Lam Research Corporation
LAM RESEARCH CORP(Form: 10-Q, Received: 2001/11/05 08:05:37)      


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q


      (Mark One)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 23, 2001 or


[  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to _________

Commission file number 000-12933

LAM RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)

 

Delaware
94-2634797
  (State or other jurisdiction of incorporation or organization) 
(I.R.S. Employer Identification Number)

4650 Cushing Parkway
Fremont, California    94538

(Address of principal executive offices including zip code)

(510) 572-0200
(Registrant's telephone number, including area code)



    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 reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [  ],

    As of September 23, 2001 there were 125,451,590 shares of Registrant's Common Stock outstanding.









LAM RESEARCH CORPORATION
TABLE OF CONTENTS

PART I. Financial Information Page No.
     
Item 1. Financial Statements (unaudited):
 
     
       Condensed Consolidated Balance Sheets
         as of September 23, 2001 and June 24, 2001
3
     
       Condensed Consolidated Statements of Operations
         for the three months ended September 23, 2001 and September 24, 2000
4
     
       Condensed Consolidated Statements of Cash Flows
         for the three months ended September 23, 2001 and September 24, 2000
5
     
       Notes to Condensed Consolidated Financial Statements
6
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
11
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk
22
     
PART II. Other Information
 
     
Item 1. Legal Proceedings
22
     
Item 4: Submission of Matters to Vote of Security Holders
23
     
Item 6. Exhibits and Reports on Form 8-K
23
     
Signatures
24







LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)


                                                       September 23,  June 24,
                                                           2001         2001
                                                       -----------  -----------
                                                        (unaudited)     (1)
Assets

Cash and cash equivalents............................ $    94,999  $   221,659
Short-term investments...............................     764,521      642,900
Accounts receivable, net.............................     202,014      248,910
Inventories..........................................     231,552      284,757
Prepaid expenses and other current assets............      38,168       20,855
Deferred income taxes................................     157,525      157,525
                                                       -----------  -----------
          Total current assets.......................   1,488,779    1,576,606
Property and equipment, net..........................     114,475      126,533
Restricted cash......................................      60,800       60,800
Deferred income taxes................................      19,767       19,767
Other assets.........................................      54,804       88,069
                                                       -----------  -----------
          Total assets............................... $ 1,738,625  $ 1,871,775
                                                       ===========  ===========
Liabilities and stockholders' equity

Trade accounts payable............................... $    33,103  $    56,568
Accrued expenses and other
   current liabilities...............................     181,767      183,319
Deferred profit......................................     147,446      250,834
Current portion of long-term debt and
   capital lease obligations.........................     318,489        8,963
                                                       -----------  -----------
          Total Current Liabilities..................     680,805      499,684
Long-term debt and capital lease
   obligations, less current portion.................     351,259      659,718
                                                       -----------  -----------
          Total liabilities..........................   1,032,064    1,159,402
Commitments and contingencies
Preferred stock, at par value of $0.001 per share;
   authorized -- 5,000 shares, none outstanding......         --           --
Common stock, at par value of $0.001 per share;
     authorized -- 400,000 shares; issued and
     outstanding -- 125,452 shares at September 23,
    2001 and 124,917 shares at June 24, 2001.........         125          125
Additional paid-in capital...........................     501,689      498,066
Treasury stock, at cost..............................     (21,733)     (21,904)
Accumulated other comprehensive loss.................     (14,678)     (18,195)
Retained earnings....................................     241,158      254,281
                                                       -----------  -----------
          Total stockholders' equity.................     706,561      712,373
                                                       -----------  -----------
          Total liabilities and stockholders' equity. $ 1,738,625  $ 1,871,775
                                                       ===========  ===========

(1) Derived from June 24, 2001 audited financial statements.

See Notes to Condensed Consolidated Financial Statements.






LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)


                                              Three Months Ended
                                          --------------------------
                                          September 23, September 24,
                                             2001          2000
                                          ------------  ------------
                                                         (restated)
Total revenue........................... $    339,580  $    305,031

  Cost of goods sold....................      213,869       172,363
  Cost of goods sold -
   restructuring charges................        7,600          --
                                          ------------  ------------
Gross margin                                  118,111       132,668
  Research and development..............       47,230        56,531
  Selling, general and
    administrative......................       47,165        52,436
  Restructuring charges.................       13,448          --
                                          ------------  ------------
Operating income .......................       10,268        23,701
Other income (expense), net.............      (18,179)        4,640
                                          ------------  ------------
Income (loss)  before taxes.............       (7,911)       28,341
Income tax expense......................        1,009         8,501
                                          ------------  ------------
Income (loss) before cumulative effect
 of change in accounting principle...... $     (8,920) $     19,840

Cumulative effect of the application
of SAB 101, "Revenue Recognition in
Financial Statements", net of $81,441
related tax  benefit....................         --        (122,105)
                                          ------------  ------------
Net loss                                       (8,920)     (102,265)
                                          ============  ============
Net income (loss) per share:

 Basic:
  Income (loss) before cumulative effect
   of change in accounting principle....        (0.07)         0.16

  Cumulative effect of change
   in accounting principle, SAB 101.....         --           (0.98)
                                          ------------  ------------
   Basic net loss per share............. $      (0.07) $      (0.82)
                                          ============  ============
 Diluted:
  Income (loss) before cumulative effect
   of change in accounting principle....        (0.07)         0.15

  Cumulative effect of change
   in accounting principle, SAB 101.....         --           (0.91)
                                          ------------  ------------
   Diluted net loss per share........... $      (0.07) $      (0.76)
                                          ============  ============
Number of shares used in
  per share calculations:
   Basic................................      125,340       124,477
                                          ============  ============
   Diluted..............................      125,340       133,733
                                          ============  ============

See Notes to Condensed Consolidated Financial Statements.






LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


                                                          Three Months Ended
                                                      --------------------------
                                                      September 23, September 24,
                                                          2001          2000
                                                      ------------  ------------
Cash flows from operating activities:

  Net loss.......................................... $     (8,920) $   (102,265)
  Adjustments to reconcile net loss to net cash
    provided by (used for) operating activities:
  Loss on equity derivative contracts...............       17,994           --
  Cumulative effect of change in accounting
    principle, SAB 101..............................          --        122,105
  Depreciation and amortization.....................       15,954        13,260
  Deferred income taxes.............................          --        (19,749)
  Restructuring charges.............................       21,048           --
  Change in working capital accounts................      (48,937)         (236)
                                                      ------------  ------------
Net cash provided by (used for) operating
  activities........................................       (2,861)       13,115
                                                      ------------  ------------

Cash flows from investing activities:

  Capital expenditures, net.........................       (2,003)      (15,956)
  Purchases of available-for-sale securities........     (734,147)     (215,387)
  Sales of available-for-sale securities............      612,526       217,737

  Other, net........................................         (272)       (1,824)
                                                      ------------  ------------
Net cash used for investing activities..............     (123,896)      (15,430)
                                                      ------------  ------------

Cash flows from financing activities:

  Net proceeds from the issuance of short and
    long term debt..................................          --          3,441
  Principal payments on long-term debt
    and capital lease obligations...................         (604)         (674)
  Treasury stock repurchases........................      (10,678)       (3,515)
  Reissuance of treasury stock......................        6,646         7,117
  Issuance of common stock, net.....................        3,623           108
                                                      ------------  ------------
Net cash provided by (used for) financing activities       (1,013)        6,477
                                                      ------------  ------------
  Effect of exchange rate changes on cash...........        1,110           235
Net increase (decrease) in cash and
  cash equivalents..................................     (126,660)        4,397
Cash and cash equivalents at beginning of period....      221,659        70,056
                                                      ------------  ------------
Cash and cash equivalents at end of period.......... $     94,999  $     74,453
                                                      ============  ============

See Notes to Condensed Consolidated Financial Statements.






LAM RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 23, 2001
(Unaudited)

NOTE A -- BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Lam Research Corporation (the "Company" or "Lam") for the fiscal year ended June 24, 2001, which are included in the Annual Report on Form 10-K, File Number 0-12933.

Certain amounts presented in the comparative financial statements for prior years have been reclassified to conform to the 2002 presentation.

NOTE B -- CHANGES IN ACCOUNTING PRINCIPLES AND POLICIES

Revenue Recognition: The Company changed its revenue recognition policy in the fourth quarter of fiscal 2001, effective June 26, 2000, based on guidance provided in Securities and Exchange Commission ("SEC"), Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, collectibility is reasonably assured, and the Company has completed its system installation obligations and received customer acceptance, or is otherwise released from its installation or customer acceptance obligations. In the event terms of the sale provide for a lapsing customer acceptance period, the Company recognizes revenue upon the expiration of the lapsing acceptance period or customer acceptance whichever occurs first. Revenue related to spare parts sales is generally recognized on shipment. Revenue related to services is generally recognized upon performance of the services requested by a customer order. Revenue for extended maintenance service contracts with a term more than one month is recognized on a prorated straight-line basis over the term of the contract.

In accordance with guidance provided in SAB 101, the Company recorded a non-cash charge of $122.1 million (after a reduction for income taxes of $81.4 million), or ($0.92) per diluted share, to reflect the cumulative effect of the accounting change as of the beginning of the fiscal year ended June 24, 2001.

The deferred revenue balance as of June 26, 2000 was $433.0 million. This amount consists of equipment that was shipped but had not yet been accepted as of June 25, 2000 and was included in the cumulative effect adjustment as of June 26, 2000. Of this amount $167.0 million was recognized as revenue during the three-month period ending September 24, 2000, and $10.4 million was recognized as revenue during the three-month period ended September 23, 2001.

The unaudited Statement of Operations for the three-month period ending September 24, 2000 has been restated to reflect the application of SAB 101.

Prior to fiscal year 2001, the Company's revenue recognition policy was generally to recognize revenue for equipment at the time of shipment.

Investments in Derivative Financial Instruments Indexed to Lam Research Corporation Stock: In November 2000, the FASB's Emerging Issues Task Force ("EITF") reached final consensus on EITF Issue No. 00-19, "Determination of Whether Share Settlement is Within the Control of the Issuer" for purposes of applying EITF Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" ("EITF 00-19" or "the Consensus"). EITF 96-13 addresses accounting for equity derivative contracts indexed to, and potentially settled in, a company's own stock ("equity derivatives") by providing guidance for distinguishing between permanent equity, temporary equity and assets and liabilities. EITF 00-19 addresses and clarifies whether specific contract provisions or other circumstances cause a net-share or physical settlement alternative to be within or outside the control of the issuer. Under EITF 00-19, equity derivatives that were issued prior to September 20, 2000, and classified as permanent equity must meet certain criteria or be re-classified as assets or liabilities. To qualify as permanent equity all the following criteria must be met: the equity derivative contract must permit the company to settle in unregistered shares, the company must have sufficient authorized but unissued shares available to settle the contract, the contract must contain an explicit limit on the number of shares to be delivered in a share settlement, there can be no requirement in the contract to post collateral, there can be no "make whole" provisions in the contract and there can be no provisions in the contract that indicate the counterparty has rights that rank higher than those of a common shareholder. Equity derivative contracts accounted for as permanent equity are recorded at their initial fair value, and subsequent changes in fair value are not recognized unless a change in the contract's classification occurs. Equity derivative contracts not qualifying for permanent equity accounting are recorded at fair value as an asset or liability with subsequent changes in fair value recognized through the statement of operations.

In accordance with EITF 00-19, as of June 24, 2001, the Company recorded a cumulative effect adjustment for the change in accounting principle to recognize the fair value of certain put and call options indexed to its own stock as an asset. The cumulative effect adjustment, a gain of $33.1 million ($0.25 per diluted share), was based on a June 24, 2001 stock price of $28.50. The cumulative change was not recorded net of tax because the Company believes the option settlement will be non-taxable. The fair value of these equity derivatives, $33.1 million, was recorded in Other Long Term Assets.

