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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1999
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 NO. 0-9992
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KLA-TENCOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 04-2564110
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
160 RIO ROBLES, SAN JOSE, CALIFORNIA 95134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 875-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
COMMON STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based upon the closing price of the registrant's stock, as of
September 20, 1999, was $4,792,940,686. Shares of common stock held by each
officer and director and by each person or group who owns 5% or more of the
outstanding common stock have been excluded in that such persons or groups may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The registrant had 89,556,350 shares of Common Stock outstanding as of
September 20, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
June 30, 1999 ("1999 Annual Report to Stockholders") are incorporated by
reference into Parts I, II and IV of this Report. Portions of the Proxy
Statement for the Annual Meeting of Stockholders ("Proxy Statement") to be held
on November 16, 1999, and to be filed pursuant to Regulation 14A within 120 days
after registrant's fiscal year ended June 30, 1999, are incorporated by
reference into Part III of this Report.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the of Securities Exchange
Act of 1934. Actual results could differ materially from those projected in the
forward-looking statements because of a number of factors, risks and
uncertainties, including the risk factors described in this discussion and
elsewhere in this report. Generally, the words "anticipate", "expect", "intend",
"believe" and similar expressions identify forward-looking statements. The
information included in this report is as of the filing date with the Securities
and Exchange Commission and future events or circumstances could differ
significantly from the forward-looking statements included here.
THE COMPANY
KLA Instruments Corporation ("KLA") was incorporated in Delaware in July 1975.
Effective April 30, 1997, Tencor Instruments ("Tencor") merged into a
wholly-owned subsidiary of KLA. Immediately following this merger, KLA changed
its name to KLA-Tencor Corporation and the headquarters of the combined company
remained at 160 Rio Robles, San Jose, California. The merger of KLA and Tencor
brought together two companies that, through largely complementary product
lines, provide customers with yield management solutions and products
facilitating the monitoring of the entire semiconductor manufacturing process.
PRODUCTS
Our principal market is the semiconductor industry, in which profitability is
largely determined by a manufacturer's ability to quickly attain and efficiently
maintain high yields from the manufacturing process. The importance of high
yields is magnified as wafer sizes increase and process geometries decrease.
Building an integrated circuit (known colloquially as "chip") is accomplished by
the deposition on a substrate of silicon, called a "wafer", of a series of film
layers that act as conductors, semiconductors or insulators. Most chips are
built on a wafer and consist of two main structures: the lower structure,
typically consisting of transistors or capacitors, performs the "smart"
functions of the chip, and the upper structure, typically consisting of the
circuitry that connects the components in the lower structure, called the
"interconnect material." Many advanced chip designs require well over 300
individual steps and many of these processes are performed multiple times.
Today, manufacturers of advanced integrated circuits require systems capable of
measurements smaller than 0.25 micron (approximately 1/300 the thickness of a
human hair). At the same time, advanced manufacturing facilities are producing
integrated circuits on silicon wafers measuring 300 millimeters (12 inches) in
diameter. This increase in the complexity of the sub-micron semiconductor
manufacturing process coupled with the recently begun transition from aluminum
to copper as the primary interconnect material in integrated circuits has caused
dramatic growth in the demand for
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increasingly precise process monitors. The continuing evolution of semiconductor
devices to smaller line width geometries and more complex multi-level circuitry
has significantly increased the cost and performance requirements of the capital
equipment used to manufacture these devices. Construction of an advanced wafer
fabrication facility can cost over $1 billion, a substantial increase over the
cost of prior-generation facilities. As a result, there has been an increasing
focus by the semiconductor industry on obtaining increased productivity and
higher returns from manufacturing equipment, thereby reducing the effective cost
of ownership of such equipment. Total yield management solutions play a more
significant role in the semiconductor manufacturing process than in the past.
Because our yield management and process monitoring equipment typically
represent only a small percentage of the total investment required to build and
equip a fabrication facility, our customers are able to better leverage these
increasingly expensive facilities and thereby improve their returns on
investment.
We are the leader in the design, manufacture, marketing and service of yield
management and process monitoring systems for the semiconductor industry. With
our portfolio of applications-focused technologies and our dedicated yield
consulting expertise, we are in a unique position to be the single source for
comprehensive yield management solutions. Our technical expertise and
understanding of customer needs enable us to provide unique yield management
solutions and one of the broadest lines of wafer inspection, thin film
measurement, metrology and reticle inspection systems available in the
semiconductor industry. Our systems are used to analyze product and process
quality at critical points in the integrated circuits manufacturing process and
provide feedback to our customers so that fabrication problems can be
identified, addressed and contained. This ability to locate defect sources and
contain them enables semiconductor manufacturers to increase yields, thus
lowering manufacturing costs.
We market and sell products worldwide to all major integrated circuit
manufacturers and semiconductor wafer manufacturers. Our revenues are derived
primarily through product sales, principally through our direct sales force and,
to a lesser extent, through distributors. Our product line consists of equipment
capable of performing the yield management and process monitoring functions in
the chip manufacturing process, including wafer inspection, electron-beam
inspection and metrology, reticle inspection, film measurement and surface
metrology.
Yield Management
Maximizing yields is a key goal of modern semiconductor manufacturing because
higher yields increase the revenue a manufacturer can obtain from each
semiconductor wafer. As geometry line-widths decrease, yields become more
sensitive to the size and density of defects. Semiconductor manufacturers use
yield management and process monitoring systems to improve yields by identifying
defects and analyzing them to determine process problems. After corrective
action has been taken, subsequent results can be monitored to ensure that the
defect has been contained. This monitoring and analysis takes place at various
points in the fabrication process as wafers move through a production cycle
consisting of hundreds of separate process steps.
The following are some of the methods used to manage yields, all of which
require the capture and analysis of data gathered through many measurements:
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- - Engineering analysis: This method is performed off of the manufacturing line
to identify and analyze defect sources. Engineering analysis equipment
operates with very high sensitivity to enable comprehensive analysis of
wafers. Because they operate off-line, engineering analysis systems do not
require high operational speeds.
- - In-line monitoring: This method is used to review the status of integrated
circuits during production. Information generated is used to determine whether
the fabrication process steps are within required tolerances and to make any
necessary real-time process adjustments before wafer lots move to subsequent
process stations. Because the information is needed quickly to be of greatest
value, in-line monitoring requires both high throughput and high sensitivity.
- - Pass/fail tests: This method may be used at several different points in the
manufacturing process to evaluate products. For example, a pass/fail test is
used to determine whether reticles used in photolithography are defect-free.
Similarly, electrical pass/fail testing is performed at the end of the
manufacturing process to determine whether products meet performance
specifications.
The most significant opportunities for yield improvement generally occur when
production is started at new factories and when chips and wafers are first
built. Equipment that helps a manufacturer quickly increase new product yields
enables the manufacturer to offer these new products in high volumes early in
the product life cycle--the time when they are likely to generate the greatest
profits. High yielding fabrication lines are continually subject to process
variations and errors which may cause significant yield losses unless these
variations or errors are detected quickly. Equipment that helps a manufacturer
prevent these yield excursions will allow the manufacturer to maintain higher
revenue and profit from the facility.
Wafer Inspection
We pioneered the market for automated defect inspection of semiconductor wafers
over a decade ago. Our wafer inspection tools are used to find, count and
characterize particles and pattern defects on wafers in off-line engineering
applications and in-line at various stages during the semiconductor and wafer
manufacturing processes. Semiconductor manufacturers base their purchase of
wafer inspection systems on a variety of criteria, including sensitivity,
capture rate, throughput, total cost of ownership, ease of use, degree of
automation, system repeatability and correlation and the ability of the system
to be integrated into overall yield management systems. Wafer defect detection
systems inspect wafers as they move between processing steps and detect
sub-micron defects and contaminants on bare silicon and on rough films.
In 1992 we introduced the 21xx Inspection Systems, which provided the
sensitivity required not only for microprocessors and other logic devices but
also for the logic and repeating array portions of memory devices. Each new
model of the 21xx series has provided greater sensitivity and throughput than
its predecessor. In 1997, we introduced the model 2138, a new patterned wafer
inspection system combining an ultra-broadband illumination source and
significantly improved brightfield optics. In 1999, we introduced the model 2139
which extended the capability of the 21xx product line to 0.18 micron processes
and implemented additional sensitivity and ease-of-use enhancements.
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In 1995 we introduced the AIT Inspection System, a platform designed with high
throughput and low cost-of-ownership for fast and accurate feedback on process
tool performance as well as advanced line monitoring for films, CMP,
non-critical etch and photo modules. The AIT uses darkfield technology which is
a low-angle illumination technique particularly effective for detecting defects
on planar surfaces such as post-CMP wafers. In 1998, the AIT II expanded on the
capability of the AIT by increasing sensitivity and throughput.
Scanning Electron Microscopes (SEMs) use an electron beam to image and measure
surface features on a semiconductor wafer at a much higher resolution than
images captured by optical microscopes. Working closely with customers who
require the most advanced inspection systems, we developed the SEMSpec(TM), a
fully automatic electron beam defect inspection system. In 1999, we developed
the eS20, which has performance enhancements compared to the previous generation
of e-beam defect inspection systems.
The SP1(TM), introduced in 1997, is used for bare wafer qualification, process
monitoring and equipment monitoring. It provides the high sensitivity, fast
throughput and low cost of ownership required in a production environment and
is used in virtually all semiconductor manufacturing processes. The SP1 TBI was
introduced in 1998 and was designed with additional optical configurations
needed to detect submicron defects on metal films and rough surfaces while still
providing sensitivity below 0.1 micron on polished silicon. It is also used for
detecting defects on non-uniform films, a critical requirement for CMP
applications.
We offer defect review capability using optical confocal technology as well as
e-beam for higher sensitivity. The CRS optical review tool offers high
throughput and low cost-of-ownership. Our 4300+ Defect Review Tool is an
advanced, automated SEM designed to gather defect excursion information and
analyze and report the results with the improved sensitivity required at smaller
geometries.
We offer analysis and classification systems comprised of hardware and software
to translate raw inspection data into patterns that reveal process problems. Our
software productivity and analysis systems capture, store and analyze data
collected by test equipment to show defect trends and help semiconductor
manufacturers develop long-term yield improvement strategies. In 1997, we
introduced IMPACT(TM) automated defect classification (ADC), enabling
semiconductor manufacturers to utilize software systems both within and between
fabrication facilities to accelerate the ramp to higher process yields. With
IMPACT ADC, semiconductor manufacturers can develop a defect classification
recipe on one system and then export it to any other system or fabrication
facility running identical processes. An important new "run-time classification"
(RTC) capability has been introduced recently on both the AIT II and 2139
products. RTC provides classification and binning of defect types in real time
during inspection, thus providing better organized information in less time and
at a lower cost.
Our Intelligent Line Monitoring solution includes the full line of wafer
inspection systems, as well as the IMPACT/Online ADC, e-beam review (4300+) and
optical review (CRS(TM)/Offline ADC) and
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Klarity(TM) defect data analysis systems. This integrated yield management
approach provides semiconductor device manufacturers with a comprehensive tool
set providing time-to-yield enhancements and accelerated attainment of yield
goals.
Metrology
Critical Dimension (CD) SEMs are used by semiconductor makers to measure the
linewidth feature on a chip, thus assuring the accuracy of the manufacturing
process. Our current E-Beam metrology system, the 8100XP, is used for precision
measurement of high aspect ratio structures in highly automated process control
applications.
Lithography for sub-micron semiconductor fabrication requires increasingly
stringent overlay tolerances. In particular, decreasing linewidths, larger die
sizes and additional layers have made overlay mis-registration errors a crucial
cause of yield loss. To address these challenges, we offer the 5000 series
metrology systems for overlay measurement. The measurement algorithms for the
5000 series are more tolerant of process and substrate reflectivity variations
than other optical systems. Based upon these measurements, users can fine-tune
the stepper program to compensate for these errors and improve process yield. In
1999, we introduced the 5300 overlay system, which has performance enhancements
compared to the previous generation of tools and is designed to handle both 200
millimeter and 300 millimeter wafers.
Reticle Inspection
Reticles are high precision quartz plates that contain images of electronic
circuits. These reticles are used to transfer circuit patterns onto wafers to
fabricate integrated circuits. Error-free reticles are the first step in
ensuring high yields in the manufacturing process because defects in reticles
are replicated on wafers. Reticle inspection systems look for possible defects
that could be transmitted to the design pattern on the wafer. We pioneered the
market for automated inspection of reticles and photomasks for the semiconductor
manufacturing industry over two decades ago and continue to be a market leader.
Our 3XX product family incorporates both a reference database generator and a
data preparation system which give full die-to-database functionality,
permitting inspection against the ideal reticle pattern as specified by the
user's CAD program. We have continued to develop enhancements to the 3XX
inspection system to improve performance, serviceability and reliability. In
1997, we introduced two new reticle and photomask inspection enhancements, the
Advanced Performance Algorithm and the STARlight(TM) High Resolution option.
These enhancements enable highly accurate and reliable inspection of
next-generation sub-0.25 micron reticles, including reticles with complex
optical proximity correction geometries. To satisfy the need for higher
sensitivity, we developed the 353UV Automated Reticle Inspection System which
uses a shorter wavelength to inspect complex reticles for deep UV lithography
applications.
Film Measurement
Our film thickness products measure a variety of optical properties of thin
films, while our resistivity products measure the resistivity of the various
layers used to make integrated circuits. These products are used to control a
wide range of wafer fabrication steps, where within-wafer and wafer-
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to-wafer uniformity of the process is of paramount importance to semiconductor
manufacturers and enables them to achieve high yields at the lowest possible
cost. In 1995,we introduced the UV-1250SE, which brought a powerful new
technology, spectroscopic ellipsometry, to production. We recently introduced
the ASET-F5, our third generation spectroscopic ellipsometer, which addresses
the difficult film measurement needs that come from the continuing evolution of
film development driven by shorter line widths. These new films demand an
increasing capability to characterize and control them in production, a
capability provided by the ASET-F5.
Our Quantox(R) product is a non-contact, electrical performance metrology system
for gate dielectric films. Gate dielectric quality is critical to the speed and
reliability of an integrated circuit. Quantox measures key parameters such as
contamination and oxide thickness used for gate dielectric process control to
help maximize device yield.
Surface Metrology
Our Stylus profilers are used to measure the surface topography of films and
etched surfaces and are used in basic research and development as well as
semiconductor production and quality control. In addition, we produce stress
measurement systems which detect reliability related problems such as film
cracking, voiding and lifting. We recently introduced the high resolution
profiler that combines the capabilities of in-line profilers which measure
erosion and dishing with atomic force microscopes which identify nanoscale etch
process control problems such as plug recess challenges.
"KLA", "Tencor", "Surfscan" and "Quantox" are registered trademarks of
KLA-Tencor Corporation. "KLA-Tencor", "CRS", "IMPACT", "Klarity", "SP1",
"SEMSpec" and "STARlight" are trademarks of KLA-Tencor Corporation.
CUSTOMERS
We sell our systems to all major semiconductor manufacturers. In fiscal 1999,
1998 and 1997, no single customer accounted for more than 10% of our revenues.
INTERNATIONAL REVENUES
We have wholly-owned subsidiaries or branches of U.S. subsidiaries in Japan,
Korea, Taiwan, the United Kingdom, France, Germany, Italy, Israel, Singapore,
China and Malaysia for marketing, sales and service of products. In addition, we
have manufacturing operations in Israel for our optical metrology products.
International sales accounted for approximately 60%, 56% and 65% of our revenues
in fiscal 1999, 1998 and 1997, respectively. For information regarding our
revenues from foreign operations for our last three fiscal years, see Note 8 of
Notes to Consolidated Financial Statements in the 1999 Annual Report to
Stockholders.
We believe that sales outside the U.S. will continue to be a significant
percentage of our revenues. Our future performance will depend, in part, on our
ability to continue to compete successfully in international markets. Our
ability to compete internationally is dependent upon the continuation of
favorable trading relationships between countries (especially Japan and Korea)
and the United States,
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and our continuing ability to maintain satisfactory relationships with leading
semiconductor companies in the region. International sales and operations may be
adversely affected by imposition of governmental controls, restrictions on
export technology, political instability, trade restrictions, changes in tariffs
and difficulties associated with staffing and managing international
operations. In addition, international sales may be adversely affected by the
economic conditions in each country. The revenues from our international
business may be affected by fluctuations in currency exchange rates. Although we
attempt 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 our future business and financial results.
SALES, SERVICE AND MARKETING
We believe that the size and location of our field sales, service and
applications engineering organization represents a competitive advantage in our
served markets. We have direct sales forces throughout the world for
substantially all of our products. We maintain an export compliance program that
is designed to meet the requirements of the U.S. Departments of Commerce and
State.
Our facilities throughout the world employ over 1,800 sales personnel, service
engineers and applications engineers. We maintain sales and service offices
throughout the U.S. and in Japan, Korea, Taiwan, Singapore, China, Malaysia, the
United Kingdom, France, Germany, Italy and Israel.
We do not consider our business to be seasonal in nature, but it is cyclical
with respect to the capital equipment procurement practices of semiconductor
manufacturers and is impacted by the investment patterns of such manufacturers
in different global markets.
