ITEM 1. BUSINESS
This Report on Form 10-K contains certain forward looking statements regarding future events with respect to the Company. Actual events or results may differ materially as a result of the factors described herein and in the documents incorporated herein by reference, including, in particular, those factors described under "Risk Factors." Forward-looking statements are indicated by an asterisk (*).
THE COMPANY
Lam Research Corporation (Lam) designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits. Lam is recognized by its customers worldwide as a leading supplier of semiconductor production equipment. The Company's products are used to deposit special films on a silicon wafer (deposition) to selectively etch away portions of various films (etch) to create an integrated circuit. Deposition and etch processes, which are repeated numerous times during the fabrication cycle, are required to manufacture every semiconductor device produced today.
The Company currently sells a broad range of plasma (dry) etch products to address specific applications, including the AutoEtch-Registered Trademark-, Advanced Capabilities Rainbow-TM-, and Transformer Coupled Plasma-TM-(TCP-TM-) product lines. In the deposition market, Lam offers its Deep SubMicron-TM- (DSM-TM- 9800) (formerly Integrity-Registered Trademark-) low pressure (LP) chemical vapor deposition (CVD) system, a fully automated batch thermal CVD system for pre-metal dielectric applications, and its Deep SubMicron (DSM 9900) (formerly Epic-TM-) high density plasma (HDP) CVD system, which addresses advanced intermetal passivation dielectric applications for logic and microprocessor integrated circuits as well as shallow trenches for isolation in memory circuits.
PRODUCTS
Semiconductor wafers are subjected to a complex series of process steps that result in the simultaneous creation of many individual semiconductor circuits. The basic steps include deposition, photolithography, etching, assembly and testing. Lam's products are used in the deposition and etch process steps of semiconductor device manufacturing and are available as stand-alone systems or on the Company's Advanced Capabilities Alliance multichamber cluster platform. Lam incorporates its Envision-TM- interactive control system software for advanced production management on each of its systems.
ETCH PRODUCTS
The etch process defines line-widths and other micro features on integrated circuits. Plasma etching, a dry etch technique, was developed to meet the demand for device geometries with line-widths smaller than three microns. Plasma etching uses ionized gases that react with exposed portions of the wafer to produce finely delineated features and patterns of the integrated circuit.
Today manufacturers of advanced integrated circuits require etch systems that can produce line-widths as small as 0.25 micron (approximately 1/300 the thickness of a human hair) and in the future are expected to require systems capable
of producing devices with feature sizes smaller than 0.1 micron. In addition, advanced manufacturing facilities are producing integrated circuits on wafers of 150 or 200 mm (6 or 8 inches) in diameter, and a transition in wafer diameters is expected to increase to 300 mm (12 inches) starting in 1998. To accommodate these decreasing line-widths and increasing wafer diameters, manufacturers increasingly require more precise control over the etching process.
Lam's family of etch systems incorporates plasma technologies designed to meet both current and future device requirements. In the fiscal years ended June 30, 1996, 1995 and 1994, sales of the Company's etch systems contributed approximately 77%, 77% and 78% of the Company's total revenues, respectively.
AUTOETCH. The AutoEtch family was Lam's initial product line, with the first AutoEtch etcher sold in January 1982. The AutoEtch product line includes the 490, 590 and 690 series for etching polysilicon, oxide and aluminum film, respectively. Although the AutoEtch series is more than fifteen years old, continued improvements in both reliability and performance have enabled Lam to continue to offer it as a suitable product for applications involving line widths of 0.8 micron or greater and wafer sizes of six inches or smaller. In addition, Lam offers the service of refurbishing or remanufacturing AutoEtch systems.
RAINBOW. The first Rainbow etch system was introduced in 1987. The Rainbow series of products addresses processes that utilize wafer sizes up to 200 mm and feature sizes as small as 0.35 micron. The Rainbow product line also available on the Alliance platform, includes the Rainbow 4400, 4500, 4600 and 4700 series for etching polysilicon, oxide, aluminum and tungsten films, respectively. These systems are designed to accommodate evolving customer needs through hardware and process enhancements.
The Rainbow product series incorporates a number of unique features that offer semiconductor manufacturers improved etch capability, reliability and performance. These features include a patented wafer handling system, a proprietary source for generating stable plasma, and an overall product design for which Lam has received industry awards for quality and reliability. These and other Rainbow product features enable the semiconductor manufacturer to reduce wafer particle contamination to a level that exceeds industry standards, and to improve etch selectivity and uniformity while maintaining profile control and process flexibility.
