<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[ X ] ANNUAL report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 (fee required).
For the fiscal year ended DECEMBER 31, 1996
[ ] TRANSITION report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
For the transition period from _____________ to ____________
COMMISSION FILE NUMBER 0-20007
TENCOR INSTRUMENTS
(exact name of registrant as specified in its charter)
CALIFORNIA 94-2464767
(State of Incorporation) (I.R.S. Employer Identification No.)
ONE TECHNOLOGY DRIVE, MILPITAS, CALIFORNIA 95035
(Address of principal executive offices) (zip code)
Registrant's telephone number (408) 571-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange on which registered
-------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
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. [ X ]
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
--- ---
Aggregate market value of the voting stock held by non affiliates of the
registrant as of February 28, 1997: $953,727,955 (1)
Number of shares outstanding of each of the issuer's classes of common stock, as
of February 28, 1997: 31,246,903
(1) Excludes 1,789,901 shares held by directors and officers at February 28,
1997 and 5,651,000 shares held by shareholders at December 31, 1996 whose
ownership exceeded 5% of the outstanding shares at December 31, 1996.
Exclusion of such shares should not be construed as indicating that the
holders thereof possess the power, direct or indirect, to direct the
management or policies of the registrant, or that such person is controlled
by or under common control with the registrant.
Exhibit Index at page 49
Total pages 59
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PART I
ITEM 1: BUSINESS
MERGER WITH KLA
On January 14, 1997, Tencor and KLA Instruments (KLA) jointly announced a
definitive merger agreement to create a combined company. Under the terms of
the merger agreement, shares and options for KLA common stock will be
exchanged for all outstanding shares and options of the Company on the basis
of one share of KLA Instruments for each share of the Company. The transaction
is intended to qualify as a pooling of interests for financial reporting
purposes and structured to qualify as a tax-free reorganization. The
transaction is conditioned on obtaining both companies' shareholder approval,
regulatory clearance and other customary closing conditions, and is
anticipated to close during the quarter ending June 30, 1997.
BUSINESS
Tencor Instruments ("Tencor" or the "Company"), a California corporation,
designs, manufactures, markets and services wafer inspection, film measurement,
metrology systems yield measurement and physical measurement standards,
primarily for the semiconductor industry. Tencor's systems are used to assist in
the start-up of new semiconductor manufacturing facilities and new processes and
to monitor semiconductor wafers and processes during production. Certain of
Tencor's metrology systems also are sold to the data storage and flat panel
display industries. Tencor uses its technical expertise and understanding of
customer needs to create what it believes is one of the broadest lines of high
performance laser scanning-based wafer inspection, thin film measurement and
metrology systems used in the semiconductor industry. Since its founding in
1976, Tencor's products all have shared a common development philosophy: systems
and instruments must be user-friendly, generate results that are accurate and
easy to interpret, and provide the user with a rapid return on investment
resulting in a low cost of ownership. To date, Tencor has introduced over 112
different products for use in the semiconductor and other industries and has
shipped more than 10,000 systems, ranging from bench top instruments to complex
automated systems.
Tencor markets its products worldwide to virtually all of the major
semiconductor manufacturers. International sales accounted for approximately
64% of Tencor's revenues in 1996. The Company expects that international sales
will continue to represent a significant percentage of revenues.
Tencor's operating results have fluctuated in the past and the Company's
operating results may fluctuate in the future. The Company's operating results
are dependent on many factors, including the economic conditions in the
semiconductor industry, the size and timing of the receipt of orders from
customers, customer cancellations or delays of shipments, the Company's ability
to develop, introduce and market new and enhanced products on a timely basis,
the introduction of new products by its competitors, changes in average selling
prices and product mix, and exchange rate fluctuations, among others. In
addition, the Company's expense levels are based, in part, on expectations of
future revenues. If revenue levels in a particular quarter do not meet
expectations, operating results could be adversely affected. The Company's
results of operations for a particular quarter could be adversely affected if
anticipated orders are not received in time to enable shipment during the
quarter, if anticipated shipments are delayed or canceled by one or more
customers or if shipments are delayed due to manufacturing difficulties. The
slowdown in the semiconductor industry and in the construction of new wafer
fabrication facilities has resulted in Tencor experiencing a reduction in new
orders as well as rescheduled and canceled orders in 1996. There can be no
assurance that this slowdown will not continue. There can be no assurance that
these and other factors will not materially adversely affect the Company's
future business and financial results.
Tencor's business depends upon the capital equipment expenditures of
semiconductor manufacturers, which in turn depend on the current and anticipated
market demand for integrated circuits and products utilizing integrated
circuits. In addition, the Company's business depends upon new construction of
semiconductor fabrication facilities and, as to existing fabrication facilities,
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enhancements to improve yields. The semiconductor industry has been cyclical in
nature and historically has experienced periodic downturns. The semiconductor
industry is presently experiencing a slowdown in terms of product demand and
volatility in terms of product pricing. This slowdown and volatility has caused
the semiconductor industry to reduce purchases of semiconductor manufacturing
equipment and construction of new fabrication facilities. These conditions have
adversely affected Tencor and may continue to adversely affect the Company's
aggregate bookings, revenues and operating results, and no assurance can be
given that the Company's bookings, revenue and operating results will not be
adversely affected by future downturns in the semiconductor industry. Even
during periods of reduced revenues, in order to remain competitive Tencor will
be required to continue to invest in research and development and to maintain
extensive ongoing worldwide customer service and support capability which could
adversely affect its financial results.
WAFER INSPECTION SYSTEMS
The Wafer Inspection Division products include unpatterned wafer inspection,
patterned wafer inspection, and yield management and defect data analysis
systems. Wafer inspection systems are used to find, count and characterize
particles and other pattern defects on wafers both in engineering applications
and in-line at various stages during the semiconductor and wafer manufacturing
processes. Semiconductor manufacturers use wafer inspection systems to monitor
their manufacturing processes and to refine those processes to increase the
yield of acceptable integrated circuits. Accordingly, semiconductor
manufacturers base their purchase of wafer inspection systems on a variety of
criteria, including sensitivity, throughput, total cost of ownership, ease of
use, degree of automation, system repeatability and correlation, and ability to
be integrated into overall yield management systems.
Tencor is a recognized leader in the wafer inspection market with its Surfscan
family of laser-scanning products. Surfscans are widely used for wafer
qualification, process monitoring and equipment monitoring. They provide the
high sensitivity, fast throughput and low cost of ownership required in a
production environment and are used in virtually all semiconductor manufacturing
processes in use today. Surfscans are key components of the defect reduction
strategies of many leading semiconductor manufacturers. The systems use a
standardized Tencor File Format which allows defect location data to be easily
transferred to off-line review stations for defect classification. Surfscans
help Tencor's customers transition new designs from engineering to manufacturing
and to control manufacturing processes and improve yields of acceptable
integrated circuits.
The Wafer Inspection Division also produces yield management and defect data
analysis software systems. These software systems integrate defect data from
multiple sources throughout a fab, providing comprehensive defect data
management for advanced excursion monitoring, yield correlation and reporting.
The software systems identify data sources, show defect trends and help
semiconductor manufacturers develop long-term yield improvement strategies. The
division has also partnered with Uniphase Corporation to OEM Uniphase's confocal
review station or CRS to provide advanced two- and three-dimensional imaging and
defect classification to automate the time-consuming and error-prone procedure
of locating and classifying defects. The CRS interfaces with the Company's
inspection systems to collect, store and analyze defect data generated by the
Surfscan systems.
Tencor's sales of wafer inspection systems accounted for approximately 51%, 47%
and 45% of total revenues in 1996, 1995 and 1994, respectively.
FILM MEASUREMENT SYSTEMS
Tencor's Film Measurement Division produces both film thickness and resistivity
measurement tools. The Company's film thickness products are used to measure a
variety of optical properties of thin films, while the 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,
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where within-wafer and wafer-to-wafer uniformity of the process is of paramount
importance to semiconductor manufacturers achieving high yields at the lowest
possible cost.
These systems incorporate pattern recognition for automatically positioning the
wafer for measurement, communications protocols such as SECSII, contamination-
free designs and performance measurement over a wide range of applications.
Whenever possible, Tencor also has been able to provide additional benefits to
its customers by incorporating multiple measurement capabilities in a single
system, thus reducing the number of steps and unnecessary handling of wafers.
Tencor uses software technology to enhance the productivity of its Film
Measurement systems. These products offer automated wafer mapping utilizing
computer-controlled positioning stages that can move the wafer rapidly to
hundreds of user programmed measurement locations. In addition, these products
are built on the proprietary StatTrax and Summit software platforms, which
provide an operator-friendly environment for operation, setup and utilization of
all products.
Sales of these products accounted for approximately 30%, 32% and 33% of total
revenues in 1996, 1995 and 1994, respectively.
METROLOGY SYSTEMS
Metrology Division systems measure key dimensions and physical properties on
wafers. Stylus profilers are used to measure the surface topography of films
and etched surfaces and are used in production, R&D and quality control areas.
Stress measurement systems detect reliability related problems such as film
cracking, voiding and lifting. This division also produces wafer
characterization instruments which are used to determine resistivity, thickness
and dopant types for a variety of substrates. In recent years the use of surface
profiling systems and stress measurement systems has expanded from the
engineering laboratory into the production environment. Tencor believes that
the automation capabilities of its metrology systems are key strengths for their
use in the production setting. Tencor primarily markets metrology systems to the
semiconductor industry but also sells to other markets, including data storage
and flat panel display markets.
Tencor's sales of metrology systems accounted for approximately 12%, 14% and 13%
of total revenues in 1996, 1995 and 1994, respectively.
PHYSICAL MEASUREMENT STANDARDS
Physical measurement standards are used by semiconductor manufacturers and
semiconductor equipment manufacturers to calibrate inspection tools and
metrology systems. Tencor, through its wholly owned subsidiaries, VLSI
Standards, Inc., currently offers a broad line of standards which are traceable,
whenever possible, to the standards set by the National Institute for Standards
Technology (NIST). The physical measurement standards product line includes
surface particle contamination, step height, resistivity, film thickness,
linewidth, surface roughness and surface topography standards.
VLSI Standards, Inc. also manufactures physical deposition systems. These
systems deposit polystyrene spheres that have controlled diameters onto
substrates in order to calibrate defect inspection systems, such as Tencor's
Surfscan systems.
MARKETING, SALES AND SERVICE
Tencor sells products through a combination of direct sales and distribution
channels. The Company maintains 34 sales and service offices worldwide, with 14
of those in the United States, 7 in Japan, 7 in Europe, 2 in Korea, 1 in
Singapore and 1 in Taiwan. International sales accounted for 64% of the
Company's revenue for 1996, up from 62% in 1995. The Company's principle
customers in 1996 were IBM Corporation, LG International, Samsung, Texas
Instruments and Motorola, which
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accounted for 5.2%, 4.7%, 4.6%, 4.1% and 3.8% respectively. The Company's
principal customers in 1995 were Motorola, Siemens, Intel, Micron Technology and
Mitsubishi, which accounted for 8.3%, 5.1%, 4.3%, 4.2% and 4.2% of total
revenues, respectively. During 1994, the Company's principal customers were
Motorola, Texas Instruments, Intel, Samsung and Hyundai who accounted for 7.2%,
5.5% 5.3%, 5.2% and 5.0% of total revenues, respectively. The Company does not
consider its business to be seasonal in nature, but it is cyclical with respect
to the capital equipment procurement practices of major semiconductor
manufacturers.
INTERNATIONAL REVENUES
International revenues accounted for 64%, 62% and 51% of Tencor's revenues for
the years 1996, 1995 and1994, respectively. Tencor expects that international
sales will continue to represent a significant percentage of net sales of the
Company. The future performance of the Company will be dependent, in part, upon
its ability to continue to compete successfully in Asia, one of the largest
areas for the sale of yield management in process monitoring equipment. The
Company's ability to compete in this area in the future is dependent upon the
continuation of favorable trading relationships between the region (especially
Japan and Korea) and the United States and the continuing ability of the Company
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 the
difficulties associated with staffing and managing international operations. In
addition, international sales may be adversely affected by the economic
conditions in each country. The net sales and income from the Company's
international business may be affected by fluctuations in currency exchange
rates. Although Tencor attempts to manage near term currency risks through
"hedging," there can be no assurance that such efforts will be adequate. These
factors could have a material adverse effect on the Company's future business
and financial results.
BACKLOG
At December 31, 1996, the Company's firm backlog totaled $132.5 million,
compared to $175.5 million at December 31, 1995. The Company expects to fill
the present backlog of orders during fiscal 1997. All orders are subject to
cancellation or delay by the customer with limited or no penalty.
Tencor, from time to time, has experienced and expects to continue to experience
fluctuations in its orders and in its results of operations, particularly on a
quarterly basis. Expense levels are based, in part, on expectations of future
revenues. If revenue levels in a particular period do not meet expectations,
operating results will be affected adversely, which may have an adverse impact
on the market price of the Company's Common Stock. A variety of factors have an
influence on the Company's orders and operating results in a particular period.
These factors include specific economic conditions in the semiconductor
industry, the timing of the receipt of orders from major customers, customer
cancellations or delays of shipments, specific feature requests by customers,
production delays or manufacturing inefficiencies, exchange rate fluctuations,
management decisions to commence or discontinue product lines, the Company's
ability to design, introduce and manufacture new products on a cost effective
and timely basis, the introduction of new products by the Company or its
competitors, the selection of the Company's or its competitors' products by
semiconductor manufacturers for new generations of fabrication facilities, the
lengthening or shortening of order cycle times for the Company's products, the
timing of research and development expenditures, and expenses attendant to
acquisitions, strategic alliances and the further development of marketing and
service capabilities. As a result of fluctuations in orders, backlog as of the
end of successive quarters may vary significantly.
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RESEARCH AND DEVELOPMENT
Rapid technological changes in semiconductor manufacturing processes subject the
semiconductor equipment manufacturing industry to increased pressure to
maintain technological parity with deep submicron process technology. Tencor
believes that continued and timely development of new products and enhancements
to existing products is necessary to maintain its competitive position.
