Back to GetFilings.com
1
================================================================================
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
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NO. 0-9992
-------------------
KLA-TENCOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------
DELAWARE 04-2564110
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
160 RIO ROBLES, SAN JOSE, CALIFORNIA 95134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 875-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
-------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
COMMON STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant based upon the closing price of the registrant's stock, as of
September 20, 2000, was $9,992,701,796. Shares of common stock held by each
officer and director and by each person or group who owns 5% or more of the
outstanding common stock held by each officer and director and by each person or
group who owns 5% or more of the outstanding common stock have been excluded in
that such persons or groups may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
The registrant had 187,436,376 shares of Common Stock outstanding as of
September 20, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders
("Proxy Statement") to be held on November 10, 2000, and to be filed pursuant to
Regulation 14A within 120 days after registrant's fiscal year ended June 30,
2000, are incorporated by reference into Part III of this Report.
================================================================================
2
INDEX
Page
----
PART I
Item 1. Business .................................................................. 3
Item 2. Properties ................................................................ 17
Item 3. Legal Proceedings ......................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders ....................... 19
PART II
Item 5. Matters for the Registrant's Common Stock
and Related Shareholder Matters............................................ 20
Item 6. Selected Financial Data ................................................... 21
Item 7. Management's Discussion and Analysis
of Results of Operations and Financial Condition........................... 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................ 35
Item 8. Financial Statements and Supplementary Data ............................... 36
Consolidated Balance Sheets at June 30, 1999
and June 30, 2000 ................................................... 37
Consolidated Statements of Operations for each of the
three years in the period ended June 30, 2000 ....................... 38
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended June 30, 2000 ................ 39
Consolidated Statements of Cash Flows for each of the
three years in the period ended June 30, 2000 ....................... 40
Notes to Consolidated Financial Statements............................. 41
Quarterly Results of Operations (Unaudited)............................ 62
Report of Independent Accountants...................................... 63
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure .................................... 64
PART III
Item 10. Directors and Executive Officers of the Registrant ........................ 65
Item 11. Executive Compensation .................................................... 68
Item 12. Security Ownership of Certain Beneficial
Owners and Management ..................................................... 68
Item 13. Certain Relationships and Related Transactions ............................ 68
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and
Report on Form 8-K......................................................... 69
Signatures ........................................................................... 72
Schedule II Valuation and Qualifying Accounts.......................................... 73
Exhibits ........................................................................... 75
2
3
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements included in or incorporated by
reference in this Annual Report on Form 10-K, other than statements of
historical fact, are forward-looking statements. Such forward-looking statements
include, among others, those statements regarding the future results of our
operations; technological trends in the semiconductor industry; our future
product offerings and product features; anticipated revenue from various
domestic and international regions; success of our product offerings; completion
of backlog; creation of development and engineering programs for research and
development; the completion of any acquisitions of third parties, or the
technology or assets thereof; benefits received from any acquisitions;
construction of our new Livermore, California campus; the outcome of any
litigation to which we are a party; results of our investment in leading edge
technologies, enhancements of current products and strategic acquisitions; our
future income tax rate; sufficiency of our existing cash balance, investments
and cash generated from operations to meet our liquidity and working capital
requirements; and the effects of hedging transactions.
Our actual results may differ significantly from those projected in the
forward-looking statements in this report. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in the "Risk Factors" section in Item 7, "Management's Discussion and Analysis
of Results of Operations and Financial Condition" in this Annual Report on Form
10-K. You should carefully review these risks and also review the risks
described in other documents we file from time to time with the Securities and
Exchange Commission, including the Quarterly Reports on Form 10-Q that we will
file in fiscal 2001. You are cautioned not to place undue reliance on these
forward-looking statements. We undertake no obligation to update forward-looking
statements.
PART I
ITEM 1. BUSINESS
THE COMPANY
KLA-Tencor Corporation ("KLA-Tencor") is the world's leading supplier
of process control and yield management solutions for the semiconductor and
related microelectronics industries. Our comprehensive portfolio of products,
software, analysis, services and expertise is designed to help integrated
circuit manufacturers manage yield throughout the entire wafer fabrication
process - from research and development to final mass production yield analysis.
We offer a broad spectrum of products and services that are used by
every major semiconductor manufacturer in the world. These customers turn to us
for in-line wafer defect
3
4
monitoring; reticle and photomask defect inspection; CD SEM metrology; wafer
overlay; film and surface measurement; and overall yield and fab-wide data
analysis. These advanced products, coupled with our unique yield management
consulting practice, allow us to deliver the complete yield management solutions
customers need to accelerate their yield learning rates, reduce their yield
excursion risks and adopt industry-leading yield management practices.
KLA-Tencor Corporation was formed in April 1997 through the merger of
KLA Instruments Corporation and Tencor Instruments, two long-time leaders in the
semiconductor equipment industry, each with over 20 years of experience. KLA
Instruments Corporation was incorporated in Delaware in July 1975 and Tencor
Instruments in California in 1976. Effective April 30, 1997, Tencor Instruments
merged into a wholly owned subsidiary of KLA Instruments Corporation.
Immediately following this merger, KLA Instruments Corporation changed its name
to KLA-Tencor Corporation.
During fiscal 2000, we acquired ACME Systems, Inc., FINLE Technologies,
Inc. and Fab Solutions, a division of Object Space, Inc. For further details,
see the section below entitled "Acquisitions."
INDUSTRY
General Background
The semiconductor fabrication process begins with a bare silicon wafer
- - a round disk, six, eight or twelve inches in diameter, about as thick as a
credit card and gray in color. The process of manufacturing wafers is in itself
a high technology activity, involving the creation of large ingots of silicon by
pulling them out of a vat of molten silicon. The ingots are then sliced into
wafers and polished to a mirror finish on one surface, upon which the circuits
are made.
The fabrication of an integrated circuit ("IC" or "chip") is
accomplished by depositing a series of film layers upon a silicon wafer that act
as conductors, semiconductors or insulators. The deposition of these film layers
is interspersed with numerous other process steps that create circuit patterns,
remove portions of the film layers, and perform other functions such as heat
treatment, measurement and inspection. Most advanced chip designs require well
over 300 individual steps, many of which are performed multiple times. Most
chips consist of two main structures: the lower structure, typically consisting
of transistors or capacitors, which performs the "smart" functions of the chip,
and the upper structure, typically consisting of "interconnect" circuitry, which
connects the components in the lower structure.
Current Trends
Several factors inherent in the semiconductor industry drive the
critical need for comprehensive process control and yield management solutions.
Among the most significant of these factors are: increasing device complexity,
shrinking geometries, reduced product life cycles for the IC's being
manufactured, and increased competition. Our key activities during fiscal year
2000
4
5
involved development of process control and yield management equipment for
smaller feature sizes, 300mm wafers and copper-based devices.
Today, manufacturers of advanced integrated circuits require systems
capable of measurements smaller than 0.25 micron (approximately 1/300 the
thickness of a human hair). At the same time, advanced manufacturing facilities
are producing integrated circuits on silicon wafers measuring 300 millimeter in
diameter. The complexity of the sub-micron semiconductor manufacturing process
combined with the recent transition from aluminum to copper as the primary
interconnect material in integrated circuits has caused dramatic growth in the
demand for increasingly precise manufacturing process monitors. As a result,
total yield management solutions play a more significant role in the
semiconductor manufacturing process than in the past. With our portfolio of
applications-focused technologies and our dedicated yield consulting expertise,
we are in a unique position to be the single source for comprehensive yield
management solutions.
The continuing evolution of semiconductor devices to smaller line width
geometries and more complex multi-level circuitry has significantly increased
the cost and the performance requirements of the capital equipment used to
manufacture these devices. Construction of an advanced wafer fabrication
facility can cost over $1 billion, a substantial increase over the cost of
prior-generation facilities. As a result, there is a demand for increased
productivity and higher returns from manufacturing equipment. Because our
process monitoring and yield management equipment typically represent only a
small percentage of the total investment required to build a fabrication
facility, our customers are able to better leverage these increasingly expensive
facilities and significantly improve their returns on investment.
Our Process Control and Yield Management Solutions
Accelerating the yield ramp and maximizing the production yields of
high-performance devices are key goals of modern semiconductor manufacturing.
Achieving higher yields faster and with higher performance characteristics
increases the revenue a manufacturer can obtain from each semiconductor wafer.
KLA-Tencor systems are used to analyze product and process quality all at
critical points in the IC manufacturing process and provide feedback to our
customers so that fabrication problems can be identified, addressed and
eliminated. This ability to locate the source of defects and other process
issues, as well as contain them, enables semiconductor manufacturers to increase
yields and device value, thus maximizing return on investment and lowering
manufacturing costs.
As design rules decrease, yields become more sensitive to the size and
density of defects, while device performance characteristics become more
sensitive to such parameters as linewidth, film thickness variation, and other
factors. Semiconductor manufacturers use process monitoring and yield management
systems to improve yields and device performance by identifying defects and
other anomalies and analyzing them to determine process problems. After
corrective action has been taken, subsequent results can be monitored to ensure
that the problem has been contained. This monitoring and analysis takes place at
various points in the fabrication process as wafers move through a production
cycle.
5
6
The following are some of the methods used to accelerate yields and
optimize device performance, all of which require the capture and analysis of
data gathered through many measurements:
Engineering analysis: This method of analysis is performed
off-line from the manufacturing process to identify, analyze and locate
the source of defects or other manufacturing process issues.
Engineering analysis equipment operates with very high sensitivity to
enable comprehensive analysis of wafers. Because this method operates
off of the manufacturing line, high operational speeds are not
required.
In-line monitoring: This method of analysis is used to review
the status of integrated circuits during production. Information
generated is used to determine whether the fabrication process steps
are within required tolerances. It is also used to make any necessary
real-time process adjustments before wafer lots move to subsequent
process stations. Because information related to defects is needed
quickly, in-line monitoring requires both high throughput and high
sensitivity.
Pass/fail tests: This method of analysis may be used at
several different points in the manufacturing process to evaluate
whether products meet performance specifications.
The most significant opportunities for yield and device performance
improvement generally occur when production is started at new factories and when
chips or wafers are first built. Equipment that helps a manufacturer quickly
increase new product yields and optimize device performance enables the
manufacturer to offer these new products in high volumes early in the product
life cycle - the time when they are likely to generate the greatest profits.
KLA-Tencor is the leader in the design, manufacture, marketing and
service of process monitoring and yield management systems for the semiconductor
industry. Our technical expertise and understanding of customer needs enable us
to provide unique yield management solutions and one of the broadest lines of
process monitoring and yield management function systems available in the
semiconductor industry. Our systems are used to analyze product and process
quality at critical points in the IC manufacturing process and to provide
feedback to our customers that can be used to identify, address, contain and
eliminate fabrication problems. As a result, our customers may increase yields
and device value, and may maximize their return on investment and lower their
manufacturing costs.
PRODUCTS
We market and sell products to all major semiconductor IC manufacturers
and semiconductor wafer manufacturers worldwide. We combine our hardware -
consisting of patterned and unpatterned wafer inspection, optical overlay and
e-beam metrology, reticle inspection, film measurement and surface metrology
tools - with analysis and classification software, into process module control
("PMC") solutions. We offer a PMC solution optimized for each of the
6
7
manufacturing process cells - lithography, etch, deposition and chemical
mechanical planarization (CMP) - used in IC production.
Our registered trademarks are: "KLA", "Tencor", "Surfscan,"
"KLA-Tencor," "Klarity" and "Quantox". "SEMSpec", "SP1", "CRS", "PMC-Net",
"IMPACT", "SmartGallery", "pQC", "STARlight" and "iSupport" are among the other
trademarks we maintain.
Wafer Inspection
Our inspection tools are used to detect, count, classify and
characterize particles and pattern defects on wafers in off-line engineering
applications and in-line at various stages during the semiconductor and wafer
manufacturing processes. Wafer defect detection systems inspect wafers as they
move between processing steps and detect defects and contaminants on both bare
silicon and patterned silicon. We pioneered the market for automated defect
inspection of semiconductor wafers over a decade ago. The KLA-Tencor solution
includes all the tools necessary for our customers to detect, correlate and
analyze defects and to determine and correct the cause of defects.
In 1992, we introduced the 21xx inspection system series, which
provided the sensitivity required for the logic and repeating array portions of
memory devices, as well as for microprocessors and other logic devices. Each new
model of the 21xx series has provided greater sensitivity and throughput than
its predecessor. In 1997, we introduced the model 2138, a new patterned wafer
inspection system combining an ultra-broadband illumination source and
significantly improved brightfield optics. In 1999, we introduced the model
2139, which extended the capability of the 21xx product line to 0.18-micron
processes and incorporated additional sensitivity and ease-of-use enhancements.
In July of 2000, we introduced the 2350, the first ultraviolet ("UV") inspection
system to feature ultra-broadband brightfield illumination--enabling the
resolution of circuit patterns and defects for 0.13-micron and smaller design
rules. The 2350 delivers a two-fold increase in throughput over the previous
generation 21xx platform.
In 1995, we introduced the AIT inspection system, a platform designed
with high throughput and low cost of ownership ("CoO") for fast and accurate
feedback on process tool performance as well as advanced line monitoring for
films, chemical mechanical planarization ("CMP"), and non-critical etch and
photo modules. The AIT uses darkfield technology, which is a low-angle
illumination technique particularly effective for detecting defects on planar
surfaces such as post-CMP wafers. In 1998, we introduced the AIT II, which
expanded on the capability of the AIT through increased sensitivity and
throughput. In July of 2000, we introduced the AIT III, providing
high-throughput inspection with the increased sensitivity needed for 0.13-micron
and smaller design rules.
In 1991, we introduced the SEMSpec(TM) system series, which provide a
fully automatic e-beam defect inspection system. Scanning Electron Microscopes
("SEM") use an electron beam to image and measure surface features on a
semiconductor wafer at a much higher resolution than images captured by optical
microscopes. As the industry moves deeper into the sub-0.18-micron realm,
SEM-based inspection becomes mandatory for accelerating yield ramps. In 1999, we
developed the eS20, which has performance enhancements compared to the previous
generation of e-
7
8
beam defect inspection systems. In July of 2000, we introduced the eS20XP, which
delivers further improvements in sensitivity while increasing throughput.
In 1997, we introduced the Surfscan SP1(TM), which is used for bare
wafer qualification, process monitoring and equipment monitoring. It provides
the high sensitivity, fast throughput and low CoO required in a production
environment, and is used in virtually all semiconductor manufacturing processes.
The SP1 TBI ("Triple Beam Illumination") was introduced in 1998 and was designed
with additional optical configurations needed to detect sub-micron defects on
metal films and rough surfaces while still providing sensitivity below 0.1
micron on polished silicon. It is also used for detecting defects on non-uniform
films, a critical requirement for CMP applications. In November of 1999, we
introduced a Surface Nanotopography Measurement capability for the SP1,
enhancing lithography and CMP process monitoring for 0.13-micron process
development.
In 1999, we became the first to automate after-develop inspection
("ADI") for macro defects with the introduction of the 2401 macro defect
inspection system. Designed to replace inefficient manual macro ADI, the 2401 is
the industry's first fully automated inspection system able to detect and
classify front-end macro lithographic defects, which are 50 microns and larger
in size. Current manual ADI methods may capture only 20 percent of photo-related
defects as a result of wafer complexity, background patterning noise and human
boredom and fatigue. In contrast, the 2401 captures more than 90 percent of all
critical macro ADI defects, while providing comprehensive defect classification
and yield information to dramatically reduce scrap and enable continuous process
improvements.
Our defect review capability includes optical confocal technology as
well as e-beam for higher sensitivity. In 1995, we introduced the CRS(TM)
optical review system, which offers high throughput and low CoO. In 2000, we
introduced the eV300 defect review system, an advanced, automated SEM designed
to gather defect excursion information, analyze and report the results with the
improved sensitivity required at smaller design rules. The eV300 supplements
optical review by providing topographical information, enabling more accurate
defect classification than can be achieved by optical review systems alone.
We offer analysis systems comprised of hardware and software to
translate raw inspection data into patterns that reveal process problems. Our
software productivity and analysis systems capture, store and analyze data
collected by inspection, measurement and test equipment to show defect trends
and help semiconductor manufacturers develop long-term yield improvement
strategies. In November of 1999, we introduced our PMC-Net(TM) software, the
industry's first software solution to connect all yield, process and test-floor
related data into a single, automated, customizable and easy-to-use data
collection, analysis and reporting system. PMC-Net fully automates the yield
management and process control functions throughout the fab, enabling
semiconductor manufacturers to speed time to market and time to profit. The
PMC-Net product line was enhanced in fiscal 2000 with a series of strategic
acquisitions, including Taiwan-based ACME Systems, Inc., the world's leading
supplier of yield correlation software; FINLE Technologies, the industry leader
in simulation software to reduce lithography development time and cost; and Fab
Solutions, a leading provider of advanced process control ("APC") software
solutions for semiconductor manufacturing.
8
9
In 1997, we introduced IMPACT(TM) automated defect classification
("ADC"), enabling semiconductor manufacturers to utilize software systems both
within and between fabrication facilities to accelerate the ramp to higher
process yields. With IMPACT ADC, semiconductor manufacturers can develop a
defect classification recipe on one system and then export it to any other
system or fabrication facility running identical processes. In November of 1999,
we introduced IMPACT XP, incorporating improved optics support and a new
SmartGallery(TM) setup tool, which reduces the setup time associated with ADC
implementation in fabs by as much as 70 percent. This is a critical requirement,
particularly for foundries and application specific integrated circuit ("ASIC")
manufacturers, who specialize in short runs of multiple products. In July of
2000, we introduced IMPACT SEM XP, bringing to our eV300 SEM review tool the
same production-proven ADC capabilities already implemented on our
high-resolution optical wafer inspection platforms. With these new capabilities,
customers can optimize the eV300 for use in classifying and reviewing the
extremely small defects associated with advanced semiconductor manufacturing
processes, including 0.13-micron and smaller design rules, thus dramatically
reducing the CoO of SEM review.
"Run-time classification" ("RTC") capability, first introduced on both
the AIT II and 2139 products, continues to be a critical feature on all of our
next-generation optical inspection tools, including the AIT III and 2350. RTC
provides classification and binning of defect types in real time during
inspection, thus providing better organized information in less time and at a
lower cost.
All of these tools and software--together with our yield management
expertise--comprise our integrated Defect Reduction and Control Solution. This
integrated yield management approach provides semiconductor device manufacturers
with a comprehensive tool set providing accelerated attainment of yield goals.
