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 December 31, 1996
Commission File No. 0-12933
Lam Research Corporation
(Exact name of Registrant as specified in its charter)
Delaware 94-2634797
- - --------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4650 Cushing Parkway, Fremont, California 94538
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 659-0200
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ----
As of December 31, 1996 there were 30,585,280 shares of Registrant's Common
Stock outstanding.
INDEX
Page
No.
----
PART I. FINANCIAL INFORMATION....................................... 3
Item 1. Financial Statements (unaudited)............................ 3
Condensed Consolidated Balance Sheets ................... 3
Condensed Consolidated Statements of Income.............. 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......................... 9
Results of Operations.................................... 9
Liquidity and Capital Resources.......................... 11
Risk Factors............................................. 12
PART II. OTHER INFORMATION........................................... 16
Item 1. Legal Proceedings........................................... 16
Item 4. Results of Vote of Stockholders............................. 16
Item 6. Exhibits and Reports on Form 8-K............................ 17
2
ITEM 1. FINANCIAL STATEMENTS
--------------------
LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
December 31, June 30,
1996 1996
(Unaudited) (Note)
-------------- ----------
Assets
Cash and cash equivalents $17,034 $62,879
Short-term investments 143,333 67,605
Accounts receivable, net 202,896 256,767
Inventories 256,923 322,366
Prepaid expenses and other assets 21,872 17,193
Deferred income taxes 51,120 50,035
-------------- ----------
Total Current Assets 693,178 776,845
Equipment and leasehold improvements, net 199,139 170,839
Other assets 28,323 21,681
-------------- ----------
Total Assets $920,640 $969,365
============== ==========
Liabilities and Stockholders' Equity
Trade accounts payable $69,058 $112,883
Accrued expenses and other
current liabilities 135,720 155,874
Line of credit borrowings 10,000 25,000
Current portion of long-term debt and
capital lease obligations 14,181 12,896
-------------- ----------
Total Current Liabilities 228,959 306,653
Long-term debt and capital lease
obligations, less current portion 61,844 52,926
-------------- ----------
Total Liabilities 290,803 359,579
Preferred stock: 5,000 shares authorized;
none outstanding
Common Stock at par value of $.001 per share
Authorized -- 90,000 shares; issued and
outstanding 30,585 shares at December 31,
1996 and 30,266 shares at June 30, 1996 31 30
Additional paid-in capital 305,107 298,160
Retained earnings 324,699 311,596
-------------- ----------
Total Stockholders' Equity 629,837 609,786
-------------- ----------
$920,640 $969,365
============== ==========
- - ------------------------
Note -- The Condensed Consolidated Balance Sheet at June 30, 1996 has
been derived from the audited financial statements at that
date.
See Notes to condensed consolidated financial statements.
3
LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
Three Months Ended Six Months Ended
-------------------------- --------------------------
December 31, December 31,
------------ ------------
1996 1995 1996 1995
--------- --------- --------- ---------
Net sales $236,646 $284,195 $512,846 $541,942
Royalty income 4,710 6,322 11,269 11,819
--------- --------- --------- ---------
Total revenue 241,356 290,517 524,115 553,761
Costs and expenses:
Cost of goods sold 153,232 148,507 320,885 283,214
Research and development 38,846 39,054 80,371 75,037
Selling, general and
administrative 45,686 52,578 94,568 100,162
Restructuring charge - - 9,021 -
--------- --------- --------- ---------
Operating income 3,592 50,378 19,270 95,348
Other expense, net 547 1,145 1,062 1,317
--------- --------- --------- ---------
Income before income taxes 3,045 49,233 18,208 94,031
Income taxes 552 15,754 5,105 30,085
--------- --------- --------- ---------
Net income $2,493 $33,479 $13,103 $63,946
========= ========= ========= =========
Net income per share
Primary $0.08 $1.18 $0.43 $2.26
========= ========= ========= =========
Fully diluted $0.08 $1.12 $0.43 $2.12
========= ========= ========= =========
Number of shares used in
per share calculations
Primary 30,900 28,300 30,750 28,350
========= ========= ========= =========
Fully diluted 30,900 30,875 30,750 31,000
========= ========= ========= =========
See Notes to condensed consolidated financial statements.
