UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: December 31, 1994 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 0-9992 KLA INSTRUMENTS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 04-2564110 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
160 RIO ROBLES San Jose, California (Address of principal executive offices) 95134 (Zip Code) Registrant's telephone number, including area code: (408) 434-4200 ------------------------------------------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common shares outstanding at December 31, 1994: 23,224,000 This report, including all exhibits and attachments, contains 47 pages. Page 1 KLA INSTRUMENTS CORPORATION INDEX
PART I FINANCIAL INFORMATION Item 1 Financial Statements: Condensed Consolidated Statements of Operations Three Months Ended December 31, 1993 and 1994 3 Six Months Ended December 31, 1993 and 1994 4 Condensed Consolidated Balance Sheets 5 Condensed Consolidated Statements of Cash Flows 6 Notes to Condensed Consolidated Financial Information 7 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 8-10 PART II OTHER INFORMATION Items 1-6 11-13 Signatures 14 Index to Exhibits 15-16
Page 2 KLA INSTRUMENTS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, (In thousands except per share amounts) (Unaudited)
1993 1994 -------- -------- Net sales $ 57,087 $104,711 -------- -------- Costs and expenses: Cost of sales 32,417 48,374 Engineering, research and development 4,847 8,808 Selling, general and administrative 11,310 21,739 Write-off of acquired in-process technology -- 25,240 -------- -------- 48,574 104,161 -------- -------- Income from operations 8,513 550 Interest income and other, net 376 1,535 Interest expense (499) (608) -------- -------- Income before income taxes 8,390 1,477 Provision for income taxes 2,098 531 -------- -------- Net income $ 6,292 $ 946 -------- -------- Net income per share $ 0.30 $ 0.04 ======== ======== Weighted average number of common and dilutive common equivalent shares outstanding 20,909 24,094
See accompanying notes to condensed consolidated financial information. Page 3 KLA INSTRUMENTS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED DECEMBER 31, (In thousands except per share amounts) (Unaudited)
1993 1994 -------- -------- Net sales $108,991 $187,890 -------- -------- Costs and expenses: Cost of sales 63,578 88,976 Engineering, research and development 9,776 16,990 Selling, general and administrative 21,243 38,189 Write-off of acquired in-process technology -- 25,240 -------- -------- 94,597 169,395 -------- -------- Income from operations 14,394 18,495 Interest income and other, net 549 3,032 Interest expense (995) (1,082) -------- -------- Income before income taxes 13,948 20,445 Provision for income taxes 3,490 6,601 -------- -------- Net income $ 10,458 $ 13,844 ======== ======== Net income per share $ 0.50 $ 0.58 ======== ======== Weighted average number of common and dilutive common equivalent shares outstanding 20,854 23,987
See accompanying notes to condensed consolidated financial information. Page 4 KLA INSTRUMENTS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (In thousands except share amounts) (Unaudited)
JUNE 30, DECEMBER 31, 1994 1994 -------- ------------ ASSETS Current assets: Cash and cash equivalents $139,126 $119,847 Short-term investments -- 5,680 Accounts receivable, net 74,226 98,016 Inventories 53,265 67,055 Other current assets 11,838 11,811 -------- -------- Total current assets 278,455 302,409 Land, property and equipment, net 37,149 40,515 Marketable securities -- 16,982 Other assets 5,966 5,541 -------- -------- Total assets $321,570 $365,447 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 4,673 $ 2,631 Current portion of long-term debt -- 20,000 Accounts payable 11,890 14,701 Income taxes payable 12,466 18,705 Other current liabilities 36,553 55,379 -------- -------- Total current liabilities 65,582 111,416 -------- -------- Deferred income taxes 8,606 8,606 Long-term debt 20,000 -- Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value, 1,000 shares authorized, none outstanding -- -- Common stock, $0.001 par value, 75,000 shares authorized, 22,864 and 23,224 shares issued and outstanding 23 23 Capital in excess of par value 147,358 151,441 Retained earnings 80,275 94,119 Treasury stock (581) (581) Cumulative translation adjustment 307 423 -------- -------- Total stockholders' equity 227,382 245,425 -------- -------- Total liabilities and stockholders' equity $321,570 $365,447 ======== ========
See accompanying notes to condensed consolidated financial information. Page 5 KLA INSTRUMENTS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Six Months Ended December 31 (In thousands) (Unaudited)