Based on a September 21, 2001 stock price of $16.64, the fair value of the derivatives was $15.1 million. The $11.86 decline in the price per share of the Company's stock from June 24, 2001 to September 23, 2001 resulted in an $18.0 million charge to Other Income and Expense in the September 2001 Statement of Operations. The fair value of the options is recorded in Other Current Assets, as the instruments mature within the next twelve months.

In future quarters prior to maturity, the price of the Company's stock will significantly impact the fair value of the derivatives, which will be re-calculated accordingly, and the change in fair value will be reported as a gain or loss in Other Income and Expense.

NOTE C -- RECENT ACCOUNTING PRONOUNCEMENTS

In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140 ("FAS 140"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- a replacement of FASB Statement No. 125". FAS 140 revised the criteria for accounting for securitizations and other transfers of financial assets and collateral. In addition, FAS 140 expands related financial statement disclosures. FAS 140 is effective for transfers of financial assets occurring after March 31, 2001. The adoption of FAS 140 did not have a material impact on the Company's consolidated financial position or operating results.

In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141 ("FAS 141"), "Business Combinations" and Statement of Financial Accounting Standards No. 142 ("FAS 142"), "Goodwill and Other Intangible Assets". FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized, but are reviewed annually for impairment or more frequently if impairment indicators arise. Separable intangible assets that have finite lives will continue to be amortized over their useful lives. The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired prior to July 1, 2001. The Company is required to adopt FAS 142 effective July 1, 2002. As of this date, the adoption of FAS 141 and FAS 142 is not expected to materially impact the Company's consolidated financial position or operating results.

NOTE D -- INVENTORIES

Inventories consist of the following:

                                  September 23,   June 24,
                                      2001          2001
                                  ------------  ------------
                                      (in thousands)
Raw materials................... $    141,524  $    158,508
Work-in-process.................       62,893        74,170
Finished goods..................       27,135        52,079
                                  ------------  ------------
                                 $    231,552  $    284,757
                                  ============  ============

 

NOTE E -- PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

                                     September 23,   June 24,
                                         2001          2001
                                     ------------  ------------
                                         (in thousands)
Manufacturing and other equipment . $    144,488  $    147,203
Leasehold improvements.............       90,675        89,587
Furniture and fixtures.............        5,201         6,363
Computer equipment and software....       76,318        76,211
                                     ------------  ------------
                                         316,682       319,364
Less accumulated depreciation
  and amortization.................     (202,207)     (192,831)
                                     ------------  ------------
                                    $    114,475  $    126,533
                                     ============  ============

NOTE F -- OTHER INCOME (EXPENSE), NET

The significant components of other income (expense), net are as follows:


                                          Three Months Ended
                                      --------------------------
                                      September 23, September 24,
                                         2001          2000
                                      ------------  ------------
                                          (in thousands)
Loss on equity derivative contracts  $    (17,994) $         --
Interest expense....................       (7,234)       (4,109)
Interest income.....................        9,068         9,208
Other...............................       (2,019)         (459)
                                      ------------  ------------
                                     $    (18,179) $      4,640
                                      ============  ============

See the discussion "Investments in Derivative Financial Instruments Indexed to Lam Research Corporation Stock" discussed in Note B of this form 10-Q for additional information on the loss on equity derivative contracts.

NOTE G -- NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. The computation of basic net income (loss) per share for all periods presented is derived from the information on the face of the income statement and, there are no reconciling items in either the numerator or denominator.

Diluted earnings per share is computed as though all potential common shares that are dilutive were outstanding during the period. The following table provides a reconciliation of the numerators and the denominators of the basic and diluted per-share computations for income (loss) from continuing operations.


                                                                        Three Months Ended
                                                                    --------------------------
                                                                    September 23, September 24,
                                                                       2001          2000
                                                                    ------------  ------------
                                                               (in thousands, except per share data)

Numerator:
  Numerator for basic income (loss) per share before
    cumulative effect of change in accounting principle........... $     (8,920) $     19,840
                                                                    ============  ============

Denominator:
  Basic income (loss) per share before cumulative effect of
     change in accounting principle -- average shares outstanding.      125,340       124,477
     Effect of potential dilutive securities:
     Employee stock plans.........................................           --         9,256
                                                                    ------------  ------------
  Diluted income (loss) per share before cumulative effect of
     change in accounting principle -- average shares outstanding
     and other potential common shares............................      125,340       133,733
                                                                    ============  ============
Income (loss) per share before cumulative effect of change in
 accounting principle - Basic.....................................       ($0.07)        $0.16

Income (loss) per share before cumulative effect of change in       ============  ============
 accounting principle - Diluted...................................       ($0.07)        $0.15
                                                                    ============  ============


 

For the three month period ending September 23, 2001 options and convertible securities were outstanding but all 25,199,000 potential common shares were excluded from the computation of diluted net loss per common share because the effect would have been antidilutive due to the net loss for the period. For the three-month period ending September 24, 2000 diluted net income per share includes the assumed exercise of employee stock options. The assumed conversion of the convertible subordinated notes into 10,587,000 shares was antidilutive and therefore excluded from the computation of net income per share. The shares potentially issuable under the put option agreement have been excluded from the computation of dilutive net income (loss) per share because the effect would have been antidilutive for all periods presented.

 

NOTE H -- COMPREHENSIVE LOSS

The components of comprehensive loss, net of tax, are as follows:

                                      Three Months Ended
                                  --------------------------
                                  September 23, September 24,
                                     2001          2000
                                  ------------  ------------
                                      (in thousands)
Net loss ....................... $     (8,920) $   (102,265)
Foreign currency translation
  adjustment....................        3,442         2,453
Unrealized gain on financial
  instruments.....................         75            86
                                  ------------  ------------
Comprehensive loss ............. $     (5,403) $    (99,726)
                                  ============  ============

 

Accumulated other comprehensive loss, is as follows:

                                            September 23,  June 24,
                                                 2001         2001
                                            ------------ ------------
                                                   (in thousands)
Accumulated foreign currency translation
  adjustment................................   ($19,691)    ($23,132)
Accumulated unrealized gain on
  financial instruments.....................      5,013        4,937
                                            ------------ ------------
Accumulated other comprehensive loss........   ($14,678)    ($18,195)
                                            ============ ============

 

NOTE I -- DERIVATIVE INSTRUMENTS AND HEDGING

The Company recognizes all derivatives on the balance sheet at fair value. Derivatives that are not designated nor qualify as FAS 133 hedges must be adjusted to fair value through income. If the derivative is a hedge of an anticipated transaction changes in the fair value of the derivative are recorded in other comprehensive income ("OCI"), until the hedged item is recognized in earnings (cash flow hedges). Any hedge ineffectiveness is immediately recognized in earnings.

In most countries, system sales are generally transacted in U.S. dollars while spare parts and service sales are denominated in the local country's currency. In Japan, the Company sells its systems and spare parts in Japanese Yen. Therefore, in the normal course of business, the Company's financial position is routinely subjected to market risk associated with foreign currency rate fluctuations.

The Company's policy is to minimize short-term business exposure to foreign exchange risks using the most effective and efficient methods to eliminate or reduce such exposures. To protect against the reduction in value of forecasted Yen-denominated cash flows resulting from sales in Japanese Yen, the Company has instituted a foreign currency cash flow hedging program. The Company purchases foreign currency forward contracts generally expiring within 12 months, and no later than 24 months. These foreign currency forward exchange contracts, designated as cash flow hedges, are carried on the Company's balance sheet at fair value with the effective portion of the contracts' gains or losses accumulated in OCI and subsequently recognized in earnings in the same period the hedged revenue is recognized. The Company does not use derivatives for trading purposes.

Effectiveness tests for foreign currency forward contracts entered into prior to October 2000, excluded time value and compared the foreign currency spot rate at inception to the then market spot rates. Subsequent hedges include time value and are tested for effectiveness by comparing the foreign currency forward rates at inception to the current market forward rate. The change reflects the Company's conclusion that hedge effectiveness would not be substantively impacted by including time value. For the three-month period ended September 23, 2001, the Company recognized a net loss of $73,000 for hedge ineffectiveness related to the time value included in the assessment of hedge effectiveness.

 

If a cash flow hedge is discontinued because it is probable that the original forecasted transaction will not occur, the net gain or loss in accumulated OCI will be reclassified into earnings as a component of other income and expense. No such amounts were recorded in earnings during the three-month period ended September 23, 2001 and September 24, 2000.

The following table summarizes activity in accumulated OCI related solely to derivatives classified as cash flow hedges held by the Company during the quarter ended September 23, 2001.

                                                                        (in thousands)
                                                                        ------------
Balance at June 24, 2001                                               $      4,937
Reclassified into income from other comprehensive income                       (161)
Changes in fair value of derivatives, net...............                        237
                                                                        ------------
     Balance at September 23, 2001 .....................               $      5,013
                                                                        ============

 

At September 23, 2001, the Company expects to reclassify the entire amount accumulated in OCI to earnings during the next 12 months due to the recognition in earnings of the hedged forecasted transactions.

Additionally, the Company enters into foreign currency forward contracts to hedge the gains and losses generated by the remeasurement of foreign currency denominated intercompany receivables recorded by Lam Research North America. Under FAS 133 these are not "designated hedges". Therefore, the change in fair value of these derivatives is adjusted to fair value through income as a component of Other Income and Expense and offset the change in fair value of the foreign currency denominated intercompany receivables.

NOTE J -- RESTRUCTURING

In April 2001, the Company announced its intention to reduce global headcount up to 15% during the fourth quarter of fiscal 2001 ("the June 2001 Plan"). The reduction in force was driven by the anticipated decline in the Company's revenues due to the then forecasted contraction of the semiconductor equipment market from calendar year 2000 levels. During the fourth quarter of fiscal 2001, the June 2001 Plan was approved by the appropriate level of management necessary to commit the Company to its specific actions. The Company began implementing the announced restructuring plan and reduced its workforce by approximately 11% prior to June 24, 2001. The Company recorded a restructuring charge of $16.8 million which included severance and benefits for involuntarily terminated employees, charges for remaining lease payments and leasehold improvements on vacated facilities, and charges for inventories of an etch product line that has been discounted. In addition, the Company consolidated its Fremont manufacturing facilities and wrote-off the carrying cost of abandoned facility assets.

Below is a table summarizing activity relating to the June 2001 Plan:


                                             Lease
                                Severance  Payments   Abandoned               Other
                                   and     on Vacated   Fixed    Discontinued Exit
                                Benefits   Facilities  Assets    Inventory    Costs      Total
                                ---------  ---------  ---------  ----------   -------  ---------
                                                     (in thousands)
June 2001 provision........... $   8,282  $   1,312  $   3,036  $    3,732   $   407  $  16,769
Cash payments.................    (4,067)        --        --          --          --    (4,067)
Non-cash charges..............       --          --     (3,036)     (3,732)      (10)    (6,778)
                                ---------  ---------  ---------  ----------   -------  ---------
Balance at June 24, 2001......     4,215      1,312        --         --         397      5,924
Cash payments.................    (1,108)      (216)       --         --           --    (1,324)
Non-cash charges..............       --          --        --         --           --        --
                                ---------  ---------  ---------  ----------   -------  ---------
Balance at September 23, 2001. $   3,107  $   1,096  $     --   $     --     $   397  $   4,600
                                =========  =========  =========  ==========   =======  =========

Severance and Benefits relates to the salary and fringe benefit expense for involuntarily terminated employees. Prior to the date of the financial statements, management, with the proper level of authority, approved and committed the Company to the plan of termination, determined the benefits the terminated employees would receive and communicated the benefits package to employees in enough detail that they could determine their type and amount of benefit. The termination of the impacted employees occurred as soon as practical after the plan of restructuring was announced. The Severance and Benefits reserve balance of $3.1 million as of September 23, 2001 will be utilized by the end of March 2002.

Lease Payments on Vacated Facilities relates to 24 months of rent (or the remainder of the lease term, if less) after the abandonment of certain facilities currently under long-term operating lease agreements. The Company estimated, given prevailing real estate market conditions, that it would take approximately 24 months to sub-lease its vacated facilities in Fremont, California. When applicable, anticipated future sublease income relating to vacated buildings has been offset against the charge for the remaining lease payments.