TCP. Lam's TCP product line of high density, low pressure etch systems, which was introduced in late 1992, incorporates the Company's patented Transformer Coupled Plasma source technology for etching 0.35 micron and smaller geometries. The Company currently offers the TCP 9600SE for metal etch applications, the TCP 9400SE for polysilicon and polycide etch applications and the TCP 9100 for oxide etch applications. These systems are currently used to produce a broad range of advanced logic and memory devices and the Company believes these products offer technological capability to enable manufacturers to produce the next generations of advanced devices. The TCP series operates at lower pressures for improved pattern transfer control and higher plasma density for higher etch rates with independent power control to the lower electrode, which improves etch results across a wider process window. Lam's TCP systems are designed to offer customers a reliable, lower cost of ownership solution to their advanced needs. The TCP systems are available as stand-alone, single wafer tools, or on the Alliance multichamber cluster platform.
DEPOSITION PRODUCTS
CVD involves the deposition of thin films on a silicon wafer by exposing the wafer to various reactant gases containing the materials to be deposited. Insulating films are deposited to form dielectric layers on integrated circuits. The metal interconnect layer is typically deposited on the wafer surface by a sputtering process to provide electrical connection between the various circuit elements. The dielectric layer is deposited over the interconnects and subsequent layer to provide electrical insulation between the interconnect layers. To increase circuit functionality, manufacturers have designed circuits with multilevel interconnections (stacked levels of wiring separated by insulating dielectric layers) using lower resistivity materials for improved device performance. Multiple levels of interconnects allow device manufacturers to increase the density and complexity of the integrated circuit. Current state-of-the-art devices may have as many as five interconnect and dielectric layers on the integrated circuit. Lam currently manufactures two dielectric layer deposition products, the DSM 9800 and DSM 9900, to address advanced device requirements.
DSM 9800. DSM 9800 LP CVD system for depositing advanced pre-metal dielectric films. This system utilizes a patented integrated process design for flowing gases rapidly over the wafer, forming films that are highly uniform and planar at a lower thermal budget to provide improved device performance. DSM 9800 has been installed worldwide and is currently being used for production of semiconductor devices at 0.35 micron and beyond.
DSM 9900. Lam introduced its DSM 9900 HDP CVD system in November 1995. DSM 9900 represents the next generation in HDP CVD technology first introduced in the Epic system with the DSM 9900 having a smaller footprint, high reliability and improved throughput. The DSM 9900 is well suited for the demanding requirements of high production environments. Like the Epic, the DSM 9900 makes use of electron cyclotron resonance (ECR) technology to form a high density, low pressure plasma. ECR enables remote plasma coupling that minimizes particulate contamination and maximizes throughput while filling gaps as small as 0.18 microns with aspect ratios as high as 3:1. The intermetal dielectric films created by simultaneously depositing and etching are planarized more easily, by chemical mechanical polishing, than films that are repeatedly deposited and etched by conventional techniques. The DSM 9900 technology, available on Lam's Alliance platform, has been installed at several customer sites and is being qualified for production of quarter- and sub-quarter-micron logic, microprocessor, and memory integrated circuits. The Epic system is still being supported and is used for production of microprocessors.
Lam, Lam Research, Transformer Coupled Plasma, TCP, Deep SubMicron, DSM, Rainbow, Continuum, Alliance and Envision are trademarks of Lam Research Corporation. AutoEtch is a registered trademark of Lam Research Corporation.
THE RESTRUCTURING
In August 1996, the Company announced a restructuring (the restructuring) of its operations, consolidating its previous business unit structure into centralized functional organizations. As a result of the restructuring, and in response to industry conditions, the Company reduced its workforce by approximately 11%. For the first quarter of fiscal 1997, the Company will record a restructuring charge of $11.0 to 12.0 million for costs resulting primarily from severance compensation and consolidation of related facilities.
RESEARCH AND DEVELOPMENT
The market for semiconductor capital equipment is characterized by rapid technological change. The Company believes that continued and timely development of new products and enhancements to existing products are necessary for it to maintain its competitive position. Accordingly, the Company devotes a significant portion of its personnel and financial resources to research and development (R&D) programs and seeks to maintain close relationships with its customers to be responsive to their product needs.
