UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
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 0-9992
KLA-TENCOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2564110
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
160 Rio Robles
San Jose, California 95134
(Address of principal executive offices, including zip code)
(408) 875-3000
(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 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 [ ]
As of January 31, 2002, there were 187,059,556 shares outstanding of
the Registrant's Common Stock, $0.001 par value.
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 2001 and December 31, 2001.................................... 3
Condensed Consolidated Statements of Operations for the Three- and Six-
Month Periods Ended December 31, 2000 and 2001 ........................ 4
Condensed Consolidated Statements of Cash Flows
for the Six-Month Periods Ended December 31, 2000 and 2001 ............ 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 13
Item 3 Quantitative and Qualitative Disclosures About Market Risk................ 20
PART II OTHER INFORMATION
Item 1 Legal Proceedings......................................................... 21
Item 4 Submission of Matters to a Vote of Security Holders....................... 21
Item 6 Exhibits and Reports on Form 8-K.......................................... 22
Signatures .......................................................................... 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
(in thousands) 2001 2001
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $ 303,016 $ 529,674
Marketable securities 248,075 167,421
Accounts receivable, net 365,419 402,013
Inventories 335,470 394,406
Other current assets 398,966 403,432
---------- ----------
Total current assets 1,650,946 1,896,946
Land, property and equipment, net 310,326 290,254
Marketable securities 514,570 446,765
Other assets 129,718 110,586
---------- ----------
Total assets $2,605,560 $2,744,551
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 42,546 $ 60,740
Deferred profit 291,764 422,054
Other current liabilities 451,029 501,291
---------- ----------
Total current liabilities 785,339 984,085
---------- ----------
Stockholders' equity:
Common stock and capital in excess of par value 640,444 714,333
Retained earnings 1,179,042 1,043,529
Accumulated other comprehensive income 735 2,604
---------- ----------
Total stockholders' equity 1,820,221 1,760,466
---------- ----------
Total liabilities and stockholders' equity $2,605,560 $2,744,551
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
December 31, December 31,
---------------------- ----------------------
(In thousands, except per share data) 2001 2000 2001 2000
- -------------------------------------------- --------- --------- --------- ---------
Revenues $ 404,148 $ 500,833 $ 906,980 $ 883,548
Costs and operating expenses:
Costs of goods sold 201,811 215,900 446,179 398,909
Engineering, research and development 74,061 96,229 146,984 176,877
Selling, general and administrative 71,996 94,508 153,244 185,405
--------- --------- --------- ---------
Total costs and operating expenses 347,868 406,637 746,407 761,191
--------- --------- --------- ---------
Income from operations 56,280 94,196 160,573 122,357
Interest income and other, net 10,001 13,931 22,553 25,933
--------- --------- --------- ---------
Income before income taxes 66,281 108,127 183,126 148,290
Provision for income taxes 17,233 30,276 47,613 41,522
--------- --------- --------- ---------
Income before cumulative effect of
change in accounting principle 49,048 77,851 135,513 106,768
Cumulative effect of change in accounting
principle, net of tax benefit -- -- -- (306,375)
--------- --------- --------- ---------
Net income (loss) $ 49,048 $ 77,851 $ 135,513 $(199,607)
========= ========= ========= =========
Earnings per basic share:
Income before cumulative effect of
change in accounting principle $ 0.26 $ 0.42 $ 0.72 $ 0.57
Cumulative effect of change in
accounting principle -- -- -- (1.65)
--------- --------- --------- ---------
Net income (loss) $ 0.26 $ 0.42 $ 0.72 $ (1.08)
========= ========= ========= =========
Earnings per diluted share:
Income before cumulative effect of
change in accounting principle $ 0.25 $ 0.41 $ 0.70 $ 0.55
Cumulative effect of change in
accounting principle -- -- -- (1.58)
--------- --------- --------- ---------
Net income (loss) $ 0.25 $ 0.41 $ 0.70 $ (1.03)
========= ========= ========= =========
Weighted average number of shares:
Basic 186,200 185,247 186,928 186,101
========= ========= ========= =========
Diluted 194,637 190,893 194,855 193,449
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
KLA-TENCOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
-----------------------
(in thousands) 2001 2000
- ------------------------------------------------------------------ --------- ---------
Cash flows from operating activities:
Net income (loss) $ 135,513 $(199,607)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Cumulative effect of accounting change, net of tax benefit -- 306,375
Depreciation and amortization 33,345 29,224
Deferred income taxes (2,645) (39,761)
Net gain (loss) on sale of marketable securities 1,077 (3,880)
Changes in assets and liabilities:
Accounts receivable, net 36,590 (133,616)
Inventories 58,975 (107,787)
Other assets (14,318) (13,135)
Accounts payable (18,195) 6,709
Deferred profit (130,290) 147,647
Other current liabilities (44,708) 53,058
--------- ---------
Net cash provided by operating activities 55,344 45,227
--------- ---------
Cash flows from investing activities:
Purchase of land, property and equipment, net (50,776) (75,903)
Cash paid for acquisition (4,035) --
Purchase of marketable securities (783,564) (415,143)
Proceeds from sale of marketable securities 552,104 350,596
Proceeds from maturity of marketable securities 84,478 30,630
--------- ---------
Net cash used in investing activities (201,793) (109,820)
--------- ---------
Cash flows from financing activities:
Issuance of common stock, net 34,161 30,694
Stock repurchases (110,812) (149,561)
Net borrowings (payments) under short term debt obligations (499) 1,070
--------- ---------
Net cash used in financing activities (77,150) (117,797)
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents (3,059) 6,177
--------- ---------
Net decrease in cash and cash equivalents (226,658) (176,213)
Cash and cash equivalents at beginning of period 529,674 478,212
--------- ---------
Cash and cash equivalents at end of period $ 303,016 $ 301,999
========= =========
Supplemental cash flow disclosures:
Income taxes paid (refunded), net of refunds $ (16,136) $ 87,594
========= =========
Interest paid $ 428 $ 410
========= =========
See accompanying notes to condensed consolidated financial statements.