4
LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
------------------------------------
December 31, December 31,
1996 1995
-------------- --------------
Cash flows from operating activities:
Net income 13,103 63,946
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 23,166 14,803
Deferred income taxes (1,085) -
Change in certain working capital accounts 55,834 (47,898)
-------------- --------------
Net cash provided by operating activities 91,018 30,851
Cash flows from investing activities:
Capital expenditures (37,310) (22,736)
Purchase of short-term investments (380,835) (191,932)
Sale/maturities of short-term investments 305,107 157,459
Restricted cash - 900
Proceeds from sales of securities - 12,038
Other (6,642) (5,633)
-------------- --------------
Net cash used in investing activities (119,680) (49,904)
-------------- --------------
Cash flows from financing activities:
Proceeds from borrowings under line of credit 45,000 -
Repayments of borrowings under line of credit (60,000) -
Sale of stock, net of issuance costs 6,948 999
Proceeds from issuance of long-term debt 184 -
Principal payments on long-term debt
and capital lease obligations (9,315) (7,155)
Other - (681)
-------------- --------------
Net cash used in financing activities (17,183) (6,837)
-------------- --------------
Net decrease in cash and cash equivalents (45,845) (25,890)
Cash and cash equivalents at beginning
of period 62,879 43,675
-------------- --------------
Cash and cash equivalents at end of period 17,034 17,785
============== ==============
See Notes to condensed consolidated financial statements.
5
LAM RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(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")
for the year ended June 30, 1996, which are included in the Annual Report on
Form 10-K, File number 0-12933.
The results of operations for the three and six month periods ended
December 31, 1996 are not necessarily indicative of the results that may be
expected for the entire fiscal year ending June 30, 1997.
NOTE B -- INVENTORIES
Inventories consist of the following:
December 31, June 30,
1996 1996
-------------- -----------
(in thousands)
Raw materials $ 154,592 $167,513
Work-in-process 76,249 122,828
Finished goods 26,082 32,025
-------------- -----------
$ 256,923 $322,366
============== ===========
NOTE C -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
December 31, June 30,
1996 1996
-------------- -----------
(in thousands)
Equipment $ 154,771 $120,770
Furniture & fixtures 51,644 45,740
Leasehold improvements 96,866 88,131
-------------- -----------
303,281 254,641
Accumulated depreciation and
amortization (104,142) (83,802)
-------------- -----------
$ 199,139 $170,839
============== ===========
6
NOTE D -- OTHER EXPENSE, NET
The significant components of other expense, net are as follows (in
thousands):
Three Months Ended Six Months Ended
December 31, December 31,
1996 1995 1996 1995
----------------------------- -------------------------
Interest Expense $ 1,271 $ 2,131 $ 2,807 $ 4,099
Interest Income (1,316) (1,364) (2,435) (2,739)
Other 592 378 690 (43)
----------------------------- -------------------------
$ 547 $ 1,145 $ 1,062 $ 1,317
============================= =========================
NOTE E -- LINE OF CREDIT
During fiscal 1996, the Company entered into a syndicated bank line of
credit totaling $210.0 million, which expires in December 1998. At December 31,
1996, the Company had outstanding borrowings of $10.0 million against the line
of credit.
NOTE F -- NET INCOME PER SHARE
For the three and six month periods ended December 31, 1996 and 1995,
primary net income per share is calculated using the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. The common stock equivalents include shares issuable upon the assumed
exercise of stock options reflected under the treasury stock method. In
addition, fully diluted net income per share for the three and six month periods
ended December 31, 1995 reflects the assumed conversion of the Company's
convertible subordinated debentures at the beginning of that period, and also
adds the interest expense incurred on the debentures, net of income tax effect,
to the net income amount for use in the fully diluted calculation. The
convertible subordinated debentures were called by the Company during the
quarter ended June 30, 1996, and therefore the impact of the assumed conversion
is not included in the fully diluted net income per share for the three and six
month periods ended December 31, 1996.