The Company wrote-off all leasehold improvements relating to the vacated buildings of approximately $1.5 million, as these items will have no future economic benefit and have been abandoned. In addition, certain demonstration equipment and etch manufacturing inventory were abandoned and written-off.

Other exit costs relate to customer accommodations for the discontinued product line and expenses associated with a discontinued capital improvement project related to vacated facilities.

By mid to late summer, further deterioration in semiconductor sales resulted in a worsening outlook for the wafer fabrication equipment market and therefore in the company's revenues. Consequently, on August 31, 2001 the Company announced a new plan ("the September 2001 Plan") to further reduce its fixed cost infrastructure, including an approximate 10% reduction-in-force. During the September 2001 quarter, the September 2001 Plan was approved by the appropriate level of management necessary to commit the Company to its specific actions. The Company began implementing the announced restructuring activities and reduced its workforce by approximately 12% prior to September 23, 2001. The Company recorded a restructuring charge of $21.0 million which included severance and benefits for involuntarily terminated employees, charges for remaining lease payments and leasehold improvements on vacated facilities, and charges for inventories of selected, older etch product lines that have been discontinued.

Below is a table summarizing activity relating to the September 2001 Plan:



                                             Lease
                                Severance  Payments   Abandoned
                                   and     on Vacated   Fixed    Discontinued
                                Benefits   Facilities  Assets    Inventory     Total
                                ---------  ---------  ---------  ----------   -------

September 2001 provision...... $  10,767  $   2,662  $      19  $    7,600   $21,048
Cash payments.................    (1,159)        --         --         --     (1,159)
Non-cash charges..............        --         --        (19)     (7,600)   (7,619)
                                ---------  ---------  ---------  ----------   -------
Balance at September 23, 2001.     9,608      2,662         --         --     12,270
                                =========  =========  =========  ==========   =======


Severance and Benefits relates to the salary and fringe benefit expense for involuntarily terminated employees. Prior to the date of the financial statements, management, with the proper level of authority, approved and committed the Company to the plan of termination, determined the benefits the terminated employees would receive and communicated the benefits package to employees in enough detail that they could determine their type and amount of benefit. The termination of the impacted employees occurred as soon as practical after the plan of restructuring was announced. The Severance and Benefits reserve balance of $9.6 million as of September 23, 2001 will be utilized over the next four to six quarters.

Lease Payments on Vacated Facilities relates to 24 months of rent (or the remainder of the lease term, if less) after the abandonment of certain facilities currently under long-term operating lease agreements. The Company estimated, given prevailing real estate market conditions, that it would take approximately 24 months to sub-lease its vacated facilities in Fremont, California.

The Company wrote-off all leasehold improvements relating to the vacated buildings, as these items will have no future economic benefit and have been abandoned. Additionally, the Company exited selected, older etch product lines and wrote-off the related discontinued manufacturing inventory.

NOTE K -- LITIGATION

See Part II, item 1 for discussion of litigation.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

With the exception of historical facts, the statements contained in this discussion are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and are subject to the Safe Harbor provisions created by that statute. Such forward-looking statements include, but are not limited to, statements that relate to our future revenue and income, product development, demand, acceptance and market share, competitiveness, gross margins, levels of research and development and operating expenses, our management's plans and objectives for our current and future operations, and the sufficiency of financial resources to support future operations and capital expenditures. Such statements are based on current expectations and are subject to risks, uncertainties, and changes in condition, significance, value and effect, including those discussed below under the heading Risk Factors, and other documents we may file from time to time with the Securities and Exchange Commission, specifically our last filed Annual Report on Form 10-K for the fiscal year ended June 24, 2001. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and of information currently and reasonably known. We undertake no obligation to release any revisions to these forward-looking statements which may be made to reflect events or circumstances which occur after the date hereof or to reflect the occurrence or effect of anticipated or unanticipated events. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes presented thereto on pages 6 to 15 of this Form 10-Q and the financial statements and notes in our last filed Annual Report on Form 10-K for a full understanding of our financial position and results of operations for the three- month period ended September 23, 2001.

 

RESULTS OF OPERATIONS

Results of Operations

Lam Research Corporation is a leading supplier of technically complex thin film selective removal equipment used during the wafer fabrication process of semiconductor manufacturing. The Company's product offerings include single wafer plasma etch systems with a wide range of applications, Chemical Mechanical Planarization ("CMP") and post-CMP wafer cleaning systems. Demand for our equipment can fluctuate significantly from period to period as a result of various factors, including but not limited to, economic conditions, supply and demand for semiconductors, customer capacity requirements, and our ability to develop and market competitive new products. For these and other reasons, our results of operations for the three-month period ending September 23, 2001 may not necessarily be indicative of future operating results.

Total Revenue

Our total revenue for the three months ended September 23, 2001 was $339.6 million, 11.3% higher than revenue (restated for SAB 101) of $305.0 million in the corresponding period of fiscal 2000. Based on the guidance provided by SAB 101, we now generally recognize systems revenue on the date of customer acceptance. As a result, the fiscal period in which we are able to recognize systems revenue is subject to the length of time that our customers require to evaluate the performance of our equipment after shipment and installation. The new systems revenue recognition policy has the effect of delaying revenue recognition generally from four to seven months from the date of shipment. Our current quarterly operating results primarily reflect revenues recognized on shipments from prior periods.

Our current outlook is for lower revenues in the next two quarters reflecting the reduction of semiconductor manufacturers' capital expenditures and delay of deliveries of new equipment in calendar year 2001. Our revenue for calendar year 2002 will be dependent upon our customers' investments during the later part of calendar year 2001 and the first three quarters of calendar year 2002.

The geographic breakdown of revenue was as follows:

                          Three Months Ended
                      --------------------------
                      September 23, September 24,
                         2001          2000
                      ------------  ------------
North America.......           27%           34%
Europe..............           25%           24%
Asia Pacific........           38%           29%
Japan...............           10%           13%


Gross Margin

Our gross margin as percentage of revenue was 34.8% for the three-month period ended September 23, 2001, compared to 43.5% for the corresponding period in the prior fiscal year. The decrease in our gross margin percentage results from excess capacity due to lower manufacturing volumes, and September 2001 restructuring charges of $7.6 million.

Our current outlook is for diminished gross margins as a percent of revenue for the next two quarters due to lower production output and under utilization of field service resources. The unfavorable impact of unabsorbed costs is expected to be partially mitigated by cost reduction activities implemented during the September and June 2001 quarters.

Research and Development

Research and Development ("R&D") expenses were $47.2 million for the three months ended September 23, 2001, or 13.9% of total revenue, compared to $56.5 million, or 18.5% of total revenue, for the corresponding period a year ago.

We expect to maintain R&D investments at spending levels comparable to or slightly below those of the current fiscal quarter for at least the next two to three quarters.

Selling, General and Administrative

Selling, general and administrative ("SG&A") expenses of $47.2 million for the three months ended September 23, 2001 were 13.9% of total revenue compared to $52.4 million or 17.2% of total revenue for the corresponding three-month period a year ago. The decrease in SG&A expenses reflects the impact of our downsizing activities and other cost reduction programs. We expect SG&A expenses to continue to decrease in absolute dollars over the next two quarters.

Restructuring

In April 2001, we announced our intention to reduce global headcount up to 15% during the fourth quarter of fiscal 2001 ("the June 2001 Plan"). The reduction in force was driven by the anticipated decline in our revenues due to the then forecasted contraction of the semiconductor equipment market from calendar year 2000 levels. During the fourth quarter of fiscal 2001, the June 2001 Plan was approved by the appropriate level of management necessary to commit us to its specific actions. We began implementing the announced restructuring plan and reduced our workforce by approximately 11% prior to June 24, 2001. We recorded a restructuring charge of $16.8 million which included severance and benefits for involuntarily terminated employees, charges for remaining lease payments and leasehold improvements on vacated facilities, and charges for inventories of an etch product line that has been discontinued. In addition, we consolidated our Fremont manufacturing facilities and wrote-off the carrying cost of abandoned facility assets.

Below is a table summarizing activity relating to the June 2001 Plan:


                                             Lease
                                Severance  Payments   Abandoned               Other
                                   and     on Vacated   Fixed    Discontinued Exit
                                Benefits   Facilities  Assets    Inventory    Costs      Total
                                ---------  ---------  ---------  ----------   -------  ---------
                                                     (in thousands)
June 2001 provision........... $   8,282  $   1,312  $   3,036  $    3,732   $   407  $  16,769
Cash payments.................    (4,067)        --        --          --          --    (4,067)
Non-cash charges..............       --          --     (3,036)     (3,732)      (10)    (6,778)
                                ---------  ---------  ---------  ----------   -------  ---------
Balance at June 24, 2001......     4,215      1,312        --         --         397      5,924
Cash payments.................    (1,108)      (216)       --         --           --    (1,324)
Non-cash charges..............       --          --        --         --           --        --
                                ---------  ---------  ---------  ----------   -------  ---------
Balance at September 23, 2001. $   3,107  $   1,096  $     --   $     --     $   397  $   4,600
                                =========  =========  =========  ==========   =======  =========

Severance and Benefits relates to the salary and fringe benefit expense for involuntarily terminated employees. Prior to the date of the financial statements, management, with the proper level of authority, approved and committed us to the plan of termination and determined the benefits the terminated employees would receive and communicated the benefits package to employees in enough detail that they could determine their type and amount of benefit. The termination of the impacted employees occurred as soon as practical after the plan of restructuring was announced. The Severance and Benefits reserve balance of $3.1 million as of September 23, 2001 will be utilized by the end of March 2002.

Lease Payments on Vacated Facilities relates to 24 months of rent (or the remainder of the lease term, if less) after the abandonment of certain facilities currently under long-term operating lease agreements. We estimated, given prevailing real estate market conditions, that it would take approximately 24 months to sub-lease our vacated facilities in Fremont, California. When applicable, anticipated future sublease income relating to vacated buildings has been offset against the charge for the remaining lease payments.

We wrote-off all leasehold improvements relating to the vacated buildings of approximately $1.5 million, as these items will have no future economic benefit and have been abandoned. In addition, certain demonstration equipment and etch manufacturing inventory were abandoned and written-off.

Other exit costs relate to customer accommodations for the discontinued product line and expenses associated with a discontinued capital improvement project related to vacated facilities.

By mid to late summer, further deterioration in semiconductor sales resulted in a worsening outlook for the wafer fabrication equipment market and therefore in our revenues. Consequently, on August 31, 2001 we announced a new plan ("the September 2001 Plan") to further reduce our fixed cost infrastructure, including an approximate 10% reduction-in-force. During the September 2001 quarter, the September 2001 Plan was approved by the appropriate level of management necessary to commit us to its specific actions. We began implementing the announced restructuring activities and reduced our workforce by approximately 12% prior to September 23, 2001. We recorded a restructuring charge of $21.0 million which included severance and benefits for involuntarily terminated employees, charges for remaining lease payments and leasehold improvements on vacated facilities, and charges for inventories of selected, older etch product lines that have been discontinued.

Below is a table summarizing activity relating to the September 2001 Plan:



                                             Lease
                                Severance  Payments   Abandoned
                                   and     on Vacated   Fixed    Discontinued
                                Benefits   Facilities  Assets    Inventory     Total
                                ---------  ---------  ---------  ----------   -------

September 2001 provision...... $  10,767  $   2,662  $      19  $    7,600   $21,048
Cash payments.................    (1,159)        --         --         --     (1,159)
Non-cash charges..............        --         --        (19)     (7,600)   (7,619)
                                ---------  ---------  ---------  ----------   -------
Balance at September 23, 2001.     9,608      2,662         --         --     12,270
                                =========  =========  =========  ==========   =======


Severance and Benefits relates to the salary and fringe benefit expense for involuntarily terminated employees. Prior to the date of the financial statements, management, with the proper level of authority, approved and committed us to the plan of termination, determined the benefits the terminated employees would receive and communicated the benefits package to employees in enough detail that they could determine their type and amount of benefit. The termination of the impacted employees occurred as soon as practical after the plan of restructuring was announced. The Severance and Benefits reserve balance of $9.6 million as of September 23, 2001 will be utilized over the next four to six quarters.