1993 1994 -------- -------- Cash flows from operating activities: Net income $ 10,458 $ 13,844 Adjustments required to reconcile net income to cash provided by (used for) operations: Depreciation and amortization 4,904 5,669 Write-off of acquired in-process technology -- 16,154 Changes in assets and liabilities: Accounts receivable, net (13,122) (23,204) Inventories, net (2,261) (10,408) Other current assets (1,465) 56 Accounts payable 421 1,834 Income taxes payable and deferred income taxes 1,042 6,239 Other current liabilities (1,815) 14,732 Other assets (191) (2,080) -------- -------- Cash provided for (used for) operating activities (2,029) 22,836 -------- -------- Cash flows from investing activities: Capital expenditures (1,411) (6,155) Short term investments -- (5,680) Long term marketable securities -- (16,982) Acquisition of Metrologix -- (14,182) Capitalization of software development costs (248) -- -------- -------- Cash (used for) investing activities (1,659) (42,999) -------- -------- Cash flows from financing activities: Short-term borrowings and current portion of long-term debt, net (4,822) (3,315) Sales of common stock 3,191 4,083 -------- -------- Cash provided by (used for) financing activities (1,631) 768 -------- -------- Effect of exchange rate changes on cash 63 116 -------- -------- Decrease in cash and cash equivalents (5,256) (19,279) Cash and cash equivalents at beginning of period 52,362 139,126 -------- -------- Cash and cash equivalents at end of period $ 47,106 $119,847 ======== ======== Supplemental disclosure to cash flow information Cash paid during the period for: Interest $ 790 $ 1,166 Income taxes 2,012 8,766
See accompanying notes to condensed consolidated financial information. Page 6 KLA INSTRUMENTS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION (IN '000'S) UNAUDITED 1) This information is unaudited but, in the opinion of Registrant's management, all adjustments (consisting only of adjustments that are of a normal recurring nature) necessary for a fair statement of results have been included. The results for the quarter ended December 31, 1994, are not necessarily indicative of results to be expected for the entire year. This financial information should be read in conjunction with the Registrant's Annual Report on Form 10-K (including items incorporated by reference therein) for the year ended June 30, 1994. 2) Effective July 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Investments in Certain Debt and Equity Securities" (FAS 115), which requires investment securities to be classified as either held to maturity, trading or available for sale. The Company reviewed its portfolio and determined that its investment portfolio would be classified as available for sale. Under FAS 115, for those investments classified as available for sale, any difference between an investment's cost and its fair value should be recorded as a separate component of stockholder's equity. At December 31, 1994, the fair value of the Company's investments approximated cost. 3) Details of certain balance sheet components:
JUNE 30, DECEMBER 31, 1994 1994 ------- ------------ INVENTORIES: Systems raw materials $12,597 $13,991 Customer service spares 12,220 12,055 Work-In-Process 13,348 23,740 Demonstration Equipment 15,100 17,269 ------- ------- $53,265 $67,055 ======= ======= OTHER CURRENT LIABILITIES: Accrued compensation and benefits $16,328 $20,801 Accrued warranty and installation 14,367 15,924 Unearned service contract revenue 3,054 8,780 Other 2,804 9,874 ------- ------- $36,553 $55,379 ======= =======
4) In December 1994, the Company acquired Metrologix Inc., (Metrologix), a manufacturer of advanced electron beam measurement equipment for $14.2 million in cash. This acquisition was accounted for as a purchase and the total purchase price of $16.1 million has been allocated to assets acquired and liabilities assumed. A significant portion of the purchase price was allocated to acquired in-process technology. The results of operations for Metrologix from the date of the acquisition to December 31, 1994 were immaterial. During the quarter ended December 31, 1994, the Company wrote-off the acquired in-process technology resulting in an after-tax charge of $16.2 million (25.2 million pre-tax). Page 7 KLA INSTRUMENTS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION (IN '000'S) UNAUDITED RESULTS OF OPERATIONS SECOND QUARTER AND SIX MONTHS OF FISCAL 1995 COMPARED WITH SECOND QUARTER AND SIX MONTHS OF FISCAL 1994 METROLOGIX In December 1994, the Company acquired Metrologix Inc., (Metrologix), a manufacturer of advanced electron beam measurement equipment. Except for the non-recurring write-off of Metrologix technology, the acquisition did not have a material impact on the financial performance of the Company. Although Metrologix operated profitably during the quarter ended December 31, 1994, the Company does not expect the Metrologix business to contribute to earnings