Accordingly, Tencor devotes a significant portion of its personnel and financial
resources to research and development programs and seeks to maintain close
relationships with customers to remain responsive to their product needs. New
product introductions may contribute to fluctuations in operating results, since
customers may defer ordering products from existing product lines. If new
products have reliability or quality problems, reduced orders, higher
manufacturing costs, delays in acceptance of and payment for new products and
additional service and warranty expense may result. On occasion, Tencor has
experienced reliability and quality problems in connection with certain product
introductions, resulting in some of these consequences. There can be no
assurance that the Company will successfully develop and manufacture new
hardware and software products or that new hardware and software products
introduced by the Company will be accepted in the marketplace. If the Company
does not successfully introduce new products, its results of operations will be
affected adversely.
Research and development expenses were $44.3 million, or 11.0% of revenues in
1996, $33.4 million, or 10.1% of revenues in 1995 and $25.3, or 15.6% of
revenues in 1994. Research and development expenses consist primarily of
salaries, project materials, purchased R&D technologies and other costs
associated with Tencor's ongoing efforts of product development and
enhancements.
MANUFACTURING, RAW MATERIALS AND SUPPLIES
In 1996, Tencor's principal manufacturing activities took place in Mountain View
and Santa Clara, California. In early 1997, the Company began to occupy the new
facility constructed for its use in Milpitas, California. The construction and
the related move to the Milpitas Facility are scheduled for completion at the
end of March 1997 at which time substantially all of the Company's manufacturing
operations will be consolidated at the Milpitas facility. Manufacturing
activities consist primarily of assembling and testing components and
subassemblies which are acquired from third party vendors and then integrated
into Tencor's finished products. Many of the components and subassemblies are
standard products, although certain items are made to Tencor specifications.
Certain of the components and subassemblies included in Tencor's systems are
obtained from a single source or a limited group of suppliers. These specific
parts are monitored by management to ensure that adequate supplies are available
to maintain manufacturing schedules, should supply for any part be interrupted.
The partial or complete loss of certain of these sources could have at least a
temporary adverse effect on the Company's results of operations and damage
customer relationships. Further, a significant increase in the price of one or
more of these components could adversely affect the Company's results of
operations. Tencor's physical measurement standards are manufactured in an
additional facility in San Jose, California.
COMPETITION
The semiconductor equipment industry is highly competitive. Tencor has
experienced and expects to continue to experience substantial competition
throughout the world. The Company believes that to remain competitive, it will
require significant financial resources in order to offer a broad range of
products, to maintain customer service and support centers worldwide, and to
invest in product and process research and development. Tencor believes that
the semiconductor equipment industry is becoming increasingly dominated by large
manufacturers such as Applied Material, Inc. ("Applied Materials"), which
recently entered the wafer defect inspection market, Hitachi Electronics
Engineering Co., LTD. and Tokyo Electron Limited, who have the resources to
support customers on a worldwide basis. Many of these competitors have
substantially greater financial resources and more extensive engineering,
manufacturing, marketing and customer service and support capabilities than
Tencor. In addition, there are smaller emerging semiconductor equipment
companies which
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provide innovative technology. The Company expects its 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. No assurance can be given that the Company will be able to
continue to compete successfully against its competitors.
In addition, in configuring their fabrication plants, semiconductor
manufacturers increasingly tend to select specific items of manufacturing
equipment for all of the fabrication facilities used to produce each generation
of integrated circuits. As a result of this process, the Company's failure to
have one or more of its products selected by a semiconductor manufacturer for
use in its facilities for a particular generation of integrated circuits may
effectively eliminate sales of that product for all of that manufacturer's
fabrication plants used for that generation of integrated circuits. The failure
to have one or more of Tencor's products selected by a major semiconductor
manufacturer, especially one that is a significant customer of Tencor, for a
particular generation of its integrated circuit products could have a
significant and long-term adverse effect on the Company's results of operations.
Although the Company has been relatively successful to date in these selection
decisions, not all of the Company's products have been selected by each of its
customers for fabrication facilities for each generation of integrated circuits.
Further, there can be no assurance that Tencor's products will be selected in
the future, or that Tencor will continue to be as successful in connection with
selection processes as it has been to date.
PATENTS AND LICENSES
Tencor's continued success will depend in part on its proprietary technology.
While Tencor has attempted to protect its proprietary technology through
patents, copyrights and trade secrets, it believes that success will depend more
upon the technical expertise, continuing development of new systems, market
penetration, installed base and the ability to provide comprehensive support
and service to customers. There can be no assurance that the Company will be
able to protect its technology or that competitors will not be able to develop
similar technology independently. Tencor currently holds 69 U.S. patents and
has applied for 17 additional patents in the United States. In addition, Tencor
has 21 foreign patents and has applied for 44 additional foreign patents. From
time to time the Company acquires 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 the applications, that license assignments will
be made as anticipated or that the Company's patents, licenses or other
proprietary rights will be sufficiently broad to protect its technology. In
addition, no assurance can be given that any patents issued to or licensed by
the Company will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide competitive advantages to Tencor.
The Company and its customers from time to time receive letters from third
parties, including competitors, alleging infringement of such parties' patent
rights by the Company's products. However, no such letters were received in
1996. Such letters are prevalent in the industry and the Company believes that
generally, it is possible to negotiate licenses on commercially reasonable
terms. However, there can be no assurance that the Company would prevail in any
litigation seeking damages or expenses or to enjoin the Company from selling its
products on the basis of such alleged infringement, or that the Company would be
able to license any valid and infringed patents on reasonable terms, if at all.
ENVIRONMENTAL MATTERS
Tencor has learned that the soil and groundwater beneath its leased facilities
in Mountain View, California, are contaminated by certain chemicals. Tencor
understands that all or most of the contamination occurred prior to the time
Tencor began to occupy the premises and resulted either from the activities on
the property of a long-time tenant (unaffiliated with Tencor) or from an off-
site source. Tencor has a right to indemnification from the owner of the
property as to claims brought by third parties with respect to this
contamination. There is no assurance, however, that Tencor will not incur
investigative costs or other expenses with respect to the property
contamination, or that a regulatory agency or third party will not seek to
compel Tencor to undertake remedial action, resulting
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in further costs and expenses, with no assurance that such expenses are
recoverable under the indemnity agreement with the owner.
EMPLOYEES
At December 31, 1996, the Company employed 1,357 full-time and temporary
persons worldwide. None of these employees is represented by a union and Tencor
has never experienced a work stoppage, slowdown or strike. Tencor considers its
employee relations to be good.
The future success of the Company is dependent, in part, on its ability to
retain certain key personnel. To continue to grow the Company will also need to
attract additional skilled personnel in all areas of its business on a worldwide
basis. Competition for such personnel is intense. There can be no assurance
that the Company will be able to retain its existing key management, engineering
and sales personnel or attract additional qualified employees in the future.
This could be particularly significant if the Company needs to hire, train and
assimilate a large number of new employees. A failure to retain or attract
qualified employees could materially adversely affect the business and financial
results of the Company.
ITEM 2: PROPERTIES
Certain information concerning the Company's principal properties at December
31, 1996, is set forth below:
<TABLE>
<CAPTION>
Square
Location Type Principal use footage Ownership
- -------- ---- ------------- ------- ---------
<S> <C> <C> <C> <C>
Mountain View, CA Office, plant Research and Engineering, 133,025 leased
Marketing, Manufacturing,
Sales and Service
Santa Clara, CA Office, plant Corporate Headquarters, 189,280 leased
Marketing, Research and
Engineering, Manufacturing,
Sales and Service
Milpitas, CA Office Training facility 18,500 leased
Naruse, Japan Office Sales, service and 28,417 leased
applications support
</TABLE>
The Company also leases office space for 32 additional sales and service offices
throughout the world: 7 offices are located in Europe, 6 offices are in Japan,
13 offices are in the United States, 2 offices are located in Korea, 1 office is
in Singapore and 1 office is in Taiwan. In addition, the company is in the
process of opening a sales and service office in Thailand.
As a result of the Company's desire to consolidate substantially all of its
Silicon Valley operations into a single facility, the Company, in late 1995,
entered into two seven year operating lease transactions for land, office and
manufacturing facilities to be constructed for its use in Milpitas, California.
As of March 7, 1997, construction of the facility has virtually been completed
and occupancy is scheduled to be concluded by the end of the first quarter of
1997. As a result, the Company allowed certain of its California leased space
to expire in December 1996, with the remainder of leaseholds expiring at various
times through September 1998. $6.5 million of estimated future costs, such as
rents and utilities, related to unoccupied leased space was reserved for at
September 30, 1996. Rent on the Company's new facility will commence on April
1, 1997.
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The Company believes that its existing leased facilities and the Milpitas
facility will be adequate to meet the Company's office and plant space
requirements for at least the next twelve months.
ITEM 3: LEGAL PROCEEDINGS
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS IN FOURTH QUARTER OF
1996
None
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
QUARTERLY COMMON STOCK MARKET PRICE:
1996 Quarter ended March 31 June 30 September 30 December 31
- ------------------ -------- ------- ------------ -----------
High 29 26 1/2 19 5/8 28 3/8
Low 16 1/2 17 14 3/4 17 5/8
1995 Quarter ended March 31 June 30 September 30 December 31
- ------------------ -------- ------- ------------ -----------
High 31 5/8 43 1/2 47 1/8 46
Low 17 7/8 28 9/16 39 1/4 24 3/4
The preceding table sets forth the high and low sales prices as reported on the
Nasdaq National Market system during the last two years. As of February 28,
1997 there were approximately 842 shareholders of record of the Company's Common
Stock. The price for the Company's Common Stock as of the close of business on
February 28, 1997 was $40.06 per share. The Company has paid no cash dividends
to its shareholders during the past ten years. The Company does not plan to pay
cash dividends in the foreseeable future.
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ITEM 6: SELECTED FINANCIAL DATA
FIVE YEAR FINANCIAL HIGHLIGHTS
IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net Revenues $403,170 $330,197 $182,330 $107,874 $85,054
Net income $61,288 (2) $65,324 $24,316 (1) $7,158 $2,402
Net income per share $1.93 (2) $2.09 $.90 (1) $0.30 $0.12
Weighted average number
of common shares 31,763 31,212 27,162 23,492 20,270
YEAR END STATUS
Total assets $484,419 $395,040 $184,549 $91,340 $64,487
Shareholders' equity $365,033 $288,145 $144,729 $70,192 $49,236
Working capital $274,238 $241,082 $122,392 $55,590 $37,759
Current ratio 3.3:1 3.3:1 4.2:1 3.7:1 4.2:1
</TABLE>
(1) Includes $2.3 million of expenses related to Tencor's acquisition of
Prometrix Corporation.
(2) Includes a restructuring charge of $8.5 million.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Other than statements of historical fact, statements made herein, such as
statements regarding financial projections, information or expectations about
the Company's products or markets of the Company, or statements about future
events, are forward-looking and are subject to a number of risks and
uncertainties that could cause actual results to differ materially from the
statements made. These include, among others, uncertainties associated with
meeting product delivery timetables, acceptance of new products, costs
associated with new product introductions and the proposed merger with KLA, as
well as other factors described herein, including those uncertainties identified
under the heading "Other Factors Affecting Company Results," as well as the
matters identified in the discussion of the Company's business in Item 1 hereof.
OVERVIEW. The Company finished 1996 with revenues of $403,170,000 an increase
of 22% over 1995 revenues of $330,197,000 and 1994 revenues of $182,330,000.
During 1996, the Company received net new orders of $360,240,000 and at the end
of 1996 had backlog of $132,535,000 compared to backlog at the end of 1995 of
$175,465,000. Income from operations was $91,950,000 in 1996 compared to
$104,396,000 and $39,476,000 in 1995 and 1994, respectively. The current year's
decline in operating income was due primarily to an increase in the Company's
product costs, including warranty and installation, resulting in a decline in
gross margins as a percentage of revenues, and a restructuring charge of
$8,500,000 for costs related to downsizing its worldwide operations and
relocating to its new Milpitas facility.
The Company's principal market is the semiconductor industry. The Company's
revenues are derived primarily from product sales, principally through its
direct sales force and, to a lesser extent, through distributors. The Company
markets its products to virtually all of the major semiconductor manufacturers
worldwide and its level of sales to individual semiconductor manufacturers may
vary significantly from period to period depending on a variety of factors.
These factors include the amount
10
<PAGE>
of manufacturing capacity being added or modernized by a particular manufacturer
and the Company's success in having its systems selected to be utilized in
connection with such additional or modernized capacity.
Revenues from sales of products in 1996, 1995 and 1994 were $379,560,000,
$312,450,000 and $170,955,000, respectively. In addition, revenues derived from
non-warranty service were $23,610,000, $17,747,000 and $11,375,000 in 1996, 1995
and 1994, respectively. Principal customers in 1996 included IBM, LG
International, Samsung, Texas Instruments and Motorola, compared with the
Company's principal customers in 1995, Motorola, Siemens, Intel, Micron
Technology and Mitsubishi. In 1994, the Company's principal customers included
Motorola, Texas Instruments, Intel, Samsung and Hyundai. The Company expects
that it will, in the future, continue to experience significant fluctuations
from period to period in its level of activity with individual semiconductor
manufacturers.
The Company has three wholly-owned foreign subsidiaries in Europe, one in Japan
and one in Korea for marketing, sales and service of products. In early 1996,
the Company established wholly-owned subsidiaries in Singapore and Taiwan for
sales and support activities. International sales accounted for 64%, 62% and 51%
of the Company's revenues for the years 1996, 1995 and 1994, respectively. The
Company believes that foreign sales will continue to account for a significant
percentage of revenues.
As a participant in the semiconductor industry, the Company operates in a
technologically advanced, highly competitive environment. In addition, the
Company depends in large part on the capital expenditures of semiconductor
manufacturers worldwide, which in turn depend on the current and anticipated
market demand for integrated circuits and products utilizing integrated
circuits. The semiconductor industry has historically been highly cyclical and
has experienced periodic downturns, which have had an adverse effect on the
level of capital expenditures. While the Company cannot predict what effect
these various factors will have on the operating results, the effect of these
and other factors could significantly affect the Company's future operating
results and stock market value.