Lease Payments on Vacated Facilities relates to 24 months of rent (or the remainder of the lease term, if less) after the abandonment of certain facilities currently under long-term operating lease agreements. We estimated, given prevailing real estate market conditions, that it would take approximately 24 months to sub-lease the vacated facilities in Fremont, California.

We wrote-off all leasehold improvements relating to the vacated buildings, as these items will have no future economic benefit and have been abandoned. Additionally, we exited selected, older etch product lines and wrote-off the related discontinued manufacturing inventory.

Tax Expenses

Income tax expense in the September 2001 quarter was recorded using a 10% tax rate estimate for fiscal 2002 based on our continued and substantial investment in engineering and development programs qualifying for R&D tax benefits and our current revenue and profit outlook for the fiscal year. Income tax expenses were recorded using a 30% rate for the corresponding quarter a year ago.

Changes In Accounting Principles and Policies

Revenue Recognition: We changed our revenue recognition policy in the fourth quarter of fiscal 2001, effective June 26, 2000, based on guidance provided in Securities and Exchange Commission ("SEC"), Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, collectibility is reasonably assured, and we have completed our system installation obligations and received customer acceptance, or are otherwise released from our installation or customer acceptance obligations. In the event terms of the sale provide for a lapsing customer acceptance period, we recognize revenue upon the expiration of the lapsing acceptance period or customer acceptance whichever occurs first. Revenue related to spare parts sales is generally recognized on shipment. Revenue related to services is generally recognized upon performance of the services requested by a customer order. Revenue for extended maintenance service contracts with a term more than one month is recognized on a prorated straight-line basis over the term of the contract.

In accordance with guidance provided in SAB 101, we recorded a non-cash charge of $122.1 million (after a reduction for income taxes of $81.4 million), or ($0.92) per diluted share, to reflect the cumulative effect of the accounting change as of the beginning of the fiscal year ended June 24, 2001.

The deferred revenue balance as of June 26, 2000 was $433.0 million. This amount consists of equipment that was shipped but had not yet been accepted as of June 25, 2000 and was included in the cumulative effect adjustment as of June 26, 2000. Of this amount $167.0 million was recognized as revenue during the three-month period ending September 24, 2000 and $10.4 million was recognized as revenue during the quarter ended September 23, 2001.

The unaudited Statement of Operations for the three-month period ending September 24, 2000 has been restated to reflect the application of SAB 101.

Prior to fiscal year 2001, our revenue recognition policy was generally to recognize revenue for equipment at the time of shipment.

Investments in Derivative Financial Instruments Indexed to Lam Research Corporation Stock: In November 2000, the FASB's Emerging Issues Task Force ("EITF") reached final consensus on EITF Issue No. 00-19, "Determination of Whether Share Settlement is Within the Control of the Issuer" for purposes of applying EITF Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" ("EITF 00-19" or "the Consensus"). EITF 96-13 addresses accounting for equity derivative contracts indexed to, and potentially settled in, a company's own stock ("equity derivatives") by providing guidance for distinguishing between permanent equity, temporary equity and assets and liabilities. EITF 00-19 addresses and clarifies whether specific contract provisions or other circumstances cause a net-share or physical settlement alternative to be within or outside the control of the issuer. Under EITF 00-19, equity derivatives that were issued prior to September 20, 2000, and classified as permanent equity must meet certain criteria or be re-classified as assets or liabilities. To qualify as permanent equity all the following criteria must be met: the equity derivative contract must permit the company to settle in unregistered shares, the company must have sufficient authorized but unissued shares available to settle the contract, the contract must contain an explicit limit on the number of shares to be delivered in a share settlement, there can be no requirement in the contract to post collateral, there can be no "make whole" provisions in the contract and there can be no provisions in the contract that indicate the counterparty has rights that rank higher than those of a common shareholder. Equity derivative contracts accounted for as permanent equity are recorded at their initial fair value, and subsequent changes in fair value are not recognized unless a change in the contracts classification occurs. Equity derivative contracts not qualifying for permanent equity accounting are recorded at fair value as an asset or liability with subsequent changes in fair value recognized through the statement of operations.

In accordance with EITF 00-19, as of June 24, 2001, we recorded a cumulative effect adjustment for the change in accounting principle to recognize the fair value of certain put and call options indexed to our own stock as an asset. The cumulative effect adjustment, a gain of $33.1 million ($0.25 per diluted share), was based on a June 24, 2001 stock price of $28.50. The cumulative change was not recorded net of tax because we believe the option settlement will be non-taxable. The fair value of these equity derivatives, $33.1 million, was recorded in Other Long Term Assets.

Based on a September 21, 2001 stock price of $16.64, the fair value of the derivatives was $15.1 million. The $11.86 decline in the price per share of our stock from June 24, 2001 to September 23, 2001 resulted in an $18.0 million charge to the Other Income and Expense section of the September 2001 Statement of Operations. The fair value of the options is recorded in Other Current Assets, as the instruments mature within the next 12 months.

In future quarters prior to maturity, the price per share of our stock will significantly impact the fair value of the derivatives, which will be re-calculated accordingly, and the change in fair value will be reported as a gain or loss in Other Income and Expense.

Transition to Single European Currency

During fiscal 1999, we established a team to address issues raised by the introduction of the Single European Currency ("Euro") for initial implementation as of January 1, 1999 and through the transition period to January 1, 2002. We met all related legal requirements by January 1, 1999, and we expect to meet all legal requirements through the transition period. We do not expect the cost of any related system modifications to be material and do not currently expect that the introduction and use of the Euro will materially affect our foreign exchange and hedging activities, or will result in any material increase in transaction costs. We will continue to evaluate the impact over time of the introduction of the Euro; however, based on currently available information, our management does not believe that the introduction of the Euro had or will have a material adverse impact on our financial condition or results of our operations.

LIQUIDITY AND CAPITAL RESOURCES

As of September 23, 2001, we had $920.3 million in cash, cash equivalents, short-term investments, and restricted cash compared with $925.4 million at June 24, 2001.

Net cash used for operating activities was $2.9 million for the three months ending September 23, 2001. Cash used by operating activities primarily resulted from a net loss of $8.9 million offset by non-cash charges of $55.0 million (including restructuring, loss on equity derivative contracts and depreciation and amortization) and net uses of working capital of $48.9 million. Significant uses of working capital were decreases in accounts payable of $23.4 million and other liabilities, including deferred profit, of $103.4 million, offset by decreases in accounts receivables of $46.9 million and inventories of $44.4 million, net of restructuring charges.

Net cash used for investing activities for the three months ended September 23, 2001 was $123.9 million. Cash outflows stemmed primarily from net purchases of available for sale securities.

Net cash used for financing activities for the three months ended September 23, 2001 was $1.0 million. We repurchased $10.7 million of common stock and reissued $6.6 million from treasury stock through our employee option and stock purchase programs. Net proceeds from other issuance of our common stock were $3.6 million.

During the three months ended September 23, 2001 we sold U.S. dollar denominated accounts receivable of $14.0 million. These agreements increased cash and reduced accounts receivable outstanding.

During May 2001, we completed an offering of $300.0 million of 4% Convertible Subordinated Notes ("the 4% Notes"), which mature on June 1, 2006. Interest on the 4% Notes is payable on June 1 and December 1 of each year, commencing December 1, 2001. The 4% Notes are convertible into shares of our Common Stock at any time prior to the close of business on the maturity date, unless previously redeemed, at a conversion price of $44.93 per share, subject to certain adjustments. The 4% Notes are redeemable, in whole or in part, at our option beginning on June 5, 2004 with at least 20 days and no more than 60 days notice, at redemption prices starting at 101.0% and at diminishing prices thereafter, plus accrued interest. The 4% Notes are unsecured and subordinated in right of payment in full to all existing and future senior indebtedness, as defined, of the Company. Debt issuance costs associated with the offering of approximately $8.5 million have been deferred in Other Assets and are being amortized to other expense using the effective interest method over the term of the 4% Notes.

In August 1997, we completed an offering of $310.0 million of 5% Convertible Subordinated Notes ("the 5% Notes"), which mature on September 2, 2002. Interest on the 5% Notes is payable on September 1 and March 1 of each year, commencing March 1, 1998. The 5% Notes are convertible into shares of our Common Stock at any time prior to the close of business on the maturity date, unless previously redeemed, at a conversion price of $29.26 per share, subject to anti-dilution adjustments. The 5% Notes are redeemable, in whole or in part, at our option beginning on September 6, 2000 with at least 20 days notice, at redemption prices starting at 102.0% and at diminishing prices thereafter, plus accrued interest, if the closing price of our Common Stock is at least 130% of the conversion price for at least 20 trading days within a period of 30 consecutive trading days ending within five trading days prior to the notice of redemption. The 5% Notes are unsecured and subordinated in right of payment in full to all existing and future senior indebtedness, as defined, of the Company. Debt issuance costs associated with the offering of approximately $9.0 million were deferred in other assets and are being amortized to other expense using the effective interest method over the term of the 5% Notes.

In fiscal 1999, we entered into certain option transactions with independent third parties (the "third parties") for the purchase and sale of our Common Stock. Our Board of Directors authorized us to acquire from the third parties options to purchase up to 10.5 million shares of our Common Stock. These call options are to be acquired to offset the anticipated dilutive effect of a potential conversion into Common Stock of the 5% Convertible Subordinated Notes previously issued by us, and due September 2, 2002. As part of the program, our Board of Directors also authorized us to enter into put options with the same third parties covering up to 15.75 million shares of our Common Stock. We anticipated that the premiums we would receive over the course of the program from the sale of the put options to the third parties would offset in full the premium cost of our purchase of the call options from those same third parties. Consequently, we do not expect to exchange cash over the course of the program with the third parties in conjunction with our purchase of the call options.

Pursuant to the authorization described above, we have, as of September 23, 2001, acquired call options to purchase 3.72 million shares of our Common Stock; the weighted average exercise price of these options is $11.29. The call options provide that our maximum benefit at expiration is $17.97 per option share (the difference between $29.26, which is the conversion price of the 5% Notes issued in August 1997, and the weighted average exercise price of the call options). We have also entered into put option contracts with the same third parties covering 5.58 million shares of our Common Stock, giving those third parties the right to sell to us shares of our Common Stock at a weighted average price of $9.48 per share.

The call and put options are European style options exercisable upon expiration; all of the options expire no later than September 3, 2002, which is the business day following the date on which the 5% Notes must either be converted or retired. Upon option exercise, we have the ability, at our option, to permit the options to be physically settled (i.e., shares would be delivered to us against payment of the exercise price), settled in cash (i.e., by a payment from one party to the other of the value of the option being exercised) or "net settled" in shares (i.e., by delivery of a number of shares of common stock having a value equal to the value of the option being exercised). Certain scenarios may require that we deliver cash to the counter-party to achieve full settlement under the terms of the instruments. We can also terminate the options prior to expiration for a settlement value determined from time to time by the appropriate Third Party. While the options are only exercisable at expiration, the terms of the contracts with the third parties provide for early termination and settlement of the options upon the occurrence of certain events (in a form determined by us which includes net settlement of shares), including without limitation our material breach of the agreement, default on certain indebtedness or covenants relating to our financial condition, reduction in our S&P credit rating below B or a drop in the price of our Common Stock to less than $1.67 per share.

We account for these derivative financial instruments, indexed and potentially settled in our stock, under the provisions of EITF 00-19. At September 23, 2001, the instruments had a net fair value of $15.1 million in our favor and are included in Other Current Assets.

If the average stock price is below $9.48 during any period, the required number of shares to net settle our obligation under the put option agreement would be considered dilutive securities in our dilutive earnings per share ("EPS") calculation.