RESEARCH AND DEVELOPMENT
The market for yield management and process monitoring systems is characterized
by rapid technological development and product innovation. We believe that
continued and timely development of new products and enhancements to existing
products are necessary to maintain our competitive position. Accordingly, we
devote a significant portion of our human and financial resources to research
and development programs and seek to maintain close relationships with customers
to remain responsive to their needs.
To meet continuing developments in the semiconductor industry, we are committed
to significant engineering efforts toward product improvement and new product
development. New product introductions may contribute to fluctuations in
operating results, since customers may defer ordering existing products. If new
products have reliability or quality problems, those problems may result in
reduced orders, higher manufacturing costs, delays in acceptance of and payment
for new products and additional service and warranty expenses. On occasion, we
have experienced reliability and quality problems in connection with certain
product introductions, resulting in some of these consequences. There can be no
assurance that we will successfully develop and manufacture new hardware and
software products, or that new
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hardware and software products introduced by us will be accepted in the
marketplace. If we do not successfully introduce new products, our business and
results of operations will be harmed. For information regarding our research and
development expense during the last three fiscal years, see Management's
Discussion and Analysis of Results of Operations and Financial Condition in the
1999 Annual Report to Stockholders, filed as Exhibit 13.1 and incorporated by
reference.
MANUFACTURING
Our principal manufacturing activities take place in San Jose and Milpitas,
California, Bedford, Massachusetts and Migdal Ha'Emek, Israel and consist
primarily of manufacturing, assembling and testing components and subassemblies
which are acquired from third party vendors and then integrated into our
finished products. We employ approximately 2,000 manufacturing and engineering
personnel and also cross-train personnel in order to respond to changes in
product mix.
Many of the components and subassemblies are standard products, although certain
items are made to our specifications. Certain of the components and
subassemblies included in our systems are obtained from a single source or a
limited group of suppliers. Those parts subject to single or limited source
supply are routinely monitored by management and we endeavor to ensure that
adequate supplies are available to maintain manufacturing schedules, should the
supply of any part be interrupted. Although we seek to reduce our dependence on
sole and limited source suppliers, in some cases the partial or complete loss of
certain of these sources could disrupt scheduled deliveries to customers and
have a material adverse effect on our business and results of operations and
damage customer relationships.
COMPETITION
The worldwide market for yield management and process control systems is highly
competitive. In each of our product markets, we face competition from
established and potential competitors, some of which may have greater financial,
engineering, manufacturing and marketing resources than us, such as Applied
Materials, Inc. and Hitachi Electronics Engineering Co., Ltd. We expect our
competitors to continue to improve the design and performance of their current
products and processes and to introduce new products and processes with improved
price and performance characteristics. We believe that, to remain competitive,
we will require significant financial resources to offer a broad range of
products, to maintain customer service and support centers worldwide and to
invest in product and process research and development.
Significant competitive factors in the market for yield management and process
control systems include system performance, ease of use, reliability, installed
base and technical service and support. We believe that, while price and
delivery are important competitive factors, the customers' overriding
requirement is for systems which easily and effectively incorporate automated
and highly accurate inspection capabilities into their existing manufacturing
processes, thereby enhancing productivity. Our yield management and process
control systems for the semiconductor industry are generally higher priced than
those of our present competitors and are intended to compete based
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upon performance and technical capabilities. These systems also compete with
less expensive and more labor-intensive manual inspection devices.
PATENTS AND OTHER PROPRIETARY RIGHTS
We protect our proprietary technology through reliance on a variety of
intellectual property laws, including patent, copyright and trade secrets. Due
to the rapid pace of innovation within the yield management and process control
systems industry, we believe that our protection of patent and other
intellectual property rights is less important than factors such as our
technological expertise, continuing development of new systems, market
penetration and the ability to provide comprehensive support and service to
customers. There can be no assurance that we will be able to protect our
technology or that competitors will not be able to independently develop similar
or functionally competitive technology.
We have filed and obtained a number of patents in the U.S. and abroad. From time
to time we acquire license rights under U.S. and foreign patents and other
proprietary rights of third parties. No assurance can be given that patents will
be issued on any of our applications, that license assignments will be made as
anticipated or that our patents, licenses or other proprietary rights will be
sufficiently broad to protect our technology. In addition, no assurance can be
given that any patents issued to or licensed by us will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
us with a competitive advantage.
BACKLOG
Our backlog for systems totaled $449 million at June 30, 1999, compared to $424
million at June 30, 1998. In general, systems ship within six months to a year
after receipt of a customer's purchase order. We expect to fill our June 30,
1999 backlog of orders during fiscal 2000.
EMPLOYEES
As of June 30, 1999, we employed approximately 4,200 persons. None of our
employees are represented by a labor union. We have experienced no work
stoppages and believe that our employee relations are good.
Competition is intense in the recruiting of personnel in the semiconductor and
semiconductor equipment industry. We believe that our future success will depend
in part on our continued ability to hire and retain qualified management,
marketing and technical employees.
ITEM 2. PROPERTIES
Certain information concerning our properties at June 30, 1999 is set forth
below:
<TABLE>
<CAPTION>
LOCATION TYPE PRINCIPAL USE FOOTAGE OWNERSHIP
- --------------------- ------------- -------------------------------- ------- ---------
<S> <C> <C> <C> <C>
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
San Jose, CA Office, plant Corporate Headquarters, Research 271,827 Leased
and warehouse and Engineering, Marketing, 510,036 Owned
Manufacturing, Sales, Service
and Administration
Milpitas, CA Office, plant Research and Engineering, 18,463 Leased
and warehouse Marketing, Manufacturing, Sales, 554,207 Owned
Service and Administration
Scotts Valley, CA Office, plant Research and Development 9,945 Leased
Bedford, MA Office, plant Administration, Manufacturing, 50,000 Owned
Sales and Service
Austin, TX Office Sales and Service, Training 37,074 Leased
Richardson, TX Office Sales and Service, Training 22,507 Leased
Basingstoke and Office, plant Sales and Service, Warehouse 16,475 Leased
Wokingham, England
Grenoble and Evry, Office Sales and Service 8,834 Leased
France
Dresden and Pucheim, Office Sales and Service 14,975 Leased
Germany
Yokohama, Japan Office Sales and Service 56,977 Leased
Seoul, Korea Office Sales and Service 17,558 Leased
Hsinchu, Taiwan Office Sales and Service 14,892 Leased
Migdal Ha'Emek and Office Research and Engineering, 53,800 Leased
Herzliya, Israel Marketing, Manufacturing, Sales,
Service and Administration
</TABLE>
We lease several other facilities under operating leases that expire at various
times through June 30, 2012 with renewal options at the fair market value for
additional periods up to five years. For more information required by this Item,
see Note 7 of Notes to Consolidated Financial Statements in the 1999 Annual
Report to Stockholders, filed as Exhibit 13.1 and incorporated by reference.
ITEM 3. LEGAL PROCEEDINGS
On August 30, 1999, we were named as a defendant in a lawsuit in which the
plaintiff alleges trade secret misappropriation, unfair competition and trade
slander. This lawsuit is in early stages of discovery and no trial date has been
set. 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. Were an unfavorable ruling to occur, there exists the
possibility of a material impact on the net income of the period in which the
ruling occurs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
For the information required by this Item, see Note 10 of Notes to Consolidated
Financial Statements in the 1999 Annual Report to Stockholders, which is filed
herewith as Exhibit 13.1 and incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
For the information required by this Item, see "Financial Highlights" in the
1999 Annual Report to Stockholders, which is filed herewith as Exhibit 13.1 and
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
For the information required by this Item, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition" in the 1999 Annual
Report to Stockholders, which is filed herewith as Exhibit 13.1 and incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the information required by this Item, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition" in the 1999 Annual
Report to Stockholders, which is filed herewith as Exhibit 13.1 and incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For the information required by this Item, see the Consolidated Financial
Statements and Notes thereto in the 1999 Annual Report to Stockholders, which is
filed herewith as Exhibit 13.1 and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names of the directors and executive officers of
KLA-Tencor as of August 31, 1999, their ages and positions held. For additional
information required by Item 405 of Regulation S-K of the Securities Act of
1933, as amended, see "Directors and Executive Officers" in the Proxy Statement,
which is incorporated by reference.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kenneth Levy 56 Chairman of the Board and Director
Kenneth L. Schroeder 53 President, Chief Executive Officer and Director
Gary E. Dickerson 42 Chief Operating Officer
Robert J. Boehlke 58 Executive Vice President and Chief Financial Officer
Dennis J. Fortino 53 Group Vice President, Reticle and Surfscan Group
Edward C. Grady 52 Executive Vice President, Wafer Inspection Group
Samuel A. Harrell 59 Senior Vice President, Strategic Business Development
John H. Kispert 35 Vice President, Finance and Accounting
Neil Richardson 44 Executive Vice President, E-Beam Inspection and Metrology Group
Arthur P. Schnitzer 56 Executive Vice President, Customer Group
Richard P. Wallace 39 Group Vice President, Lithography and Films Group
James W. Bagley 60 Director
Edward W. Barnholt 56 Director
Leo J. Chamberlain 69 Director
Richard J. Elkus, Jr. 64 Director
Dean O. Morton 67 Director
Samuel Rubinovitz 69 Director
Dag Tellefsen 57 Director
Jon D. Tompkins 59 Director
Lida Urbanek 56 Director
</TABLE>
Kenneth Levy is a co-founder of KLA-Tencor and since July 1, 1999 has
been Chairman of the Board and a Director. From July 1, 1998 until June 30,
1999, he was the Chief Executive Officer and a Director. From April 30, 1997
until June 30, 1998 he was Chairman of the Board and a Director. From 1975 until
April 30, 1997 he was Chairman of the Board, Chief Executive Officer and a
Director. He currently serves on the boards of directors of Ultratech Stepper,
Inc., SpeedFam-IPEC, Inc. and is a Director Emeritus of SEMI, an industry trade
association.
Kenneth L. Schroeder has been President, Chief Executive Officer and a
Director of KLA-Tencor since July 1, 1999. From November 1991 until June 30,
1999, he was President, Chief Operating Officer and a Director. Mr. Schroeder
has been with the Company for 16 years and
-12-
<PAGE> 14
has held a variety of senior management positions. He currently serves on the
board of directors of GaSonics International and SEMI.
Gary E. Dickerson has been Chief Operating Officer since July 1, 1999.
From July 1997 until June 30, 1999, he was Executive Vice President of the
Customer Group. In January 1996, he was promoted to Group Vice President for the
Wafer Inspection Group. In July 1994 he became the General Manager of the WISARD
Division. Mr. Dickerson joined KLA-Tencor in 1986 and held a series of
management positions.
Robert J. Boehlke has been Executive Vice President and Chief Financial
Officer since April 1997. Mr. Boehlke joined KLA-Tencor in April 1983 as Vice
President and General Manager of the RAPID Division. During the next 7 years he
became Senior Vice President and then Executive Vice President in charge of
several operating divisions including RAPID, WISARD and ATS. He was Chief
Operating Officer from August 1989 until July 1990, when he became Chief
Financial Officer. He currently serves on the board of directors of LTX
Corporation and Entegris Corporation.
Dennis J. Fortino has been Group Vice president of the Reticle and
Surfscan Group since July 1999. From November 1995 to June 1999 he served as
Vice President and General Manager of the Surface Metrology and Surfscan
Divisions. Mr. Fortino served as Vice President and General Manager for
Spectra-Physics Lasers from July 1991 to November 1995.
Edward C. Grady has been Executive Vice President of the Wafer
Inspection Group since July 1999. From August 1998 to July 1999, he was
Executive Vice President of the Precision Measurement Group. From March 1996
until August 1998 he was Vice President and General Management of the RAPID
Division. He held the position of Vice President of Marketing from July 1995
until March 1996. Prior to July 1995, Mr. Grady served as President and CEO of
Hoya MicroMask. He currently serves on the board of directors of Informed
Diagnostics, Inc.
Dr. Samuel A. Harrell joined KLA-Tencor in September 1995 as Senior Vice
President of Strategic Business Development. Dr. Harrell served from October
1992 to December 1995 as the Senior Vice President and Chief Strategy Officer of
SEMATECH. From August 1987 to September 1992, he served as President of
SEMI/SEMATECH.
John H. Kispert has been Vice President of Finance and Accounting since
July 1999. From February 1998 to July 1999 he was Vice President of Operations
for the Wafer Inspection Group. From August 1997 to February 1998 he was
Director of Operations. Mr. Kispert joined KLA-Tencor in February 1995 and has
held a series of other management positions. Prior to KLA-Tencor, Mr. Kispert
was with IBM for 6 years.
Dr. Neil Richardson has been Executive Vice President of the E-Beam
Inspection and Metrology Group since May 1998. He was Executive Vice President
of the Metrology Group from February 1997 to April 1998. He joined KLA-Tencor in
June 1993 as Vice President and General Manager of the Metrology Division.
-13-
<PAGE> 15
Arthur P. Schnitzer has been Executive Vice President of the Customer
Group since November 1998. From June 1997 to October 1998 he was Executive Vice
President, Human Resources. From July 1993 to June 1997 he was Group Vice
President responsible for RAPID , SEMSpec, Prism and manufacturing for WISARD
and RAPID. From 1989 to July 1993 he was Vice President and General Manager of
the WISARD Division. Mr. Schnitzer joined KLA-Tencor in July 1978 and has held a
series of other management positions.
Richard P. Wallace has been the Group Vice President of the Lithography
and Films Group since July 1999. From April 1998 to June 1999 he was Vice
President and General Manager of the Mirage Division. From 1995 to March 1998 he
was Vice President and General Manager of the WISARD Division. Mr. Wallace
joined KLA-Tencor in 1988 and has held a series of other management positions.
James W. Bagley has been a Director of the Company since April 1997. He
was a Director of Tencor from June 1993 until April 1997. He has been Chief
Executive Officer and a Director of Lam Research Corporation since August 1997.
From May 1996 until August 1997 he was Chairman of the Board and Chief Executive
Officer of OnTrak Systems, Inc. until its merger with Lam Research Corporation
in August 1997. From January 1994 until October 1995 he was Vice Chairman and
Chief Operating Officer of Applied Materials, Inc., and Vice Chairman from
November 1995 until May 1996. From December 1987 until December 1993, Mr. Bagley
was President and Chief Operating Officer for Applied Materials, Inc. Mr. Bagley
currently serves on the boards of directors of Teradyne, Inc., Kulicke & Soffa
Industries, Inc., Micron Technology, Inc. and SEMI/SEMATECH.
Edward W. Barnholt has been a Director of the Company since 1995. Mr.
Barnholt joined the Hewlett Packard Company in December 1966. From 1990 to 1997
he was the General Manager of the Test and Measurement Organization and from
February 1998 to March 1999 he was General Manager of the Measurement
Organization. Mr. Barnholt was elected a Vice President of the Hewlett Packard
Company in July 1988, a Senior Vice President in November 1993 and an Executive
Vice President in November 1996. Since March 1999, Mr. Barnholt has been the
President and Chief Executive Officer of Agilent Technologies, Inc.
Leo J. Chamberlain has been a Director of the Company since 1982. He is
a private investor.
Richard J. Elkus, Jr. has been a Director of the Company since April
1997. He was Executive Vice President and Vice Chairman of the board of
directors of Tencor from February 1994 until April 1997. He currently serves on
the boards of directors of Voyan Technology, SOPRA, Barcelona Design and Lam
Research Corporation.
Dean O. Morton has been a Director of the Company since April 1997. From
June 1993 until April 1997 he was a Director of Tencor. In October 1992 Mr.
Morton retired as Executive Vice President, Chief Operating Officer and a
Director of the Hewlett-Packard Company, where he held various positions from
1960 until his retirement. Mr. Morton currently serves as Chairman of the Board
of Centigram Communications Corporation and as a member of the boards of
directors of ALZA Corporation, The
-14-
<PAGE> 16
Clorox Company and BEA Systems Inc. Mr. Morton is also a trustee of the
Metropolitan Series Fund and State Street Research Funds Group and Portfolios
Inc.
Samuel Rubinovitz has been a Director of the Company since 1990. He
previously served as a Director from October 1979 to January 1989. He currently
serves as Chairman of the Board of LTX Corporation and also serves on the boards
of directors of Richardson Electronics, Ltd. and Kronos, Inc.
Dag Tellefsen has been a Director of the Company since 1978. He is the
general partner and President and Managing Director of Glenwood Ventures I and
II, venture capital funds and the general partner and Managing Director of
Vision Capital. He currently serves on the boards of directors of Iwerks
Entertainment Corporation and Metorex International.
Jon D. Tompkins has been a Director since April 1997. He was Chairman of
the Board from July 1998 to June 30, 1999, when he retired his position as
Chairman of the Board. From April 1997 until July 1998 he was Chief Executive
Officer and a Director of KLA-Tencor. From April 1991 until April 1997 he was
President and Chief Executive Officer of Tencor prior to its merger with KLA. He
was a Director of Tencor from 1991 until April 1997 and was appointed Chairman
of the board of directors of Tencor in November 1993. He currently serves on the
boards of directors of Cymer, Electro Scientific Industries, Credence Systems,
Levelite, Logic Vision and the Community Foundation of Silicon Valley.