NOTE G -- RESTRUCTURING
During the first quarter of fiscal 1997, the Company restructured its
operations by consolidating its previous business unit structure into a more
centralized functional organization. As a result of the restructuring, and in
response to industry conditions, the Company reduced its work force by
approximately 11%. The Company recorded a restructuring charge of $9.0 million
for costs related primarily to severance compensation and consolidation of
facilities.
7
NOTE H -- STOCKHOLDER RIGHTS PLAN
On January 23, 1997, the Company adopted a Shareholder Rights Plan (the
Rights Agreement). Pursuant to the Rights Agreement rights will be distributed
as a dividend at the rate of one right for each share of common stock, par value
$0.001 per share, of the Company held by stockholders of record as of the close
of business on January 31, 1997. The Rights will expire on January 31, 2007,
unless redeemed or exchanged. Under the Rights Agreement, each right initially
will entitle the registered holder to buy one unit of a share of preferred stock
for $250.00. The rights will become exercisable only if a person or group
(other than stockholders currently owning 15 percent of the Company's common
stock) acquires beneficial ownership of 15 percent or more of the Company's
common stock or commences a tender or exchange offer upon consummation of which
such person or group would beneficially own 15 percent or more of the Company's
common stock.
NOTE I -- LITIGATION
See Part II, item 1 for discussion of litigation.
8
ITEM 2. Management's Discussion and Analysis of Financial
--------------------------------------------------
Condition and Results of Operations
-----------------------------------
The information in this discussion contains forward looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and is subject to the Safe Harbor provisions created by that statute.
Such statements are subject to certain risks and uncertainties, including those
discussed below and under the heading Risk Factors, that could cause actual
results to differ materially from those projected. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. Forward-looking statements are indicated by an asterisk (*).
The Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
The components of the Company's statements of income, expressed as a percentage
of total revenue, are as follows:
Three Months Six Months
Ended Ended
December 31 December 31,
1996 1995 1996 1995
------------------- --------------------
Net Sales 98.1% 97.8% 97.9% 97.9%
Royalty income 1.9 2.2 2.1 2.1
------------------- --------------------
100.0 100.0 100.0 100.0
Cost of goods sold 63.5 51.1 61.2 51.1
Research and development 16.1 13.5 15.3 13.6
Selling, general
& administrative 18.9 18.1 18.1 18.1
Restructuring charge - - 1.7 -
-------------------- ------------------
Operating income 1.5 17.3 3.7 17.2
Other expense, net 0.2 0.4 0.2 0.2
-------------------- ------------------
Income before income taxes 1.3 16.9 3.5 17.0
Income taxes 0.3 5.4 1.0 5.4
-------------------- ------------------
Net income 1.0% 11.5% 2.5% 11.6%
==================== ==================
Results of Operations
- - ---------------------
Total revenue for the three month period ended December 31, 1996, was 17%
and 15%, respectively, lower compared to the year-ago and preceding periods.
Total revenue for the six month period ended December 31, 1996 was $524.1
million, a decrease of $29.6 million from the year-ago period. Overall, total
revenue was down due to the reduced demand for equipment caused by oversupply.
During the first six months of fiscal 1997, the Company's product mix shifted
towards a higher percentage of sales of Alliance/TM/ cluster etch systems and
chemical
9
vapor deposition(CVD) systems and a significantly lower percentage of
sales of Rainbow/TM/ systems. Total export sales were 63% of total revenue
during the second quarter of fiscal 1997 compared to 59% and 68% of total
revenue, respectively, for the year-ago quarter and the preceding quarter.
