1
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)15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1996March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to COMMISSION FILE NUMBER___________
Commission File Number 0-9992
KLA INSTRUMENTSKLA-TENCOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2564110
(STATE OR OTHER JURISDICTION OF(State or other jurisdiction of (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.Employer
incorporation or organization) Identification No.)
160 Rio Robles
San Jose, California
95134
(Address of principal executive offices)
(Zip Code)
468-4200
(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 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_____
As of September 30, 1996April 29, 1997 there were 51,064,89551,711,809 shares of the registrant's
Common Stock, $0.001 par value, outstanding.
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KLA INSTRUMENTSKLA-TENCOR CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996MARCH 31, 1997
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
- ------ ---------------------
Item 1 Financial Statements:Statements (unaudited)
Condensed Consolidated Interim Balance Sheets at
March 31, 1997 and June 30, 1996 . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Interim Statements of Operations for
the Three Monthsand Nine Month Periods Ended September 30, 1995March 31, 1997
and March 31, 1996 ..............................3. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Balance Sheets at June 30 and
September 30, 1996...........................................................4
Condensed ConsolidatedInterim Statements of Cash Flows
for the ThreeNine Months Ended September 30, 1995March 31, 1997 and 1996 ..............................5. . . . . . . . . . . 5
Notes to Unaudited Condensed Consolidated Interim Financial Statements.........................................................6Statements . . . . . . 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations and Financial Condition.............................................7-8. . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II OTHER INFORMATION
Items 1-6..................................................................................9
Signatures................................................................................10- ------- -----------------
Item 1 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 2 Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3 Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . 12
Item 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . 12
Item 5 Other Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 12
Page
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PART I FINANCIAL INFORMATION
ItemITEM 1 Financial Statements
KLA INSTRUMENTS CORPORATIONFINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30,
(In thousands except per share amounts)INTERIM BALANCE SHEETS
(Unaudited)
1995March 31, June 30,
(In thousands) 1997 1996
--------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 149,573 $ 109,404
Short-term investments 11,003 14,279
Accounts receivable, net 122,027 203,470
Inventories 118,289 132,377
Deferred income taxes 27,909 27,246
Other current assets 14,756 6,783
--------- ---------
Total current assets 443,557 493,559
Land, property and equipment, net 73,428 71,825
Marketable securities 257,795 137,728
Other assets 13,512 9,660
--------- ---------
Total assets $ 788,292 $ 712,772
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ 2,115 $ 3,111
Accounts payable 19,732 27,330
Income taxes payable 34,762 34,595
Other current liabilities 113,725 104,167
--------- ---------
Total current liabilities 170,334 169,203
--------- ---------
Deferred income taxes 6,316 6,320
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock and additional paid-in capital 285,377 277,943
Retained earnings 328,789 259,777
Treasury stock (581) (581)
Net unrealized loss on investments (1,181) (131)
Cumulative translation adjustment (762) 241
--------- ---------
Total stockholders' equity 611,642 537,249
--------- ---------
Total liabilities and stockholders' equity $ 788,292 $ 712,772
========= =========
See accompanying notes to condensed consolidated interim financial statements.
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4
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
(In thousands, except per share amounts) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------
Net sales $ 149,076 $ 164,154
--------- ---------$157,761 $187,494 $473,586 $502,320
-------- -------- -------- --------
Costs and expenses:
Cost of sales 66,672 74,15275,322 85,215 224,508 227,239
Engineering, research and
development 15,621 21,49522,046 20,942 62,212 54,599
Selling, general and administrative 27,855 35,556
--------- ---------
110,148 131,203
--------- ---------29,622 33,655 94,368 90,957
-------- -------- -------- --------
126,990 139,812 381,088 372,795
-------- -------- -------- --------
Income from operations 38,928 32,95130,771 47,682 92,498 129,525
Interest income and other, net 4,187 3,532
Interest expense (418) (154)
--------- ---------5,144 2,033 12,065 9,504
-------- -------- -------- --------
Income before income taxes 42,697 36,32935,915 49,715 104,563 139,029
Provision for income taxes 15,371 12,352
--------- ---------12,211 17,898 35,551 50,051
-------- -------- -------- --------
Net income $ 27,32623,704 $ 23,977
========= =========31,817 $ 69,012 $ 88,978
======== ======== ======== ========
Net income per share $ 0.520.44 $ 0.46
========= =========0.61 $ 1.30 $ 1.70
======== ======== ======== ========
Shares used in computing net income
per share 52,408 52,12753,830 52,170 53,014 52,321
See accompanying notes to unaudited condensed consolidated interim financial statements.
