[Federal Register Volume 70, Number 181 (Tuesday, September 20, 2005)]
[Notices]
[Pages 55180-55182]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-18614]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27064; 812-12868]


Applied Materials, Inc.; Notice of Application

September 13, 2005.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application under section 3(b)(2) of the Investment 
Company Act of 1940 (the ``Act'').

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Summary of Application: Applied Materials, Inc. (``Applied'') seeks an 
order under section 3(b)(2) of the Act declaring it to be primarily 
engaged in a business other than that of investing, reinvesting, 
owning, holding or trading in securities. Applied, directly and through 
its wholly-owned subsidiaries, develops, manufactures, markets and 
services integrated circuit fabrication equipment.

Filing Dates: The application was filed on August 14, 2002, and amended 
on February 28, 2005, May 31, 2005 and September 6, 2005.

Hearing or Notification of Hearing: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on October 11, 2005, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-9303. Applicant, 3050 Bowers Ave., P.O. Box 
58039, Santa Clara, CA 95054.

FOR FURTHER INFORMATION CONTACT: Julia Kim Gilmer, Senior Counsel, at 
(202) 551-6871, or Janet M. Grossnickle, Branch Chief, at (202) 551-
6821 (Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Desk, 100 F Street, NE., Washington, DC 
20549-0102 (tel. 202-551-5850).

Applicant's Representations

    1. Applied, a Delaware corporation, is in the business of 
developing, manufacturing, marketing and servicing integrated circuit 
fabrication equipment. Customers for Applied's products include 
semiconductor wafer manufacturers and semiconductor integrated circuit, 
or ``chip'' manufacturers such as Intel, Texas Instruments and IBM. 
Applied represents that these chips are key components in most advanced 
electronic devices and that the push to make these devices more 
powerful, portable and affordable spurs a rapid pace of technological 
change in the semiconductor industry. Applied states that in the past 
23 years, it has introduced over 100 major products.
    2. Applied states that it requires substantial liquid capital to 
fund its global infrastructure, manufacturing and service activities, 
and to continue its research, development and engineering programs. 
Applied also intends to use its liquid capital to support other 
business and strategic objectives by acquiring and investing in 
businesses with complementary products, services and/or technologies. 
In addition to being capital intensive, Applied states that the 
integrated circuit fabrication equipment industry is subject to 
volatile business cycles due to the rapid pace of technological 
developments and changes in global and regional economic conditions. 
Applied seeks to preserve its capital and maintain liquidity, pending 
the use of such capital for its current and future operations, by 
investing in short-term investment grade and liquid fixed income and 
money market investments that earn competitive market returns and 
provide a low level of credit risk (``Capital Preservation 
Investments''). Applied's board of directors oversees Applied's 
investment practices and defines the parameters for investment 
activities. Applied states that it does not invest in securities for 
short-term speculative purposes.

Applicant's Legal Analysis

    1. Applied seeks an order under section 3(b)(2) of the Act 
declaring that it is primarily engaged in a business other than that of 
investing, reinvesting, owning, holding or trading in securities, and 
therefore not an investment company as defined in the Act.
    2. Under section 3(a)(1)(C) of the Act, an issuer is an investment 
company if it is engaged or proposes to engage in the business of 
investing, reinvesting, owning, holding, or trading in

[[Page 55181]]