Regionally, the Company experienced increased sales in the Far East (Taiwan,
Singapore and China) during both the three and six month periods ended December
31, 1996 compared to the year-ago periods. All other regions except Europe
experienced decreases in net sales for both the three and six month periods
ended December 31, 1996. Total spares and service revenue decreased 5% and 9%,
respectively during the second fiscal quarter compared with the year-ago quarter
and the preceding quarter, but was slightly higher on a fiscal year-to-date
basis. The worldwide semiconductor market has been experiencing a slowdown in
product demand. This slowdown has caused a reduction in demand for semiconductor
processing equipment. During the first six months of fiscal 1997, the Company's
revenue was adversely affected by the worldwide slowdown in the semiconductor
market. The Company anticipates that its sales will continue to be adversely
affected by this slowdown and therefore the revenue levels achieved for the
remaining half of fiscal 1997 may be lower than the revenue level achieved in
the first half months of fiscal 1997.*
Royalty income for the three month period ended December 31, 1996 decreased
25% and 28%, respectively, from the year-ago quarter and the preceding quarter.
Royalty income also decreased 5% for the first six months of fiscal 1997
compared to the year-ago period all reductions of which are due to a continued
slowdown in demand for wafer processing equipment in the Japanese market sector.
The Company expects that royalty income will decrease significantly in
subsequent quarters as the recently extended royalty agreement with Tokyo
Electron Limited reduces the 5% royalty rate to 1% beginning January 1, 1997.*
The Company's gross margin percentage declined to 36.5% in the second
quarter of fiscal 1997 compared with 48.9% and 40.7%, respectively, for the
year-ago quarter and the preceding quarter. Gross margin percentage was 38.8%
for the first six months of fiscal 1997 compared with 48.9% for the year-ago
period. Approximately half of the decline in the Company's gross margin can be
attributed to the change in product sales mix and the remaining half to a
combination of excess manufacturing capacity costs and increased warranty and
installation costs as a percentage of revenue. During the second quarter of
fiscal 1997, the Company's product mix continued to shift to a higher percentage
of the newer lower margin Alliance cluster etch and CVD products. During fiscal
1996 the Company sold a higher percentage of the higher margin Rainbow etch
products. Furthermore, as a result of reduced manufacturing volumes the Company
experienced substantial excess manufacturing capacity during the first and
second quarters of fiscal 1997 that contributed to the decline in gross margin.
Warranty and installation costs continued to increase as a percentage of the
reduced sales levels. Also contributing to the decline in gross margin were
costs incurred in relation to a first quarter fiscal 1997 inventory reduction
program involving the return of certain inventory to suppliers. During the first
six months of fiscal 1997, the Company also incurred lower gross margins on its
spares and service revenue due to increasing service contract costs and
increasing spare parts costs. The Company anticipates that the slowdown in the
worldwide semiconductor industry and the Company's related excess manufacturing
costs will continue to negatively impact its gross margins for the remainder of
fiscal 1997.*
Research and development (R&D) expenses for the quarter ended December 31,
1996 were flat compared to the year-ago quarter but decreased
10
6.5% compared to the preceding quarter. For the six month period ended December
31, 1996, R&D expenses increased 7.1% compared to the same period of the prior
fiscal year. During the first quarter of fiscal 1997, the Company implemented a
restructuring of its operations which eliminated the prior business unit
structure. As a result, the Company centralized its R&D activities and
eliminated certain duplicate functions, which resulted in reduced headcount and
contributed to the decreased R&D expense for the quarter ended December 31, 1996
compared to the year-ago quarter and preceding quarter. The Company believes
that in order to remain competitive it must continue to invest substantially in
R&D. The Company continues to invest in advanced etch applications, chemical
vapor deposition (CVD) technologies, flat panel display technology and continued
enhancements of the Alliance and TCP products.
Selling, general and administrative (SG&A) expenses decreased 13.1% and
6.5%, respectively, during the second quarter of fiscal 1997 compared to the
year-ago quarter and the preceding quarter. In addition, SG&A expenses for the
six month period ended December 31, 1996 were 5.6% lower than the prior fiscal
year period. During fiscal 1996, the Company added new employees in all areas to
accommodate the increase in sales volume. However, as a result of the slowdown
in the industry, and the need to keep costs in line with demand, the Company
implemented a restructuring of its operations during the first quarter of fiscal
1997, and implemented programs, including a reduction in workforce, to reduce
expenses and capital spending. During the second quarter of fiscal 1997, the
Company's operating expenses were reduced due to the effects of the
restructuring, execution of programs designed to reduce discretionary spending,
and a significant reduction in capital spending.