Lida Urbanek has been a Director since April 30, 1997. She was a
director of Tencor from August 1991 until April 30, 1997. She is a private
investor.
For additional information required by this Item, see "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Proxy Statement, which is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For the information required by this Item, see "Executive Compensation" in the
Proxy Statement, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For the information required by this Item, see "Security Ownership -- Principal
Stockholders and Security Ownership of Management" in the Proxy Statement, which
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the information required by this Item, see "Certain Relationships and
Related Transactions" in the Proxy Statement, which is incorporated herein by
reference.
-15-
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORT ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules.
1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets - As of June 30, 1999 and 1998
Consolidated Statements of Operations - For the Three Years
Ended June 30, 1999
Consolidated Statement of Stockholders Equity - For the Three
Years Ended June 30, 1999
Consolidated Statements of Cash Flows - For the Three Years Ended
June 30,1999
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. FINANCIAL STATEMENT SCHEDULES.
All schedules are omitted because they are either not applicable
or the required information is shown in the consolidated
financial statements or notes thereto.
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation(1)
3.2 Bylaws, as amended November 17, 1998(2)
4.1 Amended and Restated Rights Agreement dated as of August 25, 1996
between the Company and First National Bank of Boston, as Rights
Agent. The Agreement includes the Form of Right Certificate as
Exhibit A and the Summary of Terms of Rights as Exhibit B(3)
10.1 1998 Outside Director Option Plan(4)
10.2 1990 Outside Directors Stock Option Plan(5)
10.3 Tencor Instruments 1993 Nonemployee Directors Stock Option Plan(6)
10.4 1997 Employee Stock Purchase Plan(7)
10.5 Second Amended and Restated 1981 Employee Stock Purchase Plan(8)
10.6 Tencor Instruments Amended and Restated 1993 Equity Incentive
Plan(9)
10.7 1993 Employee Incentive Stock Option Plan of Prometrix
Corporation(10)
10.8 Tencor Instruments Second Amended and Restated 1984 Stock Option
Plan(11)
10.9 1983 Employee Incentive Stock Option Plan of Prometrix
Corporation(12)
10.10 Restated 1982 Stock Option Plan, as amended November 18, 1996(13)
10.11 Excess Profit Stock Plan(14)
10.12 Form of KLA-Tencor Corporation Corporate Officers Retention
Plan(15)
10.13 Form of Retention and Non-Competition Agreement(16)
10.14 Form of Indemnification Agreement(17)
</TABLE>
-16-
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C>
10.15 Separation Agreement between Graham Siddall and the Company
13.1 1999 Annual Report to Stockholders (deemed to be filed to
the extent that information is specifically incorporated by
reference)
21.1 List of Subsidiaries
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
</TABLE>
<TABLE>
<CAPTION>
Notes
- -----
<S> <C>
(1) Filed as Exhibit 3.1 to the Company's form 10-Q for the
quarter ended March 31, 1997.
(2) Filed as Exhibit 3.2 to the Company's Registration
Statement on Form S-8 filed December 4, 1998, SEC File
No. 333-68415.
(3) Filed as Exhibit 1 to the Company's report on form
8-A/A, Amendment No. 2 to the Registration Statement on
Form 8-A filed September 24, 1996, SEC File No. 0-9992.
(4) Filed as Exhibit 10.1 to the Company's Registration
Statement on Form S-8 filed December 4, 1998, SEC File
No. 333-68423.
(5) Filed as Exhibit 4.6 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1991.
(6) Filed as Exhibit 10.3 to the Company's Registration
Statement on Form S-8 filed May 8, 1997, SEC File No.
333-26681.
(7) Filed as Exhibit 10.2 to the Company's Registration
Statement on Form S-8 filed January 30, 1998, SEC File
No. 333-45271.
(8) Filed as Exhibit 10.1 to the Company's Registration
Statement on Form S-8 filed January 30, 1998, SEC File
No. 333-45271.
(9) Filed as Exhibit 10.2 to the Company's Registration
Statement on Form S-8 filed May 8, 1997, SEC File No.
333-26681.
(10) Filed as Exhibit 10.7 to the Company's Registration
Statement on Form S-8 filed May 8, 1997, SEC File No.
333-26681.
(11) Filed as Exhibit 10.1 to the Company's Registration
Statement on Form S-8 filed May 8, 1997, SEC File No.
333-26681.
(12) Filed as Exhibit 10.6 to the Company's Registration
Statement on Form S-8 filed May 8, 1997, SEC File No.
333-26681.
</TABLE>
-17-
<PAGE> 19
<TABLE>
<S> <C>
(13) Filed as Exhibit 10.74 to the Company's Registration
Statement on Form S-8 filed March 7, 1997, SEC File No.
333-22941.
(14) Filed as Exhibit 10.15 to the Company's Registration
Statement on Form S-8 filed August 7, 1998, SEC File
No. 333-60887.
(15) Filed as Exhibit 10.2 to the Company's Registration
Statement on Form S-4 filed March 11, 1997, SEC File
No. 333-23075.
(16) Filed as Exhibit 10.1 to the Company's Registration
Statement on Form S-4 filed March 11, 1997, SEC File
No. 333-23075.
(17) Filed as Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1997.
</TABLE>
(c) Reports on Form 8-K
None.
-18-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on September 28, 1999.
KLA-Tencor Corporation
By: /s/ Kenneth Levy
--------------------------------------
Kenneth Levy, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Kenneth Levy
- --------------------------- Chairman of the Board and September 28, 1999
Kenneth Levy Director
/s/ Kenneth L. Schroeder
- --------------------------- President, Chief Executive September 28, 1999
Kenneth L. Schroeder Officer and Director
(Principal Executive Officer)
/s/ Robert J. Boehlke
- --------------------------- Executive Vice President and September 28, 1999
Robert J. Boehlke Chief Financial Officer
(Principal Accounting Officer)
/s/ James W. Bagley
- --------------------------- Director September 28, 1999
James W. Bagley
/s/ Edward W. Barnholt
- --------------------------- Director September 28, 1999
Edward W. Barnholt
- --------------------------- Director
Leo J. Chamberlain
/s/ Richard J. Elkus, Jr.
- --------------------------- Director September 28, 1999
Richard J. Elkus, Jr.
/s/ Dean O. Morton
- --------------------------- Director September 28, 1999
Dean O. Morton
- --------------------------- Director
Samuel Rubinovitz
/s/ Dag Tellefsen
- --------------------------- Director September 28, 1999
Dag Tellefsen
/s/ Jon D. Tompkins
- --------------------------- Director September 28, 1999
Jon D. Tompkins
</TABLE>
-19-
<PAGE> 21
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Lida Urbanek Director September 28, 1999
- --------------------------
Lida Urbanek
</TABLE>
-20-
<PAGE> 22
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
10.15 Separation Agreement between Graham J. Siddall and the
Company
13.1 1999 Annual Report to Stockholders (deemed to be
filed to the extent that the information is
specifically incorporated by reference)
21.1 List of Subsidiaries of KLA-Tencor Corporation
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
SEPARATION AGREEMENT
This Separation Agreement (the "Agreement") is between KLA-Tencor
Corporation (the "Company"), and Graham J. Siddall ("Employee").
WHEREAS, Employee was employed by the Company;
WHEREAS, the Company and Employee have agreed that (i) Employee's full-time
employment relationship with the Company shall terminate as of the date set
forth herein, (ii) Employee shall release the Company from any claims arising
from or related to the full-time employment relationship, and (iii) Employee
shall be engaged as a part-time employee of the Company consistent with the
terms herein;
NOW THEREFORE, in consideration of the mutual promises made herein and the
benefits provided pursuant to such promises the Company and Employee (the
"Parties") hereby agree as follows:
A. Resignation. Employee hereby resigns from his full-time employment
with the Company as of April 30, 1999 (the "Full-Time Employment Termination
Date").
2. Consideration. As consideration for Employee entering into this
Agreement and agreeing to provide ongoing services to the Company at the same
level of performance as if Employee were not resigning, the Company shall
provide the following to Employee:
(a) Payment of Salary. The Company shall continue to pay
Employee all salary, wages, accrued vacation and any and all other benefits due
to Employee through the Full-Time Employment Termination Date. From May 1, 1999
through June 30, 2001 Employee shall be a part-time employee of the Company
providing such services as the parties mutually agree upon (the "Part-Time
Period").
(b) Part-Time Period Benefits.During the Part-Time Period,
Employee shall receive his full salary, and shall be eligible to participate in
the Company's 401(k) Plan (without Company match), the Executive Deferred
Savings Plan and the Company's medical, disability and life insurance plans for
so long as Employee does not work for a non-Competitor. "Full salary" shall be
deemed to be that amount paid to Employee prior to the 10% reduction instituted
by the Company during fiscal 1999.
(c) Bonus Payments. During the Part-Time Period Employee shall
be eligible to receive bonuses as determined by the Board of Directors. The
Company shall have the obligation to pay any and all bonuses referred to in this
Agreement only at the same time as bonuses are normally paid to senior
management of the Company and contingent in each case upon the Company's payment
of bonuses to senior officers of the Company in such
<PAGE> 2
fiscal year. Employee shall be entitled to receive a full bonus for each of the
Company's fiscal years ended June 30, 1999 and June 30, 2000 and for 83% of a
full bonus for the fiscal year ended June 30, 2001. The bonus amount shall be
determined using a combination of individual and Company objectives and assuming
that Employee has achieved 100% of his individual bonus objectives in
distinction to Company objectives which shall be based upon actual Company
performance for such fiscal year. Bonuses shall only be payable so long as
Employee does not work for a non-Competitor.
(d) Stock Option Vesting. During the Part-Time Period,
Employee's stock options granted on or before April 30, 1997 shall continue to
vest as set forth in the applicable stock option agreements pursuant to which
options were granted. Upon termination of the Part-Time Period, Employee shall
be entitled to exercise those vested options pursuant to the terms of the
applicable stock option agreements.
(e) No Other Benefits. Except as other specifically provided
herein, Employee agrees that all employee benefits shall cease as of the
Full-Time Employment Termination Date.
(f) Non-competition; Non-Solicitation. Payment of all benefits
hereunder, including the continued vesting of stock options, shall be contingent
on Employee not working for a "Competitor" of the Company. For purposes of this
Agreement, a "Competitor" shall include ADE, Applied Materials, Bio-Rad,
Electroglas, Estek , FEI, Hermes Microvision, Hitachi, Holon, Horiba, Inspex,
IVS, JEOL, Lasertec, Leica, Nanometrics, NEC, Nikon, n&k Technology, OSI, Park
Scientific, PDF Solutions, QC Optics, Rudolph Technologies, Schlumberger, Sopra,
Technical Instruments, Therma-Wave, TKK, TSK, Topcon, Topometrix, Toshiba,
Veeco, Wyko and Zygo. Further, payment of all benefits hereunder also be
contingent on Employee not soliciting for hire any employees of the Company for
a period of two years from the Full-Time Employment Termination Date.
3. Release of Claims. Employee agrees that the foregoing
consideration represents settlement in full of all outstanding obligations owed
to Employee by the Company. Employee, on behalf of Employee and his heirs,
executors and assigns, hereby fully and forever releases the Company and its
officers, directors, employees, investors, stockholders, administrators,
predecessor, subsidiary and successor corporations, and assigns, of and from any
claim, duty, obligation or cause of action relating to any matters of any kind,
whether presently known or unknown, suspected or unsuspected, that any of them
may possess arising from any omissions, acts or facts that have occurred up
until and including the effective date of this Agreement including, without
limitation,
(a) any and all claims relating to or arising from Employee's
employment relationship with the Company and the termination of that
relationship;
<PAGE> 3
(b) any and all claims relating to, or arising from, Employee's
right to purchase, or actual purchase of shares of stock of the Company;
(c) any and all claims for wrongful discharge of employment;
breach of contract, both express and implied; breach of a covenant of good faith
and fair dealing, both express and implied; negligent or intentional infliction
of emotional distress; negligent or intentional misrepresentation; negligent or
intentional interference with contract or prospective economic advantage; and
defamation;
(d) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment
Act of 1967, the Americans with Disabilities Act of 1990, and the California
Fair Employment and Housing Act;
(e) any and all claims arising out of any other laws and
regulations relating to employment or employment discrimination;
(f) ANY RIGHTS HE MAY HAVE UNDER THE AGE DISCRIMINATION IN
EMPLOYMENT ACT OF 1967 ("ADEA"). EMPLOYEE FURTHER ACKNOWLEDGES THAT HE HAS BEEN
ADVISED BY THIS WRITING THAT (I) HE SHOULD CONSULT WITH AN ATTORNEY PRIOR TO
EXECUTING THIS AGREEMENT; (II) HE HAS AT LEAST TWENTY-ONE (21) DAYS WITHIN WHICH
TO CONSIDER THIS AGREEMENT; (III) HE HAS AT LEAST SEVEN (7) DAYS FOLLOWING THE
EXECUTION OF THIS AGREEMENT BY THE PARTIES TO REVOKE THE AGREEMENT; AND (IV)
THIS AGREEMENT SHALL NOT BE EFFECTIVE UNTIL THE REVOCATION PERIOD HAS EXPIRED;
AND
(g) any and all claims for attorneys' fees and costs.
The Company and Employee agree that the release set forth in this section shall
be and remain in effect in all respects as a complete general release as to the
matters released. This release does not extend to any obligations incurred under
this Agreement.
4. Tax Consequences. The Company makes no representations or
warranties with respect to the tax consequences of the payment of any sums to
Employee under the terms of this Agreement. Employee agrees and understands that
he or she is responsible for payment, if any, of local, state and/or federal
taxes on the sums paid hereunder by the Company and any penalties or assessments
thereon.
5. No Admission of Liability. No action taken by the Parties hereto,
or either of them, either previously or in connection with this Agreement shall
be deemed or construed to
<PAGE> 4
be (a) an admission of the truth or falsity of any claims heretofore made or (b)
an acknowledgment or admission by either party of any fault or liability
whatsoever to the other party or to any third party.
6. Costs. The Parties shall each bear their own costs, expert fees,
attorneys' fees and other fees incurred in connection with this Agreement.
7. Arbitration and Equitable Relief.
(a) The parties hereto agree that any dispute or controversy
arising out of, relating to, or in connection with this Agreement, or the
interpretation, validity, construction, performance, breach, or termination
thereof shall be settled by arbitration to be held in Santa Clara County,
California, in accordance with the National Rules for the Resolution of
Employment Disputes then in effect of the American Arbitration Association (the
"Rules"). The arbitrator may grant injunctions or other relief in such dispute
or controversy. The decision of the arbitrator shall be final, conclusive and
binding on the parties to the arbitration. Judgment may be entered on the
arbitrator's decision in any court having jurisdiction.
(b) The arbitrator shall apply California law to the merits of
any dispute or claim, without reference to rules of conflict of law. The
arbitration proceedings shall be governed by federal arbitration law and by the
Rules, without reference to state arbitration law. The parties hereto hereby
expressly consent to the personal jurisdiction of the state and federal courts
located in California for any action or proceeding arising from or relating to
this Agreement and/or relating to any arbitration in which the parties are
participants.
(c) The Company and Employee shall each pay one-half of the
costs and expenses of such arbitration, and shall separately pay its counsel
fees and expenses.
(d) THE PARTIES HERETO HAVE READ AND UNDERSTAND SECTION 8, WHICH
DISCUSSES ARBITRATION. THE PARTIES HERETO UNDERSTAND THAT BY SIGNING THIS
AGREEMENT, THEY AGREE TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING TO,
OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY,
CONSTRUCTION, PERFORMANCE, BREACH, OR TERMINATION THEREOF TO BINDING
ARBITRATION, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF THEIR
RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO
ALL ASPECTS OF THE EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT LIMITED TO,
THE FOLLOWING CLAIMS:
<PAGE> 5
(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF
EMPLOYMENT; BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT
OF GOOD FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR
INTENTIONAL INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL
MISREPRESENTATION; NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR
PROSPECTIVE ECONOMIC ADVANTAGE; AND DEFAMATION;
(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE
OR MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL
RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN
EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE FAIR
LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND LABOR
CODE SECTION 201, et seq; AND
(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND
REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
8. Authority. The Company represents and warrants that the
undersigned has the authority to act on behalf of the Company and to bind the
Company and all who may claim through it to the terms and conditions of this
Agreement. Employee represents and warrants that he has the capacity to act on
his own behalf and on behalf of all who might claim through Employee to bind
them to the terms and conditions of this Agreement.
9. No Representations. Each party represents that it has had the
opportunity to consult with an attorney, and has carefully read and understands
the scope and effect of the provisions of this Agreement. Neither party has
relied upon any representations or statements made by the other party hereto
which are not specifically set forth in this Agreement.
10. Severability. In the event that any provision hereof becomes or
is declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
11. Entire Agreement. This Agreement represents the entire agreement
and understanding between the Company and Employee concerning Employee's
separation from the Company, and supersedes and replaces any and all prior
agreements and understandings concerning Employee's relationship with the
Company and compensation from the Company.
<PAGE> 6
12. No Oral Modification. This Agreement may only be amended in
writing signed by Employee and the Chief Executive Officer or Chairman of the
Board of the Company.