5
KLA-TENCOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The condensed consolidated financial statements
have been prepared by KLA-Tencor Corporation ("KLA-Tencor" or the "Company")
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations. In the opinion of management, the unaudited
interim financial statements reflect all adjustments (consisting only of normal,
recurring adjustments) necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods indicated. These
financial statements and notes, however, should be read in conjunction with the
Company's audited consolidated financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2001,
filed with the SEC on September 21, 2001.
The results for the three- and six- month periods ended December 31,
2000 have been adjusted to reflect the adoption of Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" (SAB 101).
The results of operations for the three- and six- month periods ended
December 31, 2001 are not necessarily indicative of the results that may be
expected for any other interim period or for the full fiscal year ending June
30, 2002.
FAIR VALUE OF FINANCIAL INSTRUMENTS KLA-Tencor has evaluated the
estimated fair value of financial instruments using available market information
and valuation methodologies. The use of different market assumptions and/or
estimation methodologies could have a significant effect on the estimated fair
value amounts. The fair value of KLA-Tencor's cash, cash equivalents, accounts
receivable, accounts payable and other current liabilities approximates the
carrying amount due to the relatively short maturity of these items.
MARKETABLE SECURITIES Short-term marketable securities include debt and
equity securities acquired with maturities exceeding three months but less than
one year from the date of acquisition. Non-current marketable securities include
debt securities acquired with maturities exceeding one year from the date of
acquisition. While KLA-Tencor's intent is to hold debt securities to maturity,
KLA-Tencor has classified all debt securities and all investments in equity
securities that have readily determinable fair values as available-for-sale, as
the sale of such securities may be required prior to maturity to implement
management strategies. Such securities are reported at fair value determined
based on quoted market prices at the reporting date for those instruments, with
unrealized gains or losses excluded from earnings and included in "Accumulated
other comprehensive income," net of applicable taxes, until realized. The cost
of securities sold is based on the specific identification method. Realized
gains or losses and declines in value, if any, judged to be other than temporary
are reported in "Interest income and other, net" in the Condensed Consolidated
Statements of Operations.
INTANGIBLE ASSETS Purchased technology, patents, trademarks, favorable
leases and goodwill are presented at cost, net of accumulated amortization.
Effective July 1, 2001, KLA-Tencor replaced ratable
6
amortization of goodwill with periodic testing of goodwill for impairment in
accordance with the provision of Statement of Financial Accounting Standard No.
142, "Goodwill and Intangible Assets." Intangible assets other than goodwill are
amortized over their estimated useful lives of three to five years using the
straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS KLA-Tencor evaluates the carrying value
of its long-lived assets whenever events or changes in circumstances indicate
that the carrying value of the asset may be impaired in accordance with the
provisions of Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." An impairment loss is recognized when estimated future cash flows expected
to result from the use of the asset including disposition, is less than the
carrying value of the asset.
CONCENTRATION OF CREDIT RISK Financial instruments, which potentially
subject KLA-Tencor to credit risk, consist principally of investments, accounts
receivable and derivative financial instruments used in hedging activities.
Investments are maintained with high-quality institutions, and the
composition and maturities of investments are regularly monitored by management.
Generally, these securities are traded in a highly liquid market, may be
redeemed upon demand and bear minimal risk. KLA-Tencor, by policy, limits the
amount of credit exposure to any one financial institution or commercial issuer.
KLA-Tencor has not experienced any material losses on its investments.
A majority of KLA-Tencor's trade receivables are derived from sales to
large multinational semiconductor manufacturers throughout the world.
Concentration of credit risk with respect to trade receivables is considered to
be limited due to its customer base and the diversity of its geographic sales
areas. KLA-Tencor performs ongoing credit evaluations of its customers'
financial condition. KLA-Tencor maintains a reserve for potential credit losses
based upon expected collectibility of all accounts receivable.
KLA-Tencor is exposed to credit loss in the event of nonperformance by
counterparties on the foreign exchange contracts used in hedging activities.
KLA-Tencor does not anticipate nonperformance by these counterparties.
WARRANTY KLA-Tencor generally warrants its systems for a period of 12
months for material and labor to repair and service the system. A provision for
the estimated cost of warranty is recorded when initial revenue is recognized on
the system.
REVENUE RECOGNITION In December 1999, the SEC issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The SEC
Staff addressed several issues in SAB 101, including the timing of revenue
recognition for sales that involve contractual customer acceptance provisions
and installation of the product if these events occur after shipment and
transfer of title. KLA-Tencor implemented the provisions of SAB 101 in the
fourth fiscal quarter of 2001, retroactive to July 1, 2000. Prior to adoption of
SAB 101, KLA-Tencor's general policy was to recognize revenue on shipment.
Accordingly, KLA-Tencor did not have any formal centralized processes for
tracking, obtaining and filing customer acceptance reports; therefore, pro forma
amounts for the periods beginning before July 1, 2000 have not been presented as
the effect of the change in accounting principle could not be reasonably
determined.
KLA-Tencor derives revenues from four sources -- system sales, spare
part sales, service contracts and software license fees. SAB 101 has no impact
on KLA-Tencor's revenue recognition policy for spare part sales, service
contracts and software license fees.
7
Prior to the implementation of SAB 101, system revenue was generally
recognized upon shipment. Effective July 1, 2000, KLA-Tencor changed its method
of accounting for system sales to generally recognize revenue upon a positive
affirmation by the customer that the system has been installed and is operating
according to predetermined specifications. In certain limited cases, KLA-Tencor
may deviate from the need for a written acceptance by the customer, as follows:
- When system sales to independent distributors have no installation,
contain no acceptance agreement, and 100% payment is done upon shipment, revenue
is recognized on shipment;
- When the system requires no integration and installation is
inconsequential, revenue is recognized on shipment. In these cases we are
required to perform the installation but we consider installation not essential
to the functionality of the equipment, and there are no additional tests
required to be performed on-site. In addition, third party distributors and
customers regularly complete the installation of these tools;
- When the customer fab has already accepted the same tool, with the
same specifications on the same process, for the same application, and it can be
objectively demonstrated that it meets all of the required acceptance criteria
upon shipment, revenue due on shipment of the product is recognized at the time
of shipment. Revenue recognized upon shipment is exclusive of the amount
allocable to the installation element. Revenue attributable to the installation
element is the higher of the amount due upon acceptance or the fair value of
installation;
- When the system is performing in production to published and
contractually agreed specifications and customer signature is withheld due to
warranty or other limited issues, revenue recognition is permitted only if all
of the specified criteria have been met and the customer is withholding final
acceptance for reasons unrelated to product performance;
Total revenues recognized under conditions when KLA-Tencor may deviate
from the need for a written acceptance by the customer were less than 1% of
total revenue for the three- and six-month periods ended December 31, 2001 and
December 31, 2000, respectively.