during the remainder of the fiscal year. NET SALES Net sales increased 83.4% and 72.4%, respectively, for the three and six month periods ended December 31, 1994 as compared to the prior fiscal year. The WISARD business unit was predominantly responsible for the dollar increase in net sales. The Company attributes the continuing increase of WISARD's sales primarily to the continuing adoption by customers of KLA's methodology of in-line monitoring. The number of fabs with multiple KLA 2100 series systems per fab increased to 70 fabs at December 31, 1994, from 25 fabs one year ago. In addition, the increase in WISARD's net sales is due to the increase in customers that are upgrading their older fabs. The Metrology division and the RAPID business unit also recorded significant increases in net sales. The RAPID business unit's sales increase is due to the increasing market acceptance of the Company's 331 model. GROSS MARGIN Gross margins were 53.8% and 52.6%, respectively, for the three and six month periods ended December 31, 1994 compared to 43.2% and 41.7% for the same periods of the prior fiscal year. The improvement in the gross margin percentage was due about equally to 1) a favorable mix effect as the WISARD business unit's share of total revenues rose and 2) improvement in the WISARD business unit's gross margin as a result of volume efficiencies and the use of lower cost components. The RAPID business unit also recorded significant improvements in gross margin for the quarter ended December 31, 1994 as compared to the same period of the prior fiscal year. The Company attributes this increase primarily to volume efficiencies. ENGINEERING, RESEARCH AND DEVELOPMENT Engineering, research and development expenses were 8.4% of net sales for the three month and 9.0% for the six month periods ended December 31, 1994, compared to 8.5% and 9.0% in the comparable periods in the prior fiscal year. Net engineering expenditures rose $4.0 million and $7.2 million, respectively, during the three and six month periods of fiscal 1995 compared to the prior fiscal year. The primary business units experiencing dollars increases were the WISARD business unit, the newly formed PRISM division and the Rapid business unit . Although the Company has significantly increased engineering headcount and spending, these expenditure increases have been slightly slower than the Company's revenue growth. Page 8 KLA INSTRUMENTS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased 1.0% and 0.8% of sales, respectively, for the three and six month periods ended December 31, 1994, compared to the same periods of the prior fiscal year, prior to the effect of the non-recurring pre-tax charge of $25.2 million, for the write-off of the Metrologix acquired in-process technology. Sales and administration expenses grew slower than revenues, while representative commissions and profit sharing grew at a rate higher than revenues. The increase in profit sharing reflects the improvement in the Company's financial performance prior to the non-recurring Metrologix charge. Representative commissions increased as a percentage of sales primarily due to the rise in the share of sales to Asia-Pacific customers. INTEREST INCOME AND OTHER, NET Interest income and other, net increased $1.2 million and $2.5 million, respectively, for the three and six month periods ended December 31, 1994 as compared to the same periods of the prior fiscal year. This increase is primarily attributable to higher average cash and cash equivalent balances. PROVISION FOR INCOME TAXES The 32.3% estimated effective tax rate for the six month period ended December 31, 1994 is lower than the U.S. statutory rate primarily as a result of income in foreign jurisdictions having a lower than U.S. tax rate, and from the realization of net deferred tax assets previously reserved, including tax credit carryforwards, and from the realization of Foreign Sales Corporation benefits and research and development tax credits. FUTURE OPERATING RESULTS The Company's future results will depend on its ability to continuously introduce new products and enhancements to its customers as demands for higher performance yield management and process control systems change or increase. Due to the risks inherent in transitioning to new products, the Company must accurately forecast demand in both volume and configuration and also manage the transition from older products. The Company's results could be affected by the ability of competitors to introduce new products which have technological and/or pricing advantages. The Company's results also will be affected by strategic decisions made by management regarding whether to continue particular product lines, and by volume, mix and timing of orders received during a period, fluctuations in foreign exchange rates, and changing conditions