Optical Overlay and E-Beam Metrology
The critical dimension ("CD") of a semiconductor device refers to a
circuit line, element, or feature that must be manufactured to tight
specifications. Semiconductor circuits can be very sensitive to the widths of
their features. Even small variations can affect the speed of the circuit, or
whether the circuit works at all. Control of linewidth errors is critical to the
manufacturing process. Our CD SEM metrology systems measure selected linewidth
features on a chip, thus enabling control of the manufacturing process.
Decreasing linewidths, larger die sizes and additional layers also affect the
tolerances for layer-to-layer matching ("Overlay"). Overlay mis-registration
errors are a crucial cause of yield loss. Our metrology systems measure the
alignment between different layers of the semiconductor device.
In 1999, we introduced the 8100XP CD SEM, designed to address the new
metrology challenges associated with manufacturing ICs with 0.18-micron and
smaller design rules. Providing maximum flexibility for both photomask
manufacturers and advanced lithography development fabs, the 8100XP is the only
CD SEM that can measure both reticles and wafers without requiring any hardware
or software changeover. In November of 1999, we enhanced our 8100 CD SEM family
with our new Pattern Quality Confirmation ("pQC"(TM)) software. With pQC, the
8100 CD SEM family combines in-line, real-time metrology with process
inspection, enabling the detection of systematic lithography and etch related
problems that can go undetected by traditional CD SEM
9
10
measurements. In June of 2000, we introduced our latest generation CD SEMs, the
8200 series (for 200 mm wafers) and the 8300 series (for 300 mm wafers). These
tools combine high throughput, advanced imaging, superior measurement precision
and enhanced productivity capabilities in a new Windows NT-based platform.
To address the challenges presented by overlay mis-registration, we
offer the 5000 series metrology systems for overlay measurement. The measurement
algorithms for the 5000 series are more tolerant of process and substrate
reflectivity variations than other optical systems. Based on these measurements,
users can fine-tune the stepper program to compensate for these errors and
improve process yield. In 1999, we introduced the 5300 overlay system, which has
performance enhancements compared to the previous generation of tools and is
designed to handle both 200 mm and 300 mm wafers.
Reticle Inspection
Our reticle inspection systems look for possible defects that could be
transmitted to the design pattern on the wafer. Reticles are high precision
quartz plates that contain microscopic images of electronic circuits. These
reticles are used to transfer circuit patterns onto wafers to fabricate ICs.
Error-free reticles are the first step in ensuring high yields in the
manufacturing process because defects in reticles can be replicated on wafers.
We pioneered the market for automated inspection of reticles and photomasks for
the semiconductor manufacturing industry over two decades ago and continue to be
a market leader.
Our 3XX product family incorporates both a reference database generator
and a data preparation system, which give full die-to-database functionality to
the inspection. This permits inspection against the ideal reticle pattern as
specified by the user's CAD program. We have continued to develop enhancements
to the 3XX to improve performance, serviceability and reliability. In 1997, we
introduced two new reticle and photomask inspection enhancements, the Advanced
Performance Algorithm and the STARlight(TM) high resolution option. These
enhancements enable highly accurate and reliable inspection of next-generation
sub-0.25-micron reticles, including reticles with complex optical proximity
correction geometries. In July of 1999, we introduced the 365UV-HR, a new high
numerical aperture ("NA") reticle pattern inspection tool for deep ultraviolet
("DUV"), sub-wavelength lithography. The industry's most sensitive UV reticle
inspection tool available today, the 365UV-HR provides the advanced reticle
inspection capabilities necessary for both high-volume manufacturing of
0.18-micron devices and early development of 0.13-micron processes. We are
currently in a joint-development program with SEMATECH to develop the family of
next-generation reticle inspection products designed for the needs of
0.13-micron production and 0.10-micron development. We expect these products to
be introduced in the fall of 2000.
Film Measurement
Our film measurement products measure a variety of optical and
electrical properties of thin films. These products are used to control a wide
range of wafer fabrication steps, where within-wafer and wafer-to-wafer
uniformity of the process is of paramount importance to semiconductor
10
11
manufacturers - enabling them to achieve high device performance characteristics
at the lowest possible cost.
In 1995, we introduced the UV-1250SE, which brought a powerful new
technology to production, called spectroscopic ellipsometry. Next came the
ASET-F5, our third generation spectroscopic ellipsometry tool, which addresses
the difficult film measurement needs that come from the continuing evolution of
film development driven by shorter linewidths. In 1999, we introduced an
enhanced version of our award-winning ASET-F5 thin film measurement system,
known as the ASET-F5x. It incorporates a single wavelength ellipsometry ("SWE")
option to complement the industry-leading spectroscopic ellipsometry ("SE") and
dual-beam spectrophotometry ("DBS") technologies incorporated in the ASET-F5.
These combined capabilities provide the accuracy, repeatability and
system-to-system matching required for the production of advanced ICs with
geometries as small as 0.1 micron. In addition, the ASET-F5x is a bridge tool
capable of handling either 200 mm or 300 mm wafers.
Our Quantox(R) product is a non-contact, electrical performance
metrology system for gate dielectric films. Gate dielectric quality is critical
to the speed and reliability of an IC. Quantox(R) measures key parameters such
as contamination and oxide thickness used for gate dielectric process control to
help maximize device yield.
Surface Metrology
Our Stylus profilers measure the surface topography of films and etched
surfaces and are used in basic research and development as well as semiconductor
production and quality control. We recently introduced the next generation of
the award-winning HRP(R) high resolution profiler. This system combines the
dishing and erosion measurement capabilities of our long-scan profilers with
high aspect ratio etched feature measurement capability historically limited to
atomic force microscopes. This allows customers to monitor their critical etch
processes such as shallow trench isolation and dual-damascene via/trench. In
addition, we produce stress measurement systems, which detect
reliability-related problems such as film cracking, voiding and lifting.
CUSTOMER SERVICE AND SUPPORT
We enhance the value of our products through our Customer Service and
Support services, which provide comprehensive worldwide service and support
across all KLA-Tencor product lines. We also offer a yield management consulting
service to improve our customers' return on investment.
Our customer support organization is responsible for much of the
support of our customers following the shipment of the equipment and software,
including on-site repair, telephone support, system installation, relocation
services, and selected post-sales applications. We also offer iSupport(TM), a
fast, comprehensive and secure on-line customer support offering that enables
KLA-Tencor's technical support and applications engineers to remotely access
data from KLA-Tencor tools and operate them in real time to diagnose and rapidly
resolve problems when they occur - all via a secure on-line connection
controller by the customer at all times. Our Worldwide Support
11
12
Operations Educational Services offers a comprehensive selection of technical
courses from maintenance and service training to basic and advanced applications
and operation. We offer standard and customized courses for individuals and
groups both at the user's location and in one of our three training facilities.
We also offer self-paced learning packages, including video, computer-based
training and study plans.
In addition, we provide yield management consulting practice, which
provides the systems, software and yield management expertise to speed the
implementation of customers' yield improvement programs. This practice provides
a broad range of services and support, including new fab yield management
solution planning, factory and field customer applications training, dedicated
ramp management support, integrated yield management consulting/applications
support for effective solution implementation, and regional customer response
centers with remote-access diagnostics. Use of our consulting practice provides
accelerated yield learning rates and improved device performance for maximum
return on investment.
CUSTOMERS
To support our growing, global customer base, we maintain a significant
presence throughout the United States, Europe, Asia-Pacific and Japan, staffed
with local sales and applications engineers, customer and field service
engineers and yield management consultants. We count among our largest customers
leading semiconductor manufacturers from each of these regions. In fiscal 2000,
1999 and 1998, no single customer accounted for more than 10% of our revenues.
Our business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market demand
for integrated circuits and products utilizing integrated circuits. We do not
consider our business to be seasonal in nature, but it is cyclical with respect
to the capital equipment procurement practices of semiconductor manufacturers
and is impacted by the investment patterns of such manufacturers in different
global markets. Downturns in the semiconductor industry or slowdowns in the
worldwide economy could have a material adverse effect on our future business
and financial results.
SALES, SERVICE AND MARKETING
Our sales, service and marketing efforts are focused on building
long-term relationships with our customers. We focus on providing a single and
comprehensive resource for the full breadth of process control and yield
management products and services. Customers benefit from the simplified planning
and coordination, as well as the increased equipment compatibility found when
dealing with a single supplier. Our revenues are derived primarily from product
sales, principally through our direct sales force and - to a lesser extent -
through distributors.
We believe that the size and location of our field sales, service and
applications engineering, and marketing organizations represent a competitive
advantage in our served markets. We have direct sales forces in the U.S.,
Europe, Asia-Pacific and Japan. We maintain an export compliance program that is
designed to fully meet the requirements of the U.S. Departments of Commerce and
State.
12
13
Our facilities throughout the world employ over 2,200 sales personnel,
service engineers and applications engineers. We maintain sales and service
offices throughout the U.S. In addition, we have wholly-owned subsidiaries or
branches of U.S. subsidiaries in Japan, Taiwan, Singapore, Malaysia, China, the
United Kingdom, France, Germany, Switzerland, Italy and Israel for marketing,
sales and service of our products. International sales accounted for
approximately 70%, 60%, and 56% of our revenues in fiscal 2000, 1999, and 1998
respectively. Additional information regarding our revenues from foreign
operations for our last three fiscal years is incorporated by reference from
Note 8 of the Notes to the Consolidated Financial Statements found under Item 8,
"Financial Statements and Supplementary Data" in this Annual Report on Form
10-K.
We believe that sales outside the U.S. will continue to be a
significant percentage of our revenues. Our future performance will depend, in
part, on our ability to continue to compete successfully in Asia, one of the
largest markets for the sale of yield management services in process monitoring
equipment. Our ability to compete in this area is dependent upon the
continuation of favorable trading relationships between countries in the region
(especially Japan, Taiwan and Korea) and the United States, and our continuing
ability to maintain satisfactory relationships with leading semiconductor
companies in the region.
International sales and operations may be adversely affected by
imposition of governmental controls, restrictions on export technology,
political instability, trade restrictions, changes in tariffs and 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 revenues from our international business may
also be affected by fluctuations in currency exchange rates. Although we attempt
to manage near term currency risks through "hedging," there can be no assurance
that such efforts will be adequate. These factors could have a material adverse
effect on our future business and financial results.
BACKLOG
Our backlog for systems totaled $982 million at June 30, 2000, compared
to $449 million at June 30, 1999. We expect to fill the present backlog of
orders during fiscal 2001; however, all orders are subject to cancellation or
delay by the customer with limited or no penalty. Due to possible customer
changes in delivery schedules and to cancellation of orders, our backlog at any
particular date is not necessarily indicative of actual sales for any succeeding
period.
RESEARCH AND DEVELOPMENT
The market for yield management and process monitoring systems is
characterized by rapid technological development and product innovation. These
technical innovations are inherently complex and require long development cycles
and appropriate professional staffing. We believe continued and timely
development of new products and enhancements to existing products are necessary
to maintain our competitive position. Accordingly, we devote a significant
portion of our human and financial resources to research and development
programs and seek to maintain close relationships with customers to remain
responsive to their needs. As part of our customer
13
14
relationships, we may enter into certain strategic development and engineering
programs whereby our customers offset certain of our research and development
costs.
Key activities during fiscal year 2000 involved development of process
control and yield management equipment for smaller feature sizes, copper-based
devices and 300mm wafers. For information regarding our research and development
expenses during the last three fiscal years, including costs offset by our
strategic development and engineering programs, see Item 7 "Management's
Discussion and Analysis of Results of Operations and Financial Condition" in
this Annual Report on Form 10-K.
In order to meet continuing developments in the semiconductor industry,
we are committed to significant engineering efforts toward both product
improvement and new product development. New product introductions may
contribute to fluctuations in operating results, since customers may defer
ordering existing products. If new products have reliability or quality
problems, those problems may result in reduced orders, higher manufacturing
costs, delays in acceptance of and payment for new products and additional
service and warranty expenses. On occasion, we have experienced reliability and
quality problems in connection with certain product introductions, resulting in
some of these consequences. There can be no assurance that we will successfully
develop and manufacture new hardware and software products, or that new hardware
and software products introduced by us will be accepted in the marketplace. If
we do not successfully introduce new products, our results of operations will be
affected adversely.
MANUFACTURING, RAW MATERIALS AND SUPPLIES
We perform system design, assembly and testing in-house and utilize an
outsourcing strategy for the manufacture of components and major subassemblies.
Our in-house manufacturing activities consist primarily of assembling and
testing components and subassemblies that are acquired through third-party
vendors and integrating those subassemblies into our finished products. Our
principal manufacturing activities take place in San Jose and Milpitas,
California, with additional operations in Bedford, Massachusetts and Migdal
Ha'Emek, Israel. We employ approximately 1,350 manufacturing and 1,350
engineering personnel.
Many of the parts, components and subassemblies (collectively "parts")
are standard commercial products, although certain items are made to KLA-Tencor
specifications. We use numerous vendors to supply parts for the manufacture and
support of our products. Although we make reasonable efforts to ensure that
these parts are available from multiple suppliers, this is not always possible;
and certain parts included in our systems may be obtained only from a single
supplier or a limited group of suppliers. We endeavor to minimize the risk of
production interruption by selecting and qualifying alternative suppliers for
key parts, by monitoring the financial condition of key suppliers and by
ensuring adequate inventories of key parts are available to maintain
manufacturing schedules.
Although we seek to reduce our dependence on sole and limited source
suppliers, in some cases the partial or complete loss of certain of these
sources could disrupt scheduled deliveries to
14
15
customers and have a material adverse effect on our results of operations and
damage customer relationships.
COMPETITION
The worldwide market for process control and yield management systems
is highly competitive. In each of our product markets, we face competition from
established and potential competitors, some of which may have greater financial,
research, engineering, manufacturing and marketing resources than us, such as
Applied Materials, Inc. and Hitachi Electronics Engineering Co., Ltd. We may
also face future competition from new market entrants from other overseas and
domestic sources. We expect our competitors to continue to improve the design
and performance of their current products and processes and to introduce new
products and processes with improved price and performance characteristics. We
believe that to remain competitive, we will require significant financial
resources to offer a broad range of products, to maintain customer service and
support centers worldwide and to invest in product and process research and
development.
Significant competitive factors in the market for process control and
yield management systems include system performance, ease of use, reliability,
installed base and technical service and support. We believe that, while price
and delivery are important competitive factors, the customers' overriding
requirement is for systems which easily and effectively incorporate automated
and highly accurate inspection and metrology capabilities into their existing
manufacturing processes, thereby enhancing productivity.
Our process control and yield management systems for the semiconductor
industry are intended to compete based upon performance and technical
capabilities. These systems may compete with less expensive and more
labor-intensive manual inspection devices.
Management believes that KLA-Tencor is a strong competitor with respect
to both its products and services. However, any loss of competitive position
could negatively impact our prices, customer orders, revenues, gross margins,
and market share, any of which would negatively impact our operating results and
financial condition.
ACQUISITIONS
We continue to pursue a course of strategic acquisitions and alliances
to expand our technologies, product offerings and distribution capabilities. In
fiscal 2000, we acquired two companies and a division of a third company to
further our position in key markets and technologies:
We acquired ACME Systems, Inc., a leading supplier of yield engineering
analysis software used to correlate electrical test and wafer sort
yield data with in-line Work In Process and Metrology Data.
We acquired FINLE Technologies, Inc., which supplies lithography
modeling and data analysis software which enables semiconductor
manufacturers to speed development of advanced lithography processes
required to develop and produce integrated circuits with 0.13 micron
and smaller geometrics.
15
16
We acquired Fab Solutions, a division of ObjectSpace, Inc., which
provides advanced process control software solutions for semiconductor
manufacturing, enabling yield and process engineers to respond to the
major yield-impacting parametric data in a fab in near-real time.
The financial position and results of operations of all three
acquisitions were immaterial in relation to those of KLA-Tencor and each
transaction was accounted for as a purchase. Further details of these
acquisitions are incorporated by reference from Note 3 of the Notes to the
Consolidated Financial Statements found under Item 8, "Financial Statements and
Supplementary Data" in this Annual Report on Form 10-K.
Acquisitions involve numerous risks, including management issues and
costs in connection with integration of the operations, technologies, and
products of the acquired companies, possible write-downs of impaired assets, and
the potential loss of key employees of the acquired companies. The inability to
manage these risks effectively could negatively impact our operating results and
financial condition.
PATENTS AND OTHER PROPRIETARY RIGHTS
We protect our proprietary technology through reliance on a variety of
intellectual property laws, including patent, copyright and trade secrets. We
have filed and obtained a number of patents in the United States and abroad and
intend to continue to pursue the legal protection of our technology through
intellectual property laws. In addition, from time to time we acquire license
rights under U.S. and foreign patents and other proprietary rights of third
parties.
Due to the rapid pace of innovation within the process control and
yield management systems industry, management believes that our protection of
patent and other intellectual property rights is less important than factors
such as our technological expertise, continuing development of new systems,
market penetration, installed base and the ability to provide comprehensive
support and service to customers.
No assurance can be given that patents will be issued on any of our
applications, that license assignments will be made as anticipated or that our
patents, licenses or other proprietary rights will be sufficiently broad to
protect our technology. No assurance can be given that any patents issued to or
licensed by us will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide us with a competitive advantage. In
addition, there can be no assurance that we will be able to protect our
technology or that competitors will not be able to independently develop similar
or functionally competitive technology.
EMPLOYEES
As of June 30, 2000, we employed a total of approximately 5,800
persons. None of our employees are represented by a labor union. We have
experienced no work stoppages and believe that our employee relations are good.
16
17
Competition is intense in the recruiting of personnel in the
semiconductor and semiconductor equipment industry. We believe that our future
success will depend in part on our continued ability to hire and retain
qualified management, marketing and technical employees.
ITEM 2. PROPERTIES
KLA-Tencor operates in a number of locations worldwide. In fiscal 2000,
we had one significant real estate transaction:
During the fourth quarter of fiscal 2000, we announced an
agreement to purchase up to 43 acres of land in Livermore, California,
to build a new campus. The campus will initially include two new
120,000-square-foot buildings dedicated to manufacturing and customer
service with a plan to build four additional buildings on the campus
over the next five years. Construction on the new campus is scheduled
to begin during the first quarter of fiscal 2001. Further details of
this new campus are incorporated by reference from Note 7 of the Notes
to the Consolidated Financial Statements found under Item 8, "Financial
Statements and Supplementary Data" in this Annual Report on Form 10-K.