Spares revenue is recognized when the product has been shipped, risk of
loss has passed to the customer and collection of the resulting receivable is
probable.
Service and maintenance revenue is recognized ratably over the term of
the maintenance contract. If maintenance is included in an arrangement, which
includes a license agreement, amounts related to maintenance are allocated based
on vendor specific objective evidence. In situations where maintenance is to be
provided over a period beyond twelve months from the balance sheet date, the
portion of revenue relating to those services is classified as noncurrent
deferred revenue. Consulting and training revenue is recognized when the related
services are performed.
Revenue from license fees is typically recognized upon shipment of the
software if collection of the resulting receivable is probable, the fee is fixed
or determinable, and vendor-specific objective evidence exists to allocate a
portion of the total fee to any undelivered elements of the arrangement. Such
undelivered elements in these arrangements typically consist of services and/or
upgrades. If vendor-specific objective evidence does not exist for the
undelivered elements of the arrangement, all revenue is deferred until such
evidence does exist, or until all elements are delivered, whichever is earlier.
In instances where an arrangement to deliver software requires significant
modification or customization, license fees are recognized under the percentage
of completion method of contract accounting.
8
Allowances are established for potential product returns and credit losses. To
date, revenues from license fees have been less than ten percent of total
revenues.
As a result of implementing SAB 101, KLA-Tencor changed its method of
accounting for revenue recognition. This change resulted in cumulative deferred
revenue of $660.9 million as of July 1, 2000, which was recorded as a non-cash
charge of $306.4 million (after reduction for product and warranty costs of $207
million and income taxes of $147.5 million). The deferred profit balance as of
December 31, 2001 was $292 million and equals the amount of system revenue that
was invoiced and due on shipment but deferred under SAB 101 less applicable
product and warranty costs of $152 million.
STRATEGIC DEVELOPMENT AGREEMENTS Net engineering, research and
development expenses were partially offset by $6 million and $5 million in
external funding received under certain strategic development programs funded by
KLA-Tencor's customers and government agencies in the six-month periods ended
December 31, 2001 and December 31, 2000.
EARNINGS PER SHARE Basic earnings per share ("EPS") is calculated by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is calculated by using the weighted average number of common shares
outstanding during the period and gives effect to all dilutive potential common
shares outstanding during the period. The reconciling difference between the
computation of basic and diluted earnings per share for all periods presented is
the inclusion of the dilutive effect of stock options issued to employees under
employee stock option plans.
During the three- and six-month periods ended December 31, 2000,
options to purchase 10,875,333 and 4,580,198 shares, respectively, at prices
ranging from $33.75 to $68.00, were not included in the computation of diluted
earnings per share because the exercise price was greater than the average
market price of the common stock for the period. During the three- and six-month
periods ended December 31, 2001, options to purchase 2,060,890 and 876,102,
respectively, at prices ranging from $45.84 to $68.00, were not included in the
computation of diluted earnings per share because the exercise price was greater
than the average market price of the common stock for the period.
RECLASSIFICATIONS Certain amounts in fiscal years prior to 2001 have
been reclassified to conform to the current financial statement presentation.
RECENT ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial
Accounting Standards Board (FASB) issued Statement No. 143 ("SFAS 143"),
"Accounting for Asset Retirement Obligations," which is effective for fiscal
years beginning after June 15, 2002. SFAS 143 applies to all entities and
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development,
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. KLA-Tencor does not expect the adoption of SFAS 143 to
have a significant impact on its financial position and results of operations.
In October 2001, the FASB issued Statement No. 144 ("SFAS 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed. SFAS 144 will be effective for
fiscal years beginning after December 15, 2001. KLA-Tencor is currently
evaluating the impact of SFAS 144, but does not expect that its adoption on July
1, 2002 will have a material effect on its financial statements.
9
NOTE 2 -- INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market. The components of inventories are as follows:
December 31, June 30,
(in thousands) 2001 2001
- ----------------------------------------------- ------------ --------
Inventories
Customer service parts $108,890 $ 99,099
Raw materials 89,014 140,765
Work-in-process 61,251 61,453
Demonstration equipment 45,310 60,228
Finished goods 31,005 32,861
-------- --------
$335,470 $394,406
======== ========
NOTE 3 -- STOCK REPURCHASE PROGRAM
The Company has adopted a plan to repurchase shares of its common stock
on the open market for the purpose of partially offsetting dilution created by
employee stock options and stock purchase plans. During the six-month periods
ended December 31, 2001 and 2000, the Company repurchased 3,130,000 and
4,450,000 shares of its common stock at a cost of approximately $111 million and
$150 million, respectively.