in both the semiconductor industry and key semiconductor markets around the world. As a result, the Company's operating results may fluctuate, especially when measured on a quarterly basis. Page 9 LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased $19.3 million at December 31, 1994 compared to June 30, 1994. The decrease in cash and cash equivalents is entirely due to the adoption of new investment strategies and the implementation of FAS 115, which caused the reclassification of $22.7 million from cash and cash equivalents to short term investments and marketable securities. Cash generated by operations was $22.8 million. The Company used $14.2 million to acquire Metrologix in December 1994. The Company also invested $6.2 million in new cleanrooms and other capital equipment. Proceeds from the exercise of stock options and the employee stock purchase plan were $4.1 million. The Company is continuing to expand and anticipates it may begin the construction of an additional facility at its San Jose campus site during 1995. The Company believes that its current level of liquid assets, credit facilities and cash generated from operations are sufficient to fund growth through the foreseeable future. Page 10 KLA INSTRUMENTS CORPORATION FORM 10-Q PART II: OTHER INFORMATION Item 1 -- Legal Proceedings Not Applicable Item 2 -- Changes in Securities Not Applicable Item 3 -- Defaults Upon Senior Securities Not Applicable Item 4 -- Submission of Matters to a Vote of Security Holders Page 12 Item 5 -- Other Events Not Applicable Item 6 -- Exhibits and Reports on Form 8-K Page 13
Page 11 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS An annual meeting of the stockholders was held on November 16, 1994 at the Company's San Jose headquarters. At the meeting Mr. Leo Chamberlain and Mr. Dag Tellefsen were elected directors of the Company. Mr. Kenneth Levy, Mr. Robert Lorenzini, Mr. Samuel Rubinovitz, Dr. Yoshio Nishi, and Mr. Kenneth Schroeder continued in the office as directors after the meeting. At the meeting four items were put to a vote of stockholders: 1. Election of two directors 2. Approval of an amendment to the 1981 Employee Stock Purchase Plan to increase the number of shares reserved for issuance under the Purchase Plan by 300,000 shares. 3. Approval of an amendment to the 1982 Stock Option Plan to increase the number of shares reserved for issuance by 1,600,000 shares and to implement a per optionee share limitation. 4. Ratification of the appointment of Price Waterhouse as the independent accountants of the Company for the fiscal year ending June 30, 1995. The voting results were:
ITEM DIRECTORS FOR AGAINST WITHHELD ABSTAIN NO VOTE - ---- ---------------------------- --------- -------- -------- ------- ------- 1. Mr. Chamberlain 19,863,163 0 24,503 Mr. Tellefsen 19,863,163 0 1,792,801 2. 19,863,163 532,920 32,141 2,257,235 3. 19,863,163 4,529,327 36,762 2,303,251 4. 19,863,163 6,501 26,029
Page 12 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K See exhibit index on page 15. The Company had no Form 8-K filings during the period ended December 31, 1994. Page 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KLA INSTRUMENTS CORPORATION February 13, 1994 Kenneth Levy - ------------------------- ----------------------------------------------------- [Date] Kenneth Levy Chairman of the Board February 13, 1994 Kenneth L. Schroeder - ------------------------- ----------------------------------------------------- [Date] Kenneth L. Schroeder President February 13, 1994 Robert J. Boehlke - ------------------------- ----------------------------------------------------- [Date] Robert J. Boehlke V.P. Finance and Administration Chief Financial Officer
Page 14 INDEX TO EXHIBITS (I) EXHIBITS INCORPORATED BY REFERENCE: 3.1 Certificate of Incorporation as amended (11) 3.2 Bylaws, as amended (11) 4.1 Rights Agreement dated as of March 15, 1989, between the Company and First National Bank of Boston, as Rights Agent. The Rights Agreement includes as Exhibit A, the form of Right Certificate, and as Exhibit B, the form of Summary of Rights to Purchase Common Stock (2) 10.15 Statement of Partnership to Triangle Partners dated April 12, 1983 (3) 10.16 Lease Agreement and Addendum thereto dated January 10, 1983, between BBK Partnership and the Company (3) 10.18 Purchase and Sale Agreement dated January 10, 1983, between BBK Partnership, Triangle Partners and the Company (3) 10.23 Research and Development Agreement, Cross License and Technology Transfer Agreement and Agreement for Option to License and Purchase Resulting Technology, all dated February 21, 1985, by and between KLA Development No. 3, Ltd., and the Company (4) 10.24 Research and Development Agreement dated February 21, 1985, by and between KLA Development No. 3, Ltd., and the Company (4) 10.25 Agreement for Option to License