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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: March 31,September 30, 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 ___________from__________to___________
Commission File Number 0-9992
KLA-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)
(408) 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_____[X] No[ ]
As of April 29,October 31, 1997 there were 51,711,80984,615,620 shares of the registrant's
Common Stock, $0.001 par value, outstanding.
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KLA-TENCOR CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
Page
Number
------
PART I FINANCIAL INFORMATION
- ------ ---------------------
Item 1 Financial Statements (unaudited)
Condensed Consolidated Interim Balance Sheets at
March 31,June 30, 1997 and JuneSeptember 30, 1996 . . . . . . . . . . . . . . . . . . . .1997 ............................ 3
Condensed Consolidated Interim Statements of Operations for
the Three and Nine Month Periods Ended March 31,September 30, 1996
and September 30, 1997 and March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . ........................................... 4
Condensed Consolidated Interim Statements of Cash Flows
for the NineThree Months Ended March 31,September 30, 1996 and 1997 and 1996 . . . . . . . . . . ........... 5
Notes to Condensed Consolidated Interim Financial Statements . . . . . .Statements..... 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . .Operations........................................... 8
PART II - OTHER INFORMATION - ------- -----------------
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 . . . . . . . . . . . . . . . . . . . . . . 1211
SIGNATURES 11
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PART II. FINANCIAL INFORMATION
ITEM 11. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED UNAUDITED INTERIM BALANCE SHEETS
(Unaudited)(In thousands)
March 31, June 30, (In thousands)September 30,
1997 1996
--------- ---------1997
----------- -----------
ASSETS
Current assetsassets:
Cash and cash equivalents $ 149,573279,225 $ 109,404249,378
Short-term investments 11,003 14,27969,606 75,514
Accounts receivable, net 122,027 203,470269,291 344,966
Inventories 118,289 132,377174,634 187,521
Deferred income taxes 27,909 27,24654,799 54,040
Other current assets 14,756 6,783
--------- ---------12,452 12,441
----------- -----------
Total current assets 443,557 493,559860,007 923,860
Land, property and equipment, net 73,428 71,825117,595 128,796
Marketable securities 257,795 137,728338,418 361,716
Other assets 13,512 9,660
--------- ---------27,287 28,575
----------- -----------
Total assets $ 788,2921,343,307 $ 712,772
========= =========1,442,947
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilitiesliabilities:
Notes payable $ 2,11525,113 $ 3,11122,618
Accounts payable 19,732 27,330
Income taxes payable 34,762 34,59541,155 47,818
Other current liabilities 113,725 104,167
--------- ---------258,483 276,802
----------- -----------
Total current liabilities 170,334 169,203
--------- ---------324,751 347,238
----------- -----------
Deferred income taxes 6,316 6,320
--------- ---------
Commitments and contingenciesother 3,943 3,179
----------- -----------
Stockholders' equity:
Common stock and additional paid-in capital 285,377 277,943in excess of par value 458,308 478,684
Retained earnings 328,789 259,777
Treasury stock (581) (581)542,706 592,428
Net unrealized lossgain on investments (1,181) (131)17,591 25,974
Cumulative translation adjustment (762) 241
--------- ---------(3,992) (4,556)
----------- -----------
Total stockholders' equity 611,642 537,249
--------- ---------1,014,613 1,092,530
----------- -----------
Total liabilities and stockholders' equity $ 788,2921,343,307 $ 712,772
========= =========1,442,947
=========== ===========
See accompanying notes to unaudited condensed consolidated interim financial
statements.
