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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                    FORM 10-Q

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

    For the quarterly period ended JULY 28, 1996   or

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

    For the transition period from _______________  to  _______________

    Commission file number   0-6920

                             APPLIED MATERIALS, INC.

             (Exact name of registrant as specified in its charter)

    DELAWARE                                             94-1655526
    (State or other jurisdiction                         (I.R.S. Employer
    of incorporation or organization)                    Identification No.)

    3050 BOWERS AVENUE, SANTA CLARA, CALIFORNIA          95054-3299
    Address of principal executive offices               (Zip Code)

    Registrant's telephone number, including area code   (408) 727-5555
                                                                       

         Indicate by check mark whether the registrant (1) has filed all reports
    required to be filed by Section 13 or 15(d) of the Securities Exchange Act
    of 1934 during the preceding 12 months (or for such shorter period that the
    registrant was required to file such reports), and (2) has been subject to
    such filing requirements for the past 90 days. Yes X No .

    Number of shares outstanding of the issuer's common stock as of July 28,
    1996: 179,800,000

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 PART I.  FINANCIAL INFORMATION

                             APPLIED MATERIALS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

Three Months Ended Nine Months Ended - --------------------------------------------------------------------------------------------------------------- July 28, July 30, July 28, July 30, (In thousands, except per share data) 1996 1995 1996 1995 - --------------------------------------------------------------------------------------------------------------- Net sales $1,115,424 $ 897,684 $3,283,859 $2,079,231 Cost of products sold 583,448 489,256 1,713,792 1,127,781 ---------- ---------- ---------- ---------- Gross margin 531,976 408,428 1,570,067 951,450 Operating expenses: Research, development and engineering 128,262 85,789 363,532 219,178 Marketing and selling 82,882 62,520 240,751 158,566 General and administrative 64,758 46,742 169,133 113,382 ---------- ---------- ---------- ---------- Income from operations 256,074 213,377 796,651 460,324 Interest expense 4,812 5,527 14,897 17,161 Interest income 8,839 6,323 28,265 16,306 ---------- ---------- ---------- ---------- Income from consolidated companies before taxes 260,101 214,173 810,019 459,469 Provision for income taxes 91,035 74,961 283,506 160,814 ---------- ---------- ---------- ---------- Income from consolidated companies 169,066 139,212 526,513 298,655 Equity in net income/loss of joint venture -- -- -- -- ---------- ---------- ---------- ---------- Net income $ 169,066 $ 139,212 $ 526,513 $ 298,655 ---------- ---------- ---------- ---------- Earnings per share $ 0.92 $ 0.78 $ 2.86 $ 1.71 ---------- ---------- ---------- ---------- Average common shares and equivalents 183,359 177,754 183,780 174,798 - --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated condensed financial statements. 2 3 APPLIED MATERIALS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS*
- ----------------------------------------------------------------------------------------------------------------- July 28, Oct. 29, (In thousands) 1996 1995 - ----------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 238,848 $ 285,845 Short-term investments 548,736 483,487 Accounts receivable, net 973,984 817,730 Inventories 533,331 427,413 Deferred income taxes 198,780 198,888 Other current assets 84,654 98,250 ---------- ---------- Total current assets 2,578,333 2,311,613 Property, plant and equipment, net 881,318 630,746 Other assets 25,602 23,020 ---------- ---------- Total assets $3,485,253 $2,965,379 ---------- ---------- LIABILITIES Current liabilities: AND Notes payable $ 24,611 $ 61,748 STOCKHOLDERS' Current portion of long-term debt 22,710 21,064 EQUITY Accounts payable and accrued expenses 779,406 659,572 Income taxes payable 32,687 119,347 ---------- ---------- Total current liabilities 859,414 861,731 Long-term debt 280,499 279,807 Deferred income taxes and other non-current obligations 52,636 40,338 ---------- ---------- Total liabilities 1,192,549 1,181,876 ---------- ---------- Stockholders' equity: Common stock 1,798 1,792 Additional paid-in capital 752,959 760,057 Retained earnings 1,526,492 999,979 Cumulative translation adjustments 11,455 21,675 ---------- ---------- Total stockholders' equity 2,292,704 1,783,503 ---------- ---------- Total liabilities and stockholders' equity $3,485,253 $2,965,379 - -----------------------------------------------------------------------------------------------------------------