11
<PAGE>
RESULTS OF OPERATIONS. The following table sets forth certain financial data
for the periods indicated as a percentage of revenues:
Percentage of Net Revenues 1996 1995 1994
- --------------------------------------------------------------------------------
Revenues 100.0% 100.0% 100.0%
Cost of sales 41.2% 36.8% 40.2%
- --------------------------------------------------------------------------------
Gross margin 58.8% 63.2% 59.8%
- --------------------------------------------------------------------------------
Operating expenses:
Research and development 11.0% 10.1% 13.9%
Marketing and selling 15.7% 16.1% 17.3%
General and administrative 7.2% 5.4% 5.7%
Restructuring/merger charges 2.1% --- 1.3%
- --------------------------------------------------------------------------------
Total operating expenses 36.0% 31.6% 38.2%
- --------------------------------------------------------------------------------
Income from operations 22.8% 31.6% 21.6%
Other income, net 1.7% 1.9% .7%
- --------------------------------------------------------------------------------
Income before income taxes 24.5% 33.5% 22.3%
Provision for income taxes 9.3% 13.7% 9.0%
- --------------------------------------------------------------------------------
Net income 15.2% 19.8% 13.3%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 CHANGE 1995 CHANGE 1994
- -----------------------------------------------------------------------------------------------
IN THOUSANDS,
EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C> <C>
Revenues $403,170 22 % $330,197 81% $182,330
Gross profit 237,047 14 % 208,675 91% 109,087
Operating expenses 145,097 39 % 104,279 50% 69,611
Net income 61,288 (6)% 65,324 169% 24,316
Net income per share 1.93 (8)% 2.09 132% 0.90
</TABLE>
YEARS ENDED DECEMBER 31, 1996 AND 1995.
REVENUES. Revenues increased by $72,973,000 or 22%, in 1996 versus 1995. The
increase in revenues was primarily attributable to increased unit volumes of
existing products and increased sales of newer products with higher average
selling prices. Products with higher average selling prices include the Surfscan
AIT and the UV-1270SE film thickness system.
Geographically, the Company's revenue growth in 1996 compared to 1995 was driven
by a 56% increase in Korea and a 123% increase in Southeast Asia, principally
Singapore and Taiwan. Domestic revenues increased $21,119,000, or 17% in 1996
over 1995. The future performance of the Company will be dependent, in part, on
the Company's ability to compete successfully overseas, and in particular, in
Asia Pacific, the largest market for semiconductor capital equipment. Factors
affecting the Company's ability to compete in foreign markets include continuing
free trade between foreign countries and the U.S. and changes in interest and
foreign currency rates. Other than for revenues generated in Japan, which in
1996 represented $94,744,000 sales contracts are generally denominated in U.S.
dollars. The Company limits its exposures to fluctuations between the U.S.
dollar and the yen by purchasing forward contracts and borrowing in yen.
12
<PAGE>
GROSS MARGIN. Gross margin decreased to 58.8% in 1996 from 63.2% in 1995. The
decrease during the period was due in part to an increase in costs related to
new product introductions and in part to an increase in support related costs as
the Company continued to add infrastructure to its worldwide customer
satisfaction organization to support its growth. The Company anticipates a
modest percentage decrease in gross margins in 1997 due, in part, to increased
competition in the market place.
RESEARCH AND DEVELOPMENT. Research and development expenses were $44,258,000
and $33,427,000 in 1996 and 1995, respectively, or 11.0% and 10.1% of revenues,
respectively. The increase in absolute dollars is due primarily to increases in
salaries and benefits expenses resulting from a net increase in headcount during
the period and increases in new product development spending, particularly
related to the Company's Surfscan AIT (Advanced Inspection Technology); Surfscan
SP1, the industry's first unpatterned wafer inspection system designed for 300mm
wafer and device technologies of 0.25 micron; and HRP-200 High Resolution
Profiler, a fully-automated surface profiling system which provides complete,
high-resolution global and local analysis of wafer surface topography during
development and in-line monitoring of processes such as Chemical-Mechanical
Polishing (CMP). The percentage increase was attributable to the Company's
32.4% growth in research and development spending compared to a 22.1% growth in
revenues. The Company is committed to technology leadership in the semiconductor
equipment industry and expects to increase its research and development
expenditures in the coming year.
MARKETING AND SELLING. Marketing and selling expenses were $63,478,000 and
$53,156,000 in 1996 and 1995, or 15.7% and 16.1% of revenues, respectively.
Compared to 1995, in 1996, marketing and selling expenses increased in absolute
dollars. This increase can be attributed in part to greater product marketing
efforts tied to new product introductions and higher employee compensation-
related costs as a result of a net increase in worldwide headcount, and higher
commission expense as a result of the increase in revenues. The Company
established sales and support operations in both Singapore and Taiwan during
1996, and expects to continue to increase its presence in Asia both through the
addition of personnel and the establishment of new sales and support
operations. The Company anticipates marketing and selling spending will
increase in absolute dollars in 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$28,861,000 and $17,696,000 in 1996 and 1995, or 7.2% and 5.4% of revenues,
respectively. The increase in absolute dollars was due in part to increases in
expenses resulting from the significant efforts involved with enhancements to
the Company's information systems infrastructure including the implementation of
the Company's new worldwide information system. The Company anticipates that
general and administrative costs will decline in absolute dollars in 1997.
RESTRUCTURING COSTS. During the quarter ended September 30, 1996, the Company
recorded a charge for restructuring costs of $8.5 million. This charge consists
of $2.0 million in employee severance and related costs as a result of
downsizing its worldwide operations through a reduction in force of
approximately 10% of the Company's regular employees. The restructuring charge
also includes costs aggregating $6.5 million associated with the relocation from
the Company's current leased facilities to the facility constructed for its use
in Milpitas, California. The Company expects complete occupation of its new
facility in Milpitas, California, in the early part of 1997. The Company has
additional facilities with leases that expire on various dates through September
1998, and as a result of the Company's move to its new facility in Milpitas,
certain of these facilities will become unoccupied during the first quarter of
1997. Due to the relatively short terms remaining on certain of these leases,
the Company may be unable to sublease all of its unoccupied facilities.
Accordingly, the Company has included in its restructuring charge an amount
equal to the remaining costs (including rent) due under those leases which are
unlikely to be subleased. The Company has also included in its lease exit cost,
amounts for estimated leasehold refurbishment costs (net of existing
13
<PAGE>
reserves) to return the facilities to their original condition as required by
the lease agreements, the decline in net book value of certain of the Company's
furniture and fixtures, and various other costs associated with the exit from
its current facilities. Of the $8.5 million total restructuring costs,
approximately $1.3 million was used as of December 31, 1996 with the majority of
the remaining balance of $7.2 million expected to be utilized during the next
nine months.
OTHER INCOME, NET. Other income, net consisted primarily of interest income on
short-term investments less interest expense on bank borrowings. Also included
were gains and losses on foreign currency transactions.
PROVISION FOR INCOME TAXES. Income taxes as a percentage of income before
income taxes were 38.0% in 1996 and 41.0% in 1995, respectively. The
decrease was due primarily to a decrease in profits in foreign jurisdictions
with higher relative tax rates. The Company expects the income tax rate to
decline modestly in 1997.
YEARS ENDED DECEMBER 31, 1995 AND 1994.
REVENUES. Revenues increased $147,867,000, or 81%, in 1995 versus 1994. The
increase in revenues was primarily attributable to increased unit volumes of
existing products and sales of newer products with higher average selling
prices. Products with higher average selling prices included the Surfscan 6420
bare wafer inspection system, the Surfscan 7700 patterned wafer inspection
system, the Prometrix UV-1250SE film thickness system and the Tencor P12 surface
profiler.
Geographically, the Company's revenue growth in 1995 compared to 1994 was driven
by a 210% increase in Europe, principally Germany, a 108% increase in Japan, a
33% increase in Korea and a 41% increase in the U.S. The rest of the world,
principally Singapore and Taiwan, increased 212%.
GROSS MARGIN. Gross margin increased to 63.2% in 1995 from 59.8% in 1994. The
increase during the period was due in part to a shift in product mix to new,
higher margin products, and lower costs of sales resulting from direct sales of
the Company's thin film and resistivity products in Japan and Europe,
manufacturing efficiencies and increased production volumes resulting in better
capacity utilization.
RESEARCH AND DEVELOPMENT. Research and development expenses were $33,427,000
and $25,325,000 in 1995 and 1994 or 10.1% and 13.9% of revenues, respectively.
The increase in absolute dollars is due primarily to increases in salaries and
benefits expenses resulting from increased headcount during the period and
increases in project material costs associated with new product development,
particularly the recently introduced Surfscan AIT and SP1. The percentage
decrease was attributable to the Company's 32% growth in research and
development spending compared to an 81% growth in revenues.
MARKETING AND SELLING. Marketing and selling expenses were $53,156,000 and
$31,620,000 in 1995 and 1994, respectively or 16.1% and 17.3% of revenues,
respectively. In 1995, compared to 1994, marketing and selling expenses
increased in absolute dollars due primarily to increased foreign distributor
commissions stemming from increased foreign distributor sales in new markets
such as Singapore and Taiwan, offset in part by selling the Company's film
measurement products direct in Japan, increased marketing and selling headcount
and increased domestic commissions stemming from increased domestic sales. The
decline as a percentage of revenues was attributable to the Company's 68% growth
in marketing and selling spending compared to an 81% growth in revenues.
14
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$17,696,000 and $10,366,000 in 1995 and 1994 or 5.4% and 5.7% of revenues,
respectively. While general and administrative expenses grew in absolute
dollars, they declined as a percentage of revenues primarily attributable to
the Company's 71% growth in general and administrative spending compared to an
81% growth in revenues.
OTHER INCOME, NET. Other income, net consisted primarily of interest income on
short-term investments less interest expense on bank borrowings. Also included
were gains and losses on foreign currency transactions.
PROVISION FOR INCOME TAXES. Income taxes as a percentage of income before
income taxes were 41.0% in 1995 and 40.4% in 1994, respectively. The increase
was due primarily to increased foreign sales in jurisdictions with higher
relative tax rates.
LIQUIDITY AND CAPITAL RESOURCES.
The Company has financed its growth primarily through cash flows from
operations and amounts, net of offering costs, raised in connection with
equity offerings in March 1993 ($10,867,000), September 1994 ($38,187,000)
and April 1995 ($65,865,000). Net cash provided by operations was $93,685,000
in 1996, an increase of $77,313,000 from cash provided by operations in 1995.
The primary factor contributing to the increase in cash generated from
operations was the decrease in accounts receivable of $25,180,000 during
1996. This decrease is due in part to improved collections and a decline in
revenues in the second half of 1996 compared to the same period in 1995. In
addition, collection times in Japan were reduced, partly as a result of the
factoring agreement with a local bank to sell, with recourse, certain trade
receivables which the Company accounted for as an off-balance sheet
arrangement.
Working capital was $274,238,000 and $241,082,000 as of December 31, 1996 and
1995, respectively. At December 31, 1996, the Company had $223,777,000 in cash
and cash equivalents and short-term investments.
For investing activities, the Company's capital requirements typically consist
of computers, manufacturing equipment and cleanrooms. Capital expenditures in
1996 and 1995 were $32,788,000 and $16,493,000, respectively. The increase in
capital expenditures in 1996 represents the Company's investment in equipment
and software for its new information system and improvements of its Milpitas-
based training facility and cleanrooms located in the U.S. and Japan.
In November 1995, the Company entered into a seven year operating lease
transaction for the office and manufacturing facility in Milpitas, California.
The Company's obligations under the lease may be collateralized at the Company's
option by cash and/or investments in order to reduce its monthly payments. At
December 31, 1996, cash and securities collateralized under the lease was
$71,300,000 and is expected to reach approximately $90,000,000 upon completion
scheduled for early 1997.
At December 31, 1996, the Company's principal sources of liquidity consisted of
$223,777,000 in cash, cash equivalents and short-term investments and
$15,291,000 available under its multi-currency revolving line of credit
agreement. Capital expenditures are expected to approximate $29,000,000 in 1997.
This amount includes funds for the continuation and completion of facilities
expansions, investments in equipment and software for its new information
systems and other capital expenditures. The Company believes that the existing
cash balances and short-term investments, along with cash generated from
operations, will be sufficient to meet the Company's working capital
requirements through 1997.
15
<PAGE>
The Company believes that success in its industry requires substantial capital
in order to maintain the flexibility to take advantage of opportunities as they
may arise. The Company may, from time to time, as market and business
conditions warrant, invest in or acquire complementary businesses, products or
technologies. The Company may effect additional equity or debt financings to
fund such activities. The sale of additional equity or convertible debt
securities could result in additional dilution to the Company's shareholders.
OTHER FACTORS AFFECTING COMPANY RESULTS
The Company, from time to time, has experienced, and expects to continue to
experience, significant fluctuations in its results of operations, particularly
on a quarterly basis. The Company's expense levels are based, in part, on
expectations of future revenues. If revenue levels in a particular period do
not meet expectations, operating results will be adversely affected. A variety
of factors have an influence on the Company's operating results in a particular
period. These factors include specific economic conditions in the semiconductor
industry, the timing of the receipt of orders from major customers, customer
cancellations or delays of shipments, specific feature requests by customers,
production delays or manufacturing inefficiencies, exchange rate fluctuations,
management decisions to commence or discontinue product lines, the Company's
ability to design, introduce and manufacture new products on a cost effective
and timely basis, the introduction of new products by the Company or its
competition, the selection of the Company's products by semiconductor
manufacturers for new generations of fabrication facilities, the timing of
research and development expenditures, and expenses attendant to restructuring,
acquisitions, strategic alliances and the further development of marketing and
service capabilities.
16
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Financial Statements:
Consolidated Balance Sheets - December 31, 1996 and 1995 . . . . . . . . . .18
Consolidated Statements of Income - December 31, 1996, 1995 and 1994 . . . .19
Consolidated Statements of Shareholder's Equity -
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . .20
Consolidated Statements of Cash Flows - December 31, 1996, 1995 and 1994 . .21
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . .22
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . .36
Financial Statement Schedules:
All schedules are omitted because they are either not applicable or the
required information is shown in the financial statements or notes thereto.