Given the cyclical nature of the semiconductor equipment industry, we believe that maintenance of sufficient liquidity reserves is important to ensure our ability to maintain levels of investment in R&D and capital infrastructure through ensuing business cycles. Based upon our current business outlook, our levels of cash, cash equivalents, and short-term investments at September 23, 2001, combined with proactive cash conserving activities, are expected to be sufficient to support our currently anticipated levels of operations and capital expenditures through at least the next twelve months.

 

 

RISK FACTORS

Our Quarterly Revenues and Operating Results are Unpredictable

Our revenues and operating results may fluctuate significantly from quarter to quarter due to a number of factors, not all of which are in our control. These factors include, but are not limited to:

  • economic conditions in the semiconductor industry generally, and the equipment industry specifically;
  • customer capacity requirements;
  • customer acceptances of equipment;
  • the size and timing of orders from customers;
  • customer cancellations or delays in our shipments and/or installations;
  • our ability in a timely manner to develop, introduce and market new, enhanced and competitive products;
  • our competitors' introduction of new products;
  • legal or technical challenges to our products and technology;
  • new or modified accounting regulations;
  • changes in average selling prices and product mix;
  • changes in import/export regulations; and
  • exchange rate fluctuations.

We manage our expense levels in part on our expectations of future revenues. If revenue levels in a particular quarter do not meet our expectations, our operating results may be adversely affected.

We derive our revenue primarily from the sale and acceptance of a relatively small number of high-priced systems. Our systems can range in price from approximately $400,000 to $4 million per unit. Our operating results for a quarter may suffer substantially if:

  • we sell fewer systems than we anticipate in any quarter;

  • we do not receive anticipated orders in time to enable shipment of equipment during a given quarter;

  • one or more customers delay or cancel anticipated shipments and/or installations;
  • shipments are delayed by procurement shortages or manufacturing or transportation difficulties or;
  • our customers delay final acceptance of our shipments due to delays in their evaluation of our systems.

Further, because most of our manufacturing operations and capacity is located at our Fremont, California facility, natural, physical, logistical or other events or disruptions affecting this facility (including labor disruptions, earthquakes and power failures) could adversely impact our financial performance.

Variations in the Amount of Time it Takes for Our Customers to Accept Our Systems May Cause Fluctuation in Our Operating Results

In December 1999 the Securities and Exchange Commission issued SAB No. 101 "Revenue Recognition in Financial Statements." SAB 101 provides guidance on the recognition of revenue for sales that involve contractual customer acceptance provisions and product installation commitments. Based on the guidance provided by SAB 101 we changed our revenue recognition policy for equipment sales effective June 26, 2000. Prior to SAB 101, we generally recognized systems revenue on the date the equipment was shipped to customers. Under SAB 101, we now recognize revenue on the date of customer acceptance or the date the contractual customer acceptance provisions lapse. As a result, the fiscal period in which we are able to recognize systems revenues is subject to the length of time that our customers require to evaluate the performance of our equipment after shipment and installation, which could cause our quarterly operating results to fluctuate.

The Semiconductor Equipment Industry is Volatile; and the Industry is Currently Experiencing Reduced Product Demand which is Expected to have a Negative Impact on Shipments and Equipment Acceptance Cycle Time

Our business depends on the capital equipment expenditures of semiconductor manufacturers, which in turn depend on the current and anticipated market demand for integrated circuits and products using integrated circuits. The semiconductor industry is cyclical in nature and historically experiences periodic downturns. In late fiscal 1999, increased demand for our products drove sales growth throughout fiscal 2000 and early fiscal 2001. In the second half of the December 2000 quarter, we began to see signs that this upturn was slowing and that customers were likely to reduce equipment purchases during the first half of calendar year 2001. These signs were confirmed in calendar year 2001 as semiconductor manufacturers canceled or delayed many orders as a result of overcapacity. These order reductions have and are expected to continue to have a negative impact on the level of system shipments and the cycle time of acceptances in at least the first half of fiscal 2002.

Fluctuating levels of investment by the semiconductor manufacturers and pricing volatility are expected to continue to materially affect our aggregate bookings, revenues and operating results. We will continue to respond to these fluctuations with cost management programs aimed at alignment of our expenditures with anticipated revenue streams, which sometimes result in restructuring charges. Even during periods of reduced revenues, we must continue to invest in research and development and to maintain extensive ongoing worldwide customer service and support capabilities to remain competitive, which may temporarily harm our financial results

We Depend on New Products and Processes for Our Success. For this Reason, We are Subject to Risks Associated with Rapid Technological Change

Rapid technological changes in semiconductor manufacturing processes subject us to increased pressure to develop technological advances enabling such processes. We believe that our future success depends in part upon our ability to develop, manufacture, and successfully introduce new products with improved capabilities and to continue to enhance our existing products. Due to the risks inherent in transitioning to new products, we must accurately forecast demand for new products while managing the transition from older products. If new products have reliability or quality problems our performance may be impacted by reduced orders, higher manufacturing costs, delays in acceptance of and payment for new products, and additional service and warranty expenses. We may be unable to develop and manufacture new products successfully, or new products that we introduce may fail in the marketplace, which would materially and adversely affect our results from operations.

We expect to continue to make significant investments in research and development and to pursue joint development relationships with customers or other members of the industry. We must manage product transitions and joint development relationships successfully, as introduction of new products could adversely affect our sales of existing products. Future technologies, processes or product developments may render our current product offerings obsolete, or we may be unable in a timely manner to develop and introduce new products or enhancements to our existing products which satisfy customer needs or achieve market acceptance. In addition, in connection with the development of new products, we will invest in pilot production inventory. Our failure, to complete commercialization of these new products in a timely manner could result in inventory obsolescence, which would adversely affect our financial results.

We are Subject to Risks Associated with the Introduction of New Products

We expect to face significant competition from multiple current and future competitors. We believe that other companies are developing systems and products that are competitive to ours and are planning to introduce new products to this market, which may affect our ability to sell our new products. Furthermore, new products represent significant investments of our resources and their success, or lack thereof, could have a material effect on our financial results.

We are Subject to Risks Relating to Product Concentration and Lack of Product Revenue Diversification

We derive a substantial percentage of our revenues from a limited number of products, and we expect these products to continue to account for a large percentage of our revenues in the near term. Continued market acceptance of our primary products is, therefore, critical to our future success. Our business, operating results, financial condition, and cash flows could therefore be adversely affected by:

  • a decline in demand for our products;
  • a failure to achieve continued market acceptance of our products;
  • an improved version of products being offered by a competitor in the market we participate in;
  • technological change that we are unable to address with our products; and
  • a failure to release new enhanced versions of our products on a timely basis.

We are Dependent Upon a Limited Number of Key Suppliers

We obtain certain components and sub-assemblies included in our products from a single supplier or a limited group of suppliers. Each of our key suppliers has a one-year blanket purchase contract under which we may issue purchase orders. We may renew these contracts periodically. Each of these suppliers sold us products during at least the last four years, and we expect that we will continue to renew these contracts in the future or that we will otherwise replace them with competent alternative source suppliers. Nevertheless, a prolonged inability to obtain certain components could adversely affect our operating results and result in damage to our customer relationships.

Once a Semiconductor Manufacturer Commits to Purchase a Competitor's Semiconductor Manufacturing Equipment, the Manufacturer Typically Continues to Purchase that Competitor's Equipment, Making it More Difficult for Us to Sell our Equipment to that Customer

Semiconductor manufacturers must make a substantial investment to qualify and integrate capital processing equipment into a semiconductor production line. We believe that once a semiconductor manufacturer selects a particular supplier's processing equipment, the manufacturer generally relies upon that equipment for that specific production line application. Accordingly, we expect it to be more difficult to sell to a given customer if that customer initially selects a competitor's equipment. We believe that to remain competitive we will require significant financial resources to offer a broad range of products, to maintain customer service and support centers worldwide, and to invest in product and process research and development.

We May Lack the Financial Resources or Technological Capabilities of Certain of Our Competitors Needed to Capture Increased Market Share

Certain of our competitors have substantially greater financial resources and more extensive engineering, manufacturing, marketing, and customer service and support resources than we do and therefore are increasingly dominating the semiconductor equipment industry. In addition, there are smaller, emerging semiconductor equipment companies that may provide innovative technology that may have performance advantages over systems we currently, or expect to, offer.

We anticipate our competitors will continue to improve the design and performance of their current products and processes and to introduce new products and processes with enhanced performance characteristics. If our competitors enter into strategic relationships with leading semiconductor manufacturers covering products similar to those we sell or may develop, it could adversely affect our ability to sell products to those manufacturers. In addition, competitors with higher levels of financial resources than we have may deeply discount products similar to those we sell. For these reasons, we may fail to continue to compete successfully worldwide.

Our present or future competitors may be able to develop products comparable or superior to those we offer or may adapt more quickly to new technologies or evolving customer requirements. In particular, while we currently are developing additional product enhancements that we believe will address customer requirements, we may fail in a timely manner to complete the development or introduction of these additional product enhancements successfully, or these product enhancements may not achieve market acceptance or be competitive. Accordingly, we may be unable to continue to compete effectively in our markets, competition may intensify or future competition may have a material adverse effect on our revenues, operating results, financial condition, and cash flows.

Our Future Success Depends on International Sales

International sales accounted for approximately 70% of our total revenue in fiscal 2001, 71% in fiscal 2000 and 54% in fiscal 1999. We expect that international sales will continue to account for a significant portion of our total revenue in future years. International sales are subject to risks, including, but not limited to:

  • foreign exchange risks;
  • changing import/export requirements;
  • foreign trade disputes; and
  • economic, political, banking and currency problems in the relevant region.

We currently enter into foreign currency forward contracts to minimize the short-term impact of exchange rate fluctuations on Yen-denominated sales and assets, and will continue to enter into hedging transactions for the foreseeable future.

A Failure to Comply with Environmental Regulations May Adversely Affect Our Operating Results

We are subject to a variety of governmental regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemicals. We believe that we are in general compliance with these regulations and that we have obtained (or will obtain or are otherwise addressing) all necessary environmental permits to conduct our business. These permits generally relate to the disposal of hazardous wastes. Nevertheless, the failure to comply with present or future regulations could result in fines being imposed on us, suspension of production, cessation of our operations or reduction in our customers' acceptance of our products. These regulations could require us to alter our current operations, to acquire significant equipment or to incur substantial other expenses to comply with environmental regulations. Our failure to control the use, sale, transport or disposal of hazardous substances could subject us to future liabilities.

Our Ability to Manage Potential Growth or Decline; Integration of Potential Acquisitions and Potential Disposition of Product Lines and Technologies Creates Risks for Us

Currently, the semiconductor equipment industry is experiencing a severe decrease in demand for its products, which challenges our management to reduce spending on operating activities. Alternatively, if we experience rapid growth in the future we may face significant challenges in maintaining adequate financial and business controls, management processes, information systems and procedures on a timely basis, and expanding, training, and managing our work force. There can be no assurance that we will be able to perform such actions successfully.

In the future, we may make acquisitions of complementary companies, products or technologies, or we may reduce or dispose of certain product lines or technologies, which no longer fit our long-term strategy. Managing an acquired business, disposing of product technologies or reducing personnel entails numerous operational and financial risks, including difficulties in assimilating acquired operations and new personnel or separating existing business or product groups, diversion of management's attention to other business concerns, amortization of acquired intangible assets and potential loss of key employees or customers of acquired or disposed operations amongst others. Our success will depend, to a significant extent, on the ability of our executive officers and other members of our senior management to identify and respond to these challenges effectively. There can be no assurance that we will be able to achieve and manage successfully any such growth, decline, integration of potential acquisitions, disposition of product lines or technologies, or reduction in personnel or that our management, personnel or systems will be adequate to support continued operations. Any such inabilities or inadequacies would have a material adverse effect on our business, operating results, financial condition, and cash flows.

An important element of our management strategy is to review acquisition prospects that would complement our existing products, augment our market coverage and distribution ability, or enhance our technological capabilities. We may acquire additional businesses, products or technologies in the future. Any acquisitions could result in changes such as potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, the amortization of related intangible assets and goodwill impairment charges, any of which could materially adversely affect our business, financial condition, and results of operations and/or the price of our Common Stock.