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KLA INSTRUMENTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except per share amounts)
(Unaudited)
June 30, September 30,
1996 1996
--------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 109,404 $ 107,106
Short-term investments 14,279 22,462
Accounts receivable, net of allowances of
$3,121 and $3,182 203,470 192,972
Inventories 132,377 138,619
Deferred income taxes 27,246 27,055
Other current assets 6,783 11,870
--------- ---------
Total current assets 493,559 500,084
Land, property and equipment, net 71,825 74,923
Marketable securities 137,728 154,882
Other assets 9,660 10,936
--------- ---------
Total assets $ 712,772 $ 740,825
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,111 $ 5,807
Accounts payable 27,330 21,498
Income taxes payable 34,595 37,287
Other current liabilities 104,167 107,482
--------- ---------
Total current liabilities 169,203 172,074
--------- ---------
Deferred income taxes 6,320 7,792
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 1,000 shares authorized,
none issued and outstanding -- --
Common stock, $0.001 par value, 75,000 shares authorized,
51,030 and 51,065 shares issued and outstanding 51 51
Capital in excess of par value 277,892 278,000
Retained earnings 259,777 283,754
Treasury stock (581) (1,213)
Net unrealized gain/(loss) on investments (131) 171
Cumulative translation adjustment 241 196
--------- ---------
Total stockholders' equity 537,249 560,959
--------- ---------
Total liabilities and stockholders' equity $ 712,772 $ 740,825
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
Page
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KLA INSTRUMENTS CORPORATION
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30,
(In thousands)
(Unaudited)
1995Nine Months Ended
March 31,
(In thousands) 1997 1996
--------- ---------
Cash flows from operating activities:
Net income $ 27,32669,012 $ 23,97788,978
Adjustments required to reconcile net income to cash
provided byby/(used in) operations:
Depreciation and amortization 3,385 5,51716,385 10,700
Deferred income taxes (667) -- 1,663
Changes in assets and liabilities:
Accounts receivable (19,081) 10,49881,443 (97,958)
Inventories (12,825) (6,242)14,088 (51,205)
Other assets 9,261 (6,363)(11,825) 4,718
Accounts payable 1,366 (5,832)(7,598) 16,954
Income taxes payable 6,945 2,692167 6,869
Other current liabilities 10,639 3,3159,558 34,757
--------- ---------
Cash provided by operating activities 27,016 29,225170,563 13,813
--------- ---------
Cash flows from investing activities:
Capital expenditures (8,097) (8,615)(17,988) (27,321)
Purchases of short and long-term available
for sale securities (137,685) (73,669)(391,890) (374,289)
Sales and maturities of short and long-term
available for sale securities 114,456 48,634274,049 361,085
--------- ---------
Cash used for investing activities (31,326) (33,650)(135,829) (40,525)
--------- ---------
Cash flows from financing activities:
Short-term borrowings, net (2,018) 2,696(996) (2,487)
Payment of current portion of long-term debt -- (20,000)
--
SalesIssuance of common stock/tax benefit of options
exercised 788 (524)stock, net 7,434 4,786
--------- ---------
Cash provided by/(used for)in) financing activities (21,230) 2,1726,438 (17,701)
--------- ---------
Effect of exchange rate changes (699) (45)(1,003) (1,020)
--------- ---------
DecreaseIncrease/(decrease) in cash and cash equivalents (26,239) (2,298)40,169 (45,433)
Cash and cash equivalents at beginning of period 109,404 92,059 109,404
--------- ---------
Cash and cash equivalents at end of period $ 65,820149,573 $ 107,10646,626
========= =========
Cash paid during the period for:
Interest $ 365 $ 841
Income taxes $ 34,599 $ 43,924
See accompanying notes to unaudited condensed consolidated interim financial statements.