17
<PAGE>
TENCOR INSTRUMENTS
CONSOLIDATED BALANCE SHEETS
December 31, 1996 1995
- -------------------------------------------------------------------------------
In thousands
ASSETS
Current assets:
Cash and cash equivalents $141,407 $ 86,944
Short-term investments 82,370 76,889
Accounts receivable, net 87,623 118,857
Inventories 51,668 46,725
Deferred income taxes 19,056 8,869
Prepaid expenses and other assets 10,165 6,666
- -------------------------------------------------------------------------------
Total current assets 392,289 344,950
- -------------------------------------------------------------------------------
Property and equipment, net 41,601 22,447
Other assets 50,529 27,643
- -------------------------------------------------------------------------------
Total assets $484,419 $395,040
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ 28,162 $ 34,123
Accounts payable 11,936 16,858
Accrued compensation 21,496 16,526
Other accrued expenses 33,029 22,816
Income taxes payable 23,428 13,545
- -------------------------------------------------------------------------------
Total current liabilities 118,051 103,868
- -------------------------------------------------------------------------------
Long-term obligations 1,335 3,027
- -------------------------------------------------------------------------------
Commitments and contingencies (Notes 2, 4, 8 and 10)
Shareholders' equity:
Common stock, no par value: 60,000 shares
authorized; 31,053 and 30,751 shares
issued and outstanding 152,756 151,675
Retained earnings 200,024 138,736
Accumulated unrealized gain on investments, net 14,602 ---
Cumulative translation adjustment (2,349) (2,266)
- -------------------------------------------------------------------------------
Total shareholders' equity 365,033 288,145
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $484,419 $395,040
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
18
<PAGE>
TENCOR INSTRUMENTS
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
In thousands, except per share data
Revenues $403,170 $330,197 $182,330
Cost of goods sold 166,123 121,522 73,243
- -------------------------------------------------------------------------------
Gross profit 237,047 208,675 109,087
- -------------------------------------------------------------------------------
Operating expenses:
Research and development 44,258 33,427 25,325
Marketing and selling 63,478 53,156 31,620
General and administrative 28,861 17,696 10,366
Restructuring/merger charges 8,500 --- 2,300
- -------------------------------------------------------------------------------
Total operating expenses 145,097 104,279 69,611
- -------------------------------------------------------------------------------
Income from operations 91,950 104,396 39,476
Other income, net 6,901 6,322 1,294
- -------------------------------------------------------------------------------
Income before income taxes 98,851 110,718 40,770
Provision for income taxes 37,563 45,394 16,454
- -------------------------------------------------------------------------------
Net income $ 61,288 $ 65,324 $ 24,316
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Net income per share $ 1.93 $ 2.09 $ 0.90
Weighted average common shares
and equivalents 31,763 31,212 27,162
See accompanying notes to consolidated financial statements.
19
<PAGE>
TENCOR INSTRUMENTS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Accum. Cumulative
-------------------- Retained Unrealized Translation
Shares Amount Earnings Gain Adjustment Totals
- --------------------------------------------------------------------------------------------------------------------------------
In thousands
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 22,990 $21,107 $49,446 --- $(361) $70,192
Adjustment to conform fiscal year
of Prometrix --- --- (350) --- --- (350)
Net issuance under employee stock plans 1,428 5,511 --- --- --- 5,511
Equity offering, net of offering costs 2,466 38,187 --- --- --- 38,187
Release of FleXus escrowed shares 178 3,422 --- --- --- 3,422
Release of Prometrix escrowed shares 394 --- --- --- --- ---
Tax benefits of stock option transactions --- 3,150 --- --- --- 3,150
Cumulative translation adjustment --- --- --- --- 301 301
Net income --- --- 24,316 --- --- 24,316
- --------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994 27,456 71,377 73,412 --- (60) 144,729
Net issuance under employee stock plans 965 5,630 --- --- --- 5,630
Equity offering, net of offering costs 2,330 65,865 --- --- --- 65,865
Tax benefits of stock option transactions --- 8,803 --- --- --- 8,803
Cumulative translation adjustment --- --- --- --- (2,206) (2,206)
Net income --- --- 65,324 --- --- 65,324
- --------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 30,751 151,675 138,736 --- (2,266) 288,145
Net issuance under employee stock plans 552 5,570 --- --- --- 5,570
Repurchase of common stock (250) (5,456) --- --- --- (5,456)
Tax benefits of stock option transactions --- 967 --- --- --- 967
Cumulative translation adjustment --- --- --- --- (83) (83)
Accum. unrealized gain on investments, net --- --- --- $14,602 --- 14,602
Net income --- --- 61,288 --- --- 61,288
- --------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 31,053 $152,756 $200,024 $14,602 $(2,349) $365,033
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
TENCOR INSTRUMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
In thousands
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 61,288 $ 65,324 $ 24,316
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 16,459 7,635 3,120
Deferred income taxes (12,425) (4,231) (4,262)
Adjustment to conform Prometrix fiscal year --- --- (350)
Non-cash acquisition of in-process R&D --- --- 1,200
Changes in assets and liabilities:
Accounts receivable, net 25,180 (67,271) (32,709)
Inventories (6,483) (25,200) (5,010)
Prepaid expenses and other assets (1,771) (4,400) (72)
Accounts payable (4,830) 8,956 3,318
Accrued compensation 5,204 7,028 4,881
Other accrued expenses 7,963 12,170 3,586
Income taxes payable 3,100 16,361 6,546
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 93,685 16,372 4,564
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (32,788) (16,493) (6,972)
Purchases of short-term investments (90,255) (48,061) (56,391)
Proceeds from sale of short-term investments 84,632 7,876 38,104
Long-term equity investment --- (10,732) ---
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (38,411) (67,410) (25,259)
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of common stock, net 5,570 5,630 7,203
Proceeds from equity offerings, net --- 65,865 38,187
Stock repurchases (5,456) --- ---
Payments under debt obligations (44,436) --- ---
Borrowings under debt obligations 41,403 29,693 ---
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,919) 101,188 45,390
- ---------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 2,108 (327) (706)
- ---------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 54,463 49,823 23,989
Cash and cash equivalents at beginning of period 86,944 37,121 13,132
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 141,407 $ 86,944 $ 37,121
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Supplemental cash flow disclosures:
Income taxes paid $ 47,849 $ 34,712 $ 12,425
Interest paid $ 1,325 $ 437 $ 197
Supplemental non-cash investing cash flow disclosures:
Tax benefits from stock option transactions $ 967 $ 8,803 $ 3,150
Accumulated unrealized gain on investment, net $ 14,602 --- ---
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of Tencor
Instruments and its wholly owned subsidiaries (the "Company"). All significant
intercompany transactions and accounts have been eliminated.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
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 (APB 25), "Accounting for Stock Issued to Employees". In 1995,
the Financial Accounting Standards Board released FAS 123, "Accounting for
Stock-Based Compensation". FAS 123 provides an alternative to APB 25 requiring
additional disclosure effective for fiscal years beginning after December 15,
1995. The Company continues to account for its employee stock plans in
accordance with APB 25 and provides additional disclosure required by FAS 123.
Accordingly, FAS 123 did not have any impact on the Company's financial position
or results of operations. Refer to Note 7 of Notes to Consolidated Financial
Statements.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments which are valued at cost, which
approximates market, and have original maturity dates of three months or less.
Cash equivalents generally consist of treasury notes and money market deposits.
INVESTMENTS
Investments in debt and equity securities are classified as "available-for-
sale." Short-term investments consist primarily of U.S. government and
municipal bonds and corporate notes which are recorded at fair market value.
The long-term equity investments consist of an investment in common stock which
is recorded at fair market value. Net unrealized gains and losses are recorded
as a separate component of shareholders' equity. Interest income is accrued as
earned.
REVENUE RECOGNITION
Revenue is generally recognized upon shipment. Revenues from distributors are
recognized upon shipment as no right of return, stock rotation or price
protection is given. 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.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates actual
cost (on a first-in, first-out basis), or market. Self-constructed
demonstration units are stated at their manufacturing costs and reserves are
recorded to state the demonstration units at their net realizable value.
22
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation of property and
equipment is based on the straight-line method over the shorter of the estimated
lives of the assets, generally three to seven years, or the lease terms.
INTANGIBLE ASSETS
Purchased patents and licenses are amortized over their remaining estimated
useful lives on a straight-line basis. Purchased product technologies are
amortized over their estimated useful lives of three to seven years on a
straight-line basis. Goodwill is amortized over ten years on a straight-line
basis. The Company periodically reviews the recoverability of intangible assets
based upon the present value of estimated future cash flows.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
consist of cash equivalents, short-term investments and marketable equity
securities, accounts receivable and financial instruments used in hedging
activities.
Cash equivalents and short-term investments are maintained with high quality
institutions, the composition and maturities of which are regularly monitored by
management. Generally, these securities maintain a highly liquid market and may
be redeemed upon demand and, therefore, bear minimal risk. 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 are 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. The write-offs related to
credit losses have been insignificant.
OFF-BALANCE SHEET RISK
The Company enters into foreign currency forward exchange contracts to reduce
the impact of currency fluctuations of intercompany balance sheet positions.
The objectives of these contracts is to neutralize the impact of foreign
currency exchange rate movements on the Company's operating results. The gains
and losses on forward exchange contracts are included in earnings when the
underlying foreign currency denominated transaction is recognized. 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.
The foreign exchange forward contracts described above generally require the
Company to sell foreign currencies for U.S. dollars at rates agreed to at the
inception of the contracts. The forward contracts generally have maturities of
three months or less. These contracts generally do not subject the Company to
significant market risk from exchange rate movements because the contracts are
designed to offset gains and losses on the balances and transactions being
hedged. At December 31, 1996, the Company had forward contracts to sell
approximately $6.4 million in Japanese Yen. The fair value of forward exchange
contracts, based upon current market rates, totaled approximately $6.2 million
at December 31, 1996. The Company does not anticipate any material adverse
effect on its financial position resulting from the use of these instruments.
FAIR VALUE OF DISCLOSURES OF FINANCIAL INSTRUMENTS
The Company has evaluated the estimated fair value of financial instruments
using available market information and valuation methodologies. The amounts
reported for cash and cash equivalents, investments and bank borrowings
reasonably estimate their fair value.
23
<PAGE>
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future tax
consequences related to temporary differences between the tax bases of the
assets and liabilities and the amounts reported in the Company's financial
statements. In estimating future tax consequences, the Company generally
considers all expected future events other than enactment of changes in the tax
law or rates.
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of common and
common equivalent shares, ("weighted average shares") outstanding during the
period, which includes net shares issuable upon the exercise of stock options,
when dilutive.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company has several foreign subsidiaries. The functional currencies of the
Company's foreign subsidiaries are the local currencies. Accordingly, all
assets and liabilities of the foreign operations are translated to U.S. dollars
at the current 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
shareholders' equity under the caption "cumulative translation adjustment."
Foreign currency transaction gains and losses have not been significant.
NOTE 2 - MERGER
On January 14, 1997, the Company and KLA Instruments Corporation jointly
announced a definitive merger agreement to create a combined company. Under
the terms of the merger agreement, shares and options for KLA Instruments
common stock will be exchanged for all outstanding shares and options of the
Company on the basis of one share of KLA Instruments for each share of the
Company. The transaction is intended to qualify as pooling of interests for
financial reporting purposes and structured to qualify as a tax-free
reorganization. The transaction is conditioned on obtaining both companies'
shareholder approval, regulatory clearance and other customary closing
conditions. The merger is expected to close during the June 30, 1997 quarter.
24
<PAGE>
NOTE 3 - BALANCE SHEET COMPONENTS
December 31, 1996 1995
- ---------------------------------------------------------------------------
(in thousands)
Short-term investments available for sale:
U.S. government notes and bonds $33,904 $40,040
Municipal notes and bonds 48,466 31,762
Corporate notes and bonds --- 5,087
----------------------
$82,370 $76,889
----------------------
----------------------
Short-term investments of $38,905 mature in less than one year, $30,952 have
maturities between one and five years and $12,513 have maturities greater than
five years.
Inventories:
Raw materials $26,010 $24,829
Work-in-process 15,100 12,948
Finished goods 10,558 8,948
----------------------
$51,668 $46,725
----------------------
----------------------
Property and equipment:
Machinery and equipment $54,617 $28,845
Office furniture and fixtures 7,228 5,705
Leasehold improvements 11,385 8,035
Less: accumulated depreciation
and amortization (31,629) (20,138)
----------------------
$41,601 $22,447
----------------------
----------------------
Other assets:
Long-term equity investments $34,355 $10,732
Purchased patents and technology, net 5,537 7,492
Goodwill, net 3,084 3,485
Deferred income taxes 4,183 1,946
Other 3,370 3,988
----------------------
$50,529 $27,643
----------------------
----------------------
Other accrued expenses:
Warranty and retrofit $ 9,215 $ 6,685
Representative sales commissions 4,650 4,597
Restructuring charges 7,179 ---
Other accrued expenses 11,985 11,534
----------------------
$33,029 $22,816
----------------------
----------------------
NOTE 4 - BORROWING ARRANGEMENTS AND OTHER LIABILITIES
The Company has a $20.0 million unsecured multi-currency revolving line of
credit agreement with a bank which expires in June 1997. As of December 31,
1996, borrowings under the line of credit were $4.3 million and incur interest
charges at the London Interbank Offering Rate (LIBOR) plus 1.0%, or
approximately 7% at December 31, 1996. The line of credit requires compliance
with certain financial covenants.
The Company's Japanese subsidiary has loan arrangements with local banks. As of
December 31, 1996 the aggregate bank borrowings are the Yen equivalent of $24.1
million. These borrowings
25
<PAGE>
incur interest charges at the LIBOR plus bank premium, which, during 1996,
ranged from 1.1% to 1.6%.
The Company's Japanese subsidiary has an agreement with a local bank to sell,
with recourse, certain of its trade receivables. The total amount of the
facility is three billion yen, or approximately $25.9 million at December 31,
1996. The Company has accounted for the sale of certain of these receivables,
for which the related product has been technologically accepted by its
customers, as an off balance sheet financing arrangement. During 1996, a total
of the yen equivalent of approximately $42.4 million of receivables were sold
under this arrangement. As of December 31, 1996, the yen equivalent of $23.2
million remains uncollected. Of the total amount uncollected, the yen
equivalent of $20.9 million was accounted for as an off-balance sheet financing
arrangement and the yen equivalent of $2.3 million has been treated as a
borrowing. The Company does not believe it is materially at risk for any losses
as a result of this agreement.