The Company's net R&D expenses during fiscal 1996, 1995 and 1994, were approximately $173.0 million, $127.8 million and $76.3 million, respectively, and represented 13.6%, 15.8% and 15.5% of total revenue, respectively. Such R&D expenses were net of third party funding, from SEMATECH, an industry consortium, and customers, representing approximately $3.4 million, $2.6 million and $1.8 million during fiscal 1996, 1995 and 1994, respectively. Such expenditures were used for the development of new products and film applications, and the continued enhancement of existing products. Current projects include the development of advanced etch and deposition products.
In June 1994, the Company received a two year contract from the United States Display Consortium (USDC) for the development of a flat panel display etch system, based on the Company's TCP technology. The Continuum-TM- etch system is designed for use in the manufacture of large scale flat panel displays for several new technologies including active matrix liquid crystal displays (AMLCDs) and field emission displays (FEDs). Included in the $3.4 million and $2.6 million of third party funded R&D for fiscal 1996 and 1995 was $3.2 million and $1.2 million from USDC.
The Company expects to continue to make substantial 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 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 process equipment for manufacturers with whom it has formed strategic alliances, its ability to sell its products to those manufacturers would be adversely affected. In addition, in connection with the development of the Company's new products, the Company invests in high levels of pre-production inventory, and the failure to complete development and commercialization of these new products in a timely manner could result in inventory obsolescence, which could reduce the Company's financial results.
MARKETING, SALES AND SERVICE
The Company's marketing and sales efforts are focused on building long-term relationships with its customers. These efforts are supported by a team of product marketing managers, sales personnel, equipment engineers and process engineers that works closely with individual customers to find solutions to their process needs. After-sales support is an essential element of the Company's marketing and sales program. The Company maintains an ongoing support relationship with its customers and has an extensive network of field service personnel in place across the United States, Europe, Japan and Asia Pacific. In addition, the Company maintains an in-house group of highly skilled application engineers to respond to customer process needs worldwide when a higher level of technical expertise is required. The Company believes that its extensive support programs and close working relationships with its customers give it a competitive advantage. The Company also believes that, by assisting its customers in the development of their advanced manufacturing processes, the customers are less likely to change equipment vendors.
The Company has 40 sales and support centers located throughout the United States, Europe, Japan, and Asia Pacific, through which direct sales personnel and independent sales representatives sell and service the Company's products. The Company has expanded its sales and support offices in Japan to support the direct sales efforts which began in October 1994. More recently, the Company has increased that effort by furthering its direct sales and service capability in Japan to directly market and support its advanced etch products. The Company now offers its customers a comprehensive, two-year warranty package on all released products with 24 hour, seven days a week service.
In Japan, the Company has licensing arrangements with Sumitomo Metal Industries, Ltd. (Sumitomo) and Tokyo Electron Limited (TEL). Sumitomo manufactures, sells and distributes certain of the Company's Rainbow products to specific customers in Japan under an exclusive license agreement with Lam. TEL has a non-exclusive license to sell products incorporating certain features of Lam's proprietary etch technology. In June 1991, the Company opened the Lam Technology Center near Tokyo, Japan, to establish a presence in Japan and to assist Sumitomo in serving Japanese customers. In May 1993, Lam completed its advanced development and demonstration laboratory in Sagamihara, Japan, which allows customers to evaluate the Company's recently introduced advanced technology products. During fiscal 1996, the Company expanded in Japan by building a third floor on this existing building. In July 1996, the Company began construction of a second facility in Sagamihara, Japan.
Export sales accounted for approximately 41%, 38% and 40% of net sales in fiscal 1996, 1995 and 1994, respectively. Export sales consist of sales from the Company's U.S. operating subsidiary to nonaffiliated customers in foreign countries. Additionally, the Company expanded its international operations, including expansion of its Japan operations, the opening of a manufacturing facility in Korea in July 1995 and the relocation and expansion of the Taiwan facility to a technology development center. 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 position, results of operations and cash flows.
CUSTOMERS
The Company's customers include most of the leading semiconductor manufacturers worldwide. In fiscal 1996, no single customer accounted for more than 10% of Lam's total revenue. Revenue from Intel accounted for 11% and 14% of
total revenue for the years ended June 30, 1995 and 1994, respectively. Revenue from Motorola accounted for 10% of total revenue for the year ended June 30, 1995.