Information regarding our principal properties at June 30, 2000 is set forth
below:
LOCATION TYPE PRINCIPAL USE FOOTAGE OWNERSHIP
- --------------------------- ----------------- -------------------------------------- -------------- -------------
Phoenix, AZ Office Sales and Service 9,736 Leased
Livermore, CA Office Sales and Service 19,604 Leased
Milpitas, CA Office, plant and Research and Engineering, Marketing, 18,463 Leased
warehouse Manufacturing, Sales and Service and 728,902 Owned
Sales Administration
San Jose, CA Office, plant and Corporate Headquarters, Research and 224,143 Leased
warehouse Engineering, Marketing, Manufacturing,
Sales and Service and Sales Owned
Administration 518,736
Scotts Valley, CA Office, plant Research and Development 9,945 Leased
Bedford, MA Office, plant Administration, Manufacturing, Sales and 50,000 Owned
Service
Portsmouth, NH Office Sales and Service 6,000 Leased
Beaverton, OR Office Sales and Service 7,567 Leased
Austin, TX Office Sales and Service, Training 66,069 Leased
Richardson, TX Office Sales and Service, Training 22,507 Leased
Basingstoke and Wokingham, Office, plant Sales and Service, Warehouse 16,475 Leased
England
17
18
Dresden and Pucheim, Office Sales and Service 14,975 Leased
Germany
Grenoble, and Evry, France Office Sales and Service 8,834 Leased
Yokohama, Japan Office Sales and Service 71,794 Leased
Singapore Office Sales and Service 6,168 Leased
Hsinchu, Taiwan Office Sales and Service 14,892 Leased
Migdal Ha'Emek and Herzliya, Office Research and Engineering, Marketing, 53,800 Leased
Israel Manufacturing and Sales and Service and
Sales Administration
We also lease office space for other, smaller sales and service offices in
several locations throughout the world. Our operating leases expire at various
times through June 30, 2012 with renewal options at the fair market value for
additional periods up to five years. Detail of these leases is incorporated by
reference from Note 7 of the Notes to the Consolidated Financial Statements
found under Item 8, "Financial Statements and Supplementary Data" in this Annual
Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
We are named from time to time as a party to lawsuits in the normal
course of our business. Litigation, in general, and intellectual property and
securities litigation in particular, can be expensive and disruptive to normal
business operations. Moreover, the results of complex legal proceedings are
difficult to predict. We believe that we have defenses in each of the cases set
forth below and are vigorously contesting each of these matters.
Therma-Wave, Inc.
Therma-Wave I: On September 3, 1998, we initiated a patent infringement
suit against Therma-Wave, Inc. alleging that certain products manufactured by
Therma-Wave infringe a patent relating to film thickness measuring technology.
On January 14, 1999, Therma-Wave filed a counterclaim against KLA-Tencor for
patent infringement with respect to one of its thin film technology patents. We
believe that the allegations contained in the counterclaim are unfounded and
intend to vigorously defend our position, and we have meritorious defenses to
those counterclaims. We believe that even if the outcome of the litigation is
adverse to us it will not have a material adverse effect on our business,
financial condition or results of operations.
Therma-Wave II: On July 22, 1999, we filed a second action against
Therma-Wave in which we alleged that Therma-Wave infringes another patent
relating to thin film thickness measuring technology. We are seeking damages and
an injunction to stop the sale of the equipment that employs the infringing
technology. On October 25, 1999, Therma-Wave filed a counterclaim against
KLA-Tencor for patent infringement with respect to two patents relating to
optical measurement systems. The counterclaim also includes allegations that
KLA-Tencor engaged in a pattern of conduct designed to disparage and improperly
damage Therma-Wave. We believe that the allegations contained in the
counterclaim are unfounded, we intend to vigorously defend our position, and we
have meritorious defenses to those counterclaims. We believe that the outcome
18
19
from such litigation, even if adverse to us, would not have a material adverse
effect on our business, financial condition or results of operations.
Schlumberger, Inc. and Rigg Systems
On August 30,1999, we were named as a defendant in a lawsuit in which
Schlumberger, Inc. alleges trade secret misappropriation, unfair competition and
trade slander. On July 21, 2000, the court granted our motion for summary
judgment dismissing the case. Schlumberger, Inc. subsequently filed a motion for
reconsideration of that dismissal and we are awaiting a ruling on that motion.
Although the outcome of these claims cannot be predicted with certainty, we do
not believe that this legal matter will have a material adverse effect on our
financial condition even if plaintiff prevails. On January 26, 2000, we filed a
complaint against Philip Rigg, RIGG Systems and Schlumberger, Inc. for
misappropriation of trade secrets, breach of contract, breach of fiduciary duty,
interference with contract, and unfair competition. The defendants filed
cross-complaints on June 5, 2000 asserting various statutory and common law
theories. Although the outcome of these claims cannot be predicted with
certainty, we do not believe that this legal matter will have a material adverse
effect on our financial condition or results of operations even if the plaintiff
prevails.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
KLA-Tencor's common stock is traded on the NASDAQ Stock Market and is
quoted on the NASDAQ National Market under the symbol KLAC. The price per share
reflected in the following table represents the range of high and low closing
prices for our common stock on the NASDAQ National Market for the periods
indicated.
1999 High Low
- ----------------------------------------------------------------------------------
First Quarter $ 16 5/32 $ 10 5/8
Second Quarter 22 7/8 10 3/4
Third Quarter 30 15/16 22 7/8
Fourth Quarter 32 7/16 21 27/32
2000 High Low
- ----------------------------------------------------------------------------------
First Quarter $ 36 11/16 $ 31 11/32
Second Quarter 55 11/16 33 1/8
Third Quarter 91 1/8 49 11/32
Fourth Quarter 97 7/16 44 1/8
The stock prices shown above have been restated to reflect KLA-Tencor's
two-for-one stock dividend, effective January 18, 2000.
As of September 1, 2000, there were 1,434 shareholders of record of the
Company's common stock. The closing price for the Company's common stock as
reported by the NASDAQ National Market as of the close of business on September
1, 2000 was $66 13/16 per share.
The Company has never paid cash dividends to its stockholders and does
not presently plan to pay cash dividends in the foreseeable future.
20
21
ITEM 6. SELECTED FINANCIAL DATA
The following tables reflect selected consolidated summary financial
data for each of the last five fiscal years. This data should be read in
conjunction with the consolidated financial statements and notes thereto, and
with Item 7, "Management's Discussion and Analysis of Results of Operations and
Financial Condition" in this Annual Report on Form 10-K.
Year ended June 30,
(in thousands, except per share data) 1996 1997 1998 1999 2000
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS:
Revenues $ 1,094,492 $ 1,031,824 $ 1,166,325 $ 843,181 $ 1,498,812
Income (loss) from operations 296,266 145,832 164,631 (10,334) 311,541
Income from operations excluding
other charges(1) 296,266 206,384 187,105 32,366 306,903
Net income 196,634 105,396 134,096 39,212 253,798
Basic earnings per share 1.21 0.65 0.79 0.23 1.39
Diluted earnings per share 1.17 0.62 0.76 0.22 1.32
Net income excluding other charges(1) 196,634 151,272 155,574 66,966 250,783
Diluted earnings per share
excluding other charges(1) 1.17 0.89 0.88 0.37 1.30
June 30, (in thousands) 1996 1997 1998 1999 2000
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS:
Cash, cash equivalents and
marketable securities $ 468,475 $ 687,249 $ 723,481 $ 755,183 $ 964,383
Working capital 591,397 531,313 605,688 590,024 1,056,927
Total assets 1,157,919 1,343,307 1,548,397 1,584,900 2,203,503
Stockholders' equity 870,999 1,014,613 1,197,714 1,232,583 1,708,676
(1) Excludes non-recurring acquisition, merger and restructuring
charges/(credits) of $61 million, $22 million, $43 million and $(5) million in
1997, 1998, 1999 and 2000 respectively.
The per share data shown above have been restated to reflect
KLA-Tencor's two-for-one stock dividend, effective January 18, 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes included in Item 8, "Financial Statements and
Supplementary Data" in this Annual Report on Form 10-K. This discussion contains
forward-looking statements which involve risk and uncertainties. Our actual
21
22
results could differ materially from those anticipated in the forward looking
statements as a result of certain factors, including but not limited to those
discussed in "Risk Factors" and elsewhere in this report.
RESULTS OF OPERATIONS
We enjoyed a strong fiscal 2000, with record bookings and revenues in
both the third and fourth quarters of the year. The upturn in the semiconductor
industry, which began in the latter half of fiscal 1999, continued throughout
fiscal 2000. With the increasing affordability of personal computers and the
growing demand to get online, computer hardware manufacturers, including
personal computers and servers, continued their growth in both shipments and
revenues. In addition, the telecommunications industry saw an increase in demand
for its products, including software-enhanced wireless communications and
internet-access products. This increased demand was further enhanced by a strong
economic recovery in the Asia-Pacific region. This overall increase in demand
caused price increases in the semiconductor industry and resulted in
semiconductor manufacturers increasing capital spending not only to expand
capacity in foundries to meet the increased demand for computer products, but
also to implement processes that incorporate the latest in technological
advances, including the adoption of deep sub-quarter micron technologies (0.13),
the transition to copper dual damascene structures (copper technology) and the
transition to 300mm wafers.
We experienced increased order levels across almost all products as a
result of the increased capital spending by major semiconductor manufacturers,
with our wafer inspection area benefiting the most. Geographically, all regions
saw increases in bookings during the year, with the most pronounced improvements
in the United States, Korea, Japan and Taiwan.
Our financial position has remained strong throughout fiscal 2000 and
we continue to have no long-term debt. We have continued our new product
development by investment in leading edge technologies and by strategic
acquisitions. These investments should position our extensive product line to
address the critical initiatives that are key to our customers.
REVENUES AND GROSS MARGIN
In fiscal 2000, revenues increased $656 million, or 78% to $1.50
billion, from $843 million in fiscal 1999. Overall revenue increases were the
result of increased capital spending by semiconductor manufacturers,
particularly in the Asia-Pacific region, as a result of the semiconductor
industry upturn. Sales of substantially all our products were positively
affected by this up cycle when compared to sales in fiscal 1999. The United
States, Korea, Japan and Taiwan exhibited the strongest revenue growth during
the year. The United States and Europe represented a larger proportion of
revenues compared to historical norms, while Japan revenues, which increased
dramatically, were still below historical rates. Revenue increases in fiscal
2000 were augmented by an increase in field service and spare parts revenues,
primarily due to our increasing installed base worldwide. Revenues in fiscal
1999 decreased $323 million, or 28% to $843 million, from $1.17 billion in
fiscal 1998, primarily due to the downturn in the semiconductor industry.
22
23
Gross margins as a percentage of revenues were 55%, 47% and 52% in
fiscal 2000, 1999 and 1998, respectively. The increase in fiscal 2000 compared
to fiscal 1999 was due primarily to increased capacity utilization resulting
from higher unit volume, as well as faster growth of higher-margin product
revenue. The decrease in fiscal 1999 compared to fiscal 1998 was primarily due
to lower sales volume of our higher margin products and increased infrastructure
costs of our field service organization.
ENGINEERING, RESEARCH AND DEVELOPMENT
Net engineering, research and development expenses were $246 million,
$165 million, and $182 million, or 16%, 20% and 16% of revenues in fiscal 2000,
1999, and 1998, respectively. The dollar increase in fiscal 2000 compared to
fiscal 1999 was primarily attributable to increases in costs associated with our
ongoing efforts to develop products which address new market segments;
enhancements to existing products including next-generation 300mm products; and
inspection enhancements for sub-quarter micron technology. The dollar decrease
in fiscal 1999 compared to fiscal 1998 was primarily attributable to development
programs that were terminated as part of the realignment and streamlining of our
product lines.
Net engineering, research and development expenses were partially
offset by $16 million, $14 million and $11 million in external funding received
under certain strategic development programs conducted with several of our
customers in fiscal 2000, 1999 and 1998, respectively.
Our future operating results will depend significantly on our ability
to produce products and services that have a competitive advantage in our
marketplace. To do this, we believe that we must continue to make substantial
investments in our research and development efforts. We remain committed to
product development in new and emerging technologies as we address the
requirements of 0.18 micron and 0.13 micron feature sizes, real-time review, and
the transition to copper technology. Our investments in new technology and
existing product enhancements are intended to enable our customers to achieve
higher productivity through cost-effective, leading edge technology solutions.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $268 million, $199
million and $242 million, or 18%, 24% and 21% of revenues, in fiscal 2000, 1999,
and 1998, respectively. The increase in dollars in fiscal 2000, as compared to
fiscal 1999, was primarily due to increases in our selling and marketing
infrastructure and commissions paid. The decrease in dollars in fiscal 1999,
compared to fiscal 1998, was primarily attributable to our restructuring
program, which included a consolidation of facilities, reductions in headcount
and other cost saving measures, and to the overall downturn in the semiconductor
industry.
NON-RECURRING ACQUISITION, RESTRUCTURING AND OTHER CHARGES
Non-recurring acquisition, restructuring and other charges/(credits)
were $(5) million, $43 million and $22 million in fiscal 2000, 1999, and 1998,
respectively. These charges are directly
23
24
attributable to non-recurring acquisition charges incurred as we continue to
pursue a course of strategic acquisitions and alliances to expand our
technologies, product offerings and distribution capabilities and to
restructuring charges incurred in connection with our fiscal 1999 restructure
plan.
Non-recurring acquisition charges for the year ended June 30, 2000
In March 2000, we purchased assets and related technology of Fab
Solutions, a division of ObjectSpace, Inc. for an aggregate purchase price of $8
million. Fab Solutions is a leading provider of advanced process control
software solutions used to respond to yield-impacting parametric data in
near-real time. We recorded a charge of $0.8 million for purchased in-process
research and development, representing the appraised value of products that were
not considered to have reached technological feasibility.
In February 2000, we acquired software developer FINLE Technologies,
Inc., a supplier of lithography modeling and data analysis software used to
speed development of advanced lithography processes required to develop and
produce integrated circuits with 0.12 micron and smaller geometries, for an
aggregate purchase price of $5 million. We recorded a charge of $0.5 million for
purchased in-process research and development, representing the appraised value
of products that were not considered to have reached technological feasibility.
In November 1999, we acquired software developer ACME Systems, Inc., a
leading supplier of yield engineering analysis software used to correlate
parametric electrical test and wafer sort yield data with in-line Work In
Process and Metrology data, for an aggregate purchase price of $6.9 million. We
recorded a charge of $1.9 million for purchased in-process research and
development, representing the appraised value of products that were not
considered to have reached technological feasibility.
To determine the value of the in-process technology of the fiscal 2000
acquisitions, the expected future cash flow attributable to the in-process
technology was discounted, taking into account the percentage of completion,
utilization of pre-existing technology, risks related to the characteristics and
applications of the technology, existing and future markets, and technological
risk associated with completing the development of the technology. The valuation
approach used was a form of discounted cash flow approach commonly known as the
"percentage of completion" approach whereby the cash flows from the technology
are multiplied by the percentage of completion of the in-process technology. In
each acquisition, the value of tangible net assets acquired was nominal.
Non-recurring acquisition charges for the year ended June 30, 1999
In December 1998, we purchased assets and related technology from
Uniphase Corporation for an aggregate purchase price of $3 million. The confocal
laser review station technology acquired is currently used for analysis of
defects on silicon wafers. Assets acquired of $3 million consisted primarily of
inventory.
24
25
In November 1998, we purchased assets and technology from Keithley
Instruments, Inc. for an aggregate purchase price of $10 million. The corona
wire gate oxide monitoring tool technology we acquired had not yet reached the
alpha stage and the cost to complete the development of this equipment was
estimated at the time of acquisition to be $1 million. We recorded a charge of
$8 million for purchased in-process research and development, representing the
appraised value of products that were not considered to have reached
technological feasibility.
In June 1998, we acquired Groff Associates, Inc. (dba VARS Inc.) for
an aggregate purchase price of $13 million. The digital and in-line-monitoring
image archiving retrieval software technology we acquired had not yet reached
the alpha stage and the cost to complete the development of these software
products was estimated at the time of acquisition to be $2 million. We recorded
a charge of $13 million for purchased in-process research and development,
representing the appraised value of products that were not considered to have
reached technological feasibility.
In May 1998 we acquired DeviceWare, Inc., a company in its development
stage, for an aggregate purchase price of $3 million. The bit mapping defect
characterization technology acquired had not yet reached the alpha stage and the
cost to complete the development of this software product was estimated at the
time of acquisition to be $1 million. We recorded a charge of $3 million for
purchased in-process research and development, representing the appraised value
of product that was not considered to have reached technological feasibility.
For each of the above three fiscal 1999 transactions, the appraised
value under the income approach used for our calculation did not differ
materially from the result under the percentage of completion approach preferred
by the Securities and Exchange Commission. The value of the tangible net assets
acquired was nominal.
Each of the above acquisitions was accounted for using the purchase
method of accounting and the developmental products acquired were evaluated in
the context of Interpretation 4 of SFAS No. 2 and SFAS No. 86. The allocation of
the purchase price to in-process research and development cost was determined by
identifying research projects in areas for which technological feasibility had
not been established and no alternative future uses existed. Substantially all
of the in-process research and development projects acquired were expected to be
complete and generating revenues within the 24 months following the acquisition
date.
Non-recurring acquisition charges for the year ended June 30, 1998
In February 1998, we acquired Nanopro GmbH (Freiburg, Germany) for an
aggregate purchase price of $3 million. This privately-held company specialized
in the development of advanced interferometric wafer inspection. The identified
in-process research and development of $3 million was estimated and expensed,
because technological feasibility of the advanced interferometric wafer
technology had not yet been reached. The technology acquired had not reached
commercial feasibility as of June 30, 1999. The value of the tangible net assets
acquired was nominal.
25
26
In April 1998, we acquired Amray, Inc. (Amray) for 1,800,000 shares of
our common stock accounted for under the pooling of interest method of
accounting. A privately-owned provider of scanning electron microscope systems,
Amray's historical operations, net assets, and cash flows were less than 3% of
our consolidated financial results and, therefore, were not reflected in the
consolidated financial results prior to the acquisition.
Development of acquired technologies remains a significant risk due to
the remaining effort required to achieve technical feasibility, rapidly changing
customer markets and significant competitive threats from numerous companies.
Failure to bring any of these products to market in a timely manner could
adversely affect our sales and profitability in the future. Additionally, the
value of net assets and other intangible assets acquired may become impaired.
Restructuring and Other Charges
During fiscal 1999, we implemented a restructuring plan to address the
impact on our business of the downturn in the semiconductor industry. Estimated
restructuring costs of $35 million were classified in four main categories:
facilities, inventory, severance and benefits, and other restructuring costs.
Facilities costs of $12 million include $8 million for lease expense resulting
from consolidation and closure of certain offices located primarily in the
United States and Japan; $3 million for leasehold improvements impaired in those
facilities; and $1 million in other facilities-related exit costs.