NOTE 4 -- COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income, net of tax, are as follows:
Three months ended Six months ended
December 31, December 31,
------------------------ ------------------------
(in thousands) 2001 2000 2001 2000
- ---------------------------------------------------------- --------- --------- --------- ---------
Net Income (loss) $ 49,048 $ 77,851 $ 135,513 $(199,607)
--------- --------- --------- ---------
Other comprehensive loss
Currency translation adjustments (6,586) (3,986) (2,659) (5,847)
Gain on cash flow hedging instruments, net 3,977 -- 1,235 --
Unrealized losses on investments, net of tax benefits
of $80 and $281 for the three- and six- month periods
ended December 31, 2001, and $982 and $3,913 for the
three- and six- month periods ended December 31, 2000 (126) (1,556) (445) (5,058)
--------- --------- --------- ---------
Other comprehensive loss (2,735) (5,542) (1,869) (10,905)
--------- --------- --------- ---------
Total Comprehensive Income (Loss) $ 46,313 $ 72,309 $ 133,644 $(210,512)
========= ========= ========= =========
NOTE 5 -- NONRECURRING ACQUISITION, RESTRUCTURING AND OTHER COSTS
ACQUISITIONS
On November 20, 2001, KLA-Tencor acquired QC Optics, Inc., a publicly
traded company (AMEX: OPC), for $4 million in cash and other consideration, to
acquire certain intellectual property related to our business, including
intellectual property rights. The acquisition was accounted for as a
10
purchase. QC Optics, Inc. was a manufacturer of laser-based inspection systems
for the semiconductor, flat panel and computer hard disk manufacturing
industries. The total purchase price was allocated to intellectual property and
amortized over three years. The estimated fair value of the assets acquired and
liabilities assumed were included in KLA-Tencor's Condensed Consolidated Balance
Sheet as of December 31, 2001 and the results of operations from November 20,
2001 through December 31, 2001 were included in the Company's Condensed
Consolidated Statement of Operations. Pro forma results of operations have not
been presented as QC Optics Inc.'s operations were not significant to the
Company's Condensed Consolidated Statements of Operations, and therefore, the
pro forma results would not significantly differ from the Company's historical
results.
RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of fiscal 2001 KLA-Tencor entered into a
restructuring plan to address the downturn in the semiconductor industry. The
plan included consolidation of facilities, writedown of assets associated with
affected programs and a reduction in the Company's global workforce, all
resulting in a restructuring charge of $8 million. As of December 31, 2001, the
remaining balance of the restructuring reserve was $1 million.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
The Company is currently party to various legal proceedings, including
those outlined in Part II, Item 1, "Legal Proceedings," in this Quarterly Report
on Form 10-Q. While management currently believes the ultimate outcome of these
proceedings, both individually and in the aggregate, will not have a material
adverse effect on the Company's financial position or operating results, the
results of complex legal proceedings are difficult to predict. However, the
Company believes that it has defenses in each of the pending claims and is
vigorously contesting each of these matters.
NOTE 7 -- GOODWILL AND OTHER INTANGIBLE ASSETS
Effective July 1, 2001, KLA-Tencor elected early adoption of Statement
of Financial Accounting Standards No. 141, "Business Combinations, " and No.
142, "Goodwill and Other Intangible Assets." Under the new accounting standards,
KLA-Tencor ceased amortization of goodwill recorded for business combinations
consummated prior to July 1, 2001, and reclassified intangible assets acquired
prior to July 1, 2001 that do not meet the criteria for recognition under SFAS
141 to goodwill. The net carrying value of goodwill recorded through
acquisitions is $15.1 million as of December 31, 2001. In the year of adoption,
SFAS 142 requires the first step of the goodwill impairment test to be completed
within the first six months and the final step to be completed with twelve
months of adoption. KLA-Tencor completed the first step of the impairment test
during the quarter ended December 31 2001 and has determined that goodwill is
not impaired. Therefore, step two of the goodwill impairment test is not
applicable.
The following table reflects consolidated results adjusted as though
the adoption of SFAS 141 and SFAS 142 occurred as of the beginning of the three-
and six- month period ended December 31, 2000 (in thousands, except per share
amounts):
Three months ended December 31, Six months ended December 31,
----------------------------------------- ------------------------------------------
2001 2000 2001 2000
----------- -------------------------- ----------- ---------------------------
As Reported As Reported As Adjusted As Reported As Reported As Adjusted
----------- ----------- ----------- ----------- ----------- -----------
Operating income ................ $ 56,280 $ 94,196 $ 94,798 $ 160,573 $ 122,357 $ 123,508
Net income ...................... 49,048 77,851 78,224 135,513 (199,607) (198,893)
Basic earning per share ......... 0.26 0.42 0.42 0.72 (1.08) (1.08)
Diluted earning per share ....... 0.25 0.41 0.41 0.70 (1.03) (1.03)
11
The following table reflects the components of other intangible assets
as of December 31, 2001 (in thousands):
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
Existing technology ................................ $6,062 $1,850
Patents ............................................ 4,035 168
Trademark .......................................... 625 105
Favorable leases and other ......................... 270 95
Other intangible assets are amortized on a straight-line basis over
their estimated useful lives of three to five years. For the three months ended
December 31, 2001 and 2000, amortization expense for other intangible assets was
$0.5 million and $0.3 million. For the six months ended December 31, 2001 and
2000, amortization expense for other intangible assets was $0.9 million and $0.5
million. Estimated amortization expense for each of the five succeeding fiscal
years is as follows:
Fiscal year ended June 30: Amount
- -------------------------- ------
2002 $2,064
2003 2,400
2004 2,400
2005 2,141
2006 632
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements included in or incorporated by
reference in this Quarterly Report on Form 10-Q, other than statements of
historical fact, are forward-looking statements. Such forward-looking statements
include, among others, those statements regarding the future results of our
operations; technological trends in the semiconductor industry; our future
product offerings and product features, as well as market acceptance of new
products; anticipated revenue from various domestic and international regions;
international sales and operations; maintenance of competitive advantage;
success of our product offerings; creation of programs for research and
development; attraction and retention of employees; management of risks involved
in acquisitions of third parties, or the technology or assets thereof; benefits
received from any acquisitions and development of acquired technologies; the
outcome of any litigation to which we are a party; results of our investment in
leading edge technologies and strategic acquisitions and alliances; our future
income tax rate; sufficiency of our existing cash balance, investments and cash
generated from operations to meet our operating and working capital
requirements; and the effects of hedging transactions.
Our actual results may differ significantly from those projected in the
forward-looking statements in this report. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in this section and those set forth in the Company's most recent Annual Report
on Form 10-K. You should carefully review these risks and also review the risks
described in other documents we file from time to time with the Securities and
Exchange Commission. You are cautioned not to place undue reliance on these
forward-looking statements. We undertake no obligation to update forward-looking
statements.