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 is currently experiencing a slowdown in terms of product demand and product pricing. This has caused semiconductor manufacturers to exercise caution in making their capital equipment purchase decisions and in certain cases customers have either rescheduled or cancelled capital equipment purchases. In response to market conditions, the Company announced a restructuring of its operations, consolidating its previous business unit structure into centralized functional organizations. No assurance can be given that the Company's revenue and operating results will not be further adversely affected if downturns in the semiconductor industry occur.
BACKLOG
The Company schedules production of its systems based upon order backlog and customer commitments. Included in backlog for the Company are orders for which written authorizations have been accepted and shipment dates have been assigned. As of June 30, 1996, the Company's order backlog was approximately $328.0 million. As of June 30, 1995, the Company's order backlog was approximately $252.6 million. The semiconductor market is presently experiencing volatility in terms of product demand and product pricing. This has caused certain semiconductor manufacturers to exercise caution in making their capital equipment purchase decisions and in certain cases to reschedule or cancel capital equipment purchases. All orders are subject to cancellation by the customer with limited penalty. Because some orders are received for systems to be shipped in the same quarter and possible customer changes in delivery schedules and cancellations of orders, the Company's backlog at any particular date is not necessarily indicative of actual sales for any succeeding period.
MANUFACTURING
The Company maintains U.S. facilities at five locations in Fremont, California and one location in Wilmington, Massachusetts for the manufacture of its etch and deposition products. In addition, in July 1995, the Company completed a manufacturing facility in CheonAn, Korea. The Company's Korean manufacturing facility may experience difficulties in management, procurement, production and staffing. There can be no assurances that these factors will not have an adverse effect on the Company's business, financial condition and results of operations.
The Company's manufacturing activities consist of assembling and testing components and subassemblies that are then integrated into finished systems. Once the manufacturing department has completed final testing of all electronic and electromechanical subassemblies that make up one of the Company's products, the completed system is process tested. Stringent cleanliness controls are present throughout the manufacturing, process and testing areas of these facilities to reduce particle contamination. Much of the assembly and testing of the Company's products is conducted in cleanroom environments where personnel are properly attired to reduce particulate contamination. Prior to shipping a completed system, the customer's engineers may perform acceptance tests at Lam's facility, using the customer's own wafers. After passing the acceptance test, the system is vacuum-bagged in a cleanroom environment and prepared for shipment.
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. 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 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.
EMPLOYEES
As of August 30, 1996, the Company had approximately 4,500 full-time employees. As a result of the restructuring in August 1996, the Company reduced its workforce by approximately 11%. None of the Company's employees are represented by a union, and the Company has never experienced a work stoppage. Management considers its employee relations to be satisfactory. In addition, each employee of the Company has signed agreements to maintain the confidentiality of the Company's proprietary information, and most key employees have stock or stock option arrangements with the Company that provide for the vesting of their interests over several years.
COMPETITION
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 to offer a broad range of products, to maintain customer service and support centers worldwide and to invest in product and process R&D. Certain of the Company's existing and potential competitors have substantially greater financial resources, more extensive engineering, manufacturing, marketing and customer service and support organizations. The Company expects its competitors to continue to improve the design and performance of their current products and processes and to introduce new products and processes with improved price and performance characteristics.* If the Company's competitors enter into strategic relationships with leading semiconductor manufacturers covering etch 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.
Significant competitive factors in the etch equipment market include etch quality, repeatability, process capability and flexibility and overall cost of ownership, including reliability, software automation, throughput, customer support and system price. Although the Company believes that it competes favorably with respect to each of these factors, the Company's ability to compete successfully in this market will depend upon its ability to introduce product enhancements and new products on a timely basis. There can be no assurance that the Company will continue to compete successfully in the future. In the etch equipment market, the Company's primary competitors are Applied Materials, Inc., TEL, and Hitachi Ltd.
Significant competitive factors in the deposition equipment market include film quality, flow uniformity, contamination control, temperature control and overall cost of ownership, including throughput, system reliability, cost of consumables, system price and customer support. In the deposition equipment market, the principal suppliers of equipment are Applied Materials, Inc., Canon Sales Co. Inc., Novellus Systems, Inc. and Watkins-Johnson Company.