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CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF OPERATIONS
(Unaudited)(In thousands, except per share data)
Three Months Ended
Nine Months Ended
March 31, March 31,
(In thousands, except per share amounts) 1997September 30,
-------------------
1996 1997
1996
- ----------------------------------------------------------------------------------------------- --------
Net sales $157,761 $187,494 $473,586 $502,320
-------- --------Revenues $261,140 $312,420
-------- --------
Costs and expenses:
Cost of sales 75,322 85,215 224,508 227,239115,364 140,764
Engineering, research and
development 22,046 20,942 62,212 54,59932,496 45,177
Selling, general and administrative 29,622 33,655 94,368 90,95758,615 62,138
Restructuring costs 8,500 --
-------- --------
-------- --------
126,990 139,812 381,088 372,795
-------- --------Total costs and operating expenses 214,975 248,079
-------- --------
Income from operations 30,771 47,682 92,498 129,52546,165 64,341
Interest income and other, net 5,144 2,033 12,065 9,504
-------- --------5,657 8,785
-------- --------
Income before income taxes 35,915 49,715 104,563 139,02951,822 73,126
Provision for income taxes 12,211 17,898 35,551 50,051
-------- --------18,242 23,404
-------- --------
Net income $ 23,70433,580 $ 31,817 $ 69,012 $ 88,978
======== ========49,722
======== ========
Net income per share $ 0.440.40 $ 0.61 $ 1.30 $ 1.70
======== ======== ======== ========0.56
Shares used in computing net income
per share 53,830 52,170 53,014 52,32183,698 88,783
See accompanying notes to unaudited condensed consolidated interim financial
statements.
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CONDENSED CONSOLIDATED UNAUDITED INTERIM STATEMENTS OF CASH FLOWS
(Unaudited)(In thousands)
NineThree Months Ended
March 31,
(In thousands)September 30,
----------------------
1996 1997 1996
--------- ---------
Cash flows from operating activities:
Net income $ 69,01233,580 $ 88,97849,722
Adjustments required to reconcile net income to net
cash provided by/(usedby (used in) operations:operating activities:
Depreciation and amortization 16,385 10,700
Deferred income taxes (667) --14,088 11,865
Changes in assets and liabilities:
Accounts receivable, 81,443 (97,958)net 27,527 (75,675)
Inventories 14,088 (51,205)(3,375) (12,887)
Other assets (11,825) 4,718(7,772) (1,083)
Accounts payable (7,598) 16,954(13,336) 6,663
Accrued compensation 556 14,402
Other current liabilities 6,434 3,493
Income taxes payable 167 6,869
Other current liabilities 9,558 34,757(1,221) (340)
--------- ---------
CashNet cash provided by (used in)
operating activities 170,563 13,81356,481 (3,840)
--------- ---------
Cash flows from investing activities:
Capital expenditures (17,988) (27,321)
Purchases of shortproperty and long-termequipment (14,567) (22,501)
Net purchases of available for sale securities (391,890) (374,289)
Sales and maturities of short and long-term
available for sale securities 274,049 361,085(30,867) (20,823)
--------- ---------
CashNet cash used forin investing activities (135,829) (40,525)(45,434) (43,324)
--------- ---------
Cash flows from financing activities:
Short-term borrowings, net (996) (2,487)
Payment of current portion of long-term debt -- (20,000)
Issuance of common stock, net 7,434 4,786942 23,276
Stock repurchases -- (2,900)
Borrowings/(payments) under debt obligations 7,702 (2,495)
--------- ---------
CashNet cash provided by/(used in)by financing activities 6,438 (17,701)8,644 17,881
--------- ---------
Effect of exchange rate changes (1,003) (1,020)on cash and cash equivalents 41 (564)
--------- ---------
Increase/(decrease)Net increase in cash and cash equivalents 40,169 (45,433)19,732 (29,847)
Cash and cash equivalents at beginning of period 109,404 92,059196,348 279,225
--------- ---------
Cash and cash equivalents at end of period $ 149,573216,080 $ 46,626249,378
========= =========
Cash paid during the period for:
Interest $ 365 $ 841Supplemental cash flow disclosures:
Income taxes paid $ 34,59918,645 $ 43,92411,393
Interest paid $ 275 $ 770
See accompanying notes to unaudited condensed consolidated interim financial
statements.
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KLA-TENCOR CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
Note 1NOTE 1. In the opinion of the Company's management, the unaudited condensed
consolidated interim financial statements include all adjustments (consisting
only of adjustments that are of a normal recurring nature)adjustments) necessary for a fair statement of results.
The results for the quarter ended March 31,September 30, 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 for the year ended June 30, 1996. The1997.
Preparation of financial statements presented in this Form 10-Q
representconformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial results of KLA 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,statements 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 3accompanying notes.
