:
Three Months Ended Six Months Ended
April 27, April 28, April 27, April 28,
1997 1996 1997 1996
--------------------------------------------------
North
America 39% 32% 37% 35%
Europe 14% 15% 19% 18%
Japan 15% 23% 15% 22%
Korea 11% 14% 9% 11%
Asia-Pacific 21% 16% 20% 14%
The Company's gross margin for the three and six months ended April 27, 1997
was 46.0 and 45.2 percent, respectively, compared to 48.0 and 47.9 percent for
the corresponding periods of fiscal 1996. These decreases can be attributed
primarily to reduced business volume and product pricing pressures associated
with reduced demand for semiconductor manufacturing equipment. The Company's
gross margin of 46.0 percent in the second quarter of fiscal 1997 improved
from 44.5 percent in the first quarter of fiscal 1997 due to increased
business volume, manufacturing material cost reductions and improved
manufacturing efficiencies. For these same reasons, management expects the
Company's gross margin to increase slightly in each of the next two fiscal
quarters.
9
10
Excluding the charge for acquired in-process research and development incurred
in connection with the acquisitions of Opal and Orbot, operating expenses as a
percentage of net sales for the three and six months ended April 27, 1997 were
29.6 and 29.3 percent, respectively, versus 23.1 and 22.9 percent for the
corresponding periods in fiscal 1996. These increases are primarily
attributable to reduced business volume and additional research and
development costs for 300mm wafer technology. Research and development
spending is expected to increase in each of the next two fiscal quarters as
the Company accelerates its 300mm product development programs.
Significant operations of the Company are conducted in foreign currencies,
primarily Japanese yen. Forward exchange contracts and options are purchased
to hedge certain existing firm commitments and foreign currency denominated
transactions expected to occur during the next year. Gains and losses on hedge
contracts are reported in income when the related transactions being hedged
are recognized. Because the impact of movements in currency exchange rates on
foreign exchange contracts generally offsets the related impact on the
underlying items being hedged, these financial instruments are not expected to
subject the Company to risks that would otherwise result from changes in
currency exchange rates. Exchange gains and losses did not have a significant
effect on the Company's results of operations for the three and six months
ended April 27, 1997 or April 28, 1996.
Interest expense for the three and six months ended April 27, 1997 was $4.9
million and $10.7 million, respectively, compared to $4.9 million and $10.1
million, respectively, for the corresponding periods of fiscal 1996. The
Company's debt consists mainly of long-term debt bearing interest at fixed
rates. Therefore, fluctuations in interest expense from period to period were
primarily due to changes in the Company's average short-term debt outstanding
during those periods.
Interest income for the three and six months ended April 27, 1997 was $14.6
million and $28.2 million, respectively, compared to $9.8 million and $19.4
million, respectively, for the corresponding periods of fiscal 1996. These
increases can be attributed primarily to higher average cash and investment
balances.
The Company's effective income tax rate for the second quarter of fiscal 1997
was 35 percent, consistent with the rate for the three and six months ended
April 28, 1996. For the six months ended April 27, 1997, the effective rate
was higher than the expected rate of 35 percent, due to the non-deductible
nature of the $59.5 million acquisition related charge discussed above.
Management anticipates that the Company's effective income tax rate for the
remainder of fiscal 1997 will be 35 percent.
10
11
The Company's results of operations for the three and six months ended April
27, 1997 are not necessarily indicative of future operating results.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition remained strong as of April 27, 1997, with a
ratio of current assets to current liabilities of 2.6:1, compared to 2.9:1 at
October 27, 1996. The Company had $1.1 billion of cash and short-term
investments as of April 27, 1997, slightly above the amount at the end of
fiscal 1996, despite significant outflows related to the acquisitions of Opal
and Orbot and early retirement of certain debt (discussed in note 7 to the
Consolidated Condensed Financial Statements).
The Company generated $475 million of cash from operations in the first six
months of fiscal 1997. This resulted primarily from net income (plus non-cash
charges for depreciation, amortization and acquired in-process research and
development) of $297 million, an increase in accounts payable and accrued
expenses of $69 million and an increase in income taxes payable of $106
million.
Cash used for investing activities of $562 million was primarily for
acquisitions ($247 million, net of cash acquired), net purchases of short-term
investments ($238 million) and net property, plant and equipment acquisitions
of $77 million.