Page
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KLA INSTRUMENTSKLA-TENCOR CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
1)Note 1 In the opinion of the Company's management, the unaudited
condensed consolidated condensedinterim financial statements include all
adjustments (consisting only of adjustments that are of a normal
recurring nature) necessary for a fair statement of results. The
results for the quarter ended September
30, 1996,March 31, 1997, are not necessarily
indicative of results to be expected for the entire year. This
financial information should be read in conjunction with the
Company's Annual Report on Form 10-K (including
items incorporated by reference therein) for the year ended June 30,
1996. 2) DetailsThe financial statements presented in this Form 10-Q
represent financial results of certain balance sheet componentsKLA Instruments Corporation on a
historical basis only, without giving effect to the merger (see
Note 2).
Note 2 On April 30, 1997, a wholly-owned subsidiary of the Company merged
into Tencor Instruments, a manufacturer of wafer defect
inspection, software-based yield management, film measurement, and
metrology systems used in semiconductor manufacturing. In
connection with the merger, the Company changed its name to
KLA-Tencor Corporation and increased its number of authorized
shares to 251,000,000. The Company issued approximately 32
million shares of Common Stock for all the outstanding Common
Stock and options of Tencor Instruments on the basis of one share
of the Company's Common Stock for one share of Tencor Instruments.
The merger will be accounted for as a pooling of interests.
The following summary, prepared on a pro forma basis, combines the
results of operations of the Company and Tencor Instruments as if
the merger had been effective as of the beginning of each of the
periods presented (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
-----------------------------------------------------------------------
Sales $252,346 $293,777 $755,641 $792,528
Net income $ 36,995 $ 52,068 $104,794 $146,182
Net income per share $ 0.43 $ 0.62 $ 1.23 $ 1.73
Weighted average shares
outstanding 86,643 83,891 85,149 84,264
The pro forma combined results are presented for illustrative
purposes only and are not necessarily indicative of what actually
would have occurred if the acquisition had been in effect for the
entire periods presented. In addition, the pro forma results are
not intended to be a projection of future results.
Note 3 Inventories (in thousands):
March 31, June 30,
September 30,1997 1996
1996
----------- ------------------- --------
Inventories:
Systems raw materials $ 33,52117,559 $ 34,60833,521
Customer service spares 22,529 13,614
20,843
Work-in-process 53,033 47,012 57,908
Demonstration equipment 25,167 38,230
25,260
----------- -----------
$ 132,377 $ 138,619
=========== ===========-------- --------
$118,289 $132,377
======== ========
3)6
7
Note 4 In AprilAugust 1996, the Compensation Committee of the Board of
Directors authorized the Company adopted a plan to repurchase, at its
discretion, up to $20 million of KLA commonre-price stock on the open market,
through October 1997. Shares repurchasedoptions issued
during the three month period ended September 30,August 1994 through August 1996, totaled 35,000 shares at a total costwhich had
exercise prices well above the August 1996 trading prices of $631,250.
4) In September 1996, the
Company granted new replacement stockCompany's Common Stock. This re-pricing was done in the form of
an exchange, whereby eligible optionees could cancel their current
options in exchange for the cancellation of the entire unexercised portion of thenew options being replaced. These options were issuedwith exercise prices at the
fair market value on the date of grant.
Note 5 The numberCompany has entered into an agreement with a bank to sell,
with recourse, certain of options granted under the
first new optionits trade receivables. The amount of
proceeds received was equal to 50% of the number of canceled options.
The remaining 50% of new options will be granted as a second new option
at some date on or before March 16, 1997, at the fair market value on
the date of grant.
5) The Company's effective tax rate decreased to 34%approximately $35 million and $80 million,
respectively, for the three monthsand nine month periods ended September 30, 1996. The Company's tax rate was 36% for the year
ended June 30, 1996. This rate decrease is due primarily to the
reinstatementMarch 31,
1997. As of March 31, 1997, approximately $41 million of the
federalfactored trade receivables remains uncollected by the bank.
Note 6 Engineering, research and development tax credit. The
difference betweenexpenditures were net of
external funding of $3.3 million and $11.0 million for the statutory tax ratethree
and the Company's effective
tax rate is primarily due to R&D tax credits, FSC benefits, tax exempt
interest and state taxes.