13. Effective Date. This Agreement is effective seven days after it
has been signed by both parties.
14. Counterparts. This Agreement may be executed in counterparts, and
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
15. Voluntary Execution of Agreement. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf of
the Parties hereto, with the full intent of releasing all claims. The Parties
acknowledge that:
(a) They have read this Agreement;
(a) They have been represented in the preparation, negotiation,
and execution of this Agreement by legal counsel of their own choice or that
they have voluntarily declined to seek such counsel;
(a) They understand the terms and consequences of this Agreement
and of the releases it contains;
(a) They are fully aware of the legal and binding effect of this
Agreement.
KLA-TENCOR CORPORATION EMPLOYEE
By: /s/ Kenneth Levy By: /s/ Graham J. Siddall
---------------------------------- ----------------------------------
<PAGE> 1
99 Annual Report
[LOGO]
<PAGE> 2
FINANCIAL HIGHLIGHTS
In thousands, except per share data
<TABLE>
<CAPTION>
Year ended June 30, 1995 1996 1997 1998 1999
Operations
<S> <C> <C> <C> <C> <C>
Revenues $ 695,950 $ 1,094,492 $ 1,031,824 $ 1,166,325 $ 843,181
Income (loss) from operations $ 156,609 $ 296,266 $ 145,832 $ 164,631 $ (10,334)
Income from operations
excluding other charges(1) $ 181,849 $ 296,266 $ 206,384 $ 187,105 $ 32,366
Net income $ 104,811 $ 196,634 $ 105,396 $ 134,096 $ 39,212
Basic earnings per share $ 1.40 $ 2.42 $ 1.29 $ 1.58 $ 0.45
Diluted earnings per share $ 1.34 $ 2.34 $ 1.24 $ 1.52 $ 0.43
Net income excluding other charges(1) $ 120,965 $ 196,634 $ 151,272 $ 155,574 $ 66,966
Diluted earnings per share
excluding other charges(1) $ 1.54 $ 2.34 $ 1.78 $ 1.76 $ 0.73
Year End Status
Cash, cash equivalents and
marketable securities $ 385,040 $ 468,475 $ 687,249 $ 723,481 $ 755,183
Working capital $ 452,350 $ 591,397 $ 531,313 $ 605,688 $ 590,024
Total assets $ 850,406 $ 1,157,919 $ 1,343,307 $ 1,548,397 $ 1,584,900
Stockholders' equity $ 652,222 $ 870,999 $ 1,014,613 $ 1,197,714 $ 1,232,583
</TABLE>
(1) Excludes non-recurring acquisition, merger and restructuring charges of $25
million, $61 million, $22 million and $43 million in 1995, 1997, 1998 and
1999, respectively.
<PAGE> 3
LETTER TO OUR STOCKHOLDERS
While some companies sought merely to survive the past year, KLA-Tencor focused
on strategies to thrive in the new millennium. These included: LEADERSHIP
THROUGH new technologies, market strategies and a next generation management
team. SOLUTIONS THAT are comprehensive yet tailored to meet emerging device
challenges. And most importantly, strategically grouped hardware, software and
consulting services to HELP CUSTOMERS achieve and maintain their competitive
edge.
<PAGE> 4
[GRAPH]
THIS PAST FISCAL YEAR MARKED ONE OF THE MOST CHALLENGING ECONOMIC PERIODS IN
MANY YEARS FOR THE SEMICONDUCTOR INDUSTRY Overall, equipment purchases by
customers world-wide dropped significantly as semiconductor companies delayed
plans for new or updated manufacturing facilities. As a result, KLA-Tencor
revenues for fiscal 1999 declined to $843 million with net income of $67 million
or 73 cents per share (excluding non-recurring restructuring and acquisition
charges of $43 million or $28 million after tax). While we were disappointed
that revenues declined year over year, we were pleased that the company was able
to maintain profitability--one of the few semiconductor equipment companies to
do so during this period. o Moving forward, we remain focused on our primary
objective: to maintain our record of fiscal strength while continuing to out
pace the industry's growth. Recent quarter results show that we are making
progress towards this goal. As outlined in this letter, we have initiated a
number of programs designed to sustain our momentum and position our company for
the future.
<PAGE> 5
DESPITE ESCALATING COMPETITION IN OUR SERVED MARKET, KLA-TENCOR HAS MAINTAINED,
AND IN SEVERAL CASES EVEN EXTENDED, ITS LEADERSHIP ROLE BOTH IN TERMS OF TECHNI-
CAL INNOVATION AND MARKET SHARE. As a result, today we are uniquely able to
deliver the combination of systems, software and yield management expertise
device manufacturers need to accelerate their critical technology transitions
and develop the device technologies of the future. o While new market strategies
and breakthrough technologies are essential to our continued growth, we believe
that the strength of our management team is equally important to sustaining
KLA-Tencor's industry leading position. Over the past decade, we have been
fortunate to be able to cultivate a team with the technical and management
expertise needed to lead us into the 21st century. With the retirement of Jon
Tompkins in July 1999, Kenneth Levy assumed the role of chairman, and the board
of directors promoted Kenneth Schroeder to chief executive officer and Gary
Dickerson to chief operating officer. These changes were an integral part of our
strategic succession plan, designed to ensure a seamless leadership transition
without any loss of corporate focus or direction. o As with many of our top
executives, both Schroeder and Dickerson are corporate veterans and bring an
exceptional combination of long-term perspective and high energy into our
leadership. We look forward to the tremendous strategic and operational
strengths they will bring to the growth and evolution of KLA-Tencor in the
coming years.
<TABLE>
<S> <C>
LEADERSHIP [Photo of Kenneth Levy] [Photo of Kenneth Schroeder] [Photo of Gary Dickerson]
Left to right: Kenneth Levy, Chairman; Kenneth Schroeder,
President and CEO; Gary Dickerson, COO
Newly appointed CEO Kenneth Schroeder has played a vital role in
helping KLA-Tencor grow more than five hundred percent in
revenues during his 16 year tenure with the company.
Gary Dickerson joined the company in 1986 and prior to his
recent appointment to COO served in a variety of capacities
including management of the Wafer Inspection and Yield
Management Groups.
</TABLE>
<PAGE> 6
KLA-Tencor is helping to drive the yield management and process
control technologies of the future. The company has maintained
its leadership in this growing segment through advanced systems,
software, and expertise that span the entire semiconductor
process -- from wafer fabrication to the finished device.
While the company's primary focus is semi-conductor device
manufacturing, KLA-Tencor technology is also well suited for
applications in such related industries as reticle and wafer
manufacturing, as well as in the data storage industry.
SOLUTIONS
IN THE SEMICONDUCTOR INDUSTRY, MARKET REQUIREMENTS CHANGE MORE QUICKLY WITH EACH
PASSING YEAR. Our customers' needs are now so complex that customized solutions
are no longer optional--they are essential. KLA-Tencor has always delivered
leading technologies to help customers achieve their technical and business
objectives. While historically these products were primarily hardware-related,
in recent years, KLA-Tencor has expanded into advanced software and consulting
services that facilitate analysis and bring broad-based expertise to bear on the
yield optimization process. o The ability to combine these elements together
into focused solutions is the next logical step in our evolution. During the
past year we initiated a program to develop Process Module Control solutions
(PMCs) for all of the key process areas in the fab including etch, deposition,
lithography, and planarization (CMP). With our extensive hardware, software and
expertise, only KLA-Tencor has the ability to both provide and integrate all the
necessary elements of a module control solution from a single source. o The
first of our process module control solutions targeted the copper interconnect
process since integration and yield are the greatest obstacles in transitioning
to this next-generation technology. Today we are already involved in a number of
projects with customers developing copper processing lines. Although it is still
early in the technology adoption curve, delivering the optimal solution during
this initial phase is essential for accelerating process development and the
eventual transfer to production, where our comprehensive solutions can deliver
the greatest advantage to our customers.
<PAGE> 7
CRITICAL TO THE CONTINUED ENHANCEMENT OF OUR PMCS IS ONGOING TECHNICAL INNOVA-
TION AND PRODUCT STRENGTH. Despite the industry downturn this past year, we were
pleased to be able to enhance our strong product portfolio through both
continued high internal R&D investment and strategic acquisitions. Our goal, as
always, is to develop both revolutionary and evolutionary systems that can meet
emerging process and production requirements. New products that provide
capabilities unique in the industry, such as the eS20 for in-line scanning
electron-beam inspection, and the 2401 for automated macro defect inspection,
are opening the door for new inspection strategies. Acquisitions of technologies
for oxide monitoring, electron beam and optical defect review, and data analysis
software, further broadened our product offering with complementary
technologies. Consistent with this strategy, we also continue to enhance all of
our top-of-the-line systems with new features and capabilities. o Another vital
KLA-Tencor strength is our long-standing relationships with customers. Working
closely to understand their issues and challenges, we are better able to develop
the products needed to address them. Our comprehensive solution sets will allow
customers to continue to rely on us for the process module control capabilities
needed to initiate any technology transition. Moreover, our customized solutions
for any tool set, process configuration or fab-specific criteria, offer
customers the ability to create and sustain the differentiation that gives them
a competitive advantage.
CUSTOMERS
KLA-Tencor continuously monitors the global
semiconductor industry to pinpoint major
opportunities for inspection and monitoring
equipment in new and remodeled manufacturing
facilities worldwide. Today, there are more than
twice as many significant opportunities as there
were just one year ago
<PAGE> 8
This letter documents recent events, but staying
ahead of the industry means responding quickly
to market changes. To keep pace with
KLA-Tencor's continuous evolution year-round,
keep an eye on our website for information on
new product launches, business developments,
executive appointments,earnings announcements,
and management presentations.
our website
IN THE COMING YEAR, KLA-TENCOR WILL CONTINUE TO EXECUTE ON THESE STRATEGIES AND
INVEST IN THE TECHNOLOGIES THAT WILL HELP ADVANCE OUR VISION OF COMPREHENSIVE,
TAILORED SOLUTIONS. As changing industry requirements mandate an evolution--from
delivering stand-alone tools to integrating and implementing complete process
module control solutions--KLA-Tencor is uniquely positioned to address these
needs. As a result, we are helping customers worldwide in their quest to control
critical processes, speed yield ramps and enhance their overall yield and
profitability. To further enhance our own profitability, we will continue our
efforts to streamline our operations; bringing greater efficiency and focus on
delivering value to our customers and stockholders. In light of this priority
and our fast-paced business development, this year we are enhancing the
information available on our investor website, in addition to providing this
annual report, so you can quickly find the latest information about KLA-Tencor
throughout the year. As always, we deeply appreciate your continued support as
KLA-Tencor moves forward to embrace both the challenges and opportunities we see
in the coming millennium.
/s/ KENNETH LEVY /s/ KENNETH SCHROEDER
-------------------- ----------------------
Kenneth Levy Kenneth Schroeder
Chairman President and CEO
<PAGE> 9
<TABLE>
<S> <C>
VISIT OUR INVESTOR WEBSITE [INVESTOR RELATIONS GRAPHICS]
www.kla-tencor.com/investors
Company Profile
View quick facts about KLA-Tencor
including company background, executive
management team, and analyst coverage.
Earnings Release
Learn the next earnings
release date and link to the most recent
earnings release data available.
Stock Price and Charts
Find the latest stock price and link to
interactive stock charts from NASDAQ.
News and Events
Read recent press releases, other
related news from NASDAQ, and a list of
upcoming events.
Annual Report
View our online annual report and
download copies of annual reports from
prior years.
Recent SEC filings
Download recent Form 10K and 10Qs and
link to other recent SEC filings through
EDGAR.
INVESTOR WEBSITE
Investor FAQs
Read frequently asked questions and
answers regarding KLA-Tencor stock,
company and product information.
Presentations
View a selection of presentation slides
with accompanying notes and information.
Investor Package
Obtain online or through the mail,
copies of our available investor
materials.
Main Website Links
Link to the rest of our corporate
website for the latest technical
developments, product information, Yield
Management Solutions magazine, trade
shows, seminars and events, as well as
our employment website.
</TABLE>
<PAGE> 10
financial review
<TABLE>
<CAPTION>
<S> <C>
MANAGEMENT'S DISCUSSION & ANALYSIS 8
FINANCIAL STATEMENTS 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24
REPORT OF INDEPENDENT ACCOUNTANTS 37
CORPORATE INFORMATION 38
</TABLE>
[PHOTO OF ROBERT J. BOEHLKE]
Robert J. Boehlke, Executive Vice President and CFO
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the of Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
risks and uncertainties, including the risk factors set forth in this discussion
and elsewhere in this Annual Report. Generally, the words "anticipate",
"expect", "intend", "believe" and similar expressions identify forward-looking
statements. The information included in this Annual Report is as of the filing
date with the Securities and Exchange Commission and future events or
circumstances could differ significantly from the forward-looking statements
included here.
RESULTS OF OPERATIONS
KLA-Tencor Corporation exited fiscal 1999 with long-awaited improvement in
business conditions and new orders during the last two quarters of fiscal 1999.
During much of fiscal 1998 and the first half of fiscal 1999, we faced a
significant downturn in the semiconductor industry. The industry-wide decline
initially began with high inventory levels, particularly of DRAM devices, at
semiconductor manufacturers and distributors and was followed by an overall
decline in demand for semiconductors worldwide. This reduced demand was prompted
by the weak economy in the Asia Pacific region, especially in South Korea and
Japan. Combined with the movement of end-users to sub-$1,000 personal computers,
this weakness in demand caused price reductions in the semiconductor
marketplace, a slowdown in the manufacture of semiconductors, and resulted in
delays and cancellations of new fabrication facility construction. Consequently,
we experienced reduced order levels and some cancellations in orders through the
second quarter of fiscal 1999.
In response to the downturn in the semiconductor industry, we adopted a
restructuring plan in the second quarter of fiscal 1999. The plan included a
consolidation of facilities, a write-down of assets associated with canceled
programs, and reductions in our global workforce. These measures, although
difficult, allowed us to endure the challenges of the recent industry-wide
downturn and enabled us to enter fiscal 2000 in a stronger position to serve our
customers and meet the new technological requirements of our business (see
further information at pages 9 to 11 of this discussion).
During the third quarter of fiscal 1999, business conditions began to
improve, driven by our customers' advanced inspection requirements for deep
sub-quarter micron technologies and the transition to copper dual damascene
structures (copper technology). Growth also was prompted by market share
increases in our metrology and film measurement business. Increased orders in
the Asia Pacific region were the result of capacity expansion in foundries and
investments in yield improvement.
Our financial position has remained strong throughout the recent down cycle
of the semiconductor industry and we continue to have no long-term debt.
REVENUES AND GROSS MARGINS
Revenues decreased $323 million, or 28% to $843 million, in fiscal 1999 from
$1.17 billion in fiscal 1998. Overall revenue declines were mostly the result of
reduced capital spending, particularly in the Asia Pacific region, as a result
of the semiconductor industry downturn. Sales of substantially all our product
lines were negatively affected by this down cycle when compared to sales in
fiscal 1998. These declines in fiscal 1999, were offset in part by an increase
in field service and spare parts revenues, primarily due to our increasing
installed base worldwide. Revenues in fiscal 1998 increased 13% when compared to
fiscal 1997, primarily due to sales from newer products lines.
<PAGE> 12
Gross margins as a percentage of revenues decreased to 47% in fiscal 1999
from 52% in fiscal 1998 and 54% in fiscal 1997. The decrease in gross margins
during the last two fiscal years was primarily due to sequentially lower sales
volume of our higher-margin products and increased infrastructure costs of our
field service organization.
ENGINEERING, RESEARCH AND DEVELOPMENT
Net engineering, research and development expenses were $165 million, $182
million and $134 million in fiscal 1999, 1998 and 1997, respectively. The
decrease in fiscal 1999 compared to fiscal 1998 is primarily attributable to
development programs that were terminated as part of the realignment and
streamlining of our product lines, as well as other cost-reduction measures
implemented during our second quarter fiscal 1999 restructuring. Costs were also
offset by additional external funding received on strategic development and
engineering programs during fiscal 1999. The increase in fiscal 1998 compared to
fiscal 1997 was primarily attributable to increases in headcount and project
material costs associated with our ongoing efforts to develop products which
address new market segments; enhancements to existing products including
next-generation 300mm products; and inspection enhancements for sub-quarter
micron technology. Our future operating results will depend significantly on our
ability to produce products and services that have a competitive advantage in
our marketplace. To do this, we believe that we must continue to make
substantial investments in our research and development efforts. We remain
committed to product development in new and emerging technologies as we address
the requirements of 0.18 micron and 0.13 micron feature sizes, real-time review,
and the transition to copper technology. Our investments in new technology and
existing product enhancements are intended to enable our customers to achieve
higher productivity through cost-effective, leading edge technology solutions.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $199 million, $242 million and
$219 million, or 24%, 21% and 21% of revenues, in fiscal 1999, 1998 and 1997,
respectively. The decrease in fiscal 1999, compared to fiscal 1998, was
primarily attributable to our restructuring program, which included a
consolidation of facilities and reductions in headcount and other cost saving
measures. The increase in fiscal 1998 compared to fiscal 1997 was primarily
attributable to increased spending in our worldwide sales and applications
organization.