Cash used for financing activities of $113 million was primarily for net
short-term debt repayments and the early retirement of certain long-term debt.
At April 27 1997, the Company's principal sources of liquidity consisted of
$1,075 million of cash, cash equivalents and short-term investments, $194
million of unissued notes registered under the Company's medium-term note
program and $337 million of available credit facilities. During the second
quarter of fiscal 1997, the Company amended its $240 million line of credit
(included in available credit facilities discussed above) to extend the
expiration to April 2001 from February 2000. The Company's liquidity is
affected by many factors, some of which are based on the normal on-going
operations of the business, and others of which relate to the uncertainties of
the industry and global economies. Although the Company's cash requirements
will fluctuate based on the timing and extent of these factors, management
believes that cash generated from operations, together with existing sources
of liquidity, will be sufficient to satisfy the Company's requirements for the
next twelve months.
11
12
Capital expenditures are expected to approximate $350 million in fiscal 1997,
up from the Company's prior estimate of $250 million. This increase can be
attributed primarily to additional applications lab and research and
development capabilities for 300mm technology. The Company's estimated capital
expenditures are based on its anticipated needs, which change from time to
time as business conditions change. This amount includes funds for the
continuation and completion of facilities improvements and investments in
demonstration and test equipment, information systems and other capital
equipment.
The Company is authorized to repurchase additional shares of its common stock
in the open market through February 1999 in amounts that are intended to
substantially offset the dilution resulting from its stock-based employee
benefit and incentive plans. The Company repurchased 500,000 shares of its
common stock during the first six months of fiscal 1997, for a total cash
outlay of approximately $25 million.
12
13
RISKS AND UNCERTAINTIES
When used in this Management's Discussion and Analysis, the words "expect,"
"anticipate," "estimate" and similar expressions are intended to identify
forward-looking statements. These statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to,
those discussed below.
The semiconductor industry has historically been cyclical and subject to
unexpected periodic downturns associated with sudden changes in supply and
demand. Although the Company's new orders and net sales are improving, and the
semiconductor industry appears to be recovering from the slowdown experienced
in 1996, the Company's ability to accurately predict the industry's cycles and
their effects on the semiconductor manufacturing equipment industry is
limited. For this reason, the Company's expectations with respect to new
orders and revenues for the next two fiscal quarters of 1997 may not be met.
It is also possible that the length and severity of future industry cycles
could be much different from those of previous cycles.
The Company's backlog as of April 27, 1997 was approximately $1,485 million,
up slightly from $1,448 million as of January 26, 1997 and $1,423 million as
of October 27, 1996. The Company schedules production of its systems based
upon order backlog and customer commitments. The backlog includes only those
orders for which written authorizations have been accepted and shipment dates
within 12 months have been assigned. Due to the potential for the cancellation
of orders and changes in customer delivery schedules, the Company's backlog at
any particular date is not necessarily indicative of actual sales for any
succeeding period.
The Company sells systems to, and provides services for, semiconductor
manufacturers located throughout the world. Each region in the global
semiconductor equipment market exhibits unique characteristics which cause
capital equipment investment patterns to vary from period to period. Although
international markets provide the Company with significant growth
opportunities, periodic economic downturns, trade balance issues, political
instability and fluctuations in interest and foreign currency exchange rates
are all risks which could affect global product and service demand. The
Company actively manages its exposure to changes in foreign currency exchange
rates; however, there can be no assurance that future changes in foreign
currency exchange rates will not have a material effect on its results of
operations or financial condition.
13
14
The Company operates in a highly competitive industry characterized by
increasingly rapid technological changes. The Company's competitive advantage
is therefore primarily dependent on its ability to timely and successfully
develop new products, technologies, processes and services (including those
for 300mm wafers and 0.25 micron and below devices), as well as its ability to
successfully develop and/or penetrate new and existing markets and to ramp
production to meet customer demands. If the Company is unable, for whatever
reason, to introduce leading-edge products, technologies, processes and
services to the market in a timely manner, its results of operations could be
adversely affected.