RESULTS OF OPERATIONS
KLA-Tencor Corporation is the world's leading supplier of process
control and yield management solutions for the semiconductor and related
microelectronics industries. Our comprehensive portfolio of products, software,
analysis, services and expertise is designed to help integrated circuit
manufacturers manage yield throughout the entire wafer fabrication process --
from research and development to final mass production yield analysis.
Currently we continue to face a significant downturn in the
semiconductor industry which started early in calendar year 2001. For several
quarters, there has been a worldwide softening in demand for semiconductors
resulting in excess capacity and reduced demand for semiconductor manufacturing
equipment. Consequently we experienced declines in both revenue and bookings in
the second fiscal quarter compared to the prior quarter.
Despite the market fluctuations, our financial position has remained
strong and we continue to have no long-term debt. In response to the downturn in
the semiconductor industry, we have implemented initiatives to reduce costs and
control spending. However, we continued our new product development by investing
in leading edge technologies and by strategic acquisitions and alliances. These
investments, acquisitions and alliances should position our extensive product
line to address the critical initiatives that are key to our customers.
Effective July 1, 2000 KLA-Tencor changed its revenue recognition
policy, based on guidance provided in SEC Staff Accounting Bulletin No. 101
("SAB 101"). KLA-Tencor changed its method of accounting for system sales to
generally recognize revenue upon a positive affirmation by the customer
13
that the system has been installed and is operating according to pre-determined
specifications. The deferred profit balance at of December 31, 2001 was $292
million which included deferred revenue of $444 million and deferred product and
warranty costs of $152 million. The deferred profit balance decreased from $422
million at June 30, 2001 primarily due to lower shipments than acceptances.
Revenues decreased $97 million, or 19% to $404 million, in the
three-month period ended December 31, 2001 from $501 million in the same period
of the prior fiscal year. The revenue decline was primarily the result of
reduced capital spending by our customers as a result of the continuing
semiconductor industry downturn. Revenues increased $23 million, or 3% to $907
million, in the six-month period ended December 31, 2001 from $884 million for
the same period of the prior fiscal year. This increase primarily resulted from
improved customer acceptance although shipments declined approximately 37%
versus the same period of the prior fiscal year. International revenues
increased to 75% of revenues, in the three-month period ended December 31, 2001
from 69% in the same period of the prior fiscal year, due to higher revenues in
Japan and Europe partially offset by lower revenues in Korea. International
revenues increased to 74% of revenues, in the six-month period ended December
31, 2001 from 71% in the same period of the prior fiscal year, due to higher
revenues in Japan, Europe and Korea partially offset by lower revenues in other
parts of the Asia Pacific region. In the three- and six-month periods ended
December 31, 2001 and 2000, no single customer accounted for more than 10
percent of our revenues.
Gross margins as a percentage of revenues were 50% and 51% for the
three- and six-month periods ended December 31, 2001, compared to 57% and 55%
for the same periods in the prior fiscal year. Gross margins decreased primarily
due to unfavorable overhead absorption in our system gross margin as production
volume decreased, and reserves for potential excess inventory due to the 200mm
to 300mm transition and other new product introductions. Higher warranty and
installation costs also contributed due to higher complexity and lower
utilization of recently introduced products. We continue to focus on the
productivity and efficiency of our manufacturing and service operations as we
ramp our new products in the face of lower overall volumes due to the industry
downturn.
Engineering, research and development ("R&D") expenses were $74 million
and $147 million for the three- and six-month periods ended December 31, 2001,
compared to $96 million and $177 million for the same periods in the prior
fiscal year. As a percentage of revenues, R&D expenses were 18% and 16% for the
three- and six-month periods ended December 31, 2001, compared to 19% and 20%
for the same periods in the prior fiscal year. The decrease in R&D expenses was
primarily attributable to temporary shutdowns, management paycuts, reductions in
temporary labor and discretionary spending as well as other cost saving measures
implemented over the last several quarters, and a lower level of non-recurring
engineering expenses due to products reaching the Beta stage (initial customer
installations). Our investment in R&D represents a continued commitment to
product development in new and emerging market segments and enhancements to
existing products for 0.18 micron and lower, copper development and 300mm
wafers.
Selling, general and administrative expenses were $72 million and $153
million for the three- and six-month periods ended December 31, 2001, compared
to $95 million and $185 million for the same periods in the prior fiscal year.
As a percentage of revenues, selling, general and administrative expenses were
18% and 17% for the three- and six-month periods ended December 31, 2001,
compared to 19% and 21% for the same periods in the prior fiscal year. The
decrease was primarily due to temporary shutdowns, management paycuts,
reductions in temporary labor and discretionary spending as well as other cost
saving measures implemented over the last several quarters in response to the
industry slowdown.
In the fourth quarter of fiscal 2001 we entered into a restructuring
plan to address the downturn in the semiconductor industry. The plan included
consolidation of facilities, writedown of assets associated with affected
programs and a reduction in our global workforce, resulting in a restructuring
14
charge of $8 million. As of December 30, 2001, the remaining balance of the
restructuring reserve was $1 million.
Interest income and other, net, was $10 million and $23 million for the
three- and six-month periods ended December 31, 2001, compared to $14 million
and $26 million in the same periods in the prior fiscal year. The decrease was
due primarily to decreased interest income resulting from declining interest
rates.
During the three- and six-month periods ended December 31, 2001, we
realized an effective 26% tax rate. This is lower than the effective 28% tax
rate realized in the same periods of the prior fiscal year due primarily to the
greater relative benefits expected to be realized from tax exempt interest and
from benefits related to sales and operations overseas.
LIQUIDITY AND CAPITAL RESOURCES
During the six-month period ended December 31, 2001, cash, cash
equivalents, short-term investments and marketable securities balances decreased
to $1.07 billion from $1.14 billion at June 30, 2001. Net cash provided by
operating activities for the six-month period ended December 31, 2001 was $55
million, compared to $45 million for the same period of the prior fiscal year.