The Company also has obligations of approximately $3.2 million related primarily
to the purchase of certain product technology. Future payments under these
obligations are as follows:
Year ending December 31,
(in thousands)
1997 $ 1,867
1998 1,272
1999 32
2000 31
--------
Total minimum payments 3,202
Less: current portion (1,867)
--------
Long-term obligations, less current portion $ 1,335
--------
--------
26
<PAGE>
NOTE 5 - RESTRUCTURING COSTS
During the quarter ended September 30, 1996, the Company recorded a charge for
restructuring costs of $8.5 million. This charge consists of $2.0 million in
employee severance and related costs as a result of downsizing its worldwide
operations through a reduction in force of approximately 10% of the Company's
regular employees. The restructuring charge also includes costs aggregating
$6.5 million associated with the relocation from the Company's current leased
facilities to the facility constructed for its use in Milpitas, California. The
Company expects complete occupation of its new facility in Milpitas, California,
in the early part of 1997. The Company maintains facilities with leases that
expire on various dates through September 1998. As a result of the Company's
move to its new facility in Milpitas, certain of these leased facilities will
become unoccupied during the first quarter of 1997. Due to the relatively short
terms remaining on certain of these leases, the Company may be unable to
sublease all of its unoccupied facilities. Accordingly, the Company has
included in its restructuring charge an amount equal to the remaining costs
(including rent) due under those leases which are unlikely to be subleased. The
Company has also included in its lease exit cost, amounts for the decline in net
book value of certain of the Company's furniture and fixtures, estimated
leasehold refurbishment costs (net of existing reserves) to return the
facilities to their original condition as required by the lease agreements, and
various other costs associated with the exit from its current facilities. Of
the $8.5 million total restructuring costs, approximately $1.3 million was used
as of December 31, 1996 with the majority of the remaining balance of $7.2
million expected to be utilized during the next nine months. A summary of
charges for restructuring costs along with the respective remaining reserves
which are included in accrued liabilities, follows (in thousands):
Charge Recorded Remaining Reserves
September 30, 1996 Payments December 31, 1996
-------------------------------------------------------
Downsizing $1,983 $( 1,151) $ 832
Lease exit costs 6,517 ( 170) 6,347
------ -------- -------
Total $8,500 $( 1,321) $ 7,179
------ -------- -------
------ -------- -------
27
<PAGE>
NOTE 6 - INCOME TAXES
December 31, 1996 1995 1994
- ------------------------------------------------------------------------------
(in thousands)
The components of income before
income taxes are as follows:
Domestic income before income taxes $96,202 $101,116 $28,221
Foreign income before income taxes 2,649 9,602 12,549
-------------------------------
$98,851 $110,718 $40,770
-------------------------------
-------------------------------
The provision (benefit) for income taxes is comprised of the following:
Current:
Federal $39,503 $ 37,704 $15,771
State 5,752 6,194 2,357
Foreign 2,898 5,727 2,572
-------------------------------
48,153 49,625 20,700
-------------------------------
Deferred:
Federal (9,310) (3,100) (2,601)
State (761) (264) (1,645)
Foreign (519) (867) ---
-------------------------------
(10,590) (4,231) ( 4,246)
-------------------------------
Provision for income taxes $37,563 $ 45,394 $16,454
-------------------------------
-------------------------------
The significant components of deferred income tax assets are as follows:
Inventories and other reserves $ 5,373 $ 2,755
Warranty and employee benefit accruals 6,186 4,105
Depreciation and amortization 3,504 360
Other 6,342 3,595
-------------------
$21,405 $ 10,815
-------------------
-------------------
The reconciliation of the United States federal statutory income tax rate to the
Company's effective income tax rate is as follows:
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 3.8 3.6 3.8
Effect of foreign operations taxed at
various rates 2.0 3.1 2.6
Benefit from foreign sales corporation (3.5) (3.1) (3.0)
Research and development tax credit --- --- (0.2)
Merger costs --- --- 1.7
Other 0.7 2.4 0.5
---- ---- ----
38.0% 41.0% 40.4%
---- ---- ----
---- ---- ----
NOTE 7 - SHAREHOLDERS' EQUITY
In February 1996, the Company repurchased 250,000 shares of its Common Stock for
$5.5 million.
In June 1996, employees holding options to purchase shares of the Company's
Common Stock were offered the opportunity to exchange their existing options
ranging in prices from $17.875 per share to $46.875 per share for options at
the then current market price of $17.625 per share. The Company granted new
replacement stock options of 831,171 shares in exchange for the cancellation
of the entire unexercised portion of the options being replaced.
28
<PAGE>
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, and performance shares. As of
December 31, 1996, only stock options have been awarded under the plans.
Options to purchase Common Stock have been granted at no less than 85% of their
fair market value on the date of grant.
The activity under the option plans, combined, was as follows:
<TABLE>
<CAPTION>
Option Weighted-
Available Options Price Average
For Grant Outstanding per Share Exercise Price
--------- ----------- --------- --------------
<S> <C> <C> <C> <C>
Balances at December 31, 1993 1,267,664 3,005,096 $ 1.13 - $ 6.00 $ 3.37
Additional shares reserved 1,000,000 --- --- ---
Options granted (1,316,690) 1,316,690 4.83 - 23.57 11.71
Options canceled 130,252 (130,252) 1.13 - 13.32 4.33
Options exercised --- (1,314,774) 1.13 - 5.88 3.20
Options expired (623,928) --- --- ---
---------- ----------
Balances at December 31, 1994 457,298 2,876,760 $ 1.29 - $23.57 $ 7.19
Additional shares reserved 800,000 --- --- ---
Options granted (974,477) 974,477 17.88 - 46.89 37.01
Options canceled 94,051 (94,051) 1.29 - 38.25 19.10
Options exercised --- (811,796) 1.29 - 13.31 4.46
Options expired (12,921) --- --- ---
---------- ----------
Balances at December 31, 1995 363,951 2,945,390 $ 1.29 - $46.89 $17.43
Additional shares reserved 1,550,000 --- --- ---
Options granted (1,787,420) 1,787,420 15.94 - 29.00 18.33
Options canceled 1,196,776 (1,196,776) 1.45 - 46.89 31.88
Options exercised --- (310,683) 1.29 - 22.31 5.62
Options expired (14,547) --- --- ---
---------- ----------
Balances at December 31, 1996 1,308,760 3,225,351 $ 1.45 - $40.00 $13.70
---------- ----------
---------- ----------
</TABLE>
29
<PAGE>
The options outstanding at December 31, 1996 have been segregated into ranges
for additional disclosure as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Vested and Exercisable
------------------------------------------------- ------------------------------------
Number Weighted-Average Weighted- Number Vested
Range of Outstanding Remaining Average and Exercisable Weighted-Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.45 - $ 5.88 639,429 4.38 $ 3.81 549,049 $ 4.07
$ 6.00 - $ 8.50 326,096 7.25 7.16 279,709 $ 7.16
$ 13.31 - $13.31 598,527 7.61 13.31 372,404 $13.31
$ 15.94 - $17.06 10,800 9.54 16.45 0 $ 0.00
$ 17.63 - $17.63 958,912 9.49 17.63 850 $17.63
$ 17.75 - $40.00 691,887 9.62 20.78 48,173 $29.75
-------------------------------------------------------------------------------------------------------------
$ 1.45 - $40.00 3,225,351 7.93 $13.70 1,250,185 $ 8.51
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average fair value of options granted in 1996 and 1995 is $9.11
and $18.53, 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 towards the quarterly 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 1996 and 1995, 242,713 and 159,042 shares, respectively,
had been purchased by employees. At December 31, 1996, 522,919 shares were
reserved and available for issuance under this plan.
PRO FORMA INFORMATION. As of December 31, 1996, the Company has various stock-
based compensation plans which are discussed above. The Company has elected to
follow APB 25 and related interpretations in accounting for its employee stock
options because, as discussed below, the alternative fair value accounting
provided for under SFAS 123 requires use of option valuation models that were
not developed for use in valuing employee stock options and employee stock
purchase plans. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized.
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
December 31, 1994 under the fair value method of SFAS 123. The fair value for
these options was estimated at the date of grant using the Black-Scholes option
pricing model for the single option approach with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rate of
approximately 5.7% for both years; volatility factor of the expected market
price of the Company's Common Stock of .58 for both years and a weighted-average
expected life of the options of approximately 3.5 for both years.
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 options and employee stock purchase plan 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 the Company's
employee stock options and the employee stock purchase plan.
30
<PAGE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
1996 1995
---- ----
Net income:
Historical 61,288 65,324
Pro forma 55,355 63,764
Earnings per share:
Historical $ 1.93 $ 2.09
Pro forma $ 1.79 $ 2.06
OTHER EMPLOYEE BENEFIT PLANS. The Company has a profit sharing program for
eligible employees. The program accumulates and distributes, on a six-month
basis, a percentage of pretax profits, as determined by the Board of Directors.
In addition, the Company has an employee savings plan (the Savings Plan) that
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. During 1996, the Company matched dollar-for-dollar up to $1,500
of an eligible employee's contribution. The total charge to operations under
the profit sharing and 401(k) programs aggregated approximately $6.6 million,
$6.3 million and $2.5 million in 1996, 1995 and 1994, respectively.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company leases its principal facilities under non-cancelable operating
leases. The leases expire at various times beginning in December 1996 through
November 2004, with renewal options at fair market value for additional periods.
The Company also leases equipment and other facilities under operating leases.
In late 1995, the Company entered into two seven-year operating leases for land,
office and manufacturing facilities being constructed for its use in Milpitas,
California. As of December 31, 1996, the lessor has funded a total of $71.3
million and has committed to fund up to $90.0 million. The leases provide for
monthly payments which vary based upon the total constructed costs of the
properties and the London Interbank offering rate (LIBOR). The Company's lease
obligations under the leases may be collateralized at the Company's option in
order to reduce the monthly payments. Payments under these leases will commence
upon the Company's occupation and completion of the buildings in the second
quarter of 1997. The leases provide the Company with the option at the end of
each lease of either acquiring the properties at their original cost or
arranging for the properties to be acquired. If the Company does not purchase
the properties at the end of the leases, the Company will be contingently liable
to the lessor for residual value guarantees aggregating $72.9 million. In
addition, under the terms of the leases, the Company must maintain compliance
with certain financial covenants. As of December 31, 1996, the Company was in
compliance with these 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.
Total operating lease expense was $5.3 million, $5.2 million and $3.3 million
for the years ended December 31, 1996, 1995 and 1994, respectively.
31
<PAGE>
Future minimum lease payments under non-cancelable operating leases, which
include estimated lease payments for its Milpitas, California facilities using a
LIBOR rate of approximately 6.0% and total construction costs of $90.0 million,
are as follows (in thousands):
1997 $ 9,782
1998 8,648
1999 7,513
2000 7,209
2001 6,778
Thereafter 17,243
-------
Total net minimum lease payments $57,173
-------
-------
Because a large number of patents exist in the semiconductor field and new
patents are issued frequently, the Company from time to time, in the normal
course of business, receives and makes inquiries with regard to possible patent
infringement. The Company believes that it is unlikely that the outcome of
these inquiries will have a material adverse effect on the Company's financial
position. The Company intends to be active in the protection of its
intellectual property, including its patents.
32
<PAGE>
NOTE 9 - INDUSTRY AND GEOGRAPHIC INFORMATION
No single customer accounted for more than 10% of net revenues in 1996 and 1995.
International sales accounted for 64%, 62% and 51% of the Company's revenues in
1996, 1995 and 1994, respectively. The Company designs, manufactures, markets
and services wafer defect inspection systems, thin film measurement and
metrology systems used primarily in the manufacture of integrated circuits by
the semiconductor industry.
The following is a summary of the Company's geographic operations:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ----------------------- ---- ---- ----
(In thousands)
<S> <C> <C> <C>
Revenues:
Sales to unaffiliated customers:
Domestic $147,197 $126,078 $ 89,269
International:
Japan 94,744 86,112 41,482
Korea 49,063 31,481 23,699
Taiwan 29,194 16,937 ---
Singapore 13,957 2,461 ---
Europe 54,521 60,871 19,649
ROW 14,494 6,257 8,231
--------------------------------------
Total sales to unaffiliated customers 403,170 330,197 182,330
Intercompany sales among geographic areas:
United States 3,615 2,868 1,244
Japan 67,785 52,350 17,292
Singapore 1,727 --- ---
Europe 39,404 37,740 8,448
Consolidation eliminations (112,531) (92,958) (26,984)
--------------------------------------
Revenues $403,170 $330,197 $182,330
--------------------------------------
--------------------------------------
Income from operations:
United States $ 5,856 $ 12,985 $ 26,913
Japan 32,614 37,884 8,755
Korea 13,160 11,204 755
Taiwan 9,998 7,610 ---
Singapore 4,279 1,121 ---
Europe 26,043 33,592 3,053
--------------------------------------
Income from operations $ 91,950 $104,396 $ 39,476
--------------------------------------
--------------------------------------
Identifiable assets at December 31:
United States $210,496 $153,717 $ 81,019
Japan 27,817 51,397 23,183
Korea 3,029 1,958 378
Taiwan 402 --- ---
Singapore 887 --- ---
Europe 18,011 24,135 6,143
General corporate assets consisting of cash,
cash equivalents and short-term investments 223,777 163,833 73,826
--------------------------------------
Total assets $484,419 $395,040 $184,549
--------------------------------------
--------------------------------------
</TABLE>
Intercompany sales among the Company's geographic areas are recorded on the
basis of intercompany prices established by the Company.
33
<PAGE>
At December 31, 1996, 1995 and 1994, total foreign liabilities (excluding
intercompany balances) were $35.9 million, $42.6 million and $10.6 million,
respectively. For fiscal years 1996, 1995 and 1994, foreign capital
expenditures and depreciation expense were $3.3 million and $542,000, $1.4
million and $331,000 and $642,000 and $299,000, respectively.
Certain reclassifications have been made to amounts in 1995 in order to be
comparative to the presentation in 1996.
NOTE 10 - CERTAIN TRANSACTIONS
UNIPHASE. In November 1995, the Company entered into agreements with Uniphase
Corporation (Uniphase) to license certain technology, provide partial funding
for research and development and purchase 665,568 shares of Uniphase's common
stock (adjusted to reflect a two for one stock split in June 1996) and, as a
result, became the exclusive OEM reseller of Uniphase's laser imaging defect
review station and automatic defect classification (ADC) software. The Company
recorded the license as acquired product technology and is amortizing the cost
over its estimated useful life of three years. The research and development
funding is charged to research and development expense over the term of the
funding agreement and the Company has recorded the purchase of Uniphase common
stock as a long-term marketable equity investment at its fair value at the time
of the purchase. Included under the caption "Accumulated unrealized gain on
investments, net" is $14.3 million related to the increase in fair market value
of the Company's investment in Uniphase common stock as of December 31, 1996.