Actual amounts could differ materially from those amounts.
NOTE 2. Inventories (in thousands):
March 31, June 30, September 30,
1997 19961997
-------- --------
Systems raw materials $ 17,559 $ 33,521
Customer service spares 22,529 13,614parts $ 31,387 $ 27,644
Raw materials 36,829 33,810
Work-in-process 53,033 47,01271,998 78,704
Demonstration equipment 25,167 38,23020,580 31,079
Finished goods 13,840 16,284
-------- --------
$118,289 $132,377$174,634 $187,521
======== ========
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Note 4NOTE 3. In August 1996, the Compensation Committee of the Board of
Directors authorizedJuly 1997, the Company adopted a plan to re-price stock options issued
during the period August 1994 through August 1996, which had
exercise prices well above the August 1996 trading pricesrepurchase, at its
discretion, up to 150,000 shares of the
Company'sits own Common Stock. This re-pricing was done in the form of
an exchange, whereby eligible optionees could cancel their current
options in exchange for new options with exercise prices at the
fair market valueStock on the date of grant.
Note 5 Theopen market.
During the quarter ended September 30, 1997, the Company has entered into an agreement with a bank to sell,
with recourse, certainrepurchased 40,500
shares of its trade receivables. The amountCommon Stock at a cost of proceeds received was approximately $35 million and $80 million,
respectively, for the three and nine month periods ended March 31,
1997. As of March 31, 1997, approximately $41 million of the
factored trade receivables remains uncollected by the bank.
Note 6 Engineering, research and development expenditures were net of
external funding of $3.3 million and $11.0 million for the three
and nine month periods ended March 31, 1997, respectively.
Note 7$2.9 million.
NOTE 4. Net income per share is computed using the weighted average number of
common and common equivalent shares (weighted average shares) outstanding during
the respective periods, including the assumedperiod, which includes net shares issuable upon the exercise of
stock options.options, when dilutive.
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 beis effective for the Company's fiscal yearquarter ending June 30, 1998.December 31, 1997. Under the new
standard, primary earnings per share will be replaced by basic earnings per
share and fully diluted earnings per share will beis replaced by diluted earnings per
share. If the Company had adopted this Statement for the three and nine month periodsmonths ended
March 31,September 30, 1997, and March 31, 1996, the Company's earnings per share for the periods ended
September 30, 1996 and 1997 would have been as follows:
Three Months Ended
Nine Months Ended
March 31, March 31,
1997September 30,
1996 1997
1996
------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.460.41 $ 0.63 $ 1.35 $ 1.760.59
Diluted $ 0.440.40 $ 0.61 $ 1.30 $ 1.700.56
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NOTE 5. The Company recorded charges totaling $60.6 million for merger,
restructuring and other non-recurring events which occurred during the year
ended June 30, 1997. Of this amount approximately $46.0 million was the result
of the merger between KLA Instruments and Tencor Instruments on April 30, 1997,
$6.1 million was a result of the write-off of a bad debt for shipments made to a
Thailand company in fiscal 1997 and additional restructuring charges of $8.5
million primarily related to lease exit costs incurred in fiscal 1997. As of
September 30, 1997, approximately $13.4 million of the accrued balance remains
relating primarily to lease exit costs, and is expected to be utilized ratably
during fiscal 1998.
NOTE 6. The Company has foreign subsidiaries which operate and sell the
Company's products in various global markets. As a result, the Company is
exposed to changes in foreign currency exchange rates and interest rates. The
Company utilizes various hedge instruments, primarily forward exchange
contracts, to manage its exposure associated with firm intercompany and
third-party transactions denominated in local currencies. At September 30, 1997,
the Company had forward exchange contracts maturing throughout fiscal 1998 and
early fiscal 1999 to sell and purchase approximately $280 million and $40
million, respectively, in foreign currency, primarily Japanese yen. Deferred
foreign exchange gains and losses were not considered material at September 30,
1997.
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ITEM 22. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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.
Important factors that could cause actual results to differ are described in the
following discussion and are particularly noted under "Risk Factors" on page 10.
RECENT DEVELOPMENTS
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.9.