The increase primarily resulted from success in lowering accounts receivable and
inventory offset by lower deferred profit. Accounts receivable declined
primarily due to lower shipment. Reduction in inventory was driven primarily in
production inventory, despite increased service inventory levels to support
newer products now being installed in our customers' facilities. Deferred profit
decreased primarily due to lower shipments than acceptances. Net cash used in
investing activities for the six-month period ended December 31, 2001 was $202
million, compared to $110 million for the same period of the prior fiscal year
primarily from increased net purchases of marketable securities. Net cash used
in financing activities for the six-month period ended December 31, 2001 was $77
million, compared to $118 million for the same period of the prior fiscal year,
due primarily to lower stock repurchases. We received $34 million from sales of
common stock issued through our employee stock purchase program and through
stock option exercises during the six-month period ended December 31, 2001, and
we paid $111 million for the repurchase of our common stock under our stock
repurchase program during the same period.
Working capital was $866 million as of December 31, 2001, compared to
$913 million at June 30, 2001. We believe that existing liquid capital resources
and funds generated from operations combined with our ability, if necessary, to
borrow funds will be adequate to meet our operating and capital requirements
through the foreseeable future. However, we can give no assurances that we will
continue to generate sufficient funds from operations or that we will be able to
borrow funds on reasonable terms in the future, if necessary.
FACTORS AFFECTING RESULTS, INCLUDING RISKS AND UNCERTAINTIES
Fluctuations in Operating Results and Stock Price
Our operating results have varied widely in the past and our future
operating results will continue to be subject to quarterly variations based upon
a wide variety of factors including those listed in this section and throughout
this Quarterly Report on Form 10-Q for the period ending December 31, 2001. In
addition, future operating results may not follow any past trends. The factors
we believe make our results fluctuate and difficult to predict include:
- the cyclical nature of the semiconductor industry;
- the fluctuating demand for semiconductors impacts the need for our
customers to order our products;
15
- the change in the price and the profitability of our products;
- our timing of new product introductions;
- our ability to develop and implement new technologies;
- the change in customers' schedules for fulfillment of orders;
- the cancellation of contracts by major customers;
- the shortage of qualified workers in the areas we operate; and
- our ability to manage our manufacturing requirements.
Operating results also could be affected by sudden changes in customer
requirements, currency exchange rate fluctuations and other economic conditions
affecting customer demand and the cost of operations in one or more of the
global markets in which we do business. As a result of these or other factors,
we could fail to achieve our expectations as to future revenues, gross profit
and income from operations. Our failure to meet the performance expectations set
and published by external sources could result in a sudden and significant drop
in the price of our stock, particularly on a short-term basis, and could
negatively affect the value of any investment in our stock.
Semiconductor Equipment Industry Volatility
The semiconductor equipment industry is highly cyclical. The purchasing
decisions of our customers are highly dependent on the economies of both the
local markets in which they are located and the semiconductor industry
worldwide. The timing, length and severity of the up-and-down cycles in the
semiconductor equipment industry are difficult to predict. This cyclical nature
of the industry in which we operate affects our ability to accurately predict
future revenues and, thus, future expense levels. When cyclical fluctuations
result in lower than expected revenue levels, operating results may be adversely
affected and cost reduction measures may be necessary in order for us to remain
competitive and financially sound. During a down cycle, we must be in a position
to adjust our cost and expense structure to prevailing market conditions and to
continue to motivate and retain our key employees. In addition, during periods
of rapid growth, we must be able to increase manufacturing capacity and
personnel to meet customer demand. We can provide no assurance that these
objectives can be met in a timely manner in response to industry cycles. If we
fail to respond to industry cycles, our business could be seriously harmed.
Currently we are in a significant industry down cycle. We are not able
to predict when the semiconductor industry will recover. During a down cycle,
the semiconductor industry typically experiences excess production capacity that
causes semiconductor manufacturers to decrease capital spending. We generally do
not have long-term volume production contracts with our customers, and we do not
control the timing or volume of orders placed by our customers. Whether and to
what extent our customers place orders for any specific products, as well as the
mix and quantities of products included in those orders, are factors beyond our
control. Insufficient orders, especially in our down cycles, will result in
under-utilization of our manufacturing facilities and infrastructure and will
negatively affect our operating results and financial condition.
International Trade and Economic Conditions
Ours is an increasingly global market. A majority of our annual
revenues are derived from outside the United States, and we expect that
international revenues will continue to represent a substantial percentage of
our revenues. Our international revenues and operations are affected by economic
conditions specific to each country and region. Because of our significant
dependence on international revenues, a decline in the economies of any of the
countries or regions in which we do business could negatively affect our
operating results.
16
Managing global operations and sites located throughout the world
presents challenges associated with, among other things, cultural diversity and
organizational alignment. Moreover, each region in the global semiconductor
equipment market exhibits unique characteristics that can cause capital
equipment investment patterns to vary significantly from period to period.
Periodic local or international economic downturns, trade balance issues,
political instability and fluctuations in interest and currency exchange rates
could negatively affect our business and results of operations. Although we
attempt to manage near-term currency risks through the use of hedging
instruments, there can be no assurance that such efforts will be adequate.
Competition
Our industry includes large manufacturers with substantial resources to
support customers worldwide. Our future performance depends, in part, upon our
ability to continue to compete successfully worldwide. Some of our competitors
are diversified companies with greater financial resources and more extensive
research, engineering, manufacturing, marketing and customer service and support
capabilities than we can provide. We face competition from companies whose
strategy is to provide a broad array of products and services, some of which
compete with the products and services that we offer. These competitors may
bundle their products in a manner that may discourage customers from purchasing
our products. In addition, we face competition from smaller emerging
semiconductor equipment companies whose strategy is to provide a portion of the
products and services which we offer, using innovative technology to sell
products into specialized markets. Loss of competitive position could negatively
impact our prices, customer orders, revenues, gross margins, and market share,
any of which would negatively affect our operating results and financial
condition. Our failure to compete successfully with these other companies would
seriously harm our business.