ACQUISITIONS. On February 25, 1994, a subsidiary of the Company completed its
merger with Prometrix Corporation ("Prometrix). As a result of conforming
Prometrix's fiscal year to that of the Company's, Prometrix's loss for the two
months ended December 31, 1993 of $350,000 was charged to retained earnings
effective January 1, 1994. Also, in connection with the merger, $2.3 million of
merger costs and expenses were incurred and charged to merger expense in 1994.
On March 3, 1992, the Company acquired FleXus, Inc. (FleXus) . A portion of the
stock was escrowed pending revenues from FleXus products achieving agreed upon
levels, and in 1994, the Company recorded the release of escrowed common stock
at a value of $3.4 million.
PARK SCIENTIFIC LICENSE. The Company expensed the purchase of an in-process R&D
technology licensing agreement with Park Scientific (PSI) in the amount of $1.2
million to R&D expense in 1994.
34
<PAGE>
NOTE 11 - QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
March 31 June 30 September 30 December 31
1996:
Revenues $106,283 $109,417 $ 96,986 $ 90,484
Gross profit 65,436 65,193 55,774 50,644
Income from operations 31,369 28,393 13,214(1) 18,974
Net income 20,251 18,546 9,603(1) 12,888
Net income per share $ 0.64 $ 0.59 $ 0.30(1) $ 0.40
1995:
Revenues $ 67,608 $ 78,664 $ 88,003 $ 95,922
Gross profit 42,558 50,229 55,502 60,386
Income from operations 20,831 24,565 29,150 29,850
Net income 12,876 15,495 18,174 18,779
Net income per share $ 0.44 $ 0.49 $ 0.57 $ 0.59
(1) Includes an $8.5 million restructuring charge.
35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Tencor Instruments
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Tencor
Instruments and its subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, 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.
PRICE WATERHOUSE LLP
San Jose, California
February 7, 1997
_________________________________
36
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table sets forth certain information as of March 7, 1997, with
respect to the Company's Board of Directors:
NAME AGE POSITION
---- --- --------
Jon D. Tompkins 56 Chairman of the Board, President and Chief
Executive Officer
Richard J. Elkus, Jr. 62 Vice Chairman of the Board
James W. Bagley 58 Director
Dean O. Morton 64 Director
Dr. Calvin F. Quate 73 Director
Lida Urbanek 53 Director
Renn Zaphiropoulos 70 Director
JON D. TOMPKINS Mr. Tompkins was appointed President and Chief Executive
Officer of Tencor in April 1991. He has served on Tencor's Board of Directors
since May 1991 and was appointed Chairman of the Board of Directors in
November 1993. Mr. Tompkins also serves on the Boards of Directors of Fusion
Systems, Varian and SEMI/SEMATECH, a private research and development consortium
of U.S. semiconductor equipment and materials companies.
RICHARD J. ELKUS, JR. Mr. Elkus has been Vice Chairman of the Board of Tencor
since February 1994 to the present. Mr. Elkus is currently serving on the Board
of Directors of OnTrak Systems, Inc. and Voyan Technology. Mr. Elkus was
Executive Vice President of Tencor from February 1994 to September 1996, and was
one of the founders of Prometrix Corporation, which was acquired by Tencor in
February 1994. Mr. Elkus was the Chairman of the Board and Chief Executive
Officer of Prometrix from 1983 until February 1994.
JAMES W. BAGLEY Mr. Bagley has been a director of Tencor since June 1993. Mr.
Bagley is Chairman and Chief Executive Officer of OnTrak Systems, Inc.
Previously, Mr. Bagley was Vice Chairman of Applied Materials, Inc., the largest
supplier of wafer fabrication systems to the semiconductor industry, until May,
1996. Prior to joining Applied Materials, Mr. Bagley was with Texas Instruments
Incorporated for more than 15 years. Mr. Bagley also serves on the Board of
Directors of Teradyne, Inc., Kulicke & Soffa Industries, Inc., and Extraction
Systems, Inc.
DEAN O. MORTON Mr. Morton has been a director of Tencor since June 1993.
Mr. Morton retired in October 1992 as Executive Vice President and Chief
Operating Officer and as a director of Hewlett- Packard Company, a computer and
instruments manufacturer, where he had held various positions since 1960.
Mr. Morton is a director of ALZA Corporation, Centigram Communications
Corporation, The Clorox Company and Raychem Corporation. He is also a director
of the Metropolitan Series Fund and
37
<PAGE>
MetLife Portfolios, a trustee of the MetLife State Street and State Street
Research funds and a director of the Kaiser Foundation Health Plan and
Hospitals. Mr. Morton also serves on the Board of Associates, Harvard Business
School and is a Trustee of the David and Lucille Packard Foundation.
DR. CALVIN F. QUATE Dr. Quate has been a director of Tencor since 1989. Dr.
Quate has been a Professor of Applied Physics and Teaching Research at Stanford
University since 1960. Since 1981, he has also served as Senior Research Fellow
at the Xerox Palo Alto Research Center. From May 1992 to July 1992 Dr. Quate
served as a consultant to SEMATECH, a semiconductor research consortium equally
funded by the U.S. Government and a group of United States semiconductor
manufacturers.
LIDA URBANEK Mrs. Urbanek has been a director of Tencor since August 1991.
Mrs. Urbanek is the widow of Dr. Karel Urbanek, founder of the Company and its
president from November 1976 until April 1991.
RENN ZAPHIROPOULOS Mr. Zaphiropoulos has been a director of Tencor since 1988.
Mr. Zaphiropoulos was President and Chief Executive Officer of Versatec, Inc.
(a Xerox Company) from 1969 until his retirement in 1988, and Corporate Vice
President of Xerox Corporation from 1984 until his retirement in 1988.
Mr. Zaphiropoulos is currently a director of Optical Coating Laboratory, Inc.
and various privately-held corporations and holds executive seminars in
management worldwide.
EXECUTIVE OFFICERS
The following table and notes thereto identify and set forth certain information
with respect to the Company's executive officers:
Name of Individual Age Position
- ------------------ --- --------
Jon D. Tompkins (1) 56 Chairman of the Board, President and
Chief Executive Officer
Dr. Graham J. Siddall (2) 50 Executive Vice President and Chief
Operating Officer
Bruce R. Wright (3) 48 Senior Vice President, Finance and
Administration, and Chief Financial
Officer
Woody Spedden (4) 59 Senior Vice President, Field Operations
Gary Bultman (5) 40 Vice President, Corporate Marketing
Dr. David Alles (6) 57 Vice President and Chief Technical
Officer
Dr. Michael E. Kahn (7) 58 Vice President, Film Measurement
Division
Dennis J. Fortino (8) 50 Vice President, Metrology Division
William A. Colby (9) 51 Vice President, Customer Satisfaction
Dr. Seiji Yoshii (10) 59 Vice President, President, Tencor Japan
Frederick A. Ball (11) 34 Vice President, Corporate Controller and
Secretary
( 1) See the information about Mr. Tompkins under "Directors and Executive
Officers of the Registrant", above.
( 2) Dr. Siddall was appointed Executive Vice President and Chief Operating
Officer in December 1995. Previously Dr. Siddall served as Senior Vice
President for the Wafer Inspection Division from November 1994 to
December 1995 and has been a Vice President since joining Tencor in
1988. Prior to joining Tencor, Dr. Siddall served in a number of key
roles at GCA corporation, Hewlett Packard Laboratories and Rank Taylor
Hobson.
( 3) Mr. Wright was appointed Senior Vice President Finance and
Administration and Chief Financial Officer in November 1994.
Mr. Wright joined Tencor in December 1991 as Vice President and
Chief Financial Officer. Prior to joining Tencor, from 1988 to 1991,
Mr. Wright served as Chief Financial Officer of Teknekron, a
Nevada-based venture capital holding company.
( 4) Mr. Spedden was appointed senior vice president of worldwide sales in
July 1996. His role was expanded in October 1996 to encompass the
worldwide customer satisfaction organization including customer
service and support. Prior to joining Tencor, he most recently served
as president and chief executive officer of Credence Systems from 1991
through 1995. Prior to joining Credence in 1989, Spedden spent 18
years in a variety of sales
38
<PAGE>
and marketing management roles at Teradyne, Inc. His background also
includes sales and engineering roles at Hewlett-Packard and the
Applied Physics Laboratory of Johns Hopkins University. He serves on
the board of directors for Advanced Energy Industries, Inc. and
Integrated Sensor Solutions, a privately held company.
( 5) Mr. Bultman was appointed Vice President of Corporate Marketing in May
1995. Prior to that time, Mr. Bultman was Vice President of Marketing
for the Film Measurement Division of the Company and for Prometrix
Corporation prior to its acquisition in February 1994. Prior to
joining Prometrix Corporation in 1993, Mr. Bultman spent 10 years with
Applied Materials in a variety of technical, marketing and sales
roles, including head of marketing for Applied Materials HTCVD
division.
( 6) Dr. Alles was appointed to the newly created post of chief technical
officer in July 1996. Working closely with the research and
engineering groups in Tencor's three divisions, he is responsible for
driving strategic technical and advanced research initiatives company-
wide. Alles joined Tencor from AT&T Bell Labs where he spent nearly
25 years in a variety of engineering and managerial roles, most
recently as director of the R&D Planning and Administration Center.
Alles' work at Bell Labs was instrumental in the development of the
electron beam exposure system (EBES), which remains the dominant
technology for photomask production.
( 7) Dr. Kahn was appointed Vice President and General Manager, Film
Measurement Division in September 1995. Dr. Kahn joined Tencor as
Vice President in May 1993. Prior to joining Tencor, Dr. Kahn was
President and Chief Executive Officer of Gamma MicroWave, Inc., a
manufacturer of microwave components and systems, from April 1991
until January 1993, and President of Teradyne Laser Systems, a
manufacturer of semiconductor manufacturing equipment, from February
1989 until March 1990.
( 8) Mr. Fortino was appointed Vice President, Metrology Division in
November 1995. Prior to joining Tencor, Mr. Fortino spent four years
with Spectra-Physics Lasers, Inc. as Vice President of the Laser
Systems Business Unit. Prior to that he served in a variety of
executive positions including Division General Manager of Spectra
Physics' Industrial laser division and president of Rofin-Sinar,Inc.
(a division of Siemens).
( 9) Mr. Colby joined Tencor in June 1995 and was appointed Vice President,
Customer Satisfaction in December 1995. Prior to joining Tencor, Mr.
Colby was the Director of service for Nikon Precision, a leading
supplier of semiconductor wafer steppers. Mr. Colby also has nine
years of experience with Ultratech Stepper in a variety of management
positions.
(10) Dr. Yoshii was appointed a Vice President of Tencor in May 1991. He
joined Tencor in May 1990 as President of Tencor Japan. From October
1989 to April 1990, Dr. Yoshii served as Vice President and General
Manager of Applied Materials Japan, the Japanese subsidiary of the
largest supplier of wafer fabrication systems to the semiconductor
industry. From February 1987 to October 1989, he was Managing
Director and General Manager of the Implant Product Division of
Applied Materials Japan.
(11) Mr. Ball joined Tencor as corporate controller in March 1995 and was
promoted to corporate vice president in January of 1996. At that
time, he also added the role of corporate secretary to his
responsibilities which include all accounting functions within the
company. Mr. Ball joined the company from Price Waterhouse LLP, where
he worked with a number of high technology companies. During his 10
years with Price Waterhouse he held a succession of management
positions, both in the United States and abroad.
39
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
outstanding shares of the Company's Common Stock, to file with the Securities
and Exchange Commission initial reports of ownership (Form 3) and changes in
ownership of such stock (Forms 4 and 5).
To the Company's knowledge, based solely upon review of the copies of such
reports and certain representations furnished to it, all Section 16(a) filing
requirements applicable to its executive officers and directors were complied
with during the year ended December 31, 1994.
40
<PAGE>
ITEM 11: EXECUTIVE COMPENSATION
BOARD COMPENSATION
Non-management directors currently are compensated at a rate of $15,000 per
year, payable quarterly, plus $1,000 per Board meeting attended and $500 per
Board committee meeting attended separate from Board meetings. Directors also
are reimbursed for their reasonable expenses incurred in attending Board and
committee meetings. Non- management directors are also entitled to receive a
mandatory initial option grant of 10,000 shares and mandatory annual option
grants of 5,000 shares pursuant to Tencor's 1993 Non-employee Directors Stock
Option Plan.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation for 1996, 1995, and 1994
of the Chief Executive Officer and each of the other four most highly
compensated executive officers of Tencor whose total salary and bonus for 1996
exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMP.
ANNUAL COMPENSATION AWARDS
------------------- ------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS($) OPTIONS (#) COMP. ($)
--------------------------- ---- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Jon D. Tompkins 1996 352,067 381,562 71,999 12,291(1)
Chief Executive Officer 1995 307,475 422,115 40,000 12,582(1)
1994 284,900 217,308 100,000 13,373(1)
Dr. Graham Siddall 1996 292,062 214,132 87,999 1,500(2)
Senior Vice President, Wafer 1995 191,580 242,074 5,000 1,000(2)
Inspection Division 1994 162,540 125,953 90,000 1,000(2)
Bruce R. Wright 1996 195,417 157,810 58,999 1,500(2)
Senior Vice President, Finance and 1995 179,175 207,505 30,000 1,000(2)
Administration, and Chief 1994 159,775 84,916 80,000 1,000(2)
Financial Officer
Dr. Seiji Yoshii 1996 298,127 152,800 40,999 _
Vice President, President of 1995 278,360 192,677 20,000 _
Tencor Japan 1994 241,990 101,381 28,000 _
Dennis Fortino 1996 187,589 132,295 139,999 1,500(2)
Vice President, Metrology 1995 31,667 62,000 50,000 1,000(2)
Division 1994 _ _ _ _
</TABLE>
(1) Includes $12,373 in 1994, $11,582 in 1995 and $10,879 in 1996 of
forgiveness of principal and interest due under a loan made by Tencor
in connection with Mr. Tompkins' employment which was being retired
over a five-year period which ended in 1996. Includes $1,500 of
matching contributions made by Tencor to Tencor's 401(k) Plan on
behalf of Mr. Tompkins.
(2) Matching contributions made by Tencor to Tencor's 401(k) Plan on
behalf of the Participant.