* Amounts as of July 28, 1996 are unaudited. Amounts as of October 29, 1995 were obtained from the October 29, 1995 audited financial statements. See accompanying notes to consolidated condensed financial statements. 3 4 APPLIED MATERIALS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------- Nine Months Ended July 28, July 30, (In thousands) 1996 1995 - ------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 526,513 $ 298,655 Adjustments required to reconcile net income to cash provided by operations: Deferred taxes (1,064) (3,111) Depreciation and amortization 103,921 54,047 Equity in net income/loss of joint venture - - Changes in assets and liabilities: Accounts receivable (181,203) (354,523) Inventories (112,282) (136,241) Other current assets 12,671 (26,282) Other assets (2,602) (1,380) Accounts payable and accrued expenses 142,773 195,272 Income taxes payable (85,028) 7,015 Other long-term liabilities 13,383 7,185 ------------- ------------- Cash provided by operations 417,082 40,637 ------------- ------------- Cash flows from investing activities: Capital expenditures, net (364,835) (144,569) Proceeds from sales of short-term investments 494,599 165,244 Purchases of short-term investments (559,848) (340,620) -------------- -------------- Cash used for investing (430,084) (319,945) -------------- -------------- Cash flows from financing activities: Short-term debt activity, net (33,422) 25,401 Long-term debt activity, net 7,062 27,910 Common stock transactions, net (7,092) 330,041 -------------- ------------- Cash provided by (used for) financing (33,452) 383,352 -------------- ------------- Effect of exchange rate changes on cash (543) (2,001) -------------- -------------- Increase (decrease) in cash and cash equivalents (46,997) 102,043 Cash and cash equivalents at beginning of period 285,845 160,320 ------------- ------------- Cash and cash equivalents at end of period $ 238,848 $ 262,363 - -----------------------------------------------------------------------------------------------------------------
For the nine months ended July 28, 1996, cash payments for interest and income taxes were $12,053 and $345,779, respectively. For the nine months ended July 30, 1995, cash payments for interest and income taxes were $13,696 and $145,573, respectively. See accompanying notes to consolidated condensed financial statements. 4 5 APPLIED MATERIALS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED JULY 28, 1996 (IN THOUSANDS) 1) Basis of Presentation In the opinion of management, the unaudited consolidated condensed financial statements included herein have been prepared on a consistent basis with the October 29, 1995 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. Certain amounts in the consolidated condensed financial statements for the periods ended July 30, 1995 have been reclassified to conform to the current presentation. 2) Earnings Per Share Earnings per share has been computed using the weighted average number of common shares outstanding and common equivalent shares from dilutive stock options. 3) Inventories Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) basis. The components of inventories are as follows:
July 28, 1996 October 29, 1995 ------------- ---------------- Customer service spares $194,936 $131,411 Systems raw materials 94,481 118,627 Work-in-process 175,241 139,537 Finished goods 68,673 37,838 -------- -------- $533,331 $427,413 ======== ========
4) Accounts Payable and Accrued Expenses The components of accounts payable and accrued expenses are as follows:
July 28, 1996 October 29, 1995 ------------- ---------------- Accounts payable $197,966 $244,014 Compensation and benefits 140,592 109,388 Installation and warranty 194,837 133,035 Other 246,011 173,135 -------- -------- $779,406 $659,572 ======== ========
5 6 5) Stockholders' Equity During the nine month period ended July 28, 1996, the Company repurchased 730,000 shares of its common stock at an average price of $35.40 per share and reissued 434,000 shares to stock-based employee benefit plans. 6) Subsequent Event On August 13, 1996, the Company announced a reduction in its global workforce that will result in an estimated $28-$32 million pre-tax restructuring charge during its fourth fiscal quarter ending October 27, 1996. The restructuring charge will cover employee severance costs and benefits, as well as certain costs incurred to consolidate facilities. The restructuring charge consists primarily of cash expenditures to be made prior to the end of the Company's first fiscal quarter of 1997, which ends January 26, 1997. 6 7 APPLIED MATERIALS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ RESULTS OF OPERATIONS The Company's net sales for the three and nine month periods ended July 28, 1996 increased 24 and 58 percent, respectively, over the corresponding periods of fiscal 1995 as a result of increased demand for the Company's advanced wafer process technology, multi-chamber equipment and installed base support services. The increased demand for the Company's advanced equipment reflects the semiconductor industry's need for the technical capability to fabricate advanced device structures and the continued investment in systems capable of performing processes required for smaller device geometries. The increase in installed base support services revenue is attributable to a larger installed systems base and our global customers' requirements for high reliability and uptime. Sales increased in the third quarter and first nine months of fiscal 1996 in all regions when compared to sales in the corresponding periods of fiscal 1995, with the exception of third quarter sales in Europe. Sales by region as a percentage of total sales were as follows:
Three Months Ended Nine Months Ended July 28, July 30, July 28, July 30, 1996 1995 1996 1995 -------------------------------------------------------------------- North America 29% 30% 33% 34% Europe 9% 16% 15% 14% Japan 26% 28% 23% 24% Korea 21% 19% 15% 18% Asia-Pacific 15% 7% 14% 10%
7 8 New orders of $931 million were received during the third quarter of fiscal 1996, versus $1,323 million in the second quarter of fiscal 1996. Orders decreased as our customers' investment decisions were negatively impacted by their declining profitability and excess capacity. The Company anticipates that this market downturn is likely to continue for some time. In response to this changing environment, the Company announced a reduction in workforce and related consolidation of facilities for which it will incur an estimated $28-$32 million pre-tax restructuring charge, or approximately $0.10-$0.11 per share after-tax, during its fourth quarter of fiscal 1996. Each region in the global semiconductor equipment market exhibits unique investment patterns which cause regional order growth rates to vary from quarter to quarter. North American orders increased to $338 million from $250 million; Europe increased to $214 million from $203 million; Japan decreased to $141 million from $319 million; Korea decreased to $67 million from $337 million; and Asia-Pacific decreased to $171 million from $214 million. Backlog at July 28, 1996 was $1,663 million, versus $1,901 million at April 28, 1996 and $1,509 million at October 29, 1995. For the three and nine months ended July 28, 1996, the Company's gross margin as a percentage of sales was 47.7 and 47.8 percent, respectively, up from 45.5 and 45.8 percent for the corresponding periods of fiscal 1995. These improvements resulted primarily from reduced cycle times, improved manufacturing efficiencies and increased unit volume. Operating expenses as a percentage of sales for the three and nine months ended July 28, 1996 were 24.7 and 23.6 percent, respectively, versus 21.7 and 23.6 percent for the three and nine months ended July 30, 1995. The increase for the three month period is primarily attributable to certain research and development programs, costs associated with the protection of intellectual property rights and the implementation of a worldwide communications software. 8 9 Significant operations of the Company are conducted in Japanese yen, British pounds and other foreign currencies. Forward exchange contracts and options are purchased to hedge certain existing firm commitments and foreign currency denominated transactions expected to occur during the next year. Gains and losses on hedge contracts are reported as a component of the related transaction. Because the impact of movements in currency exchange rates on foreign exchange contracts generally offsets the related impact on the underlying items being hedged, these financial instruments do not subject the Company to speculative risk that would otherwise result from changes in currency exchange rates. To date, exchange gains and losses have not had a significant effect on the Company's results of operations. The Company's effective tax rate for the third quarter and first nine months of fiscal 1996 was 35 percent, consistent with the corresponding periods of fiscal 1995. Management anticipates that a 35 percent effective tax rate will continue throughout fiscal 1996. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition remained strong, with a ratio of current assets to current liabilities of 3.0:1 at July 28, 1996, compared to 2.7:1 at October 29, 1995. During the first nine months of fiscal 1996, cash, cash equivalents and short-term investments increased $18 million. Cash provided by operations of $417 million resulted primarily from net income (plus non-cash depreciation and amortization charges) of $630 million and an increase in accounts payable and accrued expenses of $143 million, offset by an increase of $293 million in accounts receivable and inventories and a decrease in income taxes payable of $85 million. The principal uses of cash were for net property, plant and equipment acquisitions of $365 million, the majority of which relate to facilities expansion, and net debt repayments of $26 million. At July 28, 1996, the Company's principal sources of liquidity consisted of $788 million of cash, cash equivalents and short-term investments, $194 million of unissued notes registered under the Company's medium-term note program and $333 million of available credit facilities. The Company's liquidity is affected by many factors, some of which are