RESULTS OF OPERATIONS
Net Sales Net salesRevenues were $157.8 million and $473.6$312 million for the three and
nine month periodsmonths ended March 31,September 30, 1997, respectively,
compared to $187.5
million and $502.3$261 million for the same periodsperiod of the prior fiscal year,
which
represents a decreaserepresenting an increase of 15.9% and 5.7% for the respective periods.19.5%. The decreaseincrease in net sales, both on a quarter on quarter and year on year basis,revenues is primarily
attributed to an increase in demand in the slowdown inCompany's products compared to the
same period of the prior year when the semiconductor manufacturing industry'sindustry was
experiencing a slowdown in its capital spending levels. While overall average
selling prices remained relatively consistent duringcompared to the prior year's
quarter, revenues increased primarily because of increased sales of the CD SEM
metrology, wafer inspection including Surfscan SP1(R) and Wisard 2135 and data
analysis systems.
Gross margins were 54.9% of net sales for the three and nine month periodsperiod ended March 31,September
30, 1997, compared to the same 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%55.8% of net sales for the same periodsperiod of the prior fiscal
year. Gross margins decreasedfor system products remained relatively unchanged during the
current quarter when compared to the prior year quarter. During the current
quarter gross margins declined as a result of a changethe Company's continued investment
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 partiallyits customer support infrastructure. This decrease was offset by rising gross
margins in reticle inspectionimproved
warranty and metrology products as a result of higher unit
volume efficiencies and lower installation and warranty costs.
Engineering, Research and Development
Engineering, research and development (R&D) expenses were $22.0 million and $62.2$45 million for the
three and nine month periodsperiod ended March 31,September 30, 1997 respectively, compared to $20.9 million and $54.6$32 million for the same
periodsperiod of the prior fiscal year. As a percentage of net sales, engineering, research and developmentR&D expenses
increased to 14.0% and
13.1%14.5% for the three and nine month periodsperiod ended March 31,September 30, 1997, compared
to 11.2% and 10.9%12.4% for the same periodsperiod of the prior fiscal year. Engineering,
researchThe increase is primarily
attributable to increases in headcount 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 in new
market segments and enhancements to existing products. The increase is attributable to increases in headcount, as
well as increases in other new product spendingproducts including expenses related in
part to the next
generation reticle300mm products and inspection products. Engineering, researchenhancements for 0.25-micron and development expenditures were
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net of external funding of $3.3 million and $11.0 million for the three and
nine month periods ended March 31, 1997, respectively.
Selling, General and Administrativebelow.
Selling, general and administrative (SG&A) expenses were $29.6 million and $94.4$62 million for the
three and nine month periodsperiod ended March 31,September 30, 1997, respectively, compared to $33.7 million and $91.0$59 million for the
same periodsperiod of the prior fiscal year. As a percentage of net sales, SG&A
increased to 18.8% anddecreased from 19.9%, respectively, for the three and nine
month periodsperiod ended March 31,September 30, 1997,
compared to 17.9% and 18.1%22.5% for the same periodsperiod of the prior fiscal year. The increase in
dollars during both comparative periodsthe period is due in part to increases in headcount, and increasescontinued
investment in the Company's worldwide information systems and increased
investment in its customer group sales and applications resources worldwide.
SG&A also included sales representative commissionsIn the first quarter of approximately $3fiscal 1997, Tencor Instruments incurred restructuring
charges of $8.5 million and $12 million, respectively, for the three and nine month periods ended March
31, 1997, whichcosts related to orders previously taken by the Company's former
representative in Japan but which shipped during the respective periods.
Interest Income and Otherdownsizing its operations as well
as exiting certain leased facilities.
Interest income and other, net, increased $3.1$3 million and $2.6 million, respectively, for the three and nine month periodsperiod
ended March 31,September 30, 1997, compared to the same periodsperiod of the prior fiscal year.
These increases areThe increase is due primarily to slightly higher yields on higher cash and investment balances.
Provision for Income Taxesbalances when
compared to the same period a year ago.
The Company's effective tax rate decreased to 34%32% for the nine monthsthree month period
ended March 31,September 30, 1997, compared to 36%35.2% for the same period of the prior
fiscal year. This decrease is due
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primarily to the benefits
associated with reinstatementrealization of the federal researchtax attributes related to a prior acquisition
and developmentgreater rate reduction from R&D tax credit.credits.