NON-RECURRING ACQUISITION,
RESTRUCTURING AND OTHER CHARGES
NON-RECURRING ACQUISITION CHARGES. In December 1998, we purchased assets and
related technology from Uniphase Corporation for an aggregate purchase price of
$3 million. The confocal laser review station technology acquired is currently
used for analysis of defects on silicon wafers. Assets acquired of $3 million
consisted primarily of inventory.
In November 1998, we purchased assets and technology from Keithley
Instruments, Inc. for an aggregate purchase price of $10 million. The corona
wire gate oxide monitoring tool technology we acquired had not yet reached the
alpha stage and the cost to complete the development of this equipment was
estimated at the time of acquisition to be $1 million. We recorded a charge of
$8 million for purchased in-process research and development, representing the
appraised value of product that was not considered to have reached technological
feasibility. The appraised value under the income approach used for our
calculation did not differ materially from the result under the percentage of
completion approach currently preferred by the Securities and Exchange
Commission. Net assets acquired of $1 million consisted primarily of inventory
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and equipment and the remaining $1 million was allocated to other intangibles
including acquired technology and goodwill.
In June 1998, we acquired Groff Associates, Inc. (dba VARS Inc.) for an
aggregate purchase price of $13 million. The digital and in-line-monitoring
image archiving retrieval software technology we acquired had not yet reached
the alpha stage and the cost to complete the development of these software
products was estimated at the time of acquisition to be $2 million. We recorded
a charge of $13 million for purchased in-process research and development,
representing the appraised value of products that were not considered to have
reached technological feasibility. The appraised value under the income approach
used for our calculation did not differ materially from the result under the
percentage of completion approach currently preferred by the Securities and
Exchange Commission. The in-line-monitoring image archiving retrieval software
technology acquired had not reached commercial feasibility as of June 30, 1999.
The value of the tangible net assets acquired was nominal.
In May 1998 we acquired DeviceWare, Inc., a company in its development
stage, for an aggregate purchase price of $3 million. The bit mapping defect
characterization technology acquired had not yet reached the alpha stage and the
cost to complete the development of this software product was estimated at the
time of acquisition to be $1 million. We recorded a charge of $3 million for
purchased in-process research and development, representing the appraised value
of product that was not considered to have reached technological feasibility.
The appraised value under the income approach used for our calculation did not
differ materially from the result under the percentage of completion approach
currently preferred by the Securities and Exchange Commission. The technology
acquired had not reached commercial feasibility as of June 30, 1999. The value
of the tangible net assets acquired was nominal.
In February 1998, we acquired Nanopro GmbH (Freiburg, Germany) for an
aggregate purchase price of $3 million. This privately-held company specialized
in the development of advanced interferometric wafer inspection. The identified
in-process research and development of $3 million was estimated and expensed,
because technological feasibility of the advanced interferometric wafer
technology had not yet been reached. The technology acquired had not reached
commercial feasibility as of June 30, 1999. The value of the tangible net assets
acquired was nominal.
Each of the above acquisitions was accounted for using the purchase method
of accounting and the developmental products acquired were evaluated in the
context of Interpretation 4 of SFAS No. 2 and SFAS No. 86. The allocation of the
purchase price to in-process research and development cost was determined by
identifying research projects in areas for which technological feasibility had
not been established and no alternative future uses existed. Substantially all
of the in-process research and development projects acquired were expected to be
complete and generating revenues within the 24 months following the acquisition
date. However, development of these technologies remains a significant risk due
to the remaining effort required to achieve technical feasibility, rapidly
changing customer markets and significant competitive threats from numerous
companies. Failure to bring any of these products to market in a timely manner
could adversely affect our sales and profitability in the future. Additionally,
the value of net assets and other intangible assets acquired may become
impaired.
In April 1998, we acquired Amray, Inc. (Amray) for 1,800,000 shares of our
common stock accounted for under the pooling of interest method of accounting. A
privately-owned provider of scanning electron microscope systems, Amray's
historical operations, net assets, and cash flows were less than 3% of our
consolidated financial results and, therefore, were not reflected in the
<PAGE> 14
consolidated financial results prior to the acquisition. We incurred $2 million
in professional fees and restructuring charges related to this acquisition.
RESTRUCTURING AND OTHER CHARGES. During fiscal 1999, we implemented a
restructuring plan to address the impact on our business of the downturn in the
semi-conductor industry. Estimated restructuring costs of $35 million are
classified in four main categories: facilities, inventory, severance and
benefits, and other restructuring costs. Facilities costs of $12 million include
$8 million for lease expense resulting from consolidation and closure of certain
offices located primarily in the United States and Japan; $3 million for
leasehold improvements impaired in those facilities; and $1 million in other
facilities-related exit costs. Inventory-related costs of $10 million resulted
from impaired assets related to unique parts and non-cancelable purchase
commitments of certain development programs, which were terminated as part of
the realignment and streamlining of our product lines. Severance and
benefit-related costs of $8 million include involuntary termination of
approximately 250 personnel from manufacturing, engineering, sales, marketing,
and administration throughout the United States, Japan and Europe. Other
restructuring costs of $5 million relate primarily to the write-off of software
licenses and related non-cancelable maintenance contracts for closed locations.
Of the $35 million restructuring accrual, we utilized $18 million as of June
30, 1999. Payments under severance plans and contractual obligations that
existed when the plan was executed are expected to extend into fiscal 2001.
Facilities and severance payments of $8 million and $6 million, respectively,
are expected to be spread fairly evenly over the next ten fiscal quarters.
Inventory related costs of $3 million are expected to be incurred as assets are
disposed during the first two quarters of fiscal 2000.
During fiscal 1997, we recorded charges totaling $61 million for merger,
restructuring and other non-recurring events. Of this amount, $46 million was
the result of the merger between KLA Instruments and Tencor Instruments on April
30, 1997, $6 million was a result of the write-off of a Tencor bad debt and $9
million was additional restructuring charges, primarily related to lease exit
costs incurred by Tencor Instruments prior to the merger. This restructuring
plan was completed as of December 31, 1998.
INTEREST INCOME AND OTHER, NET
Interest income and other, net is comprised primarily of gains realized on sales
of marketable securities, interest income earned on the investment and cash
portfolio and income recognized upon settlement of certain foreign currency
contracts. The increase in fiscal 1999 as compared to fiscal 1998 was primarily
attributable to $17 million in gains realized on sale of equity securities held
in a former supplier company. The increase in fiscal 1998 as compared to fiscal
1997 was primarily the result of income realized upon settlement of foreign
currency contracts and interest resulting from higher average investment
balances.
PROVISION FOR INCOME TAXES
KLA-Tencor's effective income tax rate decreased to 22% in fiscal 1999 from 35%
in fiscal 1998 and 39% in fiscal 1997. In general, our effective income tax rate
differs from the statutory rate of 35% largely as a function of benefits
realized from our Foreign Sales Corporation, income derived from tax exempt
interest, foreign taxes, state taxes, and non-deductible merger and acquisition
related costs. During fiscal 1999, income related to tax exempt interest
increased as a component of total net income and resulted in a significantly
lower effective tax rate as compared to fiscal 1998 and fiscal 1997.
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $590 million as of June 30, 1999 compared to $606 million as
of June 30, 1998. The major components of working capital and liquidity continue
to be over $300 million of cash, cash equivalents and short-term investments. In
addition, we maintained in excess of $400 million in marketable securities
classified as long-term as of June 30, 1998 and 1999. Cash provided by operating
activities was $122 million, $74 million and $246 million in fiscal 1999, 1998
and 1997, respectively. The increase in cash provided by operating activities in
fiscal 1999 compared to fiscal 1998 was primarily due to decreased levels of
accounts receivable and inventory and, increases in depreciation and
amortization, partially offset by decreases in net income, accounts payable,
other current liabilities and increases in other assets. The decrease in cash
provided by operating activities in fiscal 1998 from fiscal 1997 reflects
increases in accounts receivable, inventories, and other assets and decreases in
depreciation and amortization, partially offset by increases in net income and
other current liabilities.
During fiscal 1999, we invested $61 million in the acquisition of capital
assets. Of this amount, we spent $27 million during fiscal 1999 to acquire land
and buildings that previously were leased. The remainder of these expenditures
related to the purchase of computers and manufacturing equipment. Capital
expenditures for each of the fiscal years 1998 and 1997 were $64 million and $57
million, respectively, and related primarily to purchase of computers and
manufacturing equipment.
During fiscal 1999, we sold, with recourse, trade notes and accounts
receivable from Japanese customers. As of June 30, 1999, $29 million of these
receivables were outstanding. In addition, during fiscal 1998, we entered into
certain lease arrangements in Milpitas and San Jose, California. In connection
with these agreements, we have a contingent liability to the lessor for $100
million in residual value guarantees of the properties under lease. The impact
of these agreements is not expected to be material to our liquidity. We believe
that the existing cash balances and investments, along with cash generated from
operations, will be sufficient to meet our working capital requirements through
fiscal year 2000.
In August 1997, we initiated the systematic repurchase of shares of our
common stock in the open market to reduce the dilution created by our
stock-based employee benefit and incentive plans. In fiscal 1999, we repurchased
1,076,000 shares of our common stock at an average price of $45.32 per share,
for a total cash outlay of $49 million. In fiscal 1998, we repurchased 378,000
shares of our common stock at an average price of $42.43 per share, for a total
cash outlay of $16 million.
YEAR 2000 ISSUE
The Year 2000 computer issue presents risks for us as it does for other
companies. The Year 2000 problem arises from the use of a two-digit field to
identify years in computer programs, and the assumption of a single century, the
1900s. Any program so created may read, or attempt to read, "00" as the year
1900. There are two other related issues which could also lead to incorrect
calculations or failure. First, some systems' programming assigns special
meaning to certain dates, and second, the year 2000 is a leap year. Accordingly,
some computer hardware and software, including programs embedded within
machinery and parts, will need to be modified prior to the year 2000 in order to
remain functional. We use a significant number of computer software programs and
operating systems in our internal operations, including applications used in our
financial, product development, order management and manufacturing systems, as
well as in the products we manufacture and sell. Additionally, we are dependent
upon our critical suppliers, contract manufacturers, other vendors, and
customers to determine if their operations, products, services and the payments
they provide are Year 2000 ready.
<PAGE> 16
The inability of computer software programs to accurately recognize,
interpret and process date codes designating the year 2000 and beyond could
cause errors or operating problems that would disrupt business operations. If
this occurs in our internal systems it could adversely affect our ability to
process orders, forecast production requirements or issue invoices. A
significant failure of our computer integrated manufacturing systems that
monitor and control factory equipment, would disrupt manufacturing operations
and cause a delay in the completion and shipping of products. Similarly, if our
critical suppliers' or customers' systems or products fail because of a Year
2000 malfunction, their disruption could negatively affect our operating
results. Finally, if our own products malfunctioned as a result of a failure in
date recognition, we could experience warranty claims and litigation.
YEAR 2000 READINESS PROGRAM. To avoid these kinds of disruptions, KLA-Tencor
commenced a broad-ranging Year 2000 readiness program during fiscal 1997. The
Year 2000 project was established to ensure that all of our company-wide
systems, components, infrastructure, critical suppliers and products will
operate in such a manner that business is uninterrupted into and beyond the year
2000. The goals of the Year 2000 readiness project were to:
- establish and maintain up-to-date communication with users;
- determine systems/items that need to be addressed for Year 2000
readiness;
- test the above systems;
- correct Year 2000 problems as necessary;
- maintain sustained support;
- develop a contingency/recovery plan for unanticipated Year 2000 issues.
We are on schedule to meet each of these goals in our three main areas of
focus. The three focus areas of our Year 2000 readiness program are: internal
information and operating systems, our supply chain, and external product
readiness.
INTERNAL INFORMATION AND OPERATING SYSTEMS. The first focus area is our internal
information and operating systems. The project team for information and
operating systems is composed of managers and individual contributors from our
computer information systems group and other functional areas including finance
and human resources, augmented by representatives from each operational
division. We also have project managers responsible for readiness in functional
areas such as treasury, facilities, security, engineering, manufacturing, and
service. This internal Year 2000 readiness project includes three major
activities:
- Inventory collection and categorization, which includes identification
of all our systems and items that need to be addressed for Year 2000
readiness and creation of a master list categorized by critical need;
- Assessment, in which each functional group evaluates the readiness of
systems inventoried, including as necessary, researching vendor
documentation, direct vendor contact, code search, and/or execution of a
detailed test plan; and
- Remediation or correction of the problems found, which include
vendor-provided application patches, correction of bugs as necessary and
needed upgrades of software and hardware.
SUPPLY CHAIN. The second area of emphasis in our Year 2000 readiness program is
to ensure our supply chain is prepared. Product divisions identified over 400
key suppliers that needed to be evaluated. Questionnaires were sent to each of
these suppliers, whose responses were reviewed and classified. On-site audits
were performed at 37 critical suppliers where readiness issues could be of
serious consequence to KLA-Tencor operations. In addition, over 100 more
suppliers are being systematically reviewed by telephone to confirm that their
preparations will be completed as required. As of June 30, 1999 we were able to
classify all our key suppliers as low risk with respect to Year 2000 readiness,
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and we continue to monitor the addition of new suppliers to assure readiness is
maintained. However, the readiness of third parties overall varies widely.
Because our readiness is dependent on timely Year 2000 readiness of third
parties, there can be no assurances that our efforts alone will resolve all Year
2000 issues applicable to our internal processes or our products.
EXTERNAL PRODUCTS. The final area of focus for our Year 2000 readiness program
is our external products. KLA-Tencor has over 18,000 installed tools at our
customers' sites. We know that Year 2000 readiness is a major issue for our
customers, who face critical logistical issues in assuring their continued
operations. Our field service engineers have audited the majority of our tools
for their configuration to determine what needs to be done to bring our
products, including older out-of-warranty products, to a state of readiness for
the year 2000. Readiness, upgrade requirements or "never ready" status has been
reviewed through a series of system audits and an implementation plan put in
place as required for each of our products. Information regarding the readiness
of all our products is available on our corporate web site at
www.kla-tencor.com. The framework of this project is similar to that established
for our internal systems. This program has covered several key areas including
date inspections, operating system investigations, runtime tests, software
inspections and third party software component inventory. As of the end of
fiscal 1999, we have met the majority of the goals of this project, and we
continue to address the remaining issues to ensure accurate information will be
available prior to January 1, 2000.
COSTS TO ADDRESS YEAR 2000 READINESS. Although a large portion of our Year 2000
readiness program used existing internal resources, we estimate we have incurred
approximately $5 million of incremental external spending directly associated
with this program through June 30, 1999. We anticipate we will incur future
incremental external spending to complete our readiness program of approximately
$3 million. However, the actual future incremental spending may prove to be
higher. Also, this estimate does not include the costs that could be incurred if
one or more of our significant third party service providers fails to achieve
Year 2000 readiness. We have not separately identified the costs incurred for
our Year 2000 readiness program that are the result of use of internal resources
and therefore, these costs are not included in the above estimates.
YEAR 2000 UNCERTAINTIES. Based on currently available information, management
does not believe that the Year 2000 issues related to internal systems or
products sold by us to customers, as discussed above, will have a material
impact on our financial condition or overall trends in results of operations.
While we have undertaken a Year 2000 readiness program and have performed
extensive testing of our internal systems and the products we manufacture, we
are uncertain to what extent we may be affected by such matters. A significant
disruption of our financial management and control systems or a lengthy
interruption in our manufacturing operations caused by a Year 2000 readiness
program-related issue could result in a material adverse impact on our operating
results and financial condition. A supplier's failure to ensure Year 2000
capability or our customer's concerns about Year 2000 readiness of our product
could seriously harm our business.
We believe that Year 2000 readiness will be achieved prior to January 1,
2000, however, due to the substantial nature of the work and the extensive
testing that must take place, there can be no assurance that there will not be
delays or material costs associated with the plan or that there will not be
adverse effects on operations relating to or as a result of Year 2000
<PAGE> 18
readiness planning and implementation, or that such programs will successfully
detect and remedy all potential Year 2000 problems in advance.
OTHER FACTORS AFFECTING RESULTS,
INCLUDING RISKS AND UNCERTAINTIES
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. For example, demand for our products increased in fiscal
1998 from the prior year, but decreased in fiscal 1999, primarily as a result of
widespread economic difficulties experienced in Japan and other parts of the
Asia Pacific region. This cyclical nature of our marketplace affects our ability
to accurately budget our expense levels, which are based in part on our
projections of future revenues. 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. For example, during the second quarter of fiscal 1999, we
implemented a restructuring plan that resulted in a non-recurring pre-tax charge
of $35 million. During a down cycle we must be in a position to adjust our cost
and expense structure to the prevailing market condition 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.
During the most recent down cycle, the semiconductor industry experienced
excess production capacity that caused 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 and the mix and quantities of products included in those
orders are factors beyond our control. Insufficient orders will result in
under-utilization of our manufacturing facilities and infrastructure and will
negatively affect our operating results and financial condition.