Inventory-related costs of $10 million resulted from impaired assets related to
unique parts and non-cancelable purchase commitments of certain development
programs, which were terminated as part of the realignment and streamlining of
our product lines. Severance and benefit-related costs of $8 million include
involuntary termination of approximately 250 personnel from manufacturing,
engineering, sales, marketing, and administration throughout the United States,
Japan and Europe. Other restructuring costs of $5 million relate primarily to
the write-off of software licenses and related non-cancelable maintenance
contracts for closed locations.
During fiscal 2000 and 1999, we utilized $7 million and $18 million of
the restructuring accrual, respectively. During fiscal 2000, we determined that
$8 million of the reserve would not be utilized because of a change in
management's plans for utilization of certain facilities resulting from an
increase in demand for the Company's products. At June 30, 2000, $2 million of
the accrual remains, representing payments under severance plans and contractual
obligations that existed when the plan was executed. These charges are expected
to be incurred during the next six fiscal quarters.
INTEREST INCOME AND OTHER, NET
Interest income and other, net was $42 million, $61 million and $42
million in fiscal 2000, 1999, and 1998, respectively. Interest income and other,
net is comprised primarily of gains realized on sales of marketable securities,
interest income earned on the investment and cash portfolio and income
recognized upon settlement of certain foreign currency contracts. The decrease
in fiscal 2000 as compared to fiscal 1999 and the increase in fiscal 1999 as
compared to fiscal 1998 are primarily due to $17 million in gains realized on
the sale of equity securities held in a former supplier company in fiscal 1999.
26
27
PROVISION FOR INCOME TAXES
KLA-Tencor's effective income tax rate was 28%, 22% and 35% in fiscal
2000, 1999 and 1998, respectively. In general, our effective income tax rate
differs from the statutory rate of 35% largely as a function of benefits
realized from our Foreign Sales Corporations, income derived from tax exempt
interest, foreign taxes, state taxes, and research and development tax credits.
During fiscal 1999, income related to tax exempt interest increased as a
component of total net income in addition to the impact of restructuring, which
resulted in a significantly lower effective tax rate as compared to fiscal 1998
and 2000.
Our future effective income tax rate depends on various factors, such
as tax legislation, the geographic composition of our pre-tax income, non-tax
deductible expenses incurred in connection with acquisitions, amounts of
tax-exempt interest income and research and development credits as a percentage
of aggregate pre-tax income and the effectiveness of our tax planning
strategies.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $1.06 billion as of June 30, 2000 compared to $590
million as of June 30, 1999. Cash, cash equivalents and short-term investments
increased to $598 million from $331 million at June 30, 1999. In addition, we
maintained $366 million and $424 million in marketable securities classified as
long-term as of June 30, 2000 and 1999, respectively.
Cash provided by operating activities was $250 million, $122 million,
and $74 million in fiscal 2000, 1999 and 1998, respectively. The increase in
cash provided by operating activities in fiscal 2000 compared to fiscal 1999 was
primarily due to the increase in net income and other current liabilities,
offset by increased levels of accounts receivable, inventories and deferred
taxes. The increase in cash provided by operating activities in fiscal 1999
compared to fiscal 1998 was primarily due to decreased levels of accounts
receivable and inventory and increases in depreciation and amortization,
partially offset by decreases in net income, accounts payable, other current
liabilities and increases in other assets.
Cash used in investing activities was $96 million, $38 million and $173
million in fiscal 2000, 1999 and 1998, respectively. Investing activities
typically consist of purchases and sales of investments, purchases of capital
assets to support long-term growth and acquisitions of technology or other
companies to allow access to new market segments or emerging technologies.
During fiscal 2000, we invested $79 million in the acquisition of capital
assets, with the majority of these expenditures related to leasehold
improvements and to the purchase of computers and manufacturing equipment.
Capital expenditures of $61 million in fiscal 1999 included $27 million to
acquire land and buildings that previously were leased. The remaining $34
million in fiscal 1999 and the $64 million in fiscal 1998 related primarily to
purchase of computers and manufacturing equipment.
We generated $61 million of cash from financing activities in fiscal
2000, used $16 million in fiscal 1999 and generated $16 million in fiscal 1998.
Financing activities typically include sales and repurchases of KLA-Tencor's
common stock, as well as borrowings and repayments of debt.
27
28
Issuance of common stock, net of repurchases, provided $79 million in fiscal
2000, used $7 million in fiscal 1999 and provided $18 million in fiscal 1998.
During fiscal 2000 and 1999, we sold, with recourse, trade notes and
accounts receivable from Japanese customers. At June 30, 2000 and 1999, $52
million and $29 million, respectively, of these receivables were outstanding.
During fiscal 1998, we entered into certain lease arrangements in
Milpitas and San Jose, California. In connection with these agreements, we have
a contingent liability to the lessor for $100 million in residual value
guarantees of the properties under lease. The impact of these agreements is not
expected to be material to our liquidity.
We believe that the existing cash balances and investments, along with
cash generated from operations, will be sufficient to meet our working capital
requirements through fiscal year 2001.
We have adopted a plan for the systematic repurchase of shares of our
common stock in the open market to reduce the dilution created by our
stock-based employee benefit and incentive plans. In fiscal 2000, we repurchased
520,000 shares of our common stock at an average price of $53.80 per share, for
a total cash outlay of $28 million. In fiscal 1999, we repurchased 2,152,000
shares of our common stock at an average price of $22.66 per share, for a total
cash outlay of $49 million.
At June 30, 2000, our principle sources of liquidity consisted of $964
million of cash, cash equivalents, and investments, and approximately $30
million of available credit facilities. We have $30 million of revolving lines
of credit which renew annually. No amounts were outstanding under these
agreements at the end of any fiscal year presented.
Our liquidity is affected by many factors, some of which are based on
the normal ongoing operations of the business, and others of which relate to the
uncertainties of global economies and the semiconductor and the semiconductor
equipment industries. Although cash requirements will fluctuate based on the
timing and extent of these factors, KLA-Tencor management believes that cash
generated from operations, together with the liquidity provided by existing cash
balances and borrowing capability, will be sufficient to satisfy our liquidity
requirements for the next 12 months.
FACTORS AFFECTING RESULTS, INCLUDING RISKS AND UNCERTAINTIES
Fluctuations in Operating Results and Stock Price
Our operating results have varied widely in the past and our future
operating results will continue to be subject to quarterly variations based upon
a wide variety of factors including those listed in this section and throughout
this Annual Report on Form 10-K. In addition, future operating results may not
follow any past trends. The factors we believe make our results more likely to
fluctuate and difficult to predict include:
- the cyclical nature of the semiconductor industry;
- the reduction in the price and the profitability of our
products;
- our timing of new product introductions;
28
29
- our ability to develop and implement new technologies;
- the change in customers' schedules for fulfillment of orders;
- the cancellation of contracts by major customers;
- the shortage of qualified workers in the areas we operate; and
- our ability to manage our manufacturing requirements.
Operating results also could be affected by sudden changes in customer
requirements, currency exchange rate fluctuations and other economic conditions
affecting customer demand and the cost of operations in one or more of the
global markets in which we do business. As a result of these or other factors,
we could fail to achieve our expectations as to future revenues, gross profit
and income from operations. Our failure to meet the performance expectations set
and published by external sources could result in a sudden and significant drop
in the price of our stock, particularly on a short-term basis, and could
negatively affect the value of any investment in our stock.
Semiconductor Equipment Industry Volatility
The semiconductor equipment industry is highly cyclical. The purchasing
decisions of our customers are highly dependent on the economies of both the
local markets in which they are located and the semiconductor industry
worldwide. The timing, length and severity of the up-and-down cycles in the
semiconductor equipment industry are difficult to predict. This cyclical nature
of the industry in which we operate affects our ability to accurately predict
future revenues and, thus, future expense levels. When cyclical fluctuations
result in lower than expected revenue levels, operating results may be adversely
affected and cost reduction measures may be necessary in order for us to remain
competitive and financially sound. During a down cycle we must be in a position
to adjust our cost and expense structure to the prevailing market condition and
to continue to motivate and retain our key employees. In addition, during
periods of rapid growth, we must be able to increase manufacturing capacity and
personnel to meet customer demand. We can provide no assurance that these
objectives can be met in a timely manner in response to industry cycles. If we
fail to respond to industry cycles, our business could be seriously harmed.
During the most recent down cycle, the semiconductor industry
experienced excess production capacity that caused semiconductor manufacturers
to decrease capital spending. We generally do not have long-term volume
production contracts with our customers and we do not control the timing or
volume of orders placed by our customers. Whether and to what extent our
customers place orders for any specific products and the mix and quantities of
products included in those orders are factors beyond our control. Insufficient
orders, especially in our down cycles, will result in under-utilization of our
manufacturing facilities and infrastructure and will negatively affect our
operating results and financial condition.
International Trade and Economic Conditions
Ours is an increasingly global market. A majority of our revenues are
derived from outside the United States and we expect that international revenues
will continue to represent a substantial percentage of our revenues. Our
international revenues and operations are affected by economic conditions
specific to each country and region. Although economies in the Asia Pacific
region have
29
30
stabilized to some degree, compared to early-to-mid fiscal 1999, and certain
countries such as Taiwan have relatively healthy economies, we remain cautious
about general macroeconomic developments in the Asia Pacific region,
particularly Japan. Japan's economy is important to the overall financial health
of the region. If the economies in the Asia Pacific region stagnate or
deteriorate, the economies of other regions could also be affected. Because of
our significant dependence on international revenues, a continued or additional
decline in the economies of any of the countries or regions in which we do
business would negatively affect our operating results.
Managing global operations and sites located throughout the world
presents challenges associated with, among other things, cultural diversity and
organizational alignment. Moreover, each region in the global semiconductor
equipment market exhibits unique characteristics that can cause capital
equipment investment patterns to vary significantly from period to period.
Periodic local or international economic downturns, trade balance issues,
political instability and fluctuations in interest and currency exchange rates
could negatively affect our business and results of operations. Although we
attempt to manage near term currency risks through the use of hedging
instruments, there can be no assurance that such efforts will be adequate.
Competition
Our industry includes large manufacturers with substantial resources to
support customers worldwide. Our future performance depends, in part, upon our
ability to continue to compete successfully worldwide. Some of our competitors
are diversified companies with greater financial resources and more extensive
research, engineering, manufacturing, marketing and customer service and support
capabilities than we can provide. We face competition from companies whose
strategy is to provide a broad array of products and services, some of which
compete with the products and services that we offer. These competitors may
bundle their products in a manner that may discourage customers from purchasing
our products. In addition, we face competition from smaller emerging
semiconductor equipment companies whose strategy is to provide a portion of the
products and services which we offer, using innovative technology to sell
products into specialized markets. Loss of competitive position could negatively
impact our prices, customer orders, revenues, gross margins, and market share,
any of which would negatively affect our operating results and financial
condition. Our failure to compete successfully with these other companies would
seriously harm our business.
Technological Change and Customer Requirements
Success in the semiconductor equipment industry depends, in part, on
continual improvement of existing technologies and rapid innovation of new
solutions. For example, the semiconductor industry continues to shrink the size
of semiconductor devices and has begun to commercialize the process of
copper-based interconnects. These and other evolving customer needs require us
to respond with continued development programs and to cut back or discontinue
older programs which may no longer have industry-wide support. Technical
innovations are inherently complex and require long development cycles and
appropriate professional staffing. Our competitive advantage and future business
success depend on our ability to accurately predict evolving industry standards,
develop and introduce new products which successfully address changing customer
needs, win
30
31
market acceptance of these new products and manufacture these new products in a
timely and cost-effective manner. If we do not develop and introduce new
products and technologies in a timely manner in response to changing market
conditions or customer requirements, our business could be seriously harmed.
In this environment, we must continue to make significant investments
in research and development in order to enhance the performance and
functionality of our products, to keep pace with competitive products and to
satisfy customer demands for improved performance, features and functionality.
There can be no assurance that revenues from future products or product
enhancements will be sufficient to recover the development costs associated with
such products or enhancements or that we will be able to secure the financial
resources necessary to fund future development. Substantial research and
development costs typically are incurred before we confirm the technical
feasibility and commercial viability of a product, and not all development
activities result in commercially viable products. In addition, we cannot ensure
that these products or enhancements will receive market acceptance or that we
will be able to sell these products at prices that are favorable to us. Our
business will be seriously harmed if we are unable to sell our products at
favorable prices or if our products are not accepted by the market in which we
operate.
Key Suppliers
We use a wide range of materials in the production of our products
including custom electronic and mechanical components, and we use numerous
suppliers to supply materials. We generally do not have guaranteed supply
arrangements with our suppliers. Because of the variability and uniqueness of
customers' orders, we do not maintain an extensive inventory of materials for
manufacturing. We seek to minimize the risk of production and service
interruptions and/or shortages of key parts by selecting and qualifying
alternative suppliers for key parts, monitoring the financial stability of key
suppliers, and maintaining appropriate inventories of key parts. Although we
make reasonable efforts to ensure that parts are available from multiple
suppliers, key parts may be available only from a single supplier or a limited
group of suppliers. There can be no assurance that our business will not be
harmed if we do not receive sufficient parts to meet our production requirements
in a timely and cost-effective manner.
Operations at our primary manufacturing facilities and our assembly
subcontractors are subject to disruption for a variety of reasons, including
work stoppages, fire, earthquake, flooding or other natural disasters. Such
disruption could cause delays in shipments of products to our customers. We
cannot ensure that alternate production capacity would be available if a major
disruption were to occur, or that if it were available, it could be obtained on
favorable terms. Such a disruption could result in cancellation of orders or
loss of customers and could seriously harm our business.
Intellectual Property Obsolescence and Infringement
Our success is dependent in part on our technology and other
proprietary rights. We own various United States and international patents and
have additional pending patent applications relating to some of our products and
technologies. The process of seeking patent protection is
31
32
lengthy and expensive, and we cannot be certain that pending or future
applications will actually result in issued patents, or that, issued patents
will be of sufficient scope or strength to provide meaningful protection or
commercial advantage to us. Other companies and individuals, including our
larger competitors, may develop technologies that are similar or superior to our
technology or design around the patents we own.
We also maintain trademarks on certain of our products and services and
claim copyright protection for certain proprietary software and documentation.
However, we can give no assurance that our trademarks and copyrights will be
upheld or successfully deter infringement by third parties.
While patent, copyright and trademark protection for our intellectual
property is important, we believe our future success in highly dynamic markets
is most dependent upon the technical competence and creative skills of our
personnel. We attempt to protect our trade secrets and other proprietary
information through agreements with our customers, suppliers, employees and
consultants and through other security measures. We also rely on trade secret
protection for our technology, in part through confidentiality agreements with
our employees, consultants and third parties. We also maintain exclusive and
non-exclusive licenses with third parties for strategic technology used in
certain products. However, these employees, consultants and third parties may
breach these agreements, and we may not have adequate remedies for wrongdoing.
In addition, the laws of certain territories in which we develop, manufacture or
sell our products may not protect our intellectual property rights to the same
extent as do the laws of the United States.
As is typical in the semiconductor equipment industry, from time to
time we have received communications from other parties asserting the existence
of patent rights, copyrights, trademark rights or other intellectual property
rights which they believe cover certain of our products, processes, technologies
or information. Our customary practice is to evaluate such assertions and
consider whether to seek licenses where appropriate. Based on industry practice
and prior experience, we believe that licenses or other rights, if necessary,
will be available on commercially reasonable terms for existing or future
claims. Nevertheless, we cannot ensure that licenses can be obtained, or if
obtained will be on acceptable terms or that litigation or other administrative
proceedings will not occur. The inability to obtain necessary licenses or other
rights on reasonable terms could seriously harm our operating results and
financial condition.
32
33
Key Employees
Our employees are vital to our success, and our key management,
engineering and other employees are difficult to replace. We generally do not
have employment contracts with our key employees. Further, we do not maintain
key person life insurance on any of our employees. The expansion of high
technology companies worldwide has increased demand and competition for
qualified personnel. We may not be able to attract, assimilate or retain
additional highly qualified employees in the future. These factors could
seriously harm our business.
Acquisitions
We seek to develop new technologies from both internal and external
sources. As part of this effort, we may make acquisitions of, or significant
investments in, businesses with complementary products, services and/or
technologies. Acquisitions involve numerous risks, including management issues
and costs in connection with integration of the operations, technologies, and
products of the acquired companies, possible write-downs of impaired assets, and
the potential loss of key employees of the acquired companies. The inability to
manage these risks effectively could seriously harm our business.
Litigation
From time to time we are involved in litigation which alleges
infringement of intellectual property rights and other damages. This type of
litigation tends to be expensive and requires significant management time and
attention. In addition, if we lose in this type of litigation, a court could
require us to pay substantial damages and/or royalties, prohibiting us from
using essential technologies. For these and other reasons, this type of
litigation could have a material adverse effect on our business, financial
condition and results of operations. Also, although we may seek to obtain a
license under a third party's intellectual property rights in order to bring an
end to certain claims or actions asserted against us, we may not be able to
obtain such a license on reasonable terms or at all.
Euro Conversion
A new European currency was implemented commencing in January 1999 to
replace the separate currencies of eleven western European countries. This
requires changes in our operations as we modify systems and commercial
arrangements to deal with the new currency. Modifications are necessary in
operations such as payroll, benefits and pension systems, contracts with
suppliers and customers, and internal financial reporting systems. During the
three-year transition period in which transactions may also be made in the old
currencies, we must maintain dual currency processes for our operations. We have
identified the issues created by this problem and the cost of this effort is not
expected to have a material effect on our business or results of operations. We
cannot be assured, however, that all problems will be foreseen and corrected or
that no material disruption of our business will occur as a result of this
currency change.
33
34
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 137 (SFAS No. 137), "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133." SFAS No. 137 amends Statement of Financial
Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative
Instruments and Hedging Activities," to defer its effective date to all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments
including standalone instruments, such as forward currency exchange contracts
and interest rate swaps or embedded derivatives, such as conversion options
contained in convertible debt investments and requires that these instruments be
marked-to-market on an ongoing basis. Along with the derivatives, the underlying
hedged items are also to be marked-to-market on an ongoing basis. These market
value adjustments are to be included either in the income statement or in
stockholders' equity, depending on the nature of the transaction. The Company
currently only participates in hedge transactions of assets, liabilities and
firm commitments and does not anticipate that the adoption of this Statement
will have a material impact on the financial statements as the gains and losses
on the hedge transactions offset the losses and gains on the underlying items
being hedged. The Company is required to adopt SFAS No. 133 in the first quarter
of our fiscal year ending June 30, 2001. The effect of adopting SFAS No. 133 is
not expected to be material to the Company's financial statements.
In March 2000, the FASB issued interpretation No. 44 (FIN 44),
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25." This Interpretation clarifies the FASB's views in
applying Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees" to certain stock compensation awards. FIN 44 is effective
July 1, 2000, however certain conclusions in this Interpretation cover specific
events that occur after December 15, 1998. To the extent this Interpretation
covers events occurring during the period after December 15, 1998, but before
the effective date of July 1, 2000, the effects of applying this Interpretation
are recognized on a prospective basis from July 1, 2000. The implementation of
FIN 44 is not expected to have any material impact on the Company's financial
statements.