PATENTS AND LICENSES
The Company has a policy of seeking patents on inventions governing new products and processes developed as part of its ongoing research, engineering and manufacturing activities. The Company holds United States patents and corresponding foreign patents covering various aspects of its products. The Company believes that the duration of its patents generally exceeds the life cycles of the technologies disclosed and claimed therein. The Company believes that although the patents it holds and may obtain will be of value, they will not determine the Company's success, which depends principally upon its engineering, marketing, service and manufacturing skills. However, in the absence of patent protection, the Company may be vulnerable to competitors who attempt to imitate the Company's products, manufacturing techniques and processes. In addition, other companies and inventors may receive patents that contain claims applicable to the Company's products and processes. The sale of the Company's products covered by such patents could require licenses that may not be available on acceptable terms.
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 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. 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. See "Item 3. Legal Proceedings."
In December 1986, the Company entered into a non-exclusive license agreement with TEL, licensing the Company's AutoEtch technology and chamber design. This license expired in December 1991, and, in January 1992, the Company entered into a new five year license agreement with TEL on substantially similar terms which was due to expire in December 1996 but has been extended at a substantially lower royalty.
The Company has two license agreements with Sumitomo. Under one agreement, Lam granted Sumitomo an exclusive license for the manufacture and sale of certain Rainbow etch systems in the Japanese market. Under the other agreement, Sumitomo granted the Company an exclusive license for the manufacture and sale of Sumitomo's ECR systems in North America and Europe.
RISK FACTORS
CURRENT SLOWDOWN AND VOLATILITY IN THE SEMICONDUCTOR INDUSTRY
The Company's business depends upon the capital equipment expenditures of semiconductor manufacturers, which in turn depend on the current and anticipated market demand for integrated circuits and products utilizing integrated circuits. The semiconductor industry has been cyclical in nature and historically experienced periodic downturns. The semiconductor industry is presently experiencing a slowdown in terms of product demand and volatility in terms of product pricing. This slowdown and volatility has caused the semiconductor industry to reduce its demand for semiconductor processing equipment. No assurance can be given that the Company's revenue and operating results will not be adversely affected during this and possible future downturns in the semiconductor industry. In addition, the need for continued investments in research and development, substantial capital equipment requirements and extensive ongoing worldwide customer service and support capability will limit the Company's ability to reduce expenses.* Accordingly, there is no assurance that the Company will be able to remain profitable in the future.
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 development. In addition, the Company intends to continue to invest substantial resources to increase sales of its systems to Japanese semiconductor manufacturers, who represent a substantial portion of the worldwide semiconductor market and whose market is difficult for non-Japanese equipment companies to penetrate. The Company believes that the semiconductor equipment industry is becoming increasingly dominated by large manufacturers who have the resources to support customers on a worldwide basis, and certain of the Company's competitors have substantially greater financial resources and more extensive engineering, manufacturing, marketing and customer service and support capabilities 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. 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 research and development.* 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 would 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 range in price from $300,000 to over $3 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, the Company has experienced certain cases of rescheduling or cancellation of orders. The Company's revenue and operating results may also fluctuate due to the mix of products sold, the geographic region or the level of royalty income from the Company's Japanese licenses. 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 TCP and Alliance products. Newer products usually have lower margins in the initial phase of production. Increases or decreases in royalty income will also have a disproportionate impact on operating income and will continue to fluctuate on a quarterly basis. 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 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, or any litigation resulting from such claims could have a material adverse effect on the Company's business and financial condition.
ITEM 2.
ITEM 2. PROPERTIES
The Company's executive offices and principal manufacturing, and research and development facilities are located in eighteen buildings in Fremont, California, occupying over 1,500,000 square feet under leases expiring from 1998 to 2006. Due to the restructuring, the Company currently has excess capacity and will consolidate and/or sublease some of its idle facilities in Fremont, California. The Company also operates a research and manufacturing facility in Wilmington, Massachusetts.
In addition, the Company leases office space for its service and sales personnel throughout the United States, Europe, Japan and Asia Pacific. The Company completed, in July 1995, construction of a manufacturing, sales and service facility of 40,000 square feet, in CheonAn, South Korea. In fiscal 1996, the Company expanded its current facility in Japan by building a third floor on an existing building and completed the design for a second facility in Sagamihara. Construction of the second facility began in July 1996.