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 Annual Report. In addition,
future operating results may not follow any past trends. The factors we believe
make our results more likely to fluctuate and difficult to predict include:
- the cyclical nature of the semiconductor industry;
- change in the price and profitability of our products;
- the timing of new product introductions;
- our ability to develop and implement new technologies;
- delays in our customers' schedules for fulfillment of orders;
- potential cancellation of contracts by major customers; 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
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
INTERNATIONAL TRADE AND ECONOMIC CONDITIONS. Ours is an increasingly global
market. In fiscal 1997, 1998 and 1999, a significant percentage of our revenues
were 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. Although economies in the Asia Pacific
region have stabilized to some degree, compared to early-to-mid fiscal 1999, and
certain countries such as Taiwan have relatively healthy economies, we remain
cautious about general macroeconomic developments in the Asia Pacific region,
particularly Japan. Japan's economy is important to the overall financial health
of the region. If the economies in the Asia Pacific region stagnate or
deteriorate, the economies of other regions could also be adversely affected.
Because of our significant dependence on international revenues, our operating
results could be negatively affected by a continued or additional decline in the
economies of any of the countries or regions in which we do business.
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 world-wide. 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, 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 impair 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
<PAGE> 20
technologies and rapid innovation of new solutions. For example, the
semiconductor industry continues to shrink the size of semiconductor devices and
recently 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, develop and introduce new
products which successfully address changing customer needs, win market
acceptance of these new products and 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 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.
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, as well
as Year 2000 related problems. 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.
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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.
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
consider whether to seek licenses where appropriate. Based on industry practice
and prior experience, we believe that licenses or other rights, if necessary,
will be available on commercially reasonable terms for existing or future
claims. Nevertheless, 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,
<PAGE> 22
including management issues and costs in connection with integration of the
operations, technologies, and products of the acquired companies, 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 which alleges
infringement of intellectual property rights and other damages. This type of
litigation tends to be expensive and requires significant management time and
attention. In addition, if we lose in this type of litigation, a court could
require us to pay substantial damages and/or royalties, 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.
EFFECTS OF RECENT
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). It
establishes accounting and reporting standards for derivative instruments
including stand-alone instruments, such as forward currency exchange contracts
and interest note swaps or embedded derivatives, such as conversion options
contained in convertible debt investments and requires that these instruments be
marked-to-market on an ongoing basis. We are required to adopt SFAS 133 in the
first quarter of our fiscal year ending June 30, 2001. The effect of SFAS No.
133 will not be material to our financial statements.
MARKET RISK DISCLOSURE
KLA-Tencor is 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, 1999. Actual results may differ materially.
At the end of fiscal 1999, we had an investment portfolio of fixed income
securities of $457 million, excluding those classified as cash and cash
equivalents (see Note 4 of Notes to Consolidated Financial Statements). 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, 1999, the fair value of the portfolio would decline by $8 million.
As of June 30, 1999 we had forward contracts to sell $221 million in foreign
currency in order to hedge currency exposures (see Note 1 of the Notes to the
Consolidated Financial Statements). The fair market value of these contracts,
based on prevailing exchange rates on June 30, 1999, was $218 million. A 10%
adverse move in currency exchange rates affecting the contracts would decrease
the fair value of the contracts by $20 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 expenses should have no material impact to the income or cash flows.
<PAGE> 23
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, (in thousands, except per share data) 1998 1999
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 215,970 $ 271,488
Short-term investments 92,343 59,574
Accounts receivable, net 304,140 280,070
Inventories 234,565 195,679
Deferred income taxes 90,729 113,037
Other current assets 18,624 22,493
---------- ----------
Total current assets 956,371 942,341
Land, property and equipment, net 140,937 168,335
Marketable securities 415,168 424,121
Other assets 35,921 50,103
Total assets $1,548,397 $1,584,900
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 21,482 $ 14,567
Accounts payable 46,353 35,249
Other current liabilities 282,848 302,501
---------- ----------
Total current liabilities 350,683 352,317
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, $0.001 par value, 250,000 authorized,
87,444 and 88,682 shares issued and outstanding 87 89
Capital in excess of par value 497,496 504,263
Retained earnings 683,836 723,048
Accumulated other comprehensive income 16,295 5,183
Total stockholders' equity 1,197,714 1,232,583
---------- ----------
Total liabilities and stockholders' equity $1,548,397 $1,584,900
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 24
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Year ended June 30, (in thousands, except per share data) 1997 1998 1999
<S> <C> <C> <C>
Revenues $1,031,824 $1,166,325 $843,181
---------- ---------- --------
Costs and operating expenses:
Cost of goods sold 471,910 554,917 447,059
Engineering, research and development 134,105 181,903 164,699
Selling, general and administrative 219,425 242,400 199,057
Non-recurring acquisition, restructuring
and other charges 60,552 22,474 42,700
---------- ---------- --------
Total costs and operating expenses 885,992 1,001,694 853,515
Income (loss) from operations 145,832 164,631 (10,334)
Interest income and other, net 28,147 41,680 60,643
---------- ---------- --------
Income before income taxes 173,979 206,311 50,309
Provision for income taxes 68,583 72,215 11,097
---------- ---------- --------
Net income $ 105,396 $ 134,096 $ 39,212
========== ========== ========
Earnings per share:
Basic $ 1.29 $ 1.58 $ 0.45
Diluted $ 1.24 $ 1.52 $ 0.43
Weighted average number of shares:
Basic 81,943 85,097 87,737
Diluted 85,203 88,522 91,672
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock and Capital
in Excess of Par Value Accumulated
----------------------- Retained other compre-
(in thousands) Shares Amount Earnings hensive income Totals
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1996 81,746 $ 426,430 $ 437,310 $ 7,259 $ 870,999
Components of comprehensive income:
Net income -- -- 105,396 -- 105,396
Change in unrealized gain
on investments -- -- -- 8,388 8,388
Currency translation adjustments -- -- -- (2,048) (2,048)
-------
Total comprehensive income -- -- -- -- 111,736
-------
Net issuance under employee stock plans 2,013 22,235 -- -- 22,235
Tax benefits of stock option transactions -- 9,643 -- -- 9,643
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1997 83,759 458,308 542,706 13,599 1,014,613
Components of comprehensive income:
Net income -- -- 134,096 -- 134,096
Change in unrealized gain
on investments -- -- -- 8,517 8,517
Currency translation adjustments -- -- -- (5,821) (5,821)
-------
Total comprehensive income -- -- -- -- 136,792
-------
Net issuance under employee stock plans 2,263 34,537 -- -- 34,537
Repurchase of common stock (378) (16,038) -- -- (16,038)
Tax benefits of stock option transactions -- 20,529 -- -- 20,529
Issuance of common stock in connection
with acquisition 1,800 247 7,034 -- 7,281
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1998 87,444 497,583 683,836 16,295 1,197,714
Components of comprehensive income:
Net income -- -- 39,212 -- 39,212
Change in unrealized gain
on investments -- -- -- (14,877) (14,877)
Currency translation adjustments -- -- -- 3,765 3,765
-------
Total comprehensive income -- -- -- -- 28,100
-------
Net issuance under employee stock plans 2,314 41,324 -- -- 41,324
Repurchase of common stock (1,076) (48,767) -- -- (48,767)
Tax benefits of stock option transactions -- 14,212 -- -- 14,212
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1999 88,682 $ 504,352 $ 723,048 $ 5,183 $ 1,232,583
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 26
<TABLE>
<CAPTION>
Year ended June 30, (in thousands) 1997 1998 1999
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $105,396 $134,096 $ 39,212
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 52,340 38,917 48,217
Restructuring charges -- -- 35,000
In-process technology -- 20,546 7,700
Net gain on sale of marketable securities -- -- (18,819)
Deferred income taxes (17,267) (46,225) (27,930)
Changes in assets and liabilities:
Accounts receivable 34,859 (57,542) 40,898
Inventories 21,307 (62,271) 30,834
Other assets (11,817) (16,951) (15,449)
Accounts payable (3,580) 3,821 (12,145)
Other current liabilities 64,737 59,769 (5,172)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 245,975 74,160 122,346
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of technology and net assets -- (18,771) (10,047)
Purchase of property and equipment (56,793) (64,389) (60,736)
Purchases of available for sale securities (997,283) (915,185) (598,170)
Proceeds from sale of available for sale securities 870,391 825,643 631,188
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (183,685) (172,702) (37,765)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of common stock, net 22,235 34,537 41,324
Stock repurchases -- (16,038) (48,767)
Net payments under short term debt obligations (6,752) (2,636) (8,714)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 15,483 15,863 (16,157)
- ---------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (252) 19,424 (12,906)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 77,521 (63,255) 55,518
Cash and cash equivalents at beginning of period 201,704 279,225 215,970
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $279,225 $215,970 $271,488
===============================================================================================================
Supplemental cash flow disclosures:
Income taxes paid $ 68,430 $ 85,394 $ 10,437
Interest paid $ 1,551 $ 2,303 $ 2,073
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF THE OPERATIONS AND PRINCIPLES OF CONSOLIDATION. KLA-Tencor
Corporation ("the Company") is a global provider of yield management solutions
for semiconductor manufacturing and related industries. The Company has
subsidiaries in the United States and in key markets throughout the world. The
consolidated financial statements include the financial statements of KLA-Tencor
and its wholly owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated.
CASH EQUIVALENTS AND INVESTMENTS. Cash equivalents consist of highly liquid
investments that are valued at amortized cost, which approximates market value,
and have original maturity dates of three months or less from the date of
acquisition. Investments include debt and equity securities with maturities
greater than three months from the date of acquisition. The Company has
classified all securities as available-for-sale, as the sale of such securities
may be required prior to maturity to implement management strategies.
Investments classified as available-for-sale are reported at fair value with
unrealized gains or losses excluded from earnings and reported as a separate
component of stockholders' equity, net of applicable taxes, until realized.
INVENTORIES. Inventories are stated at the lower of cost (on a first-in,
first-out basis) or market. Demonstration units are stated at their
manufacturing cost and reserves are recorded to state the demonstration units at
their net realizable value.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost.
Depreciation of property and equipment is based on the straight-line method over
the estimated useful lives of the assets, which are 30 years for buildings, 10
years for building improvements, 5 to 7 years for furniture and fixtures, and 3
to 5 years for machinery and equipment. The life of the lease or the useful
life, whichever is shorter, is used for the amortization of leasehold
improvements.
CONCENTRATION OF CREDIT RISK. Financial instruments, which potentially subject
the Company to credit risk, consist principally of investments, accounts
receivable and 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. The Company, by policy, limits the
amount of credit exposure to any one financial institution or commercial issuer.
The Company has not experienced any material losses on its investments.
A majority of the Company's trade receivables are derived from sales to
large multinational semiconductor manufacturers. 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. The Company
performs ongoing credit evaluations of its customers' financial condition. The
Company maintains a provision for potential credit losses based upon expected
collectibility of all accounts receivable.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on the foreign exchange contracts used in hedging activities. The
Company does not anticipate nonperformance by these counterparties.
FOREIGN CURRENCY. The functional currencies of the Company's significant foreign
subsidiaries are the local currencies. Accordingly, all assets and liabilities
of the foreign operations are translated to U.S. dollars at current period end
exchange rates, and revenues and expenses are translated to U.S. dollars using
weighted average exchange rates in effect during the period. The gains and
losses from foreign currency translation of these subsidiaries' financial
statements are recorded directly into a separate component of stockholders'
equity under the caption "Accumulated other comprehensive income." Currency
transaction gains and losses have not been significant.
The Company's foreign subsidiaries operate and sell the Company's products
in various global markets. As a
<PAGE> 28
result, the Company is exposed to changes in interest rates and foreign currency
exchange rates. The Company utilizes foreign currency forward exchange contracts
to hedge against certain future movements in foreign exchange rates that affect
certain foreign currency denominated sales and purchase transactions. The
Company attempts to match the forward contracts with the underlying items being
hedged in terms of currency, amount, and maturity. The Company does not use
derivative financial instruments for speculative or trading purposes. Since the
impact of movements in currency exchange rates on forward contracts offsets most
of the related impact on the exposures hedged, these financial instruments
generally do not subject the Company to speculative risk that would otherwise
result from changes in currency exchange rates. Realized gains and losses on
forward exchange contracts are included in interest income and other, net, which
offset foreign exchange gains or losses from revaluation of foreign
currency-denominated receivable and payable balances. The cash flows related to
gains and losses on these contracts are classified in the same category as the
hedged transactions in the Consolidated Statements of Cash Flows.
At June 30, 1999, the Company had forward exchange contracts maturing
throughout fiscal 2000 and early fiscal 2001 to sell and purchase $247 million
and $26 million, respectively, in foreign currency, primarily Japanese yen. At
June 30, 1998, the Company had forward contracts maturing throughout fiscal 1999
and early 2000 to sell and purchase $219 million and $6 million, respectively,
in foreign currency, primarily Japanese yen. Of the forward exchange contracts
existing at June 30, 1999, $119 million and $12 million of contracts hedge
foreign currency assets and liabilities, respectively, were carried on the
consolidated balance sheet as of June 30, 1999, and consequently, the
consolidated financial statements reflect the fair market value of the contracts
and their underlying transactions. Contracts of $128 million and $14 million
hedge firm commitments for future sales and purchases, respectively, denominated
in foreign currency. The fair market value of these contracts on June 30, 1999,
based upon prevailing market rates on that date, was $126 million and $13
million, respectively. As of June 30, 1999, and based on prevailing market rates
on that date, the unrealized loss on each set of contracts was $1 million.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company has evaluated the estimated
fair value of financial instruments using available market information and
valuation methodologies. The amounts reported as investments and bank borrowings
reasonably estimate their fair value. The fair value of the Company'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.
REVENUE RECOGNITION. The Company recognizes revenue when the product has been
shipped and collection of the resulting receivable is probable. A provision for
the estimated costs of fulfilling warranty and installation obligations is
recorded at the time the related revenue is recognized. Service and maintenance
contract revenues are deferred and recognized ratably over the period of the
related contract.
EARNINGS PER SHARE. The Company computes its earnings per share under the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (EPS). Basic earnings per share is computed 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 computed 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.
Options to purchase 760,287, 1,078,708, and 674,028 shares were outstanding
at June 30, 1999, 1998, and 1997 respectively, but not included in the
computation of diluted EPS because the exercise price was greater than the
average market price of common shares in each respective year. The exercise
price ranges of these options
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
were $42.25 to $69.88, $48.06 to $69.88, and $33.81 to $48.31 at June 30, 1999,
1998 and 1997 respectively.
MANAGEMENT ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION PLANS. The Company accounts for its employee stock
option plans and employee stock purchase plan in accordance with provisions of
the Accounting Principles Board's Opinion No. 25, "Accounting for Stock Issued
to Employees." The Company provides additional proforma disclosure required by
Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation" (see Note 6).
RECLASSIFICATIONS. Certain amounts in fiscal years prior to 1999 have been
reclassified to conform to the 1999 financial statement presentation.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting and
reporting standards for derivative instruments including stand-alone
instruments, such as forward currency exchange contracts and interest note swaps
or embedded derivatives, such as conversion options contained in convertible
debt investments and requires that these instruments be marked-to-market on an
ongoing basis. Along with the derivatives, the underlying hedged items are also
to be marked-to-market on an ongoing basis. These market value adjustments are
to be included either in the income statement or stockholders' equity, depending
on the nature of the transaction. The Company currently only participates in
hedge transactions of assets, liabilities and firm commitments and does not
anticipate that the adoption of this Statement will have a material impact on
the financial statements as the gains and losses on the hedge transactions
offset the losses and gains on the underlying items being hedged. The Company is
required to adopt SFAS 133 in the first quarter of its fiscal year ending June
30, 2001.
<TABLE>
<CAPTION>
NOTE 2 BALANCE SHEET COMPONENTS
June 30, (in thousands) 1998 1999
- ----------------------------------------------------------------------
<S> <C> <C>
Accounts receivable, net
Accounts receivable, gross $ 312,402 $ 296,708
Allowance for doubtful accounts (8,262) (16,638)
- ----------------------------------------------------------------------
$ 304,140 $ 280,070
======================================================================
Inventories:
Customer service parts $ 31,671 $ 41,276
Raw materials 49,630 45,906
Work-in-process 79,238 52,913
Demonstration equipment 47,234 37,469
Finished goods 26,792 18,115
- ----------------------------------------------------------------------
$ 234,565 $ 195,679
======================================================================
Property and equipment:
Land $ 10,687 $ 16,187
Buildings and improvements 11,169 30,370
Machinery and equipment 158,317 183,135
Office furniture and fixtures 22,280 24,742
Leasehold improvements 54,440 64,461
- ----------------------------------------------------------------------
256,893 318,895
Less: accumulated depreciation
and amortization (115,956) (150,560)
- ----------------------------------------------------------------------
$ 140,937 $ 168,335
======================================================================
Other current liabilities:
Warranty, installation and retrofit $ 60,008 $ 44,665
Compensation and benefits 101,975 122,851
Unearned revenue 13,947 20,055
Income taxes payable 57,660 59,934
Restructuring accrual 4,586 16,930
Other accrued expenses 44,672 38,066
- ----------------------------------------------------------------------
$ 282,848 $ 302,501
======================================================================
Accumulated other comprehensive income:
Currency translation adjustments $ (9,813) $ (6,048)
Unrealized gains on investments, net 26,108 11,231
- ----------------------------------------------------------------------
$ 16,295 $ 5,183
======================================================================
</TABLE>
<PAGE> 30
NOTE 3 NON-RECURRING ACQUISITION,
RESTRUCTURING AND OTHER CHARGES
ACQUISITIONS. In December 1998, the Company purchased a confocal review station
product and related technology from Uniphase Corporation for an aggregate
purchase price of $3 million. Assets acquired of $3 million consisted primarily
of inventory.