During the first quarter of fiscal 1997, and as part of the restructuring,
the Company recorded a charge of $9.0 million related primarily to severance
compensation and consolidation of facilities. The Company expects that operating
expenses may continue to decline on a dollar basis in fiscal 1997 compared to
fiscal 1996 but may be slightly higher as a percentage of revenue.*
The effective tax rate for the fiscal 1997 six month period is 28% compared
to 32% for the prior year period, due primarily to the reinstatement of the
federal research and development tax credit for fiscal 1997 and available tax
credits becoming a higher percentage of the Company's lower profit before tax in
fiscal 1997.
Liquidity and Capital Resources
- - -------------------------------
Net cash from operating activities was $91.0 million for the six months
ended December 31, 1996, derived primarily from decreases in working capital.
The decline in system shipments contributed to decreases in receivables,
inventory and accounts payable. Also contributing to the decrease in inventory
was the impact of a Company-wide inventory reduction program. During the first
six months of fiscal 1997, an additional $46.7 million was provided from the
sale of yen-denominated Japanese receivables to a bank (under an amended
agreement whereby the Company increased the amount of yen-denominated Japanese
receivables it may sell to the bank from 6 billion yen to 9 billion). At
December 31, 1996, $21.2 million of the total receivables sold under this
agreement remained uncollected by the bank and subject to recourse provisions.
Capital expenditures for the six month period ended December 31, 1996 were $37.3
million, primarily for capitalization of Alliance demonstration machines, and
the completion of facility
11
leasehold improvements and furnishings. Also contributing to the cash used in
investing activities were net purchases of short-term investments of $75.7
million. Net cash used in financing was $17.2 million due primarily to net
repayments of borrowings under the line of credit of $15.0 million and principal
debt payments of $9.3 million offset by proceeds from the sale of common stock
under the employee stock purchase and option plans.
As of December 31, 1996, the Company had $160.4 million in cash, cash
equivalents and short-term investments compared with $130.5 million at June 30,
1996. The Company has a total of $210.0 million available under a syndicated
bank line of credit which is due to expire in December 1998. Borrowings under
the line of credit bear interest at the bank's prime rate or 0.7% to 0.9% over
London Interbank Offered Rate. Borrowings under the line of credit are subject
to the Company's compliance with financial covenants. At December 31, 1996, the
Company had borrowings against the syndicated bank line of credit of $10.0
million.
The Company's cash, cash equivalents, short-term investments and available
lines of credit at the end of the first quarter of fiscal 1997 are considered
adequate to support current levels of operations for at least the next twelve
months.*
Risk Factors
- - ------------
CURRENT VOLATILITY IN THE SEMICONDUCTOR INDUSTRY
The Company's business depends upon the capital expenditures of
semiconductor manufacturers, which in turn depend on the current and anticipated
market demand for integrated circuits and products utilizing integrated
circuits. The semiconductor industry has been cyclical in nature and
historically experienced periodic downturns. The semiconductor industry has
recently followed such cyclicality and is presently experiencing such a downturn
in product demand and pricing. This slowdown has had an adverse effect on the
semiconductor industry's demand for semiconductor processing equipment which has
had an adverse effect on the Company's operating results in the first six months
of fiscal 1997. The Company anticipates that the current slowdown in demand for
semiconductor equipment will continue to adversely affect the Company's
operating results through fiscal 1997.* No assurance can be given that the
Company's revenue and operating results will not continue to be adversely
affected for longer or by future downturns. In addition, the need for continued
investments in R&D, substantial capital equipment requirements and extensive
ongoing worldwide customer service and support requirements may limit the
Company's ability to reduce expenses. Accordingly, there can be no assurance
that the Company will be able to remain profitable in the future or if it
remains profitable how profitable it will be.*
HIGHLY COMPETITIVE INDUSTRY
The semiconductor processing equipment industry is highly competitive. The
Company faces substantial competition throughout the world. The Company
believes that to remain competitive, it will require significant financial
resources in order to offer a broad range of products, to maintain customer
service and support centers worldwide, and to invest in product and process
research and
12
development. In addition, the Company intends to continue to invest substantial
resources into its effort to increase sales of its systems to Japanese