The Market for Our Common Stock is Volatile, which May Affect our Ability to Raise Capital or Make Acquisitions

The market price for our Common Stock is extremely volatile and has fluctuated significantly over the past years. The trading price of our Common Stock could continue to be highly volatile and fluctuate widely in response to factors, including but not limited to the following:

  • general market or semiconductor industry conditions;
  • global economic fluctuations;
  • variations in our quarterly operating results;
  • variations in our revenues or earnings from levels that securities analysts forecast;
  • announcements of restructurings, technological innovations, reductions in force, departure of key employees, consolidations of operations or introduction of new products;
  • government regulations;
  • developments in or claims relating to patent or other proprietary rights;
  • disruptions with key customers; or
  • political, economic or environmental events occurring globally or in our key sales regions.

In addition, the stock market experiences significant price and volume fluctuations. Recent volatility in the price of our Common Stock was tied in part to the actual or anticipated movement in interest rates and the price of and markets for semiconductors. These broad market and industry factors may adversely affect the price of our Common Stock, regardless of our actual operating performance. In the past, following volatile periods in the price of stock, many companies become the object of securities class action litigation. If we are sued in a securities class action, we could incur substantial costs and it could divert management's attention and resources and have an unfavorable impact on the price for our Common Stock.

Risk Associated with Our Call and Put Options

We have entered into third party option transactions for the purchase and sale of our stock. The option positions will be of value to us if our stock price exceeds the exercise price of the call options at the time the options are exercised. Conversely, our stock price could also decline. If our stock price on the exercise date of the options were below the put option exercise price, we would have to settle the put obligation by paying cash or the equivalent value in Common Stock.

If settlement were to occur prior to option expiration because of the occurrence of an event giving the third parties the right to terminate the transactions, we will be required both to pay to the third parties the value of their position (which would depend on a number of factors, including the time remaining to expiration and the volatility of our Common Stock) which could be greater or lesser than the difference between the options' exercise prices and the then market price of our Common Stock, as well as any costs or expenses incurred by the third parties as a result of unwinding the transactions.

The Potential Anti-Takeover Effects of Our Bylaws Provisions and the Rights Plan We have in Place May Affect Our Stock Price and Inhibit a Change of Control Desired by Some of Our Stockholders

In 1997, we adopted a Rights Plan (the "Rights Plan") in which rights were distributed as a dividend at the rate of one right for each share of our Common Stock, held by stockholders of record as of the close of business on January 31, 1997, and thereafter. In connection with the adoption of the Rights Plan, our Board of Directors also adopted a number of amendments to our Bylaws, including amendments requiring advance notice of stockholder nominations of directors and stockholder proposals.

Our Rights Plan may have certain anti-takeover effects. Our Rights Plan will cause substantial dilution to a person or group that attempts to acquire Lam in certain circumstances. Accordingly, the existence of the Rights Plan and the issuance of the related rights may deter certain acquirers from making takeover proposals or tender offers. The Rights Plan, however, is not intended to prevent a takeover. Rather it is designed to enhance the ability of our Board of Directors to negotiate with a potential acquirer on behalf of all of our stockholders.

In addition, our Certificate of Incorporation authorizes issuance of 5,000,000 shares of undesignated Preferred Stock. Our Board of Directors, without further stockholder approval, may issue this Preferred Stock on such terms as the Board of Directors may determine, which also could have the effect of delaying or preventing a change in control of Lam. The issuance of Preferred Stock could also adversely affect the voting power of the holders of our Common Stock, including causing the loss of voting control. Our Bylaws and indemnity agreements with certain officers, directors and key employees provide that we will indemnify officers and directors against losses that they may incur in legal proceedings resulting from their service to Lam. Moreover, Section 203 of the Delaware General Corporation Law restricts certain business combinations with "interested stockholders", as defined by that statute.

Intellectual Property and Other Claims Against Us Can Be Costly and Could Result in the Loss of Significant Rights which are Necessary to Our Continued Business and Profitability

Other parties may assert infringement, unfair competition or other claims against us. Additionally, from time to time, other parties send us notices alleging that our products infringe their patent or other intellectual property rights. In such cases, it is our policy either to defend the claims or to negotiate licenses on commercially reasonable terms. However, we may be unable in the future to negotiate necessary licenses on commercially reasonable terms, or at all, and any litigation resulting from these claims by other parties may materially adversely affect our business and financial results.

In October 1993, Varian Associates, Inc. sued us in the United States District Court for the Northern District of California, seeking monetary damages and injunctive relief based on our alleged infringement of certain patents Varian held. We asserted defenses that the subject patents are invalid and unenforceable, and that our products do not infringe these patents. Litigation is inherently uncertain, and we may fail to prevail in this litigation. However, we believe that the Varian lawsuit will not materially adversely affect our operating results or financial position. See Part II Item 1 of this Form 10-Q for a discussion of the Varian lawsuit.

Additionally, in September 1999, Tegal Corporation sued us in the United States District Court for the Eastern District of Virginia, seeking monetary damages and injunctive relief based on our alleged infringement of certain patents Tegal holds. Specifically, Tegal identified our 4520XLe ä and Exelan â products as infringing the patents Tegal is asserting. Litigation is inherently uncertain, and we may fail to prevail in this litigation. However, we believe that the Tegal lawsuit will not materially adversely affect our operating results or financial position. See Part II Item 1of this Form 10-Q for a discussion of the Tegal lawsuit.

We May Fail to Protect Our Proprietary Technology Rights, which Would Affect Our Business

Our success depends in part on our proprietary technology. While we attempt to protect our proprietary technology through patents, copyrights and trade secret protection, we believe that our success also depends on increasing our technological expertise, continuing our development of new systems, increasing market penetration and growth of our installed base, and providing comprehensive support and service to our customers. However, we may be unable to protect our technology in all instances, or our competitors may develop similar or more competitive technology independently. We currently hold a number of United States and foreign patents and pending patent applications. However, other parties may challenge or attempt to invalidate or circumvent any patents the United States or foreign governments issue to us or these governments may fail to issue pending applications. In addition, the rights granted or anticipated under any of these patents or pending patent applications may be narrower than we expect or in fact provide no competitive advantages.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

For financial market risks related to changes in interest rates and foreign currency exchange rates, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Company's Annual Report on Form 10-K for the year ended June 24, 2001.

During fiscal 1999, we entered into third party option transactions for the purchase and sale of our Common Stock, in order to offset the dilutive effect of a potential conversion into Common Stock of the $309.8 million 5% Convertible Subordinated Notes which are due September 2, 2002. As of September 23, 2001, we have acquired call options to purchase 3.72 million shares of our Common Stock. The weighted average exercise price of these options is $11.29. The call options provide that our maximum benefit at expiration is $17.97 per option share (the difference between $29.26, which is the conversion price of the Notes, and the weighted average exercise price of the call options). We have also entered into put option contracts with the same third parties covering 5.58 million shares of our Common Stock, giving those third parties the right to sell to us shares of our Common Stock at a weighted average price of $9.48 per share.

Below is a table showing, at assumed exercise prices for the put and call options and market prices for our Common Stock, our gain or (loss) under the put and call options upon exercise or upon maturity of the options transaction.

                           At
                      September 23,      At
                          2001        Maturity
                      ------------  ------------
                          (in thousands)
         Stock Value
              $5.00  $    (25,133) $    (24,998)
             $15.00  $     10,872  $     13,814
             $25.00  $     31,601  $     51,029
             $35.00  $     43,835  $     66,877
             $45.00  $     49,753  $     66,877
             $55.00  $     53,730  $     66,877


Based on a September 21, 2001 stock price of $16.64, the fair value of the derivatives was $15.1 million. The $11.86 decline in the price per share of our stock from June 24, 2001 to September 23, 2001 resulted in an $18.0 million non-taxable charge to Other Income and Expense in the September 2001 Statement of Operations. The fair value of the options is carried in Other Current Assets, as the instruments mature within the next twelve months.

For future quarters, the price of our stock will significantly impact the value of the derivatives which will be re-calculated accordingly, and the change in fair value will be reported as a gain or loss in Other Income and Expense. This discussion should be read in conjunction with Note B presented in the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q.

 

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, for the Northern District of California, seeking monetary damages and injunctive relief based on our alleged infringement of certain patents held by Varian. By order of the Court, those proceedings were bifurcated into an initial phase to determine the validity of the Varian patents and our infringement (if any), and a secondary phase to determine damages to Varian (if any) and whether our infringement (if shown) was willful. On April 13, 1999, the Court issued an interlocutory order construing the meaning of the terms of the patent claims at issue in the action. In early January 2001, the Court issued an order determining that the Company did not literally infringe Varian's patents, but the Court also held that a question of fact remained as to whether we may have infringed those patents by the doctrine of equivalents. There is now a trial date of November 26, 2001. There have been no findings in the action, which have caused us reasonably to believe that any infringement, if found, or any damages, if awarded, would have a material adverse effect on our operating results or our financial position.

In September 1999, Tegal Corporation ("Tegal") brought suit against the Company in the United States District Court for the Eastern District of Virginia, seeking monetary damages and injunctive relief based on our alleged infringement of certain patents held by Tegal. Specifically, Tegal identified our 4520XLe ä and Exelan â products as infringing the patents Tegal is asserting. On our motion, this case was transferred to California and is now pending in the United States District Court for the Northern District of California. To date, however, there has been no determination as to the actual scope of those claims, or whether our products have infringed or are infringing Tegal's patents. No trial date is currently scheduled in the action. Furthermore, there have been no findings in the action, which have caused us reasonably to believe that any infringement, if found, or any damages, if awarded, could have a material adverse effect on our operating results or our financial position.

From time to time, we have received notices from third parties alleging infringement of such parties' patent or other intellectual property rights by our products. In such cases, it is our policy to defend the claims or negotiate licenses on commercially reasonable terms, where considered appropriate. However, no assurance can be given that we will be able in the future to negotiate necessary licenses on commercially reasonable terms, or at all, or that any litigation resulting from such claims would not have a material adverse effect on our consolidated financial position or operating results.

ITEM 4. Submission of Matters to Vote of Security Holders

Not applicable.

ITEM 6. Exhibits and Reports on Form 8-K

  1. Exhibits: Employment agreement for Scott Landstrom, dated March 21, 2001.
  2. Reports on Form 8-K

The Company filed a Form 8-K on July 25, 2001 making an item 5 disclosure announcing that on July 24, 2001, Lam Research Corporation (the "Company") issued a press release announcing its fiscal 2001 fourth quarter and year-end results.








LAM RESEARCH CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 2, 2001

 

LAM RESEARCH CORPORATION

 

(Registrant)

 

By: 

/s/ Mercedes Johnson

 


 

Mercedes Johnson

 

Vice President, Finance & Chief Financial Officer

 

(Principal Financial Officer)








EXHIBIT INDEX

Exhibit

10.77

Employment Agreement for Scott Landstrom, dated March 21, 2001.








 

 

Exhibit 10.77

EMPLOYMENT AGREEMENT

This Employment Agreement (the "Agreement"), with an Effective Date of March 21, 2001, is made and entered into between Scott J. Landstrom (the "Executive") and Lam Research Corporation, a Delaware corporation (the "Company").

R E C I T A L S

A. The Company and Executive desire to enter into this Agreement with respect to the Executive's employment with the Company.

B. Certain capitalized terms used in the Agreement are defined in Section 5 below.

In consideration of the mutual covenants herein contained, and in consideration of the employment of Executive by the Company, the parties agree as follows:

1. Duties and Scope of Employment .

(a) Position. During the Employment Period (as defined in Section 2 (a) below), the Executive shall serve as a Vice President of the Company. The duties and responsibilities of Executive shall include the duties and responsibilities as the Office of the Chief Executive Officer and the Board of Directors of the Company (the "Board") may, from time to time, reasonably assign to Executive, in all cases to be consistent with Executive's offices and positions.

(b) Obligations . Executive shall comply with all of Lam's policies and procedures governing employment. During the Employment Period, the Executive shall devote his full business efforts and time to the Company. The foregoing, however, shall not preclude the Executive from engaging in such activities and services as do not interfere or conflict with his responsibilities to the Company.