In June 2000, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101B (SAB 101B), "Second Amendment: Revenue Recognition
in Financial Statements." SAB 101B amends Staff Accounting Bulletin No. 101 (SAB
101) "Revenue Recognition in Financial Statements," to defer the implementation
date of SAB 101 for registrants until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. SAB 101 summarizes certain of
the SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements of all public companies. The Company is
required to adopt SAB 101 in the fourth quarter of its fiscal year ending June
30, 2001. Accordingly, any shipments previously reported as revenue, including
revenue reported for the first three quarters of fiscal 2001, that do not meet
SAB 101's guidance will be recorded as revenue in future periods. Changes in our
revenue recognition policy resulting from the interpretation of SAB 101 would
not involve the restatement of prior fiscal year statements, but would, to the
extent applicable, be reported as a change in accounting principle in the fiscal
year ending June 30, 2001, with the
34
35
appropriate restatement of interim periods as required by SFAS No. 3 "Reporting
Accounting Changes in Interim Financial Statements." The Company's reported
results of operations for the 12 months ending June 30, 2001 will include a
cumulative adjustment for all prior annual and interim periods including an
adjustment for revenue reported in the first quarter of fiscal 2001 as if SAB
101 had been adopted on July 1, 2000. The Company, in conjunction with the
semiconductor capital equipment industry association is seeking clarification on
the requirements of SAB 101 as they relate to the semiconductor capital
equipment industry. Management believes that SAB 101 and 101B, to the extent
that they impact us, will not affect the underlying strength or weakness of our
business operations as measured by the dollar value of our product shipments and
cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest
rates, foreign currency exchange rates and marketable equity security prices. To
mitigate these risks, we utilize derivative financial instruments. We do not use
derivative financial instruments for speculative or trading purposes. All of the
potential changes noted below are based on sensitivity analyses performed on our
financial position at June 30, 2000. Actual results may differ materially.
At the end of fiscal 2000, we had an investment portfolio of fixed
income securities of $446 million, excluding those classified as cash and cash
equivalents (Detail of these securities is incorporated by reference from Note 4
of Notes to Consolidated Financial Statements found under Item 8, "Financial
Statements and Supplementary Data" in this Annual Report on Form 10-K). These
securities, as with all fixed income instruments, are subject to interest rate
risk and will fall in value if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 10% from levels as
of June 30, 2000, the fair value of the portfolio would decline by $5 million.
As of June 30, 2000 we had forward contracts to sell $204 million in
foreign currency in order to hedge currency exposures (Detail of these contracts
is incorporated by reference from Note 1 of the Notes to the Consolidated
Financial Statements found under Item 8, "Financial Statements and Supplementary
Data" in this Annual Report on Form 10-K). The fair market value of these
contracts, based on prevailing exchange rates on June 30, 2000, was $199
million. A 10% adverse move in currency exchange rates affecting the contracts
would decrease the fair value of the contracts by $20 million. However, if this
occurred, the fair value of the underlying exposures hedged by the contracts
would increase by a similar amount. Accordingly, we believe that the hedging of
our foreign currency exposure should have no material impact to income or cash
flows.
35
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets at June 30, 1999 and June 30, 2000 ............................ 37
Consolidated Statements of Operations for each of the
three years in the period ended June 30, 2000 ........................................... 38
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended June 30, 2000 .................................... 39
Consolidated Statements of Cash Flows for each of the
three years in the period ended June 30, 2000 ........................................... 40
Notes to Consolidated Financial Statements................................................. 41
Quarterly Results of Operations (Unaudited)................................................ 62
Report of Independent Accountants.......................................................... 63
36
37
CONSOLIDATED BALANCE SHEETS
June 30, (in thousands, except per share data) 1999 2000
- ----------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 271,488 $ 478,212
Short-term investments 59,574 119,932
Accounts receivable, net 280,070 481,950
Inventories 195,679 282,489
Deferred income taxes 113,037 164,294
Other current assets 22,493 24,877
- -------------------------------------------------------------------------------------------------------------------
Total current assets 942,341 1,551,754
Land, property and equipment, net 168,335 199,719
Marketable securities 424,121 366,239
Other assets 50,103 85,791
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 1,584,900 $ 2,203,503
===================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 14,567 $ --
Accounts payable 35,249 55,016
Other current liabilities 302,501 439,811
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 352,317 494,827
- -------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $0.001 par value, 1,000 shares
authorized, none outstanding -- --
Common stock, $0.001 par value, 250,000 shares authorized,
177,364 and 187,465 shares issued and outstanding 177 187
Capital in excess of par value 504,175 717,978
Retained earnings 723,048 976,846
Accumulated other comprehensive income 5,183 13,665
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,232,583 1,708,676
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,584,900 $ 2,203,503
===================================================================================================================
See accompanying notes to consolidated financial statements.
37
38
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
(in thousands, except per share data) 1998 1999 2000
- --------------------------------------------------------------------------------------------------------------------
Revenues $ 1,166,325 $ 843,181 $ 1,498,812
- -------------------------------------------------------------------------------------------------------------------
Costs and operating expenses:
Cost of goods sold 554,917 447,059 677,805
Engineering, research and development 181,903 164,699 246,227
Selling, general and administrative 242,400 199,057 267,877
Non-recurring acquisition, restructuring
and other charges 22,474 42,700 (4,638)
- --------------------------------------------------------------------------------------------------------------------
Total costs and operating expenses 1,001,694 853,515 1,187,271
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 164,631 (10,334) 311,541
Interest income and other, net 41,680 60,643 41,536
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 206,311 50,309 353,077
Provision for income taxes 72,215 11,097 99,279
- -------------------------------------------------------------------------------------------------------------------
Net income $ 134,096 $ 39,212 $ 253,798
===================================================================================================================
Earnings per share:
Basic $ 0.79 $ 0.22 $ 1.39
============ ============ ============
Diluted $ 0.76 $ 0.21 $ 1.32
============ ============ ============
Weighted average number of shares:
Basic 170,194 175,474 182,177
============ ============ ============
Diluted 177,044 183,344 192,564
============ ============ ============
See accompanying notes to consolidated financial statements.
38
39
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock and Capital
in Excess of Par Value Accumulated
------------------------- Retained Other Compre-
(in thousands) Shares Amount Earnings hensive Income Totals
- -------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1997 167,518 $ 458,308 $ 542,706 $ 13,599 $ 1,014,613
Components of comprehensive income:
Net income -- -- 134,096 -- 134,096
Change in unrealized gain on investments -- -- -- 8,517 8,517
Currency translation adjustments -- -- -- (5,821) (5,821)
-----------
Total comprehensive income -- -- -- -- 136,792
-----------
Net issuance under employee stock plans 4,526 34,537 -- -- 34,537
Repurchase of common stock (756) (16,038) -- -- (16,038)
Tax benefits of stock option transactions -- 20,529 -- -- 20,529
Issuance of Common stock in connection
with acquisition 3,600 247 7,034 -- 7,281
- -------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1998 174,888 497,583 683,836 16,295 1,197,714
Components of comprehensive income:
Net income -- -- 39,212 -- 39,212
Change in unrealized gain on investments -- -- -- (14,877) (14,877)
Currency translation adjustments -- -- -- 3,765 3,765
-----------
Total comprehensive income -- -- -- -- 28,100
-----------
Net issuance under employee stock plans 4,628 41,324 -- -- 41,324
Repurchase of common stock (2,152) (48,767) -- -- (48,767)
Tax benefits of stock option transactions -- 14,212 -- -- 14,212
- -------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1999 177,364 504,352 723,048 5,183 1,232,583
Components of comprehensive income:
Net income -- -- 253,798 -- 253,798
Change in unrealized gain on investments -- -- -- 5,580 5,580
Currency translation adjustments -- -- -- 2,902 2,902
-----------
Total comprehensive income -- -- -- -- 262,280
-----------
Net issuance under employee stock plans 10,621 109,951 -- -- 109,951
Repurchase of common stock (520) (27,978) -- -- (27,978)
Tax benefits of stock option transactions -- 131,840 -- -- 131,840
- -------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2000 187,465 $ 718,165 $ 976,846 $ 13,665 $ 1,708,676
===============================================================================================================================
See accompanying notes to consolidated financial statements.
39
40
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30, (in thousands) 1998 1999 2000
- -------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 134,096 $ 39,212 $ 253,798
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 38,917 48,217 63,338
Restructuring charges -- 35,000 (7,838)
In-process technology 20,546 7,700 3,200
Net (gain) loss on sale of marketable securities -- (18,819) 5,306
Deferred income taxes (46,225) (27,930) (60,522)
Changes in assets and liabilities:
Accounts receivable (57,542) 40,898 (185,262)
Inventories (62,271) 30,834 (95,780)
Other assets (16,951) (15,449) (13,549)
Accounts payable 3,821 (12,145) 18,969
Other current liabilities 59,769 (5,172) 270,857
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 74,160 122,346 252,517
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of technology and net assets (18,771) (10,047) (19,925)
Purchase of property and equipment (64,389) (60,736) (78,694)
Purchase of available for sale securities (915,185) (598,170) (667,887)
Proceeds from sale of available for sale securities 825,643 631,188 670,052
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (172,702) (37,765) (96,454)
- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of common stock, net 34,537 41,324 106,999
Stock repurchases (16,038) (48,767) (27,978)
Net payments under short term debt obligations (2,636) (8,714) (18,316)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 15,863 (16,157) 60,705
- -------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents 19,424 (12,906) (10,044)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (63,255) 55,518 206,724
Cash and cash equivalents at beginning of period 279,225 215,970 271,488
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 215,970 $ 271,488 $ 478,212
=============================================================================================================
Supplemental cash flow disclosures:
Income taxes paid, net of refunds $ 85,394 $ 10,437 $ 1,243
Interest paid $ 2,303 $ 2,073 $ 1,131
See accompanying notes to consolidated financial statements.
40
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION KLA-Tencor
Corporation ("KLA-Tencor") is a global provider of process control and yield
management solutions for the semiconductor manufacturing and related
microelectronics industries. Headquartered in San Jose, California, KLA-Tencor
has subsidiaries both in the United States and in key markets throughout the
world.
The consolidated financial statements include the accounts of
KLA-Tencor and our wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
MANAGEMENT ESTIMATES The preparation of the consolidated 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 at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has evaluated the
estimated fair value of financial instruments using available market information
and valuation methodologies. The amounts reported as investments and bank
borrowings reasonably estimate their fair value. The fair value of the Company's
cash, cash equivalents, accounts receivable, accounts payable and other current
liabilities approximates the carrying amount due to the relatively short
maturity of these items.
CASH EQUIVALENTS Cash equivalents consist of highly-liquid investments
that are valued at amortized cost, which approximates market value, and have
original maturity dates of three months or less from the date of acquisition.
INVESTMENTS Short-term investments include debt and equity securities
acquired with maturities exceeding three months but less than one year from the
date of acquisition. Marketable securities include debt and equity securities
acquired with maturities exceeding one year from the date of acquisition. While
KLA-Tencor's intent is to hold debt securities to maturity, consistent with
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," we have classified all debt
securities and all investments in equity securities that have readily
determinable fair values as available-for-sale, as the sale of such securities
may be required prior to maturity to implement management strategies. Such
securities are reported at fair value, with unrealized gains or losses excluded
from earnings and included in "Accumulated other comprehensive income," net of
applicable taxes, until realized. The cost of securities sold is based on the
specific identification method. Realized gains or losses and declines in value,
if any, judged to be other than temporary are reported in "Interest income and
other, net" in the Consolidated Statements of Operations.
41
42
INVENTORIES Inventories are stated at the lower of cost (on a first-in,
first-out basis) or market. Demonstration units are stated at their
manufacturing cost and reserves are recorded to state the demonstration units at
their net realizable value.
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost.
Depreciation of property and equipment is based on the straight-line method over
the estimated useful lives of the assets, which are 30 years for buildings, 10
years for building improvements, five to seven years for furniture and fixtures,
and three to five years for machinery and equipment. Leasehold improvements are
amortized by the straight-line method over the shorter of the life of the
related asset or the term of the underlying lease.
INTANGIBLE ASSETS Purchased technology and goodwill are presented at
cost, net of accumulated amortization, and are amortized over their estimated
useful lives of three to five years using the straight-line method.
SOFTWARE DEVELOPMENT COSTS Development costs incurred in the research
and development of new software products are expensed as incurred until
technological feasibility of the product has been established. Software
development costs incurred after technological feasibility has been established
are capitalized up to the time the product is available for general release to
customers. At June 30, 1999 and 2000, there were no amounts capitalized as
KLA-Tencor's current development process is essentially complete concurrent with
the establishment of technological feasibility.
LONG-LIVED ASSETS KLA-Tencor evaluates the carrying value of its
long-lived assets, including identifiable intangible assets, whenever events or
changes in circumstances indicate that the carrying value of the asset may be
impaired. An impairment loss is recognized when estimated future cash flows
expected to result from the use of the asset including disposition, is less than
the carrying value of the asset. During fiscal 2000, no long-lived assets were
determined to be impaired. During fiscal 1999, certain long-lived assets were
determined to be impaired as part of the Company's restructuring plan (See Note
3).
CONCENTRATION OF CREDIT RISK Financial instruments, which potentially
subject KLA-Tencor to credit risk, consist principally of investments, accounts
receivable and derivative financial instruments used in hedging activities.
Investments are maintained with high-quality institutions, and the
composition and maturities of investments are regularly monitored by management.
Generally, these securities are traded in a highly liquid market, may be
redeemed upon demand and bear minimal risk. The Company, by policy, limits the
amount of credit exposure to any one financial institution or commercial issuer.
The Company has not experienced any material losses on its investments.
A majority of the Company's trade receivables are derived from sales to
large multinational semiconductor manufacturers throughout the world.
Concentration of credit risk with respect to trade receivables is considered to
be limited due to its customer base and the diversity of its geographic sales
areas. The Company performs ongoing credit evaluations of its customers'
42
43
financial condition. The Company maintains a provision for potential credit
losses based upon expected collectibility of all accounts receivable.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on the foreign exchange contracts used in hedging activities. The
Company does not anticipate nonperformance by these counterparties.
FOREIGN CURRENCY The functional currencies of the Company's significant
foreign subsidiaries are the local currencies. Accordingly, all assets and
liabilities of the foreign operations are translated to U.S. dollars at current
period end exchange rates, and revenues and expenses are translated to U.S.
dollars using average exchange rates in effect during the period. The gains and
losses from foreign currency translation of these subsidiaries' financial
statements are recorded directly into a separate component of stockholders'
equity under the caption "Accumulated other comprehensive income." Currency
transaction gains and losses have not been significant.
The Company's foreign subsidiaries operate and sell the Company's
products in various global markets. As a result, the Company is exposed to
changes in interest rates and foreign currency exchange rates. The Company
utilizes foreign currency forward exchange contracts to hedge against certain
future movements in foreign exchange rates that affect certain foreign currency
denominated sales and purchase transactions. The Company attempts to match the
forward contracts with the underlying items being hedged in terms of currency,
amount, and maturity. The Company does not use derivative financial instruments
for speculative or trading purposes. Since the impact of movements in currency
exchange rates on forward contracts offsets most of the related impact on the
exposures hedged, these financial instruments generally do not subject the
Company to speculative risk that would otherwise result from changes in currency
exchange rates. Realized gains and losses on forward exchange contracts are
included in "Interest income and other, net," which offset foreign exchange
gains or losses from revaluation of foreign currency-denominated receivable and
payable balances. The cash flows related to gains and losses on these contracts
are classified in the same category as the hedged transactions in the
Consolidated Statements of Cash Flows.
At June 30, 2000, the Company had forward exchange contracts maturing
throughout fiscal 2001 to sell and purchase $289 million and $85 million,
respectively, in foreign currency, primarily Japanese yen. At June 30, 1999, the
Company had forward exchange contracts maturing throughout fiscal 2000 and early
fiscal 2001 to sell and purchase $247 million and $26 million, respectively, in
foreign currency, primarily Japanese yen. Of the forward exchange contracts
existing at June 30, 2000, $181 million and $80 million of contracts hedge
foreign currency assets and liabilities, respectively, were carried on the
consolidated balance sheet as of June 30, 2000, and consequently, the
consolidated financial statements reflect the fair market value of the contracts
and their underlying transactions. Contracts of $108 million and $5 million
hedge firm commitments for future sales and purchases, respectively, denominated
in foreign currency. The fair market value of these contracts on June 30, 2000,
based upon prevailing market rates on that date, was $106 million and $5
million, respectively. As of June 30, 2000, and based on prevailing market rates
on that date, the unrealized loss on outstanding contracts was $2 million.
43
44
REVENUE RECOGNITION KLA-Tencor generally recognizes systems and spares
revenue when the product has been shipped, risk of loss has passed to the
customer and collection of the resulting receivable is probable. A provision for
the estimated costs of fulfilling warranty and installation obligations is
recorded at the time the related revenue is recognized.
Service and maintenance revenue is recognized ratably over the term of
the maintenance contract. If maintenance is included in an arrangement which
includes a license agreement, amounts related to maintenance are allocated based
on vendor specific objective evidence. In situations where maintenance is to be
provided over a period beyond twelve months from the balance sheet date, the
portion of revenue relating to those services is classified as noncurrent
deferred revenue. Consulting and training revenue is recognized when the related
services are performed.
Revenue from license fees is typically recognized upon shipment of the
software if collection of the resulting receivable is probable, the fee is fixed
or determinable, and vendor-specific objective evidence exists to allocate a
portion of the total fee to any undelivered elements of the arrangement. Such
undelivered elements in these arrangements typically consist of services. If
vendor-specific objective evidence does not exist to allocate the total
delivered and undelivered elements of the arrangement, revenue is deferred until
such evidence does exist, or until all elements are delivered, whichever is
earlier. In instances where an arrangement to deliver software requires
significant modification or customization, license fees are recognized under the
percentage of completion method of contract accounting. Allowances are
established for potential product returns and credit losses. If a license of
software requires customer acceptance, revenue is recognized upon the earlier of
customer acceptance or the expiration of the acceptance period. To date,
revenues from license fees has been less than ten percent of total revenues
ADVERTISING EXPENSES The Company expenses advertising costs as
incurred. Advertising expenses for fiscal 2000, 1999 and 1998 were approximately
$6 million, $4 million and $6 million respectively.
STRATEGIC DEVELOPMENT AGREEMENTS Net engineering, research and
development expenses were partially offset by $16 million, $14 million and $11
million in external funding received under certain strategic development
programs conducted with several of the Company's customers in fiscal 2000, 1999
and 1998, respectively.