In November 1998, the Company purchased assets and technology from Keithley
Instruments, Inc. for an aggregate purchase price of $10 million. The corona
wire gate oxide monitoring tool technology we acquired had not yet reached the
alpha stage and the cost to complete the development of this equipment was
estimated at the time of acquisition to be $1 million. The Company recorded a
charge of $8 million for purchased in-process research and development,
representing the appraised value of product that was not considered to have
reached technological feasibility. The calculated appraised value under the
income approach used by the Company did not differ materially from the result
under the percentage of completion approach currently preferred by the
Securities and Exchange Commission. Net assets acquired of $1 million consisted
primarily of inventory and equipment and the remaining $1 million was allocated
to other intangibles including acquired technology and goodwill.
In June 1998, the Company acquired Groff Associates, Inc. (dba VARS Inc.)
for an aggregate purchase price of $13 million. The digital and
in-line-monitoring image archiving retrieval software technology acquired had
not yet reached the alpha stage and the cost to complete the development of
these software products was estimated at the time of acquisition to be $2
million. The Company recorded a charge of $13 million for purchased in-process
research and development, representing the appraised value of products that were
not considered to have reached technological feasibility. The calculated
appraised value under the income approach used by the Company did not differ
materially from the result under the percentage of completion approach currently
preferred by the Securities and Exchange Commission. The in-line monitoring
image archiving retrieval software technology acquired had not reached
commercial feasibility as of June 30, 1999. The value of the tangible net assets
acquired was nominal.
In May 1998, the Company acquired DeviceWare, Inc., a company in its
development stage, for an aggregate purchase price of $3 million. The bit
mapping defect characterization technology acquired had not yet reached the
alpha stage and the cost to complete the development of this software product
was estimated at the time of acquisition to be $1 million. The Company recorded
a charge of $3 million for purchased in-process research and development,
representing the appraised value of product that was not considered to have
reached technological feasibility. The calculated appraised value under the
income approach used by the Company did not differ materially from the result
under the percentage of completion approach currently preferred by the
Securities and Exchange Commission. The technology acquired had still not
reached commercial feasibility as of June 30, 1999. The value of the tangible
net assets acquired was nominal.
In February 1998, the Company acquired Nanopro GmbH (Freiburg, Germany) for
an aggregate purchase price of $3 million. This privately-held company
specialized in the development of advanced interferometric wafer inspection. The
identified in-process research and development of $3 million was estimated and
expensed, as technological feasibility of the viable advanced interferometric
wafer technology had not yet been reached. The technology acquired had not
reached commercial feasibility as of June 30, 1999. The value of the tangible
net assets acquired was nominal.
Each of the above acquisitions was accounted for using the purchase method
of accounting and the developmental products acquired were evaluated in the
context of Interpretation 4 of SFAS No. 2 and SFAS No. 86. The allocation of the
purchase price to in-process research and development cost was determined
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
by identifying research projects in areas for which technological feasibility
had not been established and no alternative future uses existed. Substantially
all of the in-process research and development projects acquired were expected
to be complete and generating revenues within the 24 months following the
acquisition date. However, development of these technologies remains a
significant risk due to the remaining effort required to achieve technical
feasibility, rapidly changing customer markets and significant competitive
threats from numerous companies. Failure to bring any of these products to
market in a timely manner could adversely affect sales and profitability of the
Company in the future. Additionally, the value of net assets and other
intangible assets acquired may become impaired.
In April 1998, the Company acquired Amray, Inc. (Amray) in exchange for
1,800,000 shares of its common stock accounted for under the pooling method of
accounting. A privately-owned provider of scanning electron microscope systems,
Amray's historical operations, net assets, and cash flows were less than 3% of
the Company's consolidated financial results and, therefore, were not reflected
in the consolidated financial results prior to the acquisition. The Company
incurred $2 million in professional fees and restructuring charges related to
this acquisition.
RESTRUCTURING AND OTHER CHARGES. In November 1998, the Company entered into a
restructuring plan to address the downturn in the semiconductor industry. The
plan included a consolidation of facilities, a write-down of assets associated
with affected programs and a reduction in the Company's global workforce,
resulting in a restructuring charge of $35 million. Restructuring costs have
been assigned to four main categories including facilities, inventory, severance
and benefits, and other restructuring charges. Facilities costs totaling $12
million include $8 million for lease expense resulting from consolidation and
closure of certain offices located primarily in the U.S. and Japan; $3 million
for leasehold improvements in those facilities; and $1 million in other
facilities-related exit costs. Inventory-related costs of $10 million are assets
related to unique parts and non-cancelable purchase commitments of certain
development programs which were terminated as part of the realignment and
streamlining of the Company's product lines. Severance and benefit-related costs
totaling $8 million included involuntary termination of approximately 250
personnel from manufacturing, engineering, sales, marketing, and administration
throughout the U.S., Japan and Europe during fiscal 1999. Other restructuring
costs of $5 million relate primarily to the write-off of software licenses and
related non-cancelable maintenance contracts for closed locations.
Payments under certain contractual obligations, which existed as of the date
the plan was executed, and certain severance agreements are expected to extend
into fiscal 2001. Facilities and severance payments of $8 million and $6
million, respectively, are expected to be spread fairly evenly over the next ten
fiscal quarters. Inventory dispositions of $3 million are expected to be
executed during the first two quarters of fiscal 2000. The following table sets
forth the restructuring during fiscal 1999 (in thousands):
<TABLE>
<CAPTION>
Severance
Facilities Inventory and Benefits Other Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Restructuring provision $ 12,491 $ 9,721 $ 8,126 $ 4,662 $ 35,000
Write-down of assets (2,035) (6,729) -- (3,168) (11,932)
Cash expenditures (2,109) (409) (2,620) (1,000) (6,138)
- ---------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $ 8,347 $ 2,583 $ 5,506 $ 494 $ 16,930
===================================================================================================
</TABLE>
<PAGE> 32
During fiscal 1997, the Company recorded charges totaling $61 million for
merger, restructuring and other non-recurring events. Of this amount, $46
million was the result of the merger between KLA Instruments and Tencor
Instruments on April 30, 1997, $6 million was a result of the write-off of a
Tencor bad debt and $9 million was additional restructuring charges primarily
related to lease exit costs incurred by Tencor Instruments prior to the merger.
This restructuring plan was completed as of December 31, 1998.
NOTE 4 INVESTMENTS
The amortized cost and estimated fair value of securities available for sale as
of June 30, 1998 and 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
June 30, 1998
U.S. Treasuries $ 22,849 $ 102 $ 21 $ 22,930
Mortgage-backed
securities 39,951 567 76 40,442
Municipal bonds 414,760 3,649 140 418,269
Corporate debt
securities 63,439 155 53 63,541
Corporate equity
securities 10,895 38,292 -- 49,187
Other 84,727 139 233 84,633
- --------------------------------------------------------------------------
636,621 42,904 523 679,002
Less:cash
equivalents 171,466 43 18 171,491
short-term
investments 73,260 19,406 323 92,343
- --------------------------------------------------------------------------
Long-term
investments $391,895 $ 23,455 $ 182 $415,168
==========================================================================
June 30, 1999
U.S. Treasuries $ 53,097 $ 85 $ 728 $ 52,454
Mortgage-backed
securities 40,522 51 421 40,152
Municipal bonds 386,719 1,358 2,416 385,661
Corporate debt
securities 63,880 18 517 63,381
Corporate equity
securities 5,931 21,164 -- 27,095
Other 93,075 123 357 92,841
- --------------------------------------------------------------------------
643,224 22,799 4,439 661,584
Less:cash
equivalents 177,891 -- 2 177,889
short-term
investments 38,361 21,232 19 59,574
- --------------------------------------------------------------------------
Long-term
investments $426,972 $ 1,567 $ 4,418 $424,121
==========================================================================
</TABLE>
The contractual maturities of securities classified as available for sale
as of June 30, 1999, regardless of the consolidated balance sheet
classification, are as follows (in thousands):
<TABLE>
<CAPTION>
Estimated
Fair Value
- ----------------------------------------------------
<S> <C>
Due within one year $204,106
Due after one year through five years 274,157
Due after five years 156,226
- ----------------------------------------------------
$634,489
====================================================
</TABLE>
<PAGE> 33
Actual maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. The realized gains and losses for the year ended June 30,
1999 and 1998, were not material to the Company's financial position or results
of operations.
NOTE 5 INCOME TAXES
The components of income before income taxes are as follows:
<TABLE>
<CAPTION>
Year ended June 30,
(in thousands) 1997 1998 1999
- ----------------------------------------------------------------
<S> <C> <C> <C>
Domestic income before
income taxes $152,778 $172,964 $ 30,097
Foreign income before
income taxes 21,201 33,347 20,212
- ----------------------------------------------------------------
$173,979 $206,311 $ 50,309
================================================================
</TABLE>
The provision (benefit) for income taxes are comprised of the following:
<TABLE>
<CAPTION>
Year ended June 30,
(in thousands) 1997 1998 1999
- -------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 66,439 $ 94,402 $ 22,902
State 10,603 13,598 7,040
Foreign 8,808 10,440 9,085
- -------------------------------------------------------------
85,850 118,440 39,027
Deferred:
Federal (15,238) (42,149) (22,256)
State (1,766) (4,376) (6,273)
Foreign (263) 300 599
- -------------------------------------------------------------
(17,267) (46,225) (27,930)
- -------------------------------------------------------------
Provision for
income taxes $ 68,583 $ 72,215 $ 11,097
=============================================================
</TABLE>
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Actual current tax liabilities are lower than reflected above for fiscal
years 1997, 1998 and 1999 by $10 million, $21 million and $14 million,
respectively, due to the stock option deduction benefits recorded as credits to
capital in excess of par value.
The significant components of deferred income tax assets (liabilities) are
as follows:
<TABLE>
<CAPTION>
June 30, (in thousands) 1998 1999
- -------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Federal and state loss and
credit carryforwards $ 1,633 $ 5,231
Employee benefits accrual 26,606 27,889
Non-deductible reserves and other 98,218 119,035
--------- ---------
126,457 152,155
- -------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (4,625) (6,202)
Unremitted earnings of
foreign subsidiaries not
permanently reinvested (11,501) (12,138)
Unrealized (gain) loss
on investments (15,330) (7,104)
Other (6,951) (2,840)
--------- ---------
(38,407) (28,284)
- -------------------------------------------------------------------
Deferred tax assets valuation
allowance (1,633) (1,298)
--------- ---------
Total net deferred tax assets $ 86,417 $ 122,573
===================================================================
</TABLE>
The reconciliation of the United States federal statutory income tax rate
to the Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
June 30, 1997 1998 1999
- ---------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 3.3 2.9 1.0
Effect of foreign operations
taxed at various rates 0.7 -- 4.8
Benefit from foreign
sales corporation (3.3) (2.8) (3.3)
Realized deferred tax assets
previously reserved -- (1.4) (0.7)
Merger and acquisition costs 4.5 3.0 --
Tax exempt interest (2.0) (2.6) (11.8)
Other 1.2 0.9 (2.9)
---- ---- ----
39.4% 35.0% 22.1%
===============================================================
</TABLE>
Undistributed earnings of certain of the Company's foreign subsidiaries,
for which no United States federal income taxes have been provided, aggregated
$14 million at June 30, 1999. The amount of the unrecognized deferred tax
expense related to the investments in foreign subsidiaries is estimated at $4
million at June 30,1999.
The IRS is currently auditing the Company's federal income tax returns for
fiscal 1995 to 1996. Management believes sufficient taxes have been provided in
prior years and that the ultimate outcome of the IRS audits will not have a
material adverse impact on the Company's financial position or results of
operations.
NOTE 6 STOCKHOLDERS' EQUITY AND EMPLOYEE BENEFITS
In March 1989, the Company implemented a plan to protect stockholders' rights in
the event of a proposed takeover of the Company. The Plan provides that if any
person or group acquires 15% or more of the Company's Common Stock, each Right
not owned by such person or group will entitle its holder to purchase, at the
then-current exercise price, the Company's Common Stock at a value of twice that
exercise price. The rights are redeemable by the Company and expire in April
2006.
STOCK REPURCHASE PROGRAM. In July 1997, the Board of Directors authorized the
Company to systematically repurchase shares of its common stock in the open
market. This plan was entered into to reduce the dilution from the Company's
employee benefit and incentive plans such as the stock option and employee stock
purchase plans. In fiscal 1998, 378,000 shares were repurchased under this plan
at an average price of $42.43 per share. In fiscal 1999, 1,076,000 shares were
repurchased under this plan at an average price of $45.32 per share. The Company
has a remaining 241,600 shares authorized for repurchase under this program as
of June 30, 1999.
STOCK OPTION AND INCENTIVE PLANS. The Company has various stock option and
management incentive plans for selected employees, officers, directors, and
consultants. The plans provide for awards in the form of stock options, stock
appreciation rights, stock purchase rights,
<PAGE> 35
and performance shares. As of June 30, 1999, only stock options have been
awarded under the plans.
On August 31, 1998, employees of the Company, excluding certain executive
officers, holding options with exercise prices of $28.00 or higher were granted
the opportunity to surrender those options and replace them with new options
having an exercise price of $21.25, the fair market value of the Company's stock
on that date, and begin a new vesting schedule from the date of grant. In
addition, on October 31, 1998, certain executive officers were granted the
opportunity to surrender their options and replace them with a reduced number of
options having an exercise price of $33.94, the fair market value on that date,
and begin a new vesting schedule from the date of grant. A total of 4,179,697
options were repriced during fiscal 1999.
The activity under the option plans, combined, was as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Available Options Exercise
For Grant Outstanding Price
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Balances at June 30, 1996 4,395,360 8,860,905 $16.70
Additional shares reserved 1,600,000 -- --
Options granted (4,479,879) 4,479,879 30.15
Options canceled/expired 610,357 (1,992,129) 31.22
Options exercised -- (1,087,689) 8.20
- --------------------------------------------------------------------------
Balances at June 30, 1997 2,125,838 10,260,966 20.65
Additional shares reserved 2,501,603 -- --
Options granted (3,629,888) 3,629,888 46.44
Options canceled/expired 751,710 (915,914) 30.56
Options exercised -- (1,380,175) 10.33
- --------------------------------------------------------------------------
Balances at June 30, 1998 1,749,263 11,594,765 29.11
Additional shares reserved 3,618,837
Options granted (7,655,613) 7,655,613 24.23
Options canceled/expired 5,541,546 (5,541,546) 42.06
Options exercised -- (1,494,680) 15.41
- --------------------------------------------------------------------------
Balances at June 30, 1999 3,254,033 12,214,152 $21.84
==========================================================================
</TABLE>
The options outstanding at June 30, 1999, have been segregated into ranges for
additional disclosure as follows:
<TABLE>
<CAPTION>
Options Vested
Options Outstanding and Exercisable
- -----------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Average
Range of of Shares Contract Exercise Number Exercise
Exercise Outstanding at Life Price at Vested and Price at
Prices June 30, 1999 (in years) June 30, 1999 Exercisable June 30, 1999
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.35-$17.63 1,679,352 4.37 $ 9.52 1,602,177 $ 9.13
$17.75-$18.63 1,236,633 5.24 18.57 1,100,448 18.61
$18.75-$19.06 268,548 7.37 19.06 218,576 19.06
$19.38-$21.25 5,716,726 9.16 21.25 15,593 20.77
$21.63-$21.88 1,225,732 7.26 21.70 422,797 21.72
$22.06-$33.94 1,265,071 8.67 29.95 193,584 25.54
$34.06-$69.88 822,090 8.93 44.65 189,063 42.84
- -----------------------------------------------------------------------------------------------
$ 2.35-$69.88 12,214,152 7.81 $21.84 3,742,238 $16.52
===============================================================================================
</TABLE>
The weighted average fair value of options granted in 1999, 1998 and 1997
was $14.93, $26.36 and $14.61, respectively. Options exercisable were 3,742,238,
5,111,912, and 4,592,963 as of June 30, 1999, 1998 and 1997, respectively.
EMPLOYEE STOCK PURCHASE PLAN. The Company's employee stock purchase plan
provides that eligible employees may contribute up to 10% of their base earnings
toward the semi-annual purchase of the Company's Common Stock. The employee's
purchase price is derived from a formula based on the fair market value of the
Common Stock. No compensation expense is recorded in connection with the plan.
In 1999, 1998 and 1997, employees purchased 819,667, 882,869 and 925,311 shares,
respectively. At June 30, 1999, 1,299,639 shares were reserved and available for
issuance under this plan. The weighted average fair value of shares issued in
1999, 1998 and 1997 is $10.48, $11.20, and $7.67, respectively.