2. Employment Period .

(a) Term . This Agreement shall begin upon the Effective Date and shall continue until March 20, 2006 unless earlier terminated as set forth herein (the "Employment Period"). Except as otherwise provided herein, the Employment Period shall end on the Termination Date. For the period March 21, 2001 through April 22, 2001, Executive will be on unpaid leave from the Company, although he will be an employee of the Company during such period.

(b) Termination .

(i) By the Company . The Company may terminate the Executive's employment for Cause (as defined in Section 5(a) below), by giving the Executive thirty (30) days' advance written notice, subject, however, to the cure provisions of such Section. The Company may terminate the Executive's employment with the Company for any other reason (which termination shall be regarded as an Involuntary Termination of the Executive) by giving the Executive ninety (90) days' advance notice in writing. Any waiver of notice shall be valid only if it is made in writing and expressly refers to the applicable notice requirement of this Section 2(b). Termination under this section shall become effective at the end of the notice period (unless cured prior to the expiration of such period).

(ii) By the Executive . The Executive may terminate his employment with the Company by reason of Involuntary Termination (as defined in Section 5(c) below) by giving the Company thirty (30) days' advance written notice, subject, however, to the cure provisions of such Section. The Executive may terminate his employment with the Company at any time for any other reason ("Voluntary Resignation") by giving the Company ninety (90) days' advance written notice. Any waiver of notice shall be valid only if it is made in writing and expressly refers to the applicable notice requirement of this Section 2(b). Termination under this section shall become effective at the end of the notice period (unless cured prior to the expiration of such period).

(c) Death . The Executive's employment shall terminate immediately in the event of his death. The Company shall pay to the Executive's estate any earned but unpaid salary and vacation pay accrued to the date of her death.

(d) Disability . The Company may terminate the Executive's employment for Disability (as defined in Section 5(b) below) by giving the Executive ninety (90) days' advance notice in writing. In the event the Executive resumes the performance of substantially all of his duties hereunder before the termination of his employment under this Section 2(d) becomes effective, the notice of termination shall automatically be deemed to have been revoked.

(e) Priority of Rights and Obligations upon Termination. If any event leading to or permitting Termination of this Agreement, or providing notice thereof, occurs at approximately the same time as any other Early Termination event or during any Termination notice period, and those events invoke different notice periods or different severance or other benefit arrangements, the deadlines, obligations, rights and benefits applicable to the Termination event having the highest priority shall control. The priority of Termination events (from highest to lowest priority) is as follows: (1) Termination for Cause; (2) Voluntary Resignation; (3) Involuntary Termination; (4) Disability; and (5) death. For example, if Executive gives notice of his Voluntary Resignation and, before the 90 day notice period has expired, he is subject to an Involuntary Termination, only the rights and benefits available to him for Voluntary Resignation apply since the provisions governing Voluntary Resignation have a higher priority than those applicable to Involuntary Termination. Similarly, if Executive has been subject to an Involuntary Termination and dies during the notice period, he shall have the rights and benefits available to his estate as one subject to an Involuntary Termination. Expiration of this Agreement prevails over all termination events.

 

3. Compensation and Benefits .

(a) Base Compensation . During the term of this Agreement, the Company shall pay the Executive as compensation for services a base salary. The base salary shall be $275,000 per year as of the Effective Date. The Board, at least annually, will review such base salary for possible increase, reasonably taking into account Executive's performance and prevailing compensation for executives at similar levels in similar sized companies in the industry. Such salary shall be paid periodically in accordance with normal Company payroll. The annual compensation specified in this Section 3(a) is referred to in this Agreement as "Base Compensation."

(b) Bonus. Unless otherwise determined by the Board of Directors in its sole discretion, Executive shall not be entitled to participate in participate in any performance bonus plan offered by the Company. Executive shall receive a hiring bonus of $200,000 payable within thirty days of the Effective Date. Executive shall be obligated to repay the hiring bonus in full if, prior to March 21, 2002, he receives notice of termination by the Company for Cause that ultimately leads to a termination. The hiring bonus may, at Executive's election, be deferred pursuant to the terms and conditions of the Company's Executive Deferred Compensation Plan.

(c) Stock Options. The Executive shall be granted non-qualified stock options (the "Stock Options") to purchase 300,000 shares of the Company's common stock, par value $.001 per share (the "Common Stock"), with an exercise price equal to the closing price of the Common Stock as reported on the NASDAQ Stock Market on the date of grant, as determined by the Compensation Committee of the Board of Directors, in its discretion, but in no event later than April 30, 2001 (the "Grant Date"). The Stock Options shall vest with resect to one-fourth of the option shares on each of the first four anniversaries of the Grant Date; provided, that except as provided in Sections 4(a)(i) and 4(c) below, no portion of the Stock Options shall vest following the termination of Executive's employment with the Company. The Stock Options shall have a term of ten (10) years from the Grant Date.

(d) Deferred Compensation . The Executive shall be entitled to participate in the Company's Executive Deferred Compensation Plan pursuant to the terms thereof.

(e) Benefits . During the Employment Period, the Executive shall be eligible to participate in the benefit plans and compensation programs maintained by the Company of general applicability to other key executives of the Company, including (without limitation) retirement plans, automobile allowance, savings or profit-sharing plans, deferred compensation plans, supplemental retirement or excess-benefit plans, stock option, life, disability, health, accident and other insurance programs, paid vacations (but accruing at not less than three weeks per year), and similar plans or programs, but excluding any performance bonus plans, subject in each case to the generally applicable terms and conditions of the plan or program in question and to the determination of the Board or any committee administering such plan or program.

(f) Reimbursement of Business Expenses . The Company shall reimburse the Executive for all reasonable and necessary business expenses incurred by the Executive in the performance of her duties hereunder upon proper submission of expense reports in accordance with Company policies regarding such reimbursement.

(g) Section 162(m) . Executive and the Company agree to use reasonable good faith efforts, to the extent reasonably practicable and not materially adverse to Executive, to structure payment of all amounts of Executive's compensation from the Company so as to avoid non-deductibility of any such amounts under Section 162(m) of the Internal Revenue Code (the "Code") or any successor provision.

(h) Excise Tax on Payments . Notwithstanding anything to the contrary contained herein, in the event it shall be determined that any payment or benefit by the Company to or for the benefit of the Executive, whether paid or payable but determined without regard to any additional payments required under this Section 6 (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any comparable federal, state or local excise tax (such excise tax, together with any interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in such an amount that after the payment of all taxes (including, without limitation, any interest and penalties on such taxes and the Excise Tax) on the Payment and on the Gross-Up Payment, the Executive shall retain an amount equal to the Payment minus all applicable taxes on the Payment not imposed as a result of the Excise Tax. The intent of the parties is that the Company shall be solely responsible for, and shall pay, any Excise Tax on the Payment and Gross-Up Payment and any income and employment taxes (including, without limitation, penalties and interest) imposed on any Gross-Up payment, as well as any loss of tax deduction caused by the Gross-Up Payment.

All determinations required to be made under this Section, including without limitation, whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determinations, shall be made by a nationally recognized accounting firm that is the Company's outside auditor at the time of such determinations, which firm must be reasonably acceptable to the Executive (the "Accounting Firm"). All fees and expenses of the Accounting Firm shall be borne solely by the Company.

4. Severance Benefits .

(a) Severance Benefits . Executive is not entitled to severance benefits of any kind due to the expiration of this Agreement or benefits or compensation of any kind upon termination of his employment for any reason, except as expressly provided herein. If Executive's employment with the Company terminates prior to the expiration of this Agreement, then the Executive shall be entitled to receive severance benefits as follows:

    1. Involuntary Termination . If the Executive's employment terminates as a result of Involuntary Termination during the Employment Period, then the Company shall pay the Executive within ten (10) business days after the termination date a lump sum equal to one times the Executive's annual Base Compensation (based on annualizing the rate at which Executive was most recently accruing Base Compensation). In addition, the Stock Options that Executive would have received during the next twelve-month period following termination shall be accelerated so as to be fully vested upon the Termination Date.
    2. Voluntary Resignation; Disability; Death; Termination for Cause . If, any time during this Agreement, (A) the Executive's employment terminates by reason of the Executive's (i) vVoluntary rResignation (and is not the result of an Involuntary Termination), (ii) Disability or (iii) death, or (B) the Executive's employment is terminated by the Company for Cause, then unless as otherwise expressly provided in Section 4(b) Executive shall not be entitled to receive severance or other benefits beyond the Termination Date except for those (if any) as may then be established (and applicable) under the Company's then-existing severance and benefits plans and policies at the time of such termination.

However, should the Executive make a Voluntary Resignation during the first eighteen (18) months of this Agreement (an effective date prior to September 20, 2002), the Executive shall receive those Severance Benefits as set forth in subsection 4(a)(i) Involuntary Termination. On or about March 21, 2002 the Executive and his supervisor agree to meet and assess the need to have this eighteen- (18) month period shortened or eliminated. Any mutually agreed to modification will be reduced to writing and executed as an amendment to this Agreement.

(b) Benefits; Miscellaneous . In the event the Executive is entitled to severance benefits pursuant to subsection 4(a)(i) or is terminated due to death or Disability, then in addition to such severance benefits, the Company shall continue to provide the Executive (and his family) for a period of one year following the Termination Date, welfare benefits or such comparable alternative welfare benefits as the Company may, in its discretion, determine to be sufficient to satisfy its obligations to the Executive under this Agreement (including, without limitation, medical, prescription, dental, disability, individual life, group life, accidental death and travel accident plans and programs) which are at least as favorable as the most favorable plans of the Company applicable to other peer executives and their families as of the Termination Date. Notwithstanding the foregoing, if the Executive is covered under any medical, life, or disability insurance plan(s) provided by a subsequent employer, then the amount of coverage required to be provided by the Company hereunder shall be reduced by the amount of coverage provided by the subsequent employer's medical, life or disability insurance plan(s). The Executive's rights under this Section 4(b) shall be in addition to, and not in lieu of, any post-termination continuation coverage or conversion rights the Executive may have pursuant to applicable law, including without limitation, continuation coverage required by Section 4980B of the Code.

In addition, in the event of any termination of Executive's employment at any time during the term of this Agreement, (i) the Company shall pay the Executive any unpaid Base Compensation due for periods prior to the Termination Date; (ii) the Company shall pay the Executive all of the Executive's accrued and unused vacation through the Termination Date; and (iii) following submission of proper expense reports by the Executive (or her Estate), the Company shall reimburse the Executive for all expenses reasonably and necessarily incurred by the Executive in connection with the business of the Company. These payments shall be made promptly and within the period of time mandated by law.

    1. Benefits upon a Change in Control. If a Change in Control (as defined in this Agreement), occurring prior to the Termination Date, is followed within a one-year period by (1) the Involuntary Termination of Executive's employment or (2) Executive's acceptance of a position of materially lesser authority or responsibility offered to him by the Company, then any unvested portion of the Stock Options shall automatically be accelerated in full so as to become completely vested, except that no such acceleration will occur if the Change in Control or Involuntary Termination occurs after the Executive has (i) given notice of Voluntary Resignation or (ii) been given notice of Termination for Cause by the Company unless that notice is subsequently withdrawn (in writing) by the Company and Executive's employment does not terminate as a result of such notice.
    2. Post-Termination Exercisability of Options . If Executive's employment with the Company does not continue after expiration of this Agreement, Executive may exercise any vested Stock Options (which have not previously terminated) for a period of: (1) ninety (90) dayss following either (i) voluntary termination of this Agreement by the Executive, or (ii) termination for cause; (2) one hundred eighty (180) days following termination of this Executive's employment for any other reason. After expiration of this Agreement, the terms of any applicable plan and grant documents shall dictate the length of time following termination in which Executive may exercise the Stock Options.