based on the normal on-going operations of the business and others of which relate to the uncertainties of the industry and global economies. Although the Company's cash requirements will fluctuate based on the timing and extent of these factors, management believes that cash generated from operations, together with its existing sources of liquidity, will be sufficient to satisfy its liquidity requirements for the remainder of the fiscal year. 9 10 Capital expenditures are expected to approximate $500 million for fiscal 1996. This amount includes funds for the continuation and completion of facilities expansion and investments in demonstration and test equipment, information systems and other capital equipment. As of July 28, 1996, the Company is authorized to repurchase 4,470,000 shares of its common stock in the open market. This authorization expires in March 1999. DISCLOSURE PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 When used in this Management's Discussion and Analysis, the words "anticipate," "estimate," "expect" and similar expressions are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties, including, but not limited to, slowing growth in the demand for semiconductors and the Company's systems and services, challenges from the Company's competition, insufficient cost reduction programs, product pricing pressures, continuing semiconductor device price declines and semiconductor manufacturers' reduced capital spending, that could cause actual results to differ materially from those projected. For more details, refer to the Company's Form 8-K filed with the SEC on February 13, 1996. The Company undertakes no obligation to update the information, including the forward-looking statements, in this Form 10-Q. 10 11 PART II OTHER INFORMATION Item 1. Legal Proceedings In the first of two lawsuits filed by the Company, captioned Applied Materials, Inc. v. Advanced Semiconductor Materials America, Inc., Epsilon Technology, Inc. (doing business as ASM Epitaxy) and Advanced Semiconductor Materials International N.V. (collectively "ASM") (case no. C-91-20061-RMW), Judge William Ingram of the United States District Court for the Northern District of California ruled on April 26, 1994 that ASM's Epsilon I epitaxial reactor infringed three of the Company's United States patents and issued an injunction against ASM's use and sale of the ASM Epsilon I in the United States. ASM has appealed the decision and the injunction has been stayed pending the appeal only as to ASM products offered for sale as of April 1994. The Court recently ruled that ASM's announced redesign of its reduced pressure epitaxial reactors is not subject to this stay order. The stay order further requires that ASM pay a fee, as security for the Company's interest, for each Epsilon I system sold by ASM in the United States after the date of the injunction. Judge Ronald M. Whyte of the same Court ruled that proceedings to resolve the issues of damages, willful infringement and ASM's counterclaims, which had been bifurcated for separate trial, will also be stayed, pending the appeal of Judge Ingram's decision. Oral arguments regarding this appeal were completed on June 5, 1995 before the Court of Appeals for the Federal Circuit. The Company is awaiting the decision of the Court of Appeals. The trial of the Company's second patent infringement lawsuit against ASM, captioned Applied Materials, Inc. v. ASM (case no. C-92-20643-RMW), was concluded before Judge Whyte in May 1995. On November 1, 1995, the Court issued its judgment holding that two of the Company's United States patents were valid and infringed by ASM's reduced pressure epitaxial reactors. ASM has appealed this decision. A permanent injunction was entered on March 7, 1996 prohibiting ASM's use or sale of its ribbed quartz epitaxial reactors within the United States effective June 15, 1996. ASM is allowed to continue service and maintenance of the installed base, including the sale of replacement chambers upon payment of a fee to the Company. On June 14, 1996, the Court entered a stay of the permanent injunction, substantially increasing the fees paid to the Company on ASM's sale of reduced pressure reactors, and permitting ASM's continued sales of such reactors at an average of one (1) reactor per month, until a decision is reached in the Court of Appeals for the Federal Circuit. 