The Company's fiscal 1996 rental payments for the facilities occupied as of June 30, 1996 aggregated approximately $35.3 million and are subject to periodic increases. The Company believes that its existing facilities are well maintained and in good operating condition.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In October 1993, Varian Associates, Inc. (Varian) brought suit against the Company in the United States District Court, for the Northern District of California, seeking monetary damages and injunctive relief based on the Company's alleged infringement of certain patents held by Varian. The lawsuit is in the late stages of discovery and has recently been reassigned to 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 flow statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to the Company's 1996 Annual Report to Stockholders under the heading "Selected Financial Data" on page 14.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to the Company's 1996 Annual Report to Stockholders under the heading "Selected Financial Data" on page 14.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference to the Company's 1996 Annual Report to Stockholders under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 15-19.
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements required by this Item are incorporated by reference to pages 20-32 of the Company's 1996 Annual Report to Stockholders. The unaudited quarterly results of operations are incorporated by reference to page 14 of the Company's 1996 Annual Report to Stockholders.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in that the Registrant will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for its Annual Meeting of Stockholders to be held October 31, 1996 and certain information included therein is incorporated herein by reference. (The Compensation Committee Report and the stock performance graph of the Registrant's Proxy Statement are expressly not incorporated by reference herein.)
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is incorporated by reference to "Election of Directors" in the Company's Proxy Statement.
The executive officers of the Company, who are elected by and serve at the discretion of the Board of Directors, are as follows:
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- Roger D. Emerick 57 Chairman of the Board and Chief Executive Officer Hsui-Sheng (Way) Tu 39 President Henk J. Evenhuis 53 Executive Vice President, Finance, and Chief Financial Officer Alexander M. Voshchenkov 51 Vice President and Chief Technical Officer Raymond L. Degner 52 Senior Vice President Thomas O. Yep 57 Senior Vice President Robert C. Fink 61 Senior Vice President Rick Friedman 39 Vice President George R Canavan 49 Vice President Richard H. Lovgren 42 Vice President, General Counsel and Secretary
Roger D. Emerick joined the Company in 1982 as President, Chief Executive Officer and a Director. In 1984, he was elected Chairman of the Board of Directors. Mr. Emerick is currently a director Electroglas, Inc., Brooks Automation, Inc., Integrated Process Equipment Corp., and Semiconductor Equipment and Materials International (SEMI). From 1980 to 1982, he was Senior Vice President of Optical Specialties, Inc. which markets automated visual wafer inspection equipment for the semiconductor industry.
Hsui-Sheng (Way) Tu joined the Company in 1983 and has held various positions with the Company. In fiscal 1996, Mr. Tu was named President of Lam Research Corporation. In 1994, Mr. Tu was named Vice President of the Oxide Etch Business Unit. In 1992, he was named Vice President of Asian Operations. Before joining the Company, Mr. Tu was Process Engineering Supervisor for Fairchild Semiconductor.
Henk J. Evenhuis joined the Company in 1987 as Vice President of Finance and Administration and Chief Financial Officer and was named Senior Vice President of Finance in 1988. In fiscal 1996, Mr. Evenhuis was named Executive Vice President of the Company. Mr. Evenhuis is currently a director of Credence Systems Corporation, a test equipment manufacturer. Before joining the Company and since 1986, Mr. Evenhuis was Vice President of Finance and Administration and Chief Financial Officer for Corvus Systems Inc. He was Vice President of Finance and Administration and Chief Financial Officer of Trimedia Corporation from 1985, until Trimedia was acquired by Xidex Corporation in 1986.
Alexander M. Voshchenkov, Ph.D., joined the Company in 1993 as Vice President and Chief Technical Officer. Before joining the Company and since 1972, Dr. Voshchenkov was a Member of the Technical Staff at AT&T Bell Labs,
serving in various research and managerial positions. His most recent position was as Supervisor of the High Speed Electronics Department.
Raymond L. Degner, Ph.D., joined the Company in 1984 as Vice President of Engineering. In August 1996, he was named Senior Vice President of Etch Products. In January 1992, Dr. Degner was appointed Vice President of the Poly Etch Business Unit. In 1989 he was named Vice President of Research and Development. From 1983 to 1984, he served as Director of Development for Silicon Valley Group, a semiconductor equipment manufacturer.