semiconductor manufacturers, who represent a substantial portion of the
worldwide semiconductor market and whose market is difficult for non-Japanese
equipment companies to penetrate.* The Company believes that the semiconductor
equipment industry is becoming increasingly dominated by large manufacturers
which have the resources to support customers on a worldwide basis and to
provide a single source for a broad range of products, and certain of the
Company's competitors have substantially greater financial resources, more
extensive engineering, manufacturing, marketing and customer service and support
capabilities and broader product line than the Company. In addition, there are
smaller emerging semiconductor equipment companies which provide innovative
technology. The Company expects its competitors to continue to improve the
design and performance of their current products and processes and to introduce
new products and processes with improved price and performance characteristics.*
Although no such alliances have yet been formed which have negatively impacted
the Company's business, if the Company's competitors enter into strategic
relationships with leading semiconductor manufacturers covering etch or
deposition products similar to those sold by the Company, its ability to sell
its products to those manufacturers could be adversely affected. No assurance
can be given that the Company will continue to compete successfully in the
United States or worldwide.*
DEPENDENCE ON NEW PRODUCTS AND PROCESSES; RAPID TECHNOLOGICAL CHANGE
Semiconductor manufacturing equipment and processes are subject to rapid
technological change. The Company believes that its future success will depend
in part upon its ability to continue to enhance its existing products and their
process capabilities and to develop and manufacture new products with improved
process capabilities. As a result, the Company expects to continue to make
significant investments in R&D.* The Company also must manage product
transitions successfully, as introductions of new products could adversely
affect sales of existing products. There can be no assurance that future
technologies, processes or product developments will not render the Company's
current product offerings obsolete or that the Company will be able to develop
and introduce new products or enhancements to its existing products and
processes in a timely manner which satisfy customer needs or achieve market
acceptance. The failure to do so could adversely affect the Company's business.
Furthermore, if the Company is not successful in the development of advanced
processes or equipment for manufacturers with whom it has formed strategic
alliances, its ability to sell its products to those manufacturers will be
adversely affected. In addition, in connection with the development of the
Company's new products, the Company invests in high levels of preproduction
inventory, and the failure to complete development and commercialization of
these new products in a timely manner could result in inventory obsolescence,
which could have an adverse effect on the Company's financial results.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's revenue and operating results may fluctuate from quarter to
quarter. The Company derives its revenue primarily from the sale of a relatively
small number of high-priced systems which can
13
range in price from $300,000 to over $3.5 million. Some of these systems are
ordered and shipped during the same quarter. The Company's results of operations
for a particular quarter could be adversely affected if anticipated orders for
even a small number of systems were not received in time to enable shipment
during the quarter, if anticipated shipments were delayed or cancelled by one or
more customers or if shipments were delayed due to manufacturing difficulties.
In particular, during the first six months of fiscal 1997 the Company has
experienced certain cases of rescheduling or cancellation of orders, which have
had an adverse effect on the Company's operating results. The Company's revenue
and operating results may also fluctuate due to the mix of products sold, the
channel of distribution or the level of royalty income from the Company's
Japanese licensees. The Company generally realizes a higher margin on sales of
its mature etch products and on revenue from service and spare parts than on
sales of new Alliance cluster etch, CVD and flat panel display products. While
newer products usually have lower margins in the initial phase of production,
there can be no assurance that margins will improve as the products mature.*
Increases or decreases in royalty income will also have a disproportionate
impact on operating income and will continue to fluctuate on a quarterly basis.
Specifically, the Company's royalty agreement with Tokyo Electron Limited, which
was due to expire in December 1996, has been renewed at a significantly lower
royalty rate. The impact of these and other factors on the Company's revenues
and operating results in any future periods is difficult for the Company to
forecast.