6)nine month periods ended March 31, 1997, respectively.
Note 7 Net income per share is computed using the weighted average number
of common and common equivalent shares outstanding during the
respective periods, including the assumed net shares issuable upon
exercise of stock options, when dilutive.
Page 6options.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share." The Statement redefines earnings per share under
generally accepted accounting principles, and will be effective
for the Company's fiscal year ending June 30, 1998. Under the new
standard, primary earnings per share will be replaced by basic
earnings per share and fully diluted earnings per share will be
replaced by diluted earnings per share. If the Company had
adopted this Statement for the three and nine month periods ended
March 31, 1997 and March 31, 1996, the Company's earnings per
share would have been as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
------------------------------------------------------------------
Earnings per share:
Basic $ 0.46 $ 0.63 $ 1.35 $ 1.76
Diluted $ 0.44 $ 0.61 $ 1.30 $ 1.70
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KLA INSTRUMENTS CORPORATION8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS AND FINANCIAL CONDITIONOPERATIONS.
The following discussion and analysis may contain forward-looking statements
that reflect the Company's current judgment regarding the matters addressed by
such statements. Because such statements apply to future events, they are
subject to risks and uncertainties that could cause actual results to differ
substantially.differ.
Important factors that could cause actual results to differ are described in
the following discussion and are particularly noted under "Future
Operating Results""Risk Factors" on
page 8.
Results10.
RECENT DEVELOPMENTS
On April 30, 1997, a wholly-owned subsidiary of Operations
First Quarterthe Company merged into Tencor
Instruments, a manufacturer of Fiscal 1997 Comparedwafer defect inspection, software-based yield
management, film measurement, and metrology systems used in semiconductor
manufacturing. In connection with First Quarterthe merger, the Company changed its name to
KLA-Tencor Corporation and increased its number of Fiscal 1996authorized shares to
251,000,000. The Company issued approximately 32 million shares of Common
Stock for all the outstanding Common Stock and options of Tencor Instruments on
the basis of one share of the Company's Common Stock for one share of Tencor
Instruments. The merger will be accounted for as a pooling of interests.
RESULTS OF OPERATIONS
Net Sales Net sales increased $15.1were $157.8 million or 10.1%and $473.6 million for the three and
nine month periodperiods ended September 30, 1996 asMarch 31, 1997, respectively, compared to $187.5
million and $502.3 million for the same periods of the prior fiscal year, which
represents a decrease of 15.9% and 5.7% for the respective periods. The
decrease in net sales, both on a quarter on quarter and year on year basis, is
primarily attributed to the slowdown in the semiconductor manufacturing
industry's capital spending levels. While average selling prices remained
relatively consistent during the three and nine month periods ended March 31,
1997, compared to the first quartersame periods of the prior fiscal year, overall unit
shipment volumes decreased, which was primarily associated with the wafer
inspection products.
Gross Margin Gross margins were 52.3% and 52.6% of net sales, respectively,
for the three and nine month periods ended March 31, 1997, compared to 54.6%
and 54.8% of net sales for the same periods of the prior fiscal year. The RAPID business unit, driven primarily by changes in technology, was
predominately responsible for the increase in sales. The Company attributes the
increase in RAPID's sales primarily to the ongoing industry-wide retooling for
advanced reticle manufacturing, as well as continuing industry movement towards
smaller line widths. Unit sales in the WISARD business unit declined, reflecting
the industry's capital spending weakness. Many of the leading manufacturers have
placed new fab construction on hold while they evaluate the marketplace and
assess the future supply/demand relationship for various semiconductor devices.
Gross Margin
Gross
margins were 54.9% for the three month period ended September 30, 1996
compared to 55.3% in the first quarter of the prior fiscal year. The slight
decrease in the gross margin reflects a mix shift towards the RAPID business
unit. Gross margins for the RAPID business unit have increaseddecreased as a result of lower cost componentsa change in the product mix as wafer
inspection products with higher relative gross margins decreased as a
percentage of total Company revenues. Additionally, wafer inspection gross
margins decreased as a result of unit volume inefficiencies and new product
introduction costs. These effects were partially offset by rising gross
margins in reticle inspection and metrology products as a result of higher unit
volume efficiencies and lower installation and warranty costs, but these
margins are still below the Company average. Gross margins were favorably
affected by the sales of two SEMSpec units during the quarter, however the
slight increase was offset by changes in product mix within the WISARD business
due to the ramp up of the KLA 2135.costs.