INCOME TAXES KLA-Tencor accounts for income taxes under an asset and
liability approach. Deferred tax liabilities are recognized for future taxable
amounts and deferred tax assets are recognized for future deductions, net of a
valuation allowance to reduce deferred tax assets to amounts that are more
likely than not to be realized.
EARNINGS PER SHARE Basic earnings per share is computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed by
using the weighted average number of common shares outstanding during the period
and gives effect to all dilutive potential common shares outstanding during the
period. The reconciling difference between the computation of basic and
44
45
diluted earnings per share for all periods presented is the inclusion of the
dilutive effect of stock options issued to employees under employee stock option
plans.
Options to purchase 211,009, 1,520,574 and 2,157,416 shares were
outstanding at June 30, 2000, 1999 and 1998 respectively, but not included in
the computation of diluted EPS because the exercise price was greater than the
average market price of common shares in each respective year. The exercise
price ranges of these options were $56.31 to $68.00, $21.13 to $34.94 and $24.03
to $34.94 at June 30, 2000, 1999 and 1998, respectively.
STOCK-BASED COMPENSATION PLANS The Company accounts for its employee
stock option plans and employee stock purchase plan in accordance with
provisions of the Accounting Principles Board's Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company provides additional proforma disclosure
required by SFAS No. 123, "Accounting for Stock-Based Compensation" (see Note
6).
RECLASSIFICATIONS Certain amounts in fiscal years prior to 2000 have
been reclassified to conform to the 2000 financial statement presentation.
RECENT ACCOUNTING PRONOUNCEMENTS In June 1999, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
137 (SFAS No. 137), "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No.
137 amends Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities," to defer its
effective date to all fiscal quarters of all fiscal years beginning after June
15, 2000. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments including standalone instruments, such as forward
currency exchange contracts and interest rate swaps or embedded derivatives,
such as conversion options contained in convertible debt investments and
requires that these instruments be marked-to-market on an ongoing basis. Along
with the derivatives, the underlying hedged items are also to be
marked-to-market on an ongoing basis. These market value adjustments are to be
included either in the income statement or in stockholders' equity, depending on
the nature of the transaction. The Company currently only participates in hedge
transactions of assets, liabilities and firm commitments and does not anticipate
that the adoption of this Statement will have a material impact on the financial
statements as the gains and losses on the hedge transactions offset the losses
and gains on the underlying items being hedged. The Company is required to adopt
SFAS No. 133 in the first quarter of our fiscal year ending June 30, 2001. The
effect of adopting SFAS No. 133 is not expected to be material to the Company's
financial statements.
In March 2000, the FASB issued interpretation No. 44 (FIN 44),
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25." This Interpretation clarifies the FASB's views in
applying Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees" to certain stock compensation awards. FIN 44 is effective
July 1, 2000, however certain conclusions in this Interpretation cover specific
events that occur after December 15, 1998. To the extent this Interpretation
covers events occurring during the period after December 15, 1998, but before
the effective date of July 1, 2000, the effects of applying
45
46
this Interpretation are recognized on a prospective basis from July 1, 2000. The
implementation of FIN 44 is not expected to have any material impact on the
Company's financial statements.
In June 2000, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101B (SAB 101B), "Second Amendment: Revenue Recognition
in Financial Statements." SAB 101B amends Staff Accounting Bulletin No. 101 (SAB
101) "Revenue Recognition in Financial Statements," to defer the implementation
date of SAB 101 for registrants until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. SAB 101 summarizes certain of
the SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements of all public companies. The Company is
required to adopt SAB 101 in the fourth quarter of its fiscal year ending June
30, 2001. Accordingly, any shipments previously reported as revenue, including
revenue reported for the first three quarters of fiscal 2001, that do not meet
SAB 101's guidance will be recorded as revenue in future periods. Changes in our
revenue recognition policy resulting from the interpretation of SAB 101 would
not involve the restatement of prior fiscal year statements, but would, to the
extent applicable, be reported as a change in accounting principle in the fiscal
year ending June 30, 2001, with the appropriate restatement of interim periods
as required by SFAS No. 3 "Reporting Accounting Changes in Interim Financial
Statements." The Company's reported results of operations for the 12 months
ending June 30, 2001 will include a cumulative adjustment for all prior annual
and interim periods including an adjustment for revenue reported in the first
quarter of fiscal 2001 as if SAB 101 had been adopted on July 1, 2000. The
Company, in conjunction with the semiconductor capital equipment industry
association is seeking clarification on the requirements of SAB 101 as they
relate to the semiconductor capital equipment industry. Management believes that
SAB 101 and 101B, to the extent that they impact us, will not affect the
underlying strength or weakness of our business operations as measured by the
dollar value of our product shipments and cash flows.
NOTE 2 - FINANCIAL STATEMENT COMPONENTS
BALANCE SHEETS
June 30, (in thousands) 1999 2000
- ------------------------------------------------------------------------------
Accounts receivable, net
Accounts receivable, gross $ 296,708 $ 496,739
Allowance for doubtful accounts (16,638) (14,789)
- --------------------------------------------------------------------------------
$ 280,070 $ 481,950
================================================================================
Inventories:
Customer service parts $ 41,276 $ 54,442
Raw materials 45,906 83,103
Work-in-process 52,913 82,922
Demonstration equipment 37,469 50,817
Finished goods 18,115 11,205
- --------------------------------------------------------------------------------
$ 195,679 $ 282,489
================================================================================
46
47
Property and equipment:
Land $ 16,187 $ 16,187
Buildings and improvements 30,370 20,860
Machinery and equipment 183,135 183,985
Office furniture and fixtures 24,742 26,977
Leasehold improvements 64,461 94,466
- --------------------------------------------------------------------------------
318,895 342,475
Less: accumulated depreciation
and amortization (150,560) (142,756)
- --------------------------------------------------------------------------------
$168,335 $ 199,719
================================================================================
Other current liabilities:
Warranty, installation and retrofit $ 44,665 $ 79,874
Compensation and benefits 122,851 180,365
Unearned revenue 20,055 22,412
Income taxes payable 59,934 88,037
Restructuring accrual 16,930 1,686
Other accrued expenses 38,066 67,437
- --------------------------------------------------------------------------------
$302,501 $ 439,811
================================================================================
Accumulated other comprehensive income:
Currency translation adjustments $ (6,048) $ (3,146)
Unrealized gains on investments, net 11,231 16,811
- --------------------------------------------------------------------------------
$ 5,183 $ 13,665
================================================================================
STATEMENTS OF OPERATIONS
Year ended June 30, (in thousands) 1998 1999 2000
- ------------------------------------------------------------------------------------------------
Interest income and other, net
Interest income $ 42,588 $ 38,403 $ 39,335
Interest expense (3,166) (1,293) (698)
Foreign exchange gain 248 1,136 3,791
Realized gain/(loss) on sale of securities --- 18,819 (5,306)
Other 2,010 3,578 4,414
- -------------------------------------------------------------------------------------------------
$ 41,680 $ 60,643 $ 41,536
=================================================================================================
47
48
NOTE 3 - NON-RECURRING ACQUISITION, RESTRUCTURING AND OTHER CHARGES
ACQUISITIONS
For the year ended June 30, 2000
In March 2000, we purchased assets and related technology of Fab
Solutions, a division of ObjectSpace, Inc., for an aggregate purchase price of
$8 million. Fab Solutions is a leading provider of advanced process control
software solutions used to respond to yield-impacting parametric data in
near-real time. We recorded a charge of $0.8 million for purchased in-process
research and development, representing the appraised value of products that were
not considered to have reached technological feasibility.
In February 2000, we acquired software developer FINLE Technologies,
Inc., a supplier of lithography modeling and data analysis software used to
speed development of advanced lithography processes required to develop and
produce integrated circuits with 0.12 micron and smaller geometries, for an
aggregate purchase price of $5 million. We recorded a charge of $0.5 million for
purchased in-process research and development, representing the appraised value
of products that were not considered to have reached technological feasibility.
In November 1999, we acquired software developer ACME Systems, Inc., a
leading supplier of yield engineering analysis software used to correlate
parametric electrical test and wafer sort yield data with in-line Work In
Process and Metrology data, for an aggregate purchase price of $6.9 million. We
recorded a charge of $1.9 million for purchased in-process research and
development, representing the appraised value of products that were not
considered to have reached technological feasibility.
To determine the value of the in-process technology of the fiscal 2000
acquisitions, the expected future cash flow attributable to the in-process
technology was discounted, taking into account the percentage of completion,
utilization of pre-existing technology, risks related to the characteristics and
applications of the technology, existing and future markets, and technological
risk associated with completing the development of the technology. The valuation
approach used was a form of discounted cash flow approach commonly known as the
"percentage of completion" approach whereby the cash flows from the technology
are multiplied by the percentage of completion of the in-process technology. In
each acquisition, the value of tangible net assets acquired was nominal.
For the year ended June 30, 1999
In December 1998, the Company purchased a confocal review station
product and related technology from Uniphase Corporation for an aggregate
purchase price of $3 million. Assets acquired of $3 million consisted primarily
of inventory.
48
49
In November 1998, the Company purchased assets and technology from
Keithley Instruments, Inc. for an aggregate purchase price of $10 million. The
corona wire gate oxide monitoring tool technology we acquired had not yet
reached the alpha stage and the cost to complete the development of this
equipment was estimated at the time of acquisition to be $1 million. The Company
recorded a charge of $8 million for purchased in-process research and
development, representing the appraised value of product that was not considered
to have reached technological feasibility.
In June 1998, we acquired Groff Associates, Inc. (dba VARS Inc.) for an
aggregate purchase price of $13 million. The digital and in-line-monitoring
image archiving retrieval software technology we acquired had not yet reached
the alpha stage and the cost to complete the development of these software
products was estimated at the time of acquisition to be $2 million. We recorded
a charge of $13 million for purchased in-process research and development,
representing the appraised value of products that were not considered to have
reached technological feasibility.
In May 1998 we acquired DeviceWare, Inc., a company in its development
stage, for an aggregate purchase price of $3 million. The bit mapping defect
characterization technology acquired had not yet reached the alpha stage and the
cost to complete the development of this software product was estimated at the
time of acquisition to be $1 million. We recorded a charge of $3 million for
purchased in-process research and development, representing the appraised value
of product that was not considered to have reached technological feasibility.
For each of the above three fiscal 1999 transactions, the appraised
value under the income approach used for our calculation did not differ
materially from the result under the percentage of completion approach preferred
by the Securities and Exchange Commission. The value of the tangible net assets
acquired was nominal.
Each of the above acquisitions was accounted for using the purchase
method of accounting and the developmental products acquired were evaluated in
the context of Interpretation 4 of SFAS No. 2 and SFAS No. 86. The allocation of
the purchase price to in-process research and development cost was determined by
identifying research projects in areas for which technological feasibility had
not been established and no alternative future uses existed. Substantially all
of the in-process research and development projects acquired were expected to be
complete and generating revenues within the 24 months following the acquisition
date.
For the year ended June 30, 1998
In February 1998, we acquired Nanopro GmbH (Freiburg, Germany) for an
aggregate purchase price of $3 million. This privately-held company specialized
in the development of advanced interferometric wafer inspection. The identified
in-process research and development of $3 million was estimated and expensed,
because technological feasibility of the advanced interferometric wafer
technology had not yet been reached. The appraised value under the income
approach used for our calculation did not differ materially from the result
under the percentage of completion approach preferred by the Securities and
Exchange Commission. The technology
49
50
acquired had not reached commercial feasibility as of June 30, 1999. The value
of the tangible net assets acquired was nominal.
In April 1998, we acquired Amray, Inc. (Amray) for 1,800,000 shares of
our common stock accounted for under the pooling of interest method of
accounting. A privately-owned provider of scanning electron microscope systems,
Amray's historical operations, net assets, and cash flows were less than 3% of
our consolidated financial results and, therefore, were not reflected in the
consolidated financial results prior to the acquisition.
Development of acquired technologies remains a significant risk due to
the remaining effort required to achieve technical feasibility, rapidly changing
customer markets and significant competitive threats from numerous companies.
Failure to bring any of these products to market in a timely manner could
adversely affect our sales and profitability in the future. Additionally, the
value of net assets and other intangible assets acquired may become impaired.
RESTRUCTURING AND OTHER CHARGES
In November 1998, the Company entered into a restructuring plan to
address the downturn in the semiconductor industry. The plan included a
consolidation of facilities, a write-down of assets associated with affected
programs and a reduction in the Company's global workforce, resulting in a
restructuring charge of $35 million. Restructuring costs have been assigned to
four main categories including facilities, inventory, severance and benefits,
and other restructuring charges. Facilities costs totaling $12 million include
$8 million for lease expense resulting from consolidation and closure of certain
offices located primarily in the U.S. and Japan; $3 million for leasehold
improvements in those facilities; and $1 million in other facilities-related
exit costs. Inventory-related costs of $10 million are assets related to unique
parts and non-cancelable purchase commitments of certain development programs
which were terminated as part of the realignment and streamlining of the
Company's product lines. Severance and benefit-related costs totaling $8 million
included involuntary termination of approximately 250 personnel from
manufacturing, engineering, sales, marketing, and administration throughout the
U.S., Japan and Europe during fiscal 1999. Other restructuring costs of $5
million relate primarily to the write-off of software licenses and related
non-cancelable maintenance contracts for closed locations.
During fiscal year 2000, KLA-Tencor management determined that $7.8
million of the restructure reserve would not be utilized because of a change in
management's plans for utilization of certain facilities resulting from an
increase in demand for the Company's products. Accordingly, the restructuring
reserve reversal was included in the determination of income from operations for
the year ended June 30, 2000.
50
51
The following table sets forth the restructuring reserve since inception:
Severance
(in thousands) Facilities Inventory and Benefits Other Total
- ----------------------------------------------------------------------------------------------------------
Restructuring provision -
November 1998 $ 12,491 $ 9,721 $ 8,126 $ 4,662 $ 35,000
Write-down of assets (2,035) (6,729) -- (3,168) (11,932)
Cash expenditure (2,109) (409) (2,620) (1,000) (6,138)
- ----------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 8,347 2,583 5,506 494 16,930
Write-down of assets (326) (2,304) (339) (494) (3,463)
Non-cash stock compensation -- -- (2,952) -- (2,952)
Cash expenditure (398) -- (593) -- (991)
Reserve Reversal (6,978) (279) (581) -- (7,838)
- ----------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $ 645 $ -- $ 1,041 $ -- $ 1,686
==========================================================================================================
The remaining balance at June 30, 2000 consists of payments under
certain contractual obligations which existed as of the date of the plan was
executed and certain severance agreements.
NOTE 4 - INVESTMENTS
The amortized costs and estimated fair value of securities available
for sale as of June 30, 1999 and 2000 are as follows:
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1999 (in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasuries $ 53,097 $ 85 $ 728 $ 52,454
Mortgage-backed securities 40,522 51 421 40,152
Municipal bonds 386,719 1,358 2,416 385,661
Corporate debt securities 63,880 18 517 63,381
Corporate equity securities 5,931 21,164 -- 27,095
Other 93,075 123 357 92,841
- -------------------------------------------------------------------------------------------------------------------
643,224 22,799 4,439 661,584
Less: Cash equivalents 177,891 -- 2 177,889
Short-term investments 38,361 21,232 19 59,574
- -------------------------------------------------------------------------------------------------------------------
Long-term investments $ 426,972 $ 1,567 $ 4,418 $ 424,121
===================================================================================================================
51
52
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 2000 (in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasuries $ 33,545 $ 24 $ 348 $ 33,221
Mortgage-backed securities 37,282 2 663 36,621
Municipal bonds 580,328 633 1,236 579,725
Corporate debt securities 187,919 28 563 187,384
Corporate equity securities 26,047 14,427 45 40,429
Other 33,216 -- -- 33,216
- -------------------------------------------------------------------------------------------------------------------
898,337 15,114 2,855 910,596
Less: Cash equivalents 424,429 -- 4 424,425
Short-term investments 105,569 14,455 92 119,932
- -------------------------------------------------------------------------------------------------------------------
Long-term investments $ 368,339 $ 659 $ 2,759 $ 366,239
===================================================================================================================
The contractual maturities of securities classified as available for
sale as of June 30, 2000, regardless of the consolidated balance sheet
classification, are as follows:
Estimated
June 30, 2000 (in thousands) Fair Value
- -----------------------------------------------------------
Due within one year $ 528,685
Due after one year through five years 278,717
Due after five years 62,765
- -----------------------------------------------------------
$ 870,167
============================================================
Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Net realized gains and losses for the years ended June
30, 1999 and 2000 were not material to the Company's financial position or
results of operations.
NOTE 5 - INCOME TAXES
The components of income before income taxes are as follows:
Year ended June 30, (in thousands) 1998 1999 2000
- ----------------------------------------------------------------------------------------------
Domestic income before income taxes $ 172,964 $ 30,097 $ 311,240
Foreign income before income taxes 33,347 20,212 41,837
- -----------------------------------------------------------------------------------------------
Total net income before taxes $ 206,311 $ 50,309 $ 353,077
===============================================================================================
52
53
The provision (benefit) for income taxes are comprised of the following:
Year ended June 30, (in thousands) 1998 1999 2000
- ------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 94,402 $ 22,902 $ 121,639
State 13,598 7,040 23,187
Foreign 10,440 9,085 14,975
- -------------------------------------------------------------------------------------------------------------------
118,440 39,027 159,801
Deferred:
Federal (42,149) (22,256) (44,893)
State (4,376) (6,273) (13,958)
Foreign 300 599 (1,671)
- --------------------------------------------------------------------------------------------------------------------
(46,225) (27,930) (60,522)
- --------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 72,215 $ 11,097 $ 99,279
===================================================================================================================
Actual current tax liabilities are lower than reflected above for
fiscal years 1998, 1999 and 2000 by $21 million, $14 million and $132 million,
respectively, due to the stock option deduction benefits recorded as credits to
capital in excess of par value.