11 12 In a separate lawsuit filed by ASM against the Company involving one patent relating to the Company's single wafer epitaxial product line, captioned ASM America, Inc. v. Applied Materials, Inc. (case no. C-93-20853-RMW), the Court granted three motions for summary judgment in favor of the Company which eliminate the Company's liability on this patent. The Company's counterclaims against ASM for inequitable conduct were tried by the Court in July 1996. No decision has been made yet. ASM has not indicated whether it intends to appeal this matter. A separate action severed from ASM's case, captioned ASM America, Inc. v. Applied Materials, Inc. (case no. C-95-20169-RMW), involves one United States patent which relates to the Company's Precision 5000 product line. Trial has been scheduled for December 9, 1996, and discovery is proceeding. In these cases, ASM seeks injunctive relief, damages and such other relief as the Court may find appropriate. Further, the Company has filed a Declaratory Judgment action against ASM, captioned Applied Materials, Inc. v. ASM (case no. C-95-20003-RMW), requesting that an ASM United States patent be held invalid and not infringed by the Company's single wafer epitaxial product line. Discovery is proceeding, and no trial date has been set. On April 10, 1996, the Court denied ASM's motion for summary judgment and granted the Company's motion for summary judgment finding several independent grounds why the Company's reactors do not literally infringe ASM's patent. With this ruling, the Company's liability has been substantially eliminated on this patent. ASM has not indicated whether it intends to appeal this decision. On July 7, 1996, ASM filed a lawsuit, captioned ASM America, Inc. v. Applied Materials, Inc. (case no. C95-20586-RMW), concerning alleged infringement of a United States patent by susceptors in chemical vapor deposition chambers. Discovery has commenced and no trial date has been set. In September 1994, General Signal Corporation filed a lawsuit against the Company (case no. 94-461-JJF) in the United States District Court, District of Delaware. General Signal alleges that the Company infringes five of General Signal's United States patents by making, using, selling or offering for sale multi-chamber wafer fabrication equipment, including for example, the Precision 5000 series machines. General Signal seeks an injunction, multiple damages and costs, including reasonable attorneys' fees and interest, and such other relief as the court may deem appropriate. This lawsuit is currently in active discovery, and a trial date has been set for January 20, 1997. 12 13 In January 1995, the Company filed a lawsuit against Novellus Systems, Inc. in the United States District Court, Northern District of California (case no. C-95-0243-MMC). This lawsuit alleges that Novellus' Concept One, Concept Two, and Maxxus F TEOS systems infringe the Company's United States patent relating to the TEOS-based, plasma enhanced CVD process for silicon oxide deposition. The lawsuit seeks an injunction, damages and costs, including reasonable attorneys' fees and interest, and such other relief as the court may deem appropriate. Damages and counterclaims have been bifurcated for separate trial. A jury trial has been scheduled for November 4, 1996, before Judge Charles A. Legge. On September 15, 1995, the Company filed another lawsuit against Novellus alleging that Novellus' newly announced blanket tungsten interconnect process infringes the Company's United States patent relating to a tungsten CVD process. The Company also sought a declaration that a Novellus United States patent for a gas purge mechanism is not infringed by the Company and/or is invalid. Novellus answered by denying the allegations and counterclaimed by alleging that the Company's plasma enhanced TEOS CVD systems infringe Novellus' United States patents concerning gas purge and gas debubbler mechanisms. Novellus also filed a separate lawsuit as a plaintiff before the same court which contains the same claims as those stated in Novellus' defense of the Company's lawsuit. Both cases have been assigned to Judge Legge. Discovery has commenced, and trial has been set for August 1997. In the normal course of business, the Company from time to time receives and makes inquiries with regard to possible patent infringement. Management believes that it is unlikely that the outcome of these lawsuits or of the patent infringement inquiries will have a material adverse affect on the Company's financial position or results of operations. 13 14 Item 5. Other Information The ratio of earnings to fixed charges for the nine months ended July 28, 1996 and July 30, 1995, and for each of the last five fiscal years, was as follows:
Nine Months Ended ----------------- July 28, July 30, Fiscal Year -------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- 23.68x 16.43x 21.25x 13.37x 7.61x 3.63x 3.02x ====== ======= ====== ====== ===== ===== =====
Item 6. Exhibits and Reports on Form 8-K a) Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K: 10.23 Amendment to Employment Agreement with James Bagley, dated May 17, 1996. 27.0 Financial Data Schedule: filed electronically b) Report on Form 8-K was filed on May 14, 1996. The report contains the Company's financial statements for the period ended April 28, 1996, as attached to its press release dated May 14, 1996. 14 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. APPLIED MATERIALS, INC. September 10, 1996 By: \s\Gerald F. Taylor ---------------------------------- Gerald F. Taylor Senior Vice President and Chief Financial Officer (Principal Financial Officer) By: \s\Michael K. O'Farrell ---------------------------------- Michael K. O'Farrell Corporate Controller (Principal Accounting Officer) 15
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CONFIDENTIAL