5. Definition of Terms . The following terms referred to in this Agreement shall have the following meanings:

    1. Cause . "Cause" shall mean (i) a willful act of personal dishonesty knowingly taken by the Executive in connection with his responsibilities as an employee and intended to result in her substantial personal enrichment, (ii) a willful and knowing act by the Executive which constitutes gross misconduct, (iii) any refusal by the Executive to comply with a reasonable written directive of the Board, (iv) a willful breach by the Executive of a material provision of this Agreement, or (v) a material and willful violation of a material federal or state law or regulation applicable to the business of the Company. No act, or failure to act, by the Executive shall be considered "willful" unless committed without good faith and without a reasonable belief that the act or omission was in the Company's best interest. Termination for Cause shall not be deemed to have occurred unless, by the affirmative vote of all of the members of the Board (excluding the Executive, if applicable), at a meeting called and held for that purpose (after reasonable notice to the Executive and his counsel and after allowing the Executive and his counsel to be heard before the Board), a resolution is adopted finding that in the good faith opinion of such Board members the Executive was guilty of conduct set forth in (i), (ii), (iii), (iv) or (v), of this section, specifying the particulars thereof; provided that in the case of conduct set forth in (iii),(iv) (iv) or (v), the Executive shall have the opportunity to cure same within 30 days following the Executive's receipt of written notice thereof.
    2. Disability . "Disability" shall mean that the Executive has been or will be unable to substantially perform his duties under this Agreement for a period of six or more consecutive months due to illness, accident or other physical or mental incapacity.

(c) Involuntary Termination . "Involuntary Termination" shall mean:

(i) the continued assignment to the Executive of any duties or the continued significant change in the Executive's duties, either of which is substantially inconsistent with the Executive's duties immediately prior to such assignment or change for a period of thirty (30) days after notice thereof from the Executive to the Board setting forth in reasonable detail the respects in which Executive believes such assignments or duties are significantly inconsistent with the Executive's prior duties;

(ii) a reduction in the Executive's Base Compensation, other than any such reduction which is part of, and generally consistent with, a general reduction of officer salaries;

(iii) a material reduction by the Company in the kind or level of employee benefits (other than salary) to which the Executive is entitled immediately prior to such reduction with the result that the Executive's overall benefits package (other than salary) is substantially reduced (other than any such reduction applicable to officers of the Company generally);

(iv) the relocation of the Company's principal executive office to a location more than fifty (50) miles from its present location;

(v) any purported termination of the Executive's employment by the Company other than for Cause, Disability or death;

(vi) the failure of the Company to obtain the assumption of this Agreement by any successors contemplated in Section 6 below; or

(vii) (vii) any material breach by the Company of any material provision of this Agreement;

(viii) a change in the Executive's title which results in the Executive having a title of lesser status within the Company's organizational structure;

provided, that none of the foregoing shall constitute Involuntary Termination to the extent the Executive has agreed thereto; and provided, further, that the foregoing shall constitute Involuntary Termination only if and to the extent that (i) the Executive provides written notice to the Company setting forth in reasonable detail such facts which Executive believes constitute Involuntary Termination and (ii) any circumstances constituting Involuntary Termination remain uncured for a period of thirty (30) days following the Company's receipt of such written notice.

(d) Termination Date . "Termination Date" shall mean (i) the last day of the applicable notice period set forth in Section 2(b) or 2(d) above (except for any Involuntary Termination Notice, given by the Executive, which is cured by the Company, or a Termination for Disability Notice which is revoked by the Executive resuming the performance of her duties), (ii) the date as of which such notice is waived in accordance with the terms of Section 2(b), (iii) the date of Executive's employment termination pursuant to this Agreement if notice of the same is not required under Section 2, or (iv) the date upon which this Agreement expires. If more than one Termination Date may apply, then the priority provisions of section 2(e) of this Agreement shall determine which Termination Date controls.

(e) Change in Control. "Change in Control" shall mean the occurrence of any of the following events:

    1. Any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, but excluding any person or group as such term is used in Rule 13d-1(b) under the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule13-d-3 under said Act), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the total voting power represented by the Company's then outstanding voting securities; or
    1. A change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the Effective Date, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or
    2. The stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets (other than to a subsidiary or subsidiaries).

(f) Voluntary Resignation . "Voluntary Resignation" shall mean termination of Executive's employment with the Company at Executive's voluntary discretion, and shall specifically exclude all instances of Involuntary Termination.

6. Successors .

(a) Company's Successors . Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the Company's obligations under this Agreement and agree expressly to perform such obligations in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and/or assets which executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by the terms of this Agreement by operation of law.

(b) Executive's Successors . The terms of this Agreement and all rights of the Executive hereunder shall inure to the benefit of, and be enforceable by, the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

7. Notice .

(a) General . Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Executive, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary.

(b) Notice of Termination . Any termination by the Company for Cause or by the Executive as a result of a vVoluntary rResignation or an Involuntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with Section 7(a) of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and shall specify the termination date in accordance with Section 2(b) or 2(d) Subject to the second provision to Section 5(d), the failure by the Executive to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing her rights hereunder. The failure by the Executive to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder.

 

8. Non-Compete; Non-Solicit .

(a) The parties hereto recognize that the Executive's services are special and unique and that her level of compensation and the provisions herein for compensation upon Involuntary Termination are partly in consideration of and conditioned upon the Executive's not competing with the Company, and that the covenant on his part not to compete and not to solicit as set forth in this Section 8 is essential to protect the business and goodwill of the Company.

(b) The Executive agrees that prior to the Termination Date, the Executive will not either directly or indirectly, whether as a director, officer, consultant, employee or advisor or in any other capacity (i) render any planning, marketing or other services respecting the creation, design, manufacture or sale of semiconductor manufacturing equipment and/or software to any business, agency, partnership or entity ("Restricted Business") other than the Company, or (ii) make or hold any investment in any Restricted Business in the United States other than the Company, whether such investment be by way of loan, purchase of stock or otherwise, provided that there shall be excluded from the foregoing the ownership of not more than 2% of the listed or traded stock of any publicly held corporation. For purposes of this Section 8, the term "Company" shall mean and include the Company, any subsidiary or affiliate of the Company, any successor to the business of the Company (by merger, consolidation, sale of assets or stock or otherwise) and any other corporation or entity of which the Executive may serve as a director, officer or employee at the request of the Company or any successor of the Company.

(c) Prior to the Termination Date, and for the period extending six (6) months thereafter(other than upon expiration of the two-year Employment Period without early termination thereof), the Executive will not, directly or indirectly, induce or attempt to influence any employee of the Company to leave its employ, and the Executive will not, directly or indirectly, involve himself in decisions to hire any employee who has left the Company's employ within the three-month period preceding the Executive's cessation of employment or the three-month period following his cessation of employment.

(d) The Executive agrees that the Company would suffer an irreparable injury if he were to breach the covenants contained in subparagraphs (b) or (c) and that the Company would by reason of such breach or threatened breach be entitled to injunctive relief in a court of appropriate jurisdiction, and the Executive hereby stipulates to the entering of such injunctive relief prohibiting him from engaging in such breach.

(e) If any of the restrictions contained in this Section 8 shall be deemed to be unenforceable by reason of the extent, duration or geographical scope or other provisions thereof, then the parties hereto contemplate that the court shall reduce such extent, duration, geographical scope or other provisions hereof (but only to the extent necessary to render such restrictions enforceable) and then enforce this Section 8 in its reduced form for all purposes in the manner contemplated hereby.

 

9. Existing Confidentiality and Non-Compete Agreements . Executive represents and warrants (i) that prior to the date hereof he has provided the Company with true and complete copies of any and all written confidentiality and/or non-compete agreements to which Executive is a party as of the date hereof (together with a written description of any such oral agreements), and (ii) to the best of Executive's knowledge, full compliance with the terms of each such agreement will not materially interfere with Executive's duties hereunder (except to the extent that Executive reasonably may determine to absent himself from certain Company meetings and communication during the first year of the Employment Period). The Executive further covenants that he will not willfully and knowingly fail to fully abide by the terms of any and all such agreements and will work in good faith with the Company to avoid any breach thereof.

10. Arbitration . At the option of either party, any and all disputes or controversies whether of law or fact and of any nature whatsoever arising from or respecting this Agreement shall be decided by arbitration by the American Arbitration Association in accordance with the rules and regulations of that Association with the exception of any claim for temporary, preliminary or permanent injunctive relief arising from or respecting this Agreement which may be brought by the Company in any court of competent jurisdiction irrespective of Executive's desire to arbitrate such a claim.

The arbitrator shall be selected as follows. In the event the Company and the Executive agree on one arbitrator, the arbitration shall be conducted by such arbitrator. In the event the Company and the Executive do not so agree, the Company and the Executive shall each select one independent, qualified arbitrator and the two arbitrators so selected shall select the third arbitrator. The Company reserves the right to object to any individual arbitrator who shall be employed by or affiliated with a competing organization.

Arbitration shall take place in San Jose, California, or any other location mutually agreeable to the parties. At the request of either party, arbitration proceedings will be conducted in the utmost secrecy; in such case all documents, testimony and records shall be received, heard and maintained by the arbitrators in secrecy under seal, available for the inspection only by the Company and the Executive and their respective attorneys and their respective experts who shall agree in advance and in writing to receive all such information confidentially and to maintain such information in secrecy unless and until such information shall become generally known. The arbitrator, who, if more than one, shall act by majority vote, shall have the power and authority to decree any and all relief of an equitable nature including, but not limited to, such relief as a temporary restraining order, a temporary and/or permanent injunction, and shall also have the power and authority to award damages, with or without an accounting and costs, provided, that punitive damages shall not be awarded, and provided, further, that the Executive shall be entitled to reimbursement for his reasonable attorney's fees to the extent he prevails as to the material issues in such dispute. The decree or judgment of an award rendered by the arbitrators may be entered in any court having jurisdiction thereof.

Reasonable notice of the time and place of arbitration shall be given to all persons, other than the parties, as shall be required by law, in which case such persons or those authorized representatives shall have the right to attend and/or participate in all the arbitration hearings in such a manner as the law shall require.

11. Miscellaneous Provisions .

(a) No Duty to Mitigate . Provided that Executive fully performs her obligations under this Agreement, the Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that the Executive may receive from any other source.

(b) Waiver . No provisions of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Executive and by an authorized officer of the Company (other than the Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time.

(c) Whole Agreement . This Agreement and the documents expressly referred to herein represent the entire agreement of the parties with respect to the matters set forth herein. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly referred to herein have been made or entered into by either party with respect to the subject matter hereof. Nothing herein affects the continued enforceability of that certain pre-existing indemnification letter between the

parties.Nothing herein affects the continued enforceability of the Company's Employment, Confidential Information and Invention Assignment Agreement to be executed by the Executive.

(d) Choice of Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California.

(e) Severability . The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect If any provision of this Agreement is determined to be invalid or unenforceable, the Agreement shall remain in full force and effect as to the remaining provisions, and the parties shall replace the invalid or unenforceable provision with one which reflects the parties' original intent in agreeing to the invalid/unenforceable one..

(f) No Assignment of Benefits . Except as otherwise provided herein, the rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnishment, attachment or other creditor's process, and any action in violation of this subsection (f) shall be void.

(g) Employment Taxes . All payments made pursuant to this Agreement by Company shall be subject to withholding of applicable income and employment taxes.

(h) Assignment by Company . The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company, provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs the Executive.

(i) Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.

(j) Expense Reimbursement . The Company will reimburse Executive for his reasonable legal fees and costs associated with the negotiation and execution of this Agreement and all other matters associated with becoming an employee of the Company, not to exceed $12,000 in the aggregate.

(k) Survival of Obligations . The obligations of paragraphs 4, 7, 8, 9, 10 and 11 shall survive termination of this Agreement.

 

IN WITNESS WHEREOF, the parties have executed this Agreement.

LAM RESEARCH CORPORATION

 

By: /s/ Richard H. Lovgren By: /s/ Scott J. Landstrom

RICHARD H. LOVGREN SCOTT J. LANDSTROM

Its: Vice President, General Counsel and Secretary

 

Dated: March 21, 2001 Dated: March 21, 2001