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Net Income and Earnings Per Share Pro forma information regarding net
income and net income per share is required by SFAS 123, and has been determined
as if the Company had accounted for its employee stock purchase plan and
employee stock options granted subsequent to June 30, 1995, under the fair value
method of SFAS 123. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model for the single option
approach with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
- -----------------------------------------------------------------
Stock option plan:
<S> <C> <C> <C>
Expected stock price volatility 50.0% 55.0% 65.0%
Risk free interest rate 6.2% 5.8% 5.0%
Expected life of options (years) 5.4 5.6 5.6
Stock purchase plan:
Expected stock price volatility 50.0% 55.0% 65.0%
Risk free interest rate 5.6% 5.4% 4.8%
Expected life of options (years) 1-2 1-2 1-2
- -----------------------------------------------------------------
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock option and employee stock purchase plans
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of such Company
options.
For purposes of pro forma disclosures required by SFAS 123, the estimated
fair value of the options is amortized to expense over the options' vesting
periods.
The Company's pro forma information for the years ended June 30, 1997, 1998,
1999 follows (in thousands except for earnings per share information):
<TABLE>
<CAPTION>
1997 1998 1999
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $89,608 $106,882 $ 5,278
Pro forma earnings per share:
Basic $ 1.09 $ 1.26 $ 0.06
Diluted $ 1.07 $ 1.24 $ 0.06
- ---------------------------------------------------------------------------------
</TABLE>
The pro forma effect on net income and earnings per share for fiscal 1999,
fiscal 1998 and fiscal 1997 is not representative of the pro forma effect net
income in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to fiscal 1996.
Other Employee Benefit Plans The Company has a profit sharing program for
eligible employees which distributes, on a quarterly basis, a percentage of
pretax profits. In addition, the Company has an employee savings plan that
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. During 1999, the Company matched dollar-for-dollar up to $500 of
an eligible employee's contribution. The total charge to operations under the
profit sharing and 401(k) programs aggregated $24 million, $22 million and $7
million in 1997, 1998 and 1999, respectively.
The Company has a non-qualified deferred compensation plan whereby certain
key executives may defer a portion of their salary and bonus. Participants
direct the investment of their account balances among mutual funds selected by
the participants. Distributions from the plan commence following a participant's
retirement or termination of employment. At June 30, 1999, the Company had a
deferred compensation liability under the plan of $36 million.
32 KLA-TENCOR
<PAGE> 37
NOTE 7 COMMITMENTS AND CONTINGENCIES
The Company has an agreement with a bank to sell, with recourse, certain of its
trade receivables. The total amount of the facility is the yen equivalent of $80
million based upon exchange rates as of June 30, 1999. The Company has accounted
for the sale of certain of these receivables as an off-balance sheet financing
arrangement. During fiscal 1999, $91 million of receivables were sold under this
arrangement. As of June 30, 1999, $29 million were outstanding. The Company does
not believe it is materially at risk for any losses as a result of this
agreement.
In November 1997, the Company entered into a master operating lease for
land, office and manufacturing facilities constructed for its use in Milpitas
and San Jose, California. Monthly rent payments under this lease vary based upon
the London Interbank Offering Rate (LIBOR). Under the terms of the lease, the
Company, at its option, can acquire the properties at their original cost or
arrange for the properties to be acquired. In April 1999, the Company chose to
exercise its option to purchase certain of the land and facilities for a total
aggregate value of $27 million. If the Company does not purchase the remaining
properties by the end of the lease, the Company will be contingently liable to
the lessor for residual value guarantees aggregating $100 million. In addition,
under the terms of the lease, the Company must maintain compliance with certain
financial covenants. As of June 30, 1999, the Company was in compliance with all
of its covenants. Management believes that the contingent liability relating to
the residual value guarantees does not currently have a material adverse effect
on the Company's financial position or results of operations.
The Company leases several other facilities under operating leases that
expire at various times through fiscal 2012, with renewal options at the fair
market value for additional periods up to five years. The Company also leases
equipment and other facilities under operating leases.
Total rent expense under all operating leases was $18 million, $18 million
and $15 million for the years ended June 30, 1999, 1998 and 1997, respectively.
Future minimum lease commitments under these operating leases at June 30,
1999 (which include estimated lease payments for the Company's Milpitas and San
Jose, California, facilities using a LIBOR of 5.7% and total construction costs
of $119 million), are $15 million, $12 million, $12 million, $6 million, $3
million, and $8 million in fiscal 2000 through 2004 and thereafter,
respectively.
NOTE 8 SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements
and requires that certain selected information about operating segments be
reported in interim financial reports. It also establishes standards for related
disclosures about products and services, and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is evaluated regularly by the chief operating decision
maker, or decision-making group, in deciding how to allocate resources and in
assessing performance. The Company's chief operating decision makers are the
Chief Executive Officer and the Chief Operating Officer. SFAS No. 131 differs
from the previous accounting standard SFAS No. 14, which required companies to
disclose certain financial information about each industry segment in which they
operate.
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is engaged primarily in designing, manufacturing, and marketing
yield management and process monitoring systems for the semiconductor industry.
All operating units have been aggregated due to their inter-dependencies,
commonality of long-term economic characteristics, products and services, the
production processes, class of customer and distribution processes. No single
customer accounted for 10% or more of net revenues or accounts receivable in any
of the periods presented.
Long-lived assets consist of net property and equipment, goodwill,
capitalized software and other intangibles, and other long-term assets,
excluding long-term deferred tax assets.
The Company's significant operations outside the United States include a
manufacturing facility in Israel and sales, marketing and service offices in
Western Europe, Japan, and the Asia Pacific region. The following is a summary
of operations by entities located within the indicated geographic areas for
fiscal years 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Year ended June 30,
(in thousands) 1997 1998 1999
- ------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
United States $ 364,162 $ 513,065 $ 338,791
Western Europe 137,314 147,070 133,099
Japan 257,382 291,175 198,196
Asia Pacific 272,966 215,015 173,095
- ------------------------------------------------------------------
Total $1,031,824 $1,166,325 $ 843,181
==================================================================
Long-lived assets:
United States $ 128,741 $ 149,776 $ 192,869
Western Europe 6,202 9,132 21,630
Japan 9,186 13,044 13,068
Asia Pacific 6,162 4,906 4,601
- ------------------------------------------------------------------
Total $ 150,291 $ 176,858 $ 232,168
==================================================================
</TABLE>
NOTE 9 SUBSEQUENT EVENT
The Company is subject to various legal proceedings and claims, either asserted
or unasserted, that arise in the ordinary course of business. On August 30,
1999, the Company was named as a defendant in a lawsuit in which the plaintiff
alleges trade secret misappropriation, unfair competition and trade slander.
This lawsuit is in early stages of discovery and no trial date has been set.
Although the outcome of these claims cannot be predicted with certainty,
management does not believe that any of these legal matters will have a material
adverse effect on the Company's financial condition. Were an unfavorable ruling
to occur, there exists the possibility of a material impact on the net income of
the period in which ruling occurs.
<PAGE> 39
NOTE 10 QUARTERLY CONSOLIDATED
RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
In thousands, except per share amounts September 30 December 31 March 31 June 30
- -------------------------------------------------------------------------------------------------------------------
Fiscal 1998:
<S> <C> <C> <C> <C>
Revenues $ 312,420 $ 326,361 $ 274,164 $ 253,380
Gross profit 171,656 176,126 139,940 123,686
Income from operations 64,341 67,224 30,708(1) 2,358(2)
Net income 49,722 52,058 28,971(1) 3,345(2)
Net income per share:
Basic $ 0.59 $ 0.61 $ 0.34(1) $ 0.04(2)
Diluted $ 0.56 $ 0.59 $ 0.33(1) $ 0.04(2)
Fiscal 1999:
Revenues $ 205,230 $ 193,371 $ 210,939 $ 233,641
Gross profit 92,575 88,462 100,259 114,826
Income (loss) from operations (2,924) (42,674)(3) 12,964 22,300
Net income (loss) 10,180 (17,597)(3) 20,782 25,847
Net income (loss) per share:
Basic $ 0.12 $ (0.20)(3) $ 0.24 $ 0.29
Diluted $ 0.11 $ (0.20)(3) $ 0.22 $ 0.28
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Includes non-recurring acquisition and restructuring charges of $3 million.
Net income, basic and diluted net income per share would have been $31
million, $0.37 and $0.35, respectively, excluding these costs.
(2)Includes non-recurring acquisition and restructuring charges of $19 million.
Net income, basic and diluted net income per share would have been $23
million, $0.26 and $0.26, respectively, excluding these costs.
(3)Includes non-recurring acquisition and restructuring charges of $43 million.
Net income, basic and diluted net income per share would have been $10
million, $0.12 and $0.11, respectively, excluding these costs.
<PAGE> 40
QUARTERLY COMMON STOCK MARKET PRICE
<TABLE>
<CAPTION>
Fiscal 1999 Quarter ended September 30 December 31 March 31 June 30
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High 32 5/16 45 3/4 61 7/8 64 7/8
Low 21 1/4 21 1/2 45 3/4 43 11/16
- -------------------------------------------------------------------------------------------------------------
Fiscal 1998 Quarter ended September 30 December 31 March 31 June 30
- -------------------------------------------------------------------------------------------------------------
High 76 7/8 74 48 43 1/4
Low 48 1/4 33 1/2 33 3/8 24 1/4
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The preceding table sets forth the high and low closing prices of the Company's
Common Stock as traded on the Nasdaq National Market during the last two years.
As of September 1, 1999, there were 1,755 shareholders of record of the
Company's Common Stock. The closing price for the Company's Common Stock as
reported by the Nasdaq National Market as of the close of business on September
1, 1999 was $65.25 per share. The Company has never paid cash dividends to its
stockholders. The Company does not presently plan to pay cash dividends in the
foreseeable future.
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
KLA-Tencor Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of KLA-Tencor
Corporation and its subsidiaries at June 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
San Jose, California
July 27, 1999, except as to Note 9, which is as of August 30, 1999
<PAGE> 42
<TABLE>
<CAPTION>
CORPORATE INFORMATION
<S> <C> <C>
BOARD OF DIRECTORS Edward C. Grady KLA-Tencor Limited
Executive Vice President West Lothian, Scotland
Kenneth Levy Wafer Inspection Group
Chairman of the Board KLA-Tencor Italy SRL
Neil Richardson, Ph.D. Vimercate, Italy
Kenneth L. Schroeder Executive Vice President
President and E-Beam Inspection and KLA-Tencor (Israel) Corporation
Chief Executive Officer Metrology Group Migdal Ha'Emek, Israel
James W. Bagley Arthur P. Schnitzer KLA-Tencor Japan Ltd.
Chairman and Executive Vice President Yokohama, Japan
Chief Executive Officer Customer Group
Lam Research Inc. KLA-Tencor Korea Inc.
Samuel A. Harrell, Ph.D. Seoul, Korea
Edward W. Barnholt Senior Vice President
President and Chief Executive Officer Strategic Business Development KLA-Tencor Taiwan Branch
Agilent Technologies, Inc. Hsinchu, Taiwan
J. Dennis Fortino
Leo J. Chamberlain Group Vice President KLA-Tencor (Malaysia) Sdn Bhd
Private Investor Reticle and Surfscan Group Selangor, Malaysia
Richard J. Elkus, Jr. John H. Kispert KLA-Tencor (Singapore) Pte Ltd
Co-Chairman, Voyan Technology and Vice President Singapore
Director, Lam Research Inc. Finance and Accounting
Dean O. Morton Richard P. Wallace LEGAL COUNSEL
Retired Executive Vice President Group Vice President
and Chief Operating Officer Lithography and Films Group Wilson Sonsini Goodrich & Rosati
Hewlett Packard Co. Palo Alto, California
Samuel Rubinovitz SUBSIDIARY OPERATING
Retired Executive Vice President INDEPENDENT ACCOUNTANTS
EG&G, Inc. OFFICERS
PricewaterhouseCoopers LLP
Dag Tellefsen Yasuo Mizokami San Jose, California
Managing Partner President
Glenwood Ventures/Vision Capt. KLA-Tencor Japan Ltd.
TRANSFER AGENT/REGISTRAR
Jon D. Tompkins Hee-June Choi
Retired Chairman President Boston Equiserve LLP
KLA-Tencor Corporation KLA-Tencor Korea Inc. Boston, Massachusetts
Lida Urbanek
Private Investor Russell W. Weiss STOCK SYMBOL
President
KLA-Tencor Europe Common Stock traded on the
CORPORATE SECRETARY Nasdaq National Market under the
Avi Cohen symbol KLAC
Larry W. Sonsini President
Partner KLA-Tencor (Israel) Corporation
Wilson Sonsini Goodrich & Rosati ANNUAL MEETING
CORPORATE HEADQUARTERS Stockholders are invited to attend
CORPORATE OFFICERS the Annual Meeting at 11:00 am on
KLA-Tencor Corporation Tuesday, November 16, 1999 at
Kenneth Levy 160 Rio Robles KLA-Tencor's Milpitas facility:
Chairman of the Board San Jose, California 95134 One Technology Drive, Milpitas,
(408) 875-3000 California.
Kenneth L. Schroeder www.kla-tencor.com
President and Additional copies of this report as well
Chief Executive Officer as copies of the Company's annual
INTERNATIONAL OFFICES report on Form 10K for the year
Gary E. Dickerson ended June 30, 1999 may be obtained
Chief Operating Officer KLA-Tencor Limited at www.kla-tencor.com, by calling
Wokingham, United Kingdom (408) 875-3600, or by writing to:
Robert J. Boehlke
Executive Vice President KLA-Tencor GmbH KLA-Tencor Corporation
and Chief Financial Officer Munich, Germany Attn: Investor Relations
160 Rio Robles
KLA-Tencor France SARL San Jose, CA 95134
Evry Cedex, France
</TABLE>
<PAGE> 43
[LOGO]
<PAGE> 1
EXHIBIT 21.1
KLA-Tencor Subsidiaries
-----------------------
<TABLE>
<CAPTION>
State or Other Jurisdiction
Name of Incorporation
- ---- ---------------------------
<S> <C>
DOMESTIC SUBSIDIARIES
International Sales & Business, Inc. California
KLA-Tencor Building Corporation California
KLA-Tencor DISC Corporation California
KLA-Tencor International Corporation California
KLA-Tencor Klinnik Corporation California
KLA-Tencor Management Corporation California
KLA-Tencor (Thailand Branch) Corporation California
VLSI Standards, Inc. California
INTERNATIONAL SUBSIDIARIES
KLA-Tencor (Cayman) Limited I Cayman Islands
KLA-Tencor (Cayman) Limited II Cayman Islands
KLA-Tencor (Cayman) Limited III Cayman Islands
KLA-Tencor (Israel) Corporation Israel
KLA-Tencor Holding Corporation 1987 Limited Israel
KLA-Tencor Corporation 1992 Limited Israel
KLA-Tencor Italy S.R.L. Italy
KLA-Tencor Japan, Ltd. Japan
KLA-Tencor Foreign Sales Corporation Barbados
KLA-Tencor GmbH Germany
KLA-Tencor France SARL France
KLA-Tencor Korea, Inc. Korea
KLA-Tencor Limited United Kingdom
KLA-Tencor (Malaysia) Sdn Bhd Malaysia
KLA-Tencor (Singapore) PTE, Ltd. Singapore
KLA-Tencor (Service) Limited United Kingdom
VLSI Standards, KK Japan
KLA-Tencor International Trading (Shanghai) Co. Ltd. China
KLA Instruments Switzerland, S.A. Switzerland
</TABLE>
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-15784, No. 2-71584, No. 2-75314, No. 33-26002,
No. 33-42973, No. 33-42982, No. 33-42975, No. 33-55362, No. 33-88662, No.
333-03003, No. 333-22939, No. 333-22941, No. 333-26681, No. 333-32537, No.
333-45271, No. 333-60887, No. 333-60883, No. 333-68423, No. 333-68415, No.
333-85121 and No. 333-85123) and in the Prospectus constituting part of the
Registration Statement on Form S-3 (No. 333-52393) of KLA-Tencor Corporation of
our report dated July 27, 1999 appearing on page 37 of the Annual Report to
Stockholders which is incorporated in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers LLP
San Jose, California
September 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS, THE CONSOLIDATED BALANCE SHEET AND THE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 271,488
<SECURITIES> 483,695
<RECEIVABLES> 296,708
<ALLOWANCES> 16,638
<INVENTORY> 195,679
<CURRENT-ASSETS> 942,341
<PP&E> 318,895
<DEPRECIATION> 150,560
<TOTAL-ASSETS> 1,584,900
<CURRENT-LIABILITIES> 352,317
<BONDS> 0
0
0
<COMMON> 504,352
<OTHER-SE> 728,231
<TOTAL-LIABILITY-AND-EQUITY> 1,584,900
<SALES> 843,181
<TOTAL-REVENUES> 843,181
<CGS> 447,059
<TOTAL-COSTS> 447,059
<OTHER-EXPENSES> 406,456
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,344
<INCOME-PRETAX> 50,309
<INCOME-TAX> 11,097
<INCOME-CONTINUING> 39,212
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,212
<EPS-BASIC> 0.45
<EPS-DILUTED> 0.43
</TABLE>