and Purchase Resulting Technology dated February 21, 1985, by and between KLA Development No. 3, Ltd., and the Company (4) 10.33 (Research and Development) Agreement dated as of February 1, 1987, by and between IBM Corporation and the Company (5) 10.35 Research and Development Agreement, Cross License and Technology Transfer Agreement and Agreement for Option to License and Purchase Resulting Technology, all dated October 1, 1986, by and between KLA Development No. 4, Ltd., and the Company (5) 10.43 Amendment to the Exclusive Marketing Agreement dated February 23, 1989, by and between Micrion Limited Partnership and the Company (6) 10.44 Bank Loan Guarantee dated June 29, 1989, by the Company in favor of The First National Bank of Boston for the Micrion Limited Partnership (6) 10.45 Distribution Agreement, Manufacturing License Agreement, and Technical Marketing Assistance Agreement, all dated July 1990, by and between Tokyo Electron Limited, a Japanese Corporation, and the Company (7) 10.46 Principle facility Purchase Agreement dated July 1990, including all exhibits and amendments; Lease Agreement, Termination of Lease, Lot line adjustment, rights of first refusal, Deeds of Trust (7) 10.47 Joint Venture Agreement between the Company and Nippon Mining Company, Limited, dated September 18, 1990 (8) 10.48 Exercise of Option to Purchase Technology made effective as of September 30, 1989, by and between KLA Development No. 3, and the Company (8) 10.49 Exercise of Option to Purchase Technology made effective as of January 1, 1990, by and between KLA Development No. 4, and the Company (8) 10.51 Guarantee Agreement between First National Bank of Boston and the Company, dated June 29, 1989 (8) 10.52 Amendment to the Guarantee Agreement between First National Bank of Boston and the Company, dated April 19, 1991 (8) 10.53 Secured Installment Note between Micrion and First National Bank of Boston, dated April 19, 1991 (8) 10.54 Micrion Corporation Series E Preferred Stock Purchase Agreement, dated September 13, 1991 (8) 10.55 Micrion Corporation Guaranty and Warrant Agreement, dated December 8, 1989 (8) 10.57 Stock repurchase and option grant agreement between Bob Boehlke and the Company, dated April 22, 1991 (8) 10.58 Purchase Agreement between the Company and Ono Sokki Co., Ltd., dated October 18, 1991 with certain portions for which confidential treatment has been requested, excised (9) 10.59 Credit Agreement between Bank of America NT & SA and the Company, dated November 15, 1991, as amended July 29, 1992 (9) 10.60 Employment agreement between the Company and Kenneth L. Schroeder dated October 4, 1991 (9) 10.61 Amendment of Credit Agreement between Bank of America NT & SA and the Company, dated October 28, 1992 (10)
Page 15 10.62 Amendment of Credit Agreement between Bank of America NT & SA and the Company, dated December 31, 1992 (10) 10.63 Amendment of Credit Agreement between Bank of America NT & SA and the Company, dated February 28, 1993 (10) 10.64 Amendment of Credit Agreement between Bank of America NT & SA and the Company, dated March 31, 1993 (10) 10.65 Amendment of Credit Agreement between Bank of America NT & SA and the Company, dated June 1, 1993 (10) 10.66 Amendment of Credit Agreement between Bank of America NT & SA and the Company, dated December 31, 1993 (16) 10.67 Amendment of Credit Agreement between Bank of America NT & SA and the Company, dated March 31, 1994 (16) 10.68 Credit Agreement between Bank of America NT & SA and the Company, dated April 30, 1994 (16) 10.71 1990 Outside Directors Stock Option Plan (14) (II) EXHIBITS INCLUDED HEREWITH: 10.73 Amendment of Credit Agreement between Bank of America NT & SA and the Company dated December 31, 1994 10.74 1981 Employee Stock Purchase Plan, as amended by the Board of Directors on October 7, 1994 10.75 1982 Stock Option Plan, as amended by the Board of Directors on October 7, 1994 27 Financial Data Schedule
- --------------- 2 Filed as exhibit number 1 to Form 8-A, filed effective March 23, 1989 3 Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1983 4 Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1985 5 Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1987 6 Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1989 7 Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1990 8 Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1991 9 Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1992 10 Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1993 11 Filed as the same exhibit number to Registrant's registration statement no. 33-51819 on Form S-3, dated February 2, 1994 14 Filed as exhibit number 4.6 as set forth herein to Registrant's Form 10-K for the year ended June 30, 1991 16 Filed as the same exhibit number as set forth herein to Registrant's Form 10-K for the year ended June 30, 1994 Page 16