Engineering, Research and Development Engineering, research and development
expenses were 13.1% of net sales$22.0 million and $62.2 million for the three and nine month
periodperiods ended September 30, 1996March 31, 1997, respectively, compared to 10.5% in$20.9 million and $54.6
million for the first
quartersame periods of the prior fiscal year. NetAs a percentage of net
sales, engineering, expenditures rose $5.9 million
duringresearch and development expenses increased to 14.0% and
13.1% for the first quarter of fiscalthree and nine month periods ended March 31, 1997, compared to
11.2% and 10.9% for the first quartersame periods of the prior fiscal 1996.year. Engineering,
research and development expenses consist primarily of employee
compensation-related costs, project material, and other costs associated with
the Company's ongoing efforts for product development and enhancements to
existing products. The Companyincrease is concentrating onattributable to increases in headcount, as
well as increases in other new product spending including expenses related in
part to the broad opportunities in yield
management, includingnext generation reticle inspection products. Engineering, research
and development expenditures were
8
9
net of external funding of $3.3 million and $11.0 million for the networking of all measurement tools in a fab, the
development of new measurement tools,three and
the related software for using those
tools.nine month periods ended March 31, 1997, respectively.
Selling, General and Administrative Selling, general and administrative (SG&A)
expenses were 21.7% of net sales$29.6 million and $94.4 million for the three and nine month
periodperiods ended September 30, 1996March 31, 1997, respectively, compared to 18.7% in$33.7 million and $91.0
million for the first
quartersame periods of the prior fiscal year. Operating costsAs a percentage of net
sales, SG&A increased to 18.8% and 19.9%, respectively, for the three and nine
month periods ended March 31, 1997, compared to 17.9% and 18.1% for the same
periods of the prior fiscal year. The increase during both comparative periods
is due in part to increases in headcount, and increases in the Company's
investment in its customer group sales and applications resources worldwide.
SG&A also included approximately $5.0
million ofsales representative commissions of approximately $3 million
and $12 million, respectively, for the three and nine month periods ended March
31, 1997, which relaterelated to orders previously taken by the Company's former
representative in Japan but which shipped during the first
quarter. These commissions will phase out substantially during the next several
Page 7
8
quarters. Some reductions in other operating costs were initiated during the
quarter, the full effects of which will not be realized until the next quarter.respective periods.
Interest Income and Other Interest income and other, net, decreased $0.7increased $3.1
million and $2.6 million, respectively, for the three and nine month periodperiods
ended September 30, 1996March 31, 1997, compared to the first quartersame periods of the prior fiscal year.
This decrease isThese increases are due primarily to lowerslightly higher yields on the Company'shigher cash and
investment
portfolio offsetting higher average cash balances.
Provision for Income Taxes The Company's effective tax rate decreased to 34%
for the threenine months ended September 30, 1996. The Company's tax rate wasMarch 31, 1997, compared to 36% for the year ended June 30,
1996.same period
of the prior fiscal year. This rate decrease is due primarily to the benefits
associated with reinstatement of the federal research and development tax
credit. The difference between the statutory tax
rate and the Company's effective tax rate is primarily due to R&D tax credits,
FSC benefits, tax exempt interest and state taxes.
The IRS is currently auditing the Company's federal income tax returns for
fiscal years 1985 tothrough 1992. The Company has received a notice of proposed
tax deficiency for such years. The Company filed a tax protest letter with the
IRS on June 10, 1996, in response to the IRS notice. Management believes
sufficient taxes have been provided in prior years and that the ultimate
outcome of the IRS audit will not have a material adverse impact on the
Company's financial position or results of operations.