The significant components of deferred income tax assets (liabilities) are as
follows:
June 30, (in thousands) 1999 2000
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Federal and state loss and credit carryforwards $ 5,231 $ 37,796
Employee benefits accrual 27,889 32,834
Non-deductible reserves and other 119,035 144,065
- -------------------------------------------------------------------------------------------------------------------
152,155 214,695
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (6,202) (7,473)
Unremitted earnings of foreign subsidiaries not
permanently reinvested (12,138) (12,070)
Unrealized gain on investments (7,104) (10,613)
Other (2,840) (4,952)
- --------------------------------------------------------------------------------------------------------------------
(28,284) (35,108)
- --------------------------------------------------------------------------------------------------------------------
Deferred tax assets valuation allowance (1,298) --
- -------------------------------------------------------------------------------------------------------------------
Total net deferred tax assets $ 122,573 $ 179,587
===================================================================================================================
53
54
The reconciliation of the United States federal statutory income tax
rate to the Company's effective income tax rate is as follows:
Year ended June 30, 1998 1999 2000
- -------------------------------------------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 2.9 1.0 1.7
Effect of foreign operations taxed at various rates (0.1) 4.8 (0.6)
Benefit from Foreign Sales Corporation (2.8) (3.3) (2.9)
Research and development tax credit (1.7) (1.2) (2.5)
Merger and acquisition costs 3.0 -- --
Tax exempt interest (2.6) (11.8) (1.6)
Other 1.3 (2.4) (1.0)
- -------------------------------------------------------------------------------------------------------------------
Provision for Income Taxes 35.0% 22.1% 28.1%
===================================================================================================================
Undistributed earnings of certain of the Company's foreign
subsidiaries, for which no United States federal income taxes have been
provided, aggregated $20 million at June 30, 2000. The amount of the
unrecognized deferred tax expense related to the investments in foreign
subsidiaries is estimated at $5.5 million at June 30, 2000.
The IRS is currently auditing the Company's federal income tax returns
for fiscal 1995 to 1996. Management believes sufficient taxes have been provided
in prior years and that the ultimate outcome of the IRS audits will not have a
material adverse impact on the Company's financial position or results of
operations.
NOTE 6 - STOCKHOLDERS' EQUITY AND EMPLOYEE BENEFITS
STOCKHOLDER'S RIGHTS PLAN In March 1989, the Company implemented a plan
to protect stockholders' rights in the event of a proposed takeover of the
Company. The Plan was amended in April, 1996. The Plan provides that if any
person or group acquires 15% or more of the Company's common stock, each Right
not owned by such person or group will entitle its holder to purchase, at the
then-current exercise price, the Company's common stock at a value of twice that
exercise price. As amended to date, under the Plan, the rights are redeemable at
the Company's option for $0.01 per right and expire in April 2006.
STOCK REPURCHASE PROGRAM In July 1997, the Board of Directors
authorized the Company to systematically repurchase shares of its common stock
in the open market. This plan was entered into to reduce the dilution from the
Company's employee benefit and incentive plans such as the stock option and
employee stock purchase plans. In fiscal years 2000, 1999 and 1998, the Company
repurchased 520,000, 2,152,000 and 756,000 shares at an average price of $53.80,
$22.66 and $21.22 per share, respectively. At June 30, 2000, 463,200 shares are
authorized for repurchase under this program.
54
55
STOCK SPLIT For shareholders of record on January 4, 2000, the Company
effected a two-for-one stock split of its common stock in the form of a 100
percent stock dividend. The stock dividend was paid on January 18, 2000. All
prior-period share and per share amounts have been adjusted to reflect this
transaction retroactively.
EMPLOYEE STOCK PURCHASE PLAN The Company's employee stock purchase plan
provides that eligible employees may contribute up to 10% of their base earnings
toward the semi-annual purchase of the Company's common stock. The employee's
purchase price is derived from a formula based on the fair market value of the
common stock. No compensation expense is recorded in connection with the plan.
In fiscal years 2000, 1999 and 1998, employees purchased 1,935,031, 1,639,334
and 1,765,738 at a weighted average fair value of shares issued of $13.28, $5.24
and $5.60, respectively. At June 30, 2000, 533,577 shares were reserved and
available for issuance under this plan.
STOCK OPTION AND INCENTIVE PLANS The Company has authorized 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 June 30, 2000, only stock options have been awarded under the
plans.
Under the Company's stock option plans, options generally have vesting
periods of four years, are exercisable for a period not to exceed ten years from
the date of issuance and are granted at prices not less than the fair market
value of the Company's common stock at the grant date.
In August 1998, employees of the Company, excluding certain executive
officers, holding options with exercise prices of $14.00 or higher were granted
the opportunity to surrender those options and replace them with new options
having an exercise price of $10.63, the fair market value of the Company's stock
on that date, and begin a new vesting schedule from the date of grant. In
addition, in October 1998, certain executive officers were granted the
opportunity to surrender their options and replace them with a reduced number of
options having an exercise price of $16.97, the fair market value on that date,
and begin a new vesting schedule from the date of grant. A total of 8,359,934
options were repriced.
The activity under the option plans, combined, was as follows:
Weighted-
Available Options Average
For Grant Outstanding Price
- --------------------------------------------------------------------------------------------------
Balances at June 30, 1997 4,251,676 20,521,932 $ 10.33
Additional shares reserved 5,003,206 -- --
Options granted (7,259,776) 7,259,776 23.22
Options canceled/expired 1,503,420 (1,831,828) 15.28
Options exercised -- (2,760,350) 5.17
- --------------------------------------------------------------------------------------------------
55
56
Balances at June 30, 1998 3,498,526 23,189,530 14.56
Additional shares reserved 7,237,674 -- --
Options granted (15,311,226) 15,311,226 12.12
Options canceled/expired 11,083,092 (11,083,092) 21.03
Options exercised -- (2,989,360) 7.71
- ------------------------------------------------------------------------------------------------
Balances at June 30, 1999 6,508,066 24,428,304 10.92
Additional shares reserved 5,320,924 -- --
Options granted (8,165,856) 8,165,856 37.35
Options canceled/expired 1,483,568 (1,551,794) 18.62
Options exercised -- (8,686,654) 9.50
- ------------------------------------------------------------------------------------------------
Balances at June 30, 2000 5,146,702 22,355,712 $ 20.23
================================================================================================
The options outstanding at June 30, 2000 have been segregated into
ranges for additional disclosure as follows:
Options Vested
Options Outstanding and Exercisable
- --------------------------------------------------------------------------- -----------------------------------
Weighted- Weighted- Weighted-
Number Average Average Average
Range of of Shares Remaining Exercise Number Exercise
Exercise Outstanding at Contract Life Price at Vested and Price at
Prices June 30, 2000 (in years) June 30, 2000 Exercisable June 30, 2000
- --------------------------------------------------------------------------- -----------------------------------
$ 1.75-$ 8.81 727,658 3.99 $ 5.54 727,658 $ 5.54
$ 8.88-$ 9.31 1,226,738 4.24 $ 9.29 1,161,303 $ 9.30
$ 9.53-$10.63 8,590,944 8.12 $ 10.60 2,968,640 $ 10.55
$10.81-$11.03 1,659,496 6.33 $ 10.85 733,514 $ 10.85
$11.23-$16.97 1,536,149 7.92 $ 15.71 680,713 $ 14.98
$17.03-$31.47 1,616,098 8.48 $ 24.81 452,484 $ 22.62
$33.75-$33.75 5,450,764 9.33 $ 33.75 -- $ --
$34.94-$68.00 1,547,865 9.65 $ 51.32 53,437 $ 45.55
- -------------------------------------------------------------------------------------------------------------
$ 1.75-$68.00 22,355,712 8.05 $ 20.23 6,777,749 $ 11.36
=============================================================================================================
The weighted average fair value of options granted in fiscal years
2000, 1999 and 1998 was $24.15, $7.47 and $13.18, respectively. Options
exercisable were 6,777,749, 7,484,476 and 10,223,824 as of June 30, 2000, 1999
and 1998, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION Pro forma information regarding
net income and net income per share is required by SFAS 123, and has been
determined as if the Company had accounted for its employee stock purchase plan
and employee stock options granted subsequent to June 30, 1995, under the fair
value method of SFAS 123. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model for the single
option approach with the following weighted-average assumptions:
56
57
June 30, 1998 1999 2000
- ------------------------------------------------------------------------------------------------
Stock option plan:
Expected stock price volatility 55.0% 65.0% 70.0%
Risk free interest rate 5.8% 5.0% 6.3%
Expected life of options (in years) 5.6 5.6 5.3
Stock purchase plan:
Expected stock price volatility 55.0% 65.0% 70.0%
Risk free interest rate 5.4% 4.8% 6.3%
Expected life of options (in years) 1-2 1-2 1-2
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock option and employee stock
purchase plans have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of such
Company options.
For purposes of pro forma disclosures required by SFAS 123, the
estimated fair value of the options is amortized to expense over the options'
vesting periods. The Company's pro forma information is as follows:
Year ended June 30,
(in thousands, except per share data) 1998 1999 2000
- ------------------------------------------------------------------------------------------------
Pro-forma net income $ 106,882 $ 5,278 $ 197,610
Pro-forma earnings per share:
Basic $ 0.63 $ 0.03 $ 1.08
Diluted $ 0.62 $ 0.03 $ 1.05
The pro forma effect on net income and earnings per share for fiscal
years 2000, 1999 and 1998 is not representative of the pro forma effect net
income in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to fiscal 1996.
OTHER EMPLOYEE BENEFIT PLANS The Company has a profit sharing program
for eligible employees which distributes, on a quarterly basis, a percentage of
pretax profits. In addition, the Company has an employee savings plan that
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. During fiscal years 1998 and 1999, the Company matched
dollar-for-dollar up to $500 of an eligible employee's contribution. During
fiscal year 2000, the Company matched $0.25 per dollar up to $1000 of an
eligible employee's contribution, with $500 of
57
58
the amount funded from the profit sharing program. The total charge to
operations under the profit sharing and 401(k) programs aggregated $38 million,
$7 million and $22 million in fiscal years 2000, 1999 and 1998, respectively.
The Company has a non-qualified deferred compensation plan whereby
certain key executives may defer a portion of their salary and bonus.
Participants direct the investment of their account balances among mutual funds
selected by the participants. Distributions from the plan commence the quarter
following a participant's retirement or termination of employment. At June 30,
2000, the Company had a deferred compensation liability under the plan of $54
million.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
FACTORING The Company has an agreement with a bank to sell, with
recourse, certain of its trade receivables. The total amount of the facility is
the yen equivalent of $80 million based upon exchange rates as of June 30, 2000.
During fiscal 2000, approximately $83.4 million of receivables were sold under
this arrangement. As of June 30, 2000, approximately $51.9 million were
outstanding. The Company does not believe it is materially at risk for any
losses as a result of this agreement.
LINE OF CREDIT The Company has revolving lines of credit with two
banks, which expire at various dates through October 2000 under which the
Company can borrow up to $30 million. The first line, for $15 million, bears
interest at LIBOR plus 0.85% (7.46% at June 30, 2000). The second line, for $15
million, bears interest at the higher of the announced base rate or the Fed
funds rate plus 0.5% (7.0% at June 30, 2000). At June 30, 2000, no amounts were
outstanding.
FACILITIES In November 1997, the Company entered into a master
operating lease for land, office and manufacturing facilities constructed for
its use in Milpitas and San Jose, California. Monthly payments under this lease
vary based upon the London Interbank Offering Rate (LIBOR) plus 0.42%. The Lease
runs through November of 2002, with an option to extend up to two more years.
Under the terms of the lease, the Company, at its option, can acquire the
properties at their original cost or arrange for the properties to be acquired.
In April 1999, the Company chose to exercise its option to purchase certain of
the land and facilities for a total aggregate value of approximately $27.4
million. If the Company does not purchase the remaining properties by the end of
the lease, the Company will be contingently liable to the lessor for residual
value guarantees aggregating up to approximately $100.2 million. In addition,
under the terms of the lease, the Company must maintain compliance with certain
financial covenants. As of June 30, 2000, the Company was in compliance with all
of its covenants. Based on current market conditions, management does not
believe that the Company will have to make any significant payments under the
contingent liability relating to the residual value guarantees.
The Company leases several other facilities under operating leases that
expire at various times through fiscal 2012, with renewal options at the fair
market value for additional periods up to five years. The Company also leases
equipment and other facilities under operating leases.
58
59
Total rent expense under all operating leases was approximately $17.5
million, $17.7 million and $17.5 million for the years ended June 30, 2000, 1999
and 1998, respectively (which includes lease payments for the Company's Milpitas
and San Jose, California facilities).
Future minimum lease commitments under these operating leases at June
30, 2000 (which include estimated lease payments for the Company's Milpitas and
San Jose, California, facilities using a LIBOR of 7.17% and total construction
costs of $119.3 million), are approximately $17.5 million, $15.6 million, $7.4
million, $3.1 million, $2.0 million, and $4.5 million in fiscal 2001 through
2005 and thereafter, respectively.
LAND PURCHASE In May 2000, the Company entered into an agreement to
purchase up to 43 acres of land in Livermore, California to build a new campus.
The initial 31 acre parcel of land is scheduled to be purchased in the first
quarter of fiscal 2001, for approximately $15.1 million (See Note 10). The
Company holds an option to purchase the remaining 12 acres for approximately
$5.7 million, which expires at the end of calendar 2001. The Company is
obligated for assessments not to exceed approximately $3.4 million and $1.3
million for construction on the 31 acre and 12 acre lots, respectively.
LEGAL MATTERS From time to time the Company is named as a party to
lawsuits in the normal course of our business. Litigation, in general, and
intellectual property and securities litigation in particular, can be expensive
and disruptive to normal business operations. Moreover, the results of complex
legal proceedings are difficult to predict. The Company believes that it has
defenses in each of the cases set forth below and are vigorously contesting each
of these matters.
Therma-Wave, Inc.
Therma-Wave I: On September 3, 1998, we initiated a patent infringement
suit against Therma-Wave, Inc. alleging that certain products manufactured by
Therma-Wave infringe a patent relating to film thickness measuring technology.
On January 14, 1999, Therma-Wave filed a counterclaim against KLA-Tencor for
patent infringement with respect to one of its thin film technology patents. We
believe that the allegations contained in the counterclaim are unfounded and
intend to vigorously defend our position, and we have meritorious defenses to
those counterclaims. We believe that even if the outcome of the litigation is
adverse to us it will not have a material adverse effect on our business,
financial condition or results of operations.
Therma-Wave II: On July 22, 1999, we filed a second action against
Therma-Wave in which we alleged that Therma-Wave infringes another patent
relating to thin film thickness measuring technology. We are seeking damages and
an injunction to stop the sale of the equipment that employs the infringing
technology. On October 25, 1999, Therma-Wave filed a counterclaim against
KLA-Tencor for patent infringement with respect to two patents relating to
optical measurement systems. The counterclaim also includes allegations that
KLA-Tencor engaged in a pattern of conduct designed to disparage and improperly
damage Therma-Wave. We believe that the allegations contained in the
counterclaim are unfounded, we intend to vigorously defend our position, and we
have meritorious defenses to those counterclaims. We believe that the outcome
59
60
from such litigation, even if adverse to us, would not have a material adverse
effect on our business, financial condition or results of operations.
Schlumberger, Inc. and Rigg Systems
On August 30,1999, we were named as a defendant in a lawsuit in which
Schlumberger, Inc. alleges trade secret misappropriation, unfair competition and
trade slander. On July 21, 2000, the court granted our motion for summary
judgment dismissing the case. Schlumberger, Inc. subsequently filed a motion for
reconsideration of that dismissal and we are awaiting a ruling on that motion.
Although the outcome of these claims cannot be predicted with certainty, we do
not believe that this legal matter will have a material adverse effect on our
financial condition even if plaintiff prevails. On January 26, 2000, we filed a
complaint against Philip Rigg, RIGG Systems and Schlumberger, Inc. for
misappropriation of trade secrets, breach of contract, breach of fiduciary duty,
interference with contract, and unfair competition. The defendants filed
cross-complaints on June 5, 2000 asserting various statutory and common law
theories. Although the outcome of these claims cannot be predicted with
certainty, we do not believe that this legal matter will have a material adverse
effect on our financial condition or results of operations even if the plaintiff
prevails.
NOTE 8 -- SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting information about operating segments in annual financial
statements and requires that certain selected information about operating
segments be reported in interim financial reports. It also establishes standards
for related disclosures about products and services, and geographic areas.
Operating segments are defined as components of an enterprise about which
separate financial information is evaluated regularly by the chief operating
decision maker, or decision-making group, in deciding how to allocate resources
and in assessing performance. The Company's chief operating decision makers are
the Chief Executive Officer and the Chief Operating Officer. SFAS No. 131
differs from the previous accounting standard SFAS No. 14, which required
companies to disclose certain financial information about each industry segment
in which they operate.
The Company is engaged primarily in designing, manufacturing, and
marketing yield management and process monitoring systems for the semiconductor
industry. All operating units have been aggregated due to their
inter-dependencies, commonality of long-term economic characteristics, products
and services, the production processes, class of customer and distribution
processes. Since the Company operates in one segment, all financial segment
information required by SFAS 131 can be found in the consolidated financial
statements.
The Company's significant operations outside the United States include
a manufacturing facility in Israel and sales, marketing and service offices in
Western Europe, Japan, and the Asia Pacific region. For geographical reporting,
revenues are attributed to the geographic location in which the customer is
located. No single customer accounted for 10% or more of net revenues or
accounts receivable in any of the periods presented. Long-lived assets consist
of net property and equipment, goodwill, capitalized software and other
intangibles, and other long-term assets,
60
61
excluding long-term deferred tax assets and are attributed to the geographic
location in which they are located. The following is a summary of operations by
entities located within the indicated geographic areas for fiscal years 1998,
1999 and 2000.
Year ended June 30, (in thousands) 1998 1999 2000
- --------------------------------------------------------------------------------
Revenues:
United States $ 513,065 $338,791 $ 448,022
Western Europe 147,070 133,099 222,186
Japan 291,175 198,196 309,062
Taiwan 141,895 87,883 299,442
Asia Pacific 73,120 85,212 220,100
- --------------------------------------------------------------------------------
Total $1,166,325 $843,181 $1,498,812
================================================================================
June 30, (in thousands) 1998 1999 2000
- --------------------------------------------------------------------------------
Long-lived assets:
United States $ 149,776 $183,332 $ 240,148
Western Europe 9,062 7,785 8,059
Japan 13,044 13,068 11,012
Taiwan 1,418 1,162 2,469
Asia Pacific 3,488 3,439 5,703
- --------------------------------------------------------------------------------
Total $ 176,788 $208,786 $ 267,391
================================================================================
NOTE 9 - SUBSEQUENT EVENT
On August 15, 2000, the Company closed on the purchase of a 31 acre
parcel of land in Livermore, California for approximately $15.1 million (See
Note 7). Construction on the land is scheduled to begin in the first quarter of
fiscal 2001.
61
62
NOTE 10 - QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
The following table presents certain unaudited consolidated quarterly
financial information for the eight quarters ended June 30, 2000. In our
opinion, this information has been prepared on the same basis as the audited
consolidated financial statements appearing elsewhere in this Form 10-K and
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the unaudited quarterly results of operations set
forth herein.