securities, and owns or proposes to acquire investment securities 
having a value in excess of 40 percent of the value of the issuer's 
total assets (exclusive of government securities and cash items) on an 
unconsolidated basis. Section 3(a)(2) of the Act defines ``investment 
securities'' to include all securities except government securities, 
securities issued by employees' securities companies, and securities 
issued by majority-owned subsidiaries of the owner which (a) are not 
investment companies, and (b) are not relying on the exclusions from 
the definition of investment company in section 3(c)(1) or 3(c)(7) of 
the Act. Applied states that as of January 30, 2005, approximately 50% 
of its total assets (exclusive of government securities and cash 
items), on an unconsolidated basis, consisted of investment securities 
as defined in section 3(a)(2) of the Act.
    3. Rule 3a-1 provides an exemption from the definition of 
investment company if no more than 45% of a company's total assets 
consist of, and not more than 45% of its net income over the last four 
quarters is derived from, securities other than government securities, 
securities of majority-owned subsidiaries and primarily controlled 
companies. Applied states that it cannot rely upon rule 3a-1 under the 
Act because as of January 30, 2005, such other securities exceeded 45% 
of its total assets. Applied further states that it cannot rely on rule 
3a-1 because the percentage of its net income derived from investment 
securities fluctuates unpredictably with the cycles of the 
semiconductor industry. The cyclical nature of the industry, rather 
than any change in Applied's business or financial management policies, 
has led to significant variations in the ratio of Applied's income from 
investment securities relative to net operating income.
    4. Rule 3a-8 under the Act provides an exemption from the 
definition of investment company if, among other factors, a company's 
research and development expenses are a substantial percentage of its 
total expenses for the last four fiscal quarters combined. While 
Applied believes it could satisfy the other factors in the rule, 
Applied's research and development expenses have fluctuated from year 
to year due to the cyclical nature of the industry. During the 2000 
through 2004 fiscal years, Applied's research and development expenses 
have varied, ranging from approximately 16% to 22% of its total 
expenses, including cost of goods sold. Applied's ratio of research and 
development expenses to total expenses thus may be deemed a 
``substantial percentage'' in certain years, but not others. Applied 
presently cannot rely on rule 3a-8 because its research and development 
expenses for the last four fiscal quarters ended on January 30, 2005 
represented approximately 16% of its total expenses, including cost of 
goods sold.
    5. Section 3(b)(2) of the Act provides that, notwithstanding 
section 3(a)(1)(C) of the Act, the Commission may issue an order 
declaring an issuer to be primarily engaged in a business or businesses 
other than that of investing, reinvesting, owning, holding, or trading 
in securities either directly, through majority-owned subsidiaries. 
Applied requests an order under section 3(b)(2) of the Act declaring 
that it is primarily engaged in a business other than that of 
investing, reinvesting, owning, holding or trading in securities, and 
therefore not an investment company as defined in the Act.
    6. In determining whether a company is primarily engaged in a non-
investment company business under section 3(b)(2), the Commission 
considers: (a) the issuer's historical development; (b) its public 
representations of policy; (c) the activities of its officers and 
directors; (d) the nature of its present assets; and (e) the sources of 
its present income.\1\
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    \1\ Tonopah Mining Company of Nevada, 26 SEC 426, 427 (1947).
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    a. Historical Development. Applied states that since its inception 
in 1967 it has, directly and through its wholly-owned subsidiaries, 
developed into the largest supplier of products and services to the 
global semiconductor industry. Applied states that it currently 
manufactures systems that perform a majority of the steps in the 
semiconductor integrated circuit fabrication process and also provides 
products and services that enhance manufacturing yields. Customers for 
Applied's products include semiconductor wafer manufacturers and 
semiconductor integrated circuit, or ``chip'' manufacturers such as 
Intel, Texas Instruments and IBM. Applied further states that in the 
past 23 years, it has introduced over 100 major products. Applied 
states that it has not sold any of its subsidiaries in over 20 years 
and that these sales were conducted for reasons related to its business 
as a supplier of integrated circuit fabrication equipment and services.
    b. Public Representations of Policy. Applied states that it has 
never represented that it is involved in any business other than 
developing, manufacturing, marketing and servicing integrated circuit 
fabrication equipment. Applied asserts that it has consistently stated 
in its annual reports, stockholder letter, prospectuses, filings with 
the Commission, press releases, marketing materials and website that it 
is the largest supplier of products and services to the global 
semiconductor industry. Applied states that it generally does not make 
public representations regarding its investment securities except as 
required by its obligation to file periodic reports to comply with 
federal securities laws. Applied further states that it has emphasized 
operating results and has never emphasized either its investment income 
or the possibility of significant appreciation from its cash management 
investment strategies as a material factor in its business or future 
growth.
    c. Activities of Officers and Directors. Applied states that its 
directors and officers spend substantially all of their time managing 
Applied's business of developing, manufacturing, marketing and 
servicing integrated circuit fabrication equipment. Nine out of 
Applied's ten directors have extensive experience in the semiconductor 
or electronics industries. The remaining director is experienced in 
government and academia. Applied's directors spend less than 1% of 
their time on investment-related matters. Applied's chief financial 
officer spends less than 10% of her time monitoring Applied's cash 
balances and managing short-term investment securities in accordance 
with Applied's investment policies. Out of Applied's approximately 
thirty senior officers, only two (other than the chief financial 
officer) spend time monitoring cash balances and managing short-term 
investment securities; the treasurer spends less than 30% of his time 
and the corporate controller spends less than 5% of her time on such 
activities. Applied has approximately 13,000 full-time employees in 
approximately 80 locations throughout the world. In addition to the 
officers discussed above, only three other employees spend their time 
on matters relating to the management of Applied's investment 
securities; the rest of Applied's employees are involved in product 
design and engineering, manufacturing, customer technical support, 
supplier and materials management, sales and marketing, finance and 
corporate services, human resources, environmental, health and safety 
issues, global security, information technology, transactional and 
corporate legal services and protection and enforcement of intellectual 
property rights.
    d. Nature of Assets. Applied states that as of January 30, 2005 its