                        AMENDMENT TO EMPLOYMENT AGREEMENT


                             This Amendment (the "Amendment"), made effective as
of May 17, 1996, to that certain Employment Agreement dated August 15, 1995 (the
"Employment Agreement") between Applied Materials, Inc., a Delaware corporation
(the "Company"), a corporation having its principal office at 3050 Bowers
Avenue, Santa Clara, California, and James W. Bagley ("Executive").

                                    RECITALS

                             Executive resigned his positions as Vice Chairman
of the Board of Directors and as a member of the Board of Directors effective
May 17, 1996.

                             Executive is willing to continue employment by the
Company on a part-time basis upon the terms and conditions hereinafter set
forth.

                             The effectiveness of this Amendment is conditioned
upon its being duly authorized and approved by the Board of Directors of the
Company ("Board"), and the terms of compensation contained herein being approved
by the Stock Option and Compensation Committee ("Committee") of the Board.

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                             Capitalized terms used throughout this Amendment
will have the same meanings as such terms are defined in the Employment
Agreement except as may be modified herein.

                             This Amendment refers to and should be read in
conjunction with the Employment Agreement.

                             NOW, THEREFORE, in consideration of the foregoing
premises and the mutual covenants herein contained, the parties
hereto agree as follows:

                             1. Paragraph 1 of the Employment Agreement
(Employment) shall be unchanged.

                             2. Paragraph 2 of the Employment Agreement
(Position and Responsibilities) is amended to read in full as follows: 
                             Position and Responsibilities. Effective
                             immediately, Executive shall serve the Company and
                             the Company shall employ Executive as an advisor to
                             the Company's Chairman of the Board on business,
                             management and performance issues related to the
                             Company, as requested by the Chief Executive
                             Officer.

                             3. Paragraph 3 of the Employment Agreement (Terms
and Duties) is amended to read in full as follows: 
                             Terms and Duties. Executive shall continue as an
                             employee of this Company on an "at will" status.
                             The 

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                             term of this Employment Agreement shall expire
                             at the close of business on January 3, 1997. Either
                             party hereto may terminate the Employment
                             Agreement, as amended herein, at any time, by
                             giving written notice of its or his election to do
                             so not less than 30 days prior to the effective
                             date of termination. Termination may be
                             accomplished with or without Cause.

                             4. Paragraph 4 of the Employment Agreement
(Compensation and Reimbursement of Expenses; Other Benefits) is hereby amended
to read in full as follows:
                             Compensation and Reimbursement of Expenses: Other
                             Benefits. The Company shall compensate Executive
                             during the period of employment at an annualized
                             base salary of $100. A bonus (not payable under the
                             Senior Executive Bonus Plan) shall be awarded to
                             Executive in December 1996 using the same formula
                             and parameters as were used to compute the fiscal
                             year OCEO bonuses. The bonus payment to Executive
                             for fiscal year 1996 will be computed on the salary
                             earned (both paid and deferred) for fiscal 1996
                             and, if the Executive elects in accordance with the
                             Executive Deferred Compensation Plan, will be
                             deferred in accordance with Executive's 

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                             election. Executive will be permitted to defer
                             compensation under the Company's Executive Deferred
                             Compensation Plan and will retain stock options
                             held by him, but Executive will not be eligible for
                             any other Company-sponsored employee benefit plans
                             or compensation arrangements.

                             5. Paragraph 5 of the Employment Agreement
(Obligations of Executive During and After Employment) shall be unchanged.

                             6. Paragraph 6 of the Employment Agreement
(Termination by Company) is superseded in its entirety by this Amendment.

                             7. Paragraph 7 of the Employment Agreement
(Termination by Executive) is superseded in its entirety by this Amendment.

                             8. Paragraph 8 of the Employment Agreement
(Arbitration) shall be unchanged.

                             9. Paragraph 9 of the Employment Agreement (Notice)
shall be unchanged.

                             10. Paragraph 10 of the Employment Agreement (Non-
Waiver. Complete Agreement, Governing Law.) shall be unchanged.

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                             11. Paragraph 11 of the Employment Agreement
(Severability) shall be unchanged.

                             12. Paragraph 12 (Counterparts) of the Employment
Agreement shall be unchanged.

                             13. Paragraph 13 (Publicity) of the Employment
Agreement is hereby terminated.

                             The Executive and the Company have executed this
Amendment, effective as of the date first above written. 


                                    APPLIED MATERIALS, INC.
                                    a Delaware Corporation

                                    By
                                       --------------------------------------
                                       James C. Morgan, Chairman of the
                                       Board of Directors and
                                       Chief Executive Officer


                                    THE EXECUTIVE



                                       --------------------------------------
                                       James W. Bagley

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5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED JULY 28, 1996. 1,000 YEAR OCT-27-1996 JUL-28-1996 238,848 548,736 973,984 0 533,331 2,578,333 1,190,632 309,314 3,485,253 859,414 280,499 0 0 1,798 2,290,906 3,485,253 1,115,424 1,115,424 583,448 583,448 128,262 0 4,812 260,101 91,035 169,066 0 0 0 169,066 0.92 0.92