41
<PAGE>
The following table sets forth certain information with respect to the
options granted to the executive officers named in the Summary Compensation
Table during 1996:
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
------------------ Potential Realizable Value
Number of % of Total at Assumed Annual Rates
Securities Options of Stock Price Appreciation
Underlying Granted to Exercise or for Option Term(2)
Options Employees In Base Price Expiration ---------------------------
Name Granted (#)(1) Fiscal Year ($/sh) Date 5% ($) 10% ($)
- ---- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jon D. Tompkins 71,999 4.1% $17.625 6/27/06 $798,056 $2,022,431
Dr. Graham Siddall 87,999 5.0% $17.625 6/27/06 $975,404 $2,471,866
Bruce R. Wright 58,999 3.3% $17.625 6/27/06 $653,960 $1,657,264
Dr. Seiji Yoshii 40,999 2.3% $17.625 6/27/06 $454,443 $1,151,650
Dennis Fortino 39,999 2.3% $17.625 6/27/06 $443,360 $1,123,560
</TABLE>
(1) The options granted in June 1996, with terms of 10 years, vest at the rate
of 25% per year beginning one year after grant. Payments by the optionees
on exercise (including any taxes Tencor is required to withhold) may be
made in cash, by a full recourse promissory note or by the tender of
shares. All options were granted at the fair market value of Tencor's
Common Stock on the date of grant.
(2) Potential realizable value is based on certain assumed rates of
appreciation over the term of the option. The amounts are calculated
based on rules of the Securities and Exchange Commission and do not
represent the Company's estimate of future stock price growth.
The following table sets forth certain information with respect to the options
exercised by the executive officers named in the Summary Compensation Table
during 1996 and options outstanding at fiscal year end.
42
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Value of Unexercised
Shares Value Number of Unexercised In-the-Money Options
Acquired on Realized Options at FY-End (#) at FY-End ($)
Name Exercise (#) ($)(1) Vested/Unvested Vested/Unvested (2)
---- ------------ ----- --------------- -------------------
<S> <C> <C> <C> <C>
Jon D. Tompkins -- -- 113,121 / 122,001 $2,321,643 / $1,283,142
Dr. Graham Siddall 10,955 $155,099 65,823 / 110,201 $1,193,834 / $1,105,005
Bruce R. Wright -- -- 131,498 / 80,001 $2,620,349 / $ 828,080
Dr. Seiji Yoshii 2,070 $ 27,945 53,466 / 55,001 $1,067,312 / $ 541,642
Dennis Fortino -- -- -- / 39,999 -- / $ 349,991
</TABLE>
_________
(1) Market value of underlying securities at exercise date less the exercise
price.
(2) Market value of underlying securities at fiscal year-end minus the exercise
price of "in the money" options.
43
<PAGE>
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Tencor's Common Stock as of January 31, 1997: (i) by each person
who is known by Tencor to own beneficially more than 5% of the outstanding
shares of Common Stock; (ii) by each of Tencor's directors; (iii) by each of
Tencor's executive officers named in the Summary Compensation Table herein; and
(iv) by all directors and executive officers as a group. Except as otherwise
indicated, Tencor believes that the beneficial owners of the securities listed
below, based on information furnished by such owners, have sole investment and
voting power with respect to the Common Stock shown as being beneficially owned
by them.
Shares Beneficially
Owned
----------------------------
Name of Beneficial Owner Number (1) Percent
- ------------------------ ----------------------------
Pioneering Management Corporation (2) 2,940,000 9.5%
60 State Street
Boston MA 02109
J.W. Seligman & Co. Incorporated (2) 2,711,000 8.7%
100 Park Avenue - 8th Floor
New York NY 10006
Jon D. Tompkins (3) 119,751 *
Richard Elkus 75,000 *
James Bagley (4) 14,443 *
Dean O. Morton (5) 13,243 *
Calvin Quate (6) 31,415 *
Lida Urbanek (7) 812,897 2.6%
Renn Zaphiropoulos (8) 5,138 *
Graham Siddall (9) 93,197 *
Bruce R. Wright (10) 147,995 *
Dr. Seiji Yoshii (11) 55,536 *
Dennis Fortino 1,185 *
All executive officers and directors
as a group (21 persons) (12) 1,789,901 5.8%
* Less than 1%.
(1) The number of shares of Common Stock and calculation of percent of
ownership takes into account those underlying stock options held by the
named individual or group that are vested and exercisable within 60 days of
January 31, 1997.
(2) The number of shares is as of December 31, 1996, and is based on Schedule
13G filed by each of the named shareholders.
(3) Includes 113,121 shares issuable upon exercise of outstanding options.
(4) Consists of 14,443 shares issuable upon exercise of outstanding options.
(5) Includes 10,835 shares issuable upon exercise of outstanding options.
(6) Includes 14,165 shares issuable upon exercise of outstanding options.
(7) Includes 647,232 shares held by a trust of which Mrs. Urbanek is a trustee.
Also includes 14,165 shares issuable upon exercise of outstanding options.
(8) Consists of 5,138 shares issuable upon exercise of outstanding options.
(9) Includes 73,023 shares issuable upon exercise of outstanding options.
(10) Includes 137,498 shares issuable upon exercise of outstanding options.
(11) Includes 53,466 shares issuable upon exercise of outstanding options.
(12) Includes 619,624 shares issuable upon exercise of outstanding options.
44
<PAGE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 1993, Tencor loaned Bruce Wright, its Senior Vice President, Finance and
Administration and Chief Financial Officer, $400,000 pursuant to a promissory
note secured by his principal residence, which bears interest at 5.5% per annum
and is due in May 2002.
In November 1996, Tencor loaned David Alles, its Vice President and Chief
Technology Officer, $200,000 pursuant to a promissory note secured by his
principal residence, which bears interest at 6.52% per annum and is due October
2003.
45
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1, 2) See item 8.
(3) Exhibits. See Exhibit Index on page 49 of this report. The following
exhibits are filed as part of this Form 10-K.
2.1 Agreement and Plan of Reorganization dated January 14, 1997,
among Registrant, KLA Instruments Corporation and Tiger
Acquisition Corporation. (9)
3.1 Copy of Registrant's Articles of Incorporation as amended (7)
3.2 Copy of Registrant's Bylaws, as amended (8)
10.1 Registrant's Second Amended and Restated 1984 Stock Option Plan
(2)*
10.2 Registrant's Form of Option Agreement*
10.5 Master Lease for the premises at 2400-2476 Charleston Road
dated July 5, 1988 between the Company and Meridian Point
Realty
Trust '83 (1)
10.6 Lease for the premises at 2370 Charleston Road dated October 7,
1983 between the Company and E&K Properties, as amended by
Addendum No.1 dated October 31,1983 and letters dated May 12,
1987 and June 30, 1988 (1)
10.8 Form of indemnification Agreement between the Company and its
officers and directors, as amended. (1)
10.11 Registrant's 401(k) Plan (1)
10.12 Prometrix Corporation's 401(k) Plan (8)
10.15 Description of Registrant's Senior Executive Incentive Program
(5)*
10.16 Registrant's 1993 Equity Incentive Plan, as amended (4)*
10.17 Registrant's 1993 Nonemployee Directors Stock Option Plan (4)*
10.18 Registrant's Employee Stock Purchase Plan (4)
10.19 Registrant's Foreign Employee Stock Purchase Plan (2)
10.20 Prometrix 1983 Employee Incentive Stock Option Plan, as
amended (6)*
10.21 Prometrix 1993 Employee Incentive Stock Option Plan (6)*
10.25 Leases for the premises at 3233 Scott Blvd., Santa Clara,
California (8)
10.26 Multi-currency loan agreement with Bank of Boston dated
June 15, 1995 (10)
46
<PAGE>
10.27 Phase IIA and Phase IIB Leases for Milpitas Facility dated
December 29, 1995 (10)
21.1 Subsidiaries of the Registrant
23.1 Consent of Price Waterhouse LLP, Independent Accountants
(1) In addition to the Amendment to Indemnification Agreement
attached hereto as Exhibit 10.8, previously filed as an
exhibit, with corresponding exhibit number, to
Registration Statement on Form S-1 (33-46799) filed March
27, 1992, as amended.
(2) Previously filed as exhibit to Registration Statement on
Form S-8 (33-62986) filed May 20, 1993.
(3) Previously filed as exhibit 28 to Registration Statement
on Form S-8 (33-60690) filed April 8, 1993.
(4) Previously filed as exhibit to Registration Statement on
Form S-8 (333-08785) filed July 25, 1996.
(5) Previously filed as an exhibit, with corresponding
exhibit number, to Registrant's Annual report on Form 10-
K for the fiscal year ended December 31, 1993.
(6) Previously filed as an exhibit, with corresponding
exhibit number, to Registration Statement on Form S-4
(33-73586) filed December 30, 1993, as amended.
(7) In addition to the Certificate of Amendment to Articles
of Incorporation filed with the California Secretary of
State on May 31, 1995, a copy of which is attached hereto
as Exhibit 3.1 previously filed as an exhibit 3.1 to the
Registration Statement identified in footnote (1) above,
except for a Certificate of Amendment thereto filed as
exhibit 3.3 to the Annual Report on Form 10-K identified
in footnote (5) above and a Certificate of Amendment
filed as exhibit 3.1 to Registration Statement on Form S-
3 (33-83014) filed August 19, 1994, as amended.
(8) Previously filed as an exhibit, with corresponding
exhibit number, to Registration Statement on Form S-3
identified in footnote (7) above.
(9) Previously filed as an exhibit, with corresponding
exhibit number, to current report on Form 8-K filed
January 22, 1997.
(10) Previously filed as an exhibit, with corresponding
exhibit number, to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
* Management contract or compensatory plans.
(b) No reports on Form 8-K were filed during the Company's fiscal quarter ended
December 31, 1996.
On January 22, 1997, the Company filed a report on Form 8-K related to the
proposed merger between the Company and KLA Instruments Corp.
(c) Exhibits: The exhibits listed in Item (a)(3) above, if not noted as
previously filed, are submitted as a separate section of this report.
(d) The individual financial statements of the registrant have been omitted
since the registrant is primarily an operating company and all subsidiaries
are included in the consolidated financial statements.
47
<PAGE>
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 March 7, 1997.
TENCOR INSTRUMENTS
By /s/ Bruce R. Wright
-------------------------------
Bruce R. Wright
Senior Vice President and
Chief Financial Officer
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.
Title Date
/s/ Jon D. Tompkins Chairman of the Board, President March 7, 1997
- ------------------------- and Chief Executive Officer
Jon D. Tompkins (Principal Executive Officer)
/s/ Bruce R. Wright Senior Vice President, Chief Financial March 7, 1997
- ------------------------- Officer (Principal Financial Officer)
Bruce R. Wright
/s/ Frederick A. Ball Vice President, Corporate Controller
- ------------------------- and Secretary (Principal March 7, 1997
Frederick A. Ball Accounting Officer)
/s/ Richard J. Elkus, Jr. Vice Chairman of the Board March 7, 1997
- -------------------------
Richard J. Elkus, Jr.
/s/ James W. Bagley Director March 7, 1997
- -------------------------
James W. Bagley
/s/ Dean O. Morton Director March 7, 1997
- -------------------------
Dean O. Morton
/s/ Dr. Calvin F. Quate Director March 7, 1997
- -------------------------
Dr. Calvin F, Quate
/s/ Lida Urbanek Director March 7, 1997
- -------------------------
Lida Urbanek
/s/ Renn Zaphiropoulos Director March 7, 1997
- -------------------------
Renn Zaphiropoulos
48
<PAGE>
INDEX TO EXHIBITS
3.1 Certificate of Amendment to Articles of Incorporation
10.2 Registrants' Form of Option Agreements
10.8 Registrants' Form of Amendment to Indemnification Agreement
21.1 Subsidiaries of Registrant
23.1 Consent of Price Waterhouse LLP, Independent Accountants
49
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION
JON D. TOMPKINS and CLAUDIA CASEY certify that:
1. They are the President and the Secretary, respectively, of TENCOR
INSTRUMENTS, a California corporation.
2. Article Third of the Articles of Incorporation of this corporation
is amended in its entirety to read as follows:
THIRD: This corporation is authorized to issue two classes of
shares which shall be known as Common Stock and Preferred Stock. The
total number of shares of Common Stock which this corporation is
authorized to issue is 60,000,000. The total number of shares of
Preferred Stock which this corporation is authorized to issue is
1,000,000. Upon the amendment of this article, each outstanding share
of Common Stock is split up and converted into two (2) shares of Common
Stock.
3. The foregoing amendment of the Articles of Incorporation has been
duly approved by the Board of Directors.
4. The corporation has only one class of shares outstanding and, in
accordance with Section 902 of the California Corporations Code, the
foregoing amendment of the Articles of Incorporation did not require the
approval of the outstanding shares.
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in this Certificate are true and
correct of our own knowledge.
Dated: May 25, 1995
/s/ Jon D. Tompkins
-----------------------------------------
JON D. TOMPKINS, President
/s/ Claudia Casey
-----------------------------------------
CLAUDIA CASEY, Secretary
<PAGE>
EXHIBIT 10.2
TENCOR INSTRUMENTS
NONSTATUTORY STOCK OPTION AGREEMENT
(A) Name of Optionee: ___________________
(B) Grant Date: _________________________
(C) Number of Shares: ___________________
(D) Exercise Price: _____________________
(E) Effective Date: _____________________
(F) Percentage to Vest at end Year One: ___%
(G) Percentage to Vest Monthly/Annually After Year One: ___%
THIS NONSTATUTORY STOCK OPTION AGREEMENT (the "Agreement") is made and
entered into as of the date set forth in Item E above (the "Effective Date")
between Tencor Instruments, a California corporation (the "Company"), and the
person named in Item A above ("Optionee"). This option will not be treated as
an "incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code.
1. GRANT. The Company hereby grants to Optionee pursuant to the
Company's 1993 Amended and Restated Equity Incentive Plan (the "Plan"), the
terms and conditions of which are incorporated herein by this reference, an
option (the "Option") to purchase the number of shares (the "Option Shares")
of the Company's common stock listed in Item C above on the terms and
conditions set forth herein and in the Plan.
2. VESTING OF OPTION SHARES. The vesting base date (the "Vesting Base
Date") shall be the same date as the grant date set forth in Item B above;
the Option Shares shall vest on the first anniversary of the Vesting Base
Date at the rate specified in Item F above; the Option Shares shall vest at
the end of each full period thereafter at the rate specified in Item G above.