[[Page 55182]]

investment securities (as defined in Section 3(a)(2) of the Act) of 
$5.1 billion constituted approximately 48% of Applied's total assets 
(excluding Government securities and cash items), consolidated with its 
wholly-owned subsidiaries.\2\ More than 99% of Applied's investment 
securities consisted of Capital Preservation Investments. Applied's 
remaining investment securities consisted of investments in businesses 
with complementary products, services and/or technologies and an 
interest in a limited partnership that invests in early-stage companies 
involving nanotechnology and/or communications technology. Applied 
anticipates that its investment securities other than Capital 
Preservation Investments will not exceed 10% of Applied's total 
consolidated assets (excluding Government securities and cash items) in 
the future. Applied further states that a significant portion of its 
assets consist of intangible assets such as internally-developed 
intellectual property that are not included in the value of Applied's 
total assets for purposes of determining Applied's status under the 
Act. Applied states that the asset tests used in connection with 
sections 3(a)(1)(c) and 3(b) of the Act therefore significantly 
understate the relative value of Applied's non-investment security 
assets.
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    \2\ Applied states that consolidation provides a more accurate 
picture of its primary business of developing, manufacturing, 
marketing and servicing integrated circuit fabrication equipment 
because Applied does not have any independent business operations 
separate from the activities of its wholly-owned subsidiaries. 
Applied has not sold any subsidiaries in over 20 years, and those 
sales were related to its business as a supplier of integrated 
circuit fabrication equipment and services. Since the subsidiaries 
being consolidated are all wholly-owned, consolidation will not 
result in the type of distortions that could result from 
consolidating other types of subsidiaries. Applied also has a 50% 
owned subsidiary that is dormant, has no operations and has not been 
consolidated for purposes of determining Applied's status under the 
Act.
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    e. Sources of Income and Revenue. Applied states that for the four 
quarters ended January 30, 2005, its operating activities produced 94% 
of its net income after taxes, while its investment securities produced 
6% of its net income on a tax-equivalent basis. However, for the fiscal 
year ended October 26, 2003, Applied had operating losses while 
deriving net income from its investment securities. Applied states that 
its net income does not always accurately reflect its operating 
activities since its net income fluctuates unpredictably with the 
cycles of the semiconductor industry. Applied thus believes that its 
activities as an operating company are more appropriately analyzed by 
looking at its revenues. Applied states that, for the four quarters 
ending January 30, 2005, its revenues from operations \3\ represented 
approximately 99% of its total revenues, and its revenues from 
investments, or net investment income, represented approximately 1% of 
its total revenues. Applied expects that as its business continues in 
the future, the percentage of its total revenues derived from operating 
activities will ordinarily be over 90% and the percentage derived from 
investments will ordinarily be under 10%.
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    \3\ For the reasons stated above, revenues of Applied's wholly-
owned subsidiaries were consolidated for purposes of this 
discussion. Applied consolidates its wholly-owned subsidiaries when 
preparing its financial statements in accordance with Generally 
Accepted Accounting Principles.
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    7. Applied thus asserts that it satisfies the standards for an 
order under section 3(b)(2) of the Act.

Applicant's Conditions

    1. Applied will continue to allocate and use its accumulated cash 
and investment securities for bona fide business purposes.
    2. Applied will refrain from investing or trading in securities for 
short-term speculative purposes.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 05-18614 Filed 9-19-05; 8:45 am]
BILLING CODE 8010-01-P