The Company has a number of programs in place to reduce the cost of
manufacturing its products and providing its services. These programs focus
primarily on improving manufacturing efficiencies and partnering with the
Company's suppliers to obtain materials at the lowest possible price. If the
Company's programs are not successful or results of the programs are not
achieved when anticipated, the Company's expected improvement in its gross
margin in each of the next two fiscal quarters may not be attained. In
addition, if the Company is not able, for whatever reason, to maintain its
gross margin at the current level, its results of operations could be
adversely affected.
The Company completed its acquisitions of Opal and Orbot during its first
quarter of fiscal 1997. These acquisitions marked the Company's entrance into
the metrology and inspection semiconductor manufacturing equipment market. To
date, the Company's results of operations have not been materially impacted as
a result of the acquisitions, except for a one-time charge for acquired
in-process research and development. However, the Company does expect the
acquired companies to contribute significantly to its results of operations at
some point in the future. If the Company is not able to successfully integrate
the operations of these newly acquired companies or expand their customer
bases, the Company's expectations of its future results of operations may not
be met. Also, to the extent that there is an impairment, for whatever reason,
in the value of intangible assets recorded in connection with the
acquisitions, the Company's results of operations could be adversely affected.
The Company is currently involved in litigation regarding patents and other
intellectual property rights and could become involved in additional
litigation in the future. There can be no assurance about the outcome of
current or future litigation or patent infringement inquiries.
The Company undertakes no obligation to update the information, including the
forward-looking statements, contained in this Form 10-Q.
14
15
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In the first of two lawsuits filed by the Company, captioned Applied
Materials, Inc. v. Advanced Semiconductor Materials America, Inc.(ASMA),
Epsilon Technology, Inc. (doing business as ASM Epitaxy) and Advanced
Semiconductor Materials International N.V. (collectively "ASM") (case no.
C-91-20061-RMW), Judge William Ingram of the United States District Court for
the Northern District of California ruled on April 26, 1994 that ASM's Epsilon
I epitaxial reactor infringed three of the Company's United States patents and
issued an injunction against ASM's use or sale of the atmospheric versions of
ASM Epsilon I in the United States. On October 28, 1996, the U.S. Court of
Appeals for the Federal Circuit decided ASM's appeal of this decision,
affirming the trial court's judgment that one of the Company's patents is
valid and infringed. A permanent injunction is now effective which prohibits
ASM's use and sale of its epitaxial reactors in the United States.
The trial of the Company's second patent infringement lawsuit against ASM,
captioned Applied Materials, Inc. v. ASM (case no. C-92-20643-RMW), was
concluded before Judge Whyte in May 1995. On November 1, 1995, the Court
issued its judgment holding that two of the Company's United States patents
were valid and infringed by reduced pressure versions of ASM's Epsilon I
epitaxial reactors. ASM appealed this decision. On December 17, 1996, the U.S.
Court of Appeals for the Federal Circuit rejected ASM's appeal, and affirmed
the District Court's ruling. A permanent injunction was entered on March 7,
1996 prohibiting ASM's manufacture, use or sale of reduced pressure versions
of its Epsilon I epitaxial reactors within the United States. Trial in the
District Court has been set for July 28, 1997 to determine ASM's liability,
damages and willfulness, for both case no. C-91-20061-RMW and C-92-20643-RMW.
In a separate lawsuit filed by ASM against the Company involving one patent
relating to the Company's single wafer epitaxial product line, captioned ASM
America, Inc. v. Applied Materials, Inc. (case no. C-93-20853-RMW), the Court
granted three motions for summary judgment in favor of the Company which
eliminate the Company's liability on this patent. ASM has not indicated
whether it intends to appeal this matter. The Company's counterclaims against
ASM for inequitable conduct were denied by the Court on April 11, 1997. A
separate action severed from ASM's case, captioned ASM America, Inc. v.
Applied Materials, Inc. (case no. C-95-20169-RMW), involves one United States
patent which relates to the Company's Precision 5000 product. A previously set
trial date has been vacated; no trial date is currently
15
16
scheduled. In these cases, ASM seeks injunctive relief, damages and such other
relief as the Court may find appropriate.