Technological Change and Customer Requirements
Success in the semiconductor equipment industry depends, in part, on
continual improvement of existing technologies and rapid innovation of new
solutions. For example, the semiconductor industry continues to shrink the size
of semiconductor devices and has begun to commercialize the process of
copper-based interconnects. These and other evolving customer needs require us
to respond with continued development programs and to cut back or discontinue
older programs, which may no longer have industry-wide support. Technical
innovations are inherently complex and require long development cycles and
appropriate professional staffing. Our competitive advantage and future business
success depend on our ability to accurately predict evolving industry standards,
to develop and introduce new products which successfully address changing
customer needs, to win market acceptance of these new products and to
manufacture these new products in a timely and cost-effective manner. If we do
not develop and introduce new products and technologies in a timely manner in
response to changing market conditions or customer requirements, our business
could be seriously harmed.
In this environment, we must continue to make significant investments
in research and development in order to enhance the performance and
functionality of our products, to keep pace with competitive products and to
satisfy customer demands for improved performance, features and functionality.
There can be no assurance that revenues from future products or product
enhancements will be sufficient to recover the development costs associated with
such products or enhancements or that we will be able to secure the financial
resources necessary to fund future development. Substantial research and
development costs typically are incurred before we confirm the technical
feasibility and commercial viability of a product, and not all development
activities result in commercially viable products. In addition, we cannot ensure
that these products or enhancements will receive market acceptance or that we
will be able to sell these products at prices that are favorable to us. Our
business
17
will be seriously harmed if we are unable to sell our products at favorable
prices or if our products are not accepted by the market in which we operate.
Key Suppliers
We use a wide range of materials in the production of our products,
including custom electronic and mechanical components, and we use numerous
suppliers to supply materials. We generally do not have guaranteed supply
arrangements with our suppliers. Because of the variability and uniqueness of
customers' orders, we do not maintain an extensive inventory of materials for
manufacturing. We seek to minimize the risk of production and service
interruptions and/or shortages of key parts by selecting and qualifying
alternative suppliers for key parts, monitoring the financial stability of key
suppliers and maintaining appropriate inventories of key parts. Although we make
reasonable efforts to ensure that parts are available from multiple suppliers,
key parts may be available only from a single supplier or a limited group of
suppliers. There can be no assurance that our business will not be harmed if we
do not receive sufficient parts to meet our production requirements in a timely
and cost-effective manner.
Manufacturing Disruption
Operations at our primary manufacturing facilities and our assembly
subcontractors are subject to disruption for a variety of reasons, including
work stoppages, fire, earthquake, flooding or other natural disasters. In
addition, this year, California suffered from a severe energy shortage, causing
rolling blackouts through the state. Such disruption could cause delays in
shipments of products to our customers. We cannot ensure that alternate
production capacity would be available if a major disruption were to occur or
that, if it were available, it could be obtained on favorable terms. Such a
disruption could result in cancellation of orders or loss of customers and could
seriously harm our business.
Intellectual Property Obsolescence and Infringement
Our success is dependent in part on our technology and other
proprietary rights. We own various United States and international patents and
have additional pending patent applications relating to some of our products and
technologies. The process of seeking patent protection is lengthy and expensive,
and we cannot be certain that pending or future applications will actually
result in issued patents or that issued patents will be of sufficient scope or
strength to provide meaningful protection or commercial advantage to us. Other
companies and individuals, including our larger competitors, may develop
technologies that are similar or superior to our technology or may design around
the patents we own.
We also maintain trademarks on certain of our products and services and
claim copyright protection for certain proprietary software and documentation.
However, we can give no assurance that our trademarks and copyrights will be
upheld or successfully deter infringement by third parties.
While patent, copyright and trademark protection for our intellectual
property is important, we believe our future success in highly dynamic markets
is most dependent upon the technical competence and creative skills of our
personnel. We attempt to protect our trade secrets and other proprietary
information through agreements with our customers, suppliers, employees and
consultants and through other security measures. We also rely on trade secret
protection for our technology, in part through confidentiality agreements with
our employees, consultants and third parties. We also maintain exclusive and
non-exclusive licenses with third parties for strategic technology used in
certain products. However, these employees, consultants and third parties may
breach these agreements, and we may not have adequate remedies for wrongdoing.
In addition, the laws of certain territories in which we develop, manufacture or
sell our products may not protect our intellectual property rights to the same
extent, as do the laws of the United States.
18
As is typical in the semiconductor equipment industry, from time to
time we have received communications from other parties asserting the existence
of patent rights, copyrights, trademark rights or other intellectual property
rights which they believe cover certain of our products, processes, technologies
or information. Our customary practice is to evaluate such assertions and to
consider whether to seek licenses where appropriate. However, we cannot ensure
that licenses can be obtained or, if obtained, will be on acceptable terms or
that litigation or other administrative proceedings will not occur. The
inability to obtain necessary licenses or other rights on reasonable terms could
seriously harm our operating results and financial condition.
Key Employees
Our employees are vital to our success, and our key management,
engineering and other employees are difficult to replace. We generally do not
have employment contracts with our key employees. Further, we do not maintain
key person life insurance on any of our employees. The expansion of high
technology companies worldwide has increased demand and competition for
qualified personnel. We may not be able to attract, assimilate or retain
additional highly qualified employees in the future. These factors could
seriously harm our business.
Acquisitions
We seek to develop new technologies from both internal and external
sources. As part of this effort, we may make acquisitions of, or significant
investments in, businesses with complementary products, services and/or
technologies. Acquisitions involve numerous risks, including management issues
and costs in connection with the integration of the operations and personnel,
technologies and products of the acquired companies, the possible write-downs of
impaired assets, and the potential loss of key employees of the acquired
companies. The inability to manage these risks effectively could seriously harm
our business.
Litigation
From time to time we are involved in litigation of various types,
including litigation that alleges infringement of intellectual property rights
and other claims. Litigation tends to be expensive and requires significant
management time and attention. If we lose in a dispute concerning intellectual
property, a court could require us to pay substantial damages and/or royalties
or could issue an injunction prohibiting us from using essential technologies.
For these and other reasons, this type of litigation could have a material
adverse effect on our business, financial condition and results of operations.