Future Operating Results
The Company's future results will depend on its ability to continuously
introduce new products and enhancements to its customers as demands for higher
performance yield management and process control systems change or increase. Due
to the risks inherent in transitioning to new products, the Company must
accurately forecast demand in both volume and configuration and also manage the
transition from older products. The Company's results could be affected by the
ability of competitors to introduce new products which have technological and/or
pricing advantages. The Company's results also will be affected by strategic
decisions made by management regarding whether to continue particular product
lines, and by volume, mix and timing of orders received during a period,
fluctuations in foreign exchange rates, and changing conditions in both the
semiconductor industry and key semiconductor markets around the world. As a
result, the Company's operating results may fluctuate, especially when measured
on a quarterly basis.
Liquidity and Capital Resources Cash, cash equivalents, short-term investments
and marketable securities balances increased $157 million to $284.5$418 million
during the nine month period ended March 31, 1997. Cash generated from
operations for the three months ended September 30, 1996. Cash generated by
operationsnine month period was $30.7$170.6 million, derived primarily from
net income and reductions in receivables. This was offset by long term investmentsaccounts receivable. The decrease in accounts
receivable is due in part to an agreement the Company has with a bank to factor
certain of $17.2its accounts receivable. During the nine months ended March 31,
1997, approximately $80 million forof the quarter.Company's accounts receivable were
factored.
The Company's capital expenditures during the nine month period ended March 31,
1997 were primarily in facilityfacilities improvements, new computers, manufacturing
tooling to accommodate general business needs,improve production efficiencies, and engineering computers and equipment to
support the Company's expanding research and development efforts.
The Company believes that success in its current levelindustry requires substantial capital
in order to maintain the flexibility to take advantage of liquid
assets,opportunities as they
may arise. Accordingly, the Company may, from time to time, as market and
business conditions warrant, invest in or acquire businesses, products, or
technologies which it believes complement its overall business strategy.
Borrowings under the Company's credit facilities, or public offerings of equity
or debt securities, are available if the need arises. The sale of additional
equity or convertible debt securities could result in additional dilution to
the Company's stockholders.
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10
RISK FACTORS
Fluctuations in Quarterly Operating Results The Company's quarterly operating
results have fluctuated in the past and expected cash generatedmay fluctuate in the future. The
Company's operating results are dependent on many factors, including the
economic conditions in the semiconductor industry, the size and timing of the
receipt of orders from customers, customer cancellations or delays of
shipments, the Company's ability to develop, introduce, and market new and
enhanced products on a timely basis, the introduction of new products by its
competitors, changes in average selling prices and product mix, and exchange
rate fluctuations, among others. There can be no assurance that one or more of
these factors will not adversely impact the Company's quarterly operating
results.
Current Slowdown and Volatility in the Semiconductor Equipment Industry The
Company's business depends and will depend in the future upon the capital
equipment expenditures of semiconductor manufacturers, which in turn depend on
the current and anticipated market demand for integrated circuits and products
utilizing integrated circuits. The semiconductor industry has been cyclical in
nature and historically has experienced periodic downturns. The semiconductor
industry is presently experiencing a slowdown in terms of product demand and
volatility in terms of product pricing. This slowdown and volatility has
caused the semiconductor industry to reduce purchases of semiconductor
manufacturing equipment and construction of new fabrication facilities. There
can be no assurance that this slowdown will not continue. Even during periods
of reduced revenues, in order to remain competitive, the Company will be
required to continue to invest in research and development and to maintain
extensive ongoing worldwide customer service and support capability which could
adversely affect its financial results.
Dependence on New Products and Processes; Rapid Technological Change Rapid
technological changes in semiconductor manufacturing processes subject the
semiconductor manufacturing equipment industry to increased pressure to
maintain technological parity with deep submicron process technology. The
Company believes that its future success will depend in part upon its ability
to develop, manufacture and successfully introduce new products with improved
capabilities and to continue to enhance existing products. Due to the risks
inherent in transitioning to new products, the Company will be required to
accurately forecast demand for new products while managing the transition from
older products. If new products have reliability or quality problems, reduced
orders, higher manufacturing costs, delays in acceptance of and payment for new
products and additional service and warranty expense may result. In the past,
the Company has experienced some delays as well as reliability and quality
problems in connection with product introductions, resulting in some of these
consequences. There can be no assurance that the Company will successfully
develop and manufacture new products, or that new products introduced by the
Company will be accepted in the marketplace. If the Company does not
successfully introduce new products, the Company's results of operations will
be materially adversely affected.