Further, the Company has filed a Declaratory Judgment action against ASM,
captioned Applied Materials, Inc. v. ASM (case no. C-95-20003-RMW), requesting
that an ASM United States patent be held invalid and not infringed by the
Company's single wafer epitaxial product line. No trial date has been set. On
April 10, 1996, the Court denied ASM's motion for summary judgment and granted
the Company's motion for summary judgment finding several independent grounds
why the Company's reactors do not literally infringe ASM's patent. With this
ruling, the Company's liability has been substantially eliminated on this
patent. ASM has not indicated whether it intends to appeal this decision. On
July 7, 1996, ASM filed a lawsuit, captioned ASM America, Inc. v. Applied
Materials, Inc. (case no. C95-20586-RMW), concerning alleged infringement of a
United States patent by susceptors in chemical vapor deposition chambers.
Discovery is proceeding, and no trial date has been scheduled.
On January 13, 1997, the Company filed a patent infringement suit against ASM,
captioned Applied Materials, Inc. v. ASMA, et al. (case no.
C-97-20045-RMW(EAI)) in the United States District Court, Northern District of
California, regarding ASM's newly announced Epsilon 2000 reactor. Discovery is
commencing, and no trial date has been scheduled.
In September 1994, General Signal Corporation filed a lawsuit against the
Company, captioned General Signal Corporation v. Applied Materials, Inc. (case
no. 94-461-JJF) in the United States District Court, District of Delaware.
General Signal alleges that the Company infringes five of General Signal's
United States patents by making, using, selling or offering for sale
multi-chamber wafer fabrication equipment, including the Precision 5000 series
machines, for example. General Signal seeks an injunction, multiple damages
and costs, including reasonable attorneys' fees and interest, and such other
relief as the court may deem appropriate. A previously scheduled trial date
has been vacated; no trial date is currently scheduled.
On May 5, 1997, the Company entered into a comprehensive, global settlement
with Novellus Systems, Inc. which included a termination of all outstanding
litigation and cross licenses of patents related to certain aspects of
chemical vapor deposition. Pursuant to the settlement, Novellus paid the
Company $80 million in damages for past patent infringement and will pay a
royalty for all future shipments of TEOS-based systems. The parties have
stipulated to dismiss the three cases pending between them in the United
States District Court for the Northern District of California.
16
17
As a result of the Company's acquisition of Orbot, the Company is involved in
a lawsuit captioned KLA Instruments Corporation v. Orbot (case no.
C93-20886-JW) in the United States District Court, Northern District of
California, alleging infringement of one patent regarding equipment for the
inspection of masks or reticles, and seeking an injunction, damages and such
other relief as the Court may find appropriate. There has been discovery, but
no trial date has been scheduled.
In the normal course of business, the Company from time to time receives and
makes inquiries regarding possible patent infringement. Management believes
that it has meritorious defenses and intends to pursue these matters
vigorously.
Item 4. Submission of Matters to a Vote of Security-Holders
The Annual Meeting of Stockholders was held on March 19, 1997 in Santa Clara,
California. Eight incumbent directors were re-elected without opposition to
serve another one-year term in office. The results of this election were as
follows:
Name of Director Votes For Votes Withheld
-----------------------------------------------------------
James C. Morgan 142,829,156 468,407
Dan Maydan 142,790,061 507,502
Michael H. Armacost 142,843,023 454,540
Herbert M. Dwight, Jr. 142,843,748 453,815
Philip V. Gerdine 142,846,578 450,985
Tsuyoshi Kawanishi 142,841,398 456,165
Paul R. Low 142,836,568 460,995
Alfred J. Stein 142,846,313 451,250
On a proposal to amend the Company's 1995 Equity Incentive Plan to increase
the number of shares issuable thereunder by 6,000,000 shares, there were
89,066,659 votes cast in favor, 51,484,911 votes cast against, 593,099
abstentions and 2,152,894 broker non-votes.
17
18
Item 5. Other Information
The ratio of earnings to fixed charges for the six months ended April 27, 1997
and April 28, 1996, and for each of the last five fiscal years, was as
follows:
Six Months Ended Fiscal Year
------------------- --------------------------------------------
April 27, April 28,
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
11.73x 24.66x 20.14x 21.25x 13.37x 7.61x 3.63x
====== ====== ====== ====== ====== ===== =====
The Company's ratio of earnings to fixed charges for the six months ended
April 27, 1997 was computed on a consistent basis with the ratio for 1996, as
detailed in Exhibit 12.1 of the Company's Annual Report on Form 10-K for its
fiscal year ended October 27, 1996.