DEPENDENCE ON KEY SUPPLIERS
Certain of the components and subassemblies included in the Company's
products are obtained from a single supplier or a limited group of suppliers.
The Company believes that alternative sources could be obtained and qualified to
supply these products.* Nevertheless, a prolonged inability to obtain certain
components could have an adverse effect on the Company's operating results and
could result in damage to customer relationships.
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of governmental regulations related to
the discharge or disposal of toxic, volatile, or otherwise hazardous chemicals
used in the manufacturing process. The Company believes that it is in
compliance with these regulations and that it has obtained all necessary
environmental permits to conduct its business, which permits generally relate to
the disposal of hazardous wastes. Nevertheless, the failure to comply with
present or future regulations could result in fines being imposed on the
Company, suspension of production or cessation of operations. Such regulations
could require the Company to acquire significant equipment or to incur
substantial other expenses to comply with environmental regulations. Any
failure by the Company to control the use of, or adequately restrict the
discharge or disposal of hazardous substances could subject the Company to
future liabilities.
INTERNATIONAL SALES
The Company anticipates that export sales will continue to account for a
significant portion of its net sales. Additionally, the Company continues to
expand its international operations, including expansion
14
of its facilities in Asia.* As a result, a significant portion of the Company's
sales and operations will be subject to certain risks, including tariffs and
other barriers, difficulties in staffing and managing foreign subsidiary and
branch operations, difficulties in managing distributors, potentially adverse
tax consequences and the possibility of difficulty in accounts receivable
collection. There can be no assurance that any of these factors will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
INTELLECTUAL PROPERTY MATTERS
From time to time, the Company is notified that it may be in violation of
certain patents. In such cases, the Company's policy is to defend against the
claims or negotiate licenses where considered appropriate. However, no
assurance can be given that it will be able to obtain necessary licenses on
commercially reasonable terms or at all. Any failure to obtain such licenses on
commercially reasonable terms, or at all, or litigation resulting from such
claims could have a material adverse effect on the Company's business and
financial condition.
CHANGE OF CONTROL
On January 23, 1997, the Company adopted a Shareholder Rights Plan (the
"Rights Plan") in which rights were distributed as a dividend at the rate of one
right for each share of common stock, par value $.001 per share, of the Company
held by stockholders of record as of the close of business on January 31, 1997.
In connection with the adoption of the Rights Plan, the Board of Directors also
adopted a number of amendments to the Company's Bylaws, including amendments
requiring advance notice of stockholder nominations of directors, stockholder
proposals, actions by written consent by stockholders and a stockholder's
intention to cumulate votes. The Bylaw amendments also eliminate the right of
stockholders to call special meetings of stockholders.
The Rights Plan may have certain anti-takeover effects. The Rights Plan
will cause substantial dilution to a person or group that attempts to acquire
the Company in certain circumstances. Accordingly, the existence of the Rights
Plan and the issuance of the related rights may deter certain acquirors from
making takeover proposals or tender offers. The Rights Plan, however, is not
intended to prevent a takeover but rather is designed to enhance the ability of
the Board of Directors to negotiate with a potential acquiror on behalf of all
of the stockholders.
In addition, certain of the provisions of the Bylaw amendments may have the
effect of delaying or deferring a change in control of the Company.
15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
- - ------- -----------------
In October 1993, Varian Associates, Inc. ("Varian") brought suit against
the Company in the United States District Court, Northern District of
California, seeking monetary damages and injunctive relief based on the
Company's alleged infringement of certain patents held by Varian. The lawsuit is
in the late stages of discovery and was reassigned a new judge. The Company has
asserted defenses of invalidity and unenforceability of the patents that are the
subject of the lawsuit, as well as noninfringement of such patents by the
Company's products. While litigation is subject to inherent uncertainties and no
assurance can be given that the Company will prevail in such litigation or will
obtain a license under such patents on commercially reasonable terms or at all
if such patents are held valid and infringed by the Company's products, the
Company believes that the Varian lawsuit will not have a material adverse effect
on the Company's consolidated financial statements.