In addition, the Company expects to continue to make significant investments in
research and development. There can be no assurance that future technologies,
processes or product developments will not render the Company's current product
offerings obsolete or that the Company will be able to develop and introduce
new products or enhancements to its existing products which satisfy customer
needs in a timely manner or achieve market acceptance. The failure to do so
could adversely affect the Company's business.
Highly Competitive Industry The semiconductor equipment industry is highly
competitive. The Company has experienced and expects to continue to face
substantial competition throughout the world. The Company believes that to
remain competitive, it will require significant financial resources in order to
offer a broad range of products, to maintain customer service and support
10
11
centers worldwide, and to invest in product and process research and
development. The Company believes that the semiconductor equipment industry is
becoming increasingly dominated by large manufacturers, who have the resources
to support customers on a worldwide basis. Many of these competitors have
substantially greater financial resources and more extensive engineering,
manufacturing, marketing and customer service and support capabilities than the
Company. In addition, there are sufficientsmaller emerging semiconductor equipment
companies which provide innovative technology. No assurance can be given that
the Company will be able to fund growthcompete successfully worldwide.
Importance of International Sales International sales accounted for 65%, 69%
and 68% of the Company's net sales for fiscal years 1994, 1995 and 1996,
respectively. The Company expects that international sales will continue to
represent a significant percentage of its net sales. The future performance of
the Company will be dependent, in part, upon its ability to continue to compete
successfully in Asia, one of the largest areas for the sale of yield management
and process monitoring equipment. International sales and operations may be
adversely affected by imposition of governmental controls, restrictions on
export technology, political instability, trade restrictions, changes in
tariffs and the difficulties associated with staffing and managing
international operations. In addition, international sales may be adversely
affected by the economic conditions in each country. The net sales and income
from the Company's international business may be affected by fluctuations in
currency exchange rates. Although the Company attempts to manage near term
currency risks through "hedging," there can be no assurance that such efforts
will be adequate. These factors could have a material adverse effect on the
next fiscal year.
Page 8Company's future business and financial results.
11
9
KLA INSTRUMENTS CORPORATION
FORM 10-Q12
PART II:II OTHER INFORMATION
ItemITEM 1 Legal Proceedings
None
ItemLEGAL PROCEEDINGS
None.
ITEM 2 Changes in SecuritiesCHANGES IN SECURITIES
Not applicable
ItemApplicable.
ITEM 3 Defaults Upon Senior SecuritiesDEFAULTS UPON SENIOR SECURITIES
Not applicable
ItemApplicable.
ITEM 4 Submission of Matters to a Vote of Security HoldersSUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ItemApplicable.
ITEM 5 Other EventsOTHER EVENTS
Not applicable
ItemApplicable.
ITEM 6 Exhibits and Reports on FormEXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.13.1 Amended and Restated Articles of Incorporation
3.2 Bylaws
11.1 Calculation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
Current report on Form 8-K filed September 24, 1996:
The Company filed a Form 8-K on September 24, 1996, reporting
that asJanuary 22, 1997 announcing
the signing on January 14, 1997 of April 26, 1996, the Company amended its Shareholder
Rights Plan. The amendment increased the exercise price from
$50.00 to $160.00, changed the acquisition threshold from 20%
to 15%, extended the term from 1999 to 2006, added an exchange
provisionAgreement and made certain other technical changes.
Page 9Plan of
Reorganization with Tencor Instruments.
12
1013
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrantregistrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KLA INSTRUMENTSKLA-TENCOR CORPORATION
November 12, 1996 ROBERT J. BOEHLKE(Registrant)
May 13, 1997 JON D. TOMPKINS
- ----------------- -----------------
[Date] Robert J. Boehlke
V.P. Finance------------------------ ------------------------
Date Jon D. Tompkins
Chief Executive Officer
13
14
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION.
- ------- ------------
3.1 Amended and Administration
ChiefRestated Articles of Incorporation
3.2 Bylaws
11.1 Calculation of Earnings Per Share
27 Financial Officer
Page 10Data Schedule