(In thousands, except
per share data) September 30 December 31 March 31 June 30
- -------------------------------------------------------------------------------------------------------------------
Fiscal 1999:
Revenues $ 205,230 $ 193,371 $ 210,939 $ 233,641
Gross profit 92,575 88,462 100,259 114,826
Income (loss) from operations (2,924) (42,674)(1) 12,964 22,300
Net income (loss) 10,180 (17,597)(1) 20,782 25,847
Net income (loss) per share:
Basic $ 0.06 $ (0.10) (1) $ 0.12 $ 0.15
Diluted $ 0.06 $ (0.10) (1) $ 0.11 $ 0.14
Fiscal 2000:
Revenues $ 272,989 $ 330,757 $ 413,017 $ 482,049
Gross profit 136,872 177,384 231,645 275,106
Income from operations 42,740 (2) 61,550 91,147 (3) 116,104
Net income 39,502 (2) 49,249 73,347 (3) 91,700
Net income per share:
Basic $ 0.22 (2) $ 0.27 $ 0.40 (3) $ 0.49
Diluted $ 0.21 (2) $ 0.26 $ 0.38 (3) $ 0.47
(1) Includes non-recurring acquisition and restructuring charges of $43
million. Net income, basic and diluted net income per share would have been
$10 million, $0.06 and $0.06, respectively, excluding these costs.
(2) Includes non-recurring acquisition and restructuring charges of $(6)
million. Net income, basic and diluted net income per share would have been
$36 million, $0.20 and $0.19, respectively, excluding these costs.
(3) Includes non-recurring acquisition and restructuring charges of $1 million.
Net income would have been $74 million, basic and diluted net income per
share would have remained unchanged.
62
63
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of KLA-Tencor Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of KLA-Tencor
Corporation and its subsidiaries at June 30, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2000, in conformity with accounting principles generally accepted
in the United States of America. 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 auditing standards generally
accepted in the United States of America 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.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
July 24, 2000, except as to Note 9, which is as of August 15, 2000
- ---------------------------------
63
64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
64
65
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names of the present directors and executive
officers of KLA-Tencor as of September 22, 2000, their ages and positions held.
Additional information required by Item 405 of Regulation S-K of the Securities
Act of 1933, as amended, is incorporated herein by reference to our Proxy
Statement.
Name Age Position
----------------------------------------------------------------------------------------------------------
Kenneth Levy 57 Chairman of the Board
Kenneth L. Schroeder 54 President and Chief Executive Officer
Gary E. Dickerson 43 Chief Operating Officer
John H. Kispert 36 Executive Vice President, and Chief Financial Officer
Dennis J. Fortino 54 Executive Vice President, Optical Surface inspection
and Measurement Group
Edward C. Grady 53 Executive Vice President, Wafer Inspection Group
Samuel A. Harrell 60 Senior Vice President, Strategic Business Development
Maureen Lamb 39 Vice President, Finance and Accounting
Stuart J. Nichols 40 Vice President, General Counsel
Neil Richardson 45 Executive Vice President, E-Beam Inspection and
Metrology Group
Arthur P. Schnitzer 57 Executive Vice President, Customer Group
Richard P. Wallace 40 Executive Vice President, Wafer Inspection Group
Edward W. Barnholt 57 Director
H. Raymond Bingham 54 Director
Robert T. Bond 57 Director
Richard J. Elkus, Jr. 65 Director
Dean O. Morton 68 Director
Jon D. Tompkins 60 Director
Lida Urbanek 55 Director
Kenneth Levy is a co-founder of KLA-Tencor and since July 1, 1999 has
been Chairman of the Board and a Director. From July 1998 until June 30, 1999
he was the Chief Executive Officer and a Director. From April 30, 1997 until
June 30, 1998 he was Chairman of the Board. From 1975 until April 30, 1997 he
was Chairman of the Board and Chief Executive Officer. He currently serves on
the boards of directors of Ultratech Stepper, Inc., SpeedFam-IPEC, Inc. and is a
Director Emeritus of SEMI, an industry trade association
Kenneth L. Schroeder has been President and Chief Executive Officer and
a Director of KLA-Tencor since July 1, 1999. From November 1991 until June 30,
1999, he was President and
65
66
Chief Operating Officer and a Director. He currently serves on the boards of
directors of GaSonics International and SEMI, an industry trade association.
Gary E. Dickerson has been Chief Operating Officer since July 1, 1999.
Mr. Dickerson joined KLA-Tencor in January 1986 and has held a series of
management positions. From July 1997 until June 30, 1999, he was Executive Vice
President of the Customer Group. In January 1996, he was promoted to Group Vice
President for the Wafer Inspection Group. In July 1994 he became the General
Manager of the Wisard Division.
John H. Kispert became Chief Financial Officer in July 2000. Before
becoming CFO, Mr. Kispert was Vice President of Finance and Accounting since
July 1999. From February 1998 to July 1999 he was Vice President of Operations
for the Wafer Inspection Group. From August 1997 to February 1998 he was
Director of Operations. Mr. Kispert joined KLA-Tencor in February 1995 and has
held a series of other management positions within the Company. Prior to
KLA-Tencor, Mr. Kispert was with IBM for 6 years.
Dennis J. Fortino has been Executive Vice President of the Optical
Surfscan Inspection and Measurement Group since July 1999. From August 1997 to
June 1999, he served as Vice President and General Manager of the Surfscan
Division and from November 1995 to July 1997 as the Vice President and General
Manager of the Surface Metrology Division. Mr. Fortino served as Vice President
and General Manager for Spectra-Physics Lasers from July 1991 to October 1995.
Edward C. Grady has been Executive Vice President of the Wafer
Inspection Group since July 1999. From August 1998 to July 1999, he was
Executive Vice President of the Precision Measurement. In March 1996 until
August 1998 he was Vice President and General Management of the RAPID Division.
He took held position of Vice President of Marketing in July 1995 until March
1996.
Dr. Samuel A. Harrell joined KLA-Tencor in September 1995 as Senior
Vice President of Strategic Business Development. Dr. Harrell is responsible for
strategic corporate development. Dr. Harrell served from October 1992 to
December 1995 as the Senior Vice President and Chief Strategy Officer of
SEMATECH. From August 1987 to September 1992 he served as President of
SEMI/SEMATECH.
Maureen Lamb became Vice President, Finance and Accounting in July
2000. She was the Corporate Controller from January 1999 to July 2000.
Stuart J. Nichols joined KLA-Tencor in October 1999 as Vice President,
General Counsel. Before KLA-Tencor, Mr. Nichols served from May 1997 to October
1999 as Vice President, General Counsel and Secretary of Phoenix Technologies
Ltd. Mr. Nichols also served as General Counsel of Samsung Semiconductor, Inc.
from August 1995 to May 1997.
Dr. Neil Richardson has been Executive Vice President of E-Beam
Inspection and Metrology Group since May 1998. He was Executive Vice President
of the Metrology Group from February
66
67
1997 to April 1998. He joined KLA-Tencor in June 1993 as Vice President and
General Manager of the Metrology Division.
Arthur P. Schnitzer has been Executive Vice President of the Customer
Group since November 1998. From June 1997 to October 1998 he was Executive Vice
President, Human Resources. From July 1993 to June 1997 he was Group Vice
President responsible for RAPID, SEMSPEC, PRISM and manufacturing for WISARD and
RAPID. From 1989 to July 1993 he was Vice President and General Manager of the
Wisard division. He joined KLA-Tencor in July 1978 and has held a series of
other management positions within the Company.
Richard P. Wallace became Executive Vice President of the Wafer
Inspection Group in July 1999. From July 1999 to June 2000, he was the Group
Vice President for Lithography and Films. From April 1998 to June 1999 he was
Vice President and General Manager of the Mirage Group. From 1995 to March 1998
he was Vice President and General Manager of the Wisard division. Mr. Wallace
joined KLA-Tencor in 1988 and has held a series of other management positions.
Edward W. Barnholt has been a Director of the Company since 1995. Since
May 1999, he has been President and Chief Executive Officer and a director of
Agilent Technologies, Inc. Mr. Barnholt served as General Manager of
Hewlett-Packard's Measurement Organization from 1998 to 1999, which included
Hewlett-Packard's Electronic Instruments Group, the Microwave and Communications
Group, the Communications Test Solutions Group, the Automated Test Group, the
Chemical Analysis Group, the Components Group and the Medical Products Group.
From 1990 to 1998, he served as General Manager of Hewlett-Packard's Test and
Measurement Organization. He was elected a Senior Vice President of
Hewlett-Packard in 1993 and an Executive Vice President in 1996.
H. Raymond Bingham has been a Director of the Company since August
2000. He has been President and Chief Executive Officer of Cadence Design
Systems, Inc. since April 1999. Mr. Bingham has been a director of Cadence since
November 1997. From 1993 to April 1999, Mr. Bingham served as Executive Vice
President and Chief Financial Officer of Cadence. Prior to joining Cadence, Mr.
Bingham was Executive Vice President and Chief Financial Officer of Red Lion
Hotels and Inns, an owner and operator of a chain of hotels, for eight years.
Mr. Bingham is a director of Legato Systems, Inc., Onyx Software Corporation,
TenFold Corporation and a director and Chairman of Integrated Measurement
Systems, Inc.
Robert T. Bond has been a Director of the Company since August 2000.
From April 1996 to January 1998, Mr. Bond served as Chief Operating Officer of
Rational Software Corporation. Prior to that, he held various executive
positions at Rational Software Corporation. Mr. Bond was employed by
Hewlett-Packard Company from 1967 to 1983 and held various management positions
during his tenure there. He is on the Advisory Board of Cyntric Corporation and
is also a director. He also serves on the Advisory Board of Grid Data
Corporation.
Richard J. Elkus, Jr. has been a Director of KLA-Tencor since April
1997. He was Executive Vice President and Vice Chairman of the board of
directors of Tencor from February 1994 until April 1997. He is the Co-Chairman
of the Board and a Director of Voyan Technology. He currently serves on the
boards of directors of Sopra, S.A., a semiconductor equipment company, Lam
Research Corporation, and Virage Logic, Corporation.
67
68
Dean O. Morton has been a Director of the Company since April 1997.
From June 1993 until April 1997 he was a Director of Tencor. In October 1992 Mr.
Morton retired as Executive Vice President, Chief Operating Officer and a
Director of Hewlett-Packard Company. Mr. Morton held various positions at
Hewlett-Packard Company from 1960 until his retirement. Mr. Morton currently
serves on the boards of directors of ALZA Corporation, The Clorox Company, BEA
Systems Inc., Cepheid, and Pharsight Corporation. Mr. Morton is also a trustee
of the Metropolitan Series Fund and State Street Research Funds Group and
Portfolios Inc.
Jon D. Tompkins has been a Director of the Company since April 1997. He
was Chairman of the Board from July 1998 to June 1999, when he retired his
position as Chairman of the Board. Mr. Tompkins has continued to serve as a
Director. From April 1997 until July 1998 he was Chief Executive Officer and a
Director of KLA-Tencor. From April 1991 until April 1997 he was President and
Chief Executive Officer of Tencor prior to its merger with KLA. He was a
Director of Tencor from 1991 until April 1997 and was appointed Chairman of the
board of directors of Tencor in November 1993. He currently serves on the boards
of directors of Cymer, Inc., Electro Scientific Industries, Credence Systems,
Levelite, Logic Vision, and Community Foundation of Silicon Valley.
Lida Urbanek has been a Director of the Company since April 30, 1997.
She is a private investor. She was a director of Tencor from August 1991 until
April 30, 1997.
For additional information required by this item see "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement,
which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For the information required by this Item, see "Executive Compensation"
in the Proxy Statement, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For the information required by this Item, see "Security Ownership -
Principal Stockholders and Security Ownership of Management" in the Proxy
Statement, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the information required by this Item, see "Certain Transactions"
in the Proxy Statement, which is incorporated herein by reference.
68
69
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
1. Financial Statements:
The following financial statements and schedules of the
Registrant are contained in Item 8 of this Annual Report on
Form 10-K:
Consolidated Balance Sheets at June 30, 1999 and 2000
Consolidated Statements of Operations for each of the
Three Years in the Period Ended June 30, 2000
Consolidated Statements of Stockholders' Equity for each
of the Three Years in the Period Ended June 30,
2000
Consolidated Statements of Cash Flows for each of the
Three Years in the Period Ended June 30, 2000
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Financial Statement Schedules:
The following financial statement schedule of the Registrant
is filed as part of this Annual Report on Form 10-K and should
be read in conjunction with the financial statements:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are either not
applicable or the required information is shown in the
consolidated financial statements or notes thereto.
(b) Exhibits
EXHIBIT
NO. DESCRIPTION
-------- -----------
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 Bylaws, as amended November 17, 1998 (2)
4.1 Amended and Restated Rights Agreement dated as of August
25, 1996 between the Company and First National Bank of
Boston, as Rights Agent. The Agreement includes the Form
of Right Certificate as Exhibit A and the Summary of Terms
of Rights as Exhibit B (3)
69
70
10.1 1998 Outside Director Option Plan (4)
10.2 1990 Outside Directors Stock Option Plan (5)
10.3 Tencor Instruments 1993 Nonemployee Directors Stock Option Plan (6)
10.4 1997 Employee Stock Purchase Plan (7)
10.5 Second Amended and Restated 1981 Employee Stock Purchase Plan (8)
10.6 Tencor Instruments Amended and Restated 1993 Equity Incentive Plan (9)
10.7 1993 Employee Incentive Stock Option Plan of Prometrix Corporation (10)
10.8 Tencor Instruments Second Amended and Restated 1984 Stock Option Plan (11)
10.9 1983 Employee Incentive Stock Option Plan of Prometrix Corporation (12)
10.10 Restated 1982 Stock Option Plan, as amended November 18, 1996 (13)
10.11 Excess Profit Stock Plan (14)
10.12 Form of KLA-Tencor Corporation Corporate Officers Retention Plan (15)
10.13 Form of Retention and Non-Competition Agreement (16)
10.14 Form of Indemnification Agreement (17)
10.15 Separation Agreement between Graham Siddall and the Company (18)
10.16 Livermore Land Purchase and Sale Agreement
21.1 List of Subsidiaries
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
NOTES
-----
(1) Filed as Exhibit 3.1 to the Company's form 10-Q for the quarter ended March 31, 1997.
(2) Filed as Exhibit 3.2 to the Company's Registration Statement on Form S-8 filed December 4,
1998, SEC File No. 333-68415.
(3) Filed as Exhibit 1 to the Company's report on form 8-A/A, Amendment No. 2 to the
Registration Statement on Form 8-A filed September 24, 1996, SEC File No. 0-9992.
(4) Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-8 filed December 4,
1998, SEC File No. 333-68423.
(5) Filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K for the year ended June
30, 1991.
(6) Filed as Exhibit 10.3 to the Company's Registration Statement on Form S-8 filed May 8,
1997, SEC File No. 333-26681.
70
71
(7) Filed as Exhibit 10.2 to the Company's Registration Statement on Form S-8 filed January 30,
1998, SEC File No. 333-45271.
(8) Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-8 filed January 30,
1998, SEC File No. 333-45271.
(9) Filed as Exhibit 10.2 to the Company's Registration Statement on Form S-8 filed May 8,
1997, SEC File No. 333-26681.
(10) Filed as Exhibit 10.7 to the Company's Registration Statement on Form S-8 filed May 8,
1997, SEC File No. 333-26681.
(11) Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-8 filed May 8,
1997, SEC File No. 333-26681.
(12) Filed as Exhibit 10.6 to the Company's Registration Statement on Form S-8 filed May 8,
1997, SEC File No. 333-26681.
(13) Filed as Exhibit 10.74 to the Company's Registration Statement on Form S-8 filed March 7,
1997, SEC File No. 333-22941.
(14) Filed as Exhibit 10.15 to the Company's Registration Statement on Form S-8 filed August 7,
1998, SEC File No. 333-60887.
(15) Filed as Exhibit 10.2 to the Company's Registration Statement on Form S-4 filed March 11,
1997, SEC File No. 333-23075.
(16) Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-4 filed March 11,
1997, SEC File No. 333-23075.
(17) Filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended June
30, 1997.
(18) Filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended June
30, 1999.
(c) Reports on Form 8-K
None
71
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on September 28, 2000.
KLA-Tencor Corporation
By: /s/ KENNETH LEVY
------------------------------
Kenneth Levy
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ KENNETH LEVY Chairman of the Board and Director September 28, 2000
- --------------------------------------------
Kenneth Levy
/s/ KENNETH L. SCHROEDER President, Chief Executive Officer and September 28, 2000
- -------------------------------------------- Director (Principle Executive Officer)
Kenneth L. Schroeder
/s/ JOHN H. KISPERT Executive Vice President and Chief Financial September 28, 2000
- -------------------------------------------- Officer (Principal Accounting Officer)
John H. Kispert
/s/ EDWARD W. BARNHOLT Director September 28, 2000
- --------------------------------------------
Edward W. Barnholt
/s/ H. RAYMOND BINGHAM Director September 28, 2000
- --------------------------------------------
H. Raymond Bingham
/s/ ROBERT T. BOND Director September 28, 2000
- --------------------------------------------
Robert T. Bond
/s/ RICHARD J. ELKUS, Jr. Director September 28, 2000
- --------------------------------------------
Richard J. Elkus, Jr.
/s/ DEAN O. MORTON Director September 28, 2000
- --------------------------------------------
Dean O. Morton
/s/ JON D. TOMPKINS Director September 28, 2000
- --------------------------------------------
Jon D. Tompkins
/s/ LIDA URBANEK Director September 28, 2000
- --------------------------------------------
Lida Urbanek
72
73
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors
of KLA-Tencor Corporation
Our audits of the consolidated financial statements referred to in our report
dated July 24, 2000, except as to Note 9, which is as of August 15, 2000
appearing in this Annual Report on Form 10-K also included an audit of the
financial statement schedule listed in Item 14(a)2 on this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
July 24, 2000
- ---------------------------------
73
74
SCHEDULE II
Valuation and Qualifying Accounts
Balance at Balance
Beginning Charged to At End
(in thousands) of Period Expense Deductions of Period
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998:
Allowance for Doubtful Accounts $ 2,980 $ 13,577 $ 8,295 $ 8,262
Year Ended December 31, 1999:
Allowance for Doubtful Accounts $ 8,262 $ 19,271 $ 10,895 $ 16,638
Year Ended December 31, 2000:
Allowance for Doubtful Accounts $ 16,638 $ 13,731 $ 15,580 $ 14,789
74
75
EXHIBITS
As required under Item 14, "Exhibits, Financial Statement Schedules and Reports
on Form 8-K," the exhibits filed as part of this report are provided in this
separate section. The exhibits included in this section are as follows:
Exhibit
Number Description
------ -----------
10.16 Livermore Land Purchase and Sale Agreement
21.1 List of Subsidiaries of KLA-Tencor Corporation
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
75