3. EXERCISE OF THE OPTION. This Option may be exercised in whole or
part at any time. The exercise price shall be the price set forth in Item D
above (the "Exercise Price"). Optionee hereby agrees that in the event that
the Company deems it necessary or advisable in the exercise of its
discretion, the issuance of Option Shares may be conditioned upon certain
representations and acknowledgments by the person exercising the Option.
a. EXERCISE BEFORE VESTING. The Optionee may exercise the Option
before vesting of the Option Shares by delivering to the Company: (i) the
Exercise Price, (ii) an executed copy of the Notice of Exercise attached
hereto as Exhibit 1, and (iii) an executed copy of the Acknowledgment and
Statement of Decision Regarding Election attached hereto as Exhibit 2. Share
certificates representing Option Shares purchased before vesting shall be
held in escrow and released to the Optionee upon vesting, or at the Company's
sole discretion, Option Shares purchased before vesting may be issued in book
entry form without certification. The Company shall instruct the person
maintaining the book entry system that such Option Shares shall not be
available for transfer until such Option Shares are vested or the Company's
right of repurchase (as provided in Section 4 below) has otherwise
terminated. As a condition to exercising the Option before vesting of the
Option Shares, the Optionee shall execute such documents as are reasonably
necessary to carry out the intent of this Section, including
-1-
<PAGE>
execution of an escrow agreement, the terms and conditions of which shall be
determined by the Company at its sole discretion.
b. EXERCISE AFTER VESTING. The Optionee may exercise the Option
after vesting of the Option Shares by delivering to the Company: (i) the
Exercise Price, and (ii) an executed copy of the Notice of Exercise attached
hereto as Exhibit 1.
4. RIGHT OF REPURCHASE. The Company shall have a right to repurchase
(the "Right of Repurchase"), at the price paid by the Optionee, any Option
Shares that have not vested. The Right of Repurchase shall terminate upon the
later of: (i) 45 days after the date on which the Optionee ceases to be
employed by, or a consultant to, the Company, or (ii) 30 days after the
Option is exercised. Upon exercise of the Right of Repurchase, the Optionee
shall endorse and deliver to the Company the stock certificates, if any,
representing the Option Shares being repurchased and the Company shall pay
the Optionee the repurchase price. Upon receipt of payment from the Company,
the Optionee shall have no rights whatsoever in any Option Shares repurchased
by the Company. Option Shares subject to the Right of Repurchase shall not be
assigned, pledged, transferred, hypothecated or otherwise disposed of by the
Optionee and shall bear the following legend: "The securities represented
hereby are subject to the terms of an agreement between Tencor Instruments
and the holder of such securities. Pursuant to the terms of such agreement,
Tencor Instruments has the rights to purchase such securities under certain
conditions. A copy of the agreement can be obtained from the Secretary of
Tencor Instruments."
5. TERM. The Option expires and ceases to be exercisable upon the
earlier of (i) ten years after the grant date specified in Item B above, or
(ii) three months after the Optionee's employment or consultancy relationship
with the Company is terminated.
6. TAXES. The Optionee acknowledges that (i) the Optionee has not been
given by the Company and is not relying upon representations of the Company
as to tax consequences of the grant or exercise of this Option, (ii) the
foregoing tax consequences are known to be complex and dependent in part upon
Optionee's particular circumstances, and (ii) the Optionee has consulted,
and will consult at appropriate times, with Optionee's own tax adviser
regarding such tax consequences.
IN WITNESS WHEREOF, the parties have executed this Nonstatutory Stock
Option Agreement as of the Effective Date.
-----------------------------------------
TENCOR INSTRUMENTS Optionee
By
-------------------------------- -----------------------------------------
Title Optionee's Spouse*
-----------------------------
* Optionee's spouse indicates by the execution of this Agreement his or her
consent to be bound by the terms thereof as to his or her interests, whether
as community property or otherwise, if any, in the option granted hereunder,
and in any Option Shares purchased pursuant to this Agreement.
-2-
<PAGE>
TENCOR INSTRUMENTS
INCENTIVE STOCK OPTION AGREEMENT
(A) Name of Optionee: ___________________
(B) Grant Date: _________________________
(C) Number of Shares: ___________________
(D) Exercise Price: _____________________
(E) Effective Date: _____________________
(F) Percentage to Vest at end Year One: ___%
(G) Percentage to Vest Monthly/Annually After Year One: ___%
THIS INCENTIVE STOCK OPTION AGREEMENT (the "Agreement") is made and
entered into as of the date set forth in Item E above (the "Effective Date")
between Tencor Instruments, a California corporation (the "Company"), and the
person named in Item A above ("Optionee").
1. GRANT. The Company hereby grants to Optionee pursuant to the
Company's 1993 Amended and Restated Equity Incentive Plan (the "Plan"), the
terms and conditions of which are incorporated herein by this reference, an
option (the "ISO") to purchase the number of shares (the "ISO Shares") of the
Company's common stock listed in Item C above on the terms and conditions set
forth herein and in the Plan.
2. VESTING OF ISO SHARES. The vesting base date (the "Vesting Base
Date") shall be the same date as the grant date set forth in Item B above;
the ISO Shares shall vest on the first anniversary of the Vesting Base Date
at the rate specified in Item F above; the ISO Shares shall vest at the end
of each full period thereafter at the rate specified in Item G above.
3. EXERCISE OF THE ISO. This ISO may be exercised in whole or part at
any time. The exercise price shall be the price set forth in Item D above
(the "Exercise Price"). Optionee hereby agrees that, in the event that the
Company deems it necessary or advisable in the exercise of its discretion,
the issuance of ISO Shares may be conditioned upon certain representations
and acknowledgments by the person exercising the ISO.
a. EXERCISE BEFORE VESTING. The Optionee may exercise the ISO
before vesting of the ISO Shares by delivering to the Company: (i) the
Exercise Price, (ii) an executed copy of the Notice of Exercise attached
hereto as Exhibit 1, and (iii) an executed copy of the Acknowledgment and
Statement of Decision Regarding Election attached hereto as Exhibit 2. Share
certificates representing ISO Shares purchased before vesting shall be held
in escrow and released to the Optionee upon vesting, or at the Company's sole
discretion, ISO Shares purchased before vesting may be issued in book-entry
form without certification. The Company shall instruct the person maintaining
the book-entry system that such ISO Shares shall not be transferred until
such ISO Shares are vested or the Company's right of repurchase (as provided
in Section 4 below) has otherwise terminated. As a condition to exercising
the ISO before vesting of the ISO Shares, the Optionee shall execute such
documents as are reasonably necessary to carry out the intent of this
Section, including execution of an escrow agreement, the terms and conditions
of which shall be determined by the Company at its sole discretion.
<PAGE>
b. EXERCISE AFTER VESTING. The Optionee may exercise the ISO after
vesting of the ISO Shares by delivering to the Company: (i) the Exercise
Price, and (ii) an executed copy of the Notice of Exercise attached hereto as
Exhibit 1.
4. RIGHT OF REPURCHASE. The Company shall have a right to repurchase
(the "Right of Repurchase"), at the price paid by the Optionee, any ISO
Shares that have not vested. The Right of Repurchase shall terminate upon the
later of: (i) 45 days after the date on which the Optionee ceases to be
employed by, or a consultant to, the Company, or (ii) 30 days after the ISO
is exercised. Upon exercise of the Right of Repurchase, the Optionee shall
endorse and deliver to the Company the stock certificates, if any,
representing the ISO Shares being repurchased and the Company shall pay the
Optionee the repurchase price. Upon receipt of payment from the Company, the
Optionee shall have no rights whatsoever in any ISO Shares repurchased by the
Company. ISO Shares subject to the Right of Repurchase shall not be assigned,
pledged, transferred, hypothecated or otherwise disposed of by the Optionee
and shall bear the following legend: "The securities represented hereby are
subject to the terms of an agreement between Tencor Instruments and the
holder of such securities. Pursuant to the terms of such agreement, Tencor
Instruments has the rights to purchase such securities under certain
conditions. A copy of the agreement can be obtained from the Secretary of
Tencor Instruments."
5. TERM. The ISO expires and ceases to be exercisable upon the earlier
of (i) ten years after the grant date specified in Item B above, or (ii)
three months after the Optionee's employment or consultancy relationship with
the Company is terminated.
6. TAXES. The Optionee acknowledges that (i) the Optionee has not been
given by the Company and is not relying upon representations of the Company
as to tax consequences of the grant or exercise of this Option, (ii) the
foregoing tax consequences are known to be complex and dependent in part upon
Optionee's particular circumstances, and (iii) the Optionee has consulted,
and will consult at appropriate times, with Optionee's own tax adviser
regarding such tax consequences.
IN WITNESS WHEREOF, the parties have executed this Incentive Stock
Option Agreement as of the Effective Date.
-----------------------------------------
TENCOR INSTRUMENTS Optionee
By
-------------------------------- -----------------------------------------
Title Optionee's Spouse*
-----------------------------
* Optionee's spouse indicates by the execution of this Agreement his or her
consent to be bound by the terms thereof as to his or her interests, whether
as community property or otherwise, if any, in the option granted hereunder,
and in any ISO Shares purchased pursuant to this Agreement.
-2-
<PAGE>
Exhibit 10.8
AMENDMENT TO INDEMNIFICATION AGREEMENT
THIS AMENDMENT TO INDEMNIFICATION AGREEMENT (the "Amendment") is dated
as of January 13, 1997, by and between TENCOR INSTRUMENTS, a California
corporation (the "Company"), and DENNIS J. FORTINO (the "Indemnitee").
WHEREAS, the Company and the Indemnitee have previously entered into an
Indemnification Agreement (the "Agreement"); and
WHEREAS, the Company and the Indemnitee desire to amend and supplement
the Agreement, all on the terms and conditions provided herein.
NOW, THEREFORE, the Company and the indemnitee hereby agree as follows:
1. SUBSECTION 2(a) - ADVANCES OF EXPENSES. The following shall be
added at the end of Subsection 2(a) of the Agreement:
Any dispute concerning the advancement of expenses shall be
resolved by arbitration before an arbitrator selected by
Indemnitee and approved by the Company. If the parties cannot
agree on a single arbitrator, then the claim shall be heard by a
panel of three arbitrators, with one selected by Indemnitee, one
selected by the Company and one selected jointly by the
foregoing two arbitrators. Each of the arbitrators shall be a
litigation or corporate attorney with experience in the field of
officer and director indemnification. The arbitrators shall be
selected within fifteen (15) days after demand for arbitration
and shall render a decision within forty-five (45) days after
selection, unless good cause is shown for requiring a longer
decision period. The Company shall act in utmost good faith to
provide timely information to the arbitrators and insure
Indemnitee a full opportunity to defend against the Company's
claim that Indemnitee is not entitled to an advance of expenses.
The Company shall indemnify Indemnity against all expenses
incurred by Indemnitee under the dispute resolutions proceedings
set forth in this Subsection 2(a), unless a court of competent
jurisdiction finds that each of the claims and/or defenses by
indemnitee in the action or proceeding for which an advance is
sought was frivolous or made in bad faith.
2. SUBSECTION 2(c) - PROCEDURE. The third sentence of Subsection 2(c)
of the agreement shall be amended in its entirety to read as
follows:
It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in connection
with any action or proceeding in advance of its final
disposition) that Indemnitee has not met the standards of
conduct which make it permissible under applicable law for the
Company to indemnify Indemnitee for the amount claimed, but it
shall be presumed that Indemnitee has met any applicable
standard of conduct required for indemnification, unless the
Company has affirmatively shown that Indemnitee did not meet
that standard, and Indemnitee shall be entitled to receive
interim payments of expenses pursuant to Subsection 2(a), unless
and until such defense may be finally adjudicated by court order
or judgment from which no further right of appeal exists.
<PAGE>
3. SUBSECTION 2(d) - NOTICE TO INSURERS. The following shall be
added at the end of Subsection 2(d) of the Agreement:
The Company shall indemnify Indemnitee against any reasonable
direct or indirect costs (including, without limitation,
attorneys' fees and disbursements) incurred by Indemnitee in
connection with any successful action brought by Indemnitee for
recovery under any insurance policies referred to in this
Subsection 2(d) and shall advance to Indemnitee the costs of
such action in the manner provided in Subsection 2(a) hereof.
4. NO FURTHER AMENDMENT. Except as specifically provided herein, the
Agreement shall not be amended and shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
COMPANY:
TENCOR INSTRUMENTS
By: _______________________________
Its:
INDEMNITEE:
<PAGE>
Exhibit 21.1
Subsidiaries of Registrant
VLSI Standards Incorporated
California, USA
Tencor Instruments Japan Co. Ltd.
Japan
Tencor Instruments Korea
Korea
Tencor Instruments GmbH
Germany
Tencor Instruments, Sarl
France
Tencor Instruments, Ltd.
United Kingdom
Tencor Instruments (S) Pte. Ltd. *
Singapore
Tencor Instruments (S) Pte. Ltd. *
Taiwan
- --------------------------
* established in 1996
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (No. 33-62988, No. 33-60690, No. 33-77104, No.
33-83176, No. 33-94360 and No. 333-08785) of our report dated February 7,
1997 appearing on page 36 of Tencor Instruments Annual Report on Form 10-K
for the year ended December 31, 1996.
Price Waterhouse LLP
San Jose, California
March 6, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 19 AND 20 OF THE COMPANY'S 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 141,407
<SECURITIES> 82,370
<RECEIVABLES> 87,623
<ALLOWANCES> 0
<INVENTORY> 51,668
<CURRENT-ASSETS> 392,289
<PP&E> 41,601
<DEPRECIATION> 0
<TOTAL-ASSETS> 484,419
<CURRENT-LIABILITIES> 118,051
<BONDS> 0
0
0
<COMMON> 152,756
<OTHER-SE> 212,277
<TOTAL-LIABILITY-AND-EQUITY> 484,419
<SALES> 403,170
<TOTAL-REVENUES> 403,170
<CGS> 166,123
<TOTAL-COSTS> 166,123
<OTHER-EXPENSES> 145,097
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 98,851
<INCOME-TAX> 37,563
<INCOME-CONTINUING> 61,288
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,288
<EPS-PRIMARY> 1.93
<EPS-DILUTED> 1.92
</TABLE>
