8-KMaterial Agreements

APPLIED MATERIALS INC /DE 8-K Report, Material Agreement (Aug 5, 2005)

Filed August 5, 2005For Securities:AMAT

Summary

Applied Materials, Inc. (AMAT) filed an 8-K on August 4, 2005, to report a significant decision by its Human Resources and Compensation Committee regarding stock options. Effective August 5, 2005, the company approved the acceleration of vesting for certain "out-of-the-money" stock options. These are options where the exercise price is higher than the current market price of the stock, making them currently unexercisable and less valuable to employees. This strategic move is primarily aimed at reducing future compensation expenses under the upcoming Financial Accounting Standards Board Statement No. 123 (Revised 2004), "Share-Based Payment" (SFAS 123R), which requires companies to recognize the cost of stock-based compensation. By accelerating the vesting of these specific options, Applied Materials expects to lower its recognized compensation expense by approximately $138 million on a pre-tax basis over fiscal years 2006, 2007, and 2008. It's important to note that this acceleration excludes options held by top executives, non-employee directors, and consultants, and is not anticipated to result in an immediate charge to earnings.

Key Highlights

  • 1Applied Materials accelerated the vesting of certain "out-of-the-money" employee stock options, effective August 5, 2005.
  • 2This action is intended to reduce future compensation expense recognition under SFAS 123R.
  • 3The company projects a pre-tax expense reduction of approximately $138 million over fiscal years 2006-2008.
  • 4Vesting acceleration does not apply to options held by the most senior executive officers, non-employee directors, or consultants.
  • 5The acceleration is not expected to result in an immediate charge to earnings.
  • 6SFAS 123R expense recognition provisions are set to be implemented starting in fiscal Q1 2006 (beginning October 31, 2005).
  • 7The company acknowledges potential forward-looking risks and uncertainties related to SFAS 123R interpretations and actual results.

Frequently Asked Questions

The primary reason is to reduce the impact of future compensation expense that Applied Materials will be required to recognize under SFAS 123R, which mandates the expensing of stock-based compensation. By accelerating these "out-of-the-money" options, the company anticipates a significant reduction in its reported compensation costs over the next few fiscal years.

The vesting acceleration specifically excludes stock options held by Applied Materials' most senior executive officers (James C. Morgan, Michael R. Splinter, Nancy H. Handel, Franz Janker, and David N.K. Wang), non-employee directors, and consultants.

According to the filing, this accelerated vesting is not expected to result in a charge to earnings based on U.S. generally accepted accounting principles. The financial impact is primarily related to the timing and amount of future expense recognition under SFAS 123R.

SFAS 123R is a standard issued by the Financial Accounting Standards Board that requires companies to expense the cost of stock-based compensation. Applied Materials is preparing for its implementation, which begins with its fiscal year 2006, and this option acceleration is a proactive measure to manage the financial reporting impact of this new requirement.