Also, although we may seek to obtain a license under a third party's
intellectual property rights in order to bring an end to certain claims or
actions asserted against us, we may not be able to obtain such a license on
reasonable terms or at all.
Terrorism
The threat of terrorism targeted at the regions of the world in which
we do business, including the United States increase the uncertainty in our
markets, could result in significant losses and may delay any recovery in the
market. It is too early to determine the direct or indirect impacts of the
events of September 11, 2001 or other terrorist acts on our business.
19
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations,"
which is effective for fiscal years beginning after June 15, 2002. SFAS 143
applies to all entities and addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and/or the normal operation of a long-lived asset,
except for certain obligations of lessees. We do not expect the adoption of SFAS
143 will have a significant impact on our financial position and results of
operations.
In October 2001, the FASB issued Statement No. 144 ("SFAS 144),
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed. SFAS 144 will be effective for
fiscal years beginning after December 15, 2001. We are currently evaluating the
impact of SFAS 144, but do not expect that our adoption on July 1, 2002 will
have a material effect on our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest
rates, foreign currency exchange rates and marketable equity security prices. To
mitigate these risks, we utilize derivative financial instruments. We do not use
derivative financial instruments for speculative or trading purposes. All of the
potential changes noted below are based on sensitivity analyses performed on our
financial position at June 30, 2001 and at December 31, 2001. Actual results may
differ materially.
As of June 30, 2001 and December 31, 2001, we had an investment
portfolio of fixed income securities of $575 million and $738 million,
respectively, excluding those classified as cash and cash equivalents. These
securities, as with all fixed income instruments, are subject to interest rate
risk and will fall in value if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 10% from levels as
of June 30, 2001 and December 31, 2001, the fair value of each portfolio would
decline by $5 million.
As of June 30, 2001 and December 31, 2001, we had net forward contracts
to sell U.S. dollar equivalent $159 million and $171 million, respectively, in
foreign currency in order to hedge our currency exposures. If we had entered
into these contracts on June 30, 2001 and December 31, 2001, the U.S. dollar
equivalent would be $151 million and $160 million, respectively. The fair market
value we would have received if we had sold the contracts on June 30, 2001 and
December 31, 2001, would have been $8 million and $11 million, respectively. A
10% adverse move in currency exchange rates affecting the contracts from their
June 30, 2001 and December 31, 2001 levels would decrease the fair value of the
contracts by $19 million. However, if this occurred, the fair value of the
underlying exposures hedged by the contracts would increase by a similar amount.
Accordingly, we believe that the hedging of our foreign currency exposure should
have no material impact to income or cash flows.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A discussion regarding certain pending legal proceedings is included in
Part I, Item 3, "Legal Proceedings," included in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2001. Since the fiscal year ended June 30,
2001, certain material developments have occurred with respect to the legal
proceedings described in our Annual Report and we have been named as a party in
certain additional matters as follows:
ADE Corporation
On October 11, 2000, ADE Corporation ("ADE"), a competitor, filed a
patent infringement lawsuit against KLA-Tencor in the U.S. District Court in
Delaware. ADE claimed damages and sought an injunction under U.S. Patent No.
6,118,525. We filed a counterclaim in the same court alleging that ADE has
infringed four of our patents. We claimed damages and are seeking a permanent
injunction against ADE. In addition, we are seeking a declaration from the
District Court that ADE's patent is invalid and not infringed by KLA-Tencor. On
October 22, 2001, we filed a separate action for declaratory judgment against
ADE in the Northern District of California. ADE has moved to consolidate the
California case with the Delaware case. While we cannot predict the outcome, we
believe that we have valid defenses and further believe that our counterclaims
have merit.
Schlumberger, Inc. and Rigg Systems, Inc.
On August 30, 1999, we were named as a defendant in a lawsuit filed in
the U.S. District Court in the Northern District of California in which
Schlumberger, Inc. alleges trade secret misappropriation, unfair competition and
trade slander. On July 21, 2000, the court granted our motion for summary
judgment dismissing the case. Schlumberger subsequently filed a motion for
reconsideration of that dismissal and its request for reconsideration was
denied. Schlumberger has now appealed. Although the outcome of these claims
cannot be predicted with certainty, we do not believe that this legal matter
will have a material adverse effect on our financial condition even if the
plaintiff prevails. On January 26, 2000, we filed a complaint against Philip
Rigg, RIGG Systems and Schlumberger for misappropriation of trade secrets,
breach of contract, breach of fiduciary duty, interference with contract, and
unfair competition. The defendants filed cross-complaints on June 5, 2000
asserting various statutory and common law theories.
Although we cannot predict the outcome of these claims, management does
not believe that any of these legal matters will have a material adverse effect
on KLA-Tencor. Were an unfavorable ruling to occur in one or more of the pending
claims, there exists the possibility of a material impact on our operating
results for the period in which the ruling occurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of KLA-Tencor Corporation was held
on November 9, 2001 at the Company's offices in Milpitas, California. Of the
188,175,083 shares of Common Stock outstanding as of September 14, 2001 (the
record date), 163,286,263 shares (87%) were present or represented by proxy at
the meeting.
21
1. The table below presents the results of the election to the Company's board
of directors.
Votes
Votes for Withheld
----------- ----------
Edward W. Barnholt 161,669,814 1,616,449
Dean O. Morton 161,846,182 1,440,081
Kenneth L. Schroeder 131,156,000 32,130,263
The terms of Kenneth Levy, H. Raymond Bingham, Robert T. Bond, Richard J. Elkus,
Jr., Jon D. Tompkins and Lida Urbanek, as directors of the Company, continued
after the meeting.
2. The stockholders ratified the appointment of PricewaterhouseCoopers LLP as
the Company's independent accountants for the fiscal year ended June 30, 2002.
This proposal received 153,547,754 votes for and 4,654,805 votes against.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Form 8-K
None
22
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)
February 13, 2002 /s/ JOHN H. KISPERT
- ----------------- ---------------------------------------
(Date) John H. Kispert
Executive Vice President
and Chief Financial Officer
23