Thomas O. Yep, Ph.D., joined the Company in 1985 as Director of Process Technology, and in 1989 was named Vice President of Process Technology. In August 1996, he was named to Senior Vice President of the CVD Products and Japan. In February 1992, he was named Vice President of the Metal Etch Business Unit. Before joining the Company and since 1980, he served as Manager for the plasma etch and thin film program at Intel Corporation. From 1969 to 1980, Dr. Yep served as solid-state physicist at Varian Central Research.
Robert C. Fink joined the Company in 1993 as Vice President and Chief Operating Officer. In August 1996 he was named Senior Vice President of Corporate Support. In 1995 he was named Senior Vice President of Corporate Development. Mr. Fink is currently a director of SEMI/SEMATECH and Consilium Inc. Before joining the Company and since 1988, Mr. Fink served as President of Drytek, Inc., a former subsidiary of General Signal Corporation. From 1984 to 1988, he was Director of VLSI Operations (North America) for ITT Corporation's Semiconductor Division. Prior to ITT, Mr. Fink served 12 years with General Instrument Corporation's Microelectronics Division, serving most recently as Director of Worldwide Manufacturing Resources.
Rick Friedman joined the Company in 1993 as director of strategic development in Lam's Wilmington, Massachusetts facility. In February 1996, he was promoted to Vice President of Worldwide Sales and Service. In 1995, he was promoted to Vice President of North America Sales and Service. Prior to that he was Director of Western Region Sales and Service. Before joining Lam he held various positions at Drytek, Inc. (mid 1980's to 1993). His most recent position at Drytek, Inc. was North American sales manager.
George Canavan joined the Company in December 1994 as Director of Business Development for the Oxide Etch Business Unit. In August 1996, he was named to Vice President of Marketing. In December 1995, he was promoted to Vice President of Oxide Etch Business Unit. Prior to joining Lam, Mr. Canavan spent three years at Applied Materials, Inc. as global marketing manager and two years as Vice President of Sales and Marketing at ADVANTAGE Production Technology Inc. Prior to that he held various marketing positions at Applied Materials, Inc., and engineering and operations positions at Amdahl Corporation and National Semiconductor Corp.
Richard H. Lovgren joined the Company in 1995 as Vice President, General Counsel and Corporate Secretary. Before joining the Company and since 1979, Mr. Lovgren held various legal positions at Advanced Micro Devices, Inc. His most recent position at Advanced Micro Devices, Inc. was Director and Deputy General Counsel.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the Company's Proxy Statement under the heading "Executive Compensation and Other Information."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the Company's Proxy Statement under the heading "Election of Directors" and "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the Company's Proxy Statement under the heading "Certain Relationships and Related Transactions."
PART IV
LAM RESEARCH CORPORATION
INDEX TO FINANCIAL STATEMENT SCHEDULES
* Incorporated by reference to the Company's 1996 Annual Report to Stockholders.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
LAM RESEARCH CORPORATION
By /s/ ROGER D. EMERICK
Roger D. Emerick, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER)
Dated: September 23, 1996
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Roger D. Emerick and Henk J. Evenhuis, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report of Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS LAM RESEARCH CORPORATION
ADDITIONS
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(1) Costs incurred for warranty repair and/or product improvements during this year.
(2) Included in the Balance Sheet under the caption "Accrued expenses and other liabilities."
(3) Represents specific customer accounts written off.
(4) Includes $236,000 related to the accounts receivable of Drytek, Inc. acquired July 1, 1993 and $247,000 reclassification of reserve which was included in a liability account at June 30, 1993.