In addition, the Company is from time to time notified by various
parties that it may be in violation of certain patents. In such cases, it is
the Company's intention to seek negotiated licenses where it is considered
appropriate. The outcome of these matters will not, in management's opinion,
have a material impact on the Company's consolidated financial position,
operating results or cash flows.
ITEM 4. Results of Vote of Stockholders
The Annual Meeting of Stockholders of Lam Research Corporation was held at
the principal office of the Company at 4650 Cushing Parkway, Fremont, California
94538 on October 31, 1996.
Out of 30,298,633 shares of Common Stock entitled to vote at the meeting,
27,372,313 shares were present in person or by proxy.
The vote for nominated directors, to serve for the ensuing year, and until
their successors are elected, was as follows:
NOMINEE IN FAVOR WITHHELD
- - ------- -------- --------
Roger D. Emerick 26,991,096 381,217
David G. Arscott 27,047,741 324,572
Jack R. Harris 27,045,927 326,386
Grant M. Inman 27,047,156 325,157
Osamu Kano 27,000,163 372,150
The results of voting on the following items were as set forth below:
(a) Approval of amendment of the Company's 1984 Employee Stock Purchase Plan to
increase the number of shares reserved for issuance thereunder by 350,000
shares to 1,687,500:
BROKER
IN FAVOR OPPOSED WITHHELD NON-VOTES
-------- ------- -------- ---------
26,533,000 571,670 108,498 159,145
(b) Ratification of appointment of Ernst & Young LLP as independent auditors
for the Company for the fiscal year ending June 30, 1997:
BROKER
IN FAVOR OPPOSED WITHHELD NON-VOTES
-------- ------- -------- -------------
27,284,278 42,856 45,179 none
16
ITEM 6. Exhibits and Reports on Form 8-K
- - ------- --------------------------------
(a) Exhibits
Exhibit 3.2/(1)/ Amended and Restated ByLaws of the Registrant,
dated January 23, 1997
Exhibit 4.7/(2)/ Rights Agreement, dated as of January 23, 1997 ,
between the Registrant and Chase Mellon
Shareholder Service, L.L.C., which includes
Exhibit B thereto the Form of Right Certificate
Exhibit 10.34 Agreement between Registrant and Henk J. Evenhuis,
dated January 21, 1997
Exhibit 11.1 Statement Re: Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on February 4, 1997, reporting that on January
23, 1997, the Company adopted a Shareholder Rights Plan (the Rights Agreement)
and a number of amendments to the Company's ByLaws.
Pursuant to the Rights Agreement rights will be distributed as a dividend
at the rate of one right for each share of common stock, par value $0.001 per
share, of the Company held by stockholders of record as of the close of business
on January 31, 1997. The Rights will expire on January 31, 2007, unless redeemed
or exchanged. Under the Rights Agreement, each right initially will entitle the
registered holder to buy one unit of a share of preferred stock for $250.00.
The rights will become exercisable only if a person or group (other than
stockholders currently owning 15 percent of the Company's common stock) acquires
beneficial ownership of 15 percent or more of the Company's common stock or
commences a tender or exchange offer upon consummation of which such person or
group would beneficially own 15 percent or more of the Company's common stock.
In connection with the adoption of the Rights Plan, the Board of Directors
also adopted a number of amendments to the Company's ByLaws, including
amendments requiring advance notice of stockholder nomination of directors,
stockholder proposals, actions by written consent by stockholders, and a
stockholder's intention to cumulate votes. The ByLaw amendments also eliminate
the right of stockholders to call special meetings of stockholders.
/(1)/ Incorporated herein by reference to Exhibit 3.10 to the Company's Current
Report on Form 8-K filed by the Company on February 4, 1997.
/(2)/ Incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement and Form 8-A/A, dated January 30, 1997.
17
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: February 12, 1997
LAM RESEARCH CORPORATION
By:/s/ Henk J. Evenhuis
--------------------
Henk J. Evenhuis, Executive Vice
President, Finance & Chief
Financial Officer
18