Item 6. Exhibits and Reports on Form 8=K
a) Exhibits are numbered in accordance with the Exhibit Table of Item 601 of
Regulation S=K:
10.1 Amended and Restated Credit Agreement, dated April 4, 1997 among
Applied Materials, Inc., the Banks party hereto, and Morgan
Guaranty Trust Company of New York
10.2 Amendment No. 1 to Amended and Restated Credit Agreement, dated
May 7, 1997
10.3 Resolution pertaining to the Amendment of the Applied Materials,
Inc. 1995 Equity Incentive Plan, adopted by the Stock Option
and Compensation Committee of the Board of Directors of Applied
Materials, Inc. on December 12, 1996
18
19
10.4 Participation Agreement dated as of April 30, 1997 among Applied
Materials, Inc. (as Lessee and Construction Agent), Credit Suisse
Leasing 92A, L.P., (as Lessor and Borrower), Greenwich funding
Corporation (as CP Lender), The Persons Named on Schedule I (as
Eurodollar Lenders) and Credit Suisse First Boston (acting
through its New York Branch, as Agent)
10.5 Appendix 1 to Participation Agreement, Master Lease Agreement and
Loan Agreement, dated as of April 30, 1997 (Definitions and
Interpretation) for Applied Materials, Inc.
10.6 Loan Agreement dated as of April 30, 1997 among Credit Suisse
Leasing 92A, L.P. (as Borrower), Greenwich Funding Corporation
(as CP Lender), The Persons Named on Schedule I (as Eurodollar
Lenders) and Credit Suisse First Boston (acting through its New
York Branch as Agent) for Revolving Commercial Paper, Eurodollar
Credit and Base Rate Program
10.7 Real Estate and Equipment Facility Master Lease dated as of April
30, 1997 between Credit Suisse Leasing 92A, L.P. (as Lessor), and
Applied Materials, Inc. (as Lessee)
b) A Report on Form 8-K was filed on May 13, 1997. The report contained a
press release dated May 5, 1997, announcing a litigation settlement with
Novellus Systems, Inc. The report also included the Company's financial
statements for the period ended April 27, 1997, as attached to its earnings
release dated May 13, 1997.
19
20
SIGNATURE
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.
APPLIED MATERIALS, INC.
June 10, 1997 By: \s\Gerald F. Taylor
--------------------
Gerald F. Taylor
Senior Vice President and
Chief Financial Officer
(Principal Financial
Officer)
By: \s\Michael K. O'Farrell
-------------------------
Michael K. O'Farrell
Vice President and
Corporate Controller
(Principal Accounting
Officer)
20
21
INDEX TO EXHIBITS
10.1 Amended and Restated Credit Agreement, dated April 4, 1997 among
Applied Materials, Inc., the Banks party hereto, and Morgan
Guaranty Trust Company of New York
10.2 Amendment No. 1 to Amended and Restated Credit Agreement, dated
May 7, 1997
10.3 Resolution pertaining to the Amendment of the Applied Materials,
Inc. 1995 Equity Incentive Plan, adopted by the Stock Option
and Compensation Committee of the Board of Directors of Applied
Materials, Inc. on December 12, 1996
10.4 Participation Agreement dated as of April 30, 1997 among Applied
Materials, Inc. (as Lessee and Construction Agent), Credit Suisse
Leasing 92A, L.P., (as Lessor and Borrower), Greenwich funding
Corporation (as CP Lender), The Persons Named on Schedule I (as
Eurodollar Lenders) and Credit Suisse First Boston (acting
through its New York Branch, as Agent)
10.5 Appendix 1 to Participation Agreement, Master Lease Agreement and
Loan Agreement, dated as of April 30, 1997 (Definitions and
Interpretation) for Applied Materials, Inc.
10.6 Loan Agreement dated as of April 30, 1997 among Credit Suisse
Leasing 92A, L.P. (as Borrower), Greenwich Funding Corporation
(as CP Lender), The Persons Named on Schedule I (as Eurodollar
Lenders) and Credit Suisse First Boston (acting through its New
York Branch as Agent) for Revolving Commercial Paper, Eurodollar
Credit and Base Rate Program
10.7 Real Estate and Equipment Facility Master Lease dated as of April
30, 1997 between Credit Suisse Leasing 92A, L.P. (as Lessor), and
Applied Materials, Inc. (as Lessee)