LAM RESEARCH CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1996 EXHIBIT INDEX EXHIBIT DESCRIPTION ------- ----------- 3.1(20) Certificate of Incorporation of the Registrant, as amended. 3.2(1) ByLaws of the Registrant. 4.1(2) Amended 1981 Incentive Stock Option Plan and Forms of Stock Option Agreements. 4.2(2) Amended 1984 Incentive Stock Option Plan and Forms of Stock Option Agreements. 4.3(22) Amended 1984 Employee Stock Purchase Plan and Form of Subscription Agreement. 4.4(22) Amended 1991 Stock Option Plan and Forms of Stock Option Agreements. 4.5 1996 Performance-Based Restricted Stock Plan 10.1(3) Lease dated November 10, 1986 between the Registrant and Northport Associates No. 17. 10.2(1) Amendments to lease dated November 10, 1986 between the Registrant and Northport Associates No. 17. 10.3(4) Form of Indemnification Agreement. 10.4(9) Lease agreements dated January 1, 1990 between the Registrant and Aetna Life Insurance Company. 10.5(5) Agreements dated July 6, 1988 between the Registrant and Sumitomo Metal Industries, Ltd. 10.7(5) Roger D. Emerick Promissory Note and Deed of Trust. 10.8(7) Patent Purchase and Sale Agreement dated February 22, 1989 between the Registrant and The Perkin-Elmer Corporation. 10.9(6) Acquisition Agreement dated June 7, 1989 among the Registrant, Monkowski-Rhine, Incorporated and the shareholders of Monkowski- Rhine, Incorporated. 10.10(6) Common Stock Purchase Agreement dated May 18, 1989 between the Registrant and Sumitomo Metal Industries, Ltd. 10.12(8) ECR Technology License Agreement and Rainbow Technology License Agreement by and between Registrant and Sumitomo Metal Industries, Ltd. 10.13(10) Amended and Restated Revolving Credit Agreement dated March 28, 1991 between First Interstate Bank, Silicon Valley Bank and Lam Research Corporation. 10.14(11) Lease agreement dated July 24, 1991 between the Registrant and Northport Associates No. 18 10.15(12) Technology Licensing Agreement dated October 25, 1991 between the Registrant and International Business Machines Corporation. 10.16(13) License Agreement effective January 1, 1992 between the Registrant and Tokyo Electron Limited. 10.18(14) Business Sales Agreement dated June 21, 1993 by and among Lam Research Corporation, Drytek Incorporated, and General Signal Corporation. 10.19(15) Deferred Compensation Agreement with Roger D. Emerick. 10.20(17) Credit Agreement dated June 24, 1994 between Lam Research Corporation and ABN Amro Bank 10.21(17) Credit Agreement dated July 22, 1994 between Lam Research Corporation and Union Bank 10.22(16) Trust Indenture 10.25(19) Receivables Purchase Agreement between Lam Research Corporation and ABN-AMRO Bank N.V., Cayman Islands Branch 10.26(20) Amendment to Receivables Purchase Agreement between Lam Research Corporation and ABN-AMRO Bank N.V., Cayman Islands Branch 10.27(20) Receivables Purchase Agreement between Lam Research Corporation and ABN-AMRO Bank N.V., Tokyo Branch 10.28(20) Guaranty of Supplemental Receivables Purchase Agreement between Lam Research Corporation and ABN-AMRO Bank N.V., Tokyo Branch dated June 28, 1995 10.29(22) Credit Agreement Between Lam Research Corporation and ABN-AMRO Bank N.V. dated December 20, 1995 10.30(23) Operating Lease Agreement Between Lam Research Corporation and the Industrial Bank of Japan, Limited dated March 27, 1996 10.31 Term Loan Agreement between The Sakura Bank and Lam Research Co. Ltd. dated June 26, 1996
10.32 The Continuing Guaranty between The Sakura Bank Ltd. and Lam Research Corporation dated June 26, 1996
11.1 Computation of Earnings Per Share 13.1 Annual Report to Stockholders for the year ended June 30, 1996 (to be deemed filed only to the extent required by the instruction to exhibits for reports on Form 10-K 21 Subsidiaries of the Registrant. 23 Consent of Ernst & Young LLP, Independent Auditors. 24 Power of Attorney (see page 17). 27 Financial Data Schedule - - ------- (1) Incorporated by reference to the Registrant's Registration Statement on Form 8-B filed with the Securities and Exchange Commission on April 11, 1990.
(2) Incorporated by reference to Post Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-8 (No. 33-32160) filed with the Securities and Exchange Commission on May 10, 1990.
(3) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 28, 1986.
(4) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 3, 1988.
(5) Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1988.
(6) Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1989.
(7) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended April 2, 1989.
(8) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1989.
(9) Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1990.
(10) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1991.
(11) Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1991.
(12) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991.
(13) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1991.
(14) Incorporated by reference to Registrant's Report on Form 8-K dated July 1, 1993.
(15) Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1993.
(16) Incorporated by reference to Registrant's Registration Statement on Form S-3 (No. 33-61726) declared effective by the Securities and Exchange Commission on May 4, 1993.
(17) Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1994.
(19) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
(20) Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1995.
(21) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995
(22) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1995.
(23) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
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EXHIBITS TO FORM 10-K
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