The IRS is currently auditing the Company's federal income tax returns for
fiscal years 1985 through 1992. The Company has received a notice of proposed
tax deficiency for such years. The Companyyears and filed a tax protest letter with the IRS on
June 10, 1996, in response to thethat 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.
Liquidity and Capital Resources Cash,LIQUIDITY AND CAPITAL RESOURCES
During the three month period ended September 30, 1997, cash, cash equivalents,
short-term investments and marketable securities balances increased $157 million to $418 million
during the nine month period ended March 31, 1997.were unchanged at $687
million. Cash generated fromused in operations for the ninethree month period was $170.6$4 million,
derivedresulting primarily from net income and reductions in accounts receivable. The decreaseincreases in accounts receivable is dueand inventory and
offset in part to an agreement the Company has with a bank to factor
certain of its accounts receivable.by net income (which includes non-cash charges for depreciation)
and accrued compensation. During the ninethree months ended March 31,September 30, 1997,
approximately $80$53 million of the Company's accounts receivable were factored.
The Company's capitalsold.
Capital expenditures of $23 million during the nine month period ended March 31,first quarter of fiscal 1997 were
primarily infor facilities improvements newand computers manufacturing
tooling to improve production efficiencies, and engineering equipment to support the Company's
expanding researchgrowth. Cash and development efforts.cash equivalents provided by financing activities during the
first quarter of fiscal 1997 were $18 million compared to $9 million provided in
the same period of the prior year. The increase is primarily attributed to
issuance of the Company's Common Stock in connection with employee benefit
plans.
The Company believes that existing liquid resources and funds generated from
operations combined with its ability to borrow funds will be adequate to meet
its operating and capital requirements and obligations through the foreseeable
future. The Company believes that success in its industry requires substantial
capital in order to maintain the flexibility to take advantage of 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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RISK FACTORS
Fluctuations in Quarterly Operating Results
The Company's quarterly operating results have fluctuated in the past and may
fluctuate in the future. The Company's operating results are dependent on many
factors, including the economic conditions in the semiconductor industry, both
in the US and abroad, 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(which includes its ability to attract, hire and assimilate an adequate number
of new products by its
competitors, changes in average selling prices and product mix, and exchange
rate fluctuations,qualified people), 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
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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 including those
for 300mm wafers and devices with critical dimensions at 0.25-m and below 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, theThe 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
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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 smaller emerging
semiconductor equipment companies which provide innovative technology. No
assurance can be given that the Company will be able to compete successfully
worldwide.
Importance of International Sales International salesrevenues accounted for 65%, 69%66% and 68%65% of the Company's net
salesrevenues for fiscal years 1994, 1995, 1996 and 1996,1997, respectively. International sales
were 57% for the three months ended September 30, 1997. The Company expects that
international salesrevenues will continue to represent a significant percentage of
its net sales.revenues. 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 salesrevenues 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
salesrevenues 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 Company's future business and financial results.
10
11
12
PART IIII. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None.
ITEM 2 CHANGES IN SECURITIES
Not Applicable.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5 OTHER EVENTS
Not Applicable.
ITEM 66. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation
3.2 Bylaws
11.1 Calculation of Earnings Per Share
2727.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed aThere were no reports on Form 8-K on January 22, 1997 announcingfiled during the signing on January 14, 1997 of an Agreement and Plan of
Reorganization with Tencor Instruments.
12
13period
ended September 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KLA-TENCOR CORPORATION
(Registrant)
May 13,November 11, 1997 JON D. TOMPKINSRobert J. Boehlke
- ------------------------ ------------------------
Date Jon D. Tompkins------------------------------- -------------------------------
(Date) Robert J. Boehlke
Executive Vice President
and Chief ExecutiveFinancial Officer
1311
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EXHIBIT12
INDEX EXHIBIT
NO. DESCRIPTION.
- ------- ------------
3.1 Amended and Restated Articles of Incorporation
3.2 Bylaws
11.1 Calculation of Earnings Per Share
27TO